U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: December 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-28260
EP MEDSYSTEMS, INC.
(Name of small business issuer as specified in its charter)
New Jersey 22-3212190
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
58 Route 46 West, Budd Lake, NJ 07828
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (201) 691-6400
Securities registered under Section 12(g) of the Exchange
Act: Common Stock, no par value, $.001 stated value per
share
Check whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days. ___X___ Yes ______No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained herein, and
no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
The issuer had revenues of $2,315,959 for the fiscal year
ended December 31, 1996.
The aggregate market value of the issuer's outstanding
voting stock held by non-affiliates on March 19, 1997,
based on the closing sale price of its common stock on the
Nasdaq National Market on such date, was approximately $23.0
million.
As of March 19, 1997, there were outstanding 7,599,917
shares of the registrant's Common Stock, no par value,
stated value $.001 per share.
Transitional Small Business Disclosure Format (check one)
______Yes ___X___No
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report
contains forward-looking statements relating to such matters
as anticipated financial and operational performance,
business prospects, technological developments,new products,
research and development activities and similar matters.
The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. EP
MedSystems, Inc. (the "Company") notes that a variety of
factors could cause the Company's actual results and
experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may
affect the operation, performance and development and
results of the Company's business include, but are not
limited to, those matters discussed herein in the section
entitled "Business Considerations." Readers are cautioned
not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described
in other documents the Company files from time to time with
the Securities and Exchange Commission.
TRADEMARKS AND TRADENAMES
ProCath is a registered trademark of the Company. EP
MedSystems, ALERT, ALERT SYSTEM, ALERT Catheter, ALERT
Companion, EP WorkMate, EP-2, EP-3 and PaceBase are
trademarks of the Company. This Annual Report also includes
tradenames and trademarks of companies other than the
Company. EchoEye, EchoMark and ColorMark are, to the
Company's knowledge, trademarks of EchoCath, Inc.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
EP MedSystems, Inc. has developed a new product for internal
cardioversion of atrial fibrillation known as 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
also currently designs, manufactures and markets a broad-
based line of specially-designed products for the cardiac
electrophysiology ("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 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.
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, NJ
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 ("ProCath").
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
arrhythmias are known as arrhythmias.
Atrial Fibrillation
Atrial fibrillation, a form of arrhythmia, 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, 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
SwanGanz 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 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 ALERT System
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 (the "ALERT Catheter") and an external
energy source (the "ALERT Companion"). The ALERT Catheter
is inserted into a vein in a patient's arm and guided to the
heart. Small amounts of energy are then delivered from the
external energy source through the ALERT Catheter to the
heart. The ALERT System simultaneously provides temporary
pacing capabilities and blood pressure monitoring in the
left pulmonary artery during this procedure.
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 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, MD, a member of the Company's Scientific Advisory
Board. Two patents have been issued in the U.S. and Dr. Alt
has filed an application for patents in 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. The Company has filed
additional patents on the method of manufacturing the ALERT.
See "-- Patents and Intellectual Property."
U.S. Clinical Trials
The Company believes the ALERT System is a Class III medical
device which will require pre-market approval ("PMA") from
the U.S. Food and Drug Administration ("FDA") prior to
marketing in the U.S. The Company has prepared a clinical
study protocol for submission to the FDA as part of an
application for an Investigational Device Exemption ("IDE").
In February, 1997, the Company filed its Pre-IDE application
for the ALERT System with the FDA. Subject to FDA comments
to the Pre-IDE application, the Company expects to file an
IDE application for the ALERT System during the second
quarter of 1997. 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. The Company has received commitments from several
leading electrophysiology centers to participate in clinical
trials. The Company expects to begin clinical trials during
1997. See " -- Government Regulation."
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.
EXISTING PRODUCTS
The Company develops, markets, sells and services a broad
based, integrated line of electrophysiology products used to
monitor, analyze, diagnose and treat cardiac arrhythmias.
All of these products have received 510(k) clearance except
for the PaceBase software, which the Company believes is not
an FDA-regulated product. 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 electrophysiology workstation that
monitors, displays and stores cardiac electrical activity
and arrhythmia data. Electrophysiology workstations are
dedicated data management systems designed specifically for
use in electrophysiology 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 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
electrophysiology 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 electrophysiology 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 electrophysiology market.
Catheter Products
The Company presently markets a full line of diagnostic
electrophysiology catheters for stimulation and sensing of
electrical signals during electrophysiology 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 numerous
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 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)
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, 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.
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 U.S. patents, an exclusive license under one patent
application pending in the European Patent Office and has
filed two patent applications in the United States on a
method of manufacturing the ALERT Catheter. The Company has
a semi-exclusive license under one issued U.S. patent as to
certain technology to conduct temporary ventricular
defibrillation. The Company has an Exclusive Rights
Agreement to develop the clinical and commercial potential
of a proprietary ion beam deposition process for applying a
thin metallic coating to the Company's electrophysiology
catheters and accessories. The Company licensed nine issued
U.S. patents and four foreign filings as to the EchoMark,
EchoEye and ColorMark technologies in an attempt to develop
products which allow visualization of the heart's anatomy
and visualization of catheters inside the heart through the
use of ultrasound imaging. The field of use of the license
covers cardiac electrophysiology except for pacemaker leads
and permanently implanted defibrillation devices. These
license agreements generally provide for the payment of
royalties on the sale by the Company of products using the
patented technology. In addition, the Company has filed
four patent applications in the U.S. for catheter
technologies.
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
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, MD (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.
In May, 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
proprietary ion beam deposition 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 June 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.
During February, 1997, the Company licensed certain
technologies from EchoCath, Inc. ("EchoCath") in order to
attempt to develop products which allow visualization of the
heart's anatomy and visualization of catheters inside the
heart through the use of ultrasound imaging. The agreement
calls for the Company to make payments totaling $700,000, in
four installments, as certain development milestones and
initial sales are achieved. Terms of the license call for
a royalty on net sales, including minimum royalties
beginning in 1999 and continuing for the life of the
applicable patents and continuations thereof. The Company
also purchased 280,000 shares of newly issued 5.4%
cumulative convertible preferred stock of EchoCath for $1.4
million in cash.
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.
RESEARCH AND DEVELOPMENT
The electrophysiology 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
(which includes expenditures for clinical trials, regulatory
affairs and engineering) totaled approximately $856,191,
$320,311 and $129,855 in the twelve month periods ending
December 31, 1996, 1995 and 1994, respectively. During
1996, the Company's principal research and development
project involved the ALERT System, including engineering and
development of the ALERT Catheter and ALERT Companion
hardware, design of the clinical trial protocol and the
preparation of the Pre-IDE application to the FDA.
Additionally, other research and development efforts are
ongoing to develop new products, enhance product quality and
lower production costs.
In May, 1996, the Company entered into an Exclusive Rights
Agreement with Spire, whereby the Company obtained the
exclusive right to develop the clinical and commercial
potential of Spire's proprietary ion beam deposition process
for applying a thin metallic coating to the Company's
electrophysiology catheters and accessories. The Company
has undertaken several development projects for new or
improved catheter products utilizing Spire's ion beam
deposition process, including applications with the ALERT
Catheter, electrophysiology catheters and ablation
catheters. There can be no assurance that development of
the Spire technology will result in future products.
During February, 1997, the Company licensed certain
technologies from EchoCath in order to attempt to develop
products which allow visualization of the heart's anatomy
and visualization of catheters inside the heart through the
use of ultrasound imaging. There can be no assurance that
development of the EchoCath technology will result in future
products.
The Company is developing a steerable catheter which will
deflect, or steer, the tip of the catheter. The catheter is
being designed for use in diagnostic electrophysiology
studies and the Company has filed a U.S. patent application.
The Company also intends to design a modified version that
will have therapeutic cardiac ablation abilities. Prior to
marketing such products domestically, FDA clearance or
approval will be required.
Software development is generally performed by Company
software engineers. The Company is developing an
electrophysiology 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. FDA clearance of such product
enhancements may be required.
SALES AND MARKETING
Domestic
Historically, the Company has relied on third party
distributors for all of its sales activities. Following
completion of its initial public offering, the Company began
efforts to build a direct sales and marketing force to sell
all of its products in the domestic market. During 1996,
the Company hired a new Vice President of Sales and
Marketing, a National Sales Manager, four Regional Sales
Managers, a Director of Marketing and several technical
service and administrative support personnel. Also during
this time, the Company terminated its relationships with all
of its domestic distributors. The Company intends to
continue to expand its direct sales and marketing efforts
through 1997.
International
The Company is continuing to utilize distributors to sell
its products overseas and is in the process of adding
distributors in several countries not previously
represented. The Company expects to expend considerable
effort to expand and strengthen its global sales and support
network. The Company intends to focus on developing key
distributor relationships in Japan and certain European
countries. The Company hired an International Sales Manager
in 1997 to facilitate this development. In 1997, the
Company formed a U.S. subsidiary, with a branch based in the
United Kingdom, to improve distributor relationships and
customer service in Europe. During 1996, the Company's
distributor received approval from the Japanese Ministry of
Health to sell electrophysiology equipment and catheters in
the Japanese market. The Company initiated sales through
its Japanese distributor during the fourth quarter of 1996.
No assurance can be given that the Company or its
distributors can successfully introduce the Company's
products in Europe, Japan or elsewhere on terms acceptable
to the Company, or at all. Future foreign sales will be
subject to certain risks, including exchange rate
fluctuations, international monetary conditions, tariffs and
taxes, import restrictions and other regulations.
MANUFACTURING
Substantially all of the Company's catheter products are
manufactured at a facility located in Berlin, New Jersey.
Each catheter is assembled and tested by the Company prior
to sterilization. The Company's Berlin facilities and
quality assurance procedures are subject to Good
Manufacturing Practices ("GMP") regulations promulgated by
the FDA. All raw material vendors are required to submit
certificates of compliance to the Company's specifications.
Procath recently received ISO-9001 Certification of its
manufacturing facility. Also, during 1997, ProCath received
approval from its European notified body to apply the CE
Mark to its catheter products, a necessity for the continued
sales of the Company's products in the European Community.
These approvals were also necessary in order for the Company
to initiate sales of the ALERT System in Europe.
During February, 1997, ProCath purchased approximately 7,500
square feet of space, including 2,500 square feet of space
that was leased by ProCath. The purchase will allow for the
expansion of the existing manufacturing operations, provide
for additional warehousing, shipping and quality assurance
activities and relocation of ProCath's administrative
offices. The Company believes that this facility has
sufficient capacity to satisfy its catheter manufacturing
needs for the next two years.
Substantially all of the Company's other products are either
manufactured or assembled on a contract basis by Hi-Tronics
Designs, Inc. ("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.
GOVERNMENT REGULATION
In the U.S., the development, testing, manufacture,
labeling, marketing, promotion and sale of medical devices
are regulated by the FDA under the Federal Food, Drug, and
Cosmetic Act ("FFDCA"). The FDA has broad discretion in
enforcing the FFDCA, and noncompliance with applicable
requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial
suspension of production, failure to grant premarket
clearance or premarket approval for devices and criminal
prosecution.
Medical devices are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary
to reasonably ensure their safety and effectiveness. Class
I devices require general controls such as proper labeling,
premarket notification and adherence to GMP. Class II
devices require the use of special controls such as
performance standards, post-market 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 pre-clinical
and clinical trial data to demonstrate the safety and
efficacy of the device. If human clinical trials of a
device are undertaken, and the device presents a
"significant risk," the manufacturer or the distributor of
the device must obtain FDA approval of an IDE application
prior to commencing human clinical trials in the U.S.
The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If
the IDE application is approved, human clinical trials may
begin at a specific number of investigational sites with a
maximum specific number of patients, as approved by the FDA.
Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study
provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently
complete to permit a substantive review. If the FDA
determines that 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 three 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. Subject to the FDA's comments as to the Company's
Pre-IDE application, the Company intends to apply for an IDE
from the FDA during the second quarter of 1997. 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 electrophysiology centers
to participate in clinical trials. There can be no
assurance that the IDE will be approved by the FDA or, if it
is, that the clinical trials conducted under the IDE will
determine the safety and effectiveness of the ALERT System,
or that a subsequently filed PMA application will be
accepted by the FDA for filing or approved.
Following FDA clearance or approval of a device for
commercial distribution, the primary form of government
regulation of medical devices is the FDA's GMP regulations
for medical devices. These regulations, administered by the
FDA, set forth requirements to be observed in the design,
manufacture, packaging, labeling and storage of medical
products for human use, including implementation of a
quality assurance program. These regulations require, among
other things, that manufacturing be controlled by the use of
written procedures and the ability to produce devices that
meet specifications be validated by extensive testing. They
also require inspection and testing of the products produced
and investigation when devices fail to meet specifications.
Failure to adhere to GMP requirements would cause the
products produced to be considered in violation of the FFDCA
and subject to enforcement action. The FDA monitors
compliance with these requirements by requiring
manufacturers to register their manufacturing facilities and
list their products with the FDA, and subjecting the
facilities to periodic FDA inspections. If an FDA inspector
observes conditions that might be violative of GMP
procedures, the manufacturer must correct those conditions
or explain them satisfactorily, or face potential regulatory
action that might include physical removal of the product
from the market. The FDA's Medical Device Reporting
regulations require that the Company provide information to
the FDA on the occurrence of any deaths or serious injuries
alleged to have been associated with the use of the
Company's products, as well as on any product malfunction
that would likely cause or contribute to a death or serious
injury if the malfunction were to recur. FDA law and
regulations also prohibit a device from being labeled or
promoted for unapproved or uncleared indications. If the
FDA believes that a company is not in compliance with any of
these 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 has recently received the CE Mark for its
catheter products, including the ALERT Catheter. 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 a PMA generally may be exported without further
FDA authorization, provided certain conditions are met. A
Class III device without a PMA may be exported to a foreign
country for commercial marketing if the exporting firm
obtains prior FDA authorization and the following
requirements are satisfied: (i) the device meets the
specifications of the foreign purchaser; (ii) the device is
not in conflict with the laws of the country to which it is
intended for export; (iii) the device is labeled that it is
intended for export; (iv) the device is not sold or offered
for sale in domestic commerce; and (v) the FDA determines
that the exportation of the device is not contrary to the
public health and has the approval of the country to which
it is intended for export.
The FDA Export Reform and Enhancement Act of 1996 has
relaxed the exportation requirements governing devices under
certain circumstances. Pursuant to this new law, a device
that has not obtained FDA clearance or approval may be
exported to any country in the world without FDA
authorization if the product complies with the laws of that
country and has valid marketing authorization in one of the
following countries: Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa, the European Union or a
country in the European economic area. The FDA is
authorized to add countries to this list in the future.
Among other restrictions, a device may only be exported
under the new law if it is not adulterated, meets the
specifications of the foreign manufacturer, complies with
the laws of the importing country, is labeled for export, is
manufactured in substantial compliance with GMP regulations
or recognized international standards and is not sold in the
U.S.
The Company is also subject to numerous federal, state and
local laws relating to such matters as safe working
conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance
that it will not be required to incur significant costs to
comply with such laws and regulations in the future or that
such laws and regulations will not have a materially adverse
effect upon the Company's ability to do business.
COMPETITION
The medical device market, particularly in the area of
cardiac electrophysiology 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 Prucka Engineering, Inc.,
Quinton Instruments (a subsidiary of American Home Products,
Inc.), C.R. Bard Inc. and Fischer Imaging. The Company's
TeleTrace/PaceBase products compete with PaceArt. Other
companies vying for market share in the cardiac
electrophysiology 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. The Company's business will depend upon its ability
to remain competitive with other developers of such medical
devices and therapies.
THIRD-PARTY REIMBURSEMENT
In the U.S., the Company's products are marketed to medical
institutions and physicians that then bill various third-
party payors, such as government programs, principally
Medicare and Medicaid, and private insurance plans, for the
healthcare services provided to their patients. Third-party
payors are increasingly challenging the prices charged for
medical products and services, and substantial uncertainty
exists as to third-party reimbursement for investigational
and newly approved products. Government agencies, private
insurers and other payors generally reimburse hospitals for
medical treatment at a fixed rate per patient or based on
the procedures performed. The fixed rate reimbursement is
unrelated to the specific devices used in treatment. If a
procedure is not covered, payors may deny reimbursement. In
addition, some payors may deny reimbursement if they
determine that the device used in the treatment was
unnecessary, inappropriate or not cost-effective, or if it
was experimental or was used for a non-approved indication,
even if it has FDA approval. Because the amount of the
reimbursement is fixed, to the extent a physician uses more
expensive devices, the amount of potential profit relating
to the procedure is reduced. Accordingly, hospitals must
determine 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.
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.
EMPLOYEES
As of March 19, 1997, the Company had 40 full-time
employees, of whom 11 are dedicated to manufacturing and
quality assurance, 11 are engaged in management and
administration, 8 are engaged in sales and marketing and 8
are engaged in research and development and technical
service. The Company believes its employee relations are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
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.
At December 31, 1996, the Company's subsidiary, ProCath,
leased 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.
In February, 1997, ProCath purchased approximately 7,500
square feet of space, including 2,500 square feet of space
that was under lease by ProCath, for an aggregate purchase
price of approximately $386,000, including certain
transaction costs. The purchase will allow for the
expansion of ProCath's manufacturing operations, provide for
additional warehousing, shipping and quality assurance
activities and relocation of ProCath's administrative
offices. The lease on ProCath's remaining 2,500 square feet
of leased space expires in November, 1997 and will not be
renewed. The Company believes that its facilities are
sufficient to meet its expected needs for at least the next
twelve months.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq
National Market under the trading symbol "EPMD" since the
Company completed its initial public offering of Common
Stock on June 21, 1996. Prior to that date, there was no
public market for the Company's Common Stock.
The following table sets forth the high and low closing sale
prices for the Company's Common Stock during the second
(from June 21, 1996 through June 30, 1996), third and fourth
quarters of 1996, based on transaction data as reported by
the Nasdaq National Market.
For the year ended
December 31, 1996 High Low
Second quarter
(commencing June 21, 1996) $6.00 $5.50
Third quarter $6.00 $4.00
Fourth quarter $5.50 $3.25
On March 19, 1997, the last reported sale price for the
Company's Common Stock as reported by the Nasdaq National
Market was $3.81 per share.
As of March 19, 1997, there were approximately 81 registered
holders of record of the Company's Common Stock. This
number excludes individual stockholders holding stock under
nominee security position listings. Because many of such
shares are held by brokers and other institutions on behalf
of stockholders, the Company is unable to estimate the total
number of stockholders represented by these record holders.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements
relating to future events or the future financial
performance of the Company. Such statements involve risks
and uncertainties and actual events or results may differ
materially from the results discussed in such forward-
looking statements. Factors that could cause or contribute
to such differences include those discussed under "Business
Considerations" herein as well as those discussed in other
filings made by the Company with the Securities and Exchange
Commission.
GENERAL
The Company was formed in January, 1993 to develop,
manufacture, market and sell a range of electrophysiology
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. 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 various electrophysiology
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 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
electrophysiology 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.
- May, 1996: The Company entered into an Exclusive Rights
Agreement with Spire, whereby the Company obtained the
exclusive right to develop the clinical and commercial
potential of Spire's proprietary ion beam deposition process
for applying a thin metallic coating to the Company's
electrophysiology catheters and accessories. The Company
has undertaken several development projects for new or
improved catheter products utilizing Spire's ion beam
deposition process, including applications with the ALERT
Catheter, electrophysiology catheters and ablation
catheters. These projects are ongoing although there can be
no assurance that such projects will be successful..
- February, 1997: The Company licensed certain
technologies from EchoCath in order to attempt to develop
products which allow visualization of the heart's anatomy
and visualization of catheters inside the heart through the
use of ultrasound rather than by using fluoroscopy, or x-ray
imaging. The license includes all rights to the EchoMark,
EchoEye and ColorMark technologies for use in the field of
electrophysiology. The license excludes use on permanently
implantable defibrillators and pacemaker leads.
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
applicable 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
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
December 31, 1996, had an accumulated deficit of
approximately $5.06 million. The Company believes that it
will have sufficient capital to carry out its proposed
business objectives for at least the next 12 months.
RESULTS OF OPERATIONS
GENERAL
Historically, the Company has relied on third party
distributors for all of its sales activities. Following
completion of its initial public offering, the Company began
efforts to build a direct sales and marketing force to sell
all of its products in the domestic market and to strengthen
its international distribution network. During 1996, the
Company hired a new Vice President of Sales and Marketing, a
National Sales Manager, an International Sales Manager,
four Regional Sales Managers, a Director of Marketing and
several technical service and administrative support
personnel. Also during this time, the Company terminated
its relationships with all of its domestic distributors.
The Company believes that the change from a distributor-
based sales force to a direct sales force had a temporary
adverse effect on sales of its electrophysiology equipment
during the third and fourth quarters of 1996. However, the
Company also believes its domestic direct sales force has
the potential to generate greater sales in the future than
the Company had been experiencing through the use of
independent distributors. It is likely that the Company
will incur additional losses as a result of the increased
fixed costs associated with a direct sales force until such
time as sufficient incremental sales are generated to cover
such costs. The Company cannot determine when or if that
level of sales will be achieved.
The Company is continuing to utilize distributors to sell
its products overseas and is in the process of adding
distributors in several countries not previously
represented. In 1997, the Company formed a U.S. subsidiary,
with a branch based in the United Kingdom, to improve
distributor relationships and customer service in Europe.
During 1996, the Company's distributor received approval
from the Japanese Ministry of Health to sell
electrophysiology equipment and catheters in the Japanese
market. The Company initiated sales through its Japanese
distributor during the fourth quarter of 1996.
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
Product sales increased $64,822 (or 3.2%) from $2,001,137 in
1995 to $2,065,959 in 1996. Sales of the EP WorkMate
increased by approximately $330,000 as the product began to
gain market acceptance after its introduction in late 1995.
Sales of the Company's catheter line also increased during
1996 while sales of stand-alone EP-3 Stimulators declined,
partially due to the fact that EP-3 Stimulators are an
integrated component of the EP WorkMate. As discussed above
under "General," the Company believes that the change from a
network of independent distributors to a newly hired
domestic direct sales force had a temporary adverse impact
on electrophysiology equipment sales in the third and fourth
quarters of 1996.
During 1996, the Company recorded $250,000 in catheter
development revenue related to a Product Development and
Supply Agreement with InControl. The agreement covers a new
temporary atrial defibrillation catheter ("TADCATH"). The
Company will manufacture and supply TADCATH to InControl for
clinical trials and subsequent product sales. The agreement
provides for annual minimum purchases. The Company also
entered into non-exclusive distribution agreements which
allow InControl to sell the ALERT Catheter in parts of
Europe, Africa and the Middle East and the ALERT Companion
on a world-wide basis for a period of two years subject to
renewal upon mutual agreement of the parties. While
InControl will be primarily responsible for all regulatory
clearances of the TADCATH, the Company will make a $75,000
payment to InControl towards the cost of clinical trials.
The Company has determined that continued sale and service
of arrhythmia monitors does not represent a good strategic
fit with the Company's existing products and planned product
line, including the ALERT System, due, in part, to the fact
that the customers for arrhythmia monitors usually do not
purchase the Company's electrophysiology equipment and
catheters. The Company also determined that the gross
margins generated by the sale of arrhythmia monitors are not
sufficient to justify the expense and efforts by its direct
sales force to generate sales of the product. Therefore,
the Company plans to discontinue sale of the MemoryTrace
line of arrhythmia monitors. Sales of arrhythmia monitors
were approximately $12,000 and $198,000 in the years ended
December 31, 1996 and 1995, respectively. In 1997, the
Company agreed to sell its rights, title and interest in (i)
the 4221, 4222 and 4222 ATM arrhythmia monitors, including
manufacturing drawings and regulatory approvals and (ii) the
4400 ATM arrhythmia monitor currently under development by
HDI, to HDI in return for 60,000 shares of common stock in
Neomedics, Inc., a newly created company involved in the
design and manufacture of implantable medical devices, which
is an affiliate of HDI.
Cost of products sold decreased $95,520 (or 7.6%) from
$1,257,468 to $1,161,948. Excluding catheter development
revenues, gross profit for 1996 was $904,011 (or 43.8% as a
percentage of product sales), as compared with $743,669 (or
37.2%) for 1995. This increase in gross profit was
principally due to higher sales, higher gross margins
realized on the EP WorkMate which represented a larger
proportion of sales in 1996 than in 1995 and the decline in
sales of MemoryTrace arrhythmia monitors which produced a
low gross margin in 1995.
Sales and marketing expenses increased $287,556 (or 60.3%)
from $477,209 to $764,765 and as a percentage of total
revenues from 23.8% to 33.0%. Beginning in September, 1996,
the Company began hiring a domestic direct sales force,
including several salaried sales and marketing managers and
personnel. The effort also involved increased base
commissions for direct sales representatives, increased
travel and lodging and convention related expenses and
increased promotion expenses related to existing products.
The Company expects sales and marketing expenses to increase
significantly in 1997 as the direct sales force will be in
place for the entire year and as product promotion
associated with the direct sales effort continues to
increase. It is likely that the Company will incur
additional losses as a result of the increased fixed costs
associated with direct sales until such time as sufficient
incremental sales are generated to cover such costs. The
Company cannot determine when or if that level of sales will
be achieved. Further, the Company has filed a Pre-IDE
application with the FDA and expects to begin clinical
trials for the ALERT System during the second quarter of
1997. Although there can be no assurance of such fact, the
Company anticipates that international sales of the ALERT
System will begin in 1997. As a result, the Company will
incur additional expenses related to the introduction of the
ALERT System.
General and administrative expenses increased $311,329 (or
41.1%) from $757,635 to $1,068,964 and increased as a
percentage of total revenues from 37.9% to 46.2%. The
dollar increase was due to the hiring of additional
administrative personnel, increased occupancy costs,
increased use of professional services, including accounting
fees and legal fees associated with several patent filings,
and increased product liability and directors and officers
insurance expense. The Company expects general and
administrative expense to increase in future periods due to
anticipated future growth. It is anticipated, however, that
these expenses will decline as a percentage of total
revenues at such time as sufficient incremental sales are
generated to cover such costs. The Company cannot determine
when or if such incremental sales will be achieved.
Research and development expenses increased $535,880 (or
167.3%) from $320,311 to $856,191 and as a percentage of net
sales from 16.0% to 37.0%. The increase was due to
significant expenses associated with the ALERT System,
including engineering development associated with the ALERT
Catheter and the ALERT Companion hardware, design of the
clinical trial protocol and preparation of the Pre-IDE
filing with the FDA. The Company also realized increases in
research and development expenses related to the licensing
and development of the Spire technology for placement of a
flexible metallic coating on its electrophysiology
catheters, hiring of additional in-house engineering and
technical support personnel and increased development work
on existing products, including the EP WorkMate. The
Company expects that expenses related to the ALERT System
will be significant in 1997 and 1998 when clinical trials
are anticipated to commence. The Company also expects that
other research and development expenses will increase as it
continues attempts to develop new products, including
ultrasound guided catheters utilizing technology licensed
from EchoCath in February, 1997 and catheters utilizing the
Spire technology as well as ongoing improvements to existing
products.
Upon repayment of the 1995 Debentures, the Company recorded
a write-off of $49,232 representing the unamortized discount
on the 1995 Debentures related to the 1995 Warrants.
Interest expense decreased $6,114 (or 12.0%) from $50,893 to
$44,779 and as a percentage of revenues from 2.5% to 1.9%.
The decrease was due to the Company's repayment of
$1,137,500 face amount of 1995 Debentures in June, 1996 and
the repayment of the $96,350 balance plus accrued interest
payable on a note incurred in connection with the
acquisition of ProCath. The Company does not expect to
incur material interest expense in 1997.
Interest income during 1996 was $338,335 due to interest
earned on the proceeds of the June, 1996 initial public
offering. Interest income was insignificant in 1995. The
Company expects to continue earning interest on its excess
cash in future periods, but the amount of interest income
will decrease as proceeds are utilized in the Company's
business.
The Company incurred a net loss $1,570,578 (or $.23 per
share based on 6,762,019 shares outstanding), in 1996 as
compared with $1,482,650 (or $.26 per share based on
5,789,654 shares outstanding) in 1995. The increase of
$87,928 (or 5.9%) in net loss was caused by the factors
discussed above.
Year Ended December 31, 1995 Compared to Year Ended December
31, 1994
Net sales increased $489,061 (or 32.3%) from $1,512,076 in
1994 to $2,001,137 in 1995. The increase was due to
increased sales of PaceBase and TeleTrace products and
diagnostic and temporary pacing catheters as well as the
initiation of sales of the EP WorkMate in September, 1995.
The increase was partially offset by a decline in sales of
the EP-2 due to the discontinuation of sales of the EP-2 in
1994.
Cost of sales increased $344,011 (or 37.7%) from $913,457 to
$1,257,468. Gross profit increased $145,050 (or 24.2%) from
$598,619 to $743,669 but decreased as a percentage of net
sales due to increases in catheter manufacturing overhead
that were not fully offset by increased product sales.
Sales and marketing expenses increased $214,439 (or 81.6%)
from $262,770 to $477,209 and as a percentage of net sales
from 17.4% to 23.8%. The increase was due to increased
sales, the hiring 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 III-S Receiver and increased internal research and
development related to the EP WorkMate.
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.
The Company incurred a net loss $1,482,650 (or $.26 per
share based on 5,789,654 shares outstanding), in 1995 as
compared with $1,596,850 (or $.29 per share based on
5,480,262 shares outstanding), in 1994. The decrease of
$114,200 (or 7.2%) in net loss was caused by the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have exceeded its
revenues, resulting in an accumulated deficit of $5.06
million at December 31, 1996. Until June, 1996, the Company
had financed its operations through the sale of its Common
Stock in private placements; the issuance of certain
debentures (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. On June 21, 1996, the Company completed its initial
public offering of 2,500,000 shares of Common Stock at a
purchase price of $5.50 per share, for aggregate net
proceeds of approximately $11,786,000 after deducting
offering expenses.
Net cash used in operating activities for the year ended
December 31, 1996 was $1,891,776 as compared to $337,916 for
the year ended December 31, 1995. The net use of cash in
operations during 1996 was due primarily to the Company's
$1,570,578 net loss from operations. Accounts receivable,
net, increased by $233,382 in 1996 from $438,120 to $671,503
and inventories increased by $157,442, from $469,265 to
$626,707 due to increased operating volume and activity.
Accounts payable and accrued expenses increased by $148,036
from $529,515 to $677,551 due to increased accruals for
product liability and directors and officers liability
insurance, legal and accounting fees, outside development
and consulting expenses for the ALERT System and an accrual
for clinical costs of the TADCATH catheter to be undertaken
by InControl. This was offset by a decrease in accounts
payable as the Company's improved cash position allowed it
to make timely payments to vendors and other trade
creditors. Amounts payable to a related party declined by
$173,685 from $258,720 to $85,035 due to the Company's
improved cash position which allowed it to make payments to
the related party under normal supplier terms. Prepaid
expenses and other current assets increased by $132,113 from
$53,648 to $185,761. The increase was due to increases in
prepaid insurance and deposits for several upcoming industry
trade shows.
Capital expenditures, net of disposals, were $97,337 during
the twelve months ended December 31, 1996 as compared to
$55,754 in 1995. The increase was due to purchases of
office equipment, including computer equipment for the
direct sales force, and normal capital expenditures at the
ProCath manufacturing facility. In February, 1997, ProCath
purchased approximately 7,500 square feet of manufacturing,
administrative and warehouse space, including 2,500 square
feet of space that was under lease by ProCath, for an
aggregate purchase price of approximately $386,000,
including certain transaction costs. The purchase will
allow for the expansion of ProCath's manufacturing
operations, provide for additional warehousing, shipping and
quality assurance activities and relocation of ProCath's
administrative offices. The lease on ProCath's remaining
2,500 square feet of space expires in November, 1997 and
will not be renewed. As of the date of this Annual Report,
the Company does not have any other material commitments for
capital expenditures. However, the Company expects to
purchase capital equipment and to expand its manufacturing
and assembly capabilities as it continues to grow. The
Company leases office and manufacturing space and certain
office equipment under operating leases. The aggregate
commitment for minimum rentals under these leases is
approximately $78,000 for 1997.
In 1995, at a time when the Company was contemplating the
establishment of a United Kingdom catheter manufacturing
facility, the Company purchased a $100,000 note receivable
payable by Falfab L.L.C., a United Kingdom angioplasty
catheter manufacturer ("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. Upon maturity, FalFab was
unable to repay amounts loaned to it by the Company and was
subsequently liquidated by its creditors. Accordingly, the
Company wrote off the $107,500 note receivable in 1996.
Net cash provided by financing activities was $12,243,424
for the year ended December 31, 1996 and included
approximately $11,786,000 of net proceeds of the Company's'
initial public offering and $500,000 from the private sale
of Common Stock in January, 1996, prior to the initial
public offering. During 1996, the Company repaid the
remaining $92,050 principal plus accrued interest due
thereon on a note issued in connection with its November,
1993 acquisition of PCC. The Company borrowed and
subsequently repaid a $50,000 short term note payable to
HDI.
During June, 1996, the holders of $1,025,000 face amount of
1995 Debentures elected to exercise their warrants issued in
connection with the 1995 Debentures ("1995 Warrants") to
purchase 512,500 shares of Common Stock at $2.00 per share
through the forgiveness of amounts due under the 1995
Debentures. On June 30, 1996, the Company repaid the
remaining outstanding 1995 Debentures in the face amount of
$112,500 in cash. Subsequent to the repayment, the holders
of the remaining 1995 Warrants exercised their option to
purchase 56,250 shares of Common Stock at $2.00 per share.
Upon repayment of the 1995 Debentures, the Company recorded
a write-off of $49,232, representing the unamortized value
placed on the 1995 Warrants issued in connection with the
1995 Debentures.
In May, 1996, the Company entered into an Exclusive Rights
Agreement with Spire, whereby the Company obtained the
exclusive right to develop the clinical and commercial
potential of Spire's proprietary ion beam deposition 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 form 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.
The Company has undertaken several development projects for
new or improved catheter products utilizing Spire's ion beam
deposition process, including applications with the ALERT
Catheter, electrophysiology catheters and ablation
catheters. These projects are ongoing and will require
additional funding by the Company.
During February, 1997, the Company licensed certain
technologies from EchoCath in order to attempt to develop
products which allow visualization of the heart's anatomy
and visualization of catheters inside the heart through the
use of ultrasound rather than by using fluoroscopy, or x-
ray imaging. The license includes all rights to the
EchoMark, EchoEye and ColorMark technologies for use in the
field of electrophysiology. The license excludes use on
permanently implantable defibrillators and pacemaker leads.
EchoCath will also transfer its 510-K approval on the
EchoMark electrophysiology catheter to the Company.
The agreement calls for the Company to make payments
totaling $700,000, in four installments, as certain
development milestones and initial sales are achieved on the
EchoMark and EchoEye technologies. The EchoCath license
provides for a royalty on net sales, including minimum
royalties of $120,000 beginning in 1999 and increasing to
$400,000 in 2005 and thereafter for the life of the
applicable patents and continuations. The Company may elect
not to make minimum royalty payments and, in such case,
EchoCath has the option to make the license non-exclusive or
cancel the license and return the $700,000 milestone
payments. The Company also purchased 280,000 shares of
newly-issued EchoCath 5.4% cumulative convertible preferred
stock for $1.4 million in cash. The Company's $1.4 million
investment is intended to fund development of the EchoEye
technology. Upon successful completion of its development
projects, the Company may introduce ultrasound technology
into its electrophysiology catheter line although there can
be no assurance that the Company will be successful in this
effort.
The Company plans to finance its capital needs principally
from existing capital resources, which the Company believes
will be sufficient to fund its operations through 1997.
Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material
adverse effect on the Company's business, financial
condition, results of operations and cash flows.
BUSINESS CONSIDERATIONS
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 December 31, 1996, the Company's accumulated deficit
was approximately $5.06 million. While the Company
currently manufactures 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,
the ability to manage domestic and international sales
growth 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
FDA and is not currently 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 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
IDE. The Company has prepared a protocol for such clinical
trials as part of an IDE application and has filed a Pre-IDE
application with the FDA and, subject to FDA comments,
expects to file the ALERT IDE application during the second
quarter of 1997. 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 is
in the final stages of 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. The Company will also be dependent on sub-
contractors for certain key components of the ALERT
Companion. Failure to obtain FDA approval for, market
acceptance of, efficient manufacturing processes and/or
reliable sub-contractors 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
electrophysiology workstation. Although the Company sells a
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 28% of the Company's net sales in the year
ended December 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. 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
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
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 pre-filing
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.
The FDA also strictly regulates the development and testing
of medical devices under the agency's 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 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 or other new products under development, 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 GMP regulations under the FFDCA, and the Company's
manufacturing facilities, and those of its subcontractors
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. 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 and
maintain 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. The Company has previously
exported limited quantities of what it considered to be a
custom device to a single physician pursuant to his written
specifications. There can be no assurance that the FDA
would agree with this determination. The Company believes,
however, that this would not affect its ability to export
products in the future. 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,
such as the ALERT System, ultrasound technology and Spire
technology. As a result, research and development for any
potential new product or product refinement may take longer
and require greater expenditures than expected, and may
ultimately prove unsuccessful. The commercial acceptance of
any new product will depend on the medical community's
acceptance of such product. There can be no assurance that
the Company will be able to develop new products or to
refine existing products that will be commercially accepted.
See "Business - The ALERT System," "- Research and
Development" and "-Manufacturing."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS.
Several factors may have a significant impact upon the
Company's revenues, expenses and results of operations from
quarter to quarter and year to year, including but not
limited to a long sales cycle for the EP WorkMate, hospital
budgetary processes, the timing of new product introductions
by the Company or its competitors, development of other
treatments for atrial fibrillation and other heart rhythm
disorders, changes in government or third-party
reimbursement policies, mix of products sold, foreign
currency fluctuations to the extent the Company has
developed significant international sales, the ability to
obtain products to meet customer demand and increases or
fluctuations in sales and marketing, administrative,
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 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 U.S. patents, an exclusive license under one patent
application pending in the European Patent Office and has
filed two patent applications in the United States on a
method of manufacturing the ALERT Catheter. The Company has
a semi-exclusive license under one issued U.S. patent as to
certain technology to conduct temporary ventricular
defibrillation. The Company has an Exclusive Rights
Agreement with Spire to develop the clinical and commercial
potential of a proprietary ion beam deposition process for
applying a thin metallic coating to the Company's
electrophysiology catheters and accessories. The Company
licensed nine issued U.S. patents and four foreign filings
from EchoCath as to the EchoMark, EchoEye and ColorMark
technologies in an attempt to develop products which allow
visualization of the heart's anatomy and visualization of
catheters inside the heart through the use of ultrasound
imaging. In addition, the Company has filed four patent
applications in the U.S. for catheter technologies.
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 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 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, 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
the Company's rights under patents, 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
electrophysiology 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 are putting pressure on medical equipment
suppliers to reduce prices. Furthermore, substantial
uncertainty exists as to third-party reimbursement for
investigational and newly approved products. The U.S.
Health Care Financing Authority has entered into an
interagency agreement with the FDA pursuant to which the FDA
places 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."
ABILITY TO MANAGE SALES GROWTH.
During 1996, the Company began to assemble a domestic direct
sales and marketing force to sell and promote the Company's
products in the U.S. market. Previously, the Company relied
on third-party distributors for all sales efforts. There
can be no assurance that the Company will be able to attract
and retain qualified and capable individuals who can
successfully promote the Company's products.
The Company is in the process of expanding its marketing
internationally and will continue to rely on third-party
distributors in foreign markets. During 1997, the Company
formed a U.S. subsidiary, with a branch based in the United
Kingdom, to improve distributor relationships and customer
service in Europe. During 1996, the Company's distributor
received approval from the Japanese Ministry of Health to
sell electrophysiology equipment and catheters in the
Japanese market and initiated sales through its Japanese
distributor during the fourth quarter of 1996. The Company
operates pursuant to written agreements with third party
distributors which are 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 actively and effectively market the
Company's products 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
international markets. 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 CORPORATE GROWTH.
The Company has acquired technology and related assets,
introduced or commenced marketing several new products,
begun assembling a domestic direct sales force 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 is actively recruiting additional management, sales
and technical personnel. The Company's success will depend,
in part, on its ability to attract and retain highly-
qualified personnel. There can be no assurance that the
Company will be able to attract and retain such personnel.
The Company competes for such personnel with other medical
device companies, academic institutions and other
organizations. The loss of any key personnel, the inability
to hire or retain qualified personnel or the failure of such
personnel to function effectively as a management group
could have a material adverse effect on the Company's
business, results of operations and financial condition.
See "Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act."
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 intends to manufacture the
ALERT Catheter. There can be no assurance that the Company
will be able to manufacture catheters or other products with
sufficient processes and in quantities necessary to achieve
and sustain profitability. In addition, the Company is
attempting to expand its catheter manufacturing facilities
and hire and train additional personnel. The Company has no
experience in large-scale manufacturing and there can be no
assurance that the Company will be successful in
manufacturing catheter products.
The Company relies on HDI for the manufacture of the EP
WorkMate, EP-3 Clinical Stimulator and the TeleTrace III
Receiver. 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. See "Business -- Manufacturing" and "Certain
Relationships and Related Transactions."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Approximately 39% of the Company's revenues for 1996 were
derived from sales of its products outside the U.S. As
such, the Company is 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 maintain and expand profitable foreign
sales and, consequently, on the Company's business, results
of operations and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE.
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 "Market for Common
Equity and Related Stockholder Matters."
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 and has repurchased
rights to the arrhythmia monitor product line from the
Company. 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 Relationships and
Related Transactions."
CONCENTRATION OF OWNERSHIP.
As of March 19, 1997, the Company's directors and executive
officers and their affiliates beneficially owned an
aggregate of approximately 22.7% of the Company's
outstanding Common Stock, including unexercised vested stock
options. 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 "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 7. FINANCIAL STATEMENTS
The information in response to this item is set forth in the
Consolidated Financial Statements beginning on page F-1 of
this report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE
EXCHANGE ACT
The following table sets forth certain information regarding
the directors, executive officers and certain key employees
of the Company as of March 19 1997:
NAME AGE POSITION
David A. Jenkins(3) 39 Chairman of the Board,
President and Chief Executive
Officer
James J. Caruso 36 Chief Financial Officer,
Treasurer and Secretary
C. Bryan Byrd 37 Vice President of Engineering
Robert W. Evans 53 Vice President of Sales and
Marketing
Joseph C. Griffin, III 37 President,ProCath Corporation
David W. Mortara, Ph.D.(1)(2) 55 Director
Lester J. Swenson(2) 57 Director
Jon A. Tietbohl(1)(2) 38 Director
Anthony J. Varrichio(3) 50 Director
(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 electrophysiology 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 of 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 software modules, and
before that with Mt. Sinai Medical Center in Miami Beach,
Florida. He has developed databases for all aspects of
cardiac surgery.
Robert W. Evans has been the Vice President of Sales and
Marketing of the Company since September, 1996. From 1992
to 1996, Mr. Evans served as Vice President of Sales and
Marketing for Cordis Webster, Inc. which was recently
purchased by Johnson & Johnson. While at Webster, he was
responsible for setting up worldwide distribution of the
Webster line of electrophysiology catheters, including
building a direct sales force covering the entire U.S.
domestic market. During a career spanning twenty five
years prior to 1992, Mr. Evans served as Vice President of
Sales and Marketing of Telos Medical, a division of Smith
Industries; Vice President of Sales and Marketing of
Interpore International; Vice President of Sales of
Cardiovascular Devices, Inc.; Vice President, Domestic Sales
of American Edwards Laboratories Division of American
Hospital Supply Corporation and Sales Representative of The
Upjohn Company.
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.
Lestor 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 Nguyen
Electronics, Inc.
Jon A. Tietbohl has served as a Director of the Company
since November, 1995. Since 1990, Mr. Tietbohl has served as
Managing Director and co-head of Mergers and Acquisitions at
Tucker Anthony Incorporated, a Boston-based investment
banking firm. 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.
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 Varrichio are members of the Plan Committee.
COMPLIANCE WITH REPORTING REQUIREMENTS
Under the securities laws of the United States, the
Company's directors, executive officers and any persons
holding more than ten percent of the Company's Common Stock
are required to report their ownership of the Company's
Common Stock and any changes in that ownership to the
Securities and Exchange Commission and the Nasdaq National
Market Surveillance Department. Based solely on its review
of the forms received by it from such persons for their 1996
transactions, the Company believes that all filing
requirements applicable to such officers, directors and
greater than ten percent beneficial holders were complied
with in a timely manner.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain
information concerning compensation paid or accrued to the
Chief Executive Officer of the Company (the "Named Executive
Officer") for services rendered in all capacities for the
years ended December 31, 1996, 1995 and 1994. No other
executive officer of the Company was paid a salary and bonus
aggregating greater than $100,000 during such time periods.
Summary Compensation Table
Annual Compensation Long Term
Compensation
Securities
Name and Principal Salary Bonus Underlying
Position Year ($) ($) Options
David A. Jenkins 1996 $127,500 $250 0
Chairman,President 1995 $110,000 $5,250 166,000 (1)
Chief Executive 1994 $108,542 $ 0 0
Officer
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, 1996.
Option Grants in Fiscal Year 1996
Individual Grants
Percent of
Total
Number of Options
Shares Granted Exercise
Underlying to Price Expira
Options Employees per tion
Granted in Fiscal Share Date
Year
David A. Jenkins - - - -
Chairman, President
and Chief Executive
Officer
1) On August 31, 1995, the Company granted Mr. Jenkins a
non-qualified stock option to purchase 96,000 shares of
Common Stock at an exercise price of $2.20 per share.
Options to purchase 30,000 shares became exercisable on the
grant date and options to purchase 1,000 shares become
exercisable each month thereafter. The term of such option
is five years. On November 29, 1995, the Company granted
Mr. Jenkins an incentive stock option to purchase 70,000
shares of Common Stock pursuant to the Company's 1995 Long
Term Incentive Plan at an exercise price of $2.20 per share.
Options to purchase 45,000 shares became exercisable upon
completion of the Company's initial public offering and
options to purchase 25,000 shares become exercisable on the
first anniversary of such date. The term of such option is
ten years.
OPTION EXERCISES AND HOLDINGS
The following table provides certain information with
respect to the Named Executive Officer concerning the
exercise of stock options during the fiscal year ended
December 31, 1996 and the value of unexercised stock options
held as of December 31, 1996.
AGGREGATED OPTION EXERCISES IN 1996
AND YEAR END OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C>
Number of Shares Value of
Shares Underlying Unexercised
Acquired Value Unexercised In the Money
on Exercise Realized Options at Options at
(#) ($) December 31, 1996 December 31,
1996 ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
David A. Jenkins - - 90,000 76,000 $218,250 $184,300
Chairman, President
and Chief Executive
Officer
</TABLE>
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 361,500 shares were
outstanding as of December 31, 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.
(1) Amounts calculated by subtracting the exercise price of
the options from the market value of the underlying Common
Stock using the closing sale price on the Nasdaq National
Market of $4.625 per share on December 31, 1996.
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 288,000 shares were outstanding as
of December 31, 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
During 1996, no directors of the Company received cash or
other compensation for services on the Board of Directors or
any committee thereof. The directors were reimbursed for
their reasonable travel expenses incurred in performance of
their duties as directors.
COMPENSATION OF SCIENTIFIC ADVISORY BOARD MEMBERS
During 1996, no members of the Scientific Advisory Board
received cash or other compensation for services to the
Company. During 1995, each member 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. Scientific Advisory Board members
are reimbursed for their reasonable expenses incurred in the
performance of their duties as Scientific Advisory Board
members.
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
an increase in base compensation to $145,000 beginning upon
the consummation of an initial public offering of the
securities of the Company, plus 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of Common Stock of the Company as of
March 19, 1997 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.
Name and Address Number of Percentage of
of Beneficial Owner Shares Class
Beneficially Beneficially
Owned Owned (1)
David A. Jenkins (2) 905,000 11.8%
c/o EP MedSystems, Inc.
58 Route 46 West
Budd Lake, NJ 07828
Medtronic, Inc. 548,000 7.2%
7000 Central Avenue NE
Minneapolis, MN 55432
Anthony J. Varrichio (3) 521,000 6.8%
1 Hemlock Lane
Flanders, NJ 07836
Edwin K. Hunter (4) 504,500 6.6%
1807 Lake Street
Lake Charles, LA 70602
Oppenheimer Funds, Inc. 500,000 6.6%
Two World Trade Center
New York, NY 10048
AWM Investment Co., Inc. 436,500 5.7%
153 East 53 Street
New York, NY 10022
David W. Mortara, Ph.D(5) 69,000 *
7865 North 86th Street
Milwaukee, WI 53224
Jon A. Tietbohl (5) 44,000 *
Third Floor
200 Liberty Street
New York, NY 10281
Lester J. Swenson (5) 19,000 *
7000 Central Avenue NE
Minneapolis, MN 55432
All executive officers and
directors as a group
(nine persons) 1,788,367 22.7%
* Represents beneficial ownership of less than one percent
of the Common Stock.
(1) Applicable percentage ownership as of March 19 1997
is based upon 7,599,917 shares of Common Stock
outstanding together with the applicable options for
such stockholder. Beneficial ownership is determined in
accordance with 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. "Beneficial
ownership" under Rule 13d-3 includes all shares over
which a person has sole or shared dispositive or voting
power.
(2) Includes 95,000 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 50,000 shares issuable upon exercise of
options.
(4) Includes 140,000 shares held by a trust of which
Mr. Hunter is the trustee, 150,000 shares held by a
private foundation over whose assets Mr. Hunter has
voting and investment power and 12,500 shares held by
two trusts of which Mr. Hunter is the trustee.
(5) Includes 19,000 shares issuable upon exercise of
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HI-TRONICS DESIGNS, INC. -- GENERAL
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 19, 1997, Mr.
Varrichio owned beneficially 6.8% of the Company's Common
Stock, Mr. Winstrom owned beneficially 4.9% and Medtronic
owned 7.2%
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
and the TeleTrace III Receiver 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
accrued interest at 9.25% per annum and was repaid on June
30, 1996.
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 $31,868 and $150,159 of products from the Company,
including EP-2s and EP-3s, during the twelve month periods
ended December 31, 1996 and 1995, respectively. 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 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
$392,000 and $424,000 during the twelve months ended
December 31, 1996 and 1995, 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, 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 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 III-S 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 a 510(k) submission with
the FDA. The parties subsequently entered into a written
amendment memorializing this agreement. Development of the
TeleTrace III-S Receiver is ongoing.
The Company has determined that continued sale and service
of arrhythmia monitors does not represent a good strategic
fit with the Company's existing products and planned product
line, including the ALERT System, due, in part, to the fact
that the potential customers for arrhythmia monitors are
different than those purchasing electrophysiology equipment
and catheters. The Company also determined that the gross
margins generated by arrhythmia monitors were not sufficient
to justify the expense and efforts by its direct sales force
to generate sales of such product. Therefore, the Company
plans to discontinue sale of the MemoryTrace line of
arrhythmia monitors. Sales of arrhythmia monitors were
approximately $12,000 and $198,000 in the years ended
December 31, 1996 and 1995, respectively. The Company has
recently agreed to sell its rights, title and interest in
(i) the 4221, 4222 and 4222 ATM arrhythmia monitors,
including manufacturing drawings and regulatory approvals
and (ii) the 4400 ATM arrhythmia monitor, currently under
development by HDI, to HDI in return for 60,000 shares of
common stock in Neomedics, Inc. ("Neomedics"), a newly
created company involved in the design and manufacture of
implantable medical devices. Neomedics is an affiliate of
HDI. In addition, HDI and Messrs. Varrichio and Winstrom
were released from their agreement not to design or
manufacture arrhythmia monitors for parties other than the
Company.
EP WORKMATE
The Company uses HDI to manufacture and assemble the EP
WorkMate. The Company paid $209,185 and $54,570 to HDI for
such manufacturing and assembly during the years ended
December 31, 1996 and 1995, respectively.
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.
During 1996, the holders of the 1995 Debentures elected to
exercise their 1995 Warrants through the forgiveness of
amounts due under the 1995 Debentures.
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 "lockup" 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 to sell
or otherwise dispose of any of their shares of Common Stock
for a period of one year following the initial public
offering of shares of Common Stock of the Company.
ACQUISITION OF NOTE RECEIVABLE
In September, 1995, at a time when the Company was
considering establishing a catheter manufacturing facility
based in the United Kingdom, the Company acquired a note
receivable in the amount of $100,000 from FalFab. Edwin K.
Hunter, who beneficially owned 504,500 shares of Common
Stock of the Company as of March 19, 1997, was also a
principal shareholder of FalFab. The note receivable accrued
interest at 8% per annum and was due and payable on July 15,
1996. The Company loaned an additional $7,500 to Falfab
during the second quarter of 1996. Upon maturity of the note
receivable, Falfab was unable to repay amounts due the
Company and was liquidated by its creditors. Accordingly,
the Company reflected a write-off of the $107,500 note
receivable in 1996.
ITEM 13. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM
8-K
(a) Documents filed as a part of this Form 10-KSB:
(1) Financial Statements The following Consolidated
Financial Statements of EP MedSystems, Inc. and
report of independent public accountants relating
thereto are filed with this report on Form 10-K:
Consolidated Balance Sheets as of December
31, 1996 and 1995
Consolidated Statement of Operations for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(3) Exhibits
3.1 Amended and Restated Certificate of
Incorporation (1)
3.2 Bylaws, as amended (1)
10.1 Agreement of Lease dated November, 1995
between EP Medical, Inc. and Yeh Bin Wu
an Jean Wu, as landlords (1)
10.6 Employment Agreement dated as of March
1, 1993 between EP Medical, Inc. and David
A. Jenkins, as amended (1)
10.7 Employment Agreement dated as of
November 6, 1993 between EP Acquisition
Corp. and Joseph C. Griffin, III (1)
10.8 1995 Director Option Plan (1)
10.9 1995 Long Term Incentive Plan (1)
10.10 License Agreement dated as of
November, 1, 1995 between EP Medical,
Inc. and Dr. Eckhard Alt, as amended (1)
10.11 Consulting Agreement dated as of
February 1, 1996 between EP Medical, Inc.
and Raman Mitra (1)
10.12 License Agreement dated as of
November, 1, 1995 between EP Medical,
Inc. and Sanjeev Saksena (1)
10.13 Consultant Agreement dated February
26, 1996 between EP Medical, Inc. and
Regulatory Strategies, Inc. (1)
10.14 Investment Agreement dated April
22, 1994 among EP Medical, Inc., David
Jenkins, Anthony Varrichio, William
Winstrom and American Medical Electronics,
Inc. (1)
10.15 Letter Agreement dated December,
15, 1995 between EP Medical, Inc. and
Rudiger Dahle (1)
10.16 Investment Agreement dated January
16, 1996 among EP Medical, Inc., Rudiger
Dahle, Anthony Varrichio and William
Winstrom (1)
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 (1)
10.22 Master Manufacturing Agreement
dated April 16, 1996 between EP
MedSystems, Inc. and Hi-Tronics Designs, Inc.
(1)
10.25 Exclusive Rights Agreement dated
May 26, 1996 between EP MedSystems, Inc.
and Spire Corporation (1)
10.26 Letter Agreement dated April 12,
1996 between EP MedSystems, Inc. and Hi-
Tronics Designs, Inc. relating to the
TeleTrace IV Receiver (1)
10.27 Consulting Agreement dated as of
May 24, 1996 between EP MedSystems, Inc.
and Elliott Young and Associates, Inc., as
amended and restated (1)
10.28 Stock Option Agreement dated August
31, 1995 between EP MedSystems, Inc. and
Tracey E. Young, as amended (1)
10.29 Registration Rights Agreement dated
as of May 24, 1996 between EP MedSystems,
Inc. and Tracey E. Young (1)
10.30 Exclusive License Agreement dated
February 27, 1997 between EP MedSystems,
Inc. and EchoCath, Inc.
10.31 Subscription Agreement dated
February 27, 1997 between EchoCath, Inc.
and EP MedSystems, Inc.
11.1 Statement regarding Calculation of
Shares Used in Computing Net Loss per
Share
21.1 List of Subsidiaries
27 Financial Data Schedule (2)
(1) Incorporated by reference to the exhibit
of the same number previously filed with the
Commission in connection with the Company's
Registration Statement on Form SB-2 and Pre-
Effective Amendments No. 1 and 2 thereto.
(2) EDGAR Filing only.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during 1996.
EP MEDSYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31,
1996 and 1995 F-3
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Changes in
Shareholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1
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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 10, 1997
F-2
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
Current assets:
Cash and cash equivalents $ 5,491,857 $ 34,588
Short-term investments 1,794,553 --
Accounts receivable, net of allowance for
doubtful accounts of $82,709 and $89,100, 671,503 438,120
respectively
Inventories 626,707 469,265
Notes receivable, net - 150,000
Prepaid expenses and other current assets 185,761 53,648
Total current assets 8,770,381 1,145,621
Long-term investments 3,001,222 --
Property and equipment, net 181,385 148,954
Intangible assets, net 615,861 722,448
Other assets 31,000 26,837
Total assets $ 12,599,849 $ 2,043,860
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable $ -- $ 17,200
Accounts payable 238,764 281,118
Payables due to related party 85,035 258,720
Accrued expenses 438,787 248,397
Deferred revenue 42,938 145,875
Customer deposits 103,999 91,502
Total current liabilities 909,523 1,042,812
Long-term debt -- 1,180,318
Total liabilities 909,523 2,223,130
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, 5,000,000
shares authorized, 7,599,917 and 4,352,000
shares issued and outstanding 7,600 4,352
Additional paid-in capital 16,743,014 3,306,088
Accumulated deficit (5,060,288 (3,489,710
) )
Total shareholders' equity (deficit) 11,690,326 (179,270)
Total liabilities and shareholders' equity $ 12,599,849 $ 2,043,860
The accompanying notes are an integral part of these
statements.
F-3
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1996 1995 1994
<TABLE>
<S> <C> <C> <C>
Product sales $ 2,065,959 $ 2,001,137 $ 1,512,076
Revenue from catheter development 250,000 -- --
Total revenues 2,315,959 2,001,137 1,512,076
Operating costs and expenses:
Cost of products sold 1,161,948 1,257,468 913,457
Sales and marketing expenses 764,765 477,209 262,770
General and administrative expenses 1,068,964 757,635 648,135
Depreciation and amortization 171,493 170,271 383,532
Research and development expenses 856,191 320,311 129,855
Acquired research and development -- 450,000 500,000
Write-off of intangible and other
assets 107,500 -- 215,216
Loss from operations (1,814,902) (1,431,757) (1,540,889)
Interest expense (44,779) (50,893) (55,961)
Interest income 338,335 -- --
Write-off of unamortized discount
on Debentures (49,232) -- --
Net loss $ (1,570,578) $ (1,482,650) $ (1,596,850)
Net loss per share $ (.23) $ (.26) $ (.29)
Weighted average shares outstanding 6,762,019 5,789,654 5,480,262
Supplementary net loss per share $ (.22) $ (.25)
</TABLE>
The accompanying notes are an integral part of these
statements
F-4
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIT)
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 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 Bio-
Physical Interface Corp. 37,500 38 49,962 -- 50,000
Issuance of common stock
for acquisition of
technology from Electro-
Physiology 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 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
Issuance of common stock
upon exercise of
stock options 12,500 12 16,654 -- 16,666
Issuance of common stock
upon initial public
offering 2,500,000 2,500 11,783,508 -- 11,786,008
Issuance of common stock
upon exercise of
1995 Warrants 568,750 569 1,136,931 -- 1,137,500
Net loss -- -- -- (1,570,578) (1,570,578)
Balance,December 31, 1996 7,599,917 $ 7,600 $ 16,743,014 $ (5,060,288) $ 11,690,326
</TABLE>
The accompanying notes are an integral part of these
statements.
F-5
EP MEDSYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Cash flows from operating activities:
Net loss $ (1,570,578) $ (1,482,650) $ (1,596,850)
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 171,493 170,271 383,532
Acquired research and development -- 440,000 500,000
Issuance of stock for consulting services -- 29,000 --
Issuance of stock for research and development -- 138,000 --
Write-off of intangible and other assets 107,500 -- 215,216
Write-off of unamortized discount on Debentures 49,232 -- --
Amortization of discount on payable to
related parties -- -- 24,241
Amortization of premium or discount on
long-term and short-term investments (6,233) -- --
Bad debt expense 5,017 52,400 36,700
Changes in assets and liabilities:
(Increase) in accounts receivable (238,400) (194,449) (234,067)
(Increase) decrease in inventories (157,442) 18,433 (260,221)
(Increase) decrease in prepaid expenses
and other current assets (132,113) (48,526) 42,513
(Increase) in other assets (4,163) (26,837) (4,500)
(Decrease) increase in due to related party (173,685) 177,988 11,524
(Decrease) increase in accounts payable (42,354) 131,513 98,388
Increase (decrease) in accrued expenses,
deferred revenue and customer deposits 99,950 256,941 64,057
Net cash used in operating activities (1,891,776) (337,916) (719,467)
Cash flows from investing activities:
Purchase of investments (21,567,497) -- --
Proceeds from sale of investments 16,777,955 -- --
Capital expenditures, net of disposals (97,337) (55,754) (33,030)
Loan to FalFab (7,500) (100,000) --
Net cash used in investing activities (4,894,379) (155,754) (33,030)
Cash flows from financing activities:
(Repayments)proceeds from debentures, net (62,500) 687,500 --
Proceeds from issuance of common stock,
net of offering expenses 12,398,508 -- 663,400
Proceeds from exercise of stock options 16,666 -- --
Payments of borrowing under line of credit -- -- (102,681)
(Payments) proceeds from borrowings -- (70,000) 66,000
Payment of notes payable (109,250) (109,250) --
Payment due to related party -- -- (58,500)
Net cash provided by financing activities 12,243,424 508,250 568,219
Net increase (decrease) in cash and cash
equivalents 5,457,269 14,580 (184,278)
Cash and cash equivalents, beginning of period 34,588 20,008 204,286
Cash and cash equivalents, end of period $ 5,491,857 $ 34,588 $ 20,008
The accompanying notes are an integral part of these
statements.
F-6
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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").
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 in consolidation.
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.
Accounts Receivable and Notes Receivable
The Company's customer base for its products is primarily
comprised of hospitals, distributors 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 had two notes receivable
aggregating $150,000: a $50,000 6% note receivable arising
from the subscription to the Company's debenture offering
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 matured on July 15,
1996. The Company loaned an additional $7,500 to Falfab
during the second quarter of 1996. Upon maturity, Falfab
was unable to repay the amounts due the Company and was
liquidated by its creditors. Accordingly, the Company
reflected a write-off of the $107,500 note receivable in
1996. A former shareholder of Falfab is a beneficial
shareholder in excess of 5% of the outstanding shares of the
Company's common stock.
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.
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.
Long-Lived Assets
On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 requires that an
entity review its long-lived assets and certain related
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review,
adoption of this standard did not have a material impact on
the Company's results of operations or financial position.
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. Costs incurred in developing patents are expensed
as incurred.
Net Loss Per Common Share
Net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock and common
stock equivalents outstanding during the periods presented.
The weighted average number of shares is based upon (i) APB
15 for the periods after June 30, 1996 which excludes common
stock equivalents as they are antidilutive, and (ii)
Securities and Exchange Commission Staff Accounting Bulletin
No. 83 ("SAB 83"), for periods prior to June 30, 1996. In
applying SAB 83, common stock, stock options and warrants
issued during the twelve months preceding the initial public
offering (see Note 3) at prices below the 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 the initial public 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, 1996 and 1995
had been paid at the beginning of the period or the date of
issuance, if later, and assuming that (i) 222,385 common
shares were issued to pay the 1995 Debentures and (ii)
$33,875 and $24,286 of interest expense was eliminated for
the periods ending December 31, 1996 and 1995, respectively
as a result of such payment.
Stock Options
The Company accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") and adopted the
disclosure requirements of Statement of Financial Accounting
Standard No. 123 "Accounting for Stock Based Compensation"
("SFAS 123") for the year ending December 31, 1996. (See
Note 13).
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.
Reclassification
Certain prior year amounts have been reclassified to conform
with the current year's presentation.
3. ISSUANCE OF COMMON STOCK
During January, 1996, the Company sold an aggregate of
166,667 shares of Common Stock to two investors at a
purchase price of $3.00 per share. The net proceeds from
the sale were $500,000.
On June 21, 1996, the Company completed its initial public
offering of 2,500,000 shares of Common Stock at a purchase
price of $5.50 per share. The net proceeds from the
offering were approximately $11,786,000 net of offering
costs.
4. INVESTMENT SECURITIES
The Company accounts for its investment securities in
accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This Statement requires the
classification of debt and equity securities based on
whether the securities will be held to maturity, are
considered trading securities, or are available for sale.
Classification within these categories may require the
securities to be reported at their fair market value with
unrealized gains and losses included in current earnings or
reported as a separate component of stockholders' equity.
As of December 31, 1996, all short-term and long-term
investments, except for $297,828 invested in corporate
preferred stock, have been classified as held to maturity.
These investments are stated at amortized cost, which
approximates market, and consist of U.S. Agency Notes and
corporate bonds. The maturities of long-term investments
range from August, 1998 to September 2000. At December 31,
1996, the Company classified $297,828 invested in two issues
of corporate preferred stock as available for sale. These
investments are stated at market, which approximates their
amortized cost.
Short-term and long-term investments held to maturity at
December 31, 1996 are as follows:
Held to maturity securities:
Short-term investments
U.S Government Agency $ $1,496,725
Obligations
Long-term investments
Corporate bonds $ $3,001,222
Total held to maturity $ $4,497,947
securities
The Company's available for sale securities are as follows:
Corporate preferred stocks $ 297,828
5. ACQUISITIONS OF PRODUCTS AND TECHNOLOGY AND RELATED
PARTY TRANSACTIONS
Technology from Hi-Tronics Design, Inc.
General
The Company's initial shareholders were David A. Jenkins,
its current Chairman, President and Chief Executive Officer,
and Hi-Tronics Designs, Inc. ("HDI"), a corporation engaged
in the business of contract engineering and manufacturing.
The Company acquired rights to its first product, the EP-2,
from HDI, and in its early stages, the Company subleased
office space from HDI, participated in HDI's employee health
insurance policies and utilized personnel, facilities and
other related resources in an effort to quickly and
efficiently develop the Company's operations and to minimize
cash expenditures. In subsequent periods, the Company has
purchased rights to certain other products and the next
generation of several products under development from HDI.
The Company has utilized, and continues to utilize, HDI to
provide 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
$392,000, $424,000, $471,000 in 1996, 1995 and 1994,
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 accrued
interest at 9.25% and was repaid on June 30, 1996.
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. In 1995, the Company paid
off $70,000 of the Medtronic Note and converted the
remaining principal into $200,000 face amount of debentures
issued in full satisfaction of the amounts due and the
security agreement was terminated (See Note 11). 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 III-S") for the Company
and agreed to not engage in the design or manufacture of
arrhythmia monitors, with exceptions, for a period of the
greater of three years or so long as the Company uses HDI to
manufacture its arrhythmia monitors. Of the purchase price,
$100,000 was allocated to technology rights in existing
arrhythmia monitors. The shares issued relating to the
arrhythmia monitors being developed by HDI were expensed
during the year ended December 31, 1995, as work performed
represented research and development costs.
In January, 1995, the Company entered into an agreement with
HDI pursuant to which HDI agreed to continue development of
the TeleTrace III-S 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. The Company recorded a charge to
research and development expense of $38,000 during the year
ended December 31, 1995. During the year ended December 31,
1996, no amounts were charged to research and development
expense and development of the TeleTrace III-S is ongoing.
The Company has determined that continued sale and service
of arrhythmia monitors does not represent a good strategic
fit with the Company's existing products and planned product
line, including the ALERT System, due, in part, to the fact
that the potential customers for arrhythmia monitors are
different than those purchasing the Company's
electrophysiology equipment and catheters. The Company also
determined that the gross margins generated by arrhythmia
monitors were not sufficient to justify the expense and
efforts of its direct sales force to generate sales of the
product. Therefore, the Company plans to discontinue sale
of the MemoryTrace line of arrhythmia monitors. Sales of
arrhythmia monitors were approximately $12,000 and $198,000
in the years ended December 31, 1996 and 1995, respectively.
In 1997, the Company agreed to sell its rights, title and
interest in (i) the 4221, 4222 and 4222 ATM arrhythmia
monitors, including manufacturing drawings and regulatory
approvals, and (ii) the 4400 ATM arrhythmia monitor,
currently under development by HDI, to HDI in return for the
60,000 shares of common stock in Neomedics, Inc., a newly
created company involved in the design and manufacture of
implantable medical devices, which is affiliated with HDI.
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.
6. 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
electrophysiology 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 pre-marketing 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. In
1995, 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.
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. In 1995, 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.
Spire Corporation License
In May, 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
proprietary ion beam deposition 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 June 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.
As of December 31, 1996, the Company recorded $58,333 as
research and development expense related to this license
fee.
7. AGREEMENTS WITH INCONTROL
During 1996, the Company recorded catheter development
revenue of $250,000 related to a Product Development and
Supply Agreement (the "Development Agreement") with
InControl, Inc. The Development Agreement covers a new
temporary atrial defibrillation catheter ("TADCATH"). The
Development Agreement provides for payment in three
installments, with the final $90,000 installment after
receipt by the Company of CE Mark approval for its temporary
defibrillation catheters. CE Mark approval was received in
January, 1997. The Company will manufacture and supply
TADCATH to InControl for clinical trials and subsequent
sales. The agreement calls for certain annual minimum
purchases. InControl will be responsible for complying
with the regulatory requirements and marketing and
distributing the TADCATH. The Company will make a $75,000
payment to support the clinical trials in Europe. Such
payment has been accrued for in the consolidated financial
statements at December 31, 1996.
The Company also entered into non-exclusive distribution
agreements which allow InControl to sell the ALERT Catheter
in parts of Europe, Africa and the Middle East and the ALERT
Companion on a world-wide basis for a period of two years
subject to renewal upon mutual agreement of the parties.
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
1996 1995
Catheter technology $ 774,099 $ 774,099
Arrhythmia monitors 100,000 100,000
Cardiac monitoring technology 50,000 50,000
Other 6,900 6,900
930,999 930,999
Less: accumulated amortization (315,138) (208,551)
$ 615,861 $ 722,448
9. INVENTORIES
Inventories consist of the following:
December 31,
1996 1995
Raw materials $ 173,936 $ 285,326
Work in progress 11,456 21,671
Finished goods 441,315 162,268
$ 626,707 $ 469,265
F-16
EP MEDSYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1996 1995
Leasehold improvements $ 112,670 $90,540
Machinery and equipment 244,559 169,352
357,229 259,892
Less: accumulated depreciation (175,844) (110,938)
$ 181,385 $ 148,954
11. 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 was the earlier of June 30, 2000 or 30 days after the
completion of an initial public offering of the Company's
securities. 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 was
being amortized on a straight-line basis over the life of
the 1995 Debentures.
During June, 1996, the holders of $1,025,000 face amount of
1995 Debentures elected to exercise their 1995 Warrants to
purchase 512,500 shares of common stock at $2.00 per share
through the forgiveness of amounts due under the 1995
Debentures. On June 30, 1996, the Company repaid the
remaining outstanding 1995 Debentures in the face amount of
$112,500 in cash. During the subsequent thirty day period,
the holders of the remaining 1995 Warrants exercised their
option to purchase 56,250 shares of common stock at $2.00
per share. Upon repayment of the 1995 Debentures, the
Company wrote off the unamortized discount on the 1995
Debentures of $49,232.
Note Payable
In connection with the acquisition of ProCath in 1993, the
Company assumed a $218,500 note payable. The note provided
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 was accrued at an
annual rate of 8% to be paid with the final payment at
maturity. No gain was recorded upon the modification of debt
terms as it was not significant. During September, 1996,
the Company repaid the remaining balance of $92,050 plus
accrued interest on the note.
12. 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 December,
2001. The future aggregate commitment for minimum rentals as
of December 31, 1996 is as follows:
1997 $78,076
1998 7,272
1999 7,272
2000 7,272
2001 and thereafter 6,636
Rent expense associated with these leases was approximately
$112,643, $83,661 and $53,661 for the years ended December
31, 1996, 1995 and 1994, respectively.
Employment Agreements
The Company has employment agreements with two corporate
officers and two employees. 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 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 agreements with the President and the
President of ProCath contain certain non-competition
provisions in the event of termination of their employment.
The Company also has an agreement with the Vice President of
Sales and Marketing which calls for a bonus equal to 1/2% of
1997 net sales, provided that the Company is profitable.
The aggregate minimum commitment for future salaries,
excluding bonuses, as of December 31, 1996, is as follows:
1997 $409,000
1998 237,400
1999 125,807
2000 106,722
2000 112,058
The Company has key man life insurance policies for
$1,000,000 covering its President, $1,000,000 for the
President of ProCath and $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 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 up to $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, approximately $131,000
including certain reimbursable expenses has been recorded as
an expense through December 31, 1996. The remaining cash
consideration, of approximately $122,500, represents
financial consulting fees for services performed in
connection with the Company's initial public offering, which
was paid upon closing and was recorded as a reduction of the
net proceeds of the offering.
13. 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 361,500 shares of Common
Stock, at an exercise price of $2.00 to $5.50 per share,
have been granted and are outstanding as of December 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 of Directors. 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 288,000 shares
of common stock, at an exercise price of $2.00 per share,
are outstanding as of December 31, 1996. The 1995 Director
Plan provides for grants of director options to eligible
directors of the Company and for grants of advisor options
to eligible members of the Scientific Advisory Board of the
Company. Each of the director options and the advisor
options are exercisable at the rate of 1,000 shares per
month, commencing with the first month following the date of
grant. The terms of these options range from three to five
years. The 1995 Director Plan will terminate on November
30, 2005, unless earlier terminated by the Board of
Directors.
Other Options
On June 1, 1993, the Company granted stock options to
purchase an aggregate of 47,500 common shares of the
Company, exercisable through June 1, 1998. All options are
exercisable at $1.33 per common share. During April 1996,
options for 12,500 common shares were exercised.
The Company granted stock options during 1994 to purchase an
aggregate of 55,000 common shares of the Company with a
defined option term of five years at an exercise price of
$2.00 per common share.
During 1995, the Company issued options to its President,
directors, employees, Scientific Advisory Board Members and
a consultant totaling 1,013,000 shares. The exercise prices
of these options range from $2.00 to $2.20 per share. The
options have terms ranging from five to ten years and vest
over varying periods, including 70,000 options that vest in
connection with a successful initial public offering of the
Company's common stock. In addition, the Company issued
374,000 options in connection with a licensing agreement
(See Note 6).
During 1996, the Company issued options to purchase 222,500
shares of common stock. The exercise prices of these
options range from $4.75 to $5.50 per share. The options
have terms ranging from five to ten years and vest over
varying periods.
Information relating to options is as follows:
Option Weighted
Number Price Average
of
Options Range Exercise
Price
Outstanding at December 31, 1993 47,500 $1.33 $1.33
Granted 55,000 $1.33 - $2.00 $2.00
Outstanding at December 31, 1994 102,500 $1.33 - $2.00 $1.69
Granted 1,387,00 $.10 - $2.20 $1.72
0
Canceled (118,000 $1.33 - $2.00 $1.97
)
Outstanding at December 31, 1995 1,371,50 $.10 - $2.20 $1.70
0
Granted 222,500 $4.75 - $5.50 $4.88
Exercised (12,500) $1.33 $1.33
Canceled (138,000 $2.00 $2.00
)
Outstanding at December 31, 1996 1,443,50 $.10 - $5.50 $2.16
0
Exercisable at December 31, 1996 730,331 $.10 - $5.50 $1.64
At December 31, 1996 and 1995, the Company had 1,443,500 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 or the fair market value on the
date of grant for options issued after the Company's initial
public offering. 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 6).
The Company accounts for its stock option plans based upon
the "intrinsic value" method set forth in APB 25. Had
compensation costs for the Company's stock option plans been
determined consistent with SFAS 123, the Company's pro-forma
net loss and loss per share for 1996 and 1995 would have
been as follows:
1996 1995
Net loss $(1,791,372) $(1,760,223)
Net loss per share $ (.27) $ (.30)
Because SFAS 123 has not been applied to options granted
prior to January 1, 1995, the resulting pro-forma
compensation cost may not be representative of that to be
expected in future periods.
Under SFAS 123, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions in 1996 and 1995, respectively: risk free
interest rate of 6% and 6%; expected life of approximately 5
and 4 years; expected volatility of 50% and 50%. The
weighted average fair value of the options granted during
1996 and 1995 was $2.60 and $1.08, respectively.
14. MAJOR CUSTOMER AND EXPORT SALES
During 1996, 1995 and 1994, sales to Medtronic, Inc., a
shareholder of the Company, accounted for approximately 1%,
8%, and 34% respectively, of total revenues of the Company.
Receivables outstanding from these sales were approximately
$18,853, $983, and $2,300 at December 31, 1996, 1995 and
1994, respectively. Catheter development revenues from
InControl accounted for approximately 11% of total revenues
for the year ended December 31, 1996. Receivables
outstanding for catheter development was $90,000 at December
31, 1996.
The following table sets forth export sales:
December 31,
1996 1995
Europe $ $
545,817 235,563
Asia and Pacific 275,784 257,834
Rim
Other 91,165 63,564
$ $
912,766 556,961
15. 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:
December 31,
1996 1995
Allowance for doubtful $ 30,000 $ 36,000
accounts
Inventory reserves 59,000 59,000
Intangible asset 16,000 58,000
amortization
Depreciation 24,000 14,000
Accrued liabilities 23,000 23,000
Net operating loss 1,417,000 768,000
carryforwards
Research and development 52,000 24,000
credit
1,624,000 982,000
Less: Valuation allowance (1,624,000) (982,000)
$ -- $ --
On December 31, 1996, the Company had approximately
$3,500,000 of net operating loss carryforwards available to
offset future income. Due to ownership changes that
occurred during 1995 and 1996, as defined by Section 382 of
the Internal Revenue Code, the Company is limited to the use
of net operating losses generated prior to the changes in
ownership in each year following the changes in ownership.
16. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Supplemental Noncash Investing and Financing Activities
Supplemental noncash investing and financing activities:
1994
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)
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.
During 1996, the holders of $1,025,000 face amount of 1995
Debentures elected to exercise their 1995 Warrants to
purchase 512,500 shares of common stock at $2.00 per share
through the forgiveness of amounts due under the 1995
Debentures. Upon repayment of the 1995 Debentures, the
Company recorded a write-off of $49,232, representing the
unamortized value placed on the 1995 Warrants.
Cash paid for interest was $60,969, $26,150 and $22,155
during the years ended December 31, 1996, 1995 and 1994,
respectively.
17. SUBSEQUENT EVENTS
PROCATH BUILDING PURCHASE
During February, 1997, ProCath purchased approximately 7,500
square feet of manufacturing, administrative and warehouse
space, including 2,500 square feet of space that was leased
by ProCath, for an aggregate purchase price of approximately
$386,000, including certain transaction costs. The purchase
will allow for the expansion of the existing manufacturing
operations, provide for additional warehousing, shipping and
quality assurance activities and relocation of ProCath's
administrative offices. The lease on ProCath's remaining
2,500 square feet of space expires in November, 1997 and
will not be renewed.
ECHOCATH LICENSE
During February, 1997, the Company licensed certain
technologies from EchoCath, Inc. ("EchoCath") in order to
attempt to develop products which allow visualization of the
heart's anatomy and visualization of catheters inside the
heart through the use of ultrasound rather than by using
fluoroscopy, or x-ray imaging. The license includes all
rights to the EchoMark, EchoEye and ColorMark technologies
for use in the field of electrophysiology. The license
excludes use on permanently implantable defibrillators and
pacemaker leads. EchoCath will also transfer its 510-K
approval on the EchoMark EP catheter to the Company.
The agreement calls for the Company to make payments
totaling $700,000, in four installments, as certain
development milestones and initial sales are achieved on the
EchoMark and EchoEye technologies. Terms of the license
call for a royalty on net sales, including minimum royalties
beginning in 1999 and continuing for the life of the
applicable patents and continuations thereof. The Company
may elect to not make minimum royalty payments and in such
case, EchoCath can make the license non-exclusive or cancel
the license and return the $700,000 milestone payments. The
Company also purchased 280,000 shares of newly issued 5.4%
cumulative convertible preferred stock of EchoCath for $1.4
million in cash.
The minimum royalties under the license are as follows:
1999 $120,000
2000 160,000
2001 200,000
2002 280,000
2003 320,000
2004 360,000
2005 and thereafter 400,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EP MEDSYSTEMS, INC.
/s/ David A. Jenkins March 26, 1997
David A. Jenkins, Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Date
/s/ David A. Jenkins March 26, 1997
David A. Jenkins, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ James J. Caruso March 26, 1997
James J. Caruso, Chief Financial Officer
and Secretary (Principal Accounting Officer)
/s/ David W. Mortara March 26, 1997
David W. Mortara, Ph.D.
Director
/s/ Lestor J. Swenson March 26, 1997
Lestor J. Swenson
Director
/s/ Jon A. Tietbohl March 26, 1997
Jon A. Tietbohl
Director
/s/ Anthony J. Varrichio March 26, 1997
Anthony J. Varrichio
Director
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Certificate of
Incorporation (1)
3.2 Bylaws, as amended (1)
10.1 Agreement of Lease dated November, 1995
between EP Medical, Inc. and Yeh Bin Wu
and Jean Wu, as landlords (1)
10.6 Employment Agreement dated as of March
1, 1993 between EP Medical, Inc. and
David A. Jenkins, as amended (1)
10.7 Employment Agreement dated as of
November 6, 1993 between EP Acquisition
Corp. and Joseph C. Griffin, III (1)
10.8 1995 Director Option Plan (1)
10.9 1995 Long Term Incentive Plan (1)
10.10 License Agreement dated as of November,
1, 1995 between EP Medical, Inc. and Dr.
Eckhard Alt, as amended (1)
10.11 Consulting Agreement dated as of
February 1, 1996 between EP Medical,
Inc. and Raman Mitra (1)
10.12 License Agreement dated as of November,
1, 1995 between EP Medical, Inc. and
Sanjeev Saksena (1)
10.13 Consultant Agreement dated February 26,
1996 between EP Medical, Inc. and
Regulatory Strategies, Inc. (1)
10.14 Investment Agreement dated April 22,
1994 among EP Medical, Inc., David
Jenkins, Anthony Varrichio, William
Winstrom and American Medical
Electronics, Inc. (1)
10.15 Letter Agreement dated December, 15,
1995 between EP Medical, Inc. and
Rudiger Dahle (1)
10.16 Investment Agreement dated January 16,
1996 among EP Medical, Inc., Rudiger
Dahle, Anthony Varrichio and William
Winstrom (1)
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 (1)
10.22 Master Manufacturing Agreement dated
April 16, 1996 between EP MedSystems,
Inc. and Hi-Tronics Designs, Inc. (1)
10.25 Exclusive Rights Agreement dated May 26,
1996 between EP MedSystems, Inc. and
Spire Corporation (1)
10.26 Letter Agreement dated April 12, 1996
between EP MedSystems, Inc. and Hi-
Tronics Designs, Inc. relating to the
TeleTrace IV Receiver (1)
10.27 Consulting Agreement dated as of May 24,
1996 between EP MedSystems, Inc. and
Elliott Young and Associates, Inc., as
amended and restated (1)
10.28 Stock Option Agreement dated August 31,
1995 between EP MedSystems, Inc. and
Tracey E. Young, as amended (1)
10.29 Registration Rights Agreement dated as
of May 24, 1996 between EP MedSystems,
Inc. and Tracey E. Young (1)
10.30 Exclusive License Agreement dated
February 27, 1997 between EP MedSystems,
Inc. and EchoCath, Inc.
10.31 Subscription Agreement dated February
27, 1997 between EchoCath, Inc. and EP
MedSystems, Inc.
11.1 Statement regarding Calculation of
Shares Used in Computing Net Loss per
Share
21.1 List of Subsidiaries
27 Financial Data Schedule (2)
(1) Incorporated by reference to the exhibit of the same
number previously filed with the Commission in connection
with the Company's Registration Statement on Form SB-2 and
Pre-Effective Amendments No. 1 and 2 thereto.
(2) EDGAR Filing only.
</TABLE>
EXHIBIT 11.1
EP MEDSYSTEMS, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the years ended December 31,
Historical Earnings Per Share 1996 1995 1994
<S> <C> <C> <C>
Net loss $(1,570,578) $(1,482,650) $1,596,850)
Weighted average shares
outstanding:
Common Stock (1) 6,131,749 4,518,667 4,209,275
Stock Options (2) 450,792 909,055 909,055
Warrants (2) 179,478 361,932 361,932
6,762,019 5,789,654 5,480,262
Historical net loss per share $ (.23) $ (.26) $ (.29)
</TABLE>
1. The weighted average number of shares outstanding for
the year ended December 31, 1996, is based on (i) APB 15 for
the periods after June 30, 1996 which excludes common stock
equivalents as they are antidilutive, and (ii) Securities
and Exchange Commission Staff Accounting Bulletin No. 83
("SAB 83"), for periods prior to June 30, 1996. In applying
SAB 83, common stock, stock options and warrants issued
during the twelve months preceding the initial public
offering at prices below the 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. 93,500
and 166,667 shares 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 initial public offering price of
$5.50 per share. Pursuant to Staff Accounting Bulletin No.
83 ("SAB 83") such shares have been included in the weighted
average of shares outstanding for all periods prior to the
initial public offering date.
2. Option and warrants of 909,055 and 361,932
respectively, were granted at prices below the initial
public offering price of $5.50 per share. The dilutive
effect of these options have been included n the earnings
per share calculation using the treasury stock method in
accordance with SAB No. 83 for periods prior to June 30,
1996.
Options Warrants
Options issued within one year of
initial registration statement filing 1,324,00 568,750
0
Proceeds from exercise $2,282,2 $1,137,5
00 00
Initial public offering price / $5.50 / $5.50
Treasury stock 414,945 206,818
Incremental shares 909,055 361,932
EXHIBIT 21.1
SUBSIDIARIES OF EP MEDSYSTEMS, INC.
ProCath Corporation
Cooper Run Executive Park
334 D6 Cooper Road
Berlin, NJ 08009
State of Incorporation: New Jersey
Business Name: ProCath Corporation
EP MedSystems, UK Ltd.
58 Route 46 West
Budd Lake, NJ 07828
State of Incorporation: New Jersey
Business Name: EP MedSystems, UK Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS AND
CONSOLIDATED BALANCE SHEET FOR THE PERIOD ENDED DECEMBER 31,
1996 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,492
<SECURITIES> 4,796
<RECEIVABLES> 754
<ALLOWANCES> 83
<INVENTORY> 627
<CURRENT-ASSETS> 8,770
<PP&E> 357
<DEPRECIATION> 176
<TOTAL-ASSETS> 12,600
<CURRENT-LIABILITIES> 910
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 16,743
<TOTAL-LIABILITY-AND-EQUITY> 12,600
<SALES> 2,066
<TOTAL-REVENUES> 2,316
<CGS> 1,162
<TOTAL-COSTS> 4,130
<OTHER-EXPENSES> (156,732)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (1,570)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,570)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
EXHIBIT 10.30
EXCLUSIVE LICENSE AGREEMENT
AGREEMENT, made on this 27 day of February, 1997, by and
between ECHOCATH, INC., a New Jersey Corporation maintaining
its principal offices at 4326 Route One, Monmouth Junction,
New Jersey 08852 ("EchoCath"), and EP MEDSYSTEMS INC., a New
Jersey corporation maintaining its principal offices 58
Route 46 West Budd Lake, New Jersey 07828 ("EP MedSystems").
W-I-T-N-E-S-S-E-T-H
WHEREAS, EchoCath has developed certain proprietary
technology related to ultrasound guidance and imaging, which
technology is the subject of the Patents (as defined below),
and
WHEREAS, EchoCath is the exclusive owner with respect to
such proprietary technology; and
WHEREAS, EP MedSystems desires to obtain from EchoCath an
exclusive license with respect to such proprietary
technology within the Field of Use as defined below to make,
have made, use and sell medical products as limited herein;
and
NOW THEREFORE, in consideration of the above promises and
the mutual covenants herein contained and other good and
sufficient consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows.
ARTICLE 1. DEFINITIONS
In this Agreement and in the License referred to herein,
unless the context otherwise requires, the following
definitions shall apply:
1.1 "Product(s)" means any product made, used or sold
coming within the scope of the Field of Use and of the
claims of one or more of the Patents (as defined below).
"Products"' expressly exclude any interface hardware or
sensors to be used with the Products. Such interface
hardware and sensors will be sold to EP MedSystems by
EchoCath pursuant to the terms of separate agreements for
the purchase of such items.
1.2 "Affiliate" means any corporation or other
business entity controlled by, controlling, or under common
control with a party hereto, with "control" meaning direct
or indirect beneficial ownership of more than fifty percent
(50%) of the voting stock of, or more than a fifty percent
(50%) interest in the income of, or the right to receive
more than fifty percent (50%) of the distributed profits of,
such corporation or other business entity, or such other
relationship as, in fact, constitutes actual control.
1.3 "EchoEye" means EchoCath's proprietary technology
for allowing clinicians to view tissues and organs in three-
dimensional real-time and provide forward looking
intravascular images and guidance for ultrasound guided
procedures, and covered by the Patents.
1.4 "EchoMark" means EchoCath's proprietary catheter
positioning system which is covered by the Patents.
1.5 "ColorMark" means EchoCath's proprietary needle
and stylete positioning system which is covered by the
Patents.
1.6 "Effective Date" means the date first above
written, which shall be the date of execution of this
Agreement.
1.7 "Exclusive" means, with respect to the grant of a
license, a license whereby the licensee's rights are sole
and entire, and operate to exclude all others, including the
licensor. An Exclusive licensee (and permitted sub-
licensees) may sell and distribute Products through agents
and distributors under exclusive or non-exclusive
arrangements in any country in the Territory. The Exclusive
licensee may exercise its licensed rights itself or through
its permitted sub-licensees or its Affiliates.
1.8 "Field of Use" shall include the application of
the EchoMark, EchoEye and ColorMark technologies as they
apply to any and all systems and products which are designed
and/or manufactured for electrophysiology applications to
include but not limited to mapping, ablation and internal
cardioversion. The Field of Use specifically excludes
permanent pacemaker leads and permanent defibrillator leads
attached to permanent implantable pulse generators.
1.9 "Improvement" means any modification, development
or invention (whether patentable or non-patentable) relating
to the subject matter of the Licensed Rights.
1.10 "Licensed Rights" means the Patents and the
Technical Information and their Improvements which is
proprietary to EchoCath and not readily available to any
third party which is disclosed to EP MedSystems under this
agreement.
11.1 "Net Sales" means the aggregate gross sales price
of Product(s) invoiced to non-Affiliated third parties in an
arms-length transaction by EP MedSystems, its Affiliates and
any sub-licensees pursuant to this Agreement less discounts
to foreign distributors and the following deductions:
(a) transportation and insurance charges or
allowances, if any,
(b) credits or allowances, if any, given or made on
account of the return or rejection of any royalty-
bearing Product sold, and
(c) any tax, duty, or other governmental
charge on the importation or exportation, sale or use of any
royalty-bearing Product (including, without limitation,
sales taxes).
1.12 "Patents" means, individually and collectively,
(i) the patents specified in Schedule A attached hereto for
the EchoMark, EchoEye and ColorMark technologies and which
correspond to the patent numbers listed on Schedule A, and,
(ii) patents, re-examinations, re-issues, renewals,
extensions, divisionals and continuations issued thereon and
all foreign counterparts to the Patents.
1.13 "Technical Information" means all know-how,
specifications and drawings, process information, flow
charts, equipment specifications, and any other documents or
information, and improvements thereof, which relate to or
are used or useful in connection with the Patents as related
to their application in the Field of Use.
1.14 "Term" means the period during which this
Agreement is in force.
1.15 "Territory" means the entire world, without
exception.
ARTICLE 2. GRANTS
2.1 Grant of License. EchoCath hereby grants EP
MedSystems and EP MedSystems' Affiliates solely within the
Field of Use the Exclusive right and license under the
Licensed Rights to use the Licensed Rights to make, have
made, use, and sell Product(s) in the Territory as limited
within the Field of Use.
2.2 Trademarks. EchoCath hereby grants EP MedSystems
a license to use the EchoEye, EchoMark, and ColorMark
trademarks solely in connection with uses consistent with
the Field of Use and shall identify EchoCath as the owners
of such marks.
ARTICLE 3. ROYALTIES
3.1 Initial License Fee. In consideration of the
License herein granted, EP MedSystems shall pay to EchoCath
an initial license fee of $700,000 payable as follows:
a) $150,000 upon the successful completion of a
limited series (5 patients) single site
feasibility IDE of EchoMark Guided Ablation.
b) $400,000 upon completion of a development
program for EchoEye that shall include these
Milestones: (i) demonstration by March 30,1998 of
a bench EchoEye system capable of visualization of
the myocardium of human-size cardiac structures,
and (ii) demonstration by September 30, 1998 of
the use of an EchoEye in at least 5 animals to
view and display endocardial tissue using a
transvascular approach.
c) $l50.000 after the sale of the first 100
EchoMark EP catheters.
3.2 The total cumulative royalties paid under this
Agreement shall be limited to and shall not exceed thirty
million dollars ($30,000,000). During the term of this
Agreement, EP MedSystems shall pay a Royalty to EchoCath
equal to two percent (2%) of Net Sales of Products by EP
MedSystems and EP MedSystems' Affiliates and any
sublicensees pursuant to this Agreement in the Territory.
If a Product is sold as a component of a procedure package
or kit containing other items which are not Products, (i)
the royalty due shall be calculated with respect to the list
price (as if sold separately) of the Product component only
and (ii) any percentage discount given or allowed to a
customer on the list price of the procedure package or kit
shall be applied to the list price (as if sold separately)
of the components Product.
3.3 Minimum Royalties. Notwithstanding the Royalties
to be calculated and paid per paragraph 3.2, beginning
January 1, 1999, EP MedSystems shall pay to EchoCath minimum
quarterly royalties in each calendar quarter, payable no
later than 30 days after the end of each quarter, according
to the following schedule:
Quarterly
YEAR Minimum Payments
1999 $ 30,000
2000 $ 40,000
2001 $ 50,000
2002 $ 60,000
2003 $ 70,000
2004 $ 80,000
2005 and each year
thereafter $100,000
Failure to make any payment of minimum Royalties in a timely
manner shall result in EchoCath's option to at any time
either terminate in writing this Agreement or to render it
as a non-exclusive license agreement. EP MedSystems shall
have a 10 day cure period after the written notice prior to
the effective date of termination under this section for non-
payment. In the event EchoCath terminates this Agreement,
then it shall refund to EP MedSystems such amounts as have
been actually paid to it pursuant to paragraph 3.1 above.
In the event any of the Patents are ruled invalid, the
parties agree to engage in good faith discussions for
renegotiation of the minimum Royalties, to the extent
impacted by such invalidity.
3.4 Notwithstanding anything to the contrary contained
herein, (i) any amounts payable to EchoCath by EP MedSystems
pursuant to Section 3.2 and 3.3 above on any royalty payment
date shall be reduced, but not to an amount below zero, by
an amount equal to the amount of any dividends under
EchoCath's Series B Cumulative convertible Preferred Stock
("Preferred Stock") which are accrued but not paid as of
such date, (ii) the amount by which such royalties are
reduced shall be deemed to be payment of such accrued but
unpaid dividends in an amount
equal to such reduction, and (iii) amounts payable as
royalties pursuant to Sections 3.2 and 3.3 above will not be
paid to EchoCath unless all dividends payable under the
Preferred Stock have been paid as of such royalty payment
date. In the event any shares of Preferred Stock are
transferred from EP MedSystems to a third party unaffiliated
with EP MedSystems ("Holder"), and this Agreement is not
also assigned by EP MedSystems to such Holder, such
Holder shall not be entitled to the offset rights set forth
in this Section 3.4 with respect to such shares.
3.5 One Royalty Only. Any royalty due hereunder
shall be payable only on the first arms length sale of each
Product and all subsequent sales or uses of that Product by
such buyer shall be royalty free. Only one (1) royalty per
Product sale will be due regardless of the number of Patents
involved in a Product.
ARTICLE 4. ROYALTY RECORDS, PAYMENTS AND STATEMENTS
4.1 Records. EP MedSystems agrees during the term of
this Agreement to keep full and accurate records for
EchoCath, showing the quantity and nature of Products sold
by EP MedSystems, its Affiliates and any sublicensee, the
Net Sales price thereof, and the basis for the calculation
of royalties. These records shall be open to inspection,
only once each calendar year, by EchoCath's representative
or certified public accountant, not reasonably objectionable
to EP MedSystems, at EchoCath's expense, during EP
MedSystems' business hours, and upon reasonable notice to EP
MedSystems.
4.2 Payments and Credit Calculations.
(a) All royalty payments provided for within this
Agreement shall be made by EP MedSystems to EchoCath at
the address of EchoCath, as indicated hereinafter, or
at any other place designated by EchoCath to EP
MedSystems in writing. Royalties, if any, shall he
payable quarterly after the end of each calendar
quarter, respectively, with respect to Net Sales made
during such quarterly period; provided, however, that
no royalty shall be payable with respect to any sale of
Product unless and until EP MedSystems receives full
payment with respect to such sale. All such payments
shall be made on or before the thirtieth (30th) day of
the month following the end of the period for which the
payment is made. A report will be made on a form
provided by EP MedSystems, which will provide
reasonably necessary information to apprise EchoCath of
sales by EP MedSystems, its Affiliates and any
sublicensees pursuant to this Agreement and the basis
for the royalties paid.
(b) All royalty payments as well as any other
payments by EP MedSystems to EchoCath, pursuant to this
Agreement, shall be payable in United States currency.
Currency exchange rates applicable to such payments
shall be calculated on the basis of the selling price
of United States currency as reported in The Wall
Street Journal, Eastern Edition, on the last business
day of the calendar month preceding the payment date.
If no such rate of exchange can be determined as of
such date because of governmental regulations, exchange
controls, absence of currency transactions, or
otherwise, there shall be substituted the most recent
preceding date as of which such a rate of exchange can
be determined.
(c) if, by law, regulations, or fiscal policy of a
particular country, conversion into or transfer to
United States dollars is restricted or forbidden,
notice thereof in writing will be given to EchoCath,
and payment of the royalty will be made through such
lawful means or methods as EchoCath reasonably
designates. Failing the designation by EchoCath of
lawful means or methods as aforesaid within sixty (60)
days after the aforementioned notice is given to
EchoCath, the payment of royalty by EP MedSystems or
its Affiliates will be made by the deposit thereof in
local currency to the credit of EchoCath in a
recognized banking institution designated by EchoCath
or, if none be designated by EchoCath within the period
of sixty (60) days as aforesaid, then in a recognized
banking institution notified to EchoCath by EP
MedSystems or its Affiliates. When in any country the
law or regulations prohibits both the transmittal and
deposit of royalties on sales in that country, royalty
payments will be suspended for as long as that
prohibition is in effect, and as soon as the
prohibition ceases to be in effect, all royalties which
EP MedSystems or its Affiliates would have been under
obligation to transmit or deposit, but for the
prohibition, will forthwith be promptly deposited or
transmitted to the extent allowable, as the case may
be.
(d) Any and all taxes levied by a proper taxing
authority and paid by EP MedSystems or its Affiliates
on account of royalties accruing to EchoCath under this
Agreement, remittable from a country in which provision
is made in the law or by regulation for withholding of
taxes, may be deducted from royalties paid by EP
MedSystems or its Affiliates, provided EchoCath can
obtain the benefit of that deduction by way of a tax
credit, and provided proof of payment is secured and
sent promptly by EP MedSystems or its Affiliates to
EchoCath as evidence of payment.
ARTICLE 5. PATENT APPLICATIONS AND EXPENSES
5.1 Patent Applications. EchoCath shall be responsible
for the preparation, filing, prosecution, maintenance and
taxes associated with the Patents and for all costs and
expenses associated therewith in countries where it has
filed for patent protection. The countries in which EchoCath
has filed for patent protection are listed on Schedule B
hereto. If EP MedSystems wishes to file patent applications
in additional countries, it will be responsible for the
costs thereof in each country, which will be reimbursed by
the royalties generated in each country and EP MedSystems
shall be permitted to deduct such costs from the royalties
due EchoCath in each such particular country. After the cost
of patent prosecution in each particular country has been
reimbursed, EchoCath will receive its regular royalty
thereafter.
ARTICLE 6. TECHNICAL INFORMATION
6.1 Delivery of Technical Information. EchoCath shall
within a reasonable time after execution of this Agreement,
deliver to EP MedSystems the Technical Information, as
reasonably requested by EP MedSystems.
6.2 FDA Submissions. EchoCath shall promptly upon
execution of this Agreement, transfer to EP MedSystems all
rights with respect to and pursuant to any and all FDA
510(k) approvals relating to the Products. EchoCath will
provide reasonable assistance and cooperation for such FDA
applications, and EP MedSystems will reimburse EchoCath for
its reasonable and customary costs and expenses and for its
out-of-pocket expenses for such assistance, subject to EP
MedSystems' authorization for these costs.
ARTICLE 7. IMPROVEMENTS
7.1 Pre-existing Intellectual Property. Any
intellectual property that exists as of the execution of
this Agreement shall remain the property of its original
owner, whether or not it is shared with or used by the other
party for purpose of this Agreement.
7.2 Improvements. Any Improvements made by a party
during the term of this Agreement exclusively using its own
resources and invented by its own personnel shall remain the
property of the inventing party.
7.3 Joint Improvements. Any Improvements made jointly
by personnel of EP MedSystems and EchoCath shall be owned
jointly with each party having joints rights to use and
license. EP MedSystems has exclusive license rights under
the EchoCath share in the Joint Inventions within the Field
of Use. The Royalties payable by EP MedSystems to EchoCath
for the right to use and license such Joint Inventions and
the terms for calculation thereof shall be in accordance
with the terms of Sections 3.2 and 3.3 above.
ARTICLE 8. DISTRIBUTION AGREEMENT
8.1 Distribution Agreement. In connection with this
Agreement, the parties have simultaneously with the
execution hereof executed a Distribution Agreement
(Interface Hardware) and a purchase Agreement (Sensors).
Notwithstanding the related nature of these agreements there
shall be no cross-default provisions among this Agreement
and the other Agreements.
ARTICLE 9. INFRINGEMENT
9.1 Infringement of Third Party Patent. With respect
to third party patents, where it is alleged by a person
(herein the "Alleger") other than EchoCath, EP MedSystems or
an Affiliate thereof that the manufacture or sale of
Product by or on behalf of EP MedSystems infringes one (1)
or more valid patents held by the Alleger or any person
through or under whom the Alleger claims the parties agree
as follows:
(a) Each party shall, immediately upon becoming aware
of any such allegation, notify the other party in
writing of the nature and substance of the allegation.
(b) EchoCath shall have the first option at its
discretion to negotiate for a license with the Alleger
or to defend or initiate any corresponding legal
action. If requested, EP MedSystems will provide
EchoCath with reasonable assistance and cooperation in
the conduct of any such action.
(c) If EchoCath is unwilling or unable to take action
under paragraph (b) of this Section 9.1. EP MedSystems
may take such action. Under such circumstances, if EP
MedSystems requests, EchoCath will provide EP
MedSystems with reasonable assistance and cooperation
in the conduct of any such action. EchoCath agrees to
reimburse all of EP MedSystems' reasonable costs in
defending such action to the extent of all royalties
paid under Article 3 by EP MedSystems to EchoCath
hereunder.
(d) Each party shall keep the other party reasonably
informed of any proceedings hereunder.
9.2 Prosecution of Infringement of Licensed Technology
by Third Party.
(a) Each of EP MedSystems and EchoCath shall
promptly notify the other if it knows or has reason to
believe that rights to the Licensed Technology are
being infringed or misappropriated by a third party
within the Field of Use or that such infringement or
misappropriation is threatened. EP MedSystems shall,
after learning of and investigating such alleged
infringement or misappropriation, send notice to
EchoCath electing to do one of the following: (i)
prosecute such alleged infringement or misappropriation
for EP MedSystems' own account; (ii) offer EchoCath the
choice of participating in such prosecution; or (iii)
decline to prosecute such alleged infringement or
misappropriation.
(b) In the event EP MedSystems elects to prosecute
such alleged infringement or misappropriation for its
own account pursuant to (a)(i) above, EP MedSystems
shall be solely responsible for payment of all of its
own costs of prosecution and of negotiating settlement,
and shall retain all proceeds from such prosecution. EP
MedSystems shall have the right to join EchoCath as a
party plaintiff to any such proceeding if EP MedSystems
believes it is necessary to successfully prosecute such
infringement or misappropriation. EchoCath shall
cooperate, at EP MedSystems' expense, in connection
with the initiation and prosecution by EP MedSystems of
such suit.
(c) In the event EP MedSystems offers EchoCath the
choice of participating in such prosecution pursuant to
(a) (ii) above. upon receipt of EP MedSystems' notice,
EchoCath shall have thirty (30) days in which to notify
EP MedSystems in writing of EchoCath's election to
participate in the prosecution of such alleged
infringement or misappropriation. If EchoCath elects to
participate, EchoCath shall be obligated to pay fifty
percent (50%) of the costs and expenses incurred by EP
MedSystems and EchoCath in such prosecution and shall
be entitled to receive fifty percent (50%) of the net
proceeds realized from EchoCath and EP MedSystems
prosecuting of such matter and remaining after
reimbursement of EP MedSystems' and EchoCath's costs
and expenses out of the proceeds of such matter.
(d) In the event EP MedSystems elects not to
prosecute pursuant to (a) (iii) above, EchoCath may, at
its option, prosecute such alleged infringement or
misappropriation for its own account, in which event
EchoCath shall be solely responsible for all costs of
prosecution and of negotiating settlement and shall
retain all proceeds from such prosecution.
(e) Each party shall keep the other party reasonably
informed of any proceedings hereunder.
ARTICLE 10. REPRESENTATIONS, WARRANTIES AND
INDEMNIFICATION
10.1 EchoCath Representations. EchoCath hereby
represents and warrants as follows:
(a) The Licensed Rights being licensed hereunder are
subsisting and are not invalid or unenforceable, in
whole or in part.
(b) EchoCath has the full right, power, authority and
legal ability to enter into this Agreement, to grant
the license and rights set forth herein and to perform
its obligations hereunder. EchoCath is the sole and
exclusive licensor of the Licensed Rights, which are
free and clear of any liens, charges or encumbrances.
(c) EchoCath is the owner of all right title and
interest in and to the Licensed Rights and no
conflicting claims of ownership exist or are
outstanding.
(d) The Licensed Rights do not violate the patent,
trade secret or other proprietary or intellectual
property rights of any other person or entity.
(e) It has not granted any license of the Licensed
Rights for the Field of Use to any third party.
(f) There is no present intention to alter or change
the agreement regarding forfeitable shares as it is
described on page 17 of the EchoCath prospectus dated
January 17, 1996.
10.2 EP MedSystems Representations. EP MedSystems
hereby represents and warrants as follows:
(a) EP MedSystems has the full right, power authority
and ability to enter into this Agreement and to
perform its obligations hereunder.
(b) EP MedSystems is a corporation duly organized,
validly existing and in good standing under the laws of
the State of New Jersey, is not subject to any
conflicting obligations which will or might prevent it
from, or interfere with, its execution of this
Agreement and/or its performance hereunder.
(c) that the execution and delivery of this Agreement
by EP MedSystems has been duly and validly authorized
by all necessary corporate action on the part of EP
MedSystems, and that this Agreement is a valid and
binding obligation of EP MedSystems enforceable against
it.
10.3 Indemnification.
(a) EchoCath shall indemnify and hold EP MedSystems
harmless from any damages, costs and fees (including,
without limitation, reasonable attorneys fees) suffered
or otherwise incurred by EP MedSystems and its
Affiliates as a consequence of any breach by EchoCath
of the warranties set forth in Section 10.1 above.
(b) EP MedSystems shall indemnify and hold EchoCath
harmless from any damages, costs and less (including,
without limitation, reasonable attorneys fees) suffered
or otherwise incurred by EchoCath and its Affiliates as
a consequence of any breach by EP MedSystems of the
warranties set forth in Section 10.2 above.
10.4 Survival of Representations and Warranties.
Notwithstanding any provision of this Agreement to the
contrary, the provisions of Sections this Article 10 shall
survive until barred by any applicable statute of
limitations.
ARTICLE 11. LIMITATION OF LIABILITY
11.1 EP MedSystems shall not be liable to EchoCath with
respect to any and all claims of any kind or nature
whatsoever relating, directly or indirectly, to the
negotiation, execution or performance of this Agreement
(including claims based on breach of contract or tort
including fraud but excluding claims based in products
liability) in excess of $30,000,000. Under no circumstances
shall EP MedSystems be liable to EchoCath for indirect
incidental, consequential, special or punitive damages.
11.2 EchoCath shall not be liable to EP MedSystems with
respect to any and all claims of any kind or nature
whatsoever relating, directly or indirectly to the
negotiation, execution or performance of this Agreement
(including claims based on breach of contract or loss
including fraud but excluding claims based in products
liability) in excess of $30,000,000. Under no circumstances
shall EchoCath be liable to EP MedSystems for indirect,
incidental, consequential, special or punitive damages.
11.3 The parties acknowledge and agree that the
foregoing provisions are reasonable and appropriate
ARTICLE 12. TERM AND TERMINATION
12.1 Term. The term of this Agreement shall be from
the Effective Date until the last to expire Patent
right licensed hereunder including the last to expire Patent
for any Improvements, unless this Agreement is terminated
earlier as provided in Section 12.3 below
12.2 Rights Upon Termination.
(a) Upon expiration or termination of this Agreement
pursuant to Section l2.1 above (but not pursuant to
Section 12.3 below), and payment by EP MedSystems of
any unpaid royalty then due EchoCath under this
Agreement, all duties obligations and responsibilities
of EP MedSystems under this Agreement shall be deemed
fulfilled and satisfied, and EP MedSystems shall have
no future duty. obligation or responsibility to
EchoCath whatsoever. Without limiting the foregoing,
upon expiration of this Agreement, EP MedSystems may
retain and continue to use the Technical Information
for any purpose and shall have a paid-up non-terminable
license in the Territory under the Licensed Rights to
make, have made, use and sell Product(s) without any
further duty, obligation or responsibility to EchoCath
whatsoever.
(b) In the event that this Agreement is terminated
by EP MedSystems, as the Aggrieved Party, as provided
for in Section 12.3 hereunder, EP MedSystems will have,
at its option, the right to purchase the Licensed
Rights for a once and for all payment to EchoCath. Such
payment will be in an amount equal to the royalties
payable hereunder for the calendar year immediately
preceding that calendar year in which EchoCath became
the Defaulting Party under Section 12.3 hereunder.
(c) In the event that this Agreement is terminated,
as provided for in clause 12.3 hereunder, and EchoCath
is the Aggrieved Party, then EP MedSystems undertakes
to return to EchoCath all the Technical Information
provided to EP MedSystems by EchoCath.
12.3 Termination. Notwithstanding Section l2.1 above,
either party to this Agreement (the "Aggrieved Party") may,
at its sole option and upon giving written notice to the
other Party, immediately terminate this Agreement upon any
one or more of the following events occurring in relation to
the other party (the "Defaulting Party"):
(a) insolvency of the Defaulting Party;
(b) judicial or private receivership of the Defaulting
Party;
(c) the Defaulting Party making an assignment for the
general benefit of its creditors or committing an act
of bankruptcy or being declared bankrupt;
(d) the Defaulting Party's taking or becoming subject
to proceedings for its dissolution or the winding up or
liquidation of its business, or in any way ceasing to
carry on business, except as effected by corporate
reorganization of either party hereto not involving
change in the ultimate control or ownership of such
party; or
(e) if the Defaulting Party shall commit any material
or substantial breach of any of its obligations or
representations or warranties herein, or of any of the
provisions of this Agreement, and such Defaulting Party
shall fail within thirty (30) days of being notified
thereof in writing by the Aggrieved Party to remedy
such breach or default.
12.4 Claims. In the event this Agreement is terminated
by an Aggrieved Party in accordance with the foregoing
provisions of either Sections l2.1, 12.3(a) to 12.3(d),
neither party shall have any claim against the other for
compensation or indemnity of any kind as a consequence of
such termination, provided, however, that such termination
shall not affect any of the obligations hereunder having
arisen prior to the effective date of termination.
ARTICLE 13. MISCELLANEOUS
13.1 Governing Law; Consent to Jurisdiction. This
Agreement and its effects are subject to and shall be
construed and enforced in accordance with the law of the
State of New Jersey, except as to any issue which by the law
of New Jersey depends upon the validity, scope or
enforceability of any Patent within the Licensed Rights
which issue shall be determined in accordance with the
applicable patent laws of the jurisdiction which issued the
Patent. The parties agree that the exclusive jurisdiction
and venue for any dispute or controversy arising from this
Agreement shall be in an appropriate State Court in the
State of New Jersey or the United States District Court for
the District of New Jersey.
13.2 Governmental Consent to Exportation. This
Agreement is made subject to any restrictions concerning the
export of products or technical information from the United
States which may be imposed upon or related to EP MedSystems
or EchoCath from time-to-time by the government of the
United States.
13.3 Force Majeure. Any delays in or failure of
performance by either Party under this Agreement shall not
be considered a breach thereof if such delay or failure is
occasioned by force majeure and is therefore beyond the
reasonable control of the Party affected. Force majeure in
this context shall mean and include but not be limited to
acts of government or failure of government to act where
such action is required, acts of God, strikes or other
concerted acts of workmen including workmen of the Parties,
fires, floods, explosions, riots, civil disturbances,
insurrections, earthquakes, wars, rebellions, epidemics and
sabotage.
13.4 Severability. Should any provision of this
Agreement be held by a court to be illegal or in conflict
with any law, ride of law, statute or regulation, the
validity of the remaining provisions will not be affected
thereby. Any waiver by one party of any rights arising
from any breach by the other party will not be construed as
a waiver of other breaches of the same or other terms of
this Agreement
13.5 Notices. Any notice to be given pursuant to this
Agreement shall be delivered (i) personally to the place of
business of the Party to whom it is addressed, (ii) by
prepaid, registered mail, return receipt requested, or (iii)
via Federal Express or other internationally known and
reputable overnight delivery service, and addressed as
follows:
(a) in the case of EchoCath to: EchoCath, Inc.,
4326 U.S Route One
Monmouth Junction, New Jersey O8852
Attn.: President
With a copy to: EchoCath, Inc.
PO. Box 7224
Princeton, New Jersey 08543-7224
Attn.: President
(b) in the case of EPMedSystems to:
EP MedSystems, Inc.
58 Route 46 West
Budd Lake, New Jersey 07828
Attn.: David Jenkins, President
13.6 Successors. This Agreement shall be binding upon
and shall endure to the benefit of both EchoCath and EP
MedSystems together with each of their respective
affiliates, subsidiaries, successors and assigns, together
with all other persons who are controlled by such person(s)
13.7 Entire Agreement. This Agreement constitutes the
entire agreement between the Parties concerning the Patents
and the rights granted thereunder and supersedes all prior
understandings oral or written. Any representations,
warranties, terms, conditions or covenants to amend, modify
or otherwise alter this Agreement shall be of no force or
effect unless made in writing and signed by both parties.
13.8 Assignment. This Agreement and the
performance of substantially all of its obligations
hereunder, may not be assigned by a party hereto without the
prior written consent of the other party which consent shall
not be unreasonably withheld but shall be binding upon and
inure to the benefit of and be enforceable by the parties
hereto, their successors, and permitted assignees; provided,
however, that either party shall be entitled to assign its
obligations under this Agreement without the consent of the
other party, in the event of a merger, sale of
substantially all of its assets or other acquisition of such
party, or to any affiliate of that party provided that such
assignee assumes the assigning party's obligations
hereunder, EP MedSystems shall be permitted to exercise its
license rights hereunder through sublicensees or affiliates
so long as EP MedSystems remains primarily liable hereunder.
13.9 This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the
same agreement, and shall become effective when one or more
counterparts have been signed by each of the parties and
delivered to the parties.
IN WITNESS WHEREOF, the parties hereto have affixed their
names and seals by their duly authorized executive officers
on the day and year first above written.
ATTEST ECHOCATH, INC.
/s/ James J. Caruso By:/s/ Frank DeBernardis
Title: President
ATTEST EP MEDSYSTEMS, INC.
/s/ James J. Caruso By: /s/ David Jenkins
Title: President
SCHEDULE A
For the purposes of this Agreement the "Patents" and their
corresponding patent numbers are:
U.S. Issued Expire
Patents
ECHOMARK 5,076,2 12/31/9 12/31/2 (Design of
78 1 011 Sensor)
5,161,5 11/10/9 11/10/2 (Electronics
36 2 012 for Detection)
ECHOEYE 5.373,8 12/20/9 12/20/2
45 4 014
COLORMARK 5,329,9 07/19/9 07/19/2 (Equipment)
27 4 014
5,343.8 09/16/9 09/16/2 (Method)
65 4 014
5,425.3 06/20/9 06/20/2 ("GreyMark")
70 5 015
5,421,3 06/06/9 06/06/2 (Needle
36 6 016 Engager)
Echo - 10 Awaitin
g
Serial File ("Color
# 12/03/9 Needle")
6
SCHEDULE B
Patent applications have been filed in the following
countries in connection with the Patents:
Foreign Filings:
ECHOMARK PCT US 9l/07207 Filed: Oct.
8,1991
SENSOR EPO* Appl. No.
91919875-4
Japanese Appl. No.
5180601/91
Canadian Appl. No.
2093645
Electroni PCT USP 2/01671 Filed: March 5,
cs 1992
EPO* Appl. No.
9290811.7
Japanese Appl. No.
507568/92
ECHOEYE PCT US 93/04040
EPO* Application Filed 10/19/94
COLORMARK Device and Method
PCT US 94/01752 Filed: Feb. 22,
1994
EPO* Appl. No.
94910127.3
Japanese Appl. No
519154/94
Canadian Appl. No
2156831
"GreyMark PCT US 95/03173 Filed: March
" 14, 1995
EPO* Filed, but no
Appl. No. as yet
* European Countries Designated: Belgium, France, Germany,
Italy, Netherlands, United Kingdom.
EXHIBIT 10.31
ECHOCATH, INC.
SUBSCRIPTION AGREEMENT
EchoCath Inc.
P.O. Box 7224
Princeton, New Jersey 08543
Attention: Frank DeBernardis, President
Gentlemen:
I. Subscription. The undersigned, intending to be legally
bound, hereby irrevocably agrees to purchase from EchoCath,
Inc., a New Jersey corporation (the "Company"), the number
of shares (the "Shares") of the Company's Series B
Cumulative Convertible Preferred Stock (the "Preferred
Stock"), set forth on the signature page hereof, at a
purchase price of $5.00 per Share.
II. Payment. The undersigned will pay for the subscription
on the date hereof by check payable in U.S. dollars, or by
wire transfer in US. dollars to an account designated by the
Company. The Company will file a Certificate of Amendment
for the Preferred Stock in the form of Exhibit A attached
hereto and will issue certificates representing the Shares
within 30 days of the date hereof.
III. Acceptance of Subscription. The undersigned
understands and agrees that the Company in its sole
discretion reserve the right to accept or reject this or any
other subscription for Shares, in whole or in part,
notwithstanding prior receipt by the undersigned of notice
of acceptance of this subscription. The Company shall have
no obligation hereunder until the Company shall accept and
agree to the terms of this Subscription Agreement, as
evidenced by the execution and delivery to the undersigned
of an executed copy of this Subscription Agreement. If this
subscription is rejected in whole, this Subscription
Agreement and all funds received from the undersigned will
be returned without interest or deduction, and the
Subscription Agreement shall thereafter be of no further
force or effect. If this subscription is rejected in part,
the funds for such rejected portion of this subscription
will be returned without interest or deduction, and this
Subscription Agreement shall continue in force and effect to
the extent this subscription was accepted.
IV. Representations and Warranties. The undersigned hereby
acknowledges, represents, warrants to and agrees with the
Company as follows:
(a) None of the Shares are registered under the
Securities Act of 1933, as amended (the "Securities
Act") or any state securities laws. The undersigned
understands that the offering and sale of the Shares is
intended to be exempt from registration under the
Securities Act, by virtue of Section 4(2) and the rules
and regulations promulgated thereunder, based, in part,
upon the representations, warranties and agreements
contained in this Subscription Agreement;
(b) The undersigned has access to the same kind of
information which would be available in registration
statements filed by the Company under the Securities
Act;
(c) Neither the Securities and Exchange Commission
(the "Commission") nor any state securities commission
has approved the Shares offered or passed upon or
endorsed the merits of the offering, and the offering
of the Shares has not been reviewed by any Federal,
state or other regulatory authority;
(d) The undersigned acknowledges that prior to the
date hereof it has received and reviewed a copy of the
Company's annual report on Form 1O-KSB, which annual
report is attached hereto as Exhibit B;
(e) The undersigned acknowledges that all documents,
records, and books pertaining to the investment in the
Shares have been made available for inspection by it,
its attorney, accountant, purchaser representative or
tax advisor (collectively, the "(Advisors");
(f) The undersigned and the Advisors have had a
reasonable opportunity to ask questions of and receive
answers from a person or persons acting on behalf of
the Company concerning the offering of the Shares and
all such questions have been answered to the full
satisfaction of the undersigned and its Advisors;
(g) In evaluating the suitability of an investment in
the Company, the undersigned has not relied upon any
representation or other information (oral or written)
other than as contained in documents or answers to
questions so furnished to the undersigned or its
Advisors by the Company;
(h) The undersigned is unaware of; and in no way
relying on, any form of general solicitation or general
advertising in connection with the offer and sale of
the Shares;
(i) The undersigned has such knowledge and experience
in financial, tax, and business matters so as to enable
it to utilize the information made available to it in
connection with the offering of the Shares to evaluate
the merits and risks of an investment in the Shares and
to make an informed investment decision with respect
thereto;
(j) The undersigned is not relying on the Company
respecting the tax and other economic considerations of
an investment m the Shares, and the undersigned has
relied on the advice of; or has consulted with, only
its own Advisors;
(k) The undersigned is acquiring the Shares solely for
its own account for investment and not with a view to
resale or distribution and the undersigned will not
sell or transfer the Shares until they are registered
for resale under the Securities Act or an exemption
therefrom is available;
(l) The undersigned must bear the economic risk of the
investment indefinitely because none of the Shares may
be sold, hypothecated or otherwise disposed of unless
subsequently registered under the Act and applicable
state securities laws or an exemption from registration
is available. Legends shall be placed on the Shares to
the effect that they have not been registered under the
Securities Act or applicable state securities laws and
appropriate notations thereof will be made in each of
the Company's stock books;
(m) The undersigned has adequate means of providing
for the undersigned's current needs and foreseeable
personal contingencies and has no need for the
undersigned's investment in the Shares to be liquid;
(n) The undersigned is aware that an investment in the
Shares involves a number of very significant risks and
is able to bear the loss of its entire investment;
(o) The undersigned represents that it was not formed
for the specific purpose of acquiring the Shares, such
entity is validly existing under the laws of the state
of its organization, the consummation of the
transactions contemplated hereby is authorized by, and
will not result in a violation of state law or its
charter or other organizational documents, such entity
has full power and authority to execute and deliver
this Subscription Agreement and all other related
agreements or certificates and to carry out the
provisions hereof and thereof, this Subscription
Agreement bas been duty authorized by all necessary
action, this Subscription Agreement has been duly
executed and delivered on behalf of such entity and is
a legal, valid and binding obligation of such entity.
V. Indemnification. The undersigned agrees to indemnity
and hold harmless each of the Company, their respective
officers, directors, employees, agents, and affiliates
against all losses, liabilities, claims, damages, and
expenses (including, but not limited to, any and all
expenses incurred in investigating, preparing, or defending
against any litigation commenced or threatened) arising out
of any false representation or warranty or breach by the
undersigned of any Agreement herein or in any other document
delivered in connection with this Subscription Agreement.
VI. Registration of the Shares.
(a) Piggyback Registration Rights.
(i) If, at any time commencing after the date of
this Subscription Agreement and expiring five (5)
years thereafter, the Company proposes to file a
registration statement or statements under the
Securities Act for the public sale of the
Company's Class A Common Stock, no par value (the
"Common Stock"), for cash (other than in
connection with a merger or pursuant to Form S-4,
Form S-8 or comparable registration statement) it
will give written notice, at least thirty (30)
days prior to the filing of each such registration
statement, to the undersigned of its intention to
do so. If the undersigned notifies the Company in
writing within ten (10) business days after
receipt of any such notice of its desire to
include the shares of the Common Stock, which may
be issued upon conversion of the Shares (the
"Common Shares") in such proposed registration
statement, the Company shall afford the
undersigned the opportunity to have the Common
Shares registered under such registration
statement; provided, however, that in the case of
an underwritten offering, if the Company notifies
the undersigned in writing that the managing
underwriter of such offering has notified the
Company that the inclusion in the registration
statement of any portion of the Common Shares
would have an adverse effect on such underwritten
offering, then the managing underwriter may limit
the number of Common Shares to be included in such
registration statement only to the extent
necessary to avoid such adverse effect; provided,
further, however, that in the event any shares of
Common Stock issued pursuant to any of the
securities issued in the Company's initial public
offering ("IPO Securities") are to be included in
such underwritten offering, and the managing
underwriter shall have determined to limit the
number of Common Shares or IPO Securities to be so
included, then such limitation shall be applied to
The Common Shares and the IPO Securities, pro rata
based on the number of Common Shares and IPO
Securities requested to be included in such
underwritten offering; and provided, further,
however that in the event securities of the
Company, other than IPO Securities, held by any
person or entity other than the Company or the
undersigned ( "Third Party Securities") are to be
included in such underwritten offering, and the
managing underwriter shall have determined to
limit the number of Common Stock, IPO Securities
or Third Party Securities to be so included, then
such limitation shall be applied to the Common
Shares, the IPO Securities and the Third Party
Securities, based on the number of Common Shares,
IPO Securities and Third Party Securities
requested to be included in such underwritten
offering so that the amount of Third Party
Securities are reduced by a percentage which is
twice as great as the percentage which the Common
Shares and the IPO Securities are reduced.
Notwithstanding the provisions of this Section
VI(a)(i), the Company shall have the right at any
time after it shall have given written notice
pursuant to this Section VI(a)(i) (irrespective of
whether a written request for inclusion of any
such securities shall have been made) to elect not
to file any such proposed registration statements
or to withdraw the same after
the filing but prior to the effective date
thereof.
(ii) Following the effective date of a
registration statement filed pursuant to Section
VI(a)(i), the Company shall, upon the written
request of the undersigned, forthwith supply such
reasonable number of copies of the registration
statement, prospectus and other documents
necessary or incidental to the registration as
shall be reasonably requested by the undersigned
to permit the undersigned to make a public
distribution of the Common Shares. The Company
will use its reasonable efforts to qualify the
Common Shares for sale in such states as the
undersigned shall reasonably request, provided
that no such qualification will be required in any
jurisdiction where, solely as a result thereof,
the Company would be subject to general service of
process or to taxation or qualification as a
foreign corporation doing business in such
jurisdiction. The obligations of the Company
hereunder with respect to the Common Shares are
expressly conditioned on the undersigned
furnishing to the Company such appropriate
information concerning the undersigned and the
Common Shares as the Company may reasonably
request.
(iii) The Company shall bear the entire cost and
expense of the registration of the Common Shares
pursuant to Section VI(a)(i); provided, however,
that the undersigned shall be solely responsible
for the fees of any counsel retained by the
undersigned in connection with such registration
and any transfer taxes or underwriting discounts,
commissions or fees applicable to the Common
Shares sold by the undersigned pursuant thereto.
(iv) Neither the filing of a registration
statement by the Company pursuant to this Section
VI(a) nor the making of any request for
prospectuses by the undersigned shall impose upon
the undersigned any obligation to sell the Common
Shares.
(v) The undersigned, upon receipt of notice from
the Company that an event has occurred which
requires a post-effective amendment to a
registration statement or a supplement to a
prospectus included therein, shall promptly
discontinue the sale of the Common Shares until
the undersigned receives a copy of a supplemented
or amended prospectus from the Company, which the
Company shall provide as soon as practicable after
such notice.
(vi) Not withstanding anything else to the
contrary contained in this Subscription Agreement,
if the undersigned requests to have any of the
Common Shares registered under the Securities Act
pursuant to this Section VI(a), and if such Common
Shares are so registered, then this Section VI(a)
shall be of no further force or effect.
(b) Demand Registration.
(i) At any time commencing September 1, 1997 and
expiring five (5) years from the date of this
Subscription Agreement, the undersigned shall have
the right (which right is in addition to the
registration rights under Section VI(a) hereof),
exercisable by written notice to the Company, to
have the Company prepare and file with the
Commission, on one occasion, a registration
statement and such other documents, including a
prospectus, as may be necessary in the opinion of
counsel for the Company, in order to comply with
the provisions of the Securities Act, so as to
permit a public offering and sale of the Common
Shares.
(ii) If the undersigned exercises its
registration request, pursuant to Section V1(b)(i)
above, between September 1st and November 1st (the
"Window Period") of any given year, the
registration costs and filing fees incurred in
connection with such registration (the "Costs")
shall be divided evenly between the undersigned
and the Company; provided, however, that the Costs
payable by the undersigned shall be capped at
$25,000. If the undersigned exercises such
registration request on a date outside of the
Window Period, the Costs shall be divided evenly
between the undersigned and the Company; provided,
however, that the Costs payable by the undersigned
shall be capped at $40,000. Costs shall not
include any amounts payable to the undersigned's
counsel, any transfer taxes or underwriting
discounts, commissions or fees applicable to the
Common Shares, which shall be payable solely by
the undersigned. Notwithstanding the foregoing,
if the registration statement to which the Costs
are associated is, due solely to actions of the
Company, not declared effective by the Commission
within six months from the date it is first filed
with the Commission, then the Company shall pay
all Costs associated with such registration
statement.
(iii) In connection with any registration under
Section V1(b) hereof, the Company covenants and
agrees as follows:
a. The Company shall use its best efforts to
file a registration statement within sixty
(60) days of receipt of any demand therefor,
except that if such demand is made during the
Window Period, the Company shall use its best
efforts to file a registration statement
within 60 days of the end of the Window
Period, shall use its best efforts to have
any registration statements declared
effective at the earliest possible time, and
shall furnish the undersigned such number of
prospectuses as shall reasonably be
requested; provided, however, that the
Company may, at any time, delay the filing or
delay or suspend the effectiveness of such
demand registration or, without suspending
such effectiveness, instruct the undersigned
not to sell any securities included in such
demand registration, (i) if the Company shall
have determined upon the written advice of
counsel (confirmation of which notice shall
be provided to the undersigned in writing by
such counsel) that the Company would be
required to disclose any actions taken or
proposed to be taken by the Company in good
faith and for valid business reasons,
including without limitation, the acquisition
or divestiture of assets, which disclosure
would have a material adverse effect on the
Company or on such actions, or (ii) if
required by law, to update the prospectus
relating to any such registration to include
updated financial statements (a "Suspension
Period") by providing the undersigned with
written notice of such Suspension Period and
the reasons therefor; and provided further
that the Suspension Periods, in the
aggregate, do not exceed sixty (60) days. The
Company shall provide such notice as soon as
practicable and in any event prior to the
commencement of such a Suspension Period. The
obligations of the Company hereunder with
respect to the Common Shares are expressly
conditioned on the undersigned furnishing to
the Company such appropriate information
concerning the undersigned and the Common
Shares as the Company may reasonably request.
b. The Company agrees that it will use its
best efforts to maintain the effectiveness of
any registration statement filed pursuant to
Section VI(b) hereof for a period of 1 year
from the effective date of such registration
statement.
c. The Company will take all necessary action
which may be required in qualifying or
registering the Common Shares included in a
registration statement for offering and sale
under the securities or blue sky laws of such
states as reasonably are requested by the
undersigned, provided that the Company shall
not be obligated to execute or file any
general consent to service of process or to
qualify as a foreign corporation to do
business under the laws of any such
jurisdiction.
(iv) Neither the filing of a registration
statement by the Company pursuant to this Section
VI(b) nor the making of any request for
prospectuses by the undersigned shall impose upon
the undersigned any obligation to sell the Common
Shares.
(v) The undersigned, upon receipt of notice
from the Company that an event has occurred which
requires a post-effective amendment to a
registration statement or a supplement to a
prospectus included therein, shall promptly
discontinue the sale of the Common Shares until
the undersigned receives a copy of a supplemented
or amended prospectus from the Company, which the
Company shall provide as soon as practicable after
such notice.
(VII). Registration Indemnification.
(a) The Company shall indemnity and hold harmless the
undersigned from and against any and all losses,
claims, damages and liabilities caused by any untrue
statement of a material fact contained in any
registration statement covering the Common Shares filed
by the Company under the Securities Act, any post-
effective amendment to such registration statement, or
any prospectus included therein required to be filed or
furnished by reason of Section VI of this Subscription
Agreement or caused by any 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 omission based upon information furnished
or required to be furnished in writing to the Company
by the undersigned expressly for use therein, which
indemnification shall include each person, if any, who
controls the undersigned within the meaning of the Act;
provided, however, that the indemnification in this
paragraph VII(a) with respect to any prospectus shall
not inure to the benefit of the undersigned (or to the
benefit of any person controlling the undersigned) on
account of any such loss, claim, damage or liability
arising from the sale of the Common Shares by the
undersigned, if a copy of a subsequent prospectus
correcting the untrue statement or omission in such
earlier prospectus was provided to the undersigned by
the Company prior to the subject sale and the
subsequent prospectus was not delivered or sent by the
undersigned to the purchaser prior to such sale; and
provided further, that the Company shall not be
obligated to so indemnity the undersigned or other
person referred to above unless the undersigned or
other person, as the case may be, shall at the same
time indemnity the Company, its directors, each officer
signing such registration statement and each person, if
any, who controls the Company within the meaning of the
Securities Act, from and against any and all losses,
claims, damages and liabilities caused by any untrue
statement of a material fact contained in such
registration statement, any registration statement or
any prospectus required to be filed or furnished by
reason of this Subscription Agreement or caused by any
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, insofar as such losses, claims,
damages or liabilities are caused by any untrue
statement or omission based upon information furnished
in writing to the Company by the undersigned expressly
for use therein.
(b) If for any reason the indemnification provided for
in the preceding subparagraph is held by a court of
competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, claim,
damage, liability or expense referred to therein, then
the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the
amount paid or payable by the indemnified party as a
result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the
relative benefits received by the indemnified party and
the indemnifying party, but also the relative fault of
the indemnified party and the indemnifying party, as
well as any other relevant equitable considerations.
VIII. Board Seat. At any time, through the date which
is three years from the date of this Subscription Agreement,
a seat on the Company's Board of Directors (the "Board")
shall become vacant, for whatever reason, and, if the
Company determines, in its sole discretion, to fill such
vacant Board seat, then the Company shall notify the
undersigned and the undersigned shall have thirty (30) days
following such notification to provide the Company with the
name of an individual to fill such Board seat. If the
Company approves such individual, which approval shall not
be unreasonably withheld, then the Company shall elect such
individual to the Board. If such individual is not approved
then the undersigned shall have the right to submit the
names of additional individuals until one is elected to the
Board. Once one individual nominated by the undersigned is
elected to the Board the undersigned shall not have the
right to nominate any additional individuals to the Board.
IX. Series A Preferred Stock. The Company hereby
represents that there are currently no shares of the
Company's Series A Convertible Preferred Stock ("Series A
Stock") issued and/or outstanding and the Company hereby
covenants that it will not issue any shares of Series A
Stock while there are any shares of the Preferred Stock
issued and outstanding.
X. Irrevocability; Binding Effect. The undersigned hereby
acknowledges and agrees that the subscription hereunder is
irrevocable by the undersigned, except as required by
applicable law, and that this Subscription Agreement shall
survive the death or disability of the undersigned and shall
be binding upon and inure to the benefit of the parties and
their heirs, executors, administrators, successors, legal
representatives, and permitted assigns. If the undersigned
is more than one person, the obligations of the undersigned
hereunder shall be joint and several and the agreements,
representations, warranties, and acknowledgments herein
shall be deemed to be made by and be binding upon each such
person and his heirs, executors, administrators, successors,
legal representatives, and permitted assigns.
XI. Modification. This Subscription Agreement shall not be
modified or waived except by an instrument in writing signed
by the party against whom any such modification or waiver is
sought.
XII. Notices. Any notice or other communication required
or permitted to be given hereunder shall be in writing and
shall be mailed by certified mail, return receipt requested,
or delivered against receipt to the party to whom it is to
be given (a) if to either of the Company, at the address set
forth above, or (b) if to the undersigned, at the address
set forth on the signature page hereof (or, in either case,
to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section
XII). Any notice or other communication given by certified
mail shall be deemed given at the time of certification
thereof, except for a notice changing a party's address
which shall be deemed given at the time of receipt thereof.
XIII. Assignability. Following the initial purchase of
the Shares, the rights and obligations hereunder are
assignable by the undersigned; provided, however, that
anyone to whom this Subscription Agreement is assigned must
agree in writing to be bound by all of the terms and
provisions hereof but the rights and obligations of the
undersigned under Section VIII of this Subscription
Agreement are not transferable or assignable.
XIV. Applicable Law. This Subscription Agreement shall be
governed by and construed in accordance with the internal
laws of the State of New Jersey without regard to its
conflicts of laws principles.
XV. Blue Sky Qualification. The Sale of the Shares is
expressly conditioned upon the exemption from qualification
of the offer and sale of the Shares from applicable Federal
and state securities laws. The Company shall not be required
to qualify this transaction under the securities laws of any
jurisdiction and, should qualification be necessary, the
Company shall be released from any and all obligations to
maintain its offer, and may rescind any sale contracted, in
the jurisdiction.
XVI. Counterparts. This Subscription Agreement may be
executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument and
any of the parties hereto may execute this subscription by
signing any of such counterparts and delivering the same by
telex, telecopy, telegraph, cable or otherwise in writing
(each delivery by any of such means to be deemed to be in
writing, for purposes of this Subscription Agreement).
XVII. Use of Pronouns. All pronouns and any variations
thereof used herein shall be deemed to refer to the
masculine, feminine, neuter, singular or plural as the
identity of the person or persons referred to may require.
IN WITNESS WHEREOF, the undersigned has executed this
Subscription Agreement this 27th day of February, 1997.
Number of Shares Subscribed: 280,000 Shares of Preferred
Stock
Total Subscription Amount: $1,400,000
EP MEDSYSTEMS, INC.
By: /s/ David A. Jenkins
Name: David A. Jenkins
Title: President
Address: 58 Route 46 West
Budd Lake, NJ 07828
Taxpayer Identification Number: 22-3212190
ACCEPTED AND AGREED
ECHOCATH, INC.
By: /s/ Frank DeBernardis
Name: Frank DeBernardis
Title: President
Date: February 27, 1997
