SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
0-25828
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(Commission File No.)
ELECTROPHARMACOLOGY, INC.
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(Exact name of Small Business Issuer as specified in its charter)
Delaware 954315412
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
2301 N.W. 33rd Court, Suite 102, Pompano Beach, Florida 33069
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (954) 975-9818
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
The issuer's revenues for the fiscal year ended December 31, 1997 are
$2,401,249.
The aggregate market value of the registrant's Common Stock held by non-
affiliates as of April 13, 1998 was approximately $860,916. As of April 13, 1998
there were 4,132,493 shares of the registrant's Common Stock outstanding.
Documents Incorporated by Reference:
None
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ITEM 1. DESCRIPTION OF BUSINESS
General
Electropharmacology, Inc. (the "Company") is engaged in the business of
developing medical applications for pulsed electromagnetic signals (PEMS) and is
manufacturing and marketing a PEMS device called SofPulse. The Company intends
to pursue the application of PEMS in enhancing the delivery of drugs and
biologics to selected tissues and promoting the regeneration of cells in tissues
damaged by trauma or chronic diseases. The Company's strategy also includes the
acquisition of other biotechnologies with potential applications in cancer and
autoimmune diseases. Incorporated under the laws of the State of California in
August 1990 under the name Magnetic Resonance Therapeutics, Inc., the Company
reorganized in February 1995 through a merger with and into Electropharmacology,
Inc. a Delaware Corporation. The Company's executive offices are located at 2301
NW 33rd Court, Suite 102, Pompano Beach, Florida 33069, and its telephone number
is (954) 975-9818.
The first embodiment of the Company's PEMS technology is the SofPulse
device ("SofPulse") that was cleared for commercial marketing in January 1991 by
the United States Food and Drug Administration ("FDA") pursuant to a Section
510(k) premarket notification. SofPulse broadcasts PEMS in the radio frequency
range at 27.1 MHz ("PEMS(RF)") and is marketed as an adjunct in the palliative
treatment of pain and edema associated with various medical conditions that
involve superficial soft tissue injury. SofPulse is an easy to operate,
non-invasive device that broadcasts PEMS(RF) which can be administered through
clothings, casts and dressings. As a result, SofPulse can be conveniently used
immediately following trauma or surgery. To date, SofPulse has been used by
clinicians on medical conditions such as acute or chronic (non-healing or
recalcitrant) skin ulcers, edema and pain resulting from trauma of hand and
ankle, pain associated with sprains of the lower back, and pain and edema
following reconstructive and plastic surgery.
The Company's principal sources of revenue from SofPulse device have been
rental fees charged to nursing homes and hospitals and sales to certain
distributors and cosmetic surgeons. To date, the Company has generated limited
revenue from sales and rentals of the SofPulse which has achieved only limited
market acceptance. As of March 31, 1998, the Company had 96 SofPulse devices
under rental agreements at nursing homes. In 1997, the Company sold 79 new and
refurbished SofPulse devices and had varying numbers of SofPulse on rental at
different times of the year. The Company's management believes that SofPulse can
be marketed to cosmetic surgeons, sports team trainers and physicians, pain
clinics, physical rehabilitation centers and distributors or medical equipment
rental companies who serve the home care market for the recovery of
post-operative ambulatory patients. Expanding market penetration for the
SofPulse is expected to require increased marketing efforts and cost-effective
manufacturing in compliance with the current Good Manufacturing Practice
("cGMP") guidelines for the domestic market and additional regulations (such as
ISO-9000 and CE-Mark) for international markets.
The Company's strategy is to develop novel medical applications of PEMS(RF)
based on the effects of these energy fields on cells and local blood flow in
superficial soft tissues. Since its introduction in commercial markets, the
SofPulse has been used to administer PEMS(RF) at various dosages in more than
300,000 treatments to thousands of patients. There has been no report of
significant adverse reaction in treated tissues in humans caused by the
indicated use of SofPulse. Clinicians who have used SofPulse have reported
beneficial effects of SofPulse treatment in the repair of superficial soft
tissues and augmentation of local blood flow at the site of application. The
Company also has continued to expand its technology and know-how that it expects
will enable it to achieve the delivery of various PEMS(RF) signals to different
anatomical locations of the body at predetermined field strengths, signal
frequencies and duration. In order to improve the protection for the
commercialization of its PEMS(RF) technology, the Company has been building its
patent portfolio which currently consists of three issued U.S. patents, one
issued Canadian patent and pending patent applications in the U.S. and in
certain foreign countries. However, the development of novel medical
applications and obtaining regulatory approval for commercial marketing of
products based on the PEMS(RF) modality in tissue repair by inducing cell
regeneration or in the enhancement of drug delivery by improving local blood
flow will require significant research and development expense, effort and time.
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The Company's management does not believe that it can create shareholder
value by pursuing on its own both the growth of the SofPulse device business and
the PEMS technology business. Accordingly, the Company is currently implementing
a strategy to create value from each of the two lines of businesses under
separate business structures. The Company, subject to necessary approvals and a
satisfactory outcome of mutual due diligence, has negotiated the principal terms
of an asset purchase agreement pursuant to which a company (the "Purchaser")
that is engaged in the development and manufacturing of medical electronic
devices and topical dermatological products, will acquire most of the Company's
SofPulse device units and certain other assets specifically related to the
business of SofPulse device manufacturing and marketing. In exchange therefor,
the Purchaser will agree to assume certain specified liabilities and issue a
number of shares of Purchaser's stock and grant the Company a warrant to
purchase additional shares of Purchaser's stock tied to the revenues generated
from the SofPulse marketing by the Purchaser. In the event that the Purchaser is
successful in increasing the revenues from SofPulse marketing, the Company's
management believes that the value of the Company's equity position will
increase, although there can be no assurance that this increase in value will
occur. The Company also is in advanced stages of negotiations with two
development stage, privately held biotechnology companies to enter into a merger
and reorganization agreement and a stock purchase agreement. The proposed
transaction with the biotechnology companies are contingent upon several
conditions, including the closing of the SofPulse device transaction with the
Purchaser, obtaining necessary stockholder approvals and a satisfactory outcome
of mutual due diligence. The consummation of the biotechnology company
transactions will provide the Company with a broad portfolio of biotechnologies,
collaborative affiliations with major medical institutions and relationships
with internationally recognized scientists. Upon consummation of the foregoing
contemplated transactions, the Company intends to conclude a financing in order
to provide it with the capital necessary to pursue the development of the
portfolio of proposed technologies to be acquired, including technologies in
large therapeutic markets such as cancer and infectious diseases, and uses by
the Company's existing technologies in tissue repair/regeneration through
corporate partnerships. However, there can be no assurance that the Company will
be able to close any of the contemplated transactions or conclude the
contemplated financing.
Background of Technologies:
PEMS(RF) Technology. The Company's technologic focus is on non-invasive
(non-touch) delivery (broadcast) of pulses of electromagnetic signals in the
radio frequency range that may induce a local electric field (E-field) in a
patient's superficial soft tissue sites without tissue heating. The Company's
technologic approach is distinct from three other similar technologies: Low
frequency pulsed electromagnetic fields ("PEMF"), direct Electrical Stimulation
("E-Stim") and pulsed radio frequency ("PRF") diathermy. PEMF (in the 50 Hz
frequency range) has been used since 1977 in the treatment of nonunion bone
fractures (i.e., fractures which refuse to heal) and is administered principally
through the use of coils attached to (or implanted in) the patient in close
proximity to the site of the fracture. Over the past 20 years, clinical research
in the field of PEMF has demonstrated that the use of pulsed electromagnetic
fields promotes the healing of human and other mammalian bone tissue under
selected conditions. E-Stim (in the form of galvanic currents) has been used
since the 1960s to achieve therapeutic effects (muscle, nerve and other soft
tissue injuries) and is administered by placing electrodes in direct contact
with the tissue by the use of conductive gels and garments. PRF (in the 27.12
MHz radio frequency range) has been used over the past 30 years to achieve
varying degrees of tissue heating ("diathermy") depending on the frequency or
the amplitude and the total dosage.
The Company's PEMS(RF) is delivered as controlled pulses of high energy
(27.12 MHz radio frequency range) at a low average power and short duty cycles
(i.e., the total duration of signal delivery during a course of administration)
relative to traditional diathermy. This frequency (27.12 MHz) is approved by the
Federal Communications Commission ("FCC") as the radio frequency band for
medical applications. During the past twenty years, several research reports
have been published claiming the ability of PEMS(RF) to modulate cells in a
non-thermal manner (i.e., without heating), presumably through the induction of
an E-field throughout the treated tissue site. The Company's goal is to use
modern tools of molecular biotechnology to design specific PEMS(RF) signal
patterns that can achieve specific therapeutic objectives through defined
mechanisms of action on specific cell targets.
The SofPulse. The SofPulse is a compact, easy to operate, non-invasive medical
device embodiment of the Company's PEMS(RF) technology. The Company has been
marketing the SofPulse as an adjunct to other treatments for
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the palliation of post-operative pain and edema in soft tissues. The SofPulse
consists of a compact solid state electronic console ("Generator") that supplies
radio frequency electric power to a nine-inch diameter circular treatment head
("Applicator") which houses the coil that produces the electromagnetic
broadcast. The Generator contains controls that can be used to adjust (i) the
number of pulses per second (80 - 600); (ii) the peak power output (174 - 363
watts); and (iii) the length of treatment. Because the energy is pulsed in 65
microsecond bursts, the SofPulse broadcasts PEMS(RF) energy for only between
0.5% to 3.9% of the total time during which the power is on. The resulting
PEMS(RF) is not expected to produce the deep tissue heating that is generally
produced by traditional diathermy devices operating at the 27.12 Mhz range and
in this regard is similar to the PEMF treatment used in bone growth stimulation
devices operating at about 50Hz.
The Company commenced production and marketing of the current SofPulse
Model 912 in October 1993 replacing previous models designated 911 and MRT100.
Since receiving the right to commercialize its device, the Company has continued
to improve certain features related to the reliability, safety and ease of use
of its product including (i) design improvements that require less power to
generate the intended electromagnetic field; (ii) reduction of weight of the
Generator; and (iii) reduction of magnetic interference. The Company initiated
the development of a new model that it expects will require less power and,
thus, its Generator would be able to deliver power to more than one Applicator
to treat multiple sites simultaneously or be operable by a battery. See
"Research and Development". The Company has received certification from the
Canadian Standards Association (CSA) to market the SofPulse in Canada, and the
Underwriter Laboratories, Inc. certification (UL) in the U.S.
Technology Application Potential. A large body of observations from the clinical
use of electromagnetic fields indicates that these energy fields can penetrate
through tissues and produce effects either by directly altering cellular
metabolism or by enhancing blood flow at the application site. Definitive
scientific studies to understand the relationship between the energy dosage and
the nature of effects on cells and tissues or the role of specific effects in
causing desired therapeutic outcomes have not been conducted. Preliminary
studies conducted on behalf of the Company at the Miami Heart Institute have
indicated that PEMS(RF) increases vascular perfusion (blood flow) at the tissue
site where the energy is delivered, even at the ends of the limbs and in
patients with blood flow problems such as diabetic patients. The Company's
management believes that certain of its proprietary know-how relating to such
blood flow improvement in superficial tissues (breast, brain, joints) may have
applications in enhancing the delivery of drugs or biotechnology products,
especially to those anatomical locations where blood flow is limited under
certain disease conditions. Enhancement of drug delivery is now recognized as a
segment of the pharmaceutical and biotechnology industries where a growing
number of companies are exploring a multitude of technical approaches for
products used in the treatment of cancer, infection and degenerative diseases.
The Company's management believes that its approach is unique since the PEMS(RF)
is non-invasive. In addition to the potential use of PEMS(RF) in drug delivery
enhancement, electric field presumably induced in tissues in response to
PEMS(RF) may facilitate tissue regeneration by influencing the metabolism and
gene activities at the cellular level. There are anecdotal reports of such
cellular changes in the scientific literature. The Company intends to pursue
research and development on the effects of PEMS(RF) on specific tissue cells in
order to determine if the PEMS(RF) modality may be used to develop products for
the regeneration of soft tissues damaged by trauma (surgery, burns) or
degenerative diseases (arthritis, ulcers).
The Company's contemplated transactions involving the two biotechnology
companies will provide the Company with a portfolio of patents and know-how
relating to emerging biotechnologies including (i) novel molecules aimed at
preventing the spread ("metastasis") of cancer, (ii) proprietary databases for
genetic predisposition to diseases influenced by diet and nutrition, and (iii)
the design and synthesis of the building blocks ("nucleosides") for genetic
diagnostic products and the treatment of cancer and inflammation.
Company Revenue - Marketing and Sales:
Rental and Sales. The Company's principal sources of revenue to date have been
rental fees charged to nursing homes for use of the SofPulse and sale of the
SofPulse to certain distributors and surgeons. The Company's pricing and
marketing strategies are market dependent and affect both rentals and sales. The
Company's pricing policy for
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rental rates and sales prices have been based on several factors that include
reimbursement by third party payors and private health care insurers, domestic
and international market variations, and discounts based on volume. Rental fees
are invoiced based on the number of hours of use of SofPulse on a monthly basis
at a rate agreed upon in rental agreements with the customers that are generally
on a month-to-month basis. In a certain number of cases, the customer pays a
flat monthly fee, with no written rental agreement, regardless of the extent of
use. The SofPulse Model 912 carries a list price of $27,500 for an individual
unit sale and the hourly rental fee for SofPulse is between $30 to $36. The
Company offers discounts to customers on a case by case basis, for example, in
cases where a distributor or a customer orders multiple SofPulse units. As of
March 31, 1998, the Company has sold 114 new SofPulse units at an average price
of approximately $14,000 per unit. The Company engages independent sales
representatives and independent distributor groups in certain regions in the
U.S. for marketing the SofPulse. Sales representatives and distributors are paid
on a commission basis (generally 20% of the Company's revenue attributable to
the SofPulse revenue) and are generally responsible in their respective
geographic markets for identifying, placing and promoting the utilization of the
SofPulse devices in nursing homes and hospitals, and with physicians and other
health care providers. The independent sales representatives and distributors
represent and deal in various medical product lines, none of which in the
opinion of the Company's management, compete directly with the Company's
products.
Strategic Alliance Agreement. In May 1997, the Company entered into a strategic
alliance agreement with National Patient Care Systems (NPCS) of New Jersey (the
"Strategic Alliance Agreement") whereby NPCS acquired control of the Company's
then existing fleet of SofPulse devices comprising about 540 units and the
SofPulse rental business from the Company as well as certain rights to market
SofPulse in selected clinical indications in the U.S. Pursuant to the agreement,
NPCS was to make certain monthly payments to the Company, be responsible for
sales and marketing expenses relating to SofPulse rental, purchase a certain
minimum number of new SofPulse units every month from the Company and pay
certain royalties based on SofPulse rental revenues generated by NPCS. Upon
completing this transaction, the Company had intended to focus on research and
development on new medical applications for its PEMS(RF) technology and the
SofPulse product. The Strategic Alliance Agreement was terminated in July 1997
as a consequence of the issuance by the Health Care Financing Administration
("HCFA") of a national policy of non-reimbursement by Medicare for all forms of
electrotherapy for wound healing.
The Company's rental revenues were materially adversely affected as a
consequence of the HCFA policy. HCFA was enjoined from implementing this
national policy under a ruling by a U.S. District Court in Massachusetts on
November 18, 1997. Although the preliminary injunction reduced the rate of
decline in the Company's rental revenue, no significant increase in rental usage
of SofPulse by nursing homes was experienced by the Company during the first
quarter of 1998. Upon reacquisition of the fleet of SofPulse and all rights
granted to NPCS under the agreement, the Company initiated an effort to sell
SofPulse, especially refurbished SofPulse units that were no longer generating
rental revenues, to surgeons and to nursing homes in order to generate revenues
without increasing internal sales and marketing expenses. The Company sold 55
such refurbished units at an average price of about $7,000 per unit most of
which were sold during the third and the fourth quarters of 1997. The Company's
current strategy is to market the SofPulse to nursing homes and hospitals where
substantial numbers of patients may benefit from the SofPulse treatment, to the
home health care market where patients may continue the SofPulse treatment after
being released from hospitals, and to surgeons in several subspecialties
(maxillofacial, aesthetic, emergency and reconstructive) where the SofPulse may
help in treating edema or pain and help patients to recover. The Company is in
advanced stages of negotiations with a company with regard to a transaction
relating to the manufacturing and sale of SofPulse in its current label
indications. See " - General".
Research and Development:
Since 1992, the Company has engaged various independent research groups and
also conducted certain research studies in-house aimed at the development and
evaluation of various PEMS(RF) 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(RF) 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. SofPulse, which represents the first
embodiment of
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the Company's PEMS(RF) technology, has been used by physical therapists,
cosmetic surgeons and sports team physicians. The users have reported clinical
benefits to a number of patients without any significant adverse side effects in
over 300,000 administrations to thousands of patients. The Company's future
research and development plans include cellular, animal and human clinical
studies on PEMS(RF) in order to identify its commercial feasibility, although
there can be no assurance that any commercial applications will be found or
that, if found, such applications can be commercialized to the Company's
benefit. In order to pursue the potential of PEMS(RF) in novel medical
applications that the Company believes to be feasible, the Company intends to
seek research grants, including Small Business Innovations Research grants and
Advanced Technology Program 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(RF), significant additional funds and
time will be required to successfully commercialize potential products in the
large, potentially world wide markets of drug delivery and tissue regeneration.
(See " - Government Regulation").
From August 1994 to December 1995, in anticipation of a potential order
from the FDA requiring the submission of a premarket approval application
("PMA") for continued commercial marketing of the SofPulse, the Company
conducted a multi-site study evaluating the use of SofPulse as an adjunct to
other forms of treatment for edema and pain of the soft tissue associated with
ankle sprains sustained from trauma. Although a rigorous analysis of the results
did not show a statistically significant effect of SofPulse treatment on either
reducing pain or edema, this study involving more than 400 subjects had no
adverse events reported. The Company anticipates that new clinical trials will
be necessary if the FDA orders in the future that a regulatory approval based on
a PMA application will be required for continued commercial marketing of the
SofPulse for specific indications. However, there can be no assurance that such
clinical trials can be completed and that, if completed, would yield results
that would support the submission of a satisfactory PMA submission leading to an
approval by the FDA for commercial marketing of the SofPulse for intended
clinical indications. During the above time period, the Company expended,
excluding internal expenses, an aggregate of approximately $650,000 in payments
to outside third parties in connection with the various tasks conducted for the
clinical study.
From late 1992 to September 1996, Dr. Arthur A. Pilla, a former member of
the Board of Directors and former Chairman of the Scientific and Medical
Advisory Board of the Company, conducted, supervised, reviewed and analyzed
research for the Company pursuant to certain agreements with the Company. Dr.
Pilla's work on behalf of the Company under these agreements included, in part,
an evaluation of the effectiveness of certain electromagnetic signals on an
animal model that assesses bone fracture healing, the development of proprietary
strategies relating to the novel electromagnetic signals with medical
applications and technical information relating to electromagnetic signals for
use by the Company in the contemplated submission of a PMA application with the
FDA. Based on work performed pursuant to these agreements, Dr. Pilla
communicated to the Company that certain of the electromagnetic signals
developed for the Company increase the healing of animal tissue and bone repair.
Dr. Pilla presented some of his findings, in certain national and international
conferences, relating to his research conducted pursuant to the agreements with
the Company. Dr. Pilla also presented certain reports, based on his analysis of
the Company's clinical trials on the use of SofPulse in the treatment of ankle
sprain, that claimed a statistically significant reduction in edema by SofPulse
treatment. To date, the Company has paid approximately $750,000 in connection
with such research and consulting services. These claims were subsequently
determined by the Company to be incorrect. 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 are yet to be resolved between Dr. Pilla and the
Company.
The Company also has sponsored additional basic science studies and
clinical evaluation of SofPulse from late 1992 to early 1997. These include
studies conducted on (i) nerve regeneration in laboratory and animal models by
Dr. Betty F. Sisken at the University of Kentucky, (ii) the increase in local
blood flow in humans conducted by Dr. Harvey Mayrovitz at the Miami Heart
Institute and (iii) the safety of SofPulse use and the potential efficacy of
SofPulse in treating edema and pain in grade I and grade II ankle sprains for
possible PMA submission. The Company is in the process of evaluating the results
reported from these studies in order to assess the potential
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commercial feasibility and to design future research and development programs on
novel medical applications of the PEMS(RF) technology.
For the years ended December 31, 1995, 1996 and 1997, the Company expended
approximately $1,690,163, $815,722 and $214,686, respectively, on research and
development, primarily in connection with its initial efforts to achieve a PMA
application submission for SofPulse with the U.S. FDA and for the development of
new models of SofPulse. 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.
There can be no assurance that the Company will be able or intends to, for
financial or other reasons, conduct additional research and clinical studies and
file a PMA application for the SofPulse for any of its intended uses. See " -
Government Regulation".
The Company's agreements with its consultants generally provide that title
to any reports, inventions, discoveries, improvements or modifications, whether
patentable or not, that are conceived or reduced to practice by the consultant
and that are used or usable by the Company shall be the property of the Company.
Generally, pursuant to the Company's research and study agreements with
institutions, title to all inventions and discoveries made by an institution
resulting from the research performed will be property of the Company, provided
that the Company grants the institution an option to negotiate royalty-bearing
licenses in non-competitive areas to commercialize any product resulting from
such invention or discovery conceived or reduced to practice. The Company has
filed patent applications in the U.S. Patent & Trademark Office and in certain
foreign countries, claiming certain products, methods and the like based on the
results of some of the research and development conducted by or on behalf of the
Company. The Company is the assignee of three issued U.S. patents and certain
patent applications in the U.S. and certain foreign countries. See " - Patents
and Proprietary Information".
Manufacturing and Suppliers:
The Company uses third party suppliers for the supply of components
incorporated in the SofPulse. The Company has used a contract manufacturer (see
below - "Ameritron/MFJ Enterprises") for the supply of some of the SofPulse
units of certain of its models that have been marketed by the Company. The
Company currently manufactures a substantial portion of the current model of the
SofPulse. The carts, plastic molded cradles and counter-balanced arms
incorporated into the SofPulse are manufactured and obtained from sole
suppliers. The Company has been informed by the manufacturer of the
counter-balanced arm that it will discontinue the manufacturing of the arm
during 1997. Therefore, the Company is seeking other alternatives in design and
supply of the arm. However, management does not believe failure by 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,
including RF Generators and Applicators, the Company's business is generally
subject to the risk of price fluctuations and periodic shortages of components.
The Company has no long-term supply agreements with any of its suppliers and,
accordingly, purchases components pursuant to purchase orders placed from time
to time in the ordinary course of business.
The Company has previously purchased about 255 units and discussed certain
terms for the future purchase of MRT SofPulse(tm) Model 912 devices from
Ameritron/MFJ Enterprises, Inc. of Mississippi ("Ameritron/MFJ"), 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 Ameritron/MFJ and the Company has not accrued any
reserves for royalty payments owed, if any, or provisions for minimum purchases
beyond the requirements of the Company in its normal course of business.
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The Company currently employs one individual engaged in quality control and
inspections of the Company's products for conformity with the Company's
specifications. The Company oversees manufacturing of its products, third party
suppliers and manufacturers to ensure compliance with the FDA's cGMP guidelines.
The Company's quality control operation involves the certification of each
component, a series of quality specification measurements, and various other
tests to verify final performance specifications of the SofPulse and promotional
marketing materials provided by the Company to customers for rental or purchase
of SofPulse. In September, 1997, the Company was inspected by the Florida
District Office of the FDA with regard to the Company's compliance with cGMP and
as a result thereof the Company received citations pursuant to a Form 483 report
from the inspector with respect to certain aspects of the Company's
manufacturing records and product promotional marketing materials. The Company
responded in a timely manner to all such citations and provided the FDA Florida
District Office with revisions of the Company's manufacturing documents and
other materials and actions that the Company believes adequately address the
citations. On January 14, 1998, the FDA issued a warning letter to the Company
on the grounds that the Company had not responded to the citations. The Company
promptly responded to this letter notifying the FDA that the FDA had in fact
received the Company's responses and provided the FDA with proof of the FDA's
receipt of such materials during October and November 1997. The Company believes
that its responses were adequate although there can be no assurance that the FDA
will not require additional action by the Company or that the Company will be
able to maintain compliance with ongoing requirements under the cGMP guidelines
and ongoing revisions thereof. Inability to continue to meet such requirements
will materially adversely affect the Company's ability to manufacture and sell
or rent SofPulse devices. See " - Government Regulation."
Competition:
The medical products market is highly competitive. Diapulse Corporation of
America, Inc. manufactures and markets devices that are substantially equivalent
to the Company's SofPulse 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 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 SofPulse also faces 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. In addition, other forms of treatment that compete with SofPulse
treatment may achieve rapid acceptance in the medical community.
Several other companies manufacture medical devices based on the principle
of electromagnetic field technologies for applications in bone healing and
spinal fusion, and may adapt their technologies or products to compete directly
with the SofPulse. 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 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 SofPulse.
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
continually enhance and improve its products and to develop successfully or
acquire and market new products. The technologies that are expected to be
acquired by the Company pursuant to the proposed transactions with the
development stage biotechnology companies and the products or services resulting
therefrom are subject to additional competition from pharmaceutical and
biotechnology companies with substantially greater resources and expertise
compared to the Company. 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
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obsolete or less marketable or that the Company will be able to enhance
successfully its existing products or develop or acquire new products.
Government Regulation:
In January 1991, the FDA advised the Company of its determination, pursuant
to the premarket notification provisions under Section 510(k) of the FDC Act, to
treat the MRT100, the first model of the SofPulse as a class III device. The FDA
retains the right to require the manufacturers of certain class III medical
devices to submit a PMA application in order to sell such devices or to promote
such devices for specific indications. 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 cGMP guidelines. 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. The Company
has not been asked by the FDA to seek PMA for SofPulse; however, there can be no
assurance that the Company will not be required to do so and that, if required,
the Company will be able to comply with such requirement for SofPulse.
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. The products and services that are expected to arise from the technologies
being acquired by the Company pursuant to the contemplated transactions with the
biotechnology companies, are subject to complex regulations enforced by the
Bureau of Biologics and the Bureau of Drugs of the FDA. The process of
development, seeking clearance for human clinical evaluation under
Investigational New Drug Exemptions, prolonged three phase clinical trials and
the submission of Biologics License Applications or New Drug Applications
require substantially longer time and expenses compared to the submission of a
PMA for a medical device.
After regulatory approvals are obtained, a marketed product and its
manufacturer are subject to continuing regulatory review. The manufacture of the
SofPulse is subject to cGMP 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 cGMP 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'
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and manufacturer's manufacturing facilities are in compliance in all material
respects with all applicable local, state and federal regulations (see
"Manufacturing and Suppliers"). 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
products.
Sales of medical products outside the U.S. are subject to foreign
regulatory requirements that vary widely from country to country. There can be
no assurance that the Company will be successful in obtaining and maintaining
necessary approvals to market the SofPulse, or additional products that are
developed or acquired by the Company, in foreign markets.
Third Party Reimbursement:
In the U.S., health care providers, such as hospitals and physicians, that
purchase or lease medical devices such as the Company's products, generally rely
on third-party payors, principally Medicare, Medicaid and private health
insurance plans, including health maintenance organizations, to reimburse all or
part of the cost of the treatment for which the medical device is being used.
Successful commercialization of the Company's products will depend in part upon
the 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 price of medical products and services, which has
and could continue to have a significant effect on the purchasing patterns of
many health care providers. Several proposals have been made by federal and
state government officials that may lead to health care reforms, including a
government directed national health care system and health care cost-containment
measures. The effect of changes in the health care system or method of
reimbursement for the SofPulse 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 Medicare's 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 HCFA, an
agency within the Department of Health and Human Services that is responsible
for administering the Medicare program, has interpreted this provision to
prohibit Medicare coverage of procedures that, among other things, are not
deemed safe and effective treatments for the conditions for which they are being
used, or which are still investigational. In July 1997, HCFA issued a memorandum
implementing a national policy of non-reimbursement by Medicare for the use of
any form of electrotherapy in wound healing. The Company's SofPulse is included
broadly in the category of products classified as electrotherapy products and
although the SofPulse is not promoted by the Company for wound healing, a number
of clinicians at nursing homes have used it to treat edema and pain surrounding
wounds. As a result of HCFA's memorandum, the Company's revenues were materially
adversely affected and its Strategic Alliance Agreement with NPCS was terminated
in July 1997. A U.S. District Court enjoined HCFA in November, 1997, from
implementing this national policy and HCFA notified the fiscal intermediaries in
February of 1998 not to abide by the July 1997 national policy memorandum.
However, the Company has not observed an appreciable increase in its rental
revenues subsequent to these events. Recently, it has been proposed that
Medicare reimbursement be subject to a prospective payment system that would
reimburse products that reduce the cost of patient care in specific medical
conditions. Such a reimbursement system would require the demonstration that
SofPulse use actually reduces cost of patient care in order for continued
reimbursement by Medicare in the future. There is no assurance that the Company
will be able to demonstrate such cost reduction that is expected to result from
the use of SofPulse.
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The Company is unable to predict what additional legislation or
regulations, if any, may be enacted or adopted in the future relating to the
reimbursement for SofPulse use, 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 health care products, and there can be no assurance
that adequate third-party coverage will be available with respect to any of the
Company's products in the future. Failure by physicians, hospitals, nursing
homes and other users of the Company's products to obtain sufficient
reimbursement for treatments using the Company's products will have a material
adverse effect on the Company.
Patent Protection and Proprietary Information:
The Company is the assignee of three Patents (No. 5,370,680, No. 5,584,863
and No. 5,723,001) issued by the U.S. Patents & Trademark Office and has certain
patent applications pending in the U.S. and certain foreign countries. The
Company believes that patent protection is of material importance to its
business and anticipates that it will apply for additional patents as it deems
appropriate and seek to obtain licenses to patents and patent applications from
others. There can be no assurance, however, that patents will issue from any
present or future applications or, if patents issue, that any claims allowed
will be sufficiently broad to protect the Company's technology. In addition,
there can be no assurance that the patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company. Further, the medical
products industry is covered by many issued patents and patent applications.
Patent applications in the U.S. remain confidential until a patent is issued
and, therefore, the Company's products could in the future be found to infringe
third-party patents of which the Company is not currently aware. If the
Company's products are suspected of using technology, processes or other subject
matter that is claimed under other existing U.S. or foreign patents, or if other
companies obtain patents claiming subject matter utilized by the Company, such
companies may bring infringement actions against the Company. Because many
holders of patents in the medical products industry have substantially greater
resources than the Company and because the patent litigation is very expensive,
the Company may not have the resources necessary to successfully challenge the
validity of such patents or withstand claims of infringement of challenges to
its patents in cases where the Company's position has merit. Even if the Company
is successful in prevailing in such actions, the cost of such litigation could
have material adverse effect on the Company's business, financial condition and
results of operations. An adverse outcome in any future patent dispute could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed or require the Company to cease using the
infringed technology. There can be no assurance that the Company will be able to
obtain such licenses or that such licenses, if available, can be obtained on
commercially reasonable terms. Although the Company believes that its products
do not and will not infringe patents or violate proprietary rights of others and
the Company has not been notified of infringement by the SofPulse on other
patents, in the event the Company's products infringe patents or proprietary
rights of others, the Company may be required to modify the design of its
products or obtain a license.
The Company also relies on trade secret and copyright law, employee and
third-party nondisclosure agreements and other protective measures to protect
its intellectual property rights pertaining to its products and technology.
There can be no assurance that these agreements and measures will provide
meaningful protection of the Company's trade secrets, know-how, or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as do the laws of
the U.S. There can be no assurance that the Company will be able to successfully
protect its intellectual property.
Furthermore, although the Company has confidentiality agreements with its
employees and appropriate vendors, certain of these agreements are due to expire
over the next three to five years. Accordingly, there can be no assurance that
such arrangements will adequately protect certain of the Company's proprietary
information beyond the next three to five years.
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Insurance:
The Company may be exposed to potential product liability claims by
patients who use the Company's products. Therefore, the Company maintains a
general liability insurance policy, which includes aggregate product liability
coverage of $3,000,000. The Company believes that its present insurance coverage
is adequate for the types of products currently marketed. There can be no
assurance, however, that such insurance will be sufficient to cover potential
claims or that the present level of coverage will be available in the future at
a reasonable cost. The Company has named the SofPulse manufacturer,
Ameritron/MFJ, and certain representatives as an additional insured. The Company
indemnified the Miami Heart Institute ("MHI") against any claims, damages or
liabilities incurred by MHI in connection with its use of the SofPulse in a
clinical study that was completed three years ago from which no adverse effects
have been reported. The Company may be required to indemnify other research
institutions against certain liabilities incurred by them as a result of the use
of the Company's products in research and clinical studies. In the event a claim
that is partially or completely uninsured is successfully made against the
Company, or in the event an indemnification claim is made against the Company
and is partially or completely uninsured, the Company's business and financial
condition could be materially adversely affected.
The Company warrants its products to be free from defects in materials and
workmanship for a one-year period. The Company believes that with the quality
record of the product and the majority of products in a rental pool, future
warranty expenses will not have a material adverse effect on the Company,
although there can be no assurance thereof.
Employees
As of March 31, 1998, the Company had 10 full-time employees and no
part-time employees subsequent to a down-sizing of the Company's personnel in
October 1997. The Company believes that its relations with such personnel are
satisfactory. The Company is not a party to any collective bargaining agreement.
Item 2. Description of Property
The Company's current executive and administrative offices are located at
2301 NW 33rd Court, Suite 102, Pompano Beach, Florida, 33069, where it leases
approximately 8,000 square feet of office and warehouse space under a verbal
month to month lease that provides for rental payments of $3,597 per month.
Item 3. Legal Proceedings
In February 1993, Diapulse Corporation of America, Inc. ("Diapulse") filed
a citizen's petition requesting that the FDA revoke the substantial equivalence
finding for the SofPulse and prevent the Company from making certain labeling
claims. The Company believes, based upon the advice of regulatory counsel, that
Diapulse's petition is without merit. The Company has responded to the petition.
The Company, however, in response to comments received by the Company from the
FDA, has made revisions in its promotional materials to obviate any claim that
such material is inconsistent with FDA regulations. The Company has received an
opinion of regulatory counsel stating that Diapulse's petition is lacking in
merit and that it is highly unlikely that the FDA will grant the petition.
Nevertheless, in the event that the FDA were to grant the petition, the
Company's business and prospects would be materially adversely affected. In
October 1993, Diapulse submitted additional information to the FDA in support of
its petition and the Company responded. As of the date hereof, the FDA has not
notified the Company as to any action with respect to the aforementioned
petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the State
of New York, Nassau County ("The Court"), captioned Diapulse Corporation of
America V. Magnetic Resonance Therapeutics, Inc. et al., alleging that
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the defendants, Magnetic Resonance Therapeutics, Inc., a legal predecessor to
the Company, Bio-Sales, Inc., the Company, and certain of the Company's present
and former directors and officers, including Joshua Barnum ("Barnum"), David
Mills ("Mills"), Arthur Pilla ("Pilla"), David Saloff ("Saloff"), and David
Winter ("Winter"), engaged in deceptive acts and practices, false advertising
and unfair competition in the marketing of a medical device. The complaint also
alleges that Barnum and Mills breached confidentiality and noncompetition
agreements with Diapulse and that the Company, Barnum and Pilla aided in the
alleged tortious breach of the agreements. Diapulse seeks unspecified
compensatory damages, disgorgement of profits realized by the defendants as a
result of their alleged acts, treble damages, punitive damages and reasonable
attorneys' fees. Diapulse also seeks unspecified injunctive relief prohibiting
the defendants from engaging in the alleged acts and ordering the defendants to
take remedial action to rectify the effects on consumers and Diapulse caused by
the defendants' alleged acts. The defendants jointly moved to dismiss the
complaint on jurisdictional and substantive grounds. The Court dismissed Winer
from the case based on lack of personal jurisdiction. The Court also dismissed
certain claims, as to the remaining individual defendants, including deceptive
acts and practices, false advertising and unfair competition. As to the claims
remaining against the individual defendants, certain of such claims may be
indemnified by the Company. As to the Company, the Court denied the motion to
dismiss. The Company answered the complaint, denied all material allegations,
asserted various affirmative defenses and counterclaimed against Diapulse and
Jesse Ross, individually. The counterclaims allege causes of action against
Diapulse and Jesse Ross for federal unfair competition and tortious interference
of existing and contractual business relations. In addition, the Company has
asserted claims against Diapulse for deceptive acts and unfair trade practices,
and trade disparagement. In its counterclaims, the Company seeks compensatory
and punitive damages in an amount to be proved at trial. This lawsuit is in a
preliminary stage and its outcome is uncertain. Although the Company believes
that it has meritorious defenses that it will vigorously pursue, there can be no
assurance that the outcome of such action will be resolved favorably to the
Company or that such litigation will not have an adverse effect on the Company's
liquidity, financial condition and results of operations.
On March 27, 1997, Ancillary Provider Services, Inc. ("APS") filed a
complaint entitled Ancillary Provider Services, Inc. v. Christian Bowman, Hirsch
Medical Services, Inc., Electropharmacology, Inc. and Does 1 Through 100 in the
Superior Court in Los Angeles, California against Christian Bowman ("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. On April 23, 1997, the Court
denied the APS motion for preliminary injunction, without prejudice, on the
grounds that "[t]he court is unable to conclude that plaintiff is likely to
prevail in the lawsuit." 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 contractual relations with its customers and solicit such
customers to do business with Hirsch. 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 customers.
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 ("AAA") in Miami, Florida
seeking a declaration that the 1996 distributorship agreement governs APS and
the Company, that the Company has no continuing
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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. APS initially informed AAA that it declined to participate in the
arbitration. On May 12, 1997, the Company filed in the Superior Court a petition
to compel APS to arbitrate the parties' dispute. Under California procedure, the
Company's petition constitutes a response to APS' complaint, and the Company is
not required to answer the complaint. On July 24, 1997, the Court granted the
Company's petition to compel arbitration, and the Court also stayed all
proceedings in the case pending the arbitration. On August 1, 1997, APS selected
an arbitrator and stated its intention to proceed with the arbitration. The date
for the arbitration hearing has not yet been set by the AAA.
On March 19, 1998, the Company and APS entered into an agreement to settle
APS' claims against the Company, as well as to settle the AAA arbitration
proceeding. The settlement agreement provides that it does not constitute an
admission of liability. The settlement is conditional upon the Court's finding
that the settlement was entered into in good faith. Pursuant to the settlement
agreement, ten days after the final determination by the Court that the
settlement is in good faith (i) APS will dismiss the pending litigation against
the Company; (ii) the Company will terminate the AAA arbitration proceeding; and
(iii) the Company and APS will enter into a new distributorship agreement. The
distributor agreement provides, inter alia, that APS will receive a maximum
aggregate discount up to $100,000 towards the future purchase of a certain
minimum additional number of SofPulse devices. Defendants Hirsch and Bowman have
stated that they will oppose the Company's request that the settlement with APS
be approved as a good faith settlement. Defendants Hirsh and Bowman assert that
in connection with entering into the Company's prior distribution agreement with
Hirsch, the Company made certain misrepresentations concerning whether APS had
trade secrets. They also assert that the Company induced Mr. Bowman to breach
certain fiduciary duties and have threatened to sue the Company. As of March 31,
1998, Hirsch and Bowman have not filed any claim against the Company, and their
threat to do so appears to be conditioned upon the consummation of the Company's
settlement with APS, which settlement is subject to Court approval.
On August 28, 1997, Michelle O'Connell, formerly employed by Kinetech
Medical, Inc. ("Kinetech") as the Company's representative, filed a complaint
entitled O'Connell v. Kinetech Medical, Inc. and Electropharmacology, Inc. in
the County Court in Dallas County, Texas. The complaint alleges that Kinetech
and the Company are jointly and severally liable for an unspecified amount of
commissions earned by O'Connell from Kinetech, but unpaid, and asserts a cause
of action quantum meruit against the Company. A motion to transfer venue to
Houston, Texas by Kinetech was denied. The Company answered the complaint and
asserted several affirmative defenses. The case has not yet been set for trial
and no discovery between the Company and O'Connell has taken place.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
Part II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
From May 12, 1997 to September 23, 1997, the Company's Common Stock was
traded on the Nasdaq Small Cap Market under the symbol "EPHI." On September 23,
1997, Nasdaq notified the Company that the Company's stock would be delisted
from the NASDAQ SmallCap Market as of the close of business on September 23,
1997 due to noncompliance with the minimum capital and surplus requirement and
minimum value of the public market float. The Company's stock is now trading on
the NASDAQ OTC Bulletin Board under the symbol "EPHI". The following table sets
forth, for the periods indicated, the range of high and low bid quotations for
the Common Stock as reported by Nasdaq. However, the Company's Common Stock
generally is not actively traded or is traded in low volumes, and accordingly
there can be no assurance that market quotations for the Common Stock are
indicative of
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prices at which actual sales thereof may be made. These quotations represent
inter-dealer prices, without retail markup, markdown or commissions, and do not
necessarily represent actual transactions. Further, there can be no assurance
that a public trading market for the Company's Common Stock will continue to
exist.
High Low
------ -----
Fiscal year ended December 31, 1996:
First Quarter $7.875 $6.25
Second Quarter $6.75 $5.50
Third Quarter $6.00 $5.50
Fourth Quarter $6.00 $2.00
Fiscal year ended December 31, 1997:
First Quarter $6.50 $2.00
Second Quarter $3.50 $1.72
Third Quarter $2.00 $0.38
Fourth Quarter $1.19 $0.23
Fiscal year ended December 31, 1998:
First Quarter (through March 31) $0.47 $0.27
On March 31, 1998, the last full trading day on the date of this annual
report, the closing price of the Common Stock on the OTC Bulletin Board was $.29
per share. As of March 31, 1998, there were approximately 75 registered
stockholders of record of the Common Stock. The Company has not declared or paid
any cash dividends on its Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company was organized in August 1990 and commenced commercial marketing
of the SofPulse device in early 1992. To date, the Company has generated only
modest revenues from sales and rentals of the SofPulse, which has achieved only
limited market acceptance. The Company's expenses have exceeded revenue,
resulting in losses of $2,927,990 and $1,647,917, respectively, for the years
ended December 31, 1996 and 1997. As of December 31, 1997, the Company had an
accumulated deficit of $15,305,311. Losses incurred since inception have been
primarily attributable to costs incurred in connection with the design and
development of the Company's products, research on PEMS(RF) technology and
clinical studies on the SofPulse, manufacturing of SofPulse, marketing
literature and advertisement for the SofPulse, and personnel expenses related to
the Company's operations. The Company continues to have high levels of operating
expenses (including salaries of management, manufacturing and marketing
personnel) but no longer plans for the foreseeable future to incur significant
expenses in connection with research and clinical studies or to purchase
additional materials necessary to manufacture SofPulse devices. The Company
anticipates that it will continue to incur significant losses unless the Company
can generate sufficient revenue to support its operations. The Company believes
that generation of a level of revenue sufficient to support operations is
dependent upon, among other things, the Company's ability to demonstrate
successfully and objectively SofPulse's clinical utility through clinical
studies; expand its sales and marketing infrastructure to increase significantly
the sale and rental of the SofPulse devices; and continue to obtain
reimbursement for the SofPulse treatment by third party payors. There can be no
assurance that the Company will be able to achieve any of the foregoing, which
could have a material adverse effect on the Company's business, financial
condition, cash flows, results of operations and prospects.
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The Company's management does not believe that it can create shareholder
value by pursuing on its own both the growth of the SofPulse device business and
the PEMS(RF) technology business. Accordingly, the Company is currently
implementing a strategy to create value from each of the two lines of businesses
under separate business structures. The Company, subject to necessary approvals
and a satisfactory outcome of mutual due diligence, has negotiated the principal
terms of an asset purchase agreement pursuant to which a company (the
"Purchaser") that is engaged in the development and manufacturing of medical
electronic devices and topical dermatological products, will acquire most of the
Company's SofPulse device units and certain other assets specifically related to
the business of SofPulse device manufacturing and marketing. In exchange
therefor, the Purchaser will agree to assume certain specified liabilities and
issue a number of shares of Purchaser's stock and grant the Company a warrant to
purchase additional shares of Purchaser's stock tied to the revenues generated
from the SofPulse marketing by the Purchaser. In the event that the Purchaser is
successful in increasing the revenues from SofPulse marketing, the Company's
management believes that the value of the Company's equity position will
increase, although there can be no assurance that this increase in value will
occur. The Company also is in advanced stages of negotiations with two
development stage, privately held biotechnology companies to enter into a merger
and reorganization agreement and a stock purchase agreement. The proposed
transaction with the biotechnology companies are contingent upon several
conditions, including the closing of the SofPulse device transaction with the
Purchaser, obtaining necessary stockholder approvals and a satisfactory outcome
of mutual due diligence. The consummation of the biotechnology company
transactions will provide the Company with a broad portfolio of biotechnologies,
collaborative affiliations with major medical institutions and relationships
with internationally recognized scientists. Upon consummation of the foregoing
contemplated transactions, the Company intends to conclude a financing in order
to provide it with the capital necessary to pursue the development of the
portfolio of proposed technologies to be acquired, including technologies in
large therapeutic markets such as cancer and infectious diseases, and uses by
the Company's existing technologies in tissue repair/regeneration through
corporate partnerships. However, there can be no assurance that the Company will
be able to close any of the contemplated transactions or conclude the
contemplated financing.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue for 1997 was $2,401,249 compared to $2,105,762 for 1996, or an
increase of $295,487. This 14.0% increase was primarily attributable to a
$290,945, or 71.0 % increase in SofPulse sales during 1997 as compared to 1996.
Rental revenues in 1997 as compared to 1996 remained relatively comparable, in
part, due to a significant increase in rental revenues during the first four
months of 1997, although 1997 rental revenues were impacted by three events. In
the first four months of the year, monthly rental revenues increased by 33% to
approximately $268,000 in April 1997 as a result of the reorganization of the
company's sales force in 1996, the expansion of the Company's domestic
geographic coverage and its contract with four additional representative
organizations. Monthly rental revenues during the months of May, June and July
decreased to $130,000 due to the Strategic Alliance Agreement with NPCS which
provided for monthly payments in this amount. On July 18, 1997, after the HCFA
announcement denying Medicare reimbursement for the use of all electrical
stimulation, including pulsed electromagnetic fields, in treating wounds, the
Strategic Alliance Agreement was terminated. As a result of the HCFA
announcement, during the last five months of 1997 monthly rental revenues
declined from approximately $112,000 in August 1997 to approximately $56,000 in
December 1997. At December 31, 1997, there were 101 SofPulse units under rental
contracts or monthly fixed fee arrangements, as compared to 278 units at the end
of 1996.
Revenue from the sales of units increased from $409,818 in 1996 to $700,763
in 1997. The increase in sales revenue in the first half of 1997 was primarily
attributable to purchases by NPCS, in part to fulfill NPCS' obligations to
purchase specific minimum monthly quotas pursuant to the Strategic Alliance
Agreement. Subsequent to the HCFA announcement and the termination of the NPCS
agreement in July, the Company shifted its marketing strategy from renting the
SofPulse to selling used SofPulse devices to nursing homes and distributors at
significantly reduced prices. Accordingly, for the year ended December 31, 1997,
the Company sold 79 SofPulse devices as compared to 30 devices in 1996.
16
<PAGE>
Cost of revenue in 1996 increased $235,505 to $611,702, compared to
$376,197 in 1996. This 62.6% increase reflects the increased number of SofPulse
devices sold over the prior year, as well as a $99,518 write down of the book
value of the SofPulse devices for obsolescence and impairment.
Selling, general and administrative expenses were $3,177,031 in 1997, as
compared to $3,941,235 in 1996, a decrease of $764,204, or 19.4%. This cost
decrease reflects an approximate $688,000 reduction in consulting expenses, as
well as a decrease of approximately $285,000 in salaries and related benefits
associated with personnel reductions in the sales and marketing, clinical
support services and manufacturing departments during 1997.
Research and development expense in 1997 decreased to $214,686 from
$815,722 in 1996, a decrease of $601,036, or 73.7%. This decrease in expense is
primarily attributable to the reduction in basic scientific research involving
PRF and PEMS technologies.
Interest expense increased to $25,135 from $8,933 in 1996. With the
exception of obligations under capital equipment leases, the Company had no debt
outstanding at December 31, 1996; whereas on December 31, 1997, the Company had
debt outstanding to officers and a former officer of the Company in the
aggregate amount of $73,926, a note payable to the Company's outside law firm
secured by 55 SofPulse devices in the amount of $672,751 for legal services
rendered during 1997, and notes payable in the amount of $131,428 to finance the
Company's directors and officers' and liability insurance policies.
Interest income in 1997 decreased to $9,894 as compared to $108,335 in 1996
due to the lack of funds of the Company available for short term investment in
1997.
As a consequence of the Company's deteriorating cash position and its
unsuccessful efforts to consummate a financing in late 1996 and early 1997, the
Company underwent a reduction in personnel from 27 to 18 employees, or 33%, in
March 1997. In a further attempt to contain costs after revenues declined
subsequent to the HCFA ruling, the Company underwent a second reduction in
personnel to 10 full-time employees in October 1997. In September 1997, as part
of its efforts to enter into a strategic alliance with another biotechnology
company, the Company signed a merger agreement with Eurobiotech Group, Inc., a
development stage biotechnology company, which agreement was terminated on
December 31, 1997 due to the inability of Eurobiotech Group, Inc. to meet
certain conditions precedent to closing, including the production of audited
financial statements.
Liquidity and Capital Resources
The Company's cash requirements have been and will continue to be
significant. Since its inception, the Company has satisfied its operating
requirements primarily through the issuance of equity and debt securities and
loans from stockholders. At December 31, 1997, the Company had a working capital
deficit of $(899,573) and a deficiency in capital of $74,936.
Net cash provided by operating activities in 1997 was $103,380 as compared
to net cash used in operating activities of $2,630,218 in 1996. Net cash
was used primarily to fund the losses from operations. Net cash used in 1997
investing activities was $29,186, which was used primarily to pursue and
maintain the company's patents. At December 31, 1997, the Company did not have
any material commitments for capital expenditures. Net cash used in financing
activities was $186,222 for 1997 as compared to $166,317 of cash provided by
these activities in 1996. Financing activities in 1997 included payments of
capital lease obligations and payments on a note payable to a former officer and
director of the Company. At December 31, 1997, the Company had cash of $111,496.
At December 31, 1997, the Company had a net operating loss ("NOL")
carryforward of $10,719,000 available to offset future taxable income, if any,
through the year 2012. During 1993 and 1995, changes in ownership of greater
than 50% occurred as a result of the Company issuing equity securities.
Accordingly, a substantial limitation will be imposed upon the future
utilization of approximately $2,450,000 of its net operating loss carryforwards.
17
<PAGE>
Under the present circumstances, the Company's ability to continue as a
going concern depends on its ability to restructure, improve its operations, and
ultimately, to obtain additional financing. The Company has taken steps that
include reductions in operating costs, including stringent cost controls,
personnel reductions and redeployments, the deferral of product development and
clinical studies, and reductions in sales and marketing expenses until after
additional financing is obtained. There can be no assurance that these measures
will be successful. Moreover, deferring research and development activities will
delay the development of new products. The deferral of new products and clinical
studies may adversely affect the continued acceptance or use of the SofPulse
device and negatively affect the Company in the longer term. The Company's
management believes that it is unlikely that the Company's revenues will
increase without incurring additional sales and marketing expenses. 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 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 on
favorable terms. On September 23, 1997, Nasdaq notified the Company that the
Company's stock would be delisted from the Nasdaq SmallCap Market as of the
close of business on September 23, 1997 due to noncompliance with the minimum
capital, surplus and public float requirements. The Company is now quoted on the
Nasdaq OTC Bulletin Board. There can be no assurance, however, that a public
trading market for the Company's Common Stock will continue to exist.
The Company cannot predict whether the operating and financing strategies
described above will be successful. If the Company is unable to restructure and
improve its operations and is unable to ultimately obtain additional financing,
it may not be able to continue as a going concern.
Impact of the Year 2000
The Securities and Exchange Commission, in Staff Legal Bulletin No. 5
(CF/IM), has stated that public operating companies should consider whether they
will be affected by any material expenditures, problems or uncertainties
associated with the Year 2000 issue, which affects many existing computer
systems that use only two digits to identify a year in the date field. The
Company believes that the matters raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its own computer systems and the Company
intends to confirm that any computer systems that the Company may purchase or
lease in the future will have addressed the Year 2000 issue.
The Company is currently determining the extent to which it may be impacted
by third parties' failure to remedy their own Year 2000 issues. The Company is
having, and will continue to have, formal communications with all of its
significant customers, payers, suppliers, and other third parties to determine
the extent, if any, to which the Company's systems could be impacted by any
third party Year 2000 issues and related remedies. The Company presently
believes that the Year 2000 issue will not pose significant operational problems
for the Company. However, Year 2000 issues could adversely impact the Company if
systems operated by its customers or vendors are not Year 2000 compliant.
Item 7. Financial Statements
The financial statements appear in a separate section of this report
following Part III.
Item 8. Changes in and Disagreements with Accountants and Financial Disclosure
On November 14, 1996, the Company discontinued the services of BDO Seidman,
LLP as its principal independent accountant. The report of BDO Seidman, LLP on
the financial statements of the Company for the year ended December 31, 1995,
did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of the fiscal year ended December 31, 1995 and
during the period from January 1, 1996 through November 14, 1996, there were no
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures or
any reportable events. The decision to change accountants was approved by the
Company's board of directors.
The Company retained Ernst & Young, LLP as the new auditing firm in January
1997 to act as the Company's principal independent accountants.
Part III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The directors and executive officers of the Company as of April 2, 1998
were as follows:
18
<PAGE>
NAME AGE POSITION
- ---- --- --------
Arup Sen, Ph.D. 46 Chairman of the Board, President, Chief
Executive Officer and Secretary
David Saloff 45 Vice Chairman of the Board, Chief Financial
Officer & Executive Vice President
of Corporate Development
Murray Feldman 63 Director
ARUP SEN, Ph.D. has served as Chairman of the Board, President, Chief
Executive Officer and Secretary since April 1, 1997. He served as a Director and
as Executive Vice President of Research, Development, Regulatory, and Clinical
Studies of the Company from November 1996 until April 1, 1997. He has also
served since December 1993, as the Chairman of the Board of Health Tech
Development Inc., a biotechnology development company. Dr. Sen served as the
Chief Executive Officer and President of Dallas BioMedical, Inc., a development
stage company specializing in technologies for the diagnosis and treatment of
cancer and other diseases, from June 1992 to July 1993. Prior to that, Dr. Sen
was Vice President of the Immunoconjugate Division of Sterling Drug, formerly a
subsidiary of Eastman Kodak. Over the past five years, Dr. Sen's
responsibilities have included overall business management, new product
development and corporate partnership negotiations.
DAVID SALOFF has served as Vice Chairman, and Executive Vice President of
Corporate Development for the Company since August 1996. Since April 1, 1997, he
has served as its Chief Financial Officer. He served as Chairman of the Board,
President and Chief Executive Officer since founding the Company in August 1990
to August 1996. Mr. Saloff is the nephew of Murray Feldman, a director of the
Company.
MURRAY FELDMAN has served as a director of the Company since September
1996. From June 1982 to present, Mr. Feldman has served as President of Murray
Financial Associates, Inc., a company primarily engaged in originating, selling,
and servicing residential mortgages. Mr. Feldman is the uncle of David Saloff,
the Vice Chairman and Executive Vice President of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to fiscal 1997, or written representations from certain reporting
persons, the Company believes that its officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, have
complied with all applicable filing requirements, except that during fiscal
1997, Dr. Sen inadvertently failed to file timely three Statements of Beneficial
Changes of Ownership and Mr. Feldman inadvertently failed to file timely four
Statements of Beneficial Changes of Ownership.
Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's
President and Chief Executive Officer and the Company's most
19
<PAGE>
highly compensated executive officer employed by the Company (the "Named
Executives").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
-------------------------------- ---------------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND FISCAL COMPENSATION STOCK OPTIONS/ LIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AWARDS($) SARS(#) PAYOUT($) ($)
- ------------------ ---- --------- ------- ------------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arup Sen (1) 1997 123,604 -- 6,000(2) 152,446(3) 25,000 -- --
Chairman, President 1996 25,962 23,967(4) 31,162(5) 75,000 -- --
& Chief Executive 1995
Officer
David Saloff 1997 137,219 -- 10,000 -- -- -- --
Vice Chairman & 1996 43,297 -- 8,500 -- 100,000 -- --
Executive Vice 1995 126,000 -- 6,000 -- -- -- --
Vice President
Joseph Mooibroek (1) 1997 53,109 132,269(6) 25,000(7)
Former Chairman, 1996 112,644 -- 70,396(8) 94,596(5) 592,086(9) -- --
President, Chief 1995 -- -- -- -- -- -- --
Executive Officer
</TABLE>
- ------------------------------------
(1) Dr. Arup Sen was appointed Chairman, President, Chief Executive Officer
and Secretary on April 1, 1997. Mr. Mooibroek served as President and
Chief Executive Officer from August 5, 1996 until he resigned from such
positions on April 1, 1997. As of April 12, 1997, Mr. Mooibroek entered
into a severance agreement with the Company. (See "Executive Compensation
--Employment Contracts, Terminations of Employment and Change of Control
Agreements").
(2) Includes a $6,000 car allowance.
(3) Represents the value on the various dates of grant of 116,047 shares of
Common Stock received by Dr. Sen in lieu of cash compensation.
(4) Includes a $833 car allowance, $13,838 of deferred compensation for the
payment of taxes and, in lieu of cash compensation, 1,688 shares of
Common Stock valued at $8,696 at December 31, 1996.
(5) Represents the value at the date of grant of 10,838 and 32,903 shares of
Common Stock received by Dr. Sen and Mr. Mooibroek, respectively, for
reimbursement of relocation expenses.
(6) Includes $3,000 car allowance and $129,269 in severance payments and
interest on note payable for such severance payments, $8,569 of which
remained outstanding at year end.
(7) Represents a ten-year warrant to purchase Company stock at $2.25 per
share.
(8) Includes a $5,000 car allowance and $36,788 as reimbursement for the
payment of taxes. Also includes $28,608 of deferred compensation. In lieu
of cash compensation, Mr. Mooibroek elected to receive 5,555 shares of
Common Stock valued at $28,608 at December 31, 1996.
(9) 384,450 of these options were canceled on April 12, 1997 in connection
with Mr. Mooibroek's severance agreement. The remaining 207,236 options
became fully vested.
20
<PAGE>
OPTION GRANTS DURING 1997 FISCAL YEAR
The following table provides information related to options granted to
the Named Executives during fiscal 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
---- ---------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Arup Sen............ 25,000(1) 83.3% 1.81 6/24/07
David Saloff........ - - - -
Joseph Mooibroek.... - - - -
</TABLE>
- -------------------
(1) Options to acquire shares of Common Stock all (100%) of which are currently
exercisable.
OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options held by the
Named Executives. No stock options were exercised by a Named Executive during
fiscal 1996. Because the option exercise price exceeds the closing price for the
Company's Common Stock on December 31, 1997, no options held by Named Executives
are considered in-the-money at December 31, 1997. The Company does not have any
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)(1)
--------------------------- ---------------------------
SHARES VALUE
NAME ACQUIRED REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Arup Sen................ 0 -- 70,000 30,000 -- --
David Saloff............ 0 -- 100,000 -- -- --
Joseph Mooibroek........ 0 -- 207,236 -- -- --
</TABLE>
- ------------------------
21
<PAGE>
(1) The closing price for the Company's Common Stock as reported through the
Nasdaq OTC Bulletin Board on December 31, 1997, the last trading day of
the 1997 fiscal year, was $0.28. Value is calculated on the basis of the
difference between the option exercise price and $0.28 multiplied by the
number of shares of Common Stock underlying the option.
(2) Value is calculated based on the difference between the option exercise
price and the closing market price of the Common Stock on the date of
exercise multiplied by the number of shares to which the exercise
relates.
COMPENSATION OF DIRECTORS
Pursuant to the Company's Non-Employee Directors' Equity Compensation
Plan, the Company pays each non-employee director $2,500 per fiscal quarter in
Common Stock priced at the closing on the last business day of trading in such
quarter, payable after January 1 of the following year. For 1997, each
non-employee director also received a stock option of 2,500 shares of Common
Stock, which option was granted on the last trading day of the year, immediately
vested and has a term of four years. At the time that a non-employee director
joins the Board of Directors, the director is granted a stock option of 15,000
shares of Common Stock, which option is granted upon the directors attendance at
the first meeting of the Board of Directors, vests immediately with respect to
20% of the underlying shares and with respect to the remaining shares vests an
additional 20% of the shares upon each anniversary year thereafter.
Directors who are also employees of the Company do not receive compensation
for their participation as members of the Board of Directors of the Company.
EMPLOYMENT CONTRACTS, TERMINATIONS OF EMPLOYMENT, AND CHANGE OF CONTROL
AGREEMENTS
The Company entered into an employment agreement with Arup Sen, dated
November 11, 1996, for a term expiring on December 31, 1999. Dr. Sen was
appointed Chairman of the Board, President and Chief Executive Officer of the
Company on April 1, 1997. The employment agreement entered into in November, as
amended, is still in effect. The agreement provides for a base salary of not
less than $180,000 (up to 33% of which may be deferred to be repaid, with
interest, on the first day of the following year in either cash or in Company
Common Stock at the discretion of the Board of Directors), reimbursement of
relocation expenses of up to $50,000, benefits, a term life contract, an
automobile allowance and three weeks vacation per year. The agreement also
provides that the Company would grant to Dr. Sen on the date of the agreement an
option to purchase 75,000 shares of Common Stock with 25,000 of the shares
covered thereby vesting immediately, 20,000 of the shares covered thereby
vesting on the first anniversary of the agreement and an additional 10,000 of
the shares covered thereby vesting on each of the second, third and fourth
anniversaries of the date of the agreement. The agreement also provides that if
Dr. Sen's employment is terminated by him by permitted resignation or by the
Company other than for cause, Dr. Sen will receive an amount equal to the sum of
his annual base salary and the average annual bonus received by him and that he
will continue to receive benefits pursuant to the Company's welfare programs and
perquisite plans for a period of one year. The amounts received upon termination
may vary depending upon the amount of time remaining in the term of the
agreement. The employment agreement was amended on June 24, 1997, to provide Dr.
Sen additional remuneration as Chairman of the Board, President and Chief
Executive Officer, as follows: (a) 50,000 shares of Common Stock in lieu of a
cash increase; (b) a ten year option to purchase 25,000 shares of Common Stock
which vested immediately; and (c) to provide that the shares of Common Stock to
be issued for deferred compensation would be issued quarterly based on the
monthly average trading price. Effective January 1, 1998, the agreement was
amended to reduce by one-third Dr. Sen's annual base salary and, in lieu of the
foregone salary, to provide for the grant of options to purchase common stock on
January 1 of each year, the number of such options to be issued to be equal to
the salary otherwise foregone divided by the current market price per share of
the Common Stock on the grant date ("Grant Date Market Value"). The exercise
price of such options would equal the Grant Date Market
22
<PAGE>
Value. One half of the shares covered thereby would vest immediately and one
half of the shares covered thereby would vest on July 1. The agreement also
provides that in the event of a change in control of the Company, the President
will receive a cash payment equal to the aggregate exercise price of such
options. The agreement was also amended effective February 1, 1998 to provide
for the annual grant of options to purchase common stock in an amount equal to
$6,000 divided by the Grant Date Market Value, with an exercise price equal to
the Grant Date Market Value, in lieu of the $500 monthly automobile allowance
previously paid in cash under the agreement. All of the shares covered by such
options would vest immediately.
The Company entered into an employment agreement with David Saloff, dated
August 5, 1996, for a term expiring on December 31, 2001. The agreement provides
for a base salary of not less than $139,000, an incentive bonus, benefits, a
term life insurance contract, an automobile allowance and four weeks vacation
per year. The agreement also provides that if Mr. Saloff's employment is
terminated by him by permitted resignation or by the Company other than for
cause, Mr. Saloff will receive an amount equal to the sum of his annual base
salary and the average annual bonus received by him and that he will continue to
receive benefits pursuant to the Company's welfare programs and perquisite plans
for a period of one year. The amounts received upon termination may vary
depending upon the amount of time remaining in the term of the agreement. The
agreement was amended effective February 1, 1998 to provide for the annual grant
of options to purchase common stock in an amount equal to $12,000 divided by the
Grant Date Market Value, with an exercise price equal to the Grant Date Market
Value, in lieu of the $1,000 monthly automobile allowance previously paid in
cash under the agreement. All of the shares covered by such options would vest
immediately.
The Company entered into an employment agreement with Joseph Mooibroek,
dated August 5, 1996, for a term of five 5 years and for the position of
Chairman of the Board, President and Chief Executive Officer. The agreement
provided for a base salary of not less than $275,000 (up to 25% of which could
have been deferred to be repaid, with interest, on the first day of the
following year in either cash or in Company Common Stock at the discretion of
the Board of Directors), reimbursement of relocation expenses of up to $200,000,
benefits, a term life contract, an automobile allowance and four weeks vacation
per year. The agreement also provided that the Company would grant to Mr.
Mooibroek on the date of the agreement an option to purchase 592,086 shares of
Common Stock with 20% of the shares covered thereby vesting immediately and an
additional 20% of the shares covered thereby vesting on each of the first,
second, third and fourth anniversaries of the date of the agreement. The
agreement provided that upon the exercise of warrants to purchase Common Stock
of the Company by Mr. Norton Herrick, the Company would grant to Mr. Mooibroek
an option to purchase one-tenth of the number of shares of Common Stock of the
Company as to which Mr. Herrick exercised his warrant. The agreement also
provided that, if Mr. Mooibroek's employment was terminated by him by permitted
resignation or by the Company other than for cause, Mr. Mooibroek would receive
an amount equal to two times the sum of his highest annual base salary and the
average annual bonus received by him and that he would continue to receive
benefits pursuant to the Company's welfare programs and perquisite plans for a
period of two years. The amounts received upon termination were to vary
depending upon the amount of time remaining in the term of the agreement.
Mr. Mooibroek resigned from his position as Chairman, President and Chief
Executive officer on April 1, 1997. As of April 12, 1997 the Company and Mr.
Mooibroek entered into a severance agreement that provides, among other things,
in settlement of all rights under his employment agreement with the Company, for
a cash payment of $128,700 to Mr. Mooibroek over approximately five months, the
issuance of 5,555 shares of Common Stock of the Company that were assigned to
Mr. Mooibroek in lieu of a portion of his salary during 1996, the grant to Mr.
Mooibroek of a 10-year warrant to purchase 25,000 shares of Common Stock of the
Company at $2.25 per share and the cancellation of 384,850 options to purchase
shares of Common Stock of the Company that were previously granted to Mr.
Mooibroek, leaving Mr. Mooibroek with 207,236 fully vested options to purchase
shares of Common Stock of the Company. The severance agreement also provides for
the cancellation of Mr. Mooibroek's right to be granted an option to purchase
one-tenth of the number of shares of Common Stock of the Company as to which Mr.
Herrick exercised his warrant. Mr. Mooibroek further agreed to assign to the
Company patent protection on inventions made by Mr. Mooibroek and to cooperate
with the Company in obtaining such patent protection.
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 27, 1997, regarding
the beneficial ownership of Common Stock by each person known by the Company to
own 5% or more of the outstanding shares of Common Stock, each director of the
Company, the Named Executives, and the directors and executive officers of the
Company as a group. The persons named in the table have sole voting and
investment power with respect to all shares of Common Stock owned by them,
unless otherwise noted. The address for each person below listed is c/o the
Company, 2301 NW 33rd Court, Suite 102, Pompano Beach, Florida 33069, unless
otherwise noted.
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL OWNER OR BENEFICIAL PERCENT
NUMBER OF PERSONS IN GROUP OWNERSHIP OF CLASS
- --------------------------- ------------ --------
Arup Sen......................................... 328,031(1) 7.57
David Saloff..................................... 1,126,188(2) 26.41
Murray Feldman................................... 1,122,517(3) 24.84
Joseph Mooibroek
17643 Bocaire Way
Boca Raton, FL 33487........................ 232,236(4) 5.32
Norton Herrick
2295 Corporate Blvd. N.W., Suite 222
Boca Raton, FL 33431........................ 2,856,509(5) 50.33
Paragon Capital Corporation
at Spear, Leeds, Kellogg, LLC
c/o George Levine
1250 E. Hallandale Beach Blvd., Suite 300
Hallandale, FL 33009........................ 791,604(6) 18.32
20th Century Associates, Inc
14 Plaza 9
Manalapan, NJ 02276......................... 250,000 6.05
All directors, executive officers, and
Named Executives as a group (4 persons).......... 2,073,562 46.89
- ------------------
(1) Includes 199,458 shares subject to presently exercisable options.
(2) Includes 131,579 shares subject to presently exercisable options; 735,410
shares of Common Stock over which Mr. Saloff has the sole power to vote
or to direct the vote pursuant to a proxy, which is terminable at will,
granted to Mr. Saloff by Mr. Murray Feldman.
(3) Includes 373,607 shares subject to presently exercisable warrants and
13,500 shares subject to presently exercisable options.
(4) Includes 207,236 shares subject to presently exercisable options and
25,000 shares subject to presently exercisable warrants.
(5) Includes 242,950 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock and 1,300,000 shares subject to presently
exercisable warrants. Mr. Herrick disclaims beneficial ownership of
60,000 shares of common stock owned by Rozel International Holdings,
which shares are pledged to Mr. Herrick as security for a loan. Mr.
Herrick also disclaims beneficial ownership over 994,609 shares of
24
<PAGE>
Common Stock over which he shares with Mr. Saloff the power to vote or to
direct the vote because such voting power is limited to the election of
certain nominees of the Board of Directors of the Company.
(6) Includes 187,500 shares subject to presently exercisable warrants.
Information regarding share ownership was obtained from an Amendment No.
3 to Schedule 13D filed by Norton Herrick with the Securities and
Exchange Commission on September 19, 1997.
ITEM 12. CERTAIN TRANSACTIONS
In November 1995, the Company entered into a Preferred Stock and Warrant
Subscription Agreement with Mr. Norton Herrick, an investor in the Company
beneficially owning greater than 10% of the Common Stock of the Company, whereby
the Company issued to Mr. Herrick (i) 421,950 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") and (ii) warrants to purchase an
aggregate of 1,721,950 shares of Common Stock in consideration of $2,000,000.
Each share of Preferred Stock is convertible, at the option of the holder, into
one share of Common Stock (subject to adjustment in certain circumstances) at
any time until November 13, 2000, at which time outstanding shares of Preferred
Stock automatically convert into Common Stock. Shares of Preferred Stock have
votes equal to those of the Common Stock into which they are convertible and,
subject to certain exceptions and except as required by law, vote together with
the Common Stock as a single class. The Preferred Stock is entitled to receive
non-cumulative cash dividends when, as and if declared by the Board of Directors
of the Company and has a liquidation preference of $4.74 per share. Mr. Herrick
has converted 179,000 shares of Preferred Stock into Common Stock in 1997. The
Warrants consisted of warrants to purchase (i) 421,950 shares of Common Stock at
an exercise price of $.01 per share; (ii) 800,000 shares of Common Stock at an
exercise price of $6.00 per share; (iii) 250,000 shares of Common Stock at an
exercise price of $7.50 per share; and (iv) Series A Convertible Preferred Stock
at an exercise price of $9.00 per share. The Warrants are exercisable at any
time until November 13, 2005. In 1996, Mr. Herrick exercised warrants to
purchase 421,950 shares of Common Stock. Mr. Herrick has registration rights
with respect to the shares of Common Stock issuable upon conversion of the
Preferred Stock or upon exercise of the warrants. Additionally, the Company
granted Mr. Herrick a right of first refusal with respect to any sale by the
Company of Common Stock, options, warrants or other securities convertible into
Common Stock.
In connection with Mr. Herrick's investment, the Company entered into a
Stockholders Agreement with Mr. Herrick and Mr. David Saloff whereby Mr. Herrick
was given the right to nominate two individuals for election as directors and to
require the Company to increase the number of directors to nine persons. Mr.
Saloff agreed to vote all of his shares of Common Stock for the persons
nominated by Mr. Herrick and to take all other actions necessary in his capacity
as a stockholder to cause the election to the Board of Directors of the persons
nominated by Mr. Herrick.
On November 25, 1997, the Company entered into an advisory service
agreement with 20th Century Associates, Inc. ("20th Century"), relating to
planning, implementation and provision of investor and financial relations
services to the Company for which the Company agreed to issue 350,000 shares of
newly issued and registered Common Stock to 20th Century. As of December 31,
1997, the Company had issued 250,000 shares of the Common Stock to 20th Century
in consideration of the advisory services rendered under the agreement.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
1.1 Underwriting Agreement, dated May 12, 1995, from Paragon Capital
Corporation for 1,250,000 shares of Common Stock and warrants to
purchase 625,000 shares of Common Stock of the Company. (1)
3.1 Certificate of Incorporation, as amended. (2)
25
<PAGE>
3.2 By-Laws. (1)
4.1 Preferred Stock and Warrant Subscription Agreement, dated
November 13, 1995, between the Company and Norton Herrick. (3)
4.2 Warrant Agreement, dated May 12, 1995, between the Company and
Paragon Capital Corporation. (1)
4.3 Warrant Agreement between North American Transfer Co., Paragon
Capital Corporation and the Company. (4)
4.4 Warrant Agreement between the Company and Norton Herrick. (3)
4.5 Registration Rights Agreement, dated November 13, 1995, between
the Company and Norton Herrick. (3)
4.6 Conversion of Debt into Equity Agreement, dated August 30, 1993,
between the Company and Murray Feldman. (1)
4.7 First Amendment and Restated Convertible Promissory Note, dated
September 22, 1994, between the Company and Murray Feldman. (1)
4.8 Warrant Agreement, dated as of May 26, 1993, between the Company
and Whale Securities Co., L.P. (1)
9.1 Stockholder Agreement, dated November 13, 1995, among the Company,
David Saloff and Norton Herrick. (3)
9.2 Proxy to Vote Corporate Shares, dated November 9, 1994, by and
among David Saloff and Murray Feldman. (4)
10.1 Strategic Alliance Agreement dated as of May 1, 1997 between the
Company and National Patient Care Services, Inc. (5)
10.2 The Company Employee Stock Purchase Plan, as amended January 13,
1997. (6)
10.3 Promissory Note to Dr. Arup Sen from the Company dated October 10,
1997. (6)
10.4 Promissory Note to Murray Feldman from the Company dated
October 10, 1997. (6)
10.5 Promissory Note to David Saloff from the Company dated October 10,
1997. (6)
10.6 Employment Agreement, dated August 5, 1996, between the Company
and Joseph Mooibroek. (7)
10.7 Employment Agreement, dated August 5, 1996, between the Company
and David Saloff ("Saloff Employment Agreement"). (2)
10.8 First Amendment to Saloff Employment Agreement dated February 1,
1998. (6)
10.9 Employment Agreement, dated November 11, 1996, between the Company
and Dr. Arup Sen ("Sen Employment Agreement"). (2)
10.10 First Amendment to Sen Employment Agreement, dated June 24,
1997. (6)
26
<PAGE>
10.11 Second Amendment to Sen Employment Agreement, dated January 1,
1998. (6)
10.12 Form of Non-Employee Directors' Equity Compensation Plan,
effective as of January 1, 1996. (2)
10.13 Performance Sharing Program, dated December 13, 1996. (2)
10.14 Consultant's Agreement, dated January 1, 1993, between the Company
and Arthur A. Pilla, Ph.D.; and Addendum thereto, dated August 1,
1994. (1)
10.15 Clinical Research and Study Agreement, dated October 27, 1994,
between the Company and Pilla Consulting. (1)
10.16 Form of Certificate of Designations of Series A Convertible
Preferred Stock of the Company. (3)
10.17 Agreement, dated April 12, 1997, between the Company and Joseph
Mooibroek. (2)
10.18 The Company's 1993 Stock Option Plan, as amended November 1,
1996. (6)
10.19 Consulting Agreement, dated November 25, 1997, by and between
20th Century Associates, Inc. and the Company. (8)
16.2 Letter from BDO Seidman, LLP regarding response to Change in
Certifying Accountants, dated January 8, 1997. (9)
24.1 Power of Attorney. (2)
27.1 Financial Data Schedule. (6)
- -----------
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-87934-A).
(2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
(3) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated November 13, 1995.
(4) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(5) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated May 7, 1997.
(6) Filed herewith.
(7) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated August 5, 1996.
(8) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-41303).
(9) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated December 13, 1996.
(B) Reports on Form 8-K
None.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Amendment No. 1 to the registrant's Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
ELECTROPHARMACOLOGY, INC.
By: /s/ ARUP SEN
---------------------------------
Arup Sen
Chief Executive Officer
In accordance with the Exchange Act, this Annual Report on Form 10-KSB
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ ARUP SEN Chairman of the Board April 15, 1998
- -------------------------- and Chief Executive Officer
Arup Sen
/s/ DAVID SALOFF Chief Financial Officer April 15, 1998
- -------------------------- (Principal Financial and Accounting
David Saloff Officer)
/s/ MURRAY FELDMAN Director April 15, 1998
- --------------------------
Murray Feldman
</TABLE>
28
<PAGE>
Electropharmacology, Inc.
Audited Financial Statements
Year ended December 31, 1997
CONTENTS
Report of Independent Certified Public Accountants................. 1
Audited Financial Statements
Balance Sheet...................................................... 2
Statements of Operations........................................... 3
Statements of Shareholders' Equity .(Net Capital Deficiency)....... 4
Statements of Cash Flows........................................... 5
Notes to Financial Statements...................................... 7
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Electropharmacology, Inc.
We have audited the accompanying balance sheet of Electropharmacology, Inc. (the
Company) as of December 31, 1997 and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electropharmacology, Inc. at
December 31, 1997 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2 to
the financial statements, the Company incurred significant recurring operating
losses and has both a working capital deficit and a net capital deficiency.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
--------------------------------
West Palm Beach, Florida
March 31, 1998
F-1
<PAGE>
Electropharmacology, Inc.
Balance Sheet
December 31, 1997
ASSETS
Current assets:
Cash ....................................................... $ 111,496
Trade accounts receivable, net of allowance
for doubtful accounts of $26,000 .......................... 169,404
Inventory .................................................. 152,233
Trade notes and other receivables .......................... 32,748
Prepaid expenses ........................................... 157,065
------------
Total current assets ......................................... 622,946
Rental and other equipment, net .............................. 713,466
Patents, net of accumulated amortization
of $14,000 ................................................. 89,129
Deposits ..................................................... 18,001
------------
Total assets ................................................. $ 1,443,542
============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Notes payable .............................................. $ 804,179
Accounts payable ........................................... 380,313
Accrued expenses ........................................... 187,933
Accrued commissions ........................................ 46,181
Accrued payroll ............................................ 18,385
Customer deposits .......................................... 7,561
Notes payable to related parties ........................... 73,926
------------
Total current liabilities .................................... 1,518,478
Commitments and contingencies
Net capital deficiency:
Convertible preferred stock, $.01 par value--
10,000,000 authorized shares; issued and
outstanding 242,950 ....................................... 2,430
(entitled to $2,000,043 in liquidation)
Common stock, $.01 par value--30,000,000 authorized
shares; 4,071,194 shares issued and outstanding ........... 40,711
Additional paid-in capital ................................. 15,254,912
Deferred Compensation ...................................... (67,678)
Deficit ...................................................... (15,305,311)
------------
Net capital deficiency ....................................... (74,936)
------------
Total liabilities and net capital deficiency ................. $ 1,443,542
============
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Electropharmacology, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1997 1996
----------- -------------
Revenue:
Rentals .................................... $ 1,700,486 $ 1,695,944
Sales ...................................... 700,763 409,818
----------- -----------
Total revenue ................................ 2,401,249 2,105,762
Operating expenses:
Cost of revenue ............................ 611,702 376,197
Selling, general and administrative ........ 3,177,031 3,941,235
Research and development ................... 214,686 815,722
----------- -----------
Total operating expenses ..................... 4,003,419 5,133,154
----------- -----------
Loss from operations ......................... (1,602,170) (3,027,392)
Other (expense) income:
Interest expense ........................... (25,135) (8,933)
Interest income ............................ 9,894 108,335
Loss on disposal of equipment .............. (30,506) --
----------- -----------
Total other (expense) income ................. (45,747) 99,402
----------- -----------
Net loss ..................................... (1,647,917) (2,927,990)
=========== ===========
Net loss per share - basic and diluted ....... $ (.45) $ (.89)
=========== ===========
Weighted average number of common shares
outstanding - basic and diluted ............. 3,697,611 3,298,849
=========== ===========
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Electropharmacology, Inc.
Statements of Shareholders' Equity (Net Capital Deficiency)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ---------------- PAID-IN DEFERRED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT
--------- -------- --------- ------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 . 421,950 4,220 3,074,474 30,745 14,708,689 (60,000) (10,671,267)
Exercise of warrants ....... 421,950 4,220
Issuance of common stock for
services .................. 43,741 437 125,321
Net loss ................... (2,927,990)
-------- ------- --------- ------- ----------- -------- --------- ------------
Balance at December 31, 1996 . 421,950 $4,220 3,540,165 $35,402 $14,834,010 -- $(60,000) $(13,599,257)
Issuance of common stock for
services .................. 348,519 3,484 307,125
Issuance of common stock for
employee stock plan ....... 14,003 140 16,785
Retirement of treasury stock . (10,493) (105) (1,758) 60,000 (58,137)
Conversion of preferred stock
to common stock ........... (179,000) (1,790) 179,000 1,790
Issuance of stock options to
purchase 72,500 shares of
common stock .............. 98,750 (67,678)
Net loss .................... (1,647,917)
-------- ------- --------- ------- ----------- -------- --------- ------------
Balance at December 31, 1997 . 242,950 $ 2,430 4,071,194 $40,711 $15,254,912 $(67,678) -- $(15,305,311)
======== ======= ========= ======= =========== ======== ========= ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(NET CAPITAL
DEFICIENCY)
----------
<S> <C>
Balance at December 31, 1995 . 4,012,387
Exercise of warrants ....... 4,220
Issuance of common stock for
services .................. 125,758
Net loss ................... (2,927,990)
------------
Balance at December 31, 1996 . $ 1,214,375
Issuance of common stock for
services .................. 310,609
Issuance of common stock for
employee stock plan ....... 16,925
Retirement of treasury stock . --
Conversion of preferred stock
to common stock ........... --
Issuance of stock options to
purchase 72,500 shares of
common stock .............. 31,072
Net loss .................... (1,647,917)
------------
Balance at December 31, 1997 . $ (74,936)
============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Electropharmacology, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................... $(1,647,917) $(2,927,990)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation .................................... 297,963 286,037
Amortization .................................... 5,130 3,516
Issuance of common stock and warrants for
services ....................................... 310,609 125,758
Issuance of stock options to purchase common
stock .......................................... 31,072 --
Issuance of notes payable for services .......... 822,378
Loss on disposal of laboratory and office
equipment ...................................... 30,506 6,426
Provision for doubtful accounts ................. 9,214 93,000
Discount on trade note receivable ............... -- 21,982
Provision for impairment of inventory and
SofPulse units ................................. 99,518 --
Changes in operating assets and liabilities:
Trade notes receivable ........................ 210,442 273,162
Inventory ..................................... (67,294) (47,893)
Accounts receivable ........................... 398,584 (315,370)
Prepaid expenses .............................. 129,037 14,532
Accounts payable .............................. 60,743 65,537
Accrued payroll ............................... (86,316) 44,369
Accrued expenses, commissions and customer
deposits ..................................... (309,861) 194,543
Rental equipment (SofPulse units) ............. (194,469) (467,827)
----------- -----------
Net cash provided by (used in) operating activities 99,339 (2,630,218)
INVESTING ACTIVITIES
Purchases of property and equipment ................ -- (32,548)
Proceeds from sale of property and equipment ....... 7,299 --
Patents, deposits and other assets ................. (32,444) (17,142)
----------- -----------
Net cash used in investing activities .............. (25,145) (49,690)
FINANCING ACTIVITIES
Repayment of long-term notes payable and capitalized
lease obligations ................................. (127,446) (50,537)
Repayment of notes payable to related parties ...... (120,700) (120,000)
Proceeds from notes payable to related parties ..... 45,000 --
Proceeds from sale of common stock ................. 16,925 4,220
----------- -----------
Net cash used in financing activities .............. (186,221) (166,317)
----------- -----------
Net decrease in cash ............................... (112,027) (2,846,225)
Cash at beginning of year .......................... 223,523 3,069,748
----------- -----------
Cash at end of year ................................ $ 111,496 $ 223,523
=========== ===========
</TABLE>
F-5
<PAGE>
Electropharmacology, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1997 1996
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net ... $ 12,287 $ 6,596
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for services ........... $310,609 $125,758
Notes payable for prepaid insurance ............. 235,975 0
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND MAJOR SUPPLIERS
Electropharmacology, Inc. (the Company) was incorporated on August 31, 1990
under the laws of the State of California under the name Magnetic Resonance
Therapeutics, Inc. and reorganized through a merger with and into
Electropharmacology, Inc., a Delaware Corporation, in February 1995. The Company
is developing novel medical applications for pulsed electromagnetic signals; and
has been engaged in designing, developing, manufacturing and marketing medical
devices that deliver pulsed electromagnetic signals in the radio frequency
range. The Company's current product is SofPulse.
REVENUE RECOGNITION
Rental revenue is recognized over the month-to-month period in which the related
equipment is under lease to a customer, primarily on a per use basis. Sales
revenue is recognized upon shipment and the transfer of ownership of the
product.
INVENTORY
Inventory, which consists primarily of raw materials, is valued at the lower of
cost (average cost method) or market. Upon completion, finished goods are
transferred to property and equipment.
PATENTS
Patents are amortized using the straight-line method over 17 years from the date
of issuance of the patent.
RENTAL AND OTHER EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Rental and other equipment is carried at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives (or
lease term if shorter) of the related assets as follows:
Rental equipment 5 years
Leasehold improvements 3 years
Office equipment 4 to 7 years
Laboratory equipment 4 to 7 years
COST OF REVENUE
Cost of revenue for the years ended December 31, 1997 and 1996 includes costs
associated with rental of the SofPulse units of approximately $485,000 and
$328,000 respectively.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Financial Accounting Standards Board (FASB)
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-7
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
("SFAS No. 128"), EARNINGS PER SHARE, which established new standards for
computing and presenting earnings per share. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
All loss per share amounts have been presented to conform to the SFAS No. 128
presentation. Stock options and warrants have not been included in the
computation of diluted loss per share as the computation would not be dilutive.
For additional disclosure regarding stock options and warrants see Notes 7 and
8.
ADVERTISING COSTS
Advertising costs, included in selling, general and administrative expenses, are
expensed as incurred and were $48,000 and $62,000 for 1997 and 1996,
respectively.
USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISK
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The Company sells and/or rents its product to healthcare providers such as
nursing homes, hospitals and physician practices with no specific geographic
concentration and extends credit based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
In 1997, sales to three customers National Patient Care Services, Inc. (NPC),
Physiologic Reps, Inc. and Matt Starring accounted for 36%, 30% and 11%,
respectively, of the Company's total sales. Accounts receivable at December 31,
1997 from NPC totals approximately $30,000 (net of amounts owed by the Company
to NPC of $4,000)
DEFERRED COMPENSATION
Deferred compensation related to stock options is amortized over the period
during which the options become exercisable.
INCOME TAXES
The Company provides for income taxes under the provisions of FASB Statement No.
109, ACCOUNTING FOR INCOME TAXES, which requires the asset and liability method
of accounting for income taxes. Under the asset and liability method of FASB
Statement No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.
F-8
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
2. LIQUIDITY AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business.
The Company reported a net loss of $1,647,917 for the year ended December 31,
1997 and has incurred cumulative losses aggregating $15,305,311 through December
31,1997. In addition, at December 31, 1997, the Company had a deficiency in
working capital of $899,573 and a net capital deficiency of $74,936.
The Company's 1998 operating plan contemplates focusing activities on selling
the majority of its existing fleet of SofPulse devices to medical device
companies or investor groups and to enter into strategic alliances with or
acquire development stage biotechnology companies to better enable it to focus
its efforts in research and development. It also contemplates stringent cost
controls and personnel reductions. The Company is also exploring alternative
sources of additional financing. No definite sources of additional financing
have been identified at this time, nor has the Company consummated the sale of
its SofPulse devices.
The Company cannot predict whether the operating and financing plans described
above will be successful. If the Company is unable to restructure and improve
its operations and is unable to ultimately sell its existing medical devices and
obtain additional financings, it may not be able to continue as a going concern.
If the Company is unsuccessful in its efforts, it may be unable to meet its
obligations, making it necessary to undertake such other actions as may be
appropriate to preserve asset values.
3. TRADE NOTES AND OTHER RECEIVABLE
During 1995, the Company received two promissory notes in connection with the
sale of SofPulse devices. In January 1997, the Company agreed to accept $248,190
in full payment of these notes, which had an outstanding balance of $270,172 at
the time of the agreement. The notes were repaid in 1997, resulting in a
discount of $21,982. This discount was recognized in the statement of operations
for the year ended December 31, 1996. The balance in trade notes and other
receivables represents amounts received by NPC on behalf of the Company relating
to medical device rentals.
4. RENTAL AND OTHER EQUIPMENT
A summary of rental and other equipment at December 31, 1997 is as follows:
Rental equipment ............................. $ 1,171,060
Leasehold improvements ....................... 68,270
Office equipment under capital lease ......... 142,388
Office equipment ............................. 118,530
-----------
1,500,248
Less accumulated depreciation and amortization (786,782)
-----------
Net rental and other equipment ............... $ 713,466
===========
5. NOTES PAYABLE
Notes payable at December 31, 1997 consists of the following:
8% note payable to general counsel, due
on December 31, 1998 ............................ $ 672,751
7.99% note payable to finance company
for directors and officers insurance,
due November 15, 1998 ........................... 120,311
9.75% note payable to finance company
for commercial general liability
insurance, due April 21, 1998 ................... 11,117
---------
804,179
=========
F-9
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
5. NOTES PAYABLE (CONTINUED)
The note payable to general counsel is collateralized by a security agreement on
55 SofPulse units.
6. NOTE PAYABLE TO RELATED PARTIES
In October 1997, the Company issued three notes payable to its Chief Financial
Officer, Chief Executive Officer and member of the board of directors totaling
$65,926 in exchange for cash advances of $45,000 and deferral of salaries of
$20,926. These notes bear interest at the prime rate (8.5% at December 31, 1997)
plus 1% and are due on demand.
On April 12, 1997, the Company and the former Chief Executive Officer entered
into a severance agreement that provides for, among other things, a cash payment
by the Company of $128,700 in settlement of all rights under his employment
agreement with the Company. The loan and accrued interest was paid in
installments through January 1998. The balance due under this agreement at
December 31, 1997 was $8,000.
7. SHAREHOLDERS' EQUITY AND WARRANTS
On November 1, 1996, the Company's stockholders approved proposals to increase
the Company's authorized capital stock from 10,000,000 to 30,000,000 shares of
$.01 par value common stock and from 1,000,000 to 10,000,000 shares of $.01 par
value preferred stock.
Each share of Preferred Stock is convertible at a conversion price of $4.74 per
share which was at a discount from the market price of $6.50 per share, at the
option of the holder, into one share of common stock, subject to adjustment in
certain circumstances, at any time until November 13, 2000, at which time
outstanding shares of Preferred Stock automatically convert into common stock.
Shares of Preferred Stock have votes equal to those of common stock into which
they are convertible and, subject to certain exceptions and except as required
by law, vote together with the common stock as a single class. The Preferred
Stock votes as a single class on certain matters including the incurrence of
secured indebtedness by the Company, changes in the number and the terms of the
directors of the Company and the issuance of cash dividends and redemptions or
repurchase of securities by the Company. The Preferred Stock is entitled to
receive noncumulative cash dividends, when, as and if declared by the Board of
Directors of the Company and has a liquidation preference of $4.74 per share. In
May 1997, the Preferred Stock investor ("Investor") converted 179,000 shares of
the preferred stock in to the same number of shares of common stock with no
proceeds to the Company.
The Investor's warrants consist of warrants to purchase: (i) 421,950 shares of
common stock at an exercise price of $.01 per share; (ii) 800,000 shares of
common stock at an exercise price of $6.00 per share; (iii) 250,000 shares of
common stock at an exercise price of $7.50 per share; and (iv) 250,000 shares of
common stock at an exercise price of $9.00 per share. The warrants are
exercisable at any time until November 13, 2005. The exercise price and number
of shares issuable upon exercise of the warrants are subject to adjustment in
certain circumstances, including the issuance of securities for a price less
than the current market value of the common stock. In June 1996, for proceeds to
the Company of $4,220, the Investor exercised 421,950 warrants to purchase
common stock at an exercise price of $.01 per share.
In April 1997, a ten-year warrant to purchase 25,000 shares of common stock at
$2.25 was issued to the former President as part of his severance agreement. The
fair value of the warrant based on the Black-Scholes valuation method is $1.8
per share using the assumptions described in Note 8 and the actual life of the
warrant.
Warrants to purchase an aggregate of 3,052,707 shares of common stock have been
issued to date. During 1996, 421,950 warrants were exercised. No warrants were
exercised during 1997.
The following table summarizes information relative to the Company's warrants
which are exercisable at various dates through April 12, 2007:
F-10
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
7. SHAREHOLDERS' EQUITY AND WARRANTS (CONTINUED)
SHARES PRICE RANGE
--------- --------------
Outstanding January 1, 1996 ....... 3,449,657 $ .01 - $ 9.00
Exercised ................ (421,950) $ .01
---------
Outstanding December 31, 1996 ..... 3,027,707 $ 1.00 - $ 9.00
Granted .................. 25,000 $2.25
---------
Outstanding December 31, 1997 ..... 3,052,707 $ 1.00 - $ 9.00
=========
At December 31, 1997, shares of the Company's authorized but unissued common
stock were reserved for issuance as follows:
NUMBER OF
SHARES
----------
Exercise of warrants ...................... 3,052,707
Employee stock option plans (see Note 8)... 590,778
Convertible preferred stock ............... 242,950
----------
3,886,435
==========
In December 1995, the Company repurchased 10,493 shares of common stock for
$60,000 in connection with the resignation of the Company's chief operating
officer. The entire 10,493 shares were retired by the Company in October 1997.
During 1997 and 1996, the Company issued 75,482 and 43,741 shares of common
stock, respectively, to officers of the Company in lieu of cash for payment of
outstanding employment related liabilities, totaling $158,609 and $125,758,
respectively.
During 1997, the Company issued 250,000 shares of common stock at $.40 per share
to consultants of the Company for certain investor relations work. The Company
recorded expense of $100,000 in connection with this transaction based on the
fair value of the Company's stock on the date the shares were issued.
Effective November 1, 1996, the Board of Directors approved an Employee Stock
Purchase Plan (ESPP) covering all employees who meet service period
requirements. The ESPP provides for the sale of common stock to employees of the
Company at a price equal to 85% of the lesser of the market value at the end of
or beginning of each respective quarter. No shares were issued under the ESPP
during 1996. During 1997 the Company issued 14,003 shares under the ESPP. The
ESPP was terminated effective October 1, 1997.
Effective January 1, 1996, the Company established the Electropharmacology, Inc.
1996 Non-Employee Director's Equity Compensation Plan (the Compensation Plan).
The Compensation Plan provides for the issuance of common shares as compensation
for serving as a director of the Company. No shares were issued under the
Compensation Plan during 1996. During 1997 the Company issued 23,037 shares
under the Compensation Plan.
8. STOCK OPTIONS
The Company has adopted a stock option plan which was amended on November 1,
1996 (the Plan) for officers, directors, employees and consultants. Under the
Plan, the options granted may be either "incentive stock options" (for officers
and employees only) within the meaning of Section 422A of the Internal Revenue
Code, and/or nonqualified stock options (for officers, employees, directors and
consultants). The exercise price of incentive stock options may not be less than
100% of the fair market value of the Company's common stock as of the date of
grant (110% of the fair market value if the grant is to an employee who owns
more than 10% of the outstanding common stock). Nonqualified stock options may
be granted under the Plan at an exercise price less than fair market value of
the common stock on the date of grant.
As of December 31, 1997, the Board of Directors has authorized the granting of
options for up to 1,500,000 shares of common stock. Grants of options to
purchase 590,778 common shares, (215,020 of which are considered incentive stock
options), have been formalized under the Plan. The options generally vest
immediately to ratably up to ten years on differing vesting
F-11
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
8. STOCK OPTIONS (CONTINUED)
schedules. The options expire at dates ranging from two to ten years after date
of grant.
As required by Statement No. 123, pro forma information regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996:
For the year ended December 31,
1997 1996
------------- ----
Risk free interest rate ........... 5.71% - 6.69% 5.2%
Expected lives (years)............. 4 - 10 10
Expected volatility ............... .681 .775
Expected dividend yield ........... - -
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, the existing models,
in management's opinion, do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect of
compensation expense from stock option awards on pro forma net loss reflects
only the vesting of 1995 through 1997 awards in 1997 and the vesting of 1996 and
1995 awards in 1996, in accordance with Statement 123. Because compensation
expense associated with a stock option award is recognized over the vesting
period, the initial impact of applying Statement 123 may not be indicative of
compensation expense in future years, when the effect of the amortization of
multiple awards will be reflected in pro forma net loss. The Company's pro forma
information follows:
1997 1996
----------- ------------
Net loss ....................... $(2,015,631) $(3,665,506)
=========== ===========
Loss per common share (basic
and diluted) .................. $ (.55) $ (1.11)
=========== ===========
Transactions under the Plan are summarized as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF PRICE PER
SHARES SHARE
------- ---------
Outstanding January 1, 1996 .......... 191,774 $ 4.87
Exercised ............................ 0 0
Expired .............................. 0 0
Forfeited ............................ 0 0
Canceled ............................. (37,000) $ 8.09
Granted .............................. 959,086 $ 5.12
--------- ------
Outstanding December 31, 1996 ........ 1,113,860 $ 4.98
Exercised ............................ 0 0
Expired .............................. 0 0
Forfeited ............................ 0 0
Canceled ............................. (608,082) $ 4.87
Granted .............................. 85,000 $ 2.55
--------- ------
Outstanding December 31, 1997 ........ 590,778 $ 4.73
========= ======
F-12
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
8. STOCK OPTIONS (CONTINUED)
1997 1996
------- -------
Exercisable at December 31, ................ 501,950 397,985
======= =======
Reserved for future option grants at
December 31, ............................. 909,222 386,140
======= =======
Weighted average fair value of options
granted .................................. $1.30 $4.26
===== =====
During 1997, the Company granted stock options to consultants for the purchase
of 72,500 common shares at exercises prices ranging from $3.375 to $5.75 per
share. Deferred compensation of $98,750 was recorded in connection with the
issuance of these options based on the Black-Scholes valuation model using the
assumptions described above and the estimated life of options. The Company will
amortize the deferred compensation over the consultants' required service period
of four years. Compensation expense for the year ended December 31, 1997 totaled
$31,072.
The following table sets forth the information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Number Remaining Average Number
Range of Outstanding as of Contractual Exercise Exercisable as of
Exercise Prices December 31, 1997 Life Price December 31, 1997
- --------------- ------------------ ------------ -------- ------------------
<S> <C> <C> <C> <C>
$ .28 - $2.88 ..... 89,728 5.33 years $2.34 68,728
$3.38 - $5.75 ..... 501,050 7.54 years $5.16 433,222
------- ---------- ----- -------
590,778 7.20 years $4.73 501,950
</TABLE>
9. INCOME TAXES
As of December 31, 1996, the Company has net operating loss carryforwards of
approximately $10,719,000 available to offset future taxable income. Such
carryforwards, which may provide future tax benefits, expire in the years 2008
through 2012 and tax credits of $148,000 which expire approximately in the years
2008 through 2011. During 1993 and 1995 changes in ownership of greater than 50%
occurred as a result of the Company issuing equity securities. As a result, a
substantial limitation will be imposed upon the future utilization of
approximately $2,450,000 of its net operating loss carryforwards.
Significant components of the Company's deferred income taxes at December 31,
1997 are as follows:
Net operating loss carryforwards ............ $ 4,033,395
Other ....................................... 221,262
-----------
Deferred tax assets ......................... 4,254,657
Deferred tax liabilities--equipment ......... (99,097)
-----------
4,155,560
Less valuation allowance .................... (4,155,560)
-----------
Net deferred tax assets ..................... $ 0
===========
The net change in the valuation allowance for the year ended December 31, 1997
was an increase of approximately $680,000.
F-13
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
9. INCOME TAXES (CONTINUED)
The difference between the benefit for income taxes and the amount which results
from applying the federal statutory tax rate of 34% to the loss is due to the
increase in the valuation allowance in 1997 and 1996, resulting in no tax
benefit reported in any of those years.
Year ended December 31,
1997 1996
------- -------
Tax at U.S. statutory rate ................... (34.00%) (34.00%)
State taxes, net of federal benefit .......... (3.61%) (3.63%)
Nondeductible items .......................... .16% .30%
Change in valuation allowance ................ 41.28% 36.72%
Other ........................................ (3.82%) .61%
------ ------
0.00% 0.00%
====== ======
10. LEASE COMMITMENTS
The Company leases certain office equipment under operating lease agreements
which expire at various dates through October 2, 2001. The Company leases its
administrative facilities on a month-to-month basis at a monthly rate of $3,600.
Future minimum rental payments required under operating leases that have an
initial term in excess of one year as of December 31, 1997, are as follows:
Year ended December 31,
1998 ................................ $22,709
1999 ................................ 22,709
2000 ................................ 17,459
2001 ................................ 13,091
-------
Total ............................... $75,968
=======
Rent expense under operating leases approximated $73,258 and $62,475 for the
years ended December 31, 1997 and 1996, respectively.
11. EMPLOYMENT AGREEMENTS
As of December 31, 1997, the Company has employment agreements with certain
executive officers, the terms of which expire at various times through December
31, 2001.
The former President of the Company (the "Former President") resigned on April
1, 1997. As of April 12, 1997, the Company and the Former President entered into
a severance agreement that provided, among other things, a settlement of all
rights under his employment agreement with the company, a cash payment by the
Company of $128,700 over approximately five months, the issuance of 5,555 shares
of common stock of the Company that were assigned to the former President in
lieu of a portion of his salary during 1996, the grant to the Former President
of a ten-year warrant to purchase 25,000 shares of common stock of the company
at $2.25 per share and the cancellation of 384,850 options to purchase shares of
common stock of the Company that were previously granted to the Former
President, leaving the Former President with 207,236 fully vested options to
purchase shares of common stock of the Company. The severance agreement also
provided for the cancellation of the President's right to be granted an option
to purchase one-tenth of the number of shares of common stock of the Company as
to which another shareholder of the Company had the right to exercise certain of
his warrants. The Former President further agreed to assign to the Company
patent protection on inventions made by him and to cooperate with the Company in
obtaining such patent protection.
The Executive Vice President of Corporate Development and Chief Financial
Officer of the Company has an employment agreement expiring on December 31,
2001, which provides for a current annual base salary of $139,000 and options to
purchase up to 100,000 shares of common stock at an exercise price of $5.50 per
share. The agreement also provides that if employment is terminated other than
for cause, this individual will receive an amount equal to the sum of his annual
F-14
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
11. EMPLOYMENT AGREEMENTS (CONTINUED)
base salary and the average annual bonus received by him and that he will
continue to receive benefits pursuant to the Company's welfare programs and
perquisite programs for a period of one year. The agreement was amended
effective February 1, 1998 to provide for the annual issuance of options to
purchase 34,286 shares of common stock in lieu of a $1,000 monthly automobile
allowance previously paid in cash.
The current President and Chief Executive Officer of the Company (the
"President") has an employment agreement expiring on December 31, 1999 which
provides for a annual base salary of $180,000, one third of which can be
deferred and/or paid in stock, at the Board's discretion, an annual increase in
the base salary tied to the Consumer Price Index ("CPI) and options to purchase
up to 75,000 shares, of common stock at an exercise price of $4.75 per share.
The employment agreement was amended on June 24, 1997 to provide additional
remuneration as follows: (a) 50,000 shares of common stock in lieu of a cash
increase of $90,650; (b) a ten year option to purchase 25,000 shares of common
stock, at an exercise price of $1.81 per share, which vested immediately; and
(c) to provide that the shares of common stock to be issued for deferred
compensation would be issued quarterly based on the monthly average trading
price. Effective January 1, 1998, the agreement was amended to reduce the
President's current annual base salary, to $127,308, and to issue options to the
President on January 1st of each year, the number of such options to be issued
to be equal to the salary foregone divided by the current market price of the
Company's common stock on the grant date. One half of the shares covered thereby
will vest immediately and one half of the shares covered thereby will vest on
July 1, 1998. The agreement provides that in the event of a change in control of
the Company, the President will receive a cash payment equal to the aggregate
exercise price of such options. On January 1, 1998, 227,336 of such options were
issued to the President at an exercise price of $.28 per share. The agreement
was also amended effective February 1, 1998 to provide for the issuance of
options to purchase 17,143 shares of common stock at an exercise price of $.35
per share in lieu of the $500 monthly automobile allowance previously paid in
cash. These options were issued on February 1, 1998. The agreement also provides
that if his employment is terminated other than for cause, the President will
receive an amount equal to the sum of his annual base salary and the average
annual bonus received by him and that he will continue to receive benefits
pursuant to the Company's welfare programs and perquisite plans for a period of
one year.
For the year ended December 31, 1997, approximately $152,446 of compensation was
paid or is payable in common stock.
12. TERMINATION OF DISTRIBUTION AGREEMENT
The Company announced on July 18, 1997 that its purchase-distribution agreement
with NPC was terminated following the announcement by the U.S. Health Care
Financing Administration (HCFA)of its new policy denying Medicare reimbursement
for the use of all electrical stimulation, including pulsed electromagnetic
fields, in treating wounds. The multi-year distribution agreement for the sale
and rental of SofPulse devices was initially executed as of May 1, 1997 and
required NPC to purchase from the Company specified minimum quotas of SofPulse
devices in exchange for exclusive distribution rights to three selected market
applications of SofPulse in the U.S. NPC was also to assume responsibility for
the growth and operation of the Company's current fleet of rental devices
including the Company's sales and marketing group and was to make monthly
payments to the Company for five years and pay royalties to the Company on NPC's
rental revenues. The Company also "sold" approximately $270,000 of accounts
receivable arising from April 1997 rental revenues to NPC for an initial payment
from NPC in the amount of $200,000. NPC will remit the balance to the Company
when it is collected from the rental customers after deducting certain interest
payments on the initial $200,000 advance. Upon the termination of the NPC
purchase-distribution agreement, the Company reaquired the marketing rights and
control of its fleet of SofPulse devices from NPC. Subsequently, a U.S. District
Court enjoined HCFA in November 1997 from implementing the national policy noted
above and HCFA notified the fiscal intermediaries in February of 1998 not to
abide by the July 1997 national policy memorandum.
13. CONTINGENCIES
PROPOSED FEDERAL FOOD AND DRUG ADMINISTRATION REGULATIONS
The Company and its products are regulated by the Federal Food and Drug
Administration (the "FDA") which has determined that the Company's products are
Class III medical devices. In April 1994, the FDA proposed the adoption of new
regulations requiring the submission of premarket approval (PMA) applications
for Class III medical devices.
F-15
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
13. CONTINGENCIES (CONTINUED)
The Company believes that such proposed regulations, if adopted, could require a
PMA submission in 1998 for continued marketing of the SofPulse device although
significant additional events need to occur prior to enactment and enforcement
of such new regulations. In addition, the Company will be provided an
opportunity to seek reclassification of its device to Class II. The PMA requires
medical device manufacturers to provide information establishing the safety and
effectiveness of medical devices based on controlled trials. The PMA process is
lengthy, expensive and complex, and will require the submission to the FDA of
substantial clinical data and statistical analysis demonstrating significant
effects. The Company plans to conduct new clinical trials, as the basis for
seeking a PMA from the FDA for its SofPulse device, but there can be no
assurance that the Company will be able, for financial or other reasons, to
successfully complete required studies and file its PMA application on a timely
basis, or at all. Failure to file a PMA application within 90 days following the
adoption of final regulations by the FDA, or failing to be granted a
reclassification of the Company's device to Class II by the FDA would result in
the revocation of the Company's Section 510(k) approval and otherwise prevent
the Company from marketing and, consequently, generating any revenue from sales
or rentals of the SofPulse in the United States until a PMA application is filed
and approved by the FDA. The inability to file and obtain a PMA approval, if and
when required by the FDA, and the inability to obtain reclassification to Class
II would have a material adverse effect on the Company, including possibly
requiring the Company to significantly curtail its operations.
The Company believes that it is taking reasonable measures in order to maintain
its right to continue to market its product in the United States for the
foreseeable future.
LITIGATION
In August 1994, a competitor of the Company filed a lawsuit against the Company
and certain of its present and former directors and officers alleging the
defendants had engaged in deceptive acts and practices, false advertising,
unfair competition, breach of contracts of fiduciary duties between the
plaintiff and certain of the Company's employees, and the Company's involvement
in facilitating or participating in the breach of contracts. The plaintiff is
seeking an injunction to rectify the effects of the misconduct, an unspecified
amount of compensatory damages, disgorgement of profits, treble damages,
punitive damages and attorney's fees. The plaintiff also seeks unspecified
injunctive relief prohibiting the Company from engaging in the alleged acts and
ordering the defendants to take remedial action to rectify the effects on
consumers and the plaintiff caused by the alleged acts. Although the Company
believes that it has meritorious defenses which it will pursue vigorously and
has filed a counterclaim against the plaintiff, there can be no assurance that
the ultimate outcome of such action will not have a material adverse effect on
the Company's liquidity, financial condition and results of operations.
On March 27, 1997 a former distributor for the Company filed a complaint against
the Company and other defendants alleging, among other things, misappropriation
of trade secrets, breach of fiduciary duty, unfair business practices, tortious
inducement to breach contracts, tortious interference with prospective economic
advantage and breach of contract. The plaintiff seeks unspecified damages,
restitution and an injunction prohibiting the defendants from contacting or
doing business with the plaintiff's customers. In July 1997 the court granted
the Company's petition to compel APS to arbitrate the parties' dispute. On March
19, 1998, the Company and APS entered into a settlement agreement (the
Settlement Agreement) regarding APS' claims against the Company and to settle
the arbitration proceeding. The Settlement Agreement is conditional upon the
court's finding that the settlement was entered into in good faith. The terms of
the Settlement Agreement specify (i) APS will dismiss the pending litigation
against the Company, (ii) the Company will terminate the arbitration proceeding
and (iii) the Company and APS will enter into a new distributorship agreement
providing APS with a maximum discount up to $100,000 towards the purchase of
SofPulse devices. The Settlement Agreement is also subject to the approval of
the co-defendants in the matter. Two of the co-defendants have stated that they
will oppose the Company's request that the settlement be approved as a good
faith settlement. The co-defendants assert that in connection with entering into
the Company's prior distribution agreement, the Company made certain
misrepresentations concerning whether the plaintiff had trade secrets. They also
assert that the Company induced one of the co-defendants to breach certain
fiduciary duties and have threatened to sue the Company. As of March 31, 1998,
they have not filed any claim against the Company, and their threat to do so
appears to be conditioned upon the consummation of the Company's settlement with
the plaintiff, which settlement is subject to Court approval. Although the
Company believes that it has meritorious defenses which it will pursue
vigorously, there can be no assurance that the ultimate outcome of such action
will not have a material adverse effect on the Company's liquidity, financial
condition and results of operations. As of December 31, 1997, the Company has
not accrued any loss contingencies or related expenses in connection with this
lawsuit.
Management is unable to make a meaningful estimate of the likelihood or amount
or range of loss that could result from an unfavorable outcome of the pending
F-16
<PAGE>
Electropharmacology, Inc.
Notes to Financial Statements (Continued)
13. CONTINGENCIES (CONTINUED)
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarter or annual period or its financial position could
be materially affected by an unfavorable outcome.
Other claims have been asserted by various claimants. The claims are in various
stages of processing and may ultimately be brought to trial. Based on
discussions with counsel, management has accrued its best estimate of the
ultimate expense of its contingent losses.
14. FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash, accounts
receivable, notes receivable from customers notes payable, notes payable to
related parties and accounts payable approximate fair value as of December 31,
1997 because of the short maturity of these items.
15. FOURTH QUARTER ADJUSTMENTS
Certain adjustments were recorded in the fourth quarter of 1997 which included
an adjustment to provide additional allowance for obsolete inventory and rental
equipment of $73,000 and to reduce the carrying value of rental equipment and
inventory by $95,000.
F-17
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
1.1 Underwriting Agreement, dated May 12, 1995, from Paragon Capital
Corporation for 1,250,000 shares of Common Stock and warrants to
purchase 625,000 shares of Common Stock of the Company.(1)
3.1 Certificate of Incorporation, as amended.(2)
3.2 By-Laws.(1)
4.1 Preferred Stock and Warrant Subscription Agreement, dated
November 13, 1995, between the Company and Norton Herrick.(3)
4.2 Warrant Agreement, dated May 12, 1995, between the Company and
Paragon Capital Corporation.(1)
4.3 Warrant Agreement between North American Transfer Co., Paragon
Capital Corporation and the Company.(4)
4.4 Warrant Agreement between the Company and Norton Herrick.(3)
4.5 Registration Rights Agreement, dated November 13, 1995, between the
Company and Norton Herrick.(3)
4.6 Conversion of Debt into Equity Agreement, dated August 30, 1993,
between the Company and Murray Feldman.(1)
4.7 First Amendment and Restated Convertible Promissory Note, dated
September 22, 1994, between the Company and Murray Feldman.(1)
4.8 Warrant Agreement, dated as of May 26, 1993, between the Company
and Whale Securities Co., L.P.(1)
9.1 Stockholder Agreement, dated November 13, 1995, among the Company,
David Saloff and Norton Herrick(3)
9.2 Proxy to Vote Corporate Shares, dated November 9, 1994, by and among
David Saloff and Murray Feldman.(4)
10.1 Strategic Alliance Agreement dated as of May 1, 1997 between the
Company and National Patient Care Services, Inc.(5)
10.2 The Company Employee Stock Purchase Plan, as amended January 13,
1997(6)
10.3 Promissory Note to Dr. Arup Sen from the Company dated October 10,
1997(6)
10.4 Promissory Note to Murray Feldman from the Company dated October 10,
1997(6)
10.5 Promissory Note to David Saloff from the Company dated October 10,
1997.(6)
<PAGE>
10.6 Employment Agreement, dated August 5, 1996, between the Company and
Joseph Mooibroek.(7)
10.7 Employment Agreement, dated August 5, 1996, between the Company and
David Saloff ("Saloff Employment Agreement").(2)
10.8 First Amendment to Saloff Employment Agreement dated February 1,
1998.(6)
10.9 Employment Agreement, dated November 11, 1996, between the Company
and Dr. Arup Sen ("Sen Employment Agreement").(2)
10.10 First Amendment to Sen Employment Agreement, dated June 24,
1997.(6)
10.11 Second Amendment to Sen Employment Agreement, dated January 1,
1998.(6)
10.12 Form of Non-Employee Directors' Equity Compensation Plan, effective
as of January 1, 1996.(2)
10.13 Performance Sharing Program, dated December 13, 1996.(2)
10.14 Consultant's Agreement, dated January 1, 1993, between the Company
and Arthur A. Pilla, Ph.D.; and Addendum thereto, dated August 1,
1994.(1)
10.15 Clinical Research and Study Agreement, dated October 27, 1994,
between the Company and Pilla Consulting.(1)
10.16 Form of Certificate of Designations of Series A Convertible
Preferred Stock of the Company.(3)
10.17 Agreement, dated April 12, 1997, between the Company and
Joseph Mooibroek. (2)
10.18 The Company's 1993 Stock Option Plan, as amended November 1,
1996.(6)
10.19 Consulting Agreement, dated November 25, 1997, by and between
20th Century Associates, Inc. and the Company.(8)
16.2 Letter from BDO Seidman, LLP regarding response to Change in
Certifying Accountants, dated January 8, 1997.(9)
24.1 Power of Attorney.(2)
27.1 Financial Data Schedule.(6)
- -------------
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-87934-A).
(2) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
(3) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated November 13, 1995.
(4) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(5) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated May 7, 1997.
<PAGE>
(6) Filed herewith.
(7) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated August 5, 1996.
(8) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-41303).
(9) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated December 13, 1996.
EXHIBIT 10.2
ELECTROPHARMACOLOGY, INC.
EMPLOYEE STOCK PURCHASE PLAN
This Electropharmacology, Inc. Employee Stock Purchase Plan, as amended
on January 13, 1997 (the "Plan") has been adopted by Electropharmacology, Inc.
(the "Company") effective as of December 13, 1996.
1. Purposes.
The purpose of the Plan is to encourage eligible employees to
become owners of common stock of the Company, thereby giving
them a greater interest in the growth and success of the
Company's business. The Plan is intended to qualify as an
"Employee Stock Purchase Plan" under Sections 421 and 423 of
the Internal Revenue Code of 1986 (the "Code"). The provisions
of the Plan will be construed in a manner consistent with the
requirements of such sections of the Code.
2. Definitions. Whenever the following terms are used in this
Plan, they shall have the meanings specified below unless the
context clearly indicates to the contrary:
(a) "Base Pay": Regular straight-time earnings
excluding payments for overtime, incentive
compensation, bonuses and other special payments.
(b) "Board": The Board of Directors of the Company.
(c) "Calendar Quarter": The three-month periods beginning
on January 1, April 1, July 1 and October 1 during
the period beginning on January 1, 1997, and ending
on December 31, 1999.
(d) "Committee": The Compensation Committee of the
Board.
(e) "Common Stock": The common stock, $.01 par value per
share, of the Company.
(f) "Company": Electropharmacology, Inc., a Delaware
corporation, and each Subsidiary (whether or not it
is now a Subsidiary) unless the context otherwise
requires.
(g) "Employee": Any person who is customarily employed
by the Company for more than 20 hours per week and
for more than five months in a calendar year.
(h) "Subsidiary": Any corporation in which the Company
owns, directly or indirectly, 50% or more of the
combined voting power of all classes of stock and
which has been designated by the Board or the
Committee as a corporation whose employees may
participate in the Plan.
<PAGE>
3. Eligibility.
(a) Participation in the Plan is voluntary. Each Employee
who is employed by the Company for one month and one
day will be eligible to participate in the Plan on
the first day of the next Calendar Quarter.
(b) Any provision of the Plan to the contrary
notwithstanding, no Employee will be granted an
option under the Plan:
(i) if, immediately after the grant, the
Employee would own stock, and/or hold
outstanding options to purchase stock,
possessing 5% or more of the total combined
voting power or value of all classes of
stock of the Company or of any Subsidiary
(for purposes of this paragraph 3(b)(i) the
rules of Section 424(d) of the Code will
apply in determining stock ownership of any
Employee); or
(ii) which permits his rights to purchase
stock under all employee stock purchase
plans (within the meaning of Section 423 of
the Code) of the Company and its
Subsidiaries to accrue at a rate which
exceeds $25,000 of the fair market value of
the stock (determined at the time such
option is granted) for each calendar year in
which such option is outstanding at any
time. For purposes of this paragraph
3(b)(iii) the provisions of Section
423(b)(8)(A), (B) and (C) of the Code will
be applicable.
4. Shares Subject to the Plan.
The total number of shares of Common Stock that may be issued
upon the exercise of options granted under the Plan will not
exceed 1,500,000 shares (subject to adjustment as provided in
paragraph 16), and such shares may be unissued shares,
reacquired shares, shares bought on the market, or any
combination of the foregoing. If any option which has been
granted expires or terminates for any reason without having
been exercised in full, the unpurchased shares will again
become available for purposes of the Plan.
5. Participation.
(a) An eligible Employee may become a participant by
completing a payroll deduction authorization form
provided by the Company and filing it with the
Company at such time and in such manner as the
Committee prescribes, and such authorization will
become effective on the first day of the next
Calendar Quarter.
(b) Payroll deductions for a participant will commence
with the first payroll period of the Calendar Quarter
in which his authorization for a payroll deduction
becomes effective and will end with the payroll
period that ends immediately prior to December 31,
1999, unless sooner terminated by the participant as
provided in paragraph 10.
(c) Nothing in the Plan will confer on a participant the
right to continue in the employ of the Company or
will limit or restrict the right of the Company to
terminate the employment of a participant at any time
with or without cause. A participant will have no
interest in any Common Stock to be purchased under
the Plan or any rights as a stockholder with respect
to such Common Stock until the Common Stock has been
purchased and credited to his account.
2
<PAGE>
6. Payroll Deductions.
(a) At the time a participant files his payroll deduction
authorization form, he will elect to have deductions
made from his Base Pay on each payday during the
Calendar Quarter in whole percentages at the rate of
not less than 0% nor more than 50% of his Base Pay.
(b) All payroll deductions made for a participant will be
credited to his account under the Plan. A participant
may not make any separate cash payment into such
account.
(c) A participant may suspend or discontinue his
participation in the Plan as provided in paragraph
10, but no other change can be made during the
Calendar Quarter and, specifically, a participant may
not alter the amount of his payroll deductions for
the Calendar Quarter. A participant may, however,
change the deductions made from his Base Pay for any
subsequent Calendar Quarter by filing a new payroll
deduction authorization form with the Company at
least ten days before the first day of such Calendar
Quarter. A participant who suspends or discontinues
participation during any Calendar Quarter may not
resume participation in the Plan until the next
Calendar Quarter.
7. Granting of Option.
(a) For each Calendar Quarter, a participant will be
deemed to have been granted an option to purchase, on
the first day of the Calendar Quarter, as many full
and fractional shares as may be purchased with the
payroll deductions (and any cash dividends as
provided in paragraph 8) credited to his account
during the Calendar Quarter.
(b) The option price of the Common Stock purchased with
payroll deductions made during each full Calendar
Quarter for a participant will be the lower of:
(i) 85% of the closing price of the Common
Stock on the NASDAQ as reported by The Wall
Street Journal in the New NASDAQ Issues on
the first day of the Calendar Quarter (or on
the next regular business date on which
shares of the Common Stock of the Company
are traded in the event that no shares of
the Common Stock have been traded on the
first day of the Calendar Quarter); or
(ii) 85% of the closing price of the Common Stock
on the NASDAQ as reported by The Wall Street
Journal in the NASDAQ on the last day of the
Calendar Quarter (or on the next regular
business date on which shares of the Common
Stock of the Company are traded in the event
that no shares of the Common Stock have been
traded on the last day of the Calendar
Quarter).
3
<PAGE>
(c) The option price of the Common Stock purchased with
payroll deductions made during the Calendar
Quarter ending March 31, 1997 for a participant will
be the lower of:
(i) 85% of the closing price of the Common Stock
on the NASDAQ as reported by The Wall Street
Journal in the New NASDAQ Issues on
January 27, 1997; (or on the next regular
business date on which shares of the
Common Stock of the Company are traded in
the event that no shares of the Common Stock
have been traded on that day); or
(ii) 85% of the closing price of the Common Stock
on the NASDAQ as reported by The Wall Street
Journal in the NASDAQ on the last day of the
Calendar Quarter (or on the next regular
business date on which shares of the Common
Stock of the Company are traded in the event
that no shares of the Common Stock have been
traded on the last day of the Calendar
Quarter).
8. Exercise of Option.
(a) Unless a participant gives written notice to the
Company's Benefits Department as provided in
paragraph 10, his option for the purchase of Common
Stock with payroll deductions made during a Calendar
Quarter will be deemed to have been exercised
automatically on the last day of the Calendar Quarter
for the purchase of the number of whole and
fractional shares of Common Stock which the
accumulated payroll deductions (and cash dividends on
the Common Stock as hereinafter provided) in his
account at that time will purchase at the applicable
option price.
(b) Cash dividends paid on shares of Common Stock held in
a participant's account will be combined with the
participant's payroll deductions and applied to the
purchase of Common Stock at the end of the Calendar
Quarter in which the dividends are received, subject
to the participant's withdrawal rights set forth in
paragraph 10. Dividends paid in the form of shares of
Common Stock with respect to shares that have been
purchased under the plan but which have not been
delivered to the participant pursuant to paragraph 9
will be delivered to the participant at the same time
as the underlying shares are delivered.
4
<PAGE>
9. Delivery of Shares.
Shares of Common Stock purchased under the Plan may be
registered in the name of a nominee or held in such other
manner as the Committee determines to be appropriate. Each
participant will be the beneficial owner of the shares of
Common Stock purchased under the Plan on exercise of the
participant's option and will have all rights of beneficial
ownership in such shares, except that the participant may not
transfer or otherwise dispose of the shares for a period of 12
months following the date on which the shares are purchased
and any dividends paid with respect to such shares will be
credited to the participant's account and applied as provided
in paragraph 8 until the shares are delivered to the
participant. The Company or a brokerage firm or other entity
selected by the Company will retain custody of the
certificates representing the shares for a period of time
ending no earlier than the expiration of such 12-month period,
after which the certificates will be delivered to the
participant as promptly as practicable following the
participant's request for such delivery.
10. Suspension and Withdrawal of Deductions.
(a) By written notice to the Company's Benefits
Department at least 15 days prior to the last day of
a Calendar Quarter, a participant may elect to
suspend or discontinue his payroll deductions and/or
to withdraw all the accumulated payroll deductions
(and any cash dividends paid on Common Stock
previously purchased under the Plan but not delivered
to the participant) credited to his account at such
time. Such notice will be on a form provided by the
Committee for that purpose. All such amounts will be
paid to the participant promptly after receipt of his
notice of withdrawal, and no further payroll
deductions will be made from his pay during the
Calendar Quarter for which the withdrawal is
effective. The Committee reserves the right to impose
on the participant a reasonable administrative fee to
cover the cost of processing the withdrawal, and such
fee may be deducted from the participant's account.
(b) Upon termination of a participant's employment for
any reason other than death, disability or retirement
that entitles the participant to an early or normal
retirement benefit under any defined benefit pension
plan of the Company, participation in the Plan will
immediately terminate and the payroll deductions and
any accumulated cash dividends and shares of Common
Stock credited to his account will be delivered to
the participant, or, in the case of his death
subsequent to the termination of his employment, to
the person or persons entitled thereto under
paragraph 13 as promptly as practicable.
Notwithstanding the foregoing, any shares purchased
for the participant under the Plan that have not been
held for at least 12 months will not be delivered to
the participant prior to the expiration of such
12-month period.
(c) Upon termination of the participant's employment
because of death, disability or retirement that
entitles the participant to an early or normal
retirement benefit under any defined benefit pension
plan of the Company, the participant or, in the event
of death, his beneficiary (as defined in paragraph
13) will have the right to elect, by written notice
given to the Company's Benefits Department, on a form
provided by the Committee for such purpose, prior to
the last day of the Calendar Quarter in which the
termination of employment occurs either:
5
<PAGE>
(i) to withdraw all of the payroll deductions
and accumulated cash dividends and shares of
Common Stock credited to the participant's
account under the Plan (whether or not the
shares have been held for at least 12 months
following their purchase); or
(ii) to exercise the participant's option for the
purchase of stock on the last day of the
Calendar Quarter in which termination of
employment occurs for the purchase of the
number of whole and fractional shares of
Common Stock which the accumulated payroll
deductions and any cash dividends credited
to the participant's account at the date of
the participant's termination of employment
will purchase at the applicable option
price.
In the event that no such written notice of election is duly
received by the Company's Benefits Department, the participant
or beneficiary will automatically be deemed to have elected to
withdraw the payroll deductions credited to the participant's
account at the date of the participant's death and the same,
together with any accumulated cash dividends and shares of
Common Stock, will be paid promptly following the last day of
the Calendar Quarter in which termination of employment
occurs.
11. Interest.
No interest will be paid or allowed on any money paid into the
Plan or credited to the account of any participant.
12. Administration.
(a) The Plan will be administered by the Committee, which
will have the plenary power, subject to and within
the limits of the express provisions of the Plan to
construe and interpret the Plan and options granted
under it, and to establish, amend and revoke rules
and regulations for its administration. The
Committee, in the exercise of this power, will
generally determine all questions of policy and
expediency that may arise, may correct any defect, or
supply any omission or reconcile any inconsistency in
the Plan or in any instrument associated with the
Plan in a manner and to the extent it will deem
necessary or expedient to make the Plan fully
effective.
(b) The Committee may, in its discretion, require as
conditions to the exercise of any option that the
shares of Common Stock reserved for issuance upon the
exercise of the option have been duly listed, upon
official notice of issuance, upon an exchange, that a
Registration Statement under the Securities Act of
1933, as amended, with respect to said shares will be
effective and that all material information
respecting the business and financial conditions of
the Company has been disclosed to the public.
6
<PAGE>
13. Designation of Beneficiary.
A participant may file a written designation of a beneficiary
who is to receive any Common Stock and/or cash credited to the
participant's account under the Plan at his death. Such
designation of beneficiary may be changed by the participant
at any time by written notice on a form supplied by the
Committee. Upon the death of a participant and upon receipt by
the Company's Benefits Department of proof of the identity and
existence at the participant's death of a beneficiary validly
designated by him under the Plan, the Committee will cause
such Common Stock and/or cash to be delivered to such
beneficiary. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan
who is living at the time of such participant's death, the
Committee will cause such Common Stock and/or cash to be
delivered to the executor or administrator of the estate of
the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Committee), the
Committee, in its discretion, may cause such Common Stock
and/or cash to be delivered to the spouse or to any one or
more dependents of the participant as the Committee may
designate. No beneficiary will, prior to the death of the
participant by whom he has been designated, acquire any
interest in the Common Stock or cash credited to the
participant under the Plan.
14. Transferability.
No amounts, whether cash or Common Stock, credited to a
participant's account nor any rights with regard to the
exercise of an option or to receive Common Stock under the
Plan may be assigned, transferred, pledged, or otherwise
disposed of in any way by the participant otherwise than by
will or the laws of descent and distribution. Any such
attempted assignment, transfer, pledge, or other disposition
will be without effect, except that the Committee may treat
such act as an election to withdraw funds in accordance with
paragraph 10.
15. Use of Funds.
All payroll deductions received or held by the Company under
this Plan may be used by the Company for any corporate purpose
and the Company will not be obligated to segregate such
payroll deductions.
16. Effect of Changes of Common Stock.
The Board may make or provide for such adjustments in the
maximum number of shares specified in paragraph 4 and the
price at which shares of Common Stock are to be purchased
under the Plan as the Board in its sole discretion, exercised
in good faith, may determine is equitably required to prevent
dilution or enlargement of the rights of participants that
otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the
capital structure of the Company, merger, consolidation,
spin-off, reorganization, partial or complete liquidation,
issuance of rights or warrants to purchase securities or any
other corporate transaction or event having an effect similar
to any of the foregoing.
17. Amendment or Termination.
The Board may at any time terminate or amend the Plan, and if
no earlier action is taken, the Plan will terminate as of
December 31, 2001. Except as hereinafter provided, no
termination or amendment will affect or change options
previously granted to any participant, nor may any amendment
7
<PAGE>
be made without prior approval of the stockholders of the
Company if such amendment would (a) materially increase the
benefits accruing to participants under the Plan, (b)
materially increase the number of shares which may be issued
under the Plan, or (c) materially modify the requirements as
to eligibility for participation under the Plan.
18. Notices.
All notices or other communications by a participant to the
Committee or the Company's Benefits Department under or in
connection with the Plan will be in writing on a form provided
by the Committee and be deemed to have been duly given when
received by the Senior Vice President, Human Resources, of the
Company or his designee.
19. Merger or Consolidation.
If the Company merges with another corporation and the Company
is the surviving entity, the holder of each option then
outstanding will thereafter be entitled to receive, upon the
exercise of such option for each share as to which such option
is exercised, the securities or property which a holder of one
share of the Common Stock was entitled to upon and at the time
of such merger, and the Board will take such steps in
connection with such merger as the Board will deem necessary
to assure that the provisions of paragraph 16 will thereafter
be applicable, as nearly as reasonably may be, in relation to
the said securities or property as to which such holder of
such option might thereafter be entitled to receive
thereunder. In the event of a merger in which the Company is
not the surviving entity or in the event of a consolidation,
the Plan will terminate, and all payroll deductions credited
to participants' accounts will be returned to the Participant.
A sale of all or substantially all the assets of the Company
will be deemed a merger or consolidation for the foregoing
purposes.
20. Approval of Stockholders.
The Plan has been adopted by the Board, but is subject to the
approval of the stockholders of the Company at the 1997
annual meeting.
EXHIBIT 10.3
PROMISSORY NOTE
October 10, 1997
$22,087.89 City of Pompano Beach
State of Florida
FOR VALUE RECEIVED, Electropharmacology, Inc. ("Borrower"), promises to
pay to the order of DR. ARUP SEN ("Lender") the principal amount of TWENTY-TWO
THOUSAND EIGHTY-SEVEN AND 89/100 DOLLARS ($22,087.89). The note shall bear
interest at the prime rate of interest plus one percent per annum and is due on
demand. The note will be secured by the accounts receivable of
Electropharmacology, Inc.
This Note may be prepaid at any time without premium or fee.
Upon the occurrence of any Default under this Note, the unpaid principal
of this Note and any part thereof, shall bear interest at a rate of eighteen
(18) per cent after Default until paid (the "Default Rate"). In any action to
collect upon this Note, the Lender or its designee shall be entitled to all
costs of collection, including reimbursement of reasonable attorney's fees
including any appeals.
All payments on this Note shall be payable in lawful currency of the
United States of America to Dr. Arup Sen, 6621 NW 41st St., Coral Springs,
Florida 33067 in immediately available funds.
Borrower hereby (a) waives demand, presentment for payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suite and
diligence in collecting this Note; and (b) agrees that Dr. Arup Sen shall not be
required first to institute any suit, or to exhaust its remedies against
Borrower or any other person or party to become liable hereunder in order to
enforce payment of this Note.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected in
excess of such maximum lawful rate shall be applied as a credit against the
unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified or
waived only by written agreement executed by Borrower and Lender.
<PAGE>
This Note is made under and governed by the laws of the State of Florida,
without regard to conflict of laws or principles.
WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
IN ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE COMPANY'S ACCEPTING THIS NOTE FROM BORROWER.
BORROWER:
By: /s/ David Saloff
----------------------------
David Saloff, Chief Financial Officer
Electropharmacology, Inc.
Date: ______________
WITNESS:
____________________________________
EXHIBIT 10.4
PROMISSORY NOTE
October 10, 1997
$25,000.00 City of Pompano Beach
State of Florida
FOR VALUE RECEIVED, Electropharmacology, Inc. ("Borrower"), promises to
pay to the order of MURRAY FELDMAN ("Lender") the principal amount of
TWENTY-FIVE THOUSAND AND 00/100 DOLLARS ($25,000.00). The note shall bear
interest at the prime rate of interest plus one percent per annum and is due on
demand. The note will be secured by the accounts receivable of
Electropharmacology, Inc.
This Note may be prepaid at any time without premium or fee.
Upon the occurrence of any Default under this Note, the unpaid principal
of this Note and any part thereof, shall bear interest at a rate of eighteen
(18) per cent after Default until paid (the "Default Rate"). In any action to
collect upon this Note, the Lender or its designee shall be entitled to all
costs of collection, including reimbursement of reasonable attorney's fees
including any appeals.
All payments on this Note shall be payable in lawful currency of the
United States of America to Murray Feldman, 8 Pilgrim Run, East Brunswick, New
Jersey 08816 in immediately available funds.
Borrower hereby (a) waives demand, presentment for payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suite and
diligence in collecting this Note; and (b) agrees that Lender shall not be
required first to institute any suit, or to exhaust its remedies against
Borrower or any other person or party to become liable hereunder in order to
enforce payment of this Note.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected in
excess of such maximum lawful rate shall be applied as a credit against the
unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified or
waived only by written agreement executed by Borrower and Lender.
<PAGE>
This Note is made under and governed by the laws of the State of Florida,
without regard to conflict of laws or principles.
WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
IN ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE COMPANY'S ACCEPTING THIS NOTE FROM BORROWER.
BORROWER:
By: /s/ Dr. Arup Sen
-------------------------------
Dr. Arup Sen, Chief Executive Officer
Electropharmacology, Inc.
Date: ______________
WITNESS:
_____________________________________
EXHIBIT 10.5
PROMISSORY NOTE
October 10, 1997
$18,838.30 City of Pompano Beach
State of Florida
FOR VALUE RECEIVED, Electropharmacology, Inc. ("Borrower"), promises to
pay to the order of DAVID SALOFF ("Lender") the principal amount of EIGHTEEN
THOUSAND EIGHT HUNDRED THIRTY-EIGHT AND 30/100 DOLLARS ($18,838.30). The note
shall bear interest at the prime rate of interest plus one percent per annum and
is due on demand. The note will be secured by the accounts receivable of
Electropharmacology, Inc.
This Note may be prepaid at any time without premium or fee.
Upon the occurrence of any Default under this Note, the unpaid principal
of this Note and any part thereof, shall bear interest at a rate of eighteen
(18) per cent after Default until paid (the "Default Rate"). In any action to
collect upon this Note, the Lender or its designee shall be entitled to all
costs of collection, including reimbursement of reasonable attorney's fees
including any appeals.
All payments on this Note shall be payable in lawful currency of the
United States of America to David Saloff, 3598 Yacht Club Drive #1804, North
Miami Beach, Florida 33180 in immediately available funds.
Borrower hereby (a) waives demand, presentment for payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suite and
diligence in collecting this Note; and (b) agrees that Lender shall not be
required first to institute any suit, or to exhaust its remedies against
Borrower or any other person or party to become liable hereunder in order to
enforce payment of this Note.
Anything contained herein to the contrary notwithstanding, if for any
reason the effective rate of interest on this Note should exceed the maximum
lawful rate, the effective rate shall be deemed reduced to and shall be such
maximum lawful rate, and any such sums of interest which have been collected in
excess of such maximum lawful rate shall be applied as a credit against the
unpaid balance due hereunder.
The provisions of this Note may from time to time be amended, modified or
waived only by written agreement executed by Borrower and Lender.
<PAGE>
This Note is made under and governed by the laws of the State of Florida,
without regard to conflict of laws or principles.
WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT
IN ANY LITIGATION BASED ON THIS NOTE, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE COMPANY'S ACCEPTING THIS NOTE FROM BORROWER.
BORROWER:
By: ________________________________
Dr. Arup Sen, Chief Executive Officer
Electropharmacology, Inc.
Date: ______________
WITNESS:
_____________________________________
EXHIBIT 10.8
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to the Employment Agreement (the "Amendment") by
and between Electropharmacology, Inc. (the "Company") and David Saloff (the
"Executive"), entered into on August 5, 1996 (the "Employment Agreement"), is
made and entered into as of this 2nd day of February 1998;
WHEREAS, the Company and the Executive agree that it is to their mutual
benefit to reduce the cash needs of the Company required for its operations;
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement in accordance with the contractual terms and conditions set forth
below:
NOW THEREFORE, in consideration of the covenants set forth herein, the
parties hereto agree as follows:
1.2. Paragraph 5. Executive Benefits, subparagraph (C) is replaced in
its entirety with the following:
In lieu of the monthly automobile allowance in the amount of $1,000
originally provided for in the Agreement, effective February 1, 1998,
and each February 1st thereafter during the term of the Agreement, the
Company will grant to the Executive a ten year option to purchase that
number of shares of the Company's common stock equal to $12,000 divided
by the last reported closing sales price of the Company's common stock
for the day prior to the date of such grant as reported in the OTC
Bulletin Board (the "Grant Date Market Value"). Each such option shall
be exercisable immediately on and after the date of grant, with an
exercise price equal to the Grant Date Market Value.
3. To the extent not superseded herein, all other provisions of the
Employment Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
/s/ David Saloff
---------------------------
David Saloff
ELECTROPHARMACOLOGY, INC.
By: /s/ Arup Sen
-----------------------
Name: Arup Sen
Title: Chief Executive Officer
EXHIBIT 10.10
Pursuant to the resolution (The "Resolution") adopted by the Board of Directors
in the meeting held on June 24, 1997, relating to compensation for Dr. Sen, the
Compensation Committee hereby authorizes the company to:
a) issue Dr. Sen 50,000 shares of restricted stock of EPi in lieu of
cash compensation increase (that would be reasonable for his role and
performance as Chairman & CEO) as a review of the company's cash flow
projection indicates that the company is not in a position to offer any
additional cash compensation; and
b) grant Dr. Sen option to purchase 25,000 shares of EPi Common Stock
at a price that is the trading price at the close of business on June
24, 1997, such option to vest immediately as of today; and
c) compute, pursuant to subsection (b)(ii) of the Resolution, the
number of shares to be issued for deferred compensation based on the
average monthly trading price and issue such shares computed on such
basis for each of the six months starting from January 1, 1997 in the
name of Dr. Arup Sen and thereafter issue such shares on a quarterly
basis based on the monthly average trading price as stated in the
Resolution.
On behalf of Compensation Committee
/s/ Murray Feldman
----------------------------
Murray Feldman,
Director
/s/ Larry Haimovitch
----------------------------
Larry Haimovitch
Director
EXHIBIT 10.11
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to the Employment Agreement (the "Amendment") by
and between Electropharmacology, Inc. (the "Company") and Arup Sen, Ph.D. (the
"Executive"), entered into on November 11, 1996, as amended by Board of
Directors resolution on June 24, 1997 (the "Employment Agreement") is made and
entered into as of this 1st day of January 1998;
WHEREAS, the Company and the Executive desire that Executive no longer
be required to incur a substantial current tax liability as a result of
receiving large grants of restricted stock pursuant to the non-cash portion of
the Executive's annual compensation;
WHEREAS, the Company and the Executive agree that it is in their mutual
benefit to reduce the cash needs of the Company required for its operations;
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement in accordance with the contractual terms and conditions set forth
below:
NOW THEREFORE, in consideration of the covenants set forth herein, the
parties hereto agree as follows:
1. Paragraph 4. Compensation, subparagraph (b) shall be replaced in its
entirety with the following:
For the period commending on January 1, 1998 and ending December 31,
1999, the Executive's base salary shall be reduced by one third (33
1/3%) (the portion of the salary to be so reduced is hereinafter
referred to as the "Foregone Salary"), so that effective January 1,
1998, the Executive's base salary shall be deemed to be $127,308 on an
annualized basis. Each January lst thereafter, for the calendar year
then commencing, the Executive's base salary, on an annualized basis,
shall be not less than two thirds the product of $190,962 per year
multiplied by the percentage obtained by dividing (I) the Consumer
Price Index for All Urban Consumers -- U.S. City Average (1982-84 =
100) (or, if publication of that index is terminated, any substantially
equivalent successor thereto) for the month of July in the fiscal year
of the Company immediately preceding such January 1st, as published by
the Bureau of Labor Statistics of the United States Department of
Labor; by (ii) said Consumer Price Index for the month of July 1998
provided that the Consumer Price Index adjustment shall in no case be
greater than 6% or less than 3% in any year. The Executive's base
salary may be increased from time to time by the Board, but in no event
shall the Executive's base salary for any calendar year be less than
the annualized base salary for 1998 plus the then applicable Consumer
Price Index adjustment provided by the preceding sentence. During the
term of the Agreement, Executive's salary shall be reviewed at least
annually by the Board to determine whether an increase beyond the
Executive's is warranted and appropriate. Except as set forth in this
Section 4, such
<PAGE>
compensation shall be payable at the times and in the manner consistent
with the Company's general policies regarding compensation of executive
employees, but in no event less frequently than bi-monthly. In lieu of
the Foregone Salary (for 1998, $63,654), on January 1, 1998 and each
January 1st thereafter, the Company shall grant to the Executive a
ten-year option to purchase that number of shares of the company's
common stock equal to that year's Foregone Salary divided by the last
reported closing sales price of the Company's common stock for the day
prior to the date of such grant as reported in the OTC Bulletin Board
(the "Grant Date Market Value"). Each such option shall be exercisable
with respect to 50% of the shares covered thereby on July 1, 1998, or
such later year as applicable, and with respect to the remaining 50% of
the shares covered thereby on December 1, 1998 or such later year as
applicable. The exercise price of the options shall be the Grant Date
Market Value. In the event of a Change of Control of the Company as
defined in the Company's Stock Option Plan, the Executive will receive
a cash payment equal to the aggregate exercise price of such option if
the Executive's employment is terminated within one year after the
Change in Control. Notwithstanding the foregoing, in the event the
Executive's employment hereunder is terminated by the Company other
than for Cause (as defined herein) or by the Executive by Permitted
Resignation (as defined herein) prior to the end of the term of this
Agreement, such option shall immediately vest and become exercisable in
accordance with Section 11(c) hereof. If the Executive is terminated
for Cause (as defined herein) all stock options, whether or not vested,
shall immediately terminate without any payment made therefor. If the
Executive resigns (other than by Permitted Resignation), all unvested
stock options shall immediately terminate without any payment therefor.
In the event of a change of control of the Company, the Executive will
receive a cash payment equal to the aggregate exercise price of such
options in the event the options would otherwise terminate. Upon the
Employee's death or Disability (as defined in the Agreement), all
unvested stock options that are to vest on the next vesting date of
this subparagraph shall immediately vest and become exercisable and all
other unvested stock options shall immediately terminate without any
payment made therefor.
2. Paragraph 5. Executive Benefits, subparagraph (c) is replaced in its
entirety with the following:
In lieu of the monthly automobile allowance in the amount of $500
originally provided for in the Agreement, effective February 1, 1998,
and each February 1st thereafter during the term of the Agreement, the
Company will grant to the Executive an option to purchase that number
of shares of the Company's common stock equal to $6,000 divided by the
Grant Date Market Value on February 1st. Each such option shall be
exercisable immediately on and after the date of grant, with an
exercise price equal to the Grant Date Market Value.
3. To the extent not superseded herein, all other provisions of the
Employment Agreement shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
/s/ Arup Sen
---------------------------
Arup Sen
ELECTROPHARMACOLOGY, INC.
By: /s/ David Saloff
---------------------------
Name: David Saloff
Title: Executive Vice President
EXHIBIT 10.18
ELECTROPHARMACOLOGY, INC.
1993 STOCK OPTION PLAN
(AS AMENDED)
1. Purpose. The purpose of the Electropharmacology, Inc. 1993 Stock
Option Plan (the "Plan"), is to provide an incentive to officers, directors,
employees and consultants of Electropharmacology, Inc. (the "Company") and to
other persons providing significant services to the Company to remain in the
employ of the Company or provide services to the Company and contribute to its
success.
As used in the Plan, the term "Code" shall mean the Internal Revenue
Code of 1986, as amended, and any successor statute, and the term "Subsidiary"
shall have the meaning set forth in Section 424(f) of the Code. Although the
Company has no Subsidiaries as of the date of Board approval of this Plan,
references to Subsidiaries herein shall apply to any Subsidiaries which the
Company may acquire in the future.
2. Administration. (a) The Plan shall be administered by the Board of
Directors of the Company (the "Board"), which may from time to time delegate all
or any part of its authority under the Plan to a committee (the "Plan
Committee") of two or more non-employee Directors (as defined in Rule 16b-3 as
promulgated by the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934) who also qualify as "outside directors" for purposes of
Section 162(m) of the Code. A majority of the Board or Plan Committee shall
constitute a quorum, and the action of the members of the Board or Plan
Committee present at any meeting at which the quorum is present, or acts
unanimously approved in writing, shall be the acts of the Board or Plan
Committee.
(a) The interpretation and construction by the Board of any
provisions of the Plan or of any agreement, notification or document evidencing
the grant of Options and any determination by the Board pursuant to any
provision of the Plan or of any such agreement, notification or document shall
be final and conclusive. No member of the Board shall be liable for any such
action or determination made in good faith.
(b) Subject to the provision of the Plan, the Board shall have the
sole authority to determine:
(1) The persons to whom options to purchase Stock (as defined
herein) shall be granted;
(2) The number of options to be granted to each person and the
number of shares of Stock to which each option pertains,subject to the
limitations set forth in section 4 of the Plan;
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<PAGE>
(3) The price to be paid for the Stock upon the exercise of each
option, which shall be equal to or grater than the market value per share of
Stock on the date the option is granted;
(4) The period within which each option shall be exercised and,
with the consent of the optionee, any extensions of such period (provided,
however, that the original period and all extensions shall not exceed the
maximum period permissible under the Plan); and
(5) The terms and conditions of each stock option agreement
entered into between the Company and persons to whom the Company has granted an
option and of any amendments thereto (provided that the optionee consents to
each such amendment).
3. Eligibility. Officers, directors, employees and consultants of the
Company and persons providing significant services to the Company shall be
eligible to receive grants of options under the Plan.
4. Stock Subject to Plan. (a) There shall be reserved for issue upon
the exercise of options granted under the Plan 1,500,000 shares of Common Stock
of the company ("Stock") or the number of shares of Stock, which, in accordance
with the provisions of Section 10 hereof, shall be substituted therefor. Such
shares may be shares of original issuance or treasury shares or a combination
thereof.
(a) Upon the full or partial payment of any option price by the
transfer to the Company of shares of Stock or upon satisfaction of tax
withholding provisions in connection with any such exercise or any other payment
made or benefit realized under the Plan by the transfer or relinquishment of
shares of Stock, there shall be deemed to have been issued or transferred under
the Plan only the net number of shares of Stock actually issued or transferred
by the Company.
(b) Upon payment in cash of the benefit provided by any award
granted under the Plan, any shares of Stock that were covered by that option
shall again be available for issuance or transfer hereunder.
(c) Notwithstanding any other provision of the Plan to the contrary,
no optionee shall be granted options for more than 1,000,000 shares of Stock
during any period of five consecutive calendar years, subject to adjustment as
provided in Section 10 of the Plan.
5. Terms of Options.
(a) Incentive Stock Options. It is intended that options granted
pursuant to this Section 5(a) qualify as incentive stock options as defined in
Section 422 of the Code. Incentive stock options shall be granted only to
employees of the Company. Each stock
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<PAGE>
option agreement evidencing an incentive stock option shall provide that the
option is subject to the following terms and conditions and to such other terms
and conditions not inconsistent therewith as the Board may deem appropriate in
each case.
(1) Option Price. The price to be paid for each share of Stock
upon the exercise of each incentive stock option shall be determined by the
Board at the time the option is granted, but shall in no event be less than 100%
of the fair market value of the shares on the date the option is granted, or not
less than 110% of the fair market value of such shares on the date such option
is granted in the case of an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or Subsidiaries. As used in this Plan the
term "date the option is granted" means the date on which the Board authorizes
the grant of an option hereunder or any later date specified by the Board. Fair
market value of the shares shall be (i) the mean of the high and low prices of
shares of Stock sold on the New York or American Stock Exchange on the date the
option is granted (or if there was no sale on such date, the highest asked price
for the Stock on such date), or (ii) date the option is granted, the mean
between the "bid" and "asked" prices of the Stock in the National
Over-The-Counter Market on the date the option is granted, or (iii) if the Stock
is not traded in any market, the price determined by the Board to be fair market
value, based upon such evidence as it may deem necessary or desirable.
(2) Period of Option and Exercise. The period or periods within
which an option may be exercised shall be determined by the Board at the time
the option is granted, but in no event shall any option granted hereunder be
exercised more than ten years from the date the option was granted nor more than
five years from the date the option was granted in the case of an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or
Subsidiaries.
(3) Payment for Stock. (A) Each grant of an incentive stock
option shall specify the form of consideration to be paid in satisfaction of the
option price and the manner of payment of such consideration, which may include
(i) cash in the form of currency or check or other cash equivalent acceptable to
the Company, (ii) nonforfeitable, unrestricted shares of Stock, which are
already owned by the optionee and have a value at the time of exercise that is
equal to the option price, (iii) any other legal consideration that the Board
may deem appropriate, including without limitation any form of consideration
authorized under Section 5(a)(3)(B) below, on such basis as the Board may
determine in accordance with the Plan and (iv) any combination of the foregoing.
(A) Any grant may provide that payment of the option price
may also be made in whole or in part in the form of other shares of stock that
are subject to risk of forfeiture or restrictions on transfer. Unless otherwise
determined by the Board whenever any option price is paid in whole or in part by
means of any of the
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<PAGE>
forms of consideration specified in this Section 5(a)(3)(B), the shares received
by the optionee upon the exercise of the option shall be subject to the same
risks of forfeiture or restrictions on transfer as those that applied to the
consideration surrendered by the optionee; provided, however, that such risks of
forfeiture and restrictions on transfer shall apply only to the same number of
shares received by the optionee as applied to the forfeitable or restricted
shares surrendered by the optionee.
(B) Any grant may provide for deferred payment of the option
price from the proceeds of sale through a bank or broker on the date of exercise
of some or all of the shares to which the exercise relates.
(b) Nonqualified Stock Options. Nonqualified stock options may be
granted not only to employees but also to directors or consultants who are not
employees of the Company and to persons who provide substantial services to the
Company.
Each nonqualified stock option granted under the Plan shall be evidenced by a
stock option agreement between the person to whom such option is granted and the
Company. Such stock option agreement shall provide that the option is subject to
the following terms and conditions and to such other terms and conditions not
inconsistent therewith as the Board may deem appropriate in each case.
(1) Option Price. The price to be paid for each share of Stock
upon the exercise of an option shall be determined by the Board at the time the
option is granted. As used in this Plan, the term "date the option is granted"
means the date on which the Board authorizes the grant of an option hereunder or
any later date specified by the Board. To the extent that the fair market value
of Stock is relevant to the pricing of the option by the Board, fair market
value of the Stock shall be determined as set forth in Section 5(a)(1) hereof.
(2) Period of Option and Exercise. The period or periods within
which an option may be exercised shall be determined by the Board at the time
the option is granted, but in no event shall such period exceed 10 years from
the date the option is granted.
(3) Payment for Stock. (A) Each grant of a Nonqualified Stock
Option shall specify the form of consideration to be paid in satisfaction of the
option price and the manner of payment of such consideration, which may include
(i) cash in the form of currency or check or other cash equivalent acceptable to
the Company, (ii) nonforfeitable, unrestricted shares of Stock, which are
already owned by the optionee and have a value at the time of exercise that is
equal to the option price, (iii) any other legal consideration that the Board
may deem appropriate, including without limitation any form of consideration
authorized under Section 5(b)(3)(B) below, on such basis as the Board may
determine in accordance with the Plan and (iv) any combination of the foregoing.
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<PAGE>
(A) Any grant may provide that payment of the option price
may also be made in whole or in part in the form of other shares of stock that
are subject to risk of forfeiture or restrictions on transfer. Unless otherwise
determined by the Board whenever any option price is paid in whole or in part by
means of any of the forms of consideration specified in this Section 5(b)(3)(B),
the shares received by the optionee upon the exercise of the option shall be
subject to the same risks of forfeiture or restrictions on transfer as those
that applied to the consideration surrendered by the optionee; provided,
however, that such risks of forfeiture and restrictions on transfer shall apply
only to the same number of shares received by the optionee as applied to the
forfeitable or restricted shares surrendered by the optionee.
(B) Any grant may provide for deferred payment of the option
price from the proceeds of sale through a bank or broker on the date of exercise
of some or all of the shares to which the exercise relates.
6. Nontransferability. The options granted pursuant to the Plan shall
be nontransferable except by will or the laws of descent and distribution, and
shall be exercisable during the optionee's lifetime only by him and after his
death, by this personal representative or by the person entitled thereto under
his will or the laws of intestate succession. Notwithstanding the foregoing, the
Board, in its sole discretion, may provide for transferability of particular
option under the Plan.
7. Termination of Employment or Other Relationship. Upon termination of
the optionee's employment or other relationship with the Company, his rights to
exercise options then held by him shall be only as follows (in no case do the
time periods referred to below extend the term specified in any option):
(a) Death or Disability. Upon the death of an optionee, any option
which he holds may be exercised (to the extent exercisable at his death), unless
it otherwise expires, within such period after the date of his death (not to
exceed twelve (12) months) as the Board shall prescribe in his option agreement,
by the employee's representative or by the person entitled thereto under his
will or the laws of intestate succession. Upon the disability (within the
meaning of Section 22(e)(3) of the Code) of an employee, any option which he
holds may be exercised (to the extent exercisable as of the date of disability),
unless it otherwise expires, within such period after the date of his disability
(not to exceed twelve (12) months) as the Board shall prescribe in his option
agreement.
(b) Retirement. Upon the retirement of an officer, director or
employee or the cessation of services provided by a nonemployee (either pursuant
to a Company retirement plan, if any, or pursuant to the approval of the Board),
an option may be exercised (to the extent exercisable at the date of such
termination or cessation) by him within such period after the date of his
retirement or cessation of services (not to exceed three (3) months) as the
Board shall prescribe in his option agreement.
-5-
<PAGE>
(c) Other Termination. In the event an officer, director or employee
ceases to serve as an officer or director or leaves the employ of the Company or
a nonemployee ceases to provide services to the Company for any reason other
than as set forth in (a) and (b), above, any option which he holds shall
terminate at the date his employment terminates or he ceases providing services
to the Company unless otherwise specified by the Board in the option agreement.
(d) Board Discretion. The Board may in its sole discretion
accelerate the exercisability of any or all options upon termination of
employment or cessation of services.
8. Change of Control of the Company. If there is a change in control of
the Company, an option granted under the Plan will, in the sole discretion of
the Board,(1) become immediately exercisable in full. For purposes of the Plan,
"Change of Control" shall mean the occurrence of any of the following events:
(a) The Company shall merge into itself, or be merged or
consolidated with, another corporation and as a result of such merger or
consolidation less than 50% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company as the same shall have existed immediately prior to
such merger or consolidation;
(b) The Company shall sell or otherwise transfer all or
substantially all of its assets to any other corporation or other legal person,
and immediately after such sale or transfer less than 50% of the combined voting
power of the outstanding voting securities of such corporation or person is held
in the aggregate by the former shareholders of the Company as the same shall
have existed immediately prior to such sale or transfer;
(c) A person, within the meaning of Sections 3(a)(9), Section
13(d)(3) or 14(d)(2) (as in effect on the date hereof) of the Securities
Exchange Act of 1934, shall become the beneficial owner (as defined in Rule
13d-3 of the Securities and Exchange Commission pursuant to the Securities and
Exchange Act of 1934) (other than Joseph Mooibroek, Norton Herrick and David
Saloff and their respective affiliates) of 35% or more of the outstanding voting
securities of the Company (whether directly or indirectly); or
(d) During any period of three consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election, or the nomination for election by the shareholders of the Company, of
each Director first elected during any
- -----------
(1) Discretion provides flexibility, but could create problems in qualifying a
transaction for pooling accounting treatment.
-6-
<PAGE>
such period was approved by a vote of at least one-third of the Directors of the
Company who are Directors of the Company on the date of the beginning of any
such period.
9. Transfer to Related Corporation. In the event an employee leaves the
employ of the Company to become an employee of a Subsidiary or any employee
leaves the employ of a Subsidiary to become an employee of the Company or
another Subsidiary, such employee shall be deemed to continue as an employee for
purposes of this Plan.
10. Adjustment of Shares. In the event of changes in the outstanding
Stock by reason of stock dividends, split-ups, consolidations, recapitalization,
reorganizations or like events (as determined by the Board), an appropriate
adjustment shall be made by the Board in the number and kind of shares reserved
under the Plan, in the number and kind of shares set forth in Section 4 hereof,
and in the number and kind of shares and the option price per share specified in
any stock option agreement with respect to any unpurchased shares. The
determination of the Board as to what adjustments shall be made shall be
conclusive. Adjustments for any options to purchase fractional shares shall also
be determined by the Board. The Board shall give prompt notice to all optionees
of any adjustment pursuant to this Section.
11. Securities Law Requirements. The Board may require prospective
optionees, as a condition of either the grant or the exercise of an option, to
represent and establish to the satisfaction of the Board that all shares of
Stock acquired upon the exercise of such option will be acquired for investment
and not for resale. The Company may refuse to permit the sale or other
disposition of any shares acquired pursuant to any such representation to permit
the sale or other disposition of any shares acquired pursuant to any such
representation until it is satisfied that such sale or other disposition would
not be in contravention of applicable state or federal securities law.
12. Tax Withholding. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any payment
made or benefit realized by an optionee or other person under the Plan, and the
amounts available to the Company for such withholding are insufficient, it shall
be a condition to the receipt of such payment or the realization of such benefit
that an optionee or such other person make arrangements satisfactory to the
Company for payment of the balance of such taxes required to be withheld. At the
discretion of the Board, such arrangements may include relinquishment of a
portion of such benefit. The Company and any optionee or such other person may
also make similar arrangements with respect to the payment of any taxes with
respect to which withholder is not required.
13. Amendment. The Board may amend the Plan at any time, except that
without shareholder approval:
(a) The number of shares of Stock which may be reserved for issuance
under the Plan shall not be increased except as provided in Section 10 hereof;
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<PAGE>
(b) The option price per share of Stock subject to incentive options
may not be fixed at less than 100% of the fair market value of a share of Stock
on the date the option is granted;
(c) The maximum period of ten (10) years during which the options
may be exercised may not be extended;
(d) The class of persons eligible to receive options under the Plan
as set forth in Section 3 shall not be changed; and
(e) This Section 13 may not be amended in a manner that limits or
reduces the amendments which require shareholder approval.
14. Effective Date. The Plan shall be effective upon its adoption by
the Board of Directors of the Company. Options may be granted but not exercised
prior to shareholder approval of the Plan. If any options are so granted and
shareholder approval shall not have been obtained within 12 months of the date
of adoption of the Plan by the Board of Directors,such options shall terminate
retroactively as of the date they were granted.
15. Termination. The Plan shall terminate automatically as of the close
of business on the date preceding the 10th anniversary date of its initial
adoption by the Board of Directors or earlier by resolution of the Board of
Directors or upon consummation of the disposition of capital stock or assets of
the Company, as described in Sections 8 hereof. Unless otherwise provided
herein, the termination of the Plan shall not affect the validity of any option
agreement outstanding at the date of such termination.
-8-
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