<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1996
REGISTRATION NO. 333-3642
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JUNE 13, 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>
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- --------------------------------------------------------------------------------
(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 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
and other assets....... -- 215,216 -- -- 100,000
Loss from operations.... (394,453) (1,540,889) (1,431,757) (162,426) (148,741)
Net loss................ $(410,210) $(1,596,850) $(1,482,650) $(172,196) $(167,289)
========= =========== =========== ========= =========
Net loss per common and
equivalent share....... $ (.09) $ (.28) $ (.25) $ (.03) $ (.03)
========= =========== =========== ========= =========
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).... $ (.24) $ (.03)
=========== =========
</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....................................... 219,723 18,849,723
Total assets.......................................... 2,491,130 21,121,130
Long-term debt........................................ 1,174,453 83,450
Shareholders' equity.................................. $ 153,441 $19,874,444
</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 $3.7 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 a new premarket notification under Section 510(k) is
required to be filed with the FDA when, among other things, there is a major
change or modification in the intended use of a legally marketed 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, its intended use or a 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 one or more of the
Company's determinations, 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 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 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
8
<PAGE>
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 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,
9
<PAGE>
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 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."
10
<PAGE>
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. 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
11
<PAGE>
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 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
12
<PAGE>
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 631,000 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, including the possible
acquisition or establishment of a catheter manufacturing facility in Europe,
(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 Company is seeking to establish manufacturing capacity for catheter
products at an ISO 9001 certified facility in Europe in order to begin
marketing certain of its products in Europe. The Company is evaluating several
potential facilities for possible contract manufacturing or acquisition,
including Falfab, L.L.C., a United Kingdom angioplasty catheter manufacturer
("Falfab"), to which the Company has loaned a total of $107,500, and which
amount Falfab may be unable to repay upon the maturity of such indebtedness.
Edwin K. Hunter, who owns beneficially 574,500 shares of Common Stock of the
Company, is also a principal shareholder of Falfab. The Company believes that
Falfab has recently suspended its manufacturing operations while attempting to
sell existing inventory, and has reflected a write-off of $100,000 of
indebtedness due from Falfab on July 15, 1996 in the three month period ended
March 31, 1996. See "Certain Transactions -- Acquisition of Note Receivable"
and Note 1 to the Consolidated Financial Statements.
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)......................... (3,656,999) (3,703,496)
----------- -----------
Total shareholders' equity...................... 153,441 19,874,444
----------- -----------
Total capitalization............................ $ 1,345,094 $19,975,094
=========== ===========
</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 $(543,485), or
$(.12) 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 $18,086,515, or $2.41 per share,
representing an immediate increase in net tangible book value of $2.53 per
share to existing shareholders and an immediate dilution in net tangible book
value of $4.60 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.......... (.12)
Increase attributable to new investors....................... 2.53
----
Net tangible book value per share after the offering.......... 2.41
-----
Dilution per share to new investors........................... $4.59
=====
</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 $19,177,518, or $2.37 per share, representing an
immediate increase in net tangible book value of $2.49 per share to existing
shareholders and an immediate dilution in net tangible book value of $4.63 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
and other assets....... -- 215,216 -- -- 100,000
--------- ----------- ----------- --------- ---------
Loss from operations... (394,453) (1,540,889) (1,431,757) (162,426) (148,741)
Interest expense........ (15,757) (55,961) (50,893) (9,770) (18,548)
--------- ----------- ----------- --------- ---------
Net loss............... (410,210) (1,596,850) (1,482,650) (172,196) (167,289)
========= =========== =========== ========= =========
Net loss per share...... $ (.09) $ (.28) $ (.25) $ (.03) $ (.03)
========= =========== =========== ========= =========
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)........... $ (.24) $ (.03)
=========== =========
</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) 102,809 219,723
Total assets................... 1,969,729 1,789,346 2,043,860 2,491,130
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) $ 153,441
</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 $3.7 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
and other assets....... -- 14.2 -- -- 13.2
----- ------ ----- --------- ---------
Loss from operations.. (59.5) (101.9) (71.5) (35.0) (19.7)
Interest expense........ 2.4 3.7 2.6 2.1 2.4
----- ------ ----- --------- ---------
Net loss.............. (61.9)% (105.6)% (74.1)% (37.1)% (22.1)%
===== ====== ===== ========= =========
</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 $11,384 (or 15.7%) from $72,636 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.
Write-off of intangible and other assets increased $100,000, as the Company
has recently become aware that Falfab may be unable to repay amounts
previously loaned to it by the Company upon the maturity of such indebtedness.
The Company loaned Falfab $100,000 pursuant to a note receivable due July 15,
1996. As a result of Falfab's possible inability to repay such amount, the
Company has elected to write off such amount in the three month period ended
March 31, 1996. The Company loaned Falfab an additional $7,500 after March 31,
1996 and has not yet made a determination as to whether it will write off such
amount.
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 $4,907 (or 2.8%) from $172,196 to $167,289 and as a
percentage of net sales from 37.1% to 22.1%. The decrease in net loss for the
three month period ending March 31, 1996 was due to increased sales and higher
gross margins, offset by higher general and administrative expenses and the
write-off of the Falfab note receivable of $100,000. See Note 1 to the
Consolidated Financial Statements.
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
21
<PAGE>
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 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 November 1995, the Company granted an option to Dr. Alt to purchase 210,000
shares of Common Stock at $.10 per share in partial consideration for the
Company's license of the ALERT technology from Dr. Alt. In connection with this
option grant to Dr. Alt, the Company recorded acquired research and development
expense of $420,000, representing the fair market value of such option on the
issue date. 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
22
<PAGE>
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.
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
$3,755,700 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.
23
<PAGE>
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 $167,289 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, and the write-off of the Falfab note receivable of
$100,000. 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 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 $258,880 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, including the possible
acquisition or establishment of a catheter manufacturing facility in Europe.
The Company is evaluating several potential facilities in Europe for possible
contract manufacturing or acquisition, including Falfab. 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 note
receivable payable by Falfab, accruing interest at 8% and maturing on July 15,
1996. The fair market value of this note receivable approximated its book
value as of December 31, 1995. The Company loaned an additional $7,500 to
Falfab during the second quarter of 1996. The Company has recently become
aware that Falfab may be unable to repay amounts previously loaned to it by
the Company upon the maturity of such indebtedness. Accordingly, the Company
has elected to write off the $100,000 note receivable in the three month
period ended March 31, 1996. The Company has not yet made a determination as
to whether it will write off the $7,500 loan to Falfab. See Note 1 to 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
24
<PAGE>
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."
On May 28, 1996, the Company entered into an exclusive rights agreement (the
"Rights Agreement") with Spire Corporation ("Spire"), whereby the Company
obtained the exclusive right to develop the clinical and commercial potential
of Spire's specialized process for applying a thin metallic coating to the
Company's electrophysiology catheters and accessories. The Rights Agreement
provides for payments of $25,000 per quarter commencing on July 1, 1996 to
maintain exclusivity for an initial term of five years, with provision for two
year renewal terms upon mutual agreement of the parties. The Rights Agreement
may be terminated at any time by the Company upon 60 days' notice.
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.
25
<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 what the Company believes is 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.
26
<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
[GRAPHIC DEPICTING HEART WITH VARIOUS PARTS LABELED APPEARS HERE]
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
27
<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
29
<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
[GRAPHIC DEPICTING THE HUMAN HEART, AND PLACEMENT OF
THE ALERT CATHETER APPEARS HERE]
30
<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, enabling the user to analyze and archive a patient's pacemaker or
arrhythmia activity, thereby 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,
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including pertinent implant 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>
36
<PAGE>
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
37
<PAGE>
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.
38
<PAGE>
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. The Company is evaluating
several potential facilities for possible contract manufacturing or
acquisition, including Falfab, L.L.C., a United Kingdom angioplasty catheter
manufacturer ("Falfab"), to which the Company has loaned a total of $107,500,
and which amount Falfab may be unable to repay upon the maturity of such
indebtedness. The Company has reflected a write-off of $100,000 of such
indebtedness due on July 15, 1996 in the three month period ended March 31,
1996. See Note 1 to the Consolidated Financial Statements.
Substantially all of the Company's other products are either manufactured or
assembled on a contract basis by HDI. HDI's facilities, activities and quality
assurance procedures are subject to GMP regulations. Although the Company may
engage other contract manufacturers, any interruption in HDI's ability to
manufacture the Company's products would have a material adverse effect on the
Company's ability to fill orders for products manufactured 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
39
<PAGE>
("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 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
40
<PAGE>
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 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.
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<PAGE>
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 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
42
<PAGE>
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 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
43
<PAGE>
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
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 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 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
45
<PAGE>
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.
46
<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
47
<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.
48
<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.
49
<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.
50
<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.
51
<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 $70,000
and issuing $200,000 aggregate principal amount of 1995 Debentures, with
attached
52
<PAGE>
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 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
53
<PAGE>
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 $54,570 during 1995 and $70,085 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, L.L.C., an angioplasty catheter manufacturer in the
United Kingdom ("Falfab"). Edwin K. Hunter, who owns beneficially 574,500
shares of Common Stock of the Company, is also a principal shareholder of
FalFab. The note receivable bears interest at 8% per annum and is due and
payable on July 15, 1996. The Company loaned an additional $7,500 to Falfab
during the second quarter of 1996. The Company has recently become aware that
Falfab may be unable to repay amounts due the Company upon the maturity of such
indebtedness. Accordingly, the Company reflected a write-off of the $100,000
note receivable in the three month period ended March 31, 1996. The Company has
not yet made a determination as to whether it will write off the $7,500 loan to
Falfab. See Note 1 to the Consolidated Financial Statements.
54
<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 L. Gordon, Ph D.(7)... 325,000 7.1% 4.0%
12011 Wander Lane
Austin, Texas 78750
David W. Mortara, Ph 58,000 1.3% *
D.(8).....................
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%).
55
<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.
56
<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
57
<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
58
<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.
59
<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 631,000 shares
60
<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.
61
<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
62
<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
63
<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.
64
<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-20
</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, net.................. -- 150,000 --
Prepaid expenses and other current
assets................................ 5,122 53,648 45,215
----------- ----------- -----------
Total current assets.................. 808,899 1,145,621 1,382,959
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 $ 2,491,130
=========== =========== ===========
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) (3,656,999)
----------- ----------- -----------
Total shareholders' equity
(deficit).......................... 641,678 (179,270) 153,441
----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)................... $ 1,789,346 $ 2,043,860 $ 2,491,130
=========== =========== ===========
</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
and other assets....... -- 215,216 -- -- 100,000
--------- ----------- ----------- --------- ---------
Loss from
operations......... (394,453) (1,540,889) (1,431,757) (162,426) (148,741)
Interest expense........ (15,757) (55,961) (50,893) (9,770) (18,548)
--------- ----------- ----------- --------- ---------
Net loss................ $(410,210) $(1,596,850) $(1,482,650) $(172,196) $(167,289)
========= =========== =========== ========= =========
Net loss per share...... $ (.09) $ (.28) $ (.25) $ (.03) $ (.03)
========= =========== =========== ========= =========
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) $ (.03)
=========== =========
</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................ -- -- -- (167,289) (167,289)
--------- ------ ---------- ----------- -----------
Balance, March 31,
1996................... 4,518,667 $4,519 $3,805,921 $(3,656,999) $ 153,441
========= ====== ========== =========== ===========
</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) $(167,289)
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 and other
assets............... -- 215,216 -- -- 100,000
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, L.L.C., a UK-based
angioplasty catheter manufacturer ("Falfab"), which accrues interest at 8% and
matures on July 15, 1996. At December 31, 1995, the Company does not believe
that there is a significant credit risk with respect to this note receivable
and the fair market value of such note receivable approximates book value. The
Company loaned an additional $7,500 to Falfab during the second quarter of
1996. The Company has recently become aware that Falfab may be unable to repay
amounts due the Company upon the maturity of such indebtedness. Accordingly,
the Company reflected a write-off of the $100,000 note receivable in the three
month period ended March 31, 1996. The Company has not yet made a
determination as to whether it will write off the $7,500 loan to Falfab. A
shareholder of Falfab is also a beneficial shareholder of the Company.
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.
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)
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, 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
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)
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 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. In April 1996, the Company entered into a five
year exclusive manufacturing agreement with HDI to manufacture certain
products. 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
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)
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.
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.
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
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 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 fair market value of the option on the issue 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
---------------------
3. ACQUIRED RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED)
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.
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>
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
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
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.
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
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>
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 also provided for consulting
services to the Company in the areas of strategic planning, business
development, regulatory strategies and access to capital in
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
---------------------
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 agreements provide 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.
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.
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)
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).
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.
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
---------------------
10. MAJOR CUSTOMER AND EXPORT SALES (CONTINUED)
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.
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.
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
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>
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. SUBSEQUENT EVENTS (UNAUDITED)
Initial Public Offering
On April 9, 1996, the Company's Board of Directors authorized the Company to
file 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. On April
18, 1996, such registration statement was filed. See Note 1 for a discussion
of certain risks impacting the Company.
Spire Agreement
On May 28, 1996, the Company entered into an exclusive rights agreement (the
"Rights Agreement") with Spire Corporation ("Spire"), whereby the Company
obtained the exclusive right
F-19
<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
---------------------
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
to develop the clinical and commercial potential of Spire's specialized
process for applying a thin metallic coating to the Company's
electrophysiology catheters and accessories. During the term of the Rights
Agreement, the Company is required to obtain all of its requirements for
products treated with such a metallized coating from Spire. The Rights
Agreement provides for payments of $25,000 per quarter commencing on July 1,
1996 to maintain exclusivity for an initial term of five years, with provision
for two year renewal terms upon mutual agreement of the parties. The Rights
Agreement may be terminated at any time by the Company upon 60 days' notice.
F-20
<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................................................................. 26
Management............................................................... 45
Executive Compensation................................................... 49
Certain Transactions..................................................... 52
Principal Shareholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
Reports to Shareholders.................................................. 64
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 June 4, 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 June 4, 1996)
5.1 Legal Opinion and Consent 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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14 Investment Agreement dated April 22, 1994, among EP Medical, Inc.,
David Jenkins, Anthony Varrichio, William Winstrom and American
Medical Electronics, Inc.*
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.*
10.24 Promissory Note dated May 13, 1996, between EP MedSystems, Inc. and
Hi-Tronics Designs, Inc.
10.25 Exclusive Rights Agreement dated May 26, 1996, between EP MedSystems,
Inc. and Spire Corporation
10.26 Letter Agreement dated April 12, 1996, between EP MedSystems, Inc. and
Hi-Tronics Designs, Inc. relating to the TeleTrace IV Receiver
10.27 Consulting Agreement dated as of May 24, 1996, between EP MedSystems,
Inc. and Elliot Young & Associates, Inc., as amended and restated
10.28 Stock Option Agreement dated August 31, 1995, between EP MedSystems,
Inc. and Tracey E. Young, as amended
10.29 Registration Rights Agreement dated as of May 24, 1996, between EP
MedSystems, Inc. and Tracey E. Young
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 Wigman, Cohen, Leitner & Myers, P.C.
</TABLE>
- ---------------------
*Previously filed and incorporated by reference.
II-4
<PAGE>
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 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. 2 to Registration Statement to be signed on its behalf by the
undersigned, in Budd Lake, New Jersey, on this 12th day of June, 1996.
EP MEDSYSTEMS, INC.,
a New Jersey corporation
By: /s/ David A. Jenkins
-------------------------------------
DAVID A. JENKINS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 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 June 12, 1996
- --------------------------------- Chief Executive Officer
DAVID A. JENKINS (Principal Executive
Officer)
/s/ James J. Caruso Chief Financial Officer June 12, 1996
- --------------------------------- and Secretary (Principal
JAMES J. CARUSO Financial and Accounting
Officer)
/s/ David W. Mortara, Ph.D Director June 12, 1996
- ---------------------------------
DAVID W. MORTARA, PH.D
/s/ Lester J. Swenson Director June 12, 1996
- ---------------------------------
LESTER J. SWENSON
/s/ Jon A. Tietbohl Director June 12, 1996
- ---------------------------------
JON A. TIETBOHL
/s/ Anthony J. Varrichio Director June 12, 1996
- ---------------------------------
ANTHONY J. VARRICHIO
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
1 Form of Underwriting Agreement between EP MedSystems,
Inc. and Pacific Growth Equities, Inc. (draft dated June
4, 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 June 4, 1996)
5.1 Legal Opinion and Consent 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
------- ----------- -----------
<C> <S> <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.*
10.24 Promissory Note dated May 13, 1996, between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc.
10.25 Exclusive Rights Agreement dated May 26, 1996, between
EP MedSystems, Inc. and Spire Corporation.
10.26 Letter Agreement dated April 12, 1996, between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc. relating
to the TeleTrace IV Receiver.
10.27 Consulting Agreement dated as of May 24, 1996, between
EP MedSystems, Inc. and Elliot Young & Associates, Inc.,
as amended and restated.
10.28 Stock Option Agreement dated August 31, 1995, between EP
MedSystems, Inc. and Tracey E. Young, as amended.
10.29 Registration Rights Agreement dated as of May 24, 1996,
between EP MedSystems, Inc. and Tracey E. Young.
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 Wigman, Cohen, Leitner & Myers, P.C.
</TABLE>
- ---------------------
*Previously filed and incorporated by reference.
<PAGE>
Exhibit 1
3,000,000 Shares*
EP MedSystems, Inc.
Common Stock
UNDERWRITING AGREEMENT
June ___, 1996
Pacific Growth Equities, Inc.
353 Sacramento Street, 16th Floor
San Francisco, California 94111
Ladies and Gentlemen:
1. Introductory. EP MedSystems, Inc., a New Jersey corporation (the
"Company"), proposes to issue and sell to you (the "Underwriter") 3,000,000
shares (the "Firm Common Shares") of the Company's authorized but unissued
Common Stock ("Common Stock"). In addition, the Company proposes to grant to you
an option to purchase up to 450,000 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 4 hereof. The Firm Common
Shares and, to the extent such option is exercised, the Optional Common Shares,
are hereinafter collectively referred to as the "Common Shares."
You have advised the Company that you propose to make a public offering
of the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
The Company hereby confirms its agreement with respect to the purchase of
the Common Shares by the Underwriter as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to you that:
(a) The Company has prepared a registration statement on Form SB-2 (File
No. 333-3642) with respect to the Common Shares in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has filed such
registration statement with the Commission. The
- -------------------------------
*Plus an option to purchase up to 450,000 additional shares of Common Stock to
cover over-allotments, if any.
-1-
<PAGE>
Company has prepared and has filed or proposes to file prior to the effective
date of such registration statement an amendment or amendments thereto, which
have been or will be similarly prepared. The Company has delivered to you two
signed copies of such registration statement and amendments, together with two
copies of each exhibit filed therewith. Conformed copies of such registration
statement and amendments (but without exhibits) and of the related preliminary
prospectus have been delivered to you in such reasonable quantities as you have
requested. The Company will next file with the Commission one of the following:
(i) prior to effectiveness of such registration statement, a further amendment
thereto, including the form of final prospectus, (ii) a final prospectus in
accordance with Rules 430A and 424(b) of the Rules and Regulations or (iii) a
term sheet (the "Term Sheet") as described in and in accordance with Rules 434
and 424(b) of the Rules and Regulations. As filed, such amendment and form of
final prospectus, such final prospectus or such Term Sheet shall include all
Rule 430A Information (as defined below) and, except to the extent you shall
agree in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not completed at
such date and time, shall contain only such specific additional information and
other changes (beyond those contained in the latest Preliminary Prospectus) as
the Company shall have previously advised you in writing would be included or
made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations. The term "Preliminary
Prospectus" shall mean each preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" shall mean either (i) the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, (ii) if a Term Sheet is not used and no
filing pursuant to Rule 424(b) of the Rules and Regulations is required, the
form of final prospectus included in the Registration Statement at the time such
registration statement becomes effective, or (iii) if a Term Sheet is used, the
Term Sheet in the form in which it is first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations, together with the Preliminary
Prospectus included in the Registration Statement at the time it becomes
effective. The term "Rule 430A Information" means information with respect to
the Common Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information
-2-
<PAGE>
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by you, specifically for use in the
preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association, partnership or entity other than ProCath Corporation
(the "Subsidiary"). The Company and the Subsidiary have been duly incorporated
or otherwise formed and each is validly existing as a corporation in good
standing under the laws of the jurisdiction of its formation with full power and
authority (corporate and other) to own and lease its property and conduct its
business as described in the Prospectus. Each of the Company and the
Subsidiary: (i) is in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of its respective business, all of which are valid and in full force
and effect; and (ii) is duly qualified to do business and in good standing as a
foreign corporation in each jurisdiction in which the ownership or leasing of
properties or the conduct of its business requires such qualification, except
for jurisdictions in which the failure to so qualify would not have a material
adverse effect upon the Company. No proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, any such power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, were issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
conform to the description thereof contained in the Prospectus. Except as
disclosed in or contemplated by the Prospectus and the financial statements of
the Company, and the related notes thereto, included in the Prospectus, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights. All of the outstanding equity securities of the Subsidiary
are owned of record and beneficially by the Company, and there are no
outstanding options to purchase or other rights to subscribe for or to purchase,
any securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of equity securities of the Subsidiary or any such
options, rights, convertible securities or obligations.
(e) The Common Shares have been duly authorized and, when issued,
delivered and paid for in the manner set forth in this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and will conform to the
description thereof contained
-3-
<PAGE>
in the Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares by the
Company pursuant to this Agreement. No person has any right that has not lapsed
or been waived to require the Company to register the sale of any securities
owned by such person under the Act in the public offering contemplated by this
Agreement. No further approval or authority of the stockholders or the Board of
Directors of the Company will be required for the issuance and sale of the
Common Shares as contemplated herein.
(f) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company in accordance with its terms. The
making and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
certificate of incorporation or bylaws, or other organizational documents, of
the Company, and will not conflict with, result in the breach or violation of,
or constitute, either by itself or upon notice or the passage of time or both, a
default under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company is a party or by
which the Company or any of its properties may be bound or affected, any statute
or any authorization, judgment, decree, order, rule or regulation of any court
or any regulatory body, administrative agency or other governmental body
applicable to the Company or any of its properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Act, the Blue Sky laws applicable to
the public offering of the Common Shares by the Underwriters and the clearance
of such offering with the National Association of Securities Dealers, Inc. (the
"NASD").
(g) Arthur Anderson, LLP, who have expressed their opinion as to the
financial statements and schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus and in the Registration
Statement, are independent accountants for the Company as required by the Act
and the Rules and Regulations.
(h) The financial statements and schedules of the Company (together with
the related notes thereto) included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the results of
operations and cash flows of the Company for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis as certified, except as otherwise disclosed therein, by the independent
accountants named in subsection 2(g). No other financial statements, schedules
or information are required to be included in the Registration Statement. The
selected financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Consolidated Financial Data" fairly present the
information set forth therein on the basis stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to defaults
that individually or in the aggregate would not be material to the Company,
neither the Company nor the Subsidiary is in violation or default of any
provision of its certificate of incorporation or bylaws, or other organizational
documents, nor is the Company or the Subsidiary in
-4-
<PAGE>
breach of or default as to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which the Company or the Subsidiary is a party or by which
the Company or the Subsidiary or any of their respective properties are bound;
and there does not exist any state of facts that constitutes an event of default
on the part of the Company or the Subsidiary as defined in such documents or
that, with notice or lapse of time or both, would constitute such an event of
default.
(j) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations that have not been
described or filed as required. The descriptions of all contracts referenced in
the Prospectus are accurate and complete; all such contracts are in full force
and effect on the date hereof; and neither the Company or, to the best of the
Company's knowledge, any other party, is in breach of or default under any of
such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or the Subsidiary is or may
be a party or of which property owned or leased by the Company or the Subsidiary
is or may be the subject, or related to environmental or discrimination matters,
which actions, suits or proceedings might, individually or in the aggregate,
prevent or adversely affect the transactions contemplated by this Agreement, or
result in a material adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of the Company. No
labor disturbance by the employees of the Company or the Subsidiary exists or is
imminent that might be expected to affect adversely such condition, properties,
business, results of operations or prospects. Neither the Company nor the
Subsidiary is a party or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body.
(l) The Company or the Subsidiary, as applicable, has good and
marketable title to all the properties and assets reflected as owned in the
Company's financial statements included in the Prospectus or the Registration
Statement and all properties and assets necessary for the conduct of its
business, in each case subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except (i) those, if any, reflected in such financial
statements (or elsewhere in the Prospectus), or (ii) those that are not material
in amount and do not adversely affect the use made and proposed to be made of
such property by the Company or the Subsidiary. Except as disclosed in the
Prospectus, the Company or the Subsidiary, as applicable, holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company. Except as
disclosed in the Prospectus, the Company or the Subsidiary, as applicable, owns
or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) neither the Company nor the
Subsidiary has incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction that is not in the ordinary course of business or that
could result in a material reduction in the future earnings of the Company; (ii)
neither the Company nor the Subsidiary has sustained any material loss or
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interference with its business or property from fire, flood, windstorm, accident
or other calamity, whether or not covered by insurance; (iii) the Company has
not paid or declared any dividends or other distributions with respect to its
capital stock and neither the Company nor the Subsidiary has defaulted on the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder and upon the exercise of options and warrants or
pursuant to other employee benefit plans described in the Registration
Statement) or indebtedness material to the Company; and (v) there has not been
any material adverse change in the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company or the Subsidiary.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and the Subsidiary each has sufficient trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct its respective business as now conducted,
including all rights necessary to develop, manufacture, and sell the product
described in the Prospectus as the ALERT Catheter System; the expiration of any
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals or governmental authorizations would not have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company; and the Company has no knowledge of any
material infringement by it or the Subsidiary of any trademark, trade name
rights, patent rights, mask works, copyrights, licenses, trade secret or other
similar rights of any others, and there is no claim being made against the
Company or the Subsidiary regarding trademark, trade name, patent, copyright,
license, trade secret or other infringement that could have a material adverse
effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company.
(o) Neither the Company nor the Subsidiary has been advised, and neither
has any reason to believe, that the Company or the Subsidiary is not conducting
its business in compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business, including, without
limitation, all applicable statutes or regulations relating to: the development,
testing, manufacture, labelling, advertising, sale or use of cardiac
electrophysiology devices; the development, testing, manufacture, labelling,
advertising or sale of medical devices generally; the control of exports from
the United States; and local, state and federal environmental laws and
regulations, except as disclosed in the Prospectus and except where failure to
be so in compliance would not materially adversely affect the condition
(financial or otherwise), business, results of operations or prospects of the
Company.
(p) The Company and the Subsidiary have filed all necessary federal,
state and foreign income and franchise tax returns and has paid all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency that has
been or might be asserted or threatened against the Company or the Subsidiary
that could materially and adversely affect the business, operations or
properties of the Company.
(q) Neither the Company nor the Subsidiary is or will be after
completion of the offering described in the Prospectus, an "investment company"
or a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the
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Common Shares other than the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(s) The Company and the Subsidiary maintain insurance of the types and
in the amounts generally deemed adequate for their respective businesses,
including, but not limited to, product liability insurance, insurance covering
real and personal property owned or leased by the Company or the Subsidiary
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect.
(t) Neither the Company nor the Subsidiary has, at any time during the
last five years, directly or indirectly (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof.
(u) Neither the Company nor the Subsidiary has taken, nor will either
take, directly or indirectly, any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock has been duly authorized for quotation on the
Nasdaq National Market.
(w) The Company is not aware of any state of facts that might reasonably
be expected to result in any supplier to the Company or the Subsidiary failing
to deliver or delaying delivery of goods, services, or other products to the
Company or the Subsidiary, except for failures or delays that would not
materially adversely affect the financial condition or results of operations of
the Company.
(x) Neither the Company nor the Subsidiary has received any notice,
whether written or oral, from any distributor of the Company or the Subsidiary
of termination of a distribution agreement between the Company or the Subsidiary
and such distributor, and the Company is not aware of the revocation or
impending revocation of any governmental permit necessary for the sale of the
Company's or the Subsidiary's products in any state or country in which any such
distributor has authority to sell such products.
(y) The Company has not received any notice, whether written or oral,
from any distributor, customer, or person or entity using any product of the
Company or the Subsidiary to return any products of the Company or the
Subsidiary in material quantities, which the Company knows or should know arises
from a defect or shortcoming in the Company's or the Subsidiary's product.
3. Representations and Warranties of the Underwriter. The Underwriter
represents and warrants to the Company that the information set forth (i) on the
cover page of the Prospectus with respect to price, underwriting discounts and
commissions and terms of offering and (ii) under "Underwriting" in the
Prospectus was furnished to the Company by the Underwriter for use in connection
with the preparation of the Registration Statement and the Prospectus and is
correct in all material respects.
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4. Purchase, Sale and Delivery of Common Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and sell to
the Underwriter the 3,000,000 Firm Common Shares. The Underwriter agrees to
purchase from the Company the Firm Common Shares. The purchase price per share
to be paid by the Underwriter to the Company shall be equal to the initial price
to the public per share less an amount per share equal to the per share
underwriting discount. The initial price to the public, which shall be a fixed
price, and the underwriting discount will be determined by separate agreement
among the Company and the Underwriter in substantially the form set forth as
Exhibit A hereto. It shall be a condition to this Agreement and the obligation
of the Company to sell and deliver the Firm Common Shares hereunder, and of you
to purchase the Firm Common Shares in the manner described herein, that you
shall purchase and pay for all the Firm Common Shares agreed to be purchased
hereunder upon tender to you of all such Firm Common Shares in accordance with
the terms hereof.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriter and payment therefor shall be made at the offices of Pacific
Growth Equities, Inc., 353 Sacramento Street, 16th Floor, San Francisco,
California (or such other place as may be agreed upon by the Company and the
Underwriter) at such time and date, not later than the third full business day
following the first date that any of the Common Shares are released by you for
sale to the public, as you shall designate by at least 48 hours prior notice to
the Company (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third full
business day following the first date that any of the Common Shares are released
by you for sale to the public or the date that is 48 hours after the date that
the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or
on behalf of the Company to you, against payment of the purchase price therefor
by certified or official bank or investment bank checks payable in next day
funds to the order of the Company. The certificates for the Firm Common Shares
shall be registered in such names and denominations as you shall have requested
at least two full business days prior to the First Closing Date, and shall be
made available for checking and packaging on the business day preceding the
First Closing Date at a location in New York, New York, as may be designated by
you. Time shall be of the essence, and delivery at the time and place specified
in this Agreement is a further condition to the obligations of the Underwriter.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to you to purchase up to an aggregate
of 450,000 Optional Common Shares at the purchase price per share to be paid for
the Firm Common Shares, for use solely in covering any over-allotments made by
you in the sale and distribution of the Firm Common Shares. The option granted
hereunder may be exercised at any time (but not more than once) within 45 days
after the first date that any of the Common Shares are released by you for sale
to the public, upon notice by you to the Company setting forth the aggregate
number of Optional Common Shares as to which the Underwriter is exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and place at which such certificates will be
delivered. Such time of delivery (which may not be earlier than the First
Closing Date), being herein referred to as the "Second Closing Date," shall be
determined by you, but if at any time other than the First Closing Date shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. Certificates for the Optional Common Shares will be
made available for checking and
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<PAGE>
packaging on the business day preceding the Second Closing Date at a location in
New York, New York, as may be designated by you. The manner of payment for and
delivery of the Optional Common Shares shall be the same as for the Firm Common
Shares as specified in the two preceding paragraphs. At any time before lapse of
the option, you may cancel such option by giving written notice of such
cancellation to the Company. If the option is cancelled or expires unexercised
in whole or in part, the Company will deregister under the Act the number of
Optional Common Shares as to which the option has not been exercised.
The Company agrees to issue to you on the First Closing Date, for an
aggregate price of $1,500, a Warrant (the "Warrant") to purchase an aggregate of
150,000 shares of Common Stock at a price per share equal to 130% of the initial
price to the public for the Common Shares specified in the pricing agreement
referred to in the first paragraph of this Section. The Warrant will be
exercisable at any time and from time to time on or after the first anniversary
of the effective date of the Registration Statement up to the fifth anniversary
of such date, on the terms set forth in the Warrant. The Warrant shall be
substantially identical to the form of Warrant filed as an exhibit to the
Registration Statement and shall entitle its holder(s) to all the rights set
forth therein.
Subject to the terms and conditions hereof, the Underwriter proposes to
make a public offering of the Common Shares as soon after the effective date of
the Registration Statement as in your judgment is advisable and at the public
offering price set forth on the cover page of and on the terms set forth in the
Prospectus.
5. Covenants of the Company. The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date this
Agreement is executed and delivered by the parties hereto, to become effective.
If the Registration Statement has become or becomes effective pursuant to Rule
430A of the Rules and Regulations, or the filing of the Prospectus is otherwise
required under Rule 424(b) of the Rules and Regulations, the Company will file
the Prospectus, properly completed, pursuant to the applicable paragraph of Rule
424(b) of the Rules and Regulations within the time period prescribed and will
provide evidence satisfactory to you of such timely filing. The Company will
promptly advise you in writing (i) of the receipt of any comments of the
Commission, (ii) of any request of the Commission for amendment of or supplement
to the Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information, (iii)
when the Registration Statement shall have become effective, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose. If the Commission shall enter any such stop order at any time, the
Company shall use its best efforts to obtain the lifting of such order at the
earliest possible moment. The Company shall not file any amendment or supplement
to the Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus of which you have not been furnished
with a copy a reasonable time prior to such filing or to which you reasonably
object or which is not in compliance with the Act and the Rules and Regulations.
(b) The Company shall prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus that in your judgment may be necessary or advisable to enable
you to continue the distribution of the Common Shares and shall use its best
efforts to cause the same to become effective as promptly as possible. The
Company shall fully and completely
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comply with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in reliance upon
such Rule.
(c) If at any time within the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares is
required to be delivered under the Act any event occurs, as a result of which
the Prospectus, including any amendments or supplements, would include an untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, or if
it is necessary at any time to amend the Prospectus, including any amendments or
supplements, to comply with the Act or the Rules and Regulations, the Company
shall promptly advise you thereof and shall promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will correct
such statement or omission or an amendment or supplement which will effect such
compliance and shall use its best efforts to cause the same to become effective
as soon as possible. In case the Underwriter is required to deliver a
prospectus after such nine-month period, the Company, upon request, but at the
expense of the Underwriter, shall promptly prepare such amendment or amendments
to the Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act.
(d) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company shall make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by the Underwriter or a dealer, the Company,
at its expense, but only for the nine-month period referred to in Section
10(a)(3) of the Act, shall furnish to you copies of the Registration Statement,
the Prospectus, the Preliminary Prospectus and all amendments and supplements to
any such documents in each case as soon as available and in such quantities as
you may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
shall comply with such laws and shall continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company shall advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, shall use its
best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company shall furnish
to you: (i) as soon as practicable after the end of each fiscal year, copies of
the Annual Report of the Company containing the balance sheet of the Company as
of the close of such fiscal
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year and statements of income, stockholders' equity and cash flows for the year
then ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies of
each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q,
Report on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of its Common
Stock.
(h) During the period of 180 days after the first date any of the Common
Shares are released by you for sale to the public, without your prior written
consent (which consent may be withheld in your sole discretion), the Company
shall not, other than upon the exercise of outstanding stock options and
warrants disclosed in the Prospectus, issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable with its Common Stock or other
equity security.
(i) The Company shall apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company shall use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the Company's
Common Stock in California), shall comply with such Blue Sky laws and shall
continue such qualifications, registrations and exemptions in effect for a
period of five years after the date hereof.
(k) Prior to the Second Closing Date, the Company shall not repurchase
or otherwise acquire any of the Company's Common Stock or declare or pay any
dividend or make any other distribution upon its Common Stock.
(l) For a period of five years after the date hereof, the Company shall
use its best efforts to maintain the listing of the Common Stock on the Nasdaq
National Market.
You may, in your sole discretion, waive in writing the performance by the
Company of any one or more of the foregoing covenants or extend the time for
their performance.
6. Payment of Expenses. Whether or not the transactions contemplated
hereunder are consummated or this Agreement becomes effective or is terminated,
the Company agrees to pay all costs, fees and expenses incurred by it in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Stock,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriter, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Selected Dealers Agreement and the Blue Sky Memorandum, (vi) all
filing fees, attorneys' fees and expenses
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incurred by the Company or the Underwriter in connection with qualifying or
registering (or obtaining exemptions from the qualification or registration of)
all or any part of the Common Shares for offer and sale under the Blue Sky laws,
and (vii) the filing fee of the NASD. In addition, the Company agrees to pay
you, at the First Closing, up to $50,000 as reimbursement for accountable
expenses incurred by you in connection with the purchase and sale of the Common
Shares. Except as provided in this Section 6, Section 8 and Section 10 hereof,
the Underwriter shall pay all of its expenses, including the fees and
disbursements of its counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky Memorandum
referred to above).
7. Conditions of the Obligations of the Underwriter. The obligations of
the Underwriter to purchase and pay for the Firm Common Shares on the First
Closing Date and the Optional Common Shares on the Second Closing Date shall be
subject to the accuracy of the representations and warranties on the part of the
Company herein set forth as of the date hereof and as of the First Closing Date
or the Second Closing Date, as the case may be, to the accuracy of the
statements of Company officers made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., Washington, D.C. Time, on the date of this Agreement, or at such
later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i) there
shall not have been any change in the capital stock of the Company other than
pursuant to the exercise of outstanding options and warrants disclosed in the
Prospectus or any material change in the indebtedness of the Company or the
Subsidiary, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no material verbal or written agreement or other
transaction shall have been entered into by the Company or the Subsidiary, that
is not in the ordinary course of business or that could result in a material
reduction in the future earnings of the Company, (iii) no loss or damage
(whether or not insured) to the property of the Company or the Subsidiary shall
have been sustained that materially and adversely affects or may affect the
condition (financial or otherwise), business, results of operations or prospects
of the Company, (iv) no legal or governmental action, suit or proceeding
affecting the Company that is material to the Company or that affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened, and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company that makes it impractical or inadvisable
in the judgment of the Underwriter to proceed with the public offering or
purchase of the Common Shares contemplated hereby.
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(c) There shall have been furnished to you on each Closing Date, in form
and substance satisfactory to you:
(i) An opinion of Stradley, Ronon, Stevens & Young, LLP, counsel
for the Company, addressed to the Underwriter and dated the First Closing
Date, or the Second Closing Date, as the case may be, as set forth in
Exhibit C-1 hereto.
In rendering such opinions, such counsel may rely (i) as to matters of
local law, on opinions of local counsel, (ii) as to matters relating to the
regulation of the development, testing, manufacture, labeling, advertising
or sale of cardiac electrophysiology products and medical devices generally
("Medical Device Laws"), on the opinion of King & Spalding, (iii) as to
matters of patent and other intellectual property matters on the opinion of
Wigman, Cohen, Leitner & Myers, P.C., and (iv) as to matters of fact, on
certificates of officers of the Company or governmental officials, provided
that such counsel's opinion states that such counsel is doing so and that
the Underwriter is justified in relying on such opinions or certificates
and that copies of such opinions of local counsel or certificates are
attached to such counsel's opinion.
(ii) An opinion of Wigman, Cohen, Leitner & Myers, P.C., special
patent counsel for the Company, addressed to the Underwriter and dated the
First Closing Date, or the Second Closing Date, as the case may be, as set
forth in Exhibit C-2 hereto.
(iii) An opinion of King & Spalding, special counsel for FDA
matters for the Company, addressed to the Underwriter and dated the First
Closing Date, or the Second Closing Date, as the case may be, as set forth
in Exhibit C-3 hereto.
In rendering such opinions, such counsel may rely as to matters of local
law on opinions of local counsel, and as to matters of fact on certificates
of officers of the Company or governmental officials, provided that such
counsel's opinion states that such counsel is so doing and that the
Underwriter is justified in relying on such opinions of local counsel or
certificates and that copies of such opinions of local counsel or
certificates are attached to such counsel's opinion.
(iv) Such opinion or opinions of Howard, Rice, Nemerovski, Canady,
Falk & Rabkin, A Professional Corporation, counsel for the Underwriter,
dated the First Closing Date or the Second Closing Date, as the case may
be, with respect to the incorporation of the Company, the sufficiency of
all corporate proceedings and other legal matters relating to this
Agreement, the validity of the Common Shares, the Registration Statement
and the Prospectus and other related matters as you may reasonably require,
and the Company shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may reasonably
request for the purpose of enabling them to pass upon such matters. In
connection with such opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental officials.
(v) A certificate of the Company executed by the Chief Executive
Officer or President and the chief financial or accounting officer of the
Company, dated the First Closing Date or the Second Closing Date, as the
case may be, to the effect that:
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(1) The representations and warranties of the Company set forth in
Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as
the case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied on or
prior to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus filed as
a part of the Registration Statement or any amendment thereto; no stop
order suspending the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective signers, no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus; in his
opinion and to the best of his knowledge, the Registration Statement and
the Prospectus and any amendments or supplements thereto contain all
statements required to be stated therein regarding the Company or the
Subsidiary; and neither the Registration Statement nor the Prospectus nor
any amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(4) Since the initial date on which the Registration Statement was
filed, no agreement, written or oral, transaction or event has occurred
that should have been set forth in an amendment to the Registration
Statement or in a supplement to or amendment of any prospectus which has
not been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, and except as disclosed in
or contemplated by the Prospectus, there has not been any material adverse
change or a development involving a material adverse change in the
condition (financial or otherwise), business, properties, results of
operations, management or prospects of the Company or the Subsidiary; no
legal or governmental action, suit or proceeding is pending or threatened
against the Company or the Subsidiary that is material to the Company,
whether or not arising from transactions in the ordinary course of
business, or that may adversely affect the transactions contemplated by
this Agreement; since such dates and except as so disclosed, neither the
Company nor the Subsidiary has entered into any verbal or written agreement
or other transaction that is not in the ordinary course of business or that
could result in a material reduction in the future earnings of the Company;
neither the Company nor the Subsidiary has incurred any material liability
or obligation, direct, contingent or indirect, made any change in its
capital stock, made any material change in its short-term debt or funded
debt or repurchased or otherwise acquired any of its capital stock; and the
Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to stockholders of
record on a date prior to such Closing Date; and
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<PAGE>
(6) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus and except as disclosed
in or contemplated by the Prospectus, neither the Company nor the
Subsidiary has sustained any material loss or damage by strike, fire,
flood, windstorm, accident or other calamity (whether or not insured).
(iv) On the date immediately preceding the date this Agreement is
executed, the First Closing Date, and the Second Closing Date (if
applicable), a letter addressed to the Underwriter from Arthur Anderson
LLP, independent accountants, dated the date of its delivery as specified
above, in form and substance satisfactory to you.
(vii) On or before the First Closing Date, each director of the
Company, each officer of the Company, and each person who owns
beneficially 3% or more of the outstanding shares of Common Stock
(calculated without regard to the offering contemplated hereby) or
options to purchase 3% or more of the outstanding shares of Common Stock
(calculated without regard to the offering contemplated hereby) as of the
date hereof, in form and substance satisfactory to you, confirming that
for a period of one year after the first date any of the Common Shares
are released by you for sale to the public, such person will not directly
or indirectly sell or offer to sell or otherwise dispose of any shares of
Common Stock or any right to acquire such shares without your prior
written consent, which consent may be withheld in your sole discretion.
All such opinions, certificates, letters and documents shall be deemed in
compliance with the provisions hereof only if they are satisfactory to you and
to Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
counsel for the Underwriter. The Company shall furnish you with such manually
signed or conformed copies of such opinions, certificates, letters and documents
as you request. Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriter shall be deemed to be a
representation and warranty by the Company to the Underwriter as to the
statements made therein.
If any condition to the Underwriter's obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company without liability on the part of the Underwriter or the Company except
for the expenses to be paid or reimbursed by the Company pursuant to Sections 6
and 8 hereof and except to the extent provided in Section 10 hereof.
8. Reimbursement of Underwriter's Expenses. Notwithstanding any other
provisions hereof, if this Agreement shall be terminated by you pursuant to
Section 7, or if the sale to the Underwriter of the Common Shares at the First
Closing is not consummated because of any refusal, inability or failure on the
part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you upon demand for all out-
of-pocket expenses that shall have been reasonably incurred by you in connection
with the proposed purchase and the sale of the Common Shares, up to a maximum of
$50,000, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated hereby. Any such
termination shall be without liability of any party to any other party except
that the provisions of this Section, Section 6 and Section 10 shall at all times
be effective and shall apply.
-15-
<PAGE>
9. Effectiveness of Registration Statement. You and the Company shall
use your and its best efforts to cause the Registration Statement to become
effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
10. Indemnification. (a) The Company agrees to indemnify and hold
harmless the Underwriter and each person, if any, who controls the Underwriter
within the meaning of the Act against any losses, claims, damages, liabilities
or expenses, joint or several, to which the Underwriter or any such controlling
person may become subject, under the Act, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required to
be stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part on any inaccuracy
in the representations and warranties of the Company contained herein or any
failure of the Company to perform its obligations hereunder or under law; and
will reimburse the Underwriter and each such controlling person for any legal
and other expenses as such expenses are reasonably incurred by the Underwriter
or such controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with the information furnished to the Company
pursuant to Section 3 hereof. In addition to its other obligations under this
Section 10(a), the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, or any inaccuracy in the representations and warranties of the
Company herein or failure to perform its obligations hereunder, all as described
in this Section 10(a), it will reimburse the Underwriter on a quarterly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter shall promptly return it to the Company together with
interest, compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) announced
from time to time by Bank of America NT&SA, San Francisco, California (the
"Prime Rate"). Any such interim reimbursement payments that are not made to the
Underwriter within 30 days of a request for reimbursement, shall bear interest
at the Prime Rate from the date of such request. This indemnity agreement will
be in addition to any liability that the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company, each
of its directors, each of its officers who signed the Registration Statement and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims,
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<PAGE>
damages, liabilities or expenses to which the Company, or any such director,
officer or controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 3 hereof; and will reimburse the Company, or any such director, officer
or controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to its other obligations under
this Section 10(b), the Underwriter agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 10(b) which relates to information
furnished to the Company pursuant to Section 3 hereof, it will reimburse the
Company on a quarterly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriter's obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return it to the Underwriter together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments that are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability that the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability it may have to any indemnified party for contribution or otherwise
under the indemnity agreement contained in this Section to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate
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<PAGE>
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed counsel in connection with the assumption
of legal defenses in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel, approved by the Underwriter
in the case of paragraph (a), representing the indemnified parties who are
parties to such action) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) If the indemnification provided for in this Section is required by
its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Underwriter from the offering of the Common Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Underwriter in connection with the statements or omissions or inaccuracies
in the representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriter shall be deemed to be in the same proportion, in the
case of the Company as the total price paid to the Company for the Common Shares
sold by it to the Underwriter (net of underwriting commissions but before
deducting expenses) bears to the total price to the public set forth on the
cover of the Prospectus, and in the case of the Underwriter as the underwriting
discounts and commissions received by it bears to the total price to the public
set forth on the cover of the Prospectus. The relative fault of the Company and
the Underwriter shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact or the inaccurate or the alleged
inaccurate representation and/or warranty relates to information supplied by the
Company or the Underwriter and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in subparagraph (c) of this Section, any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in
subparagraph (c) of this Section with respect to notice of commencement of any
action shall apply if a claim for contribution is to be made under this
subparagraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under subparagraph
(c) for purposes of indemnification. The Company and the Underwriter agree that
it would not be just and equitable if contribution pursuant to this Section were
determined solely by pro rata allocation or by any other method of allocation
that does not take account of the equitable considerations referred to in the
immediately preceding
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<PAGE>
paragraph. Notwithstanding the provisions of this Section, the Underwriter shall
not be required to contribute any amount in excess of the amount of the total
underwriting commissions received by the Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 10(a) and 10(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such an arbitration
would be limited to the operation of the interim reimbursement provisions
contained in Sections 10(a) and 10(b) hereof and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse expenses which is
created by the provisions of such Sections 10(a) and 10(b) hereof.
11. Effective Date. This Agreement shall become effective immediately
as to Sections 6, 8, 10, 12 and 13 and, as to all other provisions, (i) if at
the time of execution of this Agreement the Registration Statement has not
become effective, at 2:00 P.M., California time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams offering
the Common Shares for sale to securities dealers.
12. Termination. Without limiting the right to terminate this Agreement
pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you or
by you by notice to the Company at any time prior to the time this Agreement
shall become effective as to all its provisions, and any such termination
shall be without liability on the part of the Company to the Underwriter
(except for the expenses to be paid or reimbursed by the Company pursuant to
Sections 6 and 8 hereof and except to the extent provided in Section 10
hereof) or of the Underwriter to the Company (except to the extent provided
in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock Exchange or on
the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general
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<PAGE>
banking moratorium shall have been established by federal, New York or
California authorities, (ii) if an outbreak of major hostilities or other
national or international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in your judgment, to affect
adversely the marketability of the Common Shares or securities in general,
(iii) if any adverse event shall have occurred or shall exist which makes
untrue or incorrect in any material respect any statement or information
contained in the Registration Statement or Prospectus or which is not
reflected in the Registration Statement or Prospectus but should be reflected
therein in order to make the statements or information contained therein not
misleading in any material respect, or (iv) if there shall be any action,
suit or proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or the transactions contemplated by
this Agreement, which, in the reasonable judgment of the Underwriter, may
materially and adversely affect the Company's business or earnings and makes
it impracticable or inadvisable to offer or sell the Common Shares. Any
termination pursuant to this subsection (b) shall be without liability on the
part of the Underwriter to the Company or on the part of the Company to the
Underwriter (except for expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in
Section 10 hereof).
(c) This Agreement shall also terminate at 5:00 P.M., California time,
on the tenth full business day after the Registration Statement shall have
become effective if the initial public offering price of the Common Shares
shall not then as yet have been determined as provided in Section 4 hereof.
Any termination pursuant to this subsection (c) shall be without liability on
the part of the Underwriter to the Company or on the part of the Company to
the Underwriter (except for expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in
Section 10 hereof.)
13. Representations and Indemnities to Survive Delivery. The respective
indemnities, agreements, representations, warranties and other statements of the
Company, of its officers and of the Underwriter set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, as the
case may be, and will survive delivery of and payment for the Common Shares sold
hereunder and any termination of this Agreement.
14. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriter shall be mailed, delivered or telegraphed and confirmed
to you at 353 Sacramento Street, 16th Floor, San Francisco, California 94111,
Attention: C. Fred Toney, with a copy to Howard, Rice, Nemerovski, Canady, Falk
& Rabkin, A Professional Corporation, Three Embarcadero Center, Suite 700, San
Francisco, California 94111, Attention: Mark D. Whatley; and if sent to the
Company shall be mailed, delivered or telegraphed and confirmed to the Company
at 58 Route 46 West, Budd Lake, New Jersey 07828, Attention: David A. Jenkins,
with a copy to Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, Pennsylvania 19103-7098, Attention: Dean M. Schwartz. The
Company or you may change the address for receipt of communications hereunder by
giving notice to the others.
15. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives
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<PAGE>
and assigns, and no other person will have any right or obligation hereunder. No
such assignment shall relieve any party of its obligations hereunder. The term
"successors" shall not include any purchaser of the Common Shares as such from
the Underwriter merely by reason of such purchase.
16. Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
17. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the laws pertaining to conflicts
of laws) of the State of California.
18. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly
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<PAGE>
sign and return to us the enclosed copies hereof, whereupon it will become a
binding agreement among the Company and the Underwriter, all in accordance with
its terms.
Very truly yours,
EP MEDSYSTEMS, INC.
By:_____________________________
The foregoing Underwriting Agreement
is hereby confirmed and accepted by us
in San Francisco, California as of the
date first above written.
PACIFIC GROWTH EQUITIES, INC.
By: ___________________________________
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<PAGE>
EXHIBIT A
PRICE DETERMINATION AGREEMENT
Referring to Section 4 of the Underwriting Agreement dated __________
___, 1996, among the Company and Pacific Growth Equities, Inc., with respect to
the purchase and sale of the Common Shares, we hereby confirm our agreement that
the initial public offering price of the Common Shares shall be $____ per share;
that the underwriting discount shall be $______ per share; and that the purchase
price to be paid by the Underwriter for the Common Shares to be purchased from
the Company shall be $______ per share.
This Agreement may be executed in various counterparts which together
shall constitute one and the same Agreement.
PACIFIC GROWTH EQUITIES, INC.
By________________________________
EP MEDSYSTEMS, INC.
By_________________________________
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<PAGE>
EXHIBIT C-1
[Opinion of Company Counsel]
-24-
<PAGE>
EXHIBIT C-2
[Patent counsel opinion]
-25-
<PAGE>
EXHIBIT C-3
[FDA counsel opinion]
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<PAGE>
[PICTURE OF EAGLE APPEARS HERE]
NUMBER SHARES
EP
EP MedSystems, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY
CUSIP 26881P 10 3
- --------------------------------------------------------------------------------
THIS CERTIFIED THAT
SPECIMEN
is the owner of
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+ COUNTERSIGNED AND REGISTERED +
+ REGISTRAR AND TRANSFER CO. +
+ TRANSFER AGENT AND REGISTRAR +
+ BY +
+ +
+ AUTHORIZED SIGNATURE +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK
EP MedSystems, Inc.
transferable only on the books of the Corporation in person or by duly
authorized Attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, EP MedSystems, Inc. has caused the facsimile
signatures of its duly authorized officers and a facsimile of its corporate seal
to be hereunto affixed.
DATED
[CORPORATE SEAL OF EP MedSystems APPEARS HERE]
JAMES J. CARUSO, SECRETARY DAVID A. JENKINS, PRESIDENT
<PAGE>
DRAFT DATED JUNE 4, 1996
The securities represented by this Warrant are subject to restrictions on
transfer pursuant to Subsection (c)(7)(a) of Article III, Section 44 of the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
("Subsection (c)(7)(a)"). Prior to June __, 1997, these securities shall not be
sold, transferred, assigned, pledged or hypothecated except by operation of law
or by reason of the reorganization of the Company or otherwise in accordance
with Subsection (c)(7)(a).
WARRANT
To Subscribe for and Purchase Common Stock
of
EP MEDSYSTEMS, INC.
THIS CERTIFIES THAT, for value received, PACIFIC GROWTH EQUITIES, INC.
(the "Purchaser") or its registered assigns (each a "Holder"), is entitled to
subscribe for and purchase from EP MEDSYSTEMS, INC. (the "Company"), a
corporation organized and existing under the laws of the State of New Jersey, at
the price specified below (subject to adjustment as noted below) at any time
from and after the first anniversary of the date on which the Company's
Registration Statement on Form SB-2 (No. 333-3642) is declared effective by the
Securities and Exchange Commission (the "Effective Date"), to and including the
fifth anniversary of the Effective Date, 150,000 fully paid and nonassessable
shares of the Company's Common Stock (subject to adjustment as noted below, the
"Warrant Shares").
The purchase price for the Warrant Shares (subject to adjustment as
noted below, the "Exercise Price") shall be $_______ per share.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise. The rights represented by this Warrant may be exercised
--------
by the Holder hereof, in whole or in part, by written notice of exercise to the
Company ten (10) days prior to the intended date of exercise and by the
surrender of this Warrant (properly endorsed if required) at the principal
office of the Company and upon payment to it in cash or by check of the Exercise
Price for the Warrant Shares to be purchased upon such exercise. The Company
agrees that the Warrant Shares so purchased shall be, and are deemed to be,
issued to the Holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Subject to the provisions of the
next succeeding paragraph, certificates for the Warrant Shares so purchased
shall be delivered to the Holder within a reasonable time, not exceeding ten
(10) days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of Warrant Shares, if any, as to which this Warrant shall not then have
been exercised shall also be delivered to the Holder within such time.
2. Restriction on Transferability. Notwithstanding the foregoing, the
------------------------------
Company shall not be required to deliver any certificate for Warrant Shares
except in
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<PAGE>
DRAFT DATED JUNE 4, 1996
accordance with the provisions, and subject to the limitations, of Paragraph 7
hereof and the restrictive legend under the heading "Restriction on Transfer"
below. This Warrant shall not be sold, transferred, assigned or hypothecated for
a period of one (1) year from the Effective Date except to persons who are bona
fide officers or partners of the Purchaser, by operation of law, or by reason of
the reorganization of the Company.
3. Covenants of the Company. The Company covenants and agrees that
------------------------
(i) all Warrant Shares will, upon issuance, be duly authorized and validly
issued, fully paid and nonassessable and (ii) during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or transfer upon
exercise of the rights evidenced by this Warrant, a sufficient number of shares
of its Common Stock to provide for the exercise of the rights represented by
this Warrant.
4. Anti-Dilution Adjustments. The provisions of this Warrant are
-------------------------
subject to the following:
(a) The Exercise Price shall, from and after the date of issuance
of this Warrant, be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the Exercise Price, the Holder of this Warrant
shall thereafter be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
(b) In case the Company shall (i) declare a dividend upon the
Common Stock payable in (A) Common Stock (other than a dividend declared to
effect a subdivision of the outstanding shares of Common Stock, as described in
paragraph (c) below), (B) any obligations or any shares of capital stock of the
Company that are convertible into or exchangeable for Common Stock ("Convertible
Securities"), or (C) any rights or options to purchase Common Stock or
Convertible Securities, or (ii) declare any other non-cash dividends or make any
other non-cash distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus, then thereafter the Holder of this Warrant, upon any
exercise hereof, will be entitled to receive the number of shares of Common
Stock to which such Holder shall be entitled upon such exercise, and, in
addition, and without further payment therefor, each dividend described in
clause (i) above and each dividend or distribution described in clause
(ii) above that such Holder would have received by way of dividends or
distributions if continuously since such Holder became the record holder of this
Warrant such Holder had been the record holder of the number of shares of Common
Stock then received upon the exercise hereof and had retained all dividends or
distributions in stock or securities (including Common Stock or Convertible
Securities, or in any rights or options to purchase any Common Stock or
Convertible Securities) payable in respect of such Common Stock or in respect of
any stock or securities paid as dividends or distributions and originating
directly or indirectly from such Common Stock. For the purpose of the foregoing,
a non-cash dividend or distribution shall be considered payable out of earnings
or earned surplus only to the extent that such earnings or earned surplus are
charged an amount equal to
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DRAFT DATED JUNE 4, 1996
the fair value of such dividend or distribution as determined by the Board of
Directors of the Company.
(c) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the Exercise Price in
effect immediately prior to such subdivision shall be proportionately reduced,
and, conversely, in case the outstanding shares of Common Stock of the Company
shall be combined into a smaller number of shares, the Exercise Price in effect
immediately prior to such combination shall be proportionately increased.
(d) If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation (a "Reorganization") shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition of such
Reorganization, lawful and adequate provision shall be made whereby the Holder
hereof shall thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in this Warrant and in lieu of the
Warrant Shares immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock, securities or
assets as may be issued or payable as to or in exchange for a number of
outstanding shares or other units of the same class of securities as the Warrant
Shares equal to the number of Warrant Shares immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby had such
Reorganization not taken place. In any such case appropriate provision shall be
made as to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including provisions for adjustments of the Exercise
Price and of the number of securities purchasable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof, and references to "Warrant Shares" or "Common Stock" shall apply, after
any Reorganization, mutatis mutandis, to all such shares, securities or assets.
The Company shall not effect any such Reorganization unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the Holder
hereof at the last address of such Holder appearing on the books of the Company,
the obligation to deliver to such Holder such Warrant Shares as, in accordance
with the foregoing provisions, such Holder may be entitled to purchase.
(e) Upon any adjustment of the Exercise Price, then and in each
such case the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder of this Warrant at the address of such
Holder as shown on the books of the Company, which notice shall state the
Exercise Price resulting from such adjustment and the increase or decrease, if
any, in the number of Warrant Shares purchasable at such price, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(f) In case at any time:
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DRAFT DATED JUNE 4, 1996
(i) the Company shall declare any cash dividend on its Common
Stock at a rate in excess of the rate of the last cash dividend theretofore
paid;
(ii) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of its Common Stock;
(iii) the Company shall offer the subscription to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(iv) there shall be any Reorganization; or
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the Holder of this Warrant at
the address of such Holder as shown on the books of the Company, of the date on
which (A) the books of the Company shall close or a record shall be taken for
such dividend, distribution or subscription rights, or (B) such Reorganization,
dissolution, liquidation or winding up shall take place, as the case may be.
Such notice shall also specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange his or her Common Stock for securities
or other property deliverable upon such Reorganization, dissolution, liquidation
or winding up, as the case may be. Such written notice shall be given at least
twenty (20) days prior to the action in question and not less than twenty (20)
days prior to the record date or the date on which the Company's transfer books
are closed in respect thereto.
(g) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share that would
otherwise be issuable, the Company shall pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the Holder hereof upon such
exercise) in respect of such fraction in an amount equal to the same fraction of
the market price per share of Common Stock as of the close of business on the
date of the notice required by Paragraph 1 above. "Market price" for purposes
of this Paragraph 4(g) and for purposes of Paragraph 10(d) hereof shall mean, if
the Common Stock is traded on a securities exchange or on the Nasdaq National
Market, the closing price of the Common Stock on such exchange or the Nasdaq
National Market, or, if the Common Stock is otherwise traded in the over-the-
counter market, the closing bid price, in each case averaged over a period of
twenty (20) consecutive business days prior to the date as of which "market
price" is being determined. If at any time the Common Stock is not traded on an
exchange or the Nasdaq National Market, or otherwise traded in the over-the-
counter market, the "market price" shall be deemed to be the higher of (i) the
book value thereof as determined by any firm of independent public accountants
of recognized standing selected by the Board of Directors of the Company as of
the last day of any month ending within sixty (60) days preceding the date as of
which the determination is to be
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DRAFT DATED JUNE 4, 1996
made, or (ii) the fair value thereof determined in good faith by the Board of
Directors of the Company as of a date that is within fifteen (15) days of the
date as of which the determination is to be made.
5. Common Stock. As used herein, the term "Common Stock" shall mean
------------
and include the Company's presently authorized Common Stock, no par value, and
shall also include any capital stock of any class of the Company hereafter
authorized which shall not be limited to a fixed sum percentage in respect of
the rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company; provided, that the shares purchasable
pursuant to this Warrant shall include shares designated as Common Stock of the
Company on the date of original issue of this Warrant or, in the case of any
Reorganization, the stock, securities or assets provided for in Paragraph 4(d)
above.
6. No Voting Rights. This Warrant shall not entitle the holder hereof
----------------
to any voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of Shares. The Holder of
-------------------------------------------------
this Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant or transferring any Warrant Shares of such
Holder's intention to do so, describing briefly the manner of any proposed
transfer of this Warrant or such Holder's intention as to the disposition to be
made of Warrant Shares. Such Holder shall also provide the Company with an
opinion of counsel reasonably satisfactory to the Company to the effect that the
proposed transfer of this Warrant or Warrant Shares may be effected without
registration or qualification of this Warrant or the Warrant Shares under any
applicable federal or state securities laws. Upon receipt of such written
notice and opinion by the Company, such Holder shall be entitled to transfer
this Warrant, or to exercise this Warrant in accordance with its terms and
dispose of the Warrant Shares received upon such exercise or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice and opinion delivered by such Holder to
the Company, provided that an appropriate legend, if any, respecting the
aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for such Warrant Shares.
8. Transferability. Subject to the provisions of Paragraph 2 and
---------------
Paragraph 7 hereof, this Warrant and all rights hereunder are transferable, in
whole or in part, at the principal office of the Company by the Holder hereof in
person or by duly authorized attorney, upon surrender of this Warrant properly
endorsed. Each taker and holder of this Warrant, by taking or holding the same,
consents and agrees that the bearer of this Warrant, when endorsed, may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented by this Warrant, or to the transfer hereof on the books of
the Company, any notice to the contrary notwithstanding; but until such transfer
on such books, the Company may treat the registered Holder hereof as the owner
for all purposes.
This Warrant is exchangeable, upon the surrender hereof by the Holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the
-5-
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DRAFT DATED JUNE 4, 1996
aggregate the right to subscribe for and purchase the number of Warrant Shares
that may be subscribed for and purchased hereunder (as adjusted), each such new
Warrants to represent the right to subscribe for and purchase such number of
Warrant Shares as shall be designated by said Holder at the time of such
surrender.
9. Registration Rights. The Holder of this Warrant and of the Warrant
-------------------
Shares issuable or issued upon the exercise hereof shall be entitled to the
registration, related indemnification, and other rights set forth in Exhibit "A"
attached hereto.
10. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the Holder
of this Warrant under the terms hereof, such Holder shall have the right (the
"Conversion Right") to convert this Warrant or any portion thereof into shares
of Common Stock as provided in this Paragraph 10 at any time or from time to
time after the first anniversary of the date hereof and prior to its expiration,
subject to the restrictions set forth in subparagraph (c) below. Upon exercise
of the Conversion Right as to a particular number of Warrant Shares (the
"Converted Warrant Shares"), the Company shall deliver to the Holder of this
Warrant, without payment by the Holder of any exercise price or any cash or
other consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the Converted
Warrant Shares by the fair market value (as defined in Paragraph (d) below) of a
single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value" of the
Converted Warrant Shares shall be determined by subtracting the aggregate
Exercise Price of the Converted Warrant Shares from the aggregate fair market
value of the Converted Warrant Shares. Notwithstanding anything in this
Paragraph 10 to the contrary, the Conversion Right cannot be exercised as to a
number of Converted Warrant Shares having a Net Value below $100. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the holder of this Warrant an
amount in cash equal to the fair market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the Holder of this
Warrant by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of Warrant Shares that
are being surrendered (referred to in Paragraph (a) above as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the Holder of this Warrant within fifteen (15) days following the
Conversion Date.
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<PAGE>
DRAFT DATED JUNE 4, 1996
(c) In the event the Conversion Right would, at any time this
Warrant remains outstanding, be reasonably deemed by the Company's independent
certified public accountants to give rise to a charge to the Company's earnings
for financial reporting purposes, then the Conversion Right shall automatically
terminate upon the receipt by the Holder of this Warrant of an opinion of such
independent certified public accountants, in a form reasonably satisfactory to
such holder, as to such adverse accounting treatment.
(d) For purposes of this Paragraph 10, the "fair market value" of a
share of Common Stock as of a particular date shall be its "market price,"
calculated as described in Paragraph 4(g) hereof.
11. Miscellaneous. Neither this Warrant nor any term hereof may be
-------------
changed, waived, discharged or terminated except by a written instrument
executed by the party against whom enforcement of the change, waiver, discharge
or termination is sought. All questions concerning this Warrant will be
governed and interpreted and enforced in accordance with the internal laws of
the State of New Jersey, without regard to principles of conflicts of laws
thereof. Each provision of this Warrant shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Warrant is held to be invalid, illegal or unenforceable under any applicable law
or rule in any jurisdiction, such provision will be ineffective only to the
extent of such invalidity, illegality or unenforceability in such jurisdiction,
without invalidating the remainder of this Warrant in such jurisdiction or any
provision hereof in any other jurisdiction.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and delivered by its duly authorized officers as of June __, 1996.
EP MEDSYSTEMS, INC., a New Jersey
corporation
By:_________________________________________
DAVID A. JENKINS
Chief Executive Officer
Attest:_____________________________________
______________________________
Secretary
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DRAFT DATED JUNE 4, 1996
RESTRICTIONS ON TRANSFER
The securities evidenced hereby have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or any applicable state
securities law and therefore such securities may not be resold, transferred or
pledged without (i) the registration of such securities under the Securities Act
or applicable state securities laws, or (ii) an opinion of counsel satisfactory
to the company to the effect that such registration is not necessary.
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<PAGE>
DRAFT DATED JUNE 4, 1996
WARRANT ASSIGNMENT
(To Be Executed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned ____________________________ hereby
sells, assigns and transfers unto ___________________________________ this
Warrant, and appoints ___________________________ attorneys to transfer this
Warrant on the books of the Company with the full power of substitution in the
premises.
Dated:_____________________ ___________________________________________
Signature
___________________________________________
Printed Name
___________________________________________
Authority (if applicable)
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<PAGE>
DRAFT DATED JUNE 4, 1996
WARRANT EXERCISE
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part
To: EP MedSystems, Inc. (the "Company")
The undersigned_____________________________________________________________
(please insert Social Security or other identifying number of Subscriber)
____________________________________________________________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, _______ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the Company in
the amount of $__________, such payment being made as provided on the face of
this Warrant.
The undersigned requests that certificates for such shares of Common Stock
be issued as follows:
Name:________________________________________________
Address:_____________________________________________
Deliver to:__________________________________________
Address:_____________________________________________
and, if such number of shares of Common Stock shall not be all the Warrant
Shares purchasable hereunder, that a new Warrant evidencing the right to
purchase the balance remaining of the Warrant Shares purchasable under this
Warrant be registered in the name of, and delivered to, the undersigned at the
address stated above.
Dated:________________ _______________________________________________
Signature
_______________________________________________
Printed Name
_______________________________________________
Authority (if applicable)
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<PAGE>
DRAFT DATED JUNE 4, 1996
EXHIBIT "A" to Warrant
REGISTRATION RIGHTS
1. Definitions.
-----------
a. Except as otherwise expressly set forth herein, all capitalized
terms used herein shall have the meanings ascribed to them in that certain
Warrant (the "Warrant") to which this Exhibit A is attached.
b. "Purchased Securities" shall mean the Warrant (together with any
warrant or warrants issued in substitution or exchange therefor) and the Warrant
Shares issuable upon exercise of the Warrant or in exchange or substitution
therefor, whether or not such securities (other than such Warrant) have in fact
been issued, and the stock or other securities of the Company issued in a stock
split or reclassification of, or a stock dividend or other distribution on or in
substitution or exchange for, or otherwise in connection with, any of the
foregoing securities, or in a merger or consolidation involving the Company or a
sale of all or substantially all of the Company's assets.
c. For purposes hereof, the record holder of the Warrant shall be
treated as the record holder of the related Warrant Shares then issuable upon
the exercise or conversion thereof. Nothing in this Section shall, however, be
deemed to require the Company to register the Warrant, it being understood that
the registration rights granted hereby relate only to Warrant Shares and
securities issued in substitution or exchange therefor.
2. Required Registration. If the Company shall receive a written
---------------------
request therefor from any record holder or holders of an aggregate of at least a
majority of the Warrant Shares not theretofore registered under the Securities
Act of 1933, as amended (the "Securities Act") and sold, the Company shall
prepare and file a registration statement under the Securities Act covering the
Warrant Shares that are the subject of such request and shall use its best
efforts to cause such registration statement to become effective. In addition,
upon the receipt of such request, the Company shall promptly give written notice
to all other record holders of Warrants or Warrant Shares that such registration
is to be effected. The Company shall include in such registration statement
such Warrant Shares for which it has received written requests to register by
such other record holders within twenty (20) days after the delivery of the
Company's written notice to such other record holders. The Company shall be
obligated to prepare, file and cause to become effective only one registration
statement pursuant to this Section 2 and to pay all costs and expenses
associated with such registration statement. Notwithstanding the foregoing, the
record holder or holders of an aggregate of at least a majority of the Purchased
Securities not theretofore registered under the Securities Act and sold may
require the Company, pursuant to this Section 2, to prepare, file and cause to
become effective any number of registration statements but such holder or
holders shall bear their own costs and expenses and reimburse the Company for
its costs and expenses associated with such registration statements and the
Company shall not be required to comply with more than two such requests per
year. In the event that the holders of a majority of the Purchased Securities
for which registration has been requested pursuant
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DRAFT DATED JUNE 4, 1996
to this Section 2 determine for any reason not to proceed with a registration at
any time before a registration statement has been declared effective by the
Securities and Exchange Commission (the "Commission"), and such registration
statement, if theretofore filed with the Commission, is withdrawn as to the
Warrant Shares covered thereby, and the holders of such Purchased Securities
agree to bear their own expenses incurred in connection therewith and to
reimburse the Company for the expenses incurred by it attributable to the
registration of such Warrant Shares, then the holders of such Purchased
Securities shall not be deemed to have exercised their right to require the
Company to register Warrant Shares pursuant to this Section 2.
If at the time any written request for registration is received by the
Company pursuant to this Section 2, the Company has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its Common Stock by it or any of its security holders, such written request
shall be deemed to have been given pursuant to Section 3 hereof rather than this
Section 2, and the rights of the holders of Purchased Securities covered by such
written request shall be governed by Section 3 hereof.
Without the written consent of the holders of a majority of the Purchased
Securities for which registration has been requested pursuant to this Section 2,
neither the Company nor any other holder of securities of the Company may
include securities in such registration if in the good faith judgment of the
managing underwriter, if any, of such public offering the inclusion of such
securities would interfere with the successful marketing of the Warrant Shares
or require the exclusion of any portion of the Warrant Shares to be registered.
The rights granted by this Section 2 may be transferred to and are
exercisable by subsequent transferees of any Purchased Securities, except as to
shares of Purchased Securities that have been registered under the Securities
Act and sold.
3. Incidental Registration. Each time the Company shall determine to
-----------------------
proceed with the actual preparation and filing of a registration statement under
the Securities Act in connection with the proposed offer and sale for cash of
any of its Common Stock by it or any of its security holders (other than a Form
S-4 or Form S-8 or similar registration statement), the Company will give
written notice of such determination to all record holders of Purchased
Securities not theretofore registered under the Securities Act and sold. Upon
the written request of a record holder of any Purchased Securities given within
twenty (20) days after receipt of any such notice from the Company, the Company
will, except as herein provided, cause all Warrant Shares as to which the record
holders of Purchased Securities have so requested registration, to be included
in such registration statement, all to the extent requisite to permit the sale
or other disposition by the prospective seller or sellers of the Warrant Shares
to be so registered; provided, however, that nothing herein shall prevent the
Company from, at any time, abandoning or delaying any registration. If any
registration pursuant to this Section 3 shall be underwritten in whole or in
part, the Company may require that the Warrant Shares requested for inclusion
A-2
<PAGE>
DRAFT DATED JUNE 4, 1996
pursuant to this Section 3 be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. In
the event the Warrant Shares requested for inclusion pursuant to this Section 3
would constitute more than 25% of the total number of shares to be included in a
proposed underwritten public offering, and if in the good faith judgment of the
managing underwriter of such public offering the inclusion of all of the Warrant
Shares originally covered by a request for registration would reduce the number
of shares to be offered by the Company or interfere with the successful
marketing of the shares to be offered by the Company, the number of Warrant
Shares otherwise to be included in such underwritten public offering may be
reduced proportionately (by number of shares) among the holders thereof
requesting such registration; provided, however, that, after any such required
reduction, the Warrant Shares to be included in such offering shall constitute
at least 25% of the total number of shares to be included in such offering.
The rights granted by this Section 3 may be transferred to and are
exercisable by subsequent transferees of any Purchased Securities, except as to
Warrant Shares that have been registered under the Securities Act and sold.
4. Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of Section 2 or 3 hereof to effect the registration of Warrant
Shares under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
for the sale of such Warrant Shares and use its best efforts to cause such
registration statement to become and remain effective for not less than two
years or until all Warrant Shares covered by such registration statement have
been sold, whichever is earlier (but not before the expiration of the
requirements of Section 4(3) of the Securities Act and Rule 174 thereunder, if
applicable).
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for a period of
not less than two years or until all Warrant Shares covered by such registration
statement have been sold, whichever is earlier (but not before the expiration of
the requirements of Section 4(3) of the Securities Act and Rule 174 promulgated
thereunder, if applicable).
(c) furnish to the holders of Purchased Securities participating in
such registration and to the underwriters, if any, of the Warrant Shares being
registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
underwriters, if any, may reasonably request in order to facilitate the public
offering of such Warrant Shares;
(d) use its best efforts to register or qualify the Warrant Shares
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as such participating holders may reasonably request
in writing within ten (10) days following the original filing of such
registration statement, except that the Company shall not for any purpose be
required to execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified;
A-3
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DRAFT DATED JUNE 4, 1996
(e) notify the holders of Purchased Securities participating in
such registration, promptly after it shall receive notice thereof, of the time
when such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) prepare and file with the Commission, promptly upon the request
of any such holders, any amendments or supplements to such registration
statement or prospectus that, in the opinion of counsel for such holders and
counsel for the Company is required under the Securities Act or the rules and
regulations thereunder in connection with the distribution of the Purchased
Securities by such holders;
(h) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders shall
have reasonably objected on the grounds that such amendment or supplement does
not comply in all material respects with the requirements of the Securities Act
or the rules and regulations thereunder, after having been furnished with a copy
thereof at least three (3) business days prior to the filing thereof, unless in
the opinion of counsel for the Company the filing of such amendment or
supplement is reasonably necessary to protect the Company from any liabilities
under any applicable federal or state law and such filing will not violate
applicable law;
(i) if, at any time, in the sole judgment of the Company, it is
advisable to suspend use of a prospectus due to (i) any request by the
Commission or any other federal or state governmental authority for amendments
or supplements to such registration statement or prospectus or for additional
information; (ii) the issuance by the Commission or any other federal or state
governmental authority of any stop order suspending the effectiveness of such
registration statement or the initiation or threat of any proceedings for that
purpose; (iii) the receipt by the Company of any notification as to the
suspension of the qualification or exemption of any of the Purchased Securities
for sale in any jurisdiction or the initiation or threat of any proceeding for
such purpose; (iv) the existence of any fact or the happening of any event that
makes any statement of a material fact in such registration statement or
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue or that would require the making of any changes in such
registration statement or prospectus in order that, in the case of a
registration statement, it will not contain any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of a prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; (v) the Company's determination that
a post-effective amendment to such registration statement would be appropriate
or (vi) material corporate developments or similar material events that have not
yet been publicly disclosed and as to which the Company believes public
disclosure will be prejudicial to the Company, the Company shall immediately
give notice to such holders to the effect of the foregoing and to the effect
A-4
<PAGE>
DRAFT DATED JUNE 4, 1996
that any further sales or distribution of the Purchased Securities pursuant to
the registration statement and/or the prospectus must cease, and, upon receipt
of such notice, no holder shall resume use of such prospectus until it is
advised in writing by the Company that the prospectus may be used and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such prospectus. The Company will use
its best efforts to ensure that the use of the prospectus may be resumed as soon
as practicable; provided, however, that in the case of a pending material
development or similar material event referred to in clause (vi) above, such
time period will be as soon, in the sole judgment of the Company, as disclosure
of the material relating to such pending development or event would not be
unreasonably prejudicial to the Company and provided, further, that the Company
shall not allow any period of suspension that is due to a cause referred to in
clause (iv) or (v) above to continue for more than thirty (30) days and shall
not allow suspension due to a material corporate development or similar material
corporate event referred to in clause (vi) above (an "Event Suspension Period")
to continue for more than thirty (30) days unless the Company shall deliver to
such holders a second notice to the effect set forth above, which shall have the
effect of extending the Event Suspension Period by up to an additional fifteen
(15) days. In no event shall the Company extend an Event Suspension Period
beyond such forty-five (45) day period. Any suspension of the use of a
prospectus pursuant to this subparagraph shall also suspend the running of the
two-year period during which the Company is required to keep the registration
statement effective and file required amendments and supplements.
Notwithstanding the foregoing, the Company shall not under any circumstances be
entitled to exercise its rights under this subparagraph to suspend the use of a
prospectus more than one (1) time in any three (3) month period or two (2) times
in any twelve (12) month period; and
(j) at the request of any such holder, furnish (i) an opinion,
dated as of the closing date, of the counsel representing the Company for the
purposes of such registration, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii) letters
dated as of the effective date of the registration statement and as of the
closing date, from the independent certified public accountant of the Company,
addressed to the underwriters, if any, and to the holder or holders making such
request (if such holder or holders may be considered underwriters of the
Purchased Securities), covering such matters as such underwriters and holder or
holders may reasonably request.
5. Expenses. As to registrations described in Section 2 or Section 3
--------
hereof (except as otherwise provided in such Section 2 or Section 3), the
Company shall bear the following fees, costs and expenses: all registration,
SEC filing and NASD fees, printing expenses, fees and disbursements of counsel
and accountants for the Company, fees and disbursements of counsel for the
underwriter or underwriters of such securities (if the Company is otherwise
required to bear such fees and disbursements), all internal Company expenses and
all legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified. Fees and disbursements of counsel
and accountants for the selling security holders, underwriting discounts and
commissions and
A-5
<PAGE>
DRAFT DATED JUNE 4, 1996
transfer taxes relating to the shares included in the offering by the selling
security holders, shall be borne proportionately by the selling security
holders.
6. Indemnification.
---------------
(a) The Company will indemnify and hold harmless each holder of
Purchased Securities for whom Warrant Shares are included in a registration
statement pursuant to the provisions of Section 2 or 3 hereof, its directors and
officers, and any underwriter (as defined in the Securities Act) for such holder
and each person, if any, who controls such holder or such underwriter within the
meaning of the Securities Act, from and against, and will reimburse such holder
and each such underwriter and controlling person as to, any and all loss,
damage, liability, cost and expense to which such holder or any such underwriter
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein, including any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
(b) Each holder of Purchased Securities for whom Warrant Shares are
included in a registration pursuant to the provisions of Section 2 or 3 hereof
will indemnify and hold harmless the Company, its directors and officers, and
controlling persons and any underwriter from and against, and will reimburse the
Company, its directors and officers, any controlling person and any underwriter
as to, any and all loss, damage, liability, cost or expense to which the Company
or any controlling person and/or any underwriter may become subject under the
Securities act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are cause by any untrue or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
strict conformity with written information furnished by such holder specifically
for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 6 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying
A-6
<PAGE>
DRAFT DATED JUNE 4, 1996
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability it may have to any
indemnified party, except if such failure so to notify materially prejudices the
ability of the indemnifying party to defend against such action. In case such
action is brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party shall have the right
to participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and counsel for the indemnifying party shall have reasonably
concluded that there may be a conflict of interest involved in the
representation by such counsel of both the indemnifying party and the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel, satisfactory to the indemnifying party, to participate
in the defense of such action on behalf of such indemnified party or parties (it
being understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel representing the indemnified
parties who are parties to such action). After notice from the indemnifying
party to such indemnified party of its election to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party pursuant to
the provisions of said paragraph (a) or (b) for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the proviso of
the preceding sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnifying
party within a reasonable time after notice of the commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm for all indemnified parties.
7. Availability of Registration Rights. The right to registration
-----------------------------------
pursuant hereto shall commence on the first anniversary of the Effective Date
(as defined in the Warrant to which these Registration Rights are attached) and
shall terminate as to the provisions of Section 2 hereof, on the fifth
anniversary of the Effective Date, and as to the provisions of Section 3 hereof,
on the seventh anniversary of the Effective Date.
A-7
<PAGE>
Stradley, Ronon, Stevens & Young LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215)564-8000
June 13, 1996
EP MedSystems, Inc.
58 Route 46 West
Budd Lake, New Jersey 07828
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to and for EP MedSystems, Inc., a New Jersey
corporation (the "Company"), in connection with the preparation and filing of
a Registration Statement on Form SB-2 (Registration No. 333-3642), as amended
by Amendments No. 1 and 2 (the "Registration Statement"), filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), for the purpose of registering up to 3,450,000 shares
(the "Shares") of its common stock, no par value per share (the "Common
Stock").
We have examined the Company's Amended and Restated Certificate of
Incorporation, Bylaws, as amended, resolutions of the Board of Directors of
the Company and such other documents, instruments and records as we deemed
necessary or appropriate for purposes of rendering this opinion.
In rendering this opinion, we have assumed and relied upon, without
independent investigation, other than the inquiry referred to above, (i) the
authenticity, completeness, truth and due authorization, execution and
delivery of all documents submitted to us as originals, (ii) the genuineness
of all signatures on all documents submitted to us as originals and (iii) the
conformity to the originals of all documents submitted to us as certified or
photostatic copies.
The laws covered by the opinions expressed herein are limited to (a) the
Federal statutes, judicial decisions and rules and regulations of the
governmental agencies of the United States and (b) the New Jersey Business
Corporation Act.
This opinion is given only with respect to laws and regulations presently in
effect. We assume no obligation to advise you of any changes in law or
regulation which may hereafter occur, whether the same are retroactively or
prospectively applied, or to update or supplement this letter in any fashion
to reflect any facts or circumstances which hereafter come to our attention.
Based upon, and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Shares of Common Stock of the Company covered by the
Registration Statement have been duly authorized and, when sold, issued and
paid for as contemplated by the Registration Statement, will be validly
issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and we further consent to the reference to our firm
under the caption "Legal Matters" in the Prospectus constituting a part of
this Registration Statement.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
/s/ Dean M. Schwartz
By________________________________________
Dean M. Schwartz, a Partner
<PAGE>
PROMISSORY NOTE
$50,000 MAY 13, 1996
FOR VALUE RECEIVED, EP MEDSYSTEMS, INC. (The "Maker) hereby promises to
pay to Hi-Tronics Design, Inc. (The "Lender"), in lawful money of the United
States of America, the principal sum of Fifty Thousand Dollars (50,000.00), with
interest on the unpaid balance of said principal sum.
Payment of the principal balance of this Note shall be on June 30,1996.
This Note shall bear interest on the outstanding principal balance at a constant
rate of 9.25% per year from the data hereof. Interest shall be accrued and paid
at maturity on June 30, 1996.
The Maker, at its sole option, may prepay my amount of principal or
interest due on the Note at any time without penalty. Any prepayment shall be
applied first to any interest that is accrued, and then shall be applied to
reduce the entire principal balance before any prepayment is applied to interest
that has not accrued.
In the event the Maker fails to make any payment hereunder within fifteen
(15) days of its due date, this Note shall be in default upon fifteen (15) days
following written notice to Maker by Lender and unless cured, all payments due
hereunder shall be accelerated and immediately due and payable upon demand by
the holder. If this Note is placed in the hands of an attorney for collection,
(whether or not any suit or judicial proceedings is instituted), the maker
agrees to pay a reasonable amount for attorneys' fees in addition to all other
amounts which may be due and owing hereunder.
This Note is not negotiable.
This Note is made and delivered in the State of New Jersey.
MAKER:
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
-------------------------------
David A. Jenkins, President
<PAGE>
EXCLUSIVE RIGHTS AGREEMENT
AGREEMENT made this 28 day of May 1996 by and between Spire Corporation, a
Massachusetts corporation with its principal place of business at One Patriots
Park, Bedford, Massachusetts 01730 ("Spire") and EP MedSystems, Inc. a New
Jersey corporation with its principal place of business at 28 Route 48 West,
Budd Lake, New Jersey 07828 ("EP")
WHEREAS, Spire has developed a process for metalizing medical devices using
ion beam technologies and desires to give EP the opportunity to investigate and
use this process; and
WHEREAS, EP is interested in developing the clinical and commercial
potential of the ion beam technologies to improve the surface properties of
certain of its medical devices.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, IT IS AGREED:
1. Process Covered. The process covered by this Agreement is Spire's
---------------
proprietary ion beam assisted deposition process for metalization
(SPI-MET/TM/, including all improvements thereto, if any, developed during the
Term, as defined below (the "Process").
2. Products Covered. The products covered by this Agreement are
----------------
Electrophysiology Catheters and Accessories, known collectively as "Products."
Products treated with the Process may hereinafter be referred to as "Processed
Products." This agreement explicitly excludes metalized introducer sheaths and
neurointerventional products. Electrophysiology catheters shall mean
non-implantable catheters used to sense electrical activity from the heart or
subordinate cardiovascular systems or to deliver electrical energy to the heart
or subordinate cardiovascular systems to excite or abate coronary cells. The
definition of the Products shall include all incremental modifications and
improvements made thereto during the Term of this Agreement, subject to the
following paragraph
1
<PAGE>
Spire shall not be required by this agreement to treat Products with the
Process where modifications or improvements to the Products made by EP result in
increased treatment costs, unless Spire and EP negotiate a revised price per
unit for treating the Product with the Process per unit.
3. Term. The term of this Agreement shall be five (5) years ("Term"),
----
commencing on the date hereof and may be extended for additional two (2) - year
terms upon mutual agreement. Following the expiration of the term as stated
herein, and if Spire declines to agree to either of the additional two year
extensions, Spire shall make the Process available to EP on a non-exclusive
basis, at then current rates, for a period of five (5) years. This obligation is
contingent upon the negotiation by Spire and EP of minimum annual volumes of
Product supplied by EP to Spire for treatment with the Process. If EP and Spire
are unable to negotiate acceptable minimum annual volumes as stated herein, then
EP shall have a sixty (60) day right-of-first-refusal to match any third party
offer for exclusive use of the Process with the Product. This right shall expire
two years after the expiration as stated in this section.
4. Exclusive Right. During the Term, and subject to the terms and
---------------
conditions of this Agreement, EP shall have the exclusive right to pursue,
throughout the world, the clinical investigation, development, and
commercialization ("Development") of the Process as applied to the Products.
5. Exclusive Rights Defined. The exclusive right granted to EP under
------------------------
Section 4 of this Agreement shall mean that during the Term, Spire shall not
sell, license, transfer, or otherwise convey the Process as applied to the
Products to any party and shall not apply the Process to any Products
manufactured or marketed by any party other than EP.
2
<PAGE>
6. Fees.
----
A. Exclusivity Fee. EP shall pay to Spire an exclusivity and standstill fee
---------------
of Twenty Five Thousand Dollars ($25,000) per calendar quarter, commencing as of
June 1, 1996. The first payment shall consist of one payment of $8,333 upon
execution of this Agreement. Thereafter, commencing July 1, 1996, quarterly
payments of $25,000 will be due and payable on the first day of each quarter
until termination as provided hereafter.
B. Tooling. EP shall also pay to Spire the cost of fabricating and
-------
installing tooling necessary to efficiently process EP's Products so long as EP
has approved the expenditure in writing in advance. Upon EP approval of the cost
of such tooling and the fabrication thereof, the tooling expense shall be paid
by EP within 30 days of invoicing by Spire accompanied by appropriate
documentation of the invoiced expenses. Any tooling fabricated pursuant to this
section shall be owned by EP but shall remain at Spire's facility for performing
the Process so long as this Agreement is in effect. Upon termination of this
Agreement, Spire shall dispose of the tooling pursuant to EP's written
instructions at EP's expense.
C. Development. EP shall pay to Spire, a Development Processing Fee for all
-----------
Products processed in connection with the Development effort until the Processed
Product is ready for commercial sale ("Commercial Production", further defined
in paragraph D, below). The Development Processing Fee will be proposed by Spire
to EP on the basis of its estimates of the costs of treating various quantities
of the Product with the Process and shall be quoted to EP for EP's prior
approval. The Development Processing Fee shall be paid within 30 days of receipt
of a Spire invoice. The Development Processing Fee does not include
non-recurring engineering or set-up fees, which Spire shall quote separately in
writing to EP and will seek EP approval prior to incurring them. An invoice will
be issued for these costs and they will be due and payable on the same terms as
the Development Processing Fee.
D. Commercial Production Procurement. Upon reaching the Commercial
---------------------------------
Production level for any Product treated with the Process, EP shall procure its
entire commercial requirement of said surface-treated Products from Spire,
provided that Spire continues to satisfy all of EP's commercial requirements
3
<PAGE>
for the Products treated with the Process, where EP has given Spire at least one
hundred and twenty (120) days notice of significant changes in volume to be
treated and time allowed for treatment and shall pay a production fee per unit
Product treated with the Process as agreed upon by both parties with said fee
adjusted every twelve (12) months ("Adjustment Date") to account for changes in
the Consumer Price Index. For the purpose of this Agreement, "Commercial
Production" for the Product constitutes the dedication of at least five (5)
continuous processing days per month to the treatment of the Products with the
Process. This event described herein shall not take place prior to Spire and EP
discharging the mutual obligations, described in Article 10. below.
As used in this Agreement, the Consumer Price Index means the Consumer
Price Index for all urban customers (the so-called "CPI-U"), as published in the
CPI Detailed Report by the Bureau of Labor Statistics of the Department of Labor
- -------------------
for the twelve-month period ended closest to the Adjustment Date or, if such
Index is no longer published, the successor to that Index or a comparable Index
reasonably agreeable to the parties.
During the Term, Spire shall endeavor to increase the efficiency and lower
the cost of the Process. If Spire is successful in reducing its costs, any such
reductions shall be reflected in mutually agreed upon pricing adjustments
effective prospectively for the remaining Term of this Agreement.
7. Time to Reach Commercial Production Status. EP shall use efforts
------------------------------------------
considered reasonable by prevailing industry standards to pursue Development of
the Processed Product as soon as possible and shall diligently design and
perform all studies, tests, and trials necessary or appropriate in order to meet
that goal and to obtain FDA Concurrence if necessary prior to reaching
Commercial Production status. For purposes of this Agreement, "FDA Concurrence"
shall mean receipt by EP of notice from the FDA that the FDA concurs that the
Product may be marketed in the United States with the claims proposed by, or
acceptable to, EP. If such efforts as referred to above are not commenced for
any Product by June 30, 1997, then such failure shall be deemed by Spire in its
sole opinion grounds for the termination of this Agreement in accordance with
Section 11.B(iv) below.
4
<PAGE>
8. Failure to Make Payments. The continued failure of EP to make any
------------------------
payment required by this Agreement after 60 days written notice from Spire of
such Failure shall result in the lapse of the exclusivity provisions of this
Agreement, and Spire may treat other manufacturers' Products with the Process on
an exclusive or non-exclusive basis, in its discretion. Spire may also elect to
terminate this Agreement in accordance with Section 11.B.(i).
9. Duty to Cooperate. Spire shall cooperate with EP in the development of
-----------------
appropriate tests, the collection of research and clinical data, and the
preparation and submission of applications, reports, and other information to
the FDA, including without limitation maintenance and upkeep of Spire's master
file at the FDA related to the Process, to which EP shall have access. Spire
shall keep EP informed of developments in the field, improvements to the
Process, and the like. EP shall keep Spire informed of schedules and deadlines,
marketing plans, test data and results. EP shall diligently pursue efforts to
achieve Commercial Production Status for the Processed Products and each of the
steps or requirements necessary, appropriate, or desirable to achieve Commercial
Production status in the United States, including without limitation, to the
extent deemed necessary or appropriate by EP, obtaining FDA Concurrence or
Pre-Market Approval. Each party shall fulfill its Development obligations in
good faith with the intention of achieving Commercial Production Status of one
or more Products treated with the Process as quickly as practicable.
10. Institution of Standards and Specifications: Prior to EP using the
-------------------------------------------
Processed Products in any trial involving human subjects. Spire and EP shall
have cooperated as necessary to create a specification or specifications for the
treatment of the Products with the Process. Spire and EP agree that Spire will
make no certification of any Product that has not met such a specification or
specifications upon treatment with the Process as mutually agreed upon by Spire
and EP. Such specifications and standards shall conform with current Good
Manufacturing Practices set forth by the FDA, and shall be incorporated into
this agreement as an exhibit hereto their mutual establishment by Spire and EP.
Prior to beginning Commercial Production, such specifications and standards
will be reviewed and revised as needed to insure high efficiency and quality in
the treatment of the Products by the Process,
5
<PAGE>
Commercial sale of the Products so treated shall not take place until EP and
Spire complete the aforementioned review and revision. The re-written
specifications and standards shall be incorporated into this agreement as a
revision to the exhibit mentioned in the preceding paragraph upon their mutual
establishment by Spire and EP. Spire and EP agree that Spire will make no
certification of any Product that has not met such re-written specifications
upon treatment with the Process as mutually agreed upon by Spire and EP.
Such specifications and standards as shall be mutually established by Spire
and EP shall be automatically incorporated into any instrument granting a
license to use the Process to treat the Products to EP by Spire. Such
specifications shall be held in confidence by both parties for a period of five
(5) years following any expiration or termination of this Agreement.
11.Termination.
------------
A. By EP. This Agreement may be terminated by EP at any time for any reason
------
by delivering written notice of its election to terminate to Spire at least
sixty (60) days prior to the termination date. Such notice shall be accompanied
by all fees and payments due to Spire through the date of termination.
Payments shall be prorated in case of terminations that create fractional
quarters.
B. By Spire. This Agreement may be terminated by Spire for the following
---------
reasons by delivering written notice of its election to terminate to EP at least
sixty (60) days prior to the termination date. Grounds for termination by Spire
include:
(i) Failure by EP to pay any fees or charges when due; however, such
failure may by cured by payment of the delinquent amount prior to
the expiration of the sixty (60) day notice of termination. EP
shall also be responsible for any Fees due and payable during the
notice period;
(ii) Filing by EP for bankruptcy, receivership, reorganization,
assignment for benefit of creditors of all or a substantial
portion of the assets of EP, or other admission by EP of its
inability to pay its debts as they mature;
(iii) The filing of any involuntary petition for bankruptcy,
reorganization, receivership, or
6
<PAGE>
similar proceedings against EP which proceeding is not dismissed
within sixty (60) days;
(iv) The failure of EP to pursue reasonable and good faith efforts to
achieve Commercial Production Status, with or without FDA
Concurrence or Pre-Market Appeal; or
(v) The repeated failure by EP to comply with or to perform its material
duties and obligations as set forth in this Agreement; however, such
failure may be cured by compliance or performance prior to the
expiration of the sixty (60) day notice of termination.
C. Any termination under this Article shall not require the refund by Spire
of Fees of any kind due and payable under this Agreement prior to such
termination.
D. Upon any termination or expiration of this Agreement, each party shall
seek instructions from the other party on the disposition of the other party's
property in its custody.
12. Confidentiality. EP and Spire will execute simultaneously with the
---------------
execution of this document a Confidential Disclosure Agreement (CDA). Any
conflict between the terms of this agreement and the CDA shall be resolved in
favor of the CDA.
13. Indemnification. EP shall indemnify and hold Spire harmless from and
---------------
against any and all claims, demands, actions, liabilities, and obligations
including without limitation attorneys' fees and costs ("Spire Claim") arising
from or related to the sale, use, testing, study, or surgical operation to
affix or insert Products on which Spire performs the process. EP may, upon
notice from Spire, select its own counsel to defend or settle any Spire Claim
and Spire shall cooperate with EP and its counsel. EP shall not be obligated to
indemnify Spire as provided in this Section to the extent that a Spire Claim is
directly attributable to grossly negligent or intentional action or inaction
by Spire or to the failure by Spire to meet the specifications for Processing
any Product implemented by the parties as described in Section 10 of, and
subsequent Addenda to, this Agreement.
Spire shall indemnify and hold EP harmless from and against any and all
claims, demands, actions, liabilities and obligations, including without
limitation attorneys' fees and costs ("EP Claim") arising from or related to,
claims by third parties for infringement of any intellectual property rights
allegedly owned
7
<PAGE>
by such third parties and relating to the Process or the application of the
Process to the Products, or the breach of any representations and warranties by
Spire hereunder. Spire may, upon notice to EP, select its own cousel to defend
or settle and EP Claim and EP shall cooperate with Spire and its counsel. Spire
shall not be obligated to indemnify EP as provided in this section to the extent
that a EP Claim is directly attributable to grossly negligent or intentional
action or inaction taken knowingly on the part of EP that cause or contribute
to the infringement of Intellectual Property Rights allegedly owned by third
parties.
14. General Provisions
------------------
(a) No Waiver. Waiver of any provision of this Agreement, in whole or in
---------
part , in any one instance shall not constitute a waiver of any other provision
in the same instance, nor any waiver of the same provision in another instance,
but each provision shall continue in full force and effect with respect to any
other then-existing or subsequent breach.
(b) Notice. Any notice required or permitted under this Agreement
-------
shall be given in writing to the parties at their respective addresses specified
above, or at such other address for a party as that party may specify by notice,
by (i) delivery in hand; (ii) registered or certified mail, return receipt
requested; or (iii) by Federal Express or other form of expedited mail that
provides for delivery to the sender of a signed receipt. Notice so sent shall
be effective upon receipt.
(c) Arbitration of Disputes. Any Disputes that cannot be amicably
-----------------------
resolved by the parties shall be submitted to binding arbitration for
resolution. The arbitration shall be conducted before a panel of three (3)
arbitrators in Boston, Massachusetts under the rules of the American Arbitration
Association. Each party shall select one arbitrator and the two so chosen shall
select the third, who shall act as chairperson. If a party shall fail to appoint
an arbitrator within twenty (20) days after receiving written notice of the
arbitration and the name of the arbitrator selected by the party initiating the
arbitration, the initiating party may request that the American Arbitration
Association appoint the second arbitrator, and if the two arbitrators so
selected fail to select a third arbitrator within twenty (20) days after the
appointment of the second arbitrator, either arbitrator may request that the
American Arbitration Association select the third arbitrator. The decision of a
majority of the arbitrators shall be final and binding on the parties with
respect to all matters referred to the
8
<PAGE>
arbitration panel for decision and may be enforced in an appropriate court in
any competent jurisdiction. The arbitrators shall not have the authority to
award punitive or special damages. In the absence of a contrary ruling by the
arbitrators, each party shall pay its own costs and fees in connection with the
arbitration.
(d) Miscellaneous. This Agreement: (i) may be executed in any number of
--------------
counterparts, each of which, when executed by both parties to this Agreement
shall constitute one and the same instrument (ii) shall be governed by and
construed under the laws of The Commonwealth of Massachusetts applicable to
contracts made, accepted, and performed wholly within The Commonwealth, without
application of principles of conflict of laws; (iii) except and to the extent
expressly provided in sections 10 and 12 of this Agreement, constitutes the
entire Agreement of the parties with respect to its subject matter, superseding
all prior oral and written communications, proposals, negotiations,
representations, understandings, courses of dealing, agreements, contracts, and
the like between the parties in such respect; (iv) may be amended or modified,
and any right under this Agreement may be waived in whole or in part, only by a
writing signed by both parties (v) contains headings only for convenience, which
headings do not form part, and shall not be used in construction, of this
Agreement; and (vi) shall bind and inure to the benefit of the parties and their
respective legal representatives, successors and assigns, provided that no party
may delegate any of its obligations under this Agreement or assign this
Agreement except to a related entity or a successor by sale or merger, without
the prior written consent of the other party; however, Spire agrees that EP may
assign this agreement to EP's wholly-owned subsidiary, ProCath Corporation.
(e) Force Majeure. Neither party to this Agreement shall be responsible to
--------------
the other for delays or errors in its performance or other breach under this
Agreement occurring solely by reason of circumstances beyond its control,
including acts of civil or military authority, national emergencies, fire, major
mechanical breakdown, labor disputes, flood or catastrophe, acts of God,
insurrection, war, riots, delays of suppliers, or failure of transportation,
communication or power supply.
9
<PAGE>
Executed in Massachusetts as an instrument under seal as of the date first above
written
SPIRE CORPORATION
By /s/ (Signature Appears Here)
-----------------------------
Duly Authorized
EP MEDSYSTEMS, INC.
By /s/ (Signature Appears Here)
-----------------------------
Duly Authorized
10
<PAGE>
CONFIDENTIAL DISCLOSURE
AGREEMENT
[INSERT LOGO HERE]
- --------------------------------------------------------------------------------
AGREEMENT made this 23 day of May , 1996 between SPIRE CORPORATION.
----- ---------- -
One Patriots Park, Bedford, MA 01730-2396 (hereinafter called "SPIRE") and
EP MedSystems, Inc., 58 Route 46 West, Budd Lake, New Jersey 07828 (hereinafter
- ------------------------------------------------------------------
called "COMPANY").
WHEREAS, COMPANY and SPIRE have represented to each other that each owns, may
own or is interested in receiving Proprietary information (as defined below)
pertaining to:
The manufacture of electrophysiology catheters and accessories, and a
- ------------------------------------------------------------------------------
proprietary ion beam assisted deposition process for their metallization.
- ------------------------------------------------------------------------------
WHEREAS, COMPANY and SPIRE intend to exchange Proprietary information for the
following purposes(s):
Process development and product processing purposes.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereby agree as follows:
1. Definition
For purposes of this Agreement, "Proprietary Information" means data, reports,
specifications, designs, prototypes, test results, trade secrets, processes,
patentable inventions,m plane or other business, financial or technical
information in written, electronic, magnetic or oral form (i) which is known
only to the disclosing party, (or to others to whom the disclosing party has
voluntarily disclosed it subject to restrictions similar to those set forth in
the Agreement); (ii) as to which the disclosing party has taken reasonable
precautions against disclosure; and (iii) which has been clearly labeled by the
disclosing party as "confidential", "proprietary", "secret" or other term of
similar import. Orally disclosed Proprietary Information shall retain its
character as Proprietary Information so long as the proprietary, protected
nature of the disclosed information is disclosed and in writing within thirty
(30) days of the original disclosure; or (B) in writing only, within ten (10)
days of the original disclosure. In which case the recipient shall not be held
liable for any disclosure of the Proprietary Information prior go being so
labeled.
2. Obligation to Protect Proprietary Information
(a) Each party agrees that if it is a recipient under this Agreement, it
will not publish or otherwise disclose Proprietary Information received from the
disclosing party to any third party or to any person employed by the recipient
other than those who have a "need to know" in order to evaluate and make the
decisions contemplated by the Agreement. Any employee, consultant or other agent
to whom a recipient party discloses Proprietary information received from a
disclosing party as provided in this Agreement shall be subject to
confidentiality obligations to such recipient party covering the Proprietary
information to the same or greater extent as the recipient party is obligated by
this Agreement. Each recipient party agrees to exercise reasonable care to
protect the disclosing party's Proprietary Information and shall utilize the
same procedures and systems to protect such Proprietary Information as it
utilizes to protect its own Proprietary Information and other proprietary data.
(b) Each party agrees to use Proprietary Information received from the
other party only for the purposes described in this Agreement.
(c) Immediately upon the request of the disclosing party, the recipient
shall return to the disclosing party any of the disclosing party's Proprietary
Information as requested without retaining any copies thereof. Upon termination
of the relationship or discussing contemplated by this Agreement, all
Proprietary Information shall be returned by the recipient to the disclosing
party without retaining any copies thereof.
(d) Unless otherwise stated in a writing signed by the parties, a
recipient's obligation to protect Proprietary Information shall continue for
five (5) years from disclosure.
- --------------------------------------------------------------------------------
<PAGE>
3. Limitations on the Parties' Obligations
No obligation to protect Proprietary Information shall exist under this
Agreement with respect to any information which (a) at the time of disclosure is
in the public domain, (b) enters the public domain through no act or failure to
act by the recipient, (c) comes into the possession of the recipient from a
third party without obligation on the recipient as evidenced by appropriate
documentation.
4. Effect of Agreement
All Proprietary Information remains the property of the disclosing party at all
times. This Agreement does not constitute the promise or intention of either
party to buy, sell or market any products or services or to enter into any other
type of arrangement or agreement. This Agreement does not constitute or imply
the grant of any license or permission to use any intellectual property of
Proprietary information except to the limited extent and for the limited
purposes set forth herein.
5. Miscellaneous
Any failure by either party to enforce its rights under this Agreement in any
one instance shall not constitute a waiver of those rights in any other
instance. The parties acknowledge that a breach of this Agreement by a
recipient may result in irreparable harm to the disclosing party not easily
measured in monetary damages alone. Therefore, in addition to all other
remedies available at law, the parties consent to the imposition of equitable
remedies including injunctive relief without the necessity of proof of actual
damages. This agreement shall be governed and construed under the laws of the
Commonwealth of Massachusetts.
6. Term
The term of this agreement shall be 5 (five) year(s) from the date written
--------
above, except as to the obligations set forth in paragraph 2.
AGREED, by the parties whose names appear below and signed by authorized
representatives, effective as of the date above.
- --------------------------------------------------------------------------------
SPIRE CORPORATION SIGNATURE
- --------------------------------------------------------------------------------
By: /s/ Richard S. Gregorio
----------------------------------------------------
Title: Richard S. Gregorio, Vice President & CFO
-------------------------------------------------
- --------------------------------------------------------------------------------
COMPANY SIGNATURE
- --------------------------------------------------------------------------------
Company Name: EP MedSystems, Inc.
-------------------------------------------
By: /s/ David A. Jenkins
-----------------------------------------------------
Authorized Signature
Name/Title: David A. Jenkins, President
---------------------------------------------
Type or Print
<PAGE>
April 12, 1996
Anthony J. Varrichio, President
Hi-Tronics Designs, Inc.
58 Route 46 West
Budd Lake, New Jersey 07828
Re: TeleTrace IV Development
------------------------
Dear Tony:
This letter agreement confirms our understanding with respect the
commitment of Hi-Tronics Designs, Inc. ("HDI") to complete development of the
TeleTrace IV Receiver for EP Medical, Inc. ("EP").
By letter agreement dated January 23, 1995, between HDI and EP, amended as
of June 12, 1995, HDI agreed to finalize the development of the TeleTrace IV in
exchange for a cash payment of $30,000 and the issuance by EP to HDI of 20,000
shares of common stock of EP, upon completion of development, including all
documentation necessary for filing with the FDA.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby
acknowledged, HDI and EP hereby agree that HDI shall finalize the development of
the TeleTrace IV Receiver in exchange for the issuance by EP to HDI of 19,000
shares of common stock of EP (900 shares of which were advanced to HDI on or
about January 23, 1995) and a cash payment of $30,000 upon completion of
development, including all documentation to the reasonable satisfaction of EP
and its counsel necessary for filing of an application for 510(k) clearance with
the United States Food and Drug Administration. The aforesaid June 12, 1995
letter is hereby terminated in the entirety.
If the foregoing represents your understanding of the agreement reached
between us as of the date first written above, please execute and return this
original to my attention.
Very truly yours,
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
------------------------------
David A. Jenkins, President
Intending to be legally bound, the foregoing terms contained in this Agreement
are accepted and agreed to:
HI-TRONICS DESIGNS, INC.
By: /s/ Anthony J. Varrichio
------------------------------
Anthony J. Varrichio
<PAGE>
AMENDED AND RESTATED CONSULTING AGREEMENT
-----------------------------------------
THIS AMENDED AND RESTATED CONSULTING AGREEMENT (this "Agreement") is made
as of May 24, 1996, by and between EP MedSystems, Inc. (the "Company"), and
Elliot Young & Associates, Inc. ("EYA").
WHEREAS, the Company and EYA previously entered into a Consulting Agreement
dated August 17, 1995 (the "Consulting Agreement") whereby EYA agreed to provide
the Company with certain consulting services; and
WHEREAS, the parties wish to amend certain provisions contained in the
Consulting Agreement by amending and restating it as set forth below;
NOW, THEREFORE, for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the Company and EYA hereby agree as follows:
1. Engagement. The Company hereby engages EYA to perform the consulting
----------
services set forth on Schedules A and B hereto (the "Services"), and EYA agrees
to perform such Services, for a term commencing as of August 17, 1995, and
ending on the later if (i) August 16, 1996 or (ii) upon completion of the
clinical study protocols to be submitted to the U.S. Food and Drug
Administration ("FDA") as part of an application for an investigational device
exemption ("IDE"), to the complete satisfaction of the President of the Company
(the "Term"), whereupon the obligations of the parties hereunder shall terminate
and this Agreement shall be null and void, except as expressly provided herein.
2. Compensation for Business Development Consulting Services. In
---------------------------------------------------------
consideration of EYA's performance of the consulting services set forth on
Schedule A hereto relating to development of the Company's business, the
Company agrees:
a. to grant EYA an option to purchase up to 150,000 shares of common
stock of the Company subject to the terms of a separate Stock Option Agreement
by and between the Company and EYA, as it may be amended from time to time;
b. to pay EYA $25,000 in cash;
c. to pay EYA an additional $30,000 in cash upon the completion of
the human clinical study protocol to be submitted to the FDA as part of an
application for an IDE, to the complete satisfaction of the President of the
Company; and
d. to pay EYA five percent (5%) of net sales, less shipping costs,
taxes and returns, made by any non-U.S.-based company, dealer, sales agent or
individual ("Distributor") to whom the Company is introduced or presented by EYA
during the Term of this Agreement and with whom the Company enters into a
sales/distributor/dealer/representative agreement for its products within twelve
(12) months of introduction. Payments to EYA will be made by certified check on
a quarterly basis and will
<PAGE>
continue for a period of three (3) years from the signing of any such agreement
between the Company and a Distributor. The Company further agrees to allow EYA
or its designated agent reasonable and timely access to audit Company books on a
quarterly basis, at the sole expense of EYA, for the duration of this three year
period.
3. Compensation for Financial Consulting Services. In consideration
----------------------------------------------
of EYA's performance of the financial consulting services set forth on Schedule
B hereto, the Company agrees to pay EYA a consulting fee (the "Fee") of one
hundred ninety five thousand dollars ($195,000) in immediately available funds
subject to the terms of this Agreement and the further conditions specified
below. The Fee shall be paid to EYA pursuant to the following schedule:
a. $15,000 upon delivery to the Company by EYA of a revised business
plan (as detailed on Schedule B hereto), and acceptance thereof as to content
and sufficiency by the Company at its sole discretion;
b. $5,000 upon delivery to the Company of a corporate slide
presentation by EYA (as detailed on Schedule A hereto), and acceptance thereof
as to content and sufficiency by the Company at its sole discretion; and
c. $175,000 upon the closing of an initial public offering of the
Company's securities resulting in gross proceeds to the Company of at least $18
million; provided, if such initial public offering results in gross proceeds to
the Company of less than $18 million, $52,500 shall be paid to EYA upon such
closing.
4. Acknowledgment of Compensation Previously Paid. EYA acknowledges
----------------------------------------------
and agrees that the compensation set forth in Section 2.b. and Sections 3.a. and
3.b. above has already been paid in full by the Company. EYA further expressly
acknowledges and agrees that the Stock Option Agreement dated August 31, 1995
and amended as of the date hereof to purchase 150,000 shares of the Company's
common stock issued to Tracey E. Young fully satisfies the Company's
compensation obligation under Section 2.a. above.
5. Reimbursement of Expenses. The Company agrees to reimburse EYA for
-------------------------
all reasonable, documented, out-of-pocket expenses incurred in the course of
performing consulting services for the Company, including coach travel, lodging,
meals, express mail service, long distance telephone and fax charges, and
copying charges. Expenses may be billed to the Company at cost on a periodic
basis and must be accompanied by supporting documentation. Payment is due upon
receipt of each invoice.
6. Confidentiality.
---------------
a. Employee acknowledges and agrees that all Confidential
Information (as defined below) is, and shall remain, the sole and exclusive
property of the Company, and EYA recognizes that it has no rights thereto or
interest therein. For purposes of this Agreement, the term "Confidential
Information" shall mean (i) all confidential or secret processes, plans,
formulae, data (including cost and performance data), inventions, machinery,
drawings, papers, writings, specifications, manufacturing procedures and
techniques, methods, technology, know-how, programs, devices and materials
relating to the business, products (either existing or under development),
services or activities
<PAGE>
of the Company, regardless of whether or not any or all of the foregoing are or
may be patented or copyrighted, (ii) any other information or aspect of or
related to the Company's trade, business, products or activities which are
designated or treated by the Company as confidential, secret or of a proprietary
nature, or (iii) any customer or supplier usages and requirements and any of the
Company's lists of clients, customers, suppliers and business contacts.
b. Except as required during the Term of this Agreement, EYA
represents and warrants that neither it nor any of its directors, officers,
employees or agents shall not, during the Term of this Agreement or at any time
thereafter, directly or indirectly copy or reproduce, cause to be copied or
reproduced, divulge, use, furnish, disclose or otherwise make known or
accessible to anyone any Confidential Information other than to (i) the
Company's officers, directors, employees, affiliates, agents or representatives
who have a need to know such information in order to fulfill their respective
responsibilities to the Company, or (ii) persons or entities specifically
indicated to EYA by the President of the Company.
c. EYA recognizes and agrees that any breach of the covenants or
agreements set forth in this Section 6 will result in irreparable injury to the
Company for which money damages will not be adequate as a remedy and, therefore,
the Company has the right, in addition to any other remedies which may be
available to it at law or in equity, to injunctive relief without posting of a
bond in any court of competent jurisdiction permanently enjoining a violating
party from a violation thereof. All legal costs and other costs of suit incurred
by the Company in connection with such a breach hereof shall be the sole
obligation of EYA.
7. Indemnification. The Company agrees to indemnify and hold harmless
---------------
EYA and each of its directors, officers, employees and agents from and against
any loss, claims, damages or liabilities of any kind or nature whatsoever,
including court costs and attorneys fees, resulting from any threatened or
actual legal action by any person or entity arising out of the Services provided
by EYA pursuant to this Agreement, except that such indemnification shall not
apply in the event of willful misconduct or gross negligence by EYA.
8. Notices. Any communication, demand or notice to be given hereunder
-------
will have been duly given when delivered in writing or sent by tested telecopy
to a party at its address as indicated below:
If to the Company
EP MedSystems, Inc.
Attention: David A. Jenkins, President
58 Route 46 West
Budd Lake, NJ 07828
Telecopy number: (201) 347-4427
Telephone number: (201) 691-6400
<PAGE>
If to EYA:
Elliot Young & Associates, Inc.
Attention: Tracey E. Young, President
12 Perry Lane
Ridgefield, CT 06877
Telecopy number: (203) 438-9760
Telephone number: (203) 438-5590
9. Consent to Jurisdiction. EYA and the Company irrevocably submit
-----------------------
to the jurisdiction of any New Jersey State or Federal court over any suit,
action, or proceeding arising out of or relating to this Agreement. EYA and the
Company hereby irrevocably agree that all claims in respect of such action or
proceeding may be heard and determined in such New Jersey State court, or to the
extent permitted by law, in such Federal court. EYA irrevocably waives, to the
fullest extent permitted by law, any objection which it may now or hereafter
have to the venue of any such suit, action, or proceeding brought in such a
court and any claim that any such suit, action, or proceeding has been brought
in any inconvenient forum.
10. Miscellaneous.
-------------
a. This Agreement shall be governed and construed in accordance with
the laws of the State of New Jersey.
b. This Agreement may be executed in any number of counterparts and
each such counterpart shall be deemed an original, but all such counterparts
shall constitute one and the same document.
c. This Agreement may not be modified except by written agreement
signed by both of the parties. EYA shall have no right to assign any part of
this Agreement, except with the express prior written consent of the Company.
d. If any legal action or other proceeding is brought for the
enforcement of this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorney's fees and other costs incurred in that
action or proceeding in addition to any other relief.
e. This Agreement constitutes the entire agreement between the
parties hereto pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. The Consulting Agreement dated August 17, 1995 between
the parties is hereby amended, restated, and superseded in the entirety by this
Agreement.
f. Any provision of this Agreement which is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or non-authorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Consulting Agreement to be executed and delivered as of the date first
written above.
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
-------------------------------
David A. Jenkins, President
ELLIOT YOUNG & ASSOCIATES, INC.
By: /s/ Tracey E. Young
-------------------------------
Tracey E. Young, President
<PAGE>
SCHEDULE A
----------
Business Development Consulting Services to be Performed by EYA
---------------------------------------------------------------
1. Conduct a thorough review of the Company's technologies, stages
of development, market strategies and Company structure, as they relate to the
burgeoning opportunity in arrhythmia control.
2. Introduce the Company to top-tier regulatory consultants in the
EP field for the purpose of reviewing the Company's technologies, determining
the U.S. and foreign regulatory requirements, establishing timelines and
plotting appropriate regulatory submission and documentation plan(s). Work hand-
in-hand with the regulatory consultant(s) to define the best global strategy and
then to fully articulate that strategy and the associated tactics within the
context of the business plan.
3. Assist the Company in recruiting appropriate outside director
candidates; present the Company to them and arrange for introduction to Company
management.
4. Assist the Company in recruiting a Scientific Advisory Board,
identifying and presenting appropriate candidates to Company management,
contacting the candidates and presenting the Company to them. Screen for level
of interest and commitment to the Company, and present the screened candidates
to Company management. Advise on appropriate vehicles for compensation and
agreement structures.
5. Assist the Company in identifying and recruiting additional
personnel, including a VP of Marketing and VP of Regulatory Affairs, utilizing
EYA's extensive network in the medical devices industry. If appropriate,
introduce the Company to leading search firms with demonstrated expertise in
attracting and recruiting such high-level individuals. Assist in the screening
and interviewing process, if desired.
6. Widen the Company's distribution network by introducing the
Company to well-known and successful distributors of EP-related products in
Europe and Japan. Make introductions to appropriate groups, present the Company,
and advise on agreement structure(s).
7. Conduct a preliminary review of intellectual property portfolio,
licensing and distribution arrangements and potential alliances (such as the
proposed agreement with Dr. Alt) to identify any potential problems or gaps.
Work with patent and corporate counsel to tie up any loose ends. If appropriate,
introduce Company management to additional patent and/or corporate counsel with
broad-based experience in EP-related law.
8. Assist the Company in preparing a human clinical study protocol
for submission to the United States Food and Drug Administration (the "FDA") as
part of an Investigational Device Exemption ("IDE") application for the ALERT
System.
<PAGE>
9. Assist the Company in identifying and reaching agreement with
leading electrophysiology ("EP") centers for the conduct of clinical trials for
the ALERT System.
10. Arrange and lead discussions at organizational meetings of
clinical investigators for ALERT System.
11. Assist the Company as needed in negotiating with the FDA as part
of the process of securing an IDE approval for the ALERT System.
12. Assist the Company by coordinating and leading ALERT clinical
investigators' meetings and securing IRB and Ethics Committee approvals to
participate in the ALERT clinical trials.
13. Assist the Company in any FDA review, supplemental informational
request or other investigation regarding an IDE application.
14. Draft a worldwide market and competitive analysis of the
Company's products.
15. Review new technologies, products and companies for potential
acquisition and strategic partnerships.
<PAGE>
SCHEDULE B
----------
Financing Consulting Services to be Performed by EYA
----------------------------------------------------
1. Develop a new financing strategy to reposition the Company to take
advantage of the unique opportunity in the arrhythmia control market with stable
and growing product sales, along with enormous upside potential from
development-stage products.
2. Re-draft the current business plan to reflect the new strategy and
development plan, articulate the growth opportunities, and present a
comprehensive competitive analysis.
3. Develop a slide presentation to best articulate the Company's
opportunity to investment banks, scientific advisors, and potential board
members. Work with Company management to develop optimal presentation skills for
each target audience. When appropriate, attend and participate in Company
presentations.
4. Work with Company management to develop revised financial projections.
5. Introduce Company management to top-tier SEC counsel and negotiate
terms favorable to the Company to minimize capital outlays.
6. Present the Company to a select group of pre-qualified investment
banks with demonstrated expertise in taking medical device companies public;
determine their level of interest; assist in due diligence where appropriate;
conduct and facilitate negotiations regarding valuation, timing and terms; and
assist in drafting sessions, where appropriate.
<PAGE>
AMENDMENT TO STOCK OPTION AGREEMENT
-----------------------------------
THIS AMENDMENT TO STOCK OPTION AGREEMENT (this "Amendment") is made
as of this 24th day of May, 1996, by and between EP MedSystems, Inc., a New
Jersey corporation ("Company"), and Tracey E. Young, an individual residing at
12 Perry Lane, Ridgefield, Connecticut 06877 ("Optionholder").
WITNESETH:
---------
WHEREAS, the Company (under its prior name of EP Medical, Inc.) and
Optionholder have heretofore entered into a certain Stock Option Agreement
("Stock Option"), dated as of August 31, 1995, pursuant to which Optionholder
was granted an option to purchase 150,000 shares, subject to certain
adjustments, of common stock of the Company at an exercise price of $2.00 per
share;
WHEREAS, the Company and Optionholder now desire to modify certain
provisions of the Stock Option as provided below;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound, the Company and Optionholder
hereby agree as follows:
1. The Stock Option shall be amended to provide for the issuance to
Optionholder of an option to purchase 150,000 shares of the commons stock of the
Company, which shall not be subject to further adjustment.
2. Section 1 of the Stock Option shall be amended in its entirety to
provide as follows:
The Optionholder is hereby granted an option to purchase up to 150,000
shares of common stock which shall become exercisable as follows:
100,000 shares - Upon execution of this Amendment; and
50,000 shares - Upon the completion of the human clinical study
protocol to be submitted to the U.S. Food and Drug
Administration as part of an application for an
investigational device exemption, to the complete
satisfaction of the President of the Company.
In no event shall the Optionholder exercise any purchase rights
later than August 31, 2000, at 5:00 p.m. Eastern Time (the "Expiration Date").
The Company agrees that the Optionholder shall be deemed the record owner of
such shares as of the close of business on the date on which this option shall
have been presented and payment has been made for such shares as aforesaid.
Certificates for the shares of stock so purchased shall be delivered to the
Optionholder within reasonable time, not exceeding thirty (30) days, after the
rights represented by this option have been duly exercised. This option may be
exercised in whole or in part, at the discretion of the Optionholder.
<PAGE>
3. The Optionholder shall have certain registration rights with
respect to the shares of the Company's common stock subject to the Stock Option
as more specifically set forth in the Registration Rights Agreement between the
Company and the Optionholder of even date herewith.
4. In case of any consolidation or merger of the Company with or
into another corporation (other than merger with a wholly owned subsidiary in
which the Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of common stock issuable upon exercise of the Stock Option) or in case of any
sale or transfer to another corporation of the property of the Company as an
entirety or substantially as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provision to be made that the
holder hereof shall have the right thereafter, by exercising the Stock Option,
to purchase the kind and amount of shares of stock and other securities and
property receivable upon such consolidation, merger sale or transfer by a holder
of the number of shares of common stock of the Company which might have been
purchased upon exercise of the Stock Option immediately prior to such merger,
sale or transfers. In the event that at any time, as a result of an adjustment
made pursuant to this Section 4, the holder of the Stock Option shall become
entitled to purchase upon exercise of the Stock Option shares of stock,
evidences of indebtedness, or other securities or assets (other than shares of
Common Stock), then, wherever appropriate, all references herein to shares of
common stock shall be deemed to refer to and include such shares of stock,
evidences of indebtedness, or other securities or assets, and thereafter the
number of such shares of stock, evidences of indebtedness, or other securities
or assets shall be subject to adjustment from time to time in a manner and upon
terms as nearly equivalent as practicable to the provisions contained in this
Section 4.
5. The validity, interpretation, and performance of this option and
the terms and provisions thereof shall be governed and construed in accordance
with the laws of the State of New Jersey.
6. This Amendment is not intended to modify any other provisions of
the Stock Option, except as specifically provided herein. The Stock Option, as
amended by this Amendment, shall continue in full force and effect as of the
date hereof.
7. This Amendment may be executed in any number of courterparts and
each such counterpart shall be deemed an original, but all such counterparts
shall constitute one and the same document.
8. NEITHER THE OPTION GRANTED HEREUNDER, AS AMENDED, NOR THE
SHARES OF COMMON STOCK TO BE ISSUED UPON EXERCISE OF SUCH OPTION, HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR STATE SECURITIES
LAWS AND MAY NEITHER BE REOFFERED OR SOLD UNLESS SO REGISTERED OR UNLESS AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
9. The certificates for shares of common stock to be issued upon
exercise of this option will be appropriately designated with a restrictive
legend similar to that set forth in paragraph 8 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
Stock Option to be executed and delivered as of the date first written above.
<PAGE>
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
-------------------------------
David A. Jenkins, President
/s/ Tracey E. Young
----------------------------------
TRACEY E. YOUNG
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS AND
UNTIL THEY ARE FIRST REGISTERED UNDER SUCH ACT AND ALL RULES AND REGULATIONS
RELATING TO THE SALE, TRANSFER OR OTHER DISPOSITION THEREUNDER HAVE BEEN
COMPLIED WITH OR UNLESS AND UNTIL COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE
RENDERED AN OPINION SATISFACTORY TO THE COMPANY EFFECT THAT SUCH REGISTRATION IS
NOT REQUIRED.
EP MEDICAL, INC.
A NEW JERSEY CORPORATION
STOCK OPTION
OPTION TO PURCHASE SHARES OF THE COMMON STOCK AS HEREIN DESCRIBED
DATED AS OF AUGUST 31, 1995
This certifies that, for value received
NAME: Tracey E. Young
ADDRESS: 12 Perry Lane, Ridgefield, CT 06877
(herein called "optionholder"), is entitled to purchase from EP Medical, Inc.
(herein called the "Company"), having its principal place of business at 58
Route 46, Budd Lake, NJ 07828, at the price of $2.00 per share, 150,000 shares
of the common stock of the Company.
As used in this option, the following terms have the meanings indicated:
a) Act means the Securities Act of 1933, as amended.
b) Common stock means the equity securities of the Company known as common
stock, of which 25,000,000 shares have been authorized.
c) Option price means the price of $2.00 per share.
1. Exercise of Option. The optionholder may exercise purchase rights for
-------------------
150,000 shares of common stock if and only if the Company, prior to December 31,
1996 signs a letter of intent with an investment bank to underwrite an Initial
Public Offering. Further, the actual number of shares to be acquired under this
option may increase or decrease according to the formula outlined in the
following three subparagraphs:
<PAGE>
<TABLE>
<CAPTION>
a) Pre-Money Number of Shares Number of Shares
Valuation Unexercisable by Exercisable by
for EP Medical Optionholder Optionholder
--------------------------------------------------------------------------
<S> <C> <C>
$20.0 to $24.99 Million 50,000 100,000
$25.0 to $29.99 Million 25,000 125,000
$30.0 to $34.99 Million 0 150,000
</TABLE>
b) In the event that Company closes an Initial Public Offering at a pre-
money valuation less than $20 million, the optionholder will have purchase
rights for a proportionate number of shares, as pegged to the "floor
valuation" of $20 million (i.e. if Company accepts a pre-money valuation of
$18 million optionholder would retain 90 percent of 100,000 shares, of
90,000 shares).
c) In the event that the Company closes an Initial Public Offering at a
pre-money valuation of $35 million or more, the optionholder will have
purchase rights for a proportional number of shares, as pegged to the
"ceiling valuation" of $34.99 million (i.e. if a pre-money valuation of
$38.5 million is achieved, then the option will increase by an additional
15,000 shares or 10 percent of 150,000 shares).
In no event shall the optionholder exercise any purchase rights later than
August 31, 2000, at 5:00 p.m. Eastern Time (the "expiration date"). The
Company agrees that the optionholder shall be deemed the record owner of such
shares as of the close of business on the date on which this option shall have
been presented and payment has been made for such shares as aforesaid,
Certificates for the shares of stock so purchased shall be delivered to the
optionholder within a reasonable time, not exceeding thirty (30) days, after
the rights represented by this option have been duly exercised. The
exercisable portion of this option may be exercised in whole or in part, at the
discretion of the optionholder.
2. Adjustments. In case, prior to the expiration of this Option by exercise or
-----------
by its terms, the Company shall issue any shares of its common stock as a stock
dividend or subdivide the number of outstanding shares of its common stock into
a greater number of shares, then in either of such cases, the then applicable
purchase price per share of the shares of common stock purchasable pursuant to
this Option in effect at the time of such action shall be proportionately
reduced and the number of shares at that time purchasable pursuant to this
Option shall be proportionately increased; and conversely, in the event that
Company shall contract the number of outstanding shares of common stock by
combining such shares into a smaller number of shares, then, in such case, the
then applicable purchase price per share of the shares of common stock
purchasable pursuant to this Option in effect at the time of such action shall
be proportionately increased and the number of shares of common stock at that
time purchasable pursuant to this Option shall be proportionately decreased. If
the Company shall,
<PAGE>
at any time, during the life of this Option, declare a dividend payable in cash
on its common stock and shall at substantially the same time offer of its
stockholders a right to purchase new common stock from the proceeds of such
dividend or for an amount substantially equal to the dividend, all common stock
so issued shall, for the purpose of this Option, be deemed to have been issued
as a stock dividend. Any dividend paid or distributed upon the common stock in
stock of any other class of securities convertible into shares of common stock
shall be treated as a dividend paid in common stock to the extent that shares of
common stock are issuable upon conversion thereof.
3. Exchange, Division, or Combination. Subject to the provisions hereinafter
----------------------------------
set forth, this option is exchangeable at the option of the optionholder at the
principal office of the Company for other options of different denominations
entitling the optionholder to purchase the aggregate number of shares of common
stock as are purchasable hereunder; and this option may be divided or combined
with other options which carry the same rights. In either case, any alterations
will be made upon presentation at the principal office of the Company, of the
options, together with a written notice, signed by the optionholder, of its
authorized representative, specifying the names and denominations in which any
new options are to be issued, and the payment of any transfer tax due in
connection therewith.
4. Option Price. A share of common stock may be purchased pursuant to this
------------
option, at the option price of $2.00 per share.
5. Certain Covenants of the Company. The Company agrees and covenants that:
---------------------------------
a) During the period within which the rights represented by this option may
be exercised, the Company shall at all times reserve and keep available,
free from preemptive rights out of the aggregate of its authorized but
unissued common stock, for the purpose of enabling it to satisfy any
obligation to issue shares of common stock, upon the exercise of this
option, the number of shares of common stock deliverable upon the exercise
of this option. If at any time the number of shares of authorized common
stock shall not be sufficient to effect the exercise of this option, the
Company will take such corporate action as may be necessary to increase its
authorized but unissued common stock to such number of shares as shall be
sufficient for such purpose; and the Company shall have analogous obligation
with respect to any other securities or property issuable upon the exercise
of this option;
b) All common stock which may be issued upon the exercise of the rights
represented by this option will upon issuance be validly issued, fully
paid, non-assessable, and free from all taxes, liens, and charges with
respect to the issuance thereof; and
<PAGE>
(c) All original issue taxes payable in respect of the issuance of shares
upon the exercise of the rights represented by this option shall be borne
by the Company, but in no event shall the Company be responsible or liable
for income taxes or transfer taxes upon the transfer of any option; and
(d) The Company will not, be amendment of its articles of incorporation,
or through reorganization, consolidation, merger, dissolution, issuance of
capital stock, or sale of treasury stock (otherwise than upon exercise of
this option) or sale of assets, or by any other voluntary act or deed,
avoid the performance of observance of any of the covenants, stipulations,
or conditions in this option to be observed or performed by the Company,
but will at all times in good faith assist, insofar as it is able, in
carrying out all of the provisions of this option.
6. Voting and Other Rights. Unit exercised, this option shall not entitle the
------------------------
optionholder to any voting or other rights as a shareholder of the Company.
7. Certain Restrictions or Transferability. This option shall not be sold or
----------------------------------------
transferred by the optionholder.
8. Loss, Theft, Destruction or Mutilation. If this option is lost, stolen,
---------------------------------------
mutilated, or destroyed, the Company shall, upon such terms as the Company shall
reasonably impose, including a requirement that the optionholder obtain a bond,
issue a new requirement that the optionholder obtain a bond, issue a new option
of like denomination, tenor, and date. Any such new option shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed option shall be at any time enforceable by
anyone.
9. Substituted Options. Any option issued pursuant to the provisions of the
--------------------
proceeding section, or upon exchange, division, or partial exercise of this
option or combination thereof with another option or options shall set forth
each provision set forth in this agreement, as each such provision is set forth
herein, an shall be duly executed on behalf of the Company by an authorized
officer.
10. Effect of Surrender. Upon surrender of this option for exchange, or upon
--------------------
the exercise hereof, this option shall be canceled by the Company and shall not
be reissued by the Company, except as otherwise provided for herein. Any new
option certificates shall be issued promptly but no later than seven days after
receipt of the old option certificates.
11. Persons Bound. This option shall inure to the benefit of and be binding
--------------
upon the optionholder, the Company, and the Company's successor and assigns.
<PAGE>
12. Notices. All notices required hereunder shall be in writing and shall be
-------
deemed given when telegraphed, delivered personally, telefaxed, or within two
days after mailing when mailed by certified or registered mail to the Company or
optionholder, at the address of such party as hereinafter set forth, or amended
by written notice from either the Company or the optionholder.
To the Company: 58 Route 46, Budd Lake, NJ 07828
To Optionholder: 12 Perry Lane, Ridgefield, CT 06877
13. Governing Law. The validity, interpretation, and performance of this option
-------------
and the terms and provisions hereof shall be governed by the laws of The State
of New Jersey.
IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS OPTION TO BE DULY EXECUTED
EFFECTIVE AS OF August 31, 1995, BY ITS PRESIDENT.
----------------
EP MEDICAL, INC.
By /s/ (Signature Appears Here)
---------------------------------
ATTEST
/s/ William L. Winstrom
- -----------------------------------
Secretary
Accepted by
/s/ Tracey E. Young
- -----------------------------------
Optionholder
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement"), is made as of this 24th
day of May, 1996, by and between EP MedSystems, Inc., a New Jersey corporation
(the "Company"), and Tracey E. Young ("Young").
WHEREAS, the Company and Young are parties to a certain Amended and
Restated Consulting Agreement dated as of May 24, 1996 which amended and
restated an earlier Consulting Agreement between the parties dated as of August
17, 1995 (collectively, the "Consulting Agreement"), pursuant to which Young
agreed to provide certain consulting services to the Company in consideration
for, among other items, stock option to purchase 150,000 shares of the Company's
common stock (the "Registrable Shares"); and
WHEREAS, the Company granted Young such stock option pursuant to a Stock
Option Agreement dated as of August 31, 1995 and amended as of the date hereof
(collectively, the "Option Agreement"), which also obligates the Company to
provide Young with certain registration rights with respect to the shares of
common stock in the Company underlying such option;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Piggyback Registration Rights.
-----------------------------
(a) For a period of five (5) years commencing as of the date hereof,
if the Company shall determine to proceed with the actual preparation and filing
with the U.S. Securities and Exchange Commission ("SEC") of a registration
statement in connection with the proposed offer and sale for money of any of its
equity securities under the Securities Act of 1933, as amended (the "Act"),
other than a registration relating solely to employee benefit plans, a
registration relating solely to a SEC Rule 145 transaction or a registration on
any registration form that does not permit secondary sales or does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Shares, it will give
at least thirty (30) days prior written notice to Young of its intention to do
so. Upon the subsequent written request of Young to the Company to include all
or a portion of the Registrable Shares in such registration, given within ten
(10) days after receipt of a notice of registration from the Company and stating
the number of Registrable Shares to be disposed of and the intended method of
disposition, the Company will cause all such Registrable Shares intended to be
disposed of by Young to be included in such registration under the Act, so as to
permit the sale or other disposition of such Registrable Shares by Young,
subject, however, to the limitations set forth below.
<PAGE>
(b) The Company shall not be required to include Registrable
Shares in a registration of its securities on more than two (2) occasions
pursuant to this Agreement. A registration shall not count as one of said two
permitted piggyback rights if in an underwritten offering referred to in
Section 5 hereof the underwriter excludes 50% or more of the Registrable
Shares requested to be included by Young.
(c) The Company may at any time delay or withdraw a registration
contemplated by Section 1(a) above or otherwise elect to cause such a
registration not to become effective.
2. Registration Procedure. The Company shall supply prospectuses to
----------------------
Young, qualify the Registrable Shares for sale in such states (but not more than
three (3) such states) as Young designates and furnish indemnification in the
manner as set forth in Section 6 hereof. Young shall furnish information and
indemnification as set forth in Section 6 hereof.
3. Termination of Rights. Young's rights and benefits under this
---------------------
Agreement shall immediately terminate upon the occurrence of any sale, transfer
or other conveyance, whether direct or indirect, of all or substantially all of
the assets of the Company, on a consolidated basis, in one or a series of
related transactions.
4. Expenses. The Company shall bear the full cost and expense of any
--------
registration of securities referred to in Section 1 hereof notwithstanding that
Registrable Shares may be included in any such registration; provided, however,
that Young shall bear the full cost or expense of her own counsel and
accountants and any registration fees, transfer taxes or underwriting discounts
or commissions applicable to the Registrable Shares sold by Young pursuant
thereto.
5. Underwritten Offerings.
----------------------
(a) If any registration of Registrable Shares is underwritten, the
Company's obligation to register the Registrable Shares of Young is
conditioned upon Young's participating in any such underwriting and entering
into an underwriting agreement in customary form with the Company's
underwriter. If the underwriter determines that marketing factors require a
limitation on the number of shares to be underwritten, the underwriter may
exclude from such registration and underwriting some or all of the Registrable
Shares which would otherwise be underwritten pursuant thereto, but if any
other shares of the Company's common stock owned by shareholders of the
Company are to be included in such registration and underwriting, the total
amount of the Company's common stock to be included on behalf of all such
shareholders shall be allocated as follows: (i) first, the shares of common
stock requested to be included therein which were acquired by Pacific Growth
Equities, Inc., or its successors and assigns ("PGE"), pursuant to a certain
Warrant to be issued in connection with the Company's initial public offering
covering an aggregate of 150,000 shares of common stock and (ii) second, the
shares of common stock requested to be included therein by Young and other
shareholders (excluding PGE) in proportion to the
<PAGE>
respective amounts of shares of common stock for each such person as requested
be so included.
(b) Young agrees, if so requested by the managing underwriter in an
underwritten offering, not to effect any public sale or distribution of
securities included in such offering, including a sale under Rule 144 under the
Act, during the ten (10) day period prior to, and during the forty five (45) day
period beginning on, the closing date of each offering made pursuant to such
registration statement.
6. Indemnification.
---------------
(a) The Company shall indemnify and hold harmless Young and each
underwriter, within the meaning of the Act, who may purchase from or sell for
Young any Registrable Shares from and against any and all losses, claims,
damages and liabilities arising out of or based on any untrue statement or
alleged untrue statement of a material fact contained in any prospectus,
offering circular or other document incident to any registration, qualification
or compliance (or in any related registration statement, notification or the
like) required to be filed or furnished by reason of this Agreement or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished or required to be furnished to the
Company by Young or such underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of the Act.
(b) Young and each underwriter, within the meaning of the Act, who
may purchase from or sell for Young any Registrable Shares shall indemnify the
Company, its directors, each officer signing the related registration statement
and each person, if any, who controls the Company within the meaning of the Act,
from and against any and all losses, claims, damages and liabilities caused by
any untrue statement or alleged untrue statement of a material fact contained in
any prospectus, offering circular or other document incident to any
registration, qualification or compliance (or in any related registration
statement, notification or the like) required to be filed or furnished by reason
of this Agreement or caused by any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading based upon information furnished or required
to be furnished to the Company by Young or such underwriter expressly for use
therein.
7. Notice of Proposed Transfer. Prior to the proposed transfer of
---------------------------
any of the Registrable Shares (other than under the circumstances described in
Section 1 above), Young shall give written notice to the Company of her
intention to effect such transfer. Each such notice shall describe in
sufficient detail the manner of the proposed transfer, and, if requested by the
Company, shall be accompanied by an opinion of counsel produced at Young's
<PAGE>
expense and reasonably satisfactory to the Company to the effect that the
proposed transfer may be effected without registration under the Act and
applicable state securities laws, whereupon Young shall be entitled to
transfer such Registrable Shares in accordance with the terms of her notice.
8. Miscellaneous.
-------------
(a) All notices, demands, consents and reports provided for in
this Agreement shall be in writing and shall be deemed given when hand
delivered, on the second business day after being mailed by certified mail,
return receipt requested, with postage prepaid, and on the next business day
after being sent via a nationally recognized overnight delivery service, which
service obtains a signature upon delivery to the parties at the following
addresses, or to such other addresses as may be designated by one party to the
other in writing and delivered as set forth above:
If to the Company:
EP MedSystems, Inc.
58 Route 46 West
Budd Lake, NJ 07828
Attn: David A. Jenkins, President
with a copy to:
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Attn: Dean M. Schwartz, Esq.
If to Young:
Ms. Tracey E. Young
12 Perry Lane
Ridgefield, CT 06877
(b) This Agreement constitutes the entire agreement and
understanding between the parties and shall supersede any and all prior oral
or written agreements, promises or understandings between the parties hereto
with respect to the subject matter hereof. Except as otherwise herein
provided, this Agreement may only be amended by an agreement between the
parties executed in writing.
(c) This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their successors and assigns. This Agreement may
not be assigned without the prior written consent of all parties.
<PAGE>
(d) In the event that any provision of this Agreement is held in
any jurisdiction to be invalid, prohibited or unenforceable for any reason,
such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(e) This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which taken together
shall be deemed one and the same instrument.
* * * * *
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the date and year first above written.
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
---------------------------
David A. Jenkins, President
/s/ Tracey E. Young
------------------------
TRACEY E. YOUNG
<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) $(167,289)
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) $ (.03)
---------- ----------- ----------- ---------- ----------
</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
June 11, 1996
<PAGE>
EXHIBIT 23.2
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.
/s/ George C. Myers, Jr.
By: _________________________________
George C. Myers, Jr.
Washington, D.C.
June 11, 1996
