As filed with the Securities and Exchange Commission on March 22, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEOPROBE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 2835 31-1080091
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) Classification number) identification number)
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425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(614) 793-7500
(Address and telephone number of principal executive offices)
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425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(Address of principal place of business)
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Brent L. Larson, Chief Financial Officer
Neoprobe Corporation
425 Metro Place North, Suite 300
Dublin, Ohio 43017-1367
(614) 793-7500
(Name, address and telephone number of agent for service)
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Copies to:
William J. Kelly, Esq.
Christine A. Murry, Esq.
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215
Telephone No. (614) 227-2000
Telecopier No. (614) 227-2100
wjkelly@porterwright.com
cmurry@porterwright.com
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE PROPOSED AMOUNT TO OFFERING PRICE PER PROPOSED MAXIMUM AMOUNT OF REGISTRATION
REGISTERED BE REGISTERED SHARE (1) OFFERING PRICE (1) FEE
--------------------------- --------------------- ------------------------- ---------------------- -------------------------
Common Stock, $.001 par
value................. 5,898,876(2) $ 0.465 $ 2,742,977 $ 252.35
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(1) This price is used solely for the purposes of computing the amount of
the registration fee pursuant to Rule 457 of the Securities Act and is
estimated, based on the high and low prices of the common stock on
March 18, 2002.
(2) Includes (a) 5,000,000 shares which we currently estimate will be sold
pursuant to a common stock purchase agreement, (b) 449,438 shares
already issued representing half of the total potential commitment fee
and (c) 449,438 shares issuable representing the remaining half of the
total potential commitment fee assuming we sell the full 5,000,000
shares to Fusion Capital as mentioned above.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED MARCH 22, 2002.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
NEOPROBE CORPORATION
5,898,876 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 5,898,876 shares of our common
stock by Fusion Capital Fund II, LLC. Fusion Capital is sometimes referred to in
this prospectus as the selling stockholder. The prices at which Fusion Capital
may sell the shares will be determined by the prevailing market price for the
shares or in negotiated transactions. We will not receive proceeds from the sale
of our shares by Fusion Capital.
Our common stock is quoted on the Nasdaq Over-The-Counter Bulletin Board under
the symbol NEOP. On _________ 2002, the last reported sale price for our common
stock as reported on the Nasdaq Over-The-Counter Bulletin Board was $_____ per
share.
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The selling stockholder is an "underwriter" within the meaning of the Securities
Act of 1933, as amended.
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER THE RISK FACTORS BEGINNING ON PAGE 3 BEFORE PURCHASING OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is ____________.
TABLE OF CONTENTS
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Prospectus Summary........................................................................................ 2
Risk Factors.............................................................................................. 3
Cautionary Note Regarding Forward-Looking Statements...................................................... 9
Use of Proceeds........................................................................................... 9
Market for Common Equity and Related Stockholder Matters..................................................10
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................10
Description of Business...................................................................................19
Description of Property...................................................................................33
Our Management............................................................................................33
Security Ownership of Certain Beneficial Owners and Management............................................42
Description of Capital Stock..............................................................................44
The Fusion Transaction....................................................................................48
Selling Stockholders......................................................................................51
Plan of Distribution......................................................................................52
Legal Opinion.............................................................................................53
Experts...................................................................................................53
Additional Information....................................................................................53
Index to Financial Statements.............................................................................F-1
UNLESS OTHERWISE SPECIFIED, THE INFORMATION IN THIS PROSPECTUS IS SET FORTH AS
OF _________, 2002, AND WE ANTICIPATE THAT CHANGES IN OUR AFFAIRS WILL OCCUR
AFTER SUCH DATE. WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS. IF ANY PERSON GIVES YOU
ANY INFORMATION OR MAKES REPRESENTATIONS IN CONNECTION WITH THIS OFFER, DO NOT
RELY ON IT AS INFORMATION WE HAVE AUTHORIZED. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OUR COMMON STOCK IN ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER.
1
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus and
may not contain all the information that is important to you. To understand our
business and this offering fully, you should read this entire prospectus
carefully, including the financial statements and the related notes beginning on
page F-1. When we refer in this prospectus to the "company," "we," "us," and
"our," we mean Neoprobe Corporation, a Delaware corporation, together with our
subsidiaries. This prospectus contains forward-looking statements and
information relating to Neoprobe Corporation. See Cautionary Note Regarding
Forward Looking Statements on page 9.
OUR COMPANY
We are Neoprobe Corporation, a Delaware corporation formed in 1983. We develop
and provide innovative surgical and diagnostic products that enhance patient
care by solving the critical information needs of healthcare professionals. Our
current line of gamma detection systems are widely used for intraoperative
lymphatic mapping (ILM), an emerging standard of care technology for breast
cancer and melanoma. We also hold significant interests in the development of
related biomedical systems and agents. Our strategy is to deliver superior
growth and shareholder return by maximizing our strong position in gamma
detection technologies and diversifying into new, synergistic biomedical markets
through continued investment and selective acquisitions. Neoprobe was formed in
1983.
Our principal executive offices are located at 425 Metro Place North, Suite 300,
Dublin, Ohio, 43017. Our telephone number is (614) 793-7500. The address of our
website is www.neoprobe.com. Information on our website is not part of this
prospectus.
THE OFFERING
On November 19, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC (Fusion Capital), pursuant to which Fusion Capital
has agreed to purchase, on each trading day, $12,500 of our common stock up to
an aggregate, under certain conditions, of $10 million. Fusion Capital, the
selling stockholder under this prospectus, is offering for sale up to 5,898,876
shares of our common stock (including a total of 898,876 shares issuable to
Fusion Capital as a commitment fee). As of March 1, 2002, there were 36,450,067
shares of our common stock outstanding, including 449,438 shares that we have
issued to Fusion Capital representing half of the total commitment fee for its
purchase obligations, but excluding the other 5,449,438 shares offered by Fusion
Capital pursuant to this prospectus. The number of shares offered by this
prospectus represents 16.2% of our total common stock outstanding as of March 1,
2002. The number of shares ultimately offered for sale by Fusion Capital depends
upon the number of shares purchased by Fusion Capital and the number of
additional commitment shares to be issued to Fusion Capital under the common
stock purchase agreement.
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 3.
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RISK FACTORS
An investment in our common stock is highly speculative, involves a high degree
of risk, and should be made only by investors who can afford a complete loss.
You should carefully consider the following risk factors, together with the
other information in this prospectus, including our financial statements and the
related notes, before you decide to buy our common stock. Our most significant
risks and uncertainties are described below; however, they are not the only
risks we face. If any of the following risks actually occur, our business,
financial condition, or results of operations could be materially adversely
affected, the trading of our common stock could decline, and you may lose all or
part of your investment therein.
WE HAVE SUFFERED SIGNIFICANT OPERATING LOSSES FOR SEVERAL YEARS IN OUR HISTORY
AND WE MAY NOT BE ABLE TO AGAIN ACHIEVE PROFITABILITY.
We had an accumulated deficit of approximately $118 million as of December 31,
2001. Although we were profitable in 2000 and in 2001, we incurred substantial
losses in the years prior to that. The deficit resulted because we expended more
money in the course of researching, developing and enhancing our technology and
products and establishing our marketing and administrative organizations than we
generated in revenues. We expect that our 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 we will sustain substantial operating and net losses in 2002, and it is
possible that we will never be able to sustain or develop the revenue levels
necessary to again attain profitability.
EVEN WITH OUR FINANCING ARRANGEMENT WITH FUSION CAPITAL, WE WILL LIKELY REQUIRE
ADDITIONAL FINANCING TO EXECUTE OUR BUSINESS PLAN. WE MAY HAVE DIFFICULTY
RAISING SUCH CAPITAL.
We expect to continue to devote substantial capital resources to fund research
and development of additional gamma guided surgery products as well as our new
Cardiosonix products and to maintain existing and secure new manufacturing
capacity. In order to support the initiatives envisioned in our business plan,
we may need to raise additional funds through the sale of assets, public or
private financing, collaborative relationships or other arrangements. Under our
agreement with Fusion Capital, we only have the right to receive $12,500 per
trading day unless our stock price equals or exceeds $5.00, in which case the
daily amount may be increased at our option. Generally, Fusion Capital shall not
be obligated to purchase any shares of our common stock on any trading days that
the market price of our common stock is less than $0.20. Since we initially
registered 5,000,000 shares for sale by Fusion Capital pursuant to this
prospectus (excluding the total of 898,876 shares issuable to Fusion Capital as
a commitment fee), the selling price of our common stock to Fusion Capital will
have to average at least $2.00 per share for us to receive the maximum proceeds
of $10 million without registering additional shares of common stock. Assuming a
purchase price of $0.45 per share (the closing sale price of the common stock on
March 18, 2002) and the purchase by Fusion Capital of the full 5,000,000 shares
under the common stock purchase agreement, proceeds to us would only be
$2,250,000 unless we choose to register more than 5,000,000 shares, which we
have the right, but not the obligation, to do.
The extent we rely on Fusion Capital as a source of funding will depend on a
number of factors including, the prevailing market price of our common stock and
the extent to which we are able to secure working capital from other sources. If
obtaining sufficient financing from Fusion Capital were to prove prohibitively
expensive, we will need to secure another source of funding in order to satisfy
our working capital needs. Even if we are able to access the full $10 million
under the common stock purchase agreement with Fusion Capital, we may still need
additional capital to fully implement our business, operating and development
plans Our ability to raise additional financing depends on many factors beyond
our control, including the state of capital markets, the market price of our
common stock and the development or prospects for development of competitive
technology by others. The necessary additional financing may not be available to
us or may be available only on terms that would result in further dilution to
the current owners of our common stock. If we are unable to raise additional
funds when we need them, we may have to curtail our operations.
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OUR PRODUCTS MAY NOT ACHIEVE THE BROAD MARKET ACCEPTANCE THEY NEED IN ORDER TO
BE A COMMERCIAL SUCCESS.
Widespread use of our gamma detection devices is currently limited to a surgical
procedure (i.e., ILM) used in the treatment and diagnosis of two primary types
of cancer: melanoma and breast cancer. The success of our gamma detection
devices greatly depends on the medical community's acceptance of ILM, and on our
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 our expectations. Although we continue 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. Our efforts and the efforts of
our marketing and distribution partner may not result in significant demand for
our products, and the current demand for our products may decline.
Our 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 pulmonary artery catheterization 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.
WE RELY ON THIRD PARTIES FOR THE WORLDWIDE MARKETING AND DISTRIBUTION OF OUR
GAMMA DETECTION DEVICES, WHO MAY NOT BE SUCCESSFUL IN SELLING OUR PRODUCTS.
We currently distribute our gamma detection devices in most global markets
through Ethicon Endo-Surgery, Inc. (Ethicon) and in Japan through Century
Medical, Inc. These partners are solely responsible for marketing and
distributing our gamma detection device products. The partners assume direct
responsibility for business risks related to credit, currency exchange, foreign
tax laws or tariff and trade regulation. Ethicon had agreed to purchase minimum
quantities of our 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 we believe that Ethicon intends to continue to
aggressively market our products following satisfaction of their minimum
purchases, we cannot assure you that Ethicon will succeed in marketing our
products on a global basis, or that the partner will make purchases in excess of
its minimum purchase requirements. We may not be able to maintain satisfactory
arrangements with our marketing and distribution partners, who may not devote
adequate resources to selling our gamma detection devices. If this happens, we
may not be able to successfully market our products, which would decrease our
revenues.
WE DO NOT HAVE EXPERIENCE IN MARKETING BLOOD FLOW DEVICES 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 our 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.
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THE SALE OF OUR COMMON STOCK TO 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.
The purchase price for the common stock to be issued to Fusion Capital pursuant
to the common stock purchase agreement will fluctuate based on the price of our
common stock. All shares in this offering are freely tradable. Fusion Capital
may sell none, some or all of the shares of common stock purchased from us at
any time. We expect that the shares offered by this prospectus will be sold over
a period of up to 40 months from the date of this prospectus. Depending upon
market liquidity at the time, a sale of shares under this offering at any given
time could cause the trading price of our common stock to decline. The sale of a
substantial number of shares of our common stock under this offering, 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.
WE RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS AND OUR BUSINESS WILL
SUFFER IF THEY DO NOT PERFORM.
We rely on independent contract manufacturers for the manufacture of our current
line of gamma detection systems. Our business will suffer if our contract
manufacturers have production delays or quality problems. Furthermore, medical
device manufacturers are subject to the quality system regulations (QSR) of the
U.S. Food and Drug Administration (FDA), international quality standards, and
other regulatory requirements. If our contractors do not operate in accordance
with regulatory requirements and quality standards, our business will suffer. We
use or rely on components and services used in our 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 our products, our sales and revenues will be hurt until we find a new
source of supply. In addition, our distribution agreement with Ethicon contains
failure to supply provisions, which, if triggered, could have a significant
negative impact on us.
WE MAY LOSE OUT TO LARGER AND BETTER-ESTABLISHED COMPETITORS.
The medical device and biotechnology industries are intensely competitive. Some
of our competitors have significantly greater financial, technical,
manufacturing, and distribution resources as well as greater experience in the
medical device industry than we have. The particular medical conditions our
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 our competitors'
products and/or our products may not be competitive with other technologies. If
these things happen, our 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.
OUR 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 that we
develop or market, or that would make our 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
our products. Accordingly, our success will depend, in part, on our ability to
respond quickly to medical and technological changes through the development and
introduction of new products. We may not have the resources to do this. If our
products become obsolete and our efforts to develop new products do not result
in any commercially successful products, our sales and revenues will decline.
5
WE ARE IN A HIGHLY REGULATED BUSINESS AND COULD FACE SEVERE PROBLEMS IF WE DO
NOT COMPLY WITH ALL REGULATORY REQUIREMENTS IN THE GLOBAL MARKETS IN WHICH OUR
PRODUCTS ARE SOLD.
The FDA regulates our products in the United States. Foreign countries also
subject our products to varying government regulations. In addition, such
regulatory authorities may impose limitations on the use of our products. FDA
enforcement policy strictly prohibits the marketing of FDA approved medical
devices for unapproved uses. Within the European Union, our products are
required to display the CE mark in order to be sold. We have obtained FDA
clearance to market our medical device products and European certification to
display the CE mark on our current line of gamma detection systems and on one of
Cardiosonix' products, the FlowGuard. We 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 our 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.
OUR INTELLECTUAL PROPERTY MAY NOT HAVE OR PROVIDE SUFFICIENT LEGAL PROTECTIONS
AGAINST INFRINGEMENT OR LOSS OF TRADE SECRETS.
The success of our company depends, in part, on our ability to secure and
maintain patent protection, to preserve our trade secrets, and on our ability to
operate without infringing on the patents of third parties. We seek to protect
our proprietary positions by filing United States and foreign patent
applications for our important inventions and improvements. But, domestic and
foreign patent offices may not issue these patents. Third parties may challenge,
invalidate, or circumvent our patents or patent applications in the future.
Competitors, many of which have substantially more resources than we do and have
made substantial investments in competing technologies, may apply for and obtain
patents that will prevent, limit, or interfere with our ability to make, use, or
sell our 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 our products
obsolete or will limit our patents or invalidate our patent applications.
We typically require our employees, consultants, advisers and suppliers to
execute confidentiality and assignment of invention agreements in connection
with their employment, consulting, advisory, or supply relationships with us.
They may breach these agreements and we may not obtain an adequate remedy for
breach. Further, third parties may gain access to our 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 our
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 us 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
6
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.
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.
OUR 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.
WE COULD BE DAMAGED BY PRODUCT LIABILITY CLAIMS.
Our 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 us. We currently have product liability
insurance with a $10 million per occurrence limit, which, we believe, is
adequate for our current activities. However, we
7
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 we might not have sufficient funds
available to pay any claims over the limits of our 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 our company.
WE MAY HAVE TROUBLE ATTRACTING AND RETAINING QUALIFIED PERSONNEL AND OUR
BUSINESS MAY SUFFER IF WE DO NOT.
Our business has experienced developments the past two years which have resulted
in several significant changes in our strategy and business plan, including
downsizing to what we consider to be the minimal level of management and
employees necessary to operate a publicly traded medical device business. We
believe our 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 our operations. Our success depends on our ability to
attract and retain 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 we may not be successful
in hiring or retaining the requisite personnel. If we are not able to attract
and retain qualified technical and management personnel, we will suffer
diminished chances of future success.
OUR COMMON STOCK IS TRADED OVER THE COUNTER, WHICH MAY DEPRIVE STOCKHOLDERS OF
THE FULL VALUE OF THEIR SHARES.
Our 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 OUR COMMON STOCK.
Our 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 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 our common stock.
OUR STOCKHOLDER RIGHTS PLAN, SOME PROVISIONS OF OUR 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
OUR COMPANY OR MAY BE USED TO HINDER OR DELAY A TAKEOVER BID.
Our certificate of incorporation authorizes the creation and issuance of "blank
check" preferred stock. Our 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
8
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 our company.
If we issue "blank check" preferred stock, it could have a dilutive effect upon
our common stock. This would decrease the chance that our 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 us 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 our company, and to vote
their shares in conformity with the recommendations of our 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 our company.
BECAUSE WE WILL NOT PAY DIVIDENDS, STOCKHOLDERS WILL ONLY BENEFIT FROM OWNING
COMMON STOCK IF IT APPRECIATES.
We have never paid dividends on our common stock and do not intend to do so in
the foreseeable future. We intend to retain any future earnings to finance our
growth. Accordingly, any potential investor who anticipates the need for current
dividends from his investment should not purchase our common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions, including, among other things:
-- general economic and business conditions, both nationally and in our
markets,
-- our history of losses,
-- our expectations and estimates concerning future financial performance,
financing plans and the impact of competition,
-- our ability to implement our growth strategy,
-- anticipated trends in our business,
-- advances in technologies, and
-- other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, we use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," and similar expressions to identify
forward-looking statements.
We undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by Fusion Capital. We will receive no proceeds from the
sale of shares of common stock in this offering. However, we may receive up to
$10 million in proceeds from the sale of our common stock to Fusion
9
Capital under the common stock purchase agreement. Any proceeds from Fusion
Capital we receive under the common stock purchase agreement will be used for
working capital and general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock 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 our 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, we had approximately 728 holders of common stock of record.
We have not paid any dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. We intend to retain any earnings to
finance the growth of our business. We cannot assure you that we will ever pay
cash dividends. Whether we pay cash dividends in the future will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, capital requirements and any other factors
that the Board of Directors decides is relevant. See Management's Discussion and
Analysis of Financial Condition and Results of Operations below.
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 the Form SB-2 Registration Statement, of which this
prospectus is a part. 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 the Risk Factors section of
this Form SB-2 beginning on page 3.
THE COMPANY
We are 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. 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.
10
RESULTS OF OPERATIONS
2001 marked the second consecutive year of profitability for our company.
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 us 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, our company's net income for 2001 would have been $900,000.
Including the non-recurring charge, our 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;
and
-- 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 we charged Ethicon for gamma detection
products during 2001. Our 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 us 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. We attribute 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 us;
-- 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 our 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. We believe, 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 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 company 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.
Our 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
11
administrative expenses, as a percentage of sales, increased slightly to 34% in
2001 from 33% in 2000. We believe 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 our 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 our BlueTip probes and
accompanying disposable handles. In addition, the cost to manufacture our
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 our 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 our 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 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 us related to a
loan made by a bank to our former subsidiary, Neoprobe Israel. We 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
our decision to liquidate Neoprobe Israel, as we did not expect to receive any
of the cash deposit back from the bank. We 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 us 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 our investments.
Interest income decreased because we received a lower interest rate on our
invested cash in 2001 as compared to 2000, consistent with marketplace activity
over the two periods.
12
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. We expect 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. We built up stock of certain critical long-lead
components during 2001 in order to take advantage of significant quantity price
breaks, and have 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 we have 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 during 2002. Later in 2002,
we will also start to build inventory of blood flow products in preparation for
commercial launch.
We anticipate we 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 our
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, we completed the
acquisition of Cardiosonix, and acquired $195,000 in net cash. During January
2000, we 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 detection devices.
FINANCING ACTIVITIES -- Financing activities used $188,000 in cash in 2001
versus $3.3 million in 2000. During the first quarter of 2000, we paid holders
of Series B preferred stock $2.5 million 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, we paid off debt totaling
$144,000 and $812,000, respectively, leaving us 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 Fund II, LLC (Fusion Capital) for the issuance
and purchase of our common stock. Under the stock purchase agreement, Fusion
Capital committed to purchase up to $10 million of our common stock over a
forty-month period that commences when this Registration Statement becomes
effective. Once the Registration Statement is declared effective, Fusion Capital
will purchase $12,500 of our common stock daily, which purchase amount we may
increase or decrease in our discretion. The purchase price per share of
common stock will be equal to the lesser of (a) the lowest sale price for our
common 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. However, the shares sold to Fusion Capital are subject to a minimum
sales price (floor price) currently set at $0.30. We have the right to
increase or decrease the floor price, but in no case may we decrease it below
$0.20 without Fusion Capital's prior consent. Upon execution of the common stock
purchase agreement, we issued 449,438 shares of our
13
common stock to Fusion Capital as a commitment fee. We intend to use the
proceeds of sales of shares to Fusion Capital 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 our common stock. For additional information, see The Fusion
Transaction.
During February 2002, we 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.
We cannot assure you 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. We cannot assure you that we will be able to achieve significant product
revenues from our current or potential new products. In addition, we cannot
assure you that we will achieve profitability again in the future.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - The following table
presents our 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 $ --
============== ============== ============= ============ ============
14
(1) This amount represents purchases under binding purchase orders for which we
are required to take delivery of the product under the terms of the underlying
supply agreements going out approximately four to five months. In addition, we
have 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 we must either submit binding purchase orders on a monthly
basis or reimburse the contract manufacturer for any non-cancellable,
non-returnable materials. We believe 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. We adopted SFAS 141 and SFAS 142 as of December 31, 2001 related to
our acquisition of Cardiosonix. The adoption of these pronouncements had a
material affect on our 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 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.
We are required to adopt SFAS 144 no later than the year beginning after
December 15, 2001, and plan to adopt its provisions for the quarter ending March
31, 2002. We do not expect the adoption of SFAS 144 for long-lived assets held
for use to have a material impact on our 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, we cannot determine the potential
effects that adoption of SFAS 144 will have on our 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
15
shipping and handling charges, as revenue. However, the Topic could potentially
be applied to areas such as our reimbursement of research and development
charges from Ethicon. We are analyzing the potential impacts of the Topic;
however, we are not able to determine at this time the potential impact the
adoption of Topic D-103 will have on our financial statements.
CRITICAL ACCOUNTING POLICIES -- The following accounting policies are considered
by us to be critical to our 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 our 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 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, we issued
9,714,737 shares of our common stock in exchange for all of the outstanding
shares of Cardiosonix. An additional 2,085,826 shares of our 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 our 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
16
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, we 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 our history, we believe utilization of
our 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.
Our financial performance is highly dependent on the success of our gamma
detection instrument product line and on our ability to commercialize the blood
flow products of our newly acquired subsidiary, Cardiosonix. We cannot assure
you, however, that we 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 we remain optimistic about the prospects for our
other proprietary technologies, these technologies are not anticipated to
generate any significant revenue for us during 2002. We believe our December 31,
2001 cash position and sources of future cash flow are adequate for us to
continue operating through the end of 2002 and into 2003. However, if we do not
generate adequate funds from operations, we may need to further modify our
business plan and seek other financing alternatives. Such alternatives may
include asset dispositions that could force us to further change our 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 us. 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, we believe that the surgical community will continue to
adopt the ILM application while the standard of care determination is still
pending. We also believe the lymphatic targeting agent being developed by the
University of California, San Diego (UCSD) for us, 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, we
continue 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. We also believe 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
17
our 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. We also believe that Ethicon's total purchases for 2002
will be less than 2001 as they work to decrease their overstock position of base
systems. We do 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. We cannot assure you, however, that Ethicon's sales will increase and
result in increased demand for our products.
In addition, under the terms of our marketing agreement with Ethicon, the
transfer price on product sales that we receive is based on a percentage of
Ethicon's end-customer sales price, subject to a price floor. To date, our
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 we continue to believe in the technical and user-friendly superiority
of our products, competitors continue to innovate and we 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 us
will not change again under the terms of the current distribution agreement. In
addition, the price received by us 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 our gamma detection devices to Ethicon.
Ethicon has also reimbursed us for a flat amount per quarter ($125,000) related
to research and development expenses incurred by us on Ethicon's behalf. This
flat reimbursement ends at the end of the third quarter of 2002. We cannot
assure you, however, that we will be successful in negotiating additional
reimbursement from Ethicon covering product development beyond the third quarter
of 2002 at terms acceptable to us, or at all.
Based on the above discussion, we project the gamma detection device line will
operate approximately on a breakeven basis in 2002.
Blood Flow Devices
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
We intend to continue to develop RIGScan CR and ACT, but will not do so without
a partner or third party support. We 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.
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DESCRIPTION OF BUSINESS
DEVELOPMENT OF THE BUSINESS
We are 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. We were 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 our history, we have devoted substantially all of our 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 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 Gamma Detection System, originally released in 1998, is
the third generation of our gamma detection systems. The neo2000 is designed as
a platform for future growth of our instrument business. The neo2000 is software
upgradeable and is designed to support future surgical targeting probes without
the necessity of costly remanufacture.
Surgeons are using our 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
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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 our
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 our 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 our
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.
Our ILM business strategy for 2002 centers around two primary objectives:
-- increasing our market position in device sales for intraoperative lymphatic
mapping and other gamma guided surgery applications by expanding and
improving our 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.
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BLOOD FLOW DEVICES
Accurate blood flow measurement is required for various clinical needs,
including:
-- real-time monitoring;
-- intraoperative quantification;
-- non-invasive diagnostics; and
-- evaluation of cardiac function.
Currently, the medical community has no simple, immediate, real-time means to
quantify the adequacy of organ 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.
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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 intraoperatively,
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 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.
We believe 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.
We cannot assure you, 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 our company only on the initial sale. To complement the
one-time revenue stream related to capital products,
22
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. We 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 commercialization of
Lymphoseek. We cannot assure you, 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
Our 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 our
gamma-detecting instrument, which emits an audible tone to direct the surgeon to
targeted tissue.
We conducted several clinical trials related to the first generation drug of our
RIGS technology in past years, but were 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 Drug (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 lack of funding which we believe is unrelated
to the pending clinical results of the current Phase I trial. We understand,
however, that the physician-IND researchers intend to complete the Phase I trial
during second quarter of 2002. Following completion of the trial, we intend to
evaluate the results and investigate additional interest in completing the next
stage of trials.
At this time, we cannot assure you 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 us, we believe
that it would take at least four to five years to complete development,
regulatory and commercialization activities for a RIGS product. We cannot assure
you, however, that we will be able to complete license agreements with another
development partner for the RIGS technology on terms acceptable to us, or at
all. Also, we cannot assure you 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.
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ACTIVATED CELLULAR THERAPY
We have 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, we 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 our ACT technology for
oncology. Our company 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 of 2002. We believe 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. We cannot assure you, 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, we intend 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. We do not intend to fund any significant
ACT-related research and development without a partner. We cannot assure you
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 our products, at $107 billion: $37 billion for
direct medical costs, $11 billion for indirect morbidity, and $59 billion for
indirect mortality. Our 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 our
24
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 cardiovascular circulation. Our company,
our 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 our company. We cannot assure you, 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
25
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. We intend
to continue developing additional ILM-related probes and instrument products in
cooperation with Ethicon to continue our leadership position in the ILM field.
Physician training is critical to the use and adoption of ILM products by
surgeons and other medical professionals. Our company and our marketing partners
have established relationships with leaders in the ILM surgical community and
have established and supported training courses internationally for lymphatic
mapping. We intend to continue to work with our partners to expand the number of
ILM training courses available to surgeons.
We entered into our current distribution agreement with Ethicon effective
October 1, 1999 for an initial five-year term with options to extend for two
successive two-year terms. Under this agreement, we manufacture and sell our ILM
products almost exclusively to Ethicon, who distributes the products globally.
Ethicon agreed to purchase minimum quantities of the our products over the first
three years of the five-year original term of the agreement and to reimburse us
for certain research and development costs during the first three years and a
portion of our 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
We rely on independent contract manufacturers, some of which are single-source
suppliers, for the manufacture of the principal components of our 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. We currently market a 14mm reusable probe
and a group of BlueTip reuseable probes that are used with a disposable handle.
We have devoted significant resources to develop production capability for our
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, we have 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
26
manufacture of 14mm probes and the neo2000 control unit. We also purchase
certain accessories for our line of gamma detection systems from other qualified
manufacturers.
In December 1997, we entered into a supply agreement with eV for the supply of
certain crystals and associated electronics to be used in the manufacture of our
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 us to purchase minimum
quantities of crystals and associated electronics based on forecasted production
needs. eV supplies 100% of the crystals that we use. While eV is not the only
potential supplier of such crystals, any prolonged interruption of this source
could restrict the availability of our probe products, which would adversely
affect our operating results.
In May 1999, we 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 requires that we deliver annual product
forecasts to MedTech and that we purchase at least 75% of forecasted product
demand on a quarterly basis. The agreement may be terminated by us 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 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
our orders for a given product fall below certain minimum quarterly amounts for
two successive quarters.
We cannot assure you that we will be able to maintain agreements with our
subcontractors on terms acceptable to us, or that our subcontractors will be
able to meet our production requirements on a timely basis, at the required
levels of performance and quality. In the event that any of our subcontractors
is unable or unwilling to meet our production requirements, we cannot assure you
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 that
we or our subcontractors experience would have a material adverse effect on our
ability to manufacture our products and, therefore, a material adverse effect on
our 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
We face 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 our products. In addition, a number of large established
companies are developing proprietary technologies or have enhanced their
capabilities by entering into arrangements with or acquiring
27
companies with proprietary antibody technology, or other technologies applicable
to the detection or treatment of cancer. Many of our existing or potential
competitors have substantially greater financial, research and development,
regulatory, marketing, and production resources than we have. Other companies
may develop and introduce products and processes competitive with or superior to
ours. See also Risk Factors.
For our products, an important factor in competition may be the timing of market
introduction of our products or those of our competitors' products. Accordingly,
the relative speed with which we can develop products, complete the approval
processes and supply commercial quantities of the products to the market will be
an important competitive factor. We expect 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.
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. We believe our intellectual property
portfolio will be a barrier to competitive products; we cannot assure you,
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 can be evaluated.
28
-- 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 provides only
blood flow velocity rather than volume flow.
INDIRECT BLOOD FLOW MEASUREMENT DEVICES
-- Cardiac Output (CO) Monitors. This includes various means to monitor CO
such as Thermal Dilution, Bio Impedance, and the Fick Method. These methods
are either invasive or indirect in their measurement. Thermal dilution,
primarily through pulmonary artery catheterization, 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
Computed 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
29
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 we believe we 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:
-- Intraoperative applications: EchoCath, Inc. (Doppler based), Carolina
Medical, Inc. (EMF), and Transonic Systems, Inc. and Medi-Stim AS (TT).
-- Neurosurgery applications: HADECO, Hayashi Denki Co., Ltd. (Doppler based),
and DWL Elektronische Systeme GmbH and Nicolet Biomedical (Transcranial
Doppler).
-- Critical care monitoring: Deltex Medical and Arrow International, Inc.
(Transesophageal Doppler), and CardioDynamics International Corp. (bio
impedance).
PATENTS AND PROPRIETARY RIGHTS
We regard the establishment of a strong intellectual property position in our
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,
our 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 also 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.
We continue 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 our near-term business plans, may be
important to a potential RIGS or ACT development partner. Certain aspects of our
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 our
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
our company. The scope and validity of these patents and applications, the
extent to which we may be required to obtain licenses thereunder or under other
proprietary rights, and the cost and availability of licenses are uncertain. We
cannot assure you that our patent applications will result in additional patents
being issued or that any of our patents will afford protection against
competitors with similar technology; nor can we assure you that any of our
patents will not be designed around by others or that others will not obtain
patents that we would need to license or design around. See also Risk Factors.
We also rely upon unpatented trade secrets. We cannot assure you that others
will not independently develop substantially equivalent proprietary information
and techniques, or otherwise gain access to our trade secrets, or disclose such
technology, or that the we can meaningfully protect our rights to our unpatented
trade secrets.
We require our employees, consultants, advisers, and suppliers to execute a
confidentiality agreement upon the commencement of an employment, consulting or
manufacturing relationship with us. The
30
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 agreement provides that all
inventions conceived by the individual will be the exclusive property of our
company. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets in the event of an unauthorized use
or disclosure of such information.
GOVERNMENT REGULATION
Most aspects of our business are subject to some degree of government regulation
in the countries in which our operations are conducted. As a developer,
manufacturer and marketer of medical products, we are subject to extensive
regulation by, among other governmental entities, the FDA and the corresponding
state, local and foreign regulatory bodies in jurisdictions in which we sell our
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 us 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 our
business. We believe that we are 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. We cannot assure you that such changes will not have a material
adverse effect on our 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 ours,
comply with applicable laws and regulations. We devote significant time, effort
and expense addressing the extensive governmental regulatory requirements
applicable to our business. To date, we have not received any notifications or
warning letters from the FDA or any other regulatory bodies of alleged
deficiencies in our compliance with the relevant requirements, nor have we
recalled or issued safety alerts on any of our products. However, we cannot
assure you that a warning letter, recall or safety alert, if it occurred, would
not have a material adverse effect on our 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, we cannot assure you that the
FDA review process will not continue to delay our 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 our new product offerings could have a material adverse effect on our
business, financial condition or results of operations.
While we are unable to predict the extent to which our business may be affected
by future regulatory developments, we believe that our substantial experience
dealing with governmental regulatory requirements and restrictions on our
operations throughout the world, and our development of new and improved
products, should enable us to compete effectively within this environment.
31
GAMMA DETECTION AND BLOOD FLOW MEDICAL DEVICES
Our 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 QSR and maintain appropriate technical
files and quality records. We believe the neo2000 device is exempt from the
510(k) process because it is substantially equivalent to previously cleared
predecessor devices. Our medical devices are regulated in Europe according to
the Medical Device Directive (93/42/EEC). Under this regulation, we must obtain
CE mark status for all products exported to Europe. We 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. We have 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)
Our radiolabled 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 we have encountered significant impediments and
delays related to our 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 we cannot assure you 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. We cannot assure you that
any of our 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. We or
our 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. We
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. We cannot assure you that we 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 our
business, financial condition, and results of operations.
32
EMPLOYEES
As of March 1, 2002, we had 35 full-time employees, including those of our newly
acquired subsidiary, Cardiosonix. We consider our relations with our employees
to be good.
DESCRIPTION OF PROPERTY
We currently lease our office at 425 Metro Place North, Dublin, Ohio. We
executed a lease agreement, commencing 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, we executed three lease agreements to sublease approximately 2,600
square feet, 4,600 square feet, and 6,750 square feet of our 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. Our
company and our subtenants must also pay a pro-rata portion of the operating
expenses and real estate taxes of the building. We believe that these facilities
are in good condition and will be adequate for our needs in the foreseeable
future.
Our 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.
OUR MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS
THE FOLLOWING DIRECTORS' TERMS SHALL CONTINUE UNTIL THE 2002 ANNUAL MEETING:
NANCY E. KATZ, age 42, has served as a director of our company 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 our company 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.
33
MICHAEL P. MOORE, M.D., PH.D., age 51, has served as a director of our company
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 our company 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 our company 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 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 our company 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 our company 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 our company
since August 1992 and as Chief Executive Officer since February 1998. From
August 1992 to May 1993, Mr. Bupp served as the Treasurer of our company. 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.
34
JULIUS R. KREVANS, M.D., age 77, has served as a director of our company since
May 1994 and as Chairman of the Board of Directors of our company 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 our company, is President
and Chief Executive Officer of Calypte.
EXECUTIVE OFFICERS
In addition to Mr. Bupp, the following individuals are executive officers of our
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 our
company since March 2000. Prior to that, Mr. Bosch served as our Director,
Instrument Development from May 1998 to March 2000. Before joining our company,
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 our company since November 2000. From July 1998 through November
2000, Mr. Brown served as Director, Regulatory Affairs. Prior to joining our
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 our company since February 1999. Prior to that, he served as Vice
President, Finance from July 1998 to January 1999 and as Controller from July
1996 to June 1998. Before joining our company, 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.
35
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 our 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 our company which dividends or
distributions will be delivered to us 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
we may, but are 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.
Contributions by our 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 our contributions
and income earned on contributions are not taxable to the employee until
withdrawn from the plan, and that our contributions will be deductible by
us when made.
(d) Mr. Brown began his employment with our 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 our company which dividends or
distributions will be delivered to us 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 our company which dividends or
distributions will be delivered to us under the same restrictions on
transfer and possibility of forfeitures as the shares of restricted stock
from which they derive.
36
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents certain information concerning stock options
granted to the Named Executives under our 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 our company received $2,000
per board meeting attended in person and other non-employee directors received
$1,000 each per meeting attended in person. We also paid directors $500 each per
committee meeting attended in person during 2001. We did not pay directors for
telephonic participation in board or committee meetings in 2001. We also
reimbursed non-employee directors for travel expenses for meetings attended
during 2001. In addition,
37
the Chairman and each non-employee director received 30,000 and 15,000 options,
respectively, to purchase common stock as a part of our 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 our 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 our 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 our company generally. We have approved payment
of a $46,500 bonus to Mr. Bupp relating to fiscal year 2001.
If a change in control occurs with respect to our company and the employment of
Mr. Bupp is concurrently or subsequently terminated:
-- by us 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);
-- the term of Mr. Bupp's employment agreement expires; or
-- Mr. Bupp resigns because his authority, responsibilities or compensation
have materially diminished, a material change occurs in his working
conditions or we breach the agreement, then 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 our
company, the severance payment shall be increased by $81,250.
For purposes of Mr. Bupp's employment agreement, a change in control includes:
-- the acquisition, directly or indirectly, by a person (other than our
company or an employee benefit plan established by the Board of Directors)
of beneficial ownership of 15 percent or more of our securities with voting
power in the next meeting of holders of voting securities to elect the
directors;
-- a majority of the directors elected at any meeting of the holders of our
voting securities are persons who were not nominated by our then current
board of directors or an authorized committee thereof;
-- the stockholders of our company approve a merger or consolidation of our
company with another person, other than a merger or consolidation in which
the holders of our 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
-- the stockholders of our company approve a transfer of substantially all of
the assets of our 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 us or by the holders of our 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.
38
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 we will refund the purchase
price paid) on the earlier of the date of the termination of his employment
under his employment agreement with us for any reason unless we are, 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 our 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 our company, waived the change of control provisions of
his employment and restricted stock agreements related to the acquisition.
We have 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 our company and of
Mr. Bosch and we will pay a bonus to Mr. Bosch as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee which covers the executive officers of our company
generally. We have approved payment of a $25,250 bonus to Mr. Bosch relating to
fiscal year 2001.
If a change in control occurs with respect to our company and the employment of
Mr. Bosch is concurrently or subsequently terminated:
-- 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);
-- the term of Mr. Bosch's employment agreement expires; or
-- Mr. Bosch resigns because his authority, responsibilities or compensation
have materially diminished, a material change occurs in his working
conditions or we breach the agreement, then 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:
-- the acquisition, directly or indirectly, by a person (other than our
company or an employee benefit plan established by the Board of Directors)
of beneficial ownership of 30 percent or more of our company's securities
with voting power in the next meeting of holders of voting securities to
elect the directors;
-- a majority of the directors elected at any meeting of the holders of our
voting securities are persons who were not nominated by our then current
board of directors or an authorized committee thereof;
39
-- the stockholders of our company approve a merger or consolidation of our
company with another person, other than a merger or consolidation in which
the holders of our 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
-- the stockholders of our company approve a transfer of substantially all of
the assets of our 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 us or by the holders of our 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 we will refund the
purchase price paid) on the earlier of the date of the termination of his
employment under his employment agreement with us for any reason unless we are,
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 our
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 A. 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 our company and of
Mr. Brown and we will pay a bonus to Mr. Brown as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee which covers the executive officers of our company
generally. We have approved payment of a $19,000 bonus to Mr. Brown relating to
fiscal year 2001.
Brent L. 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 our company and of
Mr. Larson and we will pay a bonus to Mr. Larson as we deem appropriate, in our
discretion. Such review and bonus will be consistent with any bonus plan adopted
by the Compensation Committee which covers the executive officers of our company
generally. We have approved a $20,250 bonus to Mr. Larson relating to fiscal
year 2001.
40
Restricted Stock Agreements. 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 agreements are identical to those
contained in Mr. Bosch's restricted stock purchase agreements discussed above
regarding vesting, forfeiture and rights of ownership.
41
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 us to be the beneficial owner of more than 5 percent of our
outstanding shares of common stock, (ii) each director or nominee for director
of our company, (iii) each of the Named Executives (see Executive
Compensation--Summary Compensation Table), and (iv) our 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 our company's 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 our 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 our 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.
(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 our 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.
42
(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 our 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 our
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 our company and 36,398 shares held in
the 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 our 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 our acquisition of Cardiosonix.
(p) Less than one percent.
43
DESCRIPTION OF CAPITAL STOCK
Authorized and Issued Stock
---------------------------
Number of Shares at March 1, 2002
----------------------------------------------------------------------
Title of Class Authorized Outstanding Reserved
-------------- ---------- ----------- --------
Common Stock, $0.001 par value per share 50,000,000 36,450,067 3,184,912
Series A Junior Participating Preferred 500,000 0 500,000
Stock, $0.001 par value per share
Preferred Stock, $0.001 par value per share 4,500,000 0 0
COMMON STOCK
DIVIDENDS
Each share of common stock is entitled to receive an equal dividend, if one is
declared, which is unlikely. We have never paid dividends on our common stock
and do not intend to do so in the foreseeable future. We intend to retain any
future earnings to finance our growth. See Risk Factors.
LIQUIDATION
If our company is liquidated, any assets that remain after the creditors are
paid and the owners of preferred stock receive any liquidation preferences will
be distributed to the owners of our common stock pro-rata.
VOTING RIGHTS
Each share of our common stock entitles the owner to one vote. There is no
cumulative voting. A simple majority can elect all of the directors at a given
meeting and the minority would not be able to elect any directors at that
meeting.
PREEMPTIVE RIGHTS
Owners of our common stock have no preemptive rights. We may sell shares of our
common stock to third parties without first offering it to current stockholders.
REDEMPTION RIGHTS
We do not have the right to buy back shares of our common stock except in
extraordinary transactions such as mergers and court approved bankruptcy
reorganizations. Owners of our common stock do not ordinarily have the right to
require us to buy their common stock. We do not have a sinking fund to provide
assets for any buy back.
CONVERSION RIGHTS
Shares of our common stock can not be converted into any other kind of stock
except in extraordinary transactions, such as mergers and court approved
bankruptcy reorganizations.
PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors to issue
"blank check" preferred stock. The board of directors may divide this stock into
series and set their rights. To date, our board of
44
directors has created one series of preferred stock. 500,000 shares of preferred
stock have been designated as Series A Junior Participating Preferred Stock and
reserved for issuance under the stockholder rights plan described below. The
board of directors had previously designated 63,000 shares of preferred stock as
5% Series B Convertible Preferred Stock, but these shares have been redeemed and
returned to the status of unissued shares. The board of directors may, without
prior stockholder approval, issue any of the remaining 4,500,000 shares
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 our company. Although we have no present
intention of issuing any shares of preferred stock, our board of directors may
do so in the future. If we do issue preferred stock in the future, it could have
a dilutive effect upon the common stock. See Risk Factors.
STOCKHOLDER RIGHTS PLAN
We have adopted a stockholder rights plan for the purpose of protecting the
interests of our stockholders if we are confronted with coercive or unfair
takeover tactics. The goal of our stockholder rights plan is to encourage third
parties interested in acquiring our company to negotiate with our board of
directors. Under the plan, we distributed rights to purchase one hundredth of a
share of Series A Preferred Stock at an exercise price of $35 per right to the
stockholders at the rate of one right per share of common stock. The rights are
attached to the common stock and are not exercisable until after 15 percent of
the common stock has been acquired or tendered for. At that point, the rights
would be separately traded and exercisable. If a third party crosses the 15
percent threshold, the rights would flip-in (but not the rights of the 15
percent stockholder) and become rights to acquire, upon payment of the exercise
price, common stock (or, in some circumstances, other securities) with a value
of twice the exercise price of the right. If a third party were to take actions
to acquire our company, such as a merger, the rights would flip-over and entitle
the owners of the rights to acquire stock of the acquiring person with a value
of twice the exercise price. We may redeem the rights at any time before they
become exercisable for $.01 per right. The plan expires on August 28, 2005. The
number of rights per share of common stock will be adjusted in the future to
reflect future splits and combinations of, and common stock dividends on, our
common stock. The exercise price of the rights will be adjusted to reflect
changes in the Series A Preferred Stock.
SERIES A PREFERRED STOCK
REDEMPTION
We may redeem Series A Preferred Stock at a price equal to 100 times the current
per share market price of the common stock, together with accrued but unpaid
dividends. We are not required to create a sinking fund to provide assets for a
redemption.
DIVIDEND
Each owner of Series A Preferred Stock is entitled to receive a minimum
quarterly dividend of $.05 per share plus an aggregate dividend of 100 times any
dividend declared on the common stock.
ELECTION OF DIRECTORS
If dividends on Series A Preferred Stock are in arrears in an amount equal to
six quarterly payments, all owners of Preferred Stock (including holders of
Series A Preferred Stock) with dividends in arrears equal to this amount, voting
as a class, could elect two directors.
LIQUIDATION
If our company is liquidated, the holders of the Series A Preferred Stock will
receive a preferred liquidation payment of $.10 per share and, after the common
stock has received a proportionate distribution, will share in the remaining
assets on a proportionate basis with the common stock.
45
PRIORITY
Series A Preferred Stock is senior to common stock, but junior to all other
classes of preferred stock as to the payment of dividends and the distribution
of assets.
VOTING
Each owner of Series A Preferred Stock is entitled to 100 votes per share of
Series A Preferred Stock.
EXCHANGES
In any merger or other transaction where common stock is exchanged, each share
of Series A Preferred Stock will be entitled to receive 100 times the amount
received by the common stock.
ANTI-DILUTION
We intend that each share of Series A Preferred Stock approximate 100 shares of
common stock as they existed on the date the rights were distributed (August 28,
1995); therefore, the redemption price, dividend, liquidation price and voting
rights will be adjusted to reflect splits and combinations of, and common stock
dividends on, the common stock after that date.
ANTI-TAKEOVER EFFECTS
Our stockholder rights plan is designed to deter coercive takeover tactics and
otherwise to encourage persons interested in acquiring Neoprobe to negotiate
with our board of directors. The stockholder rights plan will confront a
potential acquirer of our company with the possibility that our stockholders
will be able to substantially dilute the acquirer's equity interest by
exercising rights to buy additional stock in Neoprobe or, in some cases, stock
in the acquirer, at a substantial discount. The plan may have the effect of
deterring third parties from making takeover bids for control of our company or
may be used to hinder or delay a takeover bid. This would decrease the chance
that our stockholders would realize a premium over market price for their shares
of common stock as a result of a takeover bid. See Risk. Our board of directors
may redeem the rights for a nominal payment if it considers the proposed
acquisition of Neoprobe to be in the best interests of our company and our
stockholders. Accordingly, the stockholder rights plan would not interfere with
any merger or other business combination which has been approved by the board of
directors. Any plan which effectively requires an acquiring company to negotiate
with our management may be characterized as increasing management's ability to
maintain its position with Neoprobe, including the negotiation of a transaction
which provides less value to the stockholders while providing benefits to
management.
ANTI-TAKEOVER CHARTER PROVISIONS AND LAWS
In addition to the stockholder rights plan and the blank check preferred stock
described above, some features of our certificate of incorporation and by-laws
and the Delaware General Corporation Law (DGCL), which are further described
below, may have the effect of deterring third parties from making takeover bids
for control of our company or may be used to hinder or delay a takeover bid.
This would decrease the chance that our stockholders would realize a premium
over market price for their shares of common stock as a result of a takeover
bid. See Risk Factors.
LIMITATIONS ON STOCKHOLDER ACTIONS
Our certificate of incorporation provides that stockholder action may only be
taken at a meeting of the stockholders. Thus, an owner of a majority of the
voting power could not take action to replace the board of directors, or any
class of directors, without a meeting of the stockholders, nor could he amend
the by-laws without presenting the amendment to a meeting of the stockholders.
Furthermore, under the provisions of the certificate of incorporation and
by-laws, only the board of directors has the power to call a special meeting of
stockholders. Therefore, a stockholder, even one who owns a majority of the
voting
46
power, may neither replace sitting board of directors members nor amend the
by-laws before the next annual meeting of stockholders.
ADVANCE NOTICE PROVISIONS
Our by-laws establish advance notice procedures for the nomination of candidates
for election as directors by stockholders, as well as for other stockholder
proposals to be considered at annual meetings. Generally, we must receive a
notice of intent to nominate a director or raise any other matter at a
stockholder meeting not less than 120 days before the first anniversary of the
mailing of our proxy statement for the previous year's annual meeting. The
notice must contain required information concerning the person to be nominated
or the matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
DELAWARE LAW
We are incorporated in Delaware, and as such are subject to Section 203 of the
DGCL, which provides that a corporation may not engage in any business
combination with an interested stockholder during the three years after he
becomes an interested stockholder unless:
-- the corporation's board of directors approved in advance either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
-- the interested stockholder owned at least 85 percent of the corporation's
voting stock at the time the transaction commenced; or
-- the business combination is approved by the corporation's board of
directors and the affirmative vote of at least two-thirds of the voting
stock which is not owned by the interested stockholder.
An interested stockholder is anyone who owns 15 percent or more of a
corporation's voting stock, or who is an affiliate or associate of the
corporation and was the owner of 15 percent or more of the corporation's voting
stock at any time within the previous three years; and the affiliates and
associates of any those persons. Section 203 of the DGCL makes it more difficult
for an interested stockholder to implement various business combinations with
our company for a three-year period, although our stockholders may vote to
exclude it from the law's restrictions.
CLASSIFIED BOARD
Our certificate of incorporation and by-laws divide our board of directors into
three classes with staggered three year terms. There are currently nine
directors, three in each class. At each annual meeting of stockholders, the
terms of one class of directors will expire and the newly nominated directors of
that class will be elected for a term of three years. The board of directors
will be able to determine the total number of directors constituting the full
board of directors and the number of directors in each class, but the total
number of directors may not exceed 17 nor may the number of directors in any
class exceed six. Subject to these rules, the classes of directors need not have
equal numbers of members. No reduction in the total number of directors or in
the number of directors in a given class will have the effect of removing a
director from office or reducing the term of any then sitting director.
Stockholders may only remove directors for cause. If the board of directors
increases the number of directors in a class, it will be able to fill the
vacancies created for the full remaining term of a director in that class even
though the term may extend beyond the next annual meeting. The directors will
also be able to fill any other vacancies for the full remaining term of the
director whose death, resignation or removal caused the vacancy.
A person who has a majority of the voting power at a given meeting will not in
any one year be able to replace a majority of the directors since only one class
of the directors will stand for election in any one year. As a result, at least
two annual meeting elections will be required to change the majority of the
directors by the requisite vote of stockholders. The purpose of classifying the
board of directors is to provide for a continuing body, even in the face of a
person who accumulates a sufficient amount of voting
47
power, whether by ownership or proxy or a combination, to have a majority of the
voting power at a given meeting and who may seek to take control of our company
without paying a fair premium for control to all of the owners of our common
stock. This will allow the board of directors time to negotiate with such a
person and to protect the interests of the other stockholders who may constitute
a majority of the shares not actually owned by that person. However, it may also
have the effect of deterring third parties from making takeover bids for control
of our company or may be used to hinder or delay a takeover bid.
THE FUSION TRANSACTION
GENERAL
On November 19, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to purchase
on each trading day during the term of the agreement, $12,500 of our common
stock or an aggregate of $10 million. The $10 million of common stock is to be
purchased over a forty-month period, subject to a six month extension or earlier
termination at our discretion. The purchase price of the shares of common stock
will be equal to a price based upon the future market price of the common stock
without any fixed discount to the market price. We have the right to set a
minimum purchase price at any time as described below.
We estimate that the maximum number of shares we will sell to Fusion Capital
under the common stock purchase agreement will be 5,000,000 shares (exclusive of
the 898,876 shares issuable to Fusion Capital as a commitment fee) assuming
Fusion Capital purchases all $10 million of common stock.
PURCHASE OF SHARES UNDER THE COMMON STOCK PURCHASE AGREEMENT
Under the common stock purchase agreement, on each trading day Fusion Capital is
obligated to purchase a specified dollar amount of our common stock. Subject to
our right to suspend such purchases at any time, and our right to terminate the
agreement with Fusion Capital at any time, each as described below, Fusion
Capital shall purchase on each trading day during the term of the agreement,
$12,500 of our common stock. This daily purchase amount may be decreased by us
at any time. We also have the right to increase the daily purchase amount at any
time, provided however, we may not increase the daily purchase amount above
$12,500 unless our stock price is above $5.00 per share for five consecutive
trading days. The purchase price per share is equal to the lesser of:
-- the lowest sale price of our common stock on the purchase date; or
-- the average of the three (3) lowest closing sale prices of our common stock
during the twelve (12) consecutive trading days prior to the date of a
purchase by Fusion Capital.
The purchase price will be adjusted for any reorganization, recapitalization,
non-cash dividend, stock split, or other similar transaction occurring during
the trading days in which the closing bid price is used to compute the purchase
price. Fusion Capital may not purchase shares of our common stock under the
common stock purchase agreement if Fusion Capital, together with its affiliates,
would beneficially own more than 9.9% of our common stock outstanding at the
time of the purchase by Fusion Capital. However, even though Fusion Capital may
not receive additional shares of our common stock in the event that the 9.9%
limitation is ever reached, Fusion Capital is still obligated to pay to us
$12,500 on each trading day, unless the common stock purchase agreement is
suspended, an event of default occurs or the agreement is terminated. Under
these circumstances, Fusion Capital would have the right to acquire additional
shares in the future should its ownership subsequently become less than the
9.9%. Fusion Capital has the right at any time to sell any shares purchased
under the common stock purchase agreement that would allow it to avoid the 9.9%
limitation. Therefore, we do not believe that Fusion Capital will ever reach the
9.9% limitation.
48
The following table sets forth the number of shares of our common stock that
would be sold to Fusion Capital under the common stock purchase agreement at
varying purchase prices:
ASSUMED NUMBER OF SHARES TO PROCEEDS FROM THE SALE OF
AVERAGE BE PERCENTAGE OUTSTANDING 5,000,000 SHARES TO FUSION
PURCHASE ISSUED IF FULL AFTER GIVING EFFECT TO THE CAPITAL UNDER THE COMMON STOCK
PRICE PURCHASE ISSUANCE TO FUSION CAPITAL(1) PURCHASE AGREEMENT
------- -------- ----------------------------- ------------------
$ 0.20 5,000,000 14.1% $ 1,000,000
$ 0.45(2) 5,000,000 14.1% $ 2,250,000
$ 1.00 5,000,000 14.1% $ 5,000,000
$ 2.00 5,000,000 14.1% $ 10,000,000
$ 3.00 3,333,333 13.8% $ 10,000,000
--------------------
(1) Based on 36,450,067 shares outstanding as of March 1, 2002. Includes the
issuance of 898,876 shares of common stock issuable to Fusion Capital as a
commitment fee and the number of shares issuable at the corresponding
assumed purchase price set forth in the adjacent column.
(2) Closing sale price of our common stock on March 18, 2002.
We estimate that we will issue no more than 5,898,876 shares to Fusion Capital
under the common stock purchase agreement, including the shares issuable as a
commitment fee, all of which are included in this offering. If more than
5,898,876 shares are issuable to Fusion Capital under the common stock purchase
agreement, we have the right to terminate the agreement without any payment or
liability to Fusion Capital.
MINIMUM PURCHASE PRICE
We have the right to set a minimum purchase price (floor price) at any time.
Currently, the floor price is $0.30. We can increase or decrease the floor price
at any time upon one trading day prior notice to Fusion Capital. However,
without the consent of Fusion Capital, the floor price cannot be less than
$0.20. Fusion Capital shall not be permitted or obligated to purchase any shares
of our common stock in the event that the purchase price is less than the then
applicable floor price.
OUR RIGHT TO SUSPEND PURCHASES
We have the unconditional right to suspend purchases at any time for any reason
effective upon one trading day's notice. Any suspension would remain in effect
until our revocation of the suspension. To the extent we need to use the cash
proceeds of the sales of common stock under the common stock purchase agreement
for working capital or other business purposes, we do not intend to restrict
purchases under the common stock purchase agreement.
OUR RIGHT TO INCREASE AND DECREASE THE DAILY PURCHASE AMOUNT
We have the unconditional right to decrease the daily amount to be purchased by
Fusion Capital at any time for any reason effective upon one trading day's
notice. We also have the right to increase the daily purchase amount at any time
for any reason; provided however, we may not increase the daily purchase amount
above $12,500 unless our stock price has been above $5.00 per share for five
consecutive trading days. For any trading day that the sale price of our common
stock is below $5.00, the daily purchase amount shall not be greater than
$12,500.
49
OUR TERMINATION RIGHTS
We have the unconditional right at any time for any reason to give notice to
Fusion Capital terminating the common stock purchase agreement. Such notice
shall be effective one trading day after Fusion Capital receives such notice.
EFFECT OF PERFORMANCE OF THE COMMON STOCK PURCHASE AGREEMENT ON OUR STOCKHOLDERS
All shares registered in this offering will be freely tradable. It is
anticipated that shares registered in this offering will be sold over a period
of up to 40 months from the date of this prospectus. The sale of a significant
amount of shares registered in this offering at any given time could cause the
trading price of our common stock to decline and to be highly volatile. Fusion
Capital may ultimately purchase all of the shares of common stock issuable under
the common stock purchase agreement, and it may sell some, none or all of the
shares of common stock it acquires upon purchase. Therefore, the purchases under
the common stock purchase agreement may result in substantial dilution to the
interests of other holders of our common stock. However, we have the right at
any time for any reason to: (1) reduce the daily purchase amount, (2) suspend
purchases of the common stock by Fusion Capital and (3) terminate the common
stock purchase agreement.
NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL
Fusion Capital has agreed that neither it nor any of its affiliates shall engage
in any direct or indirect short-selling or hedging of our common stock during
any time prior to the termination of the common stock purchase agreement.
EVENTS OF DEFAULT
Generally, Fusion Capital may terminate the common stock purchase agreement
without any liability or payment to the Company upon the occurrence of any of
the following events of default:
-- for any reason the shares offered by this prospectus cannot be sold
pursuant to this Prospectus for a period of ten consecutive trading days or
for more than an aggregate of 30 trading days in any 365-day period;
-- suspension by our principal market of our common stock from trading for a
period of ten consecutive trading days or for more than an aggregate of 30
trading days in any 365-day period;
-- our failure to satisfy any listing criteria of our principal market for a
period of ten consecutive trading days or for more than an aggregate of 30
trading days in any 365-day period;
-- the transfer agent`s failure for five trading days to issue to Fusion
Capital shares of our common stock which Fusion Capital is entitled to
under the common stock purchase agreement;
-- any material breach of the representations or warranties or covenants
contained in the common stock purchase agreement or any related agreements
which has or which could have a material adverse affect on us subject to a
cure period of ten trading days;
-- a default by us of any payment obligation in excess of $1.0 million; or
-- any participation or threatened participation in insolvency or bankruptcy
proceedings by or against us.
COMMITMENT SHARES ISSUED TO FUSION CAPITAL
Under the terms of the common stock purchase agreement Fusion Capital has
received 449,438 shares of our common stock as a commitment fee. In connection
with purchases of our common stock by
50
Fusion Capital, we will issue to Fusion Capital an additional 449,438 shares of
our common stock as a commitment fee. The 449,438 additional shares are issuable
to Fusion Capital pro rata based upon our receipt of the $10 million aggregate
amount under the common stock purchase agreement. Unless an event of default
occurs, Fusion Capital must hold all shares issued as a commitment fee until 40
months from the date of the common stock purchase agreement or the date the
common stock purchase agreement is terminated.
NO VARIABLE PRICED FINANCINGS
Until the termination of the common stock purchase agreement, we have agreed not
to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless we have
obtained Fusion Capital's prior written consent.
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholder.
Neither the selling stockholder nor any of its affiliates has held a position or
office, or had any other material relationship, with us.
PERCENTAGE PERCENTAGE
OF OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED OWNED SHARES TO BE OWNED
SELLING BEFORE BEFORE SOLD IN THE AFTER
STOCKHOLDER OFFERING OFFERING(1) OFFERING OFFERING
----------- -------- ----------- -------- --------
Fusion Capital Fund II,
LLC (1) (2) 449,438 14.1% 5,898,876 0%
----------------------
(1) As of the date hereof, 449,438 shares of Fusion Capital have been acquired
by Fusion Capital under the common stock purchase agreement. Fusion Capital
may acquire up to an additional 5,449,438 shares under the common stock
purchase agreement. Percentage of outstanding shares is based on 36,450,067
shares of common stock outstanding as of March 1, 2002, together with such
additional 5,449,438 shares of common stock that may be acquired by Fusion
Capital from us under the common stock purchase agreement after the date
hereof. Fusion Capital may not purchase shares of our common stock under
the common stock purchase agreement if Fusion Capital, together with its
affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even
though Fusion Capital may not receive additional shares of our common stock
in the event that the 9.9% limitation is ever reached, Fusion Capital is
still obligated to pay to us $12,500 on each trading day, unless the common
stock purchase agreement is suspended, an event of default occurs or the
agreement is terminated. Under these circumstances, Fusion Capital would
have the right to acquire additional shares in the future should its
ownership subsequently become less than the 9.9%. Fusion Capital has the
right at any time to sell any shares purchased under the common stock
purchase agreement which would allow it to avoid the 9.9% limitation.
Therefore, we do not believe that Fusion Capital will ever reach the 9.9%
limitation.
(2) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion
Capital, are deemed to be beneficial owners of all of the shares of common
stock owned by Fusion Capital. Messrs. Martin and Scheinfeld have shared
voting and investment power over the shares being offered under this
prospectus.
51
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by Fusion Capital
Fund II, LLC, the selling stockholder. The common stock may be sold or
distributed from time to time by the selling stockholder directly to one or more
purchasers or through brokers, dealers, or underwriters who may act solely as
agents at market prices prevailing at the time of sale, at prices related to the
prevailing market prices, at negotiated prices, or at fixed prices, which may be
changed. The sale of the common stock offered by this prospectus may be effected
in one or more of the following methods:
-- ordinary brokers' transactions;
-- transactions involving cross or block trades;
-- through brokers, dealers, or underwriters who may act solely as agents;
-- "at the market" into an existing market for the common stock;
-- in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents;
-- in privately negotiated transactions; or
-- any combination of the foregoing.
In order to comply with the securities laws of certain states, if applicable,
the shares may be sold only through registered or licensed brokers or dealers.
In addition, in certain states, the shares may not be sold unless they have been
registered or qualified for sale in the state or an exemption from the
registration or qualification requirement is available and complied with.
Brokers, dealers, underwriters, or agents participating in the distribution of
the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from the selling stockholder and/or purchasers of the
common stock for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
Fusion Capital is an "underwriter" within the meaning of the Securities Act.
Neither we nor Fusion Capital can presently estimate the amount of compensation
that any agent will receive. We know of no existing arrangements between Fusion
Capital, any other stockholder, broker, dealer, underwriter, or agent relating
to the sale or distribution of the shares offered by this prospectus. At the
time a particular offer of shares is made, a prospectus supplement, if required,
will be distributed that will set forth the names of any agents, underwriters,
or dealers and any compensation from the selling stockholder and any other
required information.
We will pay all of the expenses incident to the registration, offering, and sale
of the shares to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify Fusion Capital and
related persons against specified liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore, unenforceable.
Fusion Capital and its affiliates have agreed not to engage in any direct or
indirect short selling or hedging of our common stock during the term of the
common stock purchase agreement.
We have advised Fusion Capital that while it is engaged in a distribution of the
shares included in this prospectus it is required to comply with Regulation M
promulgated under the Securities Exchange Act of 1934, as amended. With certain
exceptions, Regulation M precludes the selling stockholder, any affiliated
purchasers, and any broker-dealer or other person who participates in the
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
52
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the
marketability of the shares offered hereby this prospectus.
This offering will terminate on the date that all shares offered by this
prospectus have been sold by Fusion Capital.
LEGAL OPINION
The validity of the shares offered hereby has been passed upon for us by Porter,
Wright, Morris & Arthur LLP, 41 South High Street, Columbus, Ohio 43215.
EXPERTS
The consolidated financial statements of Neoprobe Corporation as of December 31,
2001 and 2000, and for the years then ended, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Cardiosonix Ltd. (formerly Biosonix Ltd.) as of
December 31, 2001 (predecessor and successor) and 2000 (predecessor), and 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, have been included herein and in the
registration statement in reliance upon the report of Somekh Chaikin, a member
of KPMG International, independent accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and file reports, proxy statements and other information with
the Securities and Exchange Commission. These reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Securities and Exchange Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New York, New York 10279.
You can obtain copies of these materials from the Public Reference Section of
the Securities and Exchange Commission upon payment of fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission's Web site contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of that site is http://www.sec.gov.
We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission under the Securities Act with respect to the securities
offered in this prospectus. This prospectus, which is filed as part of a
registration statement, does not contain all of the information set forth in the
registration statement, some portions of which have been omitted in accordance
with the Securities and Exchange Commission's rules and regulations. Statements
made in this prospectus as to the contents of any contract, agreement or other
document referred to in this prospectus are not necessarily complete and are
qualified in their entirety by reference to each such contract, agreement or
other document which is filed as an exhibit to the registration statement. The
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission, and copies of
such materials can be obtained from the Public Reference Section of the
Securities and Exchange Commission at prescribed rates.
53
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
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (Section
145) provides that directors and officers of Delaware corporations may, under
certain circumstances, be indemnified against expenses (including attorneys'
fees) and other liabilities actually and reasonably incurred by them as a result
of any suit brought against them in their capacity as a director or officer, if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. Section 145 also provides that directors and officers may
also be indemnified against expenses (including attorneys' fees) incurred by
them in connection with a derivative suit if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made without court
approval if such person was adjudged liable to the corporation.
Article V of our company's by-laws has provisions requiring us to indemnify our
officers, directors, employees and agents that are in substantially the same
language as Section 145.
Article Nine, section (b), of our company's certificate of incorporation further
provides that no director will be personally liable to us or our stockholders
for monetary damages or for any breach of fiduciary duty except for breach of
the director's duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or a knowing violation of
law, pursuant to Section 174 of the Delaware General Corporation Law (which
imposes liability in connection with the payment of certain unlawful dividends,
stock purchases or redemptions), or any amendment or successor provision
thereto, or for any transaction from which the director derived an improper
personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than the underwriting
discounts and commissions and the Underwriter's Non-Accountable Expense
Allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered.
SEC Registration.......................... $ 252.35
Legal Fees and Expenses*.................. $15,000.00
Accounting Fees*.......................... $15,000.00
Miscellaneous*............................ $ 5,000.00
Total..................................... $35,252.35
------------------
* Estimated
** To be provided by amendment.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information regarding the sale of equity
securities of our company during the period covered by this Report that were not
registered under the Securities Act of 1933 (the Securities Act).
In March 2001, March 2000, and February 1999, the Board of Directors of our
company authorized the issuance of 19,122, 23,326, and 13,734 shares of common
stock, respectively, to the trustees of our 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
our employees, which does not hold assets for the benefit of the employees of
any other employer. All of the contributions to the Plan from our employees 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 us 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 Fund II, LLC (Fusion Capital) for the issuance
and purchase of our common stock. Under the stock purchase agreement, Fusion
Capital committed to purchase up to $10 million of our common stock over a
forty-month period that commences when this Registration Statement becomes
effective. Once the Registration Statement is declared effective, Fusion Capital
will purchase $12,500 of our common stock daily, which purchase amount we may
increase or decrease in our discretion. The purchase price per share of
common stock will be equal to the lesser of (a) the lowest sale price for our
common 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. However, the shares sold to Fusion Capital are subject to a minimum
sales price (floor price) currently set at $0.30. We have the right to
increase or decrease the floor price, but in no case may we decrease it below
$0.20 without Fusion Capital's prior consent. Upon execution of the common stock
purchase agreement, we issued 449,438 shares of our common stock to Fusion
Capital as a commitment fee, in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
Exhibit
Number Exhibit Description
------ -------------------
2.1. Common Stock Purchase Agreement dated as of November 19, 2001, between
Neoprobe Corporation and Fusion Capital Fund II, LLC. (filed as Exhibit
99(b) to the Company's Current Report on Form 8-K dated November 29, 2001,
and incorporated herein by reference).
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 (filed as Exhibit 3.1 to the
Company's March 31, 2000 Form 10-Q and incorporated herein by reference).
3.2. Amended and Restated By-Laws dated July 21, 1993, as amended July 18, 1995
and May 30, 1996 (filed as Exhibit 99.4 to the Company's Current Report on
Form 8-K dated June 20, 1996, and incorporated herein by reference).
5.1. Opinion of Porter, Wright, Morris & Arthur LLP.
II-2
10.1.25. Rights Agreement between the Company and Continental Stock Transfer & Trust
Company dated as of July 18, 1995 (see Exhibit 4.3).
10.1.31. Amendment Number 1 to the Rights Agreement between the Company and
Continental Stock Transfer & Trust Company dated February 16, 1999 (see
Exhibit 4.4).
10.1.39. 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).
10.1.41. Common Stock Purchase Agreement between the Company and Fusion Capital Fund
II, LLC dated November 19, 2001 (incorporated by reference to Exhibit 99(b)
of the Company's December 3, 2001 Form 8-K).
10.2.26. 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).*
10.2.35. 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).*
10.2.37. 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).*
10.2.45. 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).*
10.2.48. 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).*
10.2.50. 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).*
10.2.54. 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).*
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).*
II-3
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 (incorporated by reference to Exhibit
10.2.60 to the Company's December 31, 2001 Form 10-KSB).*
10.2.61. Employment Agreement between Cardiosonix Ltd. (formerly Biosonix Ltd.) and
Dan Manor, dated January 1, 2002 (incorporated by reference to Exhibit
10.2.61 to the Company's December 31, 2001 Form 10-KSB.)*
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).
10.3.31. 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).
10.3.45. 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).
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).
II-4
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).
10.4.39. 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).
10.4.45. 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), (incorporated by reference to Exhibit 10.4.49 to the
Company's December 31, 2001 Form 10-KSB).
23.1. Consent of KPMG LLP.
23.2. Consent of Somekh Chaikin.
23.3. Consent of Porter, Wright, Morris & Arthur LLP (included in Exhibit 5.1
herein).
24.1. Powers of Attorney
ITEM 28. UNDERTAKINGS.
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-5
(ii) To reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any additional or changed material information on the plan
of distribution.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to the registrant's directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a directors, officers or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Columbus,
Ohio, on March 22, 2002.
NEOPROBE CORPORATION
By: /s/ David C. Bupp
---------------------------------------------
David C. Bupp, President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David C. Bupp President, Chief Executive Officer March 17, 2002
------------------------------------ and Director
David C. Bupp (principal executive officer)
/s/ Brent L. Larson* Vice President, Finance and Chief March 20, 2002
------------------------------------ Financial Officer
Brent L. Larson (principal financial officer and
principal accounting
officer)
Chairman of the Board of
------------------------------------ Directors
Julius R. Krevans
/s/ Reuven Avital* Director March 17, 2002
------------------------------------
Reuven Avital
/s/ John S. Christie* Director March 19, 2002
------------------------------------
John S. Christie
/s/ Nancy E. Katz* Director March 20, 2002
------------------------------------
Nancy E. Katz
/s/ Dan Manor* Director March 17, 2002
------------------------------------
Dan Manor
/s/ Fred B. Miller* Director March 18, 2002
------------------------------------
Fred B. Miller
Director
------------------------------------
Michael P. Moore
/s/ J. Frank Whitley, Jr*. Director March 20, 2002
------------------------------------
J. Frank Whitley, Jr.
*By: /s/ David C. Bupp
---------------------------------------
David C. Bupp, Attorney-in fact
II-7