<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1996
REGISTRATION NO. 333-3642
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EP MEDSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 5047 22-3212190
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
58 ROUTE 46 WEST
BUDD LAKE, NEW JERSEY 07828
(201) 691-6400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID A. JENKINS
PRESIDENT
EP MEDSYSTEMS, INC.
58 ROUTE 46 WEST
BUDD LAKE, NEW JERSEY 07828
(201) 691-6400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DEAN M. SCHWARTZ, ESQUIRE STRADLEY, MARK D. WHATLEY, ESQUIRE HOWARD, RICE,
RONON, STEVENS & YOUNG, LLP 2600 ONE NEMEROVSKI, CANADY, FALK & RABKIN
COMMERCE SQUARE 2005 MARKET STREET THREE EMBARCADERO CENTER 7TH FLOOR SAN
PHILADELPHIA, PENNSYLVANIA 19103-7098 FRANCISCO, CA 94111
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement Number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Number of the earlier effective Registration Statement for the
same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value per share....... 3,450,000(2) $8.00 $27,600,000 $9,517.25
- ---------------------------------------------------------------------------------------
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 450,000 shares representing the underwriter's over-allotment
option.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EP MEDSYSTEMS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM SB-
2
REGISTRATION STATEMENT HEADING OR LOCATION IN THE PROSPECTUS
----------------------------------- -------------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover Page of
Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Outside Front Cover Page; Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... Not Applicable
8. Plan of Distribution............... Underwriting
9. Legal Proceedings.................. Not Applicable
10. Directors, Executive Officers,
Promoters and Control Persons...... Management; Certain Transactions
11. Security Ownership of Certain
Beneficial Owners and Management... Executive Compensation; Principal
Shareholders
12. Description of Securities.......... Outside Front Cover Page; Description
of Capital Stock
13. Interest of Named Experts and
Counsel............................ Not Applicable
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Description of Capital Stock
15. Organization within Last Five
Years.............................. Not Applicable
16. Description of Business............ Prospectus Summary; Business
17. Management's Discussion and
Analysis or Plan of Operation...... Management's Discussion and Analysis
of Financial Condition and Results of
Operations
18. Description of Property............ Business
19. Certain Relationships and Related
Transactions....................... Certain Transactions
20. Market For Common Equity and
Related Stockholder Matters........ Risk Factors; Capitalization;
Description of Capital Stock; Shares
Eligible for Future Sale; Underwriting
21. Executive Compensation............. Executive Compensation
22. Financial Statements............... Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM SB-2
REGISTRATION STATEMENT HEADING OR LOCATION IN THE PROSPECTUS
------------------------------------ -------------------------------------
<C> <S> <C>
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure................ Not Applicable
24. Indemnification of Directors and
Officers............................ Part II
25. Expenses of Issuance and
Distribution........................ Part II
26. Recent Sales of Unregistered
Securities.......................... Part II
27. Exhibits............................ Part II; Exhibits
28. Undertakings........................ Part II
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED MAY 28, 1996
3,000,000 SHARES
EPMEDSYSTEMS
COMMON STOCK
-------------------------
All of the shares of common stock ("Common Stock") offered hereby are being
sold by EP MedSystems, Inc. (the "Company"). Prior to this offering, there has
been no public market for the Common Stock and there can be no assurance that
such a market will develop or, if one does develop, that it will be sustained.
It is currently estimated that the initial public offering price will be
between $6.00 and $8.00 per share. For a discussion of the factors to be
considered in determining the initial public offering price, see
"Underwriting." The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "EPMD."
-------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION."
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
- --------------------------------------------------------------------------------
Total(3)............................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has also agreed to (i) reimburse the Underwriter for
accountable costs and expenses up to $50,000; (ii) grant warrants to the
Underwriter to purchase an aggregate of 150,000 shares of Common Stock at
130% of the per share Price to Public and (iii) indemnify the Underwriter
against certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 450,000 additional
shares solely for the purpose of covering over-allotments, if any. If the
Underwriter exercises such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-------------------------
The shares of Common Stock are offered by the Underwriter, subject to prior
sale, withdrawal, cancellation or modification of the offer without notice,
delivery to and acceptance by the Underwriter, and certain other conditions. It
is expected that delivery of the shares of Common Stock offered hereby will be
made in New York, New York, on or about , 1996.
-------------------------
PACIFIC GROWTH EQUITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[PICTURE OF HEART AND PLACEMENT OF ALERT CATHETER]
ProCath is a registered trademark of the Company. EP MedSystems, ALERT, EP
WorkMate,
EP-2, EP-3, MemoryTrace and PaceBase are trademarks of the Company. This
Prospectus also includes tradenames and trademarks of companies other than the
Company.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in connection with and is qualified in its
entirety by reference to the more detailed information and the Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriter's over-allotment option. References to
the Company include EP MedSystems, Inc. and its wholly-owned subsidiary,
ProCath Corporation. For a discussion of certain Risk Factors affecting the
Company and the Common Stock, see "Risk Factors."
THE COMPANY
EP MedSystems, Inc. is a leader in the development of a new product for
internal cardioversion of atrial fibrillation and also develops, markets, sells
and services cardiac electrophysiology ("EP") products used to diagnose,
monitor and treat certain cardiac disorders. The Company has developed the
Atrial Low Energy Reversion Therapy catheter system (the "ALERT System"), which
uses a proprietary electrode catheter to deliver measured, variable, low energy
electrical impulses directly to the inside of the heart in order to convert
atrial fibrillation to a normal heart rhythm. The Company is not aware of any
other product currently being developed or marketed that permits low energy
internal cardioversion of atrial fibrillation with a single catheter.
Atrial fibrillation is an arrhythmia consisting of a disorganized quivering of
the upper chambers of the heart ("atria") that results from aberrant conduction
of electrical signals within the atria. The Company believes that more than 2
million Americans are currently afflicted with atrial fibrillation and an
estimated 160,000 new cases develop each year. Atrial fibrillation is most
commonly found in the elderly. In the U.S. it affects up to 5% of the
population over the age of 60. As the elderly segment of the population grows,
the atrial fibrillation patient population is also expected to increase. Atrial
fibrillation is the leading cause of arrhythmia-related hospitalizations and,
in 1992, comprised the primary diagnosis for 253,000 hospitalized patients,
more than all other types of arrhythmia combined. In 1993, more than 1.2
million patients who were hospitalized for other reasons were found to have, or
to have developed, atrial fibrillation during their hospitalization.
Atrial fibrillation leads to ineffective and uncoordinated pumping, which often
reduces cardiac output by up to 30%, causes impaired blood flow to the brain
and can cause life-threatening complications. Atrial fibrillation can also lead
to an uncontrolled ventricular heart rate, precipitating a life-threatening
situation. Although patients with atrial fibrillation can be asymptomatic, most
suffer from shortness of breath, palpitations, dizziness, fainting or reduced
tolerance to exercise and the activities of daily living. Atrial fibrillation
is a significant cause of mortality and morbidity, particularly from
thromboembolism and stroke. Each year in the U.S. approximately 75,000 strokes
are related to atrial fibrillation.
The ALERT System represents a new approach to electrical cardioversion, known
as low energy internal cardioversion, in which small amounts of electrical
energy (up to 15 joules) are delivered directly to the inside of the heart to
convert atrial fibrillation to normal heart rhythm. The ALERT System consists
of a single-use proprietary electrode catheter with two separate electrode
arrays and an external energy source. The catheter is inserted into a vein in a
patient's arm and guided to the heart. The Company believes the ALERT System
will offer significant advantages over current therapies for the treatment of
atrial fibrillation, which generally consist of external cardioversion and
antiarrhythmic, heart-rate controlling and anticoagulation drugs. External
3
<PAGE>
cardioversion involves the application of high levels of electrical energy
through the chest wall to the heart. Current therapies present certain risks
and side effects, and are not completely effective. Atrial fibrillation recurs
in a substantial percentage of patients treated with either antiarrhythmic
drugs and external cardioversion. Studies have indicated that antiarrhythmic
drugs may be associated with an increased risk of life-threatening ventricular
arrhythmias and other adverse side effects. Further, external cardioversion
involves the application of substantially greater electrical energy to the
patient, requiring the use of general anesthesia and causing greater trauma to
the patient.
The ALERT System has also been designed to be employed in patients who have
undergone open heart surgery procedures, of whom the Company believes
approximately 30% develop atrial fibrillation post-operatively. The Company
believes that in 1995 over 450,000 open heart procedures were performed in the
U.S. Due to the significantly lower amounts of energy needed for internal
cardioversion, the Company believes that the ALERT System is particularly
appropriate for these patients. It also provides temporary pacing to the atria
and ventricles and monitors blood pressure in the left pulmonary artery,
potentially replacing other single-purpose products.
The Company also currently designs, manufactures and markets a broad-based line
of specially-designed products for the cardiac EP market for the purpose of
diagnosing, monitoring, managing and treating irregular heartbeats known as
arrhythmias. This product line includes the only computerized EP clinical
stimulator marketed in the U.S. and the EP WorkMate, a computerized monitoring
and analysis workstation introduced in late 1995. The Company believes that the
EP WorkMate, when integrated with the Company's computerized EP-3 Clinical
Stimulator, offers the most advanced computer tools available to the EP market.
In comparison to other EP computer systems, the EP WorkMate offers, among other
features, 64 recorded channels of cardiac electrical data, real-time analysis
including graphical and quantitative display of such data, superior ease of use
and a single keyboard for all operations. The Company's product line also
includes diagnostic EP catheters, temporary pacing catheters and related
disposable supplies and arrhythmia monitors.
Electrophysiology, the diagnosis and treatment of cardiac arrhythmias, was
established as an accredited sub-specialty of cardiology in 1992. As of March
31, 1996, 609 physicians were certified as electrophysiologists and
approximately 1,375 physicians in the U.S. were members of the North American
Society of Pacing and Electrophysiology ("NASPE"). Biomedical Business
International ("BBI") estimates that approximately 400,000 diagnostic EP
procedures and approximately 75,000 therapeutic cardiac ablation procedures
were performed worldwide in 1994, up from 175,000 and 21,000, respectively, in
1992. In response to this rapid growth in EP procedures, hospitals are
establishing dedicated EP labs, purchasing more EP products and workstations
and replacing older equipment to improve the efficiency of their facilities and
to treat the increasing number of patients diagnosed with arrhythmias.
The Company's objective is to become a leading developer, manufacturer and
marketer of a broad range of innovative products for the cardiac EP market by
implementing the following strategy: (i) establishing the ALERT System as the
preferred technique for atrial fibrillation treatment; (ii) further developing
its distribution network; (iii) offering a broad range of innovative products;
(iv) acquiring complementary technologies and products; and (v) providing
comprehensive customer service and support.
The Company's principal offices are located at 58 Route 46 West, Budd Lake, New
Jersey 07828, and its telephone number is (201) 691-6400.
4
<PAGE>
THE OFFERING
Common Stock offered............ 3,000,000 shares
Common Stock to be outstanding
after the offering.............
8,099,917 shares(1)
Use of proceeds................. For clinical trials and related development
expenses of the ALERT System, expansion of
sales and marketing, expansion of manufactur-
ing and assembly, repayment of outstanding
debt, expansion of research and development,
working capital and general corporate pur-
poses and potential acquisitions of products
and technology. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol......................... EPMD
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION THREE MONTHS ENDED
(JANUARY 29, 1993) YEAR ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------------ --------------------
1993 1994 1995 1995 1996
--------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales............... $ 662,925 $ 1,512,076 $ 2,001,137 $ 464,112 $ 755,663
Gross profit............ 267,550 598,619 743,669 199,955 398,404
Acquired research and
development............ -- 500,000 450,000 -- --
Write-off of intangible
assets................. -- 215,216 -- -- --
Loss from operations.... (394,453) (1,540,889) (1,431,757) (162,426) (48,741)
Net loss................ $(410,210) $(1,596,850) $(1,482,650) $(172,196) $ (67,289)
========= =========== =========== ========= =========
Net loss per common and
equivalent share....... $ (0.09) $ (0.28) $ (0.25) $ (.03) $ (.01)
========= =========== =========== ========= =========
Weighted average shares
used in per share
calculations........... 4,631,755 5,613,496 5,922,888 5,922,888 5,922,888
Supplementary net loss
per common share(2).... $ (0.24) $ (0.01)
=========== =========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
---------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents............................. $ 265,582 $18,895,582
Working capital....................................... 319,723 18,949,723
Total assets.......................................... 2,591,130 21,221,130
Long-term debt........................................ 1,174,453 83,450
Shareholders' equity.................................. $ 253,441 $19,974,444
</TABLE>
- --------------------
(1) Includes 568,750 shares of Common Stock issuable upon exercise of warrants
at $2.00 per share ("1995 Warrants") issued in connection with certain
debentures ("1995 Debentures"). Excludes 1,359,000 shares issuable upon
exercise of options outstanding as of May 1, 1996 and 150,000 shares
issuable upon exercise of warrants to be issued to the Underwriter. See
"Executive Compensation" and "Underwriting."
(2) Supplementary net loss per common share has been calculated as if all of
the Company's 1995 Debentures as of December 31, 1995 and March 31, 1996
had been repaid as of the beginning of the period or the date of issuance,
if later. The calculation assumes the elimination of interest expense and
the issuance of common shares as of the beginning of the period or the date
of issuance, if later, to pay the 1995 Debentures. See "Use of Proceeds"
and Note 1 to the Consolidated Financial Statements.
(3) Adjusted to give effect to the sale by the Company of the 3,000,000 shares
of Common Stock offered hereby and assumes exercise of the 1995 Warrants
after repayment of certain debt and the write-off of $46,497 of
unamortized discount on the 1995 Debentures. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information in this Prospectus, in
evaluating an investment in the shares of Common Stock offered hereby.
HISTORY OF LOSSES; FUTURE OF PROFITABILITY UNCERTAIN. The Company commenced
operations in 1993 and has incurred substantial operating losses in each year
since inception. As of March 31, 1996, the Company's accumulated deficit was
approximately $3.5 million. While the Company has begun to manufacture certain
products and has generated revenues from product sales, the Company
anticipates that losses could continue. The Company's ability to generate
significant revenues or achieve profitable operations is dependent, in large
part, on market acceptance of existing products, the effective manufacturing
and delivery of its products, the successful development of new products, the
ability to obtain regulatory approvals on a timely basis and the ability to
compete successfully in the future. There can be no assurance that the Company
will generate significant revenues or attain profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- The ALERT System," "-- Research and Development," "--
Manufacturing" and "-- Government Regulation."
DEPENDENCE ON THE ALERT SYSTEM. Although the Company currently markets a broad
range of products, it believes its potential for substantial long-term growth
will depend on the success of the ALERT System, a new product the Company has
developed to treat atrial fibrillation. The ALERT System has not been approved
by the U.S. Food and Drug Administration ("FDA") and is not available for
commercial sale in any market. Before the Company may begin marketing the
ALERT System in the U.S., it must apply for and obtain a premarket approval
("PMA") based on, among other things, clinical data that demonstrates the
safety and effectiveness of the device. Prior to undertaking any clinical
trials in the U.S. to obtain such data, the Company must obtain FDA and
Institutional Review Board approval of an application for an Investigational
Device Exemption ("IDE"). The Company is preparing a protocol for such
clinical trials as part of an IDE application. There can be no assurance that
the Company will be permitted to undertake such clinical trials, that, if
conducted, such clinical trials will demonstrate the safety and effectiveness
of the ALERT System, or that the Company will obtain PMA approval on a timely
basis or at all. Further, if granted, FDA approval may include significant
limitations on the indicated uses for which the product may be labeled or
marketed. Assuming the ALERT System receives FDA approval, commercial success
will depend on acceptance by physicians as a desirable treatment for atrial
fibrillation. Such acceptance will depend on, among other things, substantial,
favorable clinical experience, advantages over alternative treatments,
including cost-effectiveness, and favorable reimbursement policies of third-
party payors such as insurance companies, Medicare and other governmental
programs. There can be no assurance that the ALERT System will achieve such
market acceptance. The Company's ability to sell the ALERT System at prices
necessary to achieve profits and the profitability of the system will depend
in part on the Company's ability to manufacture the system efficiently in
commercial quantities. At this time, the Company has only manufactured the
catheter component of the ALERT System in limited quantities and has not yet
completed the development of the energy source component of the system. There
can be no assurance that the Company will be able to develop the manufacturing
processes and capabilities necessary to attain efficient manufacturing.
Failure to obtain FDA approval for, market acceptance of and/or efficient
manufacturing processes for the ALERT System would have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business -- The ALERT System," " --Marketing and Distribution"
and " -- Government Regulation."
DEPENDENCE ON EP WORKMATE. In late 1995, the Company began commercial sales of
the EP WorkMate, a computerized monitoring and analysis workstation. Although
the Company sells a
6
<PAGE>
broad range of products, it believes its ability to increase revenues over the
next several years will depend significantly on acceptance of the EP WorkMate
by electrophysiologists. The EP WorkMate accounted for approximately 47.8% of
the Company's net sales in the quarter ended March 31, 1996. The EP WorkMate
has a list price of approximately $120,000 with an integrated EP-3 Clinical
Stimulator and, as a result, each sale of an EP Workmate can represent a
relatively large percentage of the Company's net sales in a particular
quarter. As of March 31, 1996, the Company had sold 10 EP WorkMates. The EP
WorkMate is a new product and there can be no assurance it will be accepted by
the EP market or that sales will be substantial. Each sale of an EP WorkMate
may take a relatively long time to complete due in part to the high selling
price relative to other types of equipment and to the budgetary processes of
hospitals to which the Company markets the EP WorkMate. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Existing Products."
GOVERNMENT REGULATION. The Company's products and manufacturing activities are
subject to extensive and rigorous government regulation, both in the U.S. and
abroad. In the U.S., the development, testing, manufacture, labeling,
marketing, promotion and sale of medical devices are regulated by the FDA
under the Federal Food, Drug and Cosmetic Act ("FFDCA"). The FFDCA and
regulations thereunder require that, unless exempted by regulation, all
products meeting the statutory definition of "device" receive FDA clearance of
a premarket notification ("510(k) clearance") or a PMA prior to marketing in
the U.S. Obtaining FDA clearance or approval can take a number of years and
may require substantial expenditures. The Company has made the determination
that one of its products, the PaceBase System, is not a medical device and
thus is not subject to FDA premarket clearance or other regulatory
requirements. There can be no assurance that the FDA would agree with this
determination. If the FDA were to disagree, it could take regulatory actions
such as issuing a warning letter or requiring that the Company stop marketing
the product until a 510(k) or PMA for the product is cleared or approved.
The FFDCA provides that new premarket notifications under Section 510(k) are
required to be filed with the FDA when, among other things, there is a major
change or modification in the intended use of the device or a change or
modification to a legally marketed device that could significantly affect its
safety or effectiveness. Changes to manufacturing procedures could also
necessitate the filing of a new 510(k) notification. A manufacturer is
expected to make the initial determination as to whether a proposed change to
a cleared device, intended use or manufacturing procedure is of a kind that
would require the filing of a new 510(k) notification. The Company has made
certain modifications to its cleared devices, and for these changes the
Company made the determination that the changes were not major changes in
intended use and did not significantly affect the safety or effectiveness of
the devices, and, accordingly, that the original 510(k) clearances permitted
the Company to market the devices in the U.S. There can be no assurance that
the FDA will conclude that these changes did not necessitate one or more new
510(k) notifications. If the FDA were to disagree with the Company's
determination, the FDA could take regulatory actions such as issuance of a
warning letter or requiring that the Company stop marketing the device or
devices until one or more new 510(k) notifications are cleared.
Future changes to manufacturing procedures could necessitate the filing of a
new 510(k) notification. Likewise, development of future products or product
enhancements or changes may require additional 510(k) clearances, PMAs or
other regulatory approvals. PMAs and other regulatory approvals generally
involve more extensive prefiling testing than a 510(k) clearance and a longer
FDA review process. FDA regulatory processes are time-consuming and expensive,
and there can be no assurance that product applications submitted by the
Company will be cleared or approved on a timely basis or at all. Delays in the
review process, failure to receive FDA clearance or approval, or rescission of
a previously received FDA clearance or approval could have a material adverse
effect on the Company's business, financial condition and results of
operations.
7
<PAGE>
The FDA also strictly regulates the development and testing of medical devices
under the agency's investigational device exemption ("IDE") regulations. In
order to conduct a clinical investigation involving human subjects for the
purpose of demonstrating the safety and effectiveness of a device, a company
must apply for and obtain Institutional Review Board ("IRB") approval of the
proposed investigation. In addition, in order to conduct such clinical
investigations involving a "significant risk" device, such as the ALERT
System, the company must also submit and obtain FDA approval of an IDE
application. There can be no assurance that the Company will be able to obtain
IRB or FDA approval to undertake clinical trials in the U.S. for the ALERT
System or for other investigational devices, or, if such approvals are
obtained, that the Company will be able to comply with the FDA's IDE and other
regulations governing clinical investigations.
The Company's products must be manufactured in compliance with Good
Manufacturing Practices ("GMP") specified in regulations under the FFDCA, and
the Company's manufacturing facilities are subject to FDA inspections to
ensure compliance with GMP and other regulations. The FDA has broad discretion
in enforcing the FFDCA and noncompliance by the Company or the Company's
contract manufacturers could result in a variety of regulatory actions ranging
from warning letters, product detentions, device alerts or field corrections
to mandatory recalls, seizures, injunctive actions and civil or criminal
penalties.
The FFDCA and regulations thereunder are amended from time to time, often
imposing additional or more stringent requirements. For example, the FDA has
proposed new GMP regulations that would require medical device manufacturers
to comply with, among other new requirements, design controls. The new GMP
regulations are expected to be published in final form in late summer 1996.
These and other new regulations may make compliance by the Company with the
FFDCA and regulations thereunder more difficult in the future.
Many countries, especially Japan and several European countries, regulate the
manufacture, marketing and use of medical devices in ways similar to the U.S.
The Company intends to seek to market its products in some of those countries
and intends to pursue product clearance, approval, or registration procedures
in such countries. There can be no assurance that the Company will be able to
obtain necessary approvals to market its products in those countries on a
timely basis or at all. In addition, under the FFDCA, a manufacturer of an
unapproved device requiring premarket approval, such as the ALERT System, must
obtain an export permit from the FDA prior to exporting such devices. There
can be no assurance that the Company will be able to obtain such a permit on a
timely basis or at all.
In addition to the import requirements of foreign countries, a company must
also comply with U.S. laws governing the export of FDA regulated products.
While devices with FDA 510(k) clearance or an approved PMA generally may be
exported without further FDA authorization, exportation of unapproved Class
III devices requiring premarket approval has required prior FDA clearance.
Although the recently enacted FDA Export Reform and Enhancement Act of 1996
has relaxed the exportation requirements for unapproved devices under certain
circumstances, there can be no assurance that the Company will be able to
satisfy FDA export requirements on a timely basis or at all. See "Business --
Government Regulation."
NECESSITY OF PRODUCT DEVELOPMENT AND IMPROVEMENT. The markets for medical
devices in general and EP products in particular are characterized by rapid
technological change. The Company's ability to compete in these markets will
depend in part on its ability to develop new products, improvements to
existing products and processes for cost-effective manufacturing on a timely
basis. Many of the Company's development efforts will be based on new
technologies or new
8
<PAGE>
applications of existing technologies. As a result, research and development
for any potential new product or product refinement may take longer and
require greater expenditures than expected, and may ultimately prove
unsuccessful. The commercial acceptance of any new product will depend on the
medical community's acceptance of such product. There can be no assurance
that the Company will be able to develop new products or to refine existing
products that will be commercially accepted. See "Business -- The ALERT
System," "-- Research and Development" and "-- Manufacturing."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Several factors may have a
significant impact upon the Company's revenues, expenses and results of
operations from quarter to quarter and year to year, including but not limited
to a long sales cycle for the EP WorkMate, hospital budgetary processes, the
timing of new product introductions by the Company or its competitors,
development of other treatments for atrial fibrillation and other heart rhythm
disorders, changes in government or third-party reimbursement policies, mix of
products sold, foreign currency fluctuations to the extent the Company has
developed significant international sales, the ability to obtain products to
meet customer demand and fluctuations in manufacturing and research and
development costs. Consequently, quarterly results of operations should be
expected to fluctuate significantly. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
POTENTIAL LACK OF PROPRIETARY PROTECTION. The Company's success and ability to
compete will depend in part upon its ability to protect its proprietary
technology and other intellectual property. The Company intends to rely on a
combination of patents, trade secrets, copyrights and trademarks to protect
its intellectual property rights. The Company has filed two patent
applications to protect technology, inventions and improvements it believes
are significant to the development of its business and are protectable under
applicable patent laws. As to the ALERT System, the Company has acquired an
exclusive license to rights under two pending U.S. patent applications, one of
which has been allowed for issuance by the U.S. Patent and Trademark Office
("PTO"), an exclusive license to rights under one corresponding patent
application pending in the European Patent Office and has filed one patent
application in the U.S. on the method of manufacturing the ALERT catheter. In
addition, the Company has a semi-exclusive license to rights under one issued
U.S. patent as to certain technology to conduct temporary ventricular
defibrillation and has filed one patent application in the U.S. relating to a
steerable catheter. There can be no assurance that any of the Company's patent
applications or applications as to which it has acquired licenses will issue
as patents, or that if patents are issued on the Company's applications or on
applications as to which the Company has acquired licenses, they will be of
sufficient scope and strength to provide meaningful protection of the
Company's technology or any commercial advantage to the Company, or that such
patents will not be challenged, invalidated or circumvented in the future.
Moreover, there can be no assurance that the Company's competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, do not presently have or will not seek patents that
will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or in other countries.
The Company's software (which is an integrated component in its EP WorkMate
and EP-3 Clinical Stimulator) is not patented and existing copyright laws
offer only limited practical protection. There can be no assurance that any
legal protection which may be sought and precautions which may be taken by the
Company will be adequate to prevent misappropriation of the Company's software
and trade secrets.
The medical device industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company does not
believe it is infringing any patents or other intellectual property rights of
others and has received no notice of infringement, it is possible that claims
in the future may adversely affect the Company's ability to market certain
products. Any such claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and management
personnel, cause shipment delays or require
9
<PAGE>
the Company to develop alternative technology or to enter into royalty or
licensing agreements. Although patent and intellectual property disputes in
the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. There can be no assurance that, if required,
necessary licenses would be available to the Company on satisfactory terms or
at all, or that the Company could redesign its products or processes to avoid
alleged infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent the Company from manufacturing and selling its products, which would
have a material adverse effect on the Company's business, results of
operations and financial condition. Conversely, costly and time-consuming
litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Business -- Patents and Intellectual Property" and "-- Competition."
SIGNIFICANT COMPETITION. The medical device market, particularly in the area
of EP products, is highly competitive. The Company competes with many
companies, some of which have access to significantly greater financial,
marketing and other resources than the Company. Further, the medical device
market is characterized by rapid product development and technological change.
The present or future products of the Company could be rendered obsolete or
uneconomic by technological advances by one or more of the Company's present
or future competitors or by other therapies. In particular, the ALERT System
is a new technology that must compete with established treatments for atrial
fibrillation as well as with new treatments currently under development by
other companies. The Company's future success will depend upon its ability to
remain competitive with other developers of such medical devices and
therapies. See "Business -- Competition."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The Company's products are generally
purchased by physicians or hospitals. In the U.S., third-party payors are then
billed for the healthcare services provided to patients using those products.
These payors include Medicare, Medicaid and private insurers. Similar
reimbursement arrangements exist in several European countries. Third-party
payors may deny or limit reimbursement for the Company's existing products and
future products such as the ALERT System. Third-party payors are increasingly
challenging the prices charged for medical products and services, and
substantial uncertainty exists as to third-party reimbursement for
investigational and newly approved products. The U.S. Health Care Financing
Authority ("HCFA") has recently entered into an interagency agreement with the
FDA pursuant to which the FDA will place all IDEs it approves into one of two
categories, "Category A" or "Category B." Category A devices are innovative
devices that are believed to be in Class III (the class of medical devices
subject to the most stringent FDA review) and are of a type as to which
initial questions of safety and effectiveness have not been resolved and the
FDA is unsure whether the device type can be safe and effective. They will not
be eligible for Medicare reimbursement. Category B devices include Class III
devices of a type as to which underlying questions of safety and effectiveness
have been resolved or that is known to be capable of being safe and effective
because other devices of that type have been approved. Category B devices will
be eligible for Medicare reimbursement if the devices are furnished in
accordance with the FDA-approved protocols governing clinical trials and all
other Medicare coverage requirements are met. The Company believes the ALERT
System is a Class III device. There can be no assurance that the ALERT System
will be categorized as a Category B device and thus eligible for Medicare
reimbursement during clinical trials. There can be no assurance that
reimbursement will be or remain available for the Company's products, or for
the ALERT System if it is approved for marketing in the U.S., or even if
reimbursement is available, that payors' reimbursement policies will not
adversely affect the Company's ability to sell its products on a profitable
basis. Mounting concerns about rising healthcare costs may cause more
restrictive coverage and reimbursement
10
<PAGE>
policies to be implemented in the future. Changes in government and private
third-party payors' policies toward reimbursement for procedures employing the
Company's products in the U.S. or other countries could have a material
adverse effect on the Company's ability to market its products. See
"Business -- Third-Party Reimbursement."
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS. The Company relies on third-party
distributors for its current sales activities. The Company plans to expand its
marketing internationally and will rely on third-party distributors in foreign
markets. The Company operates pursuant to written agreements terminable upon
60 days notice by distributors and, in certain instances, pursuant to oral
arrangements with distributors. There can be no assurance that distributors
will continue to provide sales for the Company at acceptable levels or that
the Company will be able to replace any existing distributors on advantageous
terms if any of its present relationships are terminated. Further, there can
be no assurance that the Company will be able to make arrangements with new
distributors to access new domestic or international markets. If any third-
party distributor ceases to promote the Company's products and the Company is
unable to make acceptable arrangements with replacement distributors, or if
the Company is unable to make acceptable arrangements with distributors in new
markets, the Company's business, results of operations and financial condition
may be materially adversely affected. See "Business -- Marketing and
Distribution."
HEALTHCARE REFORM. The healthcare industry is subject to changing political,
economic and regulatory influences that may affect the procurement practices
and the operation of healthcare facilities. During the past several years, the
healthcare industry has been subject to an increase in governmental regulation
of, among other things, reimbursement rates and certain capital expenditures.
Certain legislators have introduced legislation or have announced proposals to
reform certain aspects of the U.S. healthcare system, including proposals that
may increase governmental involvement in healthcare, lower reimbursement rates
for both treatment and capital costs incurred by hospitals, or otherwise
change the operating environment for the Company's customers. Significant
changes in healthcare systems may have a substantial impact on the manner in
which the Company conducts its business and could have a material adverse
effect on the Company's business, financial condition and ability to market
the Company's products. Changes resulting from healthcare reform proposals or
the enactment thereof may influence customer purchases and the amount of
reimbursement available from governmental agencies and private third-party
payors for diagnostic and therapeutic procedures conducted with the Company's
products, or could impose limitations on prices that customers will be able to
pay, or the Company may charge, for its products.
ABILITY TO MANAGE GROWTH. The Company has acquired technology and related
assets, introduced or commenced marketing several new products and generally
experienced significant growth in the number of its employees and operations.
This growth has placed, and continued growth will place, a significant strain
on the Company's management, operating and financial systems and resources. To
compete effectively and manage any potential future growth in sales and
manufacturing activities, the Company will be required to implement and
improve operational, financial and management information systems, procedures
and controls on a timely basis and to expand, train, motivate and manage its
work force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support any significant growth in
the Company's business. Any failure to implement and improve operational,
financial and management systems or to increase, train, motivate or manage
employees could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business -- Manufacturing"
and "-- Employees."
DEPENDENCE ON KEY PERSONNEL; RECENT FORMATION OF MANAGEMENT TEAM; NEED TO
RECRUIT ADDITIONAL KEY MANAGEMENT PERSONNEL. The Company is dependent upon a
limited number of key management and technical personnel, particularly David
A. Jenkins, C. Bryan Byrd and Joseph C. Griffin, III.
11
<PAGE>
The Company recently hired its Chief Financial Officer and Vice President,
Sales and is actively recruiting additional management personnel, including a
Vice President, Regulatory Affairs and a Vice President, Marketing. The
Company's success will depend, in part, on its ability to attract and retain
highly-qualified personnel. There can be no assurance that the Company will be
able to attract and retain such personnel. The Company competes for such
personnel with other medical device companies, academic institutions and other
organizations. The loss of any key personnel, the inability to hire or retain
qualified personnel or the failure of such personnel to function effectively
as a management group could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management."
PRODUCT LIABILITY AND INSURANCE. The manufacture and sale of the Company's
products involves the risk of product liability claims. The Company's products
are highly complex and some are, or will be, used in relatively new medical
procedures and in situations where there is a potential risk of serious
injury, adverse side effects or death. Misuse or reuse of catheters may
increase the risk of product liability claims. The Company currently maintains
product liability insurance with coverage limits of $5,000,000 per occurrence
and $5,000,000 in the aggregate per year; however, there can be no assurance
that this coverage will be adequate. Such insurance is expensive and may not
be available in the future on acceptable terms if at all. A successful claim
against or settlement by the Company in excess of its insurance coverage or
the Company's inability to maintain insurance in the future could have a
material adverse effect on the Company's business, results of operations and
financial condition.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON HI-TRONICS DESIGNS, INC. To
date, the Company's manufacturing activities have been limited. The Company
must manufacture, or contract for the manufacturing of, products in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
The Company currently manufactures substantially all of its catheter products
and relies on Hi-Tronics Designs, Inc. ("HDI") for the manufacture of the EP
WorkMate, EP-3 Clinical Stimulator, TeleTrace III Receiver and the MemoryTrace
line of arrhythmia monitors. Such manufacturing consists primarily of testing
of components, final assembly and systems testing. Some components are
manufactured by subcontractors to HDI in accordance with custom
specifications. Any interruption in the supply from HDI or its subcontractors
would have a material adverse effect on the Company's ability to deliver its
products until acceptable arrangements can be made with a qualified
alternative source of supply. There can be no assurance that the Company would
be able to reach an acceptable arrangement with an alternative source of
supply at acceptable prices and adequate quality levels on a timely basis. If
the Company were unable to do so, such an interruption would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, to manufacture products in quantities necessary to
achieve and sustain profitability, the Company may be required to expand its
manufacturing facilities, hire and train additional personnel, and/or locate
additional contract manufacturers. The Company has no experience in large-
scale manufacturing and there can be no assurance that the Company will be
able to successfully develop or otherwise obtain adequate and efficient
manufacturing capability. See "Business -- Manufacturing" and "Certain
Transactions."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. To the extent the Company
sells its products outside the U.S., the Company will be subject to
fluctuations in currency exchange rates and other risks of foreign operations,
including tariff regulations and export license requirements, unexpected
changes in regulatory requirements, longer periods to collect accounts
receivable, potentially inadequate protection of intellectual property rights,
local taxes, restrictions on repatriation of earnings and economic and
political instability. There can be no assurance that such factors will not
have a material adverse effect on the Company's ability to develop profitable
foreign sales and, consequently, on the Company's business, results of
operations and financial condition.
NO PRIOR PUBLIC MARKET, LACK OF LIQUIDITY; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to this offering, there has been no public market for the
Company's Common Stock. The initial public offering price will
12
<PAGE>
be determined through negotiations between the Company and the Underwriter.
There can be no assurance that an active trading market will develop or will
be sustained after completion of this offering or that the market price of the
Common Stock will not decline below the initial public offering price. In
addition, the market for securities of early stage, small market
capitalization companies has been highly volatile in recent years, often as a
result of factors unrelated to a company's operations. The Company believes
factors such as quarterly fluctuations in financial results, announcements of
new developments relating to cardiac care diagnosis and treatment therapies
and developments in third-party reimbursement policy and in the medical device
industry could contribute to the volatility of the price of its Common Stock,
causing it to fluctuate significantly. These factors, as well as general
economic conditions, such as recessions or high interest rates, or other
events unrelated to the Company or its products, may adversely affect the
market price of the Common Stock. See "Underwriting."
AVAILABILITY OF FUTURE CAPITAL. Since inception, the Company has experienced
negative cash flow from its operations. In the future the Company may require
substantial additional funds for research and development programs, patent
prosecution, the expenses of seeking regulatory clearances, other operating
expenses and expenditures to build manufacturing, inventories and sales and
marketing capabilities. There can be no assurance that funds for these
purposes, whether from financial markets, arrangements with corporate partners
or other sources, will be available when needed or on terms acceptable to the
Company. Inability to obtain additional financing may require the Company to
delay, scale back or eliminate certain of its research and development
programs, which could have a material adverse effect on its business,
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
TRANSACTIONS WITH AFFILIATES AND POTENTIAL CONFLICTS. Anthony Varrichio, a
director of the Company, and William Winstrom, both of whom are shareholders
of the Company, are officers, directors and shareholders of HDI. Medtronic,
Inc. ("Medtronic") is a shareholder of the Company and HDI, and Lester
Swenson, a director of the Company, is an officer of Medtronic. HDI has sold
rights to various products to the Company, performs research and development
services for the Company and currently manufactures substantially all of the
Company's non-catheter products. While the Company believes its arrangements
with HDI have been, and will continue to be, on terms no less favorable to the
Company than it could obtain from third parties, there can be no assurance
that all arrangements between the Company and HDI will be as favorable to the
Company as they would be in the absence of its relationships with affiliates
of HDI. See "Certain Transactions."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common Stock
in the public market after this offering could adversely affect the market
price of the Common Stock. Upon the completion of this offering and assuming
the 1995 Warrants are exercised in full, the Company will have 8,099,917
shares of Common Stock outstanding. Of this amount, the 3,000,000 shares sold
in this offering (plus any additional shares sold upon the Underwriter's
exercise of its over-allotment option) will be available for immediate sale in
the public market. In addition, 270,000 shares will be eligible for immediate
resale pursuant to Rule 144(k). Commencing 90 days after the date of this
Prospectus, approximately 555,000 additional shares will be eligible for
resale (subject to the notice, volume and other limitations of Rule 144). Upon
expiration of a one-year lock-up agreement with the Underwriter (or earlier,
to the extent such lock-up is waived by the Underwriter), 530,500 shares will
be eligible for sale without restriction and 2,169,826 shares will be eligible
for resale (subject to the notice, volume and other limitations of Rule 144).
An aggregate of 1,459,000 shares of Common Stock may be issued upon exercise
of outstanding stock options and warrants following the offering. Options
covering 621,000 shares were vested and exercisable as of May 1, 1996. Shares
issued upon exercise of such options will be restricted securities within the
meaning of Rule 144 and be subject to the volume, manner of sale, notice and
public information requirements of Rule 144; provided, certain shares issued
upon exercise of
13
<PAGE>
options granted by the Company will also be available for sale in the public
market pursuant to Rule 701 under the Securities Act, subject to the lock-up
agreements with the Underwriter. See "Shares Eligible for Future Sale" and
"Underwriting."
CONCENTRATION OF OWNERSHIP. After the offering, the Company's directors and
executive officers and their affiliates will own beneficially an aggregate of
approximately 24.3% of the Company's outstanding Common Stock after the
offering (approximately 23.1% if the Underwriter's over-allotment option is
exercised in full). The ownership interest of these persons will increase if
outstanding stock options and warrants are exercised. As a result, these
shareholders, acting together, will have significant influence over all
matters requiring approval by the shareholders of the Company. This level of
ownership could have an effect in delaying, deferring or preventing a change
in control of the Company and may adversely affect the voting and other rights
of other holders of Common Stock. See "Principal Shareholders."
MANAGEMENT'S BROAD DISCRETION OVER USE OF PROCEEDS. Approximately $12.2
million of the net proceeds of the offering have been designated for working
capital and general corporate purposes and for potential acquisitions of
technology and products. The Company does not presently have any specific uses
designated for such proceeds. As a consequence, the Company's management will
have the discretion to allocate that portion to uses the shareholders may not
deem desirable, and there can be no assurance that the proceeds can or will be
invested to yield a significant return. See "Use of Proceeds."
14
<PAGE>
THE COMPANY
The Company was incorporated in New Jersey under the name EP Medical, Inc. in
January 1993, and changed its name to EP MedSystems, Inc. in April 1996. The
Company's principal offices are located at 58 Route 46 West, Budd Lake, New
Jersey 07828, and its telephone number is (201) 691-6400. Unless the context
requires otherwise, references to the Company include EP MedSystems, Inc. and
its wholly-owned subsidiary, ProCath Corporation.
USE OF PROCEEDS
Based on an assumed public offering price of $7.00 per share, the Company
estimates that it will receive net proceeds of approximately $18,630,000
($21,559,500 if the Underwriter's over-allotment option is exercised in full)
from the sale of the Common Stock offered hereby after deducting underwriting
discounts and commissions and estimated offering expenses.
The Company expects to use such net proceeds approximately as follows: (i)
$1,500,000 for clinical trials and related development expenses of the ALERT
System, (ii) $1,500,000 for expansion of sales and marketing, (iii) $1,500,000
for expansion of manufacturing and assembly, (iv) $1,137,500 for repayment of
principal of the Company's outstanding 1995 Debentures, (v) $750,000 for
expansion of research and development and (vi) the balance of approximately
$12,200,000 for working capital and general corporate purposes and for
potential acquisitions of technology and products.
The Company's 1995 Debentures have a principal balance of $1,137,500, bear
interest at the rate of 6.0% per annum and mature on June 30, 2000 (the "1995
Debentures"). Upon the repayment of the 1995 Debentures, the 1995 Warrants
remain exercisable at $2.00 per share for a 30 day period. If all of the 1995
Warrants are exercised, the proceeds will be $1,137,500.
The above uses of proceeds are estimates based upon the Company's current
expectations regarding numerous factors that may affect the Company's
business, results of operations and financial condition. These include
uncertainties as to revenues from existing products, progress in new product
development, competition, technological change and general economic
conditions. The Company is not currently in negotiations as to and has not
targeted any specific acquisitions of or investments in businesses or
products, but the Company expects that any such acquisitions or investments
that may occur in the future would be in the medical device industry.
Management will have broad discretion as to the application of such net
proceeds. Pending the use of the net proceeds for the above purposes, the
Company intends to invest such funds in investment-grade obligations,
including short-term, interest-bearing money market instruments.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not expect
to pay any such dividends in the foreseeable future. The payment of dividends,
if any, in the future will be within the discretion of the Board of Directors
and will depend upon the Company's earnings, if any, its capital requirements
and financial condition and other relevant factors.
15
<PAGE>
CAPITALIZATION
The following table sets forth the Company's actual capitalization as of March
31, 1996 and as adjusted to reflect the issuance and sale of 3,000,000 shares
of Common Stock offered by the Company hereby at an assumed public offering
price of $7.00 per share, the application of a portion of the net proceeds
thereof to repay the 1995 Debentures and the assumed exercise of all of the
1995 Warrants at $2.00 per share resulting in the issuance of 568,750
additional shares of Common Stock.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt............... $ 17,200 $ 17,200
Total long term debt............................ $ 1,174,453 $ 83,450
Shareholders' equity (deficit):
Preferred Stock, no par value;
5,000,000 shares authorized; no
shares issued and outstanding ................ -- --
Common Stock, $0.001 stated value; 25,000,000
shares authorized; 4,518,667 shares issued and
outstanding; and 8,087,417 shares to be
outstanding as adjusted(1).................... 4,519 8,088
Additional paid-in capital..................... 3,805,921 23,569,852
Accumulated deficit(2)......................... (3,556,999) (3,603,496)
----------- -----------
Total shareholders' equity...................... 253,441 19,974,444
----------- -----------
Total capitalization............................ $ 1,445,094 $20,075,094
=========== ===========
</TABLE>
- ---------------------
(1) Excludes 1,371,500 shares issuable upon exercise of options outstanding as
of March 31, 1996 and 150,000 shares issuable upon exercise of warrants to
be issued to the Underwriter. See "Executive Compensation -- 1995 Long
Term Incentive Plan," "-- 1995 Director Option Plan," "Certain
Transactions," "Description of Capital Stock" and "Underwriting."
(2) Includes the write-off of $46,497 of unamortized discount on 1995
Debentures upon exercise of the 1995 Warrants.
16
<PAGE>
DILUTION
At March 31, 1996, the Company had a net tangible book value of $(443,485), or
$(.10) per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock. After giving effect to the sale by the Company of the 3,000,000
shares of Common Stock offered hereby (at the assumed initial public offering
price of $7.00 per share and after deducting underwriting discounts and
commissions and estimated offering expenses), the net tangible book value of
the Company at March 31, 1996 would have been $18,186,515, or $2.42 per share,
representing an immediate increase in net tangible book value of $2.52 per
share to existing shareholders and an immediate dilution in net tangible book
value of $4.58 per share to purchasers of Common Stock in the offering. The
following table illustrates the foregoing dilution to purchasers of Common
Stock in the offering on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $7.00
Net tangible book value per share at March 31, 1996.......... (.10)
Increase attributable to new investors....................... 2.52
----
Net tangible book value per share after the offering.......... 2.42
-----
Dilution per share to new investors........................... $4.58
=====
</TABLE>
The following table summarizes the relative investments of existing
shareholders and new investors giving effect to the sale by the Company of the
shares offered hereby at an assumed initial public offering price of $7.00 per
share before deducting underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CASH CONSIDERATION
----------------- -----------------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------------- -------------------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders... 4,518,667 60% $ 1,765,950 8% $ .39
New Investors........... 3,000,000 40 21,000,000 92 $7.00
--------- --- ---------------- --------
Total................. 7,518,667 100% $ 22,765,950 100%
========= === ================ ========
</TABLE>
The above tables assume no exercise of the Underwriter's over-allotment option
and no exercise of outstanding options or warrants. To the extent options or
warrants are exercised, there will be further dilution to new investors. In
particular, if all of the 1995 Warrants are exercised and the unamortized
discount on 1995 Debentures is written off, net tangible book value at March
31, 1996 would have been $19,277,518, or $2.38 per share, representing an
immediate increase in net tangible book value of $2.48 per share to existing
shareholders and an immediate dilution in net tangible book value of $4.62 per
share to purchasers of Common Stock in the offering, and the percentage of
shares held by new investors would decrease to 37% of the total shares of
Common Stock outstanding after the offering.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the period ended
December 31, 1993 and the years ended December 31, 1994 and 1995 and as of
December 31, 1993, 1994 and 1995 are derived from, and are qualified by
reference to, the Consolidated Financial Statements of the Company and the
Notes thereto, which have been audited by Arthur Andersen LLP, independent
public accountants. The selected financial data for the three months ended
March 31, 1995 and 1996 and as of March 31, 1996 are derived from the
unaudited financial statements of the Company included in this Prospectus and,
in the Company's opinion, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
herein. The results of operations for the three months ended March 31, 1995
and 1996 are not necessarily indicative of results to be expected for any
future period. These data should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD FROM INCEPTION YEAR ENDED DECEMBER 31, MARCH 31,
(JANUARY 29, 1993) TO ------------------------ --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
--------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales............... $ 662,925 $ 1,512,076 $ 2,001,137 $ 464,112 $755,663
Cost of sales........... 395,375 913,457 1,257,468 264,157 357,259
--------- ----------- ----------- --------- ---------
Gross profit........... 267,550 598,619 743,669 199,955 398,404
Sales and marketing
expenses............... 61,050 262,770 477,209 106,175 105,592
General and
administrative
expenses............... 208,773 648,135 757,635 150,733 242,872
Depreciation and
amortization........... 330,867 383,532 170,271 32,837 37,429
Research and development
expenses............... 61,313 129,855 320,311 72,636 61,252
Acquired research and
development............ -- 500,000 450,000 -- --
Write-off of intangible
assets................. -- 215,216 -- -- --
--------- ----------- ----------- --------- ---------
Loss from operations... (394,453) (1,540,889) (1,431,757) (162,426) (48,741)
Interest expense........ (15,757) (55,961) (50,893) (9,770) (18,548)
--------- ----------- ----------- --------- ---------
Net loss............... (410,210) (1,596,850) (1,482,650) (172,196) (67,289)
========= =========== =========== ========= =========
Net loss per share...... $ (0.09) $ (0.28) $ (0.25) $ (.03) $ (.01)
========= =========== =========== ========= =========
Weighted average number
of common and common
equivalent shares
outstanding............ 4,631,755 5,613,496 5,922,888 5,922,888 5,922,888
========= =========== =========== ========= =========
Supplementary net loss
per share(1)........... $ (0.24) $ (0.01)
=========== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------
1993 1994 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
DATA:
Cash and cash equivalents...... $ 204,286 $ 20,008 $ 34,588 $ 265,582
Working capital (deficit)...... (291,793) (158,769) 102,809 319,723
Total assets................... 1,969,729 1,789,346 2,043,860 2,591,130
Long term liabilities less
current portion............... 307,494 180,000 1,180,318 1,174,453
Shareholders' equity
(deficit)..................... $ 792,378 $ 641,678 $ (179,270) $ 253,441
</TABLE>
- ---------------------
(1) Supplementary net loss per share has been calculated as if all of the
Company's 1995 Debentures outstanding as of December 31, 1995 and March
31, 1996 had been repaid as of the beginning of the period or on the date
of issuance, if later. The calculation assumes the elimination of interest
expense and the issuance of common shares as of the beginning of the
period or on the date of issuance, if later, to pay the 1995 Debentures.
See "Use of Proceeds" and Note 1 to the Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company was formed in January 1993 to develop, manufacture, market and
sell a range of EP products used to diagnose, monitor and treat certain
cardiac disorders. The Company has developed the ALERT System, which uses a
proprietary electrode catheter to deliver measured, variable, low energy
electrical impulses directly to the inside of the heart in order to convert
atrial fibrillation to a normal heart rhythm. The Company is currently
preparing a protocol as part of an application for an IDE from the FDA to
commence human clinical trials in the U.S. Since inception, the Company has
acquired certain technology and related assets as well as certain marketing
rights, has developed new products and has introduced or begun marketing
approximately 20 products. The following summarizes the most significant
product acquisitions and introductions.
. March 1993: The Company purchased from HDI all rights to a clinical
cardiac stimulator (the "EP-2") and began selling the EP-2 in May 1993.
. November 1993: The Company acquired substantially all the assets of
Professional Catheter Corporation ("PCC"), a manufacturer of cardiac
electrode catheters and other related disposable products. The Company
immediately began sales of such catheters and related products and
enhancements.
. February 1994: Under an agreement with HDI, the Company began selling a
certain product for monitoring heart signals telephonically (the
"TeleTrace III Receiver"), servicing TeleTrace III Receivers previously
sold by a third party and distributing certain arrhythmia monitors
produced by HDI. In July 1994, the Company acquired from HDI all rights
to the TeleTrace III Receiver, certain arrhythmia monitors and certain
software for monitoring heart signals.
. February 1994: The Company acquired all rights to the PaceBase and
HeartBase computer software, certain software used with the TeleTrace III
Receiver and certain related technology from BioPhysical Interface Corp.
. May 1994: The Company introduced the EP-3 Clinical Stimulator (the "EP-
3"), successor to the EP-2. The Company ceased selling the EP-2 in
November 1994.
. September 1995: The Company initiated sales of the EP WorkMate, a
computer workstation for use in EP labs. The technology for the EP
WorkMate was acquired from ElectroPhysiology Systems, Inc. in May 1994.
. November 1995: The Company acquired an exclusive license to develop,
manufacture and sell an electrode catheter for internal cardioversion of
atrial fibrillation, to be incorporated in the ALERT System.
The Company recognizes product revenues on the date of shipment. Revenues
related to extended warranty contracts are recognized on a straight-line basis
over the life of the contract.
Expenditures for routine maintenance and upgrades of computer software are
expensed currently as research and development. Research and development costs
incurred in connection with developing existing and acquired technology are
expensed as incurred. Expenditures to acquire rights to technology are
expensed as acquired research and development except to the extent that, at
the time of acquisition, technological feasibility for use in a product has
been established or a future alternative use exists. To the extent
technological feasibility was established at the time of acquisition or a
future alternative use existed, expenditures are recorded as intangible assets
and amortized over the related products' estimated useful lives. In connection
with its acquisition of the assets of PCC in November 1993, the Company
recorded intangible assets of $774,099, which are being amortized over 15
years on a straight-line basis. In connection with its acquisition of
19
<PAGE>
the PaceBase, TeleTrace and HeartBase software in February 1994 and of the
TeleTrace III Receiver and arrhythmia monitor technology in July 1994, the
Company recorded intangible assets of $50,000 and $100,000, respectively,
which are being amortized over three years on a straight-line basis. In
connection with its acquisition of the rights to the EP-2 in March 1993, the
Company recorded intangible assets of $774,000, to be amortized over two
years. It wrote off the unamortized portion of that amount, $215,216, in
November 1994 when it discontinued selling the EP-2.
The Company has been unprofitable since inception and, as of March 31, 1996,
had an accumulated deficit of approximately $3.5 million. The Company's
financial statements have been prepared assuming that the Company will
continue as a going concern. This offering is an integral part of the
Company's plan to raise the capital necessary to meet its goal of increasing
revenues in order to continue as a going concern. Upon consummation of this
offering, the Company believes that it will have sufficient capital to carry
out its proposed business objectives for at least the next 12 months.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from
the Company's Consolidated Statements of Operations as a percentage of net
sales. The impact of inflation for the periods presented was not significant.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
INCEPTION (JANUARY DECEMBER 31, MARCH 31,
29, 1993) THROUGH -------------- ---------------------
DECEMBER 31, 1993 1994 1995 1995 1996
------------------ ------ ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 59.6 60.4 62.8 56.9 47.3
----- ------ ----- --------- ---------
Gross profit.......... 40.4 39.6 37.2 43.1 52.7
Sales and marketing
expenses............... 9.2 17.4 23.8 22.9 14.0
General and
administrative
expenses............... 31.5 42.9 37.9 32.5 32.1
Depreciation and
amortization........... 49.9 25.3 8.5 7.1 5.0
Research and development
expenses............... 9.3 8.6 16.0 15.6 8.1
Acquired research and
development............ -- 33.1 22.5 -- --
Write-off of intangible
assets................. -- 14.2 -- -- --
----- ------ ----- --------- ---------
Loss from operations.. (59.5) (101.9) (71.5) (35.0) (6.5)
Interest expense........ 2.4 3.7 2.6 2.1 2.4
----- ------ ----- --------- ---------
Net loss.............. (61.9)% (105.6)% (74.1)% (37.1)% (8.9)%
===== ====== ===== ========= =========
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net sales increased $291,551 (or 62.8%) from $464,112 to $755,663 in the three
months ended March 31, 1996. The increase was due to the initiation of sales
of the EP WorkMate in September 1995 and the recognition of deferred revenue
on certain disposable products. The increase was partially offset by decreased
sales of PaceBase/TeleTrace products and MemoryTrace arrhythmia monitors. The
level of 1996 sales will depend significantly on sales of the EP WorkMate. See
"Risk Factors--Dependence on EP WorkMate."
Cost of sales increased $93,102 (or 35.2%) from $264,157 to $357,259. Gross
profit increased $198,449 (or 99.2%) from $199,955 to $398,404 and increased
as a percentage of sales from 43.1% to 52.7% due to higher gross margins
realized on sales of the EP WorkMate and certain disposable products. To date,
the Company has offered discounts to purchasers of the EP WorkMate to help
20
<PAGE>
establish a base of customers. In the future, the Company will attempt to
reduce its discount and increase its list price for the EP WorkMate. However,
given the competitive nature of the market there can be no assurance that it
will be successful with respect to its pricing goals for the EP WorkMate.
Sales and marketing expenses decreased $583 (or 0.5%) from $106,175 to
$105,592 and as a percentage of net sales from 22.9% to 14.0%. The decrease
was due to decreased advertising and printing costs. The decrease was offset
by increased direct selling costs resulting from the hiring of a Vice
President, Sales in November 1995. The decrease as a percentage of sales was
due to increased sales. The Company expects these expenses to increase
significantly during the second half of 1996 to support its increased sales
efforts.
General and administrative expenses increased $92,139 (or 61.1%) from $150,733
to $242,872 but decreased as a percentage of net sales from 32.5% to 32.1%.
The dollar increase was due to the hiring of several management personnel and
increased rent and other administrative costs associated with the increased
operating activities. The decrease as a percentage of sales was due to
increased sales. The Company expects these costs to continue to increase to
support increased operations and the ALERT clinical trials.
Depreciation and amortization expenses increased $4,592 (or 14.0%) from
$32,837 to $37,429 but decreased as a percentage of net sales from 7.1% to
5.0%. The dollar increase was due to depreciation on new property and
equipment. The decrease as a percentage of sales was due to increased sales.
Research and development expenses decreased $11,385 (or 15.7%) from $72,637 to
$61,252 and decreased as a percentage of net sales from 15.6% to 8.1%. The
decrease was due to outside consulting expenses associated with the steerable
catheter technology and the EP WorkMate in 1995 which were not recurring
during the three months ended March 31, 1996. The Company expects these
expenses to increase in connection with the development of new products,
including the ALERT System, and the enhancement of existing products.
Interest expense increased $8,778 (or 89.8%) from $9,770 to $18,548 and
increased as a percentage of net sales from 2.1% to 2.4%. The increase was due
to interest expense associated with the 1995 Debentures issued beginning in
July 1995. The increase was partially offset by repayment of a portion of
indebtedness incurred in the acquisition of catheter and other technologies.
The Company expects interest expense to decline upon the repayment of the 1995
Debentures in connection with a portion of the offering proceeds. See "Use of
Proceeds."
Net loss decreased $104,907 (or 60.9%) from $172,196 to $67,289 and as a
percentage of net sales from 37.1% to 8.9%. The decrease in net loss for the
three month period ending March 31, 1996 was due to increased sales and higher
gross margins, partially offset by higher general and administrative expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased $489,061 (or 32.3%) from $1,512,076 in 1994 to $2,001,137
in 1995. The increase was due to increased sales of PaceBase and TeleTrace
products and diagnostic and temporary pacing catheters as well as the
initiation of sales of the EP WorkMate in September 1995. The increase was
partially offset by a decline in sales of the EP-2 due to the discontinuation
of sales of the EP-2 in 1994.
Cost of sales increased $344,011 (or 37.7%) from $913,457 to $1,257,468. Gross
profit increased $145,050 (or 24.2%) from $598,619 to $743,669 but decreased
as a percentage of net sales due to increases in catheter manufacturing
overhead that were not fully offset by increased product sales.
Sales and marketing expenses increased $214,439 (or 81.6%) from $262,770 to
$477,209 and as a percentage of net sales from 17.4% to 23.8%. The increase
was due to increased sales, the hiring
21
<PAGE>
of additional sales and marketing personnel, increased commissions generated
from sales of the EP-3 through distributors, increased promotion of existing
products and expenses incurred in connection with the introduction of the EP
WorkMate in 1995.
General and administrative expenses increased $109,500 (or 16.9%) from
$648,135 to $757,635 but decreased as a percentage of net sales from 42.9% to
37.9%. The dollar increase was due to the hiring of additional administrative
personnel, increased usage of professional services and increased insurance
and rent expenses. The decrease as a percentage of net sales was due to
increased sales.
Depreciation and amortization decreased $213,261 (or 55.6%) from $383,532 to
$170,271 and as a percentage of net sales from 25.3% to 8.5%. The decrease was
due to the cessation of amortization of the intangible asset related to the
EP-2, which was written off in 1994, partially offset by increases in
amortization of intangible assets related to arrhythmia monitor technology
acquired during 1994.
Research and development expenses increased $190,456 (or 146.7%) from $129,855
to $320,311 and as a percentage of net sales from 8.6% to 16.0%. The increase
was due to the payment of $138,000 to HDI in 1995 for services in connection
with development of the TeleTrace III Receiver, TeleTrace IV Receiver and
increased internal research and development related to the EP WorkMate. While
research and development costs related to the ALERT System were nominal in
1995, the Company expects that such expenses will increase substantially in
1996 and 1997 due to the initiation of clinical trials.
In connection with the Company's acquisition of the ALERT catheter license,
the Company recorded acquired research and development expense of $420,000,
representing the value of stock options granted to Dr. Alt, in November 1995.
Also in November 1995, the Company recorded acquired research and development
expense of $30,000 in connection with a semi-exclusive license of a patent
relating to certain technology permitting temporary ventricular
defibrillation.
Interest expense decreased $5,068 (or 9.1%) from $55,961 to $50,893 and as a
percentage of revenues from 3.7% to 2.6%. The decrease was due to the
Company's lower outstanding indebtedness in 1995 resulting from the repayment
of certain indebtedness in September 1995, partially offset by interest
expense associated with the 1995 Debentures.
Net loss decreased $114,200 (or 7.2%) from $1,596,850 to $1,482,650 and as
percentage of net sales from 105.6% to 74.1%. The decrease was due to
increased sales and decreased depreciation and amortization in 1995, partially
offset by lower gross margins, increased sales and marketing expenses and
general and administrative expenses.
Year Ended December 31, 1994 Compared to Period Ended December 31, 1993
Net sales increased $849,151 (or 128.1%) from $662,925 in the period from the
commencement of operations on January 29, 1993 to December 31, 1993 to
$1,512,076 in 1994. The increase was due to increased sales of existing
products, the initiation of sales of products acquired by the Company in 1994
and the fact that the Company was not in business for all of 1993.
Cost of sales increased $518,082 (or 131.0%) from $395,375 to $913,457 due to
the increase in sales described above. Gross profit increased $331,069 (or
123.7%) from $267,550 to $598,619. As a percentage of net sales, gross profit
decreased from 40.4% to 39.6% due to the initiation of lower margin catheter
sales in 1994.
Sales and marketing expenses increased $201,720 (or 330.4%) from $61,050 to
$262,770 and as a percentage of net sales from 9.2% to 17.4%. The increase was
due to increased promotion of new products, expenses related to the Company's
increased attendance at trade shows and increased commissions generated from
sales of products introduced in 1994.
22
<PAGE>
General and administrative expenses increased $439,362 (or 210.4%) from
$208,773 to $648,135 and as a percentage of net sales from 31.5% to 42.9%. The
increase was due to the inclusion of the operations of ProCath Corporation
commencing in November 1993 and the hiring of additional administrative
personnel and increased operations in 1994.
Depreciation and amortization increased $52,665 (or 15.9%) from $330,867 to
$383,532, but decreased as a percentage of net sales from 49.9% to 25.3%. The
dollar increase was due to increased amortization in 1994 relating to
acquisitions of technology during 1993 and 1994. The decrease as a percentage
of net sales was due to increased sales.
Research and development expenses increased $68,542 (or 111.8%) from $61,313
to $129,855, but decreased as a percentage of net sales from 9.3% to 8.6%. The
dollar increase was due to the Company's hiring of additional engineering
personnel in 1994. The decrease as a percentage of net sales was due to
increased sales.
In connection with the Company's acquisition of technology from
ElectroPhysiology Systems, Inc., the Company recorded acquired research and
development expenses of $400,000, representing the value of Common Stock
issued in May 1994. In October 1994, the Company recorded acquired research
and development expenses of $100,000, representing the value of Common Stock
issued in connection with the Company's acquisition of certain steerable
catheter technology.
The Company discontinued sales of the EP-2 in November 1994, recognizing a
write-off of intangible assets of $215,216.
Interest expense increased $40,204 (or 255.2%) from $15,757 to $55,961 and as
a percentage of net sales from 2.4% to 3.7%. The increase was due to the
Company's higher outstanding indebtedness in 1994.
Net loss increased $1,186,640 (or 289.3%) from $410,210 to $1,596,850 and as a
percentage of net sales from 61.9% to 105.6%. The increase was due to
increased acquired research and development expense related to the Company's
acquisition of technology, write-off of intangible assets and increased
general and administrative and sales and marketing expenses in 1994 which were
partially offset by increased sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through the sale of Common Stock; the
issuance of the 1995 Debentures; a shared bank line of credit with HDI;
extended payment terms granted by HDI for products manufactured for the
Company; and the issuance of notes in connection with the acquisition of
products from HDI. From inception through March 31, 1996, the Company has
obtained funds, technologies, businesses and services from the issuance of
$3,755,738 of Common Stock and rights to purchase Common Stock, and $737,500
from the issuance of 1995 Debentures. In addition, in 1995, the Company issued
$400,000 face amount of 1995 Debentures in satisfaction of accounts payable
and notes payable to related parties in the same amount.
Net cash used in operating activities for the three months ended March 31,
1996 was $292,161. Accounts receivable increased by $168,562 in the three
months ended March 31, 1996 from $438,120 to $606,682, due to increased
product sales. The net loss from operations of $67,289 reflects the
recognition of deferred revenue on the sale of certain disposable products
that had been prepaid, resulting in a decrease in deferred revenue of $108,875
from $145,875 to $37,000. Accounts payable decreased by $24,910 from $281,118
to $256,208 resulting from the application of a portion of the proceeds of
1996 stock sales to pay certain accounts payable. At March 31, 1996, the
Company had cash and cash equivalents of $265,582, an increase of $230,994
since December 31, 1995.
Net cash used in operating activities for the year ended December 31, 1995 was
$337,916 as compared to $719,467 for the year ended December 31, 1994. The net
use of cash in operations during 1995 was due primarily to the Company's
$1,482,650 net loss from operations. Although
23
<PAGE>
accounts receivable increased by $142,049 in 1995 from $296,071 to $438,120,
due to increased product sales, the increase was more than offset by a
decrease in inventories of $18,433 from $487,698 to $469,265 and an increase
in accounts payable, accrued expenses and payables due to related party of
$258,879 from $529,355 to $788,235. The net use of cash in operations during
1994 was due primarily to the Company's $1,596,850 loss from operations and,
to a lesser extent, an increase in accounts receivable of $234,067 from
$62,004 to $296,071. At December 31, 1995, the Company had cash and cash
equivalents of $34,588, an increase of $14,580 since December 31, 1994.
Capital expenditures were $18,245 and $55,754 during the three months ended
March 31, 1996 and the twelve months ended December 31, 1995, respectively. As
of the date of this Prospectus, the Company does not have any material
commitments for capital expenditures. However, the Company expects to use a
portion of the proceeds of this offering for the purchase of capital equipment
and for expansion of manufacturing and assembly. See "Use of Proceeds." The
Company leases office and manufacturing space and certain office equipment
under operating leases. See Note 8 of the Consolidated Financial Statements.
In 1995 the Company also purchased a $100,000 debenture payable by Falfab
International, a United Kingdom angioplasty catheter manufacturer, accruing
interest at 8% and maturing on July 15, 1996. The fair market value of this
note receivable approximates book value. See Note 1 of the Consolidated
Financial Statements.
Net cash provided by financing activities was $508,250 for the year ended
December 31, 1995 and included $687,500 of net proceeds of the sale of the
1995 Debentures. During September 1995, the Company repaid $109,250 in
principal due on a note issued in connection with its November 1993
acquisition of PCC. The balance of the note was refinanced to be paid in
installments of $4,300 per quarter through 1997 with a balloon payment of
$74,850 due on January 1, 1998. The Company also repaid $70,000 in principal
due on a note payable to a related party. Net cash provided by financing
activities was $568,219 during 1994, including $663,400 proceeds from the
issuance of Common Stock.
The 1995 Debentures bear interest at the rate of 6% per annum payable
quarterly and are due and payable on June 30, 2000. In connection with the
sale of the 1995 Debentures, the Company issued the 1995 Warrants to purchase
568,750 shares of Common Stock at a price of $2.00 per share exercisable at
any time until the earlier of June 30, 2000 or 30 days after full repayment of
the corresponding 1995 Debentures.
During the first quarter of 1996, the Company issued 166,667 shares of Common
Stock for $500,000 in cash, or $3.00 per share, and collected a $50,000 note
receivable. During May 1996, the Company borrowed $50,000 from HDI. The
promissory note matures on June 30, 1996 and provides for interest accruing at
9.25% per annum. The Company intends to use a portion of the net proceeds of
this offering to repay the $1,137,500 aggregate principal balance and all
accrued interest on the 1995 Debentures. See "Use of Proceeds."
The Company is dependent on the proceeds of this offering or other financing
to file its PMA application, complete clinical trials of the ALERT System,
expand its sales and marketing capabilities, acquire new products and expand
its existing product line. The Company believes, based on its currently
proposed plans and assumptions relating to its operations, that the proceeds
of this offering will be sufficient to complete research and clinical trials
for the ALERT System and to otherwise satisfy its contemplated cash
requirements for at least 12 months following the consummation of this
offering. In the event that this proposed public offering is not completed,
management will seek additional funds through private financing. There can be
no assurance that the Company will be able to obtain such financing or, if it
is obtained, that it will be on terms favorable to the Company. Failure to
obtain such financing would have a material adverse effect on the Company.
24
<PAGE>
BUSINESS
GENERAL
EP MedSystems, Inc. is a leader in the development of a new product for
internal cardioversion of atrial fibrillation and also develops, markets,
sells and services cardiac electrophysiology ("EP") products used to diagnose,
monitor and treat certain cardiac disorders. The Company has developed the
Atrial Low Energy Reversion Therapy catheter system (the "ALERT System"),
which uses a proprietary electrode catheter to deliver measured, variable, low
energy electrical impulses directly to the inside of the heart in order to
convert atrial fibrillation to a normal heart rhythm. The Company is not aware
of any other product currently being developed or marketed that permits low
energy internal cardioversion of atrial fibrillation with a single catheter.
The Company is currently preparing a protocol as part of an application for an
IDE from the FDA to commence human clinical trials in the U.S.
The Company believes the ALERT System will offer significant advantages over
current therapies for the treatment of atrial fibrillation, which generally
consist of a combination of external cardioversion and antiarrhythmic, heart-
rate controlling and anticoagulation drugs. External cardioversion involves
the application of high levels of electrical energy through the chest wall to
the heart. Current therapies present certain risks and side effects, and none
are reported to be completely effective. With both antiarrhythmic drugs and
external cardioversion, atrial fibrillation recurs in a substantial percentage
of patients treated. Studies have indicated that antiarrhythmic drugs may be
associated with an increased risk of life-threatening ventricular arrhythmias
and other adverse side effects. Further, external cardioversion involves the
application of substantially greater electrical energy to the patient,
requiring the use of general anesthesia and causing greater trauma to the
patient.
The Company also currently designs, manufactures and markets a broad-based
line of specially-designed products for the cardiac EP market for the purpose
of diagnosing, monitoring, managing and treating irregular heartbeats known as
arrhythmias. This product line includes the only computerized EP clinical
stimulator marketed in the U.S. and the EP WorkMate, a computerized monitoring
and analysis workstation introduced in late 1995. The Company believes that
the EP WorkMate, when integrated with the Company's computerized EP-3 Clinical
Stimulator, offer the most advanced computer tools available to the EP market.
In comparison to other EP computer systems, the EP WorkMate offers, among
other features, 64 recorded channels of cardiac electrical data, real-time
analysis including graphical and quantitative display of such data, superior
ease of use and a single keyboard for all operations. This product line also
includes diagnostic EP catheters, temporary pacing catheters and related
disposable supplies and arrhythmia monitors.
THE EP MARKET
Electrophysiology, the diagnosis and treatment of cardiac arrhythmias, was
established as an accredited sub-specialty of cardiology by the American Board
of Internal Medicine in 1992. As of March 31, 1996, 609 physicians had been
certified as electrophysiologists by that Board. In addition, approximately
1,375 physicians in the U.S. are currently members of the North American
Society of Pacing and Electrophysiology ("NASPE"). It is estimated by
Biomedical Business International ("BBI") that approximately 400,000
diagnostic EP procedures and approximately 75,000 therapeutic cardiac ablation
procedures were performed worldwide in 1994, up from 175,000 and 21,000,
respectively, in 1992. In response to this rapid growth in EP procedures,
hospitals are establishing dedicated EP labs for conducting such procedures.
Hospitals are also purchasing more EP products and workstations and replacing
older equipment to improve the efficiency of their facilities and treat the
increasing number of patients diagnosed with arrhythmias.
25
<PAGE>
BACKGROUND
The Heart and its Function
The heart, whose function is to pump blood through the body's circulatory
system, is divided into four chambers, two upper chambers, the atria, and two
lower chambers, the ventricles. At rest, a healthy heart typically beats
between 50 and 100 times per minute. Each normal heartbeat is the result of
electrical impulses generated at the heart's natural pacemaker, the sinoatrial
("SA") node, which is located near the top of the right atrium. With each
heartbeat, an electrical impulse travels down and across the atria, causing
them to contract. This contraction in turn sends blood into the ventricles,
the heart's primary pumping chambers. The electrical impulse then passes
through the atrioventricular ("AV") node, located between the atria and the
ventricles. After a brief delay, the impulse continues down the bundle
branches and back up and across the Purkinje fibers within the ventricles. The
ventricles then contract, pumping blood throughout the body's circulatory
system. When the normal electrical rhythm of the heart is disturbed, its
pumping activity can be adversely affected and life-threatening complications
can result. Such abnormal rhythms are known as arrhythmias.
FIGURE 1
[DIAGRAM OF HEART WITH LABELS SHOWING VARIOUS SECTIONS]
Electrical Disorders of the Heart
Arrhythmias, which cause the heart to beat either too slowly or too rapidly,
arise from numerous causes including heart tissue damage from previous heart
attacks, congenital defects and certain diseases. Arrhythmias characterized by
an abnormally slow heart rate (less than 50 beats per minute) are known as
bradycardias, and are usually managed by an implanted pacemaker. Arrhythmias
characterized by an abnormally fast heart rate (more than 100 beats per
minute) are known as tachycardias or tachyarrhythmias. Tachycardia that
originates in the ventricles is known as ventricular tachycardia ("VT"). The
class of tachycardias that originate above the ventricles, including in the
atria, are referred to as supraventricular tachycardias ("SVTs"). VT and SVTs
can occur randomly on an occasional basis, or can be chronic and sustained,
and both types of tachycardia can have life-threatening complications.
VT is a serious condition that can cause dizziness, unconsciousness and
cardiac arrest. VT can also lead to ventricular fibrillation, in which the
heart quivers and ceases to pump blood
26
<PAGE>
effectively. Without prompt medical attention, a patient suffering from
ventricular fibrillation will die.
SVTs, while generally not fatal themselves, can cause serious and life-
threatening complications. SVTs can be debilitating, causing chest
palpitations, fatigue and dizziness. SVTs include atrial fibrillation, Wolff-
Parkinson-White Syndrome, AV Nodal Reentry Tachycardia and atrial flutter.
Atrial fibrillation is the most common and serious form of SVT.
Current Diagnosis and Therapy of Tachycardia
Patients suspected of having tachycardia are initially screened by means of
external cardiac monitoring. If tachycardia is confirmed or the initial
screening is inconclusive, the patient may be referred to an
electrophysiologist for a diagnostic procedure known as a cardiac EP study.
During an EP study, specially-designed electrode catheters ("EP catheters")
are percutaneously deployed and guided into the heart under X-ray fluoroscopy.
The EP catheters then record electrical signals from inside the heart. These
signals are transmitted to, displayed and stored on a computerized EP
workstation. After the initial electrical signals from the heart have been
examined, small amounts of electricity are delivered from an external
stimulator through an EP catheter to the heart in order to stimulate a
tachycardia. EP studies are undertaken to provoke tachycardias in a controlled
setting, to locate the source of any electrical disturbance and to determine
the nature of the arrhythmia. EP studies are also performed prior to the
implantation of implantable cardiac defibrillators ("ICDs") and to map the
heart in conjunction with open chest procedures for the surgical treatment of
arrhythmias.
Once the specific nature of an arrhythmia is identified, a therapeutic regimen
is selected. Current therapies include drugs, surgery, ICDs, external
cardioversion and therapeutic cardiac ablation. VT is treated primarily with
drug therapy, ICDs and, in certain instances, therapeutic cardiac ablation.
While antiarrhythmic drugs remain the most commonly employed treatment for VT,
most of these drugs have undesirable side effects. Therapeutic cardiac
ablation is a procedure in which a specialized EP catheter is used to burn a
small lesion inside the heart to destroy abnormal conduction pathways, or
tissue, that cause arrhythmias. SVTs other than atrial fibrillation are
primarily treated with therapeutic cardiac ablation. Because atrial
fibrillation is characterized by random irregularity of electrical impulses in
the atria that are extremely difficult to locate and destroy, therapeutic
cardiac ablation as used today is generally ineffective as a treatment method
for atrial fibrillation.
Atrial Fibrillation
Atrial fibrillation is a disorganized quivering of the upper chambers of the
heart that results from aberrant conduction of electrical signals within the
atria. This quivering leads to an ineffective and uncoordinated pumping of the
heart, which often reduces cardiac output by up to 30% and causes impaired
blood flow to the brain. In some patients, atrial fibrillation can lead to an
uncontrolled ventricular heart rate, precipitating a life-threatening
situation. Although patients with atrial fibrillation can be asymptomatic,
most suffer from shortness of breath, palpitations, dizziness, fainting, or
reduced tolerance to exercise and the activities of daily living. Atrial
fibrillation is a significant cause of mortality and morbidity, particularly
from thromboembolism and stroke. Each year approximately 75,000 strokes in the
U.S. are related to atrial fibrillation.
The Company believes that more than 2 million Americans are currently
afflicted with atrial fibrillation and an estimated 160,000 new cases develop
each year. Generally, atrial fibrillation is related to underlying cardiac
disease, including congestive heart failure, coronary artery disease,
hypertension and rheumatic heart disease, but it may also occur in patients
with otherwise normal hearts. Atrial fibrillation is most commonly found in
the elderly. It affects up to 5% of the population in the U.S. over the age of
60. It is the leading cause of arrhythmia-related hospitalizations and, in
1992, comprised the primary diagnosis for 253,000 hospitalized patients,
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<PAGE>
more than all other types of arrhythmia combined. In 1993, more than 1.2
million patients who were hospitalized for other reasons were found to have,
or to have developed, atrial fibrillation during their hospitalization.
Atrial fibrillation also develops in the period following open heart surgery
in which the atria can suffer temporary trauma. Although usually a temporary
phenomenon encountered in the week following surgery, atrial fibrillation in
open heart surgery patients is often dangerous and requires immediate
intervention. The Company believes that in 1995, over 450,000 open heart
procedures were performed in the U.S. The Company estimates that up to 30% of
patients undergoing open heart surgery develop atrial fibrillation in the
post-operative period. These patients are either treated with external
cardioversion or, in order to avoid the additional trauma associated with
external cardioversion, are left untreated. Patients who undergo open heart
surgery typically have temporary pacing wires affixed to the outside of the
heart near the end of the procedure in order to regulate their heartbeat post-
operatively. These wires are threaded from the heart through the chest wall
and outside the body, where they can remain for several days until pulled from
their sewn-in position on the heart. Also during open heart surgery, a Swan-
Ganz catheter is typically placed in the pulmonary artery to monitor blood
pressure. This catheter can also remain in place for several days during the
post-operative period.
The underlying causes of atrial fibrillation are complex and the progression
of the disease varies from patient to patient. In patients with underlying
cardiac disease, atrial fibrillation may initially occur paroxysmally, wherein
short periods of atrial fibrillation are interspersed with normal heart
rhythm. Paroxysmal atrial fibrillation generally converts back to normal heart
rhythm spontaneously, but many patients require treatment with drugs and high
energy external cardioversion to control their heart rate and associated
symptoms. Although some patients may never progress beyond paroxysmal atrial
fibrillation, the condition often precedes the development of chronic or
persistent atrial fibrillation. In persistent atrial fibrillation, patients do
not convert to normal heart rhythm spontaneously, but require cardioversion to
terminate an episode and additional drug therapy thereafter to maintain normal
heart rhythm. Persistent atrial fibrillation can progress to permanent atrial
fibrillation, a condition in which the arrhythmia cannot be converted using
traditional external cardioversion or drug therapy. Patients with permanent
atrial fibrillation are generally given drugs to control the heart rate or
therapeutic cardiac ablation is performed to destroy the AV node and a
pacemaker is implanted to provide ventricular rate control. Neither treatment,
however, addresses the underlying atrial fibrillation problem.
Although treatment of atrial fibrillation varies from patient to patient, the
treatment goals remain constant: (1) restore and maintain normal heart rhythm,
(2) control the ventricular heart rate and (3) prevent stroke. External
cardioversion and drugs are used to restore normal heart rhythm;
antiarrhythmic drugs are used to maintain normal heart rhythm; anticoagulants
(blood thinning drugs) are used to reduce the risk of stroke; and drugs, AV
node ablation accompanied by pacemaker implantation and open heart surgery are
used to control the ventricular rate. None of these therapies is universally
effective and each presents certain risks and side effects to the patient.
Restoration of normal heart rhythm, or cardioversion, is generally attempted
by means of antiarrhythmic drug therapy or high energy external cardioversion.
A variety of drugs may be employed, but none are universally successful and
antiarrhythmic agents generally have been shown to increase the risk of life-
threatening ventricular arrhythmias. In addition, these drugs can have serious
side effects, including liver failure, thyroid dysfunction, pulmonary fibrosis
(thickening of the lungs), dizziness, nausea, difficulty urinating and
diarrhea. Numerous studies
report variable success with pharmacologic cardioversion, with higher success
rates reported in patients with recent onset atrial fibrillation of less than
48 hours duration.
High energy external cardioversion is more effective than pharmacologic
cardioversion and is a mainstay of first-line therapy for atrial fibrillation.
During external cardioversion, between one
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<PAGE>
and four high energy electrical shocks of up to 360 joules each are applied
across the chest wall by means of an external defibrillator. Because of the
severe pain involved, patients undergoing external cardioversion are given
general anesthesia or heavy sedation. This generally requires patient
hospitalization and the presence of an anesthesiologist. In addition, patients
experiencing atrial fibrillation for longer than 48 hours are routinely given
anticoagulant drugs for two to three weeks before external cardioversion to
reduce the risk of embolic strokes. Patients undergoing external cardioversion
frequently report residual neuromuscular pain. Serious side effects, while
infrequent, include damage to heart tissue, spinal fracture, thrombus
formation and stroke.
Patients who have undergone successful external cardioversion are frequently
placed on a course of antiarrhythmic drug therapy to maintain normal heart
rhythm. While external cardioversion is highly effective in terminating atrial
fibrillation, without antiarrhythmic drug therapy, a majority of patients
revert back to atrial fibrillation within one year of external cardioversion.
With antiarrhythmic drug therapy, the percentage of patients reverting to
atrial fibrillation decreases. Ninety percent of recurrences occur within the
first six months. Despite these recurrence rates and the trauma and cost
associated with high energy external cardioversion, this treatment method
remains a commonly employed first-line therapy and atrial fibrillation
patients often require multiple external cardioversions.
THE EP MEDSYSTEMS SOLUTION
The Company has developed the ALERT System to be a more effective and less
traumatic method of converting atrial fibrillation to normal heart rhythm. The
ALERT System represents a new approach to electrical cardioversion known as
low energy internal cardioversion, in which up to 15 joules of electrical
energy are delivered directly to the inside of the heart. The ALERT System
comprises a single-use proprietary electrode catheter with two separate
electrode arrays and an external energy source. The ALERT catheter is inserted
into a vein in a patient's arm and guided to the heart. See Figure 2. Small
amounts of energy are then delivered from the external energy
source through the ALERT catheter to the heart.
FIGURE 2
PLACEMENT OF THE ALERT CATHETER
[DIAGRAM OF HEART SHOWING PLACEMENT OF ALERT CATHETER WITHIN THE HEART]
29
<PAGE>
The Company believes low energy internal cardioversion provides numerous
potential advantages over high energy external cardioversion and drug
conversion therapies. The Company believes the ALERT System will prove more
effective, less painful and less traumatic than external cardioversion. It
does not require the use of general anesthesia, can be performed on an
outpatient basis and involves the delivery of much lower levels of energy to
the patient. The Company also believes the ALERT System will prove more
effective than drug conversion therapy without the risk of harmful side
effects associated with such therapy.
Atrial fibrillation often occurs in the open heart surgery post-operative
period. Consequently, an effective, low-trauma cardioversion technique that
can be deployed rapidly would have applications for open heart surgery
patients. The Company believes that due to the significantly lower amounts of
energy required to convert atrial fibrillation using internal cardioversion,
the ALERT System is a particularly appropriate cardioversion alternative for
these patients. In addition, the ALERT System may be used to provide temporary
pacing to the atria and ventricles and to monitor blood pressure in the left
pulmonary artery, replacing both temporary pacing wires sewed to the heart and
Swan-Ganz catheters, and reducing the risk of infection from such devices. The
Company believes the ALERT System's integration of these features into a
single catheter provides significant advantages over existing treatment
methods for patients who have undergone open heart surgery.
The Company also designs, manufactures and markets a broad-based line of
specially-designed products for the cardiac EP market, for the purpose of
diagnosing, monitoring, managing and treating arrhythmias. This product line
includes what the Company believes is the only computerized EP clinical
stimulator marketed in the U.S. and the EP WorkMate, a computerized EP
monitoring and analysis workstation. The Company believes that the EP
WorkMate, when integrated with the Company's computerized EP-3 Clinical
Stimulator, offers the most advanced computer tools available to the EP
market. In comparison to other EP computer systems, the EP WorkMate offers,
among other features, 64 (rather than 32) recorded channels of cardiac
electrical data, real time analysis including graphical and quantitative
display of such data, superior ease of use and a single keyboard for all
operations. This product line also includes diagnostic EP catheters, temporary
pacing catheters and related disposable supplies and arrhythmia monitors.
BUSINESS STRATEGY
The Company's objective is to become a leading developer, manufacturer and
marketer of a broad range of innovative products for the cardiac EP market.
Presently, the Company is focused on completing the development, clinical
testing and regulatory approval process for the ALERT System and on developing
the marketing and distribution network for its existing products, both in the
U.S. and overseas. The key elements of the Company's business strategy
include:
. ESTABLISH ALERT SYSTEM AS THE PREFERRED TECHNIQUE FOR ATRIAL FIBRILLATION
TREATMENT. Early clinical trials have been conducted on the ALERT System
in Europe. The Company has received commitments from leading EP centers
to participate in expanded clinical trials. The Company believes the
participation of such leaders in the EP field will provide significant
exposure through scientific publications and presentations. The Company
will stress the advantages of the ALERT System over existing therapies
for atrial fibrillation and leverage such exposure to establish the ALERT
System as the preferred cardioversion technique for atrial fibrillation.
. FURTHER DEVELOP ITS DISTRIBUTION NETWORK. The Company intends to increase
the depth and breadth of its sales and marketing efforts both
domestically and internationally. During the next twelve months, the
Company will attempt to identify additional domestic and
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international distributors to increase geographic coverage and to augment
its independent distributor network with a direct sales force to provide
greater product support and increased coverage.
. CONTINUE TO OFFER A BROAD RANGE OF INNOVATIVE PRODUCTS. The Company
offers a diverse line of EP products, including EP workstations,
stimulators, diagnostic and temporary pacing catheters and arrhythmia
monitoring equipment and software. The Company believes its market
exposure is enhanced by the breadth and innovative nature of its product
offering.
. ACQUIRE COMPLEMENTARY TECHNOLOGIES AND PRODUCTS. The Company has
historically acquired innovative technology to facilitate rapid product
introduction and constantly assesses new products and technologies under
development. The Company believes this approach results in lower research
and development expenditures, faster product line additions and the
ability to obtain the benefits of existing third-party patented and
proprietary positions.
. PROVIDE COMPREHENSIVE CUSTOMER SERVICE AND SUPPORT. The Company believes
that providing a high level of service and support has been and will
continue to be a significant factor in its success. The Company seeks to
develop long term relationships with its customers and provides training,
new product demonstrations and installations through in-house personnel,
who have a comprehensive knowledge of the Company's products.
The discussion above describes the Company's current long term goal and
strategy. There can be no assurance that changing circumstances or unforeseen
events will not cause the Company to be unable to achieve this goal or to
change one or more elements of its strategy. See "Risk Factors."
THE ALERT SYSTEM
The ALERT System is designed to perform Atrial Low Energy Reversion Therapy
for internal cardioversion, and consists of a single, proprietary electrode
catheter with two separate electrode arrays and an external energy source.
This system delivers a maximum of 15 joules directly to the heart to convert
atrial fibrillation to normal heart rhythm. The ALERT System simultaneously
provides temporary pacing capabilities and blood pressure monitoring in the
left pulmonary artery during this procedure.
The ALERT catheter is inserted percutaneously into a vein in the arm, advanced
to the heart under X-ray fluoroscopy and positioned with one defibrillation
electrode array in the left pulmonary artery and the other in the right
atrium. Energy is then delivered in small increments between the two electrode
arrays from an external energy source. During this procedure the patient is
mildly sedated, but conscious.
The Company believes that internal cardioversion using the ALERT System will
provide the following key benefits:
. Less trauma, discomfort and risk to patients than high energy external
cardioversion.
. Higher success rate in converting patients with chronic atrial
fibrillation to normal heart rhythm than with high energy external
cardioversion (based on initial clinical experience overseas).
. Elimination of harmful side effects associated with drug therapies.
. Can be used on an outpatient basis; general anesthesia not required.
. Lower overall cost per procedure than high energy external
cardioversion.
. Greater applicability for converting atrial fibrillation occurring
immediately following open heart surgery.
. Combination of temporary pacing and blood pressure monitoring features
with cardioversion in a single multi-purpose catheter.
The ALERT System is based on technology invented by Eckhard Alt, M.D., a
member of the Company's Scientific Advisory Board. Dr. Alt has filed
applications for patents in the U.S. and
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Europe on the ALERT catheter and its method of use for internal cardioversion.
The Company has licensed rights from Dr. Alt to use the ALERT technology in
the ALERT System. See "-- Patents and Intellectual Property."
Initial Clinical Results
Dr. Alt has performed human studies in Germany comparing the safety and
efficacy of low energy internal cardioversion to high energy external
cardioversion and has compared the ALERT catheter to a dual-catheter method
used to perform low energy internal cardioversion. Initial human studies
evaluating the safety and effectiveness of low energy internal cardioversion
used two separate catheters positioned in the left pulmonary artery and right
atrium. In 187 patients with chronic atrial fibrillation (mean duration 10
months), treatment with low energy internal cardioversion was compared to
treatment with high energy external cardioversion. External cardioversion was
performed on 117 patients and internal cardioversion was performed on 70
patients. Patients who received external cardioversion were given general
anesthesia, while patients who received internal cardioversion were mildly
sedated. Internal cardioversion resulted in a significantly higher rate of
conversion to normal heart rhythm compared with external cardioversion (93%
vs. 78%) at significantly lower average energy levels (5.8 joules vs. 313
joules). After successful conversion, all 187 patients were treated with the
antiarrhythmic drug sotalol. Of the 187 patients, 110 were followed for an
average of 12.5 months. Of these, 70 patients had been treated with external
cardioversion and 40 had been treated with internal cardioversion. Of the
patients treated with internal cardioversion, 57% remained in normal heart
rhythm during such period, compared with 49% of the patients treated with
external cardioversion.
Additional studies performed by Dr. Alt on patients with chronic atrial
fibrillation compared 16 patients treated with the ALERT catheter to 42
patients treated with dual-catheter internal cardioversion. The two treatment
methods yielded similar results, with 15 of 16 patients treated with the ALERT
catheter and 39 of 42 patients treated with the dual-catheter method
successfully converted at mean energies of 8 joules and 7 joules,
respectively, with no complications.
In these studies, the ALERT catheter was introduced to the heart through a
vein in the arm and typically was positioned in under two minutes. By
contrast, the dual-catheter approach required small incisions in the groin and
the neck and more time to introduce and position the two catheters in the
heart.
U.S. Clinical Trials
The Company believes the ALERT System is a Class III medical device which will
require PMA approval from the FDA prior to marketing in the U.S. The Company
is in the process of preparing a clinical study protocol for submission to the
FDA during the second half of 1996 as part of an IDE application. Upon
receiving FDA approval of an IDE application for the ALERT System, the Company
intends to initiate human clinical trials using the ALERT System in the U.S.
See "Government Regulation."
EXISTING PRODUCTS
The Company develops, markets, sells and services a broad based, integrated
line of EP products used to monitor, analyze, diagnose and treat cardiac
arrhythmias. The Company's products can be separated by function into the
three broad categories described below.
EP Laboratory Workstations and Stimulators (EP WorkMate, EP-3 Clinical
Stimulator)
The Company's EP WorkMate, commercially released in late 1995, is a
computerized EP workstation that monitors, displays and stores cardiac
electrical activity and arrhythmia data. EP workstations are dedicated data
management systems designed specifically for use in EP procedures to view and
record procedural data, facilitate data analysis and generate customized
reports. The EP WorkMate consists of a Pentium PC with integral proprietary
software, dual 17-
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or 20-inch high resolution color monitors, a tape drive for data storage, a
custom keyboard, catheter and stimulator junction box and laser printer. The
EP WorkMate is typically sold with an integrated EP-3 Clinical Stimulator. In
addition, each EP WorkMate has an internal modem to provide a direct link
between the purchaser and the Company, facilitating field software support.
The EP WorkMate is differentiated from competing products by (i) its seamless
integration with the EP-3 Clinical Stimulator, (ii) its capacity to receive
and display up to 64 channels of cardiac electrical data simultaneously, (iii)
its ability to process and simultaneously display both real-time and
historical EP activity and (iv) its simple, user-friendly software based on a
menu-driven, point-and-click interface.
The Company's EP-3 Clinical Stimulator ("EP-3") is a computerized electrical
signal generator and processor used to stimulate the heart with electrical
impulses in order to locate electrical disturbances or arrhythmias. The
Company believes the EP-3 is currently the only computerized EP clinical
stimulator being marketed in the U.S. It features automatic synchronization
and rate controls as well as the same user interface as the EP WorkMate. The
EP-3 can be sold as a stand-alone EP stimulator or integrated with the EP
WorkMate. If an EP-3 is added as a component to the EP WorkMate, both products
can be easily operated from the EP WorkMate's keyboard or mouse. The Company
believes the EP WorkMate, when integrated with the EP-3, offers the most
advanced computer tools available to the EP market.
Catheter Products
The Company presently markets a full line of diagnostic EP catheters for
stimulation and sensing of electrical signals during EP studies. The Company's
diagnostic catheters are distinguished from competing products by their
availability in various degrees of flexibility and curve shape for maximum
customization to each procedure being performed. The Company offers over 150
electrode/curve configurations in soft, medium and firm catheters. The Company
also offers diagnostic catheters with user-formed tip shaping, allowing a
physician to change the curve on the tip of a catheter before or during a
procedure to conform to a patient's anatomy.
Temporary pacing catheters incorporate both pacing and sensing electrodes and
are used to temporarily regulate pacing of the heart, including during the
period while a patient awaits permanent pacemaker implant. These catheters are
available in a number of sizes with different curve shapes. The Company also
offers a temporary pacing catheter with a balloon tip that allows guidance of
the catheter without X-ray fluoroscopy.
The Company also offers disposable introducer kits that are used to aid in the
insertion of catheters or pacemaker leads into a patient's venous system. The
kits include a plastic introducer, guidewire, needle and syringe.
Arrhythmia Monitoring Products (TeleTrace/PaceBase System, MemoryTrace
Arrhythmia Monitors)
Patients who have undergone pacemaker or ICD implantations are regularly
monitored to assess the condition of the implanted device or the status of an
arrhythmia. The Company's TeleTrace III Receiver ("TeleTrace") is an
integrated ECG monitoring device and computerized transmission system for
automation of pacemaker and arrhythmia follow-up testing and ECGs either in a
physician's office or over the telephone. TeleTrace enables an ECG to be taken
over the telephone for real time or subsequent review.
The Company's PaceBase database software stores information generated by the
TeleTrace for analysis and archiving of a patient's pacemaker or arrhythmia
activity, eliminating manual recordkeeping. PaceBase stores pacemaker and ICD
histories and also provides an interactive database of all parameters and
specifications for pacemakers and ICDs manufactured in the U.S. during the
last 15 years. PaceBase also stores certain patient data, including pertinent
implant
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data, current programmed settings, elective replacement indicators and special
notes to be displayed on-screen during patient follow-up sessions. In
addition, PaceBase allows customized settings for multiple physicians and
generates customized insurance and physician reports based on patient follow-
up sessions.
Ambulatory arrhythmia monitors are portable ECG recording devices often worn
by pacemaker or cardiac patients to record arrhythmia activity outside the
physician's office. The Company's MemoryTrace arrhythmia monitors are
presently available in three models. The ER arrhythmia monitor is a basic
event recorder that records and stores up to 60 seconds of single-channel ECG
data when activated by the ambulatory patient. The AT arrhythmia monitor is a
programmable event recorder that features automatic recording upon the
occurrence of bradycardia or tachycardia and also has the capacity to record
low frequency data. It has looping memory that stores up to 180 seconds of
single-channel ECG data or 120 seconds of dual-channel data. The ATM
arrhythmia monitor offers the same features as the AT, with storage for
multiple events.
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The following table summarizes the prices, uses and features of the Company's
existing products. All of these products have received 510(k) clearance except
for the PaceBase software, which the Company believes is not an FDA-regulated
product.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PRODUCT LIST PRICE DESCRIPTION/USAGE FEATURES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EP WorkMate $120,000 Monitoring, display and Dual monitor displays.
storage of cardiac
electrical activity.
64 channel, real-time
analysis.
Includes an integrated EP-3
Clinical Stimulator.
Easy to use, "point and
click" interface.
- --------------------------------------------------------------------------------------------------
EP-3 Clinical Stimulator $24,000 Generating measured Computerized, automatic
electrical energy for synchronization and rate
stimulation of tachycardias. controls.
Only computerized EP Programmed protocols.
stimulator currently
marketed in the U.S.
Computerized interface that
can be integrated with the
EP WorkMate for use with
single keyboard.
- --------------------------------------------------------------------------------------------------
ProCath Diagnostic EP $240-$295 Measuring heart electrical Various degrees of
Catheters activity. flexibility, curve shape and
torque for maximum
customization to each
procedure.
Applying energies from an EP
stimulator to the heart.
- --------------------------------------------------------------------------------------------------
ProCath Temporary Pacing $105-$125 Providing temporary pacing Various degrees of
Catheters to the heart with regulated flexibility, curve shape and
electrical impulses. torque for maximum
customization to each
procedure.
Available with balloon tip
for use without X-ray
fluoroscopy.
- --------------------------------------------------------------------------------------------------
ProCath Introducers $40 Allowing introduction of Disposable kit for
catheters and pacemaker introduction of catheters
leads to the venous system. and pacemaker leads.
- --------------------------------------------------------------------------------------------------
TeleTrace Receiver $8,250 Hardware and software Ease of use.
System permitting physician
monitoring of a patient's
cardiac activity over the
telephone.
Automatic analysis of
pacemaker functions.
Can be used with PaceBase
database software.
- --------------------------------------------------------------------------------------------------
PaceBase Software $6,000 Database software allowing Simple to use, menu-driven
storage and display of interface.
pacemaker patient cardiac
activity.
Typically used with Customized for use with
TeleTrace Receivers. TeleTrace Receivers.
- --------------------------------------------------------------------------------------------------
MemoryTrace Arrhythmia $595-$1,395 Monitoring of cardiac Extended battery life,
Monitors activity over various time automatic triggers, looping
intervals. memory, capacity to store
multiple events and
integrated wrist and foot
monitoring options in
different models.
Several models incorporating
various features.
- --------------------------------------------------------------------------------------------------
</TABLE>
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RESEARCH AND DEVELOPMENT
The EP market is characterized by technological change, new product
introductions and evolving industry standards. To compete effectively in this
environment, the Company engages in the continuous development of products by
(i) engaging in internal research and development or contracting with third
parties for specific research and development projects, (ii) licensing new
technology and (iii) acquiring products incorporating technology that could
not otherwise be developed as quickly using internal resources. The Company's
expenditures for research and development totaled approximately $61,313,
$129,855, $320,311, $72,636 and $61,252 in 1993, 1994 and 1995 and for the
three months ended March 31, 1995 and 1996, respectively. Research and
development efforts are ongoing to enhance product quality and lower
production costs.
The Company is currently developing a steerable catheter with a handle to
deflect, or steer, the tip of the catheter. The catheter is being designed for
use in diagnostic EP studies and the Company has filed a patent application
with the U.S. Patent and Trademark Office ("PTO"). The Company also intends to
design a modified version that will have therapeutic cardiac ablation
abilities. Prior to marketing such products in the U.S., FDA clearance or
approval will be required.
Software development is generally performed by Company software engineers. The
Company is developing an EP software database to operate with the databases
for PaceBase and the EP WorkMate. FDA clearance or approval of such software
may be required, depending upon design of the product, its intended use and a
new FDA policy governing medical software that may be implemented in the
future. The Company is also developing upgrades to its TeleTrace III Receiver
in order to reduce cost and provide a more compact design. The Company is
developing a new MemoryTrace arrhythmia monitor with automatic recording
triggers, the ability to record multiple arrhythmia events, more compact
design and longer battery life, as well as faster transmission of monitored
information to the TeleTrace III Receiver. FDA clearance of such product
enhancements may be required. See "-- Government Regulation."
PATENTS AND INTELLECTUAL PROPERTY
The Company's success and ability to compete will depend in part upon its
ability to protect its proprietary technology and other intellectual property.
The Company seeks patents on its important inventions and has acquired
licenses to rights under selected patents of third parties as to technology it
considers important to its business. As to the ALERT System, the Company has
an exclusive license under two pending U.S. patent applications, one of which
has been allowed for issuance by the PTO, an exclusive license under one
patent application pending in the European Patent Office and has filed one
patent application in the United States on a method of manufacturing the ALERT
catheter. In addition, the Company has a semi-exclusive license under one
issued U.S. patent as to certain technology to conduct temporary ventricular
defibrillation and has filed one patent application in the U.S. on a steerable
catheter. These license agreements generally provide for the payment of
royalties on the sale by the Company of products using the patented
technology. There can be no assurance that any of the Company's patent
applications or applications as to which it has acquired licenses will issue
as patents, or that if patents are issued on the Company's applications or on
applications as to which the Company has acquired licenses, they will be of
sufficient scope and strength to provide meaningful protection of the
Company's technology or any commercial advantage to the Company, or that such
patents will not be challenged, invalidated or circumvented in the future.
Moreover, there can be no assurance that the Company's competitors, many of
which have substantial resources and have made substantial investments in
competing technologies, do not presently have or will not seek patents that
will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or in other countries.
Pursuant to a License Agreement between Dr. Alt and the Company (the "Alt
License Agreement"), Dr. Alt granted the Company an exclusive worldwide right
and license to practice
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the method, to make, have made for its own resale, use, sell, offer to sell
and otherwise dispose of the ALERT catheter technology, including without
limitation the ALERT catheter device, the method underlying the ALERT System
and all continuations and improvements thereon. In return, the Company granted
to Dr. Alt royalties equal to 5% of net sales of all products covered by the
Alt License Agreement until expiration of the last licensed patent, and issued
stock options to Dr. Alt to purchase 210,000 shares of Common Stock at $.10
per share and 164,000 shares of Common Stock at $2.00 per share. The Alt
License Agreement terminates upon the expiration of the last licensed patent
subject to the Alt License Agreement, or earlier in the discretion of either
party in the event of a default by the other party.
Under a License Agreement with Sanjeev Saksena, M.D. (the "Saksena License
Agreement"), Dr. Saksena granted the Company a semi-exclusive worldwide
license under a patent as to certain technology to conduct temporary
ventricular defibrillation. The license is semi-exclusive in that one other
party has license rights under such patent. In return, the Company granted to
Dr. Saksena a continuing royalty up to a maximum of $1 million on sales of
licensed products, paid Dr. Saksena $10,000 and issued stock to Dr. Saksena.
The Saksena License Agreement terminates upon the expiration of the licensed
patent, or earlier in the discretion of either party in the event of a default
by the other party.
The Company intends to rely on a combination of patents, trade secrets,
copyrights and trademarks to protect its intellectual property rights. No
assurance can be given, however, that competitors will not independently
develop substantially equivalent proprietary technology, or that the Company
can meaningfully protect its rights in unpatented proprietary technology.
The Company has not received any notices alleging, and is not aware of, any
infringement by the Company of any patents or intellectual property of others.
However, there can be no assurance that current and potential competitors and
other third parties have not filed or in the future will not file applications
for patents, or have not received or in the future will not receive, patents
or other proprietary rights relating to devices, apparatus, materials or
processes used or proposed to be used by the Company.
The market for medical devices for the treatment of cardiovascular disease has
been characterized by frequent litigation regarding patent and other
intellectual property rights. In the event that claims of infringement of a
third party's rights are made and upheld, the Company could be prevented from
exploiting the technology or other intellectual property involved, or could be
required to obtain licenses from the owners of such intellectual property.
Alternatively, the Company could be forced to redesign its products or
processes to avoid infringement. There can be 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. Litigation may be necessary to
defend against claims of infringement, to enforce patents issued to the
Company or to protect trade secrets and could result in substantial cost to,
and diversion of effort by, the Company. See "Risk Factors -- Potential Lack
of Proprietary Protection."
MARKETING AND DISTRIBUTION
The Company presently markets its products to EP labs in the U.S. through a
network of 13 independent distributor organizations. All of the Company's
distributors are experienced in selling to electrophysiologists. These
distributors are supported by an in-house service group that provides
technical, sales and installation support. The Company intends to hire direct
sales representatives to augment its independent distributors in geographical
areas with minimal or no distributor coverage and also in selected cities with
high profile and high volume EP centers. The Company also intends to hire
several field engineers who have a clinical background in electrophysiology to
provide additional technical marketing support and customer service and
support.
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Outside the U.S., the Company expects to expend considerable effort to expand
and strengthen its global sales and support network. The Company has made
sales in a number of foreign countries and intends to focus on developing key
distributor relationships in Japan and certain European countries. The Company
also intends to employ a group of sales management and other personnel
overseas to support high volume and high profile EP centers and customers in
concentrated markets, as well as to augment distributor efforts.
The Company has recently entered into an exclusive agreement with a Japanese-
based company to import the Company's products into Japan. Introduction of the
Company's products in Japan is expected during the second half of 1996,
subject to the receipt of Japanese regulatory approvals.
The Company, working with its Scientific Advisory Board, seeks broad exposure
for its products through visibility at peer-reviewed forums, including
international scientific meetings. The Company's strategy with respect to the
ALERT System will focus on encouraging scientific publications and
presentations regarding the ALERT System and human clinical trials.
MANUFACTURING
Substantially all of the Company's catheter products are manufactured at a
facility located in Berlin, New Jersey. The Company believes this facility has
sufficient capacity to meet the Company's anticipated catheter needs for the
next two years. Each catheter is assembled and tested by the Company prior to
sterilization. The Company's Berlin facilities and quality assurance
procedures are subject to GMP regulations. All raw material vendors are
required to submit certificates of compliance to the Company's specifications.
The Company is seeking to establish manufacturing capacity for catheter
products at an ISO 9001 certified facility in Europe in order to begin
marketing certain products throughout Europe before attaining ISO 9001
certification for its Berlin, New Jersey facility. The Company is currently
evaluating potential facilities in the United Kingdom.
Substantially all of the Company's other products are either manufactured or
assembled on a contract basis by HDI. After such products are assembled and
tested by the manufacturer, the products are inspected and subjected to a
series of quality control tests by the Company prior to shipment.
The Company and its outside manufacturers fabricate certain of the Company's
proprietary components and purchase other components from various independent
suppliers. Although components and processes are available from more than one
vendor, certain components and processes are only available from a single
vendor. Any interruption of supply of certain components would have a material
adverse effect on the Company's ability to manufacture its products until
acceptable arrangements could be made with a qualified alternative source of
supply and, as a result, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Limited Manufacturing Experience."
GOVERNMENT REGULATION
In the U.S., the development, testing, manufacture, labeling, marketing,
promotion and sale of medical devices are regulated by the FDA under the
Federal Food, Drug, and Cosmetic Act ("FFDCA"). The FDA has broad discretion
in enforcing the FFDCA, and noncompliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure to grant premarket
clearance or premarket approval for devices and criminal prosecution.
Medical devices are classified into one of three classes, Class I, II or III,
on the basis of the controls necessary to reasonably ensure their safety and
effectiveness. Class I devices require general controls such as proper
labeling, premarket notification and adherence to GMP. Class
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II devices require the use of special controls such as performance standards,
postmarket surveillance by regulatory bodies, patient registries and FDA
guidelines. Class III devices must generally receive a PMA from the FDA prior
to being marketed in the U.S. in order to ensure their safety and
effectiveness.
Before a new device can be introduced into the market in the U.S., the
manufacturer generally must obtain either FDA clearance of a premarket
notification filing under Section 510(k) of the FFDCA (a "510(k) submission")
or FDA approval of a PMA application. A 510(k) submission will be granted
clearance by the FDA if the submitted data and other information establishes
that the proposed device is "substantially equivalent" to a predicate device
legally marketed in the U.S. A predicate device is a device that was legally
marketed in the U.S. prior to May 28, 1976 or a device marketed since that
date that has been determined by the FDA to be substantially equivalent
pursuant to a 510(k) application and for which a PMA is not required.
Substantial equivalence means that the device has the same intended use and is
as safe and effective as a legally marketed device and does not raise
questions of safety and effectiveness that are different than those associated
with the legally marketed device. The FDA has recently been requiring more
data and information to demonstrate substantial equivalence than in the past.
It generally takes between 3 to 12 months from the date of submission to
obtain 510(k) premarket clearance, but may take longer depending upon the
circumstances. The FDA may determine that the proposed device is not
substantially equivalent, or that additional data is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional data, could delay the
market introduction of new products that fall into this category and could
have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will obtain 510(k) premarket clearance within the above time frames,
if at all, for any of the devices for which it may file a 510(k) submission in
the future.
A 510(k) submission is also required when the manufacturer makes a change or
modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a change or
modification in the intended use of the device. When any change or
modification is made in a device or its intended use, the manufacturer is
expected to make the initial determination as to whether the change or
modification is of a kind that would necessitate a filing of a new 510(k)
submission. The FDA's regulations provide only limited guidance for making
this determination.
A PMA application must be filed as to a proposed device if the device is not
substantially equivalent to a legally marketed device or if it is a Class III
device for which the FDA has called for PMAs. The PMA procedure involves a
more rigorous, complex and lengthy review process by the FDA than the 510(k)
premarket clearance procedure. A PMA application must be supported by
extensive data, including preclinical and clinical trial data to demonstrate
the safety and efficacy of the device. If human clinical trials of a device
are undertaken, and the device presents a "significant risk," the manufacturer
or the distributor of the device must obtain FDA approval of an IDE
application prior to commencing human clinical trials in the U.S.
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 specific number of investigational sites with a
maximum specific number of patients, as approved by the FDA. Sponsors of
clinical trials are permitted to charge for those devices distributed in the
course of the study provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling.
Upon receipt of a PMA application, the FDA makes a threshold determination as
to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that
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the PMA application is sufficiently complete, it will "file" the application.
Otherwise, the FDA will request that the sponsor submit additional information
within 180 days. Depending on the nature and amount of information requested
by the FDA, the PMA review process may be substantially delayed by such a
request. Once the submission is filed, the FDA begins a review of the PMA
application. An FDA review of a PMA application generally takes between one
and two years from the date the PMA application is filed, but may take
significantly longer. The review time is often significantly extended if the
FDA requests more information or clarification of information already provided
in the submission. During the review period, an FDA advisory committee,
typically a panel of clinicians, will likely be convened to review and
evaluate the application and provide recommendations to the FDA as to whether
the PMA should be approved. In addition, the FDA will inspect the
manufacturing facility where the unapproved product is to be made to ensure
compliance with the FDA's GMP requirements prior to issuance of a PMA.
The PMA process can be expensive, and a number of devices for which PMAs have
been sought by other companies have never been approved for marketing. There
can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances on a timely basis or at all. Delays in
receipt of or failure to receive such approvals, the loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company believes the ALERT System is a Class III medical device which will
require PMA approval prior to marketing in the U.S. The Company intends to
apply for an IDE from the FDA during the second half of 1996. Assuming an IDE
is obtained, the Company intends to commence human clinical trials of the
ALERT System in the U.S. to obtain data needed for a PMA application. The
Company has received commitments from several leading EP centers to
participate in clinical trials. There can be no assurance that the IDE will be
approved by the FDA or that, if it is, that the clinical trials conducted
under the IDE will determine the safety and effectiveness of the ALERT System,
or that a subsequently filed PMA application will be accepted by the FDA for
filing or approved.
Following FDA clearance or approval of a device for commercial distribution,
the primary form of government regulation of medical devices is the FDA's GMP
regulations for medical devices. These regulations, administered by the FDA,
set forth requirements to be observed in the design, manufacture, packaging,
labeling and storage of medical products for human use, including
implementation of a quality assurance program. These regulations require,
among other things, that manufacturing be controlled by the use of written
procedures and the ability to produce devices that meet specifications be
validated by extensive testing. They also require inspection and testing of
the products produced and investigation when devices fail to meet
specifications. Failure to adhere to GMP requirements would cause the products
produced to be considered in violation of the FFDCA and subject to enforcement
action. The FDA monitors compliance with these requirements by requiring
manufacturers to register their manufacturing facilities and list their
products with the FDA, and subjecting the facilities to periodic FDA
inspections. If an FDA inspector observes conditions that might be violative
of GMP procedures, the manufacturer must correct those conditions or explain
them satisfactorily, or face potential regulatory action that might include
physical removal of the product from the market.
The FDA's Medical Device Reporting regulations require that the Company
provide information to the FDA on the occurrence of any deaths or serious
injuries alleged to have been associated with the use of the Company's
products, as well as on any product malfunction that would likely cause or
contribute to a death or serious injury if the malfunction were to recur. FDA
law and regulations also prohibit a device from being labeled or promoted for
unapproved or uncleared indications. If the FDA believes that a company is not
in compliance with any of these
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regulations, it can institute proceedings to detain or seize products, issue a
recall, seek injunctive relief or assess civil and criminal penalties against
such a company.
Sales of medical devices outside of the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. The time required to
obtain approval by a foreign country may be longer or shorter than that
required for FDA approval, and the requirements may differ. Export sales of
Class III devices that have not received FDA marketing clearance or approval
generally are subject to FDA export permit requirements. To obtain such a
permit, the Company must provide the FDA with, among other information,
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the sale of the device is not a
violation of that country's medical device laws. Many foreign countries
generally permit studies involving humans for medical devices earlier in the
product development cycle than is permitted by regulation in the U.S. Other
countries, such as Japan, have standards similar to those of the FDA. The
European Economic Community is in the process of developing a new approach to
the regulation of medical products that may significantly change the situation
in those countries. The Company intends to pursue international regulatory
approval of the ALERT System in foreign markets during 1997.
In addition to the import requirements of foreign countries, a company must
also comply with U.S. laws governing the export of FDA-regulated products.
Devices with a 510(k) clearance or an approved PMA generally may be exported
without further FDA authorization, provided certain conditions are met. A
Class III device without an approved PMA may be exported to a foreign country
for commercial marketing if the exporting firm obtains prior FDA authorization
and the following requirements are satisfied: (i) the device meets the
specifications of the foreign purchaser; (ii) the device is not in conflict
with the laws of the country to which it is intended for export; (iii) the
device is labeled that it is intended for export; (iv) the device is not sold
or offered for sale in domestic commerce; and (v) the FDA determines that the
exportation of the device is not contrary to the public health and has the
approval of the country to which it is intended for export.
The FDA Export Reform and Enhancement Act of 1996 has relaxed the exportation
requirements governing devices under certain circumstances. Pursuant to this
new law, a device that has not obtained FDA clearance or approval may be
exported to any country in the world without FDA authorization if the product
complies with the laws of that country and has valid marketing authorization
in one of the following countries: Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa, the European Union or a country in the
European economic area. The FDA is authorized to add countries to this list in
the future. Among other restrictions, a device may only be exported under the
new law if it is not adulterated, meets the specifications of the foreign
manufacturer, complies with the laws of the importing country, is labeled for
export, is manufactured in substantial compliance with GMP regulations or
recognized international standards and is not sold in the U.S.
The Company is also subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that it will not
be required to incur significant costs to comply with such laws and
regulations in the future or that such laws and regulations will not have a
materially adverse effect upon the Company's ability to do business.
COMPETITION
The medical device market, particularly in the area of cardiac EP products, is
highly competitive. Many of the Company's competitors have access to
significantly greater financial and other resources than the Company. Further,
the medical device market is characterized by
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rapid product development and technological change. The present or future
products of the Company could be rendered obsolete or uneconomic by
technological advances by one or more of the Company's present or future
competitors or by other therapies. The Company's future success will depend
upon its ability to remain competitive with other developers of such medical
devices and therapies. The Company believes that its existing products compete
primarily on the basis of features, effectiveness, quality, ease and
convenience of use, customer service and cost-effectiveness.
The Company's primary competitors in the production of catheters and
disposable accessories are C.R. Bard Inc., EP Technologies, Inc. (a subsidiary
of Boston Scientific Corporation), Medtronic, Inc., Cordis-Webster
Laboratories, Inc. (a subsidiary of Johnson & Johnson, Inc.) and Daig
Corporation (a subsidiary of St. Jude Medical, Inc.). In the computerized EP
workstation and EP stimulator market, the Company's main competitors are
Arrhythmia Research Technology/Prucka Engineering, Inc., Quinton Instruments
(a subsidiary of American Home Products, Inc.) and C.R. Bard Inc. The
Company's TeleTrace/PaceBase products compete with PaceArt, and the Company's
arrhythmia monitors compete with Instromedix. Other companies vying for market
share in the cardiac EP field include Witt Biomedical, Marquette Electronics,
Inc. and Siemens Medical Systems.
The ALERT System is a new technology that must compete with established and
emerging treatments for atrial fibrillation. These include pharmaceuticals,
high energy external cardioversion, atrioventricular node ablation combined
with pacemaker implantation and open-heart surgical ablation. Although no
devices are currently being marketed to treat atrial fibrillation using
internal cardioversion, one company is developing an implantable atrial
defibrillator that delivers energy through leads attached to the heart, and
the Company believes certain others are developing dual-chamber defibrillator
systems that could be marketed for treatment of atrial fibrillation. The
Company also believes some competitors and research organizations are
researching other approaches to treating atrial fibrillation, including
endocardial ablation and preventative pacing techniques. Many of the Company's
competitors have substantially greater financial and other resources, larger
research and development staffs, and more experience and capabilities in
conducting research and development, testing products in clinical trials and
manufacturing, marketing and distributing products than the Company.
Competitors may develop new technologies and bring products to market in the
U.S. before the Company introduces the ALERT System and may introduce products
that are more effective than the ALERT System. In addition, competitive
products may be manufactured and marketed more successfully than the ALERT
System.
THIRD-PARTY REIMBURSEMENT
In the U.S., the Company's products are marketed to medical institutions and
physicians that then bill various third-party payors, such as government
programs, principally Medicare and Medicaid, and private insurance plans, for
the healthcare services provided to their patients. Third-party payors are
increasingly challenging the prices charged for medical products and services,
and substantial uncertainty exists as to third-party reimbursement for
investigational and newly approved products. Government agencies, private
insurers and other payors generally reimburse hospitals for medical treatment
at a fixed rate per patient or based on the procedures performed. The fixed
rate reimbursement is unrelated to the specific devices used in treatment. If
a procedure is not covered, payors may deny reimbursement. In addition, some
payors may deny reimbursement if they determine that the device used in the
treatment was unnecessary, inappropriate or not cost-effective, or if it was
experimental or was used for a non-approved indication, even if it has FDA
approval. Because the amount of the reimbursement is fixed, to the extent a
physician uses more expensive devices, the amount of potential profit relating
to the procedure is reduced. Accordingly, hospitals must determine
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that the clinical benefits of more expensive equipment justify the additional
cost. The U.S. Health Care Financing Administration has recently entered into
an interagency agreement with the FDA pursuant to which the FDA will place all
devices with approved IDEs into one of two categories, "Category A" or
"Category B." Category A devices are innovative devices that are believed to
be in Class III (the class of medical devices subject to the most stringent
FDA review) and are of a type as to which initial questions of safety and
effectiveness have not been resolved. They will not be eligible for Medicare
reimbursement. Category B devices include Class III devices of a type as to
which underlying questions of safety and effectiveness have been resolved or
that is known to be capable of being safe and effective because other devices
of that type have been approved. Category B devices will be eligible for
Medicare reimbursement if the devices are furnished in accordance with the
FDA-approved protocols governing clinical trials and all other Medicare
coverage requirements are met. The Company believes the ALERT System is a
Class III device. There can be no assurance that the ALERT System will be
placed in Category B and thus eligible for Medicare reimbursement during
clinical trials. There can be no assurance that reimbursement will be or
remain available for the Company's products, or for the ALERT System if it is
approved, or even if reimbursement is available, that payors' reimbursement
policies will not adversely affect the Company's ability to sell its products
on a profitable basis. See "Risk Factors--Healthcare Reform."
EMPLOYEES
As of May 1, 1996, the Company had twenty-two full-time employees, of whom ten
are dedicated to manufacturing and quality assurance. The Company believes its
employee relations are satisfactory.
FACILITIES
The Company currently leases approximately 1,600 square feet of office space
located in Budd Lake, New Jersey through September 30, 1997 and occupies an
additional 1,800 square feet of contiguous office space on a month-to-month
basis. The Company also leases approximately 5,000 square feet of space in
Berlin, New Jersey. The Berlin facilities, which are divided into two adjacent
2,500 square foot units, contain 1,000 square feet of sterile product
inventory space, 1,500 square feet dedicated to administration, shipping and
receiving, engineering and catheter research and development, and 2,500 square
feet utilized for manufacturing operations. The Berlin facility is leased
through November 4, 1996. The Company believes it will be able to extend the
terms of its existing leases or lease replacement facilities sufficient to
meet its needs through 1997 without incurring material additional expense.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors,
executive officers and certain key employees of the Company as of March 31,
1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Jenkins(3)....................... 38 Chairman of the Board,
President and Chief Executive
Officer
James J. Caruso........................... 35 Chief Financial Officer,
Treasurer and Secretary
C. Bryan Byrd............................. 35 Vice President, Engineering
Douglas F. Studley........................ 43 Vice President, Sales
Joseph C. Griffin, III.................... 37 President, ProCath Corporation
Anthony J. Varrichio(3)................... 49 Director
David W. Mortara, Ph.D(1)(2).............. 54 Director
Lester J. Swenson(2)...................... 56 Director
Jon A. Tietbohl(1)(2)..................... 37 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Plan Committee of the Board of Directors.
Mr. Jenkins has been Chairman of the Board of Directors of the Company since
November 1995. Prior thereto, Mr. Varrichio served as the Chairman of the
Board from the Company's inception in January 1993. Directors and officers of
the Company are elected annually and hold offices until their successors are
elected and qualified or until their earlier removal, death or resignation.
Set forth below is a brief summary of the recent business experience and
background of each director and executive officer of the Company.
DAVID A. JENKINS is the co-founder and Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Mr. Jenkins served as
the President and a Director of the Company from 1993 to 1995. From 1988 to
1993, Mr. Jenkins served as the Chief Executive Officer and then Chairman of
the Board of Directors of Arrhythmia Research Technology, Inc., a publicly-
held company involved in the sale and distribution of EP products. Prior to
1988, Mr. Jenkins served as the Chief Financial Officer of Hemex Scientific,
Inc., a manufacturer of prosthetic heart valves.
JAMES J. CARUSO is the Chief Financial Officer, Treasurer and Secretary of the
Company. Mr. Caruso served from 1989 to 1995 as Vice President and Chief
Financial Officer of Micron Medical Products, Inc., a wholly-owned subsidiary
of Arrhythmia Research Technology, Inc. and a manufacturer of components for
ECG electrodes. Prior to joining Micron, Mr. Caruso was employed for five
years in the audit department of Deloitte & Touche (formerly Touche Ross &
Co.) and also by Ladenburg, Thalmann & Co, an investment banking firm. Mr.
Caruso is a Certified Public Accountant.
C. BRYAN BYRD is the Vice President, Engineering of the Company. Mr. Byrd
joined the Company in April 1993 to oversee software development for new
products. From 1989 to 1993, he co-founded and served as the Director of
Engineering for BioPhysical Interface Corp. where he was responsible for
developing automated computerized monitoring equipment for pacemaker and open
heart operating rooms and follow-up clinics. Before that, he was a software
engineer for Medtronic, Inc. ("Medtronic"), where he developed the ValveBase,
PaceBase and TeleTrace
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software modules, and before that with Mt. Sinai Medical Center in Miami
Beach, Florida. He has developed databases for all aspects of cardiac surgery.
DOUGLAS F. STUDLEY has been the Vice President, Sales of the Company since
October 1995. For seven years prior to joining the Company, Mr. Studley was
the founder and President of Bio-Technologies of Rhode Island, Inc., an
independent distributor organization that, in addition to product sales and
support, was responsible for the design and implementation of sales and
marketing plans for cardiovascular device corporations. Before that, he was
employed by Cordis Corporation for five years as a technical sales consultant
in their pacing division. Mr. Studley has twenty years of sales and marketing
experience in the cardiac pacing, medical device and pharmaceutical
industries.
JOSEPH C. GRIFFIN, III has been the President of ProCath Corporation, the
wholly-owned subsidiary of the Company, since its inception in 1993. Mr.
Griffin founded Professional Catheter Corporation, the predecessor to ProCath
Corporation, in 1990 and served as its President until the Company acquired
its business in 1993. Before that, Mr. Griffin was Manager of Research and
Development at Oscor Medical Corporation, a manufacturer of implantable pacing
leads, and Director, Research and Development and Technical Services at Nova
Medical Specialties, Inc., a division of B. Braun of America. Mr. Griffin has
more than 17 years experience in the design, development, regulation and
manufacture of cardiac catheters and has served as a member of the Health
Industry Manufacturers Association Pacemaker Task Force and Electrode Catheter
Task Force.
DAVID W. MORTARA, PH.D. has served as a Director of the Company since November
1995. Dr. Mortara founded and has served as the Chairman and Chief Executive
Officer of Mortara Instruments, Inc. ("MII"), a privately-held manufacturer
and supplier of electrocardiography equipment, since 1982. Prior to founding
MII, Dr. Mortara was Vice President, Engineering at Marquette Electronics,
Inc. He has authored numerous scientific publications on signal processing for
electrocardiography and currently serves as co-chair of AAMI's ECG Standards
Committee.
LESTER J. SWENSON has served as a Director of the Company since November 1995.
Mr. Swenson has served as Vice President, Finance of Medtronic, a leading
manufacturer and supplier of arrhythmia control products including pacemakers,
implantable defibrillators and catheter ablation systems, since 1985. At
Medtronic, Mr. Swenson previously held a variety of positions including
Assistant Corporate Controller, European Controller and International
Controller. He is currently a Director of the Health Futures Institute.
JON A. TIETBOHL has served as a Director of the Company since November 1995.
Since 1990, Mr. Tietbohl has served as the Senior Vice President and co-head
of Mergers and Acquisitions at Tucker Anthony Incorporated, a New York-based
investment banking concern that is a member of the John Hancock Financial
Services Group. During his ten year tenure at Tucker Anthony, Mr. Tietbohl has
represented both public and private companies in a range of corporate merger
and acquisition transactions, along with related experience in acquisition
finance.
ANTHONY J. VARRICHIO has served as a Director of the Company since inception
and served as the Chairman of the Board and Treasurer of the Company from 1993
to 1995. Since 1987, Mr. Varrichio has served as the President and a director
of HDI, an engineering consulting and medical device corporation. Prior to co-
founding HDI, Mr. Varrichio served as Vice President of Electro-Biology, Inc.,
a manufacturer of electronic bone growth stimulator devices. Prior thereto,
Mr. Varrichio worked in the Advanced Technology Laboratory division of
Intermedics, Inc., where he served as Director of Engineering.
45
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company has an Audit Committee of the Board of Directors
at least a majority of whom must be "independent directors" (as defined in the
bylaws of the National Association of Securities Dealers, Inc.), to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. Currently, Messrs.
Mortara, Swenson and Tietbohl are members of the Audit Committee.
Compensation Committee. The Company has a Compensation Committee of the Board
of Directors consisting of two or more disinterested, outside directors, who
may not receive options under the 1995 Long Term Incentive Plan, to determine
compensation for the Company's executive officers and to administer the 1995
Long Term Incentive Plan. Currently, Messrs. Mortara and Tietbohl are members
of the Compensation Committee.
Plan Committee. The Company has a Plan Committee of the Board of Directors
consisting of two or more directors to administer the Company's 1995 Director
Option Plan, none of whom are eligible to participate in such Plan. Currently,
Messrs. Jenkins and Varricchio are members of the Plan Committee.
SCIENTIFIC ADVISORY BOARD
The Company has formed a Scientific Advisory Board consisting of leading
physicians and scientists in the field of electrophysiology to advise and
consult with management and the Board of Directors on matters relating to the
medical device industry and the Company's product development efforts. Each of
the members of the Scientific Advisory Board has a full time occupation other
than as a member of the Scientific Advisory Board and may have commitments to,
or consulting or advisory contracts with, other entities that limit his
availability to the Company. In addition, certain members have consulting or
advisory relationships with some of the Company's competitors or potential
competitors. The current members of the Scientific Advisory Board are as
follows:
ECKHARD ALT, M.D., is an Associate Professor of Internal Medicine at the
Technical University of Munich where he directs the pacing and EP studies. An
internationally recognized authority in cardiac pacing, defibrillation and
electrophysiology, Dr. Alt has published over 300 scientific articles and has
contributed to more than 25 clinical books, primarily in the field of cardiac
pacing. Dr. Alt is the inventor of the ALERT catheter concept licensed to the
Company and currently is conducting clinical studies on various aspects of
human atrial defibrillation. He was the symposium organizer of the Third
International Congress on Rate Adaptive Pacing and Implantable Defibrillators
held in October 1993, and the Co-Editor of the Proceedings of New Therapeutic
Approaches to Atrial Fibrillation published by PACE, the official journal of
NASPE and the International Cardiac Pacing and Electrophysiology Society, in
May 1994. Dr. Alt has also been elected to be the Secretary General of the
World Congress of Pacing and Electrophysiology to be held in 1999.
CHARLES L. BYRD, M.D., F.A.C.S., is Clinical Professor of Surgery at the
University of Miami School of Medicine and a practicing thoracic and
cardiovascular surgeon at The Miami Heart Institute and Mt. Sinai Medical
Center in Florida. A pioneer in cardiac pacing and pacemaker lead removal,
Dr. Byrd specializes in pacemaker and EP surgery and serves as a consultant to
several major implantable device companies, including Medtronic, Intermedics,
Inc. and the Pacesetter Division of St. Jude Medical, Inc. He has published
numerous scientific articles and book chapters on clinical cardiac pacing. Dr.
Byrd received his M.D. from Tulane Medical College and completed residencies
at the Peter Bent Brigham Hospital in Boston, Massachusetts and Jackson
Memorial
46
<PAGE>
Hospital in Miami, Florida. Dr. Byrd is the father of C. Bryan Byrd, the Vice
President, Engineering of the Company.
JEREMY N. RUSKIN, M.D., F.A.C.C., is Associate Professor of Medicine at
Harvard Medical School and Director of the Cardiac Arrhythmia Service at
Massachusetts General Hospital in Boston, Massachusetts. A clinical and
research electrophysiologist, Dr. Ruskin has authored several hundred
scientific publications in the field of arrhythmia control, including 59 book
chapters and reviews. He serves on the editorial boards of six peer-review
journals, including the Journal of Pacing & Electrophysiology, Cardiology and
the Journal of Cardiovascular Electrophysiology, and previously served for six
years as a member of the FDA Cardiovascular and Renal Drugs Advisory
Committee. Dr. Ruskin graduated summa cum laude from Tufts University and
received his M.D. (cum laude) from Harvard Medical School.
J. MARCUS WHARTON, M.D., F.A.C.C., is Associate Professor of Medicine and
Director of Clinical Cardiac Electrophysiology at Duke University Medical
Center in Durham, North Carolina. The 1987 recipient of NASPE's prestigious
Young Investigator Award, Dr. Wharton is a leading researcher in clinical
electrophysiology and atrial defibrillation and directs the EP center at Duke
University Medical Center. Dr. Wharton received his M.D. from Vanderbilt
University and completed his postdoctoral training at the University of
California at San Francisco and Duke University Medical Center. He has
published over 150 scientific articles and abstracts and serves as a
scientific advisor to InControl, Inc., Cardiac Pathways, Inc. and Berlex
Laboratories.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth certain summary information concerning
compensation paid or accrued to the Chief Executive Officer of the Company
(the "Named Executive Officer") in all capacities for the years ended December
31, 1995, 1994 and 1993. No other executive officer of the Company had an
annual salary and bonus aggregating greater than $100,000 during such time
periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
NAME AND UNDERLYING
PRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS(#)
------------------ ---- ---------- -------- ------------
<S> <C> <C> <C> <C>
David A. Jenkins...................... 1995 $110,000 $5,250 166,000
Chairman, President and 1994 108,542 0 0
Chief Executive Officer 1993 87,500 0 0
</TABLE>
STOCK OPTIONS
The following table sets forth certain information concerning grants of stock
options to the Named Executive Officer during the fiscal year ended December
31, 1995:
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF OPTIONS GRANTED
SHARES UNDERLYING TO EMPLOYEES EXERCISE
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE PER SHARE EXPIRATION DATE
---- ----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
David A. Jenkins........ 70,000(1) $2.20 12/14/00
Chairman, President and 96,000(2) $2.00 08/30/05
-------
Chief Executive Officer 166,000 63.6%
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table provides certain information with respect to the Named
Executive Officer concerning the exercise of stock options during the fiscal
year ended December 31, 1995 and unexercised stock options held as of December
31, 1995.
AGGREGATED OPTION EXERCISES IN 1995
AND OPTION VALUES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1995 DECEMBER 31, 1995($)(3)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Jenkins........ 0 -- 33,000 133,000 0 0
Chairman, President and
Chief Executive Officer
</TABLE>
- ---------------------
(1) These options were granted as incentive stock options. Options to purchase
45,000 shares become exercisable upon the completion of an initial public
offering of the Company's securities and options to purchase 25,000 shares
become exercisable on the first anniversary of such date. The term of such
options is five years.
(2) These options were granted as non-qualified stock options. Options to
purchase 30,000 shares became immediately exercisable on the date of grant
and 1,000 shares per month become exercisable thereafter. The term of such
options is ten years.
(3) Based upon the fair market value of the Company's Common Stock of $2.00
per share as of December 31, 1995 as determined by the Board of Directors.
48
<PAGE>
COMPENSATION PLANS AND OTHER ARRANGEMENTS
1995 Long Term Incentive Plan
The Company's 1995 Long Term Incentive Plan (the "1995 Incentive Plan") was
adopted by the Board of Directors and shareholders in November 1995. A total
of 400,000 shares of Common Stock are available for issuance under the 1995
Incentive Plan and options to purchase 165,000 shares were outstanding as of
May 1, 1996. The 1995 Incentive Plan provides for grants of "incentive" and
"non-qualified" stock options to employees of the Company. The 1995 Incentive
Plan is administered by the Compensation Committee, which determines the
optionees and the terms of the options granted, including the exercise price,
number of shares subject to the options and the exercisability thereof. The
1995 Incentive Plan will terminate on November 30, 2005, unless earlier
terminated by the Board of Directors.
The exercise price of incentive stock options granted under the 1995 Incentive
Plan must be equal to at least the fair market value of the Common Stock on
the date of grant, and the term of such options may not exceed ten years. With
respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the Common Stock on the date of grant, and the term
of the option may not exceed five years. The aggregate fair market value of
Common Stock (determined as of the date of the option grant) for which an
incentive stock option may for the first time become exercisable in any
calendar year may not exceed $100,000.
1995 Director Option Plan
The Company's 1995 Director Option Plan was adopted by the Board of Directors
and the shareholders in November 1995. A total of 360,000 shares of Common
Stock of the Company are available for issuance under the 1995 Director Option
Plan and options to purchase 360,000 shares were outstanding as of May 1,
1996. The 1995 Director Option Plan provides for grants of "director options"
to eligible directors of the Company and for grants of "advisor options" to
eligible members of the Scientific Advisory Board. Director options and
advisor options become exercisable at the rate of 1,000 shares per month,
commencing with the first month following the date of grant for so long as the
optionee remains a director or advisor, as the case may be. The 1995 Director
Option Plan is administered by the Plan Committee of the Company, which
determines the optionees and the terms of the options granted, including the
exercise price and the number of shares subject to the options. The 1995
Director Option Plan will terminate on November 30, 2005, unless earlier
terminated by the Board of Directors.
COMPENSATION OF DIRECTORS
No directors of the Company receive cash or other compensation for services on
the Board of Directors or any committee thereof, except that each of Dr.
Mortara and Messrs. Swenson and Tietbohl received options to purchase 60,000
shares of Common Stock of the Company, vesting at the rate of 1,000 shares per
month, under the 1995 Director Option Plan. Messrs. Jenkins and Varrichio are
members of the Company's Plan Committee and, therefore, will not receive
options under the 1995 Director Option Plan. All directors are entitled to
reimbursement for reasonable expenses incurred in the performance of their
duties as Board members.
COMPENSATION OF SCIENTIFIC ADVISORY BOARD MEMBERS
Each of the members of the Scientific Advisory Board has received options to
purchase 36,000 shares of the Company's Common Stock under the 1995 Director
Option Plan, which vest at the rate of 1,000 shares per month, and will be
reimbursed for their reasonable expenses incurred in the performance of their
duties as Scientific Advisory Board members.
49
<PAGE>
EMPLOYMENT AGREEMENTS
On March 1, 1993, the Company entered into an Employment Agreement with David
A. Jenkins as President for an initial term of three years. The agreement
provides for base compensation of $105,000 for the first year and bonuses and
other additional compensation as may be determined by the Board of Directors
in its sole discretion. On August 31, 1995, the Company entered into an
Employment Agreement Addendum with Mr. Jenkins which extended the term of
employment through March 1, 1999. The addendum provides for base compensation
in the amount of $145,000 for the year ended February 28, 1997, plus,
beginning upon the consummation of an initial public offering of the
securities of the Company, five percent of the Company's consolidated income
before taxes. Mr. Jenkins' Employment Agreement may be terminated at any time
for cause. It contains a non-competition provision extending for two years
after termination of employment for cause and, in the Company's discretion,
one year after termination of employment for any other reason, provided that
if Mr. Jenkins is terminated without cause, the Company is obligated to
continue to pay him compensation during such discretionary period.
50
<PAGE>
CERTAIN TRANSACTIONS
Hi-Tronics Designs, Inc. -- General
Hi-Tronics Designs, Inc. ("HDI") was one of the Company's two founding
shareholders. HDI's shareholders are Anthony J. Varrichio, William Winstrom
and Medtronic, Inc. ("Medtronic"). Mr. Varrichio is the President, a director
and the largest shareholder of HDI, and Mr. Winstrom is an officer and
director of HDI.
Mr. Varrichio has been a director of the Company since the Company's inception
and was Chairman of the Board of Directors and Treasurer of the Company until
November 1995. Mr. Winstrom was a director of the Company until November 1995.
Lester Swenson, an officer of Medtronic, has been a director of the Company
since November 1995. Mr. Varrichio, Mr. Winstrom and Medtronic acquired shares
of the Company's Common Stock from HDI. As of March 31, 1996, Mr. Varrichio
owned beneficially 10.6% of the Company's Common Stock, Mr. Winstrom owned
beneficially 8.3% and Medtronic owned 10.1%.
The Company acquired the rights to its first product, the EP-2 Clinical
Stimulator, from HDI in 1993 and has acquired rights to certain other products
and technology since then. HDI has provided and continues to provide research
and development services as to selected projects and manufactures the EP
WorkMate, the EP-3 Clinical Stimulator, the Teletrace III Receiver and the
MemoryTrace arrhythmia monitors for the Company. In its early stages, the
Company subleased office space from HDI, had a joint bank line of credit
agreement with HDI and used certain of HDI's other resources. During May 1996,
the Company borrowed $50,000 from HDI. The promissory note representing the
loan matures on June 30, 1996 and bears interest at 9.25% per annum.
The Company believes that each of the following transactions with HDI was
entered into on terms and at prices no less favorable than the Company could
have received from an unaffiliated party.
EP-2 and EP-3 Clinical Stimulators
In March 1993, the Company acquired from HDI all of its rights to the EP-2 for
$360,000 in cash and guaranteed royalty payments aggregating $450,000 due on
or before March 3, 1995, based on a royalty rate of $2,250 per sale of the EP-
2 or EP-3 (which was in development by HDI at the time of the acquisition).
As of May 1, 1993, the Company entered into a Supply Agreement with Medtronic,
whereby it engaged Medtronic as its exclusive distributor of the EP-2 within
the U.S. for a one year period, and Medtronic agreed to purchase at least 50
EP-2s for distribution. Medtronic purchased an aggregate of $547,714 in 1993,
$507,895 in 1994, $150,159 in 1995, and $939 and $109,874 during the three
months ended March 31, 1995 and 1996 of products from the Company, including
EP-2s and EP-3s. In addition, the Supply Agreement granted Medtronic a right
to negotiate for acquisition of the exclusive right to purchase and distribute
the EP-3 for a period of 60 days upon its completion of development, and an
option terminating two years after expiration of the Supply Agreement to
distribute the EP-3 on a non-exclusive basis on the same terms and conditions
as offered to any third party. Medtronic did not exercise any of its rights
under the Supply Agreement with respect to the EP-3 and the Supply Agreement
expired on May 1, 1995.
The Company and HDI terminated the Company's obligation to make royalty
payments to HDI with respect to the EP-2 and EP-3 (collectively, the "EP
Stimulators") in August 1994 in exchange for 66,000 shares of the Company's
Common Stock issued to HDI and the assumption by the Company of HDI's
promissory note payable to Medtronic in the amount of $270,000 (the "Medtronic
Note"). As of such date, the Company had made aggregate royalty payments to
HDI of $114,750 as to EP Stimulators, and was obligated to pay additional
royalties of $335,250, as well as $67,500 of other debt due HDI. HDI
subsequently acquired the Medtronic Note from Medtronic and, in July 1995, the
Company satisfied the Medtronic Note in full by paying to HDI cash of
51
<PAGE>
$70,000 and issuing $200,000 aggregate principal amount of 1995 Debentures,
with attached warrants covering the right to purchase 100,000 shares of Common
Stock at an exercise price of $2.00 per share.
The Company entered into a manufacturing agreement with HDI (the "Stimulator
Manufacturing Agreement") during May 1993, pursuant to which HDI was engaged
as the exclusive manufacturer of the EP Stimulators. The Stimulator
Manufacturing Agreement provided for the purchase by the Company of at least
200 EP Stimulators prior to March 31, 1996. The Company purchased products
from HDI aggregating $413,000 during 1993, $449,000 during 1994, $424,000
during 1995 and $171,995 and $144,755 during the three months ended March 31,
1995 and 1996, respectively, including amounts under the Stimulator
Manufacturing Agreement.
The Company entered into a Master Manufacturing Agreement with HDI during
April 1996 (the "Master Manufacturing Agreement") which provides that HDI will
manufacture the EP WorkMate, the EP-3, the TeleTrace III Receiver, the
MemoryTrace line of arrhythmia monitors and all subsequent versions of such
products for the Company on an exclusive basis in accordance with GMP
regulations and all other applicable laws and regulations. The Master
Manufacturing Agreement has a term of five years commencing on March 31, 1996
and, unless terminated by either party upon at least 90 days written notice,
will automatically renew for successive terms of one year. The Master
Manufacturing Agreement also contains a one year warranty by HDI as to
materials, workmanship and conformance to written specifications. HDI also
agrees to indemnify the Company for damages resulting from HDI's breach or
failure to comply with any term of the Master Manufacturing Agreement, agrees
to keep all proprietary information of the Company relating to products
manufactured for the Company confidential and agrees to maintain certain
product liability insurance to which the Company is named as an additional
insured. The Master Manufacturing Agreement also provides for the waiver by
HDI of any remaining minimum order requirements under the Stimulator
Manufacturing Agreement.
TeleTrace Receiver and MemoryTrace Monitors
In February 1994, the Company entered into an agreement with HDI, pursuant to
which the Company (i) assumed HDI's obligation to service the TeleTrace III
Receivers previously sold by Medtronic, (ii) assumed HDI's obligation to buy
30 TeleTrace III Receivers from Medtronic and (iii) agreed to market and
distribute HDI arrhythmia monitors on an exclusive basis, provided that HDI
maintained a marketable product.
In July 1994, the Company entered into an agreement with HDI (the "Monitor
Acquisition Agreement"), pursuant to which the Company acquired all of HDI's
rights to (i) the 4221, 4222 and 4222 ATM arrhythmia monitors, including
manufacturing drawings and regulatory approvals, (ii) the TeleTrace III
Receiver, (iii) a newly designed 4400 ATM arrhythmia monitor, including
manufacturing drawings and regulatory approvals, and (iv) the ValveBase
software program, in consideration of 50,000 shares of Common Stock as of such
date and 50,000 shares of Common Stock upon submission to the FDA of a newly
designed arrhythmia monitor. HDI agreed to manufacture the arrhythmia monitors
and any new generation of the TeleTrace Receiver for the Company at a price
that provides HDI no greater than a 30% gross margin. In addition, HDI and
Messrs. Varrichio and Winstrom agreed not to design or manufacture arrhythmia
monitors for any other party for the greater of three years or so long as the
Company uses HDI to manufacture its arrhythmia monitors, with certain
exceptions. In February 1996, the Company agreed to grant HDI certain
additional exceptions in exchange for HDI's agreement to pay the Company 10%
of the gross revenues received by HDI under the excepted manufacturing
arrangements.
In January 1995, the Company entered into an agreement with HDI pursuant to
which HDI agreed to continue to develop the TeleTrace IV Receiver, in exchange
for $30,000 in cash and
52
<PAGE>
10,000 shares of Common Stock of the Company. In September 1995, the parties
agreed to amend the consideration to be paid to HDI to 19,000 shares of Common
Stock of the Company issued immediately and a cash payment of $30,000 upon
completion of development, including all documentation necessary for filing an
application for 510(k) clearance from the FDA. The parties subsequently
entered into a written amendment memorializing this agreement. Development of
the TeleTrace IV Receiver is ongoing.
EP WorkMate
The Company uses HDI to manufacture and assemble the EP WorkMate. The Company
made payments to HDI of $54,900 during 1995 and $70,285 during the three
months ended March 31, 1996 for such manufacturing and assembly.
Sublease and Other Arrangements
The Company subleased office space at its Budd Lake, New Jersey location from
HDI from inception through March 1994. Sublease payments to HDI were $6,262
during 1993 and $2,735 during 1994. In November 1995, the Company entered into
a lease with the building owner for expanded office and product assembly
space.
The Company became a co-borrower under HDI's bank line of credit in November
1993 and utilized such credit facility through April 1994. The Company's
borrowing limit under the credit facility was $100,000 at the prevailing prime
rate plus 1% and the Company borrowed up to that limit. The proceeds were used
by the Company for working capital and general business purposes. Messrs.
Jenkins, Varrichio and Winstrom each unconditionally guaranteed all
obligations of HDI and the Company under such line of credit. The Company
repaid its borrowing and accrued interest under the line of credit and the
line expired on April 30, 1994.
Other Securities Transactions
In September 1995, the Company issued units comprised of 1995 Debentures and
1995 Warrants in the amount of $200,000 to Medtronic and $200,000 to HDI in
consideration for HDI's forgiveness of $400,000 of accounts payable due HDI
from the Company for products and services provided to the Company by HDI.
With respect to such issuance to Medtronic, HDI forgave $200,000 of such
accounts payable by the Company in lieu of reimbursing Medtronic for $200,000
of prepaid research and development payments made by Medtronic to HDI.
In December 1995, the Company entered into an agreement with an investor,
pursuant to which the Company agreed to provide certain registration rights to
such investor in connection with his agreement to purchase 100,000 shares of
the Company's Common Stock from the Company and to purchase 100,000 shares of
Common Stock from Messrs. Varrichio and Winstrom. The Company subsequently
entered into a subscription agreement with such investor pursuant to which the
investor purchased 100,000 shares of Common Stock at $3.00 per share from the
Company. At the same time, the Company entered into an Investment Agreement
with such investor and Messrs. Varrichio and Winstrom, pursuant to which
Messrs. Varrichio and Winstrom sold 100,000 shares of the Company's Common
Stock to such investor at $2.00 per share, and agreed to enter into a "lock-
up" agreement with the Company's underwriter in any future public offering.
Pursuant to the lock-up provisions of such Investment Agreement, Messrs.
Varrichio and Winstrom agreed not sell or otherwise dispose of any of their
shares of Common Stock for a period to be determined by such underwriter
following an initial public offering of shares of Common Stock of the Company.
See "Description of Capital Stock -- Registration Rights."
Acquisition of Note Receivable
In September 1995, the Company acquired a note receivable in the amount of
$100,000 from FalFab International, an angioplasty catheter manufacturer in
the United Kingdom. Edwin K. Hunter, who owns beneficially 574,500 shares of
Common Stock of the Company, is also a principal shareholder of FalFab
International. The note receivable is unsecured, bears interest at 8% per
annum and is due and payable on July 15, 1996.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock of the Company as of May 1, 1996, and as adjusted to
reflect the sale of the shares offered by the Company hereby and the exercise
in full of the outstanding 1995 Warrants, by (i) each of the Company's
directors, (ii) the Named Executive Officer, (iii) all directors and executive
officers as a group and (iv) each person known to the Company to beneficially
own more than five percent of the Company's Common Stock. Except as otherwise
indicated, the persons named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
BENEFICIALLY OWNED(1)
--------------------------------
NAME & ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING
- ------------------- ------------------ ----------------- --------------
<S> <C> <C> <C>
David A. Jenkins(2)....... 895,000 19.4% 10.9%
c/o EP MedSystems, Inc.
58 Route 46 West
Budd Lake, New Jersey
07828
Edwin K. Hunter(3)........ 574,500 12.2% 7.1%
1807 Lake Street
Lake Charles, Louisiana
70602
Medtronic, Inc.(4)........ 510,000 11.0% 6.3%
7000 Central Avenue N.E.
Minneapolis, Minnesota
55432
Anthony J. Varrichio(5) .. 487,000 10.7% 6.0%
1 Hemlock Lane
Flanders, New Jersey 07836
William Winstrom(6)....... 376,000 8.2% 4.6%
2 Cliffside Drive
Andover, New Jersey 07821
Pat Gordon(7)............. 325,000 7.1% 4.0%
12011 Wander Lane
Austin, Texas 78750
David W. Mortara(8)....... 58,000 1.3% *
7865 North 86th Street
Milwaukee, Wisconsin 53224
Jon Tietbohl(9)........... 33,000 * *
6 Brendan Drive
Flanders, New Jersey 07836
Lester J. Swenson(10)..... 8,000 * *
Medtronic, Inc.
7000 Central Avenue N.E.
Minneapolis, Minnesota
55432
All executive officers and
directors as a group
(nine persons)........... 1,647,702 34.6% 19.8%
</TABLE>
- ---------------------
* Less than one percent (1%).
54
<PAGE>
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended. Under Rule 13d-3(d), shares issuable within 60 days upon
exercise of outstanding options, warrants, rights or conversion privileges
("Purchase Rights") are deemed outstanding for the purpose of calculating
the number and percentage owned by the holder of such Purchase Rights, but
not deemed outstanding for the purpose of calculating the percentage owned
by any other person. All 1995 Warrants are currently exercisable.
"Beneficial ownership" under Rule 13d-3 includes all shares over which a
person has sole or shared dispositive or voting power.
(2) Includes 85,000 shares issuable upon exercise of options. Also includes
160,000 shares held by Mr. Jenkins as trustee for the Dalin Class Trust.
Excludes 45,000 shares held by Mr. Jenkins' wife, and 20,000 shares held
by Mr. Jenkins' wife as custodian for his children.
(3) Includes 210,000 shares held by two trusts of which Mr. Hunter is the
trustee, 150,000 shares issuable upon exercise of 1995 Warrants held by a
private foundation over whose assets Mr. Hunter has voting and investment
power and 12,500 shares issuable upon exercise of 1995 Warrants held by
two trusts of which Mr. Hunter is the trustee.
(4) Includes 100,000 shares issuable upon exercise of 1995 Warrants.
(5) Includes 40,000 shares issuable upon exercise of options.
(6) Includes 33,000 shares issuable upon exercise of options.
(7) Includes 25,000 shares issuable upon exercise of 1995 Warrants.
(8) Includes 8,000 shares issuable upon exercise of options.
(9) Includes 8,000 shares issuable upon exercise of options and 25,000 shares
issuable upon exercise of 1995 Warrants.
(10) Includes 8,000 shares issuable upon exercise of options.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company summarizes the
principal rights of holders of such stock but does not purport to be complete
and is subject in all respects to applicable New Jersey law, including the New
Jersey Business Corporation Act ("NJBCA"), and to the provisions of the
Company's Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the registration statement of which this Prospectus is a
part.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock, no
par value per share. There were approximately 50 holders of the Company's
Common Stock as of May 1, 1996. Immediately following the closing of this
offering, the Company estimates that there will be 8,099,917 shares of Common
Stock outstanding (assuming that the 1995 Warrants are exercised in full and
the Underwriter's over-allotment option is not exercised). In addition, as of
May 1, 1996, 621,000 shares of Common Stock were issuable upon exercise of
outstanding vested options. Each share of Common Stock is entitled to
participate pro rata in distributions upon liquidation, subject to the rights
of any holders of the Preferred Stock. The holders of Common Stock may receive
dividends as declared by the Board of Directors out of funds legally available
therefor.
Holders of the Common Stock do not have any preemptive, subscription,
redemption or conversion rights. The holders of the Common Stock will be
entitled to one vote for each share held on all matters submitted to a vote of
shareholders, including the election of directors. The Company's Certificate
of Incorporation does not provide for cumulative voting, which means that
pursuant to the Company's Bylaws, the holders of more than 50% of the
outstanding shares of Common Stock can elect all of the directors of the
Company. All of the shares of the Common Stock currently issued and
outstanding are fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred Stock,
no par value per share. The Board of Directors of the Company has the
authority, without further action by the holders of the outstanding Common
Stock, to issue Preferred Stock from time to time in one or more classes or
series, to fix the number of shares constituting any class or series and the
stated value thereof, if different from the par value, and to fix the terms of
any such series or class, including dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the liquidation
preference of such class or series. The Company presently has no class or
series of Preferred Stock outstanding. The Company has no present plans to
issue any series or class of Preferred Stock. The designations, rights and
preferences of any Preferred Stock which may be issued would be set forth in a
Certificate of Amendment which would be filed with the Secretary of State of
the State of New Jersey.
WARRANTS
Purchasers of the 1995 Debentures received 1995 Warrants to purchase an
aggregate of 568,750 shares of Common Stock at an exercise price of $2.00 per
share. The 1995 Warrants expire on the earlier of June 30, 2000 or 30 days
following the repayment of the 1995 Debentures. The Company intends to repay
the aggregate amount of the 1995 Debentures immediately following this public
offering.
The Company has agreed to sell to the Underwriter, for $.01 per warrant, five-
year warrants to purchase up to an aggregate of 150,000 shares of the
Company's Common Stock (the "Underwriter Warrants"). The Underwriter Warrants
will be exercisable at a price per share equal to 130% of the initial offering
price per share to the public of the Common Stock offered hereby, commencing
one year from the date of this Prospectus and expiring four years after such
date. The
56
<PAGE>
Underwriter Warrants may also be converted into Common Stock at a ratio equal
to (i) the amount (if any) by which the market price of Common Stock on the
date of conversion exceeds the exercise price of the Underwriter Warrants
divided by (ii) the market price of the Common Stock on that day.
REGISTRATION RIGHTS
The Company has granted registration rights to certain holders of 650,000
shares or options to purchase shares of Common Stock (the "Shareholders"). In
the event the Company proposes to register any of its securities under the
Securities Act, the Shareholders are entitled to notice of such registration
and are entitled to include their shares therein ("Piggyback Rights"), subject
to the ability of the underwriter to limit the number of shares included in
the offering. All registration expenses incurred must be borne by the Company,
but the underwriting discounts and commissions, along with legal expenses,
will be borne and paid ratably by the holders of the shares being registered.
The holder of 200,000 shares also has the right to request a registration on
Form S-3, or an amendment of an existing registration statement of the
Company, after the shorter of one year following an initial public offering or
the shortest shareholder lock-up period requested by the underwriter. All
registration expenses shall be borne one-half by the Company and one-half by
such Shareholder. Underwriting discounts and commissions and legal expenses of
the Shareholder will be borne and paid by the Shareholder. The Shareholders'
registration rights with respect to this offering have either lapsed or been
waived.
The Company has also granted certain registration rights to the holder or
holders of the Underwriter Warrants. The holder or holders of Underwriter
Warrants covering a majority of the total shares purchasable pursuant to the
Underwriter Warrants (the "Underwriter Warrant Shares") may require the
Company to file a registration statement covering some or all of their
Underwriter Warrant Shares at the Company's expense. Upon any request to file
such a registration statement, the Company must give notice to the other
holders of Underwriter Warrants and give them the opportunity to include their
Underwriter Warrant Shares in the registration statement. The Company must
keep that registration statement effective for two years or until all the
Underwriter Warrant Shares so registered have been sold. Holders of
Underwriter Warrants may require the Company to file additional registration
statements, but they must bear the costs associated with such additional
registration statements. Holders of Underwriter Warrants also have Piggyback
Rights. None of these registration rights may be exercised until one year
after the effective date of the registration statement of which this
Prospectus is a part.
DIVIDENDS
Subject to the prior rights of any holders of the Preferred Stock, the holders
of the Common Stock are entitled to receive dividends from funds legally
available therefor. The Company has not declared or paid any dividends on its
Common Stock since its inception. The payment by the Company of dividends, if
any, is within the discretion of the Board of Directors and will depend on the
Company's earnings, if any, its capital requirements and financial condition,
as well as other relevant factors. The Board of Directors does not intend to
declare any dividends in the foreseeable future, but instead intends to retain
earnings for use in the Company's business operations.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
REPORTS TO SHAREHOLDERS
The Company has filed an application with the Securities and Exchange
Commission pursuant to which the Common Stock will be registered under the
provisions of Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act") as of the date of this Prospectus and has agreed with
57
<PAGE>
the Underwriter that it will use its best efforts to continue to maintain such
registration. Such registration will require the Company to comply with
periodic reporting, proxy solicitation and certain other requirements of the
Exchange Act.
LIMITATION OF LIABILITY AND INDEMNIFICATION
New Jersey law provides that a New Jersey corporation may include within its
Certificate of Incorporation provisions eliminating or limiting the personal
liability of its directors and officers in shareholder actions brought to
obtain damages or alleged breaches of fiduciary duties, as long as the alleged
acts or omissions did not involve a breach of a duty of loyalty to the
corporation or its shareholders, were performed in good faith, did not involve
a knowing violation of law or result in an improper personal benefit.
The Company's Certificate of Incorporation and Bylaws provide that the Company
may indemnify its directors, officers, Scientific Advisory Board members,
employees and other agents to the fullest extent permitted by New Jersey law;
provided, that such persons acted in good faith and in a manner reasonably
believed to be in the best interest of the Company and, with respect to any
criminal proceeding, had no reasonable cause to believe such conduct was
unlawful. The Company maintains liability insurance for its officers and
directors. There can be no assurance, however, that the Company will be able
to maintain such insurance on reasonable terms. At present, there is no
pending litigation or proceeding involving a director, officer, employee or
agent of the Company where indemnification will be required or threatened. The
Company is not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
The Company's Certificate of Incorporation and Bylaws provide that a director
of the Company will not be personally liable to the Company or its
shareholders for damages for breach of any duty owed to the Company or its
shareholders, except for liabilities arising from any breach of duty based
upon an act or omission (i) in breach of the duty of loyalty to the Company,
(ii) not in good faith or involving a knowing violation of law or (iii)
resulting in receipt by such director or officer of an improper personal
benefit.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and may, therefore, be unenforceable.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming the 1995 Warrants are exercised
in full, the Company will have 8,099,917 shares of Common Stock outstanding
(or 8,549,917 shares if the Underwriter's over-allotment option is exercised
in full), assuming no grants or exercises of options to purchase Common Stock.
Of these, the 3,000,000 shares sold in this offering (3,450,000 shares if the
over-allotment option is exercised in full), will be freely tradeable, without
restriction under the Securities Act, except for any such shares that may be
acquired by an affiliate of the Company (an "Affiliate"), as that term is
defined in Rule 144 under the Securities Act, which shares will be subject to
the resale limitations of Rule 144 described below.
All executive officers and directors and certain holders of the Company's
Common Stock, who currently hold in the aggregate 3,737,326 shares of Common
Stock, have agreed pursuant to lock-up agreements with the Underwriter not to
offer, sell or otherwise dispose of any shares of the Common Stock until one
year after effectiveness of the Registration Statement for the shares of
Common Stock offered hereby without the consent of the Underwriter. See
"Underwriting."
The 5,099,917 outstanding shares not sold in this offering were sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are "restricted securities" within the meaning of Rule 144.
As to 270,000 shares, the period during which resale limitations under Rule
144 apply has expired, and those shares may be sold in the public market
immediately after the consummation of this offering. Beginning 90 days after
the date of this Prospectus, an additional 555,000 shares will become eligible
for sale under Rule 144, subject to resale limitations. Also beginning at that
time, up to 27,000 shares issuable under then-exercisable options could be
sold in the public market under Rule 701. At various times prior to one year
from the date of this Prospectus an additional 77,174 shares will become
eligible for sale.
One year from the date of this Prospectus the Underwriter's lock-up agreements
will expire. At that time, 530,500 shares will be eligible for sale without
restriction and 2,169,826 shares will be eligible for sale subject to the
resale limitations of Rule 144. The remaining shares will become eligible for
sale at various times thereafter. In addition, one year from the date of this
Prospectus certain registration rights held by existing shareholders will
become exercisable. The exercise of such rights could result in the
registration and sale of shares prior to their becoming eligible for sale
under Rule 144. See "Description of Capital Stock--Registration Rights."
In general, under Rule 144 as currently in effect, if a period of at least two
years has elapsed between the later of the date restricted shares (as that
phrase is defined in Rule 144) were acquired from the Company and the date on
which they were acquired from an Affiliate, then the holder of such restricted
shares (including an Affiliate) is entitled to sell a number of shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of the Common Stock (approximately 80,999 shares
immediately after the offering), and (ii) the average weekly reported volume
of trading of the Common Stock during the four calendar weeks preceding the
date on which the notice of such sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of certain public information concerning the Company. Under
Rule 144(k), if a period of at least three years has elapsed between the later
of the date on which restricted shares were acquired from the Company and the
date on which they were acquired from an Affiliate, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be
entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above.
An aggregate of 1,459,000 shares of Common Stock will be subject to issuance
upon exercise of outstanding stock options and warrants following the
offering. Options covering 621,000 shares
59
<PAGE>
were vested and exercisable as of May 1, 1996. Shares issued upon exercise of
such options will be restricted securities within the meaning of Rule 144.
However, certain shares issued pursuant to options granted to employees,
officers or directors of or advisers to the Company pursuant to a written
compensatory plan or contract ("Rule 701 Shares") may be sold in the public
market pursuant to Rule 701 under the Securities Act, although some of these
shares are subject to lock-up agreements with the Underwriter. Under certain
circumstances, Rule 701 permits Affiliates to sell Rule 701 Shares under Rule
144 without complying with the holding period requirements of Rule 144. Non-
Affiliates may sell Rule 701 Shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144.
Sales of significant amounts of Common Stock could have an adverse impact on
the market price of the Common Stock.
60
<PAGE>
UNDERWRITING
Pacific Growth Equities, Inc. (the "Underwriter") has agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock indicated below opposite its
name at the initial public offering price less underwriting discounts and
commissions set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriter are subject to
certain conditions precedent and that the Underwriter is committed to purchase
all of the shares if it purchases any.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Pacific Growth Equities, Inc. ........................................ 3,000,000
</TABLE>
The Underwriter has advised the Company that it proposes initially to offer
the Common Stock to the public on the terms set forth on the cover page of
this Prospectus. The Underwriter may allow to selected dealers a concession of
not more than $ per share, and the Underwriter may allow, and such dealers
may re-allow, a concession of not more than $ per share to certain other
dealers. The offering price and other selling terms may be changed by the
Underwriter. The Common Stock is offered by the Underwriter when, as and if
delivered to and accepted by it and subject to various prior conditions,
including its right to reject orders in whole or in part. The Underwriter has
advised the Company that it intends to make a market in the Common Stock after
the effective date of this offering.
The Company has granted an option to the Underwriter, exercisable during the
45 day period after the date of this Prospectus, to purchase up to a maximum
of 450,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriter. The Underwriter may purchase such shares to cover over-allotments
made in connection with this offering.
The Underwriter has informed the Company that it does not expect to confirm
sales of Common Stock offered by this Prospectus to accounts over which it
exercises discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof. In addition, the Company has agreed to reimburse
the Underwriter for up to $50,000 of accountable fees and expenses and has
agreed to issue and sell to the Underwriter for $0.01 per warrant, five year
warrants to purchase up to an aggregate of 150,000 shares of the Company's
Common Stock (the "Underwriter Warrants"). The Underwriter Warrants will be
exercisable at a price per share equal to 130% of the initial offering price
per share to the public of the Common Stock offered hereby, commencing one
year from the date of this Prospectus and expiring four years after such date.
The terms of the Underwriter Warrants were established as the result of
negotiations between the Company and the Underwriter. If the Underwriter
Warrants are exercised, the Underwriter may realize additional compensation.
By their terms, the Underwriter Warrants will be restricted from sale,
transfer, assignment or hypothecation for a period of one year, except to
officers and partners of the Underwriter. The number of shares covered by the
Underwriter Warrants and the exercise price thereof are subject to adjustment
in certain events to prevent dilution. The Company has granted the holder or
holders of the Underwriter Warrants certain registration rights. See
"Description of Capital Stock--Registration Rights."
Shareholders of the Company holding in the aggregate approximately 3,737,326
shares of Common Stock have entered into Lock-up Agreements with the
Underwriter which provide that
61
<PAGE>
they will not offer, sell or otherwise dispose of any of the Company's Common
Stock for a period of one year after effectiveness of the Registration
Statement for the shares of Common Stock offered hereby without the prior
written consent of the Underwriter. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations between the Company and the Underwriter. Among the factors to be
considered in such negotiations will be the history of, and prospects for, the
Company and the industry in which it operates, an assessment of the Company's
management, its past and present operations and financial performance, the
prospects for future earnings, the general condition of the securities markets
at the time of the offering, the market prices of and demand for publicly-
traded common stock of comparable companies in recent periods and other
factors deemed relevant.
The Company entered into an Amended and Restated Consulting Agreement (the
"EYA Agreement") with Elliot Young & Associates, Inc. ("EYA"), under which EYA
agreed to provide consulting services to the Company in the areas of strategic
planning, business development, market opportunities, new technologies,
regulatory strategies and access to capital. The agreement provides for
aggregate cash compensation of $250,000, in addition to an option to purchase
150,000 shares of the Company's Common Stock at an exercise price of $2.00 per
share. The EYA Agreement also provides that the Company will pay EYA five
percent of net sales made by the Company to any non-U.S. based company,
dealer, agent or individual to whom the Company is introduced by EYA during
the term of the EYA Agreement, and with whom the Company enters into a sales,
distributor, or representative agreement for its products within one year of
introduction by EYA, for the first three years of such association.
The Company's Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol "EPMD".
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania. Certain legal matters will be passed upon for the Underwriter by
Howard, Rice, Nemerovski, Canady, Falk, & Rabkin, A Professional Corporation,
San Francisco, California.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
accounting and auditing in giving said reports.
The statements in this Prospectus regarding the Company's patents and
intellectual property on the inside front cover page and under the caption
"Risk Factors -- Potential Lack of Proprietary Protection" and "Business --
Patents and Intellectual Property" have been reviewed and approved by Wigman,
Cohen, Leitner & Myers, P.C., special patent counsel for the Company, as
experts in such matters, and are included herein in reliance upon such review
and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus, filed as a part of such
62
<PAGE>
Registration Statement, does not contain all of the information set forth in,
or annexed as exhibits to, the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and this offering,
reference is made to the Registration Statement, including the exhibits filed
therewith, which may be inspected without charge at the Office of the
Commission, 450 Fifth Street, N.W., Washington D.C. 20549; and at the
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of the Registration Statement may be obtained from the
Commission at its principal office upon payment of prescribed rates.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, where the contract or other
document has been filed as an exhibit to the Registration Statement, each
statement is qualified in all respects by reference to the applicable document
filed with the Commission.
REPORTS TO SHAREHOLDERS
Prior to the date of this Prospectus, the Company was not subject to the
information requirements of the Securities Exchange Act of 1934. The Company
intends to furnish to its shareholders annual reports containing consolidated
financial statements examined by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited consolidated financial information.
63
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS OF EP MEDSYSTEMS, INC. AND SUBSIDIARY
Report of Independent Public Accountants.......................... F-2
Consolidated Balance Sheets -- December 31, 1994 and 1995 and
March 31, 1996 (unaudited)........................................ F-3
Consolidated Statements of Operations -- For the period from
inception (January 29, 1993) through December 31, 1993 and for the
years ended December 31, 1994 and 1995 and for the three months
ended March 31, 1995 and 1996 (unaudited)......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) -- For the period from inception (January 29, 1993)
through December 31, 1993 and for the years ended December 31,
1994 and 1995 and for the three months ended March 31, 1995 and
1996 (unaudited).................................................. F-5
Consolidated Statements of Cash Flows -- For the period from
inception (January 29, 1993) through December 31, 1993 and for the
years ended December 31, 1994 and 1995 and for the three months
ended March 31, 1995 and 1996 (unaudited)......................... F-6
Notes to Consolidated Financial Statements........................ F-7 - F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EP MedSystems, Inc.:
We have audited the accompanying consolidated balance sheets of EP MedSystems,
Inc. (a New Jersey corporation) and subsidiary as of December 31, 1994 and
1995, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the period from inception (January 29,
1993) through December 31, 1993 and for the years ended December 31, 1994 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EP MedSystems, Inc. and
subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from inception (January 29,
1993) through December 31, 1993 and for the years ended December 31, 1994 and
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has negative cash flow from operations. These factors
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.
Arthur Andersen LLP
New York, New York
March 26, 1996
F-2
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 20,008 $ 34,588 $ 265,582
Accounts receivable, net of allowance
for doubtful accounts of $36,700,
$89,100 and $89,100 as of December 31,
1994 and 1995 and March 31, 1996...... 296,071 438,120 606,682
Inventories............................ 487,698 469,265 465,480
Notes receivable....................... -- 150,000 100,000
Prepaid expenses and other current
assets................................ 5,122 53,648 45,215
----------- ----------- -----------
Total current assets.................. 808,899 1,145,621 1,482,959
Property and equipment, net............. 155,913 148,954 152,046
Intangible assets, net.................. 824,534 722,448 696,926
Deferred offering costs................. -- -- 254,861
Other assets............................ -- 26,837 4,338
----------- ----------- -----------
Total assets........................ $ 1,789,346 $ 2,043,860 $ 2,591,130
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable....... $ 308,500 $ 17,200 $ 17,200
Accounts payable....................... 149,605 281,118 256,208
Deferred offering costs payable........ -- -- 254,861
Payables due to related party.......... 280,732 258,720 256,575
Accrued expenses....................... 99,018 248,397 251,429
Deferred revenue....................... 29,518 145,875 37,000
Customer deposits...................... 100,295 91,502 89,963
----------- ----------- -----------
Total current liabilities........... 967,668 1,042,812 1,163,236
Long-term debt.......................... 180,000 1,180,318 1,174,453
----------- ----------- -----------
Total liabilities................... 1,147,668 2,223,130 2,337,689
----------- ----------- -----------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, no par value,
5,000,000 shares authorized, no shares
issued and outstanding................ -- -- --
Common stock, $.001 stated value,
25,000,000 shares authorized,
4,258,500, 4,352,000 and 4,518,667
shares issued and outstanding......... 4,259 4,352 4,519
Additional paid-in capital............. 2,644,479 3,306,088 3,805,921
Accumulated deficit.................... (2,007,060) (3,489,710) (3,556,999)
----------- ----------- -----------
Total shareholders' equity
(deficit).......................... 641,678 (179,270) 253,441
----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)................... $ 1,789,346 $ 2,043,860 $ 2,591,130
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JANUARY 29, FOR THE THREE MONTHS
1993) THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------------ -----------------------
1993 1994 1995 1995 1996
-------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 662,925 $ 1,512,076 $ 2,001,137 $ 464,112 $755,663
Cost of sales........... 395,375 913,457 1,257,468 264,157 357,259
--------- ----------- ----------- --------- ---------
Gross profit........ 267,550 598,619 743,669 199,955 398,404
Sales and marketing ex-
penses................. 61,050 262,770 477,209 106,175 105,592
General and
administrative
expenses............... 208,773 648,135 757,635 150,733 242,872
Depreciation and
amortization........... 330,867 383,532 170,271 32,837 37,429
Research and development
expenses............... 61,313 129,855 320,311 72,636 61,252
Acquired research and
development............ -- 500,000 450,000 -- --
Write-off of intangible
assets................. -- 215,216 -- -- --
--------- ----------- ----------- --------- ---------
Loss from
operations......... (394,453) (1,540,889) (1,431,757) (162,426) (48,741)
Interest expense........ (15,757) (55,961) (50,893) (9,770) (18,548)
--------- ----------- ----------- --------- ---------
Net loss................ $(410,210) $(1,596,850) $(1,482,650) $(172,196) $ (67,289)
========= =========== =========== ========= =========
Net loss per share...... $ (.09) $ (.28) $ (.25) $ (.03) $ (.01)
========= =========== =========== ========= =========
Weighted average shares
outstanding............ 4,631,755 5,613,496 5,922,888 5,922,888 5,922,888
========= =========== =========== ========= =========
Supplementary net loss
per share.............. $ (.24) $ (.01)
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (January 29, 1993) through December 31, 1993 and
for the Years Ended December 31, 1994 and 1995 and for the Three Months Ended
March 31, 1996 (unaudited)
---------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of stock upon
incorporation.......... 2,587,500 $2,588 $ -- $ -- $ 2,588
Issuance of common
stock.................. 450,000 450 599,550 -- 600,000
Issuance of common stock
for acquisition of
assets from
Professional Catheter
Corporation............ 450,000 450 599,550 -- 600,000
Net loss................ -- -- -- (410,210) (410,210)
--------- ------ ---------- ----------- -----------
Balance, December 31,
1993................... 3,487,500 3,488 1,199,100 (410,210) 792,378
Issuance of common
stock.................. 367,500 367 663,033 -- 663,400
Issuance of common stock
for acquisition of
technology from
Biophysical Interface
Corp................... 37,500 38 49,962 -- 50,000
Issuance of common stock
for acquisition of
technology
from ElectroPhysiology
Systems, Inc........... 200,000 200 399,800 -- 400,000
Issuance of common stock
for acquisition of
intangible assets from
HDI.................... 50,000 50 99,950 -- 100,000
Issuance of common stock
in payment of debt..... 66,000 66 132,684 -- 132,750
Issuance of common stock
for the conveyance of
assets for steerable
catheter technology.... 50,000 50 99,950 -- 100,000
Net loss................ -- -- -- (1,596,850) (1,596,850)
--------- ------ ---------- ----------- -----------
Balance, December 31,
1994................... 4,258,500 $4,259 $2,644,479 $(2,007,060) $ 641,678
Issuance of common stock
to HDI for research and
development expenses... 69,000 69 137,931 -- 138,000
Issuance of common stock
for consulting
services............... 14,500 14 28,986 -- 29,000
Value of debenture
warrants issued........ -- -- 54,702 -- 54,702
Stock options issued in
connection with the
ALERT licensing
agreement.............. -- -- 420,000 -- 420,000
Issuance of common stock
for licensing agreement
of Saksena patent...... 10,000 10 19,990 -- 20,000
Net loss................ -- -- -- (1,482,650) (1,482,650)
--------- ------ ---------- ----------- -----------
Balance, December 31,
1995................... 4,352,000 $4,352 $3,306,088 $(3,489,710) $ (179,270)
Issuance of common
stock.................. 166,667 167 499,833 -- 500,000
Net loss................ -- -- -- (67,289) (67,289)
--------- ------ ---------- ----------- -----------
Balance, March 31,
1996................... 4,518,667 $4,519 $3,805,921 $(3,556,999) $ 253,441
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE THREE
FROM INCEPTION DECEMBER 31, MONTHS ENDED
(JANUARY 29, ------------------------ --------------------
1993) THROUGH MARCH 31, MARCH 31,
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net loss............... $(410,210) $(1,596,850) $(1,482,650) $(172,195) $ (67,289)
Adjustments to
reconcile net income
to net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 330,867 383,532 170,271 32,957 43,410
Acquired research and
development.......... -- 500,000 440,000 -- --
Issuance of stock for
consulting services.. -- -- 29,000 -- --
Issuance of stock for
research and
development.......... -- -- 138,000 -- --
Write-off of
intangible assets.... -- 215,216 -- -- --
Amortization of
discount on payable
to related parties... 10,211 24,241 -- -- --
Bad debt expense...... -- 36,700 52,400 -- --
Changes in assets and
liabilities:
(Increase) decrease
in accounts
receivable.......... (85,547) (234,067) (194,449) 90,020 (168,562)
(Increase) decrease
in inventories...... (48,047) (260,221) 18,433 9,506 3,785
(Increase) decrease
in prepaid expenses
and other current
assets.............. (47,300) 42,513 (48,526) (5,871) 8,433
(Increase) decrease
in other assets..... (10,824) (4,500) (26,837) (1,505) 22,499
Increase (decrease)
in due to related
party............... 269,208 11,524 177,988 100,688 (2,145)
(Decrease) increase
in accounts
payable............. (25,586) 98,388 131,513 (32,590) (24,910)
Increase (decrease)
in accrued expenses
and deferred
revenue............. 50,475 56,957 265,734 26,770 (105,843)
Increase (decrease)
in customer
deposits............ -- 7,100 (8,793) (150) (1,539)
--------- ----------- ----------- --------- ---------
Net cash provided
(used) by operating
activities......... 33,247 (719,467) (337,916) 47,630 (292,161)
--------- ----------- ----------- --------- ---------
Cash flows from
investing activities:
Capital expenditures,
net of disposals...... (11,480) (33,030) (55,754) (120) (18,245)
Loan to Falfab......... -- -- (100,000) -- --
Payment for acquisition
of Professional
Catheter Corporation.. (106,500) -- -- -- --
Payment for acquisition
of technology from
related party......... (360,000) -- -- -- --
--------- ----------- ----------- --------- ---------
Net cash used in
investing
activities......... (477,980) (33,030) (155,754) (120) (18,245)
--------- ----------- ----------- --------- ---------
Cash flows from financ-
ing activities:
Proceeds from issuance
of debentures......... -- -- 687,500 -- 50,000
Proceeds from issuance
of common stock....... 602,588 663,400 -- -- 500,000
(Payments) proceeds
from borrowings under
line of credit........ 102,681 (102,681) -- -- --
(Payments) proceeds
from borrowings....... -- 66,000 (70,000) -- --
Payment of notes
payable............... -- -- (109,250) -- (8,600)
Payment due to related
party................. (56,250) (58,500) -- -- --
--------- ----------- ----------- --------- ---------
Net cash provided by
financing
activities......... 649,019 568,219 508,250 -- 541,400
--------- ----------- ----------- --------- ---------
Net (decrease)
increase in cash... 204,286 (184,278) 14,580 47,510 230,994
Cash, beginning of
period................. -- 204,286 20,008 20,008 34,588
--------- ----------- ----------- --------- ---------
Cash, end of period..... $ 204,286 $ 20,008 $ 34,588 $ 67,518 $ 265,582
========= =========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
EP MedSystems, Inc. (the "Company") was incorporated in the State of New
Jersey in January 1993. The Company develops, markets, sells and services a
line of cardiac electrophysiology ("EP") products used to diagnose, monitor
and treat cardiac disorders. The Company's wholly-owned subsidiary, ProCath
Corporation ("ProCath"), manufactures and markets pacing catheters, used to
pace a patient's heart on a temporary basis, and diagnostic electrophysiology
catheters, used to detect electrical conduction disturbances in the heart by
sending and receiving electrical impulses. The Company is presently developing
a low energy internal cardioversion catheter system for atrial fibrillation
(the "ALERT System").
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred continuing
losses from operations and has negative cash flow from operations. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The Company has increased its selling effort to help create
market awareness of its product lines and thereby improve its market
penetration and revenues. Also, with the acquisition of new products and the
expansion of its current product lines, management can bring to market a range
of products to its customers. Management believes these factors will
contribute toward achieving profitability, however, there can be no assurance
that profitability will be achieved.
During the quarter ended March 31, 1996, the Company raised $500,000 in cash
through the issuance of 166,667 shares of common stock. On February 29, 1996,
the Company entered into a letter of intent for a firm commitment underwriting
of its common stock. In the event that this proposed public offering is not
completed, management will seek additional funds through private financing.
There can be no assurance that any such financing can be accomplished. The
consolidated financial statements do not include any such adjustments that
might result from the outcome of the above uncertainties.
Risk Factors
The Company faces a number of risks, including significant operating losses,
the availability of sufficient financing to meet its future cash requirements
and market acceptance of existing and future products. Additionally, other
risk factors such as government regulation, uncertainty of new product
development, changes in relationships with its third-party distributors,
significant competition, dependence on limited sources of supply of non-
catheter products, the loss of key personnel and difficulty in establishing,
preserving and enforcing intellectual property rights could impact the future
results of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of EP MedSystems,
Inc. and its wholly-owned subsidiary, ProCath. All material intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash and cash equivalents.
F-7
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Concentrations of Cash and Accounts Receivable
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivable and notes
receivable.
The Company's customer base for its products is primarily comprised of
distributors, hospitals and to a lesser extent, office-based practitioners
throughout the United States and abroad. On certain transactions, the Company
may require payment in advance or an issuance of an irrevocable letter of
credit. The Company believes that its terms of sale provide adequate
protection against significant credit risk with respect to trade accounts
receivable.
At December 31, 1995, the Company has two notes receivable aggregating
$150,000: a $50,000 6% note receivable arising from the subscription to the
Company's debenture offering (see Note 7) which was collected in February
1996; and a $100,000 note receivable from Falfab International, a UK-based
angioplasty catheter manufacturer, which accrues interest at 8% and matures on
July 15, 1996. The Company does not believe that there is significant credit
risk with respect to this note receivable. The fair market value of the note
receivable approximates book value.
Inventories
Inventories are valued at the lower of cost or market with cost being
determined on a first-in, first-out basis.
Property and Equipment
Machinery and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized on a straight-line
basis over the shorter of their estimated useful lives or the term of the
lease. Expenditures for repairs and maintenance are expensed as incurred.
Revenue Recognition
The Company recognizes product revenue on the date of shipment. Payments
received in advance of shipment of product are deferred until such products
are shipped. Revenues related to warranty contracts are recognized on a
straight-line basis over the warranty period.
Research and Development
Research and development costs incurred in connection with developing existing
and acquired technology are expensed as incurred.
Intangible Assets
Intangible assets are being amortized over a period ranging from two to
fifteen years, with technology related to the EP-2 Clinical Stimulator ("EP-
2") amortized on a straight-line basis over two years; cardiac monitoring
technology and arrhythmia monitoring technologies are being amortized on a
straight-line basis over three years; and catheter technology is being
amortized on a straight-line basis over fifteen years. Patents and license
costs are expensed as incurred.
Net Loss Per Common Share
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding
during the periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock,
F-8
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
stock options and warrants issued during the twelve months preceding the
initial filing of this offering at prices below the expected initial public
offering price have been included in the Company's loss per share computation
for all periods presented, using the treasury stock method, even though they
were antidilutive. Stock options issued prior to the twelve months preceding
the initial filing of this offering are excluded as they are antidilutive.
Supplementary Net Loss Per Common Share
Supplementary net loss per common share is computed as if all of the 1995
Debentures as of December 31, 1995 and March 31, 1996 had been paid at the
beginning of the period or the date of issuance, if later, and assuming that
(i) 174,731 common shares were issued to pay the 1995 Debentures and (ii)
$24,286 and $16,937 of interest expense was eliminated for the periods ending
December 31, 1995 and March 31, 1996, as a result of such payment.
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. Although these estimates are based on management's knowledge of current
events and actions it may undertake in the future, the estimates may
ultimately differ from actual results.
New Accounting Pronouncement
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
The Company's required adoption date is January 1, 1996. SFAS 121 standardizes
the accounting practices for the recognition and measurement of impairment
losses on certain long-lived assets. The Company anticipates the adoption of
SFAS 121 will not have a material impact on its results of operations or
financial position.
Unaudited Financial Statements
The financial statements as of March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation have been recorded. All such
adjustments were of a normal recurring nature.
2. ACQUISITIONS OF PRODUCTS AND TECHNOLOGY AND RELATED PARTY TRANSACTIONS
Technology from Hi-Tronics Design, Inc.
General
The Company's initial shareholders were David A. Jenkins, its current
Chairman, President and Chief Executive Officer, and Hi-Tronics Designs, Inc.
("HDI"), a corporation engaged in the business of contract engineering and
manufacturing. The Company acquired rights to its first product, the EP-2,
from HDI, and in its early stages, the Company subleased office space from
HDI, participated in HDI's employee health insurance policies and utilized
personnel, facilities and other related resources in an effort to quickly and
efficiently develop the Company's operations and to minimize cash
expenditures. In subsequent periods, the Company has purchased rights to
certain other products and the next generation of several products under
development from HDI. The Company has utilized, and continues to utilize, HDI
to provide
F-9
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
2. ACQUISITIONS OF PRODUCTS AND TECHNOLOGY AND RELATED PARTY TRANSACTIONS
(CONTINUED)
research and development for various products. When economically advantageous,
or practical, the Company utilizes HDI to manufacture its products, including
the EP WorkMate, EP-3 Clinical Stimulator ("EP-3") and certain other products.
The value of products and services purchased from HDI, excluding the purchase
of technology, was $427,000, $471,000, $424,000, $171,995 and $144,753 in
1993, 1994, 1995 and the three months ended March 31, 1995 and 1996,
respectively. During May 1996 the Company borrowed $50,000 from HDI. The
promissory note matures on June 30, 1996 and bears interest at 9.25% per
annum.
EP-2 Clinical Stimulator
On March 3, 1993, the Company acquired from HDI all the rights, title and
interest to the EP-2 for a purchase price of $810,000, which was principally
allocated to the intangible assets acquired. The Company paid $360,000 of the
purchase price at the date of acquisition with the remaining $450,000 payable
in four payments of varying amounts through February 1995. The Company also
entered into a manufacturing agreement with HDI to manufacture the EP-2 and
any subsequent models. In 1994, after payments of $114,750 were made, the
Company changed the original payment schedule of the purchase price for the
EP-2, together with $67,500 of other debt due HDI. The Company issued to HDI
66,000 shares of its common stock and assumed a $270,000 note (the "Medtronic
Note") payable by HDI to Medtronic, Inc., a shareholder of the Company, with
interest at 8%, as full payment for the remaining obligations. In connection
with the assumption of the Medtronic Note, the Company signed a security
agreement with HDI whereby all inventory and proceeds generated from the sale
of inventory manufactured by HDI relating to stimulator products would serve
as collateral for the loan. On July 20, 1995, the Company paid off $70,000 of
the Medtronic Note and converted the remaining principal into $200,000 face
amount of debentures issued (see Note 7) in full satisfaction of the amounts
due and the security agreement was terminated. Gains and losses resulting from
the modification of debt terms were not material.
In November 1994, the Company discontinued selling the EP-2 in favor of the
EP-3. Accordingly, the Company wrote off the net book value of the intangible
assets of $215,216 relating to the EP-2.
Arrhythmia Monitors and TeleTrace Receivers
In July 1994, the Company acquired from HDI certain rights to (i) the 4221,
4222 and 4222 ATM arrhythmia monitors, including manufacturing drawings and
regulatory approvals, (ii) the TeleTrace III Receivers, and (iii) a new
arrhythmia monitor, the 4400 ATM, to be developed by HDI. In exchange for the
rights to these assets, the Company agreed to issue HDI 100,000 shares of its
common stock, valued at $200,000, 50,000 on the agreement date and 50,000 upon
submission to the FDA of the new arrhythmia monitor. In 1995, the Company
issued the additional 50,000 shares to HDI even though the Company has not yet
submitted data for the review by the FDA of the new arrhythmia monitor. HDI
agreed to manufacture the arrhythmia monitors and any new generation of the
TeleTrace Receiver (the "TeleTrace IV") for the Company and agreed to not
engage in the design or manufacture of arrhythmia monitors, with exceptions,
for a period of the greater of three years or so long as the Company uses HDI
to manufacture its arrhythmia monitors. Of the purchase price, $100,000 was
allocated to technology rights in existing arrhythmia monitors. The shares
issued relating to the arrhythmia monitors being developed by HDI were
expensed during the year ended December 31, 1995, as work performed
represented research and development costs.
F-10
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
2. ACQUISITIONS OF PRODUCTS AND TECHNOLOGY AND RELATED PARTY TRANSACTIONS
(CONTINUED)
In January 1995, the Company entered into an agreement with HDI pursuant to
which HDI agreed to continue development of the TeleTrace IV Receiver in
exchange for 10,000 shares of common stock of the Company and $30,000 in cash
upon completion of development. In September 1995, the parties agreed to amend
the consideration to be 19,000 shares of Common Stock, issued immediately, and
$30,000 in cash upon completion of development. Development of the TeleTrace
IV is currently ongoing and the Company recorded a charge to research and
development expense of $38,000 during the year ended December 31, 1995.
Professional Catheter Corporation
On November 5, 1993, the Company acquired substantially all of the assets,
including process technology, and assumed certain liabilities of Professional
Catheter Corporation ("PCC"), a manufacturer of electrode catheters and other
disposable products. The Company issued 450,000 shares of common stock valued
at $600,000 and $106,500 in cash for this acquisition. This acquisition has
been accounted for under the purchase method of accounting. The results of
operations for PCC since the date of acquisition have been included in the
consolidated financial statements.
The unaudited consolidated results of operations for the period from inception
to December 31, 1993 on a pro forma basis as though PCC had been acquired as
of the date the Company was incorporated are as follows:
<TABLE>
<S> <C>
Revenues.......................................................... $ 912,245
Net loss.......................................................... (428,632)
Net loss per share................................................ (.09)
</TABLE>
The unaudited pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if the
combined operations had been conducted during the periods presented or of
future operations of the combined operations. A single customer which
accounted for $192,215 or 77% of total sales for PCC during 1993 discontinued
purchasing products from PCC upon its acquisition by the Company.
Technology from Biophysical Interface Corp.
On February 18, 1994, the Company acquired from Biophysical Interface Corp.
all the rights to the PaceBase, TeleTrace and HeartBase Software Packages and
the Pacer System Analyzer and Simulator for 37,500 shares of its common stock
valued at $50,000. The cost of this acquisition was capitalized as an
intangible asset and is being amortized on a straight-line basis over a three-
year period.
3. ACQUIRED RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS
Acquired Research and Development
The Company has entered into numerous transactions whereby it has acquired
technology. This technology has been expensed as acquired research and
development as at the date of acquisition, the technological feasibility of
the acquired technology had not yet been established and the technology had no
future alternative uses.
Technology from ElectroPhysiology Systems, Inc.
In May 1994, the Company purchased substantially all of the assets of
ElectroPhysiology Systems, Inc. ("EPSI"), a company engaged in the development
of a new EP workstation. At the date of
F-11
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
3. ACQUIRED RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED)
acquisition, no copyrights, patents, or revenues existed for EPSI. In
connection with this purchase, the Company issued 200,000 shares of common
stock valued at $400,000. During 1994, the Company expensed the purchase price
as acquired research and development expense as technological feasibility of
the acquired technology had not yet been established and the technology had no
future alternative uses. In 1995, after the product received market clearance,
the Company commenced selling a commercial product.
Steerable Catheters
In October 1994, the Company acquired all rights, title and interest in
certain technology relating to uni-directional and bi-directional steerable
catheters under development by a certain individual. The purchase price
consisted of 100,000 shares of the Company's common stock, which was to be
issued in four equal amounts upon the occurrence of certain events. Through
December 31, 1994, 50,000 shares of common stock were issued at a value of
$100,000. The Company will not issue the remaining 50,000 shares as it
presently does not plan to pursue the events that would necessitate the
issuance of the remaining common stock. The Company has recorded the cost to
acquire these rights as acquired research and development expense as no
commercial product existed when it was acquired, technological feasibility had
not been established and no future alternative uses exist for the technology.
No tangible assets were acquired in connection with this acquisition and no
revenues from product sales had occurred prior to the acquisition.
License Agreements
ALERT Catheter
In November 1995, the Company acquired an exclusive worldwide license to the
rights to certain technology developed by Dr. Eckhard Alt for a Temporary
Atrial Defibrillation Catheter and Treatment Method and all licensed products
and licensed methods and associated techniques, counterparts and improvement
patents (the "ALERT Technology"). In consideration of the license, the Company
(i) granted Dr. Alt an option to buy 210,000 shares of common stock at $.10
per share beginning on May 1, 1996 and ending on November 1, 2000; (ii)
granted an option to buy an additional 164,000 common stock options
exercisable at $2.00 for a period of five years, vesting upon the occurrence
of certain events, including issuance of patents and an FDA premarketing
approval and (iii) agreed to pay royalties ranging up to 5% of net sales of
the licensed products until the expiration of the licensed patents. The
Company recorded $420,000 as acquired research and development expense as
technological feasibility has not been established. This amount represented
the difference between the fair market value of the option and the option
exercise price on the issue date.
Saksena License
In November 1995, the Company acquired a semi-exclusive worldwide license to
the rights to certain technology developed by Dr. Sanjeev Saksena for a
Temporary Ventricular Defibrillation Catheter and Treatment Method and
associated techniques, methods, counterparts and improvement patents. In
consideration of the license, the Company granted Dr. Saksena 10,000 shares of
common stock and $10,000 cash. The license agreement also calls for the
payment of royalties ranging up to 5% of net sales of the licensed products
until the expiration of the licensed patents up to a maximum of $1,000,000.
The Company recorded acquired research and development expense of $30,000,
which represented the fair market value of the Company's common stock on the
license date plus the cash payment. Technological feasibility of this
technology had not been established at the license date.
F-12
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Catheter technology......................... $ 774,099 $ 774,099 $ 774,099
Arrhythmia monitors......................... 100,000 100,000 100,000
Cardiac monitoring technology............... 50,000 50,000 50,000
Other....................................... 6,900 6,900 6,900
--------- --------- ---------
930,999 930,999 930,999
Less -- Accumulated amortization............ (106,465) (208,551) (234,073)
--------- --------- ---------
$ 824,534 $ 722,448 $ 696,926
========= ========= =========
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Raw materials................................ $151,333 $285,326 $ 311,444
Work in progress............................. 25,902 21,671 5,400
Finished goods............................... 310,463 162,268 148,637
-------- --------- ---------
$487,698 $469,265 $ 465,481
======== ========= =========
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Leasehold improvements....................... $ 63,907 $ 90,540 $ 101,574
Machinery and equipment...................... 140,231 169,352 171,563
-------- --------- ---------
204,138 259,892 273,137
Less -- Accumulated depreciation............. (48,225) (110,938) (121,091)
-------- --------- ---------
$155,913 $ 148,954 $ 152,046
======== ========= =========
</TABLE>
7. DEBT
Debentures
Commencing July 1995, the Company issued $1,137,500 of debentures (of which
$687,500 was received in cash, $50,000 was received for subscription which was
paid in February 1996 and $400,000 was issued in conversion of accounts and
other notes payable into debentures) with interest payable quarterly beginning
September 30, 1995 at a rate of 6% per annum (the "1995 Debentures"). The
maturity date of the debt is June 30, 2000. The holders of the 1995 Debentures
also received warrants (the "1995 Warrants") to purchase an aggregate of
568,750 shares of the Company's common stock at $2.00 per share exercisable at
any time ending on the earlier of June 30, 2000 or thirty days after full
payment of the corresponding 1995 Debentures. In connection with the issuance
of the 1995 Debentures, the Company recorded a discount on the debentures
F-13
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
7. DEBT (CONTINUED)
issued of $54,702 representing the value of the 1995 Warrants issued. The
discount is being amortized on a straight-line basis over the life of the 1995
Debentures. It is the Company's intention to repay the 1995 Debentures upon
completion of its initial public offering (see Note 1). The fair market value
of each 1995 Debenture approximates its recorded value.
Note Payable
In connection with the acquisition of PCC described in Note 2, the Company
assumed a $218,500 note payable. The note provides for interest payable
quarterly, at the rate of 8% per year. The principal amount was to be paid in
full on November 5, 1995. In August 1995, $109,250 of the outstanding amount
was paid and the terms of the note were renegotiated on the remaining balance
to quarterly payments of $4,300 commencing on October 1, 1995. The related
interest will be accrued at an annual rate of 8% and paid with the final
payment at maturity on January 1, 1998. No gain was recorded upon the
modification of debt terms as it was not significant. The fair market value of
this note payable approximates its recorded value.
At December 31, 1995, total long term debt maturing in each of the next five
years is as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 17,200
1997.............................................................. 17,200
1998.............................................................. 74,850
1999.............................................................. --
2000.............................................................. 1,137,500
----------
$1,246,750
==========
</TABLE>
Line of Credit
From December 1993 through May 1994, the Company was a co-borrower with HDI on
a combined secured line of credit. Total permitted borrowings between the two
companies was $200,000, with the Company's portion limited to $100,000. The
credit agreement provided for interest payable monthly based on outstanding
principal balances at the prevailing bank prime rate plus 1%. The prime rate
at December 31, 1993 was 6%. As of December 31, 1993, the Company had $100,000
outstanding on the line of credit. The Company paid off its principal and
interest balance in May 1994 and the line was not renewed.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating leases relating to its office space and
manufacturing facility for periods extending through November 1997. The
Company also leases certain office equipment for periods extending through
April 2000. The future aggregate commitment for minimum rentals as of December
31, 1995 is as follows:
<TABLE>
<S> <C>
1996................................................................ $ 96,123
1997................................................................ 43,332
1998................................................................ 4,800
1999................................................................ 4,800
2000................................................................ 1,600
--------
$150,655
========
</TABLE>
F-14
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense associated with these leases was approximately $1,604, $53,661,
$83,661, $28,234 and $26,849 for the periods ended December 31, 1993, 1994,
1995 and March 31, 1995 and 1996, respectively.
Employment Agreements
The Company has employment agreements with three corporate officers and one
employee. On August 31, 1995, the Company amended the contract of the
President through March 1, 1999. This contract includes a provision for a
bonus equal to 5% of consolidated pre-tax income to be effective after
completion of an initial public offering. The contract for the President of
ProCath includes an incentive bonus equal to 5% of the net income (before
extraordinary items) generated by ProCath. The aggregate minimum commitment
for future salaries, excluding bonuses, as of December 31, 1995, is as
follows:
<TABLE>
<S> <C>
1996................................................................ $321,500
1997................................................................ 110,000
1998................................................................ 110,000
1999................................................................ 18,333
--------
$559,833
========
</TABLE>
The Company has key man life insurance policies for $1,000,000 covering its
President, $1,000,000 for the President of ProCath and effective April 13,
1996 obtained a key man life insurance policy for $500,000 for the Vice
President of Engineering, for which it is the beneficiary.
Other
In August 1995, the Company entered into an agreement with a consultant
whereby it will compensate such consultant, for a period of three years, with
five percent of net sales made by the Company to any non-U.S. based company,
dealer, agent or individual to whom the Company is introduced during the one
year term of the agreement and with whom the Company enters into a sales,
distributor, or representative agreement for its products within one year of
introduction by the consultant. The agreement provided for consulting services
to the Company in the areas of strategic planning, business development,
regulatory strategies and access to capital in return for aggregate cash
compensation of $45,000 plus certain reimbursable expenses and an option to
purchase 150,000 shares of Common Stock, subject to adjustment, at $2.00 per
share. In May 1996, the Company entered into an Amended and Restated
Consulting Agreement and an Amendment to Stock Option Agreement with the
consultant. The amended agreement provides for aggregate cash compensation of
$250,000 plus certain reimbursable expenses, in addition to the option to
purchase 150,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. The Amendment to Stock Option Agreement caused a 50,000 share
reduction in the estimated number of shares subject to the option due to the
elimination of the "subject to adjustment" clause. Of the aggregate cash
consideration, $52,500 plus certain reimbursable expenses has been recorded as
an expense through March 31, 1996 and an additional $22,500 will be recorded
as an expense when the services are performed. The remaining cash
consideration represents financial consulting fees for services performed in
connection with the Company's initial public offering which is payable upon
closing and will be recorded as a reduction of the net proceeds of the
offering.
F-15
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
9. STOCK OPTIONS AND COMMON STOCK
1995 Long-Term Incentive Plan
The Company's 1995 Long Term Incentive Plan (the "1995 Incentive Plan") was
adopted by the Board of Directors and shareholders in November 1995. A total
of 400,000 shares of Common Stock are available for issuance under the 1995
Incentive Plan and options for 165,000 shares of Common Stock, at an exercise
price of $2.00 to $2.20 per share, have been granted and are outstanding as of
March 31, 1996. The 1995 Incentive Plan provides for grants of "incentive" and
"non-qualified" stock options to employees of the Company. Options under this
plan have a term of no more than ten years and vest over a period as
determined by the Board. The 1995 Incentive Plan will terminate on November
30, 2005, unless earlier terminated by the Board of Directors.
1995 Director Option Plan
The Company's 1995 Director Option Plan (the "1995 Director Plan") was adopted
by the Board of Directors and the shareholders in November 1995. A total of
360,000 shares of common stock of the Company are available for issuance under
the 1995 Director Plan and options for 360,000 shares of common stock, at an
exercise price of $2.00 per share, have been granted and are outstanding as of
March 31, 1996. The 1995 Director Plan provides for grants of "director
options" to eligible directors of the Company and for grants of "advisor
options" to eligible members of the Scientific Advisory Board of the Company.
Each of the director options and the advisor options are exercisable at the
rate of 1,000 shares per month, commencing with the first month following the
date of grant. The terms of these options range from three to five years. The
1995 Director Plan will terminate on November 30, 2005, unless earlier
terminated by the Board of Directors.
Other Options
On June 1, 1993, the Company granted stock options to purchase an aggregate of
47,500 common shares of the Company, exercisable through June 1, 1998. All
options are exercisable at $1.33 per common share. During April 1996, options
for 12,500 common shares were exercised.
The Company granted stock options during 1994 to purchase an aggregate of
55,000 common shares of the Company with a defined option term of five years
at an exercise price of $2.00 per common share.
During 1995, the Company issued options to its President, directors,
employees, Scientific Advisory Board Members and a consultant totaling
1,013,000 shares. The exercise prices of these options range from $2.00 to
$2.20 per share. The options have terms ranging from five to ten years and
vest over varying periods, including 70,000 options that vest in connection
with a successful initial public offering of the Company's common stock. In
addition, the Company issued 374,000 options in connection with a licensing
agreement (see Note 3).
F-16
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
9. STOCK OPTIONS AND COMMON STOCK (CONTINUED)
Information relating to options is as follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996
------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.... -- 47,500 102,500 1,371,500
Granted............................... 47,500 55,000 1,387,000 --
Exercised............................. -- -- -- --
Canceled.............................. -- -- 118,000 --
------ ----------- ---------- ----------
Outstanding on December 31............ 47,500 102,500 1,371,500 --
====== =========== ========== ==========
Outstanding on March 31 (unaudited)... -- -- -- 1,371,500
====== =========== ========== ==========
Exercisable on December 31............ 47,500 52,500 373,500 --
====== =========== ========== ==========
Exercisable on March 31 (unaudited)... -- -- -- 403,500
==========
Prices per share:
Exercised............................ -- -- -- --
Unexercised at end of period......... $1.33 $1.33-$2.00 $.10-$2.20 $.10-$2.20
====== =========== ========== ==========
</TABLE>
At December 31, 1995 and March 31, 1996, the Company had 1,940,250 and
1,940,250 shares, respectively, of common stock reserved for stock options and
warrants. All stock options and warrants granted by the Company, except for an
option to purchase 210,000 shares of Common Stock at $.10 per share granted to
Dr. Alt in connection with the license of the ALERT technology (the "Alt
Option"), were granted at exercise prices not less than the current fair
market value of the Company's Common Stock on the date of grant, as determined
by the Board of Directors. The Company expensed the difference between the
fair market value of the Alt Option as of the date of grant and the actual
exercise price of the Alt Option. See Note 3.
10. MAJOR CUSTOMER AND EXPORT SALES
During 1993, 1994, 1995 and the three months ended March 31, 1995 and 1996,
sales to Medtronic, Inc., a shareholder of the Company, accounted for
approximately 83%, 34%, 8%, 0% and 15%, respectively, of total revenues of the
Company. Receivables outstanding from these sales were approximately $77,000,
$2,300, $983, $0 and $3,206 at December 31, 1993, 1994, 1995 and March 31,
1995 and 1996, respectively. Additionally, sales to another customer accounted
for approximately 28% of total revenues of the Company during the three months
ended March 31, 1995.
During the three months ended March 31, 1996, export sales were approximately
$355,000, including sales to companies in Europe of approximately $123,000,
sales to companies in Asia and the Pacific Rim of approximately $151,000 and
sales to companies in Israel of approximately $76,000.
During the year ended December 31, 1995, export sales were approximately
$553,000, including sales to companies in Europe of approximately $206,000 and
sales to companies in Asia and the Pacific Rim of approximately $283,000.
F-17
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
11. INCOME TAXES
As a result of losses incurred during the years, there is no provision for
income taxes in the accompanying financial statements. The Company has
established a full valuation allowance against its net deferred tax assets as
realizability of such assets is predicated upon the Company achieving
profitability. The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax assets
Intangible asset amortization.......................... $ 206,000 $ 71,000
Depreciation........................................... 4,000 14,000
Accrued liabilities.................................... 23,000 23,000
Net operating loss carryforwards....................... 330,000 890,000
Research and development credit........................ 11,000 19,000
--------- -----------
574,000 1,017,000
--------- -----------
Less: Valuation allowance............................... (574,000) (1,017,000)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
On December 31, 1995, the Company had approximately $2,200,000 of net
operating loss carryforwards available to offset future income. Due to an
ownership change that occurred during 1995, as defined by Section 382 of the
Internal Revenue Code, the Company is limited to the use of approximately
$500,000 of these net operating losses in each year following the change in
ownership.
12. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Supplemental Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1993 1994
---------- ---------
<S> <C> <C>
Supplemental noncash investing and financing activities:
Acquisition of the assets of Professional Catheter
Corporation:
Fair value of assets acquired......................... $1,117,602 $ --
Cash paid for assets.................................. (106,500) --
Common stock issued................................... (600,000) --
---------- ---------
Liabilities assumed................................. $ 411,102 $ --
========== =========
Acquisition of stimulator assets from HDI:
Fair value of assets acquired......................... $ 775,659 $ --
Cash paid for assets.................................. (360,000) --
Debt issued in connection with acquisition............ (415,659) --
---------- ---------
Liabilities assumed................................. $ -- $ --
========== =========
Acquisition of assets from Biophysical Interface Inc.:
Fair value of assets acquired......................... $ -- $ 50,000
Common stock issued................................... -- (50,000)
Acquisition of certain assets from HDI:
Fair value of assets acquired......................... $ -- $ 100,000
Common stock issued................................... -- (100,000)
</TABLE>
F-18
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFORMATION AS OF MARCH 31, 1995 AND 1996 AND FOR THE THREE MONTHS ENDED MARCH
31, 1995 AND 1996 IS UNAUDITED
---------------------
12. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION (CONTINUED)
During 1995, the Company paid $70,000 and issued $200,000 face amount of 1995
Debentures in payment of $270,000 in debt due to HDI. The Company also issued
$200,000 face amount of 1995 Debentures in settlement of accounts payable.
During 1994, the Company issued 66,000 shares of common stock and assumed a
note of $270,000 as payment of $401,250 in debt due HDI.
In 1995, the Company issued 1995 Warrants in connection with its 1995
Debentures offering, which were valued at $54,702.
Cash paid for interest was $2,570, $22,155, $26,150, $4,370 and $17,062 during
the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 1995 and 1996, respectively.
13. INITIAL PUBLIC OFFERING
The Company has filed a registration statement with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, to sell
3,000,000 shares of Common Stock of the Company, subject to over-allotment
provisions (see Note 1 for a discussion of certain risks impacting the
Company).
F-19
<PAGE>
Hardware/Software Products
[PHOTO OF EP WORKMATE TWO MONITOR SETUP APPEARS HERE]
EP WorkMate
Two Monitor Setup
. Real time monitor on left, showing real-time analysis.
. Review monitor on right, showing split screen capabilities.
[PHOTO OF EP-3 ELECTROPHYSIOLOGY STIMULATOR APPEARS HERE]
EP-3 Electrophysiology Stimulator
[PHOTO OF SCREEN FROM TELETRACE(R) SOFTWARE APPEARS HERE]
Screen from TeleTrace(R) Software
[SCREEN FROM PACEBASE(TM) SOFTWARE APPEARS HERE]
Screen from PaceBase(TM) Software
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECU-
RITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY BY ANY PERSON IN ANY JURIS-
DICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE OF THIS PROSPECTUS.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 5
Risk Factors............................................................. 6
The Company.............................................................. 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 25
Management............................................................... 44
Executive Compensation................................................... 48
Certain Transactions..................................................... 51
Principal Shareholders................................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Reports to Shareholders.................................................. 63
Index to Consolidated Financial Statements............................... F-1
</TABLE>
--------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
EPMEDSYSTEMS
COMMON STOCK
------------------
PROSPECTUS
------------------
PACIFIC GROWTH EQUITIES, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws provide that a director
or officer of the Company shall not be personally liable to the Company or its
shareholders for breach of any duty owed to the Company or its shareholders,
except for liability arising from any breach of duty based upon an act or
omission (i) in breach of the duty of loyalty to the Company, (ii) not in good
faith or involving a knowing violation of law or (iii) resulting in receipt by
such director or officer of an improper personal benefit. This provision does
not limit or eliminate the rights of the Company or any shareholder to seek
nonmonetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. In addition, the Company's Certificate of
Incorporation and Bylaws provide that the Company shall indemnify its
directors, officers, Scientific Advisory Board members, employees and other
agents to the fullest extent permitted by New Jersey law; provided, that such
persons acted in good faith and in a manner reasonably believed to be in the
best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe such conduct was unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Stock being registered hereby. All amounts shown, other than the
SEC registration fee and the NASD filing fee, are estimates:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 9,517
NASD filing fee.................................................. 3,260
Nasdaq National Market application fee........................... 36,297
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 100,000
Legal fees and expenses.......................................... 340,000
Accounting fees and expenses..................................... 135,000
Financial consulting fees........................................ 175,000
Transfer Agent and Registrar fees................................ 3,500
Miscellaneous.................................................... 87,426
--------
Total............................................................ $900,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in January 1993, the Company has issued and sold the
following unregistered securities without any underwriter and without payment
of any selling commission to any person:
(1) In February 1993, the Company issued and sold a total of 2,587,500
shares of Common Stock to David A. Jenkins and HDI, at $.001 per
share, for an aggregate cash purchase price of $2,587.50.
(2) In May 1993, the Company issued and sold a total of 412,500 shares
of Common Stock to a group of six individual investors, including
shares to David A. Jenkins, at $1.33 per share, for an aggregate
cash purchase price of $550,000.
(3) In November 1993, the Company issued 450,000 shares of common stock
to Professional Catheter Corporation ("PCC"), in exchange for
substantially all of the assets of PCC, pursuant to an Agreement
and Plan of Reorganization.
II-1
<PAGE>
(4) From December 1993 through August 1994, the Company issued and sold
a total of 405,000 shares of Common Stock to eight investors at
prices ranging from $1.33 to $2.00 per share, for an aggregate cash
purchase price of $713,400.
(5) In February 1994, the Company issued 37,500 shares of Common Stock
to Biophysical Interface, Inc. ("BIC"), in exchange for all rights
of BIC to its TeleTrace, PaceBase, HeartBase, Pacer System Analyzer
and Simulator products, pursuant to an Intangible Assignment.
(6) In March 1994, the Company issued 200,000 shares of common stock to
ElectroPhysiology Systems, Inc. ("EPS"), in exchange for
substantially all of the assets of EPS, pursuant to an Agreement
and Plan of Reorganization.
(7) From July 1994 through September 1995, the Company issued a total
of 185,000 shares of common stock to HDI, in exchange for (i)
certain rights to arrythmia monitors 4221, 4222 and 4222ATM
developed and manufactured by HDI, (ii) certain rights to the
TeleTrace III receiver, (iii) certain rights to the Valve Base
software program, (iv) the extinguishment of the royalty obligation
of the Company to HDI relating to the sale of the EP-2 Clinical
Stimulator, and (v) the development by HDI of the TeleTrace IV
Receiver.
(8) In June 1995, the Company issued and sold units of 1995 Debentures
and 1995 Warrants. Units representing an aggregate of $1,137,500 in
1995 Debentures and 568,750 1995 Warrants were sold to a group of
seventeen investors for an aggregate purchase price of $1,137,500,
including the issuance of $200,000 in 1995 Debentures to HDI,
$200,000 to Medtronic and $50,000 to Jon Tietbohl, the sale of
which to Mr. Tietbohl included a promissory note which was paid in
February 1996. Each 1995 Warrant entitled the purchaser to purchase
one share of Common Stock of the Company at an exercise price of
$2.00 upon the earlier of June 30, 2000 or thirty days subsequent
to the full repayment of the face value of the 1995 Debentures,
which bear interest at the rate of 6% per annum.
(9) In September 1995, the Company issued a total of 14,500 shares of
Common Stock to two individuals in exchange for financial
consulting services provided to the Company.
(10) In November 1995, the Company issued 10,000 shares of Common Stock
to Sanjeev Saksena in exchange for a semi-exclusive license to
certain patents and catheter technology.
(11) In January 1996, the Company issued 100,000 shares of Common Stock
to an investor at a price of $3.00 per share, for a cash purchase
price of $300,000.
(12) In March 1996, the Company issued 66,667 shares of Common Stock to
an investor at a price of $3.00 per share, for a cash purchase
price of $200,000.
(13) In April 1996, the Company issued 12,500 shares of Common Stock to
an optionholder upon the exercise of stock options at an exercise
price of $1.33 per share, for total proceeds to the Company of
$14,667.
Such issuances were deemed to be exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) of
the Securities Act as transactions by an issuer not involving a public
offering or Rule 701 promulgated thereunder. The recipients of securities in
each such issuance represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the stock
certificates and warrants issued in such transactions. No underwriters were
involved in any such issuances.
II-2
<PAGE>
ITEM 27. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement (draft dated April 17, 1996)*
2.1 Agreement and Plan of Reorganization dated November 5, 1993, among EP
Medical, Inc., Professional Catheter Corporation, Joseph C. Griffin,
III and Harry Heck, as amended.*
3.1 Amended and Restated Certificate of Incorporation of EP MedSystems,
Inc.*
3.2 Bylaws of EP MedSystems, Inc., as amended.*
4.1 Specimen of Stock Certificate.**
4.2 Form of Debenture of EP Medical, Inc. due June 30, 2000.*
4.3 Form of Stock Purchase Warrant of EP Medical, Inc. dated June 1995.*
4.4 Form of Definitive Subscription Agreement of EP Medical, Inc.*
4.5 Form of Underwriter Warrant (draft dated April 17, 1996)*
5.1 Legal Opinion of Stradley, Ronon, Stevens & Young, LLP.**
10.1 Agreement of Lease dated November 1995, between EP Medical, Inc. and
Yeh Bin Wu and Jean Wu, as landlords.*
10.2 Business Lease dated November 5, 1993, between ProCath Corporation and
A&D Development Company.*
10.3 Business Lease dated May 22, 1995, between ProCath Corporation and A&D
Development Company.*
10.4 Agreement and Plan of Reorganization dated May 6, 1994, among EP
Medical, Inc., Electro Physiology Systems, Inc., Robert Arzbaecher and
Janice Jenkins.*
10.5 Bill of Sale and Assignment dated October 27, 1994, between EP
Medical, Inc. and Stavros Kontos.*
10.6 Employment Agreement dated as of March 1, 1993, between EP Medical,
Inc. and David A. Jenkins, as amended.*
10.7 Employment Agreement dated as of November 6, 1993, between EP
Acquisition Corp. and Joseph C. Griffin, III.*
10.8 1995 Director Option Plan of EP MedSystems, Inc.*
10.9 1995 Long Term Incentive Plan of EP MedSystems, Inc.*
10.10 License Agreement dated as of November 1, 1995, between EP Medical,
Inc. and Dr. Eckhard Alt, as amended.*
10.11 Consulting Agreement dated as of February 1, 1996, between EP Medical,
Inc. and Raman Mitra.*
10.12 License Agreement dated as of November 1, 1995, between EP Medical,
Inc. and Sanjeev Saksena.*
10.13 Consultant Agreement dated February 26, 1996, between EP Medical, Inc.
and Regulatory Strategies, Inc.*
10.14 Investment Agreement dated April 22, 1994, among EP Medical, Inc.,
David Jenkins, Anthony Varrichio, William Winstrom and American
Medical Electronics, Inc.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 Letter Agreement dated December 15, 1995, between EP Medical, Inc. and
Rudiger Dahle.*
10.16 Investment Agreement dated January 16, 1996, among EP Medical, Inc.,
Rudiger Dahle, Anthony Varrichio and William Winstrom.*
10.17 Letter Agreement dated February 22, 1994 between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to TeleTrace III Receiver.*
10.18 Letter Agreement dated July 11, 1994 between EP Medical, Inc. and Hi-
Tronics Designs, Inc. relating to arrhythmia monitors.*
10.19 Letter Agreement dated August 3, 1994 between EP Medical, Inc. and Hi-
Tronics Designs, Inc. relating to termination of EP-2 Royalties.*
10.20 Letter Agreement dated January 23, 1995, between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to development of TeleTrace IV
Receiver, as amended.*
10.21 Letter Agreement dated February 23, 1996 between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to termination of certain non-
compete obligations of Hi-Tronics Designs, Inc.*
10.22 Master Manufacturing Agreement dated April 16, 1996, between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc.*
10.23 Promissory Note dated August 1, 1995 between EP Medical, Inc. and
Harry Heck.*
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of EP MedSystems, Inc.*
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Stradley, Ronon, Stevens & Young, LLP
23.3 Consent of Wigman, Cohen, Leitner & Myers, P.C.
</TABLE>
- ---------------------
*Previously filed and incorporated by reference.
**To be filed by amendment.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or together,
represent a fundamental change in the information in the registration
statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or
II-4
<PAGE>
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to provide the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as is required by the Underwriter
to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suite or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing Form SB-2 and authorized this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in Budd Lake, New Jersey, on this 24th day of May, 1996.
EP MEDSYSTEMS, INC., a New Jersey
corporation
/s/ David A. Jenkins
By: _________________________________
DAVID A. JENKINS PRESIDENT AND
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement was signed by the following persons
in the capacities and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ David A. Jenkins Director, President and
- --------------------------------- Chief Executive Officer May 24, 1996
DAVID A. JENKINS (Principal Executive
Officer)
/s/ James J. Caruso Chief Financial Officer
- --------------------------------- and Secretary (Principal May 24, 1996
JAMES J. CARUSO Financial and Accounting
Officer)
/s/ David W. Mortara, Ph.D Director
- --------------------------------- May 24, 1996
DAVID W. MORTARA, PH.D
/s/ Lester J. Swenson Director
- --------------------------------- May 24, 1996
LESTER J. SWENSON
/s/ Jon A. Tietbohl Director
- --------------------------------- May 24, 1996
JON A. TIETBOHL
/s/ Anthony J. Varrichio Director
- --------------------------------- May 24, 1996
ANTHONY J. VARRICHIO
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
1 Form of Underwriting Agreement between EP MedSystems, Inc. and Pacific
Growth Equities, Inc. (draft dated April 17, 1996).*
2.1 Agreement and Plan of Reorganization dated November 5, 1993, among EP
Medical, Inc., Professional Catheter Corporation, Joseph C. Griffin, III
and Harry Heck, as amended.*
3.1 Amended and Restated Certificate of Incorporation of EP MedSystems,
Inc.*
3.2 Bylaws of EP MedSystems, Inc., as amended.*
4.1 Specimen of Stock Certificate.**
4.2 Form of Debenture of EP Medical, Inc. due June 30, 2000.*
4.3 Form of Stock Purchase Warrant of EP Medical, Inc. dated June 1995.*
4.4 Form of Definitive Subscription Agreement of EP Medical, Inc.*
4.5 Form of Underwriter Warrant (draft dated April 17, 1996)*
5.1 Legal Opinion of Stradley, Ronon, Stevens & Young, LLP.**
10.1 Agreement of Lease dated November 1995, between EP Medical, Inc. and Yeh
Bin Wu and Jean Wu, as landlords.*
10.2 Business Lease dated November 5, 1993, between ProCath Corporation and
A&D Development Company.*
10.3 Business Lease dated May 22, 1995, between ProCath Corporation and A&D
Development Company.*
10.4 Agreement and Plan of Reorganization dated May 6, 1994, among EP
Medical, Inc., Electro Physiology Systems, Inc., Robert Arzbaecher and
Janice Jenkins.*
10.5 Bill of Sale and Assignment dated October 27, 1994, between EP Medical,
Inc. and Stavros Kontos.*
10.6 Employment Agreement dated as of March 1, 1993, between EP Medical, Inc.
and David A. Jenkins, as amended.*
10.7 Employment Agreement dated as of November 6, 1993, between EP
Acquisition Corp. and Joseph C. Griffin, III.*
10.8 1995 Director Option Plan of EP MedSystems, Inc.*
10.9 1995 Long Term Incentive Plan of EP MedSystems, Inc.*
10.10 License Agreement dated as of November 1, 1995, between EP Medical, Inc.
and Dr. Eckhard Alt, as amended.*
10.11 Consulting Agreement dated as of February 1, 1996, between EP Medical,
Inc. and Raman Mitra.*
10.12 License Agreement dated as of November 1, 1995, between EP Medical, Inc.
and Sanjeev Saksena.*
10.13 Consultant Agreement dated February 26, 1996, between EP Medical, Inc.
and Regulatory Strategies, Inc.*
10.14 Investment Agreement dated April 22, 1994, among EP Medical, Inc., David
Jenkins, Anthony Varrichio, William Winstrom and American Medical
Electronics, Inc.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
10.15 Letter Agreement dated December 15, 1995, between EP Medical, Inc. and
Rudiger Dahle.*
10.16 Investment Agreement dated January 16, 1996, among EP Medical, Inc.,
Rudiger Dahle, Anthony Varrichio and William Winstrom.*
10.17 Letter Agreement dated February 22, 1994 between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to TeleTrace IV Receiver.*
10.18 Letter Agreement dated July 11, 1994 between EP Medical, Inc. and Hi-
Tronics Designs, Inc. relating to arrhythmia monitors*
10.19 Letter Agreement dated August 3, 1994 between EP Medical, Inc. and Hi-
Tronics Designs, Inc. relating to termination of EP-2 Royalties.*
10.20 Letter Agreement dated January 23, 1995, between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to development of TeleTrace IV
Receiver, as amended.*
10.21 Letter Agreement dated February 23, 1996 between EP Medical, Inc. and
Hi-Tronics Designs, Inc. relating to termination of certain non-compete
obligations of Hi-Tronics Designs, Inc.*
10.22 Master Manufacturing Agreement dated April 16, 1996, between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc.*
10.23 Promissory Note dated August 1, 1995 between EP Medical, Inc. and Harry
Heck.*
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of EP MedSystems, Inc.*
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Stradley, Ronon, Stevens & Young, LLP
23.3 Consent of Wigman, Cohen, Leitner & Myers, P.C.
</TABLE>
- ---------------------
*Previously filed and incorporated by reference.
**To be filed by amendment.
<PAGE>
EXHIBIT 11
EP MEDSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------------------------- ----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
HISTORICAL EARNINGS PER
SHARE
Net Loss.............. $ (410,210) $(1,596,850) $(1,482,650) $ (172,196) $ (67,289)
Weighted average
shares outstanding:
Common Stock (1).... 3,227,534 4,209,275 4,518,667 4,518,667 4,518,667
Stock Options (2)... 997,971 997,971 997,971 997,971 997,971
Warrants (2)........ 406,250 406,250 406,250 406,250 406,250
---------- ----------- ----------- ---------- ----------
4,631,755 5,613,496 5,922,888 5,922,888 5,922,888
---------- ----------- ----------- ---------- ----------
Historical net loss
per share............ $ (.09) $ (.28) $ (.25) $ (.03) $ (.01)
---------- ----------- ----------- ---------- ----------
</TABLE>
- ---------------------
(1) 93,500 and 166,667 shares of stock were issued in 1995 and 1996,
respectively. These shares were issued within 12 months preceding the
initial filing of the registration statement at prices lower than the
expected initial public offering price of $7.00 per share. Pursuant to
Staff Accounting Bulletin No. 83 ("SAB No. 83") such shares have been
included in the weighted average number of shares outstanding for all
periods presented.
(2) Options and warrants at 997,971 and 406,250, respectively, were granted at
prices below the expected initial public offering price of $7.00. The
dilutive effect of these options have been included in the earnings per
share calculation using the treasury stock method in accordance with SAB
No. 83.
<TABLE>
<CAPTION>
OPTIONS WARRANTS
---------- ----------
<S> <C> <C>
Options issued within one year of initial registra-
tion statement filing.............................. 1,324,000 568,750
---------- ----------
Proceeds from exercise.............................. $2,282,200 $1,137,500
Expected initial public offering price.............. /$7.00 /$7.00
---------- ----------
Treasury stock...................................... 326,029 162,500
---------- ----------
Incremental shares.................................. 997,971 406,250
---------- ----------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement File No. 333-3642.
/s/ Arthur Andersen LLP
_____________________________________
Arthur Andersen LLP
New York, New York
May 24, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus constituting a part of this Registration Statement.
The legal opinion of Stradley, Ronon, Stevens & Young, LLP will be filed by
amendment.
Philadelphia, PA, May 24, 1996
/s/ Stradley, Ronon, Stevens &
Young, LLP
Stradley, Ronon, Stevens & Young,
LLP
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF WIGMAN, COHEN, LEITNER & MYERS, P.C. APPEARS HERE]
CONSENT OF SPECIAL PATENT COUNSEL
The Board of Directors and Shareholders
EP MedSystems, Inc.
We hereby consent to the reference to Wigman, Cohen, Leitner & Myers,
P.C. under the caption "Experts" in the Prospectus constituting a part of this
Registration Statement.
WIGMAN, COHEN, LEITNER & MYERS, P.C.
BY: /s/ Herbert Cohen
------------------------------
Herbert Cohen
Washington, D.C.
May 24, 1996
