UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended: December 31, 2001
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _________________ to
_______________.
Commission file number: 0-26520
NEOPROBE CORPORATION
--------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 31-1080091
--------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
425 Metro Place North, Suite 300, Dublin, Ohio 43017-1367
------------------------------------------------ -------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (614) 793-7500 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
--------------------------------------------------------------------------------
(Title of Class)
Rights to Purchase Series A Junior Participating Preferred Stock
--------------------------------------------------------------------------------
(Title of Class)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein and no disclosure will 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 aggregate market value of shares of common stock held by non-affiliates of
the registrant on March 1, 2002 was $14,816,394.
The number of shares of common stock outstanding on March 1, 2002 was 36,450,067
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
DEVELOPMENT OF THE BUSINESS
Neoprobe Corporation (Neoprobe, the Company or we) is a biomedical technology
company that provides innovative surgical and diagnostic products that enhance
patient care by meeting the critical decision-making needs of healthcare
professionals. Neoprobe was originally incorporated in Ohio in 1983 and
reincorporated in Delaware in 1988. Our executive offices are located at 425
Metro Place North, Suite 300, Dublin, Ohio 43017-1367. Our telephone number is
(614) 793-7500.
Through most of its history, Neoprobe has devoted substantially all of its
efforts and resources to the research and clinical development of innovative
systems for the intraoperative diagnosis and treatment of cancers. As we
assessed our business during early 2001, however, it became evident that we
needed to take steps to expand our product portfolio. Following our assessment,
we evaluated a variety of opportunities to acquire or license various medical
device products that were primarily, but not exclusively, in the oncology field.
In September 2001, we announced that we had reached an agreement in principle to
acquire Biosonix, Ltd., located in Kfar Malal, Israel. In February 2002,
Biosonix Ltd. changed its name to Cardiosonix Ltd. (Cardiosonix). Cardiosonix is
developing and commercializing a unique line of blood flow measurement devices
for a variety of diagnostic and surgical applications. We completed the
acquisition on December 31, 2001. The decision to expand beyond our product
focus on oncology was based on our belief that the technology platform
underlying the Cardiosonix line of products has tremendous market potential and
is very synergistic in a number of ways with our gamma detection device product
line. We intend to take advantage of those synergies in the development,
regulation and manufacture of Cardiosonix' devices. We believe that the path of
market adoption for the Cardiosonix devices will be similar to the path we have
experienced with our gamma detection devices.
Although we have expanded our strategic focus to include blood flow medical
devices, we intend to continue many of the strategies outlined in prior years
related to the internal development of gamma detecting medical devices and to
continue promoting development of our other complementary technologies through
strategic partnerships and alliances. Our primary goals are to continue to
maximize the market potential of the current gamma detection product line and to
position Cardiosonix' blood flow products as leaders in the measurement of blood
flow in both clinical and surgical settings.
OUR TECHNOLOGY
GAMMA DETECTION DEVICES
Through 2001, substantially all of our revenue has been generated from the sale
of a line of gamma radiation detection instruments used intraoperatively by
surgeons in the diagnosis and treatment of cancer and related diseases. Our
currently marketed line of gamma detection systems has been cleared by the U.S.
Food and Drug Administration (FDA) and other international regulatory agencies
for marketing and commercial distribution throughout most major global
commercial markets.
Our patented gamma detection systems consist of hand-held detector probes and a
control unit. The detection device in the tip of the probe is a highly
radiosensitive crystal that relays a signal through a preamplifier to the
control unit to produce both a digital readout and an audible signal. The
detector element fits in a housing approximately the size of a pocket
flashlight. The neo2000(R) Gamma Detection System, originally released in 1998,
is the third generation of the Company's gamma detection systems. The neo2000 is
designed as a platform for future growth of the Company's instrument business.
The neo2000 is software upgradeable and is designed to support future surgical
targeting probes without the necessity of costly remanufacture.
2
Surgeons are using Neoprobe's gamma detection systems in a surgical application
referred to as sentinel lymph node biopsy (SLNB) or intraoperative lymphatic
mapping (lymphatic mapping or ILM). ILM helps trace the lymphatic patterns in a
cancer patient to evaluate potential tumor drainage and cancer spread in
lymphatic tissue. The technique does not detect cancer; rather it helps surgeons
identify the lymph node(s) to which a tumor is likely to drain and spread. The
lymph node(s) (sometimes referred to as the "sentinel" node) may provide
critical information about the stage of a patient's disease. ILM begins when a
patient is injected at the site of the main tumor with a commercially available
radioactive tracing agent. The agent is intended to follow the same lymphatic
flow as the cancer would if it had metastasized. The surgeon may then track the
agent's path with a hand-held gamma-radiation-detection probe, thus following
the potential avenues of metastases and identifying lymph nodes to be biopsied
for evaluation and determination of cancer spread.
Numerous clinical studies, involving a total of nearly two thousand patients,
and published in peer-review medical journals such as Oncology (January 1999)
and The Journal of The American College of Surgeons (December 2000), have
indicated ILM is approximately 97% accurate in predicting the presence or
absence of disease spread in melanoma or breast cancers. Consequently, it is
estimated that more than 80% of women who would otherwise have undergone full
axillary lymph node dissections (ALND), involving the removal of as many as 20 -
30 lymph nodes, might be spared this radical surgical procedure if the sentinel
node was found to be free of cancer. Surgeons practicing ILM have found that the
Company's gamma-detecting probes are well suited to the procedure.
Lymphatic mapping has become the standard of care for treating patients with
melanoma at many institutions. For breast cancer, the technique appears to be
moving toward standard of care status in major cancer centers and is the subject
of national and international clinical trials, including studies sponsored by
the U.S. Department of Defense and the National Cancer Institute, and the
American College of Surgeons. While we believe many thought leaders in surgical
oncology have adopted lymphatic mapping, we believe the rate of growth in the
application of ILM may be slowing, thus affecting the demand for our gamma
detection devices. We believe this is due to a number of surgeons delaying
adoption of lymphatic mapping pending the outcome of these important trials. We
are also concerned that the completion of these trials may be delayed because
some patients participating in clinical trials may perceive that if they are
assigned to a particular study's control group and receive a full ALND, that
they may not be receiving the best and latest care. We continue to monitor these
trials and we continue to work with our marketing partners and thought leaders
in the surgical community to set up and support training courses internationally
for lymphatic mapping. Courses showcasing the Company's instruments have been
held at many nationally and internationally renowned cancer-specializing and
teaching institutions. These courses appear to continue to positively impact the
adoption of lymphatic mapping, albeit not as rapidly as we would like to see.
In addition to lymphatic mapping, surgeons are investigating the use of
Neoprobe's device for other gamma guided surgery applications, such as
evaluating the thyroid function, in determining the state of disease in patients
with vulvar and penile cancers, and in SLNB in gastric and non-small cell lung
cancers.
Neoprobe's ILM business strategy for 2002 centers around two primary objectives:
increasing the Company's market position in device sales for intraoperative
lymphatic mapping and other gamma guided surgery applications by expanding and
improving its ILM devices, and increasing awareness of independent research
being done to expand the application of ILM to other indications. To that end,
we are working with our marketing partners to commercialize a laparoscopic gamma
probe during 2002 and promote its clinical evaluation in gastric and other
cancers.
BLOOD FLOW DEVICES
Accurate blood flow measurement is required for various clinical needs: for
real-time monitoring, for intra-operative quantification, for non-invasive
diagnostics and for evaluation of cardiac function. Currently, the medical
community has no simple, immediate, real-time means to quantify the adequacy of
organ
3
perfusion, that is, the direct measurement of blood flow. Devices exist that
visually show perfusion of a target organ. We are unaware, however, of any
device that provides an accurate, real-time measurement of blood flow in as
many applications without having to isolate target vessels or conduct other
invasive procedures.
In addition, blood flow velocity measurements are often confused with volume
blood flow. These two variables, however, are normally different parameters that
respond differently to pathological conditions and provide different data. Blood
flow velocity is used primarily for determination of the existence of a stenosis
(narrowing or obstruction) in the vascular surgery setting, while the
applications of blood flow volume have potential impact across a broad range of
medical disciplines.
Cardiosonix is developing and commercializing a line of products that employ a
unique Angle-independent Doppler Blood Flow (ADBF(TM)) technology which allows
for angle-independent blood flow volume and velocity readings. Most current
applications of Doppler technology to blood flow measurement are angle-dependent
and therefore more prone to estimation errors and potential inaccuracy. ADBF
eliminates calculation estimation and permits real-time measurement of volume
blood flow. The ADBF technology utilizes a special application of the Doppler
method through simultaneous application of a combination of narrow beams with a
known angle between them. Thus, based on trigonometric and Doppler
considerations, the angle of insonation can be obtained, resulting in accurate,
angle-independent blood flow velocity measurements that do not require the need
to use complicated imaging systems. In order to obtain high resolution velocity
profiles, multi-gated pulse wave (PW) Doppler is utilized. With this method,
specific sample volumes along the ultrasound beam can be separately evaluated,
and the application of flow/no flow criterion can be applied. The Cardiosonix
technology applies special use of digital Doppler technology, which with the
digital signal processing (DSP) power of the system allows hundreds of sample
volumes to be sampled and processed simultaneously, thus providing high
resolution velocity profiles for both angle and vascular diameter calculations,
and subsequently volume blood flow measurements. At present, Cardiosonix has
three products in the late stages of development and pre-commercialization that
are designed to provide blood flow measurement and cardiac output information to
physicians in cardiac/vascular surgery, neurosurgery and critical care settings.
FLOWGUARD(TM) is designed to allow neurosurgeons and neurologists, as well as
intensive care unit or emergency room physicians, to non-invasively measure
global cerebral blood flow in a simple and real-time manner. FlowGuard consists
of an angle-independent ultrasound probe that obtains signals directly from the
carotid artery. FlowGuard is designed primarily for use in monitoring head
trauma patients in neuro-intensive care units and emergency rooms. Continuous
blood flow measurements minimize the risk of brain impairment. Neurological
deficit while assessing brain perfusion is not trivial, however. We are unaware
of any measurement system on the market today that provides real-time, bedside,
non-invasive, continuous, direct and accurate measurements of complete
hemodynamic parameters including blood flow. Other modalities that do monitor
capabilities of the brain are significantly more invasive, expose the patient to
incremental risk or are inherently complicated, offering only indirect
estimation of perfusion conditions. Some medical devices use an estimated
measurement of blood flow velocity to create an index of blood flow but do not
account for instantaneous changes in vascular cross-sectional area. In most
devices, moreover, blood flow velocity is angle-dependent and cannot be measured
accurately.
INFLOW(TM) (Investigational) is being designed to permit cardiovascular surgeons
and assisting physicians to obtain intraoperative volume blood flow readings in
various targeted blood vessels within seconds. The system consists of an
angle-independent ultrasound probe and digital numerical displays of blood flow
rate. Thus, the surgeon obtains immediate, real-time and quantitative reading
while focused on the target vessel. Quantifying blood flow is crucial during
anastomostic or other bypass graft procedures to determine adequate blood flow.
Measurement is advisable whenever a blood vessel is exposed intra-operatively;
but not generally followed in current practice.
Ultimately, in practice, the surgeon generally resorts to using his eyes and
fingers in a process called finger palpation to qualitatively assess vessel
perfusion. InFlow offers the surgeon immediate and simple quantitative
assessment of blood flow in multiple blood vessels and grafts. The primary
advantage of finger palpation is that it is fast and simple; the disadvantages
are that it requires a good deal of
4
experience, it is difficult to perform in vessels embedded in tissue, it can
become difficult to interpret in large vessels, and it permits only a very
qualitative and subjective assessment. A significant partial occlusion (or even
a total occlusion) will result in a significant vessel "inflation" and strong
palpations that could mislead the surgeon. Instead of such a subjective clinical
practice that is highly experience-dependent, the InFlow is designed to allow
the surgeon to rely on more evidence-based medicine. In addition, InFlow allows
for immediate cardiac output assessment during cardiac surgery, which is
particularly crucial when the patient is taken off the pump and returned to
beating heart condition. Neoprobe believes that InFlow represents the first
immediate means to directly measure blood flow intraoperatively. Other
technologies that attempt to measure intraoperative blood flow directly are
often invasive and impractical when multiple vessel measurements are required.
They are, therefore, not used routinely in the operating room, so surgeons most
often resort to using their eyes and fingers to qualitatively measure vessel
perfusion.
BIOFLOW(TM) (Investigational) is being designed as a transesophageal cardiac
function monitor for measuring blood flow in the descending aorta in critical
care settings. The system employs a special transesophageal catheter for
quantitative assessment of blood flow in the descending aorta for cardiac output
calculations. The system is designed for bedside use in intensive care settings.
Cardiac output and function monitoring is essential in critical care and trauma
patients. The procedure of transesophageal monitoring is a well-recognized
clinical modality, particularly for echocardiography of the heart. Only highly
invasive methods of cardiac output via thermodilution techniques are currently
available, or indirect and non-invasive methods such as bioimpedance with an
unknown degree of clinical significance.
Currently, the FlowGuard device has received CE mark regulatory clearance for
marketing in the European Union (EU) as well as FDA 510(k) clearance for
marketing in the United States. The InFlow and BioFlow are not currently cleared
for marketing in any market.
Our strategy related to Cardiosonix products for 2002 has three primary
objectives:
- to aggressively pursue regulatory clearance for the rest of Cardiosonix'
current products in the U.S. and EU;
- to place devices with thought leaders in the neurosurgical and cardiac
arenas for evaluation in preparation for full scale commercial launch; and,
- to initiate the first commercial sale of Cardiosonix products in the EU and
the U.S. in the fourth quarter of 2002.
There can be no assurance, however, that any of the Cardiosonix products will
achieve regulatory approval, or if approved, that such products will achieve
market acceptance. See also Risk Factors.
THE LYMPHOSEEK(TM) PROCEDURAL PRODUCT
Our gamma detection devices are primarily capital in nature; as such, they
generate revenue for the Company only on the initial sale. To complement the
one-time revenue stream related to capital products, we are developing recurring
revenue or "procedural" products that would generate revenue based on each
procedure in which they were used. To that end, we have completed an exclusive
worldwide license agreement with the University of California, San Diego (UCSD)
for a proprietary compound we refer to as Lymphoseek. We believe Lymphoseek, if
proven effective, could be used as a lymph node locating agent in ILM
procedures. Neoprobe and UCSD have completed preclinical evaluation of
Lymphoseek and are nearing completion of a Phase I breast trial in humans. The
initial Phase I breast study of Lymphoseek was funded through a research grant
from the Susan G. Komen Breast Cancer Research Foundation. In addition, UCSD
initiated a Phase I clinical trial during the fourth quarter of 2001 in melanoma
patients funded through a research grant from the American College of Surgeons.
We are working with UCSD to present results from the Phase I breast trial at an
appropriate medical venue such as the Spring 2002 meeting of the Society of
Nuclear Medicine. Subsequently, we will seek potential strategic partners to
assist in the further development and
5
commercialization of Lymphoseek. There can be no assurance, however, that any
such products will achieve regulatory approval, or if approved, that such
products will achieve market acceptance. See also Risk Factors.
THE RIGS TECHNOLOGY
The Company's radioimmunoguided surgery (RIGS) system is an investigational
technology that combines our patented hand-held gamma radiation detection probe,
proprietary disease-specific radiolabeled cancer targeting agents, and a
patented surgical method to provide surgeons with real-time information to
locate tumor deposits that may not be detectable by conventional methods, and to
assist in more thorough removal of the cancer. Before surgery, a cancer patient
is injected with one of the targeting agents, which circulates throughout the
patient's body and binds specifically to cancer cell antigens or receptors.
Concentrations of the targeting agent are then located during surgery by
Neoprobe's gamma-detecting instrument, which emits an audible tone to direct the
surgeon to targeted tissue.
Neoprobe conducted several clinical trials related to the first generation drug
of its RIGS technology in past years, but was unsuccessful in gaining the
necessary regulatory approvals. Since discontinuing internal development efforts
in 1998, we have been working to secure a partner to assume financial and
regulatory responsibility for the ongoing development of the RIGS technology.
During 2000, we executed and amended an agreement with OncoSurg, Inc. (OncoSurg,
formerly NuRIGS Ltd.), that provided OncoSurg with an option exercisable through
December 31, 2001 to license the RIGS technology for use in the diagnosis and
treatment of colorectal cancer.
During 2001, OncoSurg conducted pre-clinical testing and sponsored a Phase I
physician's Investigational New Device (IND) clinical trial for colorectal
cancer using a second-generation humanized version of our RIGS antibody.
OncoSurg did not exercise its option as of December 31, 2001 and is in the
process of winding down its operations due to a lack of funding which we believe
is unrelated to the pending clinical results of the current Phase I trial.
Neoprobe understands, however, that the physician-IND researchers intend to
complete the Phase I trial during second quarter of 2002. Following completion
of the trial, Neoprobe intends to evaluate the results and investigate
additional interest in completing the next stage of trials. At this time, we
cannot be assured that any potential development partner will have a continuing
interest in developing the RIGS technology. In addition, should such a partner
ultimately decide to move forward with development of a RIGS product and be able
to reach an agreement satisfactory to the Company, we believe that it would take
at least four to five years to complete development, regulatory and
commercialization activities for a RIGS product. There can be no assurance,
however, that the Company will be able to complete license agreements with
another development partner for the RIGS technology on terms acceptable to the
Company, or at all. Also, there can be no assurance that the regulatory
authorities will approve our RIGS products for marketing, or that any such
products will be successfully introduced or achieve market acceptance. See also
Risk Factors.
ACTIVATED CELLULAR THERAPY
Neoprobe has performed early stage research on another technology platform,
activated cellular therapy (ACT), based on work originally done in conjunction
with the RIGS technology. ACT is intended to boost the patient's own immune
system by removing lymph nodes identified during surgery and then, in a cell
processing technique, activating and expanding "helper" T-cells found in the
nodes. Within 10 to 14 days, the patient's own immune cells, now activated and
numbering more than 20 billion, are infused into the patient in an attempt to
trigger a more effective immune response to the cancer.
During the second quarter of 2001, the Company announced a research
collaboration with Aastrom Biosciences (Aastrom). This research is intended to
determine whether Aastrom's Replicell(TM) system is able to duplicate cell
expansion results experienced in previous Phase I clinical testing of Neoprobe's
ACT technology for oncology. Neoprobe and Aastrom are collaborating in the
preparation of a protocol for the evaluation of the Replicell system in the ACT
process. We experienced delays in completing the evaluation in 2001 due to a
lack of available tissue for testing purposes. We are investigating alternative
tissue sources and believe that we will be able to complete the Replicell
evaluation during the third quarter
6
of 2002. The Company believes that positive results from this evaluation, if
they occur, would provide a more effective and efficient delivery mechanism for
ACT and potentially reinvigorate interest in the underlying ACT technology
platform. There can be no assurance, however, that the evaluation will be
completed within the stated time frame, or ever, or that results from the
evaluation will support further research or ultimately result in a marketable
product. If the evaluation is successful, Neoprobe intends to identify a
strategic partner to fund further development or out-license the technology, as
appropriate. We do not know if a partner will be identified on a timely basis,
on terms acceptable to us, or at all. Neoprobe does not intend to fund any
significant ACT-related research and development without a partner. There can be
no assurance that any ACT products will be successfully developed, tested or
licensed, or that any such products will gain market acceptance. See also Risk
Factors.
MARKET OVERVIEWS
The medical device marketplace is a fast growing market. Medical Device &
Diagnostic Industry magazine reports an annual medical device and diagnostic
market of $75 billion in the U.S. and $169 billion internationally.
CANCER MARKET OVERVIEW
Cancer is the second leading cause of death in the U.S. and Western Europe and
is responsible for over half a million deaths annually in the U.S. alone. The
National Institutes of Health (NIH) estimate the overall annual costs for
cancer, the primary focus of the Company's products, at $107 billion: $37
billion for direct medical costs, $11 billion for indirect morbidity, and $59
billion for indirect mortality. The Company's line of gamma detection systems
are currently used primarily in the application of ILM in melanoma and breast
cancer.
NIH has estimated that breast cancer will annually affect approximately 500,000
women in North America, Western Europe, and other major economic markets. Breast
cancer is the leading cause of death from cancer in the United States among the
30 million women between the ages of 40 and 55 and the second leading cause of
death from cancer among all women. According to the American Cancer Society,
each year about 200,000 new cases of breast cancer are diagnosed and 50,000
women die annually from the disease. The incidence of breast cancer increases
with age, rising from about 100 cases per 100,000 women at age 40 to about 400
cases per 100,000 women at age 65. Thus, we believe that the significant aging
of the population, combined with improved education and awareness of breast
cancer and diagnostic methods, will lead to an increased number of breast cancer
surgical diagnostic procedures.
Approximately 80% of the patients diagnosed with breast cancer undergo a lymph
node dissection (either ALND or SLNB) to determine if the disease has spread.
While many breast cancer patients are treated in large cancer centers or
university hospitals, regional and/or community hospitals currently treat the
majority of breast cancer patients. Over 10,000 hospitals are located in the
markets targeted for Neoprobe's breast cancer ILM products. While we are aware
of no published statistics on the number of institutions that currently are
using gamma detection devices in ILM, we believe based on our understanding of
Ethicon's success rate in competitive bids, that approximately fifty percent of
the total potential market for gamma detecting devices remains to be penetrated
at this time. However, if the potential of Lymphoseek as a radioactive tracing
agent is ultimately realized, it has the potential to address not only the
current breast and melanoma markets on a procedural basis, but to also assist in
the clinical evaluation and staging of solid tumor cancers and expanding ILM to
additional indications, such as gastric, non-small cell lung and other solid
tumor cancers.
BLOOD FLOW MARKET OVERVIEW
Cardiovascular disease is the number one killer of men and women in the United
States and in a majority of countries in the rest of the world that track such
statistics. In the United States alone, the Center for Disease Control (CDC)
estimated that there were 60 million physician office visits and over 6 million
outpatient department visits in 1999 with a primary diagnosis of cardiovascular
disease. The CDC has registered over 6.1 million surgical procedures annually in
the United States that directly involve
7
cardiovascular circulation. The Company, its competitors and other industry
analysts generally estimate the rest of the world's incidence of such modalities
at roughly twice U.S. estimates.
The American Heart Association estimates the total cost of cardiovascular
diseases and stroke in the United States will exceed $300 billion in 2002. A
substantial portion of these expenditures is expected to be for non-invasive
image and intravascular examination. In 1999, these modalities, employed in
approximately 99 million diagnostic procedures, generated more than $2.4 billion
worldwide in product sales. Industry analysts have also estimated the worldwide
market for multi-functional patient monitoring equipment totaled $6.6 billion in
1999. This market is forecasted to grow at a compound annual rate of 11.5% over
the next five years.
We have identified three distinct markets within the hospital setting for
Cardiosonix' products: non-invasive diagnostics (FlowGuard), intraoperative
assessment (InFlow) and critical care monitoring (BioFlow). The American
Hospital Association has estimated there are over 6,000 hospitals in the U.S.,
over half of which house one hundred beds or more (i.e., large hospitals). The
American Association of Operating Room Nurses has estimated there are
approximately 30,000 operating rooms in the U.S. Based on these estimates and
information obtained from industry sources and data published by our competitors
and other medical device companies, we estimate that the worldwide totals for
hospitals and operating rooms to be approximately two to two-and-a-half times
the U.S. totals. Based on the above number of institutions, assuming the larger
hospitals could use two or more systems of each type to support their
activities, and assuming we are able to achieve market prices that are
comparable to what our competitors are achieving (currently averaging $25,000 to
$30,000 per system), we believe the worldwide market potential for blood flow
measurement products, such as those being developed by Cardiosonix, to be more
than $1.5 billion. We believe that gaining even a modest share of this market
would result in significant annual revenues for the Company. There can be no
assurance, however, that Cardiosonix products will achieve market acceptance and
generate the level of sales or prices anticipated.
MARKETING AND DISTRIBUTION
GAMMA DETECTION DEVICES
We began marketing the current generation of our gamma detection systems, the
neo2000 in October 1998. Since October of 1999, our gamma detection systems have
been marketed and distributed throughout most of the world through Ethicon
Endo-Surgery, Inc. (Ethicon), a Johnson and Johnson company. In Japan, however,
we market our products through a pre-existing relationship with Century Medical,
Inc. (Century).
The heart of the neo2000 system is a control unit that is software-upgradeable,
permitting product enhancements without costly remanufacturing. Since the
original launch of the neo2000 system, we also have launched a new version of
our 14mm reusable probe optimized for lymphatic mapping procedures, and
introduced a line of reusable, sterilizable BlueTip(TM) probes and accompanying
disposable handles to provide users with a variety of probe options. The Company
intends to continue developing additional ILM-related probes and instrument
products in cooperation with Ethicon to continue its leadership position in the
ILM field.
Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Neoprobe and its marketing partners
have established relationships with leaders in the ILM surgical community and
have established and supported training courses internationally for lymphatic
mapping. The Company intends to continue to work with its partners to expand the
number of ILM training courses available to surgeons.
The Company entered into its current Distribution Agreement (the Agreement) with
Ethicon effective October 1, 1999 for an initial five-year term with options to
extend for two successive two-year terms. Under the Agreement, the Company
manufactures and sells its ILM products almost exclusively to Ethicon, who
distributes the products globally. Ethicon agreed to purchase minimum quantities
of the Company's products over the first three years of the five-year original
term of the Agreement and to
8
reimburse the Company for certain research and development costs during the
first three years and a portion of the Company's warranty costs. Ethicon's
minimum purchase and reimbursement commitments are currently expected to be met
and/or expire in the third quarter of 2002. Our Agreement with Ethicon also
contains certain termination provisions and licenses to our intellectual
property that take effect only in the event we fail to supply product, or for
other reasons such as a change of control. See also Risk Factors.
BLOOD FLOW DEVICES
Currently, only one Cardiosonix product, FlowGuard, has regulatory clearance to
be marketed in any market. We are working aggressively to determine the optimal
marketing and distribution for Cardiosonix products. We have also begun working
with key thought leaders in the cardiac and neurosurgical fields in order to
further the clinical evaluation and promote the ultimate acceptance of
Cardiosonix products. Our decisions will be guided by the regulatory pathways to
determine the optimal combination of internal and external resources to meet our
market objectives of commercialization of the Cardiosonix products in the EU and
the U.S. during the fourth quarter of 2002.
MANUFACTURING
GAMMA DETECTION DEVICES
The Company relies on independent contract manufacturers, some of which are
single-source suppliers, for the manufacture of the principal components of its
current line of gamma detection system products. See also Risk Factors. The
neo2000 system is comprised of a software-upgradeable neo2000 control unit, a
hand-held gamma detecting probe and some accessories. The Company currently
markets a 14mm reusable probe and a group of BlueTip reuseable probes that are
used with a disposable handle.
The Company has devoted significant resources to develop production capability
for its gamma detection systems at qualified contract manufacturers. Production
of the neo2000 control unit, the 14mm probe and the BlueTip probes involve the
manufacture of components by a combination of subcontractors, including but not
limited to eV Products, a division of II-VI Corporation (eV); the MedTech Group,
Inc. (MedTech); and UMM Electronics, Inc. (UMM) a Leach Technology Group
company. Currently, the Company has manufacturing and supply agreements with eV
for the production of crystal modules used in the detector probes, with MedTech
for the manufacture of BlueTip probes and sterile disposable handles, and with
UMM for the manufacture of 14mm probes and the neo2000 control unit. The Company
also purchases certain accessories for its line of gamma detection systems from
other qualified manufacturers.
In December 1997, the Company entered into a supply agreement with eV for the
supply of certain crystals and associated electronics to be used in the
manufacture of the Company's proprietary line of hand-held gamma detection
probes. The original term of the agreement expires on December 31, 2002, but may
be automatically extended for an additional three years. The agreement calls for
the Company to purchase minimum quantities of crystals and associated
electronics based on forecasted production needs. eV supplies 100% of the
crystals used by the Company. While eV is not the only potential supplier of
such crystals, any prolonged interruption of this source could restrict the
availability of the Company's probe products, which would adversely affect our
operating results.
In May 1999, the Company entered into a supply agreement with MedTech for the
supply of BlueTip probes and related accessories. The original term of the
agreement expires on December 31, 2003, but may be automatically extended for an
additional three years. The agreement calls for the Company to deliver annual
product forecasts to MedTech and for the Company to purchase at least 75% of
forecasted product demand on a quarterly basis. The agreement may be terminated
by the Company upon twelve months notice or in the event of failure to supply,
or by either party due to material breach or by insolvency of the other.
In October 2001, we entered into a manufacturing and supply agreement with UMM
for the exclusive manufacture of our 14mm probe and neo2000 control unit. The
original term of the agreement expires in
9
February 2005 but will be automatically extended for additional one-year periods
unless either party provides written notice of non-renewal at least six months
prior to the end of the then-current term. Either party has the right to
terminate the agreement at any time on six months written notice, or may
immediately terminate the agreement upon a breach by the other. UMM may also
terminate the agreement if the Company's orders for a given product fall below
certain minimum quarterly amounts for two successive quarters.
There can be no assurances that the Company will be able to maintain agreements
with its subcontractors on terms acceptable to the Company, or that the
Company's subcontractors will be able to meet the Company's production
requirements on a timely basis, at the required levels of performance and
quality. In the event that any of the Company's subcontractors is unable or
unwilling to meet the Company's production requirements, there can be no
assurance that an alternate source of supply could be established without
significant interruption in product supply or without significant adverse impact
to product availability or cost. Any significant supply interruption or yield
problems experienced by the Company or its subcontractors would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations until a new source of supply is qualified. See also Risk
Factors.
BLOOD FLOW DEVICES
We do not currently have any long-term arrangements covering the manufacture of
Cardiosonix products. As we move closer to our commercial launch goals later in
2002, we intend to evaluate contract manufacturing options related to the
Cardiosonix products. While we are currently working with a limited number of
manufacturers of components for Cardiosonix products during the development and
prototype stages, we do not believe that we will be subject to significant sole
source supply risks once we reach commercial quantities in manufacturing.
COMPETITION
Neoprobe faces competition from medical product and biotechnology companies, as
well as from universities and other non-profit research organizations in the
field of cancer diagnostics and treatment. Many emerging medical product
companies have corporate partnership arrangements with large, established
companies to support the research, development, and commercialization of
products that may be competitive with those of the Company. In addition, a
number of large established companies are developing proprietary technologies or
have enhanced their capabilities by entering into arrangements with or acquiring
companies with proprietary antibody technology, or other technologies applicable
to the detection or treatment of cancer. Many of the Company's existing or
potential competitors have substantially greater financial, research and
development, regulatory, marketing, and production resources than those of the
Company. Other companies may develop and introduce products and processes
competitive with or superior to those of the Company. See also Risk Factors.
For the Company's products, an important factor in competition may be the timing
of market introduction of its products or those of its competitors' products.
Accordingly, the relative speed with which Neoprobe can develop products,
complete the approval processes and supply commercial quantities of the products
to the market will be an important competitive factor. Neoprobe expects that
competition among products approved for sale will be based on, among other
things, product efficacy, safety, reliability, availability, price, and patent
position.
GAMMA DETECTION DEVICES
With the emergence of ILM, a number of companies have begun to market gamma
radiation detection instruments. Most of the competitive products have been
designed from a nuclear medicine perspective rather than developing products for
the surgeon. The principal competitive product in both the United States and
Europe has been a gamma detection system marketed by US Surgical Corporation, a
subsidiary of Tyco International Ltd. In addition to Tyco's products, we also
compete with products produced by Care Wise Medical Products Corporation, PI
Medical Diagnostic Equipment B.V., Pol.Hi.Tech. Srl and other companies.
10
It is often difficult to glean accurate competitive information within the
lymphatic mapping field, primarily because most of our competitors are either
subsidiaries of a large corporation (i.e., U.S. Surgical) or privately held
corporations, whose sales revenue or volume data is, therefore, not readily
available or determinable. In addition, lymphatic mapping does not currently
have a separate reimbursement code in most healthcare systems. As such,
determining trends in the actual number of procedures being performed is
difficult. We believe, based on our understanding of Ethicon's success rate in
competitive bid situations, that our market share has remained relatively
constant despite the increased competition over the past few years. We have
experienced some erosion in market prices, however. And, as we have discussed,
we also believe that the current plateau in sales is evidence that some
prospective customers are awaiting results of important international clinical
trials. We expect the results from these trials, when announced, will likely
have a positive impact on sales volumes. The Company believes its intellectual
property portfolio will be a barrier to competitive products; there can be no
assurance, however, that competitive products will not be developed and be
successful in eroding our market share or the prices we receive for our gamma
detection devices. See also Risk Factors.
BLOOD FLOW DEVICES
There are several technologies on the market that measure or claim to measure
indices of blood flow. These products can be categorized as devices that measure
blood flow directly and devices that only obtain an estimation of flow
conditions.
Direct Blood Flow Measurement Devices
- Transit Time Ultrasound (TT) flowmetry is the leading modality in the
operating room today. TT systems monitor blood flow invasively, and are
restricted to isolated vessels. They require probe adaptation to the vessel
size, and do not provide additional vascular parameters. The technology
requires the operator to encircle the blood vessel with a probe that
includes two ultrasound transmitters/receivers on one side, and a mirror
reflector on the opposite side of the vessel. By measuring the transit time
of the ultrasound beam in the upstream and downstream directions, volume
blood flow estimates can be evaluated.
- Electromagnetic Flowmeters (EMF) are probably the oldest modality to
quantify blood flow (other than timed collection). These devices monitor
blood flow invasively, are impractical for multiple readings on different
vessels, require precise sizing of probes to blood vessels, and do not
provide additional hemodynamic parameters. The technology requires the
operator to encircle the blood vessel with an electromagnetic probe. The
probe generates an electromagnetic field, and the voltage measured due to
the blood flow is translated into volume flow estimates. In practice,
however, this technology is generally considered outdated.
- Doppler technology has been around for several decades, and is being widely
used in non-invasive vascular diagnostics. Duplex ultrasound systems have
the potential to measure blood flow non-invasively. Duplex systems are
designed for imaging the anatomical severity of pathology. This method is
technician-dependent, cumbersome, not accurate and does not offer
monitoring capabilities. In general, a wave of a specific frequency is
reflected off a moving particle with a new frequency that is proportional
to the velocity of the moving particle. In medical applications, the use of
ultrasound waves is most common. However, Duplex Doppler
11
provides only blood flow velocity rather then volume flow.
Indirect Blood Flow Measurement Devices
- Cardiac Output (CO) Monitors. This includes various means to monitor CO
such as Thermodilution, Bio Impedance, and the Fick Method. These methods
are either invasive or indirect in their measurement. Thermal dilution,
primarily through pulmonary artery catheterization (PAC), is the standard
of care today for cardiac output measurements. This technology is not
applicable to other intraoperative blood flow applications. The patient is
injected with cold saline at a fixed temperature, and a
temperature-sensitive transducer that is placed at the site of interest
(usually the pulmonary artery) measures the time to return to baseline
temperature, which is proportional to the blood flow rate. There are many
limitations to this technology, including the relatively large inaccuracies
of cardiac output measurements, the fact that it is not truly real-time,
and the fact that this method is highly invasive, and is being linked to
increased morbidity and mortality (JAMA, Connors et al., 1996).
- Computed Tomography Magnetic Resonance Imaging and Single Photon Emission
Computerized Tomography techniques show target organ perfusion, but lack
the ability to monitor or to provide real-time information. They are
technician-dependent, impractical for bedside usage and very expensive.
- Laser Doppler Flowmeters monitor skin blood flow non-invasively. They are
applicable only to superficial and tiny vessels and do not provide
additional hemodynamic parameters.
- Transcranial Doppler (TCD) monitors cerebral blood velocity rather than
direct blood flow. TCD is technician-dependent and not applicable to every
patient. TCD is non-invasive and provides continuous measurement of blood
flow velocity in the vessels of the brain.
- Plethysmography indirectly measures an index of blood flow and is limited
primarily to limb assessment. Measurement is dependent upon many factors
and output is accordingly inaccurate.
- Jugular Bulb Saturation measures the efficiency of oxygen use by the brain.
It is invasive, and provides global results.
- NIRS is a non-invasive method utilizing near infrared spectroscopy to
provide regional perfusion in the brain.
Directly Competitive Blood Flow Measurement Devices
Cardiosonix products are designed to address blood flow measurement across a
variety of clinical and surgical settings, and there are a number of companies
already in the marketplace that offer products related to blood flow
measurement. However, most of these products do not directly compete with
Cardiosonix products. The companies that do offer potentially competitive
products are, for the most part, smaller, privately held companies, with which
the Company believes it can effectively compete. Indeed, due to our belief in
the technical superiority of our products, we believe the existence of
competitors will help to educate the marketplace in the importance of blood flow
measurement. As we have discussed, adoption of blood flow monitoring devices for
the measurement of hemodynamic status will likely take an involved education
process as it often involves a change in clinical or surgical management. While
there is not a clear leader in these markets, the following companies compete
most directly with Cardiosonix:
12
- Intraoperative applications: Echocath (Doppler based), Carolina Medical
(EMF), and Transonic Systems and Medi-Stim AS (TT)
- Neurosurgery applications: Hadeco (Doppler based), and DWL and Nicolet
(Transcranial Doppler)
- Critical care monitoring: Deltex and Arrow (Transesophageal Doppler), and
Cardiodynamics (bio-impedence)
PATENTS AND PROPRIETARY RIGHTS
The Company regards the establishment of a strong intellectual property position
in its technology as an integral part of the development process. We attempt to
protect our proprietary technologies through patents and intellectual property
positions, in the United States as well as major foreign markets. Specifically,
Neoprobe's ILM technology is protected by nineteen (19) instrument patents that
have been issued in the United States as well as major foreign markets.
Cardiosonix has applied for patent coverage for the key elements of its ADBF
technology in the EU and in the U.S. These patents are in various stages of
review by the relevant governing bodies.
Lymphoseek is the subject of patent applications in the United States and
certain major foreign markets.
The Company continues to attempt to maintain proprietary protection for the
products related to RIGS and ACT in major global markets such as the U.S. and
the EU, which although not currently integral to the Company's near-term
business plans, may be important to a potential RIGS or ACT development partner.
Certain aspects of Neoprobe's RIGS technology are claimed in the United States
in U.S. Patent No. 4,782,840, which expires in 2005, unless extended.
The patent position of biotechnology and medical device firms, including the
Company, generally is highly uncertain and may involve complex legal and factual
questions. Potential competitors may have filed applications for, or may have
been issued patents, or may obtain additional patents and proprietary rights
relating to products or processes in the same area of technology as that used by
the Company. The scope and validity of these patents and applications, the
extent to which Neoprobe may be required to obtain licenses thereunder or under
other proprietary rights, and the cost and availability of licenses are
uncertain. There can be no assurance that the Company's patent applications will
result in additional patents being issued or that any of the Company's patents
will afford protection against competitors with similar technology; nor can
there be any assurance that any of the Company's patents will not be designed
around by others or that others will not obtain patents that Neoprobe would need
to license or design around. See also Risk Factors.
The Company also relies upon unpatented trade secrets. No assurance can be given
that others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Company's trade
secrets, or disclose such technology, or that the Company can
13
meaningfully protect its rights to its unpatented trade secrets. The Company
requires its employees, consultants, advisers, and suppliers to execute a
confidentiality agreement upon the commencement of an employment, consulting or
manufacturing relationship with Neoprobe. The agreement provides that all
confidential information developed by or made known to the individual during the
course of the relationship will be kept confidential and not disclosed to third
parties except in specified circumstances. In the case of employees, the
agreements provide that all inventions conceived by the individual will be the
exclusive property of Neoprobe. There can be no assurance, however, that these
agreements will provide meaningful protection for Neoprobe's trade secrets in
the event of an unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
Most aspects of the Company's business are subject to some degree of government
regulation in the countries in which its operations are conducted. As a
developer, manufacturer and marketer of medical products, the Company is subject
to extensive regulation by, among other governmental entities, the FDA and the
corresponding state, local and foreign regulatory bodies in jurisdictions in
which the Company sells its products. These regulations govern the introduction
of new products, the observance of certain standards with respect to the
manufacture, safety, efficacy and labeling of such products, the maintenance of
certain records, the tracking of such products and other matters.
Failure to comply with applicable federal, state, local or foreign laws or
regulations could subject the Company to enforcement action, including product
seizures, recalls, withdrawal of marketing clearances or approvals, and civil
and criminal penalties, any one or more of which could have a material adverse
effect on the Company. The Company believes that it is in substantial compliance
with such governmental regulations. However, federal, state, local and foreign
laws and regulations regarding the manufacture and sale of medical devices are
subject to future changes. No assurance can be given that such changes will not
have a material adverse effect on the Company.
For some products, and in some countries, government regulation is significant
and, in general, there is a trend toward more stringent regulation. In recent
years, the FDA and certain foreign regulatory bodies have pursued a more
rigorous enforcement program to ensure that regulated businesses, like the
Company's, comply with applicable laws and regulations. The Company devotes
significant time, effort and expense addressing the extensive governmental
regulatory requirements applicable to its business. To date, the Company has not
received any notifications or warning letters from the FDA or any other
regulatory bodies of alleged deficiencies in the Company's compliance with the
relevant requirements, nor has the Company recalled or issued safety alerts on
any of its products. However, there can be no assurance that a warning letter,
recall or safety alert, if it occurred, would not have a material adverse effect
on the Company.
In the early to mid 1990s, the review time by the FDA to clear medical products
for commercial release lengthened and the number of marketing clearances and
approvals decreased. In response to public and congressional concern, the FDA
Modernization Act of 1997 was adopted with the intent of bringing better
definition to the clearance process for new medical products. While FDA review
times have improved since passage of the 1997 Act, there can be no assurance
that the FDA review process will not continue to delay the Company's
introduction of new products in the U.S. in the future. In addition, many
foreign countries have adopted more stringent regulatory requirements that also
have added to the delays and uncertainties associated with the release of new
products, as well as the clinical and regulatory costs of supporting such
releases. It is possible that delays in receipt of, or failure to receive, any
necessary clearance or approval for the Company's new product offerings could
have a material adverse effect on the Company's business, financial condition or
results of operations.
While the Company is unable to predict the extent to which its business may be
affected by future regulatory developments, it believes that its substantial
experience dealing with governmental regulatory requirements and restrictions on
its operations throughout the world, and its development of new and improved
products, should enable it to compete effectively within this environment.
14
GAMMA DETECTION AND BLOOD FLOW MEDICAL DEVICES
Neoprobe's initial generation gamma detection instruments received 510(k)
marketing clearance from the FDA in December 1986 with modified versions
receiving similar clearances in 1992 through 1997. In 1998, the FDA reclassified
"nuclear uptake detectors" as being exempt from the 510(k) process. However, we
are required to continue to manufacture the devices under quality system
regulations (QSR) and maintain appropriate technical files and quality records.
The Company believes the neo2000 device is exempt from the 510(k) process
because it is substantially equivalent to previously cleared predecessor
devices. The Company's medical devices are regulated in Europe according to the
Medical Device Directive (93/42/EEC). Under this regulation, the Company must
obtain CE Mark status for all products exported to Europe. The Company obtained
the CE Mark for the neo2000 device in January 1999, and therefore, must continue
to manufacture the devices under a quality system compliant to the requirements
of ISO 9001/EN 46001 and maintain appropriate technical files. The Company has
obtained a license to import devices into Canada, and therefore must continue to
manufacture the devices under a quality system compliant to the requirements of
ISO 13485.
Cardiosonix has received initial 510(k) and CE mark clearance to market the
FlowGuard device in the U.S. and EU for intraoperative and non-invasive
applications. We intend to submit additional applications for clearance or
amendments, as appropriate, for the InFlow during 2002 and for the BioFlow in
2003.
PHARMA/BIOLOGIC PRODUCTS (LYMPHOSEEK AND RIGS)
The Company's radiolabeled targeting agents and biologic products, if developed,
would require a regulatory license to market by the FDA and by comparable
agencies in foreign countries. The process of obtaining regulatory licenses and
approvals is costly and time consuming, and the Company has encountered
significant impediments and delays related to its previously proposed biologic
products.
The process of completing pre-clinical and clinical testing, manufacturing
validation and submission of a marketing application to the appropriate
regulatory bodies usually takes a number of years and requires the expenditure
of substantial resources, and there can be no assurance that any approval will
be granted on a timely basis, if at all. Additionally, the length of time it
takes for the various regulatory bodies to evaluate an application for marketing
approval varies considerably, as does the amount of preclinical and clinical
data required to demonstrate the safety and efficacy of a specific product. The
regulatory bodies may require additional clinical studies that may take several
years to perform. The length of the review period may vary widely depending upon
the nature and indications of the proposed product and whether the regulatory
body has any further questions or requests any additional data. Also, the
regulatory bodies will likely require postmarketing reporting and surveillance
programs to monitor the side effects of the products. There can be no assurance
that any of the Company's potential drug or biologic products will be approved
by the regulatory bodies or approved on a timely or accelerated basis, or that
any approvals received will not subsequently be revoked or modified.
In addition to regulations enforced by the FDA, the manufacture, distribution,
and use of radioactive targeting agents, if developed, are also subject to
regulation by the Nuclear Regulatory Commission, the Department of
Transportation and other federal, state, and local government authorities.
Neoprobe or its manufacturer of the radiolabeled antibodies must obtain a
specific license from the Nuclear Regulatory Commission to manufacture and
distribute radiolabeled antibodies, as well as comply with all applicable
regulations. Neoprobe must also comply with Department of Transportation
regulations on the labeling and packaging requirements for shipment of
radiolabeled antibodies to licensed clinics, and must comply with federal,
state, and local governmental laws regarding the disposal of radioactive waste.
There can be no assurance that the Company will be able to obtain all necessary
licenses and permits and be able to comply with all applicable laws. The failure
to obtain such licenses and permits or to comply with applicable laws would have
a materially adverse effect on the Company's business, financial condition, and
results of operations.
15
EMPLOYEES
As of February 22, 2002, Neoprobe had 35 full-time employees, including those of
our newly acquired subsidiary, Cardiosonix. Neoprobe considers its relations
with its employees to be good.
RISK FACTORS
The discussion in this Report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the prospects discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those listed below.
Neoprobe has suffered significant operating losses for several years in its
history and it may not be able to again achieve profitability.
Neoprobe had an accumulated deficit of approximately $118 million as of December
31, 2001. Although Neoprobe was profitable in 2000 and in 2001, it incurred
substantial losses in the years prior to that. The deficit resulted because the
Company expended more money in the course of researching, developing and
enhancing its technology and products and establishing our marketing and
administrative organizations than it generated in revenues. We expect that
Neoprobe's operating expenses will increase substantially in the foreseeable
future primarily related to the development and commercialization of the
Cardiosonix product line. It is likely, as a result, that Neoprobe will sustain
substantial operating and net losses in 2002, and it is possible that Neoprobe
will never be able to sustain or develop the revenue levels necessary to again
attain profitability.
Neoprobe products may not achieve the broad market acceptance they need in order
to be a commercial success.
Widespread use of Neoprobe's gamma detection devices is currently limited to a
surgical procedure (ILM) used in the treatment and diagnosis of two primary
types of cancer: melanoma and breast cancer. The success of Neoprobe's gamma
detection devices greatly depends on the medical community's acceptance of ILM,
and on the Company's devices for use in ILM as a reliable, safe and cost
effective alternative to current treatments and procedures. The adoption rate
for ILM appears to be leveling off and may not meet the Company's expectations.
Although Neoprobe continues to believe that ILM has significant advantages over
other currently competing procedures, broad-based clinical adoption of ILM will
likely not occur until after the completion of ongoing international trials
related to breast cancer. Even if the results of these trials are positive,
there can be no assurance that ILM will attain rapid and widespread acceptance.
The efforts of Neoprobe and its marketing and distribution partner may not
result in significant demand for Neoprobe's products, and the current demand for
Neoprobe's products may decline.
Neoprobe's future success now also greatly depends on the success of the
Cardiosonix product line. Cardiosonix' products have not yet been commercially
sold in any market. The market for these products is in a relatively early stage
of development and may never fully develop as we expect. The long-term
commercial success of the Cardiosonix product line will require widespread
acceptance of our products as safe, efficient and cost-effective. Widespread
acceptance would represent a significant change in medical practice patterns.
Other cardiac monitoring procedures, such as PAC, are generally accepted in the
medical community and have a long standard of use. It is possible that the
Cardiosonix product line will never achieve the broad market acceptance
necessary to become a commercial success.
Neoprobe relies on third parties for the worldwide marketing and distribution of
its gamma detection devices, who may not be successful in selling Neoprobe's
products.
Neoprobe currently distributes its gamma detection devices in most global
markets through two partners who are solely responsible for marketing and
distributing these products. The partners assume direct responsibility for
business risks related to credit, currency exchange, foreign tax laws or tariff
and trade
16
regulation. Neoprobe's current distribution partner for all global markets
except for Japan had agreed to purchase minimum quantities of Neoprobe's
products during the initial three years of the distribution agreement. We expect
these minimum purchases to be fully met through the third quarter of 2002. While
Neoprobe believes that its distribution partner intends to continue to
aggressively market its products, there can be no assurance that the
distribution partner will succeed in marketing Neoprobe's products on a global
basis, or that the partner will make purchases in excess of its minimum purchase
requirements. Neoprobe may not be able to maintain satisfactory arrangements
with its marketing and distribution partner, who may not devote adequate
resources to selling Neoprobe's gamma detection devices. If this happens,
Neoprobe may not be able to successfully market its products, which would
decrease its revenues.
We do not have experience in marketing blood flow products and we have not yet
established strategic relationships with potential marketing partners.
We completed the Cardiosonix acquisition on December 31, 2001, and have not yet
established either an internal sales and marketing infrastructure or secured
third parties to perform these functions on our behalf. We believe the adoption
path for Cardiosonix products will be similar to that of Neoprobe's gamma
detection devices, but we have no direct experience in marketing or selling
blood flow measurement devices. We may not be successful in creating the
necessary infrastructure, either internally or through third parties, to support
the successful marketing and sales of Cardiosonix products.
Neoprobe relies on third parties to manufacture its products and Neoprobe will
suffer if they do not perform.
Neoprobe relies on independent contract manufacturers for the manufacture of its
current line of gamma detection systems. Neoprobe's business will suffer if its
contract manufacturers have production delays or quality problems. Furthermore,
medical device manufacturers are subject to the QSR regulations of the FDA,
international quality standards, and other regulatory requirements. If
Neoprobe's contractors do not operate in accordance with regulatory requirements
and quality standards, Neoprobe's business will suffer. Neoprobe uses or relies
on components and services used in its devices that are provided by sole source
suppliers. The qualification of additional or replacement vendors is time
consuming and costly. If a sole source supplier has significant problems
supplying Neoprobe products, our sales and revenues will be hurt until we find a
new source of supply. In addition, Neoprobe's Distribution Agreement with
Ethicon contains failure to supply provisions, which, if triggered, could have a
significant negative impact on Neoprobe.
Neoprobe may have difficulty raising additional capital, which could deprive it
of necessary resources.
Neoprobe expects to continue to devote substantial capital resources to fund
research and development of additional gamma guided surgery products as well as
its new Cardiosonix products and to maintain existing and secure new
manufacturing capacity. In order to support the initiatives envisioned in the
Company's business plan, Neoprobe may need to raise additional funds through the
sale of assets, public or private financing, collaborative relationships or
other arrangements. Neoprobe's ability to raise additional financing depends on
many factors beyond Neoprobe's control, including the state of capital markets,
the market price of the Company's common stock and the development or prospects
for development of competitive technology by others. Because our common stock is
not listed on a major stock exchange, many investors may not be willing or
allowed to purchase it or may demand steep discounts. The necessary additional
financing may not be available to Neoprobe or may be available only on terms
that would result in further dilution to the current owners of Neoprobe's common
stock. If Neoprobe is unable to raise additional funds when it needs them, it
may have to curtail its operations.
The recent placement of our common stock with Fusion Capital may cause dilution
and the sale of the shares of common stock acquired by Fusion Capital could
cause the price of our common stock to decline.
17
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital II LLC (Fusion) for the issuance and purchase of
our common stock. The stock purchase agreement established an equity line of
credit or draw-down facility for the Company. Under the agreement, Fusion
committed up to $10 million to purchase our common stock over a forty month
period that commences upon the effectiveness of a registration statement to be
filed by the Company for the underlying shares. Once the registration statement
is effective, Fusion may sell none, some or all of the shares of common stock at
any time. Depending upon market liquidity at the time, a sale of shares under
the registration statement could cause the trading price of our common stock to
decline, thus affecting the value that our other stockholders can obtain for
their shares. Additionally, the sale of a substantial number of shares of our
common stock by Fusion, or anticipation of such sales, could make it more
difficult for us to sell equity or equity-related securities in the future at a
time and at a price that we might otherwise wish to effect sales, and we may be
forced to effect such sales at depressed market prices.
Neoprobe may lose out to larger and better-established competitors.
The medical device and biotechnology industries are intensely competitive. Some
of Neoprobe's competitors have significantly greater financial, technical,
manufacturing, and distribution resources as well as greater experience in the
medical device industry than Neoprobe. The particular medical conditions
Neoprobe's product lines can address also can be addressed by other medical
devices, procedures or drugs. Many of these alternatives are widely accepted by
physicians and have a long history of use. Physicians may use Neoprobe's
competitors' products and/or Neoprobe's products may not be competitive with
other technologies. If these things happen, Neoprobe's sales and revenues will
decline. In addition, our current and potential competitors may establish
cooperative relationships with large medical equipment companies to gain access
to greater research and development or marketing resources. Competition may
result in price reductions, reduced gross margins and loss of market share.
Neoprobe's products may be displaced by newer technology.
The medical device and biotechnology industries are undergoing rapid and
significant technological change. Third parties may succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by Neoprobe, or that would make Neoprobe's technology and products
obsolete or non-competitive. Additionally, researchers could develop new
surgical procedures and medications that replace or reduce the importance of the
procedures that use Neoprobe's products. Accordingly, Neoprobe's success will
depend, in part, on its ability to respond quickly to medical and technological
changes through the development and introduction of new products. Neoprobe may
not have the resources to do this. If Neoprobe's products become obsolete and
its efforts to develop new products do not result in any commercially successful
products, Neoprobe's sales and revenues will decline.
Neoprobe is in a highly regulated business and it could face severe problems if
does not comply with all regulatory requirements in the global markets in which
its products are sold.
The FDA regulates Neoprobe's products in the United States. Foreign countries
also subject Neoprobe's products to varying government regulations. In addition,
such regulatory authorities may impose limitations on the use of Neoprobe's
products. FDA enforcement policy strictly prohibits the marketing of FDA
approved medical devices for unapproved uses. Within the European Union,
Neoprobe's products are required to display the CE mark in order to be sold.
Neoprobe has obtained FDA clearance to market its medical device products and
European certification to display the CE mark on its current line of gamma
detection systems and on one of Cardiosonix' products, the FlowGuard. Neoprobe
may not be able to obtain certification for any new products in a timely manner,
or at all. Failure to comply with these and other current and emerging
regulatory requirements in the global markets in which Neoprobe's products are
sold could result in, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant premarket clearance or premarket
approval for devices, withdrawal of clearances or approvals, and criminal
prosecution.
18
Neoprobe's intellectual property may not have or provide sufficient legal
protections against infringement or loss of trade secrets.
Neoprobe's success depends, in part, on its ability to secure and maintain
patent protection, to preserve its trade secrets, and on its ability to operate
without infringing on the patents of third parties. Neoprobe seeks to protect
its proprietary positions by filing United States and foreign patent
applications for its important inventions and improvements. But, domestic and
foreign patent offices may not issue these patents. Third parties may challenge,
invalidate, or circumvent Neoprobe's patents or patent applications in the
future. Competitors, many of which have substantially more resources than
Neoprobe and have made substantial investments in competing technologies, may
apply for and obtain patents that will prevent, limit, or interfere with
Neoprobe's ability to make, use, or sell its products either in the United
States or abroad.
In the United States, patent applications are secret until patents issue, and in
foreign countries, patent applications are secret for a time after filing.
Publications of discoveries tend to significantly lag the actual discoveries and
the filing of related patent applications. Third parties may have already filed
applications for patents for products or processes that will make Neoprobe's
products obsolete or will limit Neoprobe's patents or invalidate its patent
applications.
Neoprobe typically requires its employees, consultants, advisers and suppliers
to execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, advisory, or supply relationships with
Neoprobe. They may breach these agreements and Neoprobe may not obtain an
adequate remedy for breach. Further, third parties may gain access to Neoprobe's
trade secrets or independently develop or acquire the same or equivalent
information.
Agencies of the United States government conducted some of the research
activities that led to the development of antibody technology that some of
Neoprobe's proposed antibody based surgical cancer detection products use. When
the United States government participates in research activities, it retains
rights that include the right to use the technology for governmental purposes
under a royalty-free license, as well as rights to use and disclose technical
data that could preclude Neoprobe from asserting trade secret rights in that
data and software.
Conditions in Israel may affect the operations of Cardiosonix and may limit our
ability to complete development of its products.
Our Cardiosonix subsidiary is incorporated in Israel, and its offices and
research and development facilities are located there. Political, economic and
military conditions in Israel may directly affect its operations. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite the progress towards peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Since October 2000,
there has been a significant increase in violence primarily in the West Bank and
Gaza Strip. Any future armed conflict, political instability or continued
violence in the region could have a negative effect on the activities of
Cardiosonix and the completion of development and commercialization of our blood
flow monitoring products.
Cardiosonix' operations could be disrupted as a result of the obligation of key
personnel in Israel to perform military service.
Generally, all male adult citizens and permanent residents of Israel under the
age of 54 are, unless exempt, obligated to perform up to 36 days of military
reserve duty annually. Additionally, all Israeli residents of this age are
subject to being called to active duty at any time under emergency
circumstances. Certain key officers and employees of Cardiosonix are currently
obligated to perform annual reserve duty, and its operations could be disrupted
by their absence for a significant period due to military service.
19
The government grants Cardiosonix has received for research and development
expenditures restrict our ability to manufacture blood flow monitoring products
and transfer technologies outside of Israel and require us to satisfy specified
conditions. If we fail to satisfy these conditions, we may be required to refund
grants previously received together with interest and penalties, and may be
subject to criminal charges.
Cardiosonix received grants from the government of Israel through the Office of
the Chief Scientist of the Ministry of Industry and Trade for the financing of a
portion of its research and development expenditures associated with our blood
flow monitoring products. From 1998 to 2001, Cardiosonix received grants
totaling $775,000 from the Office of the Chief Scientist. The terms of the Chief
Scientist grants may prohibit us from manufacturing products or transferring
technologies developed using these grants outside of Israel without special
approvals. Even if we receive approval to manufacture our blood flow monitoring
products outside of Israel, we may be required to pay an increased total amount
of royalties, which may be up to 300% of the grant amount plus interest,
depending on the manufacturing volume that is performed outside of Israel. This
restriction may impair our ability to outsource manufacturing or engage in
similar arrangements for those products or technologies. In addition, if we fail
to comply with any of the conditions imposed by the Office of the Chief
Scientist, we may be required to refund any grants previously received together
with interest and penalties, and may be subject to criminal charges. In recent
years, the government of Israel has accelerated the rate of repayment of Chief
Scientist grants and may further accelerate them in the future.
Neoprobe's product sales may be adversely affected by healthcare pricing
regulation and reform activities.
The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.
We expect that Congress and state legislatures will continue to review and
assess healthcare proposals, and public debate of these issues will likely
continue. We cannot predict which, if any, of such reform proposals will be
adopted and when they might be adopted. Other countries also are considering
healthcare reform. Significant changes in healthcare systems could have a
substantial impact on the manner in which we conduct our business and could
require us to revise our strategies.
Neoprobe could be damaged by product liability claims.
Neoprobe's products are used or intended to be used in various clinical or
surgical procedures. If one of our products malfunctions or a physician misuses
it and injury results to a patient or operator, the injured party could assert a
product liability claim against Neoprobe. Neoprobe currently has product
liability insurance with a $10 million per occurrence limit, which, Neoprobe
believes, is adequate for its current activities. However, Neoprobe may not be
able to continue to obtain insurance at a reasonable cost. Furthermore,
insurance may not be sufficient to cover all of the liabilities resulting from a
product liability claim, and Neoprobe might not have sufficient funds available
to pay any claims over the limits of its insurance. Because personal injury
claims based on product liability in a medical setting may be very large, an
underinsured or an uninsured claim could financially damage Neoprobe.
Neoprobe may have trouble attracting and retaining qualified personnel and its
business may suffer if it does not.
Neoprobe's business has experienced developments the past two years which have
resulted in several significant changes in Neoprobe's strategy and business
plan, including downsizing to what Neoprobe considers to be the minimal level of
management and employees necessary to operate a publicly traded medical device
business. Neoprobe believes its restructured organization is appropriate to
support modest growth over the next few years. However, losing any member of the
management team could have an adverse effect on Neoprobe's operations.
Neoprobe's success depends on its ability to attract and retain
20
technical and management personnel with expertise and experience in the medical
device business. The competition for qualified personnel in the medical device
industry is intense and Neoprobe may not be successful in hiring or retaining
the requisite personnel. If Neoprobe is not able to attract and retain qualified
technical and management personnel, it will suffer diminished chances of future
success.
Neoprobe's common stock is traded over the counter, which may deprive
stockholders of the full value of their shares.
Neoprobe's common stock is quoted via the Over The Counter Bulletin Board
(OTCBB). As such, our common stock may have fewer market makers, lower trading
volumes and larger spreads between bid and asked prices than securities listed
on an exchange such as the New York Stock Exchange or the NASDAQ. These factors
may result in higher price volatility and less market liquidity for the common
stock.
A low market price may severely limit the potential market for Neoprobe's common
stock.
Neoprobe's common stock is currently trading at a price substantially below
$5.00 per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
non-NASDAQ equity security that has a market price share of less than $5.00 per
share, subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to the sale. The broker-dealer also
must disclose the commissions payable to the broker-dealer, current bid and
offer quotations for the penny stock and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Such information must be provided to the
customer orally or in writing before or with the written confirmation of trade
sent to the customer. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. The additional burdens imposed upon
broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in Neoprobe common stock.
Neoprobe's stockholder rights plan, some provisions of Neoprobe's organizational
and governing documents and an agreement with the former Cardiosonix
shareholders, may have the effect of deterring third parties from making
takeover bids for control of Neoprobe or may be used to hinder or delay a
takeover bid.
Neoprobe's certificate of incorporation authorizes the creation and issuance of
"blank check" preferred stock. The Company's Board of Directors may divide this
stock into one or more series and set their rights. The Board of Directors may,
without prior stockholder approval, issue any of the shares of "blank check"
preferred stock with dividend, liquidation, conversion, voting or other rights,
which could adversely affect the relative voting power or other rights of the
common stock. Preferred stock could be used as a method of discouraging,
delaying, or preventing a take-over of Neoprobe. If Neoprobe issues "blank
check" preferred stock, it could have a dilutive effect upon the common stock.
This would decrease the chance that Neoprobe's stockholders would realize a
premium over market price for their shares of common stock as a result of a
takeover bid.
Also, in connection with the Cardiosonix acquisition, the former shareholders of
Cardiosonix entered into an agreement with the Company that for a period of two
years following the acquisition, they would not participate in certain actions
and transactions that would lead to a change in control of the Company, and to
vote their shares in conformity with the recommendations of the Company's Board
of Directors as to certain matters, including the approval of transactions that
would result in a change in control. These provisions could have the effect of
discouraging, delaying or preventing a takeover of Neoprobe.
21
Because Neoprobe will not pay dividends, stockholders will only benefit from
owning common stock if it appreciates.
Neoprobe has never paid dividends on its common stock and does not intend to do
so in the foreseeable future. Neoprobe intends to retain any future earnings to
finance its growth. Accordingly, any potential investor who anticipates the need
for current dividends from his investment should not purchase our common stock.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its office at 425 Metro Place North, Dublin, Ohio.
The Company executed a lease agreement, commencing on January 1, 1997 and ending
in August 2003, with the landlord of these facilities for approximately 25,000
square feet. The lease provides for a monthly base rent of approximately $20,400
in 2002 and increases to $21,000 in 2003. During December 1998, February 1999,
and April 2000, the Company executed three lease agreements to sublease
approximately 2,600 square feet, 4,600 square feet, and 6,750 square feet of the
Company's office space, respectively. The three subleases are expected to
generate monthly sublease income of approximately $11,000 in 2002 increasing to
$11,200 in 2003. The Company and its subtenants must also pay a pro-rata portion
of the operating expenses and real estate taxes of the building. Neoprobe
believes these facilities are in good condition and will be adequate for its
needs for the foreseeable future.
The Company's subsidiary, Cardiosonix Ltd., currently leases its office at 6
Haprachim Street, Kfar Malal, Israel. The lease covers approximately 180 square
meters of space and expires in June, 2002. The lease provides for a monthly base
rent of $2,000 through the expiration of the lease. Cardiosonix is in the
process of identifying new space that will better serve its needs in the coming
two to three years.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company trades on the OTC Bulletin Board under the
trading symbol NEOP. The prices set forth below reflect the quarterly high, low
and closing sales prices for shares of common stock during the last two fiscal
years as reported by Reuters Limited. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions.
HIGH LOW CLOSE
---- --- -----
Fiscal Year 2001
First Quarter $ 0.69 $ 0.41 $ 0.48
Second Quarter 1.05 0.40 0.70
Third Quarter 0.77 0.35 0.37
Fourth Quarter 0.51 0.34 0.42
Fiscal Year 2000
First Quarter $ 3.50 $ 0.44 $ 1.31
Second Quarter 1.47 0.63 0.72
Third Quarter 1.25 0.53 0.63
Fourth Quarter 0.78 0.38 0.42
As of March 1, 2002, Neoprobe had approximately 728 holders of common stock of
record.
The Company has not paid any dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future. The Company intends
to retain any earnings to finance the growth of its business. There can be no
assurance that the Company will ever pay cash dividends. See Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Recent Sales of Unregistered Securities
The following sets forth certain information regarding the sale of equity
securities of the Company during the period covered by this Report that were not
registered under the Securities Act of 1933 (the Securities Act).
In March 2001 and March 2000, the Board of Directors of the Company authorized
the issuance of 19,122 and 23,326 shares of common stock, respectively, to the
trustees of its 401(k) employee benefit plan (the Plan) without registration.
Such issuance is exempt from registration under the Securities Act under Section
3(a)(2). The Plan is a pension, profit sharing or stock bonus plan that is
qualified under Section 401 of the Internal Revenue Code. The assets of the Plan
are held in a single trust fund for the benefit of the employees of the Company,
which does not hold assets for the benefit of the employees of any other
employer. All of the contributions to the plan from employees of Neoprobe have
been invested in assets other than common stock. All of the common stock held by
the plan has been contributed to the plan by the Company as a matching
contribution and has been less in value at the time it was contributed to the
plan than the employee contributions which it matches.
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital II, LLC (Fusion) for the issuance and purchase
of our common stock. Under the agreement, Fusion committed up to $10 million to
purchase shares of our common stock over a forty-month period that commences
upon the effectiveness of a registration statement that we will file with the
U.S. Securities and Exchange Commission for the underlying shares. The agreement
also establishes an equity line of credit or equity draw-down facility. Once
during each draw-down pricing period, Neoprobe could request a draw, subject to
a daily base amount, currently set at $12,500. The number of shares
23
we will issue to Fusion in return for that money is based on the lower of (a)
the closing sale price for our stock on the day of the draw request or (b) the
average of the three lowest closing sales prices during a twelve day period
prior to the draw request. No shares may be sold to Fusion at lower than a floor
price currently set at $0.30, but in no case below $0.20 without Fusion's prior
consent. Upon execution of the common stock purchase agreement, we issued
449,438 shares of our common stock to Fusion as a commitment fee, in reliance
upon an exemption from registration provided by Section 4(2) of the Securities
Act.
24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with our Financial Statements
and the Notes related to those statements, as well as the other financial
information included in this Form 10-KSB. Some of our discussion is
forward-looking and involves risks and uncertainties. For information regarding
risk factors that could have a material adverse effect on our business, refer to
Item I of this Form 10-KSB, Description of Business - Risk Factors.
THE COMPANY
Neoprobe Corporation (Neoprobe, we or the Company) is a biomedical technology
company that provides innovative surgical and diagnostic products that enhance
patient care by meeting the critical decision-making needs of healthcare
professionals. Prior to the acquisition of Cardiosonix Ltd. (Cardiosonix) on
December 31, 2001, our marketable products were limited to a line of gamma
detection devices used in the application of intraoperative lymphatic mapping
(ILM). The acquisition of Cardiosonix significantly expanded our potential
product offerings. Cardiosonix is in the process of developing and
commercializing a unique line of blood flow monitoring devices for a variety of
diagnostic and surgical applications, and has received marketing approval for
its first product, FlowGuard(TM), in the U.S. and Europe.
RESULTS OF OPERATIONS
2001 marked the second consecutive year of profitability for Neoprobe. Operating
results for the fourth quarter and for the fiscal year 2001 were affected by the
accounting treatment of the acquisition of Cardiosonix. Generally accepted
accounting principles (GAAP) required Neoprobe to expense $885,000 in the fourth
quarter of 2001 for in-process research and development (IPR&D) as part of the
allocation of the Cardiosonix purchase price. The non-cash, non-recurring charge
represents that portion of the purchase price paid for Cardiosonix that was
allocated to the Cardiosonix intraoperative cardiovascular product, InFlow(TM).
That product is still considered "in process," or under development under GAAP
because it has not received the necessary regulatory marketing approvals. As a
result, that portion of the purchase price allocated to InFlow was expensed in
2001.
Exclusive of the non-cash, non-recurring charge related to the Cardiosonix
InFlow product, Neoprobe's net income for 2001 would have been $900,000.
Including the non-recurring charge, Neoprobe's results reflected net income of
$15,000 for 2001. Financial results for 2001 were significantly impacted by two
primary factors: a decrease in the average prices received for our gamma
detection products, coupled with lower than expected demand from our primary
distributor, Ethicon.
Approximately 70% of the decline in gross margin in 2001 versus 2000 can be
attributed to the reduction in the prices the Company charged Ethicon
Endo-Surgery, Inc. (Ethicon) for gamma detection products during 2001. The
Company's distribution agreement with Ethicon provides for transfer prices based
on a percentage of the end customer average sales prices (ASP) received by
Ethicon, subject to floor transfer pricing terms. The distribution agreement
provided for a one-time change to a lower percentage of ASP to be shared with
the Company following the first full commercial year of the distribution
agreement. That period ended December 31, 2000.
The remaining decline in gross margins in 2001 versus 2000 can be attributed
primarily to the decline in demand from Ethicon. The Company attributes the
decline in demand primarily to three factors: overstocking of base systems by
Ethicon in order to comply with the initial contractual minimum purchase
commitments under Ethicon's distribution agreement with the Company, a lack of
success to date in placing our BlueTip(TM) products with end users, and the
timing of the reporting of results from multinational clinical trials regarding
the use of ILM in breast cancer. Exact market penetration for the Company's
products is difficult to gauge, as there are no widely published use statistics
on this specific type of device or the application of sentinel lymph node
biopsy. The Company believes, based on anecdotal information, that the
application of ILM has increased steadily over the past few years, but that the
global adoption rate for lymphatic mapping may be slowing pending the outcome of
major international trials in breast
25
care. In 2000, end-customer device placements of our base gamma detection
systems increased approximately 50% over 1999. We believe this was due primarily
to the initiation of our distribution arrangement with Ethicon in the fourth
quarter of 1999. In 2001, Ethicon's rate of increase in end-customer sales
slowed to approximately 30% over 2000. However, the gross increase in
end-customer placements of devices did not translate to increased Neoprobe sales
because Ethicon was carrying more than their desired level of inventory due to
purchases they were required to make to meet the periodic contractual minimums.
We expect Ethicon's minimum purchase commitments to be fully met during the
third quarter of 2002 based on current committed and forecast demand and believe
they will be adjusting their purchases during 2002 to reach their desired level
of safety stock.
Despite the declines in product prices and demand, and excluding the IPR&D
charge, we recorded net income primarily attributable to our gamma detection
product line of nearly $900,000 in 2001.
Neoprobe's major expense categories as a percentage of sales remained constant
from 2000 to 2001. Research and development expenses, as a percentage of sales,
were 5% in 2001 and 2000. Selling, general and administrative expenses, as a
percentage of sales, increased slightly to 34% in 2001 from 33% in 2000.
Management believes these major expense categories, as a percentage of sales,
will increase significantly in 2002 as compared to 2001 due to additional
research and development activities, primarily associated with the blood flow
product line, and to blood flow market development support activities. These
categories, as a percentage of sales, may also be affected by additional
declines in demand for gamma detection devices in 2002.
Years ended December 31, 2001 and 2000
Revenues and Margins. Net product sales, primarily of the Company's gamma
detection systems, decreased $2.1 million or 24% to $6.8 million in 2001 from
$8.8 million in 2000. Gross margins on product sales decreased to 35% of net
sales in 2001 from 44% of net sales in 2000.
The declines in net product sales and gross margins were the combined result of
a nearly 20% decrease in prices charged to Ethicon during 2001 as compared to
2000 for the base neo2000(R) Gamma Detection System (i.e., a 14mm probe and
neo2000 control unit), coupled with a 14% decline in demand from Ethicon for
these base systems and a 42% decline in demand for the Company's BlueTip probes
and accompanying disposable handles. In addition, the cost to manufacture the
Company's products increased slightly from 2000 to 2001 due largely to higher
electronic and crystal component costs.
Revenues in 2001 and 2000 also included $800,000 from the pro-rata recognition
of license fees related to the distribution agreement with Ethicon, and $25,000
and $75,000, respectively, from the recognition of quarterly milestone fees
related to an option agreement to license certain of the Company's
radioimmunoguided surgery (RIGS) technology.
Research and Development Expenses. Research and development expenses decreased
$128,000 or 27% to $345,000 in 2001 from $473,000 in 2000. The decrease is
primarily due to the inclusion of $40,000 in non-recurring severance costs and
$150,000 in unreimbursed costs related to development of products in the first
quarter of 2000. Research and development expenses in both 2001 and 2000 are
reflected net of $500,000 in reimbursed expenses received from the Company's
distribution partner, Ethicon.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $590,000 or 20% to $2.3 million in 2001 from
$2.9 million in 2000. The decrease was primarily the result of the elimination
of internal marketing personnel, lower net patent costs due to abandoned
patents, and net reductions in various overhead cost categories such as
insurance, professional services, space costs, and equipment rental, offset by
the inclusion of $49,000 of gains on the sale of certain property and equipment
in 2000.
Acquired In-Process Research and Development. This $885,000 charge represents
the portion of the purchase price of Cardiosonix allocated to in-process
research and development for the InFlow product
26
that was expensed at the date of consummation of the acquisition. No such
charges were incurred in 2000.
Other Income. Other income decreased $134,000 or 27% to $370,000 during 2001
from $504,000 during 2000. Other income during 2001 consisted primarily of a
$238,000 refund of a portion of the limited guarantee made by the Company
related to a loan made by a bank to the Company's former subsidiary, Neoprobe
Israel. The Company had previously put cash on deposit with the bank as security
for the limited guarantee. The full amount of the limited guarantee was written
off in 1998 in conjunction with the Company's decision to liquidate Neoprobe
Israel, as the Company did not expect to receive any of the cash deposit back
from the bank. The Company had requested a full accounting for the deposit
following the sale by the receiver of the Neoprobe Israel facility. In
connection with the refunded cash deposit, the bank granted the Company a
release from all obligations related to the loan. Other income in 2000 consisted
primarily of $262,000 in one-time gains from the forgiveness of royalties due
under a research and development agreement and interest income on the Company's
investments. Interest income decreased because the Company received a lower
interest rate on its invested cash in 2001 as compared to 2000, consistent with
marketplace activity over the two periods.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES -- Cash used in operations was $277,000 in 2001 as compared
to $1.7 million provided by operations in 2000. Working capital increased to
$4.1 million at December 31, 2001 as compared to $3.8 million at December 31,
2000. The current ratio remained at 2.6 at December 31, 2001 and December 31,
2000. The increase in working capital was primarily due to higher levels of
accounts receivable and inventory in 2001 as compared to 2000.
Accounts receivable increased to $561,000 at December 31, 2001 from $365,000 at
December 31, 2000. The Company expects receivable levels to fluctuate in 2002
depending on the timing of purchases and payments by Ethicon.
Inventory levels increased to $1.4 million at December 31, 2001 as compared to
$941,000 at December 31, 2000. The Company built up stock of certain critical
long-lead components during 2001 in order to take advantage of significant
quantity price breaks, and has continued to maintain appropriate levels of
finished good safety stock to avoid interruption in supply of finished products
to Ethicon. In addition, we recorded additional inventory reserves in accordance
with our policy of $111,000 during 2001 related to raw material components of
gamma detection products for which the Company has no alternative use and no
forecast demand within the next year. Inventory levels are expected to decrease
in early 2002 but return to 2001 levels later in the year. We will work through
our carryover stock of certain long-lead gamma device components. Later in 2002,
we will also start to build inventory of blood flow products in preparation for
commercial launch.
The Company anticipates it will need to fund up to $3.5 million in development
and market support costs during 2002 related to preparing for the commercial
launch of its blood flow product line.
INVESTING ACTIVITIES -- Cash provided by investing activities in 2001 totaled
$109,000, versus $1.4 million in 2000. On December 31, 2001, the Company
completed the acquisition of Cardiosonix, and acquired $195,000 in net cash.
During January 2000, the Company sold a minority investment in an Israeli
biotechnology company for $1.5 million. Capital expenditures in 2001 consisted
primarily of technology infrastructure, production tooling, and loaner device
upgrades. Capital expenditures in 2000 were split between purchases of
production tools and equipment, and technology infrastructure. They were offset
by the sale of excess furniture and fixtures accumulated from prior year
headcount reductions. Capital needs for 2002 are expected to increase over 2001
to support instrument development and manufacturing activities, although it is
our intent to initially outsource manufacturing of blood flow products as is
currently done for our gamma devices.
FINANCING ACTIVITIES -- Financing activities used $188,000 in cash in 2001
versus $3.3 million in 2000. During the first quarter of 2000, the Company paid
holders of Series B preferred stock $2.5 million
27
in cash and issued them 3 million each of common shares and warrants to purchase
common shares in exchange for retiring the outstanding preferred shares. In 2001
and 2000, the Company paid off debt totaling $144,000 and $812,000,
respectively, leaving the Company with $195,000 in debt at December 31, 2001.
On November 19, 2001, we entered into a common stock purchase agreement with an
investment fund, Fusion Capital II, LLC (Fusion) for the issuance and purchase
of our common stock. The stock purchase agreement established what is sometimes
termed an equity line of credit or an equity draw down facility. The facility
generally operates as follows: Fusion committed up to $10 million to purchase
Neoprobe's common stock over a forty-month period that commences when a
registration statement that Neoprobe will file for the underlying shares becomes
effective. The Company intends to file a registration statement to register for
resale up to 5 million shares of common stock of the Company shortly after the
filing of this Form 10-KSB. Once the registration statement is declared
effective, the Company will be able to request daily draw downs, subject to a
daily base amount, currently set at $12,500. The number of shares we are to
issue to Fusion in return for that money will be based on the lower of (a) the
closing sale price for our stock on the day of the draw request or (b) the
average of the three lowest closing sales prices during a twelve day period
prior to the draw request. No shares may be sold to Fusion at lower than a floor
price currently set at $0.30, but in no case below $0.20 without Fusion's prior
consent. Upon execution of the common stock purchase agreement, we issued
449,438 shares of our common stock to Fusion as a commitment fee. The Company
intends to draw on the equity line to fund development and commercialization
activities if market conditions are favorable and if we determine that the draw
downs are not having a significant negative impact on the share price of the
Company's common stock.
During February 2002, the Company entered into a line of credit facility with an
investment management company. The facility provides for a maximum line of
credit of $2.0 million and is fully collateralized by pledged cash and
investments on deposit with the investment management company. Availability
under the facility is based on advance rates varying from 80% to 92% of the
underlying available collateral. Outstanding amounts under the facility bear
interest at LIBOR plus 175 basis points. The facility expires in February 2007.
We believe our current cash position, coupled with cash expected to be provided
through sales of our gamma detection products in 2002 is adequate to sustain our
planned blood flow and gamma detection development and operations through the
fourth quarter of 2002. However, our ability to execute our plans into 2003
significantly depends on our ability to raise additional funds from sources
other than operations. Our future liquidity and capital requirements will depend
on a number of factors, including our ability to raise additional capital in a
timely manner through additional investment, expanded market acceptance of our
current products, our ability to commercialize new products such as our blood
flow product line, our ability to monetize our investment in non-core
technologies, our ability to obtain milestone or development funds from
potential development and distribution partners, regulatory actions by the FDA
and other international regulatory bodies, and intellectual property protection.
There can be no assurance that the additional capital we may require to finance
operations beyond 2002 will be available on acceptable terms, if at all. Any
failure to secure additional financing will force us to modify our business
plan. There can be no assurance that we will be able to achieve significant
product revenues from our current or potential new products. In addition, there
can be no assurance that we will achieve profitability again in the future.
28
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - The following table
presents the Company's contractual obligations and commercial commitments as of
December 31, 2001.
PAYMENTS DUE BY PERIOD
CONTRACTUAL CASH LESS THAN 1 - 3 4 - 5 AFTER
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------------ -------------- -------------- ------------- ------------ ------------
Capital Lease Obligation $ 38,306 $ 16,417 $ 21,889 $ - $ -
Operating Leases 231,582 145,724 84,828 1,030 -
Unconditional
Purchase Obligations 608,000 608,000(1) - - -
Other Long-Term
Obligations - - - - -
Total Contractual
Cash Obligations $877,888 $770,141 $106,717 $ 1,030 $ -
============== ============== ============= ============ ============
(1) This amount represents purchases under binding purchase orders for which the
Company is required to take delivery of the product under the terms of the
underlying supply agreements going out approximately four to five months. In
addition, the Company has annual minimum purchase commitments for an additional
$1.3 million in finished medical devices that are not currently covered by
binding purchase orders, but for which the Company must either submit binding
purchase orders on a monthly basis or reimburse the contract manufacturer for
any non-cancellable, non-returnable materials. The Company believes the amount
of non-cancellable, non-returnable materials to be less than half of the
remaining commitment amount at any point in time.
NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Under SFAS 141, any business combination initiated after June 30, 2001 must be
accounted for as a purchase. For purchase business combinations that are
consummated after June 30, 2001, goodwill and identifiable intangibles should be
recorded and amortized in accordance with SFAS 142, i.e., goodwill and
intangible assets with indefinite lives are not amortized and other identified
intangibles are amortized. For any purchase business combination consummated on
or before June 30, 2001, the accounting under APB 16 and APB 17 still applies.
Goodwill and separately identifiable intangibles should be recorded and
amortized until adopting SFAS 142, which is required for fiscal years beginning
after December 15, 2001. A calendar year-end company would continue to amortize
goodwill and all separately identifiable intangibles through December 31, 2001.
Upon adoption of SFAS 142, a company would cease amortizing goodwill and
separately identifiable intangibles with indefinite lives and amortize other
identifiable intangibles in accordance with the guidelines set forth in the
standard. The Company adopted SFAS 141 and SFAS 142 as of December 31, 2001
related to its acquisition of Cardiosonix. The adoption of these pronouncements
had a material affect on the Company's financial position and results of
operations for 2001 as described elsewhere in Results of Operations and in the
notes to the consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS
29
121. For example, SFAS 144 provides guidance on how a long-lived asset that is
used as part of a group should be evaluated for impairment, establishes criteria
for when a long-lived asset is held for sale, and prescribes the accounting for
a long-lived asset that will be disposed of other than by sale. SFAS 144 retains
the basic provisions of APB 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS 121, an impairment
assessment under SFAS 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under SFAS 142, Goodwill and Other
Intangible Assets.
The Company is required to adopt SFAS 144 no later than the year beginning after
December 15, 2001, and plans to adopt its provisions for the quarter ending
March 31, 2002. Management does not expect the adoption of SFAS 144 for
long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under SFAS 144 is largely
unchanged from SFAS 121. The provisions of the Statement for assets held for
sale or other disposal generally are required to be applied prospectively after
the adoption date to newly initiated disposal activities. Therefore, management
cannot determine the potential effects that adoption of SFAS 144 will have on
the Company's financial statements.
In November 2001, the Emerging Issues Task Force of the FASB issued Topic D-103,
Income Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred. The FASB is requiring Topic D-103 be applied in financial
reporting periods beginning after December 15, 2001. Topic D-103 requires
companies to characterize reimbursements received for out-of-pocket expenses,
such as shipping and handling charges, as revenue. However, the Topic could
potentially be applied to areas such as the Company's reimbursement of research
and development charges from Ethicon. The Company is analyzing the potential
impacts of the Topic; however, management is not able to determine at this time
the potential impact the adoption of Topic D-103 will have on its financial
statements.
CRITICAL ACCOUNTING POLICIES -- The following accounting policies are considered
by management to be critical to the Company's results of operations and
financial condition.
Revenue Recognition Related to Net Product Sales. We currently generate revenue
primarily from sales of our gamma detection devices. We recognize sales revenue
when the products are shipped and the earnings process has been completed. Our
customers have no right to return products purchased in the ordinary course of
business. The prices we charge our primary customer, Ethicon, are subject to
retroactive annual adjustment based on a fixed percentage of the actual sales
prices achieved by Ethicon on sales to end customers made during each fiscal
year. To the extent that we can reasonably estimate the end-customer prices
received by Ethicon, we record sales to Ethicon based upon these estimates. If
we are unable to reasonably estimate end customer sales prices related to
certain products sold to Ethicon, we record revenue related to these product
sales at the minimum price provided for under our distribution agreement with
Ethicon. Due to uncertainty regarding end customer prices during 2001, we
recorded revenue at the minimum prices for most of the year until the final
reconciliation was completed with Ethicon. The completion of the reconciliation
resulted in the Company recording approximately $60,000 in additional revenue in
the fourth quarter of 2001 related to sales made during the second and third
quarters of 2001. Final adjusted prices for the year were approximately four
percent (4%) above the floor prices. The final adjusted prices for 2001 serve as
the basis for provisional prices to be charged Ethicon for sales in 2002. As
such, we believe we have only a small amount of price exposure related to sales
to Ethicon in 2002 and beyond related to currently marketed products.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. We
account for long-lived assets in accordance with the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of
30
the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
As of December 31, 2001, the most significant long-lived assets on our balance
sheet relate to assets recorded in connection with the acquisition of
Cardiosonix and gamma detection device patents related to ILM. The
recoverability of these assets is based on the financial projections and models
related to future sales of Cardiosonix' products which have yet to begin and the
continuing success of our gamma detection product line. As such, these assets
could be subject to significant adjustment should the Cardiosonix technology not
be successfully commercialized or the sales amounts in our current projections
not be realized.
Accounting for the Acquisition of Cardiosonix. We accounted for the acquisition
of Cardiosonix in accordance with the following guidance: SFAS No. 141, Business
Combinations; SFAS No. 142, Goodwill and Other Intangible Assets; SFAS No. 2,
Accounting for Research and Development Costs; FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method, and other relevant guidance. At the closing, the Company
issued 9,714,737 shares of Neoprobe common stock in exchange for all of the
outstanding shares of Cardiosonix. An additional 2,085,826 shares of Neoprobe
common stock will be issued to the Cardiosonix shareholders on the satisfaction
of a milestone event involving Cardiosonix product development activity. The
acquisition was accounted for under the purchase method outlined in SFAS No.
141, and the results of Cardiosonix have been included in the Company's
consolidated results from the date of acquisition, or December 31, 2001. The
purchase price was allocated based on an appraisal conducted by an independent
valuation expert following the premise of continued use and applying the
traditional income approach to the present valuation of future economic
benefits. Based on the valuation, the assets acquired were allocated the
following values: $185,000 to various working capital items, $66,000 to
property, plant and equipment, $2.6 million to patents (to be amortized over 15
years), $604,000 to non-compete agreements (to be amortized over four years),
$245,000 to the completed technology related to the FlowGuard product (to be
amortized over seven years), and $885,000 to IPR&D related to the InFlow product
(expensed immediately). The allocation of the purchase price had a significant
impact on our net income in 2001.The $885,000 in IPR&D was expensed immediately
as in-process research and development because InFlow has not received
regulatory (i.e., FDA) approval to be marketed. Research and development costs
under SFAS No. 2 are expensed as incurred. The valuation is critical to results
in 2001 and future years. If the valuation had been assigned differently (i.e.,
less to patents and more to IPR&D), the results would be significantly different
for 2001 as well as future years. All of the assets to which value was assigned
are amortizable as expense for book purposes in future years. The ongoing
recoverability related to the recorded assets will be evaluated in the future
and could have a material effect on the future results of operations.
OTHER ITEMS AFFECTING FINANCIAL CONDITION -- At December 31, 2001, the Company
had U.S. net operating tax loss carryforwards and tax credit carryforwards of
approximately $92.0 million and $4.4 million, respectively, available to offset
or reduce future income tax liability, if any, through 2021. However, under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, use of
prior tax loss and credit carryforwards may be limited after an ownership
change. As a result of ownership changes as defined by Sections 382 and 383,
which have occurred at various points in the Company's history, management
believes utilization of the Company's tax loss carryforwards and tax credit
carryforwards may be limited.
OUTLOOK
This Outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially.
The Company's financial performance is highly dependent on the success of its
gamma detection instrument product line and on its ability to commercialize the
blood flow products of its newly acquired subsidiary, Cardiosonix. There can be
no assurances, however, that the Company will achieve the volume of sales
anticipated, or if achieved, that the margin on such sales will be adequate to
produce positive operating cash flow. While the Company remains optimistic about
the prospects for its other proprietary technologies, these technologies are not
anticipated to generate any significant revenue for the Company during 2002. The
Company believes its December 31, 2001 cash position and sources of future cash
flow are adequate for the Company to
31
continue operating through the end of 2002 and into 2003. However, if the
Company does not generate adequate funds from operations, it may need to further
modify its business plan and seek other financing alternatives. Such
alternatives may include asset dispositions that could force the Company to
further change its business plan.
Gamma Detection Products
Numerous articles have been published in recent years on the topics of sentinel
lymph node biopsy and ILM in peer reviewed journals, and a number of thought
leaders and cancer treatment institutions have recognized and embraced the
technology as standard of care for melanoma and, in some cases, for breast
cancer. However, as the melanoma market represents less than 10% of the breast
care market, standard of care recognition related to breast care is much more
important to the Company. Standard of care designation for breast cancer is most
likely dependent on completion of several large multi-center clinical trials in
the U.S. and abroad. Final data from these studies likely will not be presented
for several years. However, the Company believes that the surgical community
will continue to adopt the ILM application while the standard of care
determination is still pending. The Company also believes the lymphatic
targeting agent being developed by the University of California, San Diego
(UCSD) for Neoprobe, if it should become commercially available, could improve
the adoption of ILM in future years.
Despite lower than expected demand for our gamma detection products in 2001,
Neoprobe continues to be encouraged by the attention focused on ILM by the
medical community at surgical conferences, especially related to investigations
into other applications beyond melanoma and breast cancer. The Company also
believes the market focus in all major global markets for hand-held gamma
detection devices will continue to be among local/community hospitals, which
typically lag behind leading research centers and major hospitals in adapting to
new technologies. A slower than anticipated adoption rate may negatively impact
the Company's sales volumes, and therefore, revenues and net income in 2002.
Ethicon's contractual minimum purchase requirements are expected to be met
during the third quarter of 2002. The Company also believes that Ethicon's total
purchases for 2002 will be less than 2001 as they work to decrease their
overstock position of base systems. The Company does not anticipate any demand
from Ethicon for BlueTip products during 2002. However, as discussed previously,
we believe Ethicon remains fully committed to our gamma detection product line.
We expect demand from Ethicon to rebound in 2003 if Ethicon's end customer sales
follow the trends seen in 2000 and 2001. There can be no assurance, however,
that Ethicon's sales will increase and result in increased demand for Neoprobe's
products.
In addition, under the terms of the Company's marketing agreement with Ethicon,
the transfer price on product sales that the Company receives is based on a
percentage of Ethicon's end-customer sales price, subject to a price floor. To
date, the Company's products have commanded a price premium in most of the
markets in which they are sold, which we believe is due to their superior
product performance and ease of use. While Neoprobe continues to believe in the
technical and user-friendly superiority of its products, competitors continue to
innovate and the Company may lose market share as a result. A loss of market
share would likely have a direct negative impact on net income. Although the
end-customer price (i.e., ASP) may decline due to external market pressures and
competition, the percentage of ASP shared with the Company will not change again
under the terms of the current distribution agreement. In addition, the price
received by the Company during 2001 was only 4% above the floor pricing for base
systems, so we believe there is little downside pricing risk associated with
future sales of the Company's gamma detection devices to Ethicon.
Ethicon has also reimbursed the Company for a flat amount per quarter ($125,000)
related to research and development expenses incurred by the Company on
Ethicon's behalf. This flat reimbursement ends at the end of the third quarter
of 2002. There can be no assurances, however, that the Company will be
successful in negotiating additional reimbursement from Ethicon covering product
development beyond the third quarter of 2002 at terms acceptable to the Company,
or at all.
32
Based on the above discussion, we project the gamma detection device line will
operate approximately on a breakeven basis in 2002.
Blood Flow Products
Despite having received regulatory approval to market FlowGuard in the U.S. and
Europe, we anticipate spending a significant amount of time and effort in 2002
to bring it and the other Cardiosonix blood flow products to market. This will
include significant development, regulatory approval, pre-commercialization
market preparation, and administrative support activities. We anticipate placing
blood flow systems with industry thought leaders to obtain critical
pre-commercialization feedback prior to widespread market launch. These
activities will likely continue for most of 2002. We expect that total
expenditures during 2002 to support the Cardiosonix product line development and
pre-commercializaiton activities could approach $3.5 million.
RIGS and ACT
The Company intends to continue to develop RIGScan CR and ACT, but will not do
so without a partner or third party support. The Company may incur some costs
during 2002 related to enlisting new development partners and assisting those
groups, if any, with their negotiations and submissions to regulatory
authorities, although such costs are not expected to be significant.
Summary
We expect operating and net results for 2002 to show a loss, primarily because
we expect to incur up to $3.5 million in research and development, market and
administrative support costs to commercize our blood flow product line, coupled
with a projected overall breakeven contribution from the gamma detection device
product line.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of our Company. Our
Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this report and
other Company filings with the Securities and Exchange Commission and in our
reports to stockholders. Statements which relate to other than strictly
historical facts, such as statements about the Company's plans and strategies,
expectations for future financial performance, new and existing products and
technologies, and markets for the Company's products are forward-looking
statements within the meaning of the Act. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "will" and other similar
expressions identify forward-looking statements. The forward-looking statements
are and will be based on management's then current views and assumptions
regarding future events and operating performance, and speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. See Risk Factors for a discussion of events and
circumstances that could affect our financial performance or cause actual
results to differ materially from estimates contained in or underlying our
forward-looking statements.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows, liquidity and
capital resources, please refer to the information on pages 27 through 29 of
this report.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, and the related notes, together with
the report of KPMG LLP dated March 5, 2002 are set forth at pages F-1 through
F-23 attached hereto. The financial statements of the Company's wholly-owned
subsidiary, Cardiosonix Ltd. (formerly Biosonix Ltd.), and the related notes,
together with the report of Somekh Chaikin (a member of KPMG International)
dated February 28, 2002 are set forth at
33
pages F-24 through F-39 attached hereto. The unaudited pro forma statement of
operations and related notes as if Cardiosonix had been acquired as of January
1, 2001 are set forth on page F-40 through F-42 attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2002 ANNUAL MEETING:
NANCY E. KATZ, age 42, has served as a director of Neoprobe since January 2001.
Ms. Katz currently serves as President, Chief Executive Officer and a director
of Calypte Biomedical Corporation. Ms. Katz joined Calypte in October 1999 as
President, Chief Operating Officer and Chief Financial Officer. Prior to joining
Calypte, Ms. Katz served as President and Chief Operating Officer of Zila Pharm
Inc. From 1997 to 1998, Ms. Katz served as Vice President of Sales & Marketing
of LifeScan (the diabetes testing division of Johnson & Johnson) and Vice
President of U.S. Marketing, directing LifeScan's marketing and customer call
center departments from 1995 to 1997. During her seven-year career at
Schering-Plough Healthcare Products from 1987 to 1994, she held numerous
positions including Senior Director & General Manager, Marketing Director for
Footcare New Products, and Product Director of OTC New Products. Ms. Katz also
held various product management positions at American Home Products from 1981 to
1987. Ms. Katz received her B.A. in Business Administration from the University
of South Florida.
FRED B. MILLER, age 62 , has served as a director of Neoprobe since January
2002. Mr. Miller is the President and Chief Operating Officer of Seicon,
Limited, a privately held company that specializes in developing, applying and
licensing technology to reduce seismic and mechanically induced vibration. Mr.
Miller also serves on the board of two other privately-held companies. Until his
retirement in 1995, Mr. Miller had been with Price Waterhouse LLP since 1962.
Mr. Miller is a Certified Public Accountant, a member of the American Institute
of Certified Public Accountants (AICPA), a past member of the Council of the
AICPA and a member and past president of the Ohio Society of Certified Public
Accountants. He also has served on the boards or advisory committees of several
universities and not-for-profit organizations. Mr. Miller has a B.S. degree in
Accounting from the Ohio State University.
MICHAEL P. MOORE, M.D., PH.D., age 51, has served as a director of Neoprobe
since May 1994. Dr. Moore has been Attending Physician, Breast Surgery, Columbia
Presbyterian Medical Center since June 1986. Dr. Moore has a B.S. degree from
Boston College, a Ph.D. degree from Loyola University of Chicago, and a M.D.
degree from The Loyola Stritch School of Medicine.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2003 ANNUAL MEETING:
JOHN S. CHRISTIE, age 52, has served as a director of Neoprobe since May 1997.
Mr. Christie has served as President, Chief Operating Officer and a director of
Worthington Industries, Inc. since June 1999. Mr. Christie served as President
of JMAC, Inc., an investment holding company, from September 1995 to June 1999.
From August 1988 until September 1995, he was a Senior Vice President of
Battelle Memorial Institute. Mr. Christie also serves as a director of
Karrington Health, Inc. Mr. Christie has a B.S. degree in Business
Administration from Miami University and a MBA from Emory University.
DAN MANOR, PH.D., age 42, has served as a director of Neoprobe since January
2002. Dr. Manor also serves as the President and Chief Executive Officer of
Cardiosonix, Ltd., a wholly-owned subsidiary of Neoprobe Corporation. Prior to
founding Cardiosonix in 1998, Dr. Manor served as Managing Director of Medical
Dynamics Ltd., a privately-held Israeli company specializing in developing
pneumatic blood flow assist devices, from founding in 1996 through its sale in
1998. From 1995 through 1996, Dr. Manor served as Products Manager and Medical
Director of an ultrasound company. Dr. Manor started his career as a researcher,
working at various institutions, including Rambam Medical Center and the Heart
Research Center, Technion-Israel Institute
35
of Technology (IIT), Haifa, Israel. He spent the next several years at the
Department of Physiology, University of North Texas Health Science Center at
Fort Worth, Texas as a Research Assistant Professor. Dr. Manor has a B.Sc. in
Aeronautical Engineering, a M.S. and a Ph.D. in Biomedical Engineering from the
Technion-IIT. He is the recipient of numerous awards including the Wolf
Foundation award for excellence in research.
J. FRANK WHITLEY, JR., age 59, has served as a director of Neoprobe since May
1994. Mr. Whitley was Director of Mergers, Acquisitions and Licensing at The Dow
Chemical Company (Dow), a multinational chemical company, from June 1993 until
his retirement in June 1997. After joining Dow in 1965, Mr. Whitley served in a
variety of marketing, financial, and business management functions. Mr. Whitley
has a B.S. degree in Mathematics from Lamar State University.
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2004 ANNUAL MEETING:
REUVEN AVITAL, age 50, has served as a director of Neoprobe since January 2002.
Mr. Avital is a partner and general manager of Ma'Aragim Enterprises Ltd., an
investment company in Israel, through which he is a member of the board of
Neoprobe as well as a number of privately-held and Israeli public companies,
three of them in the medical device field. Mr. Avital was a board member of
Cardiosonix, Ltd. from April 2001 through December 31, 2001, when the company
was acquired by Neoprobe. Previously, Mr. Avital served in the Israeli
government in a variety of middle and senior management positions. He is also
chairman or board member in several not-for-profit organizations, mainly
involved in education for the under-privileged and international peace-building.
Mr. Avital has BA degrees in The History of the Middle East and International
Relations from the Hebrew University of Jerusalem, and a MPA from the Kennedy
School of Government at Harvard University.
DAVID C. BUPP, age 52, has served as President and a director of Neoprobe since
August 1992 and as Chief Executive Officer since February 1998. From August 1992
to May 1993, Mr. Bupp served as the Treasurer of Neoprobe. In addition to the
foregoing positions, from December 1991 to August 1992, he was Acting President,
Executive Vice President, Chief Operating Officer and Treasurer, and from
December 1989 to December 1991, he was Vice President, Finance and Chief
Financial Officer. From 1982 to December 1989, Mr. Bupp was Senior Vice
President, Regional Manager for AmeriTrust Company National Association, a
nationally chartered bank holding company, where he was in charge of commercial
banking operations throughout Central Ohio. Mr. Bupp has a B.A. degree in
Economics from Ohio Wesleyan University. Mr. Bupp completed a course of study at
Stonier Graduate School of Banking at Rutgers University.
JULIUS R. KREVANS, M.D., age 77, has served as a director of Neoprobe since May
1994 and as Chairman of the Board of Directors of Neoprobe since February 1999.
Dr. Krevans served as Chancellor of the University of California, San Francisco
from July 1982 until May 1993, and now serves on the faculty of that
institution's School of Medicine. Prior to his appointment as Chancellor, Dr.
Krevans served as a Professor of Medicine and Dean of the School of Medicine at
the University of California, San Francisco from 1971 to 1982. Dr. Krevans is a
member of the Institute of Medicine, National Academy of Sciences, and led its
committee for the National Research Agenda on Aging until 1991. He is Chairman
of the Bay Area Economic Forum, a member of the Medical Panel of A.P. Giannini
Foundation, and a member of the Board of Directors of the Bay Area BioScience
Center. Dr. Krevans has a B.S. degree and a M.D. degree, both from New York
University. Dr. Krevans also serves on the Board of Directors and the
compensation committee of the Board of Directors of Calypte Biomedical
Corporation (Calypte). Nancy E. Katz, a director of Neoprobe, is President and
Chief Executive Officer of Calypte.
36
EXECUTIVE OFFICERS
In addition to Mr. Bupp, the following individuals are executive officers of the
Company and serve in the position(s) indicated below:
NAME AGE POSITION
---- --- --------
Carl M. Bosch 45 Vice President, Instrument Development
Rodger A. Brown 51 Vice President, Regulatory Affairs and Quality
Assurance
Brent L. Larson 38 Vice President, Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
Carl M. Bosch has served as Vice President, Instrument Development of Neoprobe
since March 2000. Prior to that, Mr. Bosch served as our Director, Instrument
Development from May 1998 to March 2000. Before joining Neoprobe, Mr. Bosch was
employed by GE Medical Systems from 1994 to 1998 where he served as Manager,
Nuclear Programs. From 1977 to 1994, Mr. Bosch was employed by GE Aerospace in
several engineering and management functions. Mr. Bosch has a B.S. degree in
Electrical Engineering from Lehigh University and a M.S. degree in Systems
Engineering from the University of Pennsylvania.
Rodger A. Brown has served as Vice President, Regulatory Affairs and Quality
Assurance of Neoprobe since November 2000. From July 1998 through November 2000,
Mr. Brown served as Director, Regulatory Affairs for the Company. Prior to
joining the Company, Mr. Brown served as Director of Operations for Biocore
Medical Technologies, Inc. from April 1997 to April 1998. From 1981 through
1996, Mr. Brown served as Director, Regulatory Affairs/Quality Assurance for E
for M Corporation, a subsidiary of Marquette Electronics, Inc.
Brent L. Larson has served as Vice President, Finance and Chief Financial
Officer of Neoprobe since February 1999. Prior to that, he served as
Neoprobe's Vice President, Finance from July 1998 to January 1999 and as
Controller from July 1996 to June 1998. Before joining Neoprobe, Mr. Larson was
employed by Price Waterhouse LLP. Mr. Larson has a B.B.A. degree in Accounting
from Iowa State University of Science and Technology and is a Certified Public
Accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Act of 1934 requires our officers and directors,
and greater than 10% stockholders, to file reports of ownership and changes in
ownership of our securities with the Securities and Exchange Commission. Copies
of the reports are required by SEC regulation to be furnished to us. Based on
our review of these reports and written representations from reporting persons,
we believe that all reporting persons complied with all filing requirements
during the year ended December 31, 2001, except for a late Form 3 filing for
Carl M. Bosch and a late Form 3 filing for Nancy E. Katz.
37
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the annual and
long-term compensation of our Chief Executive Officer and our other three
executive officers having annual compensation in excess of $100,000 during the
last fiscal year (the Named Executives) for the last three fiscal years.
LONG TERM
COMPENSATION
AWARDS
--------------------------
SECURITIES
RESTRICTED UNDER-
ANNUAL COMPENSATION STOCK LYING
-------------------------------- AWARDS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) (#) COMPENSATION
--------------------------- -------------------------------- --- --- ------------
Carl M. Bosch, 2001 $129,375 $25,250 - 45,000 $ 3,081(c)
Vice President 2000 125,625 68,325 42,180(b) 45,000 1,643(c)
Instrument Development(a) 1999 116,250 23,104 - 20,000 1,163(c)
Rodger A. Brown, 2001 $99,875 $19,000 - 45,000 -
Vice President, Regulatory Affairs/ 2000 83,534 33,240 - 35,000 -
Quality Assurance(d) 1999 77,431 16,055 - 20,000 -
David C. Bupp, 2001 $310,000 $46,500 - 180,000 $ 3,400(c)
President and Chief 2000 304,769 106,300 140,600(e) 180,000 1,700(c)
Executive Officer 1999 306,731 - 21,875(e) - 1,600(c)
Brent L. Larson, 2001 $131,250 $20,250 - 60,000 $ 3,400(c)
Vice President, Finance 2000 126,250 44,900 56,240(f) 60,000 1,313(c)
and Chief Financial Officer 1999 109,375 23,104 6,250(f) 25,000 1,325(c)
(a) Mr. Bosch began his employment with the Company in May 1998 and was
promoted to Vice President in March 2000.
(b) The aggregate number of Mr. Bosch's restricted stock holdings at December
31, 2001 was 30,000 shares with an aggregate value of $12,600. Mr. Bosch
has the right to receive dividends other than dividends on or distributions
of shares of any class of stock issued by Neoprobe which dividends or
distributions will be delivered to Neoprobe under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.
(c) Amounts of matching contribution under the Neoprobe Corporation 401(k) Plan
(the 401(k) Plan). Eligible employees may make voluntary contributions and
the Company may, but is not obligated to, make matching contributions based
on 40 percent of the employee's contribution, up to five percent of the
employee's salary. Contributions by employees are invested by an
independent plan administrator in mutual funds and contributions, if any,
by the Company are made in the form of shares of common stock. The 401(k)
Plan is intended to qualify under section 401 of the Internal Revenue Code,
which provides that employee and Company contributions and income earned on
contributions are not taxable to the employee until withdrawn from the
plan, and that Company contributions will be deductible by the Company when
made.
(d) Mr. Brown began his employment with the Company in July 1998 and was
promoted to Vice President in November 2000.
(e) The aggregate number of Mr. Bupp's restricted stock holdings at December
31, 2001 was 210,000 shares with an aggregate value of $88,200. Mr. Bupp
has the right to receive dividends other than dividends on or distributions
of shares of any class of stock issued by Neoprobe which dividends or
distributions will be delivered to Neoprobe under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.
(f) The aggregate number of Mr. Larson's restricted stock holdings at December
31, 2001 was 70,000 shares with an aggregate value of $29,400. Mr. Larson
has the right to receive dividends other than dividends on or distributions
of shares of any class of stock issued by Neoprobe which dividends or
distributions will be delivered to Neoprobe under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.
38
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents certain information concerning stock options
granted to the Named Executives under the Company's Amended and Restated Stock
Option and Restricted Stock Purchase Plan during the 2001 fiscal year .
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED (SHARES) FISCAL YEAR PER SHARE DATE
---- --------------- ----------- --------- ----
Carl M. Bosch 45,000(a) 6% $0.41(b) 1/3/11(c)
Rodger A. Brown 45,000(a) 6% $0.41(b) 1/3/11(c)
David C. Bupp 180,000(a) 25% $0.41(b) 1/3/11(c)
Brent L. Larson 60,000(a) 8% $0.41(b) 1/3/11(c)
(a) Vests as to one-third of these shares on each of the first three
anniversaries of the date of grant.
(b) The per share weighted average fair value of these stock options during
2001 was $0.36 on the date of grant using the Black Scholes option pricing
model with the following assumptions: an expected life of 4 years, an
average risk-free interest rate of 4.93%, volatility of 148% and no
expected dividend rate.
(c) The options terminate on the earlier of the expiration date, nine months
after death or disability, 90 days after termination of employment without
cause or by resignation or immediately upon termination of employment for
cause.
FISCAL YEAR-END OPTION NUMBERS AND VALUES
The following table sets forth certain information concerning the number and
value of unexercised options held by the Named Executives at the end of the last
fiscal year (December 31, 2001). There were no stock options exercised by the
Named Executives during the fiscal year ended December 31, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END: AT FISCAL YEAR-END:
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
Carl M. Bosch 38,334 / 81,666 0 / $ 817
Rodger A. Brown 39,501 / 74,999 0 / $ 750
David C. Bupp 110,000 / 400,000 0 / $4,000
Brent L. Larson 68,867 / 108,333 0 / $1,083
COMPENSATION OF NON-EMPLOYEE DIRECTORS
In 2001, the Chairman of the Board of Directors of Neoprobe received $2,000 per
Board meeting attended in person and other non-employee Directors received
$1,000 each per meeting attended in person. The Company also paid Directors $500
each per Committee meeting attended in person during
39
2001. The Company did not pay Directors for telephonic participation in Board or
Committee meetings in 2001. The Company also reimbursed non-employee Directors
for travel expenses for meetings attended during 2001. In addition, the Chairman
and each non-employee Director received 30,000 and 15,000 options, respectively,
to purchase common stock as a part of the Company's annual stock incentive
grants. Options granted to purchase common stock vest on an annual basis over a
three-year period and have an exercise price equal to no less than the market
price of common stock at the date of grant.
Directors who are also officers or employees of the Company do not receive any
compensation for their services as Directors.
COMPENSATION OF MR. BUPP
Employment Agreement. David C. Bupp is employed under a thirty-six month
employment agreement effective July 1, 2001. The employment agreement provides
for an annual base salary of $310,000 with an increase to $325,000 on July 1,
2003.
The Compensation Committee of the Board of Directors will, on an annual basis,
review the performance of the Company and of Mr. Bupp and will pay a bonus to
Mr. Bupp as it deems appropriate, in its discretion. Such review and bonus will
be consistent with any bonus plan adopted by the Compensation Committee which
covers the executive officers of the Company generally. The Company has approved
payment of a $46,500 bonus to Mr. Bupp relating to fiscal year 2001.
If a change in control occurs with respect to the Company and the employment of
Mr. Bupp is concurrently or subsequently terminated (i) by the Company without
cause (cause is defined as any willful breach of a material duty by Bupp in the
course of his employment or willful and continued neglect of his duty as an
employee), (ii) the term of Mr. Bupp's employment agreement expires or (iii) Mr.
Bupp resigns because his authority, responsibilities or compensation have
materially diminished, a material change occurs in his working conditions or the
Company breaches the agreement, Mr. Bupp will be paid a severance payment of
$650,500 (less amounts paid as Mr. Bupp's salary and benefits that continue for
the remaining term of the agreement if his employment is terminated without
cause). If any such termination occurs after the substantial completion of the
liquidation of the assets of the Company, the severance payment shall be
increased by $81,250.
For purposes of Mr. Bupp's employment agreement, a change in control includes:
(a) the acquisition, directly or indirectly, by a person (other than the Company
or an employee benefit plan established by the Board of Directors) of beneficial
ownership of 15 percent or more of the Company's securities with voting power in
the next meeting of holders of voting securities to elect the Directors; (b) a
majority of the Directors elected at any meeting of the holders of the Company's
voting securities are persons who were not nominated by the Company's then
current Board of Directors or an authorized committee thereof; (c) the
stockholders of the Company approve a merger or consolidation of the Company
with another person, other than a merger or consolidation in which the holders
of the Company's voting securities outstanding immediately before such merger or
consolidation continue to hold voting securities in the surviving or resulting
corporation (in the same relative proportions to each other as existed before
such event) comprising eighty percent (80%) or more of the voting power for all
purposes of the surviving or resulting corporation; or (d) the stockholders of
the Company approve a transfer of substantially all of the assets of the Company
to another person other than a transfer to a transferee, eighty percent (80%) or
more of the voting power of which is owned or controlled by the Company or by
the holders of the Company's voting securities outstanding immediately before
such transfer in the same relative proportions to each other as existed before
such event.
Mr. Bupp's compensation will continue for the longer of twenty-four months or
the full term of the agreement if his employment is terminated without cause.
40
Restricted Stock Agreements. Mr. Bupp holds 100,000, 35,000, 45,000 shares and
30,000 shares of restricted stock granted on March 22, 2000, April 30, 1999, May
20, 1998 and June 1, 1996, respectively, pursuant to restricted stock purchase
agreements of the same dates. Mr. Bupp may not transfer or sell any of the
restricted shares unless and until they vest. Mr. Bupp will forfeit any portion
of the restricted shares that has not vested (and the Company will refund the
purchase price paid) on the earlier of the date of the termination of his
employment under his employment agreement with the Company for any reason unless
the Company is, at the time of termination for death or disability, actively
engaged in negotiations that could reasonably be expected to lead to a change in
control, or ten years from the date of grant. Restricted shares that have not
previously been forfeited will vest if and when there is a change in control of
the Company. Except for these restrictions on transfer and possibilities of
forfeiture, Mr. Bupp has all other rights with respect to the restricted shares,
including the right to vote such shares and receive cash dividends.
The term "change in control" has the same meaning under Mr. Bupp's restricted
stock agreements as it does under Mr. Bupp's employment agreement. In
conjunction with the acquisition of Cardiosonix, Mr. Bupp, along with the other
executive officers of the Company, waived the change of control provisions of
his employment and restricted stock agreements related to the acquisition.
The Company has not recognized any expense under the restricted stock agreements
due to the contingent nature of the vesting provisions and the risk of
forfeiture.
COMPENSATION AGREEMENTS WITH OTHER NAMED EXECUTIVES
Carl M. Bosch
Employment Agreement. Carl Bosch is employed under a twenty-four month
employment agreement effective October 1, 2001. The employment agreement
provides for an annual base salary of $135,000 with an increase to $148,000 on
October 1, 2002.
Mr. Bupp will, on an annual basis, review the performance of the Company and of
Mr. Bosch and the Company will pay a bonus to Mr. Bosch as it deems appropriate,
in its discretion. Such review and bonus will be consistent with any bonus plan
adopted by the Compensation Committee which covers the executive officers of the
Company generally. The Company has approved payment of a $25,250 bonus to Mr.
Bosch relating to fiscal year 2001.
If a change in control occurs with respect to the Company and the employment of
Mr. Bosch is concurrently or subsequently terminated (i) without cause (cause is
defined as any willful breach of a material duty by Bosch in the course of his
employment or willful and continued neglect of his duty as an employee), (ii)
the term of Mr. Bosch's employment agreement expires or (iii) Mr. Bosch resigns
because his authority, responsibilities or compensation have materially
diminished, a material change occurs in his working conditions or the Company
breaches the agreement, Mr. Bosch will be paid a severance payment of $296,000
and will continue his benefits for the longer of six months or the remaining
term of his employment agreement.
For purposes of Mr. Bosch's employment agreement, a change in control includes:
(a) the acquisition, directly or indirectly, by a person (other than the Company
or an employee benefit plan established by the Board of Directors) of beneficial
ownership of 30 percent or more of the Company's securities with voting power in
the next meeting of holders of voting securities to elect the Directors; (b) a
majority of the Directors elected at any meeting of the holders of the Company's
voting securities are persons who were not nominated by the Company's then
current Board of Directors or an authorized committee thereof; (c) the
stockholders of the Company approve a merger or consolidation of the Company
with another person, other than a merger or consolidation in which the holders
of the Company's voting securities outstanding immediately before such merger or
consolidation continue to hold voting securities in the surviving or
41
resulting corporation (in the same relative proportions to each other as existed
before such event) comprising eighty percent (80%) or more of the voting power
for all purposes of the surviving or resulting corporation; or (d) the
stockholders of the Company approve a transfer of substantially all of the
assets of the Company to another person other than a transfer to a transferee,
eighty percent (80%) or more of the voting power of which is owned or controlled
by the Company or by the holders of the Company's voting securities outstanding
immediately before such transfer in the same relative proportions to each other
as existed before such event.
Mr. Bosch will be paid a severance amount of $148,000 if his employment is
terminated at the end of his employment agreement or without cause, and his
benefits will be continued for up to twelve months.
Restricted Stock Agreement. Mr. Bosch also holds 30,000 shares of restricted
stock granted to him on March 22, 2000, pursuant to a restricted stock purchase
agreement with Neoprobe as of the same date. Under the terms of the underlying
restricted stock purchase agreement, Mr. Bosch may not transfer or sell any of
the restricted shares unless and until they vest. Mr. Bosch will forfeit any
portion of the restricted shares that has not vested (and the Company will
refund the purchase price paid) on the earlier of the date of the termination of
his employment under his employment agreement with the Company for any reason
unless the Company is, at the time of termination for death or disability,
actively engaged in negotiations that could reasonably be expected to lead to a
change in control, or ten years from the date of grant. Restricted shares that
have not previously been forfeited will vest if and when there is a change in
control of the Company. Except for these restrictions on transfer and
possibilities of forfeiture, Mr. Bosch has all other rights with respect to the
restricted shares, including the right to vote such shares and receive cash
dividends.
Rodger Brown
Employment Agreement. Rodger Brown is employed under a twenty-four month
employment agreement effective October 1, 2001. The employment agreement
provides for an annual base salary of $110,000 with an increase to $125,000 on
October 1, 2002. The terms of Mr. Brown's employment agreement are substantially
identical to Mr. Bosch's employment agreement except that Mr. Brown would be
paid $250,000 if terminated due to a change of control and $125,000 if
terminated at the end of his employment agreement or without cause.
Mr. Bupp will, on an annual basis, review the performance of the Company and of
Mr. Brown and the Company will pay a bonus to Mr. Brown as it deems appropriate,
in its discretion. Such review and bonus will be consistent with any bonus plan
adopted by the Compensation Committee which covers the executive officers of the
Company generally. The Company has approved payment of a $19,000 bonus to Mr.
Brown relating to fiscal year 2001.
Brent Larson
Employment Agreement. Brent Larson is employed under a twenty-four month
employment agreement effective October 1, 2001. The employment agreement
provides for an annual base salary of $135,000 with an increase to $148,000 on
October 1, 2002. The terms of Mr. Larson's employment agreement are
substantially identical to Mr. Bosch's employment.
Mr. Bupp will, on an annual basis, review the performance of the Company and of
Mr. Larson and the Company will pay a bonus to Mr. Larson as it deems
appropriate, in its discretion. Such review and bonus will be consistent with
any bonus plan adopted by the Compensation Committee which covers the executive
officers of the Company generally. The Company has approved a $20,250 bonus to
Mr. Larson relating to fiscal year 2001.
42
Restricted Stock Agreement(s). Mr. Larson also holds 40,000 shares, 20,000
shares and 10,000 shares of restricted stock granted to him at a price of $0.001
per share on March 22, 2000, April 30, 1999 and October 23, 1998, respectively,
pursuant to restricted stock purchase agreements of the same dates. The terms of
Mr. Larson's restricted stock purchase agreement are identical to those
contained in Mr. Bosch's restricted stock purchase agreement discussed above
regarding vesting, forfeiture and rights of ownership.
43
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table sets forth, as of February 28, 2002, certain information
with respect to the beneficial ownership of shares of common stock by (i) each
person known to the Company to be the beneficial owner of more than 5 percent of
the outstanding shares of common stock, (ii) each Director or nominee for
Director of the Company, (iii) each of the Named Executives (see Item 10,
Executive Compensation--Summary Compensation Table), and (iv) the Company's
Directors and executive officers as a group.
NUMBER OF
SHARES
BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(*) OF CLASS
----------------------------------------- ------------------ --------
Reuven Avital 2,286,712(a) 6.3%
Carl M. Bosch 125,652(b) (p)
Rodger A. Brown 78,634(c) (p)
David C. Bupp 510,320(d) 1.4%
John S. Christie 55,700(e) (p)
Nancy E. Katz 10,000(f) (p)
Julius R. Krevans 97,000(g) (p)
Brent L. Larson 203,929(h) (p)
Dan Manor 1,021,990(i) 2.8%
Fred B. Miller 1,000(j) (p)
Michael P. Moore 61,000(k) (p)
J. Frank Whitley, Jr. 56,000(l) (p)
All directors and officers as a group 5,005,549(m) 12.2%
(12 persons)
Paramount Capital Asset Management, Inc. 4,507,937(n) 12.3%
First Istratech Funds 2,108,555(o) 5.8%
(*) Unless otherwise indicated, the beneficial owner has sole voting and
investment power over these shares subject to the spousal rights, if any,
of the spouses of those beneficial owners who have spouses.
(a) This amount consists of 2,286,712 shares of Neoprobe common stock owned by
N. Assia. Trusteeship Ltd, Trustee for Ma'Aragim Enterprises Ltd., an
investment fund under the management and control of Mr. Avital. These
shares were acquired by Ma'Aragim in exchange for surrendering its shares
in Cardiosonix Ltd. on December 31, 2001 in connection with the
Registrant's acquisition of Cardiosonix.
(b) This amount includes 75,000 shares issuable upon exercise of options which
are exercisable within 60 days, 30,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 10,652 shares in Mr.
Bosch's account in the 401(k) Plan, but does not include 95,000 shares
issuable upon exercise of options which are not exercisable within 60 days.
Mr. Bosch is one of three trustees of the 401(k) Plan and may, as such,
share investment power over common stock held in such plan. The 401(k) Plan
holds an aggregate total of 105,532 shares of common stock. Mr. Bosch
disclaims any beneficial ownership of shares held by the 401(k) Plan that
are not allocated to his personal account.
(c) This amount includes 77,835 shares issuable upon exercise of options which
are exercisable within 60 days (5,001 of which are held by Mr. Brown's wife
and 799 shares held in Mrs. Brown's 401(k), but does not include 101,665
shares issuable upon exercise of options which are not exercisable within
60 days. Mr. Brown disclaims beneficial ownership for the shares and
options held by his wife.
44
(d) This amount includes 233,000 shares issuable upon exercise of options which
are exercisable within 60 days, 210,000 shares of restricted stock that
vest on a qualifying change in control of the Company, 13,820 shares in Mr.
Bupp's account in the 401(k) Plan, but it does not include 460,000 shares
issuable upon exercise of options which are not exercisable within 60 days.
Mr. Bupp is one of three trustees of the 401(k) Plan and may, as such,
share investment power over common stock held in such plan. The 401(k) Plan
holds an aggregate total of 105,532 shares of common stock. Mr. Bupp
disclaims any beneficial ownership of shares held by the 401(k) Plan that
are not allocated to his personal account.
(e) This amount includes 55,000 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 60,000 shares issuable
upon exercise of options which are not exercisable within 60 days.
(f) This amount includes 10,000 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 30,000 shares issuable
upon the exercise of options which are not exercisable within 60 days.
(g) This amount includes 95,000 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 105,000 shares
issuable upon exercise of options which are not exercisable within 60 days.
(h) This amount includes 117,200 shares issuable upon exercise of options which
are exercisable within 60 days, 70,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 11,229 shares in Mr.
Larson's account in the 401(k) Plan, but it does not include 110,000 shares
issuable upon exercise of options which are not exercisable within 60 days.
Mr. Larson is one of three trustees of the 401(k) Plan and may, as such,
share investment power over common stock held in such plan. The 401(k) Plan
holds an aggregate total of 105,532 shares of common stock. Mr. Larson
disclaims any beneficial ownership of shares held by the 401(k) Plan that
are not allocated to his personal account.
(i) These shares were acquired by Mr. Manor in exchange for surrendering his
shares in Cardiosonix Ltd. on December 31, 2001 in connection with the
Registrant's acquisition of Cardiosonix.
(j) This amount includes 1,000 shares held by Mr. Miller's wife for which he
disclaims beneficial ownership.
(k) This amount includes 55,000 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 60,000 shares issuable
upon exercise of options which are not exercisable within 60 days.
(l) This amount includes 55,000 shares issuable upon exercise of options which
are exercisable within 60 days, but does not include 60,000 shares issuable
upon exercise of options which are not exercisable within 60 days.
(m) This amount includes 765,034 shares issuable upon exercise of options which
are exercisable within 60 days 310,000 shares of restricted stock that vest
on a qualifying change in control of the Company and 36,398 shares held in
the Company's 401(k) Plan, but it does not include 1,186,666 shares
issuable upon the exercise of options which are not exercisable within 60
days. Certain executive officers of the Company are the trustees of the
401(k) Plan and may, as such, share investment power over common stock held
in such plan. Each trustee disclaims any beneficial ownership of shares
held by the 401(k) Plan that are not allocated to his personal account. The
401(k) Plan holds an aggregate total of 105,532 shares of common stock.
(n) This amount consists of 536,853 shares owned by the Aries Select I, LLC
(Aries I), 900,000 shares issuable upon the exercise of warrants owned by
Aries Select I, 1,265,647 shares owned by Aries Ltd., a Cayman Island
exempted company (Aries Ltd), and 2,100,000 shares issuable upon the
exercise of warrants owned by Aries Ltd. Paramount Capital Management,
Inc., a Delaware corporation (PCAM) has shared voting and dispositive power
over the shares of Aries Ltd and Aries I because PCAM is the investment
manager of Aries Ltd and the general partner of Aries I. Lindsay A.
Rosenwald, M.D. (Dr. Roswenwald) has shared voting and dispositive power
over the shares of Aries Ltd and Aries I because he is the sole shareholder
of PCAM. The address of PCAM, Aries Ltd, Aries I and Dr. Rosenwald is 787
Seventh Avenue, 48th Floor, New York, New York 10019. The disclosure
contained in this footnote is derived from a Form 4 filed by PCAM, Aries
Ltd, and Aries I and Dr. Rosenwald with the SEC on October 10, 2001.
(o) This amount consists of 448,636 shares owned by First Isratech Fund LLC,
1,394,468 shares owned by First Isratech Fund LP and 265,451 shares owned
by First Isratech Fund Norway AS. First Isratech Fund LLC is the general or
managing partner of First Isratech Fund LP and First Isratech Fund Norway
AS. These shares were acquired by First Isratech Fund LLC in exchange for
surrendering its shares in Cardiosonix Ltd. on December 31, 2001 in
connection with the Registrant's acquisition of Cardiosonix.
(p) Less than one percent.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
45
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 - K.
(A) LIST OF EXHIBITS AND FINANCIAL STATEMENTS FILED AS PART OF THIS
REPORT
(3) ARTICLES OF INCORPORATION AND BY - LAWS
3.1. Complete Restated Certificate of Incorporation of Neoprobe
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996, March 17, 1999,
and May 9, 2000 (incorporated by reference to Exhibit 3.1 to
the Company's March 31, 2000 Form 10-Q).
3.2. Amended and Restated By - Laws dated July 21, 1993, as
amended July 18, 1995 and May 30, 1996 (incorporated by
reference to Exhibit 99.4 to the Company's Current Report on
Form 8-K dated June 20, 1996).
3.3. Certificate of Elimination of Neoprobe Corporation filed on
May 9, 2000 with the Secretary of State of the State of
Delaware (incorporated by reference to Exhibit 3.3 to the
Company's March 31, 2000 Form 10-Q).
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the Restated
Certificate of Incorporation of the Company (see Exhibit
3.1).
4.2. See Articles II and VI and Section 2 of Article III and
Section 4 of Article VII of the Amended and Restated By -
Laws of the Company (see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between the
Company and Continental Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 of the Company's
registration statement on Form 8 - A).
4.4. Amendment Number 1 to the Rights Agreement between the
Company and Continental Stock Transfer & Trust Company dated
February 16, 1999 (incorporated by reference to Exhibit 4.4
to the Company's December 31, 1998 Form 10-K/A).
(10) MATERIAL CONTRACTS (*indicates management contract or
compensatory plan or arrangement).
10.1. 1. -- 10.1.24. Reserved.
10.1.25. Rights Agreement between the Company and Continental Stock
Transfer & Trust Company dated as of July 18, 1995 (see
Exhibit 4.3).
10.1.26. -- 10.1.30. Reserved.
10.1.31. Amendment Number 1 to the Rights Agreement between the
Company and Continental Stock Transfer & Trust Company
dated February 16, 1999 (see Exhibit 4.4).
10.1.32. -- 10.1.38. Reserved.
10.1.39. Settlement Agreement among the Company, The Aries Master
Fund, The Aries Domestic Fund, L.P., Paramount Capital,
Inc., and Paramount Capital Asset Management, Inc. dated
January 20, 2000 (incorporated by reference to Exhibit
10.1.39 of the Company's March 31, 2000 Form 10-Q).
10.1.40. Reserved.
46
10.1.41. Common Stock Purchase Agreement between the Company and
Fusion Capital II, LLC dated November 19, 2001 (incorporated
by reference to Exhibit 99(b) of the Company's December 3,
2001 Form 8-K).
10.2.1. -- 10.2.25. Reserved.
10.2.26. Amended and Restated Stock Option and Restricted Stock
Purchase Plan dated March 3, 1994 (incorporated by
reference to Exhibit 10.2.26 to the Company's December 31,
1993 Form 10 - K).*
10.2.27. -- 10.2.34. Reserved.
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996
between the Company and David C. Bupp (incorporated by
reference to Exhibit 10.2.35 to the Company's December 31,
1997 Form 10-K).*
10.2.36. Reserved.
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as
amended March 13, 1997 (incorporated by reference to
Exhibit 10.2.37 to the Company's December 31, 1997 Form 10
- K).*
10.2.38. -- 10.2.44. Reserved.
10.2.45. Restricted Stock Purchase Agreement between the Company
and David C. Bupp dated May 20, 1998 (incorporated by
reference to Exhibit 10.2.45 to the Company's June 30,
1998 Form 10-Q).*
10.2.46. -- 10.2.47. Reserved.
10.2.48. Restricted Stock Agreement dated October 23, 1998 between
the Company and Brent L. Larson (incorporated by reference
to Exhibit 10.2.48 to the Company's December 31, 1998 Form
10-K/A).*
10.2.49. Reserved
10.2.50. Restricted Stock Agreement dated April 30, 1999 between
the Company and David C. Bupp. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.2.50 to the
Company's June 30, 1999 Form 10 - Q).*
10.2.51. -- 10.2.53. Reserved.
10.2.54. Restricted Stock Agreement dated March 22, 2000 between
the Company and David C. Bupp. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed herewith
(incorporated by reference to Exhibit 10.2.54 of the
Company's March 31, 2000 Form 10-Q).*
10.2.55. Agreement, Release and Waiver between the Company and
Matthew F. Bowman dated March 31, 2000 (incorporated by
reference to Exhibit 10.2.55 to the Company's March 31,
2000 Form 10-Q).*
47
10.2.56. -- 10.2.58. Reserved.
10.2.59. Employment Agreement between the Company and David C.
Bupp, dated July 1, 2001 (incorporated by reference to
Exhibit 10.2.59 to the Company's September 30, 2001 Form
10-QSB).*
10.2.60. Employment Agreement between the Company and Carl M.
Bosch, dated October 1, 2001. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other agreements
omitted and setting forth the material details in which
such agreements differ from the one that is filed
herewith.*
10.2.61 Employment Agreement between Cardiosonix Ltd. (formerly
Biosonix Ltd.) and Dan Manor dated January 1, 2002.*
10.3.1. Technology Transfer Agreement dated July 29, 1992 between
the Company and The Dow Chemical Corporation (portions of
this Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.10 to the Company's Form S - 1).
10.3.2. -- 10.3.30. Reserved.
10.3.31. Cooperative Research and Development Agreement between the
Company and the National Cancer Institute (incorporated by
reference to Exhibit 10.3.31 to the Company's September
30, 1995 Form 10 - QSB).
10.3.32. -- 10.3.44. Reserved.
10.3.45. License dated May 1, 1996 between the Company and The Dow
Chemical Company (incorporated by reference to Exhibit
10.3.45 to the Company's June 30, 1996 Form 10 - QSB).
10.3.46. License Agreement dated May 1, 1996 between the Company
and The Dow Chemical Company (portions of this Exhibit
have been omitted pursuant to a request for confidential
treatment and have been filed separately with the
Commission), (incorporated by reference to Exhibit 10.3.46
to the Company's June 30, 1996 Form 10 - QSB).
10.3.47. License and Option Agreement between the Company and Cira
Technologies, Inc. dated April 1, 1998 (incorporated by
reference to Exhibit 10.3.47 to the Company's June 30, 1998
Form 10-Q).
10.3.48. Restated Subscription and Option Agreement between the
Company, Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre Triozzi and Gregory Noll, dated April
17, 1998 (incorporated by reference to Exhibit 10.3.48 to
the Company's June 30, 1998 Form 10-Q).
10.3.49. Restated Stockholders Agreement with the Company, Cira
Technologies, Inc., Richard G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith,
Ltd., Pierre L. Triozzi and Gregory Noll, dated April 17,
1998 (incorporated by reference to Exhibit 10.3.49 to the
Company's June 30, 1998 Form 10-Q).
10.3.50. Share Purchase Agreement between the Company and Biomedical
Investments (1997) Ltd. dated January 19, 2000
(incorporated by reference to Exhibit 10.3.50 to the
Company's March 31, 2000 Form 10-Q).
48
10.3.51. Option Agreement between the Company and Reico Ltd. dated
February 1, 2000 (incorporated by reference to Exhibit
10.1.40 to the Company's March 31, 2000 Form 10-Q).
10.3.52. Participation Agreement between the Company and Cira, LLC
dated November 30, 2000 (incorporated by reference to
Exhibit 10.3.52 to the Company's December 31, 2000 Form
10-KSB).
10.4.1. -- 10.4.32. Reserved.
10.4.32. Supply Agreement between the Company and eV Products dated
December 8, 1997 (portions of this Exhibit have been
omitted pursuant to a request for confidential treatment
and have been filed separately with the Commission),
(incorporated by reference to Exhibit 10.4.32 to Amendment
2 to the Company's December 31, 1997 Form 10 - K).
10.4.33. -- 10.4.38. Reserved.
10.4.39. Distribution Agreement between the Company and Ethicon
Endo-Surgery, Inc. dated October 1, 1999 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.4.39 to the Company's September 30, 1999 Form 10-Q).
10.4.40. -- 10.4.44. Reserved.
10.4.45. Manufacturing and Supply Agreement between the Company and
Plexus Corporation dated March 30, 2000 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission), (incorporated by reference to Exhibit
10.4.45 to the Company's March 31, 2000 Form 10-Q).
10.4.46. Revolving Credit Loan Agreement between the Company and
Firstar Bank, N.A. dated January 26, 2001 (incorporated by
reference to the Company's March 31, 2001 Form 10-QSB).
10.4.47. Revolving Credit Loan Note between the Company and Firstar
Bank, N.A. dated January 26, 2001 (incorporated by
reference to the Company's March 31, 2001 Form 10-QSB).
10.4.48. Continuing Security Agreement between the Company and
Firstar Bank, N.A. dated January 26, 2001 (incorporated by
reference to the Company's March 31, 2001 Form 10-QSB).
10.4.49. Product Supply Agreement between the Company and UMM
Electronics, Inc., dated October 25, 2001 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with
the Commission).
(21) SUBSIDIARIES OF THE COMPANY.
21.1. Subsidiaries of the Company.
49
(23) CONSENT OF EXPERTS AND COUNSEL.
23.1. Consent of KPMG LLP.
23.2. Consent of Somekh Chaikin.
(24) POWERS OF ATTORNEY.
24.1. Powers of Attorney.
24.2. Certified resolution of the Company's Board
of Directors authorizing officers and
directors signing on behalf of the Company
to sign pursuant to a power of attorney.
(B) REPORTS ON FORM 8 - K.
The Company filed a current report on Form 8-K on December 3,
2001, reporting its entering into a Common Stock Purchase
Agreement with Fusion Capital Fund II, LLC for the purchase of up
to $10,000,000 of common stock of the Company.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 7, 2002
NEOPROBE CORPORATION
(the Company)
By: /s/ David C. Bupp
--------------------------------
David C. Bupp, President and
Chief Executive Officer
SIGNATURE TITLE DATE
/s/David C. Bupp Director, President and Chief March 5, 2002
-------------------------------- Executive Officer
David C. Bupp (principal executive officer)
/s/ Brent L. Larson* Vice President, Finance and March 4, 2002
-------------------------------- Chief Financial Officer
Brent L. Larson (principal financial officer)
/s/ Reuven Avital* Director March 3, 2002
--------------------------------
Reuven Avital
/s/ John S. Christie* Director March 7, 2002
--------------------------------
John S. Christie
Director
--------------------------------
Nancy E. Katz
/s/ Julius R. Krevans* Chairman, Director March 5, 2002
--------------------------------
Julius R. Krevans
/s/ Dan Manor* Director March 6, 2002
--------------------------------
Dan Manor
/s/ Fred B. Miller* Director March 6, 2002
--------------------------------
Fred B. Miller
/s/ Michael P. Moore* Director March 6, 2002
--------------------------------
Michael P. Moore
/s/ J. Frank Whitley, Jr.* Director March 6, 2002
--------------------------------
J. Frank Whitley, Jr.
*By: /s/ David C. Bupp
---------------------------
David C. Bupp, Attorney-in-fact
51
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
NEOPROBE CORPORATION
------------------------
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEARS ENDED:
DECEMBER 31, 2001 AND 2000
----------------------------
FINANCIAL STATEMENTS
----------------------------
-------------------------------------------------------------------------------
NEOPROBE CORPORATION AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Neoprobe Corporation
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for the years ended
December 31, 2001 and December 31, 2000 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2001 and December 31, 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and December 31, 2000 F-7
Notes to the Consolidated Financial Statements F-8
Audited Financial Statements of Cardiosonix Ltd. (A Development Stage Company)
Report of Independent Auditors F-24
Balance Sheets as of December 31, 2001 (predecessor and successor)
and December 31, 2000 (predecessor) F-25
Statements of Operations for the years ended December 31, 2001
(predecessor and successor) and December 31, 2000
(predecessor), and for amounts accumulated during the
development stage F-27
Statements of Shareholders' Equity for the years ended December 31,
2001 (predecessor and successor) and December 31, 2000
(predecessor), and for amounts accumulated during the
development stage F-28
Statements of Cash Flows for the years ended December 31, 2001
(predecessor and successor) and December 31, 2000
(predecessor), and for amounts accumulated during the
development stage F-29
Notes to the Financial Statements F-30
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Pro Forma Condensed Consolidated Statement of Operations F-41
Notes to the Pro Forma Condensed Consolidated Financial Statements F-42
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Neoprobe Corporation
We have audited the accompanying consolidated balance sheets of Neoprobe
Corporation and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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 financial position of Neoprobe Corporation
and subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 9(b) to the financial statements, effective July 1, 2001,
Neoprobe Corporation adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations, and certain provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, as required for intangible assets
resulting from business combinations consummated after June 30, 2001.
/s/ KPMG LLP
Columbus, Ohio
March 5, 2002
F-2
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS 2001 2000
------------------- ------------------
Current assets:
Cash and cash equivalents $ 4,287,101 $ 4,643,347
Accounts receivable, net 561,129 365,061
Inventory, net 1,430,908 941,120
Prepaid expenses and other 268,445 232,416
------------------- ------------------
Total current assets 6,547,583 6,181,944
------------------- ------------------
Property and equipment 2,171,788 2,039,187
Less accumulated depreciation and amortization 1,502,676 1,174,167
------------------- ------------------
669,112 865,020
------------------- ------------------
Patents 3,183,639 622,856
Non-compete agreements 603,880 -
Acquired technology 245,131 -
------------------- ------------------
4,032,650 622,856
Less accumulated amortization 122,697 98,821
------------------- ------------------
3,909,953 524,035
------------------- ------------------
Other assets 202,258 1,816
------------------- ------------------
Total assets $ 11,328,906 $ 7,572,815
=================== ==================
CONTINUED
F-3
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------------- -------------------
Current liabilities:
Notes payable to finance company $ 161,865 $ 105,332
Capital lease obligation, current 12,914 11,359
Accrued liabilities 1,011,495 725,674
Accounts payable 489,688 731,985
Deferred license revenue, current 800,000 800,000
------------------- -------------------
Total current liabilities 2,475,962 2,374,350
------------------- -------------------
Capital lease obligation 20,011 32,926
Deferred license revenue 1,400,000 2,200,000
Contingent consideration for acquisition 453,602 -
Other liabilities 75,493 -
------------------- -------------------
Total liabilities 4,425,068 4,607,276
------------------- -------------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock; $.001 par value; 5,000,000 shares
authorized at December 31, 2001 and 2000; none issued and
outstanding (500,000 shares designated as Series A, $.001 par
value, at December 31, 2001 and 2000; none outstanding) - -
Common stock; $.001 par value; 50,000,000 shares
authorized; 36,449,067 shares issued and
outstanding at December 31, 2001; 26,264,103
shares issued and outstanding at December 31, 2000 36,449 26,264
Additional paid-in capital 124,581,800 120,668,639
Accumulated deficit (117,714,411) (117,729,364)
------------------- -------------------
Total stockholders' equity 6,903,838 2,965,539
------------------- -------------------
Total liabilities and stockholders' equity $ 11,328,906 $ 7,572,815
=================== ===================
See accompanying notes to consolidated financial statements
F-4
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000
-------------------- ------------------
Revenues:
Net sales $6,758,895 $8,835,185
License revenue 825,000 875,000
-------------------- ------------------
Total revenues 7,583,895 9,710,185
-------------------- ------------------
Cost of goods sold 4,385,632 4,990,014
-------------------- ------------------
Gross profit 3,198,263 4,720,171
-------------------- ------------------
Operating expenses:
Research and development 344,675 472,730
Selling, general and administrative 2,321,115 2,911,159
Acquired in-process research and development 884,678 -
-------------------- ------------------
Total operating expenses 3,550,468 3,383,889
-------------------- ------------------
(Loss) income from operations (352,205) 1,336,282
-------------------- ------------------
Other income (expense):
Interest income 127,657 205,964
Interest expense (11,100) (24,880)
Other 253,217 322,871
-------------------- ------------------
Total other income 369,774 503,955
-------------------- ------------------
Net income before income taxes 17,569 1,840,237
Provision for income taxes 2,616 331
-------------------- ------------------
Net income 14,953 1,839,906
-------------------- ------------------
Loss on retirement of preferred stock - 764,668
-------------------- ------------------
Income attributable to common stockholders $ 14,953 $1,075,238
==================== ==================
Income per common share:
Basic $ 0.00 $ 0.04
Diluted $ 0.00 $ 0.04
Weighted average shares outstanding:
Basic 25,899,499 25,710,127
Diluted 26,047,485 26,440,363
See accompanying notes to consolidated financial statements
F-5
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------- ------------- --------------- ---------------- -------------
Balance, December 31, 1999 23,046,644 $ 23,047 $119,407,204 $(119,569,270) $(139,019)
Exercise of employee stock options
at $1.25 to $1.50 per share 24,133 24 33,884 - 33,908
Issued to 401(k) plan at $0.79 23,326 23 18,290 - 18,313
Issued restricted stock to officers 170,000 170 - - 170
Issued common stock in redemption
of redeemable convertible preferred
stock and warrants, net of costs 3,000,000 3,000 1,209,261 - 1,212,261
Net income - - - 1,839,906 1,839,906
-------------- ------------- --------------- ---------------- -------------
Balance, December 31, 2000 26,264,103 26,264 120,668,639 (117,729,364) 2,965,539
Exercise of employee stock options
at $0.50 per share 1,667 2 832 - 834
Issued to 401(k) plan at $0.68 19,122 19 13,006 - 13,025
Issued warrants to investor relations - - 1,311 - 1,311
firm
Issued as commitment fee in connection
with equity line, net of costs 449,438 449 (45,315) - (44,866)
Issued in connection with acquisition,
net of costs 9,714,737 9,715 3,943,327 - 3,953,042
Net income - - - 14,953 14,953
-------------- ------------- --------------- ---------------- -------------
Balance, December 31, 2001 36,449,067 $ 36,449 $124,581,800 $(117,714,411) $ 6,903,838
============== ============= =============== ================ =============
See accompanying notes to consolidated financial statements.
F-6
NEOPROBE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000
----------------- ------------------
Cash flows from operating activities:
Net income $ 14,953 $ 1,839,906
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation of property and equipment 399,241 358,843
Amortization of intangible assets 23,876 33,656
Provision for bad debts 13,313 1,670
Net loss on disposal and abandonment of assets 83,192 201,088
Acquired in-process research and development 884,678 -
Other (33,630) 18,313
Change in operating assets and liabilities:
Accounts receivable (127,687) 86,675
Inventory (570,558) 38,418
Prepaid expenses and other assets 9,550 559,933
Accrued liabilities and other liabilities 121,905 (639,975)
Accounts payable (295,834) (27,976)
Deferred revenue (800,000) (800,000)
----------------- ------------------
Net cash (used in) provided by operating activities (277,001) 1,670,551
----------------- ------------------
Cash flows from investing activities:
Proceeds from sale of investment in affiliate - 1,500,000
Purchases of property and equipment (72,028) (168,165)
Proceeds from sales of property and equipment 2,175 102,516
Patent costs (16,985) (32,984)
Net cash acquired through acquisition of subsidiary 195,426 -
----------------- ------------------
Net cash provided by investing activities 108,588 1,401,367
----------------- ------------------
Cash flows from financing activities:
Settlement of obligation to preferred stockholder - (2,500,000)
Proceeds from issuance of common stock 834 34,078
Payment of offering costs (44,866) (33,275)
Payments under line of credit - (480,000)
Payment of notes payable (132,442) (169,294)
Payments under capital leases (11,359) (162,617)
----------------- ------------------
Net cash used in financing activities (187,833) (3,311,108)
----------------- ------------------
Net decrease in cash and cash equivalents (356,246) (239,190)
Cash and cash equivalents, beginning of year 4,643,347 4,882,537
----------------- ------------------
Cash and cash equivalents, end of year $4,287,101 $4,643,347
================= ==================
See accompanying notes to consolidated financial statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION AND NATURE OF OPERATIONS: Neoprobe Corporation
(Neoprobe or the Company), a Delaware corporation, is engaged
in the development and commercialization of innovative
surgical and diagnostic products that enhance patient care by
meeting the critical decision making needs of healthcare
professionals. The Company currently manufactures a line of
gamma radiation detection equipment used in the application of
intraoperative lymphatic mapping (ILM). On December 31, 2001,
the Company acquired Cardiosonix Ltd. (Cardiosonix, formerly
Biosonix Ltd.), located in Kfar Malal, Israel. Cardiosonix is
developing and commercializing a unique line of blood flow
monitoring devices for a variety of diagnostic and surgical
applications.
The Company's ILM products are marketed throughout most of the
world through a distribution arrangement with Ethicon
Endo-Surgery, Inc. (Ethicon), a Johnson & Johnson company. For
the years ended December 31, 2001 and 2000, 96% and 100% of
net sales, respectively, were made to Ethicon. The loss of
this customer would have a significant adverse effect on the
Company's operating results.
b. PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements of the Company include the accounts of the Company
and its wholly owned subsidiary beginning December 31, 2001
(See Note 9(b).). All significant inter-company accounts were
eliminated in consolidation for 2001.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class
of financial instruments:
(1) Cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities: The
carrying amounts approximate fair value because of
the short maturity of these instruments.
(1) Notes payable to finance company: The fair value of
the Company's debt is estimated by discounting the
future cash flows at rates currently offered to the
Company for similar debt instruments of comparable
maturities by banks or finance companies. At December
31, 2001 and 2000, the carrying values of these
instruments approximate fair value.
d. CASH AND CASH EQUIVALENTS: There were no cash equivalents at
December 31, 2001 or 2000. None of the cash presented in the
December 31, 2001 and 2000 balance sheets is pledged or
restricted in any way.
e. INVENTORY: The components of inventory at December 31, 2001
and 2000, are as follows:
2001 2000
---------------- ----------------
Materials and component parts $ 807,393 $ 418,087
Finished goods 623,515 523,033
---------------- ----------------
$ 1,430,908 $ 941,120
================ ================
All components of inventory are valued at the lower of cost
(first-in, first-out) or market. The Company adjusts inventory
to market value when the net realizable value is lower than
the carrying cost of the inventory. Market value is determined
based on recent sales activity and margins achieved.
f. PROPERTY AND EQUIPMENT: Property and equipment are stated at
cost. Property and equipment under capital leases are stated
at the present value of minimum lease payments. Depreciation
is computed using the straight-line method over the estimated
useful lives of the depreciable assets ranging from 2 to 7
years, and includes amortization related to equipment under
capital leases. Maintenance and repairs are charged to expense
as incurred, while renewals and improvements are capitalized.
Property and equipment includes $51,000 of equipment under
capital leases and accumulated amortization of $19,000 and
$9,000 at December 31, 2001 and 2000, respectively. During
2001 and 2000, the Company recorded (losses) gains of
$(13,000) and $49,000, respectively, on the disposal of
property and equipment.
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The major classes of property and equipment are as follows:
2001 2000
------------------ ------------------
Production machinery and equipment $ 818,047 $ 823,770
Other machinery and equipment, primarily
computers and research equipment 790,888 628,242
Furniture and fixtures 357,131 393,517
Leasehold improvements 105,166 98,353
Other 100,556 95,305
------------------ ------------------
$ 2,171,788 $ 2,039,187
================== ==================
g. INTANGIBLE ASSETS: Intangible assets consist primarily of
patents and other acquired intangible assets. Intangible
assets are stated at cost or at fair value as of the date
acquired, less accumulated amortization. Patent costs are
amortized using the straight-line method over the estimated
useful lives of the patents of up to 15 to 20 years. Patent
application costs are deferred pending the outcome of patent
applications. Costs associated with unsuccessful patent
applications and abandoned intellectual property are expensed
when determined to have no recoverable value. Non-compete
agreements and acquired technology are amortized using the
straight-line method over their estimated useful lives of four
years and seven years, respectively. The Company evaluates the
potential alternative uses of all intangible assets, as well
as the recoverability of the carrying values of intangible
assets on a recurring basis.
During 2001 and 2000, the Company recorded general and
administrative expenses of $70,000 and $250,000, respectively,
related to the abandonment of patents and patent applications
that were deemed no longer recoverable or part of the ongoing
business of the Company.
h. REVENUE RECOGNITION
(1) PRODUCT SALES AND WARRANTY: The Company derives
revenues primarily from sales of its hand-held gamma
detection instruments. The Company recognizes sales
revenue when the products are shipped and the
earnings process has been completed. The Company's
customers have no right to return products purchased
in the ordinary course of business. Sales prices on
products sold to Ethicon are subject to retroactive
annual adjustment based on a fixed percentage of the
actual sales prices achieved by Ethicon on sales to
end customers made during each fiscal year. To the
extent that the Company can reasonably estimate the
end customer prices received by Ethicon, the Company
records sales to Ethicon based upon these estimates.
To the extent that the Company is not able to
reasonably estimate end customer sales prices related
to certain product sold to Ethicon, the Company
records revenue related to these product sales at the
minimum price provided for under its distribution
agreement with Ethicon.
The Company recognizes revenue related to the sales
of products to be used for demonstration units when
products are shipped and the earnings process has
been completed. The Company's distribution agreement
does not permit return of demonstration units in the
ordinary course of business nor does the Company have
any performance obligations other than normal product
warranty obligations. To the extent that the earnings
process has not been completed, revenue is deferred.
The Company warrants its products against defects in
design, materials, and workmanship for a period of
one year from the date of sale by Ethicon. The
Company's accrual for warranty expenses is adjusted
periodically to reflect actual experience. Ethicon
also reimburses the Company for a portion of warranty
expense incurred based on end customer sales made
during a given fiscal year.
(2) LICENSE REVENUE: The Company recognizes license
revenue in connection with its distribution agreement
with Ethicon on a straight-line basis over the
five-year initial term of the agreement based on the
Company's obligations to provide ongoing support for
the intellectual property being
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
licensed such as patent maintenance and regulatory
filings. As the license relates to intellectual
property held or in-licensed by the Company, the
Company incurs no significant cost associated with
the recognition of this revenue.
i. RESEARCH AND DEVELOPMENT COSTS: All costs related to
research and development are expensed as incurred.
j. INCOME TAXES: Income taxes are accounted for under the asset
and liability method. 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 and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
k. STOCK OPTION PLANS: The Company applies the intrinsic
value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in
accounting for its stock options. As such, compensation
expense would be recorded on the date of grant and amortized
over the period of service only if the current market price of
the underlying stock exceeded the exercise price.
l. EQUITY ISSUED TO NON-EMPLOYEES: The Company accounts for
equity instruments granted to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force
Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods, or Services. All transactions
in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on
the fair value of the consideration received or the equity
instrument issued, whichever is more reliably measurable. The
measurement date of the fair value of the equity instrument
issued is the earlier of the date on which the counterpart's
performance is complete or the date on which it is probable
that performance will occur.
m. USE OF ESTIMATES: The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
n. COMPREHENSIVE INCOME (LOSS): The Company had no accumulated
other comprehensive income (loss) activity during the years
ended December 31, 2001 and 2000.
o. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF: The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net undiscounted cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
p. RECLASSIFICATION: Certain prior years' amounts have been
reclassified to conform with the 2001 presentation.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER SHARE:
Basic earnings per share is calculated using the weighted average number of
common shares outstanding during the periods. Diluted earnings per share is
calculated using the weighted average number of common shares outstanding
during the periods, adjusted for the effects of convertible securities,
options and warrants, if dilutive.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------------------------- -------------------------------------
BASIC DILUTED BASIC DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE
--------------- --------------- ---------------- -----------------
Outstanding shares 36,449,067 36,449,067 26,264,103 26,264,103
Effect of weighting changes
in outstanding shares (10,109,568) (10,109,568) (183,976) (183,976)
Contingently issuable shares (440,000) (440,000) (370,000) (370,000)
Stock options - 147,986 - 303,410
Warrants - - - 426,826
--------------- --------------- ---------------- -----------------
Adjusted shares 25,899,499 26,047,485 25,710,127 26,440,363
=============== =============== ================ =================
The following table summarizes options to purchase common stock of the
Company which were outstanding during the years ended December 31, 2001 and
2000, but which were not included in the computation of diluted income per
share because their effect was anti-dilutive.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
-------------------------------------------------- -------------------------------------------------
EXERCISE OPTIONS EXERCISE OPTIONS
PRICE OUTSTANDING PRICE OUTSTANDING
--------------------------- ------------------- ------------------------- --------------------
$ 0.60 - $ 1.25 393,169 $ 1.03 - $ 1.25 236,154
$ 1.50 - $ 2.50 227,443 $ 1.50 - $ 2.50 345,908
$ 3.25 - $ 6.00 145,871 $ 3.00 - $ 6.00 372,352
$13.38 - $15.75 47,137 $13.38 - $17.44 121,774
------------------- --------------------
813,620 1,076,188
=================== ====================
3. ACCOUNTS RECEIVABLE AND CONCENTRATIONS OF CREDIT RISK:
Accounts receivable at December 31, 2001 and 2000, net of allowance for
doubtful accounts of $39,670 and $26,357, respectively, consist of the
following:
2001 2000
---------------- --------------
Trade $226,925 $ -
Other 334,204 365,061
---------------- --------------
$561,129 $365,061
================ ==============
Trade receivables consist of receivables from customers based on the sales
and service of the Company's products.
At December 31, 2001 and 2000, approximately 57% and 73%, respectively, of
the Company's net accounts receivable are due from Ethicon. The Company
does not believe it is exposed to significant credit risk related to
Ethicon based on the overall financial strength and credit worthiness of
the customer and its parent company. The Company believes that it has
adequately addressed other credit risks in estimating the allowance for
doubtful accounts.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company estimates an allowance for doubtful accounts based on a review
and assessment of specific accounts receivable. The activity in the
allowance for doubtful accounts for the years ended December 31, 2001 and
2000 is as follows:
2001 2000
--------------- ---------------
Allowance for doubtful accounts at beginning of year $26,357 $97,382
Provision for bad debts 13,313 1,670
Writeoffs charged against the allowance - (72,695)
--------------- ---------------
Allowance for doubtful accounts at end of year $39,670 $26,357
=============== ===============
4. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE:
Accrued liabilities at December 31, 2001 and 2000 consist of the following:
2001 2000
----------------- ----------------
Contracted services and other $ 494,416 $ 263,393
Compensation 306,216 219,815
Unearned extended warranty revenue 109,841 1,875
Warranty reserve 90,000 120,000
Inventory purchases 11,022 120,591
----------------- ----------------
$1,011,495 $ 725,674
================= ================
Accounts payable at December 31, 2001 and 2000 consist of the following:
2001 2000
----------------- ----------------
Trade $359,608 $ 676,610
Other 130,080 55,375
----------------- ----------------
$489,688 $ 731,985
================= ================
5. LINE OF CREDIT:
During January 2001, the Company executed a revolving line of credit with a
bank that provided the Company with access to up to $1.5 million to finance
general working capital needs, subject to certain terms and covenants. The
Company terminated the line of credit on November 8, 2001. No fees were
incurred to terminate the credit facility.
6. INCOME TAXES:
As of December 31, 2001, the Company's net deferred tax assets in the U.S.
were approximately $36.7 million. Approximately $31.3 million of the
deferred tax assets relate principally to net operating loss carryforwards
of approximately $92.0 million available to offset future taxable income,
if any, through 2021. An additional $4.4 million relates to tax credit
carryforwards (principally research and development) available to reduce
future income tax liability after utilization of tax loss carryforwards, if
any, through 2021. The remaining $1.0 million relates to temporary
differences between the carrying amount of assets and liabilities and their
tax bases. Due to the uncertainty surrounding the realization of these
favorable tax attributes in future tax returns, all of the net deferred tax
assets have been fully offset by a valuation allowance at December 31,
2001.
As of December 31, 2001, Cardiosonix had net deferred tax assets in Israel
of approximately $675,000, primarily related to net operating loss
carryforwards of approximately $1.9 million available to offset future
taxable income, if any. Under current Israeli tax law, net operating loss
carryforwards do not expire. Due to the uncertainty surrounding the
realization of these favorable tax attributes in future tax returns, all of
the net deferred tax assets have been fully offset by a valuation allowance
at December 31, 2001.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986, as
amended, the utilization of U.S. net operating loss and tax credit
carryforwards may be limited under the change in stock ownership rules of
the IRC. As a result of ownership changes as defined by Sections 382 and
383, which have occurred at various points in the Company's history,
management believes utilization of the Company's net operating loss
carryfowards and tax credit carryforwards may be limited under certain
circumstances.
7. EQUITY:
a. REDEEMABLE PREFERRED STOCK: On February 16, 1999, the Company
executed a purchase agreement for the private placement of 30,000
shares of 5% Series B redeemable convertible preferred stock (the
Series B) and 2.9 million warrants for gross proceeds of $3 million
($2.8 million, net of certain placement costs). The Series B and
related warrants had variable conversion provisions based on the
market price of the Company's common stock and were subject to
certain redemption provisions.
On November 12, 1999, the Company entered into a binding letter of
intent to retire the Series B and the Class L warrants. The letter of
intent committed the Series B holders to surrender the Series B
shares and Class L warrants as well as to grant the Company general
releases from potential litigation associated with the transaction.
In exchange for the retirement of the Series B preferred shares and
surrendering the Class L warrants, the Company agreed to pay the
Series B holders a total of $2.5 million and to issue the Series B
holders 3 million shares of common stock and 3 million Class N
warrants to purchase shares of common stock with an exercise price of
$0.74 per share. On January 20, 2000, the Company executed and
completed a definitive Settlement Agreement with the Series B holders
on terms consistent with the November 1999 letter.
In accordance with the aforementioned terms, the transaction was
reported in the Company's first quarter 2000 financial statements and
was measured based on the market price of the Company's common stock
as of the execution of the definitive agreement (i.e., $0.59 per
share). As a result, the Company reflected a loss on the retirement
of the preferred shares of $765,000 below net income in its
calculation of earnings per share during the first quarter of 2000.
This amount represents the value of the cash given up plus the market
value of the stock issued and the estimated market value of the
warrants issued as valued on January 20, 2000 less the previously
recorded book value of the Series B preferred stock and warrants.
b. STOCK OPTIONS: At December 31, 2001, the Company has two stock-based
compensation plans. Under the Amended and Restated Stock Option
and Restricted Stock Purchase Plan (the Amended Plan), and under the
1996 Stock Incentive Plan (the 1996 Plan), the Company may grant
incentive stock options, nonqualified stock options, and restricted
stock awards to full-time employees, and nonqualified stock options
and restricted awards may be granted to consultants and agents of the
Company. Total shares authorized under each plan are 2 million shares
and 1.5 million shares, respectively. Under both plans, the exercise
price of each option is greater than or equal to the closing market
price of the Company's common stock on the day prior to the date of
the grant.
Options granted under the Amended Plan and the 1996 Plan generally
vest on either a monthly basis over two to four years or on an annual
basis over three years. Outstanding options under the plans, if not
exercised, generally expire ten years from their date of grant or
90 days from the date of an optionee's separation from employment
with the Company.
Had compensation cost for the Company's two stock-based compensation
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with SFAS No. 123, the Company's
income (loss) attributable to common stockholders and income (loss)
per common share would have been decreased to the pro forma amounts
indicated below:
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
---------------- ----------------
Income (loss) attributable to As reported $ 14,953 $ 1,075,238
common stockholders Pro forma $ (284,867) $ 677,437
Income (loss) per common
share (basic and diluted) As reported $ 0.00 $ 0.04
Pro forma $ (0.01) $ 0.03
The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions for 2001 and 2000, respectively: average risk-free interest
rates of 4.9% and 6.4%; expected average lives of three to four years
for each of the years presented; no dividend rate for any year; and
volatility of 148% for 2001 and 143% for 2000. The weighted average
fair value of options granted in 2001 and 2000 was $0.36 and $0.43,
respectively.
A summary of the status of stock options under the Company's stock
option plans as of December 31, 2001and 2000, and changes during the
years ended on those dates is presented below:
2001 2000
-------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------------- --------------- -------------- ----------------
Outstanding at
beginning of year 1,635,273 $ 2.54 1,484,002 $ 4.16
Granted 715,000 $ 0.42 750,000 $ 0.52
Forfeited (486,483) $ 6.06 (574,596) $ 4.15
Exercised (1,667) $ 0.50 (24,133) $ 1.41
------------- --------------
Outstanding at
end of year 1,862,123 $ 0.81 1,635,273 $ 2.54
============= ==============
Options exercisable
at end of year 577,627 624,465
============= ==============
On July 5, 2001, the Directors voluntarily forfeited 337,500 options,
all of which were priced above $3.00 per share. Included in outstanding
options as of December 31, 2001, are 100,000 options exercisable at an
exercise price of $2.50 per share which vest on the meeting of certain
Company achievements.
The following table summarizes information about the Company's stock
options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER
OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AS WEIGHTED
OF REMAINING EXERCISE OF AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL PRICE DECEMBER 31, EXERCISE
PRICES 2001 LIFE 2001 PRICE
----------------------- ---------------- ---------------- ------------ ---------------- --------------
$ 0.41 - $ 0.42 645,000 9 years $ 0.41 - $ -
$ 0.50 - $ 0.75 782,000 8 years $ 0.55 292,003 $ 0.57
$ 1.03 - $ 1.50 258,923 7 years $ 1.31 209,424 $ 1.33
$ 2.50 - $ 5.63 176,200 3 years $ 2.67 76,200 $ 2.89
---------------- ----------------
$ 0.41 - $ 5.63 1,862,123 8 years $ 0.81 577,627 $ 1.15
================ ================
c. RESTRICTED STOCK: During 2000, the Company granted 170,000 shares of
restricted common stock to officers of the Company under the 1996
Plan. During 2001 and 2000, 60,000 and 20,000 shares of
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding restricted common stock, respectively, were forfeited
related to the separation of two employees.
At December 31, 2001, the Company has 440,000 restricted shares issued
and outstanding under the 1996 Plan. All of the restricted shares
granted vest on a change of control of the Company as defined in the
specific grant agreements. As a result, the Company has not recorded
any deferred compensation due to the inability to assess the
probability of the vesting event. Of the shares issued and
outstanding, 75,000 also vest under certain conditions of
termination separate from a change of control as defined in an
officer's employment agreement with the Company (See Note 10(e).).
d. STOCK WARRANTS: At December 31, 2001, there are 3.1 million warrants
outstanding to purchase common stock of the Company. The warrants are
exercisable at prices ranging from $0.74 to $5.00 per share with a
weighted average exercise price per share of $0.81. Three million of
the warrants expire in January 2003, 50,000 expire in February 2004,
25,000 expire in November 2005, and 25,000 expire in November 2006.
e. COMMON STOCK RESERVED: Shares of authorized common stock have been
reserved for the exercise of all options and warrants outstanding.
f. EQUITY LINE: On November 19, 2001, the Company entered into a common
stock purchase agreement with Fusion Capital Fund II, LLC, (Fusion)
pursuant to which Fusion agreed to purchase up to $10 million of the
Company's common stock over a forty (40) month period following the
effectiveness of a registration statement and satisfaction of other
conditions.
Subject to the limitations and termination rights described below, the
Company may require Fusion to purchase up to the monthly base amount
of $250,000 of the Company's common stock at a purchase price based
on the market price for the Company's common stock. The obligation of
Fusion to purchase each month is subject to customary conditions, all
of which are outside the control of Fusion as well as the Company's
right to suspend purchases as described below.
The selling price per share is equal to the lowest of (a) the lowest
sale price of our common stock on the day of submission of a purchase
notice by Fusion; or (b) the average of the three lowest closing sale
prices of our common stock during the 12 consecutive trading days
prior to the date of submission of a purchase notice by Fusion. The
selling price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split or other similar
transaction occurring during the 15 trading days in which the closing
sale price is used to compute the purchase price.
If the closing sale price of the Company's common stock is below the
floor price of $0.30, Fusion shall not have the right or obligation to
purchase shares. The Company may increase or decrease the floor price,
but in no case may the floor price be set below $0.20 without Fusion's
consent. The Company may, at any time, suspend purchases upon one
day's written notice to Fusion.
Notwithstanding the foregoing, Fusion may not purchase shares of
common stock under the stock purchase agreement if Fusion or its
affiliates would beneficially own more than 4.9% of the Company's then
aggregate outstanding common stock immediately after the proposed
purchases, unless increased to 9.9% based on the Company's written
agreement.
Under the terms of the stock purchase agreement, Fusion received
449,438 shares of the Company's common stock representing half of the
total commitment fee for the equity line. The remaining commitment
shares are to be issued on a pro-rata basis if, and when, the Company
draws on the equity line of credit.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. SHAREHOLDER RIGHTS PLAN:
During July 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, one "Right" is to be distributed for each
share of common stock held by shareholders on the close of business on
August 28, 1995. The Rights are exercisable only if a person and its
affiliate commences a tender offer or exchange offer for 15% or more of the
Company's common stock, or if there is a public announcement that a person
and its affiliate has acquired beneficial ownership of 15% or more of the
common stock, and if the Company does not redeem the Rights during the
specified redemption period. Initially, each Right, upon becoming
exercisable, would entitle the holder to purchase from the Company one unit
consisting of 1/100th of a share of Series A Junior Participating preferred
stock at an exercise price of $35 (which is subject to adjustment). Once
the Rights become exercisable, if any person, including its affiliate,
acquires 15% or more of the common stock of the Company, each Right other
than the Rights held by the acquiring person and its affiliate becomes a
right to acquire common stock having a value equal to two times the
exercise price of the Right. The Company is entitled to redeem the Rights
for $0.01 per Right at any time prior to the expiration of the redemption
period. The Shareholder Rights Plan and the Rights will expire on August
28, 2005. The Board of Directors may amend the Shareholder Rights Plan,
from time to time, as considered necessary.
9. SEGMENTS AND SUBSIDIARIES INFORMATION:
a. SEGMENTS: The Company owns or has rights to intellectual property
involving two primary types of medical diagnostic products, including
gamma detection instruments currently used primarily in the
application of ILM, and blood flow measurement devices. Losses
incurred in 2001 associated with blood flow measurement products were
related to in-process research and development associated with the
acquisition of Cardiosonix on December 31, 2001 (See Note 9(b).).
The information in the following table is derived directly from the
segments' internal financial reporting used for corporate management
purposes. The expenses attributable to corporate activity, including
amortization and interest, and other selling, general and
administrative costs are not allocated to the operating segments.
($ AMOUNTS IN THOUSANDS) GAMMA BLOOD
2001 DETECTION FLOW UNALLOCATED TOTAL
----------------------------------------- -- ------------ --- ----------- -- -------------- --- ----------
Net sales:
United States* $ 6,538 $ - $ - $6,538
International 221 - - 221
License revenue 825 - - 825
Research and development expenses (345) - - (345)
Selling, general and administrative
expenses - - (2,321) (2,321)
Acquired in-process research and
development - (885) - (885)
Other income - - 370 370
Total assets, net of depreciation and
amortization:
United States 2,661 - 4,662 7,323
Cardiosonix Ltd. - 4, 006 - 4,006
Capital expenditures 18 - 54 72
2000
-----------------------------------------
Net sales (United States*) $ 8,835 $ - $ - $8,835
License revenue 875 - - 875
Research and development expenses (473) - - (473)
Selling, general and administrative
expenses (284) - (2,627) (2,911)
Other income - - 504 504
Total assets, net of depreciation and
amortization (United States) 2,289 - 5,284 7,573
Capital expenditures 25 - 143 168
* All sales to Ethicon are made in the U.S. Ethicon distributes the product
globally through its international affiliates.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. SUBSIDIARY: On December 31, 2001, the Company acquired 100 percent of
the outstanding common shares of Cardiosonix, an Israeli company, for
$4.1 million, excluding contingent consideration. The Company
accounted for the acquisition under SFAS No. 141, Business
Combinations, and certain provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. The results of Cardiosonix' operations have
been included in the Company's consolidated results from the date of
acquisition. Cardiosonix is involved in the development and
commercialization of blood flow measurement technology. Cardiosonix
currently has three products in the late stages of development. As a
result of the acquisition, the Company has significantly expanded its
portfolio with products that have near-term commercial potential.
The aggregate purchase price included common stock valued at
$3,983,042; a liability of $17,966 for payment of vested options of
Cardiosonix employees; and acquisition costs of $143,320. The value
of the 9,714,737 common shares issued was determined based on the
average market price of the Company's common shares over the five-day
period before and after the terms of the acquisition were agreed to
and announced. The Company also has a contingent payment due upon the
satisfaction of a certain milestone event. In accordance with SFAS
No. 141, the Company has recorded the lesser of negative goodwill or
the contingent liability as if it was a liability in the amount of
$453,602. The 2,085,826 common shares to be issued upon satisfaction
of the milestone event will be valued at the date those shares become
issuable. To the extent that the contingent payment is more than the
liability that is accrued at December 31, 2001, the Company will
record goodwill.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition.
DECEMBER 31,
2001
---------------------
Current assets $ 445,010
Property and equipment 65,887
Intangible assets 4,347,502
Other assets 50,442
---------------------
Total assets acquired 4,908,841
---------------------
Current liabilities (235,418)
Contingent consideration (453,602)
Other liabilities (75,493)
---------------------
Total liabilities assumed (764,513)
---------------------
Net assets acquired $ 4,144,328
=====================
Of the $4,347,502 of acquired intangible assets, $884,678 was assigned
to in-process research and development assets that were expensed at
the date of acquisition in accordance with FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method. Those write-offs are presented
in acquired in-process research and development expenses in the 2001
consolidated statement of operations. The remaining $3,462,824 of
acquired intangible assets have a weighted average useful life of
approximately 13 years. The intangible assets that make up that amount
include patents of $2,613,813 (15-year useful life), non-compete
agreements of $603,880 (four-year useful life), and acquired
technology of $245,131 (seven-year useful life).
As a part of the acquisition, the Company entered into a Royalty
Agreement with the three founders of Cardiosonix. Under the terms of
the Royalty Agreement, which expires December 31, 2006, the Company
is obligated to pay the founders an aggregate one percent royalty
on the first $120 million in net revenue generated by the sale of
Cardiosonix blood flow products.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma combined historical results, as if Cardiosonix
had been acquired at the beginning of 2001 and 2000, respectively, are
estimated to be:
2001 2000
---- ----
Total revenues $ 7,583,895 $ 9,710,185
(Loss) income from continuing operations $ (439,623) $ 847,852
Net (loss) income attributable to common stockholders $ (439,623) $ 83,184
Earnings per common share:
Basic $ (0.01) $ 0.00
Diluted $ (0.01) $ 0.00
Weighted average shares outstanding:
Basic 35,561,004 35,328,321
Diluted 35,561,004 36,058,557
The pro forma results include amortization of the intangible assets
presented above. The pro forma results are not necessarily indicative
of what actually would have occurred if the acquisition had been
completed as of the beginning of each period presented, nor are they
necessarily indicative of future consolidated results.
10. AGREEMENTS:
a. SUPPLY AGREEMENTS: In December 1997, the Company entered into an
exclusive supply agreement with eV Products (eV), a division of II-VI
Incorporated, for the supply of certain crystals and associated
electronics to be used in the manufacture of the Company's proprietary
line of hand-held gamma detection instruments. The original term of the
agreement expires on December 31, 2002, but may be automatically
extended for an additional three years. The agreement calls for the
Company to purchase increasing quantities of crystal modules each year
in order to maintain exclusivity. During 2001, the Company built up its
stock of crystal modules in order to take advantage of significant
quantity price breaks. Total purchases under the supply agreement were
$1.3 million and $782,000 for the years ended December 31, 2001 and
2000, respectively. The Company has issued purchase orders for $72,000
of crystal modules through the third quarter of 2002.
In May 1999, the Company entered into a supply agreement with The
MedTech Group, Inc. (MedTech) for the supply of BlueTip(TM) probes and
related accessories. The original term of the agreement expires on
December 31, 2003, but may be automatically extended for an additional
three years. The agreement calls for the Company to deliver annual
product forecasts to MedTech and for the Company to purchase at least
75% of forecasted product demand on a quarterly basis. Total purchases
under the supply agreement were $412,000 and $418,000 for the years
ended December 31, 2001 and 2000, respectively. The agreement may be
terminated by the Company upon twelve months notice or in the event of
failure to supply or by either party due to material breach or by
insolvency of the other.
In October 2001, the Company entered into a manufacturing and supply
agreement with UMM Electronics, Inc. (UMM), a Leach Technology Group
company, for the exclusive manufacture of the 14mm probe and neo2000
control unit. The original term of the agreement expires in February
2005 but will be automatically extended for additional one-year periods
unless either party provides written notice of non-renewal at least six
months prior to the end of the then-current term. Either party has the
right to terminate the agreement at any time on six months written
notice, or may immediately terminate the agreement upon a breach by the
other. UMM may also terminate the agreement if the Company's orders for
a given product fall below certain minimum quarterly amounts for two
successive quarters. The Company made no purchases under this agreement
in 2001, but has issued purchase orders for $536,000 of 14mm probes and
neo2000 control units through May 2002 under the terms of this
agreement.
During 2001, the Company also terminated its previous agreement with
Plexus Corporation (Plexus) for the manufacture of the 14mm probe and
neo2000 control unit. As a part of the termination, the
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company was required to purchase $92,000 in residual raw materials
that were not used by Plexus, a portion of which will be used in
production at UMM. Total purchases under the agreement were $2.4
million and $3.0 million in 2001 and 2000, respectively.
b. MARKETING AND DISTRIBUTION AGREEMENTS: The Company entered into a
Distribution Agreement (the Agreement) with Ethicon effective October
1, 1999 for an initial five-year term with options to extend for two
successive two-year terms. Under the Agreement, the Company
manufactures and sells its current line of ILM products (the
Products) exclusively to Ethicon, who distributes the Products
globally. Ethicon agreed to purchase minimum quantities of the
Company's Products over the first three years of the term of the
Agreement and to reimburse the Company for certain research and
development costs and a portion of the Company's warranty costs.
Ethicon also agreed to purchase certain demonstration units at cost.
The Company is obligated to continue certain product maintenance
activities and to provide ongoing regulatory support for the
Products.
Ethicon may terminate the Agreement if the Company fails to supply
Products for specified periods, commits a material breach of the
Agreement, suffers a change of control of the Company to a competitor
of Ethicon, or becomes insolvent. If termination is due to failure to
supply or a material breach by the Company, Ethicon would have the
right to use the Company's intellectual property and regulatory
information to manufacture and sell the Products exclusively on a
global basis for the remaining term of the Agreement with no
additional financial obligation to the Company. If termination is due
to insolvency or a change of control that does not affect supply of
the Products, Ethicon has the right to continue to sell the Products
on an exclusive global basis for a period of six months or require
the Company to repurchase any unsold Products in its inventory.
Under the Agreement, Ethicon received a non-exclusive, worldwide
license (the License) to the Company's ILM intellectual property to
make and sell other products that may be developed using the
Company's ILM intellectual property. The term of the License is the
same as that of the Agreement. Ethicon paid the Company a
non-refundable license fee of $4 million. The Company is recognizing
the license fee as revenue on a straight-line basis over the
five-year initial term of the Agreement. If the Agreement is
terminated by the Company as a result of a material breach by
Ethicon, Ethicon would be required to pay the Company a royalty on
all products developed and sold by Ethicon using the Company's ILM
intellectual property. In addition, the Company is entitled to a
royalty on any ILM product commercialized by Ethicon that does not
infringe any of the Company's existing intellectual property.
The Company has a separate Marketing Agreement with Century Medical,
Inc. (CMI) for the distribution of its gamma surgery products in
Japan. The Company sells products directly to CMI on the basis of a
December 2001 modification of its Agreement with Ethicon.
c. RESEARCH AND DEVELOPMENT AGREEMENTS: In 1985, the Company received
$250,000 under a research and development agreement between the
Company, The Ohio State University, and the Department of Development
of the State of Ohio. Under the terms of the agreement, the Company
was obligated to pay the State of Ohio royalties calculated as a
percentage of net sales of certain products or share proceeds
received from the sale or license of the technology. During the
fourth quarter of 2000, the State of Ohio notified the Company it was
waiving all rights to receive royalties under the agreement.
Accordingly, the Company recorded a gain of $262,000 related to the
waiver of such rights in its Statement of Operations for the year
ended December 31, 2000.
Cardiosonix' research and development efforts have been partially
financed through grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade (the OCS). In return for the
OCS's participation, Cardiosonix is committed to pay royalties to the
Israeli Government at a rate of 3% to 5% of the sales if its
products, up to 100% of the amount of the grants received (for grants
received under programs approved subsequent to January 1, 1999 - 100%
plus interest at LIBOR). Cardiosonix is entitled to the grants only
upon incurring research and development expenditures. Cardiosonix is
not obligated to repay any amount received from OCS if the research
effort is unsuccessful or if no products are sold. There are no
future performance obligations related to the grants received from
the OCS. However, under certain limited circumstances, the OCS may
withdraw
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
its approval of a research program or amend the terms of its
approval. Upon withdrawal of approval, the grant recipient may be
required to refund the grant, in whole or in part, with or without
interest, as the OCS determines. Cardiosonix' total obligation
for royalties, based on royalty-bearing government participation,
totaled approximately $775,000 as of December 31, 2001. The Company
has not yet recorded any revenues, and therefore no expenses for
royalties have been recorded.
d. OPTION AGREEMENT: During 2000, the Company executed and amended an
agreement with a third party, OncoSurg, Inc. (OncoSurg, formerly
NuRIGS Ltd.), that provided for an option exercisable through
December 31, 2001 to license Neoprobe's radioimmunoguided surgery
(RIGS) technology for use in the diagnosis and treatment of
colorectal cancer. The option called for OncoSurg to make quarterly
option payments to the Company during 2001. During the second quarter
of 2001, the Company agreed to defer the option payments to allow
OncoSurg to spend the funds to support the Phase I clinical trial.
During 2001, OncoSurg completed pre-clinical testing of the antibody
and received clearance from the U.S. Food & Drug Administration (FDA)
to begin a Phase I clinical trial in humans. Enrollment in the Phase
I trial was initiated during the third quarter of 2001. OncoSurg did
not exercise its option as of December 31, 2001; however, it is the
Company's understanding that the researchers conducting the trial
intend to complete the Phase I trial during the second quarter of
2002.
e. EMPLOYMENT AGREEMENTS: The Company maintains employment agreements
with four officers of the Company. The employment agreements contain
change in control provisions that would entitle each of the officers
to two times their current annual salaries, vest outstanding
restricted stock and options to purchase common stock, and continue
certain benefits if there is a change in control of the Company (as
defined) and their employment terminates. The maximum contingent
liability to the Company under these agreements in such an event is
approximately $1.5 million. The employment agreements also provide
for severance, disability and death benefits.
Cardiosonix also maintains employment agreements with three key
employees. The employment agreements contain provisions that would
entitle the employees to the greater of one year's salary or the
amount due under Israeli law if the employee is terminated without
cause. The agreements also provide for royalty payments to the
employees (See Note 9(b).). The maximum contingent liability under
the agreements, excluding the potential royalty, is approximately
$400,000.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. LEASES:
The Company leases certain office equipment under a capital lease which
expires in 2004. In December 1996, the Company entered into an operating
lease agreement for office space, expiring in August 2003.
The future minimum lease payments, net of sublease rentals, for the years
ending December 31 are as follows:
CAPITAL OPERATING
LEASE LEASES
-------------- ----------------
2002 $ 16,417 $ 145,724
2003 16,417 83,592
2004 5,472 1,236
2005 - 1,030
-------------- ----------------
38,306 $ 231,582
Less amount representing interest 5,381 ================
--------------
Present value of net minimum
lease payments 32,925
Less current portion 12,914
--------------
Capital lease obligations,
excluding current portion $ 20,011
==============
The Company expects rental income from subleases of $132,000 and $89,000 in
2002 and 2003, respectively, based on three subleases executed in December
1998, February 1999, and April 2000. Total rental expense, net of sublease
rental income, was $105,000 and $184,000 for the years ended December 31,
2001 and 2000, respectively.
12. EMPLOYEE BENEFIT PLAN:
The Company maintains an employee benefit plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to make contributions and
the Company may, but is not obligated to, match a portion of the employee's
contribution with the Company's common stock, up to a defined maximum. The
Company accrued expenses of $25,000 and $17,000 during 2001 and 2000,
respectively, related to common stock to be subsequently contributed to the
plan.
13. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS:
The Company paid interest aggregating $11,000 and $25,000 for the years
ended December 31, 2001 and 2000, respectively. During 2000, the Company
paid income taxes of $32,000, based on estimates of 2000 taxable income.
During 2001 and 2000, the Company transferred $81,000 and $164,000,
respectively, in inventory to fixed assets related to the creation of a
pool of service loaner equipment. Also during 2001 and 2000, the Company
prepaid $189,000 and $120,000, respectively, in insurance through the
issuance of notes payable with interest rates of 5%. On December 31, 2001,
the Company issued common stock to acquire the net assets of Cardiosonix
(See Note 9(b).). In addition, the Company incurred capital lease
obligations of $51,000 in 2000 to finance equipment.
14. CONTINGENCIES:
During the third quarter of 2001, the Company received a general waiver
from a bank in Israel that was a creditor of the Company's previous Israeli
subsidiary that is in liquidation and was deconsolidated as of December 31,
1999. As a part of the general waiver, the bank also refunded $238,000 as a
partial return of a cash guarantee that the Company had previously written
off as a part of deconsolidation. The cash refund was recognized in other
income when it was received in the third quarter of 2001. Due to the
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
receipt of the general waiver from the primary creditor and receiver of the
subsidiary, management believes it is remote that the Company will be
liable for any further amounts related to the subsidiary.
The Company is also subject to legal proceedings and claims that arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability, if any, with respect to these actions will
not materially affect the financial position of the Company.
15. SUBSEQUENT EVENT:
a. During January 2002, the Company has completed a license agreement with
the University of California, San Diego (UCSD) for a proprietary
compound that the Company believes could be used as a lymph node
locating agent in ILM procedures. The license agreement is effective
until the later of the expiration date of the longest-lived underlying
patent or January 30, 2023. Under the terms of the license agreement,
UCSD has granted the Company the exclusive rights to make, use, sell,
offer for sale and import Licensed Products as defined in the agreement
and to practice the defined Licensed Methods during the term of the
agreement. The Company may also sublicense the Patent Rights, subject
to the approval of certain sublicense terms by UCSD. In consideration
for the license rights, the Company agreed to pay UCSD a license issue
fee of $25,000 and license maintenance fees of $25,000 per year. The
Company also agreed to pay UCSD milestone payments related to
successful regulatory clearance for marketing of the Licensed Products,
a royalty of five percent on Net Sales of Licensed Products subject to
a $25,000 minimum annual royalty, fifty percent of all sublicense fees
and fifty percent of sublicense royalties. The Company also agreed to
reimburse UCSD for all patent-related costs. The Company reimbursed
UCSD for $8,000 and $18,000 of patent-related costs in 2001 and 2000,
respectively, under the previous option agreement which were included
in selling, general and administrative expenses.
UCSD also has the right to terminate the agreement or change the nature
of the agreement to a non-exclusive agreement if the Company is
determined not to have been diligent in developing and commercializing
the covered products, not marketing the products within six months of
receiving regulatory approval, reasonably filling market demand or
obtaining all the necessary government approvals.
Neoprobe and UCSD have completed the preclinical evaluation of the
compound to support applications for the human clinical evaluation.
UCSD researchers received clearance during 2001 from the U.S. FDA to
commence human clinical studies in breast and melanoma. The Phase I
human clinical studies of the compound are being funded by research
grants. Enrollment in the Phase I studies began during the third and
fourth quarters of 2001, respectively.
b. During February 2002, the Company entered into a line of credit
facility with an investment management company. The facility provides
for a maximum line of credit of $2.0 million and is fully
collateralized by pledged cash and investments on deposit with the
investment management company. Availability under the facility is based
on advance rates varying from 80% to 92% of the underlying available
collateral. Outstanding amounts under the facility bear interest at
LIBOR plus 175 basis points. The facility expires in February 2007.
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL INFORMATION (UNAUDITED):
The following summary financial data are derived from consolidated
financial statements of the Company which have been audited by the
Company's independent public accountants. These data are qualified in their
entirety by, and should be read in conjunction with, the Company's
Consolidated Financial Statements and Notes thereto included herein.
(Amounts in thousands, except per share data) Years Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- -------------- ------------ ------------ -------------
Statement of Operations Data:
Net sales $ 6,759 $ 8,835 $ 9,246 $ 5,833 $ 5,128
Gross profit 3,198 4,720 4,938 4,429 3,552
Research and development expenses 345 473 1,388 14,364 19,657
Selling, general and administrative 2,321 2,911 8,131 11,357 11,160
expenses
Acquired in-process research and 885 - - - -
development
Losses related to subsidiaries in - - 475 7,176 -
liquidation
----------- -------------- ------------ ------------ -------------
(Loss) income from operations (352) 1,336 (5,057) (28,468) (27,265)
Other income 370 504 883 436 4,018
----------- -------------- ------------ ------------ -------------
Net income (loss) $ 15 $ 1,840 $(4,174) $(28,033) $(23,247)
----------- -------------- ------------ ------------ -------------
Income (loss) attributable to common
stockholders $ 15 $ 1,075 $(7,895) $(28,033) $(23,247)
=========== ============== ============ ============ =============
Income (loss) per common share:
Basic $ 0.00 $ 0.04 $ (0.34) $ (1.23) $ (1.02)
Diluted $ 0.00 $ 0.04 $ (0.34) $ (1.23) $ (1.02)
Shares used in computing income (loss) per
common share: (1)
Basic 25,899 25,710 23,003 22,842 22,735
Diluted 26,047 26,440 23,003 22,842 22,735
As of December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- -------------- ------------ ------------- -------------
Balance Sheet Data:
Total assets $11,329 $ 7,573 $ 10,323 $ 11,994 $ 41,573
Long-term obligations 1,949 2,233 4,314 156 2,069
Accumulated deficit (117,714) (117,729) (119,569) (115,395) (87,363)
(1) Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the periods. Diluted
earnings per share is calculated using the weighted average number of
common shares outstanding during the periods, adjusted for the effects
of convertible securities, options and warrants, if dilutive.
F-23
REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying balance sheets of Cardiosonix Ltd. (the
"Company") (formerly Biosonix Ltd.) (a development stage company) as of December
31, 2001 (predecessor and successor) and 2000 (predecessor) and the related
statements of operations, shareholders' equity and cash flows for each of the
two years ended December 31, 2001 and 2000 (predecessor), for December 31, 2001
(successor) and for the period from August 16, 1998 (inception) to December 31,
2001. 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 audits.
The cumulative statements of operations, shareholders' equity and cash flows for
the period from August 16, 1998 (inception) to December 31, 2001 include amounts
for the period from August 16, 1998 (inception) to December 31, 1999 which were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for the period August 16,
1998 through December 31, 1999, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Cardiosonix Ltd. (a development stage company) as of
December 31, 2001 (predecessor and successor) and 2000 (predecessor), and the
results of its operations and its cash flows for each of the years ended
December 31, 2001 and 2000 (predecessor), for December 31, 2001 (successor) and
for the period August 16, 1998 (inception) to December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Somekh Chaikin
Certified Public Accountants (Israel)
A member of KPMG International
February 28, 2002
F-24
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
--------------------------------------------------------------------------------
PREDECESSOR
SUCCESSOR -------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
NOTE 2001 2001 2000
---- ---- ---- ----
Assets
Current assets
Cash and cash equivalents $338,746 $338,746 $368,100
Accounts receivable and other current
assets 3 106,264 106,264 23,373
-------- -------- --------
Total current assets 445,010 445,010 391,473
-------- -------- --------
Assets held for severance benefits 6 50,442 50,442 37,643
Property and equipment 4
Cost 112,639 112,639 97,728
Less - accumulated depreciation (46,752) (46,752) (26,315)
-------- -------- --------
65,887 65,887 71,413
-------- -------- --------
Intangible assets: 7
Patents 2,613,813 -- --
Non-compete agreements 603,880 -- --
Acquired technology 245,131 -- --
---------- -------- --------
Total assets $4,024,163 $561,339 $500,529
========== ======== ========
The accompanying notes are an integral part of the financial statements.
F-25
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
--------------------------------------------------------------------------------
PREDECESSOR
SUCCESSOR -------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
NOTE 2001 2001 2000
---- ---------- -------- --------
Liabilities and shareholders' equity
Current liabilities
Trade payables $ 53,537 $53,537 $13,053
Other accounts payable and accrued expenses 5 181,881 181,881 153,483
---------- -------- --------
Total current liabilities 235,418 235,418 166,536
---------- -------- --------
Long-term liabilities
Contingent consideration for acquisition 7 453,602 -- --
Liability for employee severance benefits 6 75,493 75,493 51,911
Commitments and contingencies 8
Shareholders' equity 9
Share capital
Convertible Preferred A shares of NIS 0.1
par value:
105,000 shares authorized and 87,525
issued and outstanding at December 31, 2000 -- -- 2,138
Convertible Preferred A1 shares of NIS 0.1
par value:
55,000 shares authorized and 42,475
issued and outstanding at December 31,
2000 -- -- 1,025
Ordinary shares of NIS 0.1 par value:
200,000 and 521,000 shares authorized at
December 31, 2000 and 2001, respectively
140,001 and 327,738 issued and outstanding
at December 31, 2000 and 2001, respectively 8,354 8,354 3,805
Additional paid-in capital 4,135,973 2,246,669 1,347,385
Unearned compensation -- -- (46,687)
Accumulated deficit during the
development stage (884,677) (2,004,595) (1,025,584)
---------- -------- --------
Total shareholders' equity 3,259,650 250,428 282,082
---------- -------- --------
$4,024,163 $561,339 $500,529
========== ======== ========
The accompanying notes are an integral part of the financial statements.
F-26
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR AMOUNTS
----------- ----------------------------- ACCUMULATED
YEAR ENDED DURING THE
DECEMBER 31 DECEMBER 31 DECEMBER 31 DEVELOPMENT
NOTE 2001 2001 2000 STAGE
---- ---- ---- ---- -----
Operating expenses:
Research and
development costs $ -- $1,027,093 $729,291 $2,326,236
Less - royalty bearing grants -- (301,523) (259,681) (774,844)
-------- -------- -------- ----------
Research and
development, net -- 725,570 469,610 1,551,392
-------- -------- -------- ----------
Acquired in process
research and development 7 884,677 -- -- 884,677
-------- -------- -------- ----------
General and administrative
expenses, net -- 271,518 187,971 520,830
-------- -------- -------- ----------
Operating loss 884,677 997,088 657,581 2,956,899
Financial income, net - 18,077 25,770 67,626
-------- -------- -------- ----------
Net loss $884,677 $979,011 $631,811 $2,889,273
======== ======== ======== ==========
The accompanying notes are an integral part of the financial statements.
F-27
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
SERIES A SERIES A1 SERIES B ORDINARY ADDITIONAL DURING THE
PREFERRED PREFERRED PREFERRED SHARES PAID-IN UNEARNED DEVELOPMENT
SHARES SHARES SHARES CAPITAL (1) COMPENSATION STAGE TOTAL
-------- --------- --------- ------- ---------- --------- --------- ----------
Changes during the period from
August 16 (inception) to
December 31, 1998
Ordinary shares and Preferred
shares Series A and A1 issued in
September and December 1998 $ 1,387 $ 432 $ -- $ 3,805 $ 737,118 $ -- $ -- $ 742,742
Net loss -- -- -- -- -- -- (107,985) (107,985)
-------- --------- --------- ------- ---------- --------- --------- ----------
Balances as of December 31, 1998 1,387 432 -- 3,805 737,118 -- (107,985) 634,757
Changes during the year 1999
Shares issuance expenses -- -- -- -- (6,613) -- -- (6,613)
Employees' stock options granted -- -- -- -- 21,451 (21,451) -- --
Net loss -- -- -- -- -- -- (285,788) (285,788)
-------- --------- --------- ------- ---------- --------- --------- ----------
Balance as of December 31, 1999 1,387 432 -- 3,805 751,956 (21,451) (393,773) 342,356
Changes during the year 2000
Preferred Shares Series A and A1
issued in January and February
2000 751 593 -- -- 543,148 -- -- 544,492
Employees' stock options granted -- -- -- -- 37,335 (37,335) -- --
Non-employees' stock options
granted -- -- -- -- 14,946 (14,946) -- --
Amortization of unearned
compensation -- -- -- -- -- 27,045 -- 27,045
Net loss -- -- -- -- -- -- (631,811) (631,811)
-------- --------- --------- ------- ---------- --------- --------- ----------
Balance as of December 31, 2000 2,138 1,025 -- 3,805 1,347,385 (46,687) (1,025,584) 282,082
Changes during the year 2001
Preferred Shares Series B issued
on April 2001 -- -- 1,386 -- 904,825 -- -- 906,211
Employees' stock options granted -- -- -- -- 82,055 (82,055) -- --
Non-employees' stock options
granted -- -- -- -- 19,039 (19,039) -- --
Conversion of Series A, A1 and B
Preferred shares into ordinary
shares (2,138) (1,025) (1,386) 4,549 -- -- -- --
Amortization of unearned
compensation -- -- -- -- (106,635) 147,781 -- 41,146
Net loss -- -- -- -- -- -- (979,011) (979,011)
-------- --------- --------- ------- ---------- --------- --------- ----------
Balance as of December 31, 2001
(Predecessor) -- -- -- 8,354 2,246,669 -- (2,004,595) 250,428
Purchase accounting adjustment -- -- -- -- 1,889,304 -- 1,119,918 3,009,222
-------- --------- --------- ------- ---------- --------- --------- ----------
Balance as of December 31, 2001 $ -- $ -- $ -- $ 8,354 $4,135,973 $ -- $(884,677) $3,259,650
======== ========= ========= ======= ========== ========= ========= ==========
(1) Net of issuing costs
The accompanying notes are an integral part of the financial statements.
F-28
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
SUCCESSOR PREDECESSOR AMOUNTS
------------ ------------------------------ ACCUMULATED
YEAR ENDED DURING THE
------------ ------------------------------ DEVELOPMENT
DECEMBER 31 DECEMBER 31 DECEMBER 31 STAGE
2001 2001 2000 2000
------------ ----------- ----------- -----------
Cash flows from operating activities
Loss for the period $ (884,677) $ (979,011) $(631,811) $(2,889,273)
Adjustments to reconcile loss to net cash used in
operating activities
Depreciation -- 20,437 17,556 46,752
Increase in accrued severance pay, net -- 10,783 9,951 25,051
Amortization of unearned compensation -- 41,146 27,045 68,192
Decrease (increase) in accounts receivable -- (82,891) 69,801 (106,264)
Increase in trade payables -- 40,484 6,774 53,537
Increase in other accounts payable and
accrued expenses -- 28,398 89,906 181,881
Acquired in process research and development 884,677 -- -- 884,677
----------- ----------- --------- -----------
Net cash used in operating activities -- (920,654) (410,778) (1,735,447)
----------- ----------- --------- -----------
Cash flows from investing activities
Purchase of property and equipment -- (14,911) (22,970) (112,639)
----------- ----------- --------- -----------
Net cash used in investing activities -- (14,911) (22,970) (112,639)
----------- ----------- --------- -----------
Cash flows from financing activities
Issuance of shares -- 1,000,000 550,000 2,300,000
Share issuance expenses -- (93,789) (5,508) (113,168)
----------- ----------- --------- -----------
Net cash provided by financing activities -- 906,211 544,492 2,186,832
----------- ----------- --------- -----------
Increase (decrease) in cash and cash
equivalents -- (29,354) 110,744 338,746
Cash and cash equivalents at the beginning of the
period 338,746 368,100 257,356 --
----------- ----------- --------- -----------
Cash and cash equivalents at the end of the period
$ 338,746 $ 338,746 $ 368,100 $ 338,746
=========== =========== ========= ===========
(a) Non-cash transactions
Purchase accounting adjustments
(see Note 7) $ 3,893,899 $ -- $ -- $ 3,893,899
The accompanying notes are an integral part of the financial statements.
F-29
CARDIOSONIX LTD. (FORMERLY BIOSONIX LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2001
--------------------------------------------------------------------------------
1. GENERAL
a. Cardiosonix Ltd. (the "Company"), formerly Biosonix Ltd., was
incorporated in Israel in August 1998. The Company is engaged in the
development of specialty devices for vascular blood flow diagnostics
and monitoring.
b. To date, the Company has generated no revenues from sales of its
product. Due in large part to the significant research and development
expenditures required to develop its product, the Company has
generated losses each year since its inception.
c. On December 31, 2001, the Company was acquired by Neoprobe Corporation
("Neoprobe"). Resulting from the acquisition, the Company became a
wholly-owned subsidiary of Neoprobe (see Note 7).
d. The Company's ability to continue its operations is dependent upon
obtaining additional financing from Neoprobe.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the Untied States ("US GAAP").
a. PUSH DOWN ACCOUNTING
The acquisition (as described in Note 7) was accounted for as a
purchase business combination and accordingly, purchase accounting
adjustments, including intangible assets, contingent consideration for
acquisition and acquired in process research and development, have
been pushed down and are reflected in these financial statements
subsequent to the acquisition (successor financial statements). The
financial statements of the Predecessor were prepared using the
Company's historical basis of accounting. The comparability of
operating results for the Predecessor periods and the period
subsequent to the acquisition date are affected by the purchase
accounting adjustments.
b. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
c. FUNCTIONAL AND REPORTING CURRENCY
The accounting records of the Company are maintained in New Israeli
Shekel ("NIS"). The Company's functional and reporting currency is the
United States dollar.
Transactions denominated in foreign currencies other than the United
States dollar are translated into the reporting currency using current
exchange rates. Gains and losses from the translation of foreign
currency balances are recorded in the statement of operations.
d. CASH AND CASH EQUIVALENTS
All highly-liquid investments with original maturities of three months
or less are considered to be cash equivalents.
F-30
e. ASSETS HELD FOR SEVERANCE BENEFITS
Assets held for employee severance benefits represent contributions to
severance pay funds and cash surrender of life insurance policies that
are recorded at their current redemption value.
f. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets at the following annual rates:
%
---------------------------
Computers and related equipment 33
Office furniture and equipment 6 - 15
Machinery and equipment 15
Leasehold improvements Over the term of the lease
g. INTANGIBLE ASSETS
Intangible assets consist primarily of patents, non-compete agreements
and acquired technology and are stated at cost or at fair value as of
the date acquired, less accumulated amortization. Patent costs are
amortized using the straight-line method over the estimated useful
lives of the patents of up to 15 to 20 years. Patent application costs
are deferred pending the outcome of these applications. Costs
associated with unsuccessful patent applications and abandoned
intellectual property are expensed when determined to have no
recoverable value. Non-compete agreements and acquired technology are
amortized using the straight-line method over their estimated useful
lives of 4 years and 7 years, respectively. The Company evaluated the
potential alternative uses of all intangible assets, as well as the
recoverability of the carrying values of intangible assets on a
recurring basis.
h. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
i. RESEARCH AND DEVELOPMENT
Research and development costs are charged to expenses as incurred.
j. ROYALTY-BEARING GRANTS
Royalty-bearing grants from the Government of Israel for funding
certain approved research projects, are recognized at the time in
which the Company is entitled to such grants, on the basis of the
related costs incurred.
F-31
k. STOCK COMPENSATION PLANS
Employees
The Company has adopted the Financial Accounting Standards Board's
Statement No. 123, Accounting for Stock-Based Compensation ("Statement
123") which permits entities to recognize as expense over the vesting
period, the fair value on the date of grant of all stock-based awards.
Alternatively, Statement 123 also allows entities to continue to apply
the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations
("APB Opinion No. 25") and provide pro forma net income disclosure for
employee stock option grants as if the fair-value based method defined
in Statement 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of Statement 123.
The Company applies the intrinsic value-based method prescribed in APB
Opinion No. 25 for its stock compensation to employees. As such, the
Company computes and records compensation expense for grants whose
terms are fixed with respect to the number of shares and option price
only if the shares' fair value on the date of grant exceeds the
exercise price of the stock option.
Non-Employees
The Company applies the fair value-based method of accounting set
forth in Statement 123 to account for stock based compensation to
non-employees. Using the fair value method, the total compensation
expense is computed based on the fair value of the options expected to
vest on the date the options are granted to the non-employees.
l. CONCENTRATIONS OF CREDIT RISK
Statement of Financial Accounting Standard No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet risk and credit risk
concentrations. The Company does not have significant
off-balance-sheet risk or credit risk concentrations.
m. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable between the financial statements carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of
deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of operations in the period that includes
the enactment date.
F-32
3. ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS
PREDECESSOR
AND
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31 DECEMBER 31
2001 2000
--------- -----------
Government agencies, regarding tax and
VAT refunds $ 16,274 $ 8,636
Prepaid expenses 6,604 14,190
Due from the Office of the Chief Scientists ("OCS") 43,155 --
Neoprobe Corporation 17,966 --
Due from the Israeli Marketing Promoting Fund 19,565 --
Other receivables 2,700 547
-------- --------
$106,264 $ 23,373
======== ========
4. PROPERTY AND EQUIPMENT
PREDECESSOR
AND
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31 DECEMBER 31
2001 2000
--------- -----------
COST
Computers and related equipment $ 37,336 $ 31,127
Office furniture and equipment 25,046 22,922
Machinery and equipment 46,888 40,310
Leasehold improvements 3,369 3,369
-------- --------
112,639 97,728
-------- --------
ACCUMULATED DEPRECIATION
Computers and related equipment 25,350 14,020
Office furniture and equipment 5,131 2,809
Machinery and equipment 15,644 9,196
Leasehold improvements 627 290
-------- --------
46,752 26,315
-------- --------
$ 65,887 $ 71,413
======== ========
Depreciation expense for the years ended December 2001 and 2000 was
$20,437 and $17,556, respectively.
F-33
5. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
PREDECESSOR
AND
SUCCESSOR PREDECESSOR
--------- -----------
DECEMBER 31 DECEMBER 31
2001 2000
--------- -----------
Employee and payroll accruals $102,963 $ 86,191
Accrued expenses 77,357 61,446
Other accounts payable 1,561 5,846
-------- --------
$181,881 $153,483
======== ========
6. EMPLOYEE SEVERANCE BENEFITS
Under Israeli Law, the Company is required to make severance payments to
dismissed employees and to employees terminating employment under certain
other circumstances. This liability is calculated based on the last salary
of the existing employees multiplied by the number of years of employment
for each employee respectively, in accordance with the "severance pay
laws." The Company's liability for required severance payments is covered
by funding into approved insurance policies and by an accrual. The value of
these policies is recorded as an asset in the Company's balance sheet.
Expenses recorded in respect of severance pay for the years ended December
31, 2001 and 2000 were $12,594 and $7,782, respectively.
7. SHARE PURCHASE AGREEMENT
On December 31, 2001, the Company's shareholders signed a definitive share
purchase agreement with Neoprobe, for a stock for stock transaction.
Pursuant to the agreement, all of the Company's shares were acquired in
consideration of 9,714,737 Neoprobe shares. The agreement also provides for
issuance of additional 2,085,826 shares upon the Company's compliance with
certain predetermined conditions. The purchase price used in order to apply
the push down accounting, as described in Note 2a, was approximately $4.1
million.
F-34
The following table summarizes the preliminary changes made to the accounts
of the Company and its results, subsequent to December 31, 2001, as a
result of applying push down accounting.
DECEMBER 31
BALANCE SHEET 2001
-----------
Intangible assets:
Patents $ 2,613,813
Non-compete agreements 603,880
Acquired technology 245,131
-----------
Total assets $ 3,462,824
===========
Contingent consideration for acquisition $ 453,602
-----------
Total long-term liabilities 453,602
Additional paid in capital 1,889,304
Accumulated deficit during the development stage 1,119,918
-----------
Total shareholders' equity 3,009,222
-----------
Total liabilities and shareholders' equity $ 3,462,824
===========
STATEMENT OF OPERATIONS
Acquired in process research and development $ 884,677
===========
The $3,462,824 of acquired intangible assets have a weighted average useful
life of approximately 13 years. The intangible assets that make up that
amount include patents of $2,613,813 (15-year useful life), non-compete
agreements of $603,880 (four-year useful life), and acquired technology of
$245,131 (seven-year useful life). In-process research and development
charges of $884,677 were expensed at the date of acquisition in accordance
with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method. Those
write-offs are presented in acquired in-process research and development
expenses in the 2001 (successor) statement of operations.
8. COMMITMENTS AND CONTINGENCIES
a. The Company's research and development efforts have been partially
financed through grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry and Trade (the "OCS"). In return for the
OCS's participation, the Company is committed to pay royalties to the
Israeli Government at a rate of 3% to 5% of the sales of its product,
up to 100% of the amount of the grants received (for grants received
under programs approved subsequent to January 1, 1999 - 100% plus
interest at LIBOR). The grants are deducted from research and
development expenses. Grants received in advance of the corresponding
expenditures incurred are recorded as a liability. The Company is
entitled to the grants only upon incurring research and development
expenditures. The Company is not obligated to repay any amount
received from the OCS if the research effort is unsuccessful or if no
products are sold. There are no future performance obligations related
to the grants received from the OCS. However, under certain limited
circumstances, the OCS may withdraw its approval of a research program
or amend the terms of its approval. Upon withdrawal of approval, the
grant recipient may be required to refund the grant, in whole or in
part, with or without interest, as the OCS determines. The Company's
total obligation for royalties, based on royalty-bearing government
participation totaled approximately $ 775 thousand as of December 31,
2001. The Company has not yet recorded any revenues and, therefore no
expenses for royalties have been recorded.
F-35
b. OPERATING LEASES
(1) The facility of the Company is leased under an operating lease,
for a period of one year, commencing July 2001.
The Company has the option to extend the lease for an additional
period of two years. Rent expense for year 2001 and 2000 was $24
thousand per year.
(2) The two cars of the Company are leased under operating leases
dated January 31, 2000 and April 22, 2001, for a period of three
years each. Total rent expense for the years 2001 and 2000 was
approximately $11.6 thousand and $9.8 thousand respectively.
(3) Future minimum annual operating lease payments which the Company
is committed to pay under the above leases are as follows:
DECEMBER 31
2001
2002 $ 28,644
2003 $ 3,844
c. ROYALTIES AGREEMENT
According to an agreement between the Company and the three founders,
the Company shall pay the founders royalties at the rate of 1% of the
net revenues actually received by the Company from any third party.
The total amount of royalties payable will not exceed $1.2 million.
The royalties agreement expires on December 31, 2006.
9. SHAREHOLDERS' EQUITY
a. SHARE CAPITAL
(1) In September 1998 the Company signed an agreement with a group of
investors (the "investment agreement"). In accordance with the
agreement the amount of $1,300 thousand was invested in the share
capital of the Company, in three parts as follows:
Part 1 - An investment of $100 thousand upon signing the
agreement in consideration of 10,000 preferred A
shares par value NIS 0.1.
Part 2 - An investment of $650 thousand upon reaching the
first milestone provided in the agreement for the
consideration of 47,003 preferred A shares and
17,997 preferred A1 shares par value NIS 0.1.
Part 3 - An investment of $550 thousand upon reaching the
second milestone provided in the agreement in
consideration of 30,522 preferred A shares and
24,478 preferred A1 shares par value NIS 0.1.
The rights attached to the shares according to the investment
agreement are as follows:
(a) Ordinary shares confer upon the holders the right to receive
notice to participate and vote in general meetings of the
Company and the right to receive dividends, if declared.
(b) The Company's preferred A shares entitle the holders to all
rights conferred by the ordinary shares of the Company and
to liquidation preference of $10 per share plus interest of
4% per annum, in accordance with predetermined terms. The
preferred shares are convertible into ordinary shares, at
the holder's option or upon an IPO of the Company, on a
one-for-one basis.
F-36
(c) The Company's preferred A1 shares confer upon the holders
the same rights as the preferred A shares, except for voting
rights. The preferred shares are convertible into ordinary
shares, at the holder's option or upon an IPO of the
Company, on a one-for one basis.
In 1998 the first milestone was reached and the first and second
parts of the investment as described above were received.
In January 2000 the second milestone was reached and the third
part of the investment as stipulated in the investment agreement
was received.
(2) In 1998 and 2000, in accordance with the investment agreement,
the Company issued to the holders of preferred A1 shares and
preferred A shares, warrants to purchase up to 9,092 additional
preferred A1 shares (and/or preferred A shares) of the Company at
an exercise price of $14.81 per share for 5,062 warrants and of
$18.61 per share for 4,030 warrants, exercisable until the
earlier of May 31, 2001 (30 months from the date of the
achievement of the first milestone) or an IPO. The holders did
not exercise the warrants.
(3) In April 2001 the Company and an investor signed an agreement
(the "additional agreement") according to which the amount of
$1,000 thousand was invested in the share capital of the Company
in consideration for 57,737 preferred B shares. As part of the
additional agreement the warrants which were granted to the
holders of preferred A and A1 shares were cancelled.
(4) On December 31, 2001, the Company's shareholders signed a stock
purchase agreement with Neoprobe (see Notes 1c and 7). As a
result of this agreement, all of the preferred A, A1 and B shares
were converted into ordinary shares on a one-to-one basis.
b. STOCK OPTION PLAN
In December 1999, the Company's Board of Directors adopted a stock
option plan ("the Plan"), according to which options may be granted to
employees and consultants of the Company. The options vested over a
three-year period.
A summary of the Company's option activity and its related information
is as follows:
NUMBER OF NUMBER OF WEIGHTED
OPTIONS OPTIONS AVERAGE
OUTSTANDING TO OUTSTANDING EXERCISE GRANT DATE
NON-EMPLOYEES TO EMPLOYEES PRICE FAIR VALUE
------------- ------------ ----- ----------
Balance as of January 1, 2000 -- 3, 161 $7.00 $ 10.13
Granted 1,230 4,240 $7.00 $ 12.15
Forfeited -- -- --
------ -------
Balance as of December 31, 2000 1,230 7,401
Granted 1,500 8,606 $7.00 $ 12.69
Forfeited* (2,730) (16,007) $7.00 $ 12.10
------ -------
Balance as of December 31, 2001 -- --
====== =======
* As part of the stock purchase agreement with Neoprobe, all of the
options which were outstanding as of the date of the agreement
(6,671 options outstanding to employees and 2,730 options
outstanding to non-employees) were forfeited.
During 2001, 2000 and 1999, the Company granted options to employees
below fair market value.
F-37
The Company recognized expenses of $23,266 and $24,440 related to
these options in 2001 and 2000, respectively. The Company also granted
options to non-employees for services. The Company recognized $17,881
and $2,605 of expenses related to these options in 2001 and 2000,
respectively.
Pro forma information regarding net loss is required by SFAS No. 123,
and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement.
The fair value for these options was estimated at the grant date using
the "minimum value" method, with the following weighted average
assumptions: risk free interest rate of 6.5%, dividend yield of 0% and
a weighted-average expected life of the option of 10 years.
Pro forma information under SFAS 123:
PREDECESSOR
--------------------------------- ACCUMULATED
YEAR ENDED YEAR ENDED DURING THE
DECEMBER 31 DECEMBER 31 DEVELOPMENT STAGE
----------- ----------- -----------------
2001 2000
Net loss as reported $ 979,011 $ 631,811 $ 2,889,273
========= ========= ===========
Pro forma net loss $ 984,596 $ 642,603 $ 2,905,650
========= ========= ===========
10. TAXES ON INCOME
a. Measurement of results for tax purpose under the Income Tax
(Inflationary Adjustments) Law, 1985 ("the inflationary adjustments
law"):
Under the inflationary adjustments law, results for tax purposes are
measured in real terms, in accordance with changes in the Israeli
Consumer Price Index ("Israeli CPI"). The Company is taxed under this
Law.
b. CARRYFORWARD TAX LOSSES
Carryforward tax losses amount to approximately $1,874 thousand as of
December 31, 2001, under the inflationary adjustments law. The
carryforward tax losses are linked to the Israeli CPI.
c. TAX ASSESSMENTS
The Company has not received tax assessment since its incorporation.
d. The tax effect of significant items comprising the Company's deferred
taxes as of December 31:
2001 2000
--------- ---------
Net operating loss carryforward* $ 675,000 $ 315,000
Less valuation allowance (675,000) (315,000)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
* Calculated according to 36% tax rate which is the
Company's effective tax rate.
11. RELATED PARTIES TRANSACTIONS AND BALANCES
Related parties are comprised of principal shareholders (10% and up of
the Company's share capital) and their subsidiaries and affiliates.
During the reported years, the Company's shareholders were comprised
of the three founders of the Company and a number of investors. Since
December 31, 2001, as a result of the share purchase agreement (see
Note 7), the only shareholder is Neoprobe. All transactions with
related parties are carried out under normal business conditions.
F-38
a. TRANSACTIONS
YEAR ENDED
-------------------------------
DECEMBER 31 DECEMBER 31
2001 2000
---------- ----------
Expenses:
Salaries to the Company's founders $ 353,905 $ 278,029
Management fee* $ 4,500 $ 18,000
* The management fee paid to some of the Company's investors was
$1,500 per month. In April 2001, the management fee agreement was
cancelled.
b. BALANCE OF AMOUNTS DUE TO/DUE FROM
AS OF DECEMBER 31
-------------------------------
DECEMBER 31 DECEMBER 31
2001 2000
---------- ----------
Accounts receivable - Neoprobe Corporation $ 17, 966 $ --
Accounts payable - the Company's founders $ -- $40,890
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, deposits, assets held for severance benefits and
accounts payable. The carrying amounts of these financial instruments
approximates fair value.
F-39
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 31, 2001, Neoprobe Corporation (the Company) acquired 100 percent of
the outstanding common shares of Cardiosonix Ltd. (Cardiosonix), an Israeli
company, for $4.1 million, excluding contingent consideration. The Company
accounted for the acquisition under Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, and certain provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. Cardiosonix is involved in the development
and commercialization of blood flow measurement technology. Cardiosonix
currently has three products in the late stages of development. As a result of
the acquisition, the Company has significantly expanded its portfolio with
products that have near-term commercial potential.
The aggregate purchase price included common stock valued at $3,983,042; a
liability of $17,966 for payment of vested options of Cardiosonix employees; and
acquisition costs of $143,320. The value of the 9,714,737 common shares issued
was determined based on the average market price of the Company's common shares
over the five-day period before and after the terms of the acquisition were
agreed to and announced. The Company also has a contingent payment due upon the
satisfaction of a certain milestone event. In accordance with SFAS No. 141, the
Company has recorded the lesser of negative goodwill or the contingent liability
as if it was a liability in the amount of $453,602. The 2,085,826 common shares
to be issued upon satisfaction of the milestone event will be valued at the
market price on date the milestone event is reached and those shares become
issuable. To the extent that the contingent payment is more than the liability
that is accrued at December 31, 2001, the Company will record goodwill.
The unaudited Pro Forma Statement of Operations for the year ended December 31,
2001 gives effect to the acquisition of Cardiosonix as if it had occurred on
January 1, 2001. The Pro Forma Statement of Operations is based on historical
results of operations of the Company and Cardiosonix for the year ended December
31, 2001, adjusted to reflect amortization of acquired intangible assets. The
Pro Forma Statement of Operations and accompanying notes (the Pro Forma
Financial Information) should be read in conjunction with and are qualified by
the historical financial statements of the Company and Cardiosonix and the notes
thereto.
The Pro Forma Financial Information is intended for informational purposes only
and is not necessarily indicative of the future results of operations of the
consolidated Company after the acquisition of Cardiosonix, or of the results of
operations of the consolidated Company that would have actually occurred had the
acquisition of Cardiosonix been effective on January 1, 2001.
F-40
NEOPROBE CORPORATION AND SUBSIDIARY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------
HISTORICAL
-------------------------------
NEOPROBE CARDIOSONIX PRO FORMA PRO FORMA
CORPORATION LTD. ADJUSTMENTS COMBINED
----------- --------- ---------- -----------
Revenues:
Net Sales $ 6,758,895 $ -- $ -- $ 6,758,895
License revenue 825,000 -- -- 825,000
----------- --------- ---------- -----------
Total revenues 7,583,895 -- -- 7,583,895
----------- --------- ---------- -----------
Cost of goods sold 4,385,632 -- -- 4,385,632
----------- --------- ---------- -----------
Gross margin 3,198,263 -- -- 3,198,263
----------- --------- ---------- -----------
Operating expenses:
Research and development, net 344,675 725,570 -- 1,070,245
Selling, general and administrative 2,321,115 271,518 360,243(A) 2,952,876
Acquired in-process research and development 884,678 -- (884,678)(B) --
----------- --------- ---------- -----------
Total operating expenses 3,550,468 997,088 (524,435) 4,023,121
----------- --------- ---------- -----------
Loss from operations (352,205) (997,088) 524,435 (824,858)
Other income, net 369,774 18,077 -- 387,851
----------- --------- ---------- -----------
Net income (loss) before income taxes 17,569 (979,011) 524,435 (437,007)
Provision for income taxes 2,616 -- -- 2,616
----------- --------- ---------- -----------
Net income (loss) $ 14,953 $(979,011) $ 524,435 $ (439,623)
=========== ========= ========== ===========
Net income (loss) per common share:
Basic $ 0.00 $ (0.01)
Diluted $ 0.00 $ (0.01)
Weighted average shares outstanding:
Basic 25,899,499 9,661,505 35,561,004
Diluted 26,047,485 9,513,519 35,561,004
See accompanying notes to the pro forma condensed consolidated financial
statements.
F-41
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. To reflect the increase in selling, general and administrative expenses due
to the amortization of intangible assets resulting from the acquisition of
Cardiosonix on a straight-line basis over periods of four to fifteen years.
B. To reflect the exclusion of acquired in-process research and development
resulting from the acquisition of Cardiosonix.
F-42
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
NEOPROBE CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 2001
EXHIBITS
EXHIBIT INDEX
NUMBER OF
PAGES IN
ORIGINAL
Exhibit Number DESCRIPTION DOCUMENT
3.1. Complete Restated Certificate of Incorporation of Neoprobe 11
Corporation, as corrected February 18, 1994 and as amended
June 27, 1994, July 25, 1995, June 3, 1996, March 17, 1999,
and May 9, 2000.
3.2. Amended and Restated By - Laws dated July 21, 1993, as amended 15
July 18, 1995 and May 30, 1996.
3.3. Certificate of Elimination of Neoprobe Corporation filed on 1
May 9, 2000 with the Secretary of State of the State of
Delaware.
4.1. See Articles FOUR, FIVE, SIX and SEVEN of the Restated 25
Certificate of Incorporation of the Company (see Exhibit 3.1).
4.2. See Articles II and VI and Section 2 of Article III and 13
Section 4 of Article VII of the Amended and Restated By - Laws
of the Company (see Exhibit 3.2).
4.3. Rights Agreement dated as of July 18, 1995 between the Company 47
and Continental Stock Transfer & Trust Company.
4.4. Amendment Number 1 to the Rights Agreement between the Company 3
and Continental Stock Transfer & Trust Company dated February
16, 1999.
10.1.25. Rights Agreement between the Company and Continental Stock 47
Transfer & Trust Company dated as of July 18, 1995 (see
Exhibit 4.3).
10.1.31. Amendment Number 1 to the Rights Agreement between the Company 3
and Continental Stock Transfer & Trust Company dated February
16, 1999 (see Exhibit 4.4).
10.1.39. Settlement Agreement among the Company, The Aries Master Fund, 5
The Aries Domestic Fund, L.P., Paramount Capital, Inc., and
Paramount Capital Asset Management, Inc. dated January 20,
2000.
----------
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Company's most recent Annual Meeting of Stockholders upon the payment of a
fee of fifty cents ($.50) a page.
10.1.41. Common Stock Purchase Agreement between the Company and Fusion
Capital II, LLC dated November 19, 2001. 23
10.2.26. Amended and Restated Stock Option and Restricted Stock 11
Purchase Plan dated March 3, 1994.
10.2.35. Restricted Stock Purchase Agreement dated June 5, 1996 between
the Company and David C. Bupp. 4
10.2.37. 1996 Stock Incentive Plan dated January 18, 1996 as amended
March 13, 1997. 21
10.2.45. Restricted Stock Purchase Agreement between the Company and
David C. Bupp dated May 20, 1998. 3
10.2.48. Restricted Stock Agreement dated October 23, 1998 between the
Company and Brent L. Larson. 4
10.2.50. Restricted Stock Agreement dated April 30, 1999 between
the Company and David C. Bupp. This Agreement is one of
three substantially identical agreements and is
accompanied by a schedule identifying the other
agreements omitted and setting forth the material
details in which such agreements differ from the one
that is filed herewith. 5
10.2.54. Restricted Stock Agreement dated March 22, 2000 between the 4
Company and David C. Bupp. This Agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details in which such agreements differ
from the one that is filed herewith.
10.2.55. Agreement, Release and Waiver between the Company and Matthew 6
F. Bowman dated March 31, 2000.
10.2.59. Employment Agreement between the Company and David C. Bupp 8
Dated July 1, 2001.
10.2.60. Employment Agreement between the Company and Carl M. Bosch 7
dated October 1, 2001. This Agreement is one of three
substantially identical agreements and is accompanied by a
schedule identifying the other agreements omitted and setting
forth the material details
----------
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Company's most recent Annual Meeting of Stockholders upon the payment of a
fee of fifty cents ($.50) a page.
in which such agreements differ from the one that is filed
herewith.
10.2.61 Employment Agreement between Cardiosonix Ltd. (formerly 15
Biosonix Ltd.) and Dan Manor dated January 1, 2002.*
10.3.1. Technology Transfer Agreement dated July 29, 1992 between the 15
Company and The Dow Chemical Corporation (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the
Commission).
10.3.31. Cooperative Research and Development Agreement between Company 67
and National Cancer Institute.
10.3.45. License dated May 1, 1996 between Company and The Dow Chemical 9
Company.
10.3.46. License Agreement dated May 1, 1996 between Company and The 27
Dow Chemical Company (portions of this Exhibit have been
omitted pursuant to a request for confidential treatment and
have been filed separately with the Commission).
10.3.47. License and Option Agreement between the Company and Cira 32
Technologies, Inc. dated April 1, 1998.
10.3.48. Restated Subscription and Option Agreement between the 12
Company, Cira Technologies, Inc., Richard G. Olsen, John L.
Ridihalgh, Richard McMorrow, James R. Blakeslee, Mueller &
Smith, Ltd., Pierre Triozzi and Gregory Noll, dated April 17,
1998.
10.3.49. Restated Stockholders Agreement with the Company, Cira 5
Technologies, Inc., Richard G. Olsen, John L. Ridihalgh,
Richard McMorrow, James R. Blakeslee, Mueller & Smith, Ltd.,
Pierre L. Triozzi and Gregory Noll, dated April 17, 1998.
10.3.50. Share Purchase Agreement between the Company and Biomedical 12
Investments (1997) Ltd. dated January 19, 2000.
10.3.51. Option Agreement between the Company and Reico Ltd. dated 9
February 1, 2000.
10.3.52. Participation Agreement between the Company and Cira, LLC 5
dated November 30, 2000.
10.4.32. Supply Agreement between the Company and eV Products dated 17
December 8, 1997 (portions of this Exhibit have been omitted
pursuant to a request for confidential treatment and have been
filed separately with the Commission).
----------
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Company's most recent Annual Meeting of Stockholders upon the payment of a
fee of fifty cents ($.50) a page.
10.4.39. Distribution Agreement between the Company and Ethicon 48
Endo-Surgery, Inc. dated October 1, 1999 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the
Commission).
10.4.45. Manufacturing and Supply Agreement between the Company and 22
Plexus Corporation dated March 30, 2000 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the
Commission).
10.4.46. Revolving Credit Loan Agreement between the Company and 38
Firstar Bank, N.A. dated January 26, 2001.
10.4.47. Revolving Credit Loan Note between the Company and Firstar 2
Bank, N.A. dated January 26, 2001.
10.4.48. Continuing Security Agreement between the Company and Firstar 17
Bank, N.A. dated January 26, 2001.
10.4.49. Product Supply Agreement between the Company and UMM 20
Electronics, Inc., dated October 25, 2001 (portions of this
Exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the
Commission).
21.1. Subsidiaries of the Company 1
23.1. Consent of KPMG LLP 1
23.2. Consent of Somekh Chaikin 1
24.1. Powers of Attorney 9
24.2. Certified resolution of the Company's Board of Directors 1
authorizing officers and directors signing on behalf of the
Company to sign pursuant to a power of attorney.
----------
+ The Company will furnish a copy of any exhibit to a beneficial owner of its
securities or to any person from whom a proxy was solicited in connection with
the Company's most recent Annual Meeting of Stockholders upon the payment of a
fee of fifty cents ($.50) a page.