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, 1999
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-28260
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EP MedSystems, Inc.
(Name of small business issuer in its charter)
New Jersey 22-3212190
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(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
100 Stierli Court, Mount Arlington, NJ 07856
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (973) 398-2800
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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) 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
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1999 were
$10,868,261.
The aggregate market value of the issuer's outstanding voting stock held by
non-affiliates on March 20, 2000, based on the closing sale price of its common
stock on the Nasdaq National Market on such date, was approximately $60,001,530.
As of March 20, 2000 there were outstanding 11,572,167 shares of the issuer's
Common Stock, no par value, stated value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes X No
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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 6 - Management's Discussion and Analysis or Plan of Operation"
particularly the subsection of such Item 6 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.
PART I
Item 1. Description of Business
The Company was incorporated in New Jersey in January 1993 and operates in a
single industry segment. The Company develops, manufactures, markets and sells a
line of products for the cardiac electrophysiology ("EP") market used to
diagnose, monitor and treat irregular heartbeats known as arrhythmias. Since
inception, the Company has acquired technology, has developed new products and
has begun marketing various electrophysiology products, including the EP
WorkMate(R) electrophysiology workstation, the EP-3(TM) Stimulator,
diagnostic electrophysiology catheters and internal cardioversion catheters.
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 diminished lifestyle and to a significantly
increased risk of stroke. 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(R) System, which uses a patented electrode catheter to
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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(R) System is not approved for sale in the United States, but is
currently undergoing clinical trials. On November 1, 1999 the Company completed
the submission of all modules in its Pre Market Approval ("PMA") application
including a Clinical Module containing the results to date of the clinical
trial. On January 5, 2000, the FDA notified the Company that it completed its
initial review of the PMA application and requested additional information,
including increasing patient enrollment to 150 patients. Upon addressing these
additional requests, and because no other legally marketed therapeutic device is
currently available that allows low atrial defibrillation thresholds, the FDA
has advised the Company that it will grant expedited review to the ALERT(R)
System. Expedited review, in general, means that the FDA will give the
ALERT(R) System PMA application priority over all other regular PMA
applications. The purpose of this expedited review process is to afford the U.S.
public the benefit of new medical technology as soon as possible, while assuring
that safety and effectiveness is still obtained. The Company does not anticipate
completing the clinical trial for at least several months. Due to the fact that
additional testing is necessary, approval to sell the ALERT(R) System in
the United States may take up to one year or more, if approved at all. The
Company received Class III Design Examination Certification from its European
notified body to label the ALERT(R) System with a CE Mark, an international
symbol of adherence to quality assurance standards, design reviews and hazard
analysis. This designation allows the Company to sell the ALERT(R) System
in the European Community in 1999.
In addition, the Company has developed an intracardiac ultrasound product line
including the ViewMate(TM) ultrasound imaging console and a deflectable
intracardiac imaging catheter. These products are designed to improve a
physician's ability to visualize the inside chambers of the heart, including the
internal anatomy of the heart. The Company believes that the ViewMate(TM)
System may play an important role as new and effective treatment of complex
cardiac arrhythmias, including ventricular tachyarrhythmia and atrial
fibrillation. The Company's ultrasound products are not approved for sale and
the Company does not anticipate receiving approval to sell these products for at
least six months, if approved at all.
The Company's principal offices are located at 100 Stierli Court, Suite 107,
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 including but not limited to EP
MedSystems UK Ltd. ("EP MedSystems UK") and EP MedSystems France S.A.R.L.
Products
The Company develops, manufactures, markets and sells 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 categories described below.
The ALERT(R) System
The ALERT(R) System was developed to be a more effective and less traumatic
method of converting atrial fibrillation to normal heart rhythm. The
ALERT(R) System represents a new
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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(R) System comprises a single use proprietary
electrode catheter with two separate electrode arrays (the "ALERT(R) Catheter")
and an external energy source (the "ALERT(R)Companion"). The Company believes
low energy internal cardioversion using the ALERT(R) System provides numerous
potential advantages over high-energy external cardioversion and drug conversion
therapies as follows:
o Fewer traumas, discomfort and risk to patients than high-energy
external cardioversion.
o 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).
o Elimination of harmful side effects associated with drug therapies.
o Can be used on an outpatient basis; general anesthesia is not
required.
o Lower overall cost per procedure than high-energy external
cardioversion.
o Greater applicability for converting atrial fibrillation occurring
in the days immediately following open-heart surgery.
o Combination of temporary pacing and blood pressure monitoring
features with cardioversion in a single multi purpose catheter.
The ALERT(R) System is based on medical technology invented by Eckhard Alt,
MD, a member of the Company's Scientific Advisory Medical Board. Employees of
the Company developed the catheter manufacturing technology. The Company has
licensed the exclusive worldwide right to use the ALERT(R) technology in
the ALERT(R) System from Dr. Alt. Five patents have been issued in the
United States on the ALERT(R) System. The Company and Dr. Alt have also
filed additional patent applications and continuations for the ALERT(R)
Catheter and the ALERT(R) Companion in the United States and
internationally. See "-- Patents and Intellectual Property."
Clinical Trials
The ALERT(R) System is a medical device that will require a 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(R) System and the U.S. IDE
clinical trials are currently ongoing at thirteen leading atrial fibrillation
research centers, including Duke University Medical Center; the Medical Center
of the University of Alabama at Birmingham; Baylor College of Medicine; Lehigh
Valley Hospital; University of Southern California; and University of California
at San Francisco. The Company hopes that the results of the ALERT(R)
clinical trials will demonstrate the safety and efficacy of the ALERT(R)
System for internal catheter based cardioversion of atrial fibrillation. See "
- --Government Regulation."
On November 1, 1999 the Company completed the submission of its PMA application.
On January 5, 2000, the FDA notified the Company that it completed its initial
review of the PMA application and requested additional information including
increasing patient enrollment to 150 patients. Upon addressing these additional
requests, and because no other legally marketed
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therapeutic device is currently available that allows low atrial defibrillation
thresholds, the FDA has advised the Company that it will grant expedited review
to the ALERT(R) System. Expedited review, in general, means that the FDA will
give the ALERT(R) System PMA application priority over all other regular PMA
applications. The purpose of this expedited review process is to afford the U.S.
public the benefit of new medical technology as soon as possible while assuring
that safety and effectiveness is still obtained. As of March 15, 2000, there
were 130 enrolled patients in the ALERT(R) clinical trial.
The ALERT(R) System has received Class III Design Examination Certification
for labeling with the CE Mark and the product is being sold throughout Europe.
European tests are now ongoing for a new version of the ALERT(R) Catheter
that incorporates thermodilution to the ALERT(R) pulmonary artery catheter.
This feature is expected to broaden the ALERT(R) applications to include
the critical care and heart surgery markets by incorporating cardiac output
measurement into the catheter. In February 2000, we received approval from our
European notified body to begin shipment of our new ALERT(R) Companion II,
a newer design of the ALERT(R) Companion. See "--Government Regulation."
EP Computer Workstations and Stimulators (EP WorkMate(R), EP-3(TM)
Stimulator) The EP WorkMate(R) 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(R) offers, among other features, up to 128
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(R) consists of a
Pentium PC with integral proprietary software, a proprietary signal-conditioning
unit, dual 21-inch high-resolution color monitors, an optical disk for data
storage, a custom keyboard, catheter and stimulator junction box and a laser
printer. In addition, each EP WorkMate(R) has an internal modem to provide
a direct link between the purchaser and the Company, facilitating field software
support. The EP WorkMate(R) is differentiated from competing products by
(i) its seamless integration with the EP-3(TM) Stimulator, (ii) its capacity
to receive and display up to 128 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(TM) Stimulator is a computerized electrical pulse
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(TM) Stimulator is currently the only computerized electrophysiology
clinical stimulator being sold in the U.S. It features automatic synchronization
and rate controls as well as the same user interface as the EP WorkMate(R)
The EP-3(TM) Stimulator can be sold as a stand alone electrophysiology
stimulator or integrated with the EP WorkMate(R). The Company believes the
EP WorkMate(R), when integrated with the EP-3(TM) Stimulator, offers
the most advanced computer tools available to the electrophysiology market.
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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 similar to
others sold within the industry. The Company offers numerous electrode/curve
configurations of catheters. During March 1999, the Company received substantial
equivalence 510(k) clearance from the FDA for its flexible catheter electrodes.
This clearance allows the Company to market the product in the United States.
This proprietary and patented technology known as SilverFlex(TM) offers the
Company the ability to manufacture and sell catheters with numerous electrodes
for sophisticated mapping procedures. The flexible nature and lightweight of
these electrodes enable them to be placed on the catheter shaft without the
traditional problems of unwanted stiffness, weight and poor handling
characteristics. SilverFlex(TM) appears to be a better alternative than metal
electrode bands when used with eight or more electrodes and/or with a
deflectable catheter. The Company received FDA 510(k) approval for a deflectable
catheter design to be used with diagnostic EP catheters made with both
SilverFlex(TM) and platinum electrodes. The addition of a deflectable catheter
to the catheter product line will enable the Company to become more competitive
in the diagnostic EP catheter market.
Ultrasound Products
The Company has developed an intracardiac ultrasound product line including the
ViewMate(TM) ultrasound imaging console and a deflectable intracardiac
imaging catheter. These products are designed to improve a physician's ability
to visualize inside the chambers of the heart, including the internal anatomy of
the heart. The Company believes that the ViewMate(TM) System may play an
important role as new and effective treatment options are developed for the
treatment of complex cardiac arrhythmias, including ventricular tachyarrhythmia
and atrial fibrillation. The Company's ultrasound products are not approved for
sale and the Company does not anticipate receiving approval to sell the
ViewMate(TM) System for at least six months, if approved at all.
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, some of which
have been issued, and 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 consists of the
following:
o 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.
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o 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.
o 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.
o 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. To date, the Company has elected to not pay
any minimum royalties.
o 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.
o Three patent applications were issued or allowed during 1998 for
catheter products including the One-Piececatheter, a steerable catheter
and combination pacing/sensing/cardioversion catheters.
o Four patent applications were allowed and issued in 1999 for Company
products including a Controlled Current Defibrillator, an
Electrophysiology Catheter, a Combined Cardioversion Mapping Catheter
and ALERT Catheter manufacturing method.
o Three patent applications in the United States for new catheter
products, manufacturing methods or other advanced catheter technologies
were filed in 1998.
o Three patent applications in the United States and one European patent
application for new catheter products, manufacturing methods or other
advanced catheter technologies were filed in 1999.
o The Company is in the process of preparing patent applications for
seven new products or improvements to existing products.
o On an ongoing basis, the Company reviews, negotiates and from time to
time enters into other third party licenses for technology which the
Company believes may be useful for continuing the development of the
Company's product lines.
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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 $2,215,000 and $1,606,000 in the years ending December 31, 1999,
and 1998, respectively. During 1999, the Company's principal research and
development project involved the ALERT(R) System clinical
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trials. The Company also realized research and development expenses related to
efforts to place a flexible metallic coating on its electrophysiology catheters,
efforts to develop and obtain regulatory approval of its line of ultrasound
products, hiring of additional in-house engineering and technical support
personnel and increased development work on existing products, including the EP
WorkMate(R) and electrophysiology catheters. Additionally, other research and
development efforts are ongoing to develop new products, enhance existing
products and lower production costs.
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 regulatory approval to sell any such products, if required, will
be obtained.
The Company expects that expenses related to the ALERT(R) System will be
significant during 2000. The Company expects that research and development
expenses will increase as it continues attempts to develop new products as well
as ongoing improvements to existing products and other development projects that
may arise.
Sales and Marketing
Domestic
The Company utilizes its own direct sales and marketing force to sell all of its
products in the U.S. market. This includes a Vice President of Sales, National
Sales Manager, seven Regional Sales Managers, a Director of Marketing, six
clinical engineers and administrative support personnel.
International
The Company utilizes distributors to sell its products overseas and is in the
process of adding distributors in several countries not previously represented.
The Company has branch offices in the United Kingdom and France, to improve
distributor relationships and to assist in the introduction of the ALERT(R)
System for sale in Europe. The UK and French office is currently staffed with
three Sales Managers, clinical engineers and administrative employees. The
Company expects to expend considerable resources and effort to support the sale
of the ALERT(R) 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.
No assurance can be given that the Company or its distributors can successfully
sell the ALERT(R) System or 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 its
facility located in
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West Berlin, New Jersey. Each catheter is assembled and tested by the Company
prior to sterilization. The West Berlin facilities and quality assurance
procedures are subject to Good Manufacturing Practices ("GMP") and QSR
regulations promulgated by the FDA. Raw material vendors are required to submit
certificates of compliance to the Company's specifications. The Company's West
Berlin facility has its ISO-9001 Quality System and Design Examination
Certification which allows the CE Mark to be used on its products, including the
ALERT(R) System. The Company's West Berlin facility 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.
Other Products
The Company assembles its products primarily at its West Berlin facility. The
Company's engineers generally design the Company's products and their
functionality, however, certain critical components of the ALERT(R)
Companion, EP WorkMate(R) and EP-3(TM) Stimulator are received from outside
sources. 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 and ISO 9001 audits. 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 that 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 numerous
governmental authorities, including 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, withdrawal of marketing approvals and criminal prosecution.
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 under Section 515 of the FFDCA. The FDA has
recently been requiring more data and information to demonstrate 510(k)
substantial equivalence than in the past. Based upon industry and FDA
publications, the Company believes that 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. 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
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a 510(k) submission in the future. This could have a materially adverse effect
on the Company's business, financial condition and results of operations.
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 major change or
modification in the intended use of the device.
A PMA application must be filed as to a proposed device if the device is not
substantially equivalent to a legally marketed device. The PMA procedure
involves a more rigorous, complex and lengthy review process by the FDA than the
510(k) premarket clearance procedure.
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
accept the application for filing. 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 accepted for
filing, the FDA begins a review of the PMA application. The Company believes
that an FDA review of a PMA application generally takes between one and three
years from the date the PMA application is accepted for filing 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, a 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.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
"approvable letter," which usually contains a number of conditions that must be
met in order to secure final approval of the PMA application. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA, authorizing commercial marketing of the device for certain
indications. If the FDA evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA application
or issue a "not approvable" letter. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA application.
Modifications to a device that is the subject of an approved PMA, its labeling
or manufacturing process may require approval by the FDA of PMA supplements or
new PMAs. Supplements to a PMA often require the submission of the same type of
information required for an initial PMA, except that the supplement is generally
limited to that information needed to support the proposed change from the
product covered by the original PMA. Although under the FFDCA,
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the FDA is required to complete its review of a PMA or PMA supplement within 180
days, the agency may take a significantly longer period of time to complete its
review.
The PMA process can be expensive and a number of devices for which other
companies have sought PMAs 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.
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 and
QSR 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 is controlled by the use of written procedures and the
ability to produce devices that meet specifications is 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
and QSR 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. The Company is
subject to routine inspection by the FDA for compliance with QSR, Design Control
and GMP requirements, Medical Device Reporting regulations ("MDR") and other
applicable regulations. The FDA last inspected the Company's West Berlin
Facility during June 1998. 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 has made
changes to the GMP regulations, including quality systems and design control
requirements, which will likely increase the cost of compliance with GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition, and results of operation. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that laws and regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operation. The FDA's
MDR 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
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a material adverse effect on the Company's business, financial condition and
results of operations.
In summary, the process of obtaining and maintaining required regulatory
approvals can be expensive, uncertain, and lengthy, and there can be no
assurance that the Company will ever obtain such approvals and that if such
approvals are obtained, there can be no assurance that the Company will be able
to maintain the approvals. In addition, there can be no assurance that the FDA
will act favorably or quickly on any of the Company's submissions to the FDA and
significant difficulties and costs may be encountered by the Company in its
efforts to obtain FDA clearance that could delay or preclude the Company from
selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data or require that the
Company conduct further clinical studies, causing the Company to incur
substantial cost and delay. In addition, there can be no assurance that the FDA
will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition of its PMA approval, any of
which could limit the Company's ability to market its systems. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission ("FTC"). Further, if a company
wishes to modify a product after FDA approval of a PMA, including changes in
indications or other modifications that could affect safety or efficacy,
additional clearances or approvals will be required from the FDA. Failure to
receive or delays in receipt of FDA clearances or approvals, including the need
for additional clinical trials or data as a prerequisite to clearance or
approval, or any FDA conditions that limit the ability of the Company to market
its systems, could have a material adverse effect on the Company's business,
financial condition and results of operations.
International
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary 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. 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 that 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. The Company has received Class III Design Examination Certification from
its notified body to label its products, including the ALERT(R) System,
with
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the CE Mark. This designation allows the Company to market the ALERT(R) 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.
The FDA Export Reform and Enhancement Act of 1996 relaxed the exportation
requirements governing devices under certain circumstances. Pursuant to this
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
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., Biosense Webster, 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 Marquette-Prucka (a division of General
Electric), C.R. Bard Inc., Fischer Imaging, and Siemens Medical Systems.
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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 its new products and may introduce
products that are more effective than its new products. In addition, competitive
products may be manufactured and marketed more successfully than the Company's
products. 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(R)
System may be a Class III device. There can be no assurance that the ALERT(R)
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(R) 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.
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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 20, 2000, the Company had 82 full-time employees, of whom 29 are
dedicated to manufacturing and quality assurance, 20 are engaged in management
and administration, 16 are engaged in sales and marketing and 17 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 7,800 square feet of office and
manufacturing space located in Mount Arlington, New Jersey through October 2002.
This facility contains administrative, engineering, sales, marketing, limited
assembly and warehousing for certain of the Company's hardware products. The
Company owns a facility comprising approximately 15,000 square feet in West
Berlin, New Jersey. This facility manufactures and assembles the Company's
hardware and catheter products. This facility additionally contains
administration, engineering, catheter research and development and warehousing.
EP MedSystems UK leased 945 square feet of office and storage space in London,
England through January, 2000. Upon expiration of the lease in January, 2000, EP
MedSystems UK moved into a new location in Kent, England with a lease for 822
square feet through January 2003. EP MedSystems France entered into a lease
effective, January 2000 for 1,350 square feet of office and warehouse space in
Villebon-Courtaboeuf, France through January 2003. 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 October 1997, the Company filed a lawsuit against EchoCath, Inc.
("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 prior sale of $1,400,000 of its preferred
stock to the Company.
EchoCath 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
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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. During
October 1998, the complaint was dismissed by the District Court and EchoCath's
counterclaim for attorney fees was denied. The Company argued an appeal on
December 8, 1999 and is awaiting the decision of the United States Court of
Appeals for the Third Circuit. At this time, the Company cannot determine the
outcome of the litigation and as a result, no amount has been accrued at
December 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
On November 5, 1999, the Company held its Annual Meeting of Shareholders. The
matters voted upon by the security holders were:
1) To elect (i) one (1) Class I director to the Board of Directors to serve a
three (3) year term and until such director's successor shall be duly
elected and qualified and (ii) one (1) Class II director to the Board of
Directors to serve a one (1) year term and until such director's successor
shall be duly elected and qualified;
For Withhold
--------- --------
For the election as a Class I Director
John E. Underwood 8,954,298 9,300
For the election as a Class II Director
Darryl D. Fry 8,956,798 6,800
2) To approve an amendment to the 1995 Long Term Incentive Plan to increase
the number of shares which may be issued pursuant to options thereunder
from 700,000 to 1,000,000.
For Against Abstain
- ---------------------- ------------------------ ----------------------
8,322,530 621,368 19,700
3) To ratify the selection of PricewaterhouseCoopers LLP, independent public
accountants, as auditors for the Company for the fiscal year ending
December 31, 1999:
For Against Abstain
- ---------------------- ------------------------ ----------------------
8,943,898 -0- 19,700
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
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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, 1999 High Low
- --------------------------------------- --------------- --------------
First quarter $3.50 $2.50
Second quarter $3.00 $2.00
Third quarter $3.19 $2.28
Fourth quarter $7.13 $2.94
For the year ended
December 31, 1998 High Low
- --------------------------------------- --------------- --------------
First quarter $2.25 $1.75
Second quarter $3.38 $1.31
Third quarter $4.13 $2.25
Fourth quarter $3.88 $3.19
As of March 20, 2000, there were approximately 73 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.
Recent Sales of Unregistered Securities
On September 1, 1999, the Company sold and issued an aggregate of 1,135,000
shares of common stock in a private offering exempt under Section 4 (2) of the
Securities Act of 1933 with a major institutional investment fund and two
members of its board of directors and a private investor (the "Investors") at
$2.75 per share. The Investors each received a callable warrant entitling them
to purchase an aggregate of 567,500 common shares exercisable at $3.50 per
share. The warrants are callable by the Company when the average closing price
of the Company's Common Stock has equaled or exceeded $4.125 per share during
any twenty consecutive trading days. The warrants expire five years from the
date of grant, and were valued using the Black-Scholes option pricing model. The
proceeds from the offering were $3,032,000, net of approximately $89,000 in
related filing expenses.
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The Company granted the Investors certain registration rights with respect to
the shares pursuant to a Registration Rights Agreement. The Company filed a
shelf registration statement on Form S-3 on September 30, 1999 covering such
shares which was declared effective by the Securities and Exchange Commission on
October 22, 1999.
On April 9, 1998, the Company issued and sold 2,250,000 shares of its common
stock in a private offering exempt under Section 4 (2) of the Securities Act of
1933 to six institutional investors (the "Investors") at a price of $2.25 per
share. The gross proceeds of the offering were $5,062,500 before deducting
offering expenses of approximately $401,000. The Company used the net proceeds
from the sale of these shares for working capital purposes.
The Company granted the Investors certain registration rights with respect to
these shares pursuant to a Registration Rights Agreement. The Company filed a
shelf registration statement on Form S-3 covering all of these shares. During
July 1998, the Securities and Exchange Commission declared the registration
statement effective.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following Management's Discussion and Analysis or Plan of Operation 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(R) System; the
statements in the third paragraph of "Overview" relating to approval of the
Company's ultrasound products and their role in the diagnosis and treatment of
cardiac arrhythmias; the statements in the fourth 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 2000 and beyond; the forward looking statements contained in the
second, third, fifth, sixth, seventh, eighth and tenth paragraphs under the
discussion of the "Results of Operations" for the "Year Ended December 31, 1999
compared to the Year Ended December 31, 1998"; the forward looking statements in
the second, fourth, sixth and last paragraph of "Liquidity and Capital
Resources;" and the section titled "Year 2000 Issues."
The Company cautions investors and others to review the cautionary statements
set forth in this report on Form 10-KSB 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 release the results of any
revisions to these forward looking statements that may be made to reflect events
or circumstances after the date of this report on Form 10-KSB or to reflect the
occurrence of anticipated events.
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OVERVIEW
The Company was formed in January 1993 and operates in a single segment. The
Company develops manufactures, markets and sells 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(R)
computerized electrophysiology workstation, the EP-3(TM)Stimulator,
diagnostic electrophysiology catheters, internal cardioversion catheters and
related disposable supplies. To date, these products have generated nearly all
of the Company's sales.
The Company has developed a new product for internal cardioversion of atrial
fibrillation known as the ALERT(R) 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(R) System is not approved for sale in the
United States, but is currently undergoing clinical trials. On November 1, 1999
the Company completed the submission of its PMA application on the ALERT(R)
System. On January 5, 2000, the FDA notified the Company that it completed its
initial review of the PMA application and requested additional information
including increasing patient enrollment to 150 patients. Upon addressing these
additional requests, and because no other legally marketed therapeutic device is
currently available that allows low atrial defibrillation thresholds, the FDA
advised the Company that it will grant expedited review to the ALERT(R)
System. Expedited review, in general, means that the FDA will give the
ALERT(R) System PMA application priority over all other regular PMA
applications. The purpose of this expedited review process is to afford the U.S.
public the benefit of new medical technology as soon as possible while assuring
that safety and effectiveness is still obtained. At the earliest, the Company
does not anticipate completing the clinical trial for at least
several months. Approval to sell the ALERT(R) System in the United States
may take up to one year or more, if approved at all. The Company is approved to
sell the ALERT(R) System with a CE Mark in the European Community.
During July 1998, the Company filed for 510(k) approval with the FDA for
marketing clearance for its ViewMate(TM) ultrasound imaging console and
deflectable intracardiac imaging catheter. These products are designed to
improve a physician's ability to visualize inside the chambers of the heart,
including the internal anatomy of the heart. The Company believes that the
ViewMate(TM) System may play an important role as new and effective
treatment options are developed for the treatment of complex cardiac
arrhythmias, including ventricular tachyarrhythmia and atrial fibrillation. The
Company's ultrasound products are not approved for sale and the Company does not
anticipate receiving approval to sell the ViewMate(TM) System for at least
several months, if approved at all.
The Company expects to continue to incur operating losses 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
activity 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
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approval and market acceptance of the ALERT(R) System and ultrasound products
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. The Company has an accumulated
deficit of approximately $17,648,000 at December 31, 1999.
The Company has set a number of goals for 2000 and beyond, including continued
expansion of its sales and marketing efforts aimed at achieving increased sales
of existing products, completion of the ALERT(R) clinical trial, increased
market acceptance of the ALERT(R) System in Europe, introduction of the
ultrasound product line, increased manufacturing efficiency and lower production
costs, regulatory approval and introduction of several new catheter products,
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.
During 1999, the Company achieved a number of significant milestones, including:
> Achievement of a 46% increase in sales largely due to continued market
acceptance of the Company's electrophsiology products;
> Completed a private offering of 1,135,000 shares of common stock with a
major institutional investment fund and three private investors for
aggregate gross proceeds of approximately $3,121,000.
> Submitted the final clinical module and original ALERT(R)System PMA
application with the FDA.
> Received FDA clearance to market new catheters with the Company's patented
conductive adhesive electrode bands, or what the Company calls its
SilverFlex(TM) technology.
> Received CE mark authorizatio for ALERT(R) CS and ALERT(R) RA catheters.
The ALERT(R) family of catheters is used to deliver energy directly to the
inside of the heart for cardioversion (or defibrillation) of certain types
of irregular heartbeats. The catheters combine pacing, sensing, and
cardioversion all into one catheter system.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Sales
increased $3,394,000 (or 46%) to $10,854,000 in the year ended December 31, 1999
as compared to 1998. The increase in sales in 1999 resulted primarily from
increased sales of the EP WorkMate(R). The Company believes that the EP
WorkMate(R) is the most technologically advanced and easy to use computerized
electrophysiology workstation on the market. The Company also realized increased
sales of certain of its catheter products during the period.
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The level of sales for fiscal 2000 will continue to depend materially on the
ability of the Company's direct sales force and international independent
distributors to effectively market and sell the Company's existing products
worldwide. The ALERT(R) System is currently waiting approval from the FDA
to be sold in the United States, however, it is approved and now being sold in
Europe. The Company, at this time, cannot accurately determine the sales level
of the ALERT(R) System for fiscal 2000 nor when it will be available in the
United States. Once approved, the Company expects the ALERT(R) System to
significantly contribute to sales.
Cost of products sold increased $1,257,000 (or 34%) to $4,979,000 due to
increased sales in the year ended December 31, 1999 as compared to 1998. Gross
profit on sales for the year ended December 31, 1999 was $5,875,000 (or 54% as a
percentage of sales), as compared to $3,739,000 (or 50% as a percentage of
sales) for 1998. The Company realized an increase in gross profit on sales of
existing products during 1999 primarily due to increased sales of the EP
WorkMate(R) which currently yields a higher gross margin than certain of the
Company's other products. The Company hopes to improve its overall gross profit
percentage as sales of the ALERT(R) System and other catheter products
increase, which may offset the fixed costs associated with maintaining a
catheter manufacturing operation.
Sales and marketing expenses increased $1,013,000 (or 27%) to $4,813,000 and
decreased as a percentage of total sales from 51% to 44% in the year ended
December 31, 1999 as compared to 1998. The increase during 1999 was due to
continued expansion of its sales force and including the establishment of French
operations in 1999. The Company's domestic direct sales force currently includes
twelve domestic sales and marketing professionals as well as a team of domestic
field clinical engineers and administrative support personnel. The Company
continues to improve its network of international independent distributors and
has added distributors in several territories not previously covered. The
international distribution network is supported by a team of direct
internationally based sales and marketing professionals, international field
clinical engineers and administrative support personnel. The Company incurs
significant expenses for travel, trade show related expenses, product promotion
and physician educational materials in support of its sales efforts.
The Company expects to incur substantial additional sales and marketing expense
to support the sale of the ALERT(R) System outside the United States and,
if the clinical trials progress according to expectations, for the sale of the
ALERT(R) System in the United States. Examples of the types of expenditures
would be costs associated with hiring additional sales and customer service
personnel, trade shows, physician training and education, promotional material,
and sample products.
While sales and marketing expenses for fiscal 2000 are expected to increase, it
is anticipated that these expenses may continue to decline as a percentage of
sales in the event that incremental sales are generated. It is likely that the
Company will incur additional losses as a result of the increased fixed costs
associated with its sales efforts until incremental sales are generated. The
Company cannot determine when or if that level of sales will be achieved.
General and administrative expenses increased $506,000 (or 31%) to $2,162,000
and decreased as a percentage of total sales from 22% to 20% in the year ended
December 31, 1999 as
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compared to 1998. The increase during 1999 was primarily due to continued
infrastructure investment in anticipation of future growth. It is expected that
these expenses may continue to decline as a percentage of sales as incremental
sales are generated. The Company cannot determine when or if such incremental
sales will be achieved.
Research and development expenses increased $609,000 (or 38%) to $2,215,000 for
the year ended December 31, 1999 as compared to 1998. During 1999, the Company
incurred costs associated with research and development primarily in connection
with ongoing development efforts on existing products, including the EP
WorkMate(R), the ALERT(R)System, Viewmate(TM) Ultrasound System and
several other new products under development. The Company expects that research
and development expenses are likely to increase in future periods due to ongoing
ALERT(R) System clinical trials, new product development activities and
regulatory applications aimed at gaining approval to sell other new products.
The results of operations for the year ended December 31, 1998 included a
$1,400,000 write-down of the Company's investment in 280,000 shares of
EchoCath, Inc. preferred stock.
Other income, net, decreased $110,000 for the year ended December 31, 1999 as
compared to 1998. This is primarily due to a $47,000 increase in interest
expense for the commitment fee on the Company's unused $2,000,000 line of credit
and interest expense related to the $500,000 term loan. Interest income
decreased $63,000 in 1999 compared to 1998.
The net loss for the year ended December 31, 1999 was $3,213,000 as compared to
a net loss of $4,511,000 in 1998. The basic and diluted loss per share for the
year ended December 31, 1999 was $0.31 per share as compared to $0.49 per share
in 1998.
Liquidity and Capital Resources
Since inception, the Company's expenses have exceeded its sales resulting in an
accumulated deficit of approximately $17,648,000 at December 31, 1999. 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. On
April 9, 1998, the Company sold and issued 2,250,000 shares of its common stock
to six institutional investors at a price of $2.25 per share. The gross proceeds
of the offering were $5,062,500, before deducting offering expenses of
approximately $401,000. The Company used the net proceeds from the sale of the
shares for working capital purposes.
The Company entered into two financing arrangements in March 1999 with a bank: a
$2,000,000 revolving line of credit and a $500,000 term loan. Management
believes that its current liquidity position will be sufficient to meet the
needs of the Company until at least December 31, 2000. In the event that it
cannot generate additional capital funds during 2000,
the Company believes that it can reduce non-core related expenditures, which
will allow it to continue in its operations.
On September 1, 1999, the Company sold and issued an aggregate of 1,135,000
shares of common stock in a private offering exempt under Section 4 (2) of the
Securities Act of 1933
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<PAGE>
with a major institutional investment fund and two members of its board of
directors and a private investor (the "Investors") at $2.75 per share. The
Investors each received a callable warrant entitling them to purchase an
aggregate of 567,500 common shares exercisable at $3.50 per share. The warrants
are callable when the average closing price of the Company's Common Stock has
equaled or exceeded $4.125 per share during any twenty consecutive trading days.
The warrants will expire five years from the date of grant, and were valued
using the Black-Scholes option pricing model. The proceeds from the offering
were $3,032,000, net of approximately $89,000 in related filing expenses.
During February 2000, the Company received $718,375 related to warrants that
were issued in conjunction with the private placement in September 1999.
Investors included in the exercise were two of its institutional shareholders
and two members of its board of directors. An aggregate of 205,250 new common
shares have been issued in conjunction with the exercise of the warrants. In
addition, the exercise price of the remaining warrants to purchase 362,250
common shares were increased from $3.50 to $7.50 per share and the warrants were
made non-callable.
Net cash used in operating activities for the year ended December 31, 1999 was
$3,378,000 as compared to $3,875,000 for 1998. The net use of cash in operations
during 1999 was primarily due to the Company's $3,213,000 net loss from
operations. Accounts receivable, net, increased by $628,000 and inventories
increased by $403,000 in 1999 due to increased sales activity. Accounts payable
increased by $239,000 to $995,000 in 1999 due to increased purchases of
inventory required to support the increase in sales. Accrued expenses increased
by $110,000 to $837,000 in 1999 as compared to 1998. Amounts payable to related
parties increased by $141,000 to $330,000 in 1999 as compared to 1998 due to
increased 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 $1,330,000 during 1999 as compared
to $623,000 in 1998. This was primarily due to the purchase of 7,500 square feet
of manufacturing and warehouse space at its West Berlin Facility for
approximately $400,000 in February 1999. Costs to prepare the space for intended
use was approximately $100,000. This purchase was financed via a $500,000 term
loan executed in March 1999 (see Note 9). As of the date of this Report on Form
10-KSB, 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 $114,000 for 2000.
In December 1999, two non-employee holders of non-plan stock options exercised
their options to purchase 77,000 shares of Company common stock at a price of
$2.00 per share. On June 1, 1998, four non-employee holders of non-plan stock
options exercised their options to purchase 22,500 shares of Company common
stock at a price of $1.33 per share.
The Company expects its operating losses to continue in the near future due to
continued research and development activities, clinical trials in support of
regulatory approvals,
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<PAGE>
additional personnel and equipment required to support increased manufacturing
and assembly of our products. 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(R) System and
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 at least the next twelve months.
Impact of the Year 2000
As of the date of this filing the Company has not experienced any disturbances
or interruption in its ability to transact business with its suppliers or
customers as a result of the year 2000 transition. The Company, however,
continues to monitor its systems, suppliers, and customers for any unanticipated
issues that have yet to surface.
Recent Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS No. 133) will be effective for the
Company in the first quarter of fiscal 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS No. 133 will not have a material
effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This SAB
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. As amended
by SAB 101A, this SAB must be implemented no later than June 30, 2000. The
Company does not expect the accounting and disclosures discussed in SAB 101 to
have a material impact on its financial statements.
Impact of Introduction of Single European Currency (Euro)
On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (Euro). The transition period for the introduction of
the Euro is between January 1, 1999 and January 1, 2002. `The Company is
presently identifying and ensuring that all Euro conversion compliance issues
are addressed. Although the Company cannot predict the overall impact of the
Euro conversion at this time, the Company does not expect that the Euro
conversion will have a material adverse effect on its consolidated results of
operations.
Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. The issuance of Preferred Stock
25
<PAGE>
under certain circumstances could have the effect of delaying or preventing a
change in control of the Company or otherwise adversely affecting the rights of
the holders of Common Stock.
Risk factors
You should carefully consider the following risk factors before making an
investment decision. There may be other risks and uncertainties that we don't
know of or that we don't consider material at this time. If these risks occur,
our business, financial condition and results of operations will suffer.
Additionally, this report contains forward-looking statements that involve
uncertainties. The Company's actual results may be significantly less favorable
than those forward-looking statements. This section discusses factors that can
cause those differences.
We have a history of operating losses and expect future losses.
We commenced operations in 1993 and have incurred substantial operating losses
in each following year. As of December 31, 1999, our accumulated deficit was
approximately $17.6 million. Our present product sales revenues do not cover our
operating expenses of approximately $14.1 million in 1999 and $12.1 million in
1998 (which includes a $1.4 million write-down of an investment). Additionally,
we expect that our 2000 operating expenses will exceed those for 1999 and will
not be covered by our 2000 sales revenues. Further, we expect that our future
operating expenses will continue to increase, and as such, we may continue to
incur operating losses.
We may be unable to meet our future capital requirements.
If our present projections and expectations of revenues and expenses change
materially, our existing and future capital resources may be insufficient to
meet our capital needs. If this occurs, we will have to raise additional funds
through public or private financings of equity, debt or both. Adequate funds for
our operations, from financial markets or other sources, may not be available
when needed. If this occurs, we may be required to delay or terminate research
and development programs, curtail capital expenditures and reduce business
development and other operating activities.
Clinical testing of our products is required.
On November 1, 1999 the Company completed the submission of its PMA application
on the ALERT(R)System. On January 5, 2000, the FDA notified the Company
that it completed its initial review of the PMA application and requested
additional information including increasing patient enrollment to 150 patients.
Upon addressing these additional requests, and because no other legally marketed
therapeutic device is currently available that allows low atrial defibrillation
thresholds, the FDA has advised the Company that it will grant expedited review
to the ALERT(R) System. Expedited review, in general, means that the FDA
will give the ALERT(R) System PMA application priority over all other
regular PMA applications. The purpose of this expedited review process is to
afford the U.S. public the benefit of new medical technology as soon as possible
while assuring that safety and effectiveness is still obtained. We anticipate
completing the additional ALERT(R) System clinical trials during calendar
year 2000 and to file with the FDA for approval to sell the ALERT(R) System
in the United States. The approval to sell the ALERT(R) System in the
United States may take up to one year or more, if approved at all.
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The ALERT(R) System may not prove to be safe and effective in clinical
trials. Additionally, the results of the clinical trials may identify
significant technical obstacles that must be overcome in order to obtain
regulatory and reimbursement approvals. If the ALERT(R) System does not
prove to be safe and effective in clinical trials our business and financial
condition will be materially adversely affected.
Our success depends on developing and commercializing the ALERT(R) System.
Our long-term success depends on the success of the ALERT(R) System. The
ALERT(R) System has not been approved by the FDA and cannot be sold
commercially in the United States without FDA approval. FDA approval is based
upon, among other things, the results of clinical trials that demonstrate the
safety and effectiveness of the device. We may not be able to obtain FDA
approval on a timely basis or at all. Further, FDA approval could include
significant limitations on the uses for which the ALERT(R) System may be
sold.
If the ALERT(R) System is approved, its commercial success will depend upon
acceptance by physicians. Physician acceptance will depend upon, among other
things, substantial favorable clinical experience, advantages over alternative
treatments, cost effectiveness, and favorable reimbursement policies of third
party payors such as insurance companies, Medicare and other governmental
programs.
Profitability of the ALERT(R) System will depend on our ability to
manufacture the system efficiently in commercial quantities. We have only
manufactured the components of the ALERT(R) System in limited quantities.
We may not be able to attain efficient manufacturing. Further, we will also be
dependent on sub-contractors for certain key components of the ALERT(R)
System.
Our failure to obtain FDA approval, market acceptance, manufacturing efficiency
and reliable sub-contractors will materially adversely affect our business and
financial condition.
Our success depends on continued market acceptance of the EP Workmate(R).
Our ability to increase revenues over the next several years will depend on the
continued acceptance by electrophysiologists of the EP WorkMate(R)
computerized monitoring and analysis workstation. The EP WorkMate(R)
accounted for a significant percentage of our product sales in the year ended
December 31, 1999 and is expected to account for a significant portion of our
2000 revenues. Because the EP WorkMate(R) has a list price of approximately
$129,000 with an integrated EP-3(TM) Stimulator, each sale of an EP
WorkMate(R) represents a relatively large percentage of our net sales. We
cannot be sure that the EP WorkMate(R)'s present level of market acceptance
and sales can be maintained.
Our business and financial condition are subject to various risks and
uncertainties arising from domestic and international laws and regulations.
United States. In the United States, the development, testing, manufacture,
labeling, marketing, promotion and sale of medical devices is regulated
principally by the FDA under the Federal Food, Drug, and Cosmetic Act. The FDA
has broad discretion in enforcing compliance with that statute and its
regulations. Noncompliance can result in fines,
27
<PAGE>
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.
The process for obtaining FDA approval for a new medical device is usually long,
complex and expensive. For example, the process for the ALERT(R) System
has, to date, taken two (2) years. Approval to sell the ALERT(R) System in
the United States may take up to one year or more, if approved at all.
Our EP WorkMate(R), EP-3(TM) Stimulator and many of our catheter related
products have received FDA approval. On November 1, 1999 the Company completed
the submission of its PMA application for our ALERT(R) System. On January 5,
2000, the FDA notified the Company that it completed its initial review of the
PMA application and requested additional information including increasing
patient enrollment to 150 patients. Upon addressing these additional requests,
and because no other legally marketed therapeutic device is currently available
that allows low atrial defibrillation thresholds, the FDA has advised the
Company that it will grant expedited review to the ALERT(R) System. Expedited
review, in general, means that the FDA will give the ALERT(R) System PMA
application priority over all other regular PMA applications. The purpose of
this expedited review process is to afford the US public the benefit of new
medical technology as soon as possible while assuring that safety and
effectiveness is still obtained. If the PMA application is not accepted for
filing by the FDA, or if the FDA does not approve the ALERT(R) System, we could
be required to either re-do all or a substantial portion of the ALERT(R) System
clinical trials or abandon the ALERT(R) System. This would have a severe adverse
financial impact on our ability to continue our business.
In addition to obtaining FDA approval for a new medical device, our ability to
continue to commercially sell our products, including the EP WorkMate(R) and
EP-3(TM) Stimulator, is subject to continuing FDA oversight of the on-going
design, manufacturing, packaging, labeling, storage and quality of our medical
devices. Failure to comply with the applicable FDA standards and requirements
can result in fines, injunctions, civil penalties, recalls or seizures of
products, total or partial suspensions of products, withdrawals of marketing
approvals and criminal prosecution.
International. In order for us to market our products in Europe and certain
other foreign jurisdictions, we must obtain required regulatory approvals and
clearances and otherwise comply with extensive regulations regarding safety and
manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary 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. We may not be able to
obtain regulatory approvals in such countries or we may be required to incur
significant costs in obtaining or maintaining our foreign regulatory approvals.
Delays in the receipt of approvals to market our products or failure to maintain
these approvals could have a material adverse impact on our business and
financial condition.
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Foreign countries also often have extensive regulations regarding safety,
manufacturing processes and quality that differ from those in the United States
and must be met in order to continue sale of a product within the country.
Presently, we are permitted to sell our products, including the ALERT(R)
System, in countries that are members of the European Union and the European
Free Trade Association. We cannot be sure that we will be successful in
maintaining that permission.
Our success will depend in part on our ability to keep pace with technological
and marketplace changes.
The electrophysiology market is characterized by rapidly changing technology,
new products and industry standards. Accordingly, our ability to compete depends
on our ability to develop new products and improve existing ones.
The research and development necessary for new products and for product
refinements can take longer and require greater expenditures than expected, and
might not succeed. Moreover, our new products and product refinements might not
be accepted by physicians and patients.
Our patents and proprietary rights might not provide substantial protection.
Our success and ability to compete in the marketplace will depend in part upon
our ability to protect our proprietary technology and other intellectual
property. We seek patents on our important inventions, have acquired patents and
have entered into license agreements to obtain rights under selected patents of
third parties that we consider important to our business. Patents might not be
issued on our patent applications and applications for which we have acquired
licenses. Further, if those patents are issued, they may not be of sufficient
scope and strength to provide us with meaningful protection or commercial
advantage. Additionally, these patents may be challenged, invalidated or
circumvented in the future. Moreover, our competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, may presently have or may seek patents that will prevent, limit or
interfere with our ability to make, use or sell our products in the U.S. and
other countries.
In addition to patents, we rely on a combination of trade secrets, copyrights
and trademarks to protect our intellectual property rights. For example, our
software (which is an integrated component in the EP WorkMate(R) and
EP-3(TM) Stimulator) is not patented and existing copyright laws offer only
limited practical protection from misappropriation. Our competitors may
independently develop substantially equivalent proprietary technology.
Intellectual property litigation could harm our business.
While we do not believe we are infringing any patents or other intellectual
property rights of others, litigation over infringement claims is frequent in
the medical device industry and could arise. This kind of litigation, with or
without merit, would be time consuming and costly, and could cause shipment
delays, require us to develop alternative technology or require us to enter into
costly royalty or licensing agreements. Further, if necessary licenses are not
available to us on satisfactory terms, we may not be able to redesign our
products or processes to avoid
29
<PAGE>
alleged infringement. Accordingly, we could be prevented from manufacturing and
selling some of our products.
Also, competitors might infringe our patents and trade secrets. Costly and time
consuming litigation may be necessary to enforce our patents and to protect our
trade secrets.
We might be unable to pay royalties.
We have entered into several license agreements which require us to pay
royalties, including, in some cases, minimum annual royalties. If we do not pay
those royalties, we may lose those rights under the license agreements. The loss
of certain technology licenses could have a material adverse impact on our
business and financial condition.
We face significant competition.
The medical device market, particularly in the area of electrophysiology
products, is highly competitive. Many of our competitors have access to
significantly greater financial, marketing and other resources. Further, the
medical device market is characterized by rapid product development and
technological change. Our present and future products could become obsolete or
uneconomic through technological advances by one or more of our competitors.
For example, the ALERT(R) 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. Our future success will depend
on our ability to remain competitive with other developers of medical devices
and therapies.
Third-party reimbursement might be denied or not available for some of our
products.
Our 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 our existing
products and future products such as the ALERT(R) 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, the ALERT(R) System might not be eligible for Medicare
reimbursement during clinical trials. The FDA places new medical devices of the
type (called Class III) that are undergoing clinical trials and are subject to
the most stringent FDA review into either Category A or Category B. Category A
devices, which are those whose safety and effectiveness have not yet been
demonstrated, are not eligible for Medicare reimbursement during clinical
trials. Category B devices, which are those whose safety and effectiveness
issues have been resolved, are eligible for Medicare reimbursement. The ALERT(R)
System is currently classified as a Class III Category B device. However, final
determination of device classification will be made during review by the FDA of
the ALERT(R) System pre-market approval application which might classify the
ALERT(R) System as a Category A device. If this occurs, we will not receive any
Medicare payments for the use of the ALERT(R) System. Changes in FDA
regulations, Medicare regulations or in other third party payor policies, could
reduce or make either or both Medicare or other third-party reimbursement
unavailable for our existing products and, if approved by the FDA, the ALERT(R)
System. Any of those occurrences would adversely affect our ability to achieve
profitable operations and maintain our business.
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We might not be able to maintain or effectively manage our sales force.
We utilize a domestic direct sales and marketing force to sell and promote our
products in the U.S. We might not be able to continue to attract and retain
qualified and capable individuals who can successfully promote our products.
We are also in the process of expanding our marketing internationally and will
continue to rely on third party distributors in foreign markets. We formed a
U.S. subsidiary located in France in 1999 and have a U.S. subsidiary, with a
branch based in the United Kingdom, to increase sales, improve distributor
relationships and customer service and to assist in the introduction of the
ALERT(R) System in Europe. We have sales through a Japanese distributor and
have a distribution network in the Asian markets. Some of our agreements with
third party distributors are oral, and many of our distributor agreements, both
written and oral, are terminable by distributors. The distributors might not
actively and effectively market our products, and we might not be able to
replace existing distributors if present relationships are terminated. Further,
we might not be able to make arrangements with new distributors to access new
international markets.
Our business could be subject to product liability claims.
The manufacture and sale of our products involves the risk of product liability
claims. Our 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 our
catheters may increase the risk of product liability claims. We currently
maintain product liability insurance with coverage limits of $5,000,000 per
occurrence and $5,000,000 in the aggregate per year. This insurance is expensive
and may not be available to us in the future. A successful claim against or
settlement by us in excess of our insurance coverage or our inability to
maintain insurance could have a material adverse effect on our business and
financial condition.
We have limited manufacturing experience and depend on outside sources for the
manufacture of critical components of our products.
We have limited manufacturing experience in manufacturing our catheter products,
including the ALERT(R) Catheter. Further, we have limited experience
manufacturing these products in the volume that will be necessary for us to
achieve significant commercial sales. While we have expanded our catheter
manufacturing facilities and have hired and trained additional personnel, we may
not be able to establish or maintain reliable, high-volume, cost effective
manufacturing capacity. Moreover, we may encounter difficulties in increasing
our manufacturing capacity, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
regulatory approval on new manufacturing processes. Additionally, we rely on
outside sources for the manufacturing of critical components for the ALERT(R)
Companion, EP WorkMate(R) and EP-3(TM)Stimulator. Any interruption in this
supply from our outside sources would have a material adverse effect on our
ability to deliver our products. If an interruption were to occur, we may not be
able to reach an acceptable arrangement with an alternative source of supply on
a timely basis. Our failure to find alternative manufacturing sources would have
a material adverse effect on our business and financial condition.
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Our reliance on international operations exposes us to additional risks.
In 1999, approximately 17% of our sales were derived outside the U.S. Since we
expect international sales will continue to represent a significant percentage
of our total sales, we intend to continue to increase our operations outside of
the United States. Our continued reliance on international sales will subject us
to fluctuations in currency exchange rates and other risks of foreign
operations, including:
o tariff regulations;
o export license requirements;
o unexpected changes in regulatory requirements;
o extended collection periods for accounts receivable;
o potentially inadequate protections of intellectual property rights;
o local taxes;
o restrictions on repatriation of earnings; and
o economic and political instabilities.
These factors could have a materially adverse effect on our ability to maintain
and expand profitable foreign sales. Our failure to maintain and expand
profitable foreign sales would have a material adverse effect on our business
and financial condition.
Our stock price has been volatile and future sales of substantial numbers of our
shares could have an adverse effect on the market price of our shares.
The market price of shares of our common stock has been volatile. The price of
our common stock may continue to fluctuate in response to a number of events and
factors, including:
o clinical trial results;
o the amount of our cash resources and our abilit to obtain additional
funding;
o announcements by us or our competitors of research activities,
business developments, technological innovations or new products; o
o changes in government regulation;
o disputes concerning patents or proprietary rights;
o changes in our revenues or expense levels;
o public concern regarding the safety, efficacy
o other aspects of the products or methodologies we are developing;
and
o changes in recommendations by securities analysts
Any of these events may cause the price of our shares to fall, which may
adversely affect our business and financing opportunities. In addition, the
stock market in general and the market prices for medical device companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance or financial conditions of such companies. These
broad market and industry fluctuations may adversely affect the trading price of
our shares, regardless of our operating performance or prospects.
In addition, sales, or the possibility of sales, of substantial numbers of
shares of our common
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stock in the public market could adversely affect prevailing market prices for
shares of our common stock.
Item 7. Financial Statements
The information in response to this item is set forth in the Consolidated
Financial Statements beginning on page F-1 of this report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act
The following table sets forth certain information regarding the directors and
executive officers of the Company:
NAME AGE POSITION
- ---- --- --------
David A. Jenkins (3) 42 Chairman of the Board, President
and Chief Executive Officer; Class
III Director
Joseph M. Turner 37 Chief Financial Officer, Treasurer
and Secretary
J. Randall Rolston 53 Vice President, Sales
C. Bryan Byrd 39 Vice President, Engineering and
Operations
Joseph C. Griffin, III 40 Vice President, Regulatory Affairs
David W. Mortara, 59 Class III Director
Ph.D.(1)(2)
Darryl D. Fry 60 Class II Director
John E. Underwood (1)(2) 57 Class I 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.
The Company's By-Laws provide that the number of directors, as determined from
time to time by the Board of Directors, shall not be less than three (3) nor
more than eleven (11). Pursuant to the By-Laws, the Board of Directors has set
the number of directors at four (4). The Company's Amended and Restated
Certificate of Incorporation provides that the directors shall be divided into
three (3) classes as nearly equal in number as possible. The initial term of
Class I directors expires at the 2002 annual Meeting, the initial term of Class
II directors
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expires at the 2000 Annual Meeting and the initial term of the Class III
directors expires at the 2001 Annual Meeting. Thereafter, the successors to each
class of directors whose terms expire at succeeding annual meetings, will be
elected to hold office for a term expiring at the Annual Meeting of Shareholders
held in the third year following the year of their election. 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 a founder and currently Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Mr. Jenkins served as the
President of the Company since its inception in 1993. 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. He also serves as a director
of Transneuronix, Inc., a privately held company.
Joseph M. Turner joined the Company as Chief Financial Officer, Treasurer and
Secretary of the Company effective February 1, 1999. Mr. Turner served as Chief
Financial Officer and Treasurer of Tri-Seal International, a thermoplastic
extrusion company from 1994 to 1999. Prior to joining Tri-Seal International, he
was employed at PricewaterhouseCoopers, LLP from 1985-1994. Mr. Turner is a
certified public accountant.
J. Randall Rolston is the Vice President, Sales of the Company. Mr. Rolston
joined the Company in September 1996 as National Sales Manager and was named
Vice President, Sales in April 1998. Prior to joining the Company, Mr. Rolston
was employed in various sales management positions at Cordis Webster, an
electrophysiology catheter company owned by Johnson & Johnson. Prior to Cordis
Webster, Mr. Rolston held various sales management positions, including 15 years
at American Edwards prior to its merger with Baxter Healthcare Corporation.
C. Bryan Byrd is the Vice President, Engineering and Operations 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 working on products for Medtronic, where he developed the ValveBase,
PaceBase(R) and TeleTrace(R) software modules and before that with Mt. Sinai
Medical Center in Miami Beach, Florida.
Joseph C. Griffin, III is the Vice President, Regulatory Affairs of the Company.
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
34
<PAGE>
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.
Darryl D. Fry has served as a director of the Company since September 1999, when
he was elected by the Board of Directors to fill a vacancy. From December 1993
until his retirement in January 1999, Mr. Fry served as Chairman (until his
retirement), President (until January 1997) and Chief Executive Officer (until
May 1998) of Cytec Industries, Inc., a New York Stock Exchange listed company.
Mr. Fry continues to serve as director of Cytec and also serves as a director of
North American Van Lines, Inc. and Fortis Inc.
John E. Underwood has served as a Director of the Company since June 1998. Since
1985, Mr. Underwood has served as the founder and President of Proteus
International, a venture banking and venture consulting concern with offices in
Mahwah, New Jersey. Prior to founding Proteus, Mr. Underwood held senior
management positions with Pfizer, General Electric and Becton Dickinson.
Compliance with Reporting Requirements
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and holders of more than 10% of the Company's common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Such persons are required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of such
forms received by it or oral or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that, with respect to the year ended December 31, 1999, its executive officers,
directors and greater than 10% beneficial owners complied with all such filing
requirements.
Item 10. Executive Compensation
The following summary compensation table sets forth certain information
concerning compensation paid or accrued to the Company's five most highly paid
executive officers (the "Named Executive Officers") for services rendered in all
capacities for the years ended December 31, 1999, 1998 and 1997. No other
executive officer of the Company was paid a salary and bonus aggregating greater
than $100,000 during such time periods.
35
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------ ----------------------
Name and Principal Salary Bonus Securities Underlying
Position Year $ $ Options
- ----------------------- ---- -------- ----- ---------------------
<S> <C> <C> <C> <C>
David A. Jenkins 1999 $203,750 $0 0
Chairman, President and 1998 $150,833 $0 0
Chief Executive Officer 1997 $145,000 $0 0
J. Randall Rolston (1) 1999 $158,851 $0 15,922 (5)
Vice President, Sales 1998 $156,077 $2,500 55,271 (4)
1997 $150,000 $0 28,000 (3)
Joseph C. Griffin (2) 1999 $129,212 $0 25,000 (6)
Vice President,Regulatory 1998 $103,835 $0 0
Affairs 1997 $ 99,170 $0 0
C. Bryan Byrd 1999 $112,083 $0 0
Vice President, Engineering 1998 $102,083 $0 18,000 (7)
and Manufacturing 1997 $ 92,083 $0 0
Joseph M. Turner 1999 $110,000 $0 50,000 (8)
Chief Financial Officer 1998 $ -0- $0 0
1997 $ -0- $0 0
</TABLE>
1) Mr. Rolston served as National Sales Manager of the Company until April
1998 when he was named Vice President, Sales.
2) Mr. Griffin served as President of ProCath until February 1999 when he was
named Vice President Regulatory Affairs.
3) On September 30, 1997, the Company granted Mr. Rolston an incentive stock
option to purchase 28,000 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 5,600 of such shares vest on the grant date and options to
purchase an additional 5,600 of such shares vest each year thereafter. The
term of such option is five years.
4) On April 30, 1998, the Company cancelled an incentive stock option to
purchase 12,000 shares of common stock issued in 1996 and granted Mr.
Rolston a new incentive stock option to purchase 12,000 shares of common
stock pursuant to the 1995 Long Term Incentive Plan at an exercise price
of $3.00 per share. Options to purchase 2,400 shares vested on the grant
date and options to purchase an additional 2,400 shares vest each year
thereafter. The term of such option is five years. On July 23, 1998, the
Company granted Mr. Rolston an incentive stock option to purchase 969
shares of common stock pursuant to the 1995 Long Term Incentive Plan at an
exercise price of $2.50 per share. Options to purchase all 969 of such
shares vested on the grant date. The term of such option is five years. On
July 23, 1998, the Company granted Mr. Rolston an incentive stock option
to
36
<PAGE>
purchase 15,000 shares of common stock pursuant to the 1995 Long Term
Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 3,000 shares vested on the grant date and options to purchase an
additional 3,000 shares vest each year thereafter. The term of such option
is five years. On December 7, 1998, the Company granted Mr. Rolston an
incentive stock option to purchase 12,500 shares of common stock pursuant
to the 1995 Long Term Incentive Plan at an exercise price of $3.00 per
share. Options to purchase 2,500 shares vested on the grant date and
options to purchase an additional 2,500 shares vest each year thereafter.
The term of such option is five years. On December 31, 1998, the Company
granted Mr. Rolston an incentive stock option to purchase 14,802 shares of
common stock pursuant to the 1995 Long Term Incentive Plan at an exercise
price of $2.88 per share. Options to purchase 2,960 shares vest on the
grant date and options to purchase an additional 2,960 shares become
exercisable each year thereafter. The term of such option is five years.
5) On January 1, 1999, the Company granted Mr. Rolston an incentive stock
option to purchase 12,500 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 2,500 shares vested on the grant date and options to purchase an
additional 2,500 shares vest each year thereafter. The term of such option
is five years. On June 30, 1999 the Company granted Mr. Rolston an
incentive stock option to purchase 3,422 shares of common stock pursuant
to the 1995 Long term Incentive Plan at an exercise price of $3.00 per
share. Options to purchase 685 shares vested on the grant date and options
to purchase an additional 684 vest each year thereafter. The term of such
options is five years.
6) On February 5, 1999, the Company granted Mr. Griffin an incentive stock
option to purchase 25,000 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 5,000 shares vested on the grant date and options to purchase an
additional 5,000 such shares vest each year thereafter. The term of such
option is five years.
7) On July 23, 1998, the Company granted Mr. Byrd an incentive stock option
to purchase 18,000 shares of common stock pursuant to the 1995 Long Term
Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 3,600 shares vested on grant date and options to purchase an
additional 3,600 such shares vest each year thereafter. The term of such
option is five years.
8) On February 5, 1999, the Company granted Mr. Turner an incentive stock
option to purchase 50,000 shares of common stock pursuant to the 1995 Long
Term Incentive Plan at an exercise price of $3.00 per share. Options to
purchase 10,000 shares vested on grant date and options to purchase an
additional 10,000 such shares vest each year thereafter. The term of such
option is five years.
37
<PAGE>
Stock Options
The following table sets forth certain information concerning grants of stock
options to the Named Executive Officers during the fiscal year ended December
31, 1999.
<TABLE>
<CAPTION>
Option Grants in Fiscal Year 1999
---------------------------------
Number of Shares Percent of Total Exercise
Underlying Options Options Granted to Price Per
Granted Employees in 1999 Share Expiration Date
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Randall Rolston 15,922 11.1% $3.00 January - June 2004
Vice President, Sales
Joseph Griffin 25,000 17.5% $3.00 February 2004
Vice President,
Regulatory Affairs
Joseph M. Turner 50,000 35.0% $3.00 February 2004
Chief Financial Officer
</TABLE>
Option Exercises and Holdings
The following table provides certain information with respect to the Named
Executive Officers concerning the exercise of stock options during the fiscal
year ended December 31, 1999 and the value of unexercised stock options held as
of December 31, 1999.
38
<PAGE>
Aggregated Option Exercises in 1999 and Year End Option Values
<TABLE>
<CAPTION>
Number of Shares
Underlying
Unexercised Value of Unexercised
Options at In the Money Options at
December 31, 1999 December 31, 1999 ($) (1)
----------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David A. Jenkins (2) 150,000 16,000 $398,500 $44,000
Chairman, President
and Chief Executive
Officer
J. Randall Rolston (3) 42,676 56,517 $75,878 $99,971
Vice President, Sales
Joseph C. Griffin (3) 5,000 20,000 $8,750 $35,000
Vice President
Regulatory Affairs
Joseph M. Turner (3) 10,000 40,000 $17,500 $70,000
Chief Financial Officer
C. Bryan Byrd (3) 57,200 10,800 $150,100 $18,900
Vice President,
Engineering and
Manufacturing
</TABLE>
No options were exercised by the Named Executive Officers during the fiscal year
ended December 31, 1999.
(1) Amounts calculated by subtracting the exercise price of the options from
the market value of the underlying Common Stock using the closing sale
price on the Nasdaq National Market of $4.75 per share on December 31,
1999.
(2) 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 (the
"Jenkins NQSO"). Options to purchase 30,000 of the Jenkins NQSO shares
became exercisable on the grant date and options to purchase 1,000 shares
become exercisable each month thereafter. The term of the Jenkins NQSO
option is five years. On November 29, 1995, the Company granted Mr.
Jenkins an incentive stock option to purchase 70,000 shares of Common
Stock pursuant to the Company's 1995 Plan at an exercise price of $2.20
per share (the "Jenkins ISO"). Options to purchase 45,000 of the Jenkins
ISO shares became exercisable upon completion of the Company's initial
public offering and options to purchase the remaining 25,000 Jenkins ISO
shares became exercisable on the first anniversary of the granting of the
Jenkins ISO. The term of such option is ten years.
(3) See footnotes to prior table concerning compensation.
39
<PAGE>
Compensation Plans and Other Arrangements
1995 Long Term Incentive Plan
The Company's 1995 Long Term Incentive Plan (the "1995 Incentive Plan") was
adopted by the Board of Directors and Shareholders in November 1995. On November
5, 1999, the Shareholders approved an amendment increasing the number of shares
available under the Plan from 700,000 to 1,000,000. At December 31, 1999,
options to purchase 774,347 shares were outstanding at exercise prices ranging
from $1.75 to $3.75 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 180,000 shares were outstanding as of December 31, 1999.
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
Darryl D. Fry was granted an option to purchase 60,000 shares of common stock at
$3.00 per share upon his appointment to serve on the Board of Directors. During
1999, no other directors of the Company received cash or other compensation for
services on the Board of Directors or any committee thereof. These options were
issued 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.
40
<PAGE>
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
August 31, 2000. The addendum provides for base compensation of $145,000, plus
five percent of the Company's consolidated income before taxes. During 1999, the
Board of Directors increased Mr. Jenkins' salary to $225,000 per year. 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.
Repricing
In April 1998, the Company repriced certain options to acquire 139,000 shares of
common stock of the Company which had been granted to employees in 1996 and
1997, with exercise prices of $4.75 and $5.50. The shares were reissued at an
exercise price of $3.00. The vesting periods were reset for each employee. The
options were issued at the fair market value on the date of re-issuance. Thus,
the Company did not record compensation expense related to these options.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Based upon information available to the Company, the following table sets forth
certain information regarding beneficial ownership of Common Stock of the
Company as of March 20, 2000, 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. Pusuant to filings made by respective
holders with the Securities and Exchange Commission. Except as otherwise
indicated, the persons named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws, where applicable.
<TABLE>
<CAPTION>
Name and Address Number of Percentage of
of Beneficial Owner Shares Class
Beneficially Beneficially
Owned Owned (1)
- ---------------------------------------------- ------------ -------------
<S> <C> <C>
EGS Private Healthcare Partnership, LP (2) (3) 1,312,500 11.6%
350 Park Avenue
New York, NY 10022
EGS Private Healthcare Counterpart, LP (6) (3) 187,500 1.7%
350 Park Avenue
New York, NY 10022
David A. Jenkins (4) 1,055,000 9.3%
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
H & Q Healthcare Investors (5) 645,000 5.7%
50 Rowes Wharf
Boston, MA 02110-6679
H & Q Life Sciences Investors (5) 430,000 3.8%
50 Rowes Wharf
Boston, MA 02110-6679
Oppenheimer Funds, Inc. 600,000 5.3%
Two World Trade Center
New York, NY 10048
Medtronic, Inc. 458,000 4.0%
7000 Central Avenue NE
Minneapolis, MN 55432
David W. Mortara, Ph.D. (7) 176,000 1.6%
7865 North 86th Street
Milwaukee, WI 53224
Joseph C. Griffin (8) 131,736 1.2%
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856
Darryl D. Fry (9) 120,000 1%
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856
J. Randall Rolston (10) 69,176 1%
100 Stierli Court - Suite 107
Mount Arlington, NJ 07856
John E. Underwood (11) 20,000 *
c/o Proteus International
Crossroads Plaza
Mahwah, NJ 07430
All Named Executive Officers and directors as 1,571,912 13.8%
a group (6 persons) (12)
</TABLE>
* Represents beneficial ownership of less than one percent of the Common
Stock.
(1) Applicable percentage ownership as of March 20, 2000 is based upon
11,572,167 shares of Common Stock outstanding together with the applicable
options and/or warrants for such shareholder. Beneficial ownership is
determined in accordance with Rule 13d-3 of the Securities Exchange Act of
1934, as amended. Under Rule 13d-3, shares issuable
42
<PAGE>
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 306,250 shares issuable upon exercise of warrants.
(3) EGS Private Healthcare Partnership, LP and EGS Private Healthcare
Counterpart, LP share certain common management and ownership.
(4) Includes 150,000 shares issuable upon exercise of fully vested options.
Also includes 160,000 shares held by Mr. Jenkins as trustee for the Dalin
Class Trust, 42,500 shares held by Mr. Jenkins' wife and 20,000 shares
held by Mr. Jenkins wife as custodian for his children. Mr. Jenkins
disclaims beneficial ownership of 42,500 shares held by his wife and
20,000 shares held by his wife as custodian for his children
(5) H & Q Life Sciences Investors and H & Q Healthcare Investors share certain
common management and ownership.
(6) Includes 43,750 shares issuable upon exercise of warrants.
(7) Includes 51,000 shares issuable upon exercise of fully vested options.
(8) Includes 10,000 shares issuable upon exercise of fully vested options.
(9) Includes 5,000 shares issuable upon exercise of fully vested options.
(10) Includes 35,176 shares issuable upon exercise of fully vested options.
(11) Includes 20,000 shares issuable upon exercise of fully vested options.
(12) Includes 271,000 shares issuable upon exercise of fully vested options.
Item 12. Certain Relationships and Related Transactions
Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate(R) and ALERT(R)
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 $971,000 and
$546,000 in 1999 and 1998, 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.
43
<PAGE>
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)
4.1 Common Stock Purchase Agreement, dated April 9, 1998,
between the Company and each of the Selling Security
Holders (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated April 14, 1998 and incorporated
herein by reference(4)
3.2 Registration Rights Agreement, dated April 9, 1998,
between the Company and each of the Selling Security
Holders (filed as Exhibit 4.2 to the Company's Current
Report on Form 8-K dated April 14, 1998 and incorporated
herein by reference).(4)
3.3 Form of Common Stock and Warrant Purchase Agreement
between EP MedSystems, Inc. and the Purchasers, dated as
of August 31, 1999 (including Exhibit A: Form of
Registration Rights Agreement and Exhibit B: Form of
Warrant) (filed as Exhibit 4.3 to EP MedSystems, Inc.'s
current Report on Form 8-K dated as of August 31, 1999
and incorporated herein by reference).
3.4 Form of Replacement Warrant between EP MedSystems, Inc.
and the Purchasers dated as of February 15, 2000
(including Amendment to Registration Rights Agreement
and Form of Replacement Warrant).
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
44
<PAGE>
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 (5)
16 Letter of Changes in Registrant's Certifying Accountants
(6)
21 List of Subsidiaries
27 Financial Data Schedule (7)
* Denotes management contract or compensatory plan or arrangement
45
<PAGE>
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. Incorporated by reference to the exhibit of the same number
previously filed with the Commission on in connection with the
Company's Current Report on Form 8-K dated April 14, 1998.
5. Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Form 10-KSB for the year ended December 31, 1997.
6. Incorporated by reference to the exhibit of the same number
previously filed with the Commission in connection with the
Company's Current Report on Form 8-K dated August 25, 1998.
7. EDGAR filing only.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the last quarter of
the period covered by this report.
46
<PAGE>
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, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998. F-4
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999 and 1998. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998. F-6
Notes to Consolidated Financial Statements F-7
The accompanying notes are an integral part of these statements
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EP MedSystems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of EP
MedSystems, Inc. and its subsidiaries (the "Company") at December 31, 1999 and
December 31, 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Florham Park, NJ
March 16, 2000
F-2
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,006,731 $ 2,332,931
Short-term investments -- 729,351
Accounts receivable, net of allowances for
doubtful accounts of $95,528, and $99,275 2,933,963 2,305,498
Inventories 1,888,103 1,484,991
Prepaid expenses and other current assets 253,909 151,895
------------ ------------
Total current assets 7,082,706 7,004,666
Property and equipment, net 2,055,355 1,130,052
Intangible assets, net 501,719 541,677
Other assets 22,923 19,423
------------ ------------
Total assets $ 9,662,703 $ 8,695,818
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 995,273 $ 756,365
Payables due to related parties 329,912 188,789
Accrued expenses 665,327 588,907
Deferred warranty revenue and customer deposits 171,750 138,196
Current portion of notes payable 44,374 16,274
------------ ------------
Total current liabilities 2,206,636 1,688,531
Notes payable, less current portion 466,667 --
------------ ------------
Total liabilities 2,673,303 1,688,531
------------ ------------
Commitments and contingencies (See Notes 1, 4 and 9)
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, 11,084,417 and 9,872,417 shares issued
and outstanding in 1999 and 1998 11,084 9,872
Additional paid-in capital 24,626,713 21,432,374
Accumulated deficit (17,648,397) (14,434,959)
------------ ------------
Total shareholders' equity 6,989,400 7,007,287
------------ ------------
Total liabilities and shareholders' equity $ 9,662,703 $ 8,695,818
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 10,853,967 $ 7,460,324
Cost of products sold 4,978,652 3,721,209
------------ ------------
Gross profit 5,875,315 3,739,115
Operating costs and expenses:
Sales and marketing expenses 4,812,743 3,799,500
General and administrative expenses 2,162,229 1,656,057
Research and development expenses 2,214,778 1,605,758
Write-down of investment in EchoCath -- 1,400,000
------------ ------------
Loss from operations (3,314,435) (4,722,200)
Other income, net 100,997 211,186
------------ ------------
Net loss $ (3,213,438) $ (4,511,014)
============ ============
Basic and diluted net loss per share $ (0.31) $ (0.49)
============ ============
Weighted average shares outstanding
used to compute basic and diluted loss
per share 10,250,631 9,252,835
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-in
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,599,917 $ 7,600 $ 16,743,014 $ (9,923,945) $ 6,826,669
Issuance of common stock in 2,250,000 2,250 4,659,457 -- 4,661,707
connection with private
placement
Issuance of common stock upon 22,500 22 29,903 -- 29,925
exercise of stock options
Net loss -- -- -- (4,511,014) (4,511,014)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 9,872,417 9,872 21,432,374 (14,434,959) 7,007,287
------------ ------------ ------------ ------------ ------------
Insurance of common stock in 1,135,000 1,135 2,317,356 -- 2,318,491
connection with private
placement
Issuance of warrants in -- -- 713,636 -- 713, 636
connection with
private placement
Issuance of common stock upon 77,000 77 153,923 -- 154,000
exercise of stock options
Foreign currency translation -- -- 9,424 -- 9,424
Net loss -- -- -- (3,213,438) (3,213,438)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 11,084,417 $ 11,084 $ 24,626,713 $(17,648,397) $ 6,989,400
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,213,438) $(4,511,014)
Adjustments to reconcile net income to net cash
used in operating activities:
Write-down of investment in EchoCath -- 1,400,000
Depreciation and amortization 482,933 317,653
Bad debt expense -- 10,000
Changes in assets and liabilities:
(Increase) in accounts receivable (628,465) (1,085,577)
(Increase) decrease in inventories (403,112) 27,537
(Increase) decrease in prepaid expenses and other current assets (102,014) 25,994
(Increase) decrease in other assets (3,500) 42,546
Increase in due to related parties 141,123 60,930
Increase in accounts payable 238,909 102,433
Increase (decrease) in accrued expenses, deferred revenue and
customer deposits 109,974 (265,729)
----------- -----------
Net cash used in operating activities (3,377,590) (3,875,227)
----------- -----------
Cash flows from investing activities:
Maturities of investments 729,351 1,390,733
Capital expenditures (1,330,360) (623,490)
Patent costs (34,390) (42,421)
----------- -----------
Net cash (used in) provided by investing activities (635,399) 724,822
----------- -----------
Cash flows from financing activities:
Proceeds from note payable, 500,622 39,635
Proceeds from issuance of common stock, net of offering expenses 3,032,127 4,661,708
Proceeds from exercise of stock options 154,000 29,925
----------- -----------
Net cash provided by financing activities 3,686,789 4,731,268
----------- -----------
Net (decrease) increase in cash and cash equivalents (326,200) 1,580,863
Cash and cash equivalents, beginning of period 2,332,931 752,068
----------- -----------
Cash and cash equivalents, end of period $ 2,006,731 $2,332,931
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
EP MedSystems, Inc. (the "Company") operates in a single segment. 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of EP MedSystems,
Inc. and its wholly owned subsidiaries, including EP MedSystems UK Ltd. ("EP
MedSystems UK") and EP MedSystems France S.A.R.L. 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.
Inventories
Inventories are valued at the lower of cost or market with cost being determined
on a first-in, first-out basis.
F-7
<PAGE>
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.
Impairment of Long Lived Assets
The recoverability of the excess of cost over fair value of net assets acquired
is evaluated by an analysis of operating results and consideration of other
significant events or changes in the business environment. If management
believes an impairment exists, the carrying amount of these assets would be
reduced to their fair value as defined in Statement of Financial Accounting
Standards No. 121.
Intangible Assets
Goodwill resulting from the purchase of the Company's West Berlin, NJ facility
previously named ProCath. Goodwill is being amortized by the straight-line
method over 15 years and is included in intangible assets. Unamortized goodwill
as of December 31, 1999 and 1998 amounted to $445,000 and $495,000,
respectively.
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, 1999, no such assets have been impaired.
Revenue Recognition
The Company recognizes product sales 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 sales are included in cost of
sales.
Research and Development
Research and development costs, which include clinical and regulatory costs, are
expensed as incurred.
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
Company's basic and diluted earnings per share are equal, due to the exclusion
of common stock equivalents, which would make the earnings per share
calculations anti-dilutive.
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").
F-8
<PAGE>
Comprehensive Income
The company adopted SFAS 130 "Reporting for Comprehensive Income" in 1997. For
the years ended December 31, 1999 and 1998, the Company's comprehensive income
approximated net income, except for the foreign currency translation adjustment.
The Company's foreign operations are translated to U.S. dollars using current
exchange rates with translation adjustments accumulated in stockholders' equity
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
presentation.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS No. 133) will be effective for the
Company in the first quarter of fiscal 2000 and establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It is expected that the adoption of FAS No. 133 will not have a material
effect on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements. "This SAB
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. As amended
by SAB 101A, this SAB must be implemented no later than June 30, 2000. The
Company does not expect the guidance accounting and disclosures discussed in SAB
101 to have a material impact on its financial statements.
3. Investment Securities
At December 31, 1998 investment securities were classified as available for sale
and matured June 1999. These investments were stated at market which
approximated their amortized cost.
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 called for the Company to make milestone
payments of up to $700,000, in four installments, as certain development
milestones and initial sales are achieved on the EchoMark(R) and EchoEye(R)
technologies. One of the milestones called for a $400,000 payment payable upon
the completion of a development program for the EchoEye(R). This milestone was
only payable in the event that the development was completed by September 30,
1998. To the best of the
F-9
<PAGE>
Company's knowledge, the milestone was not achieved and no milestone payments
are accrued or payable to EchoCath at December 31, 1999.
In conjunction with the license agreement, the Company purchased 280,000 shares
of 5.4% cumulative convertible preferred stock of EchoCath for $1,400,000 in
cash. 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. However, due to liquidity and funding
issues, EchoCath's common stock was delisted from the NASDAQ Small Cap Stock
Market. Their independent accountants included an explanatory paragraph in their
fiscal 1998 report on the related financial statements which raised substantial
doubt about EchoCath's ability to continue as a going concern. As such, in 1998,
the cost basis of the preferred stock was written down to zero representing the
estimated fair value of the investment and was reflected in the loss from
operations for the year ended December 31, 1998 (See Note 9).
5. Related Party Transactions
Hi-Tronics Design, Inc.
Hi-Tronics Designs, Inc. ("HDI"), is a corporation engaged in the business of
contract engineering and manufacturing. Its' president is a shareholder and
former director of the Company. The Company utilizes HDI to manufacture certain
products which are components for the EP WorkMate(R) and EP-3(TM) Stimulator.
The value of products and services purchased from HDI was $623,000 and $360,000
in 1999 and 1998, respectively.
Mortara Instrument, Inc.
The Company purchases certain components for the EP WorkMate(R) and ALERT(R)
Companion from Mortara Instrument, Inc. Dr. David W. Mortara, a director of the
Company, is also a Director and shareholder of Mortara Instrument, Inc. The
approximate value of products purchased from Mortara Instrument was $971,000 and
$546,000, in 1999 and 1998, respectively.
6. Inventories
Inventories consist of the following:
December 31,
1999 1998
---------- ----------
Raw materials $ 372,434 $ 506,344
Work in progress 31,564 46,623
Finished goods 1,484,105 932,024
$1,888,103 $1,484,991
========== ==========
F-10
<PAGE>
7. Property and Equipment
Property and equipment consist of the following:
December 31,
1999 1998
----------- -----------
Land $ 69,738 $ 69,738
Buildings and improvements 849,246 351,924
Leasehold improvements 129,332 125,283
Machinery and equipment 1,606,703 958,591
Furniture and Fixtures 377,972 197,095
----------- -----------
$ 3,032,991 $ 1,702,631
Less: accumulated depreciation (977,636) (572,579)
----------- -----------
$ 2,055,355 $ 1,130,052
=========== ===========
During February 1999, the Company purchased the remaining 7,500 square
feet of manufacturing space at its West Berlin, NJ facility for an
aggregate purchase price of $400,000 (see Note 10) for a total of
15,000 square feet.
8. Intangible Assets
Intangible assets consist of the following:
December 31,
1999 1998
--------- ---------
Catheter technology $ 774,099 $ 774,099
Other 106,356 71,966
--------- ---------
Total 880,455 846,065
Less: accumulated amortization (378,736) (304,388)
--------- ---------
$ 501,719 $ 541,677
========= =========
9. Commitments and Contingencies
Operating Leases
The Company currently has various operating leases for office facilities.
Approximately 7,600 square feet of office and manufacturing space is leased
through October 2002 in the United States. EP MedSystems UK leases 945 square
feet of office and storage space in London, England through January 2000. The
Company also leases 1,350 square feet in France. The total rent expense
associated with the office leases was approximately $111,000 and $93,000 in 1999
and 1998, respectively. Additionally, the Company also leases certain office
equipment for periods extending through December 2002.
The future aggregate commitment for minimum rentals as of December 31,
1999 is as follows:
2000 114,000
2001 118,000
2002 89,000
F-11
<PAGE>
Employee Life Insurance
The Company has key man life insurance policies for $1,000,000 covering its
President, $1,000,000 for the Vice President of Regulatory Affairs and $500,000
for the Vice President of Engineering, for which it is the beneficiary.
Litigation
During October 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 prior sale of $1,400,000 of its preferred stock to the
Company.
EchoCath 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. During October 1998, the
complaint was dismissed by the District Court and EchoCath's counterclaim for
attorney fees was denied. The Company argued an appeal on December 8, 1999 and
is awaiting the decision of the United States Court of Appeals for the Third
Circuit. At this time, the Company cannot determine the outcome of the
litigation and as a result, no amount has been accrued at December 31, 1999.
10. Note payable
During March 1999, the Company entered into a $500,000 Term Loan Agreement with
a bank, maturing December 31, 2004. The purpose of the term note is to fund the
purchase of 7,500 square feet of manufacturing and warehouse space at its West
Berlin, NJ facility and building improvements. Interest is payable monthly in
arrears at either Prime plus 3/4% or LIBOR plus 3 1/4%. Principal is payable
commencing January 2000 in 48 equal monthly installments under a 15 year
amortization schedule with a balloon payment due in December 2004.
In addition, the Company entered into a $2 million Revolving Credit Facility
expiring March 31, 2001. The proceeds of the revolver are intended to fund
working capital purposes. Borrowings bear interest at either the bank's Prime
Rate plus 1/2% or LIBOR plus 3%. A facility fee is payable quarterly on the
average unused commitment at a rate of 3/4%. No amounts were outstanding under
the facility as of December 31, 1999.
The Company is required to maintain certain financial ratios, and meet certain
net worth and indebtedness tests. The debt is collateralized by a first priority
lien on all corporate assets. The agreement also prohibits the Company from
incurring certain additional indebtedness, limits investments, advances or loans
and restricts substantial asset sales, capital expenditures and cash dividends.
11. 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 11,084,417 and
9,872,417 shares were outstanding at December 31, 1999 and 1998, respectively.
F-12
<PAGE>
On August 31, 1999, the Company sold and issued an aggregate of 1,135,000 shares
of common stock in a private offering with an institutional investment fund and
two members of the board of directors and a private investor (the "Investors")
at $2.75 per share. The Investors each received a callable warrant to purchase
an aggregate of 567,500 common shares exercisable at $3.50 per share. The
warrants are callable by the Company when the average closing price of the
Company's Common Stock has equaled or exceeded $4.125 per share during any
twenty consecutive trading days. The warrants expire five years from the date of
grant and were valued using the Black-Scholes option pricing model. The proceeds
from the offering were $3,032,127, net of approximately $89,000 in related
filing expenses (See Note 16).
The Company granted the Investors certain registration rights with respect to
the shares pursuant to a Registration Rights Agreement. The Company filed a
shelf registration statement on Form S-3 on September 30, 1999 covering all of
the common stock. The registration statement was declared effective by the
Securities and Exchange Commission on October 22, 1999.
On April 9, 1998, the Company sold and issued 2,250,000 shares of its common
stock to six institutional investors (the "Investors") at a price of $2.25 per
share. The gross proceeds of the offering were $5,062,500 before deducting
offering expenses of approximately $401,000. The Company used the net proceeds
from the sale of the shares for working capital purposes. The Company granted
the Investors certain registration rights with respect to the shares pursuant to
a Registration Rights Agreement. The Company filed a shelf registration
statement on Form S-3 covering all of the shares. The Securities and Exchange
Commission declared the registration statement effective in July 1998.
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, 1999 and 1998, the Company
had no shares of preferred stock outstanding.
Stock Options
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 November
5, 1999, the Shareholders approved an amendment increasing the number of shares
available under the Plan from 700,000 to 1,000,000. At December 31, 1999,
options to purchase 774,347 shares were outstanding at exercise prices ranging
from $2.00 to $3.00 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
F-13
<PAGE>
Plan will terminate on November 30, 2005, unless terminated earlier by the Board
of Directors.
During 1999, the Company issued options to purchase 202,737 shares of common
stock under the 1995 Incentive Plan. The exercise prices of these options range
from $3.00 to $3.75 per share. The options granted in 1999 have terms of five
years and vest over varying periods.
Repricing
In April 1998, the Company repriced certain options to acquire 139,000 shares of
stock, which had been granted to employees in 1996 and 1997, with exercise
prices of $4.75 and $5.50. The shares were reissued at an exercise price of
$3.00, which equaled the fair market value on the date of reissuance. Thus, the
Company did not record compensation expense for these shares. The re- issued
shares were included in the calculation of pro-forma compensation expense, as
required by SFAS 123. The vesting periods were reset for each employee.
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 180,000 shares of common stock, at
exercise prices ranging from $2.00 to $3.00 per share, are outstanding as of
December 31, 1999. 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 are five years. The 1995 Director Plan will terminate
on November 30, 2005, unless terminated earlier by the Board of Directors.
In December 1999, two non-employee holders of non-plan stock options exercised
their options to purchase 77,000 shares of Company common stock at a price of
$2.00 per share. On June 1, 1998, four non-employee holders of non-plan stock
options exercised their options to purchase 22,500 shares of common stock of the
Company at $1.33 per share.
At December 31, 1999 and 1998, the Company had 1,735,847 and 1,724,610 shares,
respectively, of common stock reserved for stock options under all plans. 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(R) 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.
F-14
<PAGE>
Information relating to stock options is as follows:
<TABLE>
<CAPTION>
Option Weighted
Number of Price Average
Options Range Exercise Price
------- ----- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 1,479,500 $0.10 - $4.75 $2.06
Granted - original 392,110 $1.75 - $3.00 $2.83
Exercised (22,500) $1.33 $1.33
Expired (97,500) $1.33 - $2.00 $1.98
-----------
Outstanding at December 31, 1998 1,751,610 $1.75 - $3.00 $2.12
Granted 202,737 $3.00 - $3.75 $3.06
Exercised (77,000) $2.00 $2.00
Cancelled (141,500) $2.00 - $3.00 $1.87
-----------
Outstanding at December 31, 1999 1,735,847 $0.10 - $3.75 $2.22
-----------
Exercisable at December 31, 1999 1,125,986 $0.10 - $3.75 $1.89
-----------
</TABLE>
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 1999 and 1998 would have been as follows:
1999 1998
----------- -----------
Reported net loss ($3,213,438) ($4,511,014)
=========== ===========
Reported Basic/Diluted
loss per share $ (0.31) $ (0.49)
=========== ===========
Pro-forma net loss ($3,394,622) ($4,693,373)
----------- -----------
Pro-forma Basic/Diluted
loss per share $ (0.33) $ (0.51)
=========== ===========
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 1999 and 1998, respectively:
1999 1998
-------- --------
Risk free interest rate 5.39% 5.54%
Expected life 5 years 5 years
Expected volatility 50% 50%
Weighted average fair value of
options granted during the year
$ 1.49 $ 1.47
F-15
<PAGE>
13. Industry Segment and Geographic Information
The Company manages its business on the basis of one reportable segment--the
manufacture and sale of cardiac electrophysiology products. The Company's chief
operating decision makers use consolidated results to make operating and
strategic decisions.
The following table sets forth product sales by geographic segment as of
December 31,
1999 1998
----------- -----------
United States $ 6,936,000 $ 5,112,000
Europe/Middle East 2,030,000 1,010,000
Asia and Pacific Rim 1,844,000 1,196,000
Other 44,000 142,000
----------- -----------
$10,854,000 $ 7,460,000
=========== ===========
Sales of the Company's cardiac electrophysiology devices and related catheters
aggregated $9,333,000 and $1,521,000 in 1999 and $6,316,000 and $1,144,000 in
1998, respectively. The Company's long-lived assets are located in the U.S. No
customer accounted for an excess of 10% of total sales during the years ended
December 31, 1999 and 1998.
14. 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. During the years
ended December 31, 1999 and 1998, no matching contributions were made to the
plan.
15. Income Taxes
The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to
recognize income tax benefits for the loss carryforwards which have not
previously been recorded. As a result of losses incurred since the Company's
inception, there is no provision for income taxes in the accompanying financial
statements. At December 31, 1999 the Company's net deferred tax assets are fully
offset by a valuation allowance, and, to the extent that it is determined that
such allowance is no longer required, the tax benefit of the remaining net
deferred tax assets will be recognized in the future. The tax effects of
temporary differences and carryforwards that give rise to significant portions
of deferred tax assets consist of the following:
F-16
<PAGE>
December 31,
1999 1998
----------- -----------
Allowance for doubtful accounts $ 39,000 $ 39,000
Inventory reserves 51,000 59,000
Intangible asset amortization (12,000) 3,000
Depreciation 33,000 41,000
Accrued liabilities 156,000 181,000
Net operating loss carryforwards 5,325,000 4,433,000
Research and development credit 67,000 --
Write-down of EchoCath investment 560,000 560,000
Write-off of note receivable 43,000 --
Deferred warranty income 63,000 --
Other 75,000 --
----------- -----------
6,400,000 5,316,000
Less: Valuation allowance (6,400,000) (5,316,000)
----------- -----------
$ -- $ --
----------- -----------
On December 31, 1999 and 1998, the Company had approximately $13,312,000 and
$11,082,000, respectively, of net operating loss carryforwards available to
offset future income. These carry forwards expire between 2008 and 2014. Due to
ownership changes that occurred 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.
F-17
<PAGE>
A reconciliation of the Company's effective tax rate is as follows:
Year ended December 31,
1999 1998
------ ------
Federal tax (benefit) (34.0%) (34.0%)
State tax benefit, net of
Federal tax effect (6.0) (6.0)
Valuation allowance 40.0 40.0
------ ------
-- --
====== ======
16. Subsequent Event
During February 2000, the Company received $718,375 related to warrants that
were issued in conjunction with the private placement in September 1999.
Investors included in the exercise were two of its institutional shareholders
and two members of its board of directors. 205,250 new common shares have been
issued in conjunction with the exercise of the warrants. In addition, the
exercise price of the remaining warrants to purchase 362,250 common shares were
increased from $3.50 to $7.50 per share.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EP MEDSYSTEMS, INC.
/s/ David A. Jenkins March 30, 2000
--------------------
David A. Jenkins, Chairman, President and
Chief Executive Officer
In accordance with the Securities Exchange Act, 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 30, 2000
--------------------
David A. Jenkins, Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph M. Turner March 30, 2000
--------------------
Joseph M. Turner, Chief Financial Officer
and Secretary (Principal Accounting Officer)
F-18
<PAGE>
/s/ David W. Mortara, Ph.D. March 30,2000
--------------------
David W. Mortara, Ph.D.
Director
/s/ Darryl D. Fry March 30, 2000
--------------------
Darryl D. Fry
Director
/s/ John E. Underwood March 30, 2000
--------------------
John E. Underwood
Director
F-19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (1)
2.2 Bylaws, as amended (1)
3.1 Common Stock Purchase Agreement, dated April 9, 1998, between the
Company and each of the Selling Security Holders (4)
3.2 Registration Rights Agreement, dated April 9, 1998, between the
Company and each of the Selling Security Holders.(4)
3.3 Form of Common Stock and Warrant Purchase Agreement between EP
MedSystems, Inc. and the Purchasers, dated as of August 31, 1999
(including Exhibit A: Form of Registration Rights Agreement and
Exhibit B: Form of Warrant) (filed as Exhibit 4.3 to EP MedSystems,
Inc.'s current Report on Form 8-K dated as of August 31, 1999 and
incorporated herein by reference).
3.4 Form of Replacement Warrant between EP MedSystems, Inc. and the
Purchasers dated as of February 15, 2000 (including Amendment to
Registration Rights Agreement and Form of Replacement Warrant).
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)
<PAGE>
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. (5)
<PAGE>
16 Letter of Changes in Registrant's Certifying Accountants (6)
21 List of Subsidiaries
27 Financial Data Schedule (7)
- --------------------------------------------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
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. Incorporated by reference to the exhibit of the same number previously
filed with the Commission in connection with the Company's Current Report
on Form 8-K dated April 14, 1998.
5. Incorporated by reference to the exhibit of the same number previously
filed with the Commission in connection with the Company's Form 10-KSB for
the year ended December 31, 1997.
6. Incorporated by reference to the exhibit the same number previously filed
with the Commission in connection with the Company's Current Report on
Form 8-K dated August 25, 1998.
7. EDGAR filing only.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the last quarter of the period
covered by this report.
Exhibit 3.4 to Form 10KSB
Form of Replacement Warrant between EP MedSystems, Inc. and the Purchasers dated
as of February 15, 2000 (including Amendment to Registration Rights Agreement
and Form of Replacement Warrant).
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND NEITHER SUCH SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
[LOGO] EP MEDSYSTEMS, INC.
REPLACEMENT WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
Warrant No. EP00- This Warrant Expires on February 15, 2005
THIS CERTIFIES that, for value received, _________, a __________, with an
address at (including any permitted transferee, the "Holder"), is the registered
holder of this Warrant, which represents the right to purchase [insert quantity]
(insert quantity) fully paid and nonassessable shares of the common stock, no
par value, $.001 stated value (the "Common Stock") of EP MedSystems, Inc., a New
Jersey corporation (the "Company"), at an initial exercise price equal to Seven
Dollars and Fifty Cents ($7.50) per share (subject to adjustment as provided
herein) (the "Exercise Price") upon the terms and conditions set forth herein,
at any time or from time to time before 5:00 P.M. on February 15, 2005, New York
time (the "Exercise Period").
This Warrant is issued pursuant to the issuance and repurchase of warrants
made pursuant to that letter agreement dated February 4, 2000 and that certain
Common Stock and Warrant Purchase Agreement dated as of August 31, 1999 by and
among the Company and the entities listed on Schedule I thereto (the "Purchase
Agreement").As used herein, the term "this Warrant" shall mean and include this
Warrant and any Warrant or Warrants hereafter issued as a consequence of the
exercise or transfer of this Warrant in whole or in part. The number of shares
of Common Stock issuable upon exercise of this Warrant (the "Warrant Shares")
and the Exercise Price may be adjusted from time to time as hereinafter set
forth.
1. Exercise of Warrant.
(a) This Warrant may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company, 100
Stierli Court, Suite 107, Mount Arlington,New Jersey 07856, Attention:
President, or at such other place as is designated in writing by the Company.
Such executed election must be accompanied by payment in an amount equal to the
Exercise Price multiplied by the number of Warrant Shares for which this Warrant
is being exercised. Such payment may be made by certified or bank cashier's
check payable to the order of the Company.
Page 2
<PAGE>
(b) All or any part of this Warrant may be exercised on a "cashless"
basis, by stating in the Exercise Notice such intention and the maximum number
(the "Maximum Number") of shares of Common Stock the Holder desires to purchase
in consideration of cancellation of Warrants in payment for such exercise. The
number of shares of Common Stock the Holder shall receive (the "Cashless
Exercise Number") upon such exercise pursuant to this Section 1(b) shall equal
the quotient that is obtained when the product of the Maximum Number and the
difference between the Current Weighted Market Price and the then current
Exercise Price is divided by the then Current Weighted Market Price per share
(as hereinafter defined). The Current Weighted Market Price shall mean the
average closing price of the Common Stock of the Company for the prior twenty
(20) consecutive trading days preceding the Company's receipt of the Exercise
Notice. The following is an example of the determination of the Cashless
Exercise Number:
X =Y(A-B)
A
Where X = the Cashless Exercise Number of Warrant shares to be
received
Y = the Maximum Number of Warrants to be surrendered
A = the Current Weighted Market Price of one share of the
Common Stock (at the date of such calculation)
B = the current Exercise Price (as adjusted to the date
of such calculation).
2. Issuance of Certificates Upon Exercise. Upon each exercise of the
Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the
holder of record of the Warrant Shares issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing such Warrant Shares shall not then have been actually
delivered to the Holder. As soon as practicable after each such exercise of this
Warrant, the Company shall issue and deliver to the Holder a certificate or
certificates for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Warrant should be exercised in
part only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the Holder to purchase
the balance of the Warrant Shares (or portions thereof) subject to purchase
hereunder.
3. Deleted.
4. Transfer; Restrictions on Transfer; Compliance with the Act;
Registration Rights.
(a) Any Warrants issued upon the transfer or exercise in part of
this Warrant shall be numbered and shall be registered in a Warrant Register as
they are issued. The Company shall be entitled to treat the registered holder of
any Warrant on the Warrant Register as the owner in fact thereof for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with the
knowledge of such facts that its participation therein amounts to bad faith.
This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly
Page 3
<PAGE>
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Act and the rules and regulations thereunder.
(b) The Holder acknowledges that the Holder has been advised by the
Company that neither this Warrant nor the Warrant Shares have been registered
under the Act, that this Warrant is being or has been issued and the Warrant
Shares may be issued on the basis of the statutory exemption provided by Section
4(2) of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder in the Purchase Agreement. The Holder acknowledges that he has
been informed by the Company of, or is otherwise familiar with, the nature of
the limitations imposed by the Act and the rules and regulations thereunder on
the transfer of securities. In particular, the Holder agrees that no sale,
assignment or transfer of this Warrant or the Warrant Shares issuable upon
exercise hereof shall be valid or effective, and the Company shall not be
required to give any effect to any such sale, assignment or transfer, unless (i)
the sale, assignment or transfer of this Warrant or such Warrant Shares is
registered under the Act, it being understood that neither this Warrant nor such
Warrant Shares are currently registered for sale and that the Company has no
obligation or intention to so register this Warrant or such Warrant Shares
except as specifically noted in Section 4(c) below, or (ii) this Warrant or such
Warrant Shares are sold, assigned or transferred in accordance with all the
requirements and limitations of Rule 144 promulgated under the Act, it being
understood that Rule 144 is not available at the time of the original issuance
of this Warrant for the sale of this Warrant or such Warrant Shares and that
there can be no assurance that Rule 144 sales will be available at any
subsequent time, or (iii) such sale, assignment, or transfer is otherwise exempt
from registration under the Act.
(c) The Holders of this Warrant and the Warrant Shares are entitled
to the rights and benefits of all the terms, provisions and conditions of that
certain Registration Rights Agreement dated as of August 31, 1999 herewith
between the Company and the purchasers listed on Schedule I thereto (the
"Registration Rights Agreement"), provided Holders of a majority of the Warrants
issued hereunder give written notice of the exercise of the registration rights
pursuant to the Registration Rights Agreement.
5. Nonassessable Reservation of Shares. The Company shall at all times
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of providing for the exercise of the rights to purchase
all Warrant Shares granted pursuant to this Warrant, such number of shares of
Common Stock as shall, from time to time, be sufficient therefor. The Company
covenants that all shares of Common Stock issuable upon exercise of this
Warrant, upon receipt by the Company of the full Exercise Price therefor, shall
be validly issued, fully paid, nonassessable, and free of preemptive rights.
6. Adjustment of Exercise Price and Number of Warrant Shares.
Page 4
<PAGE>
(a) In case the Company shall at any time after the date this
Warrant was first issued (i) declare a dividend on the outstanding Common Stock
payable in shares of its capital stock, (ii) subdivide the outstanding Common
Stock, (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number of Warrant Shares
issuable upon exercise of this Warrant, in effect at the time of the record date
for such dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the Holder after
such time shall be entitled to receive the aggregate number and kind of shares
which, if such Warrant had been exercised immediately prior to such time, the
Holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination, or reclassification. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price (as hereinafter defined) per
share of Common Stock on such record date, then, in each case, the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
or exchange price of the convertible or exchangeable securities so to be
offered) would purchase at such Current Market Price and the denominator of
which shall be the number of shares of Common Stock outstanding on such record
date plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible or exchangeable
securities so to be offered are initially convertible or exchangeable);
provided, however, that no such adjustment shall be made which results in an
increase in the Exercise Price and every adjustment shall be subject to Section
6(f) hereof. Such adjustment shall become effective at the close of business on
such record date; provided, however, that, to the extent the shares of Common
Stock (or securities convertible into or exchangeable for shares of Common
Stock) are not delivered, the Exercise Price shall be readjusted after the
expiration of such rights, options, or warrants (but only with respect to
Warrants exercised after such expiration), to the Exercise Price which would
then be in effect had the adjustments made upon the issuance of such rights,
options, or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into or exchangeable for
shares of Common Stock) actually issued. In case any subscription price may be
paid in consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the account
of the Company or any majority-owned subsidiary shall not be deemed outstanding
for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the Company
in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price at the record date for such distribution) or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into
Page 5
<PAGE>
or changeable for shares of Common Stock (excluding those with respect to the
issuance of which an adjustment of the Exercise Price is provided pursuant to
Section 6(b) hereof), then, in each case, the Exercise Price shall be adjusted
by multiplying the Exercise Price in effect immediately prior to the record date
for the determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Current Market Price per share of
Common Stock on such record date, less the fair market value (as determined in
good faith by the board of directors of the Company, whose determination shall
be conclusive absent manifest error) of the portion of the evidences of
indebtedness or assets so to be distributed, or of such rights, options, or
warrants or convertible or exchangeable securities, or the amount of such cash,
applicable to one share, and the denominator of which shall be such Current
Market Price per share of Common Stock. Such adjustment shall become effective
at the close of business on such record date.
(d) In case the Company shall issue shares of Common Stock or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding shares,
rights, options, warrants, or convertible or exchangeable securities issued or
issuable (i) in any of the transactions with respect to which an adjustment of
the Exercise Price is provided pursuant to Sections 6(a), 6(b), or 6(c) above,
(ii) upon any issuance of securities pursuant to this offering of Warrants or
the exercise of securities so issued, (iii) upon exercise of this Warrant or any
other warrants issued by the Company and outstanding on the date hereof, (iv)
upon any adjustment of the number of shares of Common Stock issuable upon
exercise of the Warrants pursuant to the Preamble hereof, (v) upon issuance or
exercise of stock options granted to the directors or employees of the Company
pursuant to the Company's stock option plans in effect on the date hereof, each
as may have been amended from time to time, or (vi) upon the conversion of any
outstanding convertible securities or convertible securities to be issued
pursuant to agreements in effect on the date hereof) at a price per share
(determined, in the case of such rights, options, warrants, or convertible or
exchangeable securities, by dividing (x) the total amount received or receivable
by the Company in consideration of the sale and issuance of such rights,
options, warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration payable to the Company upon exercise, conversion, or
exchange thereof, by (y) the maximum number of shares covered by such rights,
options, warrants, or convertible or exchangeable securities) lower than the
Current Market Price per share of Common Stock, in effect immediately prior to
such issuance, then the Exercise Price shall be reduced on the date of such
issuance to a price (calculated to the nearest cent) determined by multiplying
the Exercise Price in effect immediately prior to such issuance by a fraction,
(1) the numerator of which shall be an amount equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such issuance plus
(B) the quotient obtained by dividing the consideration received by the Company
upon such issuance by such Current Market Price, and (2) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such issuance; provided, however, that no such adjustment
shall be made which results in an increase in the Exercise Price and every
adjustment shall be subject to Section 6(f) hereof. For the purposes of such
adjustments, the maximum number of shares which the holders of any such rights,
options, warrants, or convertible or exchangeable securities shall be entitled
to initially subscribe for or purchase or convert or exchange such securities
into shall be deemed to be issued and outstanding as of the date of such
issuance, and the consideration received by the Company therefor shall be deemed
to be the consideration received by the Company for such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum aggregate
consideration or premiums stated in such rights, options, warrants, or
convertible or exchangeable securities to be paid for the shares covered
thereby. No further adjustment of the Exercise Price shall be made as a result
of the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such rights,
options, or warrants, or the termination of such right to convert or exchange,
the Exercise Price shall be readjusted
Page 6
<PAGE>
(but only with respect to this Warrant if exercised after such expiration or
termination) to such Exercise Price as would have obtained had the adjustments
made upon the issuance of such rights, options, warrants, or convertible or
exchangeable securities been made upon the basis of the delivery of only the
number of shares of Common Stock actually delivered upon the exercise of such
rights, options, or warrants or upon the conversion or exchange of any such
securities; and on any change of the number of shares of Common Stock
deliverable upon the exercise of any such rights, options, or warrants or
conversion or exchange of such convertible or exchangeable securities or any
change in the consideration to be received by the Company upon such exercise,
conversion, or exchange, including, without limitation, a change resulting from
the antidilution provisions thereof. In case the Company shall issue shares of
Common Stock or any such rights, options, warrants, or convertible or
exchangeable securities for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then the "price per share" and the
"consideration received by the Company" for purposes of the first sentence of
this Section 6(d) shall be as determined in good faith by the board of directors
of the Company, whose determination shall be conclusive absent manifest error.
Shares of Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the purpose of any
such computation.
(e) For the purpose of any computation under this Section 6, the
"Current Market Price" per share of Common Stock on any date shall be deemed to
be the average of the daily closing prices for the 20 consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the last reported closing sales price or the last reported closing bid price,
as the case may be, on the principal national securities exchange (including,
for purposes hereof, the Nasdaq National Market) on which the Common Stock is
listed or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported bid price
for the Common Stock as furnished by the National Association of Securities
Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is no longer
reporting such information. If on any such date the Common Stock is not listed
or admitted to trading on any national securities exchange and is not quoted by
Nasdaq or any similar organization, the fair value of a share of Common Stock on
such date, as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error, shall be used.
(f) No adjustment in the Exercise Price shall be required if such
adjustment is less than $. 05 (which amount will be proportionately adjusted in
the event of stock splits or the like); provided, however, that any adjustments
which by reason of this Section 6 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 6 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(g) In any case in which this Section 6 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised this Warrant after such
record date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(h) Whenever there shall be an adjustment as provided in this
Section 6, the Company shall promptly cause written notice thereof to be sent by
certified or registered mail, postage prepaid, to the Holder, at its address as
it shall appear in the Warrant Register, which notice shall be
Page 7
<PAGE>
accompanied by an officer's certificate setting forth the number of Warrant
Shares purchasable upon the exercise of this Warrant and the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment and the computation thereof, which officer's certificate shall
be conclusive evidence of the correctness of any such adjustment absent manifest
error.
(i) The Company shall not be required to issue fractions of shares
of Common Stock or other capital stock of the Company upon the exercise of this
Warrant.If any fraction of a share would be issuable on the exercise of this
Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the market price of
such share of Common Stock on the date of exercise of this Warrant, as
determined in good faith by the Company's Board of Directors.
7. Reclassification; Reorganization or Merger.
(a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 6 above.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (other than a change in par
value or from a specified par value to no par, or as a result of a subdivision
or combination, but including any change in the shares into two or more classes
or series of shares), or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation
and in which there is a reclassification or change (including a change to the
right to receive cash or other property) of the shares of Common Stock (other
than a change in par value, or from no par value to a specified par value, or as
a result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Warrant solely the kind and amount
of shares of stock and other securities, property, cash, or any combination
thereof receivable upon such reclassification, change, consolidation, or merger
by a holder of the number of shares of Common Stock for which this Warrant might
have been exercised immediately prior to such reclassification, change,
consolidation, or merger.Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 6.
(c) Notwithstanding anything to the contrary herein contained, in
the event of a transaction contemplated by Section 7(a) in which the surviving,
continuing, successor, purchasing or leasing corporation demands that all
outstanding convertible notes and warrants be extinguished prior to the closing
date of the contemplated transaction, the Company shall give prior notice (the
"Merger Notice") thereof to the Holder advising the Holder of such transaction.
The Holder shall have ten (10) days after the date of the Merger Notice to elect
to (i) exercise this Warrant in the manner provided herein or (ii) receive from
the surviving, continuing, successor, or purchasing corporation the same
consideration
Page 8
<PAGE>
receivable by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, or purchase reduced by such amount of the consideration as has a
market value equal to the Exercise Price, as determined by the Board of
Directors of the Company, whose determination shall be conclusive absent
manifest error. If the Holder fails to timely notify the Company of its
election, the Holder shall be deemed for all purposes to have elected the option
set forth in (ii) above. Any amounts receivable by a Holder who has elected the
option set forth in (ii) above shall be payable at the same time as amounts
payable to shareholders in connection with any such transaction.
(d) The above provisions of this Section 7 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
8. Certain Notices to the Holder. In case at any time the Company shall
propose to: (i) pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; (ii)
issue any rights, warrants, or other securities to all holders of Common Stock
entitling them to purchase any additional shares of Common Stock or any other
rights, warrants, or other securities; (iii) effect any reclassification or
change of outstanding shares of Common Stock, or any consolidation, merger,
sale, lease, or conveyance of property, described in Section 7; or (iv) effect
any liquidation, dissolution, or winding-up of the Company; then, and in any one
or more of such cases, the Company shall give written notice thereof, by
certified or registered mail, postage prepaid, to the Holder at the Holder's
address as it shall appear in the Warrant Register, mailed at least fifteen (15)
days prior to (x) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (y) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (z) the date of such action which would require
an adjustment to the Exercise Price.
9. Issue Tax. The issuance of any shares or other securities upon the
exercise of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
Page 9
<PAGE>
10. Restrictive Legend. The Warrant Shares issued upon exercise of this
Warrant shall be subject to a stop transfer order and the certificate or
certificates evidencing such Warrant Shares shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY
BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES
MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER
CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS.
11. Lost Warrant. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant (and upon surrender
of this Warrant if mutilated), and upon reimbursement of the Company's
reasonable incidental expenses and indemnity reasonably satisfactory to the
Company, the Company shall execute and deliver to the Holder thereof a new
Warrant of like date, tenor, and denomination.
12. No Shareholder Rights. The Holder of this Warrant shall not have
solely on account of such status, any rights of a shareholder of the Company,
either at law or in equity, or to any notice of meetings of shareholders or of
any other proceedings of the Company, except as provided in this Warrant.
13. Governing Law. This Warrant has been negotiated and consummated in the
State of New Jersey and shall be construed in accordance with the laws of the
State of New Jersey applicable to contracts made and performed within such
State, without regard to principles governing conflicts of law.
14. Jurisdiction. Each of the Company and the Holder of this Warrant,
irrevocably consents to the jurisdiction of the courts of the State of New
Jersey and of any federal court located in such State in connection with any
action or proceeding arising out of or relating to this Warrant, any document or
instrument delivered pursuant to, in connection with or simultaneously with this
Warrant, or a breach of this Warrant or any such document or instrument. In any
such action or proceeding, the Company waives personal service of any summons,
complaint or other process and agrees that service thereof may be made in
accordance with Section 15 hereof.
15. Notices. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given:
if to the Company: EP MedSystems, Inc.
100 Stierli Court
Suite 107
Mount Arlington, New Jersey 07856
Page 10
<PAGE>
Attention: President
Facsimile: (973) 398-8636
if to the Holder:
Facsimile:
or in either case, to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 15. Any notice or
other communication given by certified mail shall be deemed given at the time of
certification thereof, except for a notice changing a party's address which
shall be deemed given at the time of receipt thereof. Any notice given by other
means permitted by this Section 15 shall be deemed given at the time of receipt
thereof.
[signature page follows]
Page 11
<PAGE>
IN WITNESS WHEREOF, this Warrant has been duly executed as ofFebruary 15,
2000.
EP MEDSYSTEMS, INC.
By:________________________________________________
Name: David A. Jenkins
Title: President
By:________________________________________________
Name:
Title:
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ___________________ hereby sells, assigns, and transfers
unto:
Name:___________________________________________________________________________
Address:________________________________________________________________________
Social Security or Employer Identification Number:______________________________
the right to purchase ____________ shares of Common Stock, no par value, $.001
stated value, of EP MedSystems, Inc. (the "Company") represented by the attached
Warrant, together with all right, title, and interest therein, and does hereby
irrevocably constitute and appoint _____________________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated: ___________________
Signature: _________________________________
Name:_______________________________________
NOTICE
THE SIGNATURE ON THE FOREGOING ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN
UPON THE FACE OF THIS WARRANT IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Page 13
<PAGE>
ELECTION TO EXERCISE
The undersigned hereby exercises its rights to purchase _______ Warrant
Shares covered by the within Warrant, and tenders payment herewith in the
aggregate amount of $________, including (i) $________ by certified or bank
cashier's check or wire transfer, and/or (ii) cancellation of Warrants to
purchase ___ Warrant Shares based upon a Maximum Number (as therein defined) of
________, in accordance with the terms thereof, and requests that certificates
for such securities be issued in the name of, and delivered to:
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
Name of Holder
------------------------------
Dated:_________ ------------------------------
Signature
------------------------------
Print Name
------------------------------
Title (if entity)
Address:___________________________________________________________________
------------------------------
Signature Guarantee
Page 14
EXHIBIT 21
SUBSIDIARIES OF EP MEDSYSTEMS, INC.
ProCath Corporation D/B/A EP MedSystems
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.
EP MedSystems France S.A.R.L.
12, Avenue du Quebec, Batiment H
Entree 9, SILIC 633
91140 Villebon sur Yvette, France
<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, 1998 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. 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 BELOW IN PLACE
OF PRIMARY EARNINGS PER SHARE AND FULLY DILUTED EARNINGS PER SHARE.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,007
<SECURITIES> 0
<RECEIVABLES> 3,029
<ALLOWANCES> (96)
<INVENTORY> 1,888
<CURRENT-ASSETS> 7,083
<PP&E> 3,033
<DEPRECIATION> (978)
<TOTAL-ASSETS> 9,663
<CURRENT-LIABILITIES> 2,207
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 6,978
<TOTAL-LIABILITY-AND-EQUITY> 9,663
<SALES> 10,854
<TOTAL-REVENUES> 10,854
<CGS> 4,979
<TOTAL-COSTS> 9,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> (3,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,213)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
