SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 240.14a-12
EP MEDSYSTEMS, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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EP MEDSYSTEMS, INC.
575 ROUTE 73, BUILDING D
WEST BERLIN, NEW JERSEY 08091
November 24, 2004
Dear Shareholder,
You are cordially invited to join us for our Annual Meeting of
Shareholders to be held this year on December 22, 2004,
at 10:00 a.m., eastern standard time, at 120 West 45th Street, 20th
Floor, New York, New York.
The Notice of Annual Meeting of Shareholders and the Proxy Statement
that follow describe the business to be conducted at the meeting. You
will be asked to elect two directors to the Board of Directors, to
approve an amendment to our 2002 Stock Option Plan to increase the
number of shares that may be issued pursuant to the Plan, and to
approve an amendment to our Amended and Restated Certificate of
Incorporation to increase the number of our authorized shares of Common
Stock. We will also report on matters of current interest to our
shareholders.
Whether you own a few or many shares of stock, it is important that
your shares be represented. If you cannot personally attend the
meeting, we encourage you to make certain that you are represented by
signing the accompanying proxy card and promptly returning it in the
enclosed, prepaid envelope.
Sincerely,
Reinhard Schmidt
President and
Chief Executive Officer
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EP MEDSYSTEMS, INC.
575 ROUTE 73, BUILDING D
WEST BERLIN, NEW JERSEY 08091
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 22, 2004
To the Shareholders:
The Board of Directors of EP MedSystems, Inc. hereby gives notice
that the Annual Meeting of Shareholders of EP MedSystems will be held on
December 22, 2004 at 10:00 a.m., eastern standard time, at
120 West 45th Street, 20th Floor, New York, New York (the "Annual
Meeting"). The purpose of the meeting is to:
1. Elect two Class III directors to our Board of Directors to serve a
three-year term;
2. To approve an amendment to our 2002 Stock Option Plan to increase
the number of shares which may be issued upon exercise of options
granted thereunder from 600,000 to 1,000,000;
3 Consider and act on a proposal to amend our Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock by 10,000,000, from 30,000,000 to
40,000,000 shares;
4. Act on any other matters as may properly come before the
shareholders at the Annual Meeting, including any motion to
adjourn to a later date to permit further solicitation of proxies,
if necessary.
The Board of Directors has fixed the close of business December 1,
2004 as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting or any adjournment.
You are cordially invited to attend the Annual Meeting in person.
If you attend the meeting, you may vote in person if you wish, even
though you have previously returned your proxy. A copy of EP MedSystems'
Proxy Statement is enclosed.
By Order of the Board of Directors,
Matthew C. Hill
Chief Financial Officer and Secretary
November 24, 2004
YOUR PROXY VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON, IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE
RETURNED PROMPTLY. THEREFORE, PLEASE COMPLETE, DATE, AND SIGN THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THIS WILL ENSURE
REPRESENTATION OF YOUR SHARES AT THE MEETING.
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EP MEDSYSTEMS, INC.
575 ROUTE 73, BUILDING D
WEST BERLIN, NEW JERSEY 08091
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 22, 2004
INFORMATION ABOUT VOTING
GENERAL
This Proxy Statement and the accompanying Notice of Annual Meeting of
Shareholders are being furnished in connection with the solicitation by the
Board of Directors of EP MedSystems, Inc. ("EP MedSystems" or "us" or "we") of
proxies for use at the Annual Meeting of Shareholders to be held at 120 West
45th Street, 20th Floor, New York, New York, at 10:00 a.m., eastern standard
time, on December 22, 2004, and at any adjournments thereof (the "Annual
Meeting"), for the purposes set forth in the preceding Notice of Annual Meeting
of Shareholders. This Proxy Statement and accompanying proxy card are first
being distributed to all shareholders entitled to vote on or about December 3,
2004.
WHO CAN VOTE?
Only holders of record as of the close of business December 1, 2004
(the "Record Date") of EP MedSystems' Common Stock, no par value, stated value
$.001 per share (the "Common Stock"), and Series A Convertible Preferred Stock,
no par value, stated value $.001 per share (the "Series A Preferred Stock"), are
entitled to vote at the Annual Meeting. On the Record Date, there were
23,620,816 shares of Common Stock and 373,779 shares of Series A Preferred Stock
outstanding.
HOW MANY VOTES CAN I CAST?
You will be entitled to one vote per share of Common Stock owned by you
on the Record Date, and one vote per share of Common Stock into which each share
of Series A Preferred Stock owned by you may be converted on the Record Date.
HOW DO I VOTE BY PROXY?
Follow the instructions on the enclosed proxy card to vote on the
proposals to be considered at the Annual Meeting. Sign and date the proxy card
and mail it back to us in the enclosed prepaid envelope. The proxyholders named
on the proxy card will vote your shares as you instruct. If you sign and return
the proxy card but do not vote on the proposals, the proxyholders will vote for
you on the proposals. Unless you instruct otherwise, the proxyholders will vote
"FOR" the nominees proposed by the Board of Directors, "FOR" the amendment to
the 2002 Stock Option Plan and "FOR" the amendment to the Amended and Restated
Certificate of Incorporation (our "Amended Certificate").
WHAT IF OTHER MATTERS COME UP AT THE ANNUAL MEETING?
The matters described in this proxy statement are the only matters we
know will be voted on at the Annual Meeting. If other matters are properly
presented at the Annual Meeting, the proxyholders will vote your shares as they
see fit.
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WHAT CAN I DO IF I CHANGE MY MIND AFTER I VOTE MY SHARES?
At any time before the vote at the meeting, you can revoke your proxy
either by (i) giving our Secretary a written notice revoking your proxy card,
(ii) signing, dating and returning to our Secretary a new proxy card bearing a
later date, or (iii) attending the Annual Meeting and voting in person. Your
presence at the Annual Meeting will not revoke your proxy unless you vote in
person. All written notices or new proxies should be sent to our Secretary at
our principal executive offices.
CAN I VOTE IN PERSON AT THE ANNUAL MEETING RATHER THAN BY COMPLETING THE PROXY
CARD?
Although we encourage you to complete and return the proxy card to
ensure that your vote is counted, you can attend the Annual Meeting and vote
your shares in person.
WHAT DO I DO IF MY SHARES ARE HELD IN "STREET NAME"?
If your shares are held in the name of your broker, a bank, or other
nominee, that party should give you instructions for voting your shares.
WHAT ARE BROKER NON-VOTES?
Broker non-votes are shares held in street name by brokers or nominees
who indicate on their proxies that they do not have discretionary authority to
vote those shares as to a particular matter. Broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
WHAT IS A QUORUM?
We will hold the Annual Meeting if a quorum is present. A quorum will
be present if the holders of a majority of the shares of Common Stock and Series
A Preferred Stock entitled to vote on the Record Date (treated as a combined
single class) either sign and return their proxy cards or attend the Annual
Meeting. Without a quorum, we cannot hold the meeting or transact business. If
you sign and return your proxy card, your shares will be counted to determine
whether we have a quorum even if you abstain or fail to vote on the proposals
listed on the proxy card. Abstentions and broker non-votes will also be counted
as present for purposes of determining if a quorum exists.
WHAT VOTE IS NECESSARY FOR ACTION?
Passage of Proposal 1 (election of directors) requires, for each
director, the affirmative vote of a plurality of the votes cast by the holders
of the shares of our Common Stock and Series A Preferred Stock (voting together
as a single class) voting in person or by proxy at the Annual Meeting. You will
not be able to cumulate your votes in the election of directors. Approval of
Proposal 2 (amendment of the 2002 Stock Option Plan) will require the
affirmative vote of the holders of a majority of the shares of our Common Stock
and Series A Preferred Stock (voting together as a single class) present in
person or by proxy of the Annual Meeting and entitled to vote. Approval of
Proposal 3 (amendment of the Amended Certificate) will require the affirmative
vote of the holders of a majority of the shares of our Common Stock and Series A
Preferred Stock (voting together as a single class) present in person or by
proxy at the Annual Meeting and entitled to vote. Abstentions and broker
non-votes will not be counted as votes cast in the tabulation of any voting
results and will not affect the outcome of the vote.
WHO PAYS FOR THE PROXY SOLICITATION?
We do. In addition to sending you these materials, some of our
employees may contract you by telephone, by mail, or in person. None of these
employees will receive any extra compensation for doing this.
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PROPOSAL 1
ELECTION OF DIRECTORS
EP MedSystems' board of directors consists of five members and is
divided into three classes of directors serving three-year terms. One class of
directors is elected by shareholders to serve until the third annual meeting
following such annual meeting or until their successors are elected and
qualified. The current term of the Class III directors expires at the 2004
Annual Meeting, the current term of the Class I director expires at the 2005
Annual Meeting of Shareholders, and the current term of the Class II directors
expires at the 2006 Annual Meeting of Shareholders. The term of the two Class
III directors to be elected at this Annual Meeting will expire at the 2007
Annual Meeting.
The Class III directors whose terms expires at the 2004 Annual Meeting
of shareholders are Abhijeet Lele and David A. Jenkins. Mr. Lele and Mr. Jenkins
have been nominated by the Board of Directors to stand for re-election as Class
III directors at the Annual Meeting. The Board of Directors has no reason to
believe that either nominee will be unable or unwilling to serve as a director.
If, however, either of the nominees becomes unavailable, proxies will have
discretionary authority to vote for a substitute Class III nominee.
In the absence of instructions to the contrary, a properly signed and
dated proxy will vote the shares represented by that proxy, "FOR" the election
of Mr. Lele and Mr. Jenkins as Class III directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES FOR
CLASS III DIRECTORS AS SET FORTH ABOVE.
CERTAIN INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS
The following information with respect to the principal occupation or
employment, other affiliations, and business experience during the past five
years of the nominees and each continuing director has been furnished to EP
MedSystems by each director.
NOMINEES FOR CLASS III DIRECTOR
ABHIJEET LELE (age 39) has served as a director of EP MedSystems since
April 2002. He is a Class III director whose term expires in 2004. Since October
1999, Mr. Lele has served as a Managing Member of the general partner of EGS
Private Healthcare Partnership, L.P. and EGS Private Healthcare Counterpart,
L.P. (the "EGS Entities") and other affiliated funds, all of which are private
equity funds focusing on investments in private and public healthcare companies.
Each of the EGS Entities is a shareholder of EP MedSystems. From 1994 to 1997,
Mr. Lele was a consultant in the healthcare practice of McKinsey & Company.
Before joining McKinsey & Company, Mr. Lele held operating positions in the
pharmaceutical and biotechnology industries. He holds a MA in molecular biology
from Cambridge University and an MBA with distinction from Cornell University.
Mr. Lele also serves as a director of CryoCath Technologies (TSE:CYT),
Stereotaxis, Inc. (NASDQ: STXS), Optiscan Biomedical Corporation and Ekos
Corporation.
DAVID A. JENKINS (age 46) is a founder and currently the Chairman of the
Board of Directors of EP MedSystems. He is a Class III director whose term
expires in 2004. Mr. Jenkins served as the Chief Executive Officer of EP
MedSystems from its inception in 1993 until August 2002, and has been the
Chairman since 1995. Mr. Jenkins also served as President of EP MedSystems from
its inception in 1993 until August 2001. He also currently serves as President
and a director of Transneuronix, Inc., a privately-held company engaged in the
development of neuro-muscular stimulation devices.
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DIRECTORS CONTINUING IN OFFICE
PAUL L. RAY (age 57) has served as a director of EP MedSystems since
July 2002. He is a Class II director whose term expires in 2006. Mr. Ray is
co-founder of MedCap Ltd. and Konrad Capital, LLC. He formerly served as the
President, CEO and Chairman of Image Guided Technologies, Inc. ("IGT") in
Boulder, CO. Mr. Ray orchestrated IGT's venture funding, its public offering and
NASDAQ listing and finally the sale of IGT to Stryker Corporation in August of
2000. Mr. Ray has served as Commissioner and Chairman for The Colorado Advanced
Technology Institute. Mr. Ray currently serves as a Director for the Colorado
Technology Incubator and the Colorado Biotechnology Association. In addition, he
was appointed in 1999 to the position of Co-Vice Chairman of the Governor's
Commission on Science and Technology for the State of Colorado. In January 2003,
Mr. Ray became a partner in the New York-based investment banking firm of McKim
and Company, LLC, where he serves as the lifesciences partner. Mr. Ray currently
holds the position of President and Chief Executive Officer of Nervonix, Inc.,
which has developed imaging technology for pain management. Mr. Ray has over 32
years of experience in the medical industry, with an emphasis on medical
devices, and has held senior management positions with Dow Corning Corporation,
V. Mueller Allegiance, a division of Cardinal Medical, Collagen Corporation and
TMJ Implants.
REINHARD SCHMIDT (age 49) has served as President, Chief Operating Officer
and a director of EP MedSystems since August 2001. In August 2002, he also took
on the additional duties of Chief Executive Officer. He is a Class II director
whose term expires in 2006. From 1998 through 2001, Mr. Schmidt was President of
Surgical Navigation Specialist, Inc. From 1995 to 1998, Mr. Schmidt was Vice
President and General Manager of Siemens Healthcare Services, a Siemens company.
From 1990 to 1995, Mr. Schmidt worked with General Electric Medical Systems as
Manager of National Accounts and Managed Health Care Services. Prior to that,
Mr. Schmidt had over 12 years experience with Unysis Corp., culminating in the
position of Director of Finance.
RICHARD C. WILLIAMS (age 61) was elected to the Board of Directors in
August of 2002. He is a Class I director whose term expires in 2005. Since 1989,
Mr. Williams has served as the founder and President of Conner-Thoele Limited, a
consulting and financial advisory firm specializing in the healthcare industry
and pharmaceutical segment and was recently appointed to the position of
non-executive Chairman of the Board of Cellegy Pharmaceuticals, Inc., a Nasdaq
specialty pharmaceutical company. From 2000 to April 2001, he also served as
Vice Chairman - Strategic Planning and a director of King Pharmaceuticals Inc.,
a NYSE specialty pharmaceutical company. From 1992 to 2000, prior to its
acquisition by King Pharmaceuticals in 2000, Mr. Williams served as Chairman and
a director of Medco Research, a NYSE cardiovascular pharmaceutical development
company. From 1997 to 1999, he was Co-Chairman and a director of Vysis, a Nasdaq
genetic biopharmaceutical company. Prior to founding Conner-Thoele Limited in
1989, Mr. Williams held various operational and financial management officer
positions with Erbamont, N.V., Field Enterprises, Inc., Abbott Laboratories and
American Hospital Supply Corporation. Mr. Williams is also Chairman and a
director of ISTA Pharmaceuticals, Inc., a Nasdaq ophthalmology company, and is a
former member of the Listed Company Advisory Committee of New York Stock
Exchange.
No family relationships exist between any of the directors or executive
officers of EP MedSystems.
COMPENSATION OF DIRECTORS
Non-employee directors of EP MedSystems received amounts ranging from
$18,000 to $19,000 for their service for the year ended December 31, 2003.
Directors will be compensated for the year ended December 31, 2004 as follows:
(i) a retainer of $15,000 per year is payable to each outside director payable
in quarterly installments, (ii) a meeting fee of $1,500 per director is payable
with respect to each regularly scheduled meeting, and (iii) a meeting fee of
$1500 is payable for each telephone meeting in excess of one hour. In addition,
the directors are reimbursed for their reasonable travel expenses incurred in
performance of their duties as directors.
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CERTAIN INFORMATION CONCERNING BOARD MEETINGS AND COMMITTEES
During the year ended December 31, 2003, the Board of Directors met
eight times. EP MedSystems' Board of Directors has established standing Audit,
Compensation, Plan and Nominating committees. The Audit Committee met eight
times, the Compensation Committee met eight times, the Plan Committee met once,
and the Nominating Committee met 2 times during fiscal year 2003. Each member of
the Board attended 75% or more of the Board meetings, and each member of the
Board who served on either the Audit, Compensation, Plan or Nominating Committee
attended at least 75% of the committee meetings.
AUDIT COMMITTEE. Currently, Mr. Lele, Mr. Williams and Mr. Ray are
members of the Audit Committee. Pursuant to the current rules of the Nasdaq
Stock Market applicable to EP MedSystems, a majority of the members of the Audit
Committee are independent. The Board has determined that Mr. Williams and Mr.
Ray are "independent directors" under current Nasdaq Stock Market Rules. The
Board has determined that Mr. Lele qualifies as an "audit committee financial
expert" as defined by the rules of the Securities and Exchange Commission.
Pursuant to the rules of the Nasdaq Stock Market, the Board is not yet required
to determine whether Mr. Lele is "independent" as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended. The Audit Committee oversees EP MedSystems' accounting, financial
reporting process, internal controls and audits, and consults with management,
the internal auditors and the independent public accountants on, among other
items, matters related to the annual audit, the published financial statements
and the accounting principles applied. As part of its duties, the Audit
Committee appoints, evaluates and retains EP MedSystems' independent public
accountants. It also maintains direct responsibility for the compensation,
termination and oversight of EP MedSystems' independent public accountants'
qualifications, performance and independence. The Audit Committee approves all
services provided to EP MedSystems by the independent public accountants and
reviews all non-audit services to ensure they are permitted under current law.
The Committee also monitors compliance with the Foreign Corrupt Practices Act
and EP MedSystems' policies on ethical business practices and reports on these
items to the Board of Directors. The Audit Committee operates under a written
charter adopted by the Board of Directors, a copy of which is attached to this
Proxy Statement as Appendix A
COMPENSATION COMMITTEE. Currently, the members of the Compensation
Committee are Mr. Ray (chairman), Mr. Williams and Mr. Lele. The Compensation
Committee reviews, administers and determines compensation arrangements for EP
MedSystems' executive officers and administers the 1995 Long Term Incentive Plan
and 2002 Stock Option Plan. The Compensation Committee consists of at least two
non-employee directors, none of whom may receive options under the 1995 Long
Term Incentive Plan or the 2002 Stock Option Plan.
PLAN COMMITTEE. Currently, the members of the Plan Committee
are Mr. Jenkins and Mr. Schmidt. The Plan Committee administers the 1995
Director Option Plan. None of the members of the Plan Committee are eligible to
participate in the 1995 Director Option Plan.
NOMINATING COMMITTEE. Currently, the members of the Nominating
Committee are Mr. Jenkins and Mr. Schmidt. Pursuant to the current rules of
the Nasdaq Stock Market applicable to EP MedSystems, the Board is not yet
required to determine whether the members of the Nominating Committee are
independent. The Nominating Committee's responsibilities include recommending to
the Board of Directors nominees for possible election to the Board of Directors.
The Nominating Committee currently does not have a written charter.
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DIRECTOR NOMINATION PROCESS
CRITERIA FOR BOARD MEMBERSHIP. In selecting candidates for appointment
or re-election to the Board, the Nominating Committee considers the appropriate
balance of experience, skills and characteristics required of the Board of
Directors, and seeks to insure that the board has a sufficient number of
independent directors to satisfy the Audit Committee requirement set forth in
Nasdaq Stock Market Rule 4350-1(d)(2) and at least one of them qualifies as an
"audit committee financial expert" under the rules of the Securities and
Exchange Commission. Nominees for director are selected on the basis of their
depth and breadth of experience, integrity, ability to make independent
analytical inquiries, understanding of the Company's business environment, and
willingness to devote adequate time to Board duties.
STOCKHOLDER NOMINEES. The Nominating Committee will consider written
proposals from stockholders for nominees for director. Any shareholder of the
Company entitled to vote for the election of directors may nominate a person for
election to the Company's Board of Directors if such shareholder follows the
procedures outlined in our Bylaws, which are summarized below. Shareholder
nominations shall be made pursuant to notice in writing to the Secretary of the
Company within the time frame described in the Bylaws of the Company and under
the caption, "Stockholder Proposals" below. A shareholder's notice to the
Secretary shall set forth (a) as to each person whom the shareholder proposes to
nominate for election or reelection as a director (i) the name, age, business
address and residence address of the person, (ii) the number of shares of
capital stock of the corporation which are beneficially owned by the person and
(ii) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Rule 14A under the Securities Exchange Act of 1934, as amended (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to the shareholder giving the
notice (i) the name and business address and residence address of the
shareholder and (ii) the class and number of shares of the Company's stock which
are beneficially owned by the shareholder on the date of such shareholder
notice. The presiding officer of the annual meeting will determine and declare
at the annual meeting whether the nomination was made in accordance with these
terms. If not, the defective nomination will be disregarded.
PROCESS FOR IDENTIFYING AND EVALUATING NOMINEES. The Nominating
Committee believes EP MedSystems is well-served by its current directors. In the
ordinary course, absent special circumstances or a material change in the
criteria for Board membership, the Nominating Committee will renominate
incumbent directors who continue to be qualified for Board service and are
willing to continue as directors. If an incumbent director is not standing for
re-election, or if a vacancy on the Board occurs between annual stockholder
meetings, the Nominating Committee will seek out potential candidates for Board
appointment who meet the criteria for selection as a nominee and have the
specific qualities or skills being sought. Director candidates will be selected
based on input from members of the Board, senior management of EP MedSystems
and, if the Nominating Committee deems appropriate, a third-party search firm.
The Nominating Committee will evaluate each candidate's qualifications and check
relevant references; in addition, such candidates will be interviewed by at
least one member of the Nominating Committee. Candidates meriting serious
consideration will meet with all members of the Board. Based on this input, the
Nominating Committee will evaluate which of the prospective candidates is
qualified to serve as a director and whether the committee should recommend to
the Board that this candidate be appointed to fill a current vacancy on the
Board, or presented for the approval of the stockholders, as appropriate.
BOARD NOMINEES FOR THE 2004 ANNUAL MEETING. Each of the nominees listed
in this Proxy Statement are current directors standing for re-election.
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COMMUNICATIONS WITH DIRECTORS
Stockholders or other interested parties may communicate with any
director or committee of the Board by writing to them c/o Secretary, EP
MedSystems, Inc., 575 Route 73 North, Bldg. D, West Berlin, New Jersey 08091. .
Comments or questions regarding the Company's accounting, internal controls or
auditing matters will be referred to members of the Audit Committee. Comments or
questions regarding the nomination of directors and other corporate governance
matters will be referred to members of the Nominating Committee.
The Company has a policy of encouraging all directors to attend the
annual stockholder meetings. Two of our directors attended the 2003 annual
meeting.
CODE OF ETHICS
We have adopted a written code of ethics that applies to all of our
employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller and any persons performing
similar functions. The code of ethics is included in our Code of Business
Conduct and Ethics. All of our directors and employees, including our Chief
Executive Officer and other senior executives, are required to comply with our
Code of Business Conduct and Ethics to help ensure that our business is
conducted in accordance with the highest standards of moral and ethical
behavior. Our Code of Business Conduct and Ethics covers all areas of
professional conduct, including customer relationships, conflicts of interest,
insider trading, intellectual property and confidential information, as well as
requiring strict adherence to all laws and regulations applicable to our
business. Employees are required to bring any violations and suspected
violations of the Code of Business Conduct and Ethics to the attention of EP
MedSystems, through management or by using EP MedSystems' confidential
compliance line. A copy of our Code of Business Conduct and Ethics is available
on our website at http://www.epmedsystems.com. We will also provide a copy of
our code of ethics to any person without charge upon written request addressed
to EP MedSystems, Inc., 575 Route 73 North, Bldg. D, West Berlin, New Jersey
08091, Attention: Matthew C. Hill, Chief Financial Officer.
EXECUTIVE COMPENSATION AND RELATED MATTERS
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding the current
executive officers of EP MedSystems:
NAME AGE POSITION OFFICER SINCE
David A. Jenkins 46 Chairman of the Board of Directors 1993
Reinhard Schmidt 49 President and Chief Executive Officer 2001
Matthew C. Hill 36 Chief Financial Officer, Treasurer and Secretary 2003
C. Bryan Byrd 43 Vice President, Engineering and Manufacturing 1993
John Huley 47 Vice President, Sales 2004
DAVID A. JENKINS is a founder and currently the Chairman of the Board
of Directors EP MedSystems. Mr. Jenkins served as the Chief Executive Officer
of EP MedSystems from its inception in 1993 until August 2002, and as
Chairman since 1995. Mr. Jenkins also served as President of EP MedSystems from
its inception in 1993 until August 2001. He also currently serves as President
and a director of Transneuronix, Inc., a privately-held company engaged in the
development of neuro-muscular stimulation devices.
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REINHARD SCHMIDT has served as President, Chief Operating Officer and a
director of EP MedSystems since August 2001. In August 2002, he also took on the
additional duties of Chief Executive Officer. From 1998 through 2001, Mr.
Schmidt was President of Surgical Navigation Specialist, Inc. From 1995 to 1998,
Mr. Schmidt was Vice President and General Manager of Siemens Healthcare
Services, a Siemens company. From 1990 to 1995, Mr. Schmidt worked with General
Electric Medical Systems as Manager of National Accounts and Managed Health Care
Services.
MATTHEW C. HILL served as the Controller of EP MedSystems from August
2002 to March 2003. In March 2003, Mr. Hill was appointed as EP MedSystems'
Chief Financial Officer. From 1994 through 2002 Mr. Hill he held various
positions up to the level of senior manager with the international accounting
and auditing firm of Grant Thornton LLP. He has over 12 years of experience in
finance and accounting.
C. BRYAN BYRD is the Vice President, Engineering and Manufacturing of
EP MedSystems. Mr. Byrd joined EP MedSystems in April 1993 to oversee software
development for new products. Prior to joining EP MedSystems, Mr. Byrd
co-founded and served as the Director of Engineering for BioPhysical Interface
Corp. from 1989 to 1993, where he was responsible for developing automated
computerized monitoring equipment for pacemaker and open heart operating rooms
and follow-up clinics. Prior to his involvement with BioPhysical Interface
Corp., Mr. Byrd was employed by Mt. Sinai Medical Center in Miami Beach, Florida
as a clinical software engineer.
JOHN HULEY, is the Vice President of Sales. From 2000 to 2004, Mr.
Huley held the position of Northeast Region Manager with Abbott Vascular
Devices, where he managed the Northeastern U.S. in sales of interventional
cardiology devices. Prior to that, he worked for over 17 years with United
States Surgical Corporation where he rose to Divisional Manager primarily
responsible for sales of surgical stapling and suture devices. Mr. Huley has
over 20 years of increasing responsibilities in surgical device and
interventional cardiology device sales and sales management.
8
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid or accrued to the Chief Executive Officer and each
of EP MedSystems' four most highly paid executive officers whose salary and
bonus for all of their services in all capacities in 2003 exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- -----------------------------------------------------
NAME OTHER RESTRICTED SECURITIES ALL
AND ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) $ SARS (#) ($) $
---- --- --- --- - -------- --- -
Reinhard Schmidt 2003 $257,720 $37,500 - -
President and Chief 2002 $215,533 $60,000 45,000 (1) 175,000
Executive Officer 2001 $77,359 - 30,000 (1) (2)
from August 2002 160,000 (3)
Matthew C. Hill 2003 $108,224 $16,875 103,750 (4)
Chief Financial
Officer
C. Bryan Byrd 2003 $172,500 73,000 (5)
Vice President, 2002 $156,563 50,000 (6)
Engineering 2001 $150,000 -
and Manufacturing
John Talarico 2003 $127,965 $11,000 2,500 (7)
Vice President, 2002 $104,000 - 10,000 (8)
Regulatory and
Quality Assurance
Mark Adams 2003 $149,019 $15,000 100,000 (9) $10,750 (10)
Vice President, Sales
and Marketing
- ------------------------------------
<FN>
(1) In August 2001, in connection with Mr. Schmidt's employment, among
other things, Mr. Schmidt was allowed to purchase 100,000 shares of our
common stock at $2.20 per share (the "Shares"). EP MedSystems provided
a two-year, interest-free, non-recourse loan in the amount of $220,000
to finance the purchase price of the Share, which loan was secured by a
pledge to EP MedSystems of the Shares, and the principal balance of
which was to be forgiven ratably over the term of the loan. If Mr.
Schmidt had terminated his employment prior to August 20, 2003, the
remaining principal balance not forgiven would have been due and
payable. EP MedSystems has determined that the treatment for the
valuing and recording of the Shares purchased is similar to the
accounting for stock options that qualify for variable plan accounting.
Based on the purchase price of the shares of our common stock at the
time of issuance, the intrinsic value of these instruments was zero
and, as such, no compensation expense was recorded. The Shares were
re-measured on a quarterly basis and any resulting compensation expense
was to be amortized over the life of the note. In July 2002, EP
MedSystems and Mr. Schmidt agreed to rescind the stock purchase
transaction with respect to 75,000 of the Shares (the portion which had
not already been paid for through forgiveness of the loan). EP
MedSystems recorded $45,000 in compensation expense as of December 31,
2003.
(2) In consideration for the rescission of the stock purchase transaction
described in footnote (1) above, Mr. Schmidt was granted an incentive
stock option to purchase 75,000 shares of our common stock pursuant to
the 2002 Stock Option Plan (subject to shareholder approval of such
plan at the 2002 annual meeting of shareholders) at an exercise price
equal to $2.20 per share (the original purchase price established in
connection with Mr. Schmidt's stock purchase rights was greater than
9
the fair market value of the common stock on the date of grant of the
stock option). This stock option vests over four years from the date of
grant. EP MedSystems recognized a de minimus compensation charge
related to this stock option as the market price on August 29, 2002
(the date of the 2002 annual meeting of shareholders when the 2002
Stock Option Plan was approved) was greater than $2.20. The
compensation charge is amortized over the vesting period of 4 years.
Mr. Schmidt was also granted an option in September 2001 under the 1995
Director Option Plan to purchase 60,000 shares of our common stock at
an exercise price of $1.85 per share (the price of the stock on the
date of grant); that option was to vest 1,000 shares per month. Because
Mr. Schmidt was not entitled to participate in the 1995 Director Option
Plan, this option was cancelled in July 2002 in consideration for the
grant to Mr. Schmidt of an incentive stock option to purchase 60,000
shares of common stock pursuant to the 2002 Stock Option Plan (subject
to shareholder approval of such plan at the 2002 annual meeting of
shareholders) at an exercise price equal to $2.10 per share (the fair
market value of the common stock on the date of grant). EP MedSystems
recognized a de minimus compensation charge related to this stock
option as the market price on August 29, 2002 (the date of the 2002
annual meeting of shareholders when the 2002 Stock Option Plan was
approved) was greater than $2.10. The compensation charge is amortized
over the vesting period of 4 years. Lastly, on August 29, 2002, Mr.
Schmidt was granted, 40,000 shares of our common stock at $2.40 per
share, with 20% vesting on each anniversary date. Those options have a
term of 10 years.
(3) In connection with Mr. Schmidt's employment in August 2001, EP
MedSystems granted to Mr. Schmidt an option, under the 1995 Long-Term
Incentive Plan, to purchase 100,000 shares of common stock at an
exercise price of $1.91 per share (the price of the stock on the date
of grant); the option vests over four years. Also, Mr. Schmidt was
granted an option, under the 1995 Director Option Plan, to purchase
60,000 shares of common stock at an exercise price of $1.91 per share
(the price of the stock on the date of grant); the option vests 1,000
shares per month. In addition, Mr. Schmidt received a five-year
warrant, which vested immediately, to purchase an additional 100,000
shares of common stock at an exercise price of $2.75 per share.
(4) On March 5, 2003, EP MedSystems granted Mr. Hill an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
2002 Stock Option Plan, at an exercise price of $1.32 per share. On
August 15, 2003, EP MedSystems granted Mr. Hill an incentive stock
option to purchase 3,750 shares of our common stock pursuant to the
1995 Long Term Incentive Plan at an exercise price of $2.55 per share.
On August 26, 2003, EP MedSystems granted Mr. Hill an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
1995 Long Term Incentive Plan at an exercise price of $2.25 per share.
The options vest over 5 years, and the term of the options is 10 years.
(5) On May 7, 2003, EP MedSystems granted Mr. Byrd an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
2002 Stock Option Plan, at an exercise price of $2.14 per share. On
July 22, 2003, EP MedSystems granted Mr. Byrd an incentive stock option
to purchase 18,000 shares of our common stock pursuant to the 1995 Long
Term Incentive Plan, at an exercise price of $2.91 per share. On
November 19, 2003, EP MedSystems granted Mr. Byrd an incentive stock
option to purchase 5,000 shares of our common stock pursuant to the
1995 Long Term Incentive Plan at an exercise price of $3.75 per share.
The options vest over 5 years, and the term of the options is 10 years.
(6) On August 29, 2002, EP MedSystems granted Mr. Byrd an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
2002 Stock Option Plan, at an exercise price of $2.40 per share. The
options vest 10,000 per year, and the term of the option is ten years.
(7) On November 19, 2003, EP MedSystems granted Mr. Talarico an incentive
stock option to purchase 2,500 shares of our common stock pursuant to
the 1995 Long Term Incentive Plan, at an exercise price of $3.75 per
share. The options vest over 5 years, and the term of the options is 10
years.
(8) On February 26, 2002, EP MedSystems granted Mr. Talarico an incentive
stock option to purchase 10,000 shares of our common stock pursuant to
the 1995 Long Term Incentive Plan, at an exercise price of $2.60 per
share. Options to purchase 2,000 shares vest one year from the date of
grant and an additional 2,000 shares vest each year thereafter. The
term of such options is ten years.
(9) On January 20, 2003, EP MedSystems granted Mr. Adams an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
1995 Long Term Incentive Plan, at an exercise price of $1.79 per share.
On March 5, 2003, EP MedSystems granted Mr. Adams an incentive stock
option to purchase 50,000 shares of our common stock pursuant to the
2002 Stock Option Plan, at an exercise price of $1.32 per share. The
options vest over 5 years, and the term of the options is 10 years.
(10) Reimbursement of relocation expenses.
</FN>
10
STOCK OPTIONS
The following table sets forth certain information concerning grants of
stock options to each of the executive officers identified in the Summary
Compensation Table during the fiscal year ended December 31, 2003.
OPTION GRANTS IN FISCAL YEAR 2003
NUMBER OF SHARES PERCENT OF TOTAL EXERCISE
UNDERLYING OPTIONS OPTIONS GRANTED TO PRICE PER
GRANTED EMPLOYEES IN 2003 SHARE EXPIRATION DATE
---------------------- ------------------------ ------------- ---------------
- - - -
Reinhard Schmidt (1)
President and Chief Executive
Officer
50,000 11% $2.25 August 26, 2013
Matthew C. Hill 3,750 1% $2.55 August 15, 2013
Chief Financial Officer 50,000 11% $1.32 March 5, 2013
C. Bryan Byrd (1) 5,000 1% $3.75 November 19, 2013
Vice President, Engineering 18,000 4% $2.91 July 22, 2013
and Manufacturing 50,000 11% $2.14 May 7, 2013
John Talarico (1)
Vice President,
Regulatory and
Quality Assurance 2,500 1% $3.75 November 19, 2013
Mark Adams (1)
Vice President, Sales and 50,000 11% $1.32 March 5, 2013
Marketing 50,000 11% $1.79 January 20, 2013
<FN>
(1) See applicable footnotes to above Summary Compensation Table.
</FN>
The exercise prices of the options granted during the fiscal year ended
December 31, 2003 were equal to or greater than the fair market value of our
common stock on the date of each grant.
11
OPTION EXERCISES AND HOLDINGS
The following table provides certain information with respect to each
of the executive officers identified in the Summary Compensation Table
concerning the exercise of stock options during the fiscal year ended December
31, 2003 and the value of unexercised stock options held as of such date.
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SHARES UNDERLYING IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 2003 DECEMBER 31, 2003 (1)
-------------------------- --------------------------
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- -------- ---------- ------------- ----------- -------------
Reinhard Schmidt
President and Chief
Executive Officer (2) 0 0 107,000 168,000 $107,200 $150,800
Matthew C. Hill (2)
Chief Financial Officer 0 0 3,000 115,750 $3,100 $139,800
C. Bryan Byrd (2)
Vice President,
Engineering and
Manufacturing 0 0 50,000 133,000 $23,500 $72,900
John Talarico (2)
Vice President,
Regulatory and
Quality Assurance 0 0 2,000 10,500 $900 $3,500
Mark Adams
Vice President, Sales and
Marketing 0 0 0 100,000 $0 $148,500
- --------------------------
<FN>
(1) Amounts calculated by subtracting the exercise price of the options
from the market value of the underlying common stock using the closing
sale price on the Nasdaq National Market of $3.04 per share on
December 31, 2003.
(2) See footnotes to above Summary Compensation Table.
</FN>
During the fiscal year ended December 31, 2003, no options were
exercised.
12
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of December 31,
2003 concerning outstanding options and rights to purchase our common stock
granted to participants in EP MedSystems' equity compensation plans and the
number of shares of our common stock remaining available for issuance under such
equity compensation plans.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION
EXERCISE OF PRICE OF OUTSTANDING PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS COLUMN (A))
- -------------
(A) (B) (C)
Equity compensation plans approved by
security holders (1).................. 1,420,000 $2.40 514,790
--------- -------
Equity compensation plans not approved
by security holders (2) .............. 167,000 $1.95 -
---------- ----------------
Total................................. 1,587,410 $2.35 514,790
--------- -------
<FN>
(1) This consists of EP MedSystems' (i) 1995 Long Term Incentive Plan, (ii)
1995 Director Option Plan, and (iii) 2002 Stock Option Plan.
(2) These compensation plans or arrangements consist of options approved by
our Board of Directors and granted to certain employees, directors and
outside consultants from time to time to incentivize such persons in
connection with EP MedSystems' business.
</FN>
For a description of the 1995 Long Term Incentive Plan, 1995 Director
Option Plan, and 2002 Stock Option Plan, see "Compensation Plans and Other
Arrangements" below.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON- STOCK
PRICED-BASED PLANS
(A) (B) (C) (D) (E) (F)
NUMBER OF SHARES, PERFORMANCE OR OTHER
UNITS OR OTHER PERIOD UNTIL MATURATION THRESHOLD ($ TARGET MAXIMUM ($
NAME RIGHTS (#) OR PAYOUT OR #) ($ OR #) OR #)
- ---------------------- ---------------- ----------------------- ----------- --------- ----------
Reinhard Schmidt
President and Chief - - - - -
Executive Officer from
August 2002
Matthew C. Hill 103,750 5-Year Vesting - - -
Chief Financial Officer
C. Bryan Byrd 73,000 5-Year Vesting - - -
Vice President,
Engineering and
Operations
John Talarico 2,500 5-Year Vesting - - -
Vice President,
Regulatory and
Quality Assurance
Mark Adams 100,000 5-Year Vesting - - -
Vice President, Sales
and Marketing
13
COMPENSATION PLANS AND OTHER ARRANGEMENTS
1995 LONG TERM INCENTIVE PLAN
EP MedSystems' 1995 Long Term Incentive Plan was adopted by our Board
of Directors and shareholders in November 1995. There are 100,000 shares of our
common stock available for issuance under the 1995 Long Term Incentive Plan. As
of December 31, 2003, options to purchase 770,410 shares were outstanding at
exercise prices ranging from $1.34 to $4.25 per share. The 1995 Long Term
Incentive Plan provides for grants of "incentive" and "non-qualified" stock
options to employees of EP MedSystems. The 1995 Long Term Incentive Plan is
administered by the Compensation Committee, which determines the optionees and
the terms of the options granted, including the exercise price, number of shares
subject to the options and the exercisability thereof. The 1995 Long Term
Incentive Plan will terminate on November 30, 2005, unless earlier terminated by
the Board of Directors.
The exercise price of incentive stock options granted under the 1995
Long Term Incentive Plan must be equal to at least the fair market value of our
common stock on the date of grant, and the term of such options may not exceed
ten years. With respect to any optionee who owns stock representing more than
10% of the voting power of all classes of EP MedSystems' outstanding capital
stock, the exercise price of any incentive stock option must be equal to at
least 110% of the fair market value of the common stock on the date of grant,
and the term of the option may not exceed five years. The aggregate fair market
value of common stock (determined as of the date of the option grant) for which
an incentive stock option may for the first time become exercisable in any
calendar year may not exceed $100,000.
1995 DIRECTOR OPTION PLAN
EP MedSystems' 1995 Director Option Plan was adopted by the Board of
Directors and shareholders in November 1995. A total of 540,000 shares of our
common stock are available for issuance under the 1995 Director Option Plan, and
options to purchase 240,000 shares were outstanding as of December 31, 2003 at
exercise prices ranging from $2.00 to $2.50 per share. The 1995 Director Option
Plan provides for grants of "director options" to eligible directors of EP
MedSystems and for grants of "advisor options" to eligible members of the
Scientific Advisory Board. Director options and advisor options become
exercisable at the rate of 1,000 shares per month, commencing with the first
month following the date of grant for so long as the optionee remains a director
or advisor, as the case may be. The 1995 Director Option Plan is administered by
the Plan Committee of our Board of Directors, which determines the optionees and
the terms of the options granted, including the exercise price and the number of
shares subject to the options. The 1995 Director Option Plan will terminate on
November 30, 2005, unless earlier terminated by the Board of Directors.
2002 STOCK OPTION PLAN
EP MedSystems' 2002 Stock Option Plan was approved by the shareholders
in August 2002. A total of 600,000 shares of our common stock are reserved for
issuance under the 2002 Stock Option Plan. The 2002 Stock Option Plan provides
for grants of incentive stock options to employees and officers of EP MedSystems
and non-statutory stock options to employees, officers, advisors and consultants
of EP MedSystems. The 2002 Stock Option Plan is administered by the Compensation
Committee. The 2002 Stock Option Plan will terminate on August 29, 2012, unless
terminated earlier by the Board of Directors. At December 31, 2003, options to
purchase 410,000 shares were outstanding at exercise prices ranging from $1.32
to $2.40.
14
EMPLOYMENT AGREEMENTS
EP MedSystems entered into an employment agreement, dated as of July
20, 2001 (and effective on commencement, August 20, 2001), with Reinhard
Schmidt. Under that agreement, Mr. Schmidt served as President and Chief
Operating Officer of EP MedSystems for an initial term of 2 years at an annual
salary of $200,000. The Board of Directors has discretion to approve salary
increases and bonuses. On August 29, 2002, Mr. Schmidt added the duties of Chief
Executive Officer, and the Compensation Committee of the Board increased the
executive compensation to $250,000. The agreement provides that unless
terminated by either party providing the other with written notice of its
intention not to renew at least 30 days prior to the scheduled expiration date,
the agreement will renew automatically after the initial two-year term for
successive one-year terms. The agreement further provides that if the agreement
is terminated by EP MedSystems without cause, or by Mr. Schmidt for good reason
(including the occurrence of certain events within one year of change in
control), Mr. Schmidt will be entitled to severance payments equal to Mr.
Schmidt's then-current base salary for a period of twelve months. On August 20,
2004, Mr. Schmidt's employment agreement automatically renewed through August
2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PROMISSORY NOTE TRANSACTION AND PRIVATE PLACEMENT FINANCING TRANSACTION
INVOLVING EGS PRIVATE HEALTHCARE PARTNERSHIP, L.P. AND EGS PRIVATE HEALTHCARE
COUNTERPART, L.P. (THE "EGS ENTITIES")
On December 30, 2002, we issued notes, in an aggregate amount of $1
million, to EGS Private Healthcare Partners L.P. and EGS Private Healthcare
Counterpart L.P. A Managing Member of the general partner of the EGS Entities,
Abhijeet Lele, is also a member of our Board of Directors. On January 31, 2003,
the notes were converted into equity in connection with a related private
placement.
FINANCING TRANSACTION WITH MEDTRONIC, INC./PLEDGE OF SECURITY BY DAVID A.
JENKINS.
The $3.2 million note issued by us to Medtronic, Inc., a shareholder in
EP Med, was secured by a pledge of certain shares of stock in a privately held
company owned by David Jenkins, the Chairman of our Board of Directors. The note
was repaid in February 2004.
LOAN TO C. BRYAN BYRD.
In May 2000, we loaned $100,000 to one of our officers, Mr. Byrd, to
finance his exercise of fully vested options. This recourse loan bore interest
at the Federal Fund rate and was collateralized by 50,000 shares of our common
stock. Principal and any accrued interest was due and payable on May 23, 2003.
On April 4, 2003, the principal amount of, and all accrued and unpaid interest
on, the note receivable were repaid by Mr. Byrd through return to treasury of
the 50,000 shares of common stock, which collateralized that loan. The market
price of our common stock on the date of such return was $2.08. The shares were
recorded on the balance sheet under the caption "Treasury Stock."
15
REPORT OF THE AUDIT COMMITTEE
The Audit Committee reviewed and discussed EP MedSystems' audited financial
statements for the fiscal year ended December 31, 2003 with EP MedSystems'
management. In addition, the Audit Committee discussed with EP MedSystems'
independent auditors, Grant Thornton LLP, the matters required by Statement on
Auditing Standards No. 61, as may be modified or supplemented (as in effect on
the date of EP MedSystems' financial statements), which include the following:
o Grant Thornton LLP's responsibility under generally accepted auditing
standards,
o Significant accounting policies,
o Management's judgments and accounting estimates,
o Significant audit adjustments,
o Other information in documents containing audited financial statements,
o Disagreements with EP MedSystems' management, including accounting
principles, scope of audit and disclosures,
o Major issues discussed with EP MedSystems' management prior to
retention of Grant Thornton LLP, and
o Difficulties encountered in performing the audit.
The Audit Committee received and discussed with Grant Thornton LLP
written disclosures and the letter regarding any significant relationships that
could impair Grant Thornton LLP's independence (as required by Independence
Standards Board Statement No. 1, , as may be modified or supplemented, as in
effect on the date of EP MedSystems' financial statements), and considered the
compatibility of non-audit services with Grant Thornton LLP's independence.
Based upon the above reviews and discussions, the Audit Committee recommended to
the Board of Directors that EP MedSystems' audited financial statements for the
fiscal year ended December 31, 2003 be included in the Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003.
MEMBERS OF THE AUDIT COMMITTEE
Abhijeet Lele, Chairman
Richard C. Williams
Paul L. Ray
16
RELATIONSHIP WITH INDEPENDENT AUDITORS
Grant Thornton LLP ("Grant Thornton") served as EP MedSystem's
independent certified public accountants for the fiscal year ended December 31,
2003. The Audit Committee of the Board of Directors has selected Grant Thornton
to act as EP MedSystems' independent auditors for the fiscal year ending
December 31, 2004. A representative of Grant Thornton is expected to be present
at the Annual Meeting, with the opportunity to make a statement, if the
representative so desires, and is expected to be available to respond to
appropriate questions from shareholders.
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS
As disclosed in the Company's Form 8-K filed with the SEC on September
2, 2003, on August 25, 2003, the Audit Committee of our Board of Directors,
acting on behalf of the Company and our Board of Directors, dismissed
PricewaterhouseCoopers LLP ("PwC") as the Company's independent accountant. The
decision to change accountants was approved by the Audit Committee of our Board
of Directors.
During the fiscal years ended December 31, 2002 and 2001 and the
subsequent interim period through August 25, 2003 (the "Reporting Period"), none
of PwC's reports on our financial statements contained an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principle, except for the following: (1) a reference
in the PwC report on the 2002 financial statements to the adoption of the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", effective January 1, 2002 and (2) and a reference in
the PwC report on the 2001 financial statements to a revision of such financial
statements with respect to the valuation allowance related to net operating
losses incurred in the State of New Jersey.
Except as noted in the immediately succeeding paragraph, in connection
with its audits for the fiscal years ended December 31, 2002 and 2001 and
through August 25, 2003, there were no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
PwC, would have caused them to make reference thereto in their report on the
financial statements for such years.
The Company and PwC had a disagreement with respect to the application
of Emerging Issues Task Force ("EITF") Issue No. 00-27, "Application of Issue
98-5 to Certain Convertible Instruments", and EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" as it relates to the interest charge associated
with certain beneficial features and the intrinsic value of embedded conversion
options within convertible promissory bridge notes outstanding at December 31,
2002 and converted to equity on January 31, 2003. After discussions among the
Audit Committee of our Board of Directors, our management and PwC, the matter
was resolved to the satisfaction of PwC. If this matter had not been resolved to
the satisfaction of PwC, it would have been referred to in PwC's audit report on
the Company's financial statements as of and for the year ended December 31,
2003 if one were to have been issued. PwC was authorized to respond fully to the
inquiries of any successor independent accounting firm regarding this
disagreement.
As disclosed in our Form 8-K filed with the SEC on September 3, 2003,
we appointed Grant Thornton as our independent accountant on September 3, 2003.
The change of independent accountant was approved by the Audit Committee of our
Board of Directors. We did not consult with Grant Thornton during the fiscal
years ended December 31, 2001 or December 31, 2002, or during the interim period
through September 3, 2003, on (i) any matter which was the subject of any
disagreement, (ii) the application of accounting principles to a specified
transaction, either completed or proposed, or (iii) the type of audit opinion
that might be rendered on our financial statements. With respect to (i) to (iii)
above, Grant Thornton provided no written report or oral advice that was an
important factor considered by us in reaching a decision as to any accounting,
auditing, or financial reporting issue.
17
AUDIT AND OTHER FEES PAID TO INDEPENDENT AUDITORS
AUDIT FEES
The aggregate fees billed by PwC for professional services rendered for
the audit of our annual financial statements for the years ended December 31
2002, the review of the financial statements included in the our Forms 10-QSB
and consents issued in connection with our filings on Form S-3 and Form 10-KSB
for 2003 and 2002 totaled $144,450 and $188,700, respectively.
The aggregate fees billed by Grant Thornton for professional services
rendered for the audit of our annual financial statements for the years ended
December 31, 2003, the review of the financial statements included in the our
Forms 10-QSB and consents issued in connection with our filings on Form S-3 for
2003 and 2002 totaled $45,506 and $0, respectively.
AUDIT-RELATED FEES
No fees were billed by PwC for assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements, for the years ended December 31, 2003 and 2002, and are not
disclosed in the paragraph captions "Audit Fees" above.
No fees were billed by Grant Thornton for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements, for the years ended December 31, 2003 and 2002, and
are not disclosed in the paragraph captions "Audit Fees" above.
TAX FEES
The aggregate fees billed by PwC for professional services rendered for
tax compliance, for the years ended December 31, 2003 and 2002, were $34,500 and
$38,135, respectively. The aggregate fees billed by PwC for professional
services rendered for tax advice and tax planning, for the years ended December
31, 2003 and 2002, were $13,655 and $20,875, respectively.
No fees were billed by Grant Thornton for professional services
rendered for tax compliance, for the years ended December 31, 2003 and 2002. No
fees were billed by Grant Thornton for professional services rendered for tax
advice and tax planning, for the years ended December 31, 2003 and 2002.
ALL OTHER FEES
No fees were billed by PwC for products and services, other than the
services described in the paragraphs captions "Audit Fees", "Audit-Related
Fees", and "Tax Fees" above for the years ended December 31, 2003 and 2002.
No fees were billed by Grant Thornton for products and services, other
than the services described in the paragraphs captions "Audit Fees",
"Audit-Related Fees", and "Tax Fees" above for the years ended December 31, 2003
and 2002.
AUDIT COMMITTEE POLICIES AND PROCEDURES
The Audit Committee has established its pre-approval policies and
procedures, pursuant to which the Audit Committee approved the foregoing audit
services provided by PwC and Grant Thornton in 2003. Consistent with the Audit
Committee's responsibility for engaging our independent auditors, all audit and
permitted non-audit services require pre-approval by the Audit Committee. The
full Audit Committee approves proposed services and fee estimates for these
services. The Audit Committee chairperson or his designee has been designated by
the Audit Committee to approve any services arising during the year that were
not pre-approved by the Audit Committee. Services approved by the Audit
18
Committee chairperson are communicated to the full Audit Committee at its next
regular meeting and the Audit Committee reviews services and fees for the fiscal
year at each such meeting. Pursuant to these procedures, the Audit Committee
approved the foregoing audit services provided by PwC and Grant Thornton.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based upon information available to us, the following table sets forth
certain information regarding beneficial ownership of our common stock as of
October 20, 2004, by (i) each of our directors, (ii) each of the executive
officers identified in the Summary Compensation Table, (iii) all directors and
executive officers as a group and (iv) each person known to us to beneficially
own more than five percent of our common stock. Except as otherwise indicated,
the persons named in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to community property laws,
where applicable.
SHARES OF COMMON STOCK BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) PERCENT OF CLASS
- --------------------------------------------------- ----------------------------------- ----------------
Group comprised of Cardiac Capital, LLC, Rollins 3,388,500(2) 14.4%
Investment Fund, R. Randall Rollins, Gary W. Rollins
and David A. Jenkins
Cardiac Capital, LLC 2,250,000 9.6%
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324 (3)
Rollins Investment Fund 2,250,000 9.6%
R. Randall Rollins
Gary W. Rollins
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324 (4)
14.4%
David A. Jenkins 3,388,500
Chairman of the Board
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey 08091 (5)
Group comprised of Greenberg Healthcare Management, 2,967,326 12.6%
LLC, EGS Partners, LLC, The Pharmaceutical/Medical
Technology Fund, L.P., Strategic Healthcare
Investment Fund, EGS Private Healthcare Associates,
LLC, EGS Private Healthcare Partnership, L.P.,
Frederic Greenberg, and Abhijeet Lele
350 Park Avenue, 11th Floor
New York, New York 10022 (6)
Group comprised of S.A.C. Capital Advisors, LLC, 1,561,307 6.6%
S.A.C Capital Associates, LLC, S.A.C. Capital
Management, LLC and Steven A. Cohen.
172 Cummings Point Road
Stamford, CT 06902 (7)
Boston Scientific Corporation 1,481,028 6.2%
One Boston Scientific Place
Natick, MA 07160 (8)
Reinhard Schmidt 264,000 1.1%
President, Chief Executive Officer and Director
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey 08091 (9)
19
Matthew C. Hill 26,750 *
Chief Financial Officer
c/o EP MedSystems, Inc.
575 Route 73, N, Building D
West Berlin, NJ 08091 (10)
C. Bryan Byrd 105,600 *
Vice President, Engineering and Manufacturing
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey 08091 (11)
John Talarico 4,000 *
Vice President, Regulatory and Quality Assurance
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey 08091 (12)
Mark Adams 40,000 *
Vice President, Sales and Marketing
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey 08091 (13)
All executive officers and directors as a group 6,310,096 27%
(9 persons) (14)
* Represents beneficial ownership of less than 1% of the common stock.
- --------------------
<FN>
(1) Applicable percentage ownership as of October 20, 2004 is 23,524,316
shares of Common Stock outstanding. Beneficial ownership is determined
in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. Under Rule 13d-3, shares issuable within 60 days upon
exercise of outstanding options, warrants, rights or conversion
privileges are deemed outstanding for the purpose of calculating the
number and percentage owned by the holder of those rights, but not
deemed outstanding for the purpose of calculating the percentage owned
by any other person. "Beneficial ownership" under Rule 13d-3 includes
all shares over which a person has sole or shared dispositive or voting
power.
(2) The information set forth with respect to the Cardiac Capital Group is
based on information contained in a Statement on Schedule 13D filed
with the SEC on April 5, 2001 (the "Cardiac Capital Schedule 13D"). The
shares reflected in the table represent (i) 2,250,000 shares
beneficially owned by Cardiac Capital, LLC; (ii) 2,250,000 shares
beneficially owned by Rollins Investment Fund, indirectly as a 50%
owner of Cardiac Capital, LLC, with shared voting and investment power
with David A. Jenkins (see footnotes (3), (4) and (5)); (iii) 2,250,000
shares beneficially owned by each of R. Randall Rollins and Gary W.
Rollins, indirectly as equal owners of Rollins Investment Fund, with
shared voting and investment power with David A. Jenkins (see footnotes
(3), (4) and (5)); and (iv) 3,388,500 shares beneficially owned by
David A. Jenkins, 2,250,000 of which shares are owned with shared
voting and investment power with Rollins Investment Fund, R. Randall
Rollins and Gary W. Rollins (see footnotes (3) and (5)).
(3) In the Cardiac Capital Schedule 13D, the members of the group have
reported that Cardiac Capital, LLC, the record owner of the securities
reflected, is a Georgia limited liability company, the ownership of
which is divided equally between Rollins Investment Fund, a Georgia
general partnership consisting of R. Randall Rollins and Gary W.
Rollins, and David A. Jenkins. Includes 750,000 shares issuable upon
exercise of outstanding warrants exercisable by Cardiac Capital (see
footnotes (2), (4) and (5)).
(4) In the Cardiac Capital Schedule 13D, Rollins Investment Fund has
reported that it is a Georgia general partnership, the ownership of
which is divided equally between R. Randall Rollins and Gary W.
Rollins. Rollins Investment Fund owns 50% of Cardiac Capital, LLC, the
record owner of the shares of Common Stock and warrant shares reflected
in the table, and, as such, the Rollins Investment Fund's ownership is
indirect and it shares voting and investment power with David Jenkins,
the other 50% owner of Cardiac Capital. Rollins Investment Fund and
David Jenkins, together with EP MedSystems, have entered into a letter
agreement, dated March, 2002, pursuant to which David Jenkins has
agreed that he shall forbear from selling any shares of Common Stock of
EP MedSystems owned by him, and shall cause his spouse, his lineal
descendants and any trust for the benefit of any of them to similarly
forbear from selling any shares of Common Stock of EP MedSystems owned
by any of them during the first year following the closing without the
prior written consent of Rollins Investment Fund. Under the letter
agreement, Mr. Jenkins has further agreed that, notwithstanding any
provision to the contrary in the operating agreement of Cardiac
20
Capital, the decision of Cardiac Capital to exercise its registration
rights after the first anniversary of the closing may be made by
Rollins Investment Fund in its sole judgment and without the consent of
Mr. Jenkins. Includes 750,000 shares issuable upon the exercise of
outstanding warrants exercisable by Cardiac Capital. Rollins Investment
Fund disclaims beneficial ownership of 1,125,000 shares (i.e., 50%) of
Common Stock and warrant shares and each of Messrs. R. Randall Rollins
and Gary W. Rollins disclaims beneficial ownership of one-half of such
shares (see footnotes (2), (3) and (5)).
(5) Includes 166,000 shares issuable upon exercise of fully vested options.
Also includes 160,000 shares held by Mr. Jenkins as trustee for the
Dalin Class Trust, 42,500 shares held by Mr. Jenkins' wife and 20,000
shares held by Mr. Jenkins' wife as custodian for his children. Also
includes 2,250,000 shares beneficially owned by Cardiac Capital, LLC,
the ownership of which is divided equally between Mr. Jenkins and
Rollins Investment Fund and, as such, Mr. Jenkins' ownership is
indirect and he shares voting and investment power with Rollins
Investment Fund; 750,000 of such shares are issuable upon the exercise
of outstanding warrants exercisable by Cardiac Capital, LLC (see
footnotes (2), (3) and (4)). Mr. Jenkins disclaims beneficial ownership
of (i) 42,500 shares held by his wife, (ii) 20,000 shares held by his
wife as custodian for his children, and (iii) 1,125,000 shares (i.e.,
50%) of Common Stock and warrant shares held of record by Cardiac
Capital, LLC.
(6) The information set forth with respect to the EGS Group is based on
information contained in a Statement on Schedule 13D filed with the SEC
on March 18, 2003 and other information known to the Company. The
shares reflected in the table represent (i) 2,687,946 shares
beneficially owned by EGS Private Healthcare Associates, LLC ("EGS
Associates"), indirectly through its ownership of EGS Private
Healthcare Partnership, L.P. ("EGS Partnership"), which is the record
owner of 2,316,734 shares (which includes 306,250 shares issuable upon
the exercise of outstanding warrants) and EGS Private Healthcare
Counterpart, L.P. ("EGS Counterpart"), which is the record owner of
343,212 shares (which includes 56,000 shares issuable upon the exercise
of outstanding warrants); (ii) 259,380 shares beneficially owned by
Greenberg Healthcare Management, LLC ("Greenberg Management"),
indirectly through its ownership of The Pharmaceutical/Medical
Technology Fund, L.P. ("Pharma/Medical"), which is the record owner of
the 215,682 shares and through its role as investment adviser of
Strategic Healthcare Investment Fund (having an address at c/o
MeesPierson (Cayman) Limited, British American Centre, Phase 3, Dr.
Roy's Drive, P.O. Box 2003, George Town, Grand Cayman, Cayman Islands,
B.W.I.), which is the record owner of the 43,698 shares; (iii)
2,939,326 shares beneficially owned by Frederic Greenberg indirectly,
as Managing Member of Greenberg Management and EGS Associates, (iv)
20,000 shares beneficially owned by Frederic Greenberg; (v) 2,687,946
shares beneficially owned by Abhijeet Lele, indirectly, as Managing
Member of EGS Private Healthcare Management, LLC, which is the General
Partner of EGS Partnership and EGS Counterpart, and (vi) 28,000 shares
issuable upon exercise of fully vested options beneficially held by
Abhijeet Lele.
(7) The information set forth with respect to the S.A.C. Capital group is
based on information contained in a statement on Schedule 13G filed
with the SEC on April 29, 2004.
(8) The information set forth with respect to Boston Scientific Corporation
is based on information contained in a statement on Schedule 13G/A
filed with the SEC on February 17, 2004.
(9) Includes 107,000 shares issuable upon exercise of fully vested
options and 100,000 shares issuable upon the exercise of
outstanding warrants. See the Section entitled "Employment Agreements."
(10) Includes 13,000 shares issuable upon exercise of fully vested options.
(11) Includes 70,000 shares issuable upon exercise of fully vested options.
(12) Includes 4,000 shares issuable upon exercise of fully vested options.
(13) Includes 20,000 shares issuable upon exercise of fully vested options.
(14) Includes 1,870,413 shares issuable upon exercise of fully vested
options and warrants.
</FN>
21
PROPOSAL 2
APPROVAL OF THE AMENDMENT TO THE 2002 STOCK OPTION PLAN
GENERAL
On May 4, 2004, the Board approved an amendment of the 2002 Stock
Option Plan (the "Plan"), subject to shareholder approval, to increase the
number of shares of Common Stock issuable under the Plan by 400,000 shares from
600,000 shares to 1,000,000 shares. At the Annual Meeting, shareholders will be
asked to approve the amendment to the Plan.
The Board of Directors believes that existing options have contributed
substantially to the Company's ability to attract, retain and maximize the
performance of officers and key employees, and that the additional options
would, among other things, promote the interests of the Company and its
shareholders by assisting the Company in continuing to successfully achieve
these objectives. The Board believes that the 400,000 additional shares of
Common Stock available for issuance as a result of the amendment should be
sufficient to meet the Company's requirements for approximately two (2) to three
(3) years. The following is a summary of the key features of the Plan, including
the proposed amendment, and so is qualified in its entirety by reference to the
full text of the Plan, which is annexed to this Proxy Statement as Appendix B.
Unless instructed otherwise, it is the intention of the persons named
in the accompanying proxy to vote shares represented by properly executed
proxies "FOR" amendment of the Plan.
SUMMARY DESCRIPTION OF THE PLAN
The Plan was adopted by the Board of Directors in March of 2002 and
became effective on August 29, 2002 after approval of the shareholders at
the 2002 Annual Meeting. A total of 600,000 shares of Common Stock are currently
reserved for issuance under the Plan. As of September 30, 2004, options to
purchase 520,000 shares were outstanding, which excludes options to purchase
45,000 shares which were granted contingent upon shareholder approval of this
amendment, and 70,000 shares were available for future issuance. Such options
were held by 9 employees of the Company and were exercisable at exercise prices
ranging from $1.32 to $3.18 with an average exercise price of $2.40 per share.
The Plan provides for grants of "incentive" stock options ("ISO") to
officers and employees and "non-qualified" stock options ("NQSO") to officers,
employees, advisors and consultants of the Company. All employees are currently
eligible to participate in the Plan.
The Plan is administered by the Compensation Committee, which
determines, at its discretion, the optionees and the terms of the options
granted, including the exercise price, number of shares subject to the options
and the exercisability thereof. Because the Compensation Committee determines
the optionees in its discretion, it is not possible to predict the amounts that
will be received by or allocated to particular individuals or groups of
employees. Set forth in this Proxy Statement in the section titled "Executive
Compensation and Related Matters" is information relating to outstanding options
previously granted to certain executive officers and directors.
The Compensation Committee may, in its discretion, accelerate the
exercise date of outstanding options and, in connection with EP MedSystems
consummating a transaction, take other actions to terminate or cash out existing
options or issue new options of a successor corporation.
Except with respect to options then outstanding, the Plan will expire
on the earliest to occur of (a) the tenth anniversary of the date on which the
Plan was adopted by the Board of Directors, (b) the tenth anniversary of the
date on which the Plan was approved by the shareholders, or (c) the date as of
which the Board, in its sole discretion, determines to terminate the Plan.
22
The exercise price of an ISO granted under the Plan must be equal to at
least the fair market value of the common stock on the date of grant, and the
term of such option may not exceed ten years. With respect to any optionee who
owns (or is deemed to own through attribution from certain related persons)
stock representing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any ISO must be equal to at
least 110% of the fair market value of our common stock on the date of grant,
and the term of the option may not exceed five years. The aggregate fair market
value of our common stock (determined as of the date of the option grant) for
which an ISO may for the first time become exercisable in any calendar year may
not exceed $100,000. The exercise price for any NQSO will be established by the
Compensation Committee, and may be more or less than the fair market value of
our common stock on the date of grant. As of October 26, 2004, the last reported
sales price per share of our common stock on the Nasdaq SmallCap Market was
$2.94
The options will be granted at no cost to the optionee. Payment of the
exercise price for options is generally in cash, but the Compensation Committee,
subject to applicable law, may permit non-executive officer optionees to pay the
exercise price by issuing a promissory note upon terms satisfactory to the
Compensation Committee.
The Board may, at any time, terminate, modify or amend the Plan without
shareholder approval, except for an increase in the number of shares subject to
the Plan or where the vote of shareholders is required under the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to ISOs or under
Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Such
modifications or amendments may, for instance, modify the requirements for
eligibility for participation or change the class of eligible participants or
increase the benefits accruing to eligible participants with respect to options
granted under the Plan, provided that the Board cannot adversely affect the
rights of an optionee under a previously granted option without the consent of
the optionee.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE PLAN
The following discussion summarizes the material federal income tax
consequences of participation in the Plan. The discussion is general in nature
and does not address issues related to the tax circumstances of any particular
optionee. It also assumes that options granted under the Plan may be exercised
only as to vested shares (that is, shares that are not subject to a Company
repurchase right or other similar forfeiture condition). The discussion is based
on federal income tax laws in effect on the date hereof and is, therefore,
subject to possible future changes in law. The discussion does not address
state, local or foreign tax consequences, or any estate or gift tax
consequences.
OPTIONS. An optionee will not have any taxable income at the time an
ISO is granted. Furthermore, an optionee will not have regular taxable income at
the time the ISO is exercised. However, the excess of the fair market value of
the shares at the time of exercise over the option exercise price of the shares
will be a preference item that could create an alternative minimum tax
liability. If an optionee disposes of the shares acquired on exercise of an ISO
after the later of two (2) years after the grant of the ISO or one (1) year
after exercise of the ISO, the gain (i.e., the excess of the proceeds received
over the option exercise price), if any, will be long-term capital gain eligible
for favorable tax rates under the Code. If the optionee disposes of the shares
within two (2) years of the date of grant of the ISO or within one (1) year of
exercise of the ISO, the disposition is normally a "disqualifying disposition,"
and the optionee will recognize ordinary income in the year of the disqualifying
disposition equal to the excess of the amount received for the shares (or, if
less, the fair market value of the shares at the time the ISO is exercised) over
the option exercise price of the shares. The balance of the gain, if any, will
be long-term or short-term capital gain depending on whether the shares were
sold more than one (1) year after the ISO was exercised. The Company is not
entitled to a deduction as the result of the grant or exercise of an ISO. If the
optionee has ordinary income taxable as compensation as a result of a
disqualifying disposition, the Company will be entitled to a deduction at the
same time and in the same amount as the optionee, assuming that the deduction is
not disallowed by Section 162(m) of the Code (which limits the Company's
deduction in any one (1) year for renumeration paid to certain executives in
excess of $1 million) or is otherwise limited under the Code.
23
A recipient of an NQSO will not have any income at the time the NQSO is
granted, nor will the Company be entitled to a deduction at that time. When an
NQSO is exercised, the optionee will recognize ordinary income in an amount
equal to the excess of the fair market value of the shares to which the option
pertains over the option exercise price of the shares. The Company will be
entitled to a tax deduction with respect to an NQSO at the same time and in the
same amount as the recipient, assuming that the deduction is not disallowed by
Section 162(m) of the Code (which limits the Company's deduction in any one (1)
year for remuneration paid to certain executives in excess of $1 million) or is
otherwise limited under the Code. Upon the disposition of stock acquired upon
exercise of an NQSO, the optionee recognizes either long-term or short-term
capital gain or loss, depending on whether the shares were sold more than one
(1) year after the NQSO was exercised. The Company may allow NQSOs to be
transferred subject to conditions and restrictions imposed by the Compensation
Committee; special tax rules may apply on such a transfer.
In the case of both ISOs and NQSOs, special federal income tax rules
apply if our common stock is used to pay all or part of the option price.
LIMITATION ON DEDUCTION OF CERTAIN COMPENSATION. A publicly-held
corporation may not deduct compensation of over $1 million paid in any year to
one of its top five officers unless the compensation constitutes "qualified
performance-based" compensation under the Internal Revenue Code. The Company
generally attempts to ensure that any awards under the Plan meet these
standards, but may not do so in every instance.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT OF THE
PLAN.
PROPOSAL 3
AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
SUMMARY OF AMENDMENT
The Board of Directors has authorized an amendment to EP MedSystems'
Amended Certificate, subject to shareholder approval, to increase the number of
authorized shares of our common stock by 10,000,000 shares, from 30,000,000
shares to 40,000,000 shares. The proposed amendment is attached to this Proxy
Statement as Appendix C. The Board of Directors has determined that the
amendment is in the best interests of EP MedSystems and its shareholders, and
unanimously recommends approval by the shareholders.
DESCRIPTION OF CAPITAL STOCK
Our current Amended Certificate authorizes the issuance of 30,000,000
shares of our common stock and 5,000,000 shares of our preferred stock. As of
November 18, 2004, there were approximately 23,570,816 shares of our common
stock and 373,779 shares of our preferred stock issued and outstanding,
4,873,436 authorized shares of our common stock reserved for issuance pursuant
to options, warrants, contractual commitments or other arrangements (including
387,946 shares reserved for issuance upon conversion of our outstanding
preferred stock and excluding options to purchase 45,000 shares of our common
stock which are issuable upon shareholder approval of Proposal 2 above) and
1,555,748 authorized and unissued shares of our common stock that are not
reserved for any specific use and are available for future issuances. After the
proposed increase in authorized shares, there will be 11,555,748 authorized and
unissued shares of our common stock that are not reserved for any specific use
and are available for future issuances.
24
PURPOSE OF THE PROPOSED AMENDMENT TO THE AMENDED CERTIFICATE
EP MedSystems proposes an increase in the number of shares of our common
stock in order to reserve shares for issuance in the future for appropriate
corporate purposes, as may be considered advisable by the Board. Having such
shares available for issuance in the future will give us greater flexibility and
will allow shares to be issued as determined by the Board without the expense
and delay of a special stockholders' meeting to further amend the Amended
Certificate. Such stock could be used, for example, for possible strategic
relationships, for possible financings, or to increase the number of shares
issuable under our 2002 Stock Option Plan.
EFFECTS OF THE PROPOSED AMENDMENT
The rights of EP MedSystems' stockholders will not be affected by the
increase in the number of authorized shares of our common stock. However, the
Board will have the authority to issues additional shares of authorized common
stock without additional action or authorization by our shareholders prior to
such issuance, unless shareholder approval is required by applicable law or the
rules of any stock exchange or national securities association trading system on
which our common stock is then listed or quoted. For example, Nasdaq Rule
4350(i)(D) requires shareholder approval in connection with a private offering
of 20% or more of the shares of common stock of a company at a price less than
the greater of book or market value. If additional shares of our common stock
are issued, this may have a dilutive effect on earnings per share and on
stockholders' equity and voting rights. The issuance of additional shares, or
the perception that additional shares may be issued, may also adversely affect
the market price of our common stock. The holders of our common stock have no
preemptive rights to subscribe for or purchase additional shares of common stock
that may be issued in the future.
Although in some circumstances the availability for issuance of additional
shares of common stock could have an anti-takeover effect (for example, by
diluting the stock ownership of a person seeking to effect a change in the
composition of the Board of Directors or contemplating a tender offer or other
transaction directed to the combination of EP MedSystems with another company),
the current proposal to amend the Amended Certificate is not in response to any
effort to accumulate EP MedSystems' common stock or to obtain control of EP
MedSystems by means of a merger, tender offer, solicitation in opposition to
management or otherwise. The Board is not aware of any attempt to take control
of the Company, has not presented this proposal with the intention that the
increase in the authorized shares of common stock be used as a type of
anti-takeover device and currently has no plans to implement additional measures
that may have anti-takeover effects.
Existing provisions of our Amended Certificate, By-laws, other agreements, and
applicable state laws which may have anti-takeover effects include the
following:
o Our Amended Certificate does not provide for cumulative voting
with respect to the election of directors, but does provide
for staggered elections of our board of directors. As a
result, shareholders who have large holdings of our common
stock may be able to control the election of members of our
board, which may have the effect of delaying or preventing a
change in control of us, including transactions in which our
shareholders might otherwise receive a premium for their
shares over current market prices. The staggered board
provision makes it more difficult for shareholders to
change the majority of directors even when the only reason
for the change may be the performance of the present
directors. Such provisions are applicable to all elections of
directors, not only elections occurring after a change in
control.
o Pursuant to our Amended Certificate, the board of directors has
the authority to issue up to 5,000,000 shares of without any
further vote or action by the shareholders. The board of
directors, without shareholder approval, can issue preferred
stock with voting and conversion rights, which could adversely
affect the voting power of the holders of our common stock.
Currently, 373,779 shares of our Series A Convertible Preferred
Stock are outstanding.
25
Those shares are currently convertible, at our or the holder's
option, into 387,946 shares of common stock. We have
no present intention to issue additional shares of preferred
stock. The potential future issuance of preferred stock under
certain circumstances may have the effect of delaying, deferring
or preventing a change in control of us or otherwise may
adversely affect the rights of the holders of our common stock.
o Our By-laws provide that only our Board of Directors, the
Chairman of our Board or our President may call a special meeting
of the shareholders and that shareholders may not take action by
written consent without a meeting. These provisions limit the
ability of a potential acquirer or stockholders favoring a change
of control to act quickly by special meeting or without a
meeting.
o The vesting of all options granted pursuant to our 1995 Long Term
Incentive Plan, 1995 Director Option Plan, 2002 Stock Option
Plan, and other agreements accelerate in the event of (and
immediately prior to) a change in control of the Company.
Currently, approximately 800,000 shares are issuable
upon the exercise of vested options and approximately 1,000,000
shares are issuable upon the excercise of unvested options
granted pursuant to these plans and agreements.
o Section 14A:10A of the New Jersey Business Corporation Act (also
know as the "New Jersey Shareholders' Protection Act") provides
that, with certain exceptions, an "interested stockholder" is
prohibited from engaging in a "business combination" with the
company for five years following the date the stockholder first
became "interested" unless the company's board approved the
particular business combination before the acquirer became an
interested stockholder. After five years have elapsed, the
interested stockholder may engage in a business combination if
certain conditions are met.
RECENT PROPOSALS TO INCREASE THE NUMBER OF SHARES
On November 17, 2003, our shareholders approved an amendment to our Amended
Certificate to increase the number of authorized shares of our common stock from
25,000,000 shares to 30,000,000 shares. The amendment was filed with the State
of New Jersey on December 22, 2003. This increase in shares was intended to give
us greater flexibility and to allow shares to be issued as determined by the
Board without the expense and delay of a special stockholders' meeting. Such
stock could be and has been used used, for example, for possible strategic
relationships, for financings, or to increase the number of shares issuable
under our 2002 Stock Option Plan. On December 26, 2003, we issued 3,200,000
shares of our common stock to selected institutional and other accredited
investors in a private placement. Pursuant to a Senior Medical Advisor
Consulting Agreement between Dr. Sanjeev Saksena and EP MedSystems dated May 21,
2004, we issued 40,000 shares of our common stock and granted options to
purchase 50,000 shares of our common stock to Dr. Saksena. In addition,
approximately 300,000 shares of our common stock were reserved for issuance upon
conversion of a portion of a Secured Convertible Note issued by us to Laurus
Master Fund, Ltd. on August 29, 2003. We currently have no plan, understandings
or arrangements to issue additional shares of common stock except on terms which
the Board deems to be in the best interest of EP MedSystems and its
shareholders.
If Proposal 3 is approved, the Amended Certificate, as amended, will
become effective upon the filing of a Certificate of Amendment with the
Secretary of State of the State of New Jersey.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE
AMENDED CERTIFICATE.
OTHER BUSINESS
The Board of Directors does not intend to present any business at the
Annual Meeting other than as set forth in the accompanying Notice of Annual
Meeting of Shareholders, and has no present knowledge that any others intend to
present business at the Annual Meeting. If, however, other matters requiring the
vote of the shareholders properly come before the Annual Meeting or any
adjournment or postponement thereof, the persons named in the accompanying proxy
will have discretionary authority to vote the proxies held by them in accordance
with their judgment as to such matters.
26
MISCELLANEOUS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires EP
MedSystems' executive officers, directors and beneficial owners of more than 10%
of EP MedSystems' common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Such persons are required
to furnish EP MedSystems with copies of all Section 16(a) forms which they file.
Based solely on our review of the copies of such forms received by us or oral or
written representations from certain reporting persons that no Statements of
Beneficial Ownership on Form 5 were required for these persons, we believe that,
with respect to the year ended December 31, 2003, our executive officers,
directors and greater than 10% beneficial owners complied with all such filing
requirements.
During the 2003 fiscal year, each of Paul L. Ray, a Director of the
Company, Charles B. Byrd, the Company's Vice President - Engineering and
Manufacturing, Matthew C. Hill, the Company's Chief Financial Officer, John
Talarico, the Company's Vice President - Regulatory Affairs and Qualify
Assurance, Mark Adams, the Company's former Vice President - Sales and Marketing
and Richard C. Williams, a Director of the Company, failed to file their
respective Form 3 (Initial Statement of Beneficial Ownership of Securities) in a
timely fashion. Each of the above referenced persons subsequently filed a Form 3
in March of 2004. Abhijeet Lele, a Director of the Company, failed to file two
Form 4s (Statement of Changes in Beneficial Ownership) in a timely fashion. Mr.
Lele subsequently filed Form 4s on February 19, 2003 (which included one
transaction not reported on a timely basis) and March 25, 2003 (which included
two transactions not reported on a timely basis).
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the proxy materials for EP
MedSystems' 2005 Annual Meeting of Shareholders in reliance of Rule 14a-8 of the
Exchange Act must be received by EP MedSystems no later than August 5, 2005, in
such form as is required by the Securities and Exchange Commission. Shareholder
proposals submitted outside of the process of Rule 14a-8 must be received by EP
MedSystems no later than October 19, 2005. Such proposals should be directed to
EP MedSystems, Inc. at its principal executive offices, 575 Route 73 North,
Building D, West Berlin, New Jersey, 08091.
ANNUAL REPORT
A copy of EP MedSystems' Annual Report to Shareholders for the year
ended December 31, 2003, including audited financial statements, accompanies
this proxy statement. The financial statements and management discussion and
analysis contained therein are incorporated by reference and are deemed part of
this soliciting material.
FORM 10-KSB
A COPY OF EP MEDSYSTEMS' ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2003, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO BENEFICIAL SHAREHOLDERS OR SHAREHOLDERS OF RECORD
UPON WRITTEN REQUEST TO INVESTOR RELATIONS AT EP MEDSYSTEMS' PRINCIPAL EXECUTIVE
OFFICES.
By Order of the Board of Directors
Matthew C. Hill
Chief Financial Officer, Treasurer and Secretary
November 24, 2004
27
APPENDIX A
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EP MEDSYSTEMS, INC.
AMENDED AND RESTATED
AUDIT COMMITTEE CHARTER
(dated as of April 1, 2001 )
ORGANIZATION
There shall be a committee appointed by the Board of Directors of EP MedSystems,
Inc., a New Jersey corporation (the "Corporation"), of not less than two (2)
members or as required by the Securities and Exchange Commission (the "SEC"),
the applicable stock exchange regulations, or other applicable federal and state
laws to be known as the audit committee (the "Committee"). The Committee shall
be composed of members of the board of directors a majority of whom are
independent of the management of the Corporation and are free of any
relationship that, in the opinion of the board of directors, would interfere
with their exercise of independent judgment as a committee member. The members
of the Committee shall have the financial knowledge or experience to enable them
to carry out their responsibilities and at least one member of the Committee
shall have past employment experience in finance or accounting, requisite
professional certification in accounting, or any other comparable experience or
background which results in the individual's financial sophistication.
STATEMENT OF POLICY
The Committee shall provide assistance to the board of directors in fulfilling
their responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting and reporting practices of the
Corporation, and the quality and integrity of the financial reports of the
Corporation. In so doing, it is the responsibility of the Committee to maintain
free and open means of communication between the board of directors, the
independent auditors, and the financial management of the Corporation.
RESPONSIBILITIES
In carrying out its responsibilities, the Committee believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and to ensure to the board of directors and shareholders that the corporate
accounting and reporting practices of the Corporation are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the Committee will:
o Review and recommend to the board of directors the independent
auditors to be selected to audit the financial statements of
the Corporation and its divisions and subsidiaries.
o Meet with the independent auditors and financial management of
the Corporation to review the scope of the proposed audit for
the current year and the audit procedures to be utilized, and
at the conclusion thereof review such audit, including any
comments or recommendations of the independent auditors.
o Review with the independent auditors, and financial and
accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the Corporation, and
solicit any recommendations for the improvement of such
internal control procedures or particular areas where new or
more detailed control or procedures are desirable. Particular
emphasis should be given to the adequacy of such internal
controls to expose any payments, transactions, or procedures
that might be deemed illegal or otherwise improper. Further,
the committee periodically should review company policy
statements to determine their adherence to the code of
conduct.
o Review the proposed audit plans for the coming year, and the
coordination of such plans with the independent auditors.
o Review the financial statements contained in the annual report
on Form 10-K and interim financial statements contained in the
quarterly reports on Form 10-Q with management and the
independent auditors to determine that the independent
auditors are satisfied with the disclosure and content of the
financial statements to be presented to the shareholders. If
the quarterly report states that the interim financial
statements have been reviewed by the independent auditors, the
Committee shall obtain a report of such review from the
independent auditors and provide for such report to be
included in the quarterly report. Any changes in accounting
principles should be reviewed.
o In reviewing the financial statements contained in the annual
report on Form 10-K, the Committee shall provide the board of
directors with a written report stating whether:
i) The Committee reviewed and discussed the audited
financial statement with management;
ii) The Committee has discussed with the independent
auditors the matters required to be discussed by SAS
61 (Codification of Statements on Auditing
Standards);
iii) The Committee has received the written disclosures
and the letter from the independent accountants
required by Independence Standards Board Standard No.
1, and has discussed with the independent accountant
the independent accountant's independence; and
iv) Based upon (i) through (iii), the Committee
recommended to the Board of Directors that the
audited financial statements be included in the
Corporation's Annual Report on Form 10-K for the last
fiscal year for filing with the SEC.
o Review all of the Corporation's filings with the SEC to ensure
that the rules and regulations relating to the Corporation's
financial statements are complied with.
o Provide sufficient opportunity for the independent auditors to
meet with the members of the Committee without members of
management present. Among the items to be discussed in these
meetings are the independent auditors' evaluation of the
Corporation's financial, and accounting auditing personnel,
and the cooperation that the independent auditors received
during the course of the audit.
o Review accounting and financial human resources and succession
planning within the Corporation.
o Submit the minutes of all meetings of the Committee to, or
discuss the matters discussed at each committee meeting with,
the board of directors.
o Investigate, within the scope of its duties, any matter
brought to its attention with the power to retain outside
counsel for this purpose, if, in its judgment, that is
appropriate.
o Comply with the rules and regulations regarding the
requirements of the Corporation's financial statements and of
the composition and conduct of an audit committee as may be
required by SEC regulations; applicable stock exchange
requirements or other applicable federal and state law.
APPENDIX B
PROPOSED AMENDMENTS TO
EP MEDSYSTEMS, INC.
2002 STOCK OPTION PLAN
The EP MedSystems, Inc. 2002 Stock Option Plan (the "Plan") is hereby amended as
follows:
1. The first sentence of Section 3.1 of the Plan is hereby amended and
restated in entirety as follows:
"Subject to adjustment pursuant to the provisions of Section 3.2 hereof,
the number of shares of Stock of the Company which may be issued and sold
or awarded under the Plan shall not exceed 1,000,000 shares."
2. Ratification. Except as expressly set forth in this First Amendment to the
Plan, the Plan is hereby ratified and confirmed without modification.
3. Effective Date. The effective date of this amendment to the Plan shall be
December 23, 2004, subject to stockholder approval.
EP MEDSYSTEMS, INC.
2002 STOCK OPTION PLAN
AS AMENDED BY FIRST AMENDMENT
1. DEFINITIONS
As used herein, the following terms shall have the meanings hereinafter
set forth unless the context clearly indicates to the contrary:
1.1 "Board" - The Board of Directors of the Company.
1.2 "Committee" - The Compensation Committee of the Company, being
comprised of two or more members of the Board appointed by the Board to
administer the Plan. The Committee shall consist solely of directors who are
"nonemployee directors" within the meaning of Regulation 16b-3 under Section 16
of the Securities Exchange Act of 1934, as such regulations may be amended from
time to time. To the extent feasible, the members of the Committee shall also be
"outside directors" as that term is defined in the Treasury Regulations under
Section 162(m) of the Code.
1.3 "Company" - EP MedSystems, Inc., a New Jersey corporation, and any
Subsidiary thereof.
1.4 "Code" - The United States Internal Revenue Code of 1986, as
from time to time amended.
1.5 "Eligible Participant" - Any person who is an officer, employee,
advisor or consultant of the Company as determined by the Committee.
1.6 "Fair Market Value" - The per share fair market value of the Stock
of the Company, determined by and in accordance with such valuation procedures
and methods as are established from time to time by the Committee in good faith
and in accordance with the provisions of the Code and any regulations
promulgated thereunder. In particular, Treasury Regulation 20.2031-2(c) provides
that fair market value may be determined by taking the mean between the bona
fide bid and ask prices on the valuation date, or if none, by taking a weighted
average of the means between the bona fide bid and asked prices on the nearest
trading date before and the nearest trading date after the valuation date, if
both such nearest dates are within a reasonable period; if such bid and ask
prices are unavailable, fair market value is to be determined by taking into
consideration the Company's net worth, prospective earning power and dividend
paying capacity and other relevant factors such as good will, economic outlook
in the Company's industry, the Company's position in the industry and its
management, the size of the block of stock to be valued, and the values of stock
of corporation engaged in the same or similar lines of business.
1.7 "Option" - An option to purchase Stock of the Company granted
pursuant to the provisions of the Plan. Options granted to officers and
employees may be either (a) Incentive Stock Options as defined in Section 422 of
the Code ("ISOs") or (b) non-statutory stock options ("NQSOs") or any
combination thereof at the discretion of the Committee. Options granted to
advisors and consultants shall be NQSOs. The status of each grant as an ISO or
NQSO shall be clearly set forth at the time of the grant of the Option,
provided, however, that in the event that the aggregate fair market value
(determined as of the date(s) of grant) of the shares of stock with respect to
which an ISO become exercisable for the first time by an Optionee exceeds
$100,000 in any calendar year, the Options with respect to the excess shares
will be NQSOs notwithstanding anything contained in the grant of the Option to
the contrary.
1.8 "Optionee" - The person to whom an Option has been granted
pursuant to the provisions of the Plan.
1.9 "Option Price" - The per share exercise price of the Stock
with respect to which an Option has been granted under the Plan.
1.10 "Plan" - The EP MedSystems, Inc. 2002 Stock Option Plan.
1.11 "Stock" - The common stock of the Company.
1.12 "Subsidiary" - Any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns
securities possessing 50% or more of the total combined voting power of all
classes of securities in one of the other corporations in such chain.
2. ESTABLISHMENT AND PURPOSE OF PLAN
2.1 Establishment of Plan. The Company hereby establishes the Plan to
reward and provide incentives for those Eligible Participants who are primarily
responsible for the future growth, development and financial success of the
Company or a Subsidiary.
2.2 Purpose of Plan. The purpose of the Plan is to advance the
interests of the Company and its shareholders by affording to Eligible
Participants of the Company an opportunity to acquire or increase their
proprietary interest in the Company by the grant to such Eligible Participants
of Options to purchase Stock in the Company pursuant to the terms of the Plan.
By encouraging such Eligible Participants to become owners of shares of Stock in
the Company, the Company seeks to motivate, retain and attract those highly
competent individuals upon whose judgment, initiative, leadership and continued
efforts the success of the Company in large measure depends.
2.3 Effective Date of Plan. The Plan shall become effective on the date
(the "Effective Date") of its adoption by the Board; provided, however, that no
Option intended to be an ISO shall be exercisable by an Optionee unless and
until the Plan shall have been approved by the shareholders of the Company
within 12 months before or after the date of adoption of the Plan by the Board.
2.4 Expiration of the Plan. Except with respect to Options then
outstanding, the Plan shall expire on the earliest to occur of (a) the tenth
anniversary of the date on which the Plan was adopted by the Board, (b) the
tenth anniversary of the date on which the Plan was approved by the shareholders
of the Company, or (c) the date as of which the Board, in its sole discretion,
determines to terminate the Plan (the "Expiration Date"). Any Options
outstanding as of the Expiration Date shall remain in effect until they have
been exercised or have terminated or expired by their respective terms or as
otherwise provided under the Plan.
3. STOCK SUBJECT TO PLAN
3.1 Limitations. Subject to adjustment pursuant to the provisions of
Section 3.2 hereof, the number of shares of Stock of the Company which may be
issued and sold or awarded under the Plan shall not exceed 1,000,000 shares.
3.2 Adjustments.
(a) Anti-Dilution. In the event that the outstanding shares of
Stock of the Company are hereafter changed or converted into, or exchanged or
exchangeable for, a different number or kind of shares or other securities of
the Company or of another corporation by reason of a reorganization, merger,
consolidation, recapitalization, reclassification, combination of shares, stock
dividend, stock split or reverse stock split, appropriate adjustment shall be
made in the number of shares and kind of stock which may be granted subject to
the provisions of Section 3.1, and subject to unexercised Options, to the end
that the Optionee's proportionate interest shall be maintained as before the
occurrence of such event.
(b) Non-survival of the Company. In the event of a dissolution
or liquidation of the Company or any merger or combination in which the Company
is not a surviving corporation, each outstanding Option granted hereunder shall
terminate, but the Optionee shall have the right, immediately prior to such
liquidation, dissolution, merger or combination, to exercise his or her Option,
in whole or in part, to the extent that such Option is then otherwise
exercisable and has not previously been exercised, provided, however, that no
adjustment shall be made to an ISO which would constitute a "modification" of
such Option, as such term is defined in Section 424(h)(3) of the Code.
3.3 Effect of Exercise or Termination of Option. Shares of Stock with
respect to which an Option granted under the Plan shall have been exercised
shall not again be available for grant under the Plan. In the event that Options
granted under the Plan shall terminate, expire or be canceled for any reason
without being wholly exercised, new Options may be granted under the Plan with
respect to shares of Stock covered by the unexercised portion of such
terminated, expired or canceled Options, all of which may be granted as ISOs.
3.4 Character of Shares. The shares of Stock issuable upon exercise of
an Option granted under the Plan may be (i) authorized but unissued shares of
Stock, (ii) shares of Stock held in the Company's treasury, or (iii) a
combination of both.
3.5 Reservation of Shares. The number of shares of Stock reserved by
the Company for issuance under the Plan shall at no time be less than the
maximum number of shares which may be purchased at any time pursuant to
outstanding Options.
4. ADMINISTRATION OF THE PLAN
4.1 Administration by Committee. Options under the Plan shall be
granted and the Plan shall be administered by the Committee or such other
committee as the Board of Directors of the Company shall determine in its
discretion. If no committee is appointed, reference to the "Committee" shall be
deemed to refer to the Board of Directors of the Company.
4.2 Powers and Duties. Subject to the provisions of the Plan, the
Committee shall have sole discretion and authority to determine the Eligible
Participants to whom Options shall be granted, the number of shares to be
covered by any such Option, and the time or times at which any Option may be
granted or exercised. The Committee shall also have complete authority to
interpret the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine the details and provisions of each Option
Agreement executed pursuant to the Plan, and to make all other determinations
necessary or advisable in the administration of the Plan.
4.3 Quorum and Majority Rule. A majority of the then members of the
Committee shall constitute a quorum and any action taken by a majority present
at a meeting at which a quorum is present or any action taken without a meeting
evidenced by a writing executed by all of the members of the Committee, as the
case may be, shall constitute the action of the Committee.
4.4 Liability of Committee. No member of the Committee shall be liable
for any action, determination or interpretation under any provision of the Plan
or otherwise if such action, determination or interpretation was done or made in
good faith by such member of the Board or Committee.
5. OPTIONS GRANTED UNDER THE PLAN
5.1 Grant of Options. Options shall be granted only to Eligible
Participants. An Eligible Participant may be granted one or more Options. Each
Option granted under the Plan shall be evidenced by a writing addressed to the
Optionee and dated as of the date that the Option is granted by the Committee
(an "Option Agreement"). The Option Agreement shall contain such terms and
conditions as shall be determined by the Committee, consistent with the Plan.
5.2 Participation Limitation. The aggregate Fair Market Value of the
Stock with respect to which Incentive Stock Options become exercisable for the
first time by any Optionee in any calendar year shall not exceed $100,000. The
aggregate Fair Market Value of the Stock with respect to which Options are
granted shall be determined as of the date or dates the Options are granted and
the foregoing provisions shall be applied by aggregating all Incentive Stock
Options granted to an Optionee by the Company.
5.3 Option Price. The Option Price of the Stock subject to each Option
shall be determined by the Committee, provided, however, that in the case of an
Incentive Stock Option the Option Price shall not be less than 100%, or, in the
case of an Incentive Stock Option granted to an individual who, immediately
after the grant, would own, within the meaning of Section 424(d) of the Code,
more than 10% of the voting stock of the Company, 110%, of the Fair Market Value
of the Stock on the date the Option is granted.
5.4 Option Exercise Period. The period during which any Option granted
under the Plan may be exercised shall not be more than ten years or, in the case
of an Incentive Stock Option granted to an individual who, immediately after the
grant, would own more than 10% of the voting stock of the Company, five years,
from the date of grant of the Option.
5.5 Option Exercise.
(a) Procedure for Exercise. An Option granted pursuant to the
Plan shall be exercisable, in whole or in part, at such time or times or within
such period or periods, or upon the occurrence of such event or events, as shall
be determined by the Committee and set forth in the Option Agreement. If an
Option is not at the time of grant immediately exercisable in full, the
Committee may (i) in the Option Agreement evidencing such Option provide for the
acceleration of the exercise date or dates of such Option, in whole or in part,
upon the occurrence of specified events, or (ii) at any time prior to the
complete expiration of an Option, accelerate, in whole or in part, the exercise
date or dates of the Option. Exercise shall be effected prior to the termination
of the Option by delivery by the Optionee of written notice to the Company
specifying the number of shares of Stock to be purchased accompanied by full
payment for such shares of Stock. The right of exercise shall be cumulative.
Full payment shall be in cash, or at the discretion of the Committee, by the
Optionee's note payable over such period of time, at such rate of interest and
in form and substance as shall be satisfactory to the Committee.
(b) Restrictions on Exercise.
(i) No Option by its terms shall be exercisable after
the expiration of ten years from the date such Option is
granted.
(ii) No Option may be exercised at a time when the
exercise thereof or the issuance or transfer of shares upon
such exercise would, in the opinion of the Committee,
constitute a violation of any law, federal, state, local or
foreign, or any regulations thereunder, or the requirements of
the Nasdaq Stock Market or any other national securities
exchange or market.
(iii) No Option granted pursuant to the Plan may be
assigned or otherwise transferred by an Optionee and shall be
exercisable during the lifetime of the Optionee only by him or
her.
(iv) The Committee, in its discretion, may require an
Optionee to (A) represent in writing that the shares of Stock
to be received upon exercise of an Option are being acquired
for his or her own account for investment and not with a view
to distribution thereof, nor with any present intention of
distributing the same, and (B) make such other representations
and warranties as are deemed necessary by counsel to the
Company. Unless Shares issuable upon the exercise of Options
are registered by the Company, stock certificates representing
shares of Stock not registered under the Securities Act of
1933, as amended (the "1933 Act"), acquired upon the exercise
of Options shall bear a legend in substantially the following
form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT
BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY
HAVE BEEN REGISTERED UNDER SUCH ACT AND ALL SUCH
APPLICABLE LAWS OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE."
(v) No Option may be exercised for any fractional
share.
(c) Vesting.
(i) Any Options granted pursuant to this Plan shall
vest and be exercisable according to the terms hereof at such
times and under such conditions as determined by the Committee
or as set forth in the Optionee's Option Agreement.
(ii) The Committee may, in its discretion, as to
outstanding Options (A) accelerate the exercise date or dates
of the Options pursuant to Section 5.5(a) hereof, (B) upon
written notice to the holders thereof, provided the Options
have been accelerated pursuant to Clause (A) above, terminate
all such Options prior to the consummation of a transaction
unless exercised within a prescribed period, (C) provide for
payment of an amount equal to the excess of the Fair Market
Value, as determined by the Committee, over the Option Price
of such shares as of the date of a transaction, in exchange
for the surrender of the right to exercise such Options, or
(D) provide for the assumption of such Options, or the
substitution therefor of new Options, by a successor
corporation or entity, provided, however, that with respect to
ISOs, the requirements of Section 424 of the Code shall be
met.
5.6 Termination of Option.
(a) Expiration or Termination of Employment. Except as
specifically provided in Section 3.2(b) and Sections 5.6(b) and 5.6(c) hereof,
the Options granted hereunder shall terminate as of the close of business on the
earliest to occur of the date of (i) expiration of the Exercise Period, (ii) an
event of default or breach by an Optionee of the terms and conditions of the
grant of the Option, or (iii) termination of an Optionee's employment or
engagement as an agent or consultant with the Company for cause. If an
Optionee's employment is terminated other than for cause, death (as provided in
subsection (b) below) or retirement or disability (both as provided in
subsection (c) below), the Optionee must exercise his or her Option, if at all
and only to the extent the Option is exercisable at termination, within 30 days
from the date of such termination, in accordance with the terms of the Plan.
(b) Death of Optionee. In the event that an Optionee dies
prior to the exercise of his or her Option in full, the Option may be exercised
by the Optionee's executors, administrators or heirs within one year after the
date of the Optionee's death, provided such death occurred during the Optionee's
employment or engagement as an agent or consultant with the Company or within
three months following the termination of his or her employment with the Company
by reason of the Optionee's retirement after reaching the age of 65 years or the
Optionee's retirement after becoming permanently disabled. Such Option may be so
exercised by the Optionee's executors, administrators or heirs only with respect
to that number of shares of Stock which the Optionee had an Option to purchase
and which Option was exercisable (but had not theretofore been exercised) as of
the date of the earlier of the (i) retirement of the Optionee after reaching the
age of 65 years or after becoming permanently disabled, or (ii) death of the
Optionee. In no event may the Option be exercised at any time after the
expiration of the Option Exercise Period set forth in Section 5.4 hereof.
(c) Retirement or Disability. If an Optionee's employment with
the Company is terminated prior to the exercise of his or her Option in full, by
reason of the Optionee's retirement after reaching the age of 65 years or by
reason of the Optionee's retirement after becoming permanently disabled, the
Optionee shall have the right, during the period ending three months after the
date of his or her termination of employment, to exercise the Option. Such
Option may be exercised by the Optionee only with respect to that number of
shares of Stock which the Optionee had an Option to purchase and which Option
was exercisable (but had not theretofore been exercised) as of the date of the
earlier of (i) the retirement of the Optionee after reaching the age of 65
years, or (ii) the date the Optionee becomes permanently disabled. In no event
may the Option be exercised at any time after the expiration of the Option
Exercise Period set forth in Section 5.4 hereof.
5.7 Rights as Shareholder. An Optionee shall have no rights as a
shareholder of the Company with respect to any shares of Stock subject to an
Option prior to purchase of such shares of Stock by exercise of such Option as
provided in the Plan.
5.8 Right of the Company to Terminate Employment. Nothing contained in
the Plan or any Option granted under the Plan shall confer on an Optionee any
right to continued employment by the Company or interfere in any way with the
right of the Company or a Subsidiary to terminate an Optionee's employment with
it any time for any reason or for no reason.
6. DELIVERY OF STOCK CERTIFICATES
6.1 Delivery of Stock Certificates. The Company shall not be required
to issue or deliver any certificate for shares of Stock purchased upon the
exercise of all or any portion of any Option granted under the Plan prior to the
fulfillment of any of the following conditions which may, from time to time, be
applicable to the issuance of the Stock:
(a) Listing of Shares. The admission of such shares of Stock
to listing on (i) all stock exchanges on which the Stock of the Company is then
listed or (ii) the Nasdaq Stock Market.
(b) Registration and/or Qualification of Shares. The
completion of any registration or other qualification of such shares of Stock
under any federal or state securities laws or under the regulations promulgated
by the Securities and Exchange Commission or any other federal or state
governmental regulatory body, which the Committee shall deem necessary or
advisable. The Company shall in no event be obligated to register any securities
pursuant to the Securities Act of 1933, as amended, or to take any other action
in order to cause the issuance and delivery of such certificates to comply with
any such law, regulations or requirement.
(c) Approval or Clearance. The obtaining of any approval or
clearance from any federal or state governmental agency which the Committee
shall determine to be necessary or advisable.
(d) Reasonable Lapse of Time. The lapse of such reasonable
period of time following the exercise of the Option as the Committee may
establish from time to time for reasons of administrative convenience.
7. TERMINATION, AMENDMENT AND MODIFICATION OF PLAN
7.1 Termination, Amendment and Modification of Plan. The Board may at
any time terminate, modify or amend the Plan; provided, however, that if the
approval of the shareholders of the Company shall be required for any
modification or amendment under Section 422 of the Code, with respect to ISOs,
or under Rule 16b-3 under the Securities Exchange Act of 1934, as amended, with
respect to shares of Stock registered under such Act, such approval shall be
obtained before such modification or amendment shall become effective. Subject
to the foregoing, the Board may (i) modify the requirements for eligibility for
participation or change the class of Eligible Participants to whom Options may
be granted under the Plan; (ii) increase the benefits accruing to Eligible
Participants with respect to Options granted under the Plan or (iii) terminate
the Plan at any time or amend or modify the Plan at any time or from time to
time provided, however, that no such action of the Board shall do any of the
following:
(a) Increase Number of Shares. Except as contemplated in
Section 3.2 of the Plan, increase the total number of shares of Stock subject to
the Plan without the approval of shareholders.
(b) Change Terms of Outstanding Options. Change the Option
Price or otherwise alter or impair any Option previously granted to an Optionee
under the Plan without the consent of the Optionee.
Notwithstanding the foregoing, no termination, modification or
amendment of the Plan may, without the consent of an Optionee, adversely affect
his or her rights under an option previously granted to such Optionee.
8. MISCELLANEOUS
8.1 Plan Binding on the Successors. The Plan shall be binding upon
the successors and assigns of the Company.
8.2 Withholding Taxes. The Company may deduct from any cash payments
due to an Optionee upon exercise of an Option any federal, state or local
withholding taxes and employment taxes relating thereto or, as a condition of
delivery of any shares subject to Option due upon such exercise, require the
Optionee to remit, or, in appropriate cases, agree to remit when due, an amount
sufficient to satisfy such taxes; provided, however, that, subject to the prior
approval of the Committee, the Optionee may, in whole or in part, satisfy such
obligations (a) by permitting the Company to withhold some or all of the shares
subject to Option, or (b) by delivering shares of Stock already owned by him or
her. Shares so withheld or delivered shall have a fair market value, as
determined by the Committee, equal to such obligations as of the date or dates
the amounts of such taxes are required to be determined. At the time of any
disqualifying disposition, the Optionee shall remit to the Company in cash the
amount of any such taxes relating to such disposition.
8.3 Governing Law. The validity and construction of the Plan and the
Option Agreements shall be construed in accordance with and governed by the law
of the State of New Jersey.
APPENDIX C
----------
AMENDMENT TO
EP MEDSYSTEMS, INC.
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
The proposed amendment to the Amended Certificate consists of deleting the first
paragraph of Article THIRD and inserting the following paragraph in lieu
thereof:
"The total number of shares of stock which the corporation shall have
authority to issue is Forty-Five Million (45,000,000), to be divided into two
classes designated as "Common Stock" and "Preferred Stock". The corporation
shall be authorized to issue (a) Forty Million (40,000,000) shares of Common
Stock, without par value, and (b) Five Million (5,000,000) shares of Preferred
Stock, without par value."
REVOCABLE PROXY
EP MEDSYSTEMS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON DECEMBER 22, 2004.
The undersigned hereby appoint(s) Matthew C. Hill and Reinhard Schmidt, as
proxies, each with full power of substitution, to represent and vote as
designated all shares of Common Stock and Series A Preferred Stock of EP
MedSystems, Inc. held of record by the undersigned on December 1, 2004 at the
annual meeting of shareholders of EP MedSystems to be held at 120 West 45th
Street, 20th Floor, New York, New York, at 10:00 a.m., eastern standard time, on
December 22, 2004, with authority to vote upon the matters listed on this proxy
card and with discretionary authority as to any other matters that may properly
come before the meeting or any adjournment or postponement thereof.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE. [X]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR THE NOMINEES" IN ITEM 1 AND "FOR"
ITEMS 2 AND 3.
FOR WITHHOLD AUTHORITY
THE NOMINEE TO VOTE FOR THE NOMINEE
1. ELECTION OF DIRECTORS
CLASS III NOMINEES:
ABHIJEET LELE [ ] [ ]
DAVID A. JENKINS [ ] [ ]
VOTE VOTE
FOR AGAINST ABSTAIN
--- ------- -------
2. APPROVAL OF AMENDMENT TO THE 2002
STOCK OPTION PLAN [ ] [ ] [ ]
VOTE VOTE
FOR AGAINST ABSTAIN
--- ------- -------
3. APPROVAL OF THE AMENDMENT TO THE [ ] [ ] [ ]
AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION
- ------------------------------------
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE SHAREHOLDER IN
THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR THE
NOMINEES" IN ITEM 1, "FOR" ITEM 2 AND "FOR" ITEM 3.
YES NO
I PLAN TO ATTEND THE ANNUAL MEETING [ ] [ ]
IMPORTANT -- PLEASE BE SURE TO DATE AND SIGN THIS PROXY BELOW.
SIGNATURE(S):_____________________________________ DATE _________________
SHAREHOLDER SIGNATURE
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. ATTORNEYS, TRUSTEES, EXECUTORS AND OTHER FIDUCIARIES ACTING IN A
REPRESENTATIVE CAPACITY SHOULD SIGN THEIR NAMES AND GIVE THEIR TITLES. AN AUTHORIZED PERSON SHOULD SIGN ON BEHALF OF CORPORATIONS,
PARTNERSHIPS, ASSOCIATIONS, ETC. AND GIVE HIS OR HER TITLE. IF YOUR SHARES ARE HELD BY TWO OR MORE PERSONS, EACH PERSON MUST SIGN.
RECEIPT OF THE NOTICE OF MEETING AND PROXY STATEMENT IS HEREBY ACKNOWLEDGED.
PLEASE ACT PROMPTLY
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY