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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-KSB
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
0-25828
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(Commission File No.)
ELECTROPHARMACOLOGY, INC.
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(Exact name of Small Business Issuer as specified in its charter)
Delaware 954315412
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2301 N.W. 33RD COURT, SUITE 102, POMPANO BEACH, FLORIDA 33069
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (954) 975-9818
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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, 1996 is 2,149,011.
The aggregate market value of the registrant's Common Stock held by non-
affiliates as of March 27, 1997 was approximately $1,667,174. As of March
27, 1997 there were 3,540,179 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference:
NONE
______________________________________________________________________________
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Electropharmacology, Inc. (the "Company") is engaged in developing,
manufacturing and marketing medical devices that deliver pulsed electromagnetic
signals ("PEMS-TM-") in the radio frequency range. The Company was incorporated
under the laws of the State of California in August 1990 under the name Magnetic
Resonance Therapeutics, Inc., and was reorganized through a merger with and into
Electropharmacology, Inc., a Delaware corporation, in February 1995. The
Company's executive offices are located at 2301 NW 33rd Court, Suite 102,
Pompano Beach, Florida 33069, and its telephone number is (954) 975-9818.
The Company's product, which is marketed under the name SofPulse-TM-, is an
easy to operate, non-invasive device that delivers pulsed radiofrequency ("PRF")
energy. The Company has focused on PEMS-TM- that combine selected pulse forms
and amplitudes to produce certain radio frequency energy fields that are
believed to affect superficial soft tissues. In January 1991, the FDA advised
the Company of its determination, pursuant to the premarket notification
provisions under Section 510(k) of the FDC Act, to treat the MRT100, the first
model of the SofPulse-TM-, as a class III device. (See "Description of
Business -- Government Regulation"). To date, the Company's focus has been the
application of PEMS-TM- as an adjunct in the palliative treatment of pain and
edema associated with various medical conditions that involve superficial soft
tissue injury. Edema is localized tissue swelling resulting from an abnormal
accumulation of fluid in the tissue and frequently represents an obstacle to the
achievement of effective healing of soft tissue damages from conventional
medical treatment. Edema can also result in a permanent loss of range of
motion. Since PRF can be administered through clothing, casts or dressings, the
SofPulse-TM- can be conveniently used immediately following trauma or surgery.
The Company believes that the SofPulse-TM- is a cost-effective adjunct for the
palliation of pain and edema without any known significant adverse effects.
PEMS-TM- treatment is based on broadcasting pulsed electromagnetic fields
to achieve therapeutic benefits when applied to superficial soft tissue. To
date, the SofPulse-TM- has been used as an adjunct for palliative treatment of
postoperative pain and edema in various superficial soft tissues that suffer
damage in medical conditions such as acute or chronic (non-healing or
recalcitrant) skin ulcers, edema and pain resulting from trauma of hand and
ankle, pain associated with sprains of the lower back, and pain and edema
following reconstructive and plastic surgery. The traditional treatment of pain
and edema generally involves a combination of analgesic and anti-inflammatory
drugs and superficial approaches such as the application of ice packs. PEMS-TM-
has been used by clinicians as an adjunct to these other approaches.
The Company's principal marketing efforts are directed toward health care
professionals and providers engaged in medical and health care practices. The
Company's strategy has been to market the SofPulse-TM- to nursing homes and
hospitals with access to substantial numbers of patients and, to a lesser
extent, to plastic, reconstructive and orthopedic surgeons. The Company has
focused on promoting rentals as part of its pricing and marketing strategies
whereby the user is billed by the Company, on a monthly basis, for the actual
length of time that the SofPulse-TM- is used by the clinicians to treat
patients. As part of its education, marketing and promotional strategy, the
Company disseminates information it receives from the clinicians to the medical
community through summary case reports, Continuing Educational Unit courses and
advertisements in professional journals. (See "Description of Business --
Marketing and Sales").
The Company's objective is to establish PEMS-TM- delivery by the
SofPulse-TM- as a recognized modality used by physicians and other health care
practitioners, including physical therapists, occupational therapists and other
professionals, to treat postoperative pain and edema. Since its introduction in
commercial marketing, the SofPulse-TM- has been used to administer more than
250,000 treatments to thousands of patients. In order to expand further the use
of this non-invasive treatment modality, the Company has continued to expand its
technology base so that it may design proprietary devices suitable for the
delivery of various signals to (i)
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different anatomical locations of the body, and (ii) aid in the
healing or regeneration of damaged tissues. The Company intends to
conduct clinical evaluations of specific PEMS-TM- in medical
conditions where the reduction of pain and edema is desirable for
improved patient outcomes as well as in additional markets that may be
addressed by broader use of its proprietary signals in tissue
regeneration. In order to improve its competitive advantage in the
expanded market segments in the future, the Company intends to expand
its patent portfolio, which currently consists of two issued U.S.
patents and several pending patent applications in the U.S. and in
certain foreign countries. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Description of
Business -- Patent Protection and Proprietary Information").
The Company's principal sources of revenue have been rental fees charged to
nursing homes and hospitals for the use of the SofPulse-TM- and revenue
generated from sales of the SofPulse-TM- to certain distributors and surgeons.
(See "Description of Business -- Company Revenue"). As of March 31, 1997, the
Company had 364 of the SofPulse-TM- devices under rental agreements, and sold an
additional 104 SofPulse-TM- devices. To date, the Company has generated limited
revenue from sales and rentals of the SofPulse-TM-, which has achieved only
limited market acceptance. Expanding market penetration for the SofPulse-TM- is
expected to require substantial marketing efforts and the expenditure of
significant funds in order to demonstrate the technological advantage and
clinical benefit of the PEMS-TM- modality to the clinicians. There can be no
assurance that the therapeutic use of PRF energy underlying the PEMS-TM-
modality will become a generally accepted medical practice for which
reimbursement by third party payors is available. Further, there can be no
assurance that the Company's efforts will result in successful market
penetration and increased revenue from sales and rentals of its products, or
that the Company will be successful in expanding its technology base.
RECENT DEVELOPMENTS
In March 1997, the Company, in an effort to reduce expenses, reorganized
the responsibilities of its personnel and reduced the number of employees from
27 to 18. In order to minimize the adverse effect such reduction in personnel
may have on the Company's ability to generate revenue from marketing and sales
activities, the Company allocated three of its research and development
personnel to provide marketing support.
On March 26, 1997, Donald Soldatis resigned from his position as Chief
Financial Officer, Treasurer and Secretary of the Company. The resignation did
not result from any disagreement over accounting principles, practices or
financial statement disclosure. The Board of Directors appointed David Saloff,
who is Vice Chairman and Executive Vice President of Corporate Development of
the Company, as its acting Chief Financial Officer until a permanent replacement
can be found.
On April 1, 1997, Joseph Mooibroek resigned from his positions as Chairman
of the Board, President and Chief Executive Officer of the Company and entered
into a severance agreement with the Company. (See "Executive Compensation --
Employment Contracts, Terminations of Employment and Change of Control
Agreements"). The Board of Directors appointed Dr. Arup Sen, who was serving as
Executive Vice President of Research, Development, Regulatory and Clinical
Studies of the Company, as the new Chairman of the Board, President, Chief
Executive Officer and Secretary of the Company.
BACKGROUND OF PEMS-TM- TECHNOLOGY
Low frequency pulsed electromagnetic fields ("PEMF") have been used since
1977 in the treatment of nonunion bone fractures (i.e., fractures which refuse
to heal) and is administered principally through the use of coils attached to
(or implanted in) the patient in close proximity to the site of the fracture.
Over the past 20 years, clinical research in the field of PEMF has reported that
the use of pulsed electromagnetic fields promotes the healing of non-union bone
fractures. Although, the efficacy of this modality is not well established with
detailed scientific research. The U.S. Food and Drug Administration (the "FDA")
has granted a number of PEMF related product approvals in response to premarket
approval ("PMA") applications submitted by various companies. Direct electrical
stimulation ("E-Stim") by galvanic currents, which has been used since the
1960's to achieve beneficial effects on muscle
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and other soft tissues, is administered by placing electrodes in
direct contact with the tissue by the use of conductive gels and
garments. By contrast, the SofPulse-TM- utilizes a radio frequency
generator to create high frequency pulsed electromagnetic energy
fields, or PRF, that can be delivered to the patient's injury site
without actual physical contact, since PRF energy can radiate through
non-conductive media.
The majority of radiofrequency treatments utilizing PEMS-TM- technology
(pulsed and continuous fields) is presumed to cause tissue heating and is
accordingly referred to as "diathermy." Published research studies in
laboratory animal models and reports from clinicians who have used PRF in
various clinical situations over the past 30 years indicates that, depending on
the frequency or the amplitude and the total dosage of PRF fields delivered,
varying degrees of tissue heating may be achieved. By contrast, the
SofPulse-TM- delivers pulsed energy fields that are believed not to cause such
heating and, as such, this modality is called "diathermy - nonthermal." As a
result, many of the contraindications (i.e., clinical indications where a
product may not be used) that are based upon potential adverse effects
associated with tissue heating (for example, hemorrhage and use with wet
dressings or bandages) caused by the use of traditional shortwave diathermy
devices are not encountered with the use of the SofPulse-TM-.
THE SOFPULSE-TM-
The SofPulse-TM- is a compact, easy to operate, non-invasive medical device
designed to deliver pulsed electromagnetic energy fields to soft tissue for the
postoperative treatment of pain and edema. The Company markets the SofPulse-TM-
as a device for treating pain and edema in soft tissue without any known
significant adverse effects.
The SofPulse-TM- consists of a compact electronic console ("Generator") and
a nine-inch diameter circular treatment head ("Applicator") that can be combined
to fit an arm (to mount the Applicator) and a cart (to mount the arm and house
the Generator) assembly designed by the Company. The Generator, which weighs
under 14 pounds and measures 12" x 12" x 7", is a solid state RF generator that
operates at a frequency of 27.12 MHz. This frequency is approved by the Federal
Communications Commission ("FCC") and is recognized in the industry as the radio
frequency band for medical applications. The Generator supplies radio frequency
power to a coil in the Applicator that produces a PRF field able to penetrate
into superficial soft tissues. The Generator also contains controls that can be
used to adjust (i) the number of pulses per second, (ii) the peak power output,
(iii) the length of treatment, and (iv) a clock counter that records the total
time use of the SofPulse-TM-. The SofPulse-TM- offers six settings for
controlling pulses per second, which settings range between 80 and 600 pulses
per second. There are also six settings for controlling peak power output,
which settings range between 174 and 363 watts. The pulse width is 65
microseconds. The combination of pulse and power settings is used by the
clinician to estimate the total amount of energy that is applied to the
treatment area. Because the energy is pulsed (i.e., on for 65 microseconds,
then off for a longer period, then on again, etc.), at the highest repetition
rate of 600 pulses per second, the SofPulse-TM- will emit energy for only
approximately 4% of the time during use. Accordingly, the SofPulse-TM-
treatment is sometimes referred to as nonthermal diathermy since it is not
expected to produce the deep tissue heating that is generally produced by
traditional diathermy devices, which carry certain contraindications and
warnings associated with the adverse effects of tissue heating.
To use the SofPulse-TM-, a licensed clinician places the center of the
Applicator in close proximity to the superficial tissue site where the patient
presents pain or edema. PEMS-TM- is administered through clothing, casts and
dressings, permitting convenient use even immediately following surgery or the
application of a new dressing. Each treatment is typically 30 minutes in
duration. The number of treatments is dependent upon the medical diagnosis made
by the licensed clinician who is responsible for and monitors the progress of
the patient.
Since receiving the right to commercialize its device under FDA regulations
(see "Description of Business -- Government Regulation"), the Company has
continued to improve certain features related to the reliability, safety and
ease of use of its product, including (i) design improvements that require less
power to
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generate the intended electromagnetic field, (ii) reduction of weight
of the Generator, (iii) reduction of the cost of manufacturing, (iv) reduction
of magnetic interference, and (v) introduction of an integrated output meter
that can inform the user of the electromagnetic field being produced by a unit.
The Company commenced production and marketing of the current SofPulse-TM- Model
912 in October 1993, replacing previous models designated 911 and MRT100. The
Company is developing a new model that it expects will require less power and,
thus, its Generator would be able to deliver power to more than one Applicator
to treat multiple sites simultaneously. (See "Description of Business --
Research and Development").
The Company warrants the SofPulse-TM- to be free from defects in
materials and workmanship for a one-year period. The Company services
the SofPulse-TM-units, at its expense, during the term of any rental.
Replacement parts are furnished to customers if it is determined that
the service is relatively minor (such as the replacement of a cable or
fuse). All other repairs generally require replacing the unit and
repairing the product at the Company's facility in Florida. To date,
the Company estimates that its service related expenses are about $40
per unit.
COMPANY REVENUE
The Company's principal sources of revenue have been rental fees charged to
nursing homes for use of the SofPulse-TM- and revenue generated from sales of
the SofPulse-TM- to certain distributors and surgeons. The Company's pricing
and marketing strategies are market dependent and include rentals and sales.
The Company intends to evaluate and modify, if necessary, such strategies for
corporate alliance opportunities for marketing or distribution of the
SofPulse-TM-.
The Company's pricing policy is based on several factors that include
reimbursement by third party payors, private health care insurers, U.S. or
international market variations, volume, national contracts and other
variables. Rental charges are determined on a per "use" basis and typically a
30 minute treatment is billed at $18.00 to the user. At the present time,
the average monthly rental charges billed to the users is approximately $600
per device. Based on the Company's experience to date, the Company believes
that it may be able to recoup its cost of manufacturing the SofPulse-TM-
unit within about four months of renting the unit.
The Company rents SofPulse-TM- devices to nursing homes, hospitals, pain
clinics, rehabilitation centers and plastic/reconstructive and orthopedic
surgeons, all of which are billed on a per "use" basis. Rental agreements with
its customers are generally on a month-to-month basis. A tamper-proof time
clock in the SofPulse-TM- enables the Company to monitor and bill for rental
usage of the device. Company personnel and independent sales representatives
monitor clock readings and transmit results to the Company on a monthly basis.
The SofPulse-TM- Model 912 carries a sales list price of $28,000, although the
Company offers discounts in most cases where a distributor or a customer orders
multiple units. As of March 31, 1997, the Company had sold 104 of the
SofPulse-TM- units at an average price of $15,000 per unit.
MARKETING AND SALES
STRATEGY. The Company's principal marketing efforts are directed toward
health care professionals. The Company's goal is to market the SofPulse-TM- to
nursing homes and hospitals where substantial numbers of patients may benefit
from the SofPulse-TM- treatment, to the home health care market where patients
may continue the SofPulse-TM- treatment after being released from hospitals, and
to surgeons in several subspecialties (maxillofacial, aesthetic, emergency and
reconstructive) where the SofPulse-TM- may help in treating edema or pain and
help patients to recover from their medical condition. The Company's marketing
strategy is based to a significant extent upon the availability of reimbursement
by third party or private payors for the cost of using the SofPulse-TM-. (See
"Description of Business -- Third Party Reimbursement"). The Company's
objective is to establish the SofPulse-TM- therapy as a standard treatment that
physicians and other health care providers use for postoperative pain and edema.
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TARGET MARKETS. The Company has focused its initial marketing efforts on
nursing homes and selected surgeon subspecialties. Potential markets identified
by the Company include hospitals and individuals receiving home care.
NURSING HOMES. The Company believes that nursing homes utilize various
therapies intended to improve patient care, the costs of which are
reimbursable. The Company markets the SofPulse-TM- to doctors, nurses,
physical therapists and nursing home administrators through on-sight
presentations by Company personnel and independent sales representatives.
The Company believes there are currently approximately 16,000 nursing homes
operating in the U.S.
SURGEONS. The Company believes that the SofPulse-TM- may have a potential
market in a number of surgical subspecialties. The Company intends to
market the SofPulse-TM- to more than 25,000 plastic/reconstructive and
orthopedic surgeons practicing in the U.S. To date, the cost of the
SofPulse-TM- therapy following plastic/reconstructive and orthopedic
surgery has been reimbursed by Medicare, private insurance carriers, and
private payors.
HOSPITALS. The Company has identified hospitals as a potential market for
the SofPulse-TM-. However, a hospital's decision to purchase or rent new
medical equipment is often lengthy and requires the approval of hospital
administration. Consequently, there can be no assurance that the Company
will be able to achieve significant, if any, penetration in the hospital
market.
HOME CARE. The Company has also identified the large number of patients
receiving home care as a possible market for the SofPulse-TM-. A few
selective treating physicians have prescribed the SofPulse-TM- for home use
on a new indication basis. Medicare currently does not provide
reimbursement for the cost of the SofPulse-TM- for home use. (See
"Description of Business -- Third Party Reimbursement").
SALES AND RENTALS. The Company engages independent sales representatives,
direct sales representatives and independent distributor groups in various
regions throughout the U.S. for marketing the SofPulse-TM-. Sales
representatives and distributors are paid on a commission basis (generally 20 to
25% of the Company's revenue attributable to the SofPulse-TM- revenue) and are
generally responsible in their respective geographic markets for identifying,
placing and promoting the utilization of the SofPulse-TM- devices in nursing
homes and hospitals, and with physicians and other health care providers. As of
March 31, 1997, the Company had agreements with 4 independent sales
representatives, 2 direct sales representatives and 14 distributor groups. The
Company's independent sales representatives and distributors represent and deal
in various medical product lines, none of which, in the opinion of the Company's
management, compete directly with the Company's products.
The Company has received certification from the Canadian Standards
Association to market the SofPulse-TM- in Canada, and has received a notice of
completion of investigation stating that the SofPulse-TM- complies with
applicable requirements to receive the certification, UL marking, by the
Underwriter Laboratories, Inc. The Company plans to enter into other foreign
markets and, therefore, will be subject to the risks associated with foreign
sales, including economic or political instability, shipping delays,
fluctuations in foreign currency exchange rates, customs duties and export
quotas and other trade restrictions, as well as foreign regulation applicable to
the sale of medical devices, all of which could require significant funds and
have a significant impact on the Company's success in international markets.
The Company has plans to add to its management staff personnel experienced in
international marketing as and when sufficient funds are available to the
Company. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
PROMOTIONAL ACTIVITIES. The Company believes that product recognition by
physicians and other health care providers is an important factor in marketing
the Company's products. The Company is focusing its marketing efforts and
promotional activities on disseminating information relating to the value of PRF
therapy and intends to promote the SofPulse-TM- by highlighting research and
clinical studies that demonstrate its efficacy. (See "Description of
Business -- Research and Development"). Other marketing efforts include
preparation of promotional brochures and participation in industry conferences
and trade shows.
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The Company's marketing efforts are directed toward adding a non-invasive
method to the currently available remedies used by clinicians to treat pain and
edema. As is typically the case with an emerging medical treatment, demand and
market acceptance for newly introduced medical products is subject to a high
level of uncertainty. Physicians are generally reluctant to use new medical
technology until its safety, efficacy and cost-effectiveness have been
demonstrated by clinical studies published in respected scientific and medical
journals. There can be no assurance that the SofPulse-TM- therapy will become
an accepted medical practice or that the Company's efforts will result in
successful product commercialization of the SofPulse-TM-.
RESEARCH AND DEVELOPMENT
Since 1992, the Company has engaged various independent research groups and
also conducted certain research studies in-house aimed at the development and
evaluation of various PEMS-TM- in laboratory test systems and in animal models.
These efforts have led to the development of certain know-how relating to the
biological effects of PEMS-TM- that may have clinical utility in tissue healing
either by directly promoting cell growth or by indirect mechanisms such as an
increase in blood supply to treated areas. The Company intends to conduct
additional studies of PEMS-TM- in order to identify its commercial feasibility,
although there can be no assurance that any commercial applications will be
found or that, if found, such applications can be commercialized to the
Company's benefit. In order to pursue the potential of PEMS-TM- in a broad
range of medical applications that the Company believes to be feasible, the
Company intends to seek research grants, including Small Business Innovations
Research grants from governmental agencies and strategic corporate partnerships
for joint research and development programs, although there can be no assurance
that the Company will be successful in any such effort. Even if the results of
the Company's research indicate the potential for additional medical
applications of PEMS-TM-, significant additional funds and time will be required
to commercialize successfully potential products in the large, potentially world
wide markets of tissue healing. (See "Description of Business -- Government
Regulation").
From August 1994 to December 1995, in anticipation of a potential order
from the FDA requiring the submission of an application documenting the safety
and effectiveness of the Company's SofPulse-TM- product (the "PMA application"),
the Company designed and conducted through third party researchers at various
university and hospital sites in the U.S. and Canada a double-blind, randomized,
multi-center clinical study aimed at evaluating the safety and efficacy of the
SofPulse's-TM- treatment of pain and edema in grades I and II ankle sprains. In
1996, the Company issued press releases and stated in certain scientific
publications submitted by the Company's personnel and affiliates that a
statistically significant or "robust" effect was observed with respect to the
reduction of edema as a result of the treatment as compared to the control group
in a sub-population of patients. Based on such initial analyses, the Company
also had contemplated conducting certain small-scale, confirmatory studies that
the Company had believed could yield results with respect to the efficacy of the
SofPulse-TM- treatment of pain for a proposed submission of a PMA application if
required by the FDA. In February 1997, the Company completed, and publicly
announced, a rigorous and detailed evaluation of the results of this clinical
study and concluded that the earlier claims of statistically significant or
"robust" reduction of edema in Grades I and II ankle sprain by the SofPulse-TM-
treatment could not be substantiated, that published reports (including one in
the Journal of Athletic Training) claiming edema reduction presumably were based
on the inclusion of patient data with incorrect measurements and that the
results of this clinical study or any supplementary confirmatory study
contemplated by the Company would not support a satisfactory application if
required by the FDA. The Company has discontinued any further effort with, or
use of results from, this clinical study and intends to conduct new clinical
trials for one or more submissions to the FDA, if required. However, there can
be no assurance that such trials can be completed and that, if completed, would
yield results that would support the submission of a satisfactory application
to the FDA if required. The Company paid, excluding internal expenses, an
aggregate of approximately $650,000 in payments to outside third parties in
connection with agreements with institutions and outside consultants and other
expenses with respect to this clinical study.
From late 1992 to September 1996, Dr. Arthur A. Pilla, a former director
and former Chairman of the Company's Scientific and Medical Advisory Board,
conducted, supervised, reviewed and analyzed research for the Company at Mount
Sinai Medical Center, primarily in connection with evaluating the effectiveness
of different electromagnetic signals on an animal model that assesses bone
fracture healing. Dr. Pilla has communicated to the
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Company, based on such research, that certain of the SofPulse-TM-
signals increase the healing of animal tissue and bone repair which
results are currently being evaluated by the Company. Dr. Pilla also
presented certain reports, based on his analysis of the Company's
clinical trials, that claimed a statistically significant reduction in
edema by SofPulse-TM- treatment. These claims have subsequently been
determined by the Company to be incorrect. To date, the Company has
paid approximately $750,000 in connection with such research and
consulting services. The Company notified Dr. Pilla in January 1997
of its intent to terminate the Company's agreements with Dr. Pilla,
which termination has been confirmed by Dr. Pilla. However, there are
certain outstanding disagreements that have yet to be resolved between
Dr. Pilla and the Company.
Pursuant to a research agreement executed by the Company in late 1993,
certain laboratory research was conducted at the University of Kentucky on nerve
cell and nerve fiber growth and regeneration. The Company paid approximately
$100,000 for this research. The Company is evaluating such results but does not
know if they will have commercial feasibility. Starting in August 1993, the
Microvascular and Physiological Studies Unit conducted a preliminary research
study at the Miami Heart Institute to document the effects of PRF therapy on
healthy subjects and vascularly impaired patients with wounds to determine
whether and to what extent PRF therapy increases blood flow in such patients.
The results of the first two studies, published in peer-reviewed scientific
journals, indicate that PRF signals may increase blood flow in healthy subjects
and vascularly impaired patients. The Company paid approximately $40,000 in
connection with these studies.
For the years ended December 31, 1994, 1995 and 1996, the Company expended
approximately $949,820, $1,690,163 and $815,722, respectively, on research and
development, primarily in connection with its PMA application and new product
development. There can be no assurance that the Company will be able, for
financial or other reasons, to complete its research and clinical studies and
file a PMA application for the SofPulse-TM- for any of its intended uses.
The Company's future growth depends on the successful development and
introduction of new products, the enhancement of existing products, including
the development of portable units and products complemented with novel software,
and the adaptation of existing products for new clinical indications. The
Company intends to enhance continually its products and adapt its products for
specific market applications. The Company's proposed products include:
SOFTWARE BASED SOFPULSE-TM-. The Company has developed prototypes for a
second generation of the SofPulse-TM- 912 with certain software that
control and monitor certain of the functions of the device. The prototype
is currently under evaluation by the Company.
SOFDOSE-TM-. The Company is developing a portable hand-held SofPulse-TM-
and a miniaturized, battery operated SofPulse-TM- model that would use
smaller Applicators. The Company intends to incorporate in the SOFDOSE
device the ability to deliver PEMS-TM- that may have additional market
applications, including convenience for home use and promotion of healing
of tissues and bone fractures. The Company may seek a relationship with a
corporate partner for the development and commercialization of one or more
market applications of such product(s), although there can be no assurance
that such a partner can be found.
To the extent the Company proposes to market new medical devices, if
successfully developed, or adapt its existing products for new uses, the
Company may be required to comply with the requirements, among others, to
conduct preclinical and clinical studies necessary to determine the safety
and effectiveness of its products for such intended uses and submit
information based on such studies to the FDA, which has the sole authority to
determine whether a device is safe and effective for its intended use prior
to marketing. (See "Description of Business -- Government Regulation").
The Company's agreements with its consultants generally provide that
title to any reports, inventions, discoveries, improvements or modifications,
whether patentable or not, that are conceived or reduced to practice by the
consultant and that are used or usable by the Company shall be the property
of the Company. Generally, pursuant to the Company's research and study
agreements with institutions, title to all inventions and discoveries made by
an institution resulting from the research performed will be property of the
Company, provided that the Company grants
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the institution an option to negotiate royalty-bearing licenses in
non-competitive areas to commercialize any product resulting from such
invention or discovery conceived or reduced to practice. The Company has
filed patent applications in the U.S. Patent & Trademark Office and in
certain foreign countries, claiming certain products, methods and the like
based on the results of some of the research and development conducted by or
on behalf of the Company. The Company is the assignee of two issued U.S.
patents and certain patent applications in the U.S. and certain foreign
countries. (See "Description of Business -- Patents and Proprietary
Information").
MANUFACTURING AND SUPPLIERS
The Company will continue to use third party suppliers for the supply of
components incorporated in the SofPulse-TM-. The Company has used a contract
manufacturer for the supply of some of the SofPulse-TM- units that have been
marketed by the Company. The carts, plastic molded cradles and
counter-balanced arms incorporated into the SofPulse-TM- are manufactured and
obtained from sole suppliers. The Company has been informed by the
manufacturer of the counter-balanced arm that the manufacturer will
discontinue manufacturing the arm during 1997. Therefore, the Company is
seeking other alternatives in design and supply of the arm. However,
management does not believe failure by its suppliers to continue to supply
the Company with components would have a material adverse effect on the
Company. While the Company believes that alternative sources are currently
available for all components of the SofPulse-TM-, including RF Generators and
Applicators, the Company's business is generally subject to the risk of price
fluctuations and periodic shortages of components. The Company has no
long-term supply agreements with any of its suppliers and, accordingly,
purchases components pursuant to purchase orders placed from time to time in
the ordinary course of business. Failure or delay by suppliers in supplying
necessary components to the Company could adversely impact the Company's
ability to obtain and deliver products on a timely basis.
The Company has previously purchased about 255 units of MRT SofPulse-TM-
Model 912 devices and discussed certain terms for the future purchase of
SofPulse-TM- devices from a third party vendor who is a manufacturer of
electronic devices. The Company's discussions relating to such purchase have
included terms for mutual exclusivity, use of proprietary design features,
production in compliance with regulatory guidelines, possible royalty payments
for use of the vendor's proprietary features, if any, and the like. However,
no royalty rates or alternative minimum purchase orders have been agreed upon
between the Company and the vendor and the Company has not accrued any reserves
for royalty payments owed, if any, or provisions for minimum purchase beyond the
requirements of the Company in its normal course of business. Each of the
Company and the vendor has continued to improve upon the documentation and other
manufacturing practices in order to comply with regulatory guidelines.
The Company currently employs one individual engaged in quality control and
inspections of the Company's products for conformity with the Company's
specifications. The Company oversees manufacturing of its products, third party
suppliers and manufacturers to ensure compliance with the FDA's Good
Manufacturing Practices. The Company's quality control operation involves the
certification of each component, a series of quality specification measurements,
and various other tests to verify final performance specifications. (See
"Description of Business -- Government Regulation").
COMPETITION
The medical products market is highly competitive. Diapulse Corporation of
America, Inc. manufactures and markets devices that are substantially equivalent
to the Company's SofPulse-TM- device. (See "Legal Proceedings"). A number of
other manufacturers, both domestic and foreign, and distributors market
shortwave diathermy devices that produce deep tissue heat and that may be used
for the treatment of certain of the medical conditions in which the Company's
SofPulse-TM- device is also indicated. These other devices have certain
limitations to their clinical use imposed by the FDA and carry certain
contraindications associated with tissue heating. There can be no assurance
that other technologies or products that are functionally similar to those of
the Company are not currently under development. The Company's products also
face competition from other forms of treatment such as hyperbaric oxygen
chambers, thermal therapies and hydrotherapy. Other companies with
substantially larger expertise or resources than that available to the Company
may develop or market new products that directly market the SofPulse-TM-. In
addition, other
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forms of treatment that compete with the Company's PRF treatment may
achieve rapid acceptance in the medical community.
Several other companies manufacture medical devices based on the
principle of electromagnetic force technologies for applications in bone
healing and spinal fusion, and may adapt their technologies or products to
compete directly with the SofPulse-TM-. These companies include Orthologic
Corp., Electro-Biology, Inc., a subsidiary of Biomet, Inc., Orthofix, Ltd.,
and Biomagnetics, Inc. The Company is also aware of other companies that
manufacture and market thermal devices in the same target markets as the
Company. Certain of these companies have significant product sales and may
have greater financial, technical, personnel and other resources than the
Company. Also, universities and research organizations may actively engage
in research and development to develop technologies or products that will
compete with the Company's products.
The medical products market is characterized by rapidly changing technology
that may result in product obsolescence or short product life cycles. The
Company's ability to compete will be dependent on the Company's ability to
enhance continually and improve its products and to develop successfully or
acquire and market new products. There can be no assurance that the Company
will be able to compete successfully, that competitors will not develop
technologies or products that render the Company's products obsolete or less
marketable or that the Company will be able to enhance successfully its existing
products or develop or acquire new products.
The Company competes on the basis of the strength of its marketing and
sales force and to a lesser extent on price, quality and service. The Company
believes that the SofPulse-TM- offers advantages over competing products,
including size, reliability and ease of use. The Company also believes that it
will have a significant marketing advantage over competitors seeking to enter
markets if the Company is successful in filing and obtaining product approval,
based on a PMA application, from the FDA. (See "Description of Business --
Government Regulation").
GOVERNMENT REGULATION
The manufacture and marketing of medical devices, including the Company's
products, is subject to various federal and state regulations in the U.S. and in
foreign countries. The U.S. Food, Drug and Cosmetic Act (the "FDC Act"), the
Public Health Service Act, the Safe Medical Devices Act and its amendments, the
Federal Communications Commission regulations, the Occupational Safety and
Health Act and other federal and state statutes and regulations govern or
influence various aspects of the Company's operations, including the
commercialization of its products. Non-compliance with applicable regulations
can result in fines, civil penalties, injunctions, suspension or loss of
regulatory approvals, recall or seizure of products, revocation of the right to
market products, operating restrictions or restrictions on the ability of the
Company to enter into supply contracts, and the right to promote products in one
or more market segments.
Under the FDC Act, all medical devices are classified into three
categories, class I, II or III devices. A class II device is a device whose
safety and efficacy can be verified by established and currently accepted
standards. A class III device, on the other hand, is subject to the most
stringent review among medical devices, requiring that the safety and efficacy
of a device for its intended use be established through a PMA application filed
with the FDA before commencement of marketing, sales and distribution in the
U.S. However, the FDA has permitted the marketing, without having to obtain
prior approval upon filing of a PMA application, of certain class III medical
devices in cases in which it finds, pursuant to a premarket notification under
Section 510(i) of the FDC Act, that the subject device is "substantially
equivalent" to a device lawfully marketed for the selected indication prior to
1976.
In January 1991, the FDA advised the Company of the FDA's determination,
pursuant to the premarket notification provisions under Section 510(k) of the
FDC Act, to treat the MRT100, the first model of the SofPulse-TM-, as a class
III device. However, in April 1994, the FDA's Office of Device Evaluation
published a notification that may require the Company to submit information
based on clinical studies to establish independently that the SofPulse-TM- is
safe and effective for its intended use. In accordance with the FDC Act, the
FDA's rule making activities involve the publication of proposed regulations,
followed by solicitation of comments from the public and, thereafter, the
adoption of final regulations. As of March 31, 1997, the FDA had not yet
published proposed regulations indicating whether
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the Company will be required to comply with the FDA's PMA application
requirements. If the adoption of the final regulations with regard to
all class III medical devices requires the submission of satisfactory
PMA applications, then the Company would have the option to submit a
summary of and citation to information known or available to the
Company concerning the device, including information on its safety and
effectiveness, if available. After reviewing the data, the FDA would
issue proposed regulations determining whether the subject device will
remain in class III or be down-classified into class II. If the
SofPulse-TM- is deemed to be a class III device after such review,
then the Company would be required to submit a PMA application with
the FDA within 90 days of such proposed regulation. The inability of
the Company to submit a satisfactory PMA application within 90 days
of such decision, or a subsequent determination by the FDA that the
data provided by the Company in the PMA application does not satisfy
the requirement relative to the safety and effectiveness of the
SofPulse-TM- for its intended use, would prevent the Company from
continuing to market the SofPulse-TM-. Inability to market the
SofPulse-TM- would have a material adverse effect on the Company,
including possibly the need to curtail substantially its operations.
There can be no assurance that the Company will be able, for financial
or other reasons, to complete successfully clinical studies and file a
PMA application within the time ultimately prescribed by the FDA.
Failure to complete research and clinical studies and file such PMA
application could result in the revocation of the Company's Section
510(k) approval and otherwise prevent the Company from marketing and
generating any revenue from sales and rentals of the SofPulse-TM-
until a PMA application is filed and approved by the FDA. The FDC Act
provides that if the Company files its PMA application within 90 days
following the adoption of final regulations by the FDA, it will be
able to continue to market the SofPulse-TM- pending FDA approval.
The process of submitting a satisfactory PMA application is significantly
more expensive, complex and time consuming than the process of establishing
"substantial equivalence" to a device marketed prior to 1976 pursuant to the
Section 510(k) premarket notification, and requires extensive research and
clinical studies. Randomized, placebo-controlled, double-blind clinical studies
may need to be performed under a clinical protocol with assurance of adherence
to the protocol, informed consent from subjects enrolled in the study, approval
of the Institutional Review Board at each of the centers where the study is
being conducted, maintenance of required documentation, proper monitoring and
recording of all data, and sufficient statistical evaluation to determine if the
results of the treatment with the device are statistically significant in
improving patient outcome compared to the patients who did not receive the
treatment. Upon completion of these tasks, an applicant is required to assemble
and submit to the FDA all relevant clinical, animal testing, manufacturing,
laboratory specifications and other information. The submission is reviewed at
the FDA, which determines whether or not to accept the application for filing.
If accepted for filing, the application is further reviewed by the FDA and
subsequently may be reviewed by an FDA scientific advisory panel comprised of
physicians, statisticians and other qualified personnel. A public meeting may
be held before the advisory panel in which the PMA application is reviewed and
discussed. Upon completion of such process, the advisory panel issues a
favorable or unfavorable recommendation to the FDA or recommends approval with
conditions. The FDA is not bound by the opinion of the advisory panel. The FDA
may conduct an inspection to determine whether the Company conforms with current
Good Manufacturing Practice ("GMP") regulations. If the FDA's evaluation is
favorable, the FDA will subsequently publish a letter approving the PMA
application for the device for a mutually agreed upon indication of use.
Interested parties can file comments on the order and seek further FDA review.
The PMA process may take several years and no assurance can be given concerning
the ultimate outcome of PMA applications submitted by an applicant.
In the event the Company proposes to market new medical devices, if
developed or acquired, or adapt its current products for a new use, the FDA may
require the Company to comply with Section 510(k) or PMA requirements to
establish independently that a device is safe and effective for its intended
use.
After regulatory approvals are obtained, a marketed product and its
manufacturer are subject to continuing regulatory review. The manufacture of
the SofPulse-TM- is subject to GMP regulations of, and periodic compliance
inspections by, the FDA. The Company may become subject to pre-approval
inspections by the FDA prior to commercial manufacture of future products. The
Company is required to register as a medical device manufacturer with the FDA
and state agencies. The Company is also subject to inspection of radiation
control by the State of Florida. Under GMP regulations, the Company is subject
to certain procedural and documentation requirements with respect to
manufacturing and control activities. The Company's suppliers may be subject to
periodic inspections by the FDA, as well as by state and foreign regulatory
authorities. The Company believes its suppliers' and
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manufacturer's manufacturing facilities are in compliance in all
material respects with all applicable local, state and federal
regulations. Failure to comply with GMP regulations, or to satisfy
FDA regulations or inspections, could subject the Company to civil
remedies, including fines, injunctions, recalls or seizures, as well
as potential sanctions, which could have a material adverse effect on
the Company.
The Company is also subject to various FDA regulations and Good Laboratory
Practices, which govern or influence the research, testing, manufacture, safety,
labeling, storage, record keeping, advertising and promotion of medical devices.
Sales of medical devices outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. The Company has obtained
approval from the Canadian Standards Association ("CSA") to market the
SofPulse-TM- in Canada and received notification from the Underwriters
Laboratories Inc. ("UL") that the SofPulse-TM- complies with applicable
requirements for UL marking. The CSA and UL marking signify compliance with
certain national standards deemed desirable for electronic equipment, although
any benefit to sales or marketing of the SofPulse-TM- device cannot be assured
by the Company. The Company has initiated quality systems review for ISO 9000
certification and has plans to seek a CE mark for European product sales
required in 1998. There can be no assurance that the Company will be successful
in obtaining and maintaining necessary approvals to market the SofPulse-TM-, or
additional products that are developed or acquired by the Company, in foreign
markets.
THIRD PARTY REIMBURSEMENT
In the U.S., health care providers, such as hospitals and physicians, that
purchase or lease medical devices such as the Company's products generally rely
on third party payors, principally Medicare, Medicaid and private health
insurance plans, including health maintenance organizations, to reimburse all or
part of the cost of the treatment for which the medical device is being used.
Successful commercialization of the Company's products will depend in part upon
the continuing availability of reimbursement for the cost of the treatment from
third party health care payors such as Medicare, Medicaid and private health
insurance plans, including health maintenance organizations. Such third party
payors have increasingly challenged the costs of medical products and services,
which have and could continue to have a significant effect on the ratification
of such products and services by many health care providers. Several proposals
have been made by federal and state government officials that may lead to health
care reforms, including a government directed national health care system and
health care cost-containment measures. The effect of changes in the health care
system or method of reimbursement for the Company's SofPulse-TM- product or
future products cannot be determined.
While third party payors generally make their own decisions regarding which
medical procedures and services to cover, Medicaid and other third party payors
may apply standards similar to those used by Medicare in determining whether to
provide coverage for a particular procedure or service. The Medicare statute
prohibits payment for any medical procedures or services that are not reasonable
and necessary for the diagnosis or treatment of illness or injury. The Health
Care Financing Administration ("HCFA"), an agency within the Department of
Health and Human Services that is responsible for administering the Medicare
program, has interpreted this provision to prohibit Medicare coverage of
procedures that, among other things, are not deemed safe and effective
treatments for the conditions for which they are being used, or which are still
investigational.
Although a limited number of national coverage decisions are made by HCFA,
in general, the determination of whether a procedure satisfies these standards
is made by the Medicare carrier or fiscal intermediary that processes claims for
reimbursement within that carrier's or intermediary's jurisdiction. Medicare
currently uses fiscal intermediaries for payment to the nursing home industry.
To date, 12 fiscal intermediaries have approved payment for the PRF treatment
delivered by the SofPulse-TM-, while several others have not made a decision and
some have denied payment. The current primary customers of the SofPulse-TM-
device are nursing homes who undergo changes with respect to fiscal
intermediaries that determine reimbursements for treatments used by the nursing
home chains. If and when additional fiscal intermediaries decide to reimburse
for PRF treatment or additional nursing home chains use one of the fiscal
intermediaries that has approved payment for PRF treatment, then the Company may
benefit from its ability to rent the SofPulse-TM- devices to additional nursing
homes, although there can be no assurance thereof.
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Although a significant number of private health insurance plans also
have made payments, this does not necessarily mean that a coverage
determination has been made by these payors. There can be no assurance
that coverage of the SofPulse-TM- will be continued or expanded by
Medicare, Medicaid or any other third party payor. The unavailability
of third party coverage or inadequacy of third party reimbursement for
PRF treatment could adversely affect the Company's ability to market
the SofPulse-TM-, particularly to providers, such as office-based
practitioners and nursing homes, who may rely on such factors before
making the decision to purchase or rent the SofPulse-TM-. Other than
one fiscal intermediary for Medicare, the Company is not aware of
instances in which coverage has been denied for properly documented
procedures performed with the SofPulse-TM-. Such fiscal intermediary
has, however, approved reimbursement for the SofPulse-TM- in its
capacity as a third party health care payor.
The Company is unable to predict what additional legislation or
regulations, if any, may be enacted or adopted in the future relating
to the Company's business or the health care industry, including third
party coverage and reimbursement, or what effect any such legislation
or regulations may have on the Company. Additionally, significant
uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance that adequate
third party coverage will be available with respect to any of the
Company's products in the future. Failure by physicians, hospitals,
nursing homes and other users of the Company's products to obtain
sufficient reimbursement for treatments using the Company's products
could have a material adverse effect on the Company.
PATENT PROTECTION AND PROPRIETARY INFORMATION
The Company is the assignee of two Patents (No. 5,370,680 and No.
5,584,863) issued by the U.S. Patents & Trademark Office and has certain patent
applications pending in the U.S. and certain foreign countries. The Company
believes that patent protection is of material importance to its business and
anticipates that it will apply for additional patents as it deems appropriate
and seek to obtain licenses to patents and patent applications from others.
There can be no assurance, however, that patents will issue from any present or
future applications or, if patents issue, that any claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that the patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection to the Company. Further, the medical products industry
is covered by many issued patents and patent applications. Patent applications
in the U.S. remain confidential until a patent is issued and, therefore, the
Company's products could in the future be found to infringe third party patents
of which the Company is not currently aware. If the Company's products are
suspected of using technology, processes or other subject matter that is claimed
under other existing U.S. or foreign patents, or if other companies obtain
patents claiming subject matter utilized by the Company, such companies may
bring infringement actions against the Company. Because many holders of patents
in the medical products industry have substantially greater resources than the
Company and because historically patent litigation is very expensive, the
Company may not have the resources necessary to challenge successfully the
validity of such third party patents or withstand claims of infringement of
challenges to its patents in cases where the Company's position has merit.
Even if the Company is successful in prevailing in such actions, the cost of
such litigation could have material adverse effect on the Company's business,
financial condition and results of operations. An adverse outcome in any
future patent dispute could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed or require the Company to
cease using the infringed technology. There can be no assurance that the
Company will be able to obtain such licenses or that such licenses, if
available, can be obtained on commercially reasonable terms. Although the
Company believes that its products do not and will not infringe patents or
violate proprietary rights of others and the Company has not been notified of
infringement by the SofPulse-TM- on other patents, in the event the Company's
products infringe patents or proprietary rights of others, the Company may be
required to modify the design of its products or obtain a license.
The Company also relies on trade secret and copyright law, employee and
third party nondisclosure agreements and other protective measures to protect
its intellectual property rights pertaining to its products and technology.
There can be no assurance that these agreements and measures will provide
meaningful protection of the Company's trade secrets, know-how, or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure. In addition, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the U.S. There can be no assurance that the Company will be able to
protect successfully its intellectual property.
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Furthermore, although the Company has confidentiality agreements with its
employees and appropriate vendors, certain of these agreements are due to
expire over the next three to five years. Accordingly, there can be no
assurance that such arrangements will adequately protect certain of the
Company's proprietary information beyond the next two to five years.
"MRT-TM-" is a registered trademark of the Company that the Company
previously used on the SofPulse-TM- machine. The Company also has filed
trademark applications to register the marks "SofPulse-TM-" and "PRF-TM-",
and intends to file for "SofDose-TM-."
INSURANCE
The Company may be exposed to potential product liability claims by
patients who use the Company's products. Therefore, the Company maintains a
general liability insurance policy, which includes aggregate product
liability coverage of $3,000,000. The Company believes that its present
insurance coverage is adequate for the types of products currently marketed.
There can be no assurance, however, that such insurance will be sufficient to
cover potential claims or that the present level of coverage will be
available in the future at a reasonable cost. The Company has named the
SofPulse-TM- manufacturer and certain representatives as additional insureds.
The Company has also indemnified the Miami Heart Institute ("MHI") against
any claims, damages or liabilities incurred by MHI in connection with its use
of the SofPulse-TM- in a clinical study that was completed two years ago from
which no adverse effects have been reported. The Company may be required to
indemnify other research institutions against certain liabilities incurred by
them as a result of the use of the Company's products in research and
clinical studies. In the event a claim that is partially or completely
uninsured is successfully made against the Company, or in the event an
indemnification claim is made against the Company and is partially or
completely uninsured, the Company's business and financial condition could be
materially adversely affected.
The Company warrants its products to be free from defects in materials
and workmanship for a one-year period. The Company believes that with the
quality record of the product and the majority of products in a rental pool,
future warranty expenses will not have a material adverse effect on the
Company, although there can be no assurance thereof.
EMPLOYEES
As of March 31, 1997, the Company had 18 full-time employees and no
part-time employees subsequent to a down-sizing of the Company's personnel in
March 1997. The Company believes that its relations with such personnel are
satisfactory. The Company is not a party to any collective bargaining
agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's current executive and administrative offices are located at
2301 NW 33rd Court, Suite 102, Pompano Beach , Florida, 33069, where it
leases approximately 8,000 square feet of office and warehouse space under a
lease that provides for rental payments of $3,300 per month and that expired
in March 1997. The lease provides for a one-year renewal option. The Company
has a month to month lease. The landlord has, as of this date, verbally
agreed to the Company's current lease extension with substantially the same
terms.
ITEM 3. LEGAL PROCEEDINGS
In February 1993, Diapulse Corporation of America, Inc. ("Diapulse") filed
a citizen's petition requesting that the FDA revoke the substantial equivalence
finding for the SofPulse-TM- and prevent the Company from making certain
labeling claims. The Company believes, based upon the advice of regulatory
counsel, that Diapulse's petition is without merit. The Company has responded
to the petition. The Company, however, in response to comments received by
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the Company from the FDA, has made revisions in its promotional
materials to obviate any claim that such material is inconsistent with
FDA regulations. The Company has received an opinion of regulatory
counsel stating that the petition is lacking in merit and that it is
highly unlikely that the FDA will grant the petition. Nevertheless,
in the event that the FDA were to grant the petition, the Company's
business and prospects would be materially adversely affected. In
October 1993, Diapulse submitted additional information to the FDA in
support of its petition and the Company responded. As of the date
hereof, the FDA has not notified the Company as to any action with
respect to the aforementioned petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the
State of New York, Nassau County ("The Court"), captioned DIAPULSE CORPORATION
OF AMERICA V. MAGNETIC RESONANCE THERAPEUTICS, INC. ET AL., alleging that the
defendants Magnetic Resonance Therapeutics, Inc., a legal predecessor to the
Company, Bio-Sales, Inc., the Company, and certain of the Company's present and
former directors and officers, including Joshua Barnum ("Barnum"), David Mills
("Mills"), Arthur Pilla ("Pilla"), David Saloff ("Saloff"), and David Winter
("Winer"), engaged in deceptive acts and practices, false advertising and
unfair competition in the marketing of a medical device. The complaint also
alleges that Barnum and Mills breached confidentiality and noncompetition
agreements with Diapulse and that the Company, Barnum and Pilla aided in the
alleged tortious breach of the agreements. Diapulse seeks unspecified
compensatory damages, disgorgement of profits realized by the defendants as a
result of their alleged acts, treble damages, punitive damages and reasonable
attorneys' fees. Diapulse also seeks unspecified injunctive relief prohibiting
the defendants from engaging in the alleged acts and ordering the defendants to
take remedial action to rectify the effects on consumers and Diapulse caused by
the defendants' alleged acts. The defendants jointly moved to dismiss the
complaint on jurisdictional and substantive grounds. The Court dismissed Winer
from the case based on lack of personal jurisdiction. The Court also dismissed
certain claims, as to the remaining individual defendants, including deceptive
acts and practices, false advertising and unfair competition. As to the claims
remaining against the individual defendants, certain of such claims may be
indemnified by the Company. As to the Company, the Court denied the motion to
dismiss. The Company answered the complaint, denied all material allegations,
asserted various affirmative defenses and counterclaimed against Diapulse and
Jesse Ross, individually. The counterclaims allege causes of action against
Diapulse and Jesse Ross for federal unfair competition and tortious
interference of existing and contractual business relations. In addition, the
Company has asserted claims against Diapulse for deceptive acts and unfair
trade practices, and trade disparagement. In its counterclaims, the Company
seeks compensatory and punitive damages in an amount to be proved at trial.
This lawsuit is in a preliminary stage and its outcome is uncertain. Although
the Company believes that it has meritorious defenses that it will vigorously
pursue, there can be no assurance that the outcome of such action will be
resolved favorably to the Company or that such litigation will not have an
adverse effect on the Company's liquidity, financial condition and results of
operations.
On March 27, 1997, Ancillary Provider Services, Inc. ("APS") filed a
complaint entitled ANCILLARY PROVIDER SERVICES, INC. V. CHRISTIAN BOWMAN, HIRSCH
MEDICAL SERVICES, INC., ELECTROPHARMACOLOGY, INC. AND DOES 1 THROUGH 100 in the
Superior Court in Los Angeles, California against Christian Bowman, a former APS
employee, Hirsch Medical Services, Inc. ("Hirsch") and the Company. The
complaint alleges causes of action for misappropriation of trade secrets, breach
of fiduciary duty, unfair business practices, tortious inducement to breach
contracts, tortious interference with prospective economic advantage, breach of
contract and breach of covenant of good faith and fair dealing and seeks
unspecified actual, consequential, incidental and punitive damages, an
accounting, restitution and an injunction prohibiting the defendants from
contacting or doing business with APS's customers. Simultaneous with filing the
complaint, APS moved by order to show cause for a preliminary injunction against
the defendants to prevent them from contacting or doing business with APS's
customers. The hearing on the motion for preliminary injunction will be on
April 23, 1997. The complaint alleges that beginning in October 1995, APS was
the exclusive distributor in Southern California of the Company's MRT device.
The complaint further alleges that in June 1996, APS hired defendant Bowman,
formerly of the Company, to assist APS in its efforts to distribute the MRT
device. According to the complaint Bowman entered into an employment agreement
with APS that included a confidentiality provision and a non-compete clause.
APS asserts that the Company improperly terminated the APS distributorship
agreement and replaced APS with defendant Hirsch as the MRT distributor in
California. Thereafter, APS alleges that Bowman resigned from APS on March 14,
1997, joined Hirsch and that defendants misappropriated confidential trade
secrets from APS including, among other things, its proprietary customer lists.
The complaint alleges that the defendants continue to interfere with APS's
contractual relations with its customers and solicit such customers to do
business with Hirsch. This lawsuit is in the preliminary stage and, therefore,
the outcome of this litigation is uncertain. The Company believes that it has
meritorious defenses that it will pursue vigorously. Pursuant to a provision in
the 1996
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distributorship agreement between APS and the Company requiring all disputes
between APS and the Company be resolved by arbitration, the Company initiated,
on April 3, 1997, an arbitration proceeding before the American Arbitration
Association in Miami, Florida seeking a declaration that the 1996
distributorship agreement governs APS and the Company, that the Company has
no continuing obligations to APS pursuant to such agreement, and that any
claims arising out of or relating to the 1996 agreement or the alleged breach
thereof are meritless.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted several matters to a vote of security holders at
the Company's 1996 Annual Meeting of Stockholders held on November 1, 1996.
At the Annual Meeting, Messrs. Joseph Mooibroek, David Saloff, Bruce Benner,
Larry Haimovitch, Murray Feldman, and Steven Mayer were elected to serve as
directors of the Company for one-year terms ending at the 1997 Annual Meeting
of Stockholders. Mr. Benner subsequently resigned from his position as a
director on February 18, 1997. Mr. Mooibroek resigned from his position as
Chairman of the Board on April 1, 1997. The Board of Directors has not
appointed or elected anyone to fill the vacancies created by such
resignations.
At the 1996 Annual Meeting, stockholders approved an amendment to the
Company's Stock Option Plan to increase the number of shares of Common Stock
reserved for issuance thereunder from 322,840 to 1,500,000 shares with 2,763,265
votes cast for, 58,193 votes cast against and 4,475 votes abstaining.
Stockholders also approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
10,000,000 shares to 30,000,000 shares and the number of authorized shares of
Preferred Stock from 1,000,000 shares to 10,000,000 shares with 2,631,364 votes
of Common Stock cast for and 421,950 votes of Preferred Stock cast for.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap Market under
the symbol "EPHI." The following table sets forth, for the periods indicated,
the range of high and low bid quotations for the Common Stock as reported by
Nasdaq. However, the Company's Common Stock generally is not actively traded
or is traded in low volumes, and accordingly there can be no assurance that
market quotations for the Common Stock are indicative of prices at which
actual sales thereof may be made. These quotations represent inter-dealer
prices, without retail markup, markdown or commissions, and do not
necessarily represent actual transactions.
Fiscal year ended December 31, 1995: High Low
- ----------------------------------- -------- -------
Second Quarter (commencing May 12) $5.75 $5.125
Third Quarter $6.50 $5.25
Fourth Quarter $8.25 $6.00
Fiscal year ended December 31, 1996:
- -----------------------------------
First Quarter $7.875 $6.25
Second Quarter $6.75 $5.50
Third Quarter $6.00 $5.50
Fourth Quarter $6.00 $2.00
Fiscal year ended December 31, 1997:
- -----------------------------------
First Quarter (through March 27) $6.50 $2.00
There are certain capital and other requirements that the Company must
exceed or maintain in order for the Company's Common Stock to continue to be
listed on Nasdaq. If the Company is unable to obtain additional financing or
otherwise find ways to meet its cash requirements (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources"), the Company will soon be in violation of
the Nasdaq listing requirements and Nasdaq may de-list the Common Stock of
the Company. Accordingly, there can be no assurance that a public trading
market for the Company's Common Stock will continue to exist.
On March 27, 1997, the last full trading day prior to the date of this
annual report, the closing price of the Common Stock on Nasdaq was $2.00 per
share. As of March 27, 1997, there were approximately 91 registered
stockholders of record of the Common Stock. The Company has not declared or
paid any cash dividends on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was organized in August 1990 and commenced commercially
marketing the SofPulse-TM- device in early 1992. To date, the Company has
generated only modest revenue from sales and rentals of the SofPulse-TM-, which
has achieved only limited market acceptance. Since inception, the Company's
expenses have exceeded revenue, resulting in losses of $3,069,586 and
$2,927,990, respectively, for the years ended December 31, 1995 and 1996. As of
December 31, 1996, the Company had an accumulated deficit of $10,118,169.
Losses incurred since inception have been primarily attributable to costs
incurred in connection with the design and development of the Company's
products, research and clinical studies on the SofPulse-TM-, manufacturing,
marketing literature and advertisement for the
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<PAGE>
SofPulse-TM-, and the hiring of personnel necessary to support the Company's
operations. The Company continues to have high levels of operating expenses
(including salaries of management, research and development, manufacturing
and marketing personnel) and will be required to incur significant expenses
in connection with research and clinical studies and the purchase of
materials to manufacture the SofPulse-TM- devices. Once manufactured, it may
take several months for a SofPulse-TM- device to produce any rental revenue
for the Company. Accordingly, the Company anticipates that it will continue
to incur significant losses until, at the earliest, the Company generates
sufficient revenue to support its operations. The Company believes that
generation of a level of revenue sufficient to support operations is
dependent upon, among other things, the Company's ability to demonstrate
successfully and objectively SofPulse's-TM- clinical utility through
controlled clinical studies; build an effective sales and marketing
infrastructure to increase significantly the sale and rental of the
SofPulse-TM- devices in the existing and the target markets; continue to
obtain reimbursement for the SofPulse-TM- treatment by third party payors;
and develop and introduce new products and enhance existing products. There
can be no assurance that the Company will be able to achieve any of the
foregoing, which could have a material adverse effect on the Company's
business, financial condition, cash flows, results of operations and
prospects.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue for 1996 was $2,149,011 compared to $1,996,663 for 1995, or an
increase of $152,348. This 7.6% increase was primarily attributable to
increased SofPulse-TM- rental revenue during the last half of 1996. Revenue
growth during the first half of 1996 was adversely affected by the
reorganization of the Company's sales organization. That reorganization has
been completed and the Company began to experience improvement from those
changes beginning in October 1996. The Company then expanded its domestic
geographic coverage and contracted with four additional independent
representative organizations. As a result, during the second half of 1996,
monthly rental revenue increased from $112,000 in June 1996 to $202,000 in
December 1996, an increase of $90,000, or 80.4%. By the end of 1996, there
were 278 units under rental contracts, compared to 168 units at the end of
1995.
Revenue from the sale of units decreased 33.1% from $612,846 in 1995 to
$409,818 in 1996. The Company is placing more emphasis on expanding the
rental base of its SofPulse-TM- device.
Cost of revenue in 1996 increased $152,042 to $376,197, compared to
$224,155 in 1995. This 67.8% increase reflects additional depreciation
associated with the expanded SofPulse-TM- rental base.
Selling general and administrative expenses were $3,941,235 in 1996,
compared to $2,813,389 in 1995, an increase of $1,127,846, or 40.1%. This
cost increase reflects the salaries and related benefits for additional
personnel to support the Company's operations. In the first half of 1996,
the Company redirected its focus from research and development to sales and
marketing. Three full-time physical therapists, a product manager, a national
sales director and two regional sales directors joined the Company, adding to
the Company's payroll expenses. Later in 1996, Joseph Mooibroek joined the
Company as its new Chairman of the Board, President and Chief Executive
Officer. (See "Description of Business -- Recent Developments" regarding Mr.
Mooibroek's recent resignation). Mr. Mooibroek received as compensation
during fiscal 1996 an aggregate of $224,404 in cash compensation, 32,903
shares of Common Stock valued on the date of grant at $94,596, and 592,086
options to purchase shares of Common Stock of the Company.
Research and development expenses decreased to $815,722 in 1996, compared
to $1,690,163 in 1995, a decrease of $874,441, or 51.7%. This decrease was
primarily attributable to the completion in early 1996 of the Company's
initial clinical trials in connection with the Company's PMA application (see
"Description of Business -- Research and Development"), as well as the
reduction of basic scientific research involving PRF and PEMS-TM-
technologies.
Interest expense in 1996 decreased to $8,933 from $463,172 in 1995. This
$454,239 or 98.1% decrease resulted from eliminating substantially all
outstanding debt after the Company completed its initial public stock offering
in May
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<PAGE>
1995 and changed its capital structure by issuing Preferred Stock and
converting $1,000,000 of debt to Common Stock in November 1995. With the
exception of obligations under capital equipment leases, the Company had no
debt outstanding at December 31, 1996.
Interest income in 1996 decreased to $65,086, compared to $124,630 in
1995, a decrease of $59,544, or 47.8%. This decrease resulted from the lack
of funds of the Company available for short term investment.
As a consequence of the Company's deteriorating cash position and its
unsuccessful efforts to consummate a financing in late 1996 and early 1997,
in March 1997 the Company underwent a reduction in personnel from 27 to 18
employees, or 33%. In order to minimize the adverse effect such reduction in
personnel may have on the Company's ability to generate revenue from
marketing and sales activities, the Company has reallocated three of its
research and development personnel to provide marketing support until
additional funds are available. The Company also is focusing its sales
efforts mostly in geographic areas where the Company has achieved reasonable
market presence. The Company intends to redistribute the approximately 200
SofPulse-TM- devices in its rental fleet that are not generating sufficient
rental revenue to areas where higher utilization of the devices is expected.
The Company also has in its current inventory about 60 finished devices with
which it can fill future orders for the sale or rental of the product. If
the Company receives orders for more than the approximately 260 devices that
are being re-distributed or are in current inventory, the Company will have
to manufacture additional devices. (See "Description of the Business --
Manufacturing and Suppliers"). The Company cannot predict the results these
changes will have on its ongoing revenue and intends to replace terminated
employees and expand its operations when, and if, new financing is
consummated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements have been and will continue to be
significant. Since its inception, the Company has satisfied its operating
requirements primarily through the issuance of equity and debt securities and
loans from stockholders. At December 31, 1996, the Company had working
capital of $192,837.
Net cash used in 1996 operating activities was $2,630,218, as compared to
$3,193,078 in 1995. Net cash was used primarily to fund the losses from
operations. Net cash used in 1996 investing activities was $49,690, which
was used to purchase equipment. At December 31, 1996, the Company did not
have any material commitments for capital expenditures. Net cash used in
financing activities was $166,317 for 1996, compared to $5,937,555 of cash
provided by these activities in 1995. Financing activities in 1996 included
repayment of notes payable to related parties and payments of capital lease
obligations. At December 31, 1996, the Company had cash of $223,523.
At December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of $9,013,000 available to offset future taxable income, if any,
through the year 2011. In the event a 50% or greater change in ownership
occurs, a substantial annual limitation would be imposed upon the future
utilization of these loss carryforwards. At this point in time, the Company
has not completed a change in ownership study and any limitations are not
known.
Under the present circumstances, the Company's ability to continue as a
going concern depends on its ability to restructure, improve its operations,
and ultimately, to obtain additional financing. The Company has taken steps
that include reductions in operating costs, including stringent cost
controls, personnel reductions and redeployments, and the deferral of the
majority of research and development activities until after 1997. There can
be no assurance that these measures will be successful. Moreover, deferring
research and development activities will delay the development of new
products. The Company will also defer, until after 1997, conducting
definitive clinical studies that document the effectiveness of the
SofPulse-TM- treatment for its intended use. This deferral of clinical
studies may adversely affect the continued acceptance or use of the
SofPulse-TM- device and negatively affect the Company in the longer term.
However, at the present time, the Company believes these actions are
necessary to reduce near term cash requirements and to fund other operating
activities.
The Company is continuing to expand the number of SofPulse-TM- devices that
are under rental agreements generating revenue and will continue to allocate
more devices to those geographic areas where it believes it can
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<PAGE>
produce higher monthly revenue per device based on higher utilization. The
Company believes that these efforts will increase its monthly revenue,
although there can be no assurance whether sufficient revenue growth can be
achieved over the long-term.
The Company is also exploring alternative sources of additional
financing. No definitive sources of additional financing have been identified
at this time, nor can there be any assurance that additional financing will
be obtained or obtained on favorable terms. There are certain capital and
other requirements that the Company must exceed or maintain in order for the
Company's Common Stock to continue to be listed on Nasdaq. If the Company is
unable to obtain additional financing or otherwise find ways to meet its cash
requirements (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,") the
Company will soon be in violation of the Nasdaq listing requirements and
Nasdaq may de-list the Common Stock of the Company. Accordingly, there can
be no assurance that a public trading market for the Company's Common Stock
will continue to exist.
The Company cannot predict whether the operating and financing strategies
described above will be successful. If the Company is unable to restructure
and improve its operations and is unable to ultimately obtain additional
financing, it may not be able to continue as a going concern.
ITEM 7. FINANCIAL STATEMENTS
The financial statements appear in a separate section of this report
following Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
On January 18, 1995, the Company discontinued the services of KPMG Peat
Marwick LLP as its principal independent accountant. The report of KPMG Peat
Marwick LLP covering the December 31, 1993 financial statements contains an
explanatory paragraph which stated that the Company's recurring losses from
operations raised substantial doubt as to its ability to continue as a going
concern. Other than described above, KPMG Peat Marwick LLP's report on the
financial statements of the Company for the year ended December 31, 1993, did
not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting
principles. In connection with the audit of the fiscal year ended December
31, 1993, and during the period from January 1, 1995 through January 18,
1995, there were no disagreements with KPMG Peat Marwick LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with
their opinion to the subject matter of the disagreement. The Board of
Directors approved the Company's decision to change accountants. The Company
then retained BDO Seidman, LLP as its principal independent accountant.
On November 14, 1996, the Company discontinued the services of BDO
Seidman, LLP as its principal independent accountant. The report of BDO
Seidman, LLP on the financial statements of the Company for the year ended
December 31, 1995, did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audit of the fiscal year ended
December 31, 1995 and during the period from January 1, 1996 through November
14, 1996, there were no disagreements with BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures or any reportable events. The accountant's
report of BDO Seidman, LLP on the financial statements of the Company, as of
and for the year ended December 31, 1994, was modified to raise substantial
doubt about the Company's ability to continue as a going concern. BDO
Seidman, LLP changed its accountant's report to an unqualified opinion in
connection with the issuance of the December 31, 1995, financial statements.
The decision to change accountants was approved by the Company's Board of
Directors.
The Company has retained Ernst & Young, LLP as the new auditing firm to
act as the Company's principal independent accountant. The Company selected
Ernst & Young because of its breadth of experience in the health care
industry.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of April 2, 1997
were as follows:
NAME AGE POSITION
- ---- --- --------
Arup Sen, Ph.D. 45 Chairman of the Board, President, Chief Executive
Officer and Secretary
David Saloff 44 Vice Chairman of the Board, Chief Financial Officer &
Executive Vice President of Corporate Development
Murray Feldman 62 Director
Larry Haimovitch 50 Director
Steven Mayer 36 Director
ARUP SEN, PH.D. has served as Chairman of the Board, President, Chief
Executive Officer and Secretary since April 1, 1997. He served as a Director
and as Executive Vice President of Research, Development, Regulatory, and
Clinical Studies of the Company from November 1996 until April 1, 1997. He
also serves as the Chairman of the Board of Health Tech Development Inc., a
biotechnology development company, and has served as such since December
1993. Dr. Sen served as the Chief Executive Officer and President of Dallas
BioMedical, Inc., a development stage company specializing in technologies
for the diagnosis and treatment of cancer and other diseases, from June 1992
to July 1993. Prior to that, Dr. Sen was Vice President of the
Immunoconjugate Division of Sterling Drug, formerly a subsidiary of Eastman
Kodak. Over the past five years, Dr. Sen's responsibilities have included
overall business management, new product development and corporate
partnership negotiations. (See "Description of Business -- Recent
Developments" regarding Dr. Sen's recent appointment to his current
positions).
DAVID SALOFF has served as Vice Chairman, and Executive Vice President of
Corporate Development for the Company since August 1996. Since April 1, 1997,
he has served as Chief Financial Officer. He served as Chairman of the
Board, President and Chief Executive Officer since founding the Company in
August 1990 to August 1996. From 1982 to 1986, Mr. Saloff served as
President of Akros Manufacturing, Inc., a medical equipment company. Mr.
Saloff served as Managing Director for Lumex from December 1986 to December
1989. He served as a consultant and Vice President of Operations to Xsirius
Inc., a research and development company, from December 1989 to May 1992.
Mr. Saloff served as a Director and the Vice President of Marketing for
Advanced Photonix Inc., a manufacturer of fiber optics components from May
1990 to February 1992. Mr. Saloff is the nephew of Murray Feldman, a
director of the Company.
MURRAY FELDMAN has served as a director of the Company since September
1996. From June 1982 to present, Mr. Feldman has served as President of
Murray Financial Associates, Inc., a company primarily engaged in
originating, selling, and servicing residential mortgages. Mr. Feldman is
the uncle of David Saloff, the Vice Chairman and Executive Vice President of
the Company.
LARRY HAIMOVITCH has served as a director of the Company since September
1993. Since July 1991, Mr. Haimovitch has been President of Haimovitch
Medical Technology Consultants, a medical technologies consulting company.
From July 1989 to December 1990, Mr. Haimovitch was a medical device analyst
at Furrnan Selz, an investment banking firm. Mr. Haimovitch is a frequent
moderator of Biomedical Business International Medical Device Conferences and
a regular contributor to its newsletter. Mr. Haimovitch also serves on the
Board of Directors of other medical product and technology companies.
STEVEN MAYER has served as a director of the Company since September 1996.
Mr. Mayer also currently serves as managing director for Libra Investors, Inc.
From June 1994 to November 1996, he served as President and Managing Director of
Aries Capital Group, a private investment firm. From March 1992 until June
1994, Mr. Mayer was an investment banker with Apollo Advisors, L.P. and Lion
Advisors, L.P., affiliated private investment firms.
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<PAGE>
While at Apollo and Lion, Mr. Mayer was responsible for equity and debt
investments encompassing a wide range of industries. Prior to that time, Mr.
Mayer was a lawyer with Sullivan & Cromwell specializing in mergers,
acquisitions, divestitures, leveraged buyouts and corporate finance. Mr.
Mayer currently serves as a member of the Boards of Directors of Mednet, MPC
Corporation, a prescription benefit management company, Dove Audio, Inc., a
book and audio tape publisher and television producer, and Chicago Pizza &
Brewery, Inc., a restaurant owner and manager.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than
10% of a registered class of the Company's equity securities to file initial
reports of ownership and reports of changes in ownership with the Securities
and Exchange Commission (the "SEC"). Such persons are required by SEC
regulation 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
with respect to fiscal 1995, or written representations from certain
reporting persons, the Company believes that its officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, have complied with all applicable filing requirements, except
that during fiscal 1995, Messrs. Bruce Benner, Joshua E. Barnum, Stanley
Beck, and Dr. Arthur A. Pilla inadvertently failed to file timely an Initial
Statement of Beneficial Ownership of Securities and Messrs. Bruce Benner and
Murray Feldman inadvertently failed to file timely a Statement of Changes of
Beneficial Ownership of Securities. During fiscal 1996, Messrs. Joseph
Mooibroek and Donald F. Soldatis and Dr. Arup Sen inadvertently failed to
file timely an Initial Statement of Beneficial Ownership of Securities and
Messrs. Murray Feldman and Norton Herrick inadvertently failed to file timely
a Statement of Changes of Beneficial Ownership of Securities.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's
President and Chief Executive Officer and the Company's most highly compensated
executive officer employed by the Company (the "Named Executives"). No
executive officers other than the Named Executives received compensation in
excess of $100,000 during fiscal 1996.
<TABLE>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ------------------------ ----------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
FISCAL COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AWARDS($) SARS(#) PAYOUTS($) ($)
- --------------------------- ---- --------- -------- --- --------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph Mooibroek (1) 1996 112,644 -- 70,396(2) 94,596(3) 592,086 -- 68,616(4)
Chairman, President & Chief 1995 -- -- -- -- -- -- --
Executive Officer (resigned 1994 -- -- -- -- -- -- --
April 1, 1997)
David Saloff (5) 1996 143,297 -- 8,500 -- 100,000 -- --
Vice Chairman & Executive 1995 126,000 -- 6,000 -- -- -- --
Vice President 1994 120,000 -- 6,000 -- -- -- --
</TABLE>
- ---------------------------
(1) Mr. Mooibroek was appointed Chairman, President and Chief Executive Officer
on August 5, 1996. Mr. Mooibroek resigned from such positions on April 1,
1997 and as of April 12, 1997 entered into a severance agreement with the
Company. Dr. Arup Sen was appointed Chairman, President, Chief Executive
Officer and
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<PAGE>
Secretary on April 1, 1997. (See "Executive Compensation --
Employment Contracts, Terminations of Employment and Change of Control
Agreements").
(2) Includes a $5,000 car allowance and $36,788 as reimbursement for the
payment of taxes. Also includes $28,608 of deferred compensation. In
lieu of cash compensation, Mr. Mooibroek elected to receive 5,555
shares of Common Stock valued at $28,608 at December 31, 1996. These
shares were not issued as of December 31, 1996 but have been authorized
for issuance.
(3) Represents the value on the date of grant of 32,903 shares of Common Stock
received by Mr. Mooibroek.
(4) Includes $68,616 received as reimbursement for Mr. Mooibroek's relocation
expenses.
(5) Effective August 5, 1996, Mr. Saloff resigned from his position as Chairman
of the Board, President and Chief Executive Officer and was appointed Vice
Chairman and Executive Vice President of Corporate Development.
OPTION GRANTS DURING 1996 FISCAL YEAR
The following table provides information related to options granted to the
Named Executives during fiscal 1996.
<TABLE>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
- ---------------------------------------------------------------------------------- ----------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(2) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- -------------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Joseph Mooibroek. . . . . 592,086(3) 61.73% 5.50 08/05/06 2,047,978 5,189,979
David Saloff. . . . . . . 100,000(4) 10.43% 5.50 08/05/06 345,892 876,558
</TABLE>
- --------------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment, nontransferability or vesting over periods. The use of the
assumed 5% and 10% returns is established by the SEC and is not intended by
the Company to forecast possible future appreciation of the price of the
Common Stock.
(2) Options to acquire shares of Common Stock.
(3) Options with respect to 20% of the underlying shares are currently
exercisable, options with respect to 20% of the underlying shares will
become exercisable on each of August 5, 1997, August 5, 1998, August 5,
1999, and August 5, 2000.
(4) Options with respect to all (100%) of the underlying shares are currently
exercisable.
OPTION EXERCISES DURING 1996 FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options held by the
Named Executives. No stock options were exercised by a Named Executive during
fiscal 1996. Because the option exercise price exceeds the closing price
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<PAGE>
for the Company's Common Stock on December 31, 1996, no options held by Named
Executives are considered in-the-money at December 31, 1996. The Company does
not have any outstanding stock appreciation rights.
<TABLE>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)(1)
--------------------------- --------------------------
VALUE
NAME SHARES ACQUIRED REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Joseph Mooibroek . . . . . . . . 0 -- 118,417 473,669 -- --
David Saloff . . . . . . . . . . 0 -- 100,000 -- -- --
</TABLE>
- --------------------
(1) The closing price for the Company's Common Stock as reported through The
Nasdaq National Market System on December 31, 1996, the last trading day of
the 1996 fiscal year, was $2.50. Value is calculated on the basis of the
difference between the option exercise price and $2.50 multiplied by the
number of shares of Common Stock underlying the option.
(2) Value is calculated based on the difference between the option exercise
price and the closing market price of the Common Stock on the date of
exercise multiplied by the number of shares to which the exercise relates.
COMPENSATION OF DIRECTORS
Pursuant to the Company's Non-Employee Directors' Equity Compensation Plan,
the Company pays each non-employee director $2,500 per fiscal quarter in Common
Stock priced at the closing on the last business day of trading in such quarter,
payable after January 1 of the following year. Each non-employee director also
receives a stock option of 2,500 shares of Common Stock, which option is granted
on the last trading day of the year, immediately vests and has a term of five
years. At the time that a non-employee director joins the Board of Directors,
the director is granted a stock option of 15,000 shares of Common Stock, which
option is granted upon the directors attendance at the first meeting of the
Board of Directors, vests with respect to 20% of the underlying shares vest
immediately and with respect to the remaining shares vests an additional 20% of
the shares upon each anniversary year thereafter.
Directors who are also employees of the Company do not receive compensation
for their participation as members of the Board of Directors of the Company.
On August 5, 1996, the Company granted to Mr. Mooibroek, for his service as
Chairman of the Board, President and Chief Executive Officer (positions from
which Mr. Mooibroek resigned on April 1, 1997), a ten year option to purchase
592,086 shares of Common Stock at an exercise price of $5.50 per share pursuant
to the Company's incentive stock option plan, 20% of which option was
immediately exercisable with respect to the underlying shares and 20% of which
will become exercisable on each of August 5, 1997, August 5, 1998, August 5,
1999, and August 5, 2000, with respect to the underlying shares. (See
"Executive Compensation -- Employment Contracts, Terminations of Employment, and
Change of Control Agreements" regarding the vesting or cancellation of certain
of these options). On August 5, 1996, the Company granted to Mr. Saloff, for
his service as Vice Chairman of the Board and Executive Vice President of
Corporate Development, a ten year option to purchase 100,000 shares of Common
Stock at an exercise price of $5.50 per share pursuant to the Company's
incentive stock option plan, fully vested. On November 11, 1996, the Company
granted to Dr. Sen for his service as a Director and as Executive Vice President
of Research, Development, Regulatory, and Clinical Studies, a ten year option to
purchase 75,000 shares of Common Stock at an exercise price of $4.75 per share
pursuant to the Company's incentive stock option plan, with 25,000 of the
underlying shares being immediately exercisable, with 20,000 of the underlying
shares becoming exercisable on November 11, 1997, and 10,000 of the underlying
share becoming exercisable on each of November 11, 1998, November 11, 1999, and
November 11, 2000. On December 13, 1996, the Company granted to each of Mr.
Feldman and Mr. Mayer, for their service as Directors, a five year option to
purchase 15,000 shares of Common Stock at an
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<PAGE>
exercise price of $2.875 per share pursuant to the Company's non-statutory
stock option plan, 3,000 of the underlying shares of which option was
immediately exercisable and 3,000 of the underlying shares of which will
become exercisable on each of January 1, 1998, January 1, 1999, January 1,
2000 and January 1, 2001.
EMPLOYMENT CONTRACTS, TERMINATIONS OF EMPLOYMENT, AND CHANGE OF CONTROL
AGREEMENTS
The Company entered into an employment agreement with Joseph Mooibroek,
dated August 5, 1996, for a term of five 5 years and for the position of
Chairman of the Board, President and Chief Executive Officer. The agreement
provided for a base salary of not less than $275,000 (up to 25% of which
could have been deferred to be repaid, with interest, on the first day of the
following year in either cash or in Company Common Stock at the discretion of
the Board of Directors), reimbursement of relocation expenses of up to
$200,000, benefits, a term life contract, an automobile allowance and four
weeks vacation per year. The agreement also provided that the Company would
grant to Mr. Mooibroek on the date of the agreement an option to purchase
592,086 shares of Common Stock with 20% of the shares covered thereby vesting
immediately and an additional 20% of the shares covered thereby vesting on
each of the first, second, third and fourth anniversaries of the date of the
agreement. The agreement provided that upon the exercise of warrants to
purchase Common Stock of the Company by Mr. Norton Herrick, the Company would
grant to Mr. Mooibroek an option to purchase one-tenth of the number of
shares of Common Stock of the Company as to which Mr. Herrick exercised his
warrant. The agreement also provided that, if Mr. Mooibroek's employment was
terminated by him by permitted resignation or by the Company other than for
cause, Mr. Mooibroek would receive an amount equal to two times the sum of
his highest annual base salary and the average annual bonus received by him
and that he would continue to receive benefits pursuant to the Company's
welfare programs and perquisite plans for a period of two years. The amounts
received upon termination were to vary depending upon the amount of time
remaining in the term of the agreement.
Mr. Mooibroek resigned from his position as Chairman, President and Chief
Executive officer on April 1, 1997. As of April 12, 1997 the Company and Mr.
Mooibroek entered into a severance agreement that provides, among other
things, in settlement of all rights under his employment agreement with the
Company, for a cash payment of $128,700 to Mr. Mooibroek over approximately
five months, the issuance of 5,555 shares of Common Stock of the Company
that were assigned to Mr. Mooibroek in lieu of a portion of his salary during
1996, the grant to Mr. Mooibroek of a 10-year warrant to purchase 25,000
shares of Common Stock of the Company at $2.25 per share and the
cancellation of 384,850 options to purchase shares of Common Stock of the
Company that were previously granted to Mr. Mooibroek, leaving Mr. Mooibroek
with 207,236 fully vested options to purchase shares of Common Stock of the
Company. The severance agreement also provides for the cancellation of Mr.
Mooibroek's right to be granted an option to purchase one-tenth of the number
of shares of Common Stock of the Company as to which Mr. Herrick exercised
his warrant. Mr. Mooibroek further agreed to assign to the Company patent
protection on inventions made by Mr. Mooibroek and to cooperate with the
Company in obtaining such patent protection.
The Company entered into an employment agreement with David Saloff, dated
August 5, 1996, for a term expiring on December 31, 2001. The agreement
provides for a base salary of not less than $132,000, an incentive bonus,
benefits, a term life insurance contract, an automobile allowance and four
weeks vacation per year. The agreement also provides that if Mr. Saloff's
employment is terminated by him by permitted resignation or by the Company
other than for cause, Mr. Saloff will receive an amount equal to the sum of
his annual base salary and the average annual bonus received by him and that
he will continue to receive benefits pursuant to the Company's welfare
programs and perquisite plans for a period of one year. The amounts received
upon termination may vary depending upon the amount of time remaining in the
term of the agreement.
The Company entered into an employment agreement with Arup Sen, dated
November 11, 1996, for a term expiring on December 31, 1999. Dr. Sen was
appointed Chairman of the Board, President and Chief Executive Officer of the
Company on April 1, 1997. The employment agreement entered into in November
is still in effect. The agreement provides for a base salary of not less
than $180,000 (up to 33% of which may be deferred to be repaid, with
interest, on the first day of the following year in either cash or in Company
Common Stock at the discretion of the Board of Directors), reimbursement of
relocation expenses of up to $50,000, benefits, a term life contract, an
automobile allowance and three weeks vacation per year. The agreement also
provides that the Company would grant
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<PAGE>
to Dr. Sen on the date of the agreement an option to purchase 75,000 shares
of Common Stock with 25,000 of the shares covered thereby vesting
immediately, 20,000 of the shares covered thereby vesting on the first
anniversary of the agreement and an additional 10,000 of the shares covered
thereby vesting on each of the second, third and fourth anniversaries of the
date of the agreement. The agreement also provides that if Dr. Sen's
employment is terminated by him by permitted resignation or by the Company
other than for cause, Dr. Sen will receive an amount equal to the sum of his
annual base salary and the average annual bonus received by him and that he
will continue to receive benefits pursuant to the Company's welfare programs
and perquisite plans for a period of one year. The amounts received upon
termination may vary depending upon the amount of time remaining in the term
of the agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 27, 1997,
regarding the beneficial ownership of Common Stock by each person known by
the Company to own 5% or more of the outstanding shares of Common Stock, each
director of the Company, the Named Executives, and the directors and
executive officers of the Company as a group. The persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock owned by them, unless otherwise noted. The address for each person
below listed is c/o the Company, 2301 NW 33rd Court, Suite 102, Pompano
Beach, Florida 33069.
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL OWNER OR BENEFICIAL PERCENT
NUMBER OF PERSONS IN GROUP OWNERSHIP OF CLASS
- --------------------------- ------------ --------
Arup Sen . . . . . . . . . . . . . . . . . 37,526 (1) 1.06
David Saloff . . . . . . . . . . . . . . . 1,052,663 (2) 29.73
Murray Feldman . . . . . . . . . . . . . . 1,108,161 (3) 31.30
Larry Haimovitch . . . . . . . . . . . . . 1,355 *
Steven Mayer . . . . . . . . . . . . . . . 3,551 *
Joseph Mooibroek . . . . . . . . . . . . . 156,875 (4) 4.43
Norton Herrick . . . . . . . . . . . . . . 1,993,900 (5) 56.32
Bear, Stearns & Co. .. . . . . . . . . . . 689,902 19.49
Spear, Leeds & Kellogg LLC . . . . . . . . 736,187 20.80
Paragon Capital Corporation. . . . . . . . 187,500 (6) 5.30
All directors, executive officers, and
Named Executives as a group (6 persons). . 1,666,577 47.08
* Less than 1%
(1) Includes 25,000 shares subject to presently exercisable options.
(2) Includes 100,000 shares subject to presently exercisable options; 693,554
shares of Common Stock over which Mr. Saloff has the sole power to vote or
to direct the vote pursuant to a proxy, which is terminable at will,
granted to Mr. Saloff by Mr. Murray Feldman.
(3) Includes 414,607 shares subject to presently exercisable warrants.
-25-
<PAGE>
(4) Includes 118,417 shares subject to presently exercisable options. (See
"Executive Compensation -- Employment Contracts, Terminations of
Employment and Change of Control Agreements").
(5) Includes 421,950 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock, 1,300,000 shares subject to presently exercisable
warrants. Mr. Herrick disclaims beneficial ownership of 60,000 shares of
common stock owned by Rozel International Holdings, which shares are
pledged to Mr. Herrick as security for a loan. Mr. Herrick also disclaims
beneficial ownership over 972,753 shares of Common Stock over which he
shares the power to vote or to direct the vote because such voting power is
limited to the election of certain nominees of the Board of Directors of
the Company.
(6) Shares subject to presently exercisable warrants.
ITEM 12. CERTAIN TRANSACTIONS
In March 1995 and May 1995, the Company borrowed an aggregate of $400,000
from Mr. David Saloff, a Director and the Executive Vice President of
Corporate Development. Such indebtedness was repaid in May 1995. The
Company also borrowed $75,000 from Ms. Phyllis Saloff, Mr. Saloff's mother
and $45,000 from Mr. Lawrence Schlesinger, a former Director of the Company.
The Company repaid such indebtedness in January 1996.
In November 1995, the Company entered into a Preferred Stock and Warrant
Subscription Agreement with Mr. Norton Herrick, an investor in the Company
beneficially owning greater than 10% of the Common Stock of the Company,
whereby the Company issued to Mr. Herrick (i) 421,950 shares of Series A
Convertible Preferred Stock (the "Preferred Stock") and (ii) warrants to
purchase an aggregate of 1,721,950 shares of Common Stock in consideration of
$2,000,000. Each share of Preferred Stock is convertible, at the option of
the holder, into one share of Common Stock (subject to adjustment in certain
circumstances) at any time until November 13, 2000, at which time outstanding
shares of Preferred Stock automatically convert into Common Stock. Shares of
Preferred Stock have votes equal to those of the Common Stock into which they
are convertible and, subject to certain exceptions and except as required by
law, vote together with the Common Stock as a single class. The Preferred
Stock is entitled to receive non-cumulative cash dividends when, as and if
declared by the Board of Directors of the Company and has a liquidation
preference of $4.74 per share. The Warrants consisted of warrants to
purchase (i) 421,950 shares of Common Stock at an exercise price of $.01 per
share; (ii) 800,000 shares of Common Stock at an exercise price of $6.00 per
share; (iii) 250,000 shares of Common Stock at an exercise price of $7.50 per
share; and (iv) Series A Convertible Preferred Stock at an exercise price of
$9.00 per share. The Warrants are exercisable at any time until November 13,
2005. Mr. Herrick has exercised warrants to purchase 421,950 shares of
Common Stock. Mr. Herrick has registration rights with respect to the shares
of Common Stock issuable upon conversion of the Preferred Stock or upon
exercise of the warrants. Additionally, the Company granted Mr. Herrick a
right of first refusal with respect to any sale by the Company of Common
Stock, options, warrants or other securities convertible into Common Stock.
In connection with Mr. Herrick's investment, the Company entered into a
Stockholders Agreement with Mr. Herrick and Mr. David Saloff whereby Mr.
Herrick was given the right to nominate two individuals for election as
directors and to require the Company to increase the number of directors to
nine persons. Mr. Saloff agreed to vote all of his shares of Common Stock
for the persons nominated by Mr. Herrick and to take all other actions
necessary in his capacity as a stockholder to cause the election to the Board
of Directors of the persons nominated by Mr. Herrick.
Also in connection with Mr. Herrick's investment, the Company paid
$60,000 to Whale Securities Co., L.P. ("Whale") and $40,000 to Millennium
Capital Corporation and agreed to issue five-year warrants to purchase
100,000 shares at an exercise price of $5.50 per share to Whale and its
designees for introducing Mr. Herrick to the Company. The Company has issued
to Whale 40,000 shares of Common Stock subject to presently exercisable
warrants, to Mr. Craig Shapiro, a designee of Whale, 40,000 shares of Common
Stock subject to presently exercisable warrants, and to Mr. Gordon Segal, a
designee of Whale, 20,000 shares of Common Stock subject to presently
exercisable warrants.
In November 1995, Murray Feldman, the uncle of Mr. Saloff, converted an
aggregate of $1,000,000 principal amount promissory notes into 195,945 shares of
Common Stock. In consideration of such conversion, the Company granted to Mr.
Feldman five-year warrants to purchase 300,000 shares of Common Stock at a price
of $6.25 per share,
-26-
<PAGE>
subject to adjustment in certain circumstances. Subject to certain
limitations and exclusions, the Company agreed to include the shares
underlying the warrants in appropriate registration statements filed by the
Company.
In December 1995, the Company repurchased 10,943 shares of Common Stock
for $60,000 in connection with the resignation of Mr. Wasserman as the
Company's Chief Operating Officer.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) EXHIBITS
1.1 Underwriting Agreement, dated May 12, 1995, from Paragon Capital
Corporation for 1,250,000 shares of Common Stock and warrants to
purchase 625,000 shares of Common Stock of the Company. (1)
2.1 Agreement and Plan of Merger, dated November 14, 1994, between
Magnetic Resonance Therapeutics, Inc. and the Company. (1)
3.1 Certificate of Incorporation, as amended. (2)
3.2 By-Laws. (1)
4.1 Preferred Stock and Warrant Subscription Agreement, dated November 13,
1995, between the Company and Norton Herrick. (3)
4.2 Warrant Agreement, dated May 12, 1995, between the Company and Paragon
Capital Corporation. (1)
4.3 Warrant Agreement between North American Transfer Co., Paragon Capital
Corporation and the Company. (4)
4.4 Warrant Agreement between the Company and Norton Herrick. (3)
4.5 Registration Rights Agreement, dated November 13, 1995, between the
Company and Norton Herrick. (3)
4.6 Conversion of Debt into Equity Agreement, dated August 30, 1993,
between the Company and Murray Feldman. (1)
4.7 First Amendment and Restated Convertible Promissory Note, dated
September 22, 1994, between the Company and Murray Feldman. (1)
4.8 Warrant Agreement, dated as of May 26, 1993, between the Company and
Whale Securities Co., L.P. (1)
9.1 Stockholder Agreement, dated November 13, 1995, among the Company,
David Saloff and Norton Herrick. (3)
9.2 Proxy to Vote Corporate Shares, dated November 9, 1994, by and among
David Saloff and Murray Feldman. (4)
-27-
<PAGE>
10.1 Employment Agreement, dated July 1, 1993, between the Company and Dr.
Walter L. Wasserman; and First Amendment thereto, dated September 13,
1994. (1)
10.2 Employment Agreement, dated January 1, 1993, between the Company and
Joshua Barnum; Addendum thereto, dated August 24, 1994; and Second
Amendment thereto, dated September 13, 1994. (1)
10.3 Employment Agreement, dated January 1, 1993, between the Company and
David S. Winer; Addendum thereto, dated January 13, 1994; and First
Amendment thereto, dated September 13, 1994. (1)
10.4 Employment Agreement, dated August 5, 1996, between the Company and
Joseph Mooibroek. (5)
10.5 Employment Agreement, dated August 5, 1996, between the Company and
David Saloff. (2)
10.6 Employment Agreement, dated November 11, 1996, between the Company and
Dr. Arup Sen. (2)
10.7 Commercial Security Agreement, dated June 3, 1994, between the Company
and Murray Feldman; Letter Agreement, dated November 22, 1994, between
Murray Feldman and Paragon Capital Corporation; and Amendment No. 1 to
Commercial Security Agreement. (1)
10.8 Office Warehouse Lease, dated March 31, 1993, between the Company and
Anthony Lo Fria; and Addendum to Office Warehouse Lease, dated March
31, 1993. (1)
10.9 Form of Non-Employee Directors' Equity Compensation Plan, effective as
of January 1, 1996. (2)
10.10 Performance Sharing Program, dated December 13, 1996. (2)
10.11 Consultant's Agreement, dated January 1, 1993, between the
Company and Arthur A. Pilla, Ph.D.; and Addendum thereto, dated
August 1, 1994. (1)
10.12 Clinical Research and Study Agreement, dated October 27, 1994,
between the Company and Pilla Consulting. (1)
10.13 Indemnification Agreement, between the Company and Miami Heart
Research Institute, Inc. (4)
10.14 Form of Certificate of Designations of Series A Convertible
Preferred Stock of the Company. (3)
10.15 Letter Agreement, dated March 19, 1997, between the Company and
M. Kane & Co. (2)
10.16 Agreement, dated April 12, 1997, between the Company and Joseph
Mooibroek. (2)
16.1 Letter from KPMG Peat Marwick, LLP regarding response to Change in
Certifying Accountants. (6)
16.2 Letter from BDO Seidman, LLP regarding response to Change in
Certifying Accountants, dated January 8, 1997. (7)
24.1 Power of Attorney. (2)
27.1 Financial Data Schedule. (2)
- -------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-87934-A).
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<PAGE>
(2) Filed herewith.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated November 13, 1995.
(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(5) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 5, 1996.
(6) Will be filed within ten business days of the date hereof.
(7) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated December 13, 1996.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated December 13, 1996,
regarding the Company's decision to change accountants.
-29-
<PAGE>
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.
ELECTROPHARMACOLOGY, INC.
By: /s/ ARUP SEN
------------------------------------
Arup Sen
Chief Executive Officer
In accordance with the 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.
Signatures Title
- ---------- -----
/s/ ARUP SEN
- ----------------------- Chairman of the April 15, 1997
Arup Sen Board and Chief Executive Officer
/s/ DAVID SALOFF
- ----------------------- Chief Financial Officer April 15, 1997
David Saloff (Principal Financial and
Accounting Officer)
/s/ MURRAY FELDMAN
- ----------------------
Murray Feldman Director April 15, 1997
/s/ LARRY HAIMOVITCH
- ----------------------
Larry Haimovitch Director April 15, 1997
/s/ STEVEN MAYER
- ----------------------
Steven Mayer Director April 15, 1997
-30-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
1.1 Underwriting Agreement, dated May 12, 1995, from Paragon Capital
Corporation for 1,250,000 shares of Common Stock and warrants to
purchase 625,000 shares of Common Stock of the Company. (1)
2.1 Agreement and Plan of Merger, dated November 14, 1994, between
Magnetic Resonance Therapeutics, Inc. and the Company. (1)
3.1 Certificate of Incorporation, as amended. (2)
3.2 By-Laws. (1)
4.1 Preferred Stock and Warrant Subscription Agreement, dated November
13, 1995, between the Company and Norton Herrick. (3)
4.2 Warrant Agreement, dated May 12, 1995, between the Company and
Paragon Capital Corporation. (1)
4.3 Warrant Agreement between North American Transfer Co., Paragon Capital
Corporation and the Company. (4)
4.4 Warrant Agreement between the Company and Norton Herrick. (3)
4.5 Registration Rights Agreement, dated November 13, 1995, between the
Company and Norton Herrick. (3)
4.6 Conversion of Debt into Equity Agreement, dated August 30, 1993,
between the Company and Murray Feldman. (1)
4.7 First Amendment and Restated Convertible Promissory Note, dated
September 22, 1994, between the Company and Murray Feldman. (1)
4.8 Warrant Agreement, dated as of May 26, 1993, between the Company and
Whale Securities Co., L.P. (1)
9.1 Stockholder Agreement, dated November 13, 1995, among the Company,
David Saloff and Norton Herrick. (3)
9.2 Proxy to Vote Corporate Shares, dated November 9, 1994, by and among
David Saloff and Murray Feldman. (4)
10.1 Employment Agreement, dated July 1, 1993, between the Company and
Dr. Walter L. Wasserman; and First Amendment thereto, dated September
13, 1994. (1)
10.2 Employment Agreement, dated January 1, 1993, between the Company
and Joshua Barnum; Addendum thereto, dated August 24, 1994; and
Second Amendment thereto, dated September 13, 1994. (1)
-31-
<PAGE>
Exhibit
Number Description of Exhibit
------- ----------------------
10.3 Employment Agreement, dated January 1, 1993, between the Company
and David S. Winer; Addendum thereto, dated January 13, 1994; and First
Amendment thereto, dated September 13, 1994. (1)
10.4 Employment Agreement, dated August 5, 1996, between the Company and
Joseph Mooibroek. (5)
10.5 Employment Agreement, dated August 5, 1996, between the Company and
David Saloff. (2)
10.6 Employment Agreement, dated November 11, 1996, between the Company and
Dr. Arup Sen. (2)
10.7 Commercial Security Agreement, dated June 3, 1994, between the
Company and Murray Feldman; Letter Agreement, dated November 22, 1994,
between Murray Feldman and Paragon Capital Corporation; and Amendment
No. 1 to Commercial Security Agreement. (1)
10.8 Office Warehouse Lease, dated March 31, 1993, between the Company
and Anthony Lo Fria; and Addendum to Office Warehouse Lease, dated
March 31, 1993. (1)
10.9 Form of Non-Employee Directors' Equity Compensation Plan, effective as
of January 1, 1996. (2)
10.10 Performance Sharing Program, dated December 13, 1996. (2)
10.11 Consultant's Agreement, dated January 1, 1993, between the Company
and Arthur A. Pilla, Ph.D.; and Addendum thereto, dated August 1,
1994. (1)
10.12 Clinical Research and Study Agreement, dated October 27, 1994,
between the Company and Pilla Consulting. (1)
10.13 Indemnification Agreement, between the Company and Miami Heart
Research Institute, Inc. (4)
10.14 Form of Certificate of Designations of Series A Convertible
Preferred Stock of the Company. (3)
10.15 Letter Agreement, dated March 19, 1997, between the Company and M.
Kane & Co. (2)
10.16 Agreement, dated April 12, 1997, between the Company and Joseph
Mooibroek. (2)
16.1 Letter from KPMG Peat Marwick, LLP regarding response to Change in
Certifying Accountants. (6)
16.2 Letter from BDO Seidman, LLP regarding response to Change in
Certifying Accountants, dated January 8, 1997. (7)
24.1 Power of Attorney. (2)
27.1 Financial Data Schedule. (2)
- -----------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-87934-A).
(2) Filed herewith.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated November 13, 1995.
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<PAGE>
(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(5) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 5, 1996.
(6) Will be filed within ten business days of the date hereof.
(7) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated December 13, 1996.
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<PAGE>
Electropharmacology, Inc.
Audited Financial Statements
Year ended December 31, 1996
CONTENTS
Report of Independent Certified Public Accountants . . . . . . 1
Audited Financial Statements
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations . . . . . . . . . . . . . . . . . . . 4
Statements of Shareholders' Equity . . . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . 8
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Electropharmacology, Inc.
We have audited the accompanying balance sheet of Electropharmacology, Inc.
(the Company) as of December 31, 1996 and the related statements of
operations, shareholders' equity and cash flows for the year then ended.
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 audit. The financial statements of
Electropharmacology, Inc. for the year ended December 31, 1995, were audited
by other auditors whose report dated April 2, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of
Electropharmacology, Inc. at December 31, 1996 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2
to the financial statements, the Company incurred significant recurring
operating losses and negative operating cash flows. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 2.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
- -----------------------------
Ernst & Young LLP
West Palm Beach, Florida
February 9, 1997, except for the last paragraph of
Note 2, as to which the date is April 7, 1997,
the third paragraph of Note 10, as to which the
date is April 12, 1997, and the sixth paragraph
of Note 11, as to which the date is March 27,
1997
1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Electropharmacology, Inc.
We have audited the accompanying statements of operations, shareholders'
equity (capital deficit) and cash flows for the year ended December 31, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, changes in stockholders'
equity (capital deficit) and cash flows of Electropharmacology, Inc. for the
year ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
--------------------------------
BDO Seidman, LLP
Miami, Florida
April 2, 1996
2
<PAGE>
Electropharmacology, Inc.
Balance Sheet
December 31, 1996
ASSETS
Current assets:
Cash $ 223,523
Trade accounts receivable, net of allowance
for doubtful accounts of $134,000 572,202
Inventory 94,164
Trade notes receivable 248,190
Prepaid expenses 50,127
----------
Total current assets 1,188,206
Rental and other equipment, net 945,058
Deposits and other assets 79,816
----------
Total assets $2,213,080
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 316,746
Accrued expenses 513,130
Accrued commissions 30,845
Accrued payroll 104,701
Customer deposits 7,561
Current maturities of obligations under
capital leases 22,386
----------
Total current liabilities 995,369
Obligations under capital leases, less current
maturities 3,336
----------
Total liabilities 998,705
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value--10,000,000
authorized shares; issued and outstanding 421,950
(entitled to $2,000,043 in liquidation) 4,220
Common stock, $.01 par value--30,000,000 authorized
shares; 3,540,165 shares issued and 3,529,672
outstanding 35,402
Additional paid-in capital 11,352,922
Treasury stock, at cost, 10,493 common shares (60,000)
Deficit (10,118,169)
----------
Total shareholders' equity 1,214,375
----------
Total liabilities and shareholders' equity $2,213,080
==========
SEE ACCOMPANYING NOTES.
3
<PAGE>
Electropharmacology, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1996 1995
-----------------------------
Revenue:
Rentals $ 1,739,193 $ 1,383,817
Sales 409,818 612,846
-----------------------------
Total revenue 2,149,011 1,996,663
Operating expenses:
Cost of revenue 376,197 224,155
Selling, general and administrative 3,941,235 2,813,389
Research and development 815,722 1,690,163
-----------------------------
Total operating expenses 5,133,154 4,727,707
-----------------------------
Loss from operations (2,984,143) (2,731,044)
=============================
Other income (expense):
Interest expense (8,933) (463,172)
Interest income 65,086 124,630
-----------------------------
Total other income (expense) 56,153 (338,542)
-----------------------------
Net loss $(2,927,990) $(3,069,586)
=============================
Net loss per common share $ (.89) $ (1.26)
=============================
Weighted average number of common shares
outstanding 3,298,849 2,429,880
=============================
SEE ACCOMPANYING NOTES.
4
<PAGE>
Electropharmacology, Inc.
Statements of Shareholders' Equity
<TABLE>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ---------------- PAID-IN TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 0 1,628,529 $16,285 $ 3,027,824 $ 0 $ (4,120,593) $(1,076,484)
Issuance of common stock in
connection with initial
public offering 1,250,000 12,500 5,091,457 5,103,957
Note payable to related party
converted to common stock 195,945 1,960 998,040 1,000,000
Issuance of preferred stock 421,950 4,220 1,895,780 1,900,000
Repurchase of common stock (60,000) (60,000)
Issuance of warrants to
consultant for services 214,500 214,500
Net loss (3,069,586) (3,069,586)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1995 421,950 4,220 3,074,474 30,745 11,227,601 (60,000) (7,190,179) 4,012,387
Exercise of warrants 421,950 4,220 4,220
Issuance of common stock for
services 43,741 437 125,321 125,758
Net loss (2,927,990) (2,927,990)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1996 421,950 $4,220 3,540,165 $35,402 $11,352,922 $(60,000) $(10,118,169) $ 1,214,375
===============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Electropharmacology, Inc.
Statements of Cash Flows
<TABLE>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,927,990) $(3,069,586)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 286,037 221,162
Amortization 3,516 310,335
Issuance of common stock and warrants for
services 125,758 214,500
Loss on disposal of office equipment 6,426 0
Provision for doubtful accounts 93,000 45,728
Discount on trade note receivable 21,982 0
Changes in operating assets and liabilities:
Trade notes receivable 273,162 (543,334)
Inventory (47,893) (139,271)
Accounts receivable (315,370) (110,007)
Prepaid expenses 14,532 (59,291)
Accounts payable 65,537 (175,870)
Accrued payroll 44,369 (24,406)
Accrued expenses, commissions and customer
deposits 194,543 85,008
Rental equipment (SofPulse-TM- units) (467,827) 51,954
--------------------------
Net cash used in operating activities (2,630,218) (3,193,078)
INVESTING ACTIVITIES
Purchases of property and equipment (32,548) (169,058)
Deposits and other assets (17,142) 15,426
--------------------------
Net cash used in investing activities (49,690) (153,632)
FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock 0 1,900,000
Repayment of long-term notes payable and capitalized
lease obligations (50,537) (48,945)
Net proceeds from issuance of notes payable 0 400,000
Repayment of notes payable to related parties (120,000) (1,562,000)
Proceeds from sale of common stock 4,220 5,248,500
--------------------------
Net cash (used in) provided by financing activities (166,317) 5,937,555
--------------------------
Net (decrease) increase in cash (2,846,225) 2,590,845
Cash at beginning of year 3,069,748 478,903
--------------------------
Cash at end of year $ 223,523 $ 3,069,748
==========================
</TABLE>
6
<PAGE>
Electropharmacology, Inc.
Statements of Cash Flows
<TABLE>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net $ 6,596 $ 162,154
=======================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for services $ 125,758 $ 0
Notes payable to related party converted to common
stock 0 1,000,000
Prepaid offering costs reclassified to additional
paid-in capital 0 144,543
Liability incurred for the repurchase of common stock 0 60,000
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND MAJOR SUPPLIERS
Electropharmacology, Inc. (the Company) was incorporated on August 31, 1990
under the laws of the State of California under the name Magnetic Resonance
Therapeutics, Inc. and reorganized through a merger with and into
Electropharmacology, Inc., a Delaware Corporation, in February 1995. The
Company is engaged in designing, developing, manufacturing and marketing
medical devices that deliver pulsed electromagnetic signals in the radio
frequency range. The Company's current product is SofPulse-TM-.
The Company is dependent on four suppliers to supply all the major components
of its products. Management believes that alternative sources are presently
available if the current supply of any of its product's components are
discontinued, limited or delayed.
REVENUE RECOGNITION
Rental revenue is recognized over the month-to-month period in which the
related equipment is under lease to a customer, primarily on a per use basis.
Sales revenue is recognized upon shipment and the transfer of ownership of
the product.
INVENTORY
Inventory, which consists of raw materials and work-in-process, is valued at
the lower of cost (average cost method) or market. Upon completion, finished
goods are transferred to property and equipment.
OTHER ASSETS
Other assets are amortized using the straight-line method and consist
principally of patent costs, amortized over 17 years from the date of
issuance of the patent.
8
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RENTAL AND OTHER EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Rental and other equipment is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives (or
lease term if shorter life) of the related assets as follows:
Rental equipment 5 years
Leasehold improvements 3 years
Office equipment 4 to 7 years
Laboratory equipment 4 to 7 years
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations
in accounting for its employee stock options because the alternative fair
value accounting provided for under Financial Accounting Standards Board
(FASB) Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ADVERTISING COSTS
Advertising costs, included in selling, general and administrative expenses,
are expensed as incurred and were $62,000 and $36,000 for 1996 and 1995,
respectively.
USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
9
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company sells and/or rents its product to healthcare providers such as
nursing homes, hospitals and physician practices with no specific geographic
concentration and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
INCOME TAXES
The Company provides for income taxes under the provisions of FASB Statement
No. 109, ACCOUNTING FOR INCOME TAXES, which requires the asset and liability
method of accounting for income taxes. Under the asset and liability method
of FASB Statement No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
NET LOSS PER COMMON SHARE
For the years ended December 31, 1996 and 1995, options and warrants are
excluded from the computation of net loss per share because the effect of
inclusion would be antidilutive due to the Company's net operating losses.
2. LIQUIDITY AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business.
The Company reported a net loss of $2,927,990 for the year ended December 31,
1996 and has incurred losses aggregating $10,118,169 through December 31,
1996. At December 31, 1996, the Company had working capital of $192,837 and
shareholder's equity of $1,214,375.
10
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
2. LIQUIDITY AND BASIS OF PRESENTATION (CONTINUED)
The Company's 1997 operating plan contemplates focusing activities on
expanding rental revenue by both increasing the number of SofPulse-TM-
devices in markets where it has achieved reasonable market presence and
redeploying certain devices into markets where their expected use would be at
increased levels. It also contemplates stringent cost controls, personnel
reductions and the deferral of the majority of research and development
activities until after 1997. The Company is also exploring alternative
sources of additional financing. No definitive sources of additional
financing have been identified at this time.
The Company cannot predict whether the operating and financing plans
described above will be successful. If the Company is unable to restructure
and improve its operations and is unable to ultimately obtain additional
financings, it may not be able to continue as a going concern. If the Company
is unsuccessful in its efforts, it may be unable to meet its obligations,
making it necessary to undertake such other actions as may be appropriate to
preserve asset values.
3. INVENTORY
The components of inventory at December 31, 1996 are summarized as follows:
Work-in-process $24,940
Raw material 69,224
-------
$94,164
=======
4. TRADE NOTES RECEIVABLE
During 1995, the Company received two promissory notes in connection with the
sale of SofPulse-TM- devices. These trade notes receivable consist of the
following:
- - Three year noninterest bearing term note in the amount of $218,400 (less
discount of $27,937 at December 31, 1995), payable at $7,800 monthly,
interest imputed at 12%, collateralized by equipment sold.
- - Three year noninterest bearing term note in the amount of $392,400 (less
discount of $39,529 at December 31, 1995), payable at $16,200 monthly,
interest imputed at 12%, collateralized by equipment sold (the final four
payments will total $29,700).
11
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
4. TRADE NOTES RECEIVABLE (CONTINUED)
In January 1997, the Company agreed to accept $248,190 in full payment of
these notes, which had an outstanding balance of $270,172 at the time of the
agreement. The notes were repaid in 1997, resulting in a discount of $21,982.
This discount was recognized in the statement of operations for the year
ended December 31, 1996.
5. RENTAL AND OTHER EQUIPMENT
A summary of rental and other equipment at December 31, 1996 is as follows:
Rental equipment $1,107,925
Leasehold improvements 68,270
Office equipment under capital lease 153,580
Office equipment 118,530
Lab equipment 69,763
----------
1,518,068
Less accumulated depreciation and amortization (573,010)
----------
Net rental and other equipment $ 945,058
==========
6. INCOME TAXES
As of December 31, 1996, the Company has net operating loss carryforwards of
approximately $9,013,000 available to offset future taxable income. Such
carryforwards, which may provide future tax benefits, expire as follows:
2008--$1,206,000; 2009--$2,064,000; 2010--$2,901,000; 2011--$2,842,000. It
appears that a change in ownership of greater than 50% may have occurred as a
result of the Company issuing equity securities. As a result, a substantial
annual limitation may be imposed upon the future utilization of its net
operating loss carryforwards. At this point in time, the Company has not
completed a change in ownership study and the exact effects of any such
limitations are not known.
12
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income taxes at December 31,
1996 are as follows:
Net operating loss carryforwards $ 3,392,000
Other, net 158,600
-----------
Deferred tax assets 3,550,600
Deferred tax liabilities--equipment (75,300)
-----------
3,475,300
Less valuation allowance (3,475,300)
-----------
Net deferred tax assets $ 0
===========
The net change in the valuation allowance for the year ended December 31,
1996 was an increase of approximately $1,075,300.
Income tax expense differs from the expected rate for the year ended
December 31, 1996, primarily as a result of excluding benefits related
to net operating loss carryforwards because of the uncertainty of their
realization at this time.
7. SHAREHOLDERS' EQUITY AND WARRANTS
On November 1, 1996, the Company's stockholders approved proposals to
increase the Company's authorized capital stock from 10,000,000 to 30,000,000
shares of $.01 par value common stock and from 1,000,000 to 10,000,000 shares
of $.01 par value preferred stock.
On May 12, 1995, the Company consummated its initial public offering of
securities on the NASDAQ SmallCap Market and sold 1,250,000 shares of common
stock at $5.00 per share. Additionally, 718,750 redeemable warrants to purchase
common stock were issued and sold for $.10 per warrant. Each warrant entitles
the registered holder thereof to purchase one share of common stock at a price
of $6.00, subject to adjustment in certain circumstances, at any time commencing
June 12, 1996 through May 12, 1998. Net proceeds of this offering, after the
underwriter's commissions and all expenses, were $5,103,957.
For an aggregate of $187.50, the underwriter was issued warrants to purchase
125,000 shares of common stock at $7.00 per share and 62,500 warrants to
purchase warrants at $.14 each to purchase common stock at $6.00 per share.
No warrants have been exercised.
13
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)
During June 1995, the Company issued warrants to purchase 30,000 shares of
common stock at $4.00 per share and 12,000 shares of common stock at $5.25
per share to consultants of the Company for certain investor relations work.
Each of these warrants vested immediately and expires in five years. Further,
a four-year warrant to purchase 25,000 shares of common stock at $5.25 per
share was issued to a consultant to the Company for certain scientific
contributions to the Company. No warrants have been exercised.
In November 1995, in consideration of $2,000,000, the Company issued to an
investor (i) 421,950 shares of Series A Convertible Preferred Stock (the
Preferred Stock) and (ii) warrants to purchase an aggregate of 1,721,950
shares of common stock. In connection with the transaction, the Company paid
a $100,000 commission to two investment bankers and issued five-year warrants
to purchase 100,000 shares of common stock at an exercise price of $5.50 per
share.
Each share of Preferred Stock is convertible, at the option of the holder,
into one share of common stock, subject to adjustment in certain
circumstances, at any time until November 13, 2000, at which time outstanding
shares of Preferred Stock automatically convert into common stock. Shares of
Preferred Stock have votes equal to those of common stock into which they are
convertible and, subject to certain exceptions and except as required by law,
vote together with the common stock as a single class. The Preferred Stock
votes as a single class on certain matters including the incurrence of
secured indebtedness by the Company, changes in the number and the terms of
the directors of the Company and the issuance of cash dividends and
redemptions or repurchase of securities by the Company. The Preferred Stock
is entitled to receive noncumulative cash dividends, when, as and if declared
by the Board of Directors of the Company and has a liquidation preference of
$4.74 per share.
The warrants consist of warrants to purchase: (i) 421,950 shares of common stock
at an exercise price of $.01 per share; (ii) 800,000 shares of common stock at
an exercise price of $6.00 per share; (iii) 250,000 shares of common stock at an
exercise price of $7.50 per share; and (iv) 250,000 shares of common stock at an
exercise price of $9.00 per share. The warrants are exercisable at any time
until November 13, 2005. The exercise price and number of shares issuable upon
exercise of the warrants are subject to adjustment in certain circumstances,
including the issuance of securities for a price less than the current market
value of the common stock. In June 1996, for proceeds to the Company of $4,220,
the investor exercised 421,950 warrants to purchase common stock at an exercise
price of $.01 per share.
14
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)
In November 1995, a family member of an officer and current member of the
Board of Directors of the Company, converted an aggregate of $1,000,000
principle amount of promissory notes into 195,945 shares of common stock. In
consideration for such conversion, the Company granted five-year warrants to
purchase 300,000 shares of common stock at a price of $6.25 per share,
subject to adjustment in certain circumstances. Subject to certain
limitations and exclusions, the Company agreed to include the shares
underlying the warrants in an appropriate registration statement filed by the
Company. No warrants have been exercised.
In December 1995, five-year warrants to purchase 65,000 shares of common
stock at $1.00 were issued to a consultant of the Company as full
consideration for a three-year financial consulting agreement. The Company
recorded an expense of $214,500 in connection with this transaction. Also,
five-year warrants to purchase 100,000 shares of common stock at $5.79 per
share were issued to a management consultant to the Company. No warrants have
been exercised.
In December 1995, the Company repurchased 10,493 shares of common stock for
$60,000 in connection with the resignation of the Company's chief operating
officer.
In December 1996, the Company issued 43,741 shares of common stock to
officers of the Company in lieu of cash for payment of outstanding employment
related liabilities.
The Company currently has 421,950 shares of Class A Preferred Stock and
3,540,165 shares of common stock issued and outstanding. Further, warrants to
purchase an aggregate of 3,012,707 shares of common stock have been issued to
date. With exception of the 421,950 warrants exercised in June 1996, no
warrants have been exercised.
At December 31,1996, shares of the Company's authorized but unissued common
stock were reserved for issuance as follows:
NUMBER OF
SHARES
----------
Exercise of warrants 3,012,707
Employee stock option plans (see Note 8) 1,113,860
Convertible preferred stock 421,950
----------
4,548,517
==========
Such exercise and conversion would result in gross proceeds of $33,343,211.
15
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)
Effective November 1, 1996, the Board of Directors approved an Employee Stock
Purchase Plan (ESPP) covering all employees who meet service period
requirements. The ESPP provides for the sale of common stock to employees of
the Company at a price equal to 85% of the lesser of the market value at the
end of or beginning of each respective quarter. No shares have been issued
under the ESPP during 1996 as the plan is pending shareholder approval.
Effective January 1, 1996, the Company established the Electropharmacology,
Inc. 1996 Non-Employee Director's Equity Compensation Plan (the Compensation
Plan). The Compensation Plan provides for the issuance of common shares as
compensation for serving as a director of the Company. No shares were issued
under the Compensation Plan during 1996.
8. STOCK OPTIONS
The Company has adopted a stock option plan which was amended on November 1,
1996 (the Plan) for officers, directors, employees and consultants. Under the
Plan, the options granted may be either "incentive stock options" (for
officers and employees only) within the meaning of Section 422A of the
Internal Revenue Code, and/or nonqualified stock options (for officers,
employees, directors and consultants). The exercise price of incentive stock
options may not be less than 100% of the fair market value of the Company's
common stock as of the date of grant (110% of the fair market value if the
grant is to an employee who owns more than 10% of the outstanding common
stock). Nonqualified stock options may be granted under the Plan at an
exercise price less than fair market value of the common stock on the date of
grant.
As of December 31, 1996, the Board of Directors has authorized the granting
of options for up to 1,500,000 shares of common stock. Grants of options to
purchase 1,113,860 common shares, (1,043,860 of which are considered
incentive stock options), have been formalized under the Plan. The options
generally vest with a range from immediately to ratably up to five years on
differing vesting schedules. The aggregate proceeds to the Company upon
exercise of all options vested (incentive stock options and nonqualified
stock options, respectively) as of December 31, 1996 is $1,906,826. The
aggregate proceeds to the Company upon exercise of all options outstanding as
of December 31, 1996 is $5,543,616. The options expire at dates ranging from
two to ten years after date of grant.
16
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
As required by Statement No. 123, pro forma information regarding net income
and earnings per share has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free rate of return of 5.200%; dividend yield of
0.000%; volatility factor of the expected market price of the Company's
common stock of .775 and a weighted-average expected life of the options of
ten years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
the existing models, in management's opinion, do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Transactions under the Plan are summarized as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF PRICE PER
SHARES SHARE
------- ---------
Outstanding January 1, 1995 203,712
Exercised 0
Expired 0
Forfeited 0
Canceled (99,438)
Granted 87,500
---------
Outstanding December 31, 1995 191,774 $4.87
Exercised 0 0
Expired 0 0
Forfeited 0 0
Canceled (37,000) $8.09
Granted 959,086 $5.12
---------
Outstanding December 31, 1996 1,113,860 $4.98
========= =====
17
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
8. STOCK OPTIONS (CONTINUED)
Exercisable at December 31, 1996 397,985
=======
Reserved for future option grants at
December 31, 1996 386,140
=======
Weighted average for fair value of options
granted during 1996 $4.26
=====
FASB Statement No. 123 requires disclosure of the weighted average exercise
prices for the current year only in the initial year of adoption.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's 1996 and 1995 pro forma information follows:
1996 1995
----------- ------------
Net loss $(3,665,506) $(3,109,269)
=========== ===========
Loss per common share $ (1.11) $ (1.28)
=========== ===========
The 1996 pro forma effect on net loss is not necessarily representative of
the effect in the future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1995.
The exercise price of options outstanding at December 31, 1996, ranged
between $2.875 and $6.375. The weighted-average remaining contractual life of
those options for 1996 is 7.8 years.
9. LEASE COMMITMENTS
The Company leases certain office equipment and administrative facilities on
a month-to-month basis. The administrative facilities are leased at a monthly
rate of $3,300 under a three-year agreement which expires on March 31, 1997.
Rent expense under operating leases approximated $62,475 and $51,083 for the
years ended December 31, 1996 and 1995, respectively.
The Company leases certain equipment under capital leases expiring in July
1998.
18
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
9. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under capital leases are as follows:
Year ending December 31,
1997 $23,440
1998 3,706
--------
Total minimum lease payments 27,146
Less amount representing interest (1,424)
Less current maturities (22,386)
--------
Long-term obligations $ 3,336
========
10. EMPLOYMENT AGREEMENTS
As of December 31, 1996, the Company has employment agreements with certain
executive officers, the terms of which expire at various times through
December 31, 2001.
The President of the Company (the "President") had a five year employment
agreement expiring on August 4, 2001 which provided for a current annual base
salary of $275,000, one-fourth of which could be deferred and/or paid in
stock, at the Board's discretion, an annual increase in the base salary tied
to the Consumer Price Index, and options to purchase up to 592,086 shares of
common stock at an exercise price of $5.50 per share. The agreement also
provided that, upon the exercise of certain warrants owned by another
shareholder of the Company, the Company would grant the President an option
to purchase 10% of the number of shares acquired upon the exercise of such
warrants by such shareholder. The agreement also provided that if the
President's employment was terminated other than for cause, he would receive
an amount equal to the sum of the highest annual base salary and the average
annual bonus received by him and that he would continue to receive benefits
pursuant to the Company's welfare programs and perquisite programs for a
period of two years.
The President resigned on April 1, 1997. As of April 12, 1997, the Company and
the President entered into a severance agreement that provides, among other
things, a settlement of all rights under his employment agreement with the
Company, a cash payment by the Company of $128,700 over approximately five
months, the issuance of 5,555 shares of common stock of the Company that were
assigned to the President in lieu of a portion of his salary during 1996, the
grant to the President of a ten-year warrant to purchase 25,000 shares of common
stock of the company at $2.25 per share and the cancellation of 384,850 options
to purchase shares of common stock of the Company that were previously granted
to the President, leaving the
19
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
President with 207,236 fully vested options to purchase shares of common
stock of the Company. The severance agreement also provides for the
cancellation of the President's right to be granted an option to purchase
one-tenth of the number of shares of common stock of the Company as to which
the shareholder referred to above exercised his warrants. The President
further agreed to assign to the Company patent protection on inventions made
by him and to cooperate with the Company in obtaining such patent protection.
The Executive Vice President of Corporate Development of the Company has an
employment agreement expiring on December 31, 2001, which provides for a
current annual base salary of $139,000 and options to purchase up to 100,000
shares of common stock at an exercise price of $5.50 per share. The agreement
also provides that if employment is terminated other than for cause, this
individual will receive an amount equal to the sum of his annual base salary
and the average annual bonus received by him and that he will continue to
receive benefits pursuant to the Company's welfare programs and perquisite
programs for a period of one year.
The Executive Vice President of Research and Development of the Company has
an employment agreement expiring on December 31, 1999 which provides for a
current annual base salary of $180,000, one third of which may be deferred
and/or paid in stock, at the Board's discretion, an annual increase in the
base salary tied to the Consumer Price Index, and options to purchase up to
75,000 shares of common stock at an exercise price of $4.75 per share. The
agreement also provides that if employment is terminated other than for
cause, this individual will receive an amount equal to the sum of his annual
base salary and the average annual bonus received by him and that he will
continue to receive benefits pursuant to the Company's welfare programs and
perquisite programs for a period of one year.
The Chief Financial Officer of the Company has an employment agreement
expiring on December 31, 1997 which provides for a current annual base salary
of $75,000, one third of which may be deferred and/or paid in stock, at the
Board's discretion and options to purchase up to 30,000 shares of common
stock at an exercise price of $2.875 per share. The agreement also provides
that if employment is terminated other than for cause, this individual will
receive an amount equal to the sum of his annual base salary and the average
annual bonus received by him and that he will continue to receive benefits
pursuant to the Company's welfare programs and perquisite programs for a
period of one year.
For the year ended December 31, 1996, approximately $37,000 of compensation
was paid in common stock.
20
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
11. CONTINGENCIES
PROPOSED FEDERAL FOOD AND DRUG ADMINISTRATION REGULATIONS
The Company and its products are regulated by the Federal Food and Drug
Administration (the "FDA") which has determined that the Company's products
are Class III medical devices. In April 1994, the FDA proposed the adoption
of new regulations requiring the submission of premarket approval (the PMA)
applications for Class III medical devices.
The Company believes that such proposed regulations, if adopted, could require
a PMA submission in 1998 for continued marketing of the SofPulse-TM- device
although significant additional events need to occur prior to enactment and
enforcement of such new regulations. In addition, the Company will be
provided an opportunity to seek reclassification of its device to Class II.
The PMA requires medical device manufacturers to provide information
establishing the safety and effectiveness of medical devices based on
controlled trials. The PMA process is lengthy, expensive and complex, and
will require the submission to the FDA of substantial clinical data and
statistical analysis demonstrating significant effects. The Company plans to
conduct new clinical trials, as the basis for seeking a PMA from the FDA for
its SofPulse-TM- device, but there can be no assurance that the Company will
be able, for financial or other reasons, to successfully complete required
studies and file its PMA application on a timely basis, or at all.
Failure to file a PMA application within 90 days following the adoption of
final regulations by the FDA, or failing to be granted a reclassification of
the Company's device to Class II by the FDA would result in the revocation of
the Company's Section 510(k) approval and otherwise prevent the Company from
marketing and, consequently, generating any revenue from sales or rentals of
the SofPulse-TM- in the United States until a PMA application is filed and
approved by the FDA. The inability to file and obtain a PMA approval, if and
when required by the FDA, and the inability to obtain reclassification to
Class II would have a material adverse effect on the Company, including
possibly requiring the Company to significantly curtail its operations.
The Company believes that it is taking reasonable measures in order to
maintain its right to continue to market its product in the United States for
the foreseeable future.
LITIGATION
In August 1994, a competitor of the Company filed a lawsuit against the Company
and certain of its present and former directors and officers alleging the
defendants had engaged in deceptive acts and practices, false advertising,
unfair competition, breach of contracts of fiduciary duties between the
plaintiff and certain of the Company's employees, and the Company's involvement
21
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (continued)
in facilitating or participating in the breach of contracts. The plaintiff is
seeking an injunction to rectify the effects of the misconduct, an
unspecified amount of compensatory damages, disgorgement of profits, treble
damages, punitive damages and attorney's fees. The plaintiff also seeks
unspecified injunctive relief prohibiting the Company from engaging in the
alleged acts and ordering the defendants to take remedial action to rectify
the effects on consumers and the plaintiff caused by the alleged acts.
Although the Company believes that it has meritorious defenses which it will
pursue vigorously, there can be no assurance that the ultimate outcome of
such action will not have a material adverse effect on the Company's
liquidity, financial condition and results of operations. As of December 31,
1996, the Company has not accrued any loss contingencies or related expenses
in connection with this lawsuit.
On March 27, 1997 a former distributor for the Company filed a complaint
against the Company and other defendants alleging, among other things,
misappropriation of trade secrets, breach of fiduciary duty, unfair business
practices, tortious inducement to breach contracts, tortious interference
with prospective economic advantage and breach of contract. The plaintiff
seeks unspecified damages, restitution and an injunction prohibiting the
defendants from contacting or doing business with the plaintiff's customers.
Although the Company believes that it has meritorious defenses which it will
pursue vigorously, there can be no assurance that the ultimate outcome of
such action will not have a material adverse effect on the Company's
liquidity, financial condition and results of operations. As of December 31,
1996, the Company has not accrued any loss contingencies or related expenses
in connection with this lawsuit.
Management is unable to make a meaningful estimate of the likelihood or
amount or range of loss that could result from an unfavorable outcome of the
pending litigation. It is possible that the Company's results of operations
or cash flows in a particular quarter or annual period or its financial
position could be materially affected by an unfavorable outcome.
Other claims have been asserted by various claimants. The claims are in
various stages of processing and may ultimately be brought to trial. Based on
discussions with counsel, management has accrued its best estimate of the
ultimate expense of these contingent losses.
12. FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, accounts
receivable, notes receivable from customers and accounts payable approximate
fair value as of December 31, 1996 because of the short maturity of these
items.
22
<PAGE>
EXHIBIT 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 11/14/1996
960332597 - 2452007
CERTIFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
ELECTROPHARMACOLOGY, INC
------------------------------------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
------------------------------------------------
I, Joseph Mooibroek, Chairman and Chief Executive Officer, of
Electropharmacology, Inc. a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), do hereby certify as follows:
FIRST, that the Certificate of Incorporation of the Corporation be
amended as follows:
By striking out the whole first paragraph of ARTICLE FOURTH, as it
now exists and inserting instead a new first paragraph of ARTICLE FOURTH,
reading in its entirety as follows:
"FOURTH. The total number of shares of capital stock which the
Corporation shall have authority to issue is Forty Million (40,000,000)
shares, of which Thirty Million (30,000,000) shares shall be Common Stock,
par value $.01 per share, and Ten Million (10,000,000) shares shall be
Preferred Stock, par value $.01 per share."
SECOND, that such amendment has been duly adopted in accordance with
the provisions of the General Corporation Law of the State of Delaware by the
Board of Directors of the Corporation and by the vote of the holders of not less
than a majority of each class of outstanding stock of the Corporation entitled
to vote thereon and that written notice had been given to all stockholders, all
in accordance with the provisions of Sections 242 and 222 of the General
Corporation law of the State of Delaware.
IN WITNESS WHEREOF, I have signed this certificate this 14th day of
November, 1996.
/s/ JOSEPH MOOIBROEK
-------------------------------
Joseph Mooibroek
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 11/13/1995
950262266 - 2452007
CERTIFICATE OF DESIGNATIONS OF
SERIES A CONVERTIBLE
PREFERRED STOCK OF
ELECTROPHARMACOLOGY, INC.
------------------------------------------------
Pursuant to Section 151
of the Delaware General
Corporation Law
------------------------------------------------
The undersigned duly authorized officer of ELECTROPHARMACOLOGY, INC., a
corporation organized and existing under the General Corporation Law of the
state of Delaware (the "GCL"), in accordance with and pursuant to Section 151
thereof, DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors (the
"Board of Directors") by the Certificate of Incorporation (the "Certificate
of Incorporation") of ELECTROPHARMACOLOGY, INC. (including any successor
thereof, the "Corporation"), the Board of Directors on the date hereof
approved the creation, issuance and voting powers of a new series of
authorized but unissued shares of the Corporation's preferred stock, par
value $.01 per share, consisting of up to 421,950 shares of preferred
stock, designated as the Series A Convertible Preferred Stock, with the Board
of Directors fixing the designations and any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation or the conversion into, or exchange of such
shares for, shares of any other class or classes of stock of the Corporation
and that the Board of Directors duly adopted the following resolution
creating the series of Series A Convertible Preferred Stock:
RESOLVED, that pursuant to the authority expressly granted to and vested
in the Board of Directors by the provisions of the Certificate of
Incorporation and Section 151 of GCL, the issuance of a series of preferred
stock be, and the same hereby is, authorized, and the Board of Directors
hereby fixes the powers, designations, preferences and relative
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof as follows:
A. DESIGNATION AND AMOUNT. The designation of the series of preferred
stock authorized by this resolution shall be "Series A Convertible Preferred
Stock" and the number of shares constituting such series shall be 421,950
with a par value of $.01 per share. Such series is referred to herein as
"Series A Preferred Stock."
<PAGE>
B. RANKING. The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution or winding up, rank senior to all
other equity Securities of the Corporation, including the Common Stock, par
value $.01 per share ("Common Stock"), of the Corporation and any other series
or class of the Corporation's preferred or common stock, now or hereafter
authorized (collectively, "Junior Stock").
C. DIVIDENDS AND DISTRIBUTIONS. Except as may be declared by the Board
of Directors, out of funds legally available therefor, from time to time, the
Corporation shall not have any obligation to pay dividends on shares of Series A
Preferred Stock.
D. VOTING RIGHTS. In addition to any other voting rights provided by law,
shares of Series A Preferred Stock shall have the following voting rights:
(1) Except as otherwise required by applicable law and without
limiting the provisions of Paragraph D(2) below, each share of Series A
Preferred Stock shall entitle the holder thereof to vote, in person or by proxy,
at each special and annual meeting of stockholders, on all matters voted on by
holders of Common Stock, voting together as a single class with the holders of
Common Stock and with holders of all other shares entitled to vote thereon. With
respect to any such vote, each share of Series A Preferred Stock shall entitle
the holder thereof to cast that number of votes per share as is equal to the
number of votes that such holder would be entitled to cast assuming that such
shares of Series A Preferred Stock had been converted, on the record date for
determining the stockholders of the Corporation eligible to vote on any such
matters, into the maximum number of shares of Common Stock into which such
shares of Series A Preferred Stock are then convertible as provided in Paragraph
G below.
(2) Unless the consent or approval of a greater number of shares
shall then be required by law and except as provided in Paragraph D(3) below,
the affirmative vote of the holders of at least a majority of the outstanding
shares of Series A Preferred Stock, in person or by proxy, shall be necessary
to:
(a) authorize, increase the authorized number of shares of or
issue (including on conversion or exchange of any convertible or
exchangeable securities or by reclassification) any shares of any class or
classes of stock ranking senior to the Series A Preferred Stock with
respect to dividends, distributions in liquidation or any other preference,
right or power ("Senior Stock") or ranking on a parity with the Series A
Preferred Stock with respect to dividends, distributions in liquidation, or
any other preference, right or power ("Parity Stock") or any additional
shares of Series A Preferred Stock;
(b) authorize, adopt or approve each amendment to the
Certificate of Incorporation, Bylaws of the Corporation or this resolution
that would increase or decrease the par value of the shares of Series A
Preferred Stock, alter or change
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<PAGE>
the powers, preferences or rights of the shares of Series A Preferred
Stock or alter or change the powers, preferences or rights of any other
capital stock of the Corporation if after such alteration or change such
capital stock would be Senior Stock or Parity Stock;
(c) amend, alter or repeal the Certificate of Incorporation,
Bylaws of the Corporation or this resolution, or enter into any agreement
or other arrangement, so as to affect the shares of Series A Preferred
Stock adversely, including, without limitation, by granting any voting
right to any holder of notes, bonds, debentures or other debt obligations
of the Corporation;
(d) authorize or issue any security convertible into,
exchangeable for or evidencing the right to purchase or otherwise receive
any shares of any class or classes of Senior Stock or Parity Stock;
(e) directly or indirectly, issue, assume, incur or guarantee
any indebtedness for borrowed money or create, assume or suffer to exist
any mortgage, encumbrance or other lien on any property or assets of the
Corporation, other than (i) unsecured indebtedness to a bank or other
institutional lender, (ii) business expenses and current trade accounts
payable or accrued by the Corporation in the ordinary course of business,
provided the same shall be paid in the ordinary course of business, (iii)
indebtedness and related purchase money liens incurred in the purchase of
equipment, provided that any such lien shall attach concurrently with the
acquisition of such equipment, shall not encumber any other property of the
Corporation and shall not exceed the purchase price of such equipment; (iv)
liens imposed by mandatory provisions of law of carriers, warehousemen,
mechanics, materialmen and landlords, incurred in the ordinary course of
business for sums not yet due and payable; (v) liens for current taxes,
assessments or other governmental charges that are not delinquent or remain
payable without penalty or that are being contested in good faith and with
due diligence by appropriate proceedings and with respect to which adequate
reserves have been set aside, and (vi) indebtedness to a bank secured
solely by inventory and equipment up to a maximum of $5,000,000.
(f) amend or alter the Certificate of Incorporation and Bylaws
of the Corporation, or take any other action to change any right, privilege
or obligation of the Board of Directors, including, without limitation, the
size of the Board, the terms of the directors, and the quorum and voting
requirements of the Board;
(g) authorize the merger or consolidation of the Corporation
with or into, or the sale. transfer or other disposition of all or any
substantial part of the assets of the Corporation to, any other person or
entity, or the consummation of any transaction with a person or entity
that, directly or indirectly, controls, is controlled by, or is under
common control with, the Corporation (other than transactions between the
Corporation and a wholly-owned subsidiary of the Corporation), or any
material changes to the Corporation's business plan, dated November, 1995,
a copy of which has been provided to the holders of Series A Preferred
Stock; or
3
<PAGE>
(h) declare or pay cash dividends on, or redeem, purchase or
otherwise acquire for consideration, any shares of Common Stock or other
Junior Stock, or permit any subsidiary of the Corporation, or cause any
other person or entity, to make any distribution with respect to or
purchase or otherwise acquire for consideration, any shares of capital
stock of the Corporation unless the Corporation could, pursuant to this
paragraph, make such distributions or purchase or otherwise acquire such
shares at such time and in such manner.
(3) Upon the first to occur of (a) the average closing sale price per
share of the Common Stock for any one hundred eighty (180) consecutive trading
days equals or exceeds $10.00 per share and the average trading volume for such
period equals or exceeds 100,000 shares per day or (b) earnings before interest
and taxes of the Corporation, computed in accordance with generally accepted
accounting principles consistently applied, for any four consecutive quarters
equals or exceeds $3,500,000, then the consent or approval of the shares of
Series A Preferred Stock shall not be required to approve the matters described
in Paragraph (2)(e).
E. REDEMPTION. The Corporation shall not have any right or obligation to
redeem any shares of Series A Preferred Stock.
F. LIQUIDATION, DISSOLUTION OR WINDING UP.
(1) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, before any distribution or payment
to holders of Junior Stock, the holders of shares of Series A Preferred Stock
shall be entitled to be paid an amount equal to $4.74 per share (the
"Liquidation Preference"), plus an amount equal to all declared and unpaid
dividends, if any, with respect to each share of Series A Preferred Stock.
(2) If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to the
holders of Series A Preferred Stock shall be insufficient to permit payment in
fu11 to such holders of the sums which such holders are entitled to receive in
such case, then all of the assets available for distribution to holders of the
Series A Preferred Stock shall be distributed among and paid to such holders
ratably in proportion to the amounts that would be payable to such holders if
such assets were sufficient to permit payment in full.
(3) Neither the consolidation or merger of the Corporation with or
into any person or entity nor the sale or other distribution to another person
or entity of all or substantially all the assets, property or business of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this Paragraph F.
G. CONVERSION.
(1) STOCKHOLDERS' RIGHT TO CONVERT. Each share of Series A Preferred
Stock shall be convertible, at the option of the holder thereof, into fully paid
and nonassessable shares of Common Stock at the Conversion Price. The
"Conversion Price" shall mean, with respect
4
<PAGE>
to each share of Series A Preferred Stock, $4.74 subject to adjustment pursuant
to Paragraph G(4) below.
(2) AUTOMATIC CONVERSION. On the fifth anniversary of the Issue
Date, each share of Series A Preferred Stock shall be automatically converted
into fully paid and nonassessable shares of Common Stock at the Conversion
Price.
(3) NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION. The
number of shares of Common Stock to be issued upon conversion of shares of
Series A Preferred Stock, pursuant to Paragraphs G(1) or G(2) above, shall
be equal to the product of (X) and (Y), where (X) is a fraction, the
numerator of which is the Liquidation Preference and the denominator of which
is the Conversion Price and (Y) is the number of shares of Series A Preferred
Stock to be converted.
(4) ANTIDILUTION ADJUSTMENTS. The Conversion Price and the securities
or other property issuable upon conversion of the Series A Preferred Stock shall
be adjusted from time to time in certain cases as follows:
(a) ADJUSTMENT FOR RECAPITALIZATION. If the Corporation shall,
at any time or from time to time, subdivide its outstanding shares of
Common Stock (or other securities at the time receivable upon the
conversion of shares of Series A Preferred Stock) by recapitalization,
reclassification or split-up thereof, or if the Corporation shall declare a
stock dividend or distribute shares of Common Stock to its stockholders,
the Conversion Price shall be proportionately decreased so that each share
of Series A Preferred Stock upon conversion after such event shall be
entitled to receive the aggregate number of shares of Common Stock (or
other securities) which, if such share had been converted immediately prior
to such event, such share would have been entitled to receive by virtue of
such recapitalization, reclassification, stock dividend or distribution. If
the Corporation shall, at any time or from time to time, combine the
outstanding shares of Common Stock by recapitalization, reclassification or
combination thereof, the Conversion Price shall be proportionately
increased so that each share of Series A Preferred Stock upon conversion
after such event shall be entitled to receive the aggregate number of
shares of Common Stock (or other securities) which, if such share had been
converted immediately prior to such event such share, would have been
entitled to receive by virtue of such recapitalization, reclassification,
or combination. Any such adjustments pursuant to this paragraph shall be
effective at the close of business on the effective date of such
subdivision or combination or if any adjustment is the result of a stock
dividend or distribution then the effective date for such adjustment based
thereon shall be the record date therefor. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) ADJUSTMENT FOR ISSUANCE OF COMMON STOCK OR RIGHTS TO
PURCHASE COMMON STOCK BELOW CURRENT MARKET VALUE OR DILUTION PRICE. If the
Corporation shall, at any time or from time to time, directly or
indirectly, sell or issue shares of Common
5
<PAGE>
Stock or rights, options, warrants or convertible or exchange
securities containing the right to purchase shares of Common Stock
(collectively, "Rights") at a price per share of Common Stock
(determined in the case of Rights, by dividing (i) the total
consideration received or receivable by the Corporation in
consideration of the sale or issuance of such Rights, plus the total
consideration payable to the Corporation upon exercise, conversion or
exchange thereof, by (ii) the total number of shares of Common Stock
covered by such Rights) lower than the Current Market Value (as
defined below) per share of Common Stock on the date of such sale or
issuance or $2.375 per share (the "Dilution Price" and the greater of
the Current Market Value per share on any date and the Dilution Price
is referred to herein as the "Applicable Price"), then the Conversion
Price shall be reduced to a price determined by multiplying the
Conversion Price in effect immediately prior thereto by a fraction,
the numerator of which shall be the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such sale or issuance
plus (y) the number of shares of Common Stock which the aggregate
consideration received for such sale or issuance would purchase at
the Applicable Price per share of Common Stock on such date and the
denominator of which shall be the total number of shares of Common
Stock outstanding after such sale or issuance. For purposes of such
adjustments, the shares of Common Stock issuable upon exercise,
conversion or exchange of any such Rights shall be deemed to be issued
and outstanding as of the date of such sale or issuance and the
consideration "received" by the Corporation therefor shall be deemed
to be the consideration actually received or receivable by the
Corporation for such Rights, plus the consideration stated in such
Rights to be payable to the Corporation for the shares of Common Stock
covered thereby. If the Corporation shall sell or issue shares of
Common Stock for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then in determining the
"price per share of Common Stock" and the "consideration" received or
receivable by or payable to the Corporation for the purposes of this
paragraph, the fair value of such property shall be determined in good
faith by the Board of Directors. The determination of whether any
adjustment is required under this paragraph, by virtue of the sale or
issuance of any Rights, and the amount of such adjustment, if any,
shall be made only at the time of such issuance or sale and not at the
subsequent time of issuance or sale of Common Stock upon exercise,
conversion or exchange of such Rights. In the event that any such
Rights expire unexercised, the Conversion Price shall be readjusted as
if such Rights had never been issued. For purposes of calculating the
Current Market Value per share of Common Stock under this Paragraph,
such price may include a discount which is determined in good faith by
the Board of Directors to be reasonable and necessary in connection
with such sale or issuance of Common Stock or Rights; provided that
such discount shall not exceed thirty percent (30%).
(c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In the event of any reorganization of the Corporation (or any other
corporation, the securities of which are at the time receivable on the
conversion of shares of Series A Preferred Stock) or in the event the
Corporation (or any such other corporation) shall consolidate
6
<PAGE>
with or merge into another corporation or convey all or substantially
all of its assets to another corporation, then, and in each such case,
each share of Series A Preferred Stock upon conversion thereof at any
time after the consummation of such reorganization, consolidation,
merger or conveyance, shall be entitled to receive, in lieu of the
securities and property receivable upon the conversion of such share
prior to such consummation, the securities or property to which such
share would have been entitled upon such consummation if such share
had been converted immediately prior thereto. In any such event, the
terms of this resolution (including the provisions relating to
adjustments to the Conversion Price) shall be applicable to the
securities or property receivable upon the conversion of shares of
Series A Preferred Stock after such consummation.
(d) NO DILUTION. The Corporation will not, by amendment of its
Certificate of Incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this resolution, but will at all times
in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to
protect the rights of the shares of Series A Preferred Stock against
dilution or other impairment. Without limiting the generality of the
foregoing, while shares of Series A Preferred Stock are outstanding, the
Corporation will take all such action as may be necessary or appropriate in
order that the Corporation may validly and legally issue and sell fully
paid and non-assessable shares of capital stock upon the conversion of such
shares.
(e) CERTIFICATE AS TO ADJUSTMENTS. In the event of an adjustment
in the Conversion Price or the securities or other property issuable upon
conversion of the Series A Preferred Stock, the Corporation at its expense
will promptly compute such adjustment in accordance with the terms of this
resolution and prepare a certificate executed by an executive officer of
the Corporation setting forth such adjustment and showing in detail the
facts upon which such adjustment is based. The Corporation will forthwith
mail a copy of each such certificate to all holders of Series A Preferred
Stock.
(5) NOTICES OF CERTAIN EVENTS. In the event:
(a) the Corporation shall take a record of the holders of its
Common Stock (or other securities at the time receivable upon the
conversion of shares of Series A Preferred Stock) for the purpose of
entitling them to receive any dividend or other distribution, or any right
to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities, or to receive any other right; or
(b) of any capital reorganization of the Corporation, any
reclassification of the capital stock of the Corporation, any consolidation
or merger of the Corporation with or into another corporation, or any
conveyance of all or any substantial part of the assets of the Corporation
to another corporation; or
7
<PAGE>
(c) of any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation,
then, and in each such case, the Corporation shall mail or cause to be
mailed to each holder of Series A Preferred Stock at the time outstanding a
notice specifying, as the case may be, (i) the date on which a record is to
be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right,
or (ii) the date on which such reorganization, reclassification,
consolidation, merger, conveyance, dissolution. liquidation or winding up
is to take place, and the time, if any, is to be fixed, as to which the
holders of record of Common Stock (or such other securities at the time
receivable upon the conversion of shares of Series A Preferred Stock) shall
be entitled to exchange their shares of Common Stock (or such other
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding up. Such notice shall be mailed at
least 20 days prior to the date therein specified and shares of Series A
Preferred Stock may be converted prior to said date.
(6) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion shares of Series A
Preferred Stock, but the Corporation shall pay therefor an amount equal to the
Current Market Value of such fractional share of Common Stock in lieu of each
fraction of a share otherwise called for upon conversion of such shares. For
purposes of this Declaration, the "Current Market Value" of a share of Common
Stock on any date shall be determined as follows:
(a) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the NASDAQ system, the Current Market Value shall be
the average closing sale price per share of the Common Stock on such
exchange or system for the ten (10) consecutive trading days commencing
fifteen (15) trading days before the date in question as reported (absent
manifest error in the printing thereof) by the Wall Street Journal (Eastern
Edition); or
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges; the Current Market Value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau,
Inc. on the last trading day prior to the date in question; or
(c) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
Current Market Value shall be the fair market value as determined in good
faith by a committee of disinterested members of the Board of Directors
based on a written opinion of an independent investment banking firm of
nationally recognized stature.
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<PAGE>
(7) MECHANICS OF CONVERSION. The option to convert shall be excised
by surrendering for such purpose to the Corporation, at any place where the
Corporation shall maintain a transfer agent for its Common Stock, certificates
representing the shares to be converted, duly endorsed in blank or accompanied
by proper instruments of transfer, and at the time of such surrender, the person
or entity in whose name any certificate for shares of Common Stock shall be
issuable upon such conversion shall be deemed to be the holder of record of such
shares of Common Stock on such date, notwithstanding that the share register of
the Corporation shall then be closed or that the certificates representing such
Common Stock shall not then be actually delivered to such person.
(8) RESERVATION OF COMMON STOCK. The Corporation shall at all times
reserve and keep available for issuance upon the conversion of the shares of
Series A Preferred Stock the maximum number of its authorized but unissued
shares of Common Stock as is reasonably anticipated to be sufficient to permit
the conversion of all outstanding shares of Series A Preferred Stock, and shall
take all action required to increase the authorized number of shares of Common
Stock if at any time there shall be insufficient authorized but unissued shares
of Common Stock to permit such reservation or to permit the conversion of all
outstanding shares of Series A Preferred Stock.
(9) NO CONVERSION CHARGE OR TAX. The issuance and delivery of
certificates for shares of Common Stock upon the conversion of shares of Series
A Preferred Stock shall be made without charge to the holder of shares of Series
A Preferred Stock for any issue or transfer tax, or other incidental expense in
respect of the issuance or delivery of such certificates or the securities
represented thereby, all of which taxes and expenses shall be paid by the
Corporation.
H. CERTAIN REMEDIES. Any registered holder of shares of Series A
Preferred Stock shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this resolution and to enforce specifically the
terms and provisions of this resolution in any court of the United States or any
state thereof having jurisdiction, this being in addition to any other remedy to
which such holder may be entitled at law or in equity.
I. CERTAIN INFORMATION.
(1) FINANCIAL INFORMATION. Within 20 days of the end of each month,
the Corporation shall deliver to the holders of Series A Preferred Stock the
unaudited financial statements of the Corporation and its subsidiaries for such
month and for the period commencing on the first day of the fiscal year and
ending on the last day of such month, certified by the chief financial officer
of the Corporation as presenting fairly the financial condition as of such date
and for such period in conformity with generally accepted accounting principles
consistently applied, together with a certificate of such officer stating that
there has not occurred any material adverse change in the business, affairs,
operations, conditions or prospects of the Corporation.
9
<PAGE>
(2) OTHER INFORMATION. Within five (5) days of obtaining knowledge of
the events described below, the Corporation shall give written notice to the
holders of Series A Preferred Stock:
(a) of any material default or event of default under any
material agreement, contract or undertaking to which the Corporation is
bound;
(b) of any material dispute, litigation, investigation,
proceeding or suspension which may exist at any time between the
Corporation and any governmental entity or third party;
(c) of any material non-compliance by the Corporation with any
law, rule or regulation applicable to or binding upon the Corporation or
any of its properties or operations; or
(d) of any other matter that has resulted in or could reasonably
be expected to result in a material adverse change in the business,
affairs, operations, conditions or prospects of the Corporation.
Each notice pursuant to this section shall be accompanied by a certificate of
the chief financial officer of the Corporation setting forth details of the
occurrence referred to therein and stating what action the Corporation proposes
to take with respect thereto.
(3) CONFIDENTIALITY. In the event that any information provided to
the holders of Series A Preferred Stock is material non-public information, the
holders of Series A Preferred Stock shall keep such information confidential,
until such time as such information becomes generally known or available to the
Public.
IN WITNESS WHEREOF, this Certificate of Designations has been executed on
behalf of the Corporation on this 10 day of November, 1995.
ELECTROPHARMACOLOGY, INC.
ATTEST: By: /s/ David Saloff
---------------------------------
David Saloff, Chief Executive
Officer and Chairman of the Board
/s/ Walter L. Wasserman
- -------------------------------
Walter L. Wasserman,
Assistant Secretary [CORPORATE SEAL]
[JHI HERRICK-GENERAL]020A
10561-67533
10
<PAGE>
STATE OF DELAWARE
SECRETARY Of STATE
DIVISION Of CORPORATIONS
FILED 09:00 AM 12/23/1994
944254864 - 2452007
CERTIFICATE OF MERGER
OF
MAGNETIC RESONANCE THERAPEUTICS, INC.
(a California corporation)
INTO
ELECTROPHARMACOLOGY, INC.
(a Delaware corporation)
Pursuant to Section 252(c) of
the General Corporation Law
Electropharmacology, Inc., a Delaware corporation, desiring to merge
Magnetic Resonance Therapeutics, Inc., a California corporation, pursuant to the
provisions of Section 252(c) of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: The names and states of incorporation of each constituent
corporation are:
NAME STATE OF INCORPORATION
---- ----------------------
ElectroPharmacology, Inc. Delaware
Magnetic Resonance Therapeutics, Inc. California
SECOND: An Agreement and Plan of Merger has been approved, adopted,
certified, executed and acknowledged by Magnetic Resonance Therapeutics, Inc. in
accordance with Section 252(c) of the General Corporation Law and approved,
adopted, certified, executed and acknowledged by Electropharmacology, Inc. in
accordance with the second sentence of Section 251(f) of the General Corporation
Law (there being no shares of stock of such corporation issued prior to the
adoption by the Board of
<PAGE>
Directors of the resolution approving the Agreement and Plan of Merger).
THIRD: The name of the surviving corporation is Electropharmacology,
Inc., which will continue its existence under the name Electropharmacology, Inc.
upon the effective date of the merger pursuant to the provisions of the General
Corporation Law.
FOURTH: The Certificate of Incorporation of Electropharmacology, Inc.
shall be the Certificate of Incorporation of the surviving corporation.
FIFTH: An executed copy of the Agreement and Plan of Merger is on file
at the principal place of business of the surviving corporation, 2301 N.W. 33rd
Court, Suite 102, Pompano Beach, Florida 33069, and a copy of the Agreement and
Plan of Merger will be furnished by the surviving corporation, on request and
without cost, to any shareholder of any constituent corporation.
SIXTH: Magnetic Resonance Therapeutics, Inc. has authorized capital
stock of 15,000,000 shares of common stock and 5,000,000 shares of preferred
stock.
IN WITNESS WHEREOF, Electropharmacology, Inc. has caused this Certificate
to be executed by its President thereunto duly authorized this 14th day of
December, 1994
ELECTROPHARMACOLOGY, INC
(a Delaware Corporation)
By: /s/ David Saloff
---------------------------
David Saloff, President
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<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "ELECTROPHARMACOLOGY, INC.", FILED IN THIS OFFICE ON THE NINTH
DAY OF DECEMBER, A.D. 1994, AT 9 O'CLOCK A.M.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
2452007 8100 [SEAL] AUTHENTICATION: 8370973
971081527 DATE: 03-13-97
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/09/1994
944239718 - 2452007
CERTIFICATE OF INCORPORATION
OF
ELECTROPHARMACOLOGY, INC.
FIRST: The name of the Corporation is: ELECTROPHARMACOLOGY, INC.
SECOND: The address of the Corporation's registered office In the State
of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County
of Kent 19904. The name of its registered agent at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the laws of the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is eleven million (11,000,000) shares, of which
ten million (10,000,000) shares shall be Common Stock, par value $.01 per share,
and one million (1,000,000) shares shall be Preferred Stock, par value $.01 per
share.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby expressly
authorized to provide, by resolution or resolutions duly adopted by it prior to
issuance, for the creation of each such series and to fix the designation and
the powers, preferences, rights, qualifications, limitations and restrictions
<PAGE>
relating to the shares of each such series. The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but not
be limited to, determining the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any
shares of stock of any other class or any other series of Preferred Stock;
(d) whether the shares of such series shall be subject to redemption
by the Corporation, and, if so, the times, prices and other conditions of
such redemption;
(e) the amount or amounts payable upon shares of such series upon,
and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so,
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<PAGE>
the extent to and manner in which any such retirement or sinking fund
shall be applied to the purchase or redemption of the shares of such
series for retirement or other corporate purposes and the terms and
provisions relating to the operation thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of
Preferred Stock or any other securities and, if so, the price or prices or
the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of
stock of any other class or any other series of Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
Preferred Stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions, thereof.
-3-
<PAGE>
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
FIFTH: The name and address of the sole incorporator is as follows:
NAME ADDRESS
Ralph D. Mosley, Jr. 405 Lexington Avenue
New York, New York 10174
SIXTH: Unless required by law or determined by the chairman of the
meeting to be advisable, the vote by stockholders on any matter, including the
election of directors, need not be by written ballot.
SEVENTH: The Corporation reserves the right to increase or decrease
its authorized capital stock, or any class or series thereof, and to reclassify
the same, and to amend, alter, change or repeal any provision contained in the
Certificate of Incorporation under which the Corporation is organized or in any
amendment thereto, in the manner now or hereafter prescribed by law, and all
rights conferred upon stockholders in said Certificate of Incorporation or any
amendment thereto are granted subject to the aforementioned reservation.
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<PAGE>
EIGHTH: The Board of Directors shall have the power at any time,
and from time to time, to adopt, amend and repeal any and all By-Laws of the
Corporation.
NINTH: All persons who the Corporation is empowered to indemnify
pursuant to the provisions of Section 145 of the General Corporation Law of the
State of Delaware (or any similar provision or provisions of applicable law at
the time in effect), shall be indemnified by the Corporation to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise. No repeal or amendment of this Article NINTH shall
adversely affect any rights of any person pursuant to this Article NINTH which
existed at the time of such repeal or amendment with respect to acts or
omissions occurring prior to such repeal or amendment.
TENTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for any monetary damages for breaches of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the General Corporation Law of the State of
Delaware; or (iv) for any transaction from which the director derived an
improper
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<PAGE>
personal benefit. No repeal or amendment of this Article TENTH shall adversely
affect any rights of any person pursuant to this Article TENTH which existed at
the time of such repeal or amendment with respect to acts or omissions occurring
prior to such repeal or amendment.
The undersigned incorporator hereby affirms that the statements made herein
are true under penalties of perjury, and is hereby executing this Certificate of
Incorporation this 9th day of December, 1994.
/s/ Ralph D. Mosley, Jr. (L.S.)
-----------------------------------
Ralph D. Mosley, Jr.
-6-
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the
fifth day of August 1996, by and between Electropharmacology, Inc., a Delaware
Corporation (the "Company"), and David Saloff(the "Executive").
WHEREAS, the Company desires to retain the Executive in its employ as the
Executive Vice President for Corporate Development of the Company for the period
provided in this Agreement, and the Executive has agreed to continued employment
with the Company in accordance with the Executives amended contractual terms and
conditions set forth below;
WHEREAS, the Company and the Executive have discussed and the Executive has
accepted the new revised terms and conditions of the Executive's current
employment Agreement and this Agreement supersedes any and all agreements, oral
and written, between the parties hereto with respect to the subject hereof,
including without limitation, the Employment Agreement dated January 1, 1993, as
amended on; August 26, 1996; and
WHEREAS, this Agreement is intended to, and shall, set forth the definitive
agreement of the parties.
NOW THEREFORE, for and in consideration of the recitals and premises, and
the promises, covenants and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts such employment with the Company, for the term of
employment set forth in Section 2 hereof, all upon the terms and conditions
hereafter set forth.
2. TERM. Employment shall be for a term commencing on the date
hereof and, subject to prior termination under Section 8, Section 9, Section 10,
Section 12 and Section 13 hereof, expiring December 31, 2001. Notwithstanding
the previous sentence, (commencing December 31,
<PAGE>
2001), the term of this Agreement shall automatically be extended for one
additional year upon the terms and conditions set forth herein, unless either
party to this Agreement gives the other party written notice (delivered in
accordance with Section 21 hereof and at least 90 days prior to December 31,
2001) of such party's intention not to further extend the term of this
Agreement. For purposes of this Agreement, any reference to the "term" of
this Agreement shall include the original term and any extension thereof.
3. DUTIES OF THE EXECUTIVE. The Executive shall serve as the
Executive Vice President for Corporate Development of the Company. The Executive
shall perform such executive duties as an executive vice-president for corporate
development would normally perform or as otherwise specified in the By-laws of
the Company as in effect on the date of this Agreement, and shall perform, in
addition thereto, such other reasonable duties as the CEO may request. Except as
may otherwise be approved in advance by the CEO and except during vacation
periods and periods of absence due to sickness, personal injury or other
disability, the Executive shall devote substantially all of his normal working
time and his best efforts to the performance of his duties hereunder.
Notwithstanding the foregoing, nothing contained herein shall preclude the
Executive from (i) serving on the boards of directors of other companies or
organizations with the approval of the Board of Directors of the Company (the
"Board") (not to be unreasonably withheld) or (ii) pursuing his personal,
financial and legal affairs provided that such activity does not materially
interfere with the performance of the Executive's obligations hereunder.
4. COMPENSATION.
a) For purposes of this Agreement, the Executive's base salary
shall be deemed to be $130,000 per year.
-2-
<PAGE>
b) Notwithstanding the provisions of Section 4(a) hereof, for
the period commencing on the date of this Agreement the Executive's salary shall
be deemed to be $139,000 on an annualized basis. The Executive's salary may be
increased from time to time by the Board. During the term of this Agreement,
Executive's salary shall be reviewed at least annually to determine whether an
increase beyond the Executive's salary is warranted and appropriate.
Except as set forth in this Section 4, such salary shall be
payable at the times and in the manner consistent with the Company's general
policies regarding compensation of executive employees, but in no event less
frequently than bi-monthly.
c) In addition to the salary provided by Section 4(b) hereof,
the Executive shall be eligible annually to receive any incentive bonus (the
"Bonus"), that the Board may grant to him based on the Company's executive
compensation plan then in effect, based on the CEO's assessment of the
Executive's individual performance, which decision shall be made by the Board in
its sole discretion. The CEO shall give written notice to the Executive of the
grant of any such Bonus and the amount thereof upon direction of the Board and
Compensation Committee. Such Bonus shall be payable on the next date on which
the Executive is entitled to receive a payment of his base compensation. The
Board may from time to time authorize such additional compensation to the
Executive, in cash, property; options or warrants as the Board may determine in
its sole discretion to be appropriate.
5. EXECUTIVE BENEFITS.
a) In addition to the compensation described in Section 4, the
Company shall make available to the Executive and his eligible dependents such
benefits which are comparable to those provided to other executive and
management employees of the Company, including without limitation, any group
hospitalization, health, dental care or sick leave plan, life or other insurance
or death benefit plan, travel or accident insurance retirement income or pension
plan, employee stock
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<PAGE>
option plan or other present or future group employee benefit plan or program
of the Company for which key executives are or shall become eligible, and
Executive shall be eligible to receive during the period of his employment
under this Agreement, and, to the extent provided in Section 11 and Section
13 hereof, during any subsequent period for which he shall be entitled to
receive payment from the Company under Section 11 or Section 13 hereof, all
benefits for which key executives are eligible under every such plan or
program to the extent permissible under the general terms and provisions of
such plans and programs and in accordance with the provisions thereof
provided that, except to the extent specifically set forth in Sections 4(c),
11, 12 and 13, the Executive shall not be permitted to participate in
management incentive programs or in termination pay programs. The Executive
shall be eligible to participate in any such plan or program under the terms
and conditions applicable to other executive and management employees and in
a manner commensurate with the Executive's position and level of
responsibility with the Company as compared to the position and level of
responsibility of other executive and management employees of the Company as
determined by the Board in its sole discretion.
b) In addition to any life insurance coverage made available to
the Executive under Section 5(a) hereof, the Company shall provide, at its sole
cost and expense, to the Executive a term life-insurance contract on the
Executive's life in an amount one (1) times his annual base compensation, the
proceeds of which shall be payable to such beneficiary as Executive may
designate.
c) The Company shall pay to Executive an automobile allowance
in the amount of$1000 per month during the term of this Agreement.
d) The Executive shall be entitled to four (4) weeks of paid
vacation per calendar year which shall be pro-rated for partial years.
Executive may carry over from year to year up
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<PAGE>
to 500 hours of unused vacation time. Notwithstanding anything herein to the
contrary, the Executive may not take more than two (2) weeks vacation during
any twelve (12) week period without the prior written permission of the
Company, which shall not be unreasonably withheld.
6. EXPENSES. The Company shall also pay or reimburse the Executive
for all reasonable and necessary expenses incurred by the Executive in
connection with his duties on behalf of the Company in accordance with the
general policies of the Company and his employment by the Company pursuant to
this Agreement.
7. PLACE OF PERFORMANCE. In connection with his employment by the
Company, unless otherwise agreed by the Executive, the Executive shall be based
at the principal executive offices of the Company, except for travel reasonably
required for Company business.
8. TERMINATION. The Company may terminate Executive's employment
hereunder for Cause which shall mean;
a) The Executive's conviction by, or entry of a plea of guilty
or nolo-contendere in, a court of competent and final jurisdiction for any crime
involving moral turpitude or punishable by imprisonment in the jurisdiction
involved (provided that if the Executive's conviction is subsequently
overturned, and the Company had terminated the Executive pursuant to this
Section 8(a), such termination shall be deemed to be without Cause and the
Executive shall be entitled to receive the payments and benefits set forth in
Section 11, together with interest at the then current prime rate of Citibank,
Florida, from the date such payments would have been due to the Executive had
such termination been without Cause until the date such payments are made to the
Executive);
b) Executive's breach of any of the covenants contained in
Section 25 of this Agreement;
-5-
<PAGE>
c) Executive's commission of an act of fraud, whether prior to
or subsequent to the date hereof; upon Employer;
d) Executive's continuing repeated willful failure or refusal
to perform his duties as required by this Agreement, provided, that termination
of Executive's employment pursuant to this subparagraph (d) shall not constitute
valid termination for cause unless Executive shall have first received written
notice from the Board stating with specificity the nature of such failure or
refusal and affording Executive at least fifteen (15) days to correct the act or
omission complained of;
e) Gross negligence, insubordination, material violation by
Executive of any duty of loyalty to the Company or any other material misconduct
on the part of Executive, provided that termination of Executive's employment
pursuant to this subparagraph (e) shall not constitute valid termination for
cause unless Executive shall have first received written notice from the Board
stating with specificity the nature of such failure or refusal and affording
Executive at least fifteen (15) days to correct the act or omission complained
of;
f) the Executive breaches this Agreement as determined by the
Company after the Executive has been given written notice of such alleged
breach, and not less than thirty (30) days to cure such alleged breach or such
longer period as may be reasonably necessary to cure such breach provided that
the Executive is diligently pursuing such cure.
9. RESIGNATION. In the event that (i) the Company shall during the
term of this Agreement (A) fail to continue the Executive as Executive Vice
President of the Company, (B) reduce the Executive's annual salary below the
minimum amount specified in Section 4(a) without the Executive's prior written
consent, (C) violate any material term of this Agreement, provided that the
Executive gives the Company written notice of such violation and the Company
fails to cure such violation within 30 days or such longer period (the "Cure
Period") as may be reasonably necessary to
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<PAGE>
cure such violation provided that the Company is diligently pursuing such
cure, then the Executive, at his sole option, may give notice to the Company
at any time within ten (10) days after the expiration of the Cure Period of
his election to resign and terminate this Agreement ("Permitted Resignation")
effective immediately upon receipt of such notice (delivered in accordance
with Section 21 hereof), or effective upon such other date (not later than
ten (10) days following such notice) that the Executive may designate in such
notice. (ii) The Executive is required to relocate (defined as greater than
fifty [50] miles from the then present company headquarters or subsidiary
location than served by the Executive) because of a, or due to a change of
control hereinafter defined as;
A) the Company is merged, consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than fifty percent (50%) of the
combined voting power of the then outstanding securities entitled to vote
generally in the election of directors ("Voting Stock") of such corporation or
person immediately after such transaction are held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such transaction;
B) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal person,
and as a result of such sale or transfer less than fifty percent (50%) of the
combined voting power of the ten outstanding Voting Stock of such corporation
or person immediately after such sale or transfer is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale or
transfer;
C) If; during any period of two consecutive years, (a)
individuals who at the beginning of any such period constitute the Directors of
the Company and (b) such other persons as are nominated or elected by a vote of
the Directors of the company, collectively, cease for any reason to constitute
at least a majority of the Directors of the Company; provided, however, that for
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<PAGE>
purposes of this clause (v) each Director who is first elected, or first
nominated for election by the Company's stockholders, by a vote of the
Director's of the Company (or a committee thereof) then still in office who were
Director's of the company at the beginning of any such period will be deemed to
have been a Director of the company at the beginning of such period.
Upon the closing of the event/change of control and up to one
year after the change of control event, the Executive may resign and receive
benefits under 11(a) limited to the Executive's base salary pursuant to Section
4(A) plus the Executive's average annual bonus granted pursuant to Section 4(c)
hereof during the two year period immediately preceding the Executives
resignation due to a change of control and required relocation event.
10. DEATH. The term of this Agreement shall terminate on the death
of the Executive.
11. TERMINATION PAYMENTS AND BENEFITS. If the Executive's employment
hereunder is terminated by the Executive by Permitted Resignation or by the
Company other than for Cause, prior to the end of the term of this Agreement,
then the Company shall be obligated to pay to the Executive certain termination
payments and make available certain benefits as follows:
a) TERMINATION PAYMENT. The Company shall pay to the Executive
a lump sum in cash, payable within ten (10) business days after the effective
date of such termination, equal to one times the sum of (i) the Executive's base
salary pursuant to Section 4(a) PLUS (ii) the Executive's average annual bonus
granted pursuant to Section 4(c) hereof during the two-year period (or such
shorter period during which the Executive is employed by the Company)
immediately preceding the Executive's termination, prorated for a partial year.
In addition, (i) if at the time of termination the remainder of the term is
greater than one (1) year, and the Executive remains unemployed one (1) year
after the termination date, the Executive shall be entitled to receive his base
salary pursuant to Section
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<PAGE>
4(a) from such one (1) year anniversary of the termination date until the
earlier of (A) the end of the term or (B) the date on which the Executive
becomes employed (subject to the limitation that the total amount paid to the
Executive pursuant to this Section 11(a) shall not exceed the total amount of
base salary the Executive would have received pursuant to Section 4(a)
between the termination date and the end of the term) and (ii) if at the time
of termination the remainder of the term is less than one (1) year, the
Executive will receive one (1) times the amount otherwise provided in this
Section 11(a). Notwithstanding any provision to the contrary contained
herein, the Executive shall be entitled to receive the payments provided for
in the second sentence of this Section 11(a) (A) only for so long as the
Executive uses all means available to him to diligently pursue new employment
and (B) provided the Executive accepts any reasonable offer of employment. It
shall be within the Company's sole and absolute discretion to determine
whether the Executive has complied with the provisions of this Section 11(a).
b) BENEFITS. Notwithstanding any provision to the contrary in
any option agreement or other agreement or in any plan, except as provided for
under Section 10 (a), (i) all of the Executive's outstanding stock options shall
immediately vest and become exercisable and the Executive shall have the full
term of the option to exercise any of the Executive's stock options, and (ii)
all restrictions on any other equity awards relating to continued performance of
services shall lapse.
Subject to Section 15, for one year following the termination of
this Agreement, the Company shall use its reasonable best efforts to maintain in
full force and effect for the continued benefit of the Executive all employee
welfare benefit plans and perquisite programs in which the Executive was
entitled to participate immediately prior to the Executive's termination or
shall arrange to make available to the Executive benefits substantially similar
to those which the Executive would otherwise have been entitled to receive if
his employment had not been terminated; provided,
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<PAGE>
however; that (i) if the remainder of the term exceeds one (1) year, the
Company shall use its reasonable best efforts to continue to provide such
benefits to the Executive until the end of the term and (ii) if the remainder
of the term is less than one (1) year, the obligation of the Company pursuant
to this Section 11(b) shall extend for only one (1) year following the
termination date. Such welfare benefits shall be provided to the Executive
on the same terms and conditions (including, without limitation, employee
contributions toward the premium payments) under which the Executive was
entitled to participate immediately prior to his termination.
Notwithstanding the foregoing, with respect to the Executive's
continued coverage under the Company's medical and dental plan, or a successor
plan, pursuant to this provision, the Executive's "qualifying event" for
purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")
shall be his date of termination from the Company.
12. OTHER TERMINATION. If the Company terminates this Agreement for
Cause or if the Executive terminates this Agreement for any reason other than by
Permitted Resignation or if the Executive dies or in the event of the
Executive's Disability, then the Company and the Executive shall have no further
obligation hereunder except as follows or except as provided in any available
plan, program or agreement:
a) The Company shall pay the Executive his then current minimum
base salary through the effective date of such termination;
b) If the Executive terminated this Agreement other than by
Permitted Resignation, he shall receive such benefits, if any, as are afforded
by the Company under its then existing policies applicable to employees who
voluntarily terminate their employment; and
c) The Executive shall have the rights set forth in Section 13
hereof in the event of termination of this Agreement upon his Disability.
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13. DISABILITY.
a) In the event of the Executive's Disability (as defined
herein) during the term of this Agreement, the Executive's duties and
obligations hereunder shall cease and the Company shall pay to the Executive in
cash, for each calendar year until the Executive reaches the age of 65 and at
the times at which the Executive would have received payment of his base salary,
an amount equal to 60% of the sum of(i) the Executive's highest annual base
salary pursuant to Section 4(a) then in effect for the period prior to the
Executive's Disability. For this purpose, the Company shall maintain in full
force and effect during the term of this Agreement an insurance policy with an
insurance company that reasonably shall provide for the payment of such amounts
to the Executive upon his Disability.
b) "Disability" shall be defined as in the insurance policy
referenced in Section 13(a) hereof.
c) For the period during which the Executive is entitled to
receive payments under this Section 13, the Company shall use its reasonable
best efforts to maintain in full force and effect for the continued benefit of
the Executive all employee welfare benefit plans, as provided for under the
insurance policy limits, except for life insurance provided for under Section
5(b); and except for the automobile allowance set forth in Section 5(c). Such
welfare benefits shall be provided to the Executive on the same terms and
conditions (including employee contributions toward the premium payments) under
which the Executive was entitled to participate immediately prior to his
Disability.
d) The Company shall have no obligation under this Section 13
if the Executive is not insurable under an insurance policy with a reasonably
price premium, as determined by the Company in its sole absolute discretion.
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14. NO OTHER TERMINATION COMPENSATION. Except as specifically
provided in Sections 11, 12 and 13 hereof, upon termination of this Agreement
for any reason, the Executive shall not be entitled to any severance pay or to
any other compensation or payments (by way of salary, damages or otherwise) of
any nature relating to this Agreement or otherwise relating to or arising out of
his employment by the Company.
15. MITIGATION OBLIGATION. The Executive shall mitigate damages
including the amount of any payment provided for pursuant to Section 13 by
seeking other employment or otherwise; provided, however, that the Executive is
under no obligation to mitigate any amount provided for by insurance policies
under Section 13 hereof.
16. ARBITRATION. Any dispute between the parties under this Agreement
shall be submitted to arbitration and such arbitration shall be conducted in
accordance with the rules of the International Chamber of Commerce ("ICC"). Each
of the parties hereto shall appoint one person as an arbitrator to hear and
determine any such dispute and if the two arbitrators so chosen shall be unable
to agree, then the two arbitrators shall select a third impartial arbitrator
whose decision shall control. All arbitrators selected shall have previously
engaged in and conducted arbitration's for at least the past three (3) years in
accordance with the rules of the ICC. The arbitrators shall have the right only
to interpret and apply the provisions of this Agreement and may not change any
of its provisions except as permitted by Section 23 hereof. The arbitrators
shall permit reasonable pre-hearing discovery of facts, to the extent necessary
to establish a claim or a defense to a claim, subject to supervision by the
arbitrators. The determination of the arbitrators shall be conclusive and
binding upon the parties and judgment upon the same may be entered in any court
having jurisdiction thereof. The arbitrators shall give written notice to the
parties stating his or their determination, and shall furnish to each party a
signed copy of such determination. Arbitration hereunder shall be final and
binding on the parties and
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may not be appealed. The expenses of arbitration, including reasonable
attorneys' fees, shall be borne by the losing party or as the arbitrators
shall otherwise equitably determine.
17. INDEMNIFICATION. To the maximum extent permitted under the
corporate laws of the State of Delaware or, if more favorable, the By-Laws of
the Company as in effect on the date of this Agreement, (a) the Executive shall
be indemnified and held harmless by the Company, as provided under such
corporate laws or such By-Laws, as applicable, for any and all actions taken or
matters undertaken, directly or indirectly, in the performance of his duties and
responsibilities under this Agreement or otherwise on behalf of the Company, and
(b) without limiting clause (a), the Company shall indemnify and hold harmless
the Executive from and against (i) any claim, loss, liability, obligation,
damage, cost, expense, action, suit, proceeding or cause of action
(collectively, "Claims") arising from or out of or relating to the Executive's
acting as an officer, director, employee or agent of the Company or any of its
affiliates or in any other capacity, including, without limitation, any
fiduciary capacity, in which the Executive serves at the request of the Company,
and (ii) any cost or expense (including, without limitation, fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Executive
in connection with the defense or investigation thereof. If any Claim is
asserted or other matter arises with respect to which the Executive believes in
good faith the Executive is entitled to indemnification as contemplated hereby,
the Company shall pay the Expenses incurred by the Executive in connection with
the defense or investigation of such Claim or matter (or cause such Expenses to
be paid) on a monthly basis, provided that the Executive shall reimburse the
Company for such amounts, plus simple interest thereon at the then current prime
rate offered by Citibank, Florida as in effect from time to time, compounded
annually, if the Executive shall be found, as finally judicially determined by a
court of competent jurisdiction, not to have been entitled to indemnification
hereunder.
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18. AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto with respect to
the subject matter hereof, including without limitation the Employment Agreement
dated January 1, 1993, as amended on September 13, 1994, and contains all of the
covenants and agreements between the parties with respect to such subject
matter, and Executive has received legal counsel regarding the entirety of the
Agreement.
19. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
20. SUCCESSORS AND BINDING AGREEMENT.
a) The Company will reasonably require any successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to the Executive acting
reasonably, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement).
b) This Agreement will inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
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c) The rights of the Company under this Agreement may without
the consent of Executive, be assigned by the Company in its sole and unfettered
discretion (a) to any person, firm, corporation, or other business entity which
at any time, whether by purchase, merger, or otherwise, directly or indirectly,
acquires all or substantially all of the assets or business of the Company, or
(b) to any subsidiary or affiliate of the Company (the "Company Group"), or any
transferee, whether by purchase, merger or otherwise, which directly or
indirectly acquires all or substantially all of the assets of the Company or any
other member of the Company Group.
21. NOTICES. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof confirmed), or five business days
after having been mailed by United States registered or certified mail, return
receipt requested, postage prepaid, or three business days after having been
sent by a nationally recognized overnight courier service such as Federal
Express, UPS, or Purolator, addressed to the Company (to the attention of the
Secretary of the Company) at its principal executive offices and to the
Executive at his principal residence, or to such other address as any party may
have furnished to the other in writing and in accordance herewith, except that
notices of changes of address shall be effective only upon receipt.
22. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Florida, without giving effect to the
principles of conflict of laws of such State.
23. SEVERABILITY AND REFORMATION. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any present or future law,
and if the rights or obligations of the parties under this Agreement would not
be materially and adversely affected thereby, such provision
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shall be fully separable, and this Agreement shall be construed and enforced
as if such illegal, invalid or unenforceable provision had never comprised a
part thereof, the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance therefrom, and, in lieu of such
illegal, invalid or unenforceable provision, there shall be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible, and the parties hereto request the court or any
arbitrator to whom disputes relating to this Agreement are submitted to
reform the otherwise illegal, invalid or unenforceable provision in
accordance with this Section 23.
24. SURVIVAL OF PROVISIONS. Notwithstanding any other provision of
this Agreement, the parties' respective rights and obligations under Sections
11, 12, 13, 14, 15, 16, 17, 19 and 25 hereof, and under any other Sections that
provide a party with rights (including, without limitation, rights to receive
payments) that have not been fully satisfied as of such termination or
expiration, will survive any termination or expiration of this Agreement or the
termination of the Executive's employment for any reason whatsoever.
25. NONDISCLOSURE: COMPETITIVE ACTIVITY. Notwithstanding any other
provision to the contrary, the existing Agreement attached hereto as Exhibit A
(dated August 19, 1996) shall not be superseded but shall remain in full force
and effect and continue to be binding upon and inure to the benefit of the
Company and the Executive.
26. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
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will be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. Unless otherwise noted,
references to "Sections" are to sections of this Agreement. The captions used
in this Agreement are designed for convenient reference only and are not to
be used for the purpose of interpreting any provision of this Agreement.
27. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereof have executed this Agreement as
of the day and year first above written.
/s/ DAVID SALOFF
----------------------------------
David Saloff
ELECTROPHARMACOLOGY, INC.
By: /s/ JOSEPH MOOIBROEK
----------------------------
Name: Joseph Mooibroek
----------------------------
Title: Chairman and CEO
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<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the
11th day of November 1996, by and between Electropharmacology, Inc., a
Delaware Corporation (the "Company"), and Arup Sen, Ph.D. (the "Executive").
WHEREAS, the Company desires to retain the Executive in its employ as the
Executive Vice President of Research, Development and Regulatory of the
Company for the period provided in this Agreement, and the Executive has
agreed to employment with the Company in accordance with the contractual
terms and conditions set forth below;
WHEREAS, the Company and the Executive have discussed and the Executive
has agreed that this Agreement supersedes any and all agreements, oral and
written, between the parties hereto with respect to the subject hereof, and
WHEREAS, this Agreement is intended to, and shall, set forth the
definitive agreement of the parties.
NOW THEREFORE, for and in consideration of the recitals and premises, and
the promises, covenants and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive, and the
Executive hereby accepts such employment with the Company, for the term of
employment set forth in Section 2 hereof, all upon the terms and conditions
hereafter set forth.
2. TERM. Employment shall be for a term commencing on the date
hereof and, subject to prior termination under Section 8, Section 9, Section
10, Section 12 or Section 13 hereof, expiring December 31, 1999.
Notwithstanding the previous sentence, (commencing December 31, 1998), the
term of this Agreement shall automatically be extended for one additional
year upon the terms and conditions set forth herein, unless either party to
this Agreement gives the other party written
<PAGE>
notice (delivered in accordance with Section 21 hereof and at least 90 days
prior to December 31, 1999) of such party's intention not to further extend
the term of this Agreement. For purposes of this Agreement, any reference to
the "term" of this Agreement shall include the original term and any
extension thereof.
3. DUTIES OF THE EXECUTIVE. The Executive shall serve as the
Executive Vice President of Research, Development and Regulatory of the
Company. The Executive shall perform such executive duties as a
vice-president for research, development and regulatory would normally
perform or as otherwise specified in the By-Laws of the Company as in effect
on the date of this Agreement, and shall perform, in addition thereto, such
other reasonable duties as the CEO may request. Except as may otherwise be
approved in advance by the CEO and except during vacation periods and periods
of absence due to sickness, personal injury or other disability; the
Executive shall devote substantially all of his normal working time and his
best efforts to the performance of his duties hereunder. Notwithstanding the
foregoing, nothing contained herein shall preclude the Executive from (i)
serving on the boards of directors of other companies or organizations with
the approval of the Board of Directors of the Company (the "Board") (not to
be unreasonably withheld) or (ii) pursuing his personal, financial and legal
affairs provided that such activity does not materially interfere with the
performance of the Executive's obligations hereunder.
4. COMPENSATION.
a) During the term of this Agreement, the Company shall pay
to the Executive a base salary and such bonus as may be awarded to the
Executive from time to time by the Board pursuant to Section 4(b) hereof.
b) or the period commencing on the date of this Agreement,
and ending December 31, 1999 the Executive's base salary shall be deemed to
be $180,000 on an annualized basis.
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h January 1 thereafter, for the calendar year then commencing, or portion
thereof falling within the terms of this Agreement, the Executive's base
salary, on an annualized basis, shall be not less than the product of 180,000
per year multiplied by the percentage obtained by dividing (i) the Consumer
Price Index for All Urban Consumers -- U.S. City Average (1982-84 = 100) (or,
if publication of that index is terminated, any substantially equivalent
successor thereto) for the month of July in the fiscal year of the Company
immediately preceding such January 1, as published by the Bureau of Labor
Statistics of the United States Department of Labor, by (ii) said Consumer
Price Index for the month of July 1995 provided that the Consumer Price Index
adjustment shall in no case be greater than 6% or less than 3% in any year.
The Executive's base salary may be increased from time to time by the Board,
but in no event shall the Executive's base salary payable for any calendar
year or portion thereof be less than the annualized base salary payable for
any previous calendar year, on an annualized basis, during the term of this
Agreement plus the then applicable Consumer Price Index adjustment provided
by the preceding sentence. During the term of the Agreement, Executive's
salary shall be reviewed at least annually by the Board to determine whether
an increase beyond the Executive's base salary is warranted and appropriate.
Except as set forth in this Section 4, such compensation shall be
payable at the times and in the manner consistent with the Company's general
policies regarding compensation of executive employees, but in no event less
frequently than bi-monthly. For so long as either (a) the Company's net
income for its preceding fiscal year is less than 5% of its gross revenues or
(b) the Company's gross revenues in its preceding fiscal year were less than
$10,000,000 (gross revenues to be determined in each case in accordance with
generally accepted accounting principles consistently applied), at the
Board's option the Company may defer payment of up to 33 1/3% of the
Executive's base salary each pay period during the year following such fiscal
year. Such deferred payments shall
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bear interest, recomputed as of the beginning of each month, at an annual
rate at that time equal to the then current prime rate as reported in the
Wall Street Journal (the "Prime Rate"). On the first business day of each
calendar year during the term of this Agreement the Company shall pay to the
Executive any amount deferred the previous calendar year, plus interest, all
or a portion of which may, at the Board's option, such determination to have
been made by the Board of Directors on or before January 1 of said calendar
year, be paid in the Company's common stock. The calculation of the number of
shares of stock the Executive shall receive pursuant to the preceding
sentence, shall be computed on the basis of the average of the fair market
value of the Company's common stock on the first twenty (20) trading days and
the last twenty (20) trading days of such calendar year. For purposes of this
Agreement, fair market value as of any date shall be equal to the last
reported sales prices of the Company's common stock on such date as reported
in the NASDAQ National Market System or, if such common stock is traded on a
national securities exchange, the last reported sales prices of the Company's
common stock on such date as reported on any such exchange on which the
Company's common stock is listed.
c) In addition to the base salary provided by Section 4(b) hereof,
the Executive shall be eligible annually to receive any incentive bonus (the
"Bonus"), that the Board may grant to him based on the Company's executive
compensation plan then in effect, based on the CEO's assessment of the
Executive's individual performance, which decision shall be made by the Board in
its sole discretion. The CEO shall give written notice to the Executive of the
grant of any such Bonus and the amount thereof upon direction of the Board and
Compensation Committee. Such Bonus shall be payable on the next date on which
the Executive is entitled to receive a payment of his base compensation. The
Board may from time to time authorize such additional compensation to the
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Executive, in cash, property, options or warrants as the Board may determine
in its sole discretion to be appropriate.
d) Simultaneously with the execution of this Agreement, the
Company shall grant to the Executive an option to purchase that number of
shares of the Company's common stock equal to 75,000 of the Company's common
stock at a price equal to the last reported sales prices of the Company's
common stock for the date hereof as reported in the NASDAQ National market
System. Such option shall be immediately exercisable with respect to 25,000
of the shares covered thereby and such option shall be exercisable with
respect to an additional 20,000 of the shares covered thereby on the first,
and on each of the additional 10,000 of the shares, second, third and fourth
anniversaries of the date of this Agreement. Notwithstanding the foregoing,
in the event the Executive's employment hereunder is terminated by the
Company other than for Cause (as defined herein) or by the Executive by
Permitted Resignation (as defined herein) prior to the end of the term of
this Agreement, such option shall immediately vest and become exercisable in
accordance with Section 11(c) hereof. If the Executive is terminated for
Cause (as defined herein), all stock options, whether or not vested, shall
immediately terminate without any payment made therefor. If the Executive
resigns (other than by Permitted Resignation), all unvested stock options
shall immediately terminate without any payment therefor. Upon the Employee's
death or Disability (as defined herein), all unvested stock options that are
to vest on the next anniversary date of this Agreement shall immediately vest
and become exercisable and all other unvested stock options shall immediately
terminate without any payment made therefor. The agreement evidencing such
option shall be substantially in the form attached hereto as Exhibit A.
5. EXECUTIVE BENEFITS.
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a) In addition to the compensation described in Section 4,
the Company shall make available to the Executive and his eligible dependents
such benefits which are comparable to those provided to other executive and
management employees of the Company, including without limitation, any group
hospitalization, health, dental care or sick leave plan, life or other
insurance or death benefit plan, travel or accident insurance, retirement
income or pension plan, employee stock option plan or other present or future
group employee benefit plan or program of the Company for which key
executives are or shall become eligible, and Executive shall be eligible to
receive during the period of his employment under this Agreement, and, to the
extent provided in Section 11 and Section 13 hereof, during any subsequent
period for which he shall be entitled to receive payment from the Company
under Section 11 or Section 13 hereof, all benefits for which key executives
are eligible under every such plan or program to the extent permissible under
the general terms and provisions of such plans and programs and in accordance
with the provisions thereof provided that, except to the extent specifically
set forth in Sections 4(c), 11, 12 and 13, the Executive shall not be
permitted to participate in management incentive programs or in termination
pay programs. The Executive shall be eligible to participate in any such plan
or program under the terms and conditions applicable to other executive and
management employees and in a manner commensurate with the Executive's
position and level of responsibility with the Company as compared to the
position and level of responsibility of other executive and management
employees of the Company as determined by the Board in its sole discretion.
b) In addition to any life insurance coverage made available
to the Executive under Section 5(a) hereof, the Company shall provide, at its
sole cost and expense, to the Executive a term life insurance contract on the
Executive's life in an amount one (1) time his annual
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base compensation, the proceeds of which shall be payable to such beneficiary
as Executive may designate.
c) The Company shall pay to Executive an automobile allowance
in the amount of $500 per month during the term of this Agreement.
d) The Executive shall be entitled to paid vacation per
Article 7 (page 29) of the Electropharmacology, Inc. Employee Manual as of
the date hereof. The Executive will accrue vacation time at a rate which
results in 15 days (120 hours) of paid vacation time per year in the first
through fourth years of continuous employment. In the fifth through
fourteenth year of continuous employment, executives accrue vacation time at
a rate which results in 22.5 days (180) hours of paid vacation per year. In
the fifteenth through nineteenth years of continuous employment, executives
accrue vacation at a rate which results in 25 days (200 hours) of paid
vacation per year. After the twenty-fourth year of continuous employment and
thereafter, executives accrue vacation at a rate which results in 30 days
(240 hours) of paid vacation per calendar year which shall be pro-rated for
partial years. Executive may carry over from year to year up to 500 hours of
unused vacation time. Notwithstanding anything herein to the contrary, the
Executive may not take more than two (2) weeks vacation during any twelve
(12) week period without the prior written permission of the Company, which
shall not be unreasonably withheld.
6. EXPENSES.
a) The Company shall also pay or reimburse the Executive for
all reasonable and necessary expenses incurred by the Executive in connection
with his duties on behalf of the Company in accordance with the general
policies of the Company and his employment by the Company pursuant to this
Agreement.
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b) MOVING EXPENSES. The Company shall pay the Executive a
total of $50,000 to reimburse him for his moving and related expenses.
7. PLACE OF PERFORMANCE. In connection with his employment by the
Company, unless otherwise agreed by the Executive, the Executive shall be
based at the principal executive offices of the Company, except for travel
reasonably required for Company business.
8. TERMINATION. The Company may terminate Executive's employment
hereunder for Cause which shall mean;
a) The Executive's conviction by, or entry of a plea of
guilty or nolo-contendere in, a court of competent and final jurisdiction for
any crime involving moral turpitude or punishable by imprisonment in the
jurisdiction involved (provided that if the Executive's conviction is
subsequently overturned, and the Company had terminated the Executive
pursuant to this Section 8(a), such termination shall be deemed to be without
Cause and the Executive shall be entitled to receive the payments and
benefits set forth in Section 11, together with interest at the then current
prime rate as reported in the Wall Street Journal, from the date such
payments would have been due to the Executive had such termination been
without Cause until the date such payments are made to the Executive);
b) Executive's breach of any of the covenants contained in
Section 25 of this Agreement;
c) Executive's commission of an act of fraud, whether prior
to or subsequent to the date hereof, upon Employer;
d) Executive's continuing repeated willful failure or refusal
to perform his duties as required by this Agreement, provided, that
termination of Executive's employment pursuant to this subparagraph (d) shall
not constitute valid termination for cause unless Executive shall have first
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received written notice from the Board stating with specificity the nature of
such failure or refusal and affording Executive at least fifteen (15) days to
correct the act or omission complained of;
e) Gross negligence, insubordination, or material violation by
Executive of any duty of loyalty to the Company or any other material
misconduct on the part of Executive, provided that termination of Executive's
employment pursuant to this subparagraph (e) shall not constitute valid
termination for cause unless Executive shall have first received written
notice from the Board stating with specificity the nature of such failure or
refusal and affording Executive at least fifteen (15) days to correct the act
or omission complained of;
f) A material breach of this Agreement by the Executive as
determined by the Company after the Executive has been given written notice
of such alleged breach, and not less than thirty (30) days to cure such
alleged breach or such longer period as may be reasonably necessary to cure
such breach provided that the Executive is diligently pursuing such cure.
9. RESIGNATION.
a) In the event that (i) the Company shall during the term of
this Agreement (A) fail to continue the Executive as Executive Vice President
of the Company, (B) reduce the Executive's base salary below the minimum
amount specified in Section 4(a) without the Executive's prior written
consent, (C) violate any material term of this Agreement, or (D) relocate the
Executive because of a, or due to a change of control (as defined herein),
provided that the Executive gives the Company written notice of such
violation and the Company fails to cure such violation within 30 days or such
longer period (the "Cure Period") as may be reasonably necessary to cure such
violation provided that the Company is diligently pursuing such cure, then
the Executive, at his sole option, may give notice to the Company at any time
within ten (10) days after the expiration of the Cure Period of his election
to resign and terminate this Agreement ("Permitted Resignation") effective
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immediately upon receipt of such notice (delivered in accordance with Section
21 hereof), or effective upon such other date (not later than ten (10) days
following such notice) that the Executive may designate in such notice.
b) The term "Relocate" shall mean requiring the Executive to
move more than fifty [50] miles from the then place of performance of the
Executive, as defined under Section 7 herein. A "Change of Control" shall
mean the occurrence during the term of this Agreement of any of the following
events;
A) the Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than fifty percent (50%) of the
combined voting power of the then outstanding securities entitled to vote
generally in the election of directors ("Voting Stock") of such corporation
or person immediately after such transaction are held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such transaction;
or
B) The Company sells or otherwise transfers all or
substantially all of its assets to another corporation or other legal person,
and as a result of such sale or transfer less than fifty percent (50%) of the
combined voting power of the then outstanding Voting Stock of such corporation
or person immediately after such sale or transfer is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale or
transfer; or
C) If, during any period of two consecutive years, (i)
individuals who at the beginning of any such period constitute the Directors
of the Company and (ii) such other persons as are nominated or elected by a
vote of the Directors of the company, collectively, cease for any reason to
constitute at least a majority of the Directors of the Company; provided,
however, that for purposes of this clause 9(b)(C) each Director who is first
elected, or first nominated for election by the
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Company's stockholders, by a vote of the Director's of the Company (or a
committee thereof) then still in office who were Director's of the company at
the beginning of any such period will be deemed to have been a Director of
the company at the beginning of such period.
10. DEATH. The term of this Agreement shall terminate on the death
of the Executive.
11. TERMINATION PAYMENTS AND BENEFITS. If the Executive's
employment hereunder is terminated by the Executive by Permitted Resignation
or by the Company other than for Cause, prior to the end of the term of this
Agreement, then the Company shall be obligated to pay to the Executive
certain termination payments and make available certain benefits as follows:
a) TERMINATION PAYMENT. The Company shall pay to the
Executive a lump sum in cash, payable within ten (10) business days after the
effective date of such termination, equal to one time the sum of (i) the
Executive's base salary pursuant to Section 4(a) PLUS (ii) the Executive's
average annual bonus granted pursuant to Section 4(c) hereof during the
two-year period (or such shorter period during which the Executive is
employed by the Company) immediately preceding the Executive's termination,
prorated for a partial year. In addition, (i) if at the time of termination
the remainder of the term is greater than one (1) year, and the Executive
remains unemployed one (1) year after the termination date, the Executive
shall be entitled to receive his base salary pursuant to Section 4(a) from
such one (1) year anniversary of the termination date until the earlier of
(A) the end of the term or (B) the date on which the Executive becomes
employed (subject to the limitation that the total amount paid to the
Executive pursuant to this Section 11(a) shall not exceed the total amount of
base salary the Executive would have received pursuant to Section 4(a)
between the termination date and the end of the term) and (ii) if at the time
of termination the remainder of the term is less than one (1) year, the
Executive will receive one (1) time the amount otherwise provided in this
Section 11(a).
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Notwithstanding any provision to the contrary contained herein, the Executive
shall be entitled to receive the payments provided for in the second sentence
of this Section 11(a) (A) only for so long as the Executive uses all
reasonable means available to him to diligently pursue new employment and (B)
provided the Executive accepts a reasonable offer of employment. It shall be
within the Company's sole and absolute discretion to determine, such
determination to be reasonably comparable to the practice of the industry,
whether the Executive has complied with the provisions of this Section 11(a).
b) Notwithstanding the foregoing provision of Section 11(a),
upon the closing of the Change of Control event and up to one year after the
Change of Control event, the Executive may resign and receive benefits under
Section 11(a) however, limited to the Executive's base salary pursuant to
Section 4(A) plus the Executive's average annual bonus granted pursuant to
Section 4(c) hereof during the two year period immediately preceding the
Executives resignation due to a change of control and required relocation
event.
c) BENEFITS. Notwithstanding any provision to the contrary in
any option agreement or other agreement or in any plan, except as provided
for under Section 8(a), (i) all of the Executive's outstanding stock options
shall immediately vest and become exercisable and the Executive shall have
the full term of the option to exercise any of the Executive's stock options,
and (ii) all restrictions on any other equity awards relating to continued
performance of services shall lapse.
Subject to Section 15, for one year following the termination
of this Agreement, the Company shall use its reasonable best efforts to
maintain in full force and effect for the continued benefit of the Executive
all employee welfare benefit plans and perquisite programs in which the
Executive was entitled to participate immediately prior to the Executive's
termination or shall arrange to make available to the Executive benefits
substantially similar to those which the Executive would otherwise have been
entitled to receive if his employment had not been terminated; provided,
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however; that (i) if the remainder of the term exceeds one (1) year, the
Company shall use its reasonable best efforts to continue to provide such
benefits to the Executive until the end of the term and (ii) if the remainder
of the term is less than one (1) year, the obligation of the Company pursuant
to this Section 11(c) shall extend for only one (1) year following the
termination date. Such welfare benefits shall be provided to the Executive on
the same terms and conditions (including, without limitation, employee
contributions toward the premium payments) under which the Executive was
entitled to participate immediately prior to his termination.
Notwithstanding the foregoing, with respect to the Executive's
continued coverage under the Company's medical and dental plan, or a
successor plan, pursuant to this provision, the Executive's "qualifying
event" for purposes of the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") shall be his date of termination from the Company.
12. OTHER TERMINATION. If the Company terminates this Agreement for
Cause or if the Executive terminates this Agreement for any reason other than
by Permitted Resignation or if the Executive dies or in the event of the
Executive's Disability, then the Company and the Executive shall have no
further obligation hereunder except as follows or except as provided in any
available plan, program or agreement:
a) The Company shall pay the Executive his then current
minimum base salary through the effective date of such termination;
b) If the Executive terminated this Agreement other than by
Permitted Resignation, he shall receive such benefits, if any, as are afforded
by the Company under its then existing policies applicable to employees who
voluntarily terminate their employment; and
c) The Executive shall have the rights set forth in Section 13
hereof in the event of termination of this Agreement upon his Disability.
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<PAGE>
13. DISABILITY.
a) In the event of the Executive's Disability (as defined
herein) during the term of this Agreement, the Executive's duties and
obligations hereunder shall cease and the Company shall pay to the Executive
in cash, for each calendar year until the Executive reaches the age of 65 and
at the times at which the Executive would have received payment of his base
salary, an amount equal to 60% of the sum of (i) the Executive's highest
annual base salary pursuant to Section 4(a) than in effect for the period
prior to the Executive's Disability. For this purpose, the Company shall
maintain in full force and effect during the term of this Agreement an
insurance policy with an insurance company that reasonably shall provide for
the payment of such amounts to the Executive upon his Disability.
b) "Disability" shall be defined as in the insurance policy
referenced in Section 13(a) hereof.
c) For the period during which the Executive is entitled to
receive payments under this Section 13, the Company shall use its reasonable
best efforts to maintain in full force and effect for the continued benefit
of the Executive all employee welfare benefit plans, as provided for under
the insurance policy limits, except for life insurance provided for under
Section 5(b); and except for the automobile allowance set forth in Section
5(c). Such welfare benefits shall be provided to the Executive on the same
terms and conditions (including employee contributions toward the premium
payments) under which the Executive was entitled to participate immediately
prior to his Disability.
d) The Company shall have no obligation under this Section 13
if the Executive is not insurable under an insurance policy with a reasonably
price premium, as determined by the Company in its sole absolute discretion.
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<PAGE>
14. NO OTHER TERMINATION COMPENSATION. Except as specifically
provided in Sections 11, 12 and 13 hereof, upon termination of this Agreement
for any reason, the Executive shall not be entitled to any severance pay or
to any other compensation or payments (by way of salary, damages or
otherwise) of any nature relating to this Agreement or otherwise relating to
or arising out of his employment by the Company.
15. MITIGATION OBLIGATION. The Executive shall mitigate damages
including the amount of any payment provided for pursuant to Section 13 by
seeking other employment or otherwise; provided, however, that the Executive
is under no obligation to mitigate any amount provided for by insurance
policies under Section 13 hereof.
16. ARBITRATION. Any dispute between the parties under this
Agreement shall be submitted to arbitration and such arbitration shall be
conducted in accordance with the rules of the International Chamber of
Commerce ("ICC"). Each of the parties hereto shall appoint one person as an
arbitrator to hear and determine any such dispute and if the two arbitrators
so chosen shall be unable to agree, then the two arbitrators shall select a
third impartial arbitrator whose decision shall control. All arbitrators
selected shall have previously engaged in and conducted arbitrations for at
least the past three (3) years in accordance with the rules of the ICC. The
arbitrators shall have the right only to interpret and apply the provisions
of this Agreement and may not change any of its provisions except as
permitted by Section 23 hereof. The arbitrators shall permit reasonable
pre-hearing discovery of facts, to the extent necessary to establish a claim
or a defense to a claim, subject to supervision by the arbitrators. The
determination of the arbitrators shall be conclusive and binding upon the
parties and judgment upon the same may be entered in any court having
jurisdiction thereof. The arbitrators shall give written notice to the
parties stating his or their determination, and shall furnish to each party a
signed copy of such determination. Arbitration hereunder shall be final and
binding on the parties and
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may not be appealed. The expenses of arbitration, including reasonable
attorneys' fees, shall be borne by the losing party or as the arbitrators
shall otherwise equitably determine.
17. INDEMNIFICATION. To the maximum extent permitted under the
corporate laws of the State of Delaware or, if more favorable, the By-Laws of
the Company as in effect on the date of this Agreement, (a) the Executive
shall be indemnified and held harmless by the Company, as provided under
such corporate laws or such By-Laws, as applicable, for any and all actions
taken or matters undertaken, directly or indirectly, in the performance of
his duties and responsibilities under this Agreement or otherwise on behalf
of the Company, and (b)without limiting clause (a), the Company shall
indemnify and hold harmless the Executive from and against (i) any claim,
loss, liability, obligation, damage, cost, expense, action, suit, proceeding
or cause of action (collectively, "Claims") arising from or out of or
relating to the Executive's performance as an officer, director, employee or
agent of the Company or any of its affiliates or in any other capacity,
including, without limitation, any fiduciary capacity, in which the Executive
serves at the request of the Company, and (ii) any cost or expense
(including, without limitation, fees and disbursements of counsel)
(collectively, "Expenses") incurred by the Executive in connection with the
defense or investigation thereof. If any Claim is asserted or other matter
arises with respect to which the Executive believes in good faith the
Executive is entitled to indemnification as contemplated hereby, the Company
shall pay the Expenses incurred by the Executive in connection with the
defense or investigation of such Claim or matter (or cause such Expenses to
be paid) on a monthly basis, provided that the Executive shall reimburse the
Company for such amounts, plus simple interest thereon at the then current
prime rate as reported in the Wall Street Journal as in effect from time to
time, compounded annually, if the Executive shall be found, as finally
judicially determined by a court of competent jurisdiction, not to have been
entitled to indemnification hereunder.
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<PAGE>
18. AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto with respect
to the subject matter hereof, and contains all of the covenants and
agreements between the parties with respect to such subject matter, and
Executive has received legal counsel regarding the entirety of the Agreement.
19. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation
or ruling.
20. SUCCESSORS AND BINDING AGREEMENT.
a) The Company will reasonably require any successor (whether
direct or indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business or assets of the
Company, by agreement in form and substance satisfactory to the Executive
acting reasonably, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to
perform if no such succession had taken place. This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the
Company, including, without limitation, any persons acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor shall thereafter be deemed the "Company" for the purposes of
this Agreement).
b) This Agreement will inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
c) The rights of the Company under this Agreement may without
the consent of Executive, be assigned by the Company in its sole and
unfettered discretion (a) to any
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<PAGE>
person, firm, corporation, or other business entity which at any time,
whether by purchase, merger, or otherwise, directly or indirectly, acquires
all or substantially all of the assets or business of the Company, or (b) to
any subsidiary or affiliate of the Company (the "Company Group"), or any
transferee, whether by purchase, merger or otherwise, which directly or
indirectly acquires all or substantially all of the assets of the Company or
any other member of the Company Group.
21. NOTICES. For all purposes of this Agreement, all
communications, including, without limitation, notices, consents, requests or
approvals, required or permitted to be given hereunder will be in writing and
will be deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three business
days after having been sent by a nationally recognized overnight courier
service such as Federal Express, UPS, or Purolator, addressed to the Company
(to the attention of the Secretary of the Company) at its principal executive
offices and to the Executive at his principal residence, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
22. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Florida, without giving effect to
the principles of conflict of laws of such State.
23. SEVERABILITY AND REFORMATION. If any provision of this
Agreement is held to be illegal, invalid or unenforceable under any present
or future law, and if the rights or obligations of the parties under this
Agreement would not be materially and adversely affected thereby, such
provision shall be fully separable, and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part thereof, the remaining provisions of this
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Agreement shall remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its severance
therefrom, and, in lieu of such illegal, invalid or unenforceable provision,
there shall be added automatically as a part of this Agreement a legal, valid
and enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible, and the parties hereto request
the court or any arbitrator to whom disputes relating to this Agreement are
submitted to reform the otherwise illegal, invalid or unenforceable provision
in accordance with this Section 23.
24. SURVIVAL OF PROVISIONS. Notwithstanding any other provision of
this Agreement, the parties' respective rights and obligations under Sections
4, 5, 11, 12, 13, 14, 15, 16, 17, 19 and 25 hereof, and under any other
Sections that provide a party with rights (including, without limitation,
rights to receive payments) that have not been fully satisfied as of such
termination or expiration, will survive any termination or expiration of this
Agreement or the termination of the Executive's employment for any reason
whatsoever.
25. NONDISCLOSURE; COMPETITIVE ACTIVITY. With the exception of
Addendum "A" attached, the existing Agreement attached hereto as Exhibit B
(dated November 11, 1996) shall not be superseded but shall remain in full
force and effect and continue to be binding upon and inure to the benefit of
the Company and the Executive.
26. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be performed
by such other party will be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
Unless otherwise noted, references to "Sections" are to sections of this
Agreement.
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<PAGE>
The captions used in this Agreement are designed for convenient reference only
and are not to be used for the purpose of interpreting any provision of this
Agreement.
27. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same agreement.
IN WITNESS WHEREOF; the parties hereof have executed this Agreement
as of the day and year first above written.
/s/ ARUP SEN
------------------------------
Arup Sen
ELECTROPHARMACOLOGY, INC.
By: /s/ JOSEPH MOOIBROEK
---------------------------
Name: Joseph Mooibroek
-------------------------
Title: Chairman and CEO
------------------------
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<PAGE>
ADDENDUM A
The Company acknowledges that the Executive has certain commercialization
rights to certain biomedical technologies licensed by HealthTech Development,
Inc. ("HTD"), including its wholly owned subsidiary, Applied Biological
Coatings & Implants Inc. ("ABCI"). The Company hereby agrees that the
Executive shall be entitled to retain all benefits that arise out of HTD and
ABCI and the Executive agrees that he will conclude his direct operational
involvement in HTD and ABCI activities within six (6) months of the date of
this Agreement and further agrees that he will limit such involvement to no
more than four (4) days per month during such six month period. The Executive
further agrees that he will bring to the Company's attention and negotiate in
good faith with the Company a licensing or acquisition agreement with respect
to each product or technology that is reasonably deemed to be within the
scope of the Company's business. If the Company elects not to pursue such a
license or acquisition opportunity, then the Executive shall be free to offer
it to a third party and retain any consideration derived therefrom without
any further obligation to the Company with respect to such product or
technology.
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<PAGE>
EXHIBIT 10.9
ELECTROPHARMACOLOGY, INC.
NON-EMPLOYEE DIRECTORS' EQUITY COMPENSATION PLAN
Electropharmacology, Inc., a Delaware corporation (the "Company"), hereby
establishes the Electropharmacology, Inc. Non-Employee Directors' Equity
Compensation Plan (the "Plan"), effective as of January 1, 1996.
1. DEFINITIONS. Whenever the following terms are used in the Plan they
shall have the meanings specified below unless the context clearly indicates to
the contrary:
(a) "Administrator": The Board.
(b) "Annual Fee": The dollar value of the annual fees payable to a
Director as determined pursuant to paragraph 4 hereof.
(c) "Board": The Board of Directors of the Company.
(d) "Code": The Internal Revenue Code of 1986, as amended.
(e) "Common Shares": The Company's Common Stock, par value $.01 per
share.
(f) "Company": Electropharmacology, Inc. or any successor or
successors thereto.
(g) "Director": An individual duly elected or chosen as a member of
the Board.
(h) "Fair Market Value": With respect to a Common Share, (i) the last
reported closing price for a Common Share on the Nasdaq (or any
appropriate national securities or over-the-counter market if the
Common Shares are no longer listed on the Nasdaq) for the
applicable quarter-end day set forth in paragraph 5 hereof, or if
there was no sale of Common Shares so reported for such day, on
the most recently preceding day on which there was such a sale.
(i) "Fees": Compensation payable to each Director who attends any of
the regular or special meetings of the Board in the amounts set
forth in paragraph 4 hereof.
(j) "Plan": The Plan set forth in this instrument, as it may from
time to time be amended.
<PAGE>
(k) "Plan Year": The 12-month period beginning January 1 and ending
December 31.
(l) "Quarterly Fee": An amount equal to one-fourth of the Annual Fee
for the applicable Plan Year.
(m) "Restricted Shares": Common Shares awarded pursuant to paragraph
4 hereof.
(n) "Shares": All Restricted Shares and all Common Shares issued upon
exercise of options granted pursuant to paragraph 6 hereof.
2. PURPOSE. The purpose of the Plan is to provide for payment to
Directors of Fees in Restricted Shares in order to align the interests of such
Directors with the stockholders of the Company and thereby promote the long-term
success and growth of the Company.
3. PARTICIPATION. Participation in the Plan shall be automatic. In the
event that a Director first is elected or appointed during the course of a Plan
Year, such Director's participation in the Plan shall be effective only with
regard to, and such Director shall only be entitled to receive, Fees payable
pursuant to paragraphs 4 and 5 hereof commencing with the quarter in which he or
she was elected or appointed to the Board.
4. AUTOMATIC GRANTS OF RESTRICTED SHARES. Restricted Shares shall be
automatically issued to each person who is elected or appointed to the Board
during a Plan Year commencing on or after January l, 1996. Except as otherwise
set forth herein, each Director shall receive Restricted Shares with a Fair
Market Value of (i) $6,000 for the 1996 Plan Year and (ii) such dollar amount as
shall be set by the Board by Board resolution with respect to each subsequent
Plan Year (or, in each case, a pro-rata portion thereof based on the number of
quarters in such Plan Year that such person was a Director), in each case
calculated as set forth in paragraph 5 hereof (such dollar amount for a Plan
Year shall be referred to herein as the "Annual Fee"). Each such automatic
issuance of Restricted Shares shall be subject to an agreement in substantially
the form of EXHIBIT A hereto and shall be subject to all of the terms and
conditions set forth therein.
5. ISSUANCE OF AUTOMATIC GRANT RESTRICTED SHARES. Except as otherwise
provided in paragraph 3 hereof, as soon as practicable after December 31 of a
Plan Year, the Company shall issue to each Director Fees for such Plan Year in
the form of a number of whole Restricted Shares equal to the sum of (i) the
Quarterly Fee divided by the Fair Market Value on March 29, 1996, (ii) the
Quarterly Fee divided by the Fair Market Value on June 28,1996, (iii) the
Quarterly Fee divided by the Fair Market Value on September 30, 1996 and (iv)
the Quarterly Fee divided by the Fair Market Value on December 31, 1996. To the
extent that the application of the foregoing formula would result in the
issuance of fractional shares for a calendar quarter, no fractional Restricted
Shares shall be issued, but instead the Company shall round up such fraction to
a whole Restricted Share, which shall be added to the number of whole Restricted
Shares issued to such Director for such quarter.
<PAGE>
6. ADDITIONAL GRANTS OF RESTRICTED SHARES OR OPTIONS. The Board also may
authorize by Board resolution with respect to any Plan Year the issuance of
additional Common Shares or options to purchase Common Shares, with any such
issuance of Common Shares or any issuance of Common Shares upon exercise of any
such options being subject to an agreement in substantially the form of EXHIBIT
A hereto and subject to all of the terms and conditions set forth therein.
7. ADMINISTRATION. The Plan shall be administered by the Administrator.
The Administrator shall have such powers as may be necessary to discharge its
duties hereunder. The Administrator may, from time to time, employ agents and
delegate to them such administrative duties as it sees fit, and may from time to
time consult with legal counsel who may be counsel to the Company. No member of
the Administrator shall act in respect of his or her own Restricted Shares or
options. All decisions and determinations by the Administrator shall be final
and binding on all parties. All decisions of the Administrator shall be made by
the vote of the majority, including actions in writing taken without a meeting.
8. AMENDMENT AND TERMINATION. The Board may alter or amend the Plan from
time to time or may terminate it in its entirety; provided, however, that no
such action shall, without the consent of a Director, affect the rights in any
Restricted Shares issued or options granted or to which such Director is
entitled under the Plan. In the event of any change in the outstanding Common
Shares by reason of (i) any stock dividend, stock split, combination of shares,
recapitalization or any other change in the capital structure of the Company,
(ii) any merger, consolidation, spin-off; split-off; spin-out, split-up,
reorganization, partial or complete liquidation or other distribution of assets,
issuance of rights or warrants to purchase securities, or (iii) any other
corporate transaction or event having an effect similar to any of the foregoing,
the number or kind of Shares that may be issued under the Plan shall
automatically be adjusted so that the proportionate interest of the Directors
shall be maintained as before the occurrence of such event. Such adjustment
shall be conclusive and binding for all purposes with respect to the Plan.
Without limiting the generality of the foregoing, the Board may amend the Plan
to eliminate provisions which are no longer necessary as a result of changes in
tax or securities laws or regulations or in the interpretation thereof.
9. SHARES SUBJECT TO PLAN. The Shares that may be issued under the Plan
may be shares of original issue or treasury shares or a combination of both.
10. GENERAL PROVISIONS.
(a) NO CONTINUING RIGHT AS DIRECTOR. Neither the adoption or
operation of the Plan, nor any document describing or referring
to the Plan, or any part thereof, shall confer upon any Director
any right to continue as a member of the Board of the Company.
(b) RESTRICTIONS ON SHARES AND RIGHTS TO SHARES. Except for any
restrictions required by law, a Director shall have all rights of
a stockholder with respect to his or her Shares. No rights to
Shares shall be assigned,
<PAGE>
pledged, hypothecated or otherwise transferred by a Director or
any other person, voluntarily or involuntarily, other than (i) by
will or the laws of descent and distribution, (ii) pursuant to a
domestic relations order meeting the definition of a qualified
domestic relations order under the Code, or (iii) as provided in
the agreement in the form of EXHIBIT A hereto. No person shall
have any right to encumber, pledge or dispose of any other
interest herein or right to receive payments hereunder, nor shall
such interests or payments be subject to seizure, attachment or
garnishment for the payments of any debts, judgments, alimony or
separate maintenance obligations or be transferable by operation
of law in the event of bankruptcy, insolvency or otherwise, all
payments and rights hereunder being expressly declared to be
nonassignable and nontransferable.
(c) GOVERNING LAW. The provisions of the Plan shall be governed by
and construed in accordance with the laws of the State of
Delaware applicable to contracts executed in and to be performed
within that State.
(d) WITHHOLDING TAXES. To the extent that the Company is required to
withhold Federal, state or local taxes in connection with any
component of a Director's Compensation in Shares or options, it
shall be a condition to the receipt of any Restricted Shares or
options that the Director make arrangements satisfactory to the
Company for the payment of the balance of such taxes required to
be withheld, which arrangement may include relinquishment of the
Restricted Shares or options. The Company and a Director may also
make similar arrangements with respect to payment of any other
taxes derived from or related to the payment of Restricted Shares
or options with the respect to which withholding is not required.
(e) MISCELLANEOUS. Headings are given to the paragraphs of the Plan
solely as a convenience to facilitate reference. Such headings,
numbering and paragraphing shall not in any case be deemed in any
way material or relevant to the construction of the Plan or any
provisions thereof The use of the singular shall also include
within its meaning the plural, and vice versa.
ELECTROPHARMACOLOGY, INC.
By:
------------------------------
Its:
------------------------------
<PAGE>
Exhibit A of Plan
ELECTROPHARMACOLOGY, INC.
Restricted Share Agreement for Non-Employee Directors
______________________, Grantee:
Electropharmacology, Inc. ("Company"), pursuant to its Non-Employee
Directors' Equity Compensation Plan ("Plan"), has this day awarded to you, the
above named grantee, a total of _______ shares of Common Stock, par value $.01
per share, of the Company subject to the following terms, conditions,
limitations and restrictions ("Restricted Shares"):
1. RESTRICTED SHARES. The Restricted Shares subject to this award shall
be fully paid and nonassessable and shall be represented by a certificate or
certificates registered in your name and endorsed with a legend referring to the
restrictions hereinafter set forth substantially in the form attached as Annex
1. You shall have all the rights of a stockholder with respect to such shares,
including the right to vote the shares and receive all dividends paid thereon,
provided that such shares, and any additional shares that you may become
entitled to receive by virtue of a stock dividend thereon, stock split or
combination of shares with respect thereto, or a recapitalization, or a merger,
consolidation or reorganization in which the Company is the surviving
corporation or any other change in the capital structure of the Company
affecting such Restricted Shares, shall be subject to the same restrictions as
the Restricted Shares.
2. NO TRANSFER OF RESTRICTED SHARES. The Restricted Shares subject to
this award may not be assigned, exchanged, pledged, sold, transferred or
otherwise disposed of by you (collectively, "Transferred"), except pursuant to
the terms of the Plan and this Agreement. Any purported transfer in violation
of the provisions of this paragraph shall be null and void, and the purported
transferee shall obtain no rights with respect to such Restricted Shares.
3. REGISTRATION RIGHTS. In the event the Company shall elect at any time
after the date hereof to register under the Securities Act of 1933, as amended
(the "Securities Act"), any of its capital stock for sale by itself or with
other stockholders solely for cash on a form that would also permit the
registration of the Restricted Shares (except a registration covering any
employee benefit plan), the Company on each such occasion shall promptly mail
written notice thereof to the Grantee. Upon written request signed by the
Grantee and delivered to the Company within 20 days after the giving of such
notice by the Company, the Company will use all reasonably practical efforts to
cause to be registered under the Securities Act all the Restricted Shares
specified in such request to be included in a proposed Registration Statement
(if the registration form the Company intends to use so permits); provided that
the Company shall not be required to include the Restricted Shares on more than
one such occasion.
<PAGE>
4. CONDITIONS TO COMPANY REGISTRATION. In the case of a registration by
the Company:
(a) the Grantee shall, if the Company intends to have an underwritten
offering, utilize the services of the Company's underwriter(s) or other
underwriters satisfactory to the Company and its underwriter(s), and the Grantee
agrees to enter into a customary firm commitment underwriting agreement
reasonably satisfactory to such underwriters and the Grantee; and
(b) the Company shall have the right (i) not to include in such
Registration Statement the offering of all or any portion of the Restricted
Shares if, in the reasonable opinion of the Company and the Company's managing
underwriter(s), such action is necessary to avoid an adverse effect on the
marketing of the securities to be sold by the Company pursuant to the proposed
offering or (ii) to withdraw such Registration Statement for any reason.
5. OBLIGATION TO FURNISH INFORMATION. It shall be a condition precedent
to the Company's obligations pursuant to this Agreement that, in connection with
the Grantee's participation in any registration pursuant to this Agreement, the
Grantee shall cooperate with the Company to effect such registration and to
maintain the effectiveness thereof, shall accurately furnish any information
reasonably requested by the Company concerning the Grantee and the proposed
distribution by the Grantee, shall enter into appropriate and reasonable
underwriting agreements with the managing underwriter(s) selected as herein
provided and shall comply with all applicable requirements under the Securities
Act, the Securities Exchange Act of 1934, as amended, and any other applicable
federal or state laws, including without limitation furnishing the Company such
information regarding the Grantee as shall be required in connection with the
action to be taken by the Company pursuant to this Agreement.
6. EXPENSES OF REGISTRATION.
(a) Except as hereinafter provided, the Company shall pay all costs
and expenses of registration of the Restricted Shares under the Securities Act
pursuant to paragraph 4 hereof, including printing, the filing fee and the fees
and disbursements of counsel and independent public accountants of the Company
for any work done in connection with the preparation of the Registration
Statement.
(b) Notwithstanding the foregoing, (i) the Company shall not be
liable for and shall not pay underwriting discounts and selling commissions or
any expenses, fees or disbursements of counsel for or of any advisor to Grantee,
or fees or expenses incident to preparation of information by the Grantee, which
expenses shall be borne exclusively by the Grantee and (ii) the Grantee shall
bear any additional incremental registration costs and expenses of the type set
forth in paragraph 7(a) (including without limitation underwriters' discounts
and commissions), and any additional incremental costs and disbursements of
counsel for the Company that result from the inclusion of the Restricted Shares
in such registration).
<PAGE>
7. REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of paragraph 4 hereof to use all reasonably practical efforts to
effect the registration of any Restricted Shares under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement on
such form as the Company selects with respect to such securities and use all
reasonably practical efforts to cause such Registration Statement to become and
remain effective for the lesser of (i) 120 days after the effective date or (ii)
the period required to complete the distribution of such Restricted Shares
pursuant to such Registration Statement;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the period specified in paragraph (a) above and as comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Shares
covered by such Registration Statement in accordance with Grantee's intended
method of disposition set forth in such Registration Statement for such period;
(c) furnish to Grantee and to each underwriter such number of copies
of the Registration Statement and the prospectus included therein (including
each preliminary prospectus) in conformity with the Securities Act as such
persons may reasonably request in order to facilitate the public sale or other
disposition of the Restricted Shares covered by such Registration Statement; and
(d) use all reasonably practical efforts to register or qualify the
Restricted Shares covered by such Registration Statement under the securities or
blue sky laws of such jurisdictions as the managing underwriter(s) shall
reasonably request; provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction and further provided that
(anything in this Agreement to the contrary notwithstanding with respect to the
bearing of expenses) if any jurisdiction in which the Restricted Shares shall be
qualified shall require that expenses incurred in connection with the
qualification of the Restricted Shares in that jurisdiction be borne by the
Grantee, then such expenses shall be payable by the Grantee, to the extent
required by such jurisdiction.
8. POSTPONEMENT OF REGISTRATION. If after any Registration Statement
including Restricted Shares shall have become effective there shall exist in the
opinion of the Company's management material non-public information about the
Company which has not been released and which, in the opinion of the Company's
management, would not be advisable to release, then upon receipt of notice from
the Company, Grantee shall not offer or sell or permit to be offered or sold any
such Restricted Shares for such time as the Company believes, as stated in such
notice, that such condition shall continue, provided that any postponement made
under this paragraph 9 shall not exceed 90 days in length. Any time during which
the Grantee shall not be permitted to offer or sell Restricted Shares pursuant
to this paragraph 9 shall not count against the time that the Company is
required to keep the Registration Statement effective pursuant to paragraph 8
hereof.
<PAGE>
9. AWARD COVERED BY PLAN. This award of Restricted Shares is made
pursuant to the Plan, a copy of which is attached hereto. This award is subject
to all of the terms and provisions of the Plan, which are incorporated herein by
reference. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Plan.
Dated this_______ day of_____________,________
ELECTROPHARMACOLOGY, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Accepted and agreed to:
- -----------------------------------
Grantee
Dated:
-----------------------------
<PAGE>
EXHIBIT 10.10
PERFORMANCE SHARING PROGRAM
Revised Per Compensation & Board of Directors Meeting
Friday, December 13, 1996
% of base salary* awarded at each target performance.
<TABLE>
<S> <C> <C> <C> <C> <C>
ANNUAL REVENUE $5MM $7.5MM $10MM $12.5MM $15MM
EBIT 5% 7.5% 10% 12.5% 15%
250,000 560,500 1,000,000 1,582,500 2,250,000
MOOIBROEK -- -- -- 30 50
SALOFF -- -- 10 25 40
SEN -- -- 10 25 40
SOLDATIS 5 10 15 20 30
ASSOCIATES** 5 7.5 10 12.5 15
POOL (BONUS) 45,000 85,000 132,000 292,500 422,000
ESTIMATE AFTER BONUS PAY/PRETAX $.06 $.14 $.25 $.36 $.52
</TABLE>
The numbers are hurdle rates (e.g. at $7.5MM in revenue, EPi must have 7.5% EBIT
for the award to be paid at this level (column).
* To be paid out in stock via the employee stock purchase plan to the extent
possible pursuant to the plan; Rule 144 stock if issued outside of the
plan. Up to 30% of the bonus may be paid out in cash to cover employee's
taxes.
** Paid out quarterly if EPi is operating on the above plan at 50% rate with
balance at year end.
<PAGE>
PLAN PARAMETERS
1. The Performance Sharing Plan is discretionary subject to changes at any
time by the Board of Directors for any and all parameters or
additions/deletions therein.
2. Payment will be made only to those associates currently employed by the
Company at the time of payment (after plan year end for all associates with
the exception of any partial payments which may have been made to certain
non-executive staff throughout the year, see item 5).
3. Payment in part shall not be implied or construed to guarantee payment of
the balance. Any balance due is subject to performance and revision by the
Board of Directors.
4. Executive performance pay shall be made in common stock (less any
applicable taxes/withholding required) at the average price established by
the first and last month of trading closing prices for each day, as long as
EPi revenues are less than $10 million annually, with less than 10% EBIT.
5. Pay out to non-executive associates will be rewarded quarterly if the
Company is operating at or above the plan at 50% of the base salary rate
for the quarter. Quarterly and cumulative periods performance must be at or
above plan to qualify for award.
6. Hurdle rate in the plan parameters represent performance limits which must
be met or exceeded in order to pay out awards at those levels.
<PAGE>
EXHIBIT 10.15
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
10877 Wilshire Boulevard, Suite 1102
Los Angeles, CA 90024-9998
(310) 208-1166
Member: NASD/SIPC
March 19, 1997
The Board of Directors
ELECTROPHARMACOLOGY, INC.
2301 N.W. 33rd Court, Suite 102
Pompano Beach, FL 33069
Attention: Mr. Joseph Mooibroek, Chief Executive Officer CONFIDENTIAL
This letter agreement ("Agreement") confirms the exclusive engagement of
M. KANE & COMPANY, INC., ("MKC") by Electropharmacology, Inc. and its
affiliates, in existence now or hereinafter formed (the "Company") to render
certain financial advisory and investment banking services in connection with a
prospective business combination "Combination" (as hereinafter defined in
Appendix A attached hereto and incorporated herein by reference) with "Third
Parties" (as hereinafter defined in Appendix C attached hereto and incorporated
herein by reference).
1.0 SERVICES. MKC agrees to perform the following services (the
"Services"):
1.0.1 review the recent historical financial information and business
operations, prospects and forecasts of future financial results of the
Company which are made available to MKC by the Company and such other
matters as MKC deems relevant to enable it to render financial advice
and assistance to the Company;
1.0.2 derive the current (baseline) enterprise value of the Company on an
aggregate and market value basis;
1.0.3 identify, with the Company, potential entities with which the Company may
desire to form a Combination, which shall be listed from time to time on
Appendix C attached hereto and incorporated herein by reference ("Third
Parties");
1.0.4 assist the Company to compile information in a form determined by MKC
that describes the Company and its operations, management and financial
data, and other data furnished by the Company, to be circulated to
selected Third Parties on a confidential basis (in view of the
accelerated schedule on which the Company requires a prospective
Combination, the Company acknowledges that there is insufficient time to
produce a formal Confidential Memorandum and that MKC and Third Parties
will be relying primarily on the Company's publicly filed documents,
supplemented by the Company's financial projections);
1.0.5 approach Third Parties as the Company directs;
1.0.6 as necessary to potential proposed Combinations, review the recent
historical financial information and business operations, prospects and
forecasts of future financial results of Third Parties which are made
available to MKC by the Company or such Third Parties and such other
matters as MKC deems relevant to enable it to render financial advice and
assistance to the Company;
1.0.7 advise the Company as to the developing financial aspects relating to the
execution of the selected Combination and assist the Company to evaluate
and configure possible financial structures for a potential Combination;
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 2
1.0.8 assist the Company to negotiate the principal economic terms and
conditions relating to a "Combination" and assist Company counsel to
assure that the "Combination Documents" (as defined in Section 1.2,
below) prepared to effectuate the Combination conform to such principal
economic terms and conditions; and
1.0.9 at the Company's option, render an opinion as to the fairness of the
Combination, from a financial point of view, to the shareholders of the
Company ("Fairness Opinion").
1.2 INTEGRITY OF INFORMATION. The Company recognizes and confirms that in
providing the Services, MKC will be using and relying upon data, material and
other information furnished by the Company and its respective employees and
representatives ("Information"). The Company hereby agrees and represents that
all Information furnished to MKC by the Company in connection with this
Agreement shall be accurate and complete in all material respects at the time
furnished and that if such Information, in whole or in part, becomes materially
inaccurate, misleading or incomplete during the term of MKC's engagement
hereunder, the Company will so advise MKC in writing and correct any such
inaccuracy or omission. Accordingly, MKC assumes no responsibility for the
accuracy and completeness of such Information. MKC will not be required to make
an independent verification of any Information or independent evaluation of the
Company's assets and liabilities. All Information concerning the Company so
furnished that is not publicly available will be treated in strict confidence
and will not be revealed by MKC unless legally compelled. The Company agrees
that it and its counsel are responsible for ensuring that a Combination,
including any legal agreements, applications or other materials used in the
Combination (the "Combination Documents"), will comply in all respects with
applicable law.
2.0 COMPENSATION: The Company agrees to pay MKC via wire transfer the
following cash fees for the Services as follows, time being of the essence and
all such payments to be fully earned when paid (the "Compensation"):
2.1 a non-refundable cash Advisory Retainer (the "Advisory Retainer"),
payable at the rate of $10,000 per month, commencing upon the execution
of this Agreement to start the engagement, and thereafter at the
beginning of each month during which Services are to be rendered, on a
month to month basis, based on the continuing viability of the Company so
as to be able to effectuate a Combination at any meaningful level of
"Consideration" (as hereinafter defined in Appendix A, attached hereto
and incorporated herein by reference), as determined in good faith by the
Company. Any suspension by the Company, or waiver by MKC upon Company
request, of these Advisory Retainer payments: (A) will permit MKC to
suspend, at its sole discretion, substantial time and effort on new
activities under this engagement for the ensuing month for which no
Advisory Retainer payment has been made; and (B) will not constitute a
waiver by MKC of, or relieve the Company of the obligation to pay, any of
the other Compensation set forth in this Agreement or to reimburse MKC
expenses as set forth in Section 3.0 of this Agreement.
2.2 The aggregate cash success fee for a Combination (the "Success Fee")
shall be the greater of $250,000 or two percent (2%) of the
"Consideration" (as hereinafter defined in Appendix A, attached hereto
and incorporated herein by reference) received. Upon the date of
execution by the Company of an agreement with a Third Party expressing an
intent to enter into a Combination at any time, the stated Consideration
and other material provisions within which are acceptable to the Company,
the Company will remit to
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 3
MKC a non-refundable fifty thousand dollars ($50,000), upon receipt of
at least that amount from a Third Party (the "Milestone Success Fee")
which shall be credited against (i.e., deducted from) the aggregate
Success Fee. The balance of the Success Fee (that is, the applicable
Success Fee, less the Milestone Success Fee), shall be paid in full via
wire transfer at and through the earlier of the first closing of the
Combination, or the first time the Company, any shareholder and/or
creditor of the Company receives any "Consideration" (as hereinafter
defined in Appendix A) from a Third Party in connection with any
Combination;
2.3 a Fairness Opinion Fee (the "Fairness Opinion Fee") equal to $100,000
upon the delivery of the Fairness Opinion to the Board of Directors, in
writing; and
2.4 if MKC assists the Company in arranging a transaction other than that
which is contemplated herein, the Company agrees to pay MKC mutually
acceptable compensation taking into account, among other things, the
results obtained and the custom and practice among investment bankers
acting in similar transactions.
3.0 EXPENSES. In addition to the Compensation provided for hereunder, and
irrespective of whether a Combination is consummated, the Company agrees to
reimburse MKC for all of its reasonable out-of-pocket fees and expenses arising
out of MKC's engagement hereunder, not to exceed $10,000 without the Company's
permission, which shall not be unreasonably withheld. Reasonable out-of-pocket
fees and expenses include, but are not limited to, such costs as travel,
accommodations, telephone, telex, courier service, copying, direct computer and
data base expenses, secretarial overtime, fees and disbursements of legal
counsel and accountants and transaction closing announcements ("Expenses"). All
Expenses will be accounted for and invoiced monthly, and are payable within
thirty (30) days of submission to the Company. All Expenses not previously
reimbursed shall be due and payable on the effective date of "Expiration" or
"Termination" (as hereinafter defined). This Paragraph 3 shall survive the
termination or expiration of this Agreement.
4.0 INDEMNIFICATION. Execution of this Agreement shall obligate the Company
to the indemnification terms set forth in Appendix B attached hereto and
incorporated herein by reference as if fully set forth below. This Paragraph 4
shall survive the termination or expiration of this Agreement.
5.0 TERM. The term ("Term") of this engagement shall extend twelve (12)
months from the date hereof. Any party may terminate this Agreement at any time
by giving the other party at least thirty (30) days prior written notice of any
such termination. Upon termination or expiration the Company shall pay to MKC
all Compensation earned and all unpaid Expenses incurred to the date thereof.
MKC shall be entitled to the Success Fee, as set forth in Paragraph 2, if a
Combination is consummated with any Third Party listed on Appendix C within
twenty four (24) months of the termination or expiration of this Agreement.
6.0 DISCLOSURE. The Services or financial advice to be provided by MKC under
this Agreement shall not be disclosed publicly nor made available to third
parties either by MKC or by the Company without the other party's prior written
approval, except as required by law.
7.0 LIMITATION. The Company recognizes that MKC has been retained only by the
Company, and that the Company's engagement of MKC is not deemed to be on behalf
of, and is not intended to confer rights upon, any individual shareholder,
owner, creditor or partner of the Company (differentially to any other within
the same
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 4
class) or any other person not a party hereto as against MKC or any of MKC's
affiliates or the respective directors, officers, agents, employees or
representatives of either MKC or any of MKC's affiliates. Unless otherwise
expressly agreed, no one other than the Company is authorized to rely upon the
engagement of MKC hereunder or any statements, advice, opinions or conduct by
MKC.
8.0 PUBLICITY. The Company and MKC mutually agree that any references to MKC
or the Company, or any affiliate of MKC or the Company, in any release or
communication, is subject to MKC's and the Company's prior written approval,
which consent will not be unreasonably withheld. If either MKC resigns or is
terminated prior to the dissemination of any Combination Document or any other
release or communication, reference made therein to MKC shall be at MKC's
express written option. If a Combination is consummated, the Company hereby
grants permission to MKC to place an appropriate announcement in the Wall Street
Journal and such other newspapers and periodicals as the Company and MKC shall
mutually determine, stating the essential facts of the Combination and the
capacity within which MKC acted in connection with the Combination, after review
and approval by the Company, which shall not be unreasonably withheld.
9.0 EXCLUSIVITY. The Company agrees to retain MKC on an exclusive basis to
perform the Services with respect to a Combination with any Third Party listed
on Appendix C until the expiration or termination of this Agreement. If the
Company or any of its management or directors receives an inquiry concerning a
possible Combination from any party, they will promptly inform MKC of the
party's prospective interest in order that MKC can assess that party's interest
and determine whether that party should be considered for a Combination.
10.0 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF DELAWARE AND MAY NOT BE AMENDED OR MODIFIED EXCEPT IN A WRITING SIGNED BY ALL
PARTIES.
11.0 SUCCESSORS. This Agreement and all rights and obligations thereunder
shall be binding upon and inure to the benefit of each party's successors, but
may not be assigned without the prior written consent of the other party.
12.0 THIRD PARTY SERVICES. MKC will not be liable for, or have its
compensation reduced by, any obligation the Company or anyone else may incur to
a third party for that third party's services in connection with any Combination
contemplated hereby.
13.0 MEDIATION/ARBITRATION. Mindful of the high costs of litigation, not only
in dollars but time and energy as well, the parties intend to and do hereby
establish a quick, final and binding out of court dispute resolution procedure
to be followed in the unlikely event any controversy should arise out of or
concerning the performance of this agreement, other than with respect to matters
within the ambit of the of the indemnification terms set forth in Appendix B and
the determination of the Consideration in Appendix A, as to which the terms
contained in those Appendices, respectively, shall be controlling. Accordingly,
the parties do hereby covenant and agree as follows: any controversy, dispute,
or claim of whatever nature arising out of, in connection with, or in relation
to the interpretation, performance or breach of this agreement, including any
claim based on contract, tort, or statute (other than those contemplated by the
indemnification terms set forth in Appendix B and the determination of
Consideration set forth in Appendix A, in which case those Appendices,
respectively, shall be controlling) shall be resolved at the request of any
party to this agreement through a two-step dispute resolution process
administered by either the American Arbitration Association ("AAA") or
JAMS/ENDISPUTE involving first mediation with a
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 5
panel member from the AAA or JAMS/ENDISPUTE panel followed, if necessary, by
final and binding arbitration conducted at a location determined by the
arbitrator in West Los Angeles, California administered by and in accordance
with the then existing Rules of Practice and Procedure of AAA or
JAMS/ENDISPUTE, and judgment upon any award rendered by the arbitrator(s) may
be entered by any State or Federal Court having jurisdiction thereof.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed duplicate of this
letter. We look forward to working with you on this assignment.
Very truly yours,
Agreed to and Accepted this
M. KANE & COMPANY, INC. 26th day of March 1997.
By: /s/ MICHAEL W. KANE ELECTROPHARMACOLOGY, INC.
-------------------------------------
Michael W. Kane
President
By: /s/ JOSEPH MOOIBROEK
------------------------------
Mr. Joseph Mooibroek
Chief Executive Officer
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 6
APPENDIX A
A.1 DEFINITIONS. In the context of this Agreement, the following terms shall
be defined as follows:
A.1.1 COMBINATION: a sale, merger, consolidation or acquisition, or any other
business combination of the Company with another entity, without regard
to form; the disposition of the securities, businesses or assets of the
Company to another entity without regard to form; or any other corporate
combination, or similar transactions or series of transactions,
including, but not limited to, a joint venture, earn-out, licensing or
royalty agreement involving a substantial portion of the Company's
products or service lines wherein the "Consideration" (as hereinafter
defined) received is conveyed directly to the Company's shareholders or
creditors or is conveyed to the Company's treasury and is intended or
used to redeem, repurchase or otherwise liquefy the equity interest of
any shareholder or to repay the long-term debt claim of any creditor.
A.1.2 CONSIDERATION: In the context of this agreement, "Consideration" means
cash, securities (including, but not limited to stock, warrants or notes)
and any other form of consideration (including, the assumption or the
repayment of existing Company debt) received by the Company, its
shareholders and/or creditors. If part or all of the Consideration is
represented by securities publicly traded prior to the consummation of a
Combination, the value thereof shall be determined by the average sale
price for such securities for the last ten (10) trading days prior to the
consummation of a Combination. If part or all of the Consideration
received is newly-issued securities, the average last sale price for such
securities for the first ten (10) trading days subsequent to the
consummation of a Combination shall be used in determination of the
Consideration for the purpose of computing that portion of the Success
Fee, which shall be due and payable via wire transfer on the eleventh
trading day. In the event that part or all of the Consideration received
is newly-issued securities for which no market exists, the fair value of
such securities as determined in good faith by the parties shall be used
in determination of the Consideration, for the purpose of computing that
portion of the Success Fee. In the event that the value of the
securities component of the Consideration is valued subsequent to such
closing pursuant hereto, then the Success Fee will be adjusted
accordingly. Any such adjustment will be due and payable upon demand.
In the event that all or a portion of the Consideration is structured as
future cash or stock payments, then the maximum contractually defined
amount of such payments shall be discounted as follows for the purpose of
computing this component of Consideration to in turn determine
Compensation hereunder: (i) if Fixed as to amount and timing, then this
component of the Consideration shall be valued on a net present value
basis using the six-month U.S. T-bill rate as the discount rate; and (ii)
if contingent as to amount and timing (e.g., a percentage-based earn-
out), then this component of the Consideration shall be valued on a net
present value basis using the six-month U.S. T-bill rate plus 8.30% as
the discount rate. The discounted period shall be the lesser of the
maximum period contemplated in the Combination Documents or five (5)
years. Any inability to agree upon the value of securities or contingent
payments will be resolved through submission to binding arbitration
before the National Association of Securities Dealers, Inc.
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 7
APPENDIX B
The Company agrees to indemnify MKC, including M. Kane & Company, Inc., its
employees, directors, officers, agents, affiliates, and each person, if any, who
controls it within the meaning of either Section 20 of The Securities Exchange
Act of 1934 or Section 15 of The Securities Act of 1933 (each such person,
including M. Kane & Company, Inc. is referred to as an "Indemnified Party") from
and against any losses, claims, damages and liabilities, joint or several
(including, all legal or other expenses reasonably incurred by an Indemnified
Party in connection with the investigation, preparation or providing evidence
for, or defense of, any threatened or pending claim, action or proceeding,
whether or not resulting in any liability) ("Damages"), as and when incurred, to
which such Indemnified Party, in connection with its services or arising out of
its engagement hereunder, may become subject under any applicable Federal or
state law or otherwise, including but not limited to, liability (i) caused by or
arising out of an untrue statement or an alleged untrue statement of a material
fact or the omission or the alleged omission to state a material fact necessary
in order to make the statement not misleading in light of the circumstances
under which it was made, (ii) caused by or arising out of any act or failure to
act, or (iii) arising out of MKC's engagement or the rendering by any
Indemnified Party of its services under this Agreement; provided, however, that
the Company will not be liable to the Indemnified Party hereunder to the extent
that any Damages are found in a final non-appealable judgment by a court of
competent jurisdiction to have resulted solely from the gross negligence, bad
faith or willful misconduct of the Indemnified Party seeking indemnification
hereunder. The Company also agrees that the Indemnified Parties shall not have
any liability (whether direct or indirect, in contract or tort or otherwise) to
the Company for or in connection with the retention of MKC, except to the extent
such liability is found in a final non-appealable judgment by a court of
competent jurisdiction to have resulted solely from gross negligence, bad faith
or willful misconduct.
If for any reason other than a final non-appealable judgment finding any
Indemnified Party liable for Damages for its gross negligence, bad faith or
willful misconduct the foregoing indemnity is unavailable to an Indemnified
Party or insufficient to hold an Indemnified Party harmless, then the Company
shall contribute to the amount paid or payable by an Indemnified Party as a
result of such Damages in such proportion as is appropriate to reflect not only
the relative benefits received by the Company and its shareholders on the one
hand and MKC on the other, but also the relative fault of the Company and the
Indemnified Party as well as any relevant equitable considerations, subject to
the limitation that in no event shall the total contribution of all Indemnified
Parties to all such Damages exceed the amount of Compensation actually received
and retained by MKC hereunder after deduction of all applicable taxes to which
the Indemnified Parties are subject. Promptly after receipt by the Indemnified
Party of notice of any claim or of the commencement of any action in respect of
which indemnity may be sought, the Indemnified Party will notify the Company in
writing of the receipt or commencement thereof and the Company shall have the
right to assume the defense of such claim or action (including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of fees
and expenses of such counsel), provided that the Indemnified Party shall have
the right to control its defense if, in the opinion of its counsel, the
Indemnified Party's defense is unique or separate to it as the case may be, as
opposed to a defense pertaining to the Company. In any event, the Indemnified
Party shall have the right to retain counsel reasonably satisfactory to the
Company, at the Company's expense, to represent it in any claim or action in
respect of which indemnity may be sought and agrees to cooperate with the
Company and the Company's counsel in the defense of such claim or action, it
being understood, however, that the Company shall not, in connection with any
such claim or action or separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys, for all the Indemnified Parties unless the defense
of one Indemnified Party is unique or separate from that of another Indemnified
Party subject to the same claim or action. In the event that the Company does
not promptly assume the defense of a claim or action, the Indemnified Party
shall have the right to employ counsel reasonably satisfactory to the Company,
at the Company's expense, to defend such claim or action. The omission by an
Indemnified Party to promptly notify the Company of the receipt or commencement
of any claim or action in respect of which indemnity may be sought will relieve
the Company from any liability the Company may have to such Indemnified Party
only to the extent that such a delay in notification materially prejudices the
Company's defense of such claim or action. The Company shall not be liable for
any settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld or delayed. Any obligation pursuant to
this Appendix A shall survive the termination or expiration of this Agreement.
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
ELECTROPHARMACOLOGY, INC.
March 19, 1997
Page 8
APPENDIX C
"Third Parties"
INITIALS
1. National Patient Care Systems 2/19/97 MWK/R 3/20/97
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
- ---------------------------------------------------------------------------
M. KANE & COMPANY, INC.
INVESTMENT BANKERS
COMPLEX BUSINESS, TECHNOLOGY OR TRANSACTION: RESOURCEFUL FINANCIAL ADVISORY
<PAGE>
EXHIBIT 10.16
AGREEMENT
This Agreement is entered into by Joseph Mooibroek and
Electropharmacology, Inc., 2301 N.W. 33rd Ct., Suite 102, Pompano Beach,
Florida 33069 (EPI hereafter) on this 12th day of April, 1997. Although
written by hand, all parties agree that it is their mutual intention to enter
into the Agreement as a final, enforceable binding agreement. All parties
wish to resolve all disputes and conflicts they have or might ever have
between themselves by this agreement. This agreement replaces all other oral
or written agreements between the parties.
1. The parties agree that the Employment Agreement entered into 8/5/96 between
the parties is terminated effective upon Mr. Mooibroek permitted
resignation at the 4/1/96 telephonic board meeting of EPI, except that
Paragraphs 17 and 20(a) shall survive and are incorporated herein.
2. As a resolution to any and all disputes that might exist between the
parties, they have agreed to the following paragraphs.
3. EPI agrees to execute and deliver to Mr. Mooibroek the promissory note
attached as Exhibit A, which shall be incorporated herein by reference.
Additionally, EPI will give Mr. Mooibroek a warrant to purchase 25,000
shares of common stock at the closing price of EPI common stock on
April 11, 1997. Such right shall be exercised by April 11, 2007. EPI
acknowledges that Mr. Mooibroek is fully vested with respect to 207,236
shares of EPI common stock at a purchase price of $5.50 a share exercisable
on or before August 5, 2006. The remaining options which Mr. Mooibroek may
have had any interest in revert to EPI. The amount of such shares is
estimated at 384,856. Additionally, Mr. Mooibroek had an option right
relating to the exercise of the Herrick warrant (10% of 1.3 million
shares). That right, too, is voided by this Agreement.
4. Mr. Mooibroek agrees he will not reveal to any person or entity information
(that has not been disclosed to the public) about EPI which he learned
exclusively during the term of his employment with EPI. He will not use
such above-described information for any purpose. (The term of employment
is 8/5/96 to 4/1/97.)
5. All parties acknowledge that it is a material inducement for each to enter
into this Agreement that neither makes critical and/or negative comments
regarding Mr. Mooibroek's resignation and/or the company's business
affairs. The parties agree that the terms of this agreement, the
negotiations leading up to it, other than what is expressed
Page 1 of 22
<PAGE>
in the Board minutes of EPI of 4/1/97, will be held confidential unless
required to be revealed by action of a court of competent jurisdiction.
The parties agree Mr. Mooibroek will have to discuss the matter and
disclose the agreement in his lawsuit with his former employer, AME,
(now Orthofix Ltd.) sited in Dallas, Texas. The parties will uses the
information in the press release issued April 2, 1997 in describing the
separation of Mr. Mooibroek from his employment with EPI.
6. Mr. Mooibroek agrees that he will cooperate with EPI in that he will, at no
additional cost to EPI, consent to execute any and all documents necessary
to perfect and secure patent protection that will be assigned to EPI on
inventions made by Mooibroek (battery powered unit and multiplexing
system). Mr. Mooibroek agrees he will prepare and deliver to EPI by
4/25/97 the First Draft of his disclosures of the inventions which will
become an Exhibit to the Agreement after he cooperates with EPI in putting
that draft in final form (Exhibit B).
7. The parties agrees that no non-compete clause is to be implied to be part
of this Agreement.
8. EPI acknowledges that the shares of common stock (in lieu of salary) which
were assigned to Mr. Mooibroek for 1996 (5,555 shares), which have not yet
been delivered to him by May 15, 1997. EPI will use its best efforts to
deliver the certificates by 4/25/97. If the shares are not delivered to
Mr. Mooibroek by 5/15/97, then the shares shall be declared lost and re-
issued to Mr. Mooibroek as soon as possible.
9. No party in entering into this agreement admits to any liability or
wrongdoing. All parties agree this Agreement is binding on their heirs,
successors and assigns.
10. The parties agree that they have entered into Mutual General Releases which
are attached as Exhibit C which are incorporated by reference.
11. The parties agree that each is represented by counsel; that the agreement
will be governed by Florida law; that any dispute under the agreement will
be litigated in a court in Broward County; and any such litigation will
result in an award which grants attorneys fees and costs to the prevailing
party. In case of relocation of the corporate offices, a court of
competent jurisdiction in any county in Florida where EPI has an office
will be appropriate venue.
12. If any portion of this Agreement is found to be invalid, such invalidity
will not affect the validity of the remaining provisions.
Page 2 of 22
<PAGE>
13. Mr. Mooibroek has been fully informed of the protections provided by the
OLDER WORKER'S PROTECTION ACT. Understanding that the matter has to be
resolved for reasons that inure to each party's benefit, he has
intentionally waived his rights to consider this matter for an additional
21 days. Mr. Mooibroek is aware that EPI is filing a 10K with the SEC on
April 15, 1997. In order for EPI to in good faith treat this matter as
resolved, Mr. Mooibroek acknowledges his right to revoke this agreement for
a statutorily establish seven day period and agrees he will not act to so
revoke.
In witness whereof, the parties have signed in Fort Lauderdale, Florida,
this 12th day of April 1997.
WITNESS ELECTROPHARMACOLOGY, INC.
/s/ Elizabeth J. du Fresne /s/ David Saloff
- -------------------------------- --------------------------------
David Saloff,
/s/ Bruce E. Loren Executive Vice President
- --------------------------------
/s/ Joseph Mooibroek
/s/ Elizabeth J. du Fresne --------------------------------
- -------------------------------- Joseph Mooibroek
/s/ Bruce E. Loren
- --------------------------------
Verifying that he has agreed that Mr. Mooibroek's promissory note will
have preference and stand before any obligations EPI has to Norton Herrick
and/or his assigns.
/s/ Norton Herrick
--------------------------------
Norton Herrick
Page 3 of 22
<PAGE>
PAGES 4 THROUGH 15 INTENTIONALLY LEFT BLANK.
<PAGE>
RETURN TO: (ENCLOSE SELF-ADDRESSED STAMPED ENVELOPE) GENERAL RELEASE
NAME:
Bruce E. Loren
ADDRESS:
P.O. Box 1900
Fort Lauderdale, Florida 33302
THIS INSTRUMENT PREPARED BY:
ADDRESS:
Ruden, McClosky, Smith,
Schuster & Russell, P.A.
200 East Broward Boulevard
15th Floor
Fort Lauderdale, Florida 33301
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE SPACE ABOVE THIS LINE
FOR PROCESSING DATA FOR RECORDING DATA
KNOW ALL MEN BY THESE PRESENTS:
That, first party, Joseph Mooibroek, for and in consideration of the sum
of Ten and 00/100 Dollars ($10.00), and other valuable considerations,
received from or on behalf of Electropharmacology, Inc., second party, the
receipt whereof is hereby acknowledged,
(Wherever used herein the terms "first party" and "second party" shall
include singular and plural, officers, directors, agents, attorneys,
employees, insurers, heirs, legal representatives, and assigns of
individuals, and the successors and assigns of corporations, wherever
the context so admits or requires.)
HEREBY remise, release, acquit, satisfy, and forever discharge the said
second party of and from all, and all manner of action and actions, cause and
causes of action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, executions, claims and
demands whatsoever, in law or in equity, which said first party ever had, now
has, or which any personal representative, successor, heir or assign of said
first party, hereafter can, shall or may have, against said second party,
for, upon or by reason of any claims that have been made for, upon or by
reason of any matter, cause or thing whatsoever, from the beginning of the
world to the day of these presents, including without limitation, any claims
raised or that could have been raised in connection with or related to the
first party's management of or employment by the first party; except that,
this release is not intended to and shall not release second party from his
obligations and duties under that certain Settlement Agreement, dated April
12, 1997, between Electropharmacology, Inc. and Joseph Mooibroek.
Page 16 of 22
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and seal, this 12th day
of April, 1997.
Signed, sealed and delivered in presence of: JOSEPH MOOIBROEK
/s/ ELIZABETH J. DU FRESNE /s/ JOSEPH MOOIBROEK
- ----------------------------------- ---------------------------------
Witness Signature
Elizabeth J. du Fresne Joseph Mooibroek
- ----------------------------------- ---------------------------------
Printed Name Printed Name
/s/ BRUCE E. LOREN 17643 Bocaine Way
- ----------------------------------- ---------------------------------
Witness Signature Post Office Address
Bruce E. Loren Boca Raton, Florida 33487-1121
- -----------------------------------
Printed Name
STATE OF FLORIDA )
) SS:
COUNTY OF BROWARD )
I HEREBY CERTIFY that on this day, before me, an officer duly authorized
in the State aforesaid and in the County aforesaid to take acknowledgments,
the foregoing instrument was acknowledged before me by _______________________
__________________________, who is personally known to me or who has produced
______________________________ as identification.
WITNESS my hand and official seal in the County and State last aforesaid
this _____ day of ____________________, 19__.
/s/ ELIZABETH J. DU FRESNE
--------------------------------------
Notary Public
--------------------------------------
Typed, printed or stamped name of
Notary Public
My Commission Expires:
Page 17 of 22
<PAGE>
RETURN TO: (ENCLOSE SELF-ADDRESSED STAMPED ENVELOPE) GENERAL RELEASE
NAME:
Bruce E. Loren
ADDRESS:
P.O. Box 1900
Fort Lauderdale, Florida 33302
THIS INSTRUMENT PREPARED BY:
ADDRESS:
Ruden, McClosky, Smith,
Schuster & Russell, P.A.
200 East Broward Boulevard
15th Floor
Fort Lauderdale, Florida 33301
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE SPACE ABOVE THIS LINE
FOR PROCESSING DATA FOR RECORDING DATA
KNOW ALL MEN BY THESE PRESENTS:
That, first party, Electropharmacology, for and in consideration of the
sum of Ten and 00/100 Dollars ($10.00), and other valuable considerations,
received from or on behalf of Joseph Mooibroek, second party, the receipt
whereof is hereby acknowledged,
(Wherever used herein the terms "first party" and "second party" shall
include singular and plural, officers, directors, agents, attorneys,
employees, insurers, heirs, legal representatives, and assigns of
individuals, and the successors and assigns of corporations, wherever
the context so admits or requires.)
HEREBY remise, release, acquit, satisfy, and forever discharge the said
second party of and from all, and all manner of action and actions, cause and
causes of action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, executions, claims and
demands whatsoever, in law or in equity, which said first party ever had, now
has, or which any personal representative, successor, heir or assign of said
first party, hereafter can, shall or may have, against said second party,
for, upon or by reason of any claims that have been made for, upon or by
reason of any matter, cause or thing whatsoever, from the beginning of the
world to the day of these presents, including without limitation, any claims
raised or that could have been raised in connection with or related to the
second party's management of or employment by the first party; except that,
this release is not intended to and shall not release second party from his
obligations and duties under that certain Settlement Agreement, dated April
12, 1997, between Electropharmacology, Inc. and Joseph Mooibroek.
Page 18 of 22
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and seal, this 12th day
of April, 1997.
Signed, sealed and delivered in presence of: ELECTROPHARMACOLOGY, INC.
/s/ ARUP SEN By: /s/ DAVID SALOFF (L.S.)
- ----------------------------------- ---------------------------------
Witness Signature As Executive Vice President
-------------------------------
Arup Sen
- ----------------------------------- ---------------------------------
Printed Name Printed Name
/s/ BRUCE E. LOREN
- ----------------------------------- ---------------------------------
Witness Signature Post Office Address
Bruce E. Loren
- -----------------------------------
Printed Name
STATE OF FLORIDA )
) SS:
COUNTY OF BROWARD )
I HEREBY CERTIFY that on this day, before me, an officer duly authorized
in the State aforesaid and in the County aforesaid to take acknowledgments,
the foregoing instrument was acknowledged before me by _______________________
________________________, the ________________________ of Electropharmacology,
Inc., a Florida corporation, freely and voluntarily under authority duly
vested in him/her by said corporation and that the seal affixed thereto is
the true corporate seal of said corporation. He/She is personally known to
me or who has produced ______________________________ as identification.
WITNESS my hand and official seal in the County and State last aforesaid
this _____ day of ____________________, 1997.
/s/ ELIZABETH J. DU FRESNE
--------------------------------------
Notary Public
--------------------------------------
Typed, printed or stamped name of
Notary Public
My Commission Expires:
Page 19 of 22
<PAGE>
PROMISSORY NOTE
$128,700.00 City of Fort Lauderdale
State of Florida
FOR VALUE RECEIVED, ELECTROPHARMACOLOGY, INC., a Florida corporation
("Borrower"), promise to pay to the order of JOSEPH MOOIBROEK ("MOOIBROEK"),
the principal amount of ONE HUNDRED AND TWENTY EIGHT THOUSAND SEVEN HUNDRED
DOLLARS AND 00/100 DOLLARS ($128,700.00).
This Note shall be paid according to the following terms:
$15,000 due no later than April 18, 1997;
$15,000 due no later than May 1, 1997;
$15,700 due no later than May 15, 1997;
$10,000 due no later than June 1, 1997;
$10,000 due no later than June 15, 1997;
$10,000 due no later than July 1, 1997;
$10,000 due no later than July 15, 1997;
$10,000 due no later than August 1, 1997;
$10,000 due no later than August 15, 1997;
$10,000 due no later than September 1, 1997;
$11,000 due no later than September 15, 1997; and
$ 2,000 due no later than October 1, 1997
All payments to be received no later than 5:00 p.m. on the date that such
payment is due. This Note may be prepaid at any time without premium or fee.
If Borrower obtains financing in an amount greater than One Million
Dollars ($1,000,000), or if Borrower defaults on any payment to be made
herein and any such Default continues for more than ten (10) calendar days
from the date payment is due, the entire principal sum shall become due and
payable at the option of Mooibroek. Failure to exercise this option shall not
constitute a waiver of the right to exercise the same at any other time.
Upon the occurrence of any default under this Note, the unpaid principal
of this Note and any part thereof, shall bear interest at the rate of
eighteen (18) per cent after Default until paid (the "Default Rate"). The
prevailing party in any action to collect upon this Note shall be entitled to
all costs of collection, including reimbursement of their attorney's fees,
including any appeals.
All payments on this Note shall be payable in lawful currency of the
United States of America at Joseph Mooibroek, 17643 Bocaire Way, Boca Raton,
Florida 33487 in immediately available funds.
Page 20 of 22
<PAGE>
Borrower hereby (a) waives demand, presentment for payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suit
and diligence in collecting this Note; and (b) agrees that Mooibroek shall
not be required first to institute any suit, or to exhaust its remedies
against Borrower or any other person or party to become liable hereunder in
order to enforce payment of this Note.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected
in excess of such maximum lawful rate shall be applied as a credit against
the unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified or
waived only by written agreement executed by Borrower and Mooibroek.
This Note is made under and governed by the laws of the State of Florida,
without regard to conflict of laws or principles.
WAIVER OF JURY TRIAL. BORROWER AND MOOIBROEK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT
HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR MOOIBROEK'S ACCEPTING THIS
NOTE FROM BORROWER.
BORROWER:
ELECTROPHARMACOLOGY, INC.,
a Florida corporation
By: /s/ DAVID SALOFF
-------------------------------------
David Saloff, Vice Chairman/Chief
Financial Officer
Page 21 of 22
<PAGE>
STATE OF FLORIDA )
) SS:
COUNTY OF BROWARD )
I HEREBY CERTIFY that on this day, before me, an officer duly authorized
in the State aforesaid and in the County aforesaid to take acknowledgments,
the foregoing instrument was acknowledged before me by _______________, the
________________ of _______________, a _______________ corporation, freely
and voluntarily under authority duly vested in him/her by said corporation
and that the seal affixed thereto is the true corporate seal of said
corporation. He/She is personally known to me or who has produced
______________ as identification.
WITNESS my hand and official seal in the County and State last aforesaid
this __ day of ___________, 19__.
ELIZABETH J. DU FRESNE
--------------------------
Notary Public
--------------------------
Typed, printed or stamped
name of Notary Public
My Commission Expires:
Page 22 of 22
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Arup Sen the true and lawful attorney-in-fact, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, to sign on his or her behalf, as a director or officer, or
both, as the case may be, of Electropharmacology, Inc., a Delaware
corporation (the "Corporation"), an Annual Report on Form 10-KSB for the year
ended December 31, 1997 and to sign any or all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact or his
substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Dated: April 11, 1997
/s/ David Saloff
- -------------------------------------
David Saloff
/s/ Murray Feldman
- -------------------------------------
Murray Feldman
/s/ Steven Mayer
- -------------------------------------
Steven Mayer
/s/ Larry Haimovitch
- -------------------------------------
Larry Haimovitch
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 223,523
<SECURITIES> 0
<RECEIVABLES> 706,202
<ALLOWANCES> 134,000
<INVENTORY> 94,164
<CURRENT-ASSETS> 1,188,206
<PP&E> 1,518,068
<DEPRECIATION> 573,010
<TOTAL-ASSETS> 2,213,080
<CURRENT-LIABILITIES> 995,369
<BONDS> 0
4,220
0
<COMMON> 35,402
<OTHER-SE> 1,174,753
<TOTAL-LIABILITY-AND-EQUITY> 2,213,080
<SALES> 409,818
<TOTAL-REVENUES> 2,149,011
<CGS> 376,197
<TOTAL-COSTS> 376,197
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,933
<INCOME-PRETAX> (2,927,990)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,927,990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,927,990)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 223,523
<SECURITIES> 0
<RECEIVABLES> 706,202
<ALLOWANCES> 134,000
<INVENTORY> 94,164
<CURRENT-ASSETS> 1,188,206
<PP&E> 1,518,068
<DEPRECIATION> 573,010
<TOTAL-ASSETS> 2,213,080
<CURRENT-LIABILITIES> 995,369
<BONDS> 0
4,220
0
<COMMON> 35,402
<OTHER-SE> 1,174,753
<TOTAL-LIABILITY-AND-EQUITY> 2,213,080
<SALES> 409,818
<TOTAL-REVENUES> 2,149,011
<CGS> 376,197
<TOTAL-COSTS> 376,197
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,933
<INCOME-PRETAX> (2,927,990)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,927,990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,927,990)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> 0
</TABLE>
