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As filed with the Securities and Exchange Commission on June 10, 1997.
Registration No. 333-03887
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ELECTROPHARMACOLOGY, INC.
(name of registrant as specified in its charter)
Delaware 95-4315412
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2301 N.W. 33rd Court, Suite 102
Pompano Beach, Florida 33069
(954) 975-9818
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(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Arup Sen
Chief Executive Officer
Electropharmacology, Inc.
2301 N.W. 33rd Court, Suite 102
Pompano Beach, Florida 33069
(954) 975-9818
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
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With copies to:
Stephen L. Fluckiger, Esq.
Jones, Day, Reavis & Pogue,
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
(214) 220-3939
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act effective registration statement number of
the earlier registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [X]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Pursuant to Rule 429 under the Act, this Registration Statement relates to
the Registration Statement on Form SB-2 (File No. 33-87934-A), as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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PROSPECTUS
3,763,552 Shares
ELECTROPHARMACOLOGY, INC.
COMMON STOCK
This Prospectus relates to 718,750 shares of common stock, par value $.01
per share (the "Common Stock"), of Electropharmacology, Inc. (the
"Company"), which may be issued upon exercise of warrants (the "Public
Warrants") issued in connection with the Company's initial public offering in
May 1995. Each Public 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 and
including May 12, 1998. The Warrants are redeemable by the Company, with the
consent of Paragon Capital Corporation ("Paragon"), the underwriter of the
Company's initial offering, at any time after June 12, 1996, upon notice of
not less than 30 days, at a price of $.10 per Public Warrant, provided that
the closing bid quotation of the Common Stock on all 20 trading days prior to
the day on which the Company gives notice has been at least 130% of the then
exercise price of the Public Warrants.
This Prospectus also relates to an offering by certain selling
stockholders (the "Selling Stockholders") of an aggregate of up to 3,044,802
shares, consisting of (i) 574,895 shares of Common Stock, (ii) 2,039,457
shares issuable upon the exercise of warrants (the "Private Warrants"),
(iii) 242,950 shares issuable upon the conversion of preferred stock of the
Company (the "Preferred Stock") and (iv) 187,500 shares issuable upon the
exercise of warrants issued to Paragon (the "Underwriter's Warrants"). Sales
of the Common Stock by the Selling Stockholders are subject to certain
contractual obligations. See "Selling Stockholders" and "Plan of Distribution."
The Common Stock may be offered from time to time by the Selling
Stockholders through ordinary brokerage transactions in the over-the-counter
market, in negotiated transactions or otherwise, at market prices prevailing
at the time of sale or at negotiated prices. The Company will not receive any
of the proceeds from the sale of Common Stock by the Selling Stockholders. See
"Selling Stockholders" and "Plan of Distribution."
The Common Stock is traded in the over-the-counter market and is quoted on
the Nasdaq Small Cap Market under the symbol EPHI. On June 6, 1997, the
closing sale price of the Common Stock as reported by Nasdaq was $2.625.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGE 3.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is June __, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400 Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission and that is
located at http://www.sec.gov. The complete registration statement, as well as
the Company's periodic reports, are found on the Commission's EDGAR database at
such Web site. The Company's Common Stock is quoted on the Nasdaq Small Cap
Market. Copies of such reports and other information can also be inspected at
the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006.
This Prospectus constitutes a part of a Registration Statement filed by
the Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act") relating to the securities offered hereby. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to
the exhibits relating thereto for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:
(a) Annual Report on Form 10-KSB and Amendment No. 1 thereto for the
fiscal year ended December 31, 1996;
(b) Quarterly Report on Form 10-QSB for the quarter ended March 31, 1997.
(c) Current Reports on Form 8-K filed January 17, 1997, February 13, 1997,
March 27, 1997 and April 4, 1997 and May 7, 1997; and
(d) The description of the Company's Common Stock contained in its
Registration Statement on Form SB-2 (File No. 33-87934-A), declared
effective on May 12, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 prior to the termination of the
offering of the Common Stock offered hereby shall be deemed to be incorporated
by reference herein and to be a part hereof on the date of filing of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such prior statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents incorporated herein by reference, except for the
exhibits to such documents unless the exhibits themselves are expressly
incorporated by reference. Requests should be directed to Dr. Arup Sen,
Electropharmacology, Inc., 2301 N.W. 33rd Court, Suite 102, Pompano Beach,
Florida 33069, telephone: (954) 975-9818.
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RISK FACTORS
The shares offered hereby are speculative and involve a high degree of risk.
Prospective investors should carefully examine this entire Prospectus and should
give particular attention to the following risk factors before making an
investment decision.
LIMITED OPERATING HISTORY AND REVENUES; SIGNIFICANT AND CONTINUING LOSSES.
The Company was organized in August 1990 and has a limited operating history
upon which an evaluation of the Company's prospects and performance can be made.
The Company's prospects must be considered in light of the risks, expenses,
delays, problems and difficulties frequently encountered in the establishment of
a new business, the development and commercialization of new products based on
innovative technology and the competitive environment in which the Company
operates. Since its inception, the Company has generated limited revenues and
has incurred significant losses, including losses of $2,073,883, $3,069,586, and
$2,927,990, for the years ended December 31, 1994, 1995 and 1996, respectively.
As of December 31, 1996, the Company had an accumulated deficit of $10,118,169.
Losses are increasing and are continuing through the date of this Prospectus.
The Company has a high level of operating expenses (including salaries of
executive, research, technical and marketing personnel) and will continue to
incur expenses in connection with conducting research and clinical studies and
purchasing or manufacturing SofPulse-TM- devices held for rental. Thus, the
Company anticipates that it will continue to incur significant losses for the
foreseeable future. There can be no assurance that the Company will be able to
generate significant revenues or ever achieve profitability.
OPERATING LOSSES AND NEGATIVE CASH FLOWS RAISE SUBSTANTIAL DOUBT ABOUT
COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. The report of the
Company's independent certified public accountants, dated 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),
with respect to the financial statements of the Company included in its
Annual Report on Form 10-KSB for the year ended December 31, 1997 states that
the significant recurring operating losses and negative operating cash flows
of the Company raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements of the Company for the
fiscal year ended December 31, 1996 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.
TECHNOLOGICAL FACTORS; UNCERTAINTY OF PRODUCT DEVELOPMENT; UNPROVEN
TECHNOLOGY. 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 pulsed electromagnetic
signals ("PEMS-TM-") that combine selected pulse forms and amplitudes to produce
certain radio frequency energy fields that are believed to affect superficial
soft tissues. 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. 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.
Although the Company's development efforts relating to the technological
aspects of the existing versions of the SofPulse-TM- are substantially
completed, the Company is continually seeking to refine and improve the
SofPulse-TM-. The first version of the SofPulse-TM-, Model MRT 100/911, produced
electromagnetic energy fields at levels that cause interference with sensitive
electronic medical equipment, such as the electrocardiograph,
electroencephalograph and electromyelograph used extensively in operating rooms
and intensive care units of hospitals. The Company has developed an enhanced
version of the SofPulse-TM-, Model 912, which is designed to use less power to
generate energy while maintaining the same pulsed electromagnetic energy field
necessary to achieve desired benefits in its intended use. Both versions of the
SofPulse-TM-, however, as currently designed should not be used within
approximately 20 feet of any such equipment. The inability of SofPulse-TM- to be
used near such equipment could adversely affect the Company's ability to market
the SofPulse-TM- for use in certain areas of hospitals.
The Company is currently developing several different versions of the
SofPulse-TM-, which the Company believes will enhance the marketability of the
SofPulse-TM-. The Company's efforts remain subject to all of the risks
inherent in new product development, including unanticipated technical,
regulatory or other problems. These unanticipated problems could result in
significantly increased costs or material delays in product development or
commercialization, requiring the Company to commit considerable additional
time and resources to finalize the production versions of its proposed
devices. The Company's success will depend upon such products meeting
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targeted product costs and performance, and may also depend upon their timely
introduction into the marketplace. There can be no assurance that development
of the Company's proposed products will be successfully completed on a timely
basis, if at all, that they will meet projected price or performance
objectives, satisfactorily perform all of the functions for which they are
being designed, or prove to be sufficiently reliable or durable in widespread
commercial application. Moreover, there can be no assurance that unanticipated
problems will not arise with respect to technologies incorporated into the
SofPulse-TM- or that product defects will not become apparent after the
product is introduced into commerce. In the event that the Company is required
to remedy defects in any of its products after they are commercially
introduced, the costs to the Company could be significant, which could have a
material adverse effect on the Company.
In addition, there has been only limited research in many of the Company's
areas of focus and results obtained in research and testing conducted to date
are not conclusive as to what influences cause the therapeutic effect of PRF
therapy. Although research and clinical studies conducted to date do not
indicate any known significant adverse effects of PRF therapy, since the
long-term effects of PRF therapy on humans is uncertain, the Company's products
may ultimately prove to have undesirable or unintended side effects, which would
have a material adverse effect on the Company.
UNCERTAINTY OF MARKET ACCEPTANCE. The method of treating pain and edema has
traditionally been to use analgesic and anti-inflammatory pharmaceuticals and
other conventional treatments such as ice packs. 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 whose results are
published in respected scientific and medical journals. The SofPulse-TM-
represents an adjunct to traditional medical treatments for pain and edema and
as a result may be slow to achieve, or may not achieve, market acceptance, as
prospective customers may seek further validation of the efficacy of the
technology. To date, the Company has generated limited revenues from sales and
rentals of the SofPulse-TM-, which has achieved only limited market acceptance.
The Company has limited marketing experience and limited financial, personnel
and other resources to undertake independently extensive marketing activities.
Achieving market acceptance for the SofPulse-TM- will require substantial
marketing efforts and expenditure of significant funds to inform physicians of
the distinctive characteristics and benefits of PRF therapy as well as what the
Company believes are the advantages of the SofPulse-TM-. There can be no
assurance that PRF therapy will become a generally accepted medical practice or
that the Company's efforts will result in successful product commercialization
or continued market acceptance for the SofPulse-TM-.
FILING REQUIREMENT FOR PREMARKET APPROVAL APPLICATION; POSSIBLE REVOCATION
OF SECTION 510(K) APPROVAL; 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 Pre-Market Approval
("PMA") application filed with the Food and Drug Administration ("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(k) of the FDC Act,
that the subject device is "substantially equivalent" to a device lawfully
marketed for the selected indication prior to 1976.
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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 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.
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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 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.
UNCERTAINTY OF REGULATORY APPROVAL FOR THE SOFPULSE-TM-; LENGTHY APPROVAL
PROCESS. The Company's research, development, clinical trials, manufacturing
and marketing of its products are subject to an extensive, rigorous and
frequently changing regulatory review process by the FDA, other regulatory
agencies in the United States and various foreign countries. The process of
obtaining and maintaining required regulatory approvals is lengthy, expensive
and uncertain. The clinical trial period for the development of a medical
device necessary to enable the Company to submit a PMA application can take
from one to four years and averages two years. Once a PMA application is
submitted, FDA review of the medical device for approval for marketing
averages three to six years. There can be no assurance that the Company will
be able, for financial or other reasons, to file its PMA application within
the required time period or that the Company's PMA application will ultimately
be approved by the FDA. A failure to obtain FDA approval of the Company's PMA
application and revocation of its Section 510(k) clearance to market for the
current intended use would prevent the Company from marketing the
SofPulse-TM-, its only currently commercialized product in the United States.
Even if regulatory approvals are obtained, a marketed product and its
manufacturer are subject to continuing regulatory review. The discovery of
previously unknown problems or amendments to existing statutes or regulations
or the adoption of new statutes or regulations could result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. The FDA requires submission of a new PMA notification for any change
or modification to a previously marketed product that significantly affects
safety or effectiveness (e.g., a significant change or modification in design,
energy source or manufacturing process). There can be no assurance that the
Company will not be required to obtain a PMA prior to the marketing of any of
its future products. The Company is also subject to various FDA regulations
which govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, advertising and promotion of medical devices.
NEED FOR ADDITIONAL FINANCING. 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
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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 to
reduce 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 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 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
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. There are certain capital requirements 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 by the end of
1997, and the Company continues its current capital expenditure requirements,
the Company will be in violation of the listing requirements and Nasdaq may
de-list the Common Stock and Warrants of the Company. See "Risk Factors -
Possible De-Listing of Securities From NASDAQ System; Risks Relating to
Low-Priced Stocks."
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.
OPERATING LOSSES AND NEGATIVE CASH FLOW RAISE SUBSTANTIAL DOUBT ABOUT
COMPANY'S ABILITY TO CONTINUE AS A GOING CONERN. The report of the Company's
independent certified public accountants, dated 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), with
respect to the financial statements of the Company included in its Annual
Report on Form 10-KSB for the year ended December 31, 1996 states that the
significant recurring operating losses and negative operating cash flows of
the Company raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements of the Company for the fiscal
year ended December 31, 1996 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.
UNCERTAINTY OF RESEARCH AND CLINICAL STUDIES. 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,
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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.
From August 1994 to December 1995, in anticipation of a potential order
from the FDA requiring the submission of a PMA application documenting the
safety and effectiveness of the Company's SofPulse-TM- product, 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 that had been 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, although there can be no assurance
that such trials can be completed by the Company, 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 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, which reports claimed a statistically significant
reduction in edema by SofPulse-TM- treatment. These claims have subsequently
been determined 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, Dr.
Betty F. Sisken, a professor at the University of Kentucky, has conducted
certain laboratory research on nerve cell and nerve fiber growth and
regeneration. The Company paid approximately $100,000 for this research,
although the Company does not know if such results will have commercial
feasibility. Starting in August 1993, Dr. Harvey Mayrovitz, Chief,
Microvascular and Physiological Studies Unit at the Miami Heart Institute,
conducted two phases of a preliminary research study 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 phases, published in
peer-reviewed scientific journals, indicate that PRF signals may
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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 such 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.
DEPENDENCE ON 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
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 cost 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
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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 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 which 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 which 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 assurances thereof. 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. Further, significant uncertainty exists as to the reimbursement
status of newly approved healthcare 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.
LIMITED PRODUCT LINE; POTENTIAL MARKETS. To date, all of the Company's
revenues have been derived from the sale or rental of the SofPulse-TM- to a
limited number of physicians, nursing homes and hospitals. A decline in the sale
or rental of the SofPulse-TM- would have a material adverse effect on the
Company. The Company's prospects will be significantly affected by its ability
to penetrate the markets for nursing homes and hospitals, as well as
office-based practitioners, or by a decline in the economic prospects of
hospitals generally that could result in a reduction or deferral of capital
expenditures by prospective customers. There can be no assurance that recent
trends among hospitals to curtail spending will not have an adverse effect on
the Company. In addition, in recent years, office-based practitioners have been
affected by the popularity of managed care providers and general consolidation
trends in the industry, which could result in the reduction or deferral of new
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equipment purchases by such practitioners. As a result, there can be no
assurance that the Company will not remain largely dependent on non-recurring
sales and rentals of the SofPulse-TM- to a limited customer base, which sales
and rentals will constitute all or a significant portion of the Company's
revenues.
Further, to date, all of the Company's products that have been designed and
developed are based upon PRF technology. Several of the products the Company
intends to design and develop will also be based upon such PRF technology. While
the Company intends to develop additional products that may not be based upon
PRF technology, the Company's present narrow focus on a particular technology
makes the Company vulnerable to the development of superior competing products
and changes in technology which could eliminate the need for the Company's
products. While the Company believes there will be no significant change in the
foreseeable future in the need for the Company's products or the desirability of
those products, there can be no assurance that such change will not occur.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE. 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. 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 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- device. 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 "Risk Factors -- Filing Reguirement for
Premarket Approval Application; Possible Revocation of Section 510(k)
Approval; Government Regulation."
In addition, the medical products market is characterized by rapidly
changing technology and evolving industry standards, often resulting 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
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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.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS. The Company has
been and will continue to be dependent on 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 alternatives in design and supply of the arm. However, management does
not believe failure by these 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 radio frequency 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 agreement 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 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 ordinary 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.
PATENT PROTECTION AND PROPRIETARY INFORMATION. The Company is the
assignee of two patents issued by the U.S. Patents and 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 be issued from any present or future applications or, if such
patents are issued, 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
United States 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 or challenges
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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 a 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. 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. Furthermore, although the
Company has confidentiality agreements with its employees and appropriate
vendors, certain of these agreements expire over the next two to five years
and, accordingly, there can be no assurance that such arrangements will
protect the Company adequately.
CITIZEN'S PETITION AND LITIGATION RELATING TO THE SOFPULSE-TM-. 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 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
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 Winer ("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
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Company answered the complaint, denied all material allegations, asserted
various affirmative defenses and counterclaims 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 solicited 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 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.
POTENTIAL PRODUCT LIABILITY AND WARRANTY EXPENSE. The Company may be
exposed to potential product liability claims by patients who use the
Company's products. Although the Company has not experienced any product
liability claims to date, the Company maintains a general liability insurance
policy that 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 a third-party vendor which has manufactured the
SofPulse-TM- for the Company as an additional insured party. 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 that may be
incurred by them as a result of the use of the Company's products in research
and clinical studies. In the event of a partially or completely uninsured
successful claim against the Company, or in the event an indemnification
claim is made against the Company that 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
14
<PAGE>
the majority of products in a rental pool, future warranty expenses will not
have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS. The Company's future success
depends in significant part on the continued service of, and the Company's
ability to attract and retain, highly qualified financial, research, technical
and marketing personnel. Competition for qualified employees among medical
products companies is intense. There can be no assurance that the Company will
be able to retain its existing personnel or attract additional qualified
employees. The inability to attract, retain and motivate additional highly
skilled employees could adversely affect the Company's business and prospects.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK AND WARRANTS. The market
price for the Company's securities may be highly volatile as has been the case
with the securities of other companies in emerging businesses. Factors such as
the Company's financial results and introduction of new products by the Company
or its competitors, and various factors affecting the healthcare industry
generally, may have a significant impact on the market price of the Company's
securities. Additionally, in recent years, the stock market has experienced a
high level of price and volume volatility and market prices for the stock of
many companies, particularly of small and emerging growth companies, the common
stock of which trade in the over-the-counter-market, have experienced wide price
fluctuations which have not necessarily been related to the operating
performance of such companies.
SHARES ELIGIBLE FOR FUTURE SALE. As of the date of this Prospectus, the
Company has 3,721,115 shares of Common Stock outstanding, of which 1,953,046
shares of Common Stock are freely tradeable without restriction or further
registration under the Securities Act. All of the remaining 1,768,069 shares
of Common Stock outstanding (and 3,052,707 shares issuable upon the exercise
of outstanding warrants) are "restricted securities," as that term is defined
under Rule 144 promulgated under the Securities Act and may be sold without
registration pursuant to such rule. No prediction can be made as to the effect,
if any, that sales of shares of Common Stock or even the availability of such
shares for sale will have on the market prices prevailing from time to time.
The possibility that substantial amounts of Common Stock may be sold in the
public market will likely adversely affect prevailing market prices for the
Common Stock and the Warrants and could impair the Company's ability to raise
capital through the sale of its equity securities. The Selling Stockholders and
brokers or dealers engaged by the Selling Stockholders in connection with sales
of Common Stock may be deemed to be "underwriters" within the meaning of the
Securities Act.
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. As of the date
of this Prospectus, there will be 1,500,000 shares of Common Stock reserved
for issuance upon the exercise of stock options under the Company's Stock
Option Plan, of which options to purchase 1,083,860 shares have been granted
at exercise prices ranging from $1.00 to $8.00 per share. The Company has
also reserved for issuance 3,052,707 shares of Common Stock issuable upon the
exercise of outstanding warrants at exercise prices ranging from $.10 to
$9.00. The Company also has outstanding 242,950 shares of Preferred Stock
that is convertible into Common Stock on a one-to-one basis. The exercise or
conversion of the foregoing options, warrants or Preferred Stock will have a
dilutive effect on the shares currently held by the Company's stockholders.
Moreover, the terms upon which the Company would normally be able to obtain
additional equity may be adversely affected, since the holders of the options
can be expected to exercise them, if at all, at a time when the Company would
be able to obtain any needed capital through the sale of Common Stock on
terms more favorable to the Company than those terms provided in the options.
AUTHORIZATION OF PREFERRED STOCK. The Company's Certificate of
Incorporation authorizes the issuance of "blank check" preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue additional preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
15
<PAGE>
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying, or preventing a change in control of the
Company. Although the Company has no present intention to issue any shares of
its authorized preferred stock, there can be no assurance that the Company will
not do so in the future.
NO DIVIDENDS. The Company has not paid any cash dividends to date. It is
the Company's intention to retain earnings, if any, to finance the operation and
expansion of its business and, therefore, it does not expect to pay cash
dividends in the foreseeable future.
POSSIBLE DE-LISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS RELATING TO
LOW-PRICED STOCKS. The Company's Common Stock and Warrants are currently
listed on Nasdaq. In order to continue to be listed on Nasdaq, however, the
Company must maintain $2,000,000 in total assets, a $200,000 market value of
the public float and $1,000,000 in total capital and surplus. In addition,
continued inclusion requires two market-makers and a minimum bid price of
$1.00 per share; provided, however, that if the Company falls below such
minimum bid price, it will remain eligible for continued inclusion in Nasdaq
if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. By letter dated May 28, 1997,
Nasdaq notified the Company that it was in violation of Nasdaq's listing
requirements, inasmuch as the Company's total capital and surplus is less
than $1,000,000, and consequently its shares are subject to delisting
effective with the close of business on June 11, 1997 unless the Company can
provide copies of a report filed with the Commission evidencing that it meets
all Nasdaq listing requirements. If the Company cannot file such a report, it
must submit to Nasdaq by such date its proposal for achieving compliance,
including a definitive plan for doing so, together with all relevant
information in support of such plan. On the basis of the information provided
by the Compay, the staff of Nasdaq will determine whether the Company may
continue to be listed on Nasdaq. While the Company intends to file a plan for
achieving compliance with Nasdaq's listing requirements, there can be no
assurance that the Company will be able to maintain its listing with Nasdaq.
If Nasdaq de-lists the Common Stock and Warrants of the Company, sales of the
Company's securities would then be conducted in the non-Nasdaq
over-the-counter market. As a result of such de-listing, an investor could
find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Company's securities.
In addition, if the Common Stock were to become de-listed from trading on
Nasdaq and the trading price of the Common Stock were below $5.00 per share,
which it is as of the date of this Prospectus, trading in the Common Stock
would also be subject to the requirements of certain rules promulgated under
the Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less
than $5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and
impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
The additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions of the Common Stock and
Warrants, which could severely limit the market liquidity of the Common Stock
and Warrants and the ability of purchasers in this offering to sell the
Common Stock and Warrants in the secondary market.
THE COMPANY
The Company is engaged in developing, manufacturing and marketing medical
devices that deliver PEMS-TM- in the radio frequency range and that deliver
PRF energy fields. 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 achieve therapeutic benefits when applied to superficial
soft body tissue. To date, the Company's focus has been the application of
PEMS-TM- as an adjunct in the palliative treatment of pain and edema (the
abnormal accumulation of fluid in soft tissue resulting in swelling)
associated with various medical conditions that involve superficial soft
tissue injury.
The Company's product, which is marketed under the name SofPulse-TM-, is
an easy to operate, non-invasive device that delivers pulsed radio frequency
energy. The Company has developed the SofPulse-TM- in response to perceived
market opportunities arising out of various therapeutic applications for PRF
therapy. Since PRF can be administered through clothing, casts or dressings,
the SofPulse-TM- can be conveniently used
16
<PAGE>
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.
USE OF PROCEEDS
In the event that the Public Warrants, Private Warrants and Underwriter's
Warrants are exercised, of which there can be no assurance, the Company would
realize up to approximately $16,155,418 in net proceeds. Any such proceeds will
be used by the Company for working capital and general corporate purposes.
The Underwriter's Warrants contain a "cashless" exercise provision which
entitles the holder to surrender the warrant in exchange for shares of Common
Stock with a value equal to the difference between the exercise price of the
warrants and the market price of the Common Stock on the date of exercise.
The Company has agreed to pay certain expenses in connection with this
offering, currently estimated to be approximately $51,750. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders or upon the conversion of Preferred Stock.
SELLING STOCKHOLDERS
An aggregate of up to 3,044,802 shares of Common Stock may be offered and
sold pursuant to this Prospectus by certain persons (the "Selling
Stockholders"). The Private Warrants are exercisable to purchase 2,039,457
shares of Common Stock at exercise prices ranging from $.01 to $9.00 per
share. The Underwriter's Warrants are exercisable to purchase 125,000 shares
of Common Stock at an exercise price of $7.00 per share and warrants to
purchase 62,500 warrants (the "Underlying Warrants") at an exercise price of
$.14 per warrant. Each of the Underlying Warrants is exercisable to purchase
one share of Common Stock at an exercise price of $6.00. The Company has
agreed to register the shares upon the resale of the Common Stock issuable
upon the exercise of the Private Warrants, the Underwriter's Warrants, and the
shares issuable upon the conversion of Preferred Stock under the Securities
Act and to pay all expenses in connection therewith (other than brokerage
commissions and fees and expenses of counsel). Such shares have been included
in the Registration Statement of which this Prospectus forms a part. With
regard to the Private Warrants, the Underlying Warrants and the Preferred
Stock, the Registration Statement covers resales of the shares of Common
Stock, not the issuance of the shares of Common Stock pursuant to exercise or
conversion of outstanding warrants or Preferred Stock. Except as described
below, none of the Selling Stockholders has ever held any position or office
with the Company or had any other material relationship with the Company.
The following table sets forth certain information with respect to the
Selling Stockholders. The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders.
<TABLE>
PRIOR TO SALE
SELLING STOCKHOLDER (1) AFTER OFFERING (2)
- ---------------------------------------------------------- --------------- -------------------
<S> <C> <C>
Norton Herrick............................................ 1,901,900(3) -0-
Paragon Capital Corporation............................... 187,500(4) -0-
Whale Securities Co., L.P................................. 90,164(5) -0-
Craig Shapiro............................................. 40,000(6) -0-
Dr. Gordon Segal.......................................... 20,000(7) -0-
Murray Feldman............................................ 589,552(8) -0-
MESA Consulting Group, Inc................................ 100,000(9) -0-
Phyllis Saloff............................................ 8,717(10) -0-
Richard Friedman.......................................... 32,500(11) -0-
Jeffrey Markowitz......................................... 32,500(12) -0-
Arthur Pilla.............................................. 41,969(13) -0-
</TABLE>
- ------------------------
(1) Assumes all of the Underwriter's Warrants, Private Warrants and Preferred
Stock are exercised or converted and no additional shares are acquired.
(2) Assumes all of the shares are sold by the Selling Stockholder.
17
<PAGE>
(3) Consists of 358,950 shares of Common Stock, 242,950 shares of Common Stock
issuable upon conversion of the Preferred Sock and 1,300,000 shares
issuable upon exercise of warrants. Pursuant to a shareholders
agreement, Mr. Herrick shares voting control of all of the shares of
Common Stock voted by David Saloff, Vice Chairman of the Board, Chief
Financial Officer and Executive Vice President of Corporate Development
of the Company, but since such voting control is limited to the election
of directors, Mr. Herrick disclaims such beneficial ownership.
(4) Consists of 187,500 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants.
(5) Consists of 90,164 shares of Common Stock issuable upon exercise of
warrants.
(6) Consists of 40,000 shares of Common Stock issuable upon exercise of
warrants.
(7) Consists of 20,000 shares of Common Stock issuable upon exercise of
warrants.
(8) Consists of 215,945 shares of Common Stock and 373,607 shares of Common
Stock issuable upon exercise of warrants. Mr. Feldman is a director of
the Company.
(9) Consists of 100,000 shares of Common Stock issuable upon exercise of
warrants.
(10) Consists of 8,717 shares of Common Stock issuable upon exercise of
warrants. Mrs. Saloff is the mother of David Saloff, Vice Chairman of
the Board, Chief Financial Officer and Executive Vice President of
Corporate Development of the Company.
(11) Consists of 32,500 shares of Common Stock issuable upon exercise of
warrants.
(12) Consists of 32,500 shares of Common Stock issuable upon exercise of
warrants.
(13) Consists of 41,969 shares of Common Stock issuable upon exercise of
warrants.
Sales of Shares by the Selling Stockholders will be permitted under this
Prospectus, provided the Company has a current Registration Statement on file
with the Commission covering the Shares, and in certain circumstances under
Rule 144 promulgated under the Securites Act, provided the sale proposed to
be made by the Selling Stockholder under Rule 144 satisfies the requirements
thereof. The Company has agreed to maintain a current Prospectus in order to
permit sales by the Selling Stockholders under this Prospectus and, in
accordance with applicable law, intends to supplement or amend the Prospectus
from time to time to provide material information required by law to keep the
Prospectus current, including the amount of shares permitted to be sold and
the identities of the Selling Stockholders. The Company does not anticipate
that its agreement to maintain a current Prospectus will have a significant
effect on the Company's financial condition. In the event that the Company
fails to maintain a current Prospectus, under certain circumstances, it could
become liable for damages. The Company also intends to maintain its listing
in Moody's OTC Unlisted Manual for purpose of qualifying for exemptions under
certain state securities or blue sky laws.
PLAN OF DISTRIBUTION
The Common Stock may be offered and sold from time to time as market
conditions permit in the over-the-counter market, or otherwise, at prices and
terms then prevailing or at prices related to the then-current market price,
or in negotiated transactions. The shares offered hereby may be sold pursuant
to this Prospectus or, as applicable, pursuant to Rule 144 promulgated under
the Securities Act. The shares offered hereby may be sold by one or more of
the following methods: (a) a block trade in which a broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell
a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and
(d) face-to-face transactions between sellers and purchasers without a
broker-dealer under such circumstances as are allowed by the broker-dealer
laws in the jurisdiction of sale. In effecting sales, brokers or dealers
engaged by the Selling Stockholders may arrange for other brokers or dealers
to participate. Such brokers or dealers may receive commissions or discounts
from Selling Stockholders in negotiated amounts. The Selling Stockholders and
such brokers and dealers and any other participating brokers or dealers may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales.
18
<PAGE>
PRIOR UNDERWRITING
On May 12, 1995, the Company's Registration Statement on Form SB-2 was
declared effective by the Securities and Exchange Commission. The Company
sold 1,250,000 shares of Common Stock at a public price and Public Warrants
to purchase 625,000 shares of Common Stock. The Public Warrants are
exercisable from June 12, 1996 until May 12, 1998 at an exercise price of
$6.00 per share, subject to the terms of the Public Warrants, which terms are
set forth in the Warrant Agreement among the Company, North American Transfer
Co. and Paragon.
The Company has agreed, in connection with the exercise of the Public
Warrants, to pay Paragon for bona fide services a fee of 5% of the exercise
price for each Public Warrant exercised, provided, however, that Paragon will
not be entitled to receive such compensation for a Public Warrant exercise
transaction in which (i) the market price of the Common Stock at the time of
exercise is lower than the exercise price of the Public Warrants; (ii) the
Public Warrants are held in any discretionary account; (iii) disclosure of
compensation arrangements is not made in documents provided to holders of the
Public Warrants at the time of exercise; or (iv) the transaction was in
violation of Rule 10b-6 promulgated under the Exchange Act. In addition to
soliciting the exercise of the Public Warrants, either orally or in writing,
the services provided by Paragon may include disseminating information, whether
orally or in writing, to the holders of the Public Warrants concerning the
Company and the general market for the Company's securities and assisting in
the processing of any exercise of the Warrants.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers
a corporation to indemnify its directors and officers or former directors or
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. Such law provides further
that the indemnification permitted thereunder shall not be deemed exclusive
of any other rights to which the directors and officers may be entitled under
a corporation's certificate of incorporation, bylaws, any agreement or
otherwise.
Reference is made to Article Tenth of the Company's Certificate of
Incorporation, as amended (the "Certificate"), which Certificate appears as
Exhibit 3.1 to the Registration Statement of which this Prospectus is a part.
Article Tenth provides for the indemnification of directors and officers.
Reference is also made to Article Ninth of the Certificate which limits the
liability of directors to the full extent permitted by the DGCL.
Sections 7 and 8 of the Underwriting Agreement dated May 12, 1995 between
the Company and Paragon provide for the indemnification of the Company's
officers, directors and control persons under certain circumstances.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Common Stock
offered hereby have been passed upon for the Company by Tenzer Greenblatt LLP.
EXPERTS
The financial statements of the Company appearing in its Annual Report
(Form 10-KSB/A) for the year ended December 31, 1996, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
(which contains a going concern explanatory paragraph) included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The financial statements of the Company for the year ended December 31,
1995 incorporated by reference in this Prospectus and Registration Statement
have been audited by BDO Seidman, LLP, independent auditors, as set forth in
the report thereon incorporated by reference herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
19
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Shares offered by this Prospectus.
This Prospectus, filed as part of such Registration Statement, does not
contain all of the information set forth in, or annexed as exhibits to, the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made
to the Registration Statement, including the exhibits filed therewith, which
may be inspected without charge at the Office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement
may be obtained from the Commission at its principal office upon payment of
prescribed fees. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, where the
contract or other document has been filed as an exhibit to the Registration
Statement, each statement is qualified in all respects by reference to the
applicable document filed with the Commission.
FORWARD-LOOKING INFORMATION
The statements contained in this Prospectus (including the documents
incorporated by reference herein) which are not historical facts are
forward-looking statements that involve risks and uncertainties, including,
but not limited to, the effect of economic conditions and market acceptance
of the Company's products, the acquisition of regulatory approval of the
Company's products, the impact of competitors on the Company, supply
constraints or difficulties, the results of financing efforts and other risks
detailed in this Prospectus (including the documents incorporated by
reference herein).
20
<PAGE>
- ---------------------------------- -------------------------------------
- ---------------------------------- -------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO 3,763,552 SHARES OF
MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS AND, IF COMMON STOCK
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY
ANYONE IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
---------
Risk Factors.................. 3 --------------------------
The Company................... 17
Use of Proceeds............... 17 ELECTROPARMACOLOGY, INC.
Selling Stockholders.......... 17
Plan of Distribution.......... 19 --------------
Prior Underwriting............ 19 PROSPECTUS
Indemnification............... 20 --------------
Legal Matters................. 20
Experts....................... 20
Additional Information........ 20 June __, 1997
Forward-Looking Information... 21
- ------------------------------------ ----------------------------------
- ------------------------------------ ----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses payable in connection with the issuance and distribution of the
securities being registered (estimated except in the case of the registration
fee) are as follows:
Registration Fee................. $ 6,040.66
Printing......................... $ 1,750.00
Legal and Accounting Fees and
Expenses....................... $40,000.00
Transfer Agents and Registrars
Fees........................... $ 1,000.00
Miscellaneous.................... $ 2,959.34
----------
Total............................ $51,750.00
==========
The above fees will be paid by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers
a corporation to indemnify its directors and officers or former directors or
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. Such law provides further
that the indemnification permitted thereunder shall not be deemed exclusive
of any other rights to which the directors and officers may be entitled under
a corporation's certificate of incorporation, bylaws, any agreement or
otherwise.
Reference is made to Article Tenth of the Company's Certificate of
Incorporation, as amended (the "Certificate"), which appears as Exhibit 3.1
to this Registration Statement. Article Tenth provides for the
indemnification of directors and officers. Reference is also made to Article
Ninth of the Certificate which limits the liability of directors to the full
extent permitted by the DGCL.
Sections 6 and 7 of the Underwriting Agreement dated May 12, 1995 between
the Company and Paragon provide for the indemnification of the Company's
officers, directors and control persons under certain circumstances.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as a part of this
Registration Statement on Form S-3, including those incorporated herein by
reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------
3.1 Certificate of Incorporation, as amended. (1)
5.1 Opinion of Tenzer Greenblatt LLP. (2)
23.1 Consent of Ernst & Young, LLP. (3)
23.2 Consent of BDO Seidman, LLP. (3)
23.3 Consent of Tenzer Greenblatt LLP (included in
Exhibit 5.1).
24.1 Power of Attorney. (3)
- ------------------------
(1) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
II-1
<PAGE>
(2) Previously filed.
(3) Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2) For the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) to remove by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering; and
(4) For the purpose of determining any liability under the Securities Act,
each filing of an annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d)) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons
of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by
a director, officer, or controlling person of the small business issuer in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Post-Effective Amendment No. 2 to its Registration Statement to be signed on
its behalf by the undersigned, in the City of Pompano Beach, State of
Florida, on the 10th day of June, 1997.
ELECTROPHARMACOLOGY, INC.
BY: /s/ ARUP SEN
--------------------------------
Arup Sen
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 2 to the Registration Statement on Form S-3
has been signed below by the following persons in the capacities and on the
dates indicated:
SIGNATURES TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ARUP SEN Chairman of the Board and
- ------------------------------ Chief Executive Officer June 10, 1997
Arup Sen
/s/ DAVID SALOFF Chief Financial Officer
- ------------------------------ (Principal Financial and June 10, 1997
David Saloff Accounting Officer)
/s/ MURRAY FELDMAN
- ------------------------------ Director June 10, 1997
Murray Feldman
/s/ LARRY HAIMOVITCH
- ------------------------------ Director June 10, 1997
Larry Haimovitch
/s/ STEVEN MAYER
- ------------------------------ Director June 10, 1997
Steven Mayer
II-3
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------
3.1 Certificate of Incorporation, as amended. (1)
5.1 Opinion of Tenzer Greenblatt LLP. (2)
23.1 Consent of Ernst & Young, LLP. (3)
23.2 Consent of BDO Seidman, LLP. (3)
23.3 Consent of Tenzer Greenblatt LLP (included in
Exhibit 5.1).
24.1 Power of attorney. (3)
- ------------------------
(1) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
(2) Previously filed.
(3) Filed herewith.
II-4
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Electropharmacology, Inc.
Pompano Beach, Florida
We consent to the reference to our firm under the caption "Experts" in the
Post-Effective Amendment No. 2 to the Registration Statement Form S-3 No.
333-03887 and related Prospectus of Electropharmacology, Inc. for the
registration of 3,763,552 shares of its common stock and to the incorporation
by reference therein of our report dated 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) with respect to
the financial statements of Electropharmacology, Inc. included in its Annual
Report (Form 10-KSB/A) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG, LLP
----------------------------
Ernst & Young, LLP
West Palm Beach, Florida
June 9, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Electropharmacology, Inc.
Pompano Beach, Florida
We hereby consent to the incorporation by reference, in this Registration
Statement on Form S-3 (Post Effective Amendment No. 2) of our report dated
April 2, 1996, relating to the financial statements of Electropharmacology,
Inc., for the year ended December 31, 1995 appearing in the Company's annual
report on Form 10-KSB for the year ended December 31, 1996.
We also consent to the reference to us under the caption "Experts" in the
Registration Statement.
Miami, Florida /s/ BDO SEIDMAN, LLP
June 10, 1997 --------------------
BDO Seidman, LLP
<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"), a Post-Effective Amendment No. 1 to the Corporation's
Registration Statement on Form S-3 (No. 333-03887) and to sign any or all
amendments thereto, or post-effective 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
