SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-KSB/A
(Amendment No. 1)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
0-25828
--------------------
(Commission File No.)
ELECTROPHARMACOLOGY, INC.
-----------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Delaware 954315412
- ----------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
12085 Research Drive, Alachua, Florida 32615
-------------------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (904)462-2249
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, 1999 are
$513,021.
The aggregate market value of the registrant's common stock held by non-
affiliates as of April 11, 2000, was approximately $936,994. As of
April 11, 2000, there were 17,268,325 shares of the registrant's common
stock outstanding.
Documents Incorporated by Reference:
None
<PAGE>
The following information is hereby amended as follows:
Item 3. Legal Proceedings.
Item 7. Financial Statements.
Item 13. Exhibits and Reports on Form 10-KSB.
Signature Page.
Exhibit 2.4.4 Amendment to Master Agreement between
Pre-Closing EPI Stockholders and the
Healthtech Stockholders
<PAGE>
Item 3. Legal Proceedings.
In August 1994, Diapulse Corporation of America, a former 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 Company employees. They also alleged the Company was involved
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. The Company believes it has meritorious defenses, which it
will pursue vigorously and has filed a counterclaim against the plaintiff
and its President. The parties are currently in settlement negotiations
and have reached a settlement in principle whereby the Company would pay
plaintiff the amount of $50,000 plus interest in monthly payments over a
thirty-month period; however, a definitive settlement agreement has not
been executed by both parties.
The Company's future product development, including the development
of the technology underlying the SofPulse product is not likely to be
adversely affected by the outcome. However, if the anticipated settlement
does not occur, there can be no assurance the ultimate outcome of such
action will not have a material adverse effect on the Company's liquidity,
financial condition and results of operations.
In July 1999, Copelco Credit Corporation filed suit against the
Company alleging breach of lease agreement in connection with an equipment
lease on a copier. The Plaintiff is seeking to accelerate all sums
allegedly due under the lease agreement in the amount of $58,584. The
Company believes that the ultimate outcome of such action, even if
unfavorable to the Company, will not have a material adverse effect on
the Company's liquidity, financial condition or results of operations.
<PAGE>
Item 7. Financial Statements.
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
OR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
TABLE OF CONTENTS
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-4
Consolidated Statement of Stockholders' Deficit F-5
Consolidated Statement of Cash Flows F-7
Notes to the Consolidated Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Electropharmacology, Inc.
We have audited the accompanying consolidated balance sheet of
Electropharmacology, Inc. as of December 31, 1999 and the related
consolidated statements of operations, stockholders' deficit and cash
flows for the two years ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Electropharmacology, Inc. as of December 31, 1999, and the results of
its consolidated operations and its consolidated cash flows for the two
years ended December 31, 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations that raise
substantial doubt about its 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 that might
result from the outcome of this uncertainty.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
April 7, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<S> <C>
Current assets:
Cash $6,577
Accounts receivable, net of
allowance for doubtful
accounts of $30,203 61,554
Other receivable 32,612
Inventory 7,172
Investment 210,182
Prepaid expenses 30,031
Total current assets 348,128
Property and equipment, net of
accumulated depreciation
of $255,012 265,956
Patents, net of accumulated
amortization of $26,385 76,969
Other assets 400
-------
691,453
=======
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
Current liabilities:
Current portion of long term debt $1,280,890
Current portion of capital leases 54,504
Accounts payable 403,964
Accrued expenses 354,606
Accrued expenses - related party 63,654
------
Total current liabilities 2,157,618
Long term debt, less current portion 15,503
Long term capital leases, less current portion 8,188
Notes payable - related parties 65,926
Mandatorily redeemable convertible preferred stock,
"$.01 par value, 7,887 shares authorized, issued
and outstanding 8,886,544
Stockholders' deficit:
Convertible preferred stock, $.01 par value, 9,992,113 shares
authorized, no shares issued and outstanding -
Common stock, $.01 par value; 30,000,000 shares authorized;
17,268,325 issued and outstanding 172,683
Additional paid-in capital 21,738,152
Accumulated other comprehensive loss (88,399)
Retained deficit (32,506,762)
============
(10,684,326)
Common stock reserved 242,000
---------
Total stockholders' deficit (10,442,326)
------------
$691,453
========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
<S> <C> <C>
Revenue:
Rentals $ - $359,143
Sales 513,021 261,341
------- -------
Total revenue 513,021 620,484
------- -------
Expenses:
Cost of revenue 565,101 410,087
Selling, general and administrative 2,027,908 1,962,403
Research and development 298,354 53,823
Inventory obsolescence - 731,493
Impairment loss on intangible assets - 8,811,114
Impairment loss on in-process research
and development - 6,000,000
-------- ---------
Total operating expenses 2,891,363 17,968,920
--------- ---------
Operating loss (2,378,342) (17,348,436)
--------- ----------
Other income (expense):
Gain on settlement of litigation 1,150,577 -
Loss on sale of securities (106,935) -
Gain (loss) on disposal of equipment (94,502) 716,223
Interest and other income 12,634 31,882
Interest expense (147,010) (108,892)
Other expense (6,844) (6,210)
-------- --------
Total other income (expense) 807,920 633,003
-------- --------
Loss before minority interest (1,570,422) (16,715,433)
Minority interest 671,852 2,040,000
------- ---------
Net loss (898,570) (14,675,433)
Preferred stock dividends (812,377) (815,071)
--------- ---------
Net loss available to common stockholders $(1,710,947)$(15,490,504)
========= ==========
Net loss per share - basic and diluted $(0.11) $(2.15)
==== ====
Weighted average number of common shares
outstanding - basic and diluted 16,101,254 7,214,469
========== =========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Preferred Stock Common Stock Additional
$.01 par value $.01 par value paid-in Deferred
Shares Amount Shares Amount capital compensation
------ ------ ------ ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 242,950 $2,430 4,071,194 $40,711 $15,254,912 $(67,678)
Issuance of common stock for services - - 67,610 676 24,041 -
Induced conversion of preferred stock (242,950) (2,430) 1,872,000 18,720 730,081 -
Issuance of stock in settlement
of accounts payable - - 322,581 3,226 124,940 -
Issuance of common stock
for acquisition - - 6,172,100 61,721 3,253,576 -
Issuance of common stock and
stock subscription receivable - - 777,202 32,126 1,967,875 -
Issuance of warrants with convertible
mandatorily redeemable
preferred stock - - - - 400,000 -
Dividend on convertible
preferred stock - - - - - -
Amortization and cancellation of
deferred compensation - - - - (28,496) 67,678
Comprehensive loss:
Unrealized gain on securities - - - - - -
Net loss - - - - - -
Total comprehensive loss - - - - - -
--------------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 13,282,687 $157,180 $21,726,929 $-
</TABLE>
F-5
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
other Common Total
comprehensive Retained Subscription stock stockholders'
income (loss) deficit receivable reserved deficit
------------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 $- $(15,305,311) $- $ - $(74,936)
Issuance of common stock for services - - - - 24,717
Induced conversion of preferred stock - (627,571) - - 118,800
Issuance of stock in settlement
of accounts payable - - - - 128,166
Issuance of common stock
for acquisition - - - - 3,315,297
Issuance of common stock and
stock subscription receivable - - (500,000) - 1,500,001
Issuance of warrants with convertible
mandatorily redeemable
preferred stock - - - - 400,000
Dividend on convertible
preferred stock - (187,500) - - (187,500)
Amortization and cancellation of
deferred compensation - - - - 39,182
Comprehensive loss:
Unrealized gain on securities 803,279 - - - -
Net loss - (14,675,433) - - -
Total comprehensive loss - - - - (13,872,154)
--------- ------------- ---------- ------ ------------
Balance, December 31, 1998 $803,279 $(30,795,815) (500,000) $ - $ (8,608,427)
</TABLE>
F-5(cont)
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Preferred Stock Common Stock Additional
$.01 par value $.01 par value paid-in Deferred
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 - $- $13,282,687 $157,180 $21,726,929 $-
Issuance of stock on collection of
subscription receivables - - 2,435,320 - (386,667) -
Issuance of common stock for services - - 600,318 6,003 190,025 -
Issuance of stock options for services - - - - 8,365 -
Dividend on convertible
preferred stock - - - - - -
Issuance of stock for settlement
of litigation - - 950,000 9,500 199,500 -
Reserve for stock to be issued
in settlement of litigation - - - - - -
Comprehensive loss:
Net change in unrealized loss
on available-for-sale securities - - - - - -
Net loss - - - - - -
Total comprehensive loss - - - - - -
--------------------------------------------------------------------------------------
Balance, December 31, 1999 - $- $17,268,325 $172,683 $21,738,152 $-
======================================================================================
</TABLE>
F-6
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
other Common Total
comprehensive Retained Subscription stock stockholders'
income deficit receivable reserved deficit
--------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $803,279 $(30,795,815) $(500,000) $- $(8,608,427)
Issuance of stock on collection of
subscription receivable - - 500,000 - 113,333
Issuance of common stock for services - - - - 196,028
Issuance of stock options for services - - - - 8,365
Dividend on convertible
preferred stock - (812,377) - - (812,377)
Issuance of stock for settlement
of litigation - - - - 209,000
Reserve for stock to be issued
in settlement of litigation - - - 242,000 242,000
Comprehensive loss:
Net change in unrealized loss
on available-for-sale
securities (891,678) - - - (891,678)
Net loss - (898,570) - - -
Total comprehensive loss - - - - (1,790,248)
--------------------------------------------------------------------------
Balance, December 31, 1999 $(88,399) $(32,506,762) $- $242,000 $(10,442,326)
==========================================================================
</TABLE>
F-6 (cont)
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(898,570) $(14,675,433)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,236 167,865
Issuance of common stock and warrants for service 176,029 37,217
Issuance of stock options to purchase common stock 8,365 -
Reserve for stock to be issued in settlement of litigation 242,000 -
Issuance of notes payable for services - 63,654
Gain on settlement of litigation (1,150,577) -
Loss on sale of available for sale securities 106,935 -
(Gain) loss on disposal of equipment 94,502 (716,223)
Increase in inventory obsolescence allowance - 731,493
Issuance of common stock in settlement of accounts payable - 128,166
Induced conversion of warrants - 118,800
Amortization of deferred compensation - 67,678
Accretion of redeemable convertible preferred stock 228,571 171,429
Impairment loss of in-process research and development 6,000,000 -
Impairment loss of purchased intangible assets - 8,811,114
Loss attributable to minority interest (671,852) (2,040,000)
Changes in operating assets and liabilities
Decrease in accounts receivable 21,943 85,907
Decrease in other receivables 2,769 29,979
Decrease in inventory - 145,061
Decrease in prepaid expenses 103,706 23,328
Decrease in other assets 8,350 9,251
(Increase) decrease in accounts payable (79,838) 102,329
Increase in notes payable for services 35,000 -
Increase (decrease) in accrued expenses 172,968 (78,421)
-------- ---------
Net cash provided by (used in) operating activities (1,509,463) (816,806)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment (42,747) (41,694)
Proceeds from sale of property and equipment - 164,420
Cash paid for licensing and technology - (7,500,000)
Sale of available for sale securities 158,173 -
Net cash acquired from acquisitions - 346,820
--------- -----------
Net cash provided by (used in) investing activities $115,426 $(7,030,454)
--------- -----------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Proceeds from the issuance of mandatorily redeemable,
convertible preferred stock $ - $7,500,000
Proceeds from issuance of common stock, net
of subscription receivables - 600,000
Proceeds from notes payable 7,106 -
Proceeds from receipt of stock subscription receivable 1,400,000 -
Proceeds from issuance of common stock - -
Proceeds from capital leases 1,340 -
Repayment of notes payable (155,682) (192,193)
Repayment of capital leases (12,161) (12,032)
---------- ----------
Net cash used in financing activities 1,240,603 7,895,775
---------- ----------
Net increase (decrease) in cash (153,434) 48,515
Cash at the beginning of year 160,011 111,496
---------- ----------
Cash at end of year $6,577 $160,011
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $35,428 $69,153
========= =========
Cash paid during the period for income taxes $ - $ -
========= =========
Supplemental disclosure on non-cash investing and
financing activities:
Issuance of common stock for services $196,029 $37,217
Issuance of notes payable for service 35,000 63,654
Reserve for stock to be issued in settlement
of litigation 242,000 - -
Issuance of notes payable for audit fees, net - 118,430
Notes payable for prepaid insurance 7,716 137,268
Purchase of assets under capital lease financing 1,340 28,343
Conversion of preferred stock to common stock - 627,571
Conversion of warrants to common stock - 118,800
Common stock subscriptions receivable - 1,400,000
Sale of a business - 1,865,673
Issuance of common stock in settlement with
President of Gemini 209,000 -
Settlement with outside legal counsel - 778,166
Issuance of common stock for an acquisition - 3,315,297
Net value of partnership units acquired in an acquisition - 4,071,429
</TABLE>
F-8
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business and major suppliers - Electropharmacology, Inc., a
Delaware corporation (the "Company") was incorporated on August 31,
1990 in California under the name Magnetic Resonance Therapeutics,
Inc., and reorganized through a merger in February 1995 with
Electropharmacology, Inc. Until August 24, 1998, the Company
manufactured and marketed, primarily to nursing homes and plastic
surgeons, SofPulse devices that deliver pulsed electromagnetic
signals in the radio frequency range ("PEMS").
The Company consummated a corporate reorganization on August 24,
1998 when it became a biotechnology company through a series of
transactions, including (i) the acquisition of two privately held business
entities engaged in developing molecular technologies for the design of
drugs to combat cancer and arthritis, infection and other complex
diseases of humans, and (ii) the sale of the past business operations
related to the manufacturing and leasing of SofPulse devices in order to
focus on potential applications of the underlying PEMS technology in
drug delivery and tissue regeneration. Since the reorganization, the
Company has been engaged in developing drug delivery technologies to deliver
pharmaceutical drugs and biotechnology products more effectively to
diseased tissues, and drug design technologies to create new drugs aimed
at the genes and proteins that cause or control complex diseases. The
Company has used its drug design technologies to make and sell custom
products for molecular biology and genomics research.
The research activities of the Company focus on the design and
discovery of therapeutic drugs and diagnostic agents using modifications
of the building blocks of the genetic material, namely gene bases. The
Company has built a library of proprietary and exclusively licensed
compounds that target genes or proteins implicated in cancer and
rheumatoid arthritis. The Company, through Gemini Biotech, Ltd.
("Gemini" and "Gemini Division"), also makes and sells custom
products for genomics research and drug discovery to academic researchers
and biopharmaceutical companies.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company, its wholly owned
subsidiaries and partnerships. All material intercompany accounts and
transactions have been eliminated in consolidation. Minority interest
consists of the ownership interest of the minority partners of Gemini
Health Technologies, L.P. (the "Partnership") through September 17,
1999. On that date the minority partners exchanged their partnership
interests in Gemini for common shares of the Company (see Note 14).
Revenue recognition - Rental revenue during 1998 was recognized over
the period in which the related equipment was under lease to a customer,
primarily on a per use basis (see Note 3). Sales revenue was recognized
upon shipment and the transfer of ownership of the product.
Cost of Revenue - Cost of revenue for the year ended December 31,
1998 included costs associated with rental of the SofPulse units of
approximately $169,380 (see Note 3).
F-9
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments - The Company accounts for marketable securities in
accordance with the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Securities held are classified as
"available for sale" and are carried in the financial statements at fair
value. Realized gains and losses are included in earnings, while
unrealized gains and losses are excluded from earnings and reported as
comprehensive income (loss), a component of stockholders' deficit.
Inventory - Inventory at December 31, 1999, consisted primarily of
chemicals used in the Company's custom products business, and is
valued at the lower of cost or market.
Patents - Patents are amortized using the straight-line method over 17
years from the date of issuance of the patents, or over the remaining
useful lives.
Property and equipment - Property and equipment are stated at cost.
Major improvements are capitalized, while maintenance and repairs are
expensed when incurred. The cost and accumulated depreciation for
property and equipment sold, retired, or otherwise disposed of are
relieved from the accounts, and resulting gains or losses are reflected in
income.
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the
estimated useful lives of the improvements. Depreciation is computed
on the straight-line method for financial reporting purposes, and on the
declining balance method for income tax purposes.
Asset impairment - The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective carrying
values to the current and expected future cash flows to be generated from
such assets. In accordance with Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived
Assets" ("SFAS 121"), the recoverability of property and equipment,
intangible assets and goodwill are evaluated on a separate basis for the
Company and each acquisition.
Stock based compensation - The Company elected to follow Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for its
employee stock options. Accordingly, no compensation expense was
recognized for its stock options granted to employees because the
exercise price is equal to or greater than the market value of the
underlying stock at the date of the grant. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standard, No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").
F-10
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Compensation - Deferred compensation related to stock
options is amortized over the period during which the options become
exercisable. Deferred compensation was fully amortized during the year
ended December 31, 1998.
Income taxes - The Company provides for income taxes under the
provisions of Statement of Financial Accounting Standard, No. 109,
"Accounting For Income Taxes" ("SFAS 109"), which requires the asset
and liability method of accounting for income taxes in which 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. A
valuation allowance is recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Advertising costs - Advertising costs included in selling, general and
administrative expenses are expensed as incurred and were $11,633 and
$4,086 for 1999 and 1998, respectively.
Net loss per share - The Company adopted the Financial Accounting
Standards Board No. 128, "Earnings Per Share" ("SFAS No. 128"),
which established 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.
All loss per share amounts are presented to conform to SFAS No. 128.
For the years ended December 31, 1999 and 1998, options and warrants
were excluded from the computation of net loss per share because the
effect of inclusion would be anti-dilutive due to the Company's net
operating losses.
Reclassifications - Certain items presented during the year ended
December 31, 1998 have been reclassified to conform with the
presentation for the year ended December 31, 1999.
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 significantly from those estimates.
The Company provides credit to customers based on an evaluation of the
customer's financial condition, generally without requiring collateral.
Exposure to losses on receivables is principally dependent upon each
customer's financial condition. The Company monitors its exposure for
credit losses and maintains an allowance for anticipated losses.
Sales to two customers during the years ended December 31, 1999 and
1998, consisted of approximately 17% and 10%, respectively, of total
sales. The accounts receivable balances of these customers at December
31, 1999 and 1998 were $13,740 and $9,243, respectively.
F-11
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments - The fair value of the Company's
financial instruments such as accounts receivable, accounts payable,
notes payable and capital leases approximate their carrying value.
Business segment - The Company operates principally in one business
segment that develops technology and development stage products for
the health care industry.
Organizational costs - In April 1998, the Accounting Standards
Executive Committee released Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires that
start-up costs, including organizational costs, be expensed as incurred.
The Company accepted early adoption of SOP 98-5 and expensed all
start-up costs during the year ended December 31, 1998.
2. LIQUIDITY AND GOING CONCERN
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 $898,570 and $14,675,433 for the
years ended December 31, 1999 and 1998, respectively, and cumulative
net operating losses aggregating $32,506,762 through December 31,
1999. In addition, at December 31, 1999, the Company had a net capital
deficiency of $10,442,326, and a working capital deficiency of
$1,809,490. Delinquent accounts payable over 90 days past due were
approximately $400,000 at December 31, 1999. The Company was also
in default on a note for $1,163,090 to an insurance company, a note
payable of $98,430 to an accounting firm, and capital leases totaling
approximately 52,000 (see Notes 7 and 9). The holders of the Company's
defaulted debt have not exercised their rights and remedies in the
respective agreements, but there is no assurance that the holders of the
debt will not pursue the defaults and exercise all of their rights and
remedies.
On August 24, 1998, the Company reorganized to better enable the
Company to focus its efforts on research and development activities in
the field of biotechnology. On August 24, 1998, the Company sold
substantially all of the assets and certain liabilities related to the
manufacturing, sales and marketing of its SofPulse device while
retaining rights to uses of the underlying PEMS technology in
biotechnology applications such as drug delivery and tissue regeneration.
This transaction resulted in receipt of cash of $150,000, marketable
securities with a value of $596,721 and the satisfaction of $778,166 of
notes payable, accrued interest and accounts payable (see Note 3). Also,
as more fully described in Note 3, on September 30, 1998, the Company
received a commitment from Elan International Services, Ltd. ("Elan
International"), a subsidiary of Elan Corporation plc, to invest
$2,000,000 in shares of the Company's common stock. The Company
received $600,000 during 1998 and $1,400,000 during 1999.
F-12
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
2. LIQUIDITY AND GOING CONCERN (continued)
During 1999, the losses from the Gemini operations consumed
significant cash resources from the Company. While the custom
products business of Gemini grew during 1999, the operation continued
to require additional investment in personnel, materials, facilities and
equipment, resulting in substantially higher operating expenses.
Beginning in July 1999, the Company implemented a plan to
significantly reduce the operating expenses and cash outflows while
retaining the value of the custom product business. In accordance with
the plan, the Company closed the Gemini facility in The Woodlands,
Texas, and substantially reduced personnel and salaries. The Company
also reached an agreement with a former Vice Chairman of the Company
and President of Gemini, resulting in a settlement of certain employment
and other contractual obligations of the Company to this individual
that had been entered into by the Company in connection with the
Gemini acquisition transaction (see Note 14). The Company is
attempting to restructure Gemini's balance sheet, including settlement of
certain Gemini liabilities, principally the secured note to an insurance
company in the amount of $1,163,090, and equipment lease obligations
totaling approximately $52,000.
In order to reduce its occupancy expenses, the Company relocated the
Gemini operations from Texas and its executive offices from Gainesville,
Florida to Alachua, Florida where the Florida-based research laboratories
have been located since 1998. In connection with the settlement of the
Gemini office lease obligation in Texas, Gemini executed a $35,000 note
payable bearing interest at 10% with payments of $1,500 monthly over
26 months, beginning December 1, 1999 (see Note 7).
At December 31, 1999, the Company was in violation of its license
agreement with Elan Pharma International Ltd. ("Elan Pharma") because
it did not make the minimum investment required by Elan Pharma for research
and development activities as specified by the investment agreement. Elan
Pharma has not exercised any of its rights regarding the violation.
The Company's 2000 operating plan contemplates stringent cost controls
and postponement of research and development activities until additional
funds are obtained. Strategies include alliances, including mergers and
acquisitions of related or complementary custom product businesses for
the genomic research market for Gemini, the raising of additional
investment capital by the Company through a private placement and a
follow-on public offering, and seeking federal grants directly (such as
Small Business Innovation Research Grants) or through collaborations.
Until a private placement or a follow-on public offering occur, the
Company intends to supplement its revenues from the custom products
business of Gemini by selling the remainder of its ADMT stock (see Note
4) and from loans from its President and CEO.
F-13
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
2. LIQUIDITY AND GOING CONCERN (continued)
The Company cannot predict whether the operating and financing plans
described above will be successful. If the Company is unable to
successfully obtain additional financing, it may not be able to continue as
a going concern and may be unable to meet its obligations. The financial
statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
3. CORPORATE REORGANIZATION
On August 24, 1998, the Company consummated a corporate
reorganization, consisting of five steps. First, the Company contributed
all its assets and liabilities (other than those assets and liabilities related
to its business of manufacturing and distributing the SofPulse device)
(the "SofPulse Business") to its wholly-owned subsidiary, EPI
HealthTech Inc. ("EPI Sub"), a Delaware corporation in exchange for
100 shares of EPI Sub's common stock. Second, HealthTech
Development Inc. ("HTD"), a privately held Company, was merged into
EPI Sub, with the stockholders of HTD receiving 6,172,100 shares of the
Company's common stock (the number of shares being substantially
equivalent to the number of shares of the Company's common stock
outstanding). Third, EPI Sub contributed all its assets and liabilities
(including both the assets and liabilities contributed to it by the Company
and the assets and liabilities of HTD) to Gemini Health Technologies,
L.P., a newly formed Delaware limited partnership (the "Partnership") in
exchange for 12,505,480 partnership units of the Partnership (such
number of partnership units corresponding to the number of shares of the
Company's common stock issued and outstanding following the issuance
of shares of the Company's common stock to the shareholders of HTD).
Simultaneously with the contribution of EPI Sub's assets and liabilities to
the Partnership, the partners of Gemini, a privately held Texas limited
partnership, transferred all of their limited partnership interests in Gemini
Biotech, Ltd., and all the stock of Gemini's general partner, Gemini
Biotech, Inc. ("GBI"), to the Partnership in exchange for 6,000,000
partnership units in the Partnership. The partnership units were
exchangeable, subject to certain restrictions, for shares of the Company's
common stock, on the basis of one share of the Company's common
stock for each partnership unit (see Note 14 for the settlement of
litigation regarding this transaction). Fourth, the Company issued
1,872,000 shares of its common stock to holders of certain warrants and
all outstanding preferred stock of the Company in exchange for such
warrants and preferred stock. Fifth, the Company sold substantially all
its assets and specified liabilities relating to the SofPulse Business to a
wholly-owned subsidiary of ADM Tronics Unlimited, Inc. ("ADMT"), a
publicly traded company.
F-14
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. CORPORATE REORGANIZATION (continued)
Sale of operation
- ------------------
On August 24, 1998, the Company completed the sale of its SofPulse
business as part of the corporate reorganization. Prior to completion of
the transaction, management and operation of the SofPulse business were
assumed by ADMT on May 27, 1998. The assets sold consisted of
inventory, supplies and SofPulse units. The Company was paid
$150,000 in cash and 2,925,000 shares of ADMT stock for the SoftPulse
assets. The Company transferred 1,525,000 shares to a law firm to satisfy
a note payable, accrued interest thereon and certain accounts payable.
The Company retained 1,400,000 of the shares and sold some of the shares
during the year ended December 31, 1999 (see Note 4).
Conversion of preferred stock and exchange of warrants
- ------------------------------------------------------
On August 24, 1998, in connection with the merger of HTD, the
Company issued 1,575,000 common shares, valued at $627,571 for the
conversion of 242,950 shares of preferred stock. The preferred stock
was convertible at a 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 the
preferred stock would have automatically converted to common stock.
Additionally, on August 24, 1998, the Company issued 297,000 common
shares, valued at $118,800, in exchange for 1,961,107 of outstanding
warrants. These warrants were exercisable at prices between $5.42 and
$9.00 per warrant and expired on various dates through November 2005.
As a result of the conversion of the preferred shares, the Company
recorded a dividend of $627,571, and as a result of the conversion of the
warrants, the Company recorded consulting expense of approximately
$118,800, as costs to induce both conversions.
Elan investment in the Company
- ------------------------------
On September 30, 1998, Elan International, invested $7,500,000 in the
Company to acquire 7,500 shares of mandatorily redeemable, convertible
preferred stock (at a conversion ratio of one share of common stock for
each $1.20 of preferred stock investment), and warrants to acquire up
to 1,000,000 shares of common stock of the Company at an exercise price
of $2.50 per share. The preferred stock accrues a mandatory dividend of
10%, payable semi-annually, in cash or in-kind, at the Company's option.
Using the Black-Scholes option-pricing model, the warrants were valued
at $400,000 as of the date of issuance. Accordingly, in 1998 the
Company recorded a value of $7,100,000 for the mandatorily
redeemable, convertible preferred stock, and $400,000 for the warrants,
which was recorded as additional paid-in capital. The $400,000 was
amortized over the term of the warrants (seven months) and increased the
value of the mandatorily redeemable, convertible preferred stock as it
was amortized. At December 31, 1999, $999,877 of mandatory
dividends not paid in cash or in-kind had been accrued.
F-15
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. CORPORATE REORGANIZATION (continued)
On September 30, 1998, Elan International committed to invest
$2,000,000 to acquire shares of the Company's common stock at the 20-
day average closing price preceding each such investment, at a maximum
purchase price of $1.375 per share. On October 30, 1998, Elan acquired
777,202 shares of common stock for $600,000. On January 4, 1999,
Elan International acquired an additional 2,057,143 shares of common
stock for $900,000. On May 14, 1999, Elan was issued warrants to
acquire 1,520,821 shares of common stock at a purchase price of $.75
per share. On May 15, 1999, Elan acquired an additional 378,177 shares
of common stock and 387 shares of mandatorily redeemable, convertible
preferred stock in return for $500,000 to complete its commitment to
invest $2,000,000.
Elan Pharma license agreement with the Company
- ----------------------------------------------
On September 30, 1998, the Company acquired a worldwide license to
certain drug discovery technology for non-cosmetic dermatology and wound
care applications from Elan Pharma. The Company made a
payment of $7,500,000 to Elan Pharma for licenses to utilize pending
patent applications, product design and know-how related to the
development and approval of products for transdermal drug delivery, and
certain in-process research and development. The cost was allocated
$6,000,000 to in-process research and development and $1,500,000 to
goodwill. The Company will also pay royalties and license fees to Elan
Pharma based on the Company's future revenues relating to the
technology. The Company paid no royalties or license fees during the
years ended December 31, 1999 and 1998.
The Company's management determined the licensed technology had
various ascertainable long-term requirements for additional substantial
costs in order to realize economic benefits. As a result of the long-term
development requirements and uncertainties related to the technological
feasibility and commercialization of the licensed technology, the
Company recorded a one-time charge of $6,000,000 to write off in-
process research and development.
Concurrently, in accordance with SFAS 121, management evaluated the
goodwill of $1,500,000 and determined that the asset was permanently
impaired due to the Company's current period operating loss combined
with a history of operating losses. Therefore, an impairment loss for the
$1,500,000 was recognized in 1998.
F-16
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
4. MARKETABLE SECURITIES
As discussed in Note 3, the Company acquired 2,925,000 common
shares of ADMT as part of its sale of the SofPulse business on August
24, 1998. The shares of ADMT were valued at approximately $0.426
per share on the date of acquisition. As part of the agreement, 1,525,000
of the common shares of ADMT were transferred to a creditor in partial
settlement of a note payable due a law firm on August 24, 1998. The
remaining 1,400,000 shares were restricted as to sale both by ADMT and
the law firm through August 24, 1999. The Company carries the ADMT
common stock as available for sale. During 1999, the Company sold
699,530 shares of the ADMT shares and realized a loss on the sales of
$106,935.
Any unrealized gains and losses are recorded as comprehensive income,
a component of stockholders' deficit. At December 31, 1999, the number
of unsold shares totaled 700,470 and the gross unrealized loss recorded
in stockholders' deficit was $88,399, and the fair market value was
$210,182 for these shares.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Estimated
Useful life
-----------
<S> <C> <C>
Office equipment, computers
and software $77,125 3 to 7 years
Lab equipment 443,843 5 to 7 years
---------
520,968
Less: accumulated
depreciation (255,012)
---------
Total $265,956
========
</TABLE>
Depreciation charged to income for the years ended December 31, 1999
and 1998 was $90,236 and $161,559, respectively.
F-17
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
6. ACCRUED EXPENSES
At December 31, 1999, accrued expenses consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Interest expense $124,070
Litigation settlements 125,000
Board of director fees 42,500
Commissions 18,912
Property and sales tax 13,383
Vacation and sick leave 12,541
Other 18,200
---------
$354,606
=========
</TABLE>
7. NOTES PAYABLE
Notes payable at December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Variable rate note payable to an insurance
company, due July 1, 2006 (in default) $1,163,090
Note payable to an accounting firm with interest
at 12%, due August 31, 1999 (in default) 98,430
Note payable for termination of operating leases,
with interest at 10%, due January 2002 32,279
Note payable to finance insurance premiums with
interest at 11%,due April 21, 2000 2,594
----------
1,296,393
Less: current portion (1,280,890)
-------------
Long term portion of notes payable $15,503
==============
</TABLE>
On June 27, 1997, Gemini entered into a loan agreement (the "Loan")
with an insurance company in the amount of $1,315,000. The Loan
amortizes over 101 payments ending July 1, 2006. Interest is two points
over prime. At December 31, 1999, the rate was 10.5%. Collateral for
the Loan is Gemini's assets, including accounts receivable, inventory,
and property and equipment owned now or acquired in the future by
Gemini. On December 22, 1998, the Loan was modified to add as
additional collateral the Company's corporate guarantee and 65
SofPulse devices owned by the Company. The former President of Gemini,
and his wife, personally guaranteed the repayment of the indebtedness.
In addition, repayment of the Loan is guaranteed in part by the Rural
Biological Science Department of the U.S. Department of Agriculture.
F-18
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
7. NOTES PAYABLE (continued)
The terms of the Loan include maintaining certain financial covenants,
principally relating to working capital liquidity and net working capital
ratios, and permitted purchases and expenses. The covenants also
include a limitation on compensation and distributions. All of the
amounts outstanding under the agreement become due and payable if an
event of default occurs. As of December 31, 1999, Gemini was not in
compliance with the financial covenants of the Loan principally relating
to net worth and working capital, and additionally, the Company had
ceased making the required payments as of April 1999. The Company
also abandoned some of Gemini's assets when it moved the Gemini
operations from Texas to Florida due to the lack of ability to sell and the
high cost of shipping these assets. Therefore, the note is in default. The
insurance company has not exercised its rights under the loan agreement,
including acceleration of the amount due. Negotiations are underway to
reach a settlement on the payment of the Loan. Accordingly, the entire
amount has been shown as a current liability at December 31, 1999.
On October 28, 1998, the Company executed a promissory note to its
former independent certified public accountants ("Accountants") for
audit fees. The note was renegotiated on May 13, 1999 and totaled
$98,430, with interest at 12 %. The note was due on August 31, 1999,
and is in default at December 31, 1999, but the Accountants have not
exercised any of their rights and remedies as of that date.
On December 1, 1999, the Company entered into a note payable in the
amount of $35,000 with interest at 10% due in 26 equal monthly
installments. This note was in settlement of the Company's lease obligations
for the Gemini facility, which was closed in the Woodlands, Texas.
8. NOTES PAYABLE AND ACCRUED EXPENSES DUE RELATED PARTIES
During October 1997, the Company issued three notes payable to two
officers and a member of the board of directors in exchange for cash
advances of $45,000, and non-payment of salaries of $20,926. The notes
bear interest at prime plus 1% (9.5% at December 31, 1999) and are due
on demand. The balances due at December 31, 1999 were $65,926.
Effective as of August 24, 1998, as a result of the merger with HTD and
the acquisition of Gemini and in conjunction with certain change of
control provisions in the employment contract of the Company's Chief
Executive Officer, the Company recorded an accrued expense due the
Chief Executive Officer for $63,654 to be used for his exercise of
244,823 options to purchase common stock at $.26 per share. As of
December 31, 1999, the amount had not been paid, nor had the stock
options been exercised (see Note 3).
F-19
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
9. CAPITAL LEASES
The Company is the lessee of office and laboratory equipment under
capital leases expiring in various years through 2001. The assets and
liabilities under capital leases are recorded at the lower of the present
value of the minimum lease payments, or the fair value of the asset. The
assets are depreciated over their estimated useful lives. Depreciation of
assets under capital leases is included in depreciation expense for 1999
and 1998.
Depreciation on assets under capital leases charged to expense in 1999
and 1998 was $15,028 and $20,773, respectively.
Following is a summary of property held under capital leases at December
31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Lab equipment $72,852
Less: accumulated depreciation (18,247)
--------
$54,605
========
</TABLE>
Interest rates on capitalized leases vary from 8% to 12%, and are
imputed based on the lessor's implicit rate of return.
Certain equipment used in Gemini's custom products business is collateral
on capital lease with a remaining balance of $40,622 at December 31, 1999.
The lease is in default due to non-payment, but the lessor has not
exercised its rights and remedies in default under the capital lease. Two
pieces of equipment on two different capital leases, totaling approximately
$11,500, were returned to the lessors when Gemini was closed. At December 31,
1999, the $11,500 is listed as a liability under current portion of capital
leases. Management is awaiting settlement of these leases, but is unable to
estimate a settlement amount at this time.
Minimum future lease payments as of December 31, 1999, under capital
leases, excluding a lease in default which is carried as current, for
each of the next four years and in the aggregate are:
<TABLE>
<CAPTION>
Year ended:
<S> <C>
2000 $3,366
2001 3,366
2002 3,366
2003 2,859
Thereafter -
------
12,957
Less: amount representing interest (2,456)
--------
Present value of net minimum lease payments $10,501
========
</TABLE>
F-20
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
10. EQUITY TRANSACTIONS
During 1998, the Company issued 40,823 shares of common stock and
expensed $17,217 for payment of outstanding employment-related
liabilities to officers of the Company.
Effective January 1, 1996, the Company established the
Electropharmacology, Inc. 1996 Non-Employee Directors' Equity
Compensation Plan (the "Compensation Plan"). The Compensation Plan
provides for the issuance of common stock as compensation for serving
as a director of the Company. During 1999 and 1998, the Company
issued 52,083 and 26,787 shares of common stock, respectively, under
the Compensation Plan and expensed $22,500 and $7,500, respectively,
relative to the issued common stock.
As more fully described in Note 3, during August 1998, the Company
issued 1,872,000 shares of common stock in return for the conversion of
242,950 preferred shares and 1,961,107 warrants. As a result of these
transactions, the Company recorded a dividend of $627,571 and an
expense of $118,800 in 1998, as inducement related charges.
On August 24, 1998, the Company issued 322,581 shares of common
stock in settlement of an accounts payable totaling $128,166. Further, as
more fully detailed in Note 3, the Company issued 6,172,100 shares of
common stock on August 24, 1998, to stockholders of HTD to complete
the merger of EPI Sub and HTD.
On September 30, 1998, the Company and Elan International entered
into a stock subscription agreement whereby Elan International would
invest $2,000,000 in the Company. On that same date, Elan paid the
Company $600,000 and was issued 777,702 shares of common stock. At
the same time the Company recorded the stock subscription, par value
and additional paid-in capital. On January 4, 1999, Elan International
paid the Company $900,000 and received 2,057,143 shares of common
stock. At December 31, 1998, a receivable of $900,000 was recorded as
an asset since the money was received four days after the end of the year,
and a subscription receivable of $500,000 was recorded in the equity
section of the balance sheet. On May 15, 1999, Elan International
completed its obligation by paying $500,000 to the Company. However,
instead of receiving common stock for the full payment, Elan
International was issued 387 shares of additional mandatorily
redeemable, convertible preferred stock, 378,177 shares of common
stock and a warrant to purchase 1,520,821 shares of common stock at
$.75 per share. In order to record the transaction, $386,667 previously
recorded as additional paid-in capital in 1998, was reclassified as
mandatorily redeemable, convertible preferred stock.
During 1999, the Company issued 600,318 shares of common stock to
directors, financial consultants and a law firm and recorded $196,028 as
compensation expense under SFAS 123. The compensation expense is
included as part of selling, general and administrative expense.
Additionally during 1999, the Company issued 25,000 stock options to
non-employees. Under SFAS 123, the stock options were valued at
$8,365 on the date of grant and that amount was recorded as additional
paid-in capital.
On September 17, 1999, the Company issued 950,000 shares of common
stock valued at $209,000 as partial settlement of litigation with the
former President of Gemini (see Note 14).
F-21
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
11. WARRANTS
On September 30, 1998, the Company granted warrants to Elan
International to purchase 1,000,000 shares of common stock at $2.50 per
share. The warrants expire August 31, 2006. On May 14, 1999, the
Company granted warrants to Elan International to purchase 1,520,821
shares of common stock at $.75 per share. These warrants expire on
November 14, 2005.
The following table summarizes information relative to the Company's
warrants that are exercisable through August 31, 2006:
<TABLE>
<CAPTION>
Shares Price range
------ -----------
<S> <C> <C>
Outstanding January 1, 1998 3,052,707 $1.00 to $9.00
Exchanged (1,961,107) $5.42 to $9.00
Canceled (782,946) $5.03 to $6.00
Granted 1,000,000 $2.50
---------
Outstanding December 31, 1998 1,308,654 $1.00 to $5.50
Expired (76,654) $5.03 to $5.25
Canceled -
Granted 1,520,821 $.75
----------
Outstanding December 31, 1999 2,752,821 $.75 to $5.50
===========
</TABLE>
The Company's authorized but unissued common shares reserved for
issuance were as follows:
<TABLE>
<CAPTION>
Number of shares
------------------
December 31,
1999 1998
---- ----
<S> <C> <C>
Exercise of warrants 2,752,821 1,308,654
Stock option plans 1,266,988 975,488
Convertible preferred stock 6,572,223 6,250,000
---------- ---------
10,592,032 8,534,142
=========== =========
</TABLE>
F-22
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS
In April 1993, the Company adopted a stock option plan (the "Plan")
that was amended on November 1, 1996, for directors, employees and
consultants. 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 of
the Company). As of December 31, 1999, only the Chief Executive
Officer of the Company owns more than 10% of the Company's
common stock. Nonqualified stock options may be granted under the
Plan at an exercise price less than the fair market value of the common
stock on the date of the grant. If nonqualified stock options are granted
for less than the market value, the Company must record compensation
expense for the difference between fair market value and the option price
per SFAS 123.
As of December 31, 1997, the board of directors authorized the granting
of options for up to 1,500,000 shares of common stock. Grants for
options to purchase 1,308,988 common shares, (823,752 were considered
incentive stock options), have been formalized under the Plan. The
options generally vest immediately or ratably up to ten years on differing
vesting schedules. The options expire at dates ranging from two to ten
years after date of grant.
During 1997, the Company granted stock options to consultants for the
purchase of 72,500 shares of common stock at exercise prices ranging
from $3.38 to $5.75 per share. During 1998, these options either fully
vested due to the reorganization in August 1998, or were cancelled.
During 1998, the Company granted stock options to a consultant for the
purchase of 25,000 shares of common stock at the exercise price of $.51.
Compensation expense relating to these stock options recorded for 1999
and 1998 was $8,365 and $67,678, respectively. The following table
summarizes information about stock options at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding stock options Exercisable stock options
------------------------- -------------------------
Weighted Weighted
average Weighted average Weighted
Exercise remaining average remaining average
price contractual exercise contractual exercise
range Shares life price Shares life price
- --------- ------ ---------- ----- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .25-.35 583,752 6.56 $ .28 568,752 6.51 $ .29
.51-.85 365,000 8.84 .74 298,000 9.01 .79
1.81-3.06 69,500 4.37 2.53 69,500 4.37 2.53
4.75-5.50 290,736 6.27 5.30 290,736 6.27 5.30
- --------- ------- ---- ---- -------- ---- ----
$.25-5.50 1,308,988 7.02 $1.64 1,226,988 6.94 1.72
========= ========= ==== ===== ========= ==== =====
</TABLE>
F-23
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS (continued)
The following table summarizes activity for the years ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -------
<S> <C> <C> <C> <C>
Outstanding on January 1, 1,288,988 $ 1.71 590,778 $ 4.73
Exercised - - - -
Expired - - (22,424) 3.20
Forfeited - - - -
Canceled (250,000) 1.06 (205,618) 3.30
Granted 270,000 .78 926,252 .53
--------- ----- -------- ------
Outstanding on December 31, 1,308,988 $1.64 1,288,988 $1.71
========= ===== ======== ======
Exercisable on December 31, 1,266,988 $1.72 975,488 $ 1.98
Shares available on December ========= ===== ======== ======
31, for options that may
be granted 191,012 211,012
======= =======
Weighted average fair value
of options granted $ .15 $ .43
======= =======
</TABLE>
As required by SFAS 123, pro forma information regarding net income and
earnings per share was determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using the Black-Scholes option-
pricing model with the following assumptions used for grants in 1999 and
1998:
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998
---- ----
<S> <C> <C>
Risk free interest rate 5.92% 4.58%
Expected lives (years) 10 2.9-10
Expected volatility 3.395 1.72
Expected dividend yield - -
</TABLE>
F-24
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS (continued)
The Company's pro forma information under SFAS 123 for the years ended
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
As Pro As Pro
reported forma reported forma
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net loss $ (898,570) $(994,353) $(14,675,433) $(14,841,336)
Preferred stock dividends (812,377) (812,377) (815,071) (815,071)
--------- --------- --------- ---------
Net loss available
to common stockholders $(1,710,947) $(1,806,730)$(15,490,504) $(15,656,407)
=========== ========= ========== ==========
Net loss per share:
Basic and diluted $ (.11) $(.11) $ (2.15) $ (2.17)
======= ===== ======= =======
</TABLE>
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 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 1999 awards in 1999 and the
vesting of 1995 through 1998 awards in 1998, in accordance with SFAS
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.
F-25
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
13. INCOME TAXES
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $4,288,000 available to offset future
taxable income. Such carryforwards, which may provide future tax
benefits, expire in the years 2008 through 2019. Research tax credits of
$187,000 expire in the years 2008 through 2018. During the years 1993,
1995 and 1998 changes in ownership of greater than 50% occurred as a
result of the Company issuing equity securities. As a result, a substantial
limitation may be imposed upon the future utilization of its net operating
loss carryforwards.
For financial reporting purposes, a valuation allowance of $4,288,000
has been recognized to offset the net deferred tax asset related to these
carryforwards because realization of the benefit is considered unlikely.
Significant components of the Company's deferred income taxes are as
follows at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards $4,172,000 $3,751,000
Other 148,000 148,000
---------- ----------
Deferred tax assets 4,320,000 3,899,000
Deferred tax liabilities - equipment (32,000) (4,000)
--------- ---------
4,288,000 3,895,000
Less: valuation allowance (4,288,000 (3,895,000)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
</TABLE>
The net change in the valuation allowance for the years ended December
31, 1999 and 1998 was an increase of approximately $421,000, and a
decrease of approximately $261,000, respectively.
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 primarily to the non-deductible items and increases in the
valuation allowance in 1999 and 1998, resulting in no tax benefit
reported in any of those years.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Tax at statutory rate (34.00)% (34.00)%
State taxes, net of federal benefit (3.63)% (3.63)%
Non-deductible items (18.00)% 35.53 %
Change in valuation allowance 60.47 % .67 %
Other (4.84)% (1.43)%
-------- --------
- -
======== ========
</TABLE>
F-26
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office and lab facility and certain equipment
under operating leases or a license agreement with remaining terms as of
December 31, 1999, ranging from three to eight months at an average
monthly rate of $1,788. All leases have remaining terms of less than one
year.
Rent expense under operating leases was $120,868 and $66,319 for the
years ended December 31, 1999 and 1998, respectively.
Employment Agreements
On August 25, 1998, the board of directors issued a memorandum to the
Chief Executive Officer, President and Chief Financial Officer of the
Company ("CEO"), outlining, in general, the terms of his employment
effective as of September 1, 1998. The memorandum provides for an
initial base salary of $130,000, which subsequently increased to
$150,000, and may increase up to $200,000 in a series of stepped
increments upon the achievement of specified milestones. In May 1999,
the CEO voluntarily reduced his base annual salary to $126,000 in order
to reduce the Company's expenses. The memorandum also provides for
the grant to the CEO of a ten-year option to purchase 500,000 shares of
the Company's common stock at the stock price at the close of trading on
August 25, 1998, which vested based on the achievement of specific
milestones set by the board of directors. The grant was subject to an
increase in the number of shares available for issuance under the
Company's stock option plan sufficient to cover the grant, which
occurred in the year ending December 31, 1999. In the event that the
CEO's employment is terminated without "cause" before three years, he
is entitled to severance of six months' salary, subject to his mitigation of
such payment by seeking other employment. All of his stock options will
vest immediately and will remain exercisable for the original term of the
option in the event his employment is terminated due to an acquisition by
merger with a third party that he has not recommended and/or approved.
F-27
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES (continued)
As part of the reorganization transactions, the Company entered into an
employment agreement with the former Chief Executive Officer and
President (the "President") of Gemini, in August of 1998, for a term
expiring in August of 2001. This agreement was cancelled during the
year ended December 31, 1999 (see below).
Contingencies and 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 Company employees. They also alleged
the Company was involved 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,
disengorgement 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. The Company and its
competitor have negotiated a settlement in principle. While no formal
settlement agreement has been executed, the Company has recorded a
liability of $50,000 in connection with this litigation.
On July 14, 1998, a former employee of the Company filed a complaint
alleging failure by the Company to make payments of $20,000 due to
him under an agreement pursuant to which the former employee and the
Company had agreed to the terms of the termination of their
employer-employee relationship. In December 1998, the former
employee and the Company entered into a settlement agreement under
which the Company is obligated to pay $16,500 in monthly installments
of $1,500 beginning on December 1, 1998. At December 31, 1999, the
settlement agreement had been paid in full.
On September 17, 1999, the Company settled pending litigation instituted
by the Company against the former President of Gemini (the former
"President"). As part of the settlement agreement, 950,000 shares were
issued with a market value of $209,000 in exchange for 6,000,000
partnership units in Gemini. As settlement on the former President's
employment agreement, payments totalling $40,000 were to be made in
monthly installments of $5,000 each, commencing with the signing of
the settlement agreement and continuing through June 1, 2000.
Additionally, two issuance of stock are to be made on May 14, 2000 and
May 16, 2001. The two issuances will have a total value of $242,000.
The number of shares issued will be based on the higher of $.5022 per
share (the average blended per share price paid by Elan International for
its common stock investment, or the average bid market price at the close
of business on the 20 consecutive trading days immediately preceding
each issuance date, minus any amounts earned by the former President from
other employment or third party consulting services performed during
the period from the date of the agreement until May 16, 2000 and from
May 17, 2000 to May 16, 2001. The Company recorded compensation
expense to account for this transaction at December 31, 1999, and
additionally reserved 481,879 shares for issuance.
F-28
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES (continued)
In July 1999, Copelco Credit Corporation filed suit against the Company
alleging breach of lease agreement in connection with a copier. The
plaintiff is seeking to accelerate all sums due under the lease agreement.
Management estimates that the loss that could result from an unfavorable
outcome of this litigation is approximately $50,000, and a liability in that
amount was accrued for the year ended December 31, 1999.
F-29
<PAGE>
Item 13. Exhibits and Reports on Form 10-KSB
(a) The following exhibits are filed as part of this Annual Report
on Form 10-KSB:
Number Description of Exhibit
- ------ ----------------------
2.4.4 Amendment to Master Agreement between Healthtech
Stockholders and Pre-Closing EPI Stockholders
24.1 Power of Attorney (1)
- -----------
(1) Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB dated April 18, 2000 and incorporated by reference
herein.
<PAGE>
Electropharmacology, Inc.
In accordance with the Exchange Act, this Amendment No. 1 to the 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.
ELECTROPHARMACOLOGY, INC.
BY: /S/ Arup Sen
Arup Sen
Chairman of the Board, Chief
Executive Officer, President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the annual report on Form 10-KSB has been signed by the following
persons in the capacities indicated on May 19, 2000.
Signatures Title
---------- -----
/s/ Arup Sen Chairman of the Board
______________________________ Chief Executive Officer, Chief
Arup Sen Financial Officer and President
__________*___________________ Director
Murray Feldman
__________*___________________ Vice Chairman of the Board
Richard Kneipper
______________________________ Director
Bernard Carrico
______________________________ Director
Stephen Seiler
* The undersigned, by signing his or her name hereto, does sign and
execute this Amendment No. 1 to the Form 10-KSB pursuant to the Powers of
Attorney executed on behalf of the above-named officers and directors and
contemporaneously filed herewith with the Securities and Exchange Commission.
By: /s/ Arup Sen
Arup Sen
Attorney-in-fact
<PAGE>
Exhibit 2.4.4
To: Murray Feldman
Norton Herrick
James Kaput
David Saloff
Richard Kneipper
From: Arup Sen
Date: March 29, 2000
RE: Amendment to the Master Agreement dated as of June 28, 1998 by and
between each addressee above and Electropharmacology, Inc. (the
"Master Agreement").
As I previously apprised you, the Board of Directors of the Company has met and
considered the request of certain of the parties to the Master Agreement that
the Master Agreement be dissolved due to the desire of these individuals to sell
shares which are subject to the voting provisions of the Agreement until August
24, 2000. As you are aware, the Company needs to obtain equity financing over
the next several months in order to survive. Accordingly, in its best judgment,
the Board has recommended, and those members of the Board of the Directors who
are parties to the Master Agreement have also agreed, that the voting provisions
of the Master Agreement be waived by each party as to 160,000 shares of Company
common stock held by each of the other parties so that each party has the
ability to sell up to 160,000 shares of the Company's common stock through
August 23, 2000. The remaining shares held by each party will be subject to
the voting provisions of the Agreement until August 24, 2000.
Please indicate your concurrence with the foregoing amendment to the Agreement
by signing in the indicated space below and returning the executed copy to the
Company at its fax number of 1-904-462-0985.
__/s/ Murray Feldman__________ __/s/ Norton Herrick__________
Murray Feldman Norton Herrick
__/s/ James Kaput_____________ __/s/ Ddavid Saloff___________
James Kaput David Saloff
__/s/ Richard Kneipper________ __/s/ Arup Sen________________
Richard Kneipper Arup Sen
