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, 1997
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 of incorporation)
(IRS Employer Identification No.)
100 Stierli Court, Mount Arlington, NJ 07856
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (973) 398-2800
Securities registered under Section 12(b) of the Exchange Act: None
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 $4,013,782 for the fiscal year
ended December 31, 1997.
The aggregate market value of the issuer's outstanding
voting stock held by non-affiliates on March 19, 1998, based
on the closing sale price of its common stock on the Nasdaq
National Market on such date, was approximately $ 11.4
million.
As of March 19, 1998, 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 Form 10-KSB
contains forward-looking statements relating to such matters
as anticipated financial and operational performance,
business prospects, technological developments, results of
clinical trials, 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. When used in
this Form 10-KSB, the words or phrases "believes,"
"anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended
to identify such forward-looking statements, but are not the
exclusive means of identifying such statements. Such forward-
looking statements are only predictions, and the actual
events or results may differ materially from the results
discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but
are not limited to, those matters discussed herein in the
sections entitled "Item 1 - Business," "Item 3 - Legal
Proceedings" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations"
particularly the subsection of such Item 7 entitled "Factors
That May Impact Future Operations."
The Company cautions readers to review the cautionary
statements set forth in this report and in the Company's
other reports filed with the Securities and Exchange
Commission and cautions that other factors may prove to be
important in affecting the Company's business and results of
operations. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak
only as of the date of this report. The Company undertakes
no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise
after the date of this report.
Trademarks and Tradenames
ProCath, ALERT, ALERT System and ALERT Catheter are
registered trademarks of the Company. EP MedSystems, ALERT
Companion, EP WorkMate, EP-2, EP-3 and PaceBase are
trademarks of the Company. This Form 10-KSB 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. designs, manufactures and markets a
broad-based line of 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
the EP WorkMate, a computerized monitoring and analysis
workstation (the "EP WorkMate"), the EP-3 computerized
electrophysiology stimulator (the "EP-3 Stimulator" or "EP-
3") and the PaceBase/TeleTrace III receiver, an integrated
ECG monitoring device and computerized transmission system
for automation of pacemaker and arrhythmia follow-up testing
and data archiving. The Company's product line also includes
diagnostic electrophysiology catheters, temporary pacing
catheters and related disposable supplies.
The Company has identified the diagnosis and treatment of
atrial fibrillation as a primary focus for its ongoing
development efforts. Atrial fibrillation is the most
prevalent type of abnormal heart rhythm, estimated to
afflict over 2,000,000 people in the United States with an
estimated 160,000 new cases developing each year. Although
not immediately life threatening, atrial fibrillation has
been linked to a significantly increased risk of stroke. The
American Heart Association estimates that 15% of all strokes
in the United States occur in people with atrial
fibrillation, with published reports that stroke is twice as
likely to be fatal in patients with atrial fibrillation. In
patients over the age of 65, atrial fibrillation is reported
to quadruple the risk of stroke. In this regard, the Company
has developed a new product for internal cardioversion of
atrial fibrillation known as the ALERT System (the "ALERT
System"), which uses a patented 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 was incorporated in New Jersey in January, 1993.
The Company's principal offices are located at 100 Stierli
Court, Mount Arlington, NJ 07856, and its telephone number
is 973-398-2800. Unless the context requires otherwise,
references to the Company include EP MedSystems, Inc. and
its wholly owned subsidiaries ProCath Corporation
("ProCath") and EP MedSystems UK Ltd. ("EP MedSystems UK").
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 episodes
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 with published reports of up
to 70% of such patients dying or suffering severe
neurological deficit.
The Company believes that more than 2,000,000 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 1994, comprised the primary
diagnosis for approximately 300,000 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 days following surgery, atrial fibrillation in open
heart surgery patients is often dangerous and requires
immediate intervention. The Company believes that over
450,000 open heart procedures are performed annually in the
United States. 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. The greatest
percentage 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.
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.
The Company's products can be separated by function into the
following categories described below.
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 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.
The Company believes that atrial fibrillation occurs in up
to 30% of patients during the open heart surgery post-
operative period. According to published reports, atrial
fibrillation occurring during the post-operative heart
surgery recovery period can contribute to an extended
hospital stay of up to 3 to 5 days, thereby increasing the
overall cost of such surgery by as much as $20,000.
Consequently, an effective, low-trauma cardioversion
technique that can be deployed rapidly could 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 could be 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 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,
often 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 ALERT System can also simultaneously
provide temporary pacing capabilities and blood pressure
monitoring in the left pulmonary artery during the
procedure. 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).
- Elimination of harmful side effects associated with
drug therapies.
- Can be used on an outpatient basis; general anesthesia
is not required.
- Lower overall cost per procedure than high energy
external cardioversion.
- Greater applicability for converting atrial
fibrillation occurring in the days 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. The Company has licensed the exclusive worldwide
right to use the ALERT technology in the ALERT System from
Dr. Alt. Three patents have been issued in the United States
on the ALERT System. The Company and Dr. Alt have also filed
additional patent applications and continuations for the
ALERT Catheter and the ALERT Companion in the United States
and internationally. See "-- Patents and Intellectual
Property."
Clinical Trials
The Company believes the ALERT System is a medical device
which will require pre-market approval ("PMA") from the U.S.
Food and Drug Administration ("FDA") prior to marketing in
the United States. The Company submitted a clinical study
protocol to the FDA as part of an application for an
Investigational Device Exemption ("IDE"). The FDA has
approved the IDE application for the ALERT System and the
Company is conducting human clinical trials at three
hospitals in the United States: Duke University Medical
Center, the Medical Center of the University of Alabama at
Birmingham and Allegheny University of the Health Sciences
in Philadelphia, PA. The Company intends to expand the
trials to include additional leading atrial fibrillation
research centers during 1998.
The Company hopes that the results of the ALERT clinical
trials will demonstrate the safety and efficacy of the ALERT
System for internal catheter based cardioversion of atrial
fibrillation. The Company believes such results will be
critical to obtaining approval for the ALERT System from
the FDA for sale in the United States. The Company expects
to complete the patient studies and file for FDA approval to
sell the ALERT System in the United States within the next
nine to twelve months. Approval for the ALERT System may
take several years if approved at all. The Company has
received approval from its notified body to label the ALERT
System with a CE Mark. This designation allowed the Company
to initiate sales of the ALERT System in the European
Community in the fourth quarter of 1997. See " -- Government
Regulation."
EP Laboratory Workstations and Stimulators (EP WorkMate, EP-
3 Stimulator)
The Company's EP WorkMate 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 offers, among other features, up to 120 recorded
channels of cardiac electrical data, real-time analysis
including graphical and quantitative display of such data,
superior ease of use and a single keyboard for all
operations. The EP WorkMate consists of a Pentium PC with
integral proprietary software, a proprietary signal
conditioning unit, dual 21-inch, high resolution color
monitors, an optical disk or 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 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
Stimulator, (ii) its capacity to receive and display up to
120 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 Stimulator 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 electrophysiology
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 of 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.
TeleTrace/PaceBase System
Patients who have undergone pacemaker or implantable cardiac
defibrillator ("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 depends in part
upon its ability to obtain patent protection for its
existing products and those under development. The Company
has filed for patents on its important inventions, has
acquired patents and has entered into license agreements to
obtain rights under selected patents of third parties as to
technology it considers important to its business. The
Company intends to file additional patents in the future in
order to continue its efforts to establish, preserve and
enforce protection for its proprietary technology and other
intellectual property. The Company's intellectual property
consist of the following:
- An exclusive worldwide license under three issued U.S.
patents, an exclusive license under one patent application
pending in the European Patent Office and additional filed
or licensed patent applications and continuations for the
ALERT System. The license agreement provides for the Company
to pay royalties equal to 5% of net sales of all products
covered by the licensed technology until expiration of the
last licensed patent.
- A semi-exclusive license under an issued U.S. patent
for technology to conduct temporary ventricular
defibrillation. The license agreement provides for the
Company to pay royalties up to a maximum of 5% of net sales
of all products covered by the licensed technology until
expiration of the licensed patent, with lifetime royalties
limited to a maximum of $1,000,000.
-A non-exclusive license under an issued U.S. patent for
synchronization of a defibrillation shock delivered using
the ALERT Companion. The license agreement provides for the
Company to pay royalties equal to the greater of $200 per
unit or 2% of net sales of the ALERT Companion.
Exclusive licenses under nine issued U.S. patents and
four foreign filings as to certain ultrasound technologies
in an attempt to develop ultrasound guided electrophysiology
products within the field of use. The field of use of the
license covers cardiac electrophysiology except for
pacemaker leads and permanently implanted defibrillation
devices. The license agreement calls for a royalty on net
sales of all products covered by the licensed technology,
including minimum royalties beginning in 1999 and continuing
for the life of the applicable patents and continuations
thereof.
A patent covering the application of conductive
adhesive bands for catheter electrodes. The license
agreement provides for the Company to pay royalties of 1% of
net sales of all products covered by the licensed technology
until expiration of the licensed patent, with lifetime
royalties limited to a maximum of $1,000,000.
Six patent applications in the United States for new
catheter products, manufacturing methods or other advanced
catheter technologies.
The Company is in the process of preparing patent
applications for five new products or improvements to
existing 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. The agreement calls for the
Company to make payments totaling $700,000, in four
installments, as certain development milestones and initial
sales are achieved. As of March 19, 1998, none of the
development milestones have been achieved. Further, the
Company cannot determine if any of the development
milestones will be met. 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 $1,400,000 in
cash. (See Item 3. "Legal Proceedings.")
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.
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 that 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 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 rapid
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 $2,262,169,
$856,191 and $320,311 in the twelve month periods ending
December 31, 1997, 1996 and 1995, respectively. During 1997,
the Company's principal research and development project
involved the ALERT System, including engineering and
development of the ALERT Companion, qualification for ISO
9001 and approval to label the ALERT System with the CE
Mark, design of the clinical trial protocol, preparation of
submissions to the FDA and initiation of clinical trials of
the ALERT System.
The Company also realized research and development expenses
related to efforts to place a flexible metallic coating on
its electrophysiology catheters, preliminary efforts to
develop ultrasound guided products, hiring of additional in-
house engineering and technical support personnel and
increased development work on existing products, including
the EP WorkMate and electrophysiology catheters.
Additionally, other research and development efforts are
ongoing to develop new products, enhance existing products
and lower production costs.
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. The Company is engaged in
ongoing development of a number of catheter-based
electrophysiology products and employs software engineers
who are continuously involved in software development of new
products or improvements to existing products. There can be
no assurance that such development efforts will be
successful or that if products are developed that regulatory
approval to sell any such products will be obtained.
The Company expects that expenses related to the ALERT
System will be significant during 1998, when clinical trials
are expected to be ongoing. The Company also expects that
other research and development expenses will increase as it
continues attempts to develop new products, including
ultrasound guided products and several new catheter products
as well as ongoing improvements to existing products and
other development projects which may arise.
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. This included
the hiring of a National Sales Manager, five Regional Sales
Managers, a Director of Marketing and several clinical
engineers and administrative support personnel. Also, 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 products
during the second half of 1996 and the first half of 1997.
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. The Company cannot
determine when or if that level of sales will be achieved.
International
The Company utilizes 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 office based
in the United Kingdom, to improve distributor relationships
and to assist in the introduction of the ALERT System for
sale in Europe. The UK office is currently staffed with a
Sales Manager, International Marketing Manager, two clinical
engineers and one administrative employee. The Company
expects to expend considerable resources and effort as a
result of the introduction of the ALERT System in Europe.
Examples of the types of expenditures are physician training
and education, promotional material, sample products and
increased direct sales expenses, among others. During July,
1997, the Company initiated sales through a new Japanese
distributor and has taken steps to improve its distribution
network throughout the Asian markets.
No assurance can be given that the Company or its
distributors can successfully introduce the ALERT System or
the Company's other products in Europe or elsewhere on terms
acceptable to the Company, or at all. Future foreign sales
will be subject to certain risks, including exchange rate
fluctuations, local medical reimbursement issues, duties,
tariffs and taxes, import restrictions and other
regulations.
Manufacturing
Catheter Products
Substantially all of the Company's catheter products are
manufactured at ProCath's facility located in Berlin, New
Jersey. Each catheter is assembled and tested by the Company
prior to sterilization. The Berlin facilities and quality
assurance procedures are subject to Good Manufacturing
Practices ("GMP") regulations promulgated by the FDA. Raw
material vendors are required to submit certificates of
compliance to the Company's specifications. In January,
1997, Procath received ISO-9001 Certification of its
manufacturing facility. ProCath has received approval from
its European notified body to apply the CE Mark to the ALERT
product line and to its other catheter products, a necessity
for the continued sales of the Company's products in the
European Community. During 1997, ProCath expanded its
catheter manufacturing facilities and has hired and trained
additional personnel. ProCath has no experience in large-
scale manufacturing and there can be no assurance that the
Company will be successful in manufacturing products in
significant volume. The Company believes that it has
sufficient capacity to satisfy its catheter manufacturing
needs for at least the next twelve months.
Hardware and Software Products
The Company assembles its computer systems (the EP WorkMate,
EP-3 and TeleTrace) at its Mount Arlington facility. The
ALERT Companion is assembled at ProCath. Software products
are generally developed by the Company's engineers. The
Company relies on outside sources for the manufacture of
critical components of the ALERT Companion, EP WorkMate, EP-
3 Clinical Stimulator and the TeleTrace III Receiver. All
custom components are manufactured in conformity with the
Company's specifications and the manufacturers' facilities,
activities and quality assurance procedures are subject to
GMP regulations. Any interruption in the supply from these
suppliers 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 which, as a result, could have a material adverse
effect on the Company's business, financial condition and
results of operations. The Company also incorporates several
off the shelf components in its systems. Examples of these
items are computers, high resolution monitors and laser
printers which are typically available from more than one
vendor. The parts are inspected and tested upon receipt as
well as when the components are assembled into a complete
system prior to shipment.
Government Regulation
United States
In the United States, 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 pre-market
approval ("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 may be a Class III
medical device which will require FDA approval prior to
marketing in the United States. The Company received FDA
approval to begin clinical trials under its IDE filing and
has commenced human clinical trials of the ALERT System at
three hospitals in the United States: Duke University
Medical Center, the Medical Center of the University of
Alabama at Birmingham and Allegheny University of the Health
Sciences in Philadelphia, PA. The Company intends to expand
the trials to include additional leading atrial fibrillation
research centers during 1998 to obtain data needed to
support its application. There can be no assurance that the
clinical trials will demonstrate the safety and
effectiveness of the ALERT System, or that a subsequently
filed 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 also 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.
Failure on the part of the Company or by its suppliers of
critical components to comply with GMP could have a material
adverse effect on the Company's business, financial
condition and results of operations.
International
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.
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. There can be no assurance that the
Company will obtain regulatory approvals in such countries
or that it will not be required to incur significant costs
in obtaining or maintaining its foreign regulatory
approvals. Delays in the receipt of approvals to market the
Company's products or failure to maintain these approvals
could have a material adverse impact on the Company's
business, financial condition or results of operations.
Foreign countries also often have extensive regulations
regarding safety, manufacturing processes and quality which
differ from those in the United States and must be met in
order to continue sale of a product within the country. The
European Economic Community has instituted the requirement
that all medical products sold into the European Union
comply with the Medical Device Directive (the "MDD"). The
MDD requires that all such products be labeled with the CE
Mark, an international symbol of adherence to quality
assurance standards. The Company has received approval from
its notified body to label its products, including the ALERT
System with the CE Mark. This designation allowed the
Company to initiate sales of the ALERT System in countries
that are members of the European Union and the European Free
Trade Association. There can be no assurance that the
Company will be successful in maintaining its CE Mark
certification.
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 an FDA export permit 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.
Other
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 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, several
companies are developing permanently implantable atrial
defibrillators that deliver energy through leads attached to
the heart 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 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 may be 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, 1998, the Company had 60 full-time
employees, of whom 21 are dedicated to manufacturing and
quality assurance, 12 are engaged in management and
administration, 17 are engaged in sales and marketing and 10
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 7,600 square feet
of office and manufacturing space located in Mount
Arlington, New Jersey through October, 2002. The Mount
Arlington facility contains administrative, engineering,
sales and marketing and assembly operations and warehousing
for certain of the Company's hardware products. ProCath owns
approximately 7,500 square feet of space and leases an
additional 2,500 square feet of space in Berlin, New Jersey
on a month to month basis. The Company is negotiating for a
new lease with an option to purchase the 2,500 square feet
of leased space at ProCath. The Berlin facility contains
catheter manufacturing operations, administration,
engineering and catheter research and development and
warehouse space. EP MedSystems UK leases 945 square feet of
office and storage space in London through January, 2000.
The Company believes that its facilities are sufficient to
meet its expected needs for at least the next twelve months.
Item 3. Legal Proceedings
EchoCath
During September, 1997, the Company became aware that
EchoCath may have been having cash flow difficulties and
that EchoCath could have faced delisting of its common stock
from the NASDAQ Small Cap Stock Market if it did not
maintain net equity in excess of $1,000,000. On October 7,
1997, the Company filed a lawsuit against EchoCath in the
United States District Court for the District of New Jersey
alleging, among other things, that EchoCath made fraudulent
misrepresentations and omissions in connection with the sale
of $1,400,000 of its preferred stock to the Company.
On October 30, 1997, EchoCath announced that it had entered
into a license and development agreement which included a
$1,000,000 investment by the licensee and an $800,000
prepayment of license fees. The Company was informed that
this investment allowed EchoCath to meet the requirements
for continued listing on the NASDAQ Small Cap Stock Market
at such time. The agreement also provides EchoCath with
$1,800,000 of new working capital and may provide an
opportunity to earn additional royalty or licensing income.
The Company cannot determine whether this cash infusion will
be sufficient to meet EchoCath's long term cash needs or
whether EchoCath will recognize additional revenue or attain
profitability.
EchoCath has filed an answer to the complaint, denying the
allegations and asserting a counterclaim against the Company
seeking its costs and expenses in the action. EchoCath also
filed a motion to dismiss the complaint. In December, 1997,
EP MedSystems filed an amended complaint and EchoCath filed
an answer thereto again denying the allegations and
asserting a counterclaim seeking reimbursement of its costs
and expenses in the action. EchoCath also filed a motion to
dismiss the amended complaint. As of March 19, 1998, the
Court has not issued a ruling on any of the motions. The
Company believes that EchoCath's counterclaim and request
for reimbursement of its costs and expenses is without
merit. As a result, the Company has not accrued for such
costs and expenses at December 31, 1997. In the opinion of
management, the ultimate resolution of the counterclaim will
not have a material adverse impact of the Company's
financial condition or results of operations. The Company
cannot determine the outcome of the EchoCath litigation at
this time.
Former Employee
On December 31, 1997, the Company received a letter from the
attorney for David Pound, a former employee of the Company.
In the letter, the attorney alleges that Mr. Pound could
assert claims against the Company for Breach of Contract by
Termination without Sufficient Cause, Breach of Contract in
Addition to Wrongful Termination and Breach of the Implied
Covenant of Good Faith and Fair Dealing. In the letter, Mr.
Pound's attorney requests a cash settlement of $55,000 in
order to forego the opportunity for a substantial recovery
through litigation. The Company refused the attorney's
request for a cash settlement and intends to vigorously
defend itself in the event that Mr. Pound files a lawsuit.
As of March 19, 1998, the Company has not been notified that
a lawsuit has been filed. The Company believes that the
threatened claim is without merit and ultimate resolution of
the claim will not have a material adverse impact of the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On October 30, 1997, the Company held its Annual Meeting of
Shareholders for the year ended December 31, 1996. The
matters voted upon by the security holders were:
(1) To elect five directors of the Company to serve until the
next Annual Meeting of Shareholders or until their respective
successors shall have been duly elected and qualified:
For the election of Directors For Against Abstain
David A. Jenkins 5,600,176 0 6,000
David W. Mortara, Ph.D. 5,600,176 0 6,000
Lestor J. Swenson 5,600,176 0 6,000
Jon A. Tietbohl 5,600,176 0 6,000
Anthony J. Varrichio 5,600,176 0 6,000
(2) To approve an amendment to the 1995 Long Term Incentive Plan
to increase the number of shares which may be issued
thereunder from 400,000 to 700,000:
For Against Abstain
For the amendment to the Plan 4,886,026 503,850 6,000
(3) To ratify the selection of Arthur Andersen LLP,independent
public accountants, as auditors for the Company for the fiscal
year ending December 31, 1997:
For Against Abstain
For the ratification of auditors 5,600,176 0 6,000
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 since its initial
public offering based on transaction data as reported by the
Nasdaq National Market.
For the year ended
December 31, 1997 High Low
First quarter $5.00 $3.00
Second quarter $4.50 $2.75
Third quarter $3.50 $2.63
Fourth quarter $2.88 $0.94
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
As of March 19, 1998, there were approximately 90 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,
but it believes that the amount is in excess of 400.
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.
Use of Proceeds from Initial Public Offering
In accordance with Rule 463 under the Securities Act of
1933, as amended, the following represents a summary of
certain information regarding the Company's initial public
offering and the Company's use of proceeds from such
offering to date.
Effective date of the company's
registration statement June 21, 1996
Commission file number 333-3642
Date the offering commenced June 21, 1996
Name of managing underwriter Pacific Growth Equities, Inc.
Class of securities registered Common Stock
Number of shares registered and sold 2,500,000
Aggregate price of offering amount
registered and sold $13,750,000
-----------
Underwriter's discounts and commissions 962,500
Finder's fees
Expenses paid to or for underwriters 50,000
Other offering expenses (1) 951,500
Total expenses 1,964,000
-----------
Net offering proceeds $11,786,000
-----------
Use of net offering proceeds:
Purchase of plant and equipment $ 798,000
Investment in EchoCath, Inc. 1,400,000
Product development (2) 2,959,000
Sales, marketing and administration (2) 5,584,000
Repayment of indebtedness 271,000
Change in working capital (3) (2,098,000)
-----------
$ 2,872,000
-----------
Cash and cash equivalents December 31, 1997 $ 752,000
Marketable securities at December 31, 1997 2,120,000
----------
$2,872,000
----------
(1) Does not include any direct or indirect payments to
directors or officers of the issuer or their associates; to
persons owning ten (10) percent or more of any class of
equity securities of the issuer; or to affiliates of the
issuer.
(2) This amount represents a reasonable estimate.
(3) This amount represents a reasonable estimate and
includes working capital generated from product sales since
the offering.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements based upon current expectations
that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in
these forward-looking statements as a result of certain
factors, that include, but are not limited to, the risks
discussed in the following section as well as those
discussed in the section entitled "Factors That May Impact
Future Operations." These forward-looking statements
include, but are not limited to, the statement in the second
paragraph of "Overview" relating to clinical trials,
anticipated filing and approval time periods for FDA market
clearance and approval for sale of the ALERT System; the
statements in the third paragraph of "Overview" related to
the Company's anticipated results of operations, capital
requirements, development efforts of new products and the
filing of additional patents; the statements in the fifth
paragraph of "Overview" related to milestones for 1998; the
statements under "Results of Operations - General" relating
to the belief that the Company's direct sales force may
generate greater sales than its previous network of
independent distributors; the forward looking statements
contained in the second, fourth, fifth, sixth, seventh,
tenth, eleventh, and twelfth paragraphs under the discussion
of the Results of Operations for 1997 as compared to 1996;
the statements regarding future capital expenditures in the
fourth paragraph of "Liquidity and Capital Resources" and
the Company's statements regarding anticipated results of
operations and capital resources and requirements in the
last paragraph of "Liquidity and Capital Resources."
OVERVIEW
The Company was formed in January, 1993 to develop,
manufacture, market and sell a line of products for the
cardiac electrophysiology market used to diagnose, monitor
and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology and marketing
rights, has developed new products and has begun marketing
various electrophysiology products, including the EP
WorkMate electrophysiology workstation, the EP-3
computerized electrophysiology stimulator and diagnostic
electrophysiology catheters, temporary pacing catheters and
related disposable supplies.
The Company has also developed a new product for internal
cardioversion of atrial fibrillation known as 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 ALERT
System is not approved for sale in the United States, but is
currently undergoing clinical trials. At the earliest, the
Company does not anticipate filing for FDA approval for the
ALERT System for at least six months. Approval to sell the
ALERT System in the United States may take several years, if
approved at all. The Company has received approval from its
notified body to label the ALERT System with a CE Mark. This
designation allowed the Company to initiate sales of the
ALERT System in the European Community.
The Company expects its operating losses to continue in the
near future as it will continue to expend substantial funds
for research and development, clinical trials in support of
regulatory approvals, increased manufacturing capacity and
expansion of sales and marketing activities. The amount and
timing of future losses will be dependent upon, among other
things, increased sales of the Company's existing products,
the results of clinical trials, regulatory approval and
market acceptance of the ALERT System and developmental,
regulatory and market success of new products under
development as well as the Company's ability to establish,
preserve and enforce intellectual property rights to its
products. To date, the Company's products have generated
limited revenue and the Company has an accumulated deficit
of $9.9 million at December 31, 1997. The Company believes
that it will have sufficient capital to carry out its
proposed business objectives for at least the next 12
months. However, the Company is currently evaluating several
financing and strategic alternatives to help achieve its
long term objectives.
During 1997, the Company accomplished several significant
milestones including:
The Company achieved a 73% increase in revenues,
largely due to continued market acceptance of the EP
WorkMate computerized electrophysiology workstation.
The Company qualified for ISO 9001 certification and
received approval to label its products with the CE Mark,
permitting the introduction of the ALERT System for sale in
Europe.
The Company expanded its clean room and manufacturing
operations, including the hiring and training of additional
personnel in order to increase its manufacturing capacity to
support the introduction of the ALERT product line.
The Company commenced clinical trials at three leading
research hospitals in the United States for the ALERT System
and expects to add several leading atrial fibrillation
research centers to the clinical trials during 1998.
The Company established a sales and marketing
infrastructure, including a domestic direct sales force, a
domestic and international clinical engineering staff and a
UK based office established to improve distributor relations
and assist in the market release of the ALERT System in
Europe.
The Company initiated sales through a new Japanese
distributor and has taken steps to improve its distribution
network throughout the Asian markets.
The Company continued development efforts for a number
of new products, including an ultrasound product line, a
number of new catheter products and improvements to existing
products, including upgrades to the EP WorkMate. The Company
now owns or licenses fourteen issued patents and has ten
patent application on file. The Company is in the process of
preparing patent applications for five new products or
improvements to existing products.
For the next year, the Company has set a number of goals,
including continued expansion of its sales and marketing
efforts aimed at achieving increased sales of existing
products, conclusion of the ALERT clinical trials, initial
market acceptance of the ALERT System in Europe, increased
manufacturing efficiency and lower production costs,
introduction of several new products and improvements to
existing products and ongoing research and development
activities. The Company believes that attainment of these
goals is important to achieving the Company's long term
objectives.
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. This included the
hiring of a National Sales Manager, five Regional Sales
Managers, a Director of Marketing and several clinical
engineers and administrative support personnel. Also, 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 products
during the second half of 1996 and the first half of 1997.
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 July, 1997, the Company initiated sales through a new
Japanese distributor and is taking steps to improve its
distribution network throughout the Asian markets.
Year Ended December 31, 1997 Compared to Year Ended December
31, 1996
Product sales increased $1,582,823 (or 76.6%) from
$2,065,959 in 1996 to $3,648,782 in 1997. The increase in
sales for the year ended December 31, 1997 resulted
primarily from increased sales of the EP WorkMate, which
represented 59% of total product sales during the period.
Shipments of the EP WorkMate incorporating several improved
features began during the third quarter of 1997, which
contributed to the increased level of sales. The Company
believes that the EP WorkMate is now the most
technologically advanced and easy to use electrophysiology
workstation on the market. During 1997, the Company recorded
revenue from a research support grant of $365,000 which may
not be recurring in future periods. During 1996, the Company
recorded revenue of $250,000 from a catheter development
project for a third party, which also may not be recurring.
The level of sales for fiscal 1998 will depend materially on
sales of the EP WorkMate and the ability of the Company's
direct sales force and network of international independent
distributors to effectively market and sell the EP WorkMate
and the Company's other existing products. The ALERT System
is currently undergoing clinical trials and is not approved
for sale in the United States. However, the ALERT System has
been introduced for sale in Europe. The Company cannot
accurately determine the sales level of the ALERT System for
1998 at this time nor when it will be available in the
United States. The Company expects the ALERT System to
contribute a greater proportion of revenues in 1998 and
beyond.
Cost of products sold increased $1,022,966 (or 88.0%) from
$1,161,948 to $2,184,914 in 1997. Excluding revenue from a
research support grant, gross profit on product sales for
1997 was $1,463,868 (or 40.1% as a percentage of product
sales), as compared with $904,011 (or 43.8% as a percentage
of product sales) for 1996. The Company realized an
increase in gross profit on product sales during 1997 due to
higher sales of the EP WorkMate which has yielded a higher
gross margin than other product lines. This increase was
offset by increased labor and manufacturing overhead
expenses at ProCath incurred as the Company prepares to
commence manufacturing of the ALERT System. During 1996, the
Company realized high gross margins on the sale of certain
disposable products which were not recurring in 1997.
Sales and marketing expenses increased $2,171,111 (or
283.9%) from 764,765 to $2,935,876 and as a percentage of
total revenues from 33.0% to 73.1%. The hiring of a domestic
direct sales force, including several salaried sales and
marketing managers and personnel caused the increase. 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 believes that a
domestic direct sales force will generate higher sales in
the future than the Company would have generated through the
use of a network of domestic independent distributors.
During 1997, the Company also expended substantial efforts
to improve its network of international independent
distributors.
The Company has introduced the ALERT System for European
sales. The Company expects to incur substantial additional
sales and marketing expenses as a result of the introduction
of the ALERT System for sale outside of the United States
and, if the clinical trials progress according to
expectations, for the eventual introduction of the ALERT
System for sale in the United States. Examples of the types
of expenditures would be physician training and education,
promotional material, sample products and expansion of the
sales force, among others.
Sales and marketing expenses for 1998 are expected to
increase, but not by as much as the increase realized in
1997 as compared to 1996. 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.
General and administrative expenses increased $581,640 (or
46.9%) from $1,240,457 to $1,822,097 but decreased as a
percentage of total revenues from 53.6% to 45.4%. The dollar
increase was due to the hiring of additional administrative
personnel, increased occupancy costs, product liability
insurance expense and costs associated with operating as a
publicly traded company, such as printing, mailing and
professional fees, etc. 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 $1,405,978 (or
164.2%) from $856,191 to $2,262,169 and as a percentage of
total revenues from 37.0% to 56.4%. During 1997, the
Company's principal research and development project
involved the ALERT System, including engineering and
development of the ALERT Companion, qualification for ISO
9001 certification and approval to label the ALERT System
with the CE Mark, design of the clinical trial protocol,
preparation of submissions to the FDA and initiation of
clinical trials of the ALERT System.
The Company also realized research and development expenses
related to efforts to place a flexible metallic coating on
its electrophysiology catheters, preliminary development
efforts of ultrasound guided products, hiring of additional
in-house engineering and technical support personnel and
increased development work on existing products, including
EP WorkMate. Additionally, other research and development
efforts are ongoing to develop new products, enhance product
quality and lower production costs.
The Company expects that research and development expenses
related to the ALERT System will be significant during 1998,
when clinical trials are expected to be ongoing. The Company
also expects that other research and development expenses
will increase as it continues attempts to develop new
products, including ultrasound guided electrophysiology
products and several new catheter products as well as
ongoing improvements to existing products and other
development projects which may arise.
The Company incurred interest expense of $2,436 during 1997
as compared to $44,779 in 1996. 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 1997 was $330,053 due to interest
earned on the proceeds of the June, 1996 initial public
offering. Interest income in 1996 was $338,335. 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 net loss for twelve months ended December 31, 1997 was
$4,863,657 as compared to a net loss of $1,570,578 during
1996. The basic and diluted loss per share for the twelve
months ended December 31, 1997 was $.64 per share as
compared to a basic and diluted loss per share (as restated
to comply with the provisions of SFAS 128 - Earnings Per
Share) of $.26 in 1996. The increase in net loss was caused
by the factors discussed above.
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 "Results of Operations - 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 sales of the Company's
products 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, which may not be recurring in future periods. The
agreement covers a new temporary atrial defibrillation
catheter ("TADCATH") being manufactured for InControl, Inc.
by the Company.
During 1996, the Company discontinued the sale of its 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.
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.
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.
Research and development expenses increased $535,880 (or
167.3%) from $320,311 to $856,191 and as a percentage of
total revenue 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 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.
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 total revenue 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.
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 incurred a net loss $1,570,578 in 1996 as
compared with $1,482,650 in 1995. The increase of $87,928
(or 5.9%) in net loss was caused by the factors discussed
above. The basic and diluted loss per share for the twelve
months ended December 31, 1996 was $.26 per share based on
6,131,749 shares outstanding (as restated to comply with the
provisions of SFAS 128 - Earnings Per Share) as compared to
a basic and diluted loss per share (as restated to comply
with the provisions of SFAS 128 - Earnings Per Share) of
$.35 in 1995. The increase 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 $9.9
million at December 31, 1997. Until June, 1996, the Company
had financed its operations through the sale of its Common
Stock in private placements, the issuance of debentures (the
"1995 Debentures"), a shared bank line of credit with Hi-
Tronics Designs, Inc. ("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, 1997 was $5,266,424 as compared to $1,885,543
for the year ended December 31, 1996. The net use of cash in
operations during 1997 was due primarily to the Company's
$4,863,657 net loss from operations. Accounts receivable,
net, increased by $558,418 in 1997 from $671,503 to
$1,229,921 due to increased sales levels. Inventories
increased by $885,821, from $626,707 to $1,512,528 largely
due to the purchase of components to build the ALERT
Companion. Accounts payable increased by $431,442 from
$238,764 to $670,206 due to increased operating activity.
Accrued expenses payable increased by $411,720 from $438,787
to $850,507 largely due to accruals for clinical costs,
outside development and regulatory expenses for the ALERT
System. Amounts payable to related parties increased by
$42,824 from $85,035 to $127,859 due to several product
purchases near year end. Payments to related parties are
made on terms similar to those of other suppliers.
Capital expenditures, net of disposals, were $721,911 during
1997 as compared to $97,337 in 1996. During February, 1997,
the Company purchased 7,500 square feet of manufacturing,
administrative and warehouse space, including 2,500 square
feet of space that was leased by ProCath, for a purchase
price of approximately $417,000, including transaction costs
and improvements to prepare the space for its intended use.
The purchase provides for expansion of the existing
manufacturing operations, additional warehousing, shipping
and quality assurance activities and relocation of ProCath's
administrative offices. ProCath leases an additional 2,500
square feet of space in Berlin, New Jersey on a month to
month basis. The Company is negotiating for a new lease with
an option to purchase the 2,500 square feet of leased space
at ProCath.
During 1997, the Company purchased two new exhibition booths
for use at domestic and international industry trade shows.
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
$109,000 for 1998.
During February, 1997, the Company licensed the rights to
several ultrasound technologies from EchoCath, Inc.
("EchoCath") for use in the field of electrophysiology. The
license includes all rights to the EchoMark, EchoEye and
ColorMark technologies for use in the field of
electrophysiology. The agreement with EchoCath 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. As of March 19, 1998, no development
milestones had been met and no payments were due. 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 to the Company.
The Company also purchased 280,000 shares of newly-issued
EchoCath Series B Cumulative Convertible Preferred Stock for
$1,400,000 in cash. The Company's $1,400,000 investment was
intended to fund continuing development of EchoCath
products, including the EchoMark and 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. (See Item 3. Legal Proceedings)
The Company had no financing activities during 1997. 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
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 the net assets of ProCath. 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.
The Company expects its operating losses to continue in the
near future as it will continue to expend substantial funds
for research and development, clinical trials in support of
regulatory approvals, increased manufacturing capacity and
expansion of sales and marketing activities. The amount and
timing of future losses will be dependent upon, among other
things, increased sales of the Company's existing products,
clinical approval and market acceptance of the ALERT System
and developmental, regulatory and market success of new
products under development. There can be no assurance that
any of the Company's development projects will be successful
or that if development is successful, that the products will
generate any sales.
Based upon its current plans and projections, the Company
believes that its existing capital resources will be
sufficient to meet its anticipated capital needs for the
next twelve months. However, the Company is currently
evaluating several financing and strategic alternatives to
help achieve its long term objectives. While the Company
believes that additional financing is available, there can
be no assurance that such additional funds will be available
on terms acceptable to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to
stockholders, and debt financing may be costly and involve
restrictive covenants. The inability of the Company to raise
capital when needed could have a material adverse effect on
the Company's business, financial condition and results of
operations.
Year 2000
The Company has assessed the impact that the Year 2000 will
have on its computer systems, including both hardware and
software utilized by the Company in its operations. The
Company has not identified any date related deficiencies as
a result of this assessment. The computer systems and other
products sold by the Company have been engineered to
function without date related problems. Based upon the
current status of the Company's Year 2000 compliance
program, the Company believes that future costs relating to
the Year 2000 issue will not have a material adverse impact
on the Company's business, financial condition or results of
operations.
Recent Issued Accounting Standards
Effective for the year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." The adoption of SFAS 128
requires the presentation of Basic earnings per share and
Diluted earnings per share. Basic earnings per share is
computed based on weighted average shares outstanding during
the year. Diluted earnings per share is based on the average
number of common shares outstanding during the year plus the
common stock equivalents related to outstanding stock
options and warrants. Diluted earnings per share exclude the
impact of common stock equivalents, for all periods
presented, as their inclusion would be anti-dilutive. As
required by SFAS 128, prior year net loss per share has been
restated to comply with its provisions. Prior to the
adoption of SFAS 128 the Company's reported loss per share
were $.23 and $.26 for the years ended December 31, 1996 and
1995 respectively.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income" and Statement
of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related
Information." SFAS 130 establishes standards for reporting
comprehensive income and its components. Comprehensive
income reflects certain items not currently reported in
measuring net income such as changes in value of available-
for-sale securities and foreign currency translation
adjustments. SFAS 131 establishes standards for reporting
financial and descriptive information regarding an
enterprise's operating segments. Both SFAS 130 and SFAS 131
are effective for fiscal years beginning after December 15,
1997. These standards increase financial reporting
disclosures and will have no impact on the Company's
financial position or results of operations.
Factors That May Impact Future Operations
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, 1997, the Company's accumulated deficit
was approximately $9.9 million. While the Company is
generating 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 on, in large part, its
ability to raise sufficient funds to meet its future cash
requirements; the results of the ALERT clinical trials;
market acceptance of existing products, including the EP
WorkMate and the ALERT System; the ability of the Company to
increase its catheter manufacturing capabilities, improve
efficiency, control manufacturing costs and ensure the
timely delivery of its products; the successful development
of new products; the ability to obtain regulatory approvals
and reimbursement of new products on a timely basis; the
ability to compete successfully in the future with companies
which have greater resources than the Company; and the
ability to establish, preserve and enforce intellectual
property rights. 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."
Need to Raise Additional Capital
Based upon its current plans and projections, the Company
believes that its existing capital resources will be
sufficient to meet its anticipated capital needs for the
next twelve months. However, the Company is currently
evaluating several financing and strategic alternatives to
help achieve its long term objectives. While the Company
believes that additional financing is available, there can
be no assurance that such additional funds will be available
on terms acceptable to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to
stockholders, and debt financing may be costly and involve
restrictive covenants. The inability of the Company to raise
capital when needed could have a material adverse effect on
the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations,"
Dependence on the ALERT System.
Although the Company currently markets a broad range of
products, it believes its greatest 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 the United States. Before the Company may begin
marketing the ALERT System in the U.S., it must obtain FDA
approval based on, among other things, the results of
clinical trials that demonstrate the safety and
effectiveness of the device. These can be no assurance that
the clinical trials will demonstrate the safety and
effectiveness of the ALERT System, or that the Company will
obtain FDA 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 components of the ALERT
System in limited quantities. 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."
ALERT Clinical Trials
The Company has commenced human clinical trials of the ALERT
System at three hospitals in the United States: Duke
University Medical Center, the Medical Center of the
University of Alabama at Birmingham and Allegheny University
of the Health Sciences in Philadelphia, PA. The Company
intends to expand the trials to include additional leading
atrial fibrillation research centers during 1998. Clinical
data is needed in order to demonstrate the safety and
efficacy of the ALERT System under applicable FDA regulatory
guidelines. The Company anticipates that the ALERT System
clinical trials will be completed during mid calendar year
1998. At the conclusion of the clinical trials, the Company
plans to file for FDA approval to market the ALERT System
in the United States. Receipt of FDA approval to sell the
ALERT System in the United States may take several years, if
it is received at all.
There can be no assurance that the ALERT System will prove
to be safe and effective in clinical trials under applicable
United States or international regulatory guidelines or that
additional modifications to the Company's products will not
be necessary. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome
prior to obtaining necessary regulatory or reimbursement
approvals. If the ALERT System does not prove to be safe and
effective in clinical trials or if the Company is otherwise
unable to commercialize the product successfully, the
Company's business, financial condition and results of
operations could be materially adversely affected.
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 59% of the Company's revenues from product
sales in the year ended December 31, 1997 and is expected to
account for a significant portion of 1998 revenue. The EP
WorkMate has a list price of approximately $129,000 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. There can be no assurance that the EP WorkMate will
continue to be accepted by the electrophysiology 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," "Business - Products" and "- Competition."
Government Regulation.
The Company's business, financial condition and results of
operations are subject to various risks and uncertainties
arising from domestic and international laws and
regulations, including, without limitation, risks relating
to its ability to sell the ALERT System in the United
States, compliance with GMP regulations and compliance with
the requirements of the CE Mark and other foreign
regulations in order to continue product sales on a country
by country basis. For a discussion of risks and
uncertainties see Item 1 "Business - Government Regulation."
Necessity of Product Development and Improvement.
The markets for medical devices in general and
electrophysiology 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 of such
products on a timely basis. Many of the Company's
development efforts will be based on new technologies or new
applications of existing technologies. As a result, research
and development for any potential new product or product
refinement may take longer and require greater expenditures
than expected, and may ultimately prove unsuccessful. In the
event that the Company is successful in its development
efforts, 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. The Company's inability
to successfully develop new products, to introduce
improvements to existing products, to prove the safety and
efficacy of new products or to gain market acceptance of
such products could have a material adverse impact on the
business, financial condition or results of operations of
the Company. See "Business - ALERT System," "- Research and
Development," "Government Regulation," 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 with respect to capital equipment
purchases, the success of the ALERT clinical trials, the
success of new product development efforts, 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, 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, has acquired patents and has
entered into license agreements to obtain rights under
selected patents of third parties as to technology it
considers important to its business.
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."
Royalty Payment Obligations
The Company has entered into several license agreements
which provide for the Company to pay royalties based upon
net sales of products covered by the licensed technology,
including, in some cases, minimum annual royalties. In the
event that the Company does not pay such royalties, the
Company may lose its rights under the license agreements.
The loss of certain of the Company's technology licenses
could have a material adverse impact on the business,
financial condition and results of operations of the
Company.
Significant Competition.
The medical device market, particularly in the area of
electrophysiology products, is highly competitive. The
Company competes with many companies, many 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 may be 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 continue 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 increase sales in the UK, improve distributor
relationships and customer service and to assist in the
introduction of the ALERT System in Europe. The Company has
initiated sales through a new Japanese distributor and has
taken steps to improve its distribution network throughout
the Asian markets. The Company operates pursuant to written
or oral agreements with third party distributors which are
often terminable by 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 - Sales and Marketing."
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.
Dependence on Key Personnel; 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's continued growth and long term 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
"Item 9 - 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 Suppliers
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, including 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 has expanded its
catheter manufacturing facilities and hired and trained
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 in significant volume.
The Company relies on outside sources for the manufacture of
critical components of the ALERT Companion, EP WorkMate, EP-
3 Clinical Stimulator and the TeleTrace III Receiver. All
components are manufactured in conformance with the
Company's specifications. Any interruption in the supply
from its suppliers 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.
During 1997, the Company established a branch office in the
United Kingdom in order to increase sales in the UK, improve
international distributor service and relations and to aid
in the introduction of the ALERT System for sale in Europe.
Approximately 35% of the Company's revenues from product
sales for 1997 were derived from sales of its products
outside the U.S. Since international revenues are expected
to continue to represent a significant percentage of total
revenues, the Company expects to continue to increase its
operations outside of the United States. As such, the
Company will continue to be subject to fluctuations in
currency exchange rates and other risks of foreign
operations, including tariff regulations and export license
requirements, unexpected changes in regulatory requirements,
longer periods to collect accounts receivable, potentially
inadequate protection of intellectual property rights, local
taxes, restrictions on repatriation of earnings and economic
and political instability. There can be no assurance that
such factors will not have a material adverse effect on the
Company's ability to 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 price of shares of the Company's Common Stock,
like that of the common stock of many medical products high
technology companies, has, in the past, been, and is likely
in the future to continue to be, highly volatile. The
Company believes that 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 and shareholder of the
Company, is an officer, director and shareholder 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 certain of the Company's non-catheter products.
While the Company believes its arrangements with HDI have
been, and will continue to be, on terms no less favorable to
the Company than it could obtain from third parties, there
can be no assurance that all arrangements between the
Company and HDI will be as favorable to the Company as they
would be in the absence of its relationships with affiliates
of HDI. See "Certain Relationships and Related
Transactions."
The Company purchases certain components for the EP WorkMate
and ALERT Companion from Mortara Instrument, Inc. ("Mortara
Instrument"). Dr. David W. Mortara, a director and
shareholder of the Company, is also a Director and
shareholder of Mortara Instrument. While the Company
believes its arrangements with Mortara Instrument 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 Mortara Instrument will be as favorable to the Company
as they would be in the absence of its relationships with
affiliates of Mortara Instrument. See "Certain Relationships
and Related Transactions."
Concentration of Ownership.
As of March 19, 1998, the Company's six directors and
executive officers and their affiliates beneficially owned
an aggregate of approximately 22.3% of the Company's
outstanding Common Stock, including unexercised vested stock
options. As a result, these shareholders, acting together,
could 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
Not applicable.
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, 1998:
NAME AGE POSITION
David A. Jenkins (3) 40 Chairman of the Board,President
and Chief Executive Officer
James J. Caruso 37 Chief Financial Officer,
Treasurer and Secretary
C. Bryan Byrd 38 Vice President of Engineering
Joseph C. Griffin, III 38 President, ProCath Corporation
David W. Mortara,Ph.D. (1)(2) 56 Director
Lester J. Swenson (2) 58 Director
Anthony J. Varrichio (3) 51 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.
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.
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. Prior to joining
Micron, Mr. Caruso was employed for five years by 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, 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.
Joseph C. Griffin, III has been the President of ProCath
since its inception in 1993. Mr. Griffin founded
Professional Catheter Corporation, the predecessor to
ProCath, 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 18 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, the Electrode Catheter Task Force and the
Society of Manufacturing Engineers.
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 Instrument, a privately-held manufacturer and
supplier of electrocardiography equipment, since 1982. Prior
to founding Mortara Instrument, 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 and Business Systems of Medtronic, Inc. 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.
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,
a privately held engineering, consulting and medical device
manufacturing 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 was the Director of Engineering
at the Advanced Technology Laboratory division of
Intermedics, Inc.
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 and Swenson are members
of the Audit Committee. The Audit Committee met one time
during 1997.
Compensation Committee.
The Company has a Compensation Committee of the Board of
Directors consisting of 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, Mr. Mortara is the sole member of the
Compensation Committee.
Plan Committee.
The Company has a Plan Committee of the Board of 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 1997
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 and former Vice
President of Sales (the "Named Executive Officers") for
services rendered in all capacities for the years ended
December 31, 1997, 1996 and 1995. No other executive officer
of the Company was paid a salary and bonus aggregating
greater than $100,000 during such time periods.
Summary Compensation Table Long Term
Compensation
-------------
Annual Compensation Securities
Salary Bonus Underlying
Name and Principal Position Year ($) ($) Options
---- -------- ------ ----- -------
David A. Jenkins 1997 $145,000 $0 0
Chairman, President and 1996 $127,500 $250 0
Chief Executive Officer 1995 $110,000 $5,250 166,000 (1)
Robert W. Evans (2) 1997 $108,750 $0 0
Vice President of Sales 1996 $42,292 $0 125,000 (3)
and Marketing 1995 $0 $0 0
- -------------------------
1) 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. 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 became
exercisable on the first anniversary of such date. The term
of such option is ten years.
2) Mr. Evans' employment with the Company terminated on September 10, 1997.
3) On September 17, 1996, the Company granted Mr. Evans an
incentive stock option to purchase 90,000 shares of common
stock pursuant to the 1995 Long Term Incentive Plan and a
non-qualified stock option to purchase 35,000 shares of
Common Stock at an exercise price of $5.50 per share.
Options to purchase 25,000 shares became exercisable on the
grant date and options to purchase 2,083 shares became
exercisable each month thereafter. Upon the termination of
Mr. Evans employment, the options expired unexercised.
Stock Options
No stock options were granted to the Named Executive
Officers during the fiscal year ended December 31, 1997.
Option Exercises and Holdings
The following table provides certain information with
respect to the Named Executive Officers concerning the
exercise of stock options during the fiscal year ended
December 31, 1997 and the value of unexercised stock options
held as of December 31, 1997.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Aggregated Option Exercises in 1997 and Year End Option Values
Number of Shares
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options at In the Money Options at
on Exercise Realized December 31, 1997 December 31, 1997 ($) (1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ---------- -------- ----------- ------------- ----------- -------------
David A. Jenkins 0 0 127,000 39,000 $0 $0
Chairman, President
and Chief Executive
Officer
Robert W. Evans 0 0 0 0 $0 $0
Vice President of Sales
and Marketing
</TABLE>
(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 $1.75 per share on December 31, 1997.
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. On October 30, 1997, the
Shareholders approved an amendment increasing the number of
shares available under the Plan from 400,000 to 700,000. At
December 31, 1997, options to purchase 352,500 shares were
outstanding at exercise prices ranging from $2.00 to $4.75
per share. The 1995 Incentive Plan provides for grants of
"incentive" and "non-qualified" stock options to employees
of the Company. The 1995 Incentive Plan is administered by
the Compensation Committee, which determines the optionees
and the terms of the options granted, including the exercise
price, number of shares subject to the options and the
exercisability thereof. The 1995 Incentive Plan will
terminate on November 30, 2005, unless earlier terminated by
the Board of Directors.
The exercise price of incentive stock options granted under
the 1995 Incentive Plan must be equal to at least the fair
market value of the Common Stock on the date of grant, and
the term of such options may not exceed ten years. With
respect to any optionee who owns stock representing more
than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any
incentive stock option must be equal to at least 110% of the
fair market value of the Common Stock on the date of grant,
and the term of the option may not exceed five years. The
aggregate fair market value of Common Stock (determined as
of the date of the option grant) for which an incentive
stock option may for the first time become exercisable in
any calendar year may not exceed $100,000.
1995 Director Option Plan
The Company's 1995 Director Option Plan was adopted by the
Board of Directors and the shareholders in November, 1995. A
total of 360,000 shares of Common Stock of the Company are
available for issuance under the 1995 Director Option Plan
and options to purchase 288,000 shares were outstanding as
of December 31, 1997. 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 1997, no directors of the Company received cash or
other compensation for services on the Board of Directors or
any committee thereof. In the past, the Company has issued
independent Directors options to purchase shares of the
Company's Common Stock under the 1995 Director Option Plan
upon their election or appointment to the Board. These
options vest at a rate of 1,000 shares per month of service
on the Board. The directors are reimbursed for their
reasonable travel expenses incurred in performance of their
duties as directors.
Employment Agreements
On August 31, 1995, the Company entered into an Employment
Agreement Addendum with Mr. David A. Jenkins which extended
the term of his employment through March 1, 1999. The
addendum provides for base compensation of $145,000, 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, 1998 by (i) each of the Company's directors, (ii)
the Named Executive Officers, (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 Shares Percentage of Class
of Beneficial Owner Beneficially Owned Beneficially Owned (1)
- -------------------- ------------------ ----------------------
David A. Jenkins (2) 1,003,000 13.0%
c/o EP MedSystems, Inc.
100 Stierli Court
Mount Arlington, NJ
Medtronic, Inc. (3) 610,000 8.0%
7000 Central Avenue NE
Minneapolis, MN 55432
Anthony Varrichio (4) 534,000 7.0%
1 Hemlock Lane
Flanders, NJ 07836
Edwin K. Hunter (5) 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
David W. Mortara,(6) 81,000 1.0%
7865 North 86th Street
Milwaukee, WI 53224
Lester J. Swenson (3) 31,000 *
7000 Central Avenue NE
Minneapolis, MN 55432
Robert W. Evans (7) 0 *
c/o EP MedSystems, Inc.
100 Stierli Court
Mount Arlington, NJ
All executive officers
and directors as a
group (six persons) 1,766,000 22.3%
* Represents beneficial ownership of less than one percent
of the Common Stock.
(1) Applicable percentage ownership as of March 19,
1998 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 133,000 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 31,000 shares issuable upon exercise of
options granted to Mr. Swenson for which Medtronic has
claimed beneficial ownership.
(4) Includes 63,000 shares issuable upon exercise of
options.
(5) Includes 152,500 shares held by two trusts of which Mr.
Hunter is the trustee and 150,000 shares held by a
private foundation over whose assets Mr. Hunter has
shared voting and investment power.
(6) Includes 31,000 shares issuable upon exercise of
options.
(7) Mr. Evans' employment with the Company terminated on
September 10, 1997.
Item 12. Certain Relationships and Related Transactions
Hi-Tronics Designs, Inc.
HDI was one of the Company's two founding shareholders.
HDI's shareholders are Anthony J. Varrichio, William
Winstrom and Medtronic. 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, 1998, Mr. Varrichio
owned beneficially 7.0% of the Company's Common Stock, Mr.
Winstrom owned beneficially 4.9% and Medtronic owned 7.6%
Beginning in 1993, the Company engaged HDI as the
manufacturer of the EP-2 and EP-3 Clinical Stimulators.
During April, 1996, the Company entered into a Master
Manufacturing Agreement with HDI (the "Master Manufacturing
Agreement") which provides that HDI will manufacture
components for 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
Company purchased products from HDI aggregating $506,000,
$392,000 and $424,000 during the twelve months ended
December 31, 1997, 1996 and 1995, respectively.
The Company determined that continued sale and service of
arrhythmia monitors did not represent a good strategic fit
with the Company's existing products and planned product
line, including the ALERT System. Therefore, the Company
discontinued sale of the MemoryTrace line of arrhythmia
monitors. In 1997, the Company sold its line of arrhythmia
monitors including an arrhythmia monitor under development
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. Sales of arrhythmia monitors by the
Company were approximately $12,000 and $198,000 in the years
ended December 31, 1996 and 1995, respectively. Since the
value assigned to the arrhythmia monitor technology had been
fully amortized, the Company did not record a gain or loss
on the sale. The Neomedics common stock is not a registered
security traded on a public exchange and therefore its fair
value is not readily determinable. At December 31, 1997, the
Company valued the shares of Neomedics stock at zero.
HDI completed development of the TeleTrace III-S Receiver in
1997 for an aggregate consideration of 19,000 shares of
common stock of the Company, issued in 1995, and $30,000 in
cash paid in 1997. HDI is the manufacturer of the TeleTrace
III-S Receiver.
On December 29, 1997, the Company granted HDI a nonexclusive
license to sell the TeleTrace receiver in connection with
the sale of arrhythmia monitors. The agreement calls for the
payment of a royalty of $300 per unit sold by HDI.
The Company believes that each of the preceding transactions
with HDI were entered into on terms and at prices no less
favorable than the Company could have received from an
unaffiliated party.
Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate
and ALERT Companion from Mortara Instrument. Dr. David W.
Mortara, a director of the Company, is also a Director and
shareholder of Mortara Instrument. The approximate value of
products purchased from Mortara Instrument was $573,000,
$15,000, and $12,000, in 1997, 1996 and 1995, respectively.
The Company believes that each of the transactions with
Mortara Instrument were entered into on terms and at prices
no less favorable than the Company could have received from
an unaffiliated party.
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 LLC
("FalFab"). Edwin K. Hunter, who beneficially owned 504,500
shares of Common Stock of the Company as of March 19, 1998,
was also a 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. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Amended and Restated Certificate of
Incorporation (1)
3.2 Bylaws, as amended (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)
10.10 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)
10.14 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)
10.22 Master Manufacturing Agreement
dated April 16, 1996 between EP
MedSystems and Hi-Tronics Designs, Inc. (1)
10.25 Exclusive Rights Agreement dated
May 26, 1996 between EP MedSystems 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 Young, as amended (1)
10.29 Registration Rights Agreement dated
as of May 24, 1996 between EP MedSystems,
Inc. and Tracey Young (1)
10.30 Exclusive License Agreement dated
February 27, 1997 between EP MedSystems,
Inc. and EchoCath, Inc. (2)
10.31 Subscription Agreement dated
February 27, 1997 between EchoCath, Inc.
and EP MedSystems, Inc. (2)
10.32 Amended 1995 Long Term Incentive
Plan (3)
10.33 Agreement of Lease dated August 25,
1997 between EP MedSystems, Inc. and
Provident Mutual Life Insurance Company,
as landlord
11 Statement regarding Calculation of
Shares Used in Computing Net Loss per
Share
21 List of Subsidiaries
27 Financial Data Schedule (4)
27.1 Restated Financial Data Schedule (4)
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.Incorporated by reference to the exhibit of the same
number previously filed with the Commission on Form 10-KSB
for the year ended December 31, 1996.
3.Incorporated by reference to Exhibit A previously filed
with the Commission in the Company's Proxy Statement for the
Annual Meeting of Shareholders held on October 30, 1997.
4.EDGAR Filing only.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company
during 1997.
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December
31, 1997 and 1996 F-3
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in
Shareholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 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
subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in
shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1997. 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 subsidiaries as of
December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 11, 1998
F-2
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1997 1996
----------- -------------
Current assets:
Cash and cash equivalents $ 752,068 $ 5,491,857
Short-term investments 2,120,084 1,794,553
Accounts receivable, net of
allowances for doubtful accounts of
$74,112 and $82,709, respectively 1,229,921 671,503
Inventories 1,512,528 626,707
Prepaid expenses and other assets 217,526 185,761
--------- ---------
Total current assets 5,832,127 8,770,381
Long-term investments -- 3,001,222
Investment in EchoCath 1,400,000 --
Property and equipment, net 757,295 181,385
Intangible assets, net 569,705 615,861
Other assets 58,439 31,000
--------- -----------
Total assets $ 8,617,566 $12,599,849
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 670,206 $ 238,764
Payables due to related parties 127,859 85,035
Accrued expenses 850,507 438,787
Deferred revenue 34,313 42,938
Customer deposits 108,012 103,999
--------- -------
Total current liabilities 1,790,897 909,523
--------- -------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value,
5,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, $.001 stated value,
25,000,000 shares authorized,
7,599,917 issued and outstanding 7,600 7,600
Additional paid-in capital 16,743,014 16,743,014
Accumulated deficit (9,923,945) (5,060,288)
----------- -----------
Total shareholders' equity 6,826,669 11,690,326
----------- -----------
Total liabilities and shareholders' $ 8,617,566 $12,599,849
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1997 1996 1995
----------- ----------- -----------
Product sales $ 3,648,782 $ 2,065,959 $ 2,001,137
Other revenue 365,000 250,000 --
--------- --------- ---------
Total revenues 4,013,782 2,315,959 2,001,137
Operating costs and expenses:
Cost of products sold 2,184,914 1,161,948 1,257,468
Sales and marketing expenses 2,935,876 764,765 477,209
General and administrative 1,822,097 1,240,457 927,906
expenses
Research and development 2,262,169 856,191 320,311
expenses
Acquired research and -- -- 450,000
development
Write-off of other assets -- 107,500 --
----------- ----------- -----------
Loss from operations (5,191,274) (1,814,902) (1,431,757)
Interest expense (2,436) (44,779) (50,893)
Interest income 330,053 338,335 --
Write-off of unamortized
discount of 1995 Debentures -- (49,232) --
----------- ----------- -----------
Net loss $(4,863,657) $(1,570,578) $(1,482,650)
============ ============ ============
Basic loss per share $ (.64) $ (.26) $ (.35)
======= ======= =======
Diluted loss per share $ (.64) $ (.26) $(.35)
======= ======= =======
Weighted average shares
outstanding used to compute
basic and diluted loss per share 7,599,917 6,131,749 4,282,242
========= ========= =========
Supplementary loss per share $ (.24) $ (.32)
======= =======
The accompanying notes are an integral part of these statements.
F-4
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIT)
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- -------- ------------ ------------- -------------
Balance, January 1, 1995 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 -- -- 54,702 -- 54,702
Stock options issued in
connection with ALERT
licensing agreement -- -- 420,000 -- 420,000
Common stock issued in
connection with patent
licensing agreement 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 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 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
Net loss -- -- -- (4,863,657) (4,863,657)
--------- -------- ------------ ------------- -------------
Balance, December 31, 1997 7,599,917 $ 7,600 $ 16,743,014 $ (9,923,945) $ 6,826,669
========= ======== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
For the Years Ended December 31,
1997 1996 1995
Cash flows from operating activities: ------------ ------------ ------------
Net loss $(4,863,657) $(1,570,578) $(1,482,650)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 219,302 171,493 170,271
Acquired research and development -- -- 440,000
Issuance of stock for consulting services -- -- 29,000
Issuance of stock for research and development -- -- 138,000
Write-off of other assets -- 107,500 --
Write-off of unamortized discount on Debentures -- 49,232 --
Bad debt expense -- 5,017 52,400
Changes in assets and liabilities:
Increase in accounts receivable (558,418) (238,400) (194,449)
(Increase) decrease in inventories (885,821) (157,442) 18,433
Increase in prepaid expenses and other (31,765) (132,113) (48,526)
current assets
Increase in other assets (27,439) (4,163) (26,837)
Increase (decrease) in due to related parties 42,824 (173,685) 177,988
Increase (decrease) in accounts payable 431,442 (42,354) 131,513
Increase in accrued expenses,
deferred revenue and customer deposits 407,108 99,950 256,941
----------- ----------- ---------
Net cash used in operating activities (5,266,424) (1,885,543) (337,916)
----------- ----------- ---------
Cash flows from investing activities:
Purchase of investments -- (21,567,497) --
Proceeds from sale of investments 1,188,595 16,771,722 --
Maturities of investments 1,487,096
Investment in EchoCath (1,400,000) -- --
Capital expenditures, net of disposals (721,911) (97,337) (55,754)
Patent costs (27,145)
Loan to FalFab -- (7,500) (100,000)
--------- ----------- ---------
Net cash provided (used) by investing activities 526,635 (4,900,612) (155,754)
--------- ----------- ---------
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 --
Proceeds from exercise of stock options -- 16,666 --
Payment of notes payable and other borrowings -- (109,250) (179,250)
----------- ---------- ---------
Net cash provided by financing activities -- 12,243,424 508,250
----------- ---------- ---------
Net (decrease) increase in cash and cash (4,739,789) 5,457,269 14,580
equivalents
Cash and cash equivalents, beginning of period 5,491,857 34,588 20,008
--------- ----------- --------
Cash and cash equivalents, end of period $ 752,068 $ 5,491,857 $ 34,588
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
EP MedSystems, Inc. (the "Company") designs, manufactures
and markets a broad-based line of products for the cardiac
electrophysiology ("EP") market for the purpose of
diagnosing, monitoring, managing and treating irregular
heartbeats known as arrhythmias.
The Company faces a number of risks, including significant
operating losses, the ability to raise sufficient financing
to meet its future cash requirements, the results of
clinical trials and market acceptance of existing and future
products. Additionally, other risk factors such as
government regulation, uncertainty of new product
development, significant competition, the loss of key
personnel and difficulty in establishing, preserving and
enforcing intellectual property rights could impact the
future results of the Company.
The Company is currently evaluating several financing and
strategic alternatives to help achieve its long term
objectives.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts
of EP MedSystems, Inc. and its wholly-owned U.S.
subsidiaries, ProCath Corporation ("ProCath") and EP
MedSystems UK Ltd. ("EP MedSystems UK"). 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.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of
credit risk with respect to its cash investments and trade
accounts receivable. The Company invests its excess cash in
a diversified portfolio of investment grade corporate bonds
and an institutional money market account.
The Company's customer base for its products is primarily
comprised of hospitals, and distributors 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.
F-7
The Company had a note receivable of $107,500 from Falfab,
L.L.C., a UK-based angioplasty catheter manufacturer
("Falfab"), which matured on July 15, 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
Property 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. Management reviews
these assets for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the
assets might not be recoverable. The Company has determined
that, as of December 31, 1997, no property and equipment
have been impaired.
Intangible Assets
Intangible assets are being amortized over a period ranging
from two to fifteen years with catheter technology being
amortized on a straight-line basis over fifteen years.
Registration and legal fees associated with patent filings
are capitalized and amortized over three years. Management
reviews these assets for impairment whenever events or
changes in circumstances indicate that the carrying amounts
of the assets might not be recoverable. The Company has
determined that, as of December 31, 1997, no intangible
assets have been impaired.
Translation of Foreign Currency
The Company's foreign operation is translated to U.S.
dollars using current exchange rates with translation
adjustments accumulated in stockholders' equity. At December
31, 1997, translation adjustments were not material.
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. Royalties on
product revenues are included in cost of sales.
Research and Development
Research and development costs, which include clinical and
regulatory costs, are expensed as incurred.
F-8
Net Loss Per Common Share
Effective for the year ended December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). The adoption of SFAS 128
requires the presentation of Basic earnings per share and
Diluted earnings per share. Basic earnings per share is
computed based on the weighted average number of common
shares outstanding during the year. Diluted earnings per
share is based on the weighted average number of common
shares outstanding during the year plus the common stock
equivalents related to outstanding stock options and
warrants. Diluted earnings per share exclude the impact of
common stock equivalents as their inclusion would be anti-
dilutive. As required by SFAS 128, 1996 and 1995 net loss
per share amounts have been restated to comply with this
standard. Prior to the adoption of SFAS 128 the Company's
reported loss per share were $.23 and $.26 for the years
ended December 31, 1996 and 1995 respectively.
Supplementary Net Loss Per Common Share
Supplementary net loss per common share is computed as if
all of the 1995 Debentures (See Note 12) had been repaid 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. As required by SFAS 128, 1996 and 1995
supplementary net loss per share amounts have been restated
to comply with this standard. The impact of the adoption of
SFAS 128 was not material to previously reported
supplementary net loss per share.
Stock-Based Compensation
The Company accounts for stock options issued to employees
and non-employee directors in accordance with the "intrinsic
value" method set forth in Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") with supplemental pro forma disclosures of "fair
value" as required by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS 123").
The Company accounts for stock options issued to consultants
in accordance with the "fair value" method as required by
SFAS 123.
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.
F-9
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") and Statement
of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 130 establishes standards for reporting
comprehensive income and its components. Comprehensive
income reflects certain items not currently reported in
measuring net income such as changes in value of available-
for-sale securities and foreign currency translation
adjustments. SFAS 131 establishes standards for reporting
financial and descriptive information regarding an
enterprise's operating segments. Both SFAS 130 and SFAS 131
are effective for fiscal years beginning after December 15,
1997. These standards increase financial reporting
disclosures and will have no impact on the Company's
financial position or results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform
with the current year's presentation.
3. 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" ("SFAS 115"). 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, 1997, all investment securities have been
classified as available for sale. The maturities of
available for sale investments range from October, 1998 to
September, 2000. These investments are stated at market,
which approximates their amortized cost.
As of December 31, 1996, all short-term and long-term
investments, except for $297,828 invested in corporate
preferred stock, were classified as held to maturity. These
investments were stated at amortized cost, which
approximated market, and consisted of U.S. government agency
obligations and corporate bonds. At December 31, 1996, the
Company classified $297,828 invested in two issues of
corporate preferred stock as available for sale. These
investments were stated at market, which approximates their
amortized cost.
F-10
Short-term and long-term investments held to maturity are as
follows:
December 31,
1997 1996
Available for sale securities:
Corporate bonds $ 2,120,084 $ --
Corporate preferred stocks -- 297,828
------------ ---------
$ 2,120,084 $ 297,828
============ ==========
Held to maturity securities:
Short-term investments:
U.S. government agency $ -- $ 1,496,725
obligations ------------ ------------
Long-term investments:
Corporate bonds -- 3,001,222
------------ --------------
$ -- $ 4,497,947
============ ==============
4. EchoCath License
During February, 1997, the Company licensed the rights to
several ultrasound technologies from EchoCath, Inc.
("EchoCath") for use in the field of electrophysiology. 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
two percent (2%) 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. As of December 31, 1997, no milestones had been
achieved and no milestone payments were accrued or payable
to EchoCath. The Company also purchased 280,000 shares of
5.4% cumulative convertible preferred stock of EchoCath for
$1,400,000 in cash.
The minimum annual 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
During September, 1997, the Company became aware that
EchoCath may have been having cash flow difficulties and
that EchoCath could have faced delisting of its common
F-11
stock from the NASDAQ Small Cap Stock Market if it did not
maintain net equity in excess of $1,000,000. On October 7,
1997, the Company filed a lawsuit against EchoCath in the
United States District Court for the District of New Jersey
alleging, among other things, that EchoCath made fraudulent
misrepresentations and omissions in connection with the sale
of $1.4 million of its preferred stock to the Company. (see
Note 13).
On October 30, 1997, EchoCath announced that it had entered
into a license and development agreement which included a
$1,000,000 investment by the licensee in Class A common
stock of EchoCath and an $800,000 prepayment of license
fees. The Company was informed that this investment allowed
EchoCath to meet the requirements for continued listing on
the NASDAQ Small Cap Stock Market at such time. The
agreement also provides EchoCath with $1,800,000 of new
working capital and may provide an opportunity to earn
additional royalty or licensing income. The Company cannot
determine whether this cash infusion will be sufficient to
meet EchoCath's long term cash needs or whether EchoCath
will recognize additional revenue or attain profitability.
The EchoCath preferred stock is not a registered security
traded on a public exchange and therefore its fair value is
not readily determinable. Accordingly, the shares are stated
at historical cost. Management has evaluated the investment
for permanent impairment and as a result of this review,
management believes that there is no permanent impairment at
this time. However, management will continue to evaluate the
investment and may determine in the future that a permanent
impairment has occurred and that such impairment should be
recorded. The preferred stock is convertible, at the option
of the Company, into shares of EchoCath common stock at a
conversion price of $6.00 per share through 1999 and $6.50
per share thereafter. The market price for the common stock
on March 11, 1998 was $2.50 per share. The Company does not
anticipate converting its shares in the near future.
5. Research Support Grant
During 1997, the Company received a research support grant
in the amount of $365,000 from a private foundation to
support the Company's ongoing development of a proprietary
catheter. The proceeds of the grant are not refundable.
In connection with the grant, the Company has agreed to pay
the foundation a royalty of 5% of gross sales of the
developed catheter until the foundation has recovered its
$365,000, as adjusted for inflation; 3% of gross sales until
such time as the foundation has recovered four times its
$365,000 as adjusted for inflation; and 1% in perpetuity.
F-12
6. Acquisitions of Products and Technology and Related Party Transactions
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 has purchased rights to certain 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.
The Company currently utilizes HDI to manufacture certain
products, including components for the EP WorkMate and EP-3
Clinical Stimulator. The value of products and services
purchased from HDI, excluding the purchase of technology,
was $506,000, $392,000, and $424,000, in 1997, 1996 and
1995, respectively.
Arrhythmia Monitors and TeleTrace Receivers
In July, 1994, the Company acquired from HDI certain rights
to (i) a line of arrhythmia monitors, (ii) the TeleTrace III
Receiver, and (iii) a new arrhythmia monitor 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 had not submitted data
to the FDA for the new arrhythmia monitor. Of the purchase
price, $100,000 was allocated to technology rights in
existing arrhythmia monitors, which was amortized over three
years. 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 certain development milestones. 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. During the year ended
December 31, 1997, the Company paid the remaining $30,000
development fee, which was charged to research and
development expense.
During 1996, the Company discontinued the sale of its 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 sold its line of
F-13
arrhythmia monitors, including a new arrhythmia monitor
under development, 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. Since the
value assigned to the arrhythmia monitor technology had been
fully amortized, the Company did not record a gain or loss
on the sale. The Neomedics common stock is not a registered
security traded on a public exchange and therefore its fair
value is not readily determinable. At December 31, 1997, the
Company valued the shares of Neomedics stock at zero.
On December 29, 1997, the Company granted HDI a nonexclusive
license to sell the TeleTrace receiver in connection with
the sale of its arrhythmia monitors. The agreement calls for
the payment of a royalty of $300 per unit sold by HDI.
Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate
and ALERT Companion from Mortara Instrument. Dr. David W.
Mortara, a director of the Company, is also a Director and
shareholder of Mortara Instrument. The approximate value of
products purchased from Mortara Instrument was $573,000,
$15,000, and $12,000, in 1997, 1996 and 1995, respectively.
7. 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.
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 (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.
During 1997, the Company paid royalties of $2,256 in
connection with the
F-14
ALERT license. In 1995, the Company recorded $420,000 as
acquired research and development expense as technological
feasibility had not been established at the license date.
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. In
consideration of the license, the Company granted Dr.
Saksena 10,000 shares of common stock and $10,000 in 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. No royalties have been paid to
date. 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.
8. 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. ("InControl") covering a new temporary
atrial defibrillation catheter ("TADCATH").
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. The
Development Agreement expired on June 30, 1997 and the
distribution agreements are scheduled to expire on August
14, 1998, unless renewed by the parties.
9. Intangible Assets
Intangible assets consist of the following:
December 31,
1997 1996
Catheter technology $ 774,099 $ 774,099
Other 29,545 6,900
------- -------
803,644 780,999
Less: accumulated amortization (233,939) (165,138)
------------ ---------
$ 569,705 $ 615,861
============ =========
F-15
10. Inventories
Inventories consist of the following:
December 31,
1997 1996
Raw materials $ 249,018 $ 173,936
Work in progress 12,925 11,456
Finished goods 1,265,585 441,315
------------ ---------
$ 1,527,528 $ 626,707
============ =========
11. Property and Equipment
Property and equipment consist of the following:
December 31,
1997 1996
Land $ 69,738 $ --
Buildings and improvements 346,824 --
Leasehold improvements 119,332 112,670
Machinery and equipment 543,247 244,559
--------- -------
1,079,141 357,229
Less: accumulated depreciation (321,846) (175,844)
--------- ---------
$ 757,295 $ 181,385
============ ============
During February, 1997, the Company purchased 7,500 square
feet of manufacturing, administrative and warehouse space,
including 2,500 square feet of space that was leased by the
Company's ProCath subsidiary, for a purchase price of
approximately $417,000, including transaction costs and
improvements. The purchase provides for expansion of the
existing manufacturing operations, additional warehousing,
shipping and quality assurance activities and relocation of
ProCath's administrative offices.
12. 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
F-16
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 the net assets 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.
13. Commitments and Contingencies
Operating Leases
The Company currently leases approximately 7,600 square feet
of office and manufacturing space through October, 2002. In
addition to 7,500 square feet of owned space, ProCath leases
an additional 2,500 square feet of space in Berlin, New
Jersey on a month to month basis. ProCath is currently
negotiating for a new lease with an option to purchase the
2,500 square feet of leased space. EP MedSystems UK leases
945 square feet of office and storage space in London,
England through January, 2000.
The Company also leases certain office equipment for periods
extending through December, 2001. The future aggregate
commitment for minimum rentals as of December 31, 1997 is as
follows:
1998 $ 108,936
1999 106,793
2000 99,031
2001 102,974
2002 and thereafter 71,385
F-17
Rent expense associated with these leases was approximately
$92,585, $112,643 and $83,661 for the years ended December
31, 1997, 1996 and 1995, respectively.
Employment Agreements
The Company has employment agreements with two corporate
officers and two employees. The contract of the President
runs through March 1, 1999. This contract includes a
provision for a bonus equal to 5% of consolidated pre-tax
income. 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 aggregate minimum commitment for future salaries,
excluding bonuses, as of December 31, 1997, is as follows:
1998 $ 354,400
1999 125,807
2000 106,722
2001 112,058
2002 and thereafter --
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.
Litigation
EchoCath, Inc.
On October 7, 1997, the Company filed a lawsuit against
EchoCath in the United States District Court for the
District of New Jersey alleging, among other things, that
EchoCath made fraudulent misrepresentations and omissions in
connection with the sale of 280,000 shares of 5.4%
cumulative convertible preferred stock to the Company for
$1,400,000 in February, 1997. The Company cannot determine
the outcome of the EchoCath litigation at this time. (See
Note 4).
EchoCath has filed an Answer to the complaint, denying the
allegations and asserting a counterclaim against the Company
seeking reimbursement of its costs and expenses in the
action. EchoCath also filed a motion to dismiss the
complaint. The Company believes that EchoCath's counterclaim
and request for reimbursement of its costs and expenses is
without merit. As a result, the Company has not accrued for
such costs and expenses at December 31, 1997. In the opinion
of management, the ultimate resolution of the counterclaim
will not have a material adverse impact on the Company's
financial condition or results of operations.
F-18
14. Stockholders' Equity
Common Stock
The Company is authorized to issue 25,000,000 shares of
common stock, no par value, $.001 stated value per share, of
which a total of 7,599,917 shares were outstanding at
December 31, 1997 and 1996.
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.
In 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.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of
undesignated preferred stock, no par value per share. The
Board of Directors has the authority to issue preferred
stock in one or more classes, to fix the number of shares
constituting a class and the stated value thereof, and to
fix the terms of any such class, including dividend rights,
dividend rates, conversion or exchange rights, voting
rights, rights and terms of redemption, the redemption price
and the liquidation preference of such shares or class. At
December 31, 1997 and 1996, the Company had no shares of
preferred stock outstanding.
Stock Options
1995 Long-Term Incentive Plan
During July, 1997, the Board of Directors approved an
amendment to increase the number of shares of common stock
issuable under the 1995 Long Term Incentive Plan (the "1995
Incentive Plan") from 400,000 to 700,000. The amendment was
approved by the shareholders at the Annual Meeting of
Shareholders held on October 30, 1997. A total of 700,000
shares of Common Stock are available for issuance under the
1995 Incentive Plan and options for 352,500 shares of Common
Stock, at an exercise price of $2.00 to $4.75 per share,
have been granted and are outstanding as of December 31,
1997. 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 up to
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.
During 1997, the Company issued options to purchase 232,000
shares of common stock under the 1995 Incentive Plan. The
exercise prices of these options range from $2.00 to $4.75
per share. The options granted in 1997 have terms of five
years and vest over varying periods.
F-19
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, 1997. 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.
At December 31, 1997 and 1996, the Company had 1,479,500 and
1,443,500 shares, respectively, of common stock reserved for
stock options. All stock options 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. During 1995,
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 as acquired research
and development expense.
Information relating to stock options is as follows:
Option Weighted
Number of Price Averag
Options Range Exercise
Price
----------- ------------- --------
Outstanding at December 102,500 $1.33 - $2.00 $1.69
31, 1994
Granted 1,387,000 $.10 - $2.20 $1.72
Canceled (118,000) $1.33 - $2.00 $1.97
Outstanding at December 1,371,500 $.10 - $2.20 $1.70
31, 1995
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 1,443,500 $.10 - $5.50 $2.16
31, 1996
Granted 232,000 $2.00 - $4.75 $3.78
Exercised - - -
Canceled (196,000) $2.00 - $5.50 $5.31
--------- ------------- -----
Outstanding at December 1,479,500 $.10 - $4.75 $2.06
31, 1997 ========= ============= =====
Exercisable at December 965,699 $.10 - $5.50 $1.73
31, 1997 ======= ============ =====
F-20
The Company accounts for its stock options issued to
employees and nonemployee directors 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 1997 and 1996 would have
been as follows:
1997 1996 1995
Net loss ($4,961,077) $(1,791,372) $(1,760,223)
Basic loss per share $ (.65) $ (.29) $ (.41)
Diluted loss per share $ (.65) $ (.29) $ (.41)
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 1997 and 1996, respectively:
1997 1996 1995
Risk free interest rate 6.5% 6% 6%
Expected life 5 years 5 years 4 years
Expected volatility 50% 50% 50%
Weighted average fair
value of
options granted during $1.40 $2.60 $1.08
the year
15. Major Customers
Revenue from a Research Support Grant to the Company by a
not for profit charitable foundation accounted for
approximately 9% of total revenues for the year ended
December 31, 1997. Catheter development revenues from
InControl accounted for approximately 11% of total revenues
for the year ended December 31, 1996. No other customer
accounted for in excess of 10% of total revenues during the
years ended December 31, 1997 and 1996.
16. Industry Segment and Geographic Information
The Company operates in a single industry segment,
designing, manufacturing and marketing medical devices. Its
revenues, operating profits and assets for the past three
years have been attributable to this single industry
segment.
The Company began operations outside the United States by
establishing a US subsidiary, EP MedSystems UK with a United
Kingdom branch office, in January,
F-21
1997. Of the $601,000 of identifiable assets in Europe at
December 31, 1997, $408,000 were accounts receivable.
European accounts receivable are derived principally from
sales in the United Kingdom.
The following table sets forth product sales by geographic
segment:
December 31,
1997 1996 1995
United States $2,356,461 $1,153,193 $1,444,176
Europe/Middle East 1,076,776 625,835 235,563
Asia and Pacific Rim 211,495 275,784 257,834
Other 4,050 11,147 63,564
$3,648,782 $2,065,959 $2,001,137
17. Employee Benefit Plan
During 1997, the Company established an employee 401(k)
salary deferral plan that allows contributions by all
eligible full-time employees. Eligible employees may
contribute up to 15% of their respective compensation,
subject to statutory limitations, and the Company may match
a percentage of employee contributions at the discretion of
the Board of Directors. The Company made matching
contributions to eligible employees in the plan of
approximately $47,366 for the year ended December 31, 1997.
18. 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,
1997 1996
Allowance for doubtful accounts $30,000 $33,000
Inventory reserves 59,000 59,000
Intangible asset amortization 3,000 16,000
Depreciation 36,000 24,000
Accrued liabilities 239,000 23,000
Net operating loss carryforwards 3,150,000 1,417,000
Research and development credit 72,000 52,000
--------- ---------
3,589,000 1,624,000
Less: Valuation allowance (3,589,000) (1,624,000)
---------- ----------
$-- $--
========== ==========
F-22
On December 31, 1997, the Company had approximately
$7,850,000 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.
19. Supplemental Statement of Cash Flow Information
Supplemental Noncash Investing and Financing Activities
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 $2,436, $60,969 and $26,150
during the years ended December 31, 1997, 1996 and 1995,
respectively
F-23
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 27, 1998
David A. Jenkins, Chairman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, 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 27, 1998
David A. Jenkins, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ James J. Caruso March 27, 1998
James J. Caruso, Chief Financial
Officer and Secretary (Principal
Accounting Officer)
/s/ David W. Mortara March 27, 1998
David W. Mortara, Ph.D.
Director
/s/ Lestor J. Swenson March 27, 1998
Lestor J. Swenson
Director
/s/ Anthony J. Varrichio March 27, 1998
Anthony J. Varrichio
Director
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Certificate of
Incorporation (1)
3.2 Bylaws, as amended (1)
10.6 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)
10.10 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)
10.14 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)
10.22 Master Manufacturing Agreement dated
April 16, 1996 between EP MedSystems and
Hi-Tronics Designs, Inc. (1)
10.25 Exclusive Rights Agreement dated May 26,
1996 between EP MedSystems 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. (2)
10.31 Subscription Agreement dated February
27, 1997 between EchoCath, Inc. and EP
MedSystems, Inc. (2)
10.32 Amended 1995 Long Term Incentive Plan
(3)
10.33 Agreement of Lease dated August 25, 1997
between EP MedSystems, Inc. and
Provident Mutual Life Insurance Company,
as landlord
21 List of Subsidiaries
27 Financial Data Schedule (4)
27.1 Restated Financial Data Schedule (4)
(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) Incorporated by reference to the exhibit of the same
number previously filed with the Commission on Form 10-KSB
for the year ended December 31, 1996.
(3)Incorporation by reference to exhibit A previously
filed with the Commission in the Company's Proxy Statement
for the year ended December 31, 1996.
(4) EDGAR Filing only.
EXHIBIT 21
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.
100 Stierli Court, Suite 107
Mount Arlington, NJ 07856
State of Incorporation: New Jersey
Business Name: EP MedSystems, Europe Ltd.
EXHIBIT 27.1
EP MedSystems, Inc.
Restated Financial data Schedule
The Company has prepared this Restated Financial Data
Schedule in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
Quarterly Basic Earnings Per Share and Diluted Earnings per
Share are presented in this Restated Financial Data Schedule
in place of previously reported Primary Earnings Per Share
and Fully Diluted Earnings Per Share for all periods shown.
Three months ended
March 31, 1997
Basic loss per share $.12
Diluted loss per share $.12
Weighted average number
of shares outstanding 7,599,917
Six months ended
June 30, 1997
Basic loss per share $.34
Diluted loss per share $.34
Weighted average number
of shares outstanding 7,599,917
Nine months ended
September 30, 1997
Basic loss per share $.47
Diluted loss per share $.47
Weighted average number
of shares outstanding 7,599,917
Six months ended
June 30, 1996
Basic loss per share $.06
Diluted loss per share $.06
Weighted average number
of shares outstanding 4,648,570
Nine months ended
September 30, 1996
Basic loss per share $.11
Diluted loss per share $.11
Weighted average number
of shares outstanding 5,636,982
Year ended
December 31, 1996
Basic loss per share $.26
Diluted loss per share $.26
Weighted average number
of shares outstanding 6,131,749
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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,
1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 752
<SECURITIES> 2,120
<RECEIVABLES> 1,304
<ALLOWANCES> (74)
<INVENTORY> 1,513
<CURRENT-ASSETS> 5,832
<PP&E> 1,079
<DEPRECIATION> (322)
<TOTAL-ASSETS> 8,618
<CURRENT-LIABILITIES> 1,791
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 16,743
<TOTAL-LIABILITY-AND-EQUITY> 8,618
<SALES> 3,649
<TOTAL-REVENUES> 4,014
<CGS> 2,185
<TOTAL-COSTS> 7,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (4,864)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,864)
<EPS-BASIC> (.64)
<EPS-DILUTED> (.64)
[LEGEND]
In accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share," Basic Earnings Per
Share and Diluted Earnings Per Share have been included in
the Financial Data Schedule presented above in place of
Primary Earnings Per Share and Fully Diluted Earnings Per
Share.
[/LEGEND]
</TABLE>
