UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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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 __________
Commission File Number: 0-28260
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EP MEDSYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
New Jersey 22-3212190
-------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Stierli Court, Mount Arlington, New Jersey 07856
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(Address of principal executive offices) (Zip Code)
(973) 398-2800
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(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. |X| Yes
No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. |_| Yes |_| No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<PAGE>
Class Outstanding at October 30, 2000
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Common Stock, without par value 12,023,167 shares
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
2
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB
CONTENTS
PART I -- Financial INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 2000
(unaudited) 3
Consolidated Statements of Operations for three months
ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Operations for nine months
ended September 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for nine months
ended September 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-8
Item 2. Management's Discussion and Analysis or Plan of
Operation 9-13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13-14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14-15
Signatures and Exhibit Index 15
3
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2000
------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,235,657
Accounts receivable, net of allowances for
doubtful accounts of $84,022 2,419,752
Inventory, net 1,982,767
Prepaid expenses and other current assets 199,112
------------
Total current assets 5,837,288
Property and equipment, net 2,639,598
Intangible assets, net 483,521
Other assets 48,776
------------
Total assets $ 9,009,183
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 808,419
Payables due to related parties 142,592
Accrued expenses 341,397
Deferred warranty revenue 212,038
Current portion of long-term debt 1,562,476
------------
Total current liabilities 3,066,922
Long-term debt, less current portion 441,664
------------
Total liabilities $ 3,508,586
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Commitments and contingencies
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 stated value, 25,000,000
shares authorized, 11,991,167 shares issued
and outstanding $ 11,991
Additional paid-in capital 26,286,988
Accumulated deficit (20,798,382)
------------
Total shareholders' equity 5,500,597
------------
Total liabilities and shareholders' equity $ 9,009,183
============
The accompanying notes are an integral part of these statements.
4
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
September 30, September 30,
2000 1999
------------- -------------
Net sales $ 2,717,092 $ 2,836,267
Cost of products sold 1,213,981 1,215,711
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Gross profit 1,503,111 1,620,556
Operating costs and expenses:
Sales and marketing expenses 1,147,978 1,034,065
General and administrative expenses 723,361 797,772
Research and development expenses 600,278 625,606
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Loss from operations (968,505) (836,887)
Other (expense) income, net (8,368) (5,057)
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Net loss $ (976,873) $ (841,944)
============= =============
Basic and diluted loss per share $ (0.08) $ (0.08)
============= =============
Weighted average shares outstanding used
to compute basic and diluted loss per share 11,988,808 10,233,189
============= =============
The accompanying notes are an integral part of these statements.
5
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
Net sales $ 7,756,310 $ 7,792,278
Cost of products sold 3,610,527 3,480,777
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Gross profit 4,145,783 4,311,501
Operating costs and expenses:
Sales and marketing expenses 3,636,927 3,228,307
General and administrative expenses 2,028,283 1,817,623
Research and development expenses 1,864,861 1,752,808
------------- -------------
Loss from operations (3,384,288) (2,487,237)
Other income, net 225,742 44,133
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Net loss $ (3,158,546) $ (2,443,104)
============= =============
Basic and diluted loss per share $ (0.27) $ (0.25)
============= =============
Weighted average shares outstanding used
to compute basic and diluted loss per share 11,705,126 9,958,053
============= =============
The accompanying notes are an integral part of these statements.
6
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,158,546) $ (2,443,104)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 543,915 284,543
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 514,211 (592,192)
Increase in inventories (94,664) (388,001)
Decrease in prepaid and other current assets 54,797 36,387
Increase in other assets (25,853) (12,351)
(Decrease) increase in payables due to related parties (187,320) 64,761
Decrease in accounts payable (186,855) (41,786)
Decrease in accrued expenses, deferred
revenue and customer deposits (283,642) (86,586)
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Net cash (used in) operating activities $ (2,823,957) $ (3,178,329)
------------- -------------
Cash flows from investing activities:
Proceeds from maturity of investments -- 729,351
Capital expenditures (1,109,960) (837,303)
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Net cash (used in) investing activities $ (1,109,960) $ (107,952)
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Cash flows from financing activities:
Proceeds from exercise of warrants 718,375 3,032,256
Proceeds from exercise of stock options 929,221 6,000
Net borrowings under note payable 1,515,247 512,397
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Net cash provided by financing activities $ 3,162,843 $ 3,550,653
------------- -------------
Net (decrease) increase in cash and cash equivalents (771,074) 264,372
Cash and cash equivalents, beginning of period 2,006,731 2,332,931
------------- -------------
Cash and cash equivalents, end of period $ 1,235,657 $ 2,597,303
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
7
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EP MEDSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, they do not include all of the financial information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (including normal
recurring adjustments) considered necessary for a fair presentation have been
included.
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.
Actual results could differ from those estimates.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
the Company's Form 10-KSB for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.
Note 2. Inventories
Inventories at September 30, 2000 consist of the following:
Raw materials $ 1,289,090
Work in process 160,755
Finished goods 532,922
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$ 1,982,767
===========
Note 3. Note payable
In March 1999, the Company entered into a $500,000 Term Loan Agreement with a
bank, maturing December 31, 2004. The purpose of the term loan was to fund the
purchase of 7,500 square feet of manufacturing and warehouse space at its West
Berlin, NJ facility and make necessary building improvements. Interest is
payable monthly in arrears at either the bank's prime rate plus 3/4% or LIBOR
plus 3 1/4%, at the Company's option. 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.
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In addition, in March 1999, 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%, at the Company's option. A
facility fee is payable quarterly on the average unused commitment at a rate of
3/4%. As of September 30, 2000, the amount outstanding under the facility is
$1,512,000.
Under the Term Loan Agreement and the Revolving Credit Facility documentation,
the Company is required to maintain certain financial ratios and meet certain
net worth and indebtedness tests. For the quarter ended September 30, 2000, the
Company was not in compliance with the liquidity ratio minimum of 1.5 to 1. As
discussed in Note 4 below, the Company obtained $1.6 million of additional
financing which was used to pay down the outstanding balance under the Revolving
Credit Facility thereby curing the default. The Company is in the process of
obtaining a waiver of the past default from the bank. The Company is in
compliance with all other debt covenants as of September 30, 2000.
The debt under the loan documents is collateralized by a first priority lien on
all corporate assets. The loan documentation also prohibits the Company from
incurring certain additional indebtedness, limits investments, advances or loans
and restricts substantial asset sales, capital expenditures and cash dividends.
The Company's lender approved the incurring of additional indebtedness in
connection with the financing with Medtronic Asset Management, Inc. described in
Note 4 below.
Note 4. Common Stock and Liquidity
In February 2000, the Company received $718,000 related to the exercise of
warrants that were issued in conjunction with the Company's private placement in
September 1999. Investors included in the exercise were two of its institutional
shareholders and two members of its board of directors. Common stock of 205,250
shares was issued in conjunction with the exercise of the warrants. In addition,
the exercise price of the remaining unexercised warrants to purchase 362,250
shares of common stock was increased from $3.50 to $7.50 per share. The Company
used the net proceeds from the exercise of warrants for working capital
purposes.
On November 15, 2000, the Company entered into an arms-length financing
transaction, in the amount of up to $3.2 million, with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of the Company's
shareholders and one of the world's leading medical technology companies
("Medtronic"). The transaction is evidenced by a Note Purchase Agreement and
secured promissory note bearing interest at two percentage points over the prime
rate quoted by Wells Fargo Bank Minnesota, N.A. The principal and all accrued
interest on the note are to be repaid on November 15, 2003 and the note is
secured by a pledge of certain shares of stock owned by David Jenkins, the
Company's President and Chief Executive Officer and a director and shareholder
thereof, in a privately-held company. The Company received $1.6 million at
closing and is to receive the remaining $1.6 million on or about December 29,
2000, subject to satisfaction of certain conditions contained in the Note
Purchase Agreement, including, without limitation, the consummation by Medtronic
of an unrelated transaction with the privately-held company the stock of which
is the subject of the pledge from Mr. Jenkins. As part of the transaction,
Medtronic agreed to subordinate its rights to repayment from the Company to
existing rights of the Company's senior lender, Fleet National Bank.
Management believes that its current liquidity position will be sufficient to
meet the needs of the Company until at least the first half of 2001. In the
event that the Company cannot raise capital funds after this time period, the
Company believes that it can reduce non-core-related expenditures, which will
allow it to continue its operations for sometime
9
<PAGE>
thereafter. However, that continuation may not be possible should circumstances
outside the Company's control (including, for example, changes in general
economic conditions or other matters, which adversely affect the Company's
business) significantly interfere with the Company's business.
Note 5. Other Income
In March 2000, the Company sold a portion of its New Jersey cumulative net
operating loss for one of its subsidiaries for approximately $217,000. This
amount is included in other income.
Note 6. 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 for the nine
months ended September 30,
2000 1999
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United States $ 3,948,000 $ 5,216,000
Europe/Middle East 1,945,000 1,271,000
Asia and Pacific Rim 1,863,000 1,305,000
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$ 7,756,000 $ 7,792,000
=========== ===========
Sales of the Company's cardiac electrophysiology devices and related catheters
aggregated $6,750,000 and $1,006,000, respectively, for the nine months ended
September 30, 2000 and $6,883,000 and $909,000, respectively, for the comparable
period in 1999. The Company's long-lived assets are located in the U.S.
Note 7. Subsequent Events
On November 15, 2000, the Company entered into an arms-length financing
transaction in the amount of up to $3.2 million, with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of the Company's
shareholders and one of the world's leading medical technology companies
("Medtronic"). The transaction is evidenced by a Note Purchase Agreement and
secured promissory note bearing interest at two percentage points over the prime
rate quoted by Wells Fargo Bank Minnesota, N.A. The principal and all accrued
interest on the note are to be repaid on November 15, 2003 and the note is
secured by a pledge of certain shares of stock owned by David Jenkins, the
Company's President and Chief Executive Officer, and a director and shareholder
thereof, in a privately-held company. The Company received $1.6 million at
closing and is to receive the remaining $1.6 million on or about December 29,
2000, subject to satisfaction of certain conditions contained in the Note
Purchase Agreement, including, without
10
<PAGE>
limitation, the consummation by Medtronic of an unrelated transaction with the
privately-held company the stock of which is the subject of the pledge from Mr.
Jenkins. As part of the transaction, Medtronic agreed to subordinate its rights
to repayment from the Company to existing rights of the Company's senior lender,
Fleet National Bank.
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
EP MedSystems, Inc. was formed 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 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. The Company's current products include 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 commonly sustained abnormal heart rhythm, estimated to afflict over
2,000,000 people in the United States with an estimated 345,000 new cases being
diagnosed 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 and the
Companion energy source 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 the
Company completed its clinical trial of over 150 patients and submitted its
Pre-Market Approval ("PMA") application to the United States Food and Drug
Administration (the "FDA") in September 2000. The FDA advised the Company that
expedited review would be granted for the ALERT(R) System PMA. Expedited review,
in general, means that the FDA would be expected to 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. No other legally marketed therapeutic device,
which uses low atrial defibrillation thresholds like the ALERT(R) System is
currently available for sale in the U.S. Approval to market and sell the
ALERT(R) System in the U.S. may take until the second half of 2001, if approved
at all. However, the Company is approved to market and sell the ALERT(R) System
with the CE Mark in the European Community.
11
<PAGE>
In addition, the Company is developing 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 an imaging tool in conjunction with new and
effective treatment of complex cardiac arrhythmias, including ventricular
tachyarrhythmias ("VT") and atrial fibrillation ("AF"). The Company's ultrasound
products are not approved for sale and the Company does not anticipate receiving
approval to sell these products until the first half of 2001, if approved at
all.
Forward-Looking Statements
This report contains certain statements of a forward-looking nature 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. These statements are
based on information currently available to management and on management's
beliefs and assumptions. When used in this document the words "anticipate",
"designed to", "estimate", "believe", "plans", and similar expressions are
intended to identify forward-looking statements but these are not the exclusive
means of identifying such statements. Such statements are only predictions and
are subject to risks and uncertainties and that actual events or results may
differ materially from those anticipated, estimated, or projected due to a
number of factors. In evaluating such statements, specific consideration should
be given to the various factors effecting the industry and economy generally, as
well as those identified in this report and in the Company's other reports filed
with the Securities and Exchange Commission, which could cause actual results to
differ materially from those indicated by such forward-looking statements.
Results of Operations
Net sales were $7,756,310 for the nine months ended September 30, 2000 as
compared to $7,792,278 for the prior period in 1999. The level of sales for the
remaining three months of 2000 will depend primarily on sales of the EP
WorkMate(R) and diagnostic catheters and the ability of the Company's direct
sales force and network of international independent distributors to effectively
market and sell the Company's existing products. The ALERT(R) System is not
approved for sale in the United States, but the Company completed its clinical
trial of over 150 patients and submitted a Pre-Market Approval ("PMA")
application to the United States Food and Drug Administration (the "FDA") in
September 2000. The FDA advised the Company that expedited review would be
granted for the ALERT(R) System PMA. Approval to market and sell the ALERT(R)
System in the U.S. may take until the second half of 2001, if approved at all.
However, the Company is approved to market and sell the ALERT(R) System with the
CE Mark in the European Community. While, the Company expects the ALERT(R)
System to contribute a greater proportion of revenues in 2001 and beyond, the
Company cannot accurately predict the sales level of the ALERT(R) System in
Europe for the remaining three months of 2000 at this time or when it will be
available, if at all, in the United States.
12
<PAGE>
Cost of products sold was $3,610,527 for the nine months ended September 30,
2000 (an increase of $129,750 or 4%) as compared to $3,480,777 for the same
period in 1999. Gross profit on sales for the nine months ended September 30,
2000 was $4,145,783 (or 54% as a percentage of product sales), as compared with
$4,311,501 (or 55% as a percentage of product sales) for the same period in
1999. The Company realized a decrease in gross profit on sales during this
period primarily due to the decease in domestic sales of the EP WorkMate(R),
which currently yield a higher gross margin than international sales of the EP
WorkMate(R). The Company hopes to improve its overall gross profit percentage as
sales of the ALERT(R) System and other catheter products increase, which should
offset the fixed costs, associated with maintaining a catheter manufacturing
operation.
Sales and marketing expenses were $3,636,927 for the nine months ended September
30, 2000 (an increase of $408,619 or 11%) over $3,228,307 for the comparable
prior period. The increase during this period was primarily due to the expenses
associated with increases in personnel, travel, trade show related expenses, and
product promotional expenses in support of the Company's sales efforts. The
international distribution network is currently supported by a team of direct
international sales and marketing professionals, international field clinical
engineers and administrative support personnel.
General and administrative expenses were $2,028,283 for the nine months ended
September 30, 2000 (an increase of $210,660 or 11%) as compared to $1,817,623
for the same period in 1999. The increase during this period was due to
administrative costs necessary to support the increased operations worldwide. It
is anticipated that these expenses may decline as a percentage of revenues as
incremental sales are generated.
Research and development expenses were $1,864,861 for the nine months ended
September 30, 2000 (an increase of $112,053 or 6%) as compared to $1,752,808 for
the comparable prior period. During this period, the Company incurred research
and development expenses primarily associated with the clinical trials for the
ALERT(R) System, development costs and costs of preparing regulatory submissions
for the new ultrasound imaging product line, as well as costs associated with
several new products under development. In addition, the Company has ongoing
development efforts on existing products, including the EP WorkMate(R) and the
EP-3(TM) Stimulator. The Company expects that research and development expenses
are likely to increase in future periods, in part due to ongoing expenses
related to the ALERT(R) System clinical trials, new product development
activities and regulatory applications aimed at gaining approval to sell other
new products.
The net loss for the nine months ended September 30, 2000 was $3,158,546 as
compared to a net loss of $2,443,104 during the comparable period in 1999. The
basic and diluted loss per share for the nine months ended September 30, 2000
was $0.27 per share versus $0.25 per share in 1999.
Liquidity and Capital Resources
13
<PAGE>
Since inception, the Company's expenses have exceeded its sales, resulting in an
accumulated deficit of approximately $19,824,000 at June 30, 2000.
During February 2000, the Company received $718,000 related to the exercise of
warrants that were issued in conjunction with the private placement in September
1999. Investors included in the exercise were two of the Company's institutional
shareholders and two members of its board of directors. Common stock of 205,250
shares was issued in conjunction with the exercise of the warrants. In addition,
the exercise price of the remaining unexercised warrants to purchase 362,250
shares of common stock was increased from $3.50 to $7.50 per share. The Company
used the net proceeds from the exercise of warrants for working capital
purposes.
The Company has a $2 million Revolving Credit Facility expiring March 31, 2001.
The proceeds of the revolver are intended to fund working capital purposes. As
of September 30, 2000, the amount outstanding under the facility was $1,512,000.
On November 15, 2000, the Company entered into an arms-length financing
transaction, in the amount of up to $3.2 million, with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of the Company's
shareholders and one of the world's leading medical technology companies
("Medtronic"). The transaction is evidenced by a note purchase agreement and
secured promissory note bearing interest at two percentage points over the prime
rate quoted by Wells Fargo Bank Minnesota, N.A. The principal and all accrued
interest on the note are to be repaid on November 15, 2003. The Company received
$1.6 million at closing and is to receive the remaining $1.6 million on or about
December 29, 2000, subject to satisfaction of certain conditions contained in
the Note Purchase Agreement. As part of the transaction, Medtronic agreed to
subordinate its rights to repayment from the Company to existing rights of the
Company's senior lender, Fleet National Bank. The Company used the $1.6 million
obtained in the financing to pay down the outstanding balance under Revolving
Credit Facility.
Net cash used in operating activities for the nine months ended September 30,
2000 decreased $354,000 as compared to the comparable prior period. The net use
of cash in operations for the nine months ended September 30, 2000 was primarily
due to the Company's loss from operations. Payments to related parties are made
on terms similar to those of other suppliers.
Capital expenditures, were $1,110,000 during the nine months ended September 30,
2000 as compared to $837,000 for the same period in 1999. Capital expenditures
for the nine months ended September 30, 2000 resulted from building
infrastructure improvements to the Company's manufacturing facility and
capitalization of its equipment used for demonstration purposes.
14
<PAGE>
As of the date of this Quarterly Report on Form 10-QSB, 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 Company expects its operating losses to continue in the near future as it
continues to expend substantial funds for research and development, clinical
trials in support of regulatory approvals, increased manufacturing capacity and
expansion of sales and marketing activities. The amount and timing of future
losses will be dependent upon, among other things, increased sales of the
Company's existing products, clinical approval and market acceptance of the
ALERT(R) System and developmental, regulatory and market success of new products
under development. There can be no assurance that any of the Company's
development projects will be successful or that if development is successful,
that the products will generate any sales. Based upon its current plans and
projections, the Company believes that its existing capital resources will be
sufficient to meet its anticipated operational needs for at least March 2001. In
the event that the Company cannot raise capital funds after March 31, 2001, the
Company believes that it can reduce non-core-related expenditures, which will
allow it to continue its operations for sometime thereafter. However, that
continuation may not be possible should circumstances outside the Company's
control (including, for example, changes in general economic conditions or other
matters, which adversely affect the Company's business) significantly interfere
with the Company's business.
Impact of the Year 2000
As of the date of this filing the Company has not experienced any disturbances
or interruptions 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There were no material developments in legal proceedings disclosed by the
Company in previous reports during the quarterly period ended September 30,
2000.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
For the quarter ended September 30, 2000, the Company was not in compliance with
the liquidity ratio minimum of 1.5 to 1 contained in its Term Loan Agreement and
Revolving Credit Facility with Fleet National Bank. The Company obtained $1.6
million of additional financing, as described in Management's Discussion and
Analysis, which was used to pay down the outstanding balance under the Revolving
Credit Facility thereby curing the default. The Company is in the process of
obtaining a waiver of the past default from the bank. The Compnay is in
compliance with all other debt covenants as of September 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
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(a) On July 18, 2000, the Company held its Annual Meeting of Shareholders
(the "Meeting").
(b) The matters voted upon at the Meeting included, among other things,
the election of one (1) Class II 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. Daryl D. Fry was re-elected as a Class II director and John E.
Underwood, David A. Jenkins and David W. Mortara did not stand for election at
the Meeting but their respective terms of office as directors of the Company
continued after the Meeting.
(c) The matters voted upon at the Meeting and the results thereof were as
follows:
i. Election of Darryl D. Fry as Class II Director:
For Withhold
---------- ----------
For the election as a Class II
Director
Darryl D. Fry 8,075,142 25,000
ii. Approval of an amendment to and restatement of the 1995 Long Term Incentive
Plan to broaden the powers of the Compensation Committee in their administration
of the 1995 LTIP specifically including, but not limited to, broadening the
definition of Eligible Employees to expressly include agents or consultants and
providing to the Compensation Committee the power to increase benefits accruing
to Eligible Employees without the approval of the Company's shareholders.
For Against Abstain
----------- --------- ---------
7,150,342 721,000 228,800
iii. Approval of an amendment to and restatement of the 1995 Director Plan to
broaden the powers of the Plan Committee in its administration of the 1995
Director Option Plan specifically including, but not limited to, broadening the
definition of Eligible Director to expressly include newly elected members of
the Board of Directors or members of the Board of Scientific Advisors of the
Company; providing for outstanding but unvested options to vest upon a Change of
Control; and providing to the Plan Committee the power to modify the
requirements for eligibility for participation and increase benefits accruing to
Eligible Directors without the approval of the Company's shareholders.
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For Against Abstain
----------- --------- ---------
7,749,282 332,000 18,860
iv. Ratification of the appointment of PricewaterhouseCoopers LLP, independent
public accountants, as auditors for the Company for the fiscal year ending
December 31, 2000.
For Against Abstain
8,098,782 0 1,360
(d) Not applicable.
Item 5. Other Information
On November 15, 2000, the Company entered into an arms-length financing
transaction, in the amount of up to $3.2 million, with Medtronic Asset
Management, Inc., an affiliate of Medtronic, Inc., one of the Company's
shareholders and one of the world's leading medical technology companies
("Medtronic"). The transaction is evidenced by a note purchase agreement and
secured promissory note bearing interest at two percentage points over the prime
rate quoted by Wells Fargo Bank Minnesota, N.A. The principal and all accrued
interest on the note are to be repaid on November 15, 2003 and the note is
secured by a pledge of certain shares of stock owned by David A. Jenkins, the
Company's President and Chief Executive Officer and a director and shareholder
thereof, in a privately-held company. The Company received $1.6 million at
closing and is to receive the remaining $1.6 million on or about December 29,
2000, subject to satisfaction of certain conditions contained in the Note
Purchase Agreement, including, without limitation, the consummation by Medtronic
of an unrelated transaction with the privately-held company the stock of which
is the subject of the pledge from Mr. Jenkins. As part of the transaction,
Medtronic agreed to subordinate its rights to repayment from the Company to
existing rights of the Company's senior lender, Fleet National Bank.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits will be filed as part of this Form 10-QSB:
Exhibit 10.1 Note Purchase Agreement, dated as of November 15,
2000, between the Company and Medtronic Asset
Management, Inc.
Exhibit 10.2 Secured Promissory Note, dated November 15, 2000,
issued by the Company to Medtronic Asset Management,
Inc.
17
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Exhibit 10.3 Stock Pledge Agreement, dated as of November 15,
2000, between Medtronic Asset Management, Inc. and
David Jenkins
Exhibit 10.4 Subordination Agreement, dated as of November 15,
2000, between Medtronic Asset Management, Inc. and
Fleet National Bank
Exhibit 27 Financial Data Schedule (SEC filing only)
Exhibit 99 Press Release
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EP MEDSYSTEMS, INC.
-------------------
(Registrant)
Date: November 16, 2000 By: /s/ David A. Jenkins
----------------- --------------------
David A. Jenkins
President and Chief Executive Officer
Date: November 16, 2000 By: /s/ Joseph M. Turner
----------------- --------------------
Joseph M. Turner
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
--------------- --------------------------------------------------------
Exhibit 10.1 Note Purchase Agreement, dated as of November 15, 2000,
between the Company and Medtronic Asset Management, Inc.
Exhibit 10.2 Secured Promissory Note, dated November 15, 2000, issued
by the Company to Medtronic Asset Management, Inc.
Exhibit 10.3 Stock Pledge Agreement, dated as of November 15, 2000,
between Medtronic Asset Management, Inc. and David
Jenkins
Exhibit 10.4 Subordination Agreement, dated as of November 15, 2000,
between Medtronic Asset Management, Inc. and Fleet
National Bank
Exhibit 27 Financial Data Schedule
(SEC filing only)
Exhibit 99 Press Release
19
