AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CATHETER TECHNOLOGY GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 3845 52-2123035
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(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification Identification
code number) Number)
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3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164
(904) 445-5450
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(Address, including zip code, and
telephone number, including
area code, of Registrant's
principal executive
offices)
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ALAN J. RABIN
CHIEF EXECUTIVE OFFICER AND PRESIDENT
CATHETER TECHNOLOGY GROUP, INC.
3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164
(904) 445-5450
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(Address and Telephone Number of
Principal Executive Offices and Principal Place of Business)
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COPY TO:
RANDOLPH H. FIELDS, ESQ.
GREENBERG TRAURIG, P.A.
111 NORTH ORANGE AVENUE, 20TH FLOOR
ORLANDO, FLORIDA 32801
TELEPHONE: (407) 420-1000
FACSIMILE: (407) 420-5909
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
THE PUBLIC: As soon as possible after this Registration
Statement becomes effective.
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If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<TABLE>
<CAPTION>
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS AMOUNT TO BE PROPOSED OFFERING PROPOSED AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE PER SHARE OFFERING PRICE(1) REGISTRATION FEE
REGISTERED
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<S> <C> <C> <C> <C>
Common Stock, $.10 par value 650,000 shares $ 6.125 $3,981,250.00 $1,174.47
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 (a) under the Securities Act.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PUBLIC OFFERING PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 15, 1998
CATHETER TECHNOLOGY GROUP, INC.
COMMON STOCK
MAXIMUM - 650,000 SHARES
MINIMUM - 390,245 SHARES
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This is a public offering of shares of common stock of Catheter Technology
Group, Inc. We were formed for the purpose of becoming a holding company by
acquiring, through a restructuring and a merger, all of the common stock of two
medical device manufacturers, one which designs, manufactures and sells
implantable cardiac pacemakers and pacemaker leads, and the other which designs,
manufactures and sells cardiac catheter related products, used in connection
with the diagnosis and treatment of illnesses of the heart and circulatory
system. The restructuring and the merger will result in the two medical device
manufacturers becoming operating subsidiaries of Catheter Technology Group, Inc.
Catheter Technology Group, Inc. has never conducted any business other than
matters related to its formation and initial organization.
We are offering a minimum of 390,245 shares and a maximum of 650,000 shares
on a "best efforts" basis. All funds received from sales of shares will be
deposited in an escrow account and will not be released unless certain
conditions have been met within 60 days of the date of this prospectus. It is
expected that the price range per share of common stock will be between $5.125
and $6.125. See "PLAN OF DISTRIBUTION."
We intend to file an application with the Philadelphia Stock Exchange or
other regional exchange to list the common stock. There is currently no public
market for the common stock. The market price of the shares after this offering
may be higher or lower than the public offering price. We expect to engage the
assistance of independent broker-dealers to sell the shares. Participating
dealers will receive a sales commission of up to 10%, and a non-accountable
expense allowance of 3%, of the gross proceeds of sales they make.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK . SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER
BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD WITH THIS PROSPECTUS.
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PRICE TO PROCEEDS
PUBLIC COMMISSIONS TO CTG
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Per Share................................. $ $ $
Total Minimum (390,245 shares)............ $ $ $
Total Maximum (650,000 shares)............ $ $ $
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_______________, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS...........................2
PROSPECTUS SUMMARY......................................................3
RISK FACTORS............................................................6
USE OF PROCEEDS........................................................16
DIVIDEND POLICY........................................................17
CAPITALIZATION.........................................................18
DILUTION...............................................................19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA..............20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................24
MERGER.................................................................37
RESTRUCTURING MERGER...................................................39
BUSINESS...............................................................40
MANAGEMENT.............................................................63
EXECUTIVE COMPENSATION.................................................66
CERTAIN TRANSACTIONS...................................................70
PRINCIPAL SHAREHOLDERS.................................................72
DESCRIPTION OF SECURITIES..............................................74
SHARES ELIGIBLE FOR FUTURE SALE........................................76
PLAN OF DISTRIBUTION...................................................78
LEGAL MATTERS..........................................................79
EXPERTS................................................................79
AVAILABLE INFORMATION..................................................80
INDEX TO FINANCIAL STATEMENTS.........................................F-1
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Prospectus discuss future
expectations, contain statements about anticipated results of operations or
financial condition or state other "forward-looking" information. When used in
this Prospectus, the words "may," "will," "intends," "plans," "expects,"
"anticipates," "estimates," and similar expressions are intended to identify
forward-looking statements. The forward-looking statements included in this
Prospectus are subject to known and unknown risks and uncertainties. CTG's
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "RISK FACTORS"
as well as those discussed elsewhere in this Prospectus. Investors are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Prospectus. CTG undertakes no obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Prospectus or to reflect the occurrence of
unanticipated events.
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PROSPECTUS SUMMARY
Please read all of this Prospectus carefully. It describes our company,
finances and products. Federal and state securities laws require that we include
in this Prospectus all important information that investors will need to make an
investment decision. You should rely only on the information contained in this
Prospectus to make your investment decision. We have not authorized anyone to
provide you with information that is different from what is contained in this
Prospectus. The following is a summary of certain information (including
financial statements and notes thereto) contained in this Prospectus and is
qualified in its entirety by the more detailed information appearing elsewhere
herein.
UNLESS THE CONTEXT OTHERWISE INDICATES, ALL SHARE AND PER SHARE DATA WITH
RESPECT TO THE COMMON STOCK, $.10 PAR VALUE PER SHARE, OF CTG (THE "CTG COMMON
STOCK") HAS BEEN ADJUSTED TO REFLECT THE REVERSE SPLIT (DISCUSSED BELOW).
SIMILARLY, UNLESS OTHERWISE INDICATED HEREIN, ALL REFERENCES TO COMMON STOCK
ISSUABLE IN CONNECTION WITH OPTIONS, WARRANTS, DEBENTURES OR OTHER DERIVATIVE
SECURITIES OF CARDIAC AND ELECTRO GIVE EFFECT TO THE REVERSE SPLIT AND ASSUME
CONSUMMATION OF THE RESTRUCTURING MERGER AND THE MERGER.
THE COMPANY
Catheter Technology Group, Inc. ("CTG") was incorporated on September 9,
1998 under the laws of the State of Delaware and was organized as a direct,
wholly-owned subsidiary of Cardiac Control Systems, Inc., a Delaware corporation
("Cardiac"), for the purpose of restructuring into a holding company which is
intended to hold both Cardiac and Electro-Catheter Corporation, a New Jersey
corporation ("Electro"). It is intended that through the merger of a
wholly-owned subsidiary of CTG with and into Cardiac (the "Restructuring
Merger"), Cardiac will become a wholly-owned subsidiary of CTG. It is further
intended that through the merger of a wholly-owned subsidiary of Cardiac with
and into Electro (the "Merger"), Electro will become an indirect, wholly-owned
subsidiary of CTG and a direct, wholly-owned subsidiary of Cardiac. The result
of the Restructuring Merger and the Merger will be the formation of a holding
company, CTG, which holds two operating companies, Cardiac and Electro. It is a
condition to the Merger that, prior to the Merger, Cardiac will effectuate a
one-for-five reverse stock split (the "Reverse Split") of its common stock, $.10
par value per share as part of the Restructuring Merger.
The consummation of the offering of CTG Common Stock offered hereby is
intended to occur concurrently with, and is conditioned upon, the consummation
of the Restructuring Merger and the Merger. CTG has never conducted any business
other than matters related to its formation and initial organization. There has
been no public trading market for the CTG Common Stock. Cardiac and Electro both
have operating histories and have been listed in the Nasdaq Small Cap Market
prior to Cardiac's delisting in 1991 and Electro's delisting in 1997. The
information contained in this Prospectus relates to Cardiac, Electro and CTG.
PURPOSE OF THE MERGER AND RESTRUCTURING MERGER. CTG expects that the
consolidation of Cardiac and Electro with their related product lines will (i)
afford CTG the opportunity to improve operations and performance through the
realization of operating synergies and cost savings, (ii) facilitate the
commercialization of electrophysiology and other rhythm-management products from
their existing products and new products developed by them, and (iii) serve as a
"platform" to acquire or consolidate additional related products or other
companies with related products. The cardiac catheter market is comprised of a
large number of specialty niche companies, each with existing revenues and
proprietary technologies that allow them to compete in selected segments.
However, these companies are hindered due to their size, market valuations and
other factors, in their efforts to compete effectively in their market and to
raise capital. CTG believes that the Merger will provide a platform to
consolidate several of these companies into a larger entity that could
capitalize on CTG's existing management and manufacturing capabilities,
operating synergies, and a larger revenue and technology base.
CARDIAC. Cardiac was incorporated as Supramedics, Inc. on June 20, 1980
under the laws of the State of Delaware, and on August 28, 1980 changed its name
to Cardiac Control Systems, Inc. Cardiac is engaged in the design, development,
manufacture, marketing and sale of implantable leads and cardiac pacing systems,
as well as the design, development and manufacture of leads for use as
components in the products of other companies on an original equipment
manufacturing ("OEM") basis. These systems consist of single-chamber,
dual-chamber and
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single-lead atrial-controlled ventricular cardiac pacemakers together with
connecting electrode leads and equipment for the external programming and
monitoring of the pacemakers. Cardiac has received classification (clearance)
from the United States Food and Drug Administration ("FDA") to distribute
commercially products consisting of a line of single-chamber and dual-chamber
pacemaker systems and a single-lead atrial-controlled ventricular cardiac pacing
system. The equipment used for the external programming and monitoring of
Cardiac's pacemaker products is usually loaned without charge to physicians and
other purchasers of Cardiac's products. Cardiac's products are "medical devices"
as defined by the FDA and thus are subject to Federal regulations enforced by
the FDA, including restrictions on the commercial introduction of products and
clinical testing requirements.
The common stock of Cardiac (the "Cardiac Common Stock"), which
historically was listed on the Nasdaq SmallCap Market, was delisted effective
August 30, 1991 as a result of non-compliance with Nasdaq SmallCap Market's
capital and surplus requirement then in effect. However, the Cardiac Common
Stock is currently quoted on the OTC Bulletin Board. Upon consummation of the
Restructuring Merger, each outstanding share of Cardiac will be converted into
one share of CTG (after giving effect to Cardiac's Reverse Split). As a result,
the Cardiac Common Stock will no longer be traded on the OTC Bulletin Board.
ELECTRO. Electro was incorporated in New Jersey in 1961. Electro is engaged
in the business of design, development, manufacture, marketing and sale of
catheters and related devices utilized in connection with illnesses of the heart
and circulatory system. Catheters are hollow tubes that can be passed through
veins, arteries and other anatomical passageways. Electro has targeted
electrophysiology as its focal area for future growth, but intends to maintain
and develop products for the emergency care, invasive and non-invasive
cardiology and invasive radiology markets. Electro is also seeking to expand its
OEM business to capitalize on its catheter technology expertise and its
manufacturing capabilities. Electro produces a wide range of catheter products
intended to be utilized by doctors and other trained hospital personnel for
diagnostic as well as therapeutic purposes. Like Cardiac, the products of
Electro are "medical devices" within the meaning of the Federal Food, Drug and
Cosmetics Act, as amended (the "FDA Act"), and are subject to the Federal
regulations enforced by the FDA, including restrictions on the commercial
introduction of products and clinical testing requirements relative to the
marketing thereof. Electro has received FDA authorization to market its
principal existing products or is exempt from authorization requirements, as
provided by law, for certain devices already in existence prior to amendment of
the FDA Act.
The common stock of Electro (the "Electro Common Stock"), which
historically was listed on the Nasdaq SmallCap Market, was delisted effective
August 28, 1997 as a result of non-compliance with the Nasdaq SmallCap Market
bid price requirement then in effect. However, Electro is currently quoted on
the OTC Bulletin Board. Upon consummation of the Merger, each outstanding share
of Electro Common Stock will be converted into one-fifth of a share of CTG
Common Stock. Thus, the Electro Common Stock will no longer be traded on the OTC
Bulletin Board.
CTG. Before consummation of the Merger, CTG, as the parent holding company
of Cardiac, intends to apply to list its shares on the Philadelphia Stock
Exchange (the "Philadelphia Exchange") or other regional exchange. Prior to the
transactions contemplated herein, there has been no public market for the CTG
Common Stock and there can be no assurance that CTG will be able to list its
shares on the Philadelphia Exchange or other exchange, or, if listed, it can
maintain its listing.
CTG's principal executive offices are located at 3 Commerce Boulevard, Palm
Coast, Florida 32164, (904) 445-5450.
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<CAPTION>
THE OFFERING
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Securities offered........................... 650,000 shares of CTG Common Stock (maximum).
390,245 shares of CTG Common Stock (minimum).
Shares outstanding after the offering
("assuming the sale of maximum number
of shares")............................... 2,457,826 shares (maximum).(1)
Shares outstanding after the offering
("assuming the sale of minimum number
of shares")............................... 2,198,071 shares (minimum).(1)
Use of Proceeds.............................. We intend to use the offering proceeds for repayment of certain
debt, deferred salaries to officers, expenses of the
Restructuring Merger and the Merger, working capital and
general corporate purposes.
Risk Factors................................. You should read the "Risk Factors" section beginning on page 6,
as well as other cautionary statements throughout the entire
prospectus, to ensure you understand the risks associated with
an investment in our stock.
Proposed Philadelphia Exchange (or other
regional exchange) Symbol.................. To be announced.
</TABLE>
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(1) Excludes (i) 412,997 shares issuable upon the exercise of stock options and
warrants outstanding and exercisable as of the date of this Prospectus,
(ii) 13,953 shares accrued but unissued for director fees, (iii) 150,000
shares issuable upon conversion of debentures outstanding and convertible
upon the consummation of the Merger; and (iv) 151,515 shares issuable upon
conversion of 1,000 shares of Series A Preferred Stock of Electro at a
conversion rate of $1,000,000 divided by 120% of the per share offering
price (120% would be $6.60 per share assuming an offering price of $5.50
per share).
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RISK FACTORS
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, SHOULD BE
CONSIDERED CAREFULLY BEFORE PURCHASING SHARES OF CTG COMMON STOCK. EXCEPT FOR
THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES,
SUCH AS STATEMENTS OF CTG'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE
TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. CTG'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 2 OF THIS PROSPECTUS.
HISTORY OF OPERATING LOSSES; GOING CONCERN QUALIFICATION
Cardiac and Electro, the operating companies to be held by CTG after the
Merger, have had a history of net losses, have experienced cash flow
deficiencies, and have, at times, been unable to pay many of their respective
obligations as they became due.
Cardiac incurred net losses of $1,239,710 and $881,240 for the fiscal years
ended March 31, 1998, and 1997, respectively. At March 31, 1998, Cardiac had an
accumulated deficit of $21,901,927. In addition, Cardiac, at various times, was
delinquent in paying suppliers. Cardiac's cash shortages, at times, impaired its
ability to purchase components, causing production delays that resulted in
backorders and lost sales. Cash shortages also prevented Cardiac from enlarging
its sales organization and conducting aggressive marketing and advertising
campaigns. As a result, Cardiac's auditors have noted in their report that
Cardiac has experienced significant operating losses and an accumulated deficit
which raise substantial doubt about Cardiac's ability to continue as a going
concern.
Similarly, Electro incurred net losses of $851,109, $1,354,942 and $892,940
for the nine months ended May 31, 1998 and the fiscal years ended August 31,
1997 and 1996, respectively. At May 31, 1998, Electro had an accumulated deficit
of $12,307,768. Electro, at times, has been unable to timely pay its vendors,
resulting in delays in the delivery of certain product components. The delivery
delays caused backorders, delayed shipments to customers and could ultimately
result in the loss of sales should customers turn to Electro's competitors.
Electro believes that significant sales have not been lost to date, but there
can be no assurance that future sales will not be adversely affected. Electro's
auditors have reported that recurring losses from operations and limited working
capital resources raise substantial doubt about Electro's ability to continue as
a going concern and have qualified Electro's financial statements by the
assumption that Electro will continue as a going concern without including any
adjustment which might result from the outcome of this uncertainty.
The closing of the Merger is contingent upon CTG obtaining sufficient
financing from this offering and other sources, in combination, to fund the
operations of Cardiac and Electro post-Merger. There are many events and factors
in connection with the development, manufacture and sale of Cardiac's and
Electro's products over which they have little or no control, including, without
limitation, vendor and production delays, marketing difficulties, lack of market
acceptance and superior competitive products. Therefore, there can be no
assurance that, even with the proceeds from this offering and other financing,
CTG will be profitable or will be able to generate sufficient revenues to
satisfy the cash flow requirements of the operations of Cardiac and Electro.
Further, the Merger may result in the recording of a patent on CTG's financial
statements, the amortization of which would reduce reported earnings in
subsequent years. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Results of Operations -- Cardiac," and
"-- Electro".
RISKS ASSOCIATED WITH INTEGRATION OF OPERATIONS
Realization of the anticipated benefits of the Merger will depend, in part,
upon the efficient and effective integration of the operations of Cardiac and
Electro. The inability to successfully combine each company's senior
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management or the loss of the services of one or more key persons could have a
material adverse effect on CTG. The senior management of CTG and its
subsidiaries also must continue to attract and retain qualified management level
employees and continue to motivate employees in light of organizational changes
resulting from the Merger. The integration of Cardiac and Electro will require
the dedication of management resources which may distract attention from the
day-to-day operations of CTG and its subsidiaries. The diversion of management's
attention required for successful completion of the integration process, as well
as any other difficulties which may be encountered in the transition and
integration process, such as unforeseen capital and operating expenses or other
difficulties and complications and unanticipated delays frequently encountered
in connection with the expansion and integration of acquired operations, could
have an adverse effect on the revenue and operating results of CTG. See
"BUSINESS" and "MANAGEMENT."
UNCERTAINTY OF SUCCESS OF CTG'S INITIATIVES
It is anticipated that CTG will pursue a number of strategic initiatives
that either have not been pursued or have not been fully commercialized by
either Cardiac or Electro to date, including, among others, a single-lead DDD
system, a single-pass pace monitor and defibrillation lead, an atrial
fibrillation ablation system and a temporary cardioversion lead. Such
initiatives will involve the risks associated with new businesses generally,
including, but not limited to, risks associated with marketing medical devices
and implementing such initiatives and engineering, design and construction risks
in constructing and operating new facilities. See "BUSINESS" and "MANAGEMENT."
DEBT OBLIGATIONS AND CONSEQUENCES OF DEFAULT
Upon consummation of the Restructuring Merger and the Merger, CTG will
have substantial debt obligations. As of September 30, 1998, Cardiac owed an
aggregate of approximately $3,461,296 (excluding accrued interest) to various
lenders. In addition, CTG will incur additional debt concurrently with this
offering. CTG plans to borrow approximately $1,500,000; however, in any event,
it will be required to borrow at least $700,000 to satisfy the $4.0 million
financing contingency for the Merger if the maximum offering is sold and up to
$2,000,000 to satisfy the $4.0 million financing contingency if less than the
maximum offering is sold. The terms of certain of Cardiac's existing
obligations, which CTG will assume, impose substantial restrictions on CTG's
ability to raise additional funds through stock sales or other loans. All of
Cardiac's property is subject to encumbrances. The terms of the loans vary and
include the requirements of (a) lender's consent to sell or encumber any of
Cardiac's property having a total value exceeding $25,000, (b) lender's consent
to incur in any year additional indebtedness exceeding $200,000, (c) various
recurring fees, and (d) lender's consent prior to merger, consolidation or
change in ownership of 20% or more of the outstanding stock. There is no
assurance that CTG will meet these debt obligations. Failure to meet these debt
obligations, or others, will result in a material adverse effect on the
operations of CTG. The terms of these debt obligations could impair CTG's
ability to raise additional funds through stock offerings or additional loans,
which could have a material adverse effect on CTG's business and results of
operations. See "BUSINESS - Business of Cardiac - - Debt Obligations."
POSSIBLE NEED FOR ADDITIONAL OPERATING CAPITAL; INCREASED LEVERAGE AND LESS
WORKING CAPITAL IF MAXIMUM OFFERING NOT ACHIEVED
Both Cardiac and Electro have a history of operating losses and have
essentially exhausted current capital resources. Cardiac's and Electro's capital
requirements in connection with carrying inventory and designing, developing and
marketing products have been significant, and, consequently, CTG's capital
requirements will be significant going forward. Although the closing of the
Merger is contingent upon the obtaining of additional financing from this
offering and through loans, there is no assurance that these funds will be
sufficient to fund operations. If additional funds were to be needed, (i.e., if
CTG is not able to achieve cost savings or if additional funds are required for
marketing or other operational efforts), CTG could be required to seek
additional financing through loan transactions and/or the sale of securities.
However, existing obligations of Cardiac and Electro could make finding
additional financing difficult. All of Cardiac's properties are encumbered under
existing debt obligations. Further, the terms of some of Cardiac's loans impose
substantial restrictions on Cardiac's business activities. Some of the existing
loan restrictions (a) prevent Cardiac from further encumbrances on collateral
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valued in excess of $25,000, (b) require the lender's consent to incur
additional indebtedness exceeding $200,000 annually, (c) provide for
acceleration of the maturity date if the ownership of more than 20% of Cardiac's
outstanding shares are transferred without lender consent, and (d) impose fees
for certain additional financing. There can be no assurance that further
financing will be available on acceptable terms, or at all. See "BUSINESS -
Business of Cardiac - - Debt Obligations."
Further, the consummation of the Merger is dependent upon CTG raising $4.0
million through a combination of proceeds from this offering and proceeds from a
loan or line of credit. CTG anticipates raising approximately $2.0 million to
$3.3 million in this offering. CTG will be required to borrow at least $700,000
to satisfy the $4.0 financing contingency for the Merger if the maximum offering
is closed and up to $2,000,000 to satisfy the contingency if less than the
maximum offering is sold. Thus, CTG's debt obligations will be increased and it
will have less working capital available if only the minimum offering is closed.
Such increased leverage could impair CTG's ability to obtain other financing
through loans or additional sales of stock.
LOSS OF ROYALTY INCOME
Cardiac was the licensor under a license agreement with Sulzer Intermedics,
Inc. ("Intermedics") allowing Intermedics to manufacture and sell certain
pacemaker products described by United States patents (Patent Nos. 4,962,767 and
5,127,403) owned by Cardiac. Under that agreement, Cardiac recorded $2,063,250
and $2,394,250 in royalty income during the fiscal years ended March 31, 1998
and 1997, respectively, which represented approximately 35% and 36% of revenues
in such years, respectively. Intermedics' obligation to pay royalties under the
license terminated on January 22, 1998. The loss of such royalty income
adversely impacts Cardiac's working capital and revenue. See "BUSINESS -
Business of Cardiac - - Sales, Marketing and Distribution Methods."
LIMITATIONS ON THE USE OF NET OPERATING LOSS CARRYFORWARDS ("NOLS")
As of March 31, 1998, Cardiac had NOLs of approximately $18.9 million.
These NOLs can be utilized against future taxable income through the fiscal year
ending March 2012. The use of the NOLs will be significantly limited under the
provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), as a consequence of the Merger with Electro, as the Merger will create
a more than 50% aggregate change in ownership of Cardiac. Accordingly, assuming
a November 16, 1998 effective date of the Merger with Electro, the Cardiac NOL
limitation under Section 382 of the Code is approximately $50,000 per year.
Furthermore, since Electro would become the parent for tax purposes as a result
of a reverse acquisition by Electro stockholders, Cardiac's NOLs will be further
limited under the provisions of Treasury Regulation Section 1.1502-21T regarding
Separate Return Limitation Years ("SRLYs"). Unless Cardiac contributes to
consolidated taxable income (before any NOL deduction), the SRLY rules will
apply and Cardiac's NOLs may not be available to offset consolidated taxable
income. As a result of these limitations, it is possible that Cardiac's NOLs
will expire prior to their utilization.
As of August 31, 1997, Electro had NOLs of approximately $13.0 million
which may be utilized against future taxable income through the fiscal year
ending August 31, 2012. Should Electro not be the post-merger parent for tax
purposes, the SRLY rules mentioned above may apply.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
As part of its growth strategy, CTG intends to acquire additional companies
with cardiology and electrophysiology catheter products and/or complementary
products and technologies. There can be no assurance that CTG will be able to
identify, acquire or profitably integrate and manage additional companies or
complementary products or technologies, if any, into CTG without substantial
costs, delays or other operational or financial problems. Further, acquisitions
involve a number of special risks, including possible adverse effects on CTG's
operating results, diversion of management's attention, failure to retain key
personnel of the acquired companies, amortization of acquired intangible assets
and risks associated with unanticipated events or liabilities, some or all of
which could have a material adverse effect on CTG's results of operations,
financial condition or business. Customer dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
reputation of CTG. In addition, there can be no assurance that the other
companies or complementary
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products or technologies acquired in the future will achieve anticipated revenue
and earnings. See "BUSINESS" and "MANAGEMENT."
POSSIBLE NEED FOR FUTURE ACQUISITION FINANCING
CTG intends to finance future acquisitions through the use of cash (which
may include some of the proceeds from this offering), incremental debt financing
and/or by issuing additional shares of CTG Common Stock for all or a substantial
portion of the consideration to be paid on such future acquisitions. In the
event that CTG Common Stock does not maintain a sufficient market value or
potential acquisition candidates are otherwise unwilling to accept CTG Common
Stock as part of the consideration for the sale of their businesses, CTG may be
required to utilize more of its cash resources, if available, in order to
initiate and maintain its acquisition program. If CTG does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through loans or sales of its securities. There can be no
assurance that CTG will be able to obtain the financing it will need on terms it
deems acceptable, or at all. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity - - Cardiac" and "- -
Electro."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE DILUTION OF CTG
COMMON STOCK FROM EXERCISE OF OPTIONS AND WARRANTS; POSSIBLE ADVERSE EFFECT ON
MARKET PRICE
The market price of the CTG Common Stock could drop as a result of sales of
a large number of shares of common stock in the market after the offering, or
the perception that such sales could occur. These factors could also make it
more difficult for CTG to raise funds through future offerings of CTG Common
Stock. In addition, during the respective terms of CTG's outstanding derivative
securities, the holders thereof may be able to purchase shares of CTG Common
Stock at prices substantially below the then-current market price of the CTG
Common Stock with a resultant dilution in the interests of the existing
stockholders.
Upon the closing of this offering, assuming all 650,000 shares are sold in
this offering, there will be 2,457,826 shares of CTG Common Stock outstanding.
All of these shares will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares held or purchased by "affiliates" of CTG, as
defined under Rule 144 of the Securities Act ("Rule 144"). Of the 2,457,826
shares that will be outstanding immediately after the offering, approximately
391,098 shares will be "restricted securities" as defined under Rule 144 since
they will be held by affiliates. The affiliates will be subject to certain
lock-up agreements with CTG. CTG intends to enter into lock-up agreements with
its officers and directors under which they may not sell any shares of CTG
Common Stock without the consent of CTG for 180 days after the date of this
Prospectus (the "Lock-Up Agreements"). After the expiration of the Lock-up
Agreements, the shares may be sold subject to certain volume and other
limitations prescribed by Rule 144. See "SHARES ELIGIBLE FOR FUTURE SALE."
Upon consummation of the Merger, CTG will have outstanding options and
warrants to purchase shares of CTG Common Stock exercisable at various prices
from $.05 to $25.00 subject to adjustment per share, pursuant to which an
aggregate of 412,997 shares of CTG Common Stock (subject to adjustment) may be
issued. Further, there will be outstanding $300,000 in debentures convertible
upon consummation of the Merger into 150,000 shares of CTG Common Stock. There
will also be outstanding 1,000 shares of Electro preferred stock convertible
into 151,515 shares of CTG Common Stock, derived by dividing $1,000,000 by an
assumed conversion rate of $6.60. The warrants, debentures and Electro preferred
stock provide for various registration rights to register an aggregate of
598,384 shares of Common Stock (subject to adjustment) underlying their
respective derivative securities. The subsequent registration of these
securities could have an adverse effect upon the market for the price of CTG
Common Stock. See "DESCRIPTION OF SECURITIES," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources -- Cardiac, " and "SHARES ELIGIBLE FOR FUTURE SALE."
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IMMEDIATE AND SUBSTANTIAL DILUTION
The public offering price per share of CTG Common Stock exceeds the net
tangible book value per share. Accordingly, the purchasers of shares sold in
this offering will experience immediate and substantial dilution of
approximately $4.84 per share in their investment if the minimum offering is
sold and approximately $4.41 share in their investment if the maximum offering
is sold. The exercise of outstanding options and warrants, some of which may be
exercised at prices substantially below the offering price per share, will
result in further dilution to the public investors. Further, additional sales of
CTG Common Stock or other securities of CTG in connection with acquisitions or
otherwise may involve substantial dilution to the interests of CTG's then
existing stockholders. See "DILUTION."
ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICE; LACK OF PUBLIC MARKET FOR CTG
COMMON STOCK
The public offering price for the CTG Common Stock was arbitrarily
determined by CTG and there is no relationship between it and the earnings, book
value or other recognized criteria of valuation.
There has not been a public market for the CTG Common Stock. CTG intends to
apply for listing of its CTG Common Stock on the Philadelphia Exchange or other
regional stock exchange. There is no assurance that CTG will meet the criteria
to obtain such listing and, in the event CTG does meet the criteria and its
stock is listed, there is no assurance that CTG will maintain sufficient
qualifications to maintain the listing. In order for a company's securities to
be listed and maintained on any exchange, it must meet certain minimum
thresholds regarding net tangible assets, market value of its publicly-traded
stock, market price of its common stock, and in some cases, net income. Should
CTG not satisfy the listing criteria, trading in the CTG Common Stock would be
conducted in the over-the-counter market known as the OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of the CTG Common Stock.
However, notwithstanding the listing of CTG Common Stock on any exchange, there
is no assurance that an active trading market for the CTG Common Stock will
develop.
PENNY STOCK REGULATION
If the CTG Common Stock is not listed on the Philadelphia Exchange or other
exchange, it will be traded on the OTC Electronic Bulletin Board. Trading in the
OTC Electronic Bulletin Board allows market makers to enter quotes and trade
securities that do not meet listing requirements of NASDAQ or any exchange. In
such case, sales of CTG Common Stock will be subject to the "penny stock" rules
promulgated by the Securities and Exchange Commission (the "SEC"). The SEC's
regulations generally define a "penny stock" as any equity security that has a
market price (as defined) of less than $5.00 per share. The rules impose various
sales practice requirements on broker-dealers who sell securities governed by
the rules to persons other than established customers and certain accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The rules further
require the delivery by the broker-dealer of a disclosure schedule prescribed by
the SEC relating to the penny stock market. Disclosure must also be made about
all commissions and about current quotations for the securities. Finally,
monthly statements must be furnished to the SEC disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
Although the regulations provide several exceptions to or exemptions from
the penny stock rules based on, for example, specified minimum revenues or
asset-value, CTG may not fall within any of the stated exceptions. Thus, a
transaction in CTG's securities would subject the broker-dealer to sales
practice and disclosure requirements that make trading of the stock more
cumbersome which could have a material and adverse effect on the marketability
of the stock.
POSSIBLE VOLATILITY OF CTG COMMON STOCK PRICE
The market price of CTG's securities may be highly volatile, as has been
the case with the securities of other companies engaged in high technology
research and development. Factors such as announcements by CTG or
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its competitors concerning technological innovations, new commercial products or
procedures, proposed government regulations and developments, disputes relating
to patents or proprietary rights, operating results, market conditions and
economic factors may have a significant impact on the market price of CTG's
Common Stock. Further, the Merger may result in the recording of significant
goodwill on CTG's financial statements, the amortization of which would reduce
reported earnings in subsequent years. Such an effect on reported earnings could
have an adverse effect on the market price of the CTG Common Stock.
NO UNDERWRITER; NO MINIMUM NUMBER OF SHARES REQUIRED TO BE SOLD
The CTG Common Stock is being offered without the involvement of an
underwriter acting on either a firm commitment or best efforts basis.
Consequently, no person has an obligation to purchase any of the shares offered
hereby. See "PLAN OF DISTRIBUTION." In reviewing the information set forth under
the heading "CAPITALIZATION," potential purchasers of the CTG Common Stock
should note that no minimum number of shares is required to be sold in the
offering and no assurance is given that any particular number of shares will be
sold. Notwithstanding the foregoing, if CTG is unable to obtain sufficient funds
from a combination of this offering and loans, all payments made in connection
with your subscriptions for CTG Common Stock will be refunded to you without
interest or deduction.
ADVERSE EFFECT OF COMPETITION
There are a number of established companies engaged in the design,
manufacture, marketing and sale of cardiac pacemaker systems which have greater
financial resources, research and development facilities, manufacturing
capabilities and marketing organizations than Cardiac. Intermedics and
Medtronics, Inc. have developed a single-lead atrial-controlled ventricular
cardiac pacing system. Intermedics received FDA clearance for such a pacing
system and commenced marketing its system in March 1995. A successful
introduction of any such new system could dramatically impact Cardiac's
competitive position and its ability to become a viable entity in the cardiac
pacemaker industry. See "BUSINESS - Business of Cardiac - - Competition in the
Industry."
In Electro's experience, competitors who market steerable catheters for
which they have FDA approval for both diagnostic as well as therapeutic use have
a significant competitive advantage over Electro, whose steerable catheter
products are approved for diagnostic use only. Also, with regard to gaining
market acceptance, Electro has had some difficulty relative to products
introduced after competitors already had similar products on the market, due to
physicians' acceptance of and comfort with the competing products. In such
circumstances, Electro's ability to gain acceptance was limited. See "BUSINESS -
Business of Electro - - Competition."
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT OF
THIRD-PARTY PATENTS
CTG's success will depend, in part, on its ability to maintain protection
for the products and manufacturing processes of its operating entities, Cardiac
and Electro, under United States and foreign patent laws, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. Cardiac and Electro hold patents and trademark registrations for
various products and plan to continue to establish and protect their proprietary
rights with respect to new products they develop. Cardiac, in particular, also
relies on trade secrets and proprietary know-how, which it seeks to protect, in
part, by confidentiality agreements with its university research partners,
employees, consultants, advisors and others. However, actions taken to establish
and protect proprietary rights may be inadequate to prevent imitation of such
products by others or to prevent others from claiming violations of their
proprietary rights by CTG. In addition, others may assert rights in CTG's
proprietary products and processes and other proprietary rights. See "BUSINESS -
Business of Cardiac - - Certain Patents, Trademarks and Licenses," "- Business
of Electro - - Certain Patents, Trademarks and Licenses."
TECHNOLOGICAL AND PRODUCT OBSOLESCENCE
The medical device industry is characterized by extensive research and
development and rapid technological change. Development by competitors of new or
improved products, processes or technologies may make CTG's current products or
any future products obsolete or less competitive. CTG will be required to devote
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continued resources to enhance its current products and develop new products for
the medical marketplace. There are many events and factors in connection with
the development, production and sale of such products over which CTG has no
control. It is not possible to provide any assurance that CTG's business will be
successful.
ADVERSE EFFECT OF GOVERNMENT REGULATION
Cardiac's and Electro's products are classified as medical devices and are
subject to extensive regulation by the FDA and the regulatory bodies of other
countries. A medical device must be cleared by the FDA and the regulatory bodies
of other countries through an extensive application process before it can be
commercially marketed in that specific country. Any delay of clearance or
rejection of an application could have a material adverse effect on Cardiac's
and Electro's business and results of operations. See "BUSINESS Business of
Cardiac - - Government Regulation," "- Business of Electro - - Government
Regulation."
PRODUCT RECALLS
In the event problems arise with Cardiac's or Electro's products after
commercial introduction, a recall of the defective products might be required.
In any such event, the costs and potential liability to CTG could be significant
and would have a material adverse effect on CTG's business and operations.
Cardiac recalled products in September 1990, August 1991, March 1994 and
December 1996. The 1996 recall involved two pacemakers removed from hospital
shelves. In no instances have such recalls involved removal of a product from a
patient. See "BUSINESS - Business of Cardiac - - Government Regulation," "-
Business of Electro - - Government Regulation."
FDA WARNING LETTER
Electro's products, like those of Cardiac, are classified as medical
devices under the FDA Act and, as such, are subject to extensive regulatory
compliance requirements. In February, 1997, the FDA conducted an inspection and
audit of Electro's facilities and practices as a result of which the FDA issued
a warning letter (the "FDA Warning Letter") regarding noncompliance by Electro
with certain regulations regarding current good manufacturing practices ("cGMP")
in the manufacture of its products. The areas of noncompliance include Electro's
methods of investigation of device complaints, methods of validation of device
sterilization, environmental monitoring procedures, methods of validation of
extrusion processes which are used in the manufacture of certain of Electro's
catheters and other quality assurance and record keeping requirements. Electro
communicated with the FDA its intentions to remedy the noncompliance,
established a plan and timetable to effectuate such remediation and diligently
worked to take the necessary corrective actions. A subsequent FDA inspection in
September 1997 indicated that, while substantial progress had been made, not all
corrective actions had been completed. Electro is continuing in its efforts to
complete such actions and it is Electro's intention to inform the FDA before the
end of 1998 that it has completed such actions and is ready for reinspection.
There can be no assurance, however, that Electro will be ready for such
reinspection before the end of 1998 nor that Electro will pass any such
reinspection when it occurs. While Electro is currently under no restrictions by
the FDA regarding the manufacture or sale of its products, Electro is unable to
determine precisely the short-term economic impact of instituting the required
corrective actions and there can be no assurance that the FDA will not take
further action, including seizure of products, injunction and/or civil
penalties, if the necessary corrective actions are not completed on a timely
basis. The voluntary discontinuation of manufacturing of certain products and
the delay in the sale of other products has adversely affected sales by an
estimated 10%. Until all corrective actions required under the FDA Warning
Letter have been taken, the FDA will not consider new products for approval.
However, Electro's insufficient financing for research and development efforts
over the last few years have limited its ability to produce new products and,
consequently, no FDA approvals are currently sought. Electro believes that it
will have completed the corrective actions by the time it produces a product for
which FDA approval would be required. See "BUSINESS Business of Electro - -
Government Regulation."
EXPOSURE TO CLAIMS AND LITIGATION
The nature of the medical device industry subjects companies in such
industry to the risk of litigation in several areas, including claims for
personal injuries resulting from the use of the products as well as for patent,
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licensing or trademark infringement. The products of Cardiac and Electro can be
used in high risk medical situations where the risk of serious injury and/or
death is great. CTG will maintain product liability coverage in limits of
coverage which it believes is customary in the industry. There can be no
assurance, however, that CTG's insurance coverage will be adequate to address
all costs, expenses and losses which may be incurred in litigation proceedings.
In accordance with practice in the pacemaker industry, Cardiac has
attempted to limit its product warranty obligations (associated with defective
pacemakers) to replacement of any defective pacemakers and some patient
out-of-pocket expenses up to $500. CTG will continue to provide the same
warranty policy as currently exists on Cardiac's pacemaker products. There can
be no assurance that CTG's pacemaker warranty policy will be adequate to address
all expenses and losses.
Electro is currently a party to certain litigation incident to the normal
conduct of its business. See "BUSINESS - Business of Electro - - Legal
Proceedings."
PROHIBITION ON SALES OF ELECTRO PRODUCTS TO EUROPEAN COMMUNITY WITHOUT ISO
CERTIFICATION
Continued sale by Electro of certain of its products in the member nations
of the European Economic Community (the "EEC") beyond June 14, 1998 required
receipt of certification (the "CE Mark"), from the International Organization
for Standardization (the "ISO"). As this certification was not obtained prior to
such date, Electro and Cardiac have submitted an application requesting CE Mark
certification for Cardiac to sell such products, as manufacturer, with Electro
acting as vendor to Cardiac in such regard. Since the CE Mark was not received
by Electro by June 14, 1998, Electro has suffered a loss of sales in the EEC.
Additionally, while Electro and Cardiac believe that certification will be
granted for Cardiac's sale of such products for Electro, there can be no
assurance as to when or if such certification will be granted. Should such
certification not be received for some key products by calendar year-end, the
loss of sales of those products in the EEC could be as high as 15% of Electro's
sales, having a material adverse effect on Electro's revenues. "BUSINESS -
Business of Electro - - Government Regulation."
SINGLE SOURCES OF SUPPLIES AND PRODUCTION RISKS
Single sources are relied upon by Cardiac for certain critical materials
used in Cardiac's pacemaker products, including medical adhesives, integrated
circuits, hybrid microelectronic circuitry, lithium batteries and a material
used to produce Surethane(TM), a substance utilized in the manufacture of
Cardiac's leads. A delay in delivery of such critical materials or the loss of
one of the suppliers of such materials could have a significant adverse effect
on Cardiac's business. Two of Cardiac's principal suppliers of materials used
primarily in electrode lead production have indicated that they will no longer
supply their materials to the medical device industry presumably because such
suppliers perceive these and other implantable medical products to be
unacceptable risks as a result of possible product liability claims from
patients. These companies have reportedly stopped allowing the use of any of
their materials in products to be implanted in humans for medical use. Cardiac
does not believe that the material that it has used for leads has been alleged
to have caused any bodily harm in the past or that there is any present
litigation. Cardiac believes it has an adequate supply of one such material to
meet demand for the next several years and has identified alternate sources for
both materials, which Cardiac may use unless the FDA reviews and withdraws
approval for those alternate materials. See "BUSINESS - Business of Cardiac - -
Raw Materials and Production, " "- - Sources of Supply."
Electro uses outside suppliers for certain components and Electro contracts
with third parties for the performance of sterilization. Although most
components and processes are available from more than one vendor, certain
components and processes are manufactured or provided by single vendors, some
involving molds owned by Electro. Significant components for which Electro has
only one source include tubing for catheters, connector pins used in pacing
catheters, latex used in balloons, needles and certain packaging. Electro
attempts to maintain an adequate supply of the components on hand in order to
minimize any supply interruption from single source vendors to allow for time to
locate and qualify a new vendor or to find a substitute for a single source. As
such, there can be no assurance that Electro's ability to manufacture certain
products will not be materially affected by
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single source vendors. "BUSINESS - Business of Electro - - Raw Materials and
Production," and "- Sources of Supply."
DEPENDENCE ON PROPER INVENTORY MANAGEMENT
Cardiac's operations require substantial operating capital. Cardiac is
required to carry significant amounts of inventory in order to meet rapid
delivery requirements of customers and assure itself a continuous supply of key
components and parts from its suppliers. There is also a several-month lead time
between the time that Cardiac acquires parts until such time that a product is
completed and available for sale. In addition, Cardiac's domestic business is
consignment in nature insofar as Cardiac provides customers with the right to
return products that are not implanted or sold. Accordingly, inventory
management is an important business concern with respect to Cardiac's liquidity
(i.e, the amount of working capital available at any time). The amount of
product returned to Cardiac is negligible, typically less than 1 unit every 2
years from all units sold in the U.S. and approximately 1 unit per year from all
units sold to distributors internationally. See "BUSINESS - Business of Cardiac
- - - Inventory and Backlog."
RELIANCE ON THIRD-PARTY REIMBURSEMENT
Hospitals, physicians and other health care providers that purchase medical
devices for use in furnishing care to their patients typically rely on
third-party payers, principally Medicare, Medicaid, and private health insurance
plans, to reimburse all or part of the costs or fees associated with the medical
procedures performed with those devices, and of the costs of acquiring those
devices. Medicare pays the hospital/physician between $13,000 and $15,000 per
pacemaker implant. The precise amount is determined in accordance with state
regulatory provisions which vary from state to state. This reimbursement is
intended to cover the total cost of the procedure (including all physicians,
nursing personnel, etc.), cost of the patient stay in the hospital and cost of
all materials used. The most expensive materials used are the pacemaker and
lead. Depending upon the hospital (prices to hospitals vary based on bids and
contracts) the price of a pacemaker and lead can vary from $3,000 to $6,000.
Medicare reimbursement for pacemakers is not made to Cardiac. Cardiac is
paid by the hospitals based on negotiated contracts. The hospitals are
reimbursed by Medicare based on a fixed price per clinical procedure. It is from
this reimbursement that all procedural costs are deducted. Reimbursement is not
dependent on the manufacturer of the pacemaker used, i.e.: all brands of
pacemakers are reimbursed at the same rate. Cost control measures adopted by
third-party payers in recent years have had and may continue to have a
significant effect on the purchasing practices of many providers, generally
causing them to be more selective in the purchase of medical devices.
Limitations may be imposed upon the conditions for which procedures may be
performed or on the cost of procedures for which third-party reimbursement is
available, which could adversely affect the market for Cardiac's current or
future products.
RISKS INHERENT IN INTERNATIONAL OPERATIONS
CTG intends that the operating companies, Cardiac and Electro, will
endeavor to market their products and services internationally, either
independently or through joint ventures or other collaborative arrangements with
strategic partners. To date, sales of Cardiac's and Electro's products have been
made to approximately 50 distributors in foreign markets. To the extent that
operations overseas and/or sales of products in foreign markets will take place,
such will be subject to all of the risks inherent in international operations
and transactions, including the burdens of complying with a wide variety of
foreign laws and regulations, exposure to fluctuations in currency exchange
rates and tariff regulations, potential economic instability and export license
requirements. The political, economic and regulatory environments of the
countries in which CTG determines to do business will significantly affect its
operations in such countries. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Operating Trends and
Uncertanties."
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DEPENDENCE ON KEY EMPLOYEES
CTG's future success depends, in part, upon key managerial, technical and
marketing personnel and upon its ability to continue to attract and retain such
highly talented individuals. Competition for qualified personnel is intense in
the medical device industry. There can be no assurance that CTG will retain the
key employees of Cardiac and Electro or that it will attract and assimilate such
employees in the future. Further, as is the case in many acquisition
transactions, the Merger may result in the loss of key personnel through
attrition or restructuring. Such a loss of key personnel could have an adverse
effect on operations. To mitigate this risk, Cardiac entered into employment
agreements with certain executive officers. Any of the employment agreements
could be terminated prematurely in the event of the resignation, disability or
death of such employees. Cardiac has applied for policies of key-man life
insurance on the lives of three of its key management personnel, Messrs. Bart C.
Gutekunst ($1.0 million) , Alan J. Rabin ($2.0 million) and Jonathan S. Lee
($250,000). It is intended that both a Chief Financial Officer and an
Acquisition Officer with experience in the consolidation of companies will be
hired after the Merger. There can be no assurance that such individuals will be
identified and hired in a timely manner.
RELIANCE ON INDEPENDENT SALES REPRESENTATIVES
Cardiac's operations, sales and ability to attain a profitable level of
operations are dependent upon maintaining its relationships with its principal
sales representatives and upon ongoing expansion of its business volume. These
representatives have entered into contracts with Cardiac. Termination of any of
these contractual agreements between Cardiac and its key independent sales
representatives could have a material adverse effect on Cardiac's sales volume
and operations. Furthermore, Cardiac's ability to achieve a profitable level of
operations would be adversely affected if Cardiac's sales representatives were
unable to expand the volume of their business. See "BUSINESS - Business of
Cardiac - - Sales, Marketing and Distribution Methods."
UNDERSIZED SALES FORCE
Historically, Cardiac's and Electro's cash flow deficiencies prevented them
from hiring executive marketing personnel and increasing the size of their sales
force. Cardiac's and Electro's marketing success in the future will depend, at
least in part, on their ability to recruit and retain additional sales
representatives, which is critical to market acceptance and sales growth. It is
intended that a Vice President of Marketing with experience in marketing and use
of Cardiac's products will be hired after the Merger. There can be no assurance
that such an individual will be identified and hired in a timely manner. See
"BUSINESS Business of Electro - - "Sales, Marketing, and Distribution Methods,"
and "- Business of Electro - - Sales, Marketing and Distribution Methods."
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the year 2000. Some older computer systems
store dates with only a two-digit year with an assumed prefix of "19".
Consequently, this limits those systems to dates between 1900 and 1999. If not
corrected, many computer systems and applications could fail or create erroneous
results by or at the year 2000 (the "Year 2000 issue").
Both Cardiac and Electro have assessed the potential impact of the Year
2000 issue. Such assessment included a review of the impact of the issue in
primarily four areas: products, manufacturing systems, business systems and
miscellaneous/other areas. Based on the results of that initial review, CTG does
not anticipate that the Year 2000 issue will impact operations or operating
results. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Operating Trends and Uncertainties."
DIVIDENDS
CTG does not plan to pay dividends in the foreseeable future. See "DIVIDEND
POLICY."
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USE OF PROCEEDS
CTG anticipates selling a minimum of $2.0 million to a maximum of $3.3
million of its Common Stock. The offering price range is estimated to be $5.125
to $6.125. The net proceeds from this offering will be approximately $2.67
million if all of the shares are sold, or approximately $1.54 million if only
the minimum number of shares are sold, assuming all shares are sold by brokers
and after deduction of brokers' commissions and non-accountable expense
allowances and other expenses of the offering estimated to be $630,000 for the
maximum offering and $500,000 for the minimum offering. To consummate the
Merger, CTG is required to obtain an aggregate of $4.0 million through a
combination of gross proceeds from this offering and proceeds from a loan or
line of credit. In order for CTG to satisfy the $4.0 million financing
contingency that is a condition to the consummation of the Merger, CTG will be
required to have a minimum loan commitment in an amount that is equal to the
difference between $4.0 million and the gross proceeds received from this
offering. In any event, CTG anticipates borrowing at least $1.5 million.
Although CTG is discussing loan transactions with several prospective lenders,
it does not yet have a loan commitment.
The following is a description of sources and estimated uses of proceeds
from the minimum and maximum offering and a loan or line of credit in the
approximate amounts indicated assuming an offering price of $5,125 per share:
MINIMUM MAXIMUM
SOURCES:
Common Stock offering $1,540,000 $2,670,000
Loan proceeds(1) 2,000,000 1,500,000
--------- ----------
$3,540,000 $4,170,000
USES:
Repayment of debt(2) 640,000 640,000
Deferred salaries(3) 142,500 142,500
Consulting Fee(4) 100,000 100,000
Litigation Settlement(5) 200,000 200,000
Legal and accounting expenses(6) 730,000 730,000
Working capital; general corporate purposes(7) 1,727,500 2,357,500
---------- ----------
$3,540,000 $4,170,000
- --------------------
(1) As a condition to consummating the Merger, CTG must obtain $4.0 million
through a combination of gross proceeds from this offering and a loan or
line of credit.
(2) Represents the following loan payments; amounts below are subject to
adjustment for additional accrued and unpaid interest or penalties:
(a) Repayment of $200,000 in loans from The T Partnership, LLP, a New
Jersey limited liability partnership, and stockholder and creditor of
Electro which holds a total of approximately 30% of Electro Common
Stock ("The T Partnership"). The payment represents outstanding
principal of loans that mature on the closing of the Merger and that
bear interest at 12%. Accrued and unpaid interest will be paid at
closing.
(b) A payment of $190,000 to IHI representing payment of outstanding
principal and fees to be accrued as of November 12, 1998; subject to
accrual of additional fees of $2,500 per day after November 12, 1998
until paid.
(c) A payment of $250,000 to Coast representing a payment in full of
outstanding principal under a bridge loan which matures on October 31,
1998 and accrues interest at the prime rate plus 5% per annum. Accrued
and unpaid interest will be paid at closing.
-16-
<PAGE>
(3) As of October 30, 1998, represents approximately $130,400 in deferred
salaries owed Bart C. Gutekunst, Alan J. Rabin, directors and officers of
Cardiac, and W. Alan Walton, Jonathan Lee and Kirk Kamsler, officers of
Cardiac; and approximately $12,100 owed Ervin Schoenblum, an officer and
director of Electro.
(4) Represents consulting fees owed Tracy E. Young, a director of Cardiac.
(5) Settlement of claim by Japan Crescent, Inc. against Cardiac.
(6) Includes $550,000 of estimated expenses payable by Cardiac and Electro in
connection with the Restructuring Merger and the Merger, including legal,
accounting and printing expenses. The balance represents fees and costs
owed in connection with past services rendered.
(7) The remaining net proceeds will be applied toward accounts payable and for
operations. Portions of these funds may also be used for future
acquisitions, if any. CTG is not a party to any definitive acquisition
agreement, (other than in connection with the Restructuring Merger and the
Merger). Pending such uses, CTG intends to invest net proceeds of the
offering in money market funds or other interest-bearing obligations.
DIVIDEND POLICY
CTG does not anticipate paying any dividends on CTG Common Stock in the
foreseeable future. Any earnings which CTG may realize in the foreseeable future
will be retained to finance the growth of CTG. Future dividend policy will
depend upon CTG's earnings, operations, capital requirements, financial
condition and other factors considered relevant by the CTG Board. See
"DESCRIPTION OF SECURITIES."
-17-
<PAGE>
CAPITALIZATION
The following table sets forth, as of May 31, 1998, (i) the actual
capitalization of CTG, (ii) the capitalization of CTG on a pro forma basis as if
the Merger and Restructuring Merger had occurred at that date, and (iii) the
capitalization of the Company on a pro forma as adjusted basis to give effect to
the sale of the minimum and maximum number of shares at an assumed offering
price of $5.125 per share after deducting brokers' commissions and
non-accountable expense allowance and the other estimated expenses of the
offering, and the application of the estimated net proceeds as described in "USE
OF PROCEEDS". The table does not give effect to the proceeds from this offering
which must be obtained as a condition to the consummation of the Merger and the
application of the net proceeds therefrom as described in "USE OF PROCEEDS,"
since the offering is being done on a "best efforts" basis.
<TABLE>
<CAPTION>
MAY 31, 1998
-----------------------------------------------------------
PRO FORMA AS ADJUSTED
---------------------------
ACTUAL PRO FORMA(3) MINIMUM MAXIMUM
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Long-term debt, including current portion $ -- $ 5,906,490 $ 5,266,490 $ 5,266,490
Stockholders' equity:
Preferred stock, no par value; 1,000 shares authorized, 0
shares outstanding (actual), 1,000 shares outstanding
(pro forma, pro forma as adjusted minimum and maximum)(1) -- 1,000,000 1,000,000 1,000,000
Common stock, $.10 par value; 30,000,000 shares authorized,
100 shares outstanding (actual), 1,807,826 shares
outstanding (pro forma), 2,198,071 (profroma as adjusted
minimum), 2,457,826 (pro forma as adjusted maximum)(2) 10 180,793 219,807 245,783
Additional paid-in capital -- 12,301,895 13,802,881 14,906,905
Accumulated deficit -- (12,307,768) $(12,307,768) (12,307,768)
------------ ------------ ------------ -----------
Total stockholders' equity 10 1,174,920 2,714,920 3,844,920
------------ ------------ ------------ -----------
Total capitalization $ 10 $ 7,081,410 $ 7,981,410 $ 9,111,410
============ ============ ============ ===========
</TABLE>
- -----------------
(1) Shares of preferred stock in Electro and convertible into CTG Common Stock
to be issued to The T Partnership upon consummation of the Merger.
(2) Excludes (i) 412,997 shares issuable upon the exercise of stock options and
warrants outstanding and exercisable as of the date of this Prospectus,
(ii) 13,953 shares accrued but unissued for director fees, (iii) 150,000
shares issuable upon conversion of debentures outstanding and convertible
upon consummation of the Merger, and (iv) 151,515 shares issuable upon
conversion of 1,000 shares of Series A Preferred Stock of Electro at a
conversion rate of $1,000,000 divided by 120% of the per share offering
price (120% would be $6.60 per share assuming an offering price of $5.50
per share).
(3) The Merger has been accounted for on the purchase basis in the pro forma
financial statements. Based upon the controlling interest in Cardiac to be
obtained by Electro stockholders as a result of the Merger, the Merger will
be accounted for as an acquisition of Cardiac by Electro (a reverse
acquisition in which Electro is considered the acquirer for accounting
purposes.)
-18-
<PAGE>
DILUTION
At May 31, 1998, assuming the consummation of the Restructuring Merger and
the Merger, the pro forma net tangible book value (deficit) of CTG was
$(909,694), or $(.50) per share of CTG Common Stock. The following table
illustrates the per share dilution which will be realized by the investors in
the event only the minimum number of shares are sold and in the event the
maximum number shares are sold at an assumed offering price of $5.125 per share.
MINIMUM MAXIMUM
------- -------
Assumed offering price per share $ 5.125 $ 5.125
Net tangible book value (deficit) per
share before the offering (.50) (.50)
Increase per share attributable to
investors in the offering .79 1.22
Pro forma as adjusted net tangible
book value per share (1) .29 .72
Dilution per share to investors in the offering (1) $ 4.84 4.41
- ----------------
(1) Excludes (i) 412,997 shares issuable upon the exercise of stock options and
warrants outstanding and exercisable as of the date of this Prospectus,
(ii) 13,953 shares accrued but unissued for director fees, (iii) 150,000
shares issuable upon conversion of the convertible debentures outstanding
and convertible upon consummation of the Merger, and (iv) 151,515 shares
issuable upon conversion of 1,000 shares of Series A Preferred Stock of
Electro at a conversion rate of $1,000,000 divided by 120% of the per share
offering price (120% would be $6.60 per share assuming an offering price of
$5.50 per share).
-19-
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet
includes Cardiac's consolidated balance sheet as of May 31, 1998 and Electro's
balance sheet as of that same date, giving effect to the acquisition of the
Electro Common Stock in exchange for approximately 1,278,000 shares of Cardiac
Common Stock and approximately $550,000 in anticipated direct acquisition and
registration costs, as if such acquisition had occurred on May 31, 1998. The pro
forma financial statements also give effect to the conversion of $1.0 million of
debt due to The T Partnership into convertible preferred stock, the issuance of
$1.5 million in debt and the Reverse Split expected to occur prior to
consummation of the Merger. The pro forma financial statements give effect to
the sale of the minimum number of shares in the offering at an assumed offering
price of $5.125 per share for net proceeds of $1,540,000. The pro forma
financial statements do not give effect to any future cost savings expected by
CTG as a result of the Merger. The unaudited pro forma condensed consolidated
statement of operations includes Cardiac's consolidated statements of operations
for the nine months ended March 31, 1998 and the fiscal year ended September 30,
1997 and Electro's statements of operations for the nine months ended May 31,
1998 and the fiscal year ended August 31, 1997 giving effect to the Merger and
Restructuring Merger as if they had occurred on September 1, 1996. The Merger
has been accounted for on the purchase basis in such pro forma statements. Based
upon the controlling interest in Cardiac to be obtained by Electro stockholders
as a result of the Merger, the Merger will be accounted for as an acquisition of
Cardiac by Electro (a reverse acquisition in which Electro is considered the
acquirer for accounting purposes). The historical information of Cardiac has
been derived from the unaudited condensed consolidated financial statements for
the nine months ended March 31, 1998 and the unaudited consolidated financial
statements for the year ended September 30, 1997 which were derived from the
audited consolidated financial statements of Cardiac for the fiscal years ended
March 31, 1998 and 1997 and the unaudited consolidated financial statements for
the six months ended September 30, 1997 and 1996. The historical information of
Electro has been derived from the unaudited financial statements for the nine
months ended May 31, 1998 and the audited financial statements for the fiscal
year ended August 31, 1997 (which are included herein and should be read in
conjunction with such financial statements and the notes thereto). In the
opinion of the management of Cardiac and Electro, the above-mentioned unaudited
pro forma condensed consolidated financial statements of the respective
companies include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results for unaudited interim periods.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the consolidated financial position or
operating results that would have occurred had the Merger and Restructuring
Merger been consummated on the date specified, nor is it indicative of future
operating results or financial position. In the opinion of the managements of
Cardiac and Electro, all adjustments necessary to present fairly this unaudited
pro forma information have been made.
-20-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
MAY 31, 1998
-------------------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------- ----------------------------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 78,915 $ -- $ 3,040,000 (1) $ 3,118,915
Marketable securities 799 -- 799
Accounts receivable, net 581,168 759,133 1,340,301
Inventories 1,438,226 1,333,086 2,771,312
Prepaid expenses and other current
assets 234,185 64,885 -- 299,070
----------- ----------- ------------ -----------
Total current assets 2,333,293 2,157,104 3,040,000 7,530,397
Property, plant and equipment, net 1,933,155 684,002 2,617,157
Patent -- -- 1,467,737 (3) 1,467,737
Other assets 1,056,442 276,238 (340,000) (2) 992,680
----------- ----------- ------------ -----------
$ 5,322,890 $ 3,117,344 $ 4,167,737 $12,607,971
=========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $1,670,012 $ 1,382,143 $ 210,000 (2) $ 3,262,155
Deposits payable 352,482 -- 352,482
Accrued litigation expenses -- 288,400 288,400
Current portion of long-term debt 1,175,901 290,629 1,466,530
------------ ----------- ------------ -----------
Total current liabilities 3,198,395 1,961,172 210,000 5,369,567
Long-term debt, less current portion 1,798,550 2,141,410 500,000 (1) 4,439,960
Other liabilities 83,534 -- 83,534
Stockholders' equity (deficit) 242,411 (985,238) 3,457,737 (1)(3) 2,714,910
------------ ----------- ------------- -----------
$5,322,890 $ 3,117,344 $ 4,167,737 $12,607,971
============ =========== ============ ===========
</TABLE>
- -------------------
(1) Represents the addition of $1.5 million in debt at an assumed interest rate
of 11% per annum to be issued in connection with the merger and the
conversion of $1.0 million of The T Partnership debt into 9% convertible
preferred stock and the sale of the minimum number of shares in the
offering for net proceeds of $1,540,000.
(2) Represents $550,000 of costs of completing Merger, of which $340,000 had
been incurred at May 31, 1998 and $210,000 is a pro forma accrual.
(3) The acquisition of Electro by Cardiac will be accounted for as an
acquisition of Cardiac by Electro (a reverse acquisition in which Electro
is considered the acquirer for accounting purposes). The purchase price for
Cardiac is computed by valuing the outstanding common shares of Cardiac
before the acquisition (529,748 as adjusted for the Reverse Split) at $2.19
or $1,160,148 plus acquisition costs estimated at $550,000 and will be
allocated to the fair value of assets acquired and liabilities assumed. The
purchase price for Cardiac is anticipated to be allocated as follows:
Fair value of assets acquired, including $1,467,737
assigned to a pending patent $6,790,627
Fair value of liabilities assumed 5,080,479
==========
Total purchase price $1,710,148
==========
The purchase price was allocated to assets and liabilities based on
management's current estimate of their value. The final allocation of the
purchase price when the Merger is completed may vary from the estimated
allocation above.
-21-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
----------------------------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------------------- -------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1998 MAY 31, 1998
-------------- ------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,336,896 (5)(6) $ 4,152,546 $ $ 8,489,442
Cost and expenses:
Cost of goods sold 1,836,158 2,836,541 4,672,699
Selling, general and administrative expenses 1,753,746 1,525,871 110,081 (1) 3,389,698
Engineering, research & development expenses 1,317,645 416,224 1,733,869
----------- ------------ ------------- ------------
4,907,549 4,778,636 110,081 9,796,266
----------- ------------ ------------- ------------
Income (loss) from operations (570,653) (626,090) (110,081) (1,306,824)
Other income (expense):
Interest expense (441,363) (225,019) (33,750) (2) (700,132)
Other income 4,655 - 4,655
----------- ------------ ------------- ------------
(436,708) (225,019) (33,750) (695,477)
----------- ------------ ------------- ------------
Net loss (1,007,361) (851,109) (143,831) (2,002,301)
Preferred stock dividends - - (67,500) (4) (67,500)
----------- ------------ ------------- ------------
Net loss applicable to common stock $(1,007,361)(6) $ (851,109) $ (211,331) $ (2,069,801)
=========== ============ ============= ============
Net loss per common share $ (1.90) $ (0.67)
=========== ============
Pro forma net loss per common share $ (1.15) (3)
============
Weighted average common shares outstanding 530,000 1,277,400 1,807,148
=========== ============ ============
</TABLE>
- ------------------------
(1) Represents amortization of $1,467,737 of a pending patent over 10 years,
which represents the expected life of the product underlying the patent.
(2) Represents (a) reduction in interest expense of $90,000 related to the
conversion of $1.0 million of the 12% T Partnership debt into 9%
convertible preferred stock, and (b) the addition of interest expense of
$123,750 related to $1,500,000 debt issued in connection with the Merger at
an assumed interest rate of 11%.
(3) Calculated using Electro's historical weighted average shares of 1,277,400
for the nine months ended March 31, 1998, plus 529,748 outstanding Cardiac
shares as adjusted for the Reverse Split.
(4) Represents dividends on $1.0 million of The T Partnership debt converted
into 9% convertible preferred stock.
(5) Includes approximately $1,366,000 royalty income from Intermedics which
ceased in January 1998.
(6) Revenues of $1,639,990 and net loss of $167,239 of Cardiac for the three
months ended September 30, 1997, have been included in the pro forma
statement of operations for the nine months ended March 31, 1998 and the
year ended September 30, 1997.
-22-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED
-------------------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------------- -------------------------------
SEPTEMBER 30, AUGUST 31,
1997 1997
----------- -----------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,399,651 (5)(6) $ 6,648,438 $ - $ 13,048,089
Cost and expenses:
Cost of goods sold 2,418,274 4,041,486 - 6,459,760
Selling, general and administrative expenses 2,819,814 2,384,127 146,774 (1) 5,350,715
Engineering, research & development expenses 1,672,824 881,728 - 2,554,552
----------- ----------- --------- -----------
6,910,912 7,307,341 146,774 14,365,027
----------- ----------- --------- -----------
Loss from operations (511,261) (658,903) (146,774) (1,316,938)
Other income (expense):
Interest expense (435,631) (249,384) (45,000) (2) (730,015)
Litigation expense - (446,655) - (446,655)
Other income 152,351 - - 152,351
------------ ----------- ---------- -----------
(283,280) (696,039) (45,000) (1,024,319)
------------ ----------- ---------- -----------
Net loss (794,541) (6) (1,354,942) (191,774) (2,431,257)
Preferred stock dividends - - (90,000) (4) (90,000)
------------ ------------ ---------- -----------
Net loss applicable to common stock $ (794,541) (6) $(1,354,942) $ (281,774) $(2,431,257)
============ ============= ========== ===========
Net loss per common share $(1.52) $(1.06)
============== ============
Pro forma net loss per common share $ (1.35) (3)
===========
Weighted average common shares outstanding 522,271 1,276,000 1,805,748
============== ============= ===========
</TABLE>
- ---------------------------
(1) Represents amortization of $1,467,737 a pending patent over 10 years, which
represents the expected life of the product underlying the patent.
(2) Represents (a) reduction in interest expense of $120,000 related to the
conversion of $1.0 million of the 12% T Partnership debt into 9%
convertible preferred stock, and (b) the addition of interest expense of
$165,000 related to $1.5 million debt issued in connection with the Merger
at an assumed interest rate of 11%.
(3) Calculated using Electro's historical weighted average shares of 1,276,000
for the year ended August 31, 1997, plus 529,748 outstanding Cardiac shares
as adjusted for the Reverse Split.
(4) Represents dividends on $1.0 million of The T Partnership debt converted
into 9% convertible preferred stock.
(5) Includes approximately $2,476,000 royalty income from Intermedics which
ceased in January 1998.
(6) Revenues of $1,639,990 and net loss of $167,239 of Cardiac for the three
months ended September 30, 1997, have been included in the pro forma
statement of operations for the nine months ended March 31, 1998 and the
year ended September 30, 1997.
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with CTG's,
Cardiac's and Electro's financial statements and notes thereto included
elsewhere in this Prospectus. This discussion contains forward looking
statements that involve risks and uncertainties. CTG's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include but are not limited to those
discussed in "RISK FACTORS."
RESULTS OF OPERATIONS
CARDIAC
FISCAL QUARTER ENDED JUNE 30, 1998 COMPARED TO FISCAL QUARTER ENDED JUNE 30,
1997.
OVERVIEW. Cardiac's total revenues for the first quarter of fiscal year
1999 decreased 60% to approximately $621,000 from approximately $1.5 million for
the first quarter of fiscal year 1998. Sales decreased from approximately
$852,000 to approximately $621,000 and royalties decreased from approximately
$697,000 to zero. Costs and expenses in the first quarter of fiscal year 1999
decreased 32% to approximately $1.13 million from approximately $1.71 million in
the first quarter of fiscal year 1998, which, with the decrease in total
revenues, resulted in an operating loss of $509,319 in the first quarter of
fiscal year 1999 as compared to an operating loss of $155,746 in the first
quarter of fiscal year 1998. The net loss in the first quarter of fiscal year
1999 increased to $665,297 from $232,348 in the first quarter of fiscal year
1998.
SALES. Total Sales in the first quarter of fiscal year 1999 decreased by
$257,340 or 27% to $620,777 from the level of $852,288 achieved in the first
quarter of fiscal year 1998. Pacemaker unit sales decreased by 49% and pacemaker
dollar sales decreased by 46%. This decline reflects sales worldwide, and is due
to loss of sales to competition because of Cardiac's lack of a pacemaker
generator with rate response and other diagnostic features. Sales of pacing
electrode leads decreased by $208,230, which was largely offset by sales of
$166,625 for Cardiac's newly-introduced defibrillation electrode leads to a new
OEM customer. The decline in pacing lead sales was the result of a 59% decline
in units reflecting a reduction both in complete systems sold (pacemakers with
leads), as well as in leads sold to Intermedics. The reduction in sales to
Intermedics is perceived to be due to the reduction of internal inventories
maintained by Intermedics, as well as a reduction of sales of this product by
Intermedics to its customers. Penetration of the Japanese market has, so far,
been below expectations, but management believes that the long-term potential of
the Japanese and Asian markets and the more effective marketing and distribution
process intended to result from the proposed Merger warrant further perseverance
in this area.
Sales by geographic area for the first quarters of fiscal years 1999 and
1998 are as follows:
GEOGRAPHIC AREA 1999 1998
--------------- ---- ----
United States $ 565,321 $ 781,009
International 55,456 71,279
--------- ---------
$ 620,777 $ 852,288
========= =========
Sales by product line for the first quarters of fiscal years 1999 and 1998
are as follows:
PRODUCT LINE 1999 1998
------------ ---- ----
Pacemakers $ 244,062 $ 449,512
Electrode Leads 344,024 385,629
Other 32,691 17,147
--------- ---------
$ 620,777 852,288
========= =========
-24-
<PAGE>
ROYALTY INCOME. Royalty income represented royalty fees from Intermedics
pursuant to a license agreement between CTG and Intermedics, whereby Cardiac
licensed certain technology relating to its single-pass atrial-controlled
ventricular pacing system. Royalty fees under this agreement terminated on
January 22, 1998.
COST OF PRODUCTS SOLD. Cost of products sold in the first quarter of fiscal
year 1999 was $326,090, compared to $503,815 in the first quarter of fiscal year
1998, representing a decrease of 35% as compared with a sales decrease of 27%,
which improved the rate of gross margin from 41% to 47%. This improvement was
largely due to improved overall selling prices in both the domestic and the
international markets and manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $469,091 in the first quarter of fiscal year 1999,
representing a decrease of 37% from $743,072 in the first quarter of fiscal year
1998. Selling expenses were $158,770 in the first quarter of fiscal year 1999
compared to $346,377 in the first quarter of fiscal year 1998, representing a
decrease of 54%, largely due to a decrease of $137,764 in volume dependent sales
commissions and royalty expenses. General and administrative expenses were
$310,321 in the first quarter of fiscal year 1999 compared to $396,695 in the
first quarter of fiscal year 1998 representing an decrease of 22% due largely to
reduced employment costs.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development expenses were $334,915 in the first quarter of fiscal year 1999,
representing a reduction of 27% from the level of $458,272 in the first quarter
of fiscal year 1998 due to reduced activity and employment costs.
OTHER INCOME AND EXPENSES. Interest income was $317 in the first quarter of
fiscal year 1999, compared to $5,983 in the first quarter of fiscal year 1998.
Total interest expense in the first quarter of fiscal year 1999 increased to
$156,295 from the level of $82,586 incurred during the first quarter of fiscal
year 1998, due largely to additional interest arising in the first quarter of
fiscal year 1999 on the Coast Loan.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
OVERVIEW. Cardiac's total revenues for fiscal year 1998 decreased 11% to
approximately $5.9 million from approximately $6.6 million for fiscal year 1997.
Sales decreased from approximately $4.2 million to approximately $3.8 million
and royalties decreased from approximately $2.4 million to approximately $2.1
million. Royalty income represented royalties from Intermedics pursuant to a
license agreement between Cardiac and Intermedics; royalty income under this
agreement ceased on January 22, 1998. The decrease in revenue, partially offset
by a 8% decrease in costs and expenses to approximately $6.6 million as compared
to approximately $7.2 million in fiscal year 1997, resulted in an operating loss
of $726,399 as compared to an operating loss of $575,464 in fiscal year 1997.
Interest expense in fiscal year 1998 increased to $523,949 as compared to
$490,508 in fiscal year 1997 due to an increase in the amount borrowed under the
Coast Loan. Other Income decreased to $941 in fiscal year 1998 from $167,300 in
fiscal year 1997. The net loss in fiscal year 1998 increased to $1,239,710 from
$881,240 in fiscal year 1997.
SALES. Total Sales in the fiscal year ended March 31, 1998 decreased by
$377,988 or 9% to $3,823,059 from the level of $4,201,047 achieved in the prior
year. Pacemaker unit sales decreased by 1.6% and pacemaker dollar sales
decreased by 3.8%, as pacemaker average selling prices declined by 2.2% due to
competitive pressures. The average selling prices of pacing electrode leads
improved by 6%, but their unit sales declined by 40%, due to reduced demand from
an established OEM customer, resulting in a net revenue reduction of $808,421,
which was largely offset by initial sales of $503,500 for Cardiac's newly
introduced defibrillation electrode leads to a new OEM customer. Penetration of
the Japanese market has, so far, been below expectations, but management
believes that the long-term potential of the Japanese and Asian markets and the
more effective marketing and distribution process intended to result from the
proposed Merger warrant continued perseverance in this area.
-25-
<PAGE>
Sales by geographic area for fiscal years 1998 and 1997 are as follows:
GEOGRAPHIC AREA 1998 1997
--------------- ---- ----
United States $ 3,067,963 $ 3,486,511
International 755,096 714,536
----------- -----------
$ 3,823,059 $ 4,201,047
=========== ===========
Sales by product line (including product assemblies) for fiscal years
1998 and 1997 are as follows:
PRODUCT LINE 1998 1997
------------ ---- ----
Pacemakers $ 1,678,905 $ 1,744,528
Hybrid Circuits 258,250 222,303
Electrode Leads 1,866,721 2,171,641
Other 19,183 62,575
----------- -----------
$ 3,823,059 $ 4,201,047
=========== ===========
ROYALTY INCOME. Royalty income represented royalty fees from Intermedics
pursuant to a license agreement between Cardiac and Intermedics, whereby Cardiac
licensed the technology relating to its single-pass atrial-controlled
ventricular pacing system. Royalty fees under this agreement terminated on
January 22, 1998.
COST OF PRODUCTS SOLD. Cost of products sold in fiscal year 1998 was
$2,339,973, compared to $2,378,743 in fiscal year 1997, representing a decrease
of 1.6% as compared with the sales decrease of 9%, which reduced the gross
margin from 43% to 39%. This reduction was largely due to lower selling prices
for pacers and pacer assemblies in the European markets due to competitive
pressures and increased rates of manufacturing overhead cost arising from
reduced production volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,496,818 in fiscal year 1998, representing a
decrease of 17% from $3,013,724 in fiscal year 1997. Selling expenses were
$1,052,038 in fiscal year 1998 compared to $1,591,807 in fiscal year 1997,
representing a decrease of 34%, largely due to a decrease of $312,327 in volume
dependent sales commission and royalty expenses, employment costs reductions of
$141,944, and additional cost reductions. General and administrative expenses
were $1,444,780 in fiscal year 1998 compared to $1,421,917 in fiscal year 1997,
representing an increase of 1.6%, despite increases totaling $74,000 in bank and
finance charges, insurance costs and overseas taxes.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development expenses were $1,775,917 in fiscal year 1998, representing no
significant change from $1,778,294 in fiscal year 1997 due to the continued
development activities in the areas of single pass electrode leads, bipolar
dual-chamber operation, light weight pulse generator, rate responsive pacing and
the PacePro(TM) programmer.
OTHER INCOME AND EXPENSES. Interest income was $9,697 during fiscal year
1998, compared to $17,432 during fiscal year 1997. Interest expense increased in
fiscal year 1998 to $523,949 from $490,508 in fiscal year 1997 due largely to
additional interest arising in fiscal year 1998 since June 13, 1997 on the loan
from Coast.
ELECTRO
FISCAL QUARTER AND NINE MONTHS ENDED MAY 31, 1998 COMPARED TO FISCAL QUARTER AND
NINE MONTHS ENDED MAY 31, 1997
OVERVIEW. Net revenues declined $216,417 (12.6%) and $985,713 (19.2%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the three and nine months ended May 31, 1997. Product revenues increased $31,210
(2.1%) for the three months ended May 31, 1998 as compared to the same three
month period in
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the prior fiscal year. However, product revenues decreased $471,238 (10.7%) for
the nine months ended May 31, 1998 as compared to the same period in the prior
fiscal year. Contract research and development declined $240,529 (100%) and
$544,293 (100%), respectively, for the three and nine months ended May 31, 1998
as compared to the three and nine months ended May 31, 1997. Licensing fees and
royalty income increased $11,902 for the three months ended May 31, 1998 and
declined $33,309 for the nine-month period. For the nine months ended May 31,
1998 sales to an OEM customer increased $63,727, however, revenues from this
customer declined $19,000 for the three-month period ended May 31, 1998.
SALES. Domestic sales decreased $74,266 (7.4%) and $353,934 (11.6%) for the
three and nine months ended May 31, 1998, respectively, as compared to the same
periods in the prior year. These decreases are primarily due to Electro not
having an approved electrophysiology ablation catheter, lack of new products, a
continued decline in demand for Electro's older products in pacing and
monitoring, backorders, as well as the impact of not replacing sales
representatives who have left Electro. International revenues decreased $117,304
(8.6%) for the first nine months of fiscal year 1998 as compared to the first
nine months of fiscal year 1997. The decline in international revenues for the
nine-month period is attributed to the lack of new products, lower demand for
Electro's electrophysiology products, product redesign problems, lower prices
due to competition and backorders. For the three months ended May 31, 1998,
international revenues increased $105,476 (23.5%) as compared to the three
months ended May 31, 1997. This increase is attributed to new business in
countries where Electro has had representation and the timing of orders from
distributors. This increasing trend is not expected to continue in the near
term. International sales should be adversely affected in Europe (approximately
17% of total revenues) for the next six months or more as Electro was not able
to obtain the CE Mark on its products on a timely basis, in order to continue to
sell into this market. The effort to obtain the CE Mark is continuing and
management of Electro is hopeful of obtaining this designation before the end of
the calendar year on its major products in order to continue selling into this
market. However, there can be no assurance that Electro will obtain the CE Mark
or maintain the same level of revenue upon receiving the CE Mark as it did
previously.
Electro's insufficient financing has hampered its ability to introduce new
products to market and to correct the redesign issues, in order to maintain
sales at its prior levels.
GROSS PROFITS. Gross profit dollars decreased $253,622 (39.8%) and $963,846
(42.3%), respectively, for the three and nine months ended May 31, 1998 as
compared to the three and nine months ended May 31, 1997. This decrease is
primarily attributed to decreased production levels related to the lower sales
volume. The decreased production levels caused the cost of goods sold of the
catheters to increase due to less efficient labor utilization and a greater
amount of fixed overhead allocated to each catheter produced. The increased cost
of goods sold is also attributable to write-offs of certain inventories which
were scrapped for sterilization samples, evaluation and testing failures and the
increased cost associated with regulatory compliance. The lower volume continues
to negatively impact gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $151,670 (27.0%) and $234,018 (13.3%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the same periods last year. The three months ended May 31, 1998 includes an
adjustment of $144,068 to reclassify expenses associated with the Merger to
other assets. Excluding this adjustment, selling, general and administrative
expenses decreased only $35,602 (6.3%) for the three months ended May 31, 1998
as compared to the three months ended May 31, 1997. The decreases primarily
reflects lower domestic and international selling expenses substantially
attributable to the loss of field sales personnel that have not yet been
replaced and to cutbacks in international activities.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and development
expenses decreased $106,464 (47.3%) and $256,755 (38.2%), respectively, for the
three and nine months ended May 31, 1998 as compared to the same periods in the
prior fiscal year. This decrease reflects the lower level of research and
development efforts. The decrease is primarily attributed to decreased personnel
and lower material, supply, consulting and recruiting expenses. In the prior
fiscal year, costs associated with billable research and development activities
were charged to cost of revenues. There were no contract research and
development activities during the nine months ended May 31, 1998.
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OTHER INCOME AND EXPENSES. Interest expense increased as a result of the
increased borrowings from The T Partnership and interest on capitalized lease
obligations.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
OVERVIEW. Net revenues declined $713,998 (9.7%) for the fiscal year ended
August 31, 1997 as compared to the fiscal year ended August 31, 1996. Product
revenues declined $1,148,149 (16.4%) for the fiscal year ended August 31, 1997
in addition to a decline in revenues from an OEM customer of $64,133. These
declines were partially offset by an increase in contract research and
development revenues of $388,586, which included a $100,000 termination fee from
a contract research and development effort and $109,698 received from licensing
certain of Electro's technology. Gross profit dollars decreased $675,982 (20.6%)
for the fiscal year ended August 31, 1997 as compared to the fiscal year ended
August 31, 1996. This decrease is primarily attributed to decreased production
levels related to the lower sales volume as well as the write-off of certain
inventories. The gross profit percentage for the fiscal year ended August 31,
1997 was 39.2% as compared to 44.6% for the fiscal year ended August 31, 1996.
The lower volume continues to adversely impact gross profit. The net loss for
the fiscal year ended August 31, 1997 was $1,354,942 or $0.21 per share as
compared to a net loss of $892,940 or $0.14 per share for the fiscal year ended
August 31, 1996.
During the past eighteen months, Electro has devoted much of its
engineering efforts to its contract research and development customer and OEM
business. This strategy has adversely affected product sales, but Electro hopes
that this strategy will yield more positive results in the long-term as Electro
continues to investigate opportunities to capitalize on its catheter technology
and manufacturing capabilities. In May 1997, the agreement-in-principle to
perform contract research and development work for a medical device company,
which work commenced in June 1996, was terminated at the request of the other
company. The terms of the agreement-in-principle called for the other company to
pay Electro a monthly fee of $150,000 for a period of one year. A definitive
agreement was never executed. Electro received $600,000 for the work it had
performed and also received a $100,000 termination fee. As a result of the
termination, Electro's revenues were adversely affected in the short-term.
Electro's OEM business may partially offset the lost revenues from the
termination.
SALES. Direct domestic sales decreased $678,405 (14.4%) for the fiscal year
ended August 31, 1997 as compared to the fiscal year ended August 31, 1996. This
decrease is primarily due to Electro not having an approved electrophysiology
ablation catheter, lack of new products as Electro had focused its attention on
the contract research and development and OEM business, a continued decline in
demand for Electro's older products in pacing and monitoring, backorders, as
well as the impact of not replacing sales representatives who have left Electro.
International revenues decreased $496,254 (21.4%) for 1997 as compared to 1996.
The decline in international revenues is attributed to the insufficiency of new
products as Electro had focused its attention on the contract research and
development and OEM business, lower demand for Electro's electrophysiology
products, product redesign requirements, lower prices due to competition and
backorders.
GROSS PROFITS. Gross profit dollars decreased $675,982 (20.6%) for the year
ended August 31, 1997 as compared to the prior year. This decrease is primarily
attributed to decrease production levels related to the lower sales volume as
well as the write-off of certain inventories. The decreased production levels
caused the cost of goods sold of the catheters to increase due to less efficient
labor utilization and a greater amount of fixed overhead allocated to each
catheter produced. The gross profit percentage for the year ended August 31,
1997 was 39.2% as compared to 44.6% for the year ended August 31, 1996. The
lower volume continues to adversely impact gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $570,864 (19.3%) for the fiscal year ended
August 31, 1997 as compared to the fiscal year ended August 31, 1996. This
decrease primarily reflects lower domestic marketing and selling expenses of
$641,690 (32.5%), mostly attributed to the departure of field sales personnel
that have not yet been replaced. This decrease was partially offset by an
increase in the provision for bad debt which resulted from non-payments by an
international distributor experiencing cash flow problems.
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ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and development
expenses decreased $128,345 (12.7%) for the fiscal year ended August 31, 1997 as
compared to the fiscal year ended August 31, 1996. The decrease is primarily
attributed to the transfer of expenses to costs of revenues associated with
billable research and development activities in addition to lower material
purchases and consulting fees. These decreases were partially offset by higher
expenses for new personnel.
OTHER INCOME AND EXPENSES. Interest expense increased primarily as a result
of the increased borrowings from The T Partnership and interest associated with
capitalized leases for equipment. Litigation expense for 1997 represents the
jury award to a terminated employee as a result of an age discrimination suit
and Electro's legal costs from September 1996 to defend this action.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
OVERVIEW. During 1996, Electro entered into a joint venture arrangement
with one of the leading centers for electrophysiology in the U.S. to develop
products for the diagnosis of ventricular tachycardia. Electro also began to
develop products in the therapeutic area of atrial fibrillation. In June 1996,
Electro received an advance of $300,000 from an unrelated party to perform
research and development and pre-production planning. In September 1996, Electro
reached a verbal agreement-in-principle to perform further research and
development and production for this company pursuant to which Electro was to
receive a monthly fee of $150,000 for a period of one year for this effort. As
noted above, this arrangement was never formalized and has now been terminated.
In October 1996, Electro reached a formal agreement to license certain of its
technology to another medical device company that is in a market segment in
which Electro does not participate.
SALES. Net revenues increased $99,012 (1.4%) for the fiscal year ended
August 31, 1996 to $7,362,436 as compared to the fiscal year ended August 31,
1995. Total domestic sales decreased $416,351 (7.9%) while international sales
increased $359,656 (18.3%) for fiscal year 1996 as compared to fiscal year 1995.
In addition, Electro had revenues of $155,707 in fiscal year 1996 related to the
performance of research and development activities for a third party. The
decline in domestic sales is attributed to a decline in sales in several of
Electro's product lines, especially Electro's steerable catheters, and the loss
of field sales personnel that have not yet been replaced. The increase in
international sales is attributed to an increase in sales of Electro's
traditional and electrophysiology products, including sales to distributors in
countries where Electro had not previously been represented.
GROSS PROFITS. Gross profit dollars decreased $118,899 (3.5%) in fiscal
year 1996 as compared to the prior year. This decrease in gross profit is
attributed primarily to the increased fourth quarter production costs and
write-offs of certain inventories. The gross profit percentage for fiscal year
1996 was 44.6% as compared to 46.8% for fiscal year 1995. Gross profit for
fiscal year 1996 also included the positive impact of selling directly to
hospitals in the northeast region rather than through a distributor, as
previously accomplished, which required discounts. In December 1995, Electro
reduced its manufacturing staff as a result of lower than anticipated demand.
Gross profit was also negatively affected as a result of this labor reduction,
since overhead expenses were allocated over a smaller direct labor pool. In
October 1996, Electro again reduced its workforce.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $483,820 (14.1%) for fiscal year 1996 as
compared to fiscal year 1995. This decrease primarily reflects lower domestic
marketing and selling expenses. This decrease is attributed to the departure of
some of Electro's sales representatives and the Director of Clinical Development
who have not been replaced. This decrease was offset partially by hiring an
International Marketing Manager.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and development
expense increased by $78,117 (8.4%) for fiscal year 1996 as compared to the
prior fiscal year. The increase is attributed to an increase in personnel,
consulting fees and purchases of materials and supplies for new product
development.
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OTHER INCOME AND EXPENSES. Interest expense increased in fiscal year 1996
as a result of increased borrowings from The T Partnership (see Note 7 of the
Notes to the Financial Statements included in response to "Item 14. Exhibits,
Financial Statement Schedules and Reports on Form 8-K").
The net loss for fiscal year 1996 was $892,940 or $.14 per share as
compared to a loss of $1,135,890 or $.18 per share for fiscal year 1995.
RECENT DEVELOPMENTS OF ELECTRO
For each of the first three quarters of fiscal year 1998, the average sales
were approximately $1.4 million and the average loss was approximately $300,000.
The preliminary unaudited results for the fourth quarter indicate a decrease of
about $200,000 from the average quarterly sales and about a $100,000 decrease
from the average quarterly loss. Electro instituted a major cost reduction
program including personnel cutbacks that resulted in considerable savings that
more than offset the reduction in sales. A sizeable portion of the decrease in
sales is attributable to not having the CE Mark for sales in certain European
countries. Electro is in the process of working to obtain the CE Mark.
Management continues its endeavors to implement cost reduction programs.
Management believes that there has not been a material adverse change in the
financial position of Electro during the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
CARDIAC
Cardiac's liquidity benefited from its $3.5 million credit facility with
Coast Business Credit, a division of Southern Pacific Bank ("Coast"), whereby
Coast agreed to lend Cardiac an amount not to exceed $3.5 million, subject to
limitations relating to the value of receivables and inventories and including a
capital expenditure sub-line up to $500,000 and a term loan in the sum of
$300,000, of which the latter two are repayable over a forty-eight month period
(the "Coast Loan"). On June 6, 1997, as consideration for Sirrom Capital
Corporation, another lender to Cardiac ("Sirrom"), subordinating its interests
to Coast, Cardiac issued to Sirrom a warrant to purchase 10,000 shares of CTG
Common Stock exercisable commencing immediately and expiring June 6, 2002 at an
exercise price of $25.00 per share. In connection with the Coast Loan, on June
13, 1997, Cardiac issued to Coast a warrant to purchase 7,500 shares of CTG
Common Stock exercisable commencing immediately and expiring June 30, 2002 at an
exercise price of $20.00 per share. On June 11, 1998, Cardiac and Coast amended
their loan agreement executed in connection with the Coast Loan (the "Coast Loan
Agreement") to provide for a term loan in the amount of $250,000 (the "Bridge
Loan"). In connection with the Bridge Loan, Cardiac issued to Coast a warrant to
purchase 5,000 shares of CTG Common Stock exercisable commencing immediately and
expiring June 30, 2002 at an exercise price of $2.00 per share and the exercise
price per share of the warrant issued to Coast in connection with the Coast Loan
was reduced from $20.00 per share to $2.00 per share. As of September 30, 1998,
Cardiac had outstanding indebtedness of approximately $1,046,000 under the Coast
Loan.
From April 22 through May 4, 1998, Cardiac obtained $300,000 in interim
financing from select investors through the issuance of an 8% convertible
debenture, convertible at then current market price of $2.00 per share. In
consideration for this investment Cardiac lowered the exercise price of
previously issued options to purchase 715 shares of CTG Common Stock from $17.50
per share to $.40 per share and lowered the exercise price of certain warrants
to purchase 3,363 shares of CTG Common Stock from $25.00 per share, to $2.00 per
share. Cardiac is also attempting to obtain an additional $250,000 on similar
terms. There can be no assurance that Cardiac's attempts to obtain financing
will be successful.
On July 30, 1998, and August 13, 1998, Cardiac executed promissory notes in
favor of Minrad, Inc. ("Minrad") in the amount of $75,000 and $125,000,
respectively (collectively, the "Minrad Notes"). The Minrad Notes bear interest
at the rate of 15% annually, and the principal amount and all interest due
thereunder is due and payable, after September 29, 1998, within ten days after
written demand from Minrad.
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On August 26, 1998, Cardiac received $134,000 from International Holdings, Inc.
("IHI") and executed a promissory note in the amount of $165,000 (the "IHI
Note") in favor of IHI. Concurrently with execution of the IHI Note, Cardiac
paid Goodbody International, Inc., a related company of IHI ("Goodbody"), a
$34,000 consulting fee for services relating to the obtaining of additional debt
financing. Pursuant to the terms of the IHI Note, Cardiac has agreed to repay
the IHI Note on October 25, 1998. If Cardiac does not repay the IHI Note on or
before October 25, 1998, but does so on or before November 12, 1998, in addition
to repayment of the IHI Note, Cardiac has agreed to pay Goodbody a $25,000 fee
(the "Goodbody Fee"). If repayment of the IHI Note and the Goodbody Fee have not
been received by IHI on or before November 12, 1998, an immediate penalty fee of
$2,500 shall be incurred at 12:01 a.m. on November 13, 1998, and an additional
$2,500 fee will accrue and be imposed at 12:01 a.m. every 24 hours, until the
IHI Note, the Goodbody Fee and all penalty fees have been paid in full.
In connection with the IHI Note, Cardiac has agreed to issue up to four
warrants to IHI under certain conditions, each giving IHI the right to purchase
10,000 shares of CTG Common Stock at an exercise price of $.05 per share. If
repayment of the IHI Note and the Goodbody Fee have not been received by IHI on
or before November 12, 1998, at 12:01 a.m. on November 13, 1998, the first of
the four warrants will be deemed issued to and earned by IHI. At 12:01 a.m. on
the 13th day of each month thereafter for up to three months, one additional
warrant shall be issued and deemed earned, if the IHI Note, the Goodbody Fee and
all penalty fees have not been paid in full. Furthermore, if the IHI Note, the
Goodbody Fee and all penalty fees have not been paid in full by January 1, 1999,
IHI will have the option to convert any or all of the amounts due into CTG
Common Stock at an exercise price of $.05 per share. As additional consideration
for the IHI Note, IHI received a warrant to purchase 66,000 shares of CTG Common
Stock at an exercise price of $0.64 per share, exercisable at any time on or
before 5:00 p.m. Eastern Standard Time on August 26, 2003.
The interest and warrant provisions and other inducements which Cardiac is
required to offer to obtain capital are becoming increasingly more burdensome.
Interim financing of Cardiac pending the consummation of the Merger and the
Restructuring Merger is extremely difficult to obtain. If Cardiac is unable to
obtain additional interim financing it might not be able to survive until
November, the expected time of the consummation of the Merger, the Restructuring
Merger and public offering.
As of September 30, 1998, Cardiac had no commitments for the acquisition of
capital assets. As of that date, it did have material commitments pursuant to
certain inventory procurement contracts of $859,397. Cardiac does not anticipate
any significant capital expenditures during the next twelve months.
Cash used by operations during fiscal year 1998 approximated $49,000.
Capital expenditures and repayment of long-term debt obligations additionally
utilized approximated $472,000 and $330,000, respectively. Proceeds under the
line of credit and long-term borrowings approximated $1,239,000. Deferred
financing and Merger costs absorbed approximately $575,000. Overall, negative
cash flow for fiscal year 1998 approximated $164,000.
Cash generated by operations during fiscal year 1997 approximated $57,000.
Capital expenditures and repayment of debt obligations during fiscal year 1997
approximated $545,000 and $875,000 respectively. Net proceeds from the issue of
common stock and stock warrants during fiscal year 1997 approximated $301,000.
Proceeds from notes and debt obligations approximated $163,000. Overall,
negative cash flow for fiscal year 1997 approximated $982,000.
As indicated by the independent public accountants in the report and as
shown in the financial statements, Cardiac has experienced significant operating
losses which have resulted in an accumulated deficit of $21,901,927, as of March
31, 1998. In addition, as discussed below, royalty payments from IntermedicsTM
ceased in January 1998. These conditions raise substantial doubt about Cardiac's
ability to continue as a going concern.
Intermedic's obligation to pay royalties under its license agreement with
Cardiac terminated on January 22, 1998, however, the license agreement which
grants Intermedics the right to manufacture and sell the technology does not
terminate until the expiration of Cardiac's patent in July 2009. During the
fiscal years ended March 31, 1998 and 1997, Cardiac recorded $2,063,250 and
$2,394,250 in royalty income, respectively, from Intermedics.
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The termination of those royalty obligations has had and will have a material
adverse effect on Cardiac's working capital.
The financing proposed to satisfy the condition to consummation of the
Merger is intended to enable the combined companies to meet their obligations
for at least the first 24 months post closing of the Merger. The business plan
anticipates that the combined companies will, within 12 to 18 months after
completion of the Merger, be able to achieve a positive operational cash flow at
least sufficient to support normal operating and research and development
activity.
Relative to its current operations and the loss of royalty income from
Intermedics, Cardiac has taken the following actions to increase cash
availability:
a. Cardiac reduced its staff and operating expenses;
b. Cardiac expanded its revenue base by adding additional OEM
customers and providing leads to a new implantable
defibrillator customer and to a new manufacturer of otologic
implants; and
c. Cardiac obtained $915,000 in additional cash through the
Bridge Loan, the issuance of 8% convertible debentures and the
execution of both the Minrad Notes and the IHI Note.
These steps should be adequate to address liquidity needs until closing of
the Merger. If however, the Merger is not consummated, then additional cash will
have to be raised and significant additional staff and operating expense cuts
will have to be made to conserve cash. Cardiac would attempt to acquire another
entity or to be acquired itself by another entity. If another merger did not
occur, then without an additional infusion of cash, a significant increase in
revenue and a substantial reduction in operating expenses, Cardiac could not
survive.
ELECTRO
At May 31, 1998, working capital decreased $762,242 to $195,932 from fiscal
year ended August 31, 1997. The current ratio was 1.1 to 1 at May 31, 1998 as
compared to 1.6 to 1 at fiscal year ended August 31, 1997. Net cash used in
operating activities was $460,956 for the nine months ended May 31, 1998 as
compared to $103,613 used in operating activities for the nine months ended May
31, 1997. This increase in cash required for operations is primarily attributed
to the increase in Electro's losses for the nine-month period, increase in other
assets which is primarily associated with the expenses in connection with the
proposed Merger, higher inventories and increase in accounts payable offset by a
decrease in accounts receivable and other current assets. Electro was able to
satisfy its cash requirements with borrowings from The T Partnership, cost
saving measures (especially in the sales and marketing area, where field sales
personnel who had left have not yet been replaced), cash on hand and extension
of its accounts payable.
In April 1998, rather than await a decision of its appeal, Electro settled
a certain age-discrimination lawsuit to which it was a party and under which
judgment, at the trial level, had been entered against it in the amount of
approximately $330,990. See "BUSINESS - Business of Electro - - Legal
Proceedings." The settlement, in the amount of $305,000, provides for a lump sum
payment of $65,000, with the balance, bearing interest at the rate of 6% per
annum, payable in monthly installments of $10,000, plus interest, commencing on
July 1, 1998. The settlement further provides that a default in any monthly
payment remaining unpaid for a period of ten days after notification of not
having been received by the plaintiff, allows the plaintiff to declare a default
and accelerate the payment of the entire outstanding balance with interest.
Electro has made the payments due to date on a timely basis.
The rate of interest on the debt to The T Partnership is 12% per annum on
any outstanding balance and is payable monthly. Electro made scheduled monthly
principal payments of $25,000 for four months beginning on September 1, 1996.
The scheduled monthly principal payments were then deferred to September 1,
1998. Any remaining balance is due on August 1, 2003. The loan is secured by
Electro's property, building, accounts receivable, inventories and machinery and
equipment. Electro is to prepay the outstanding balance in the event Electro is
merged into or consolidated with another corporation or Electro sells all or
substantially all of its assets,
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unless The T Partnership and Electro agree otherwise. The T Partnership has
waived the prepayment of the outstanding balance in order to facilitate the
Merger. See "MERGER - Redemption of The T Partnership Debt."
Under the provisions of the agreement with The T Partnership, Electro is
obligated to comply with certain financial covenants, to be tested on a monthly
basis. Non-compliance by Electro allows The T Partnership to declare an event of
default and accelerate repayment of indebtedness. As of August 31, 1997, Electro
was not in compliance with this financial covenant. However, in November 1997,
The T Partnership agreed not to exercise its right to accelerate the repayment
of indebtedness through September 1, 1998 as a result of non-compliance with the
aforementioned financial covenant and the nonpayment of principal payments in
the 1998 fiscal year. The T Partnership has also agreed to a modification to the
financial covenant. Electro is currently in compliance with such covenant. In
September 1997, in December 1997, in January 1998, in May 1998, and in July 1998
Electro borrowed additional amounts from The T Partnership, in each case in the
amount of $100,000, under substantially the same terms and conditions as its
previous borrowings, without issuing any additional warrants. Under the current
arrangement, Electro is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by Electro with such covenant would
allow The T Partnership to declare an event of default and accelerate repayment
of indebtedness. Electro is currently in compliance with the covenant. The total
indebtedness due to The T Partnership at September 30, 1998 was approximately
$2.5 million.
Under the provisions of the original agreement, The T Partnership was
granted warrants which permit The T Partnership to purchase 33,334 shares of CTG
Common Stock at a price of $16.25 per share. The August 1995 Lending Agreement
provides that The T Partnership surrender its warrants and be granted a new
warrant to purchase 100,000 shares of CTG Common Stock at a price of $4.938 per
share in exchange for the surrendered warrant. No additional warrants were
issued as a result of subsequent borrowings. A value has been allocated to the
warrants based upon their estimated fair market value at the date of the
agreement. Such amount ($50,000) is amortized as additional interest expense
over the term of the indebtedness. The unamortized balance is shown in other
assets in the accompanying 1997 and 1996 balance sheets. The warrants are
immediately exercisable and expire on August 1, 2001. As of September 30, 1998,
these warrants remain outstanding.
The report of Electro's independent auditors on Electro's financial
statements, included elsewhere herein, includes an explanatory paragraph which
states that Electro's recurring losses and limited working capital raise
substantial doubt about Electro's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. During fiscal year 1997, Electro was able to
satisfy its cash shortfall from operating activities with the borrowings from
The T Partnership, and advances from an unrelated company to perform contract
research and development, as well as cash on hand. Electro's ability to continue
with its plans is contingent upon its ability to obtain sufficient cash flow
from operations or to obtain additional financing. Electro has had difficulty in
paying its obligations and, as a result, has delayed payments to vendors.
Electro continues to re-evaluate its plans to obtain funds. The contemplated
Merger is contingent upon Electro and Cardiac raising sufficient capital to
support each company's product development efforts. Management believes that
this Merger can offer advantages to both companies by, among other benefits,
providing economies of scale and elimination of redundancies. However, there can
be no assurance that the Merger will occur or that Electro will be able to
generate the funding required. Further, there can be no assurance that
consummation of the Merger will yield positive operating results in the future.
Electro does not plan to pay dividends in the near future.
OPERATING TRENDS AND UNCERTAINTIES
SALES OF CARDIAC. The ability of Cardiac to attain a profitable level of
operations is dependent upon expansion of sales volume, both domestically and
internationally, and continued development of new, advanced products. Cardiac
believes that with the continued release of new products, its worldwide market
expansion, and the addition of new OEM corporate customers, it will have the
potential to increase sales.
EEC nations have adopted universal standards as developed by the ISO in
order to provide simplified trade among the member nations and to assure free
access to trade while maintaining quality standards for products sold.
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All companies doing business in these nations must be certified to these
standards set forth by the EEC which is evidenced by being granted the CE Mark.
Standards for active implantable medical products were implemented January 1,
1993 with a transition period ending December 31, 1994. Cardiac Quality System
received certification to the ISO 9002 on November 19, 1996. The CE Mark
certification was issued by the Notified Body, TUV Product Services, of Munich,
Germany, during the second quarter of fiscal 1996 for Cardiac's products
intended for sale in Europe. Cardiac was audited in July 1997 by TUV Product
Services as part of the annual review of the certified Quality System. As a
result of the TUV Product Services audit the Quality System certificate was
renewed. After renewal of the ISO 9002 certificate, Cardiac developed design
control processes for its Quality System and received certification to the ISO
9001 on September 15, 1998. ISO 9001 certification means Cardiac meets the
highest and most stringent international product quality standards.
Until March 1995, Cardiac was the only manufacturer commercially marketing
single-lead atrial-controlled ventricular pacemakers. However, Intermedics, a
competitor of Cardiac, received FDA clearance to commercially market a
single-lead atrial-controlled ventricular pacemaker that it developed utilizing
Cardiac's technology pursuant to license and supply agreements with Cardiac.
Intermedics commenced marketing its new pacemakers in March 1995. In addition,
other competitors have also commenced marketing competitive single-lead
products.
Although the introduction of the new single-lead pacemakers poses
competition for Cardiac, management believes that Cardiac will benefit from such
competition since the new competition will increase the visibility of
single-lead, atrial-controlled ventricular pacemakers in the marketplace and
thereby increase market acceptance of the product. Further, management believes
that there is a sufficient market to accommodate both Cardiac's and other
competitive pacemakers. Cardiac estimates its market share of pacing products to
be about 0.25% of an estimated worldwide pacing systems market of $2.0 billion.
Various factors impact on a firm's ability to increase market share
including, but not limited to, the financial strength of the firm, the ability
of the firm and its competitors, and the time involved in obtaining FDA
clearance for new or improved products. Therefore, although management believes
that Cardiac is well poised for viable growth, management cannot predict the
degree of market share Cardiac can obtain. Factors beyond Cardiac's control may
impede its progress and in such event, its business and operations would be
adversely impacted.
Cardiac's ability to successfully compete with Intermedics and other
pacemaker manufacturers will depend on Cardiac's ability to supply product and
recruit and increase a quality sales force and continue to develop and release
new advanced products. Cardiac historically has been restricted in its marketing
capabilities due to financial constraints impeding its ability to supply
products and recruit and train a sales force. However, Cardiac believes that the
resources and products available with the Merger, and the associated funding to
be obtained in connection with the Merger, will position the combined companies
to be able to develop effective sales and marketing, and research and
development programs.
As discussed above, the manufacture for and sale of leads to Intermedics
produces income for Cardiac. Cardiac sells electrode leads to Intermedics for
its new systems under an amended and restated supply agreement that expired on
August 1, 1998.
It is anticipated that Intermedics will eventually develop its own
manufacturing capability for electrode leads necessary for its new pacemakers.
However, any such development will take time. Although Cardiac does not know how
long it will take Intermedics to develop its own manufacturing capability, added
to any such development period would be the time necessary to obtain FDA
clearance of its manufacturing process. Thus, although Cardiac cannot guarantee
that it will continue to supply Intermedics with products, Cardiac anticipates
providing Intermedics with existing or new leads for the next few years without
a supply agreement on the same or similar terms and conditions that Cardiac
sells to other similar customers. However, in the event Intermedics receives FDA
approval in a shorter time-frame than anticipated, or other events occur which
causes a decrease in Intermedics' orders, Cardiac's business and operating
results would be adversely affected.
SALES OF ELECTRO. The ability of Electro to attain a profitable level of
operations is dependant upon expansion of sales volume, both domestically and
internationally, and continued development of new and advanced
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products. Many countries in which Electro markets its products regulate the
manufacture, marketing and use of medical devices. Electro intends to pursue
product approval or registration procedures in countries where it is marketing
its products. The international registration and approval process is normally
accomplished in coordination with its international distributors. In order for
Electro to continue to sell certain of its products in the nations of the EEC,
Electro must obtain certification, the CE Mark, from ISO. Since Electro has not
yet obtained the CE Mark and is now unable to sell certain of its products in
the nations of the EEC, international sales should be adversely affected in
Europe (which account for approximately 17% of total revenues) for about the
next six months or more. The effort to obtain the CE Mark is continuing and
Electro is hopeful of obtaining this designation before the end of the calendar
year on its major products in order to continue selling into this market.
However, there can be no assurance that Electro will obtain the CE Mark or
maintain the same level of revenue upon receiving the CE Mark as it did
previously.
SOURCES OF SUPPLY. Two of Cardiac's principal suppliers of materials used
primarily in electrode lead production, Dow Corning and DuPont, indicated that
they will no longer supply their materials to the medical device industry for
use in implantable devices.
The availability of materials suitable for use in implantable medical
devices is an industry-wide problem and is not unique to Cardiac or to the
cardiovascular device segment of the industry. The Polymer Technology Group
produces a product that meets manufacturing requirements and has been identified
as a tentative replacement for the DuPont supplied material. FDA approval of
this replacement material is anticipated to be forthcoming based upon a
satisfactory outcome of testing performed on the product. Cardiac believes,
however, that it has a sufficient supply of the DuPont material to meet
Cardiac's anticipated demand for the next several years. See "BUSINESS -
Business of Cardiac - - Sources of Supply."
Suppliers of custom ASICs have advised that the technology used to produce
these ASICs will no longer be supported. As such, Cardiac placed one last bulk
order to ensure the availability of sufficient ASICs to satisfy projected
demands for product. The new pacing system under development will utilize
appropriate ASICs for the new system obviating the need for perpetual supply of
the currently used ASICs.
YEAR 2000 ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the year 2000. Some
older computer systems stored dates with only a two-digit year with an assumed
prefix of "19". Consequently, this limits those systems to dates between 1900
and 1999. If not corrected, many computer systems and applications could fail or
create erroneous results by or at the year 2000.
Cardiac has undertaken to review the potential impact of the Year 2000
issue. Such assessment has included a review of the impact of the issue in
primarily four areas: products, manufacturing systems, business systems and
miscellaneous/other areas. Based on the results of its initial review, Cardiac
does not anticipate that the Year 2000 issue will impact operations or operating
results. Cardiac is in the process of testing its systems which may be affected
by the Year 2000 issue and estimates that all affected systems can be tested,
upgraded and replaced before they cause any operational problems. This upgrading
is estimated to take less than four man-months of effort. In order to insure
Year 2000 compliance, Cardiac has created a task force to periodically review
their areas of concern. This task force is to meet on a quarterly basis through
the middle of year 2000. Management believes that the incremental costs
associated with achieving Year 2000 compliance will not be material to Cardiac's
operating results.
Cardiac relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
operations. At this time, it is impossible to assess the impact of the Year 2000
issue on each of these organizations. There can be no guarantee that the systems
of other unrelated entities on which Cardiac relies will be corrected on a
timely basis and will not have a material adverse effect on Cardiac. Cardiac's
task force has identified the other organizations which are critical to
Cardiac's continued operations. Cardiac intends to survey these organizations to
determine the impact of the Year 2000 on their operations and their plans for
addressing any potential concerns. Cardiac expects that this assessment will be
completed in the fourth quarter of 1998 and expects that any issues will be
resolved by the end of the second calendar quarter of 1999.
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Electro is reviewing its computer programs and systems to ensure that the
programs and systems will function properly and be Year 2000 compliant.
Management of Electro presently believes that the Year 2000 issue will not pose
significant operational problems for Electro's computer systems. The estimated
cost of Electro's review and assessment efforts is not expected to be material
to Electro's financial position or any year's result of operations, although
there can be no assurance of this result. In addition, the Year 2000 issue may
impact other entities with which Electro transacts business, and Electro cannot
predict the effect of the Year 2000 issue on such entities. Electro is
contacting its major vendors to ascertain if any potential problems exist.
INFLATION AND CHANGING PRICES
In the opinion of Cardiac's management, the rate of inflation during the
past two fiscal years has not had any material impact on Cardiac's operations.
In the opinion of Electro's management, the rate of inflation during the past
two fiscal years and for the nine months ended May 31, 1998 has not had any
material impact on Electro's operations. Because of the implementation of cost
containment and new Medicare regulations, any increase in sales revenues is
expected to result from an increase in the volume of business rather than from
an increase in selling prices. Both Cardiac's and Electro's respective pricing
structures may not reflect inflation rates, due to constraints of Medicare
regulations, market conditions and competition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130") and No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 130 establishes standards
for reporting and displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. Both FAS 130 and
FAS 131 are effective for periods beginning after December 15, 1997. Because of
the recent issuance of the standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial statement
disclosures.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS 133"). FAS 133 requires companies to
recognize ALL derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may specifically be designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of: (i) the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk; or (ii) the earnings effect of the hedged transaction. For a derivative
NOT designated as a hedging instrument, the gain or loss is recognized as income
in the period of change. FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
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MERGER
GENERAL
CTG was organized as a direct, wholly-owned subsidiary of Cardiac, for the
purpose of restructuring into a holding company which will acquire through the
Restructuring Merger and the Merger both Cardiac and Electro as operating
companies.
Consummation of the Merger is conditioned upon, among other things: (i)
approval and adoption of the Merger and the merger agreement (the "Merger
Agreement") by the Electro stockholders; (ii) approval of the Reverse Split,
ratification, approval and adoption of the Merger and the Merger Agreement, and
approval and adoption of the Restructuring Merger and the restructuring merger
agreement (the "Restructuring Merger Agreement") by the Cardiac stockholders;
(iii) a capital infusion into CTG of a minimum of $4.0 million from a
combination of this offering and a loan or line of credit; (iv) consents of
certain lenders; and (iv) no litigation. Prior to the consummation of the
Merger, Cardiac will effectuate the Reverse Split on a one-for-five basis.
Cardiac will become a wholly-owned subsidiary of CTG, Electro will become a
wholly-owned subsidiary of Cardiac, and all of the stockholders of Cardiac and
Electro will become stockholders of CTG. The Merger will be accounted for as a
purchase for accounting and financial reporting purposes. Based upon the
controlling interest in Cardiac to be obtained by Electro stockholders as a
result of the Merger, the Merger will be accounted for as an acquisition of
Cardiac by Electro (a reverse acquisition in which Electro is considered the
acquirer for accounting purposes).
CTG expects that the consolidation of Cardiac and Electro with their
related product lines will (i) afford CTG the opportunity to improve operations
and performance through the realization of operating synergies and cost savings,
(ii) facilitate the commercialization of electrophysiology and other
rhythm-management products from their existing products and new products
developed by them, and (iii) serve as a "platform" to acquire or consolidate
additional related products or other companies with related products. The
cardiac catheter market is comprised of a large number of specialty niche
companies, each with existing revenues and proprietary technologies that allow
them to compete in selected segments. However, these companies are hindered due
to their size, market valuations and other factors, in their efforts to compete
effectively in their market and to raise capital. CTG believes that the Merger
will provide a platform to consolidate several of these companies into a larger
entity that could capitalize on CTG's existing management and manufacturing
capabilities, operating synergies, and a larger revenue and technology base.
MERGER EXCHANGE RATIO
Each outstanding share of Electro Common Stock will be deemed cancelled and
converted into one-fifth of a share of CTG Common Stock (the "Merger Exchange
Ratio") after giving effect to the Reverse Split. The Merger Exchange Ratio is
the result of arm's-length negotiations between the parties, and was reflective
of the market price of the common stock of each of Cardiac and Electro, as well
as the current status and future prospects of the companies. The Merger Exchange
Ratio may only be adjusted by amendment to the Merger Agreement.
CONDITIONS TO THE MERGER
The obligations of Cardiac and Electro to consummate the Merger are subject
to the satisfaction of certain conditions, including, among other things: (i)
the approval and adoption of the Merger and the Merger Agreement by the
stockholders of each of Electro and Cardiac; (ii) the securing of a minimum of
$4.0 million in financing, in addition to any existing debt obligations of both
Cardiac and Electro, on terms acceptable to both Cardiac and Electro; (iii) the
completion by Cardiac of the Reverse Split and the Restructuring Merger; and
(iv) other customary conditions. None of the material conditions to the
obligations of Cardiac or Electro to consummate the Merger may be waived or
modified by the party that is, or whose stockholders are, entitled to the
benefits thereof.
In that CTG cannot satisfy the $4.0 million financing condition solely with
proceeds from this offering, CTG intends to supplement additional funds needed
to satisfy the financing condition of $4.0 million with additional debt
financing. Three proposals for the debt financing have been received by Cardiac
from prospective lenders. All three proposals contemplate a working capital
credit facility secured by accounts receivable, inventory and equipment of CTG.
If sufficient debt financing is not available from these prospective lenders to
satisfy the financing condition, CTG intends to obtain additional financing
through alternative debt financing sources, which may be more costly than the
current proposals.
THIRD PARTY CONSENTS
Pursuant to the terms of the Coast Loan Agreement, Cardiac must obtain
Coast's written consent prior to merging or consolidating with another party.
The Merger and the transactions contemplated thereby have been discussed
thoroughly with Coast, and Coast is one of the parties that has submitted a
proposal to provide the incremental debt funding discussed in the prior
paragraph. However, Cardiac has not yet received consent from
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Coast and will not receive such consent until Coast has completed its due
diligence relative to its participation in the transaction. If Coast
participates in the transaction by providing incremental debt financing, then it
will also provide the consent required. If another party provides the debt
financing, it is intended that sufficient debt financing will be provided to
repay all obligations owed to Coast, thereby making its consent unnecessary. See
"BUSINESS - Business of Cardiac - - Debt Obligations."
Pursuant to the terms of the loan agreement between Cardiac and Sirrom (the
"Sirrom Loan Agreement") in connection with a $1.5 million loan from Sirrom to
Cardiac (the "Sirrom Loan"), Cardiac must obtain Sirrom's written consent in
connection with the transactions contemplated by the Merger and the
Restructuring Merger. The Merger and the Restructuring Merger and the
transactions contemplated thereby have been discussed thoroughly with Sirrom.
Sirrom has given its verbal approval to the Reverse Split, the Merger, the
Restructuring Merger and the transactions contemplated thereby, and has
indicated that it will provide its written consent upon reviewing final
documents and arrangements for any incremental debt to be incurred in
satisfaction of the financing contingency to the Merger and the Restructuring
Merger. See "BUSINESS - Business of Cardiac - - Debt Obligations."
The receipt of the consents of Coast and Sirrom are conditions precedent to
the consummation of the Merger; the inability to obtain the consent of either
party would preclude consummation of the Merger.
SOLICITATION OF THIRD-PARTY OFFERS
In the Merger Agreement, Electro and Cardiac have agreed not to solicit,
initiate or intentionally encourage proposals or offers, or to take certain
other actions, relating to any merger, consolidation, share exchange, purchase
or other acquisition of all or (other than in the ordinary course of business)
any substantial portion of the assets or any substantial equity interest in
either party or any business combination with either party; PROVIDED, HOWEVER,
that nothing contained in the Merger Agreement shall prohibit the Board of
Directors of Electro (the "Electro Board") or the Board of Directors of Cardiac
(the "Cardiac Board") from furnishing information to, or entering into
discussions or negotiations with: (a) any unaffiliated third party that makes or
is proposing to make an unsolicited written, bona fide offer with respect to an
acquisition transaction, if the Electro Board or the Cardiac Board based upon
the written advice of outside legal counsel determines in good faith that such
action is necessary for the Electro Board or the Cardiac Board to comply with
its fiduciary duties under applicable law and prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Electro or Cardiac provides written notice to the other party; and
(b) such parties who have made proposals, formal or informal, which may become a
Superior Proposal (as defined in the Merger Agreement) as to which either
Electro or Cardiac has advised the other, in writing, prior to the date of the
Merger Agreement. The Merger Agreement provides that if either Cardiac or
Electro receives any unsolicited offer or proposal to enter into negotiations
relating to an acquisition transaction, such party shall notify the other party
thereof, including information as to the identity of the party making such offer
or proposal and the specific terms thereof.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES
The Merger Agreement shall be terminated and the Merger abandoned,
notwithstanding the approval by the respective boards of directors and
stockholders of Cardiac and Electro of the Merger Agreement and the Merger, in
the event that the conditions of the Merger Agreement shall not have been met by
January 31, 1999. Furthermore, under certain conditions, the Merger Agreement
may be terminated prior to the Merger Effective Time, whether prior to or after
approval by the stockholders of Cardiac and Electro. If the Merger Agreement is
terminated, the Merger Agreement provides, in certain specified circumstances,
for the allocation of fees and expenses incurred by the parties in connection
with the transactions contemplated by the Merger. Moreover, in the event that
the Merger Agreement is terminated as a result of the receipt by one party of a
Superior Proposal and a determination (made in accordance with the terms of the
Merger Agreement) that accepting the Superior Proposal is necessary to comply
with the fiduciary duty of the board of directors of such party under applicable
law, the Merger Agreement provides for the payment by the terminating party of a
termination fee to the other party.
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AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the Merger Effective Time, the parties may, by written
agreement, modify or amend the Merger Agreement, provided that, material
provisions may not be amended or modified: (i) after the Merger Agreement has
been approved and adopted by Electro's stockholders, without the affirmative
vote of two-thirds (2/3) of the votes cast by holders of the outstanding shares
of Electro Common Stock, present in person or represented by proxy and entitled
to vote at the special meeting of Electro's stockholders; or (ii) after the
Merger Agreement has been approved and adopted by Cardiac's stockholders,
without the affirmative vote of the holders of a majority of the shares of
Cardiac Common Stock present in person or represented by proxy and entitled to
vote at the special meeting of Cardiac's stockholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Ervin Schoenblum and Abraham Nechemie, who comprise the entire Electro
Board, are two of the five partners constituting The T Partnership, which owns
approximately 30% of the outstanding shares of Electro Common Stock and which is
a creditor of Electro, with total indebtedness due to The T Partnership at
September 30, 1998 of approximately $2.5 million. Upon consummation of the
Merger, The T Partnership will have beneficial ownership of 492,969 shares of
CTG Common Stock, which includes 16,669 and 100,000 shares which The T
Partnership will have the right to acquire pursuant to outstanding warrants. In
addition to the shares held by The T Partnership, Messrs. Schoenblum and
Nechemie will also hold currently exercisable stock options with respect to
16,000 and 1,000 shares of CTG Common Stock, respectively. Messrs. Fred Lafer,
Stephen Shapiro and Henry Taub are the three other partners constituting The T
Partnership.
Tracey E. Young, a director of Cardiac, has provided Cardiac with
consulting services on clinical studies and other matters. As of December 26,
1997, Ms. Young has invoiced Cardiac approximately $100,000 for consulting
services performed by her through such date. She provided no further consulting
services after such date. Cardiac intends to pay Ms. Young for her consulting
services with funds with the proceeds of this offering.
Pursuant to the terms of the Merger Agreement: (i) Messrs. Schoenblum and
Nechemie are to be appointed directors of CTG upon the Merger Effective Time;
(ii) Saiber Schlesinger Satz & Goldstein, LLC ("Saiber"), Electro's legal
counsel, is to be paid legal fees at the closing of the Merger; and (iii)
Greenberg, Cardiac's legal counsel, is to be paid legal fees at the closing of
the Merger.
REDEMPTION OF THE T PARTNERSHIP DEBT
The Merger Agreement contemplates that the total indebtedness outstanding
and due to The T Partnership as of September 30, 1998 plus interest accrued
thereon (totaling approximately $2.5 million) shall be redeemed at the Merger
Effective Time by: (a) the issuance by Electro to The T Partnership of an
aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock"), of Electro, which shares shall have a liquidation
value equal to, and shall be issued in redemption of, $1.0 million of the
indebtedness and shall be convertible into shares of CTG Common Stock; (b) the
delivery to The T Partnership of CTG's 9% conditional promissory note in the
amount of $1.0 million pursuant to which CTG is obligated to pay only those
amounts which are due but not paid to the holders of the Series A Preferred
Stock, or in the event of certain other non-monetary defaults; and (c) the
delivery to The T Partnership of a secured promissory note made by CTG in an
amount not to exceed $1.3 million (which amount shall be the remaining amount of
Electro's secured indebtedness to The T Partnership exclusive of the amount
redeemed under (a) above).
RESTRUCTURING MERGER
GENERAL
In accordance with the provisions of the Restructuring Merger Agreement and
Section 251 of the General Corporation Law of Delaware (the "Delaware Act"),
upon the filing of a Certificate of Merger with the Secretary of
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State of the State of Delaware, or at such later time as may be provided in the
Certificate of Merger (the "Restructuring Effective Time"), CTG Merger Sub,
Inc., a Delaware corporation and a wholly-owned subsidiary of CTG ("Merger
Sub"), shall be merged with and into Cardiac. At the Restructuring Effective
Time, each issued and outstanding share of common stock of Merger Sub shall be
deemed cancelled and converted into one share of Cardiac Common Stock. Upon
consummation of the Restructuring Merger, the rights and interests of Cardiac
stockholders as holders of CTG Common Stock will be the same as the rights and
interests previously as holders of Cardiac Common Stock.
RESTRUCTURING EXCHANGE RATIO
At the Restructuring Effective Time, each issued and outstanding share of
Cardiac Common Stock shall be deemed cancelled and converted into one share of
CTG Common Stock (the "Restructuring Exchange Ratio"). Pursuant to the terms of
the Restructuring Merger, the authorized capital stock of Cardiac will be
reduced at the Restructuring Effective Time to one hundred shares of common
stock.
CONDITIONS TO THE RESTRUCTURING MERGER
The obligations of Cardiac and CTG to consummate the Restructuring Merger
are subject to the approval and adoption of the Merger Agreement and the Merger
by the stockholders of Electro and the approval of the Reverse Split,
ratification, approval and adoption of the Merger Agreement and the Merger and
approval and adoption of the Restructuring Merger Agreement and the
Restructuring Merger by the stockholders of Cardiac.
THIRD PARTY CONSENTS
The receipt of the consents of Coast and Sirrom are two of the conditions
precedent to the consummation of the Restructuring Merger. The inability to
obtain the consent of either party would preclude the consummation of the
Restructuring Merger. See "MERGER - Third Party Consents."
TERMINATION OF THE RESTRUCTURING MERGER AGREEMENT
The Restructuring Merger Agreement shall be terminated, and the
Restructuring Merger abandoned, notwithstanding the approval by the respective
boards of directors and stockholders of Cardiac and CTG of the Restructuring
Merger Agreement and the Restructuring Merger in the event of and simultaneously
with a termination (at or at any time prior to the Restructuring Effective Time)
of the Merger Agreement.
AMENDMENT OF THE RESTRUCTURING MERGER AGREEMENT
At any time prior to the Restructuring Effective Time, the parties may, by
written agreement, modify or amend the Restructuring Merger Agreement; provided
that, material provisions may not be amended or modified after the Merger
Agreement has been approved and adopted by Cardiac stockholders and Electro
stockholders, without the affirmative vote of the holders of a majority of the
outstanding shares of Cardiac Common Stock entitled to vote at a subsequent
meeting of stockholders.
BUSINESS
OVERVIEW
CTG was incorporated under the laws of Delaware on September 9, 1998 as a
direct, wholly-owned subsidiary of Cardiac. Pursuant to the Restructuring
Merger, Cardiac will become a direct, wholly-owned subsidiary of CTG. Pursuant
to the Merger, Electro will become a wholly-owned subsidiary of Cardiac. As a
result, CTG will hold two operating companies, Cardiac and Electro. CTG has
never conducted any business other than matters related to its formation and
initial organization. See "MERGER" and "RESTRUCTURING MERGER."
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Cardiac is engaged in the design, development, manufacture, marketing and
sale of implantable leads and Cardiac Pacing Systems, as well as the design,
development and manufacture of leads on an OEM basis.
Electro is engaged in the business of design, development, manufacture,
marketing and sales of catheters and related devices utilized in connection with
illnesses of the heart and circulatory system. Electro has targeted
electrophysiology as its focal area for future growth, but intends to maintain
and develop products for the emergency care, invasive and non-invasive
cardiology and invasive radiology markets.
CTG
STRATEGY. CTG's focus is to endeavor to finalize and implement operational
strategies designed to maximize return on capital and position the combined
companies for growth. The objective is to build a company specializing in the
development and/or promotion of differentiated, niche products to address the
cardiac and catheter markets. The combined companies will utilize current,
proprietary products, an acquisition/industry consolidation strategy, as well as
newly-developed technologies (whether developed by CTG or acquired or licensed
from others), to provide more effective treatment for cardiac dysrhythmias and
to improve safety and reduce cost for the patient, physician and hospital.
Emphasis will be on the combined companies' catheter and lead technology,
providing products which allow:
/BULLET/ more accurate and faster placement within the heart and
circulatory system;
/BULLET/ more sensitive reception of cardiac signals to aid in
diagnosis; and
/BULLET/ more accurate and faster delivery of electrical signals to
cardiac tissue to aid in treatment.
Three targeted market segments with existing products and new technologies
include bradycardia (pacing), tachycardia (defibrillation) and atrial
fibrillation (defibrillation and ablation). Combined, these address a worldwide
population of almost 1 million newly-diagnosed patients each year.
To the extent that the combined companies are successful in achieving
projected growth and adding new products either through product development or
acquisition, the combined companies may then be positioned either as a
stand-alone cardiac rhythm management company with a portfolio of clinically
advanced, strategically-linked, niche products, or for acquisition by one of the
larger cardiac device manufacturers lacking one or more of the combined
companies' specific product technologies.
Management's strategy will be to both consolidate with CTG other companies
with cardiology and electrophysiology catheter products that can be manufactured
by Cardiac or Electro, and/or to acquire or license such products. CTG will
endeavor to capitalize on the operational, marketing and financial synergies
inherent in the development of a larger entity. This strategy will be supported
by three primary activities:
1. the consolidation of two companies with related product lines,
based on proprietary technology, which will have the opportunity
to improve operations and profit performance through the
realization of annual operating synergies and cost savings;
2. the commercialization of electrophysiology and other
rhythm-management products, from the existing new product
development portfolio; and
3. acquisition of and consolidation with other companies with related
products.
According to Standard & Poor's, Dun and Bradstreet, The American College of
Cardiology and the American Heart Association, there are over 2,000 public and
private specialty niche companies worldwide that constitute the cardiac catheter
market. Many of these are either private or small-cap/micro-cap public companies
whose capitalization and/or access to funding hinders rapid product development
or sales expansion. A combination of some of such companies should enable them
to improve performance and provide greater
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opportunity by: (i) reducing costs through elimination of redundant operations;
(ii) making more efficient use of sales forces and other corporate resources;
and (iii) gaining better access to capital markets.
The business plan proposes that the combined companies will, within 12 to
18 months after consummation of the Merger, be able to achieve a positive
operational cash flow at least sufficient to support normal operating and
research and development activity. Management of the combined companies
anticipates that this may be achieved assuming the realization of projected
sales growth and the savings expected from the consolidation of operations. If
this plan proves to be successful, the cash raised pursuant to this offering
should be sufficient to satisfy the combined companies' needs for the next
several years. There can be no assurance that the combined companies will
achieve the business plan as the combined companies may be unsuccessful in
achieving such sales and/or realizing such savings. See "RISK FACTORS." Should
additional cash be required for completion of a merger or specific project, a
separate financing would be initiated.
SYNERGIES OF CONSOLIDATION. CTG management believes that the combination of
Cardiac and Electro will provide operating and strategic synergies benefiting
the combined entity by enhancing revenue opportunities, reducing expenses and
accelerating the development and commercialization of new products and
technologies. The synergies identified include the following:
/BULLET/ Electro has developed a broad line of products in the
cardiac catheter market which the managements of Cardiac
and Electro together believe would fit well with Cardiac's
product line because of similarities in technology,
customers and clinical use.
/BULLET/ Both companies manufacture products that perform
essentially the same function. Electro's catheters or
leads are also used to carry electrical signals to and
from the heart and for therapeutic and diagnostic
functions. Although there are some differences in
materials and in physical characteristics between the
products, the differences were determined by Cardiac to be
an advantage because they expand on the technology base of
both companies.
/BULLET/ By combining the companies, resources and personnel could
be better utilized, allowing operational cost savings and,
eventually, profitability.
More specifically:
/DIAMOND/ the companies could be consolidated under one
group of senior management;
/DIAMOND/ the companies could take advantage of manufacturing
efficiencies by eliminating redundancies and the
combined entity ultimately plans to eliminate one
manufacturing facility; and
/DIAMOND/ the larger revenue base could better and more
efficiently support a sales group for the
products.
/BULLET/ The markets for Cardiac and Electro are similar and both have
products which are directed at corporate OEM sales. Some of
the larger actual and potential OEM customers of Electro
require the same type of products as those manufactured by
Cardiac, providing additional sales opportunities for both
companies.
/BULLET/ The larger revenue base, broader product line and anticipated
better profit performance of the combined entity are more
desirable to the financial markets and may offer greater
access to additional capital required to build these
companies.
CTG PRODUCTS. CTG will focus on the development, manufacture and sale of
catheters and leads for use in diagnosis and treatment of cardiac dysrhythmia.
These products would be used both on a long term basis, as with CTG's
implantable pacing and defibrillating leads, and on a more acute and temporary
basis as with CTG's temporary pacing and cardiac mapping catheters.
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BUSINESS OF CARDIAC
GENERAL
Cardiac was incorporated as Supramedics, Inc. on June 20, 1980 under the
laws of the State of Delaware and on August 28, 1980 changed its name to Cardiac
Control Systems, Inc. to more accurately reflect the business of Cardiac.
Cardiac is engaged in the design, development, manufacture, marketing, and sale
of implantable cardiac pacing systems. Cardiac has received classification
(clearance) from the FDA to distribute, commercially, a line of single-chamber
and dual-chamber pacemaker systems and a single-lead atrial-controlled
ventricular cardiac pacing system. The equipment used for the external
programming and monitoring of Cardiac's pacemaker products is usually loaned
without charge to physicians and other purchasers of Cardiac's products.
Cardiac's products are "medical devices" as defined by the FDA and thus are
subject to Federal regulations enforced by the FDA, including restrictions on
the commercial introduction of products and clinical testing requirements.
Cardiac Common Stock was listed on Nasdaq SmallCap Market; however, on
August 29, 1991 Cardiac was advised by the Nasdaq SmallCap Market that its
common stock would be delisted effective August 30, 1991. Cardiac was not in
compliance with the Nasdaq SmallCap Market's capital and surplus requirement
then in effect. Shares of Cardiac Common Stock are currently traded
over-the-counter under the symbol "CDCS" and are quoted on the OTC Bulletin
Board(R). This service allows market makers to enter quotes and trade securities
that do not meet Nasdaq SmallCap Market qualification requirements.
Cardiac has had a prior history of net losses and had experienced cash flow
deficiencies and had been unable to pay many of its obligations as they became
due. Cardiac is continuing its efforts to increase its sales volume and attain a
profitable level of operations. However, there is no assurance that Cardiac's
efforts will be successful. There are many events and factors in connection with
the development, manufacture and sale of Cardiac's products over which Cardiac
has little or no control, including, without limitation, production delays,
marketing difficulties, lack of market acceptance, and superior competitive
products based on future technological innovation. There can be no assurance
that future operations will be profitable or will satisfy future cash-flow
requirements.
PRODUCTS
Cardiac currently manufactures and commercially distributes a line of
single- and dual-chamber implantable pacemakers and a single-lead, dual-chamber
atrial-controlled ventricular ("VDD") pacing system, as well as electrode leads
and programming equipment developed by Cardiac. Pacemaker systems are prescribed
by physicians for patients who suffer arrhythmias or impairments of the natural
electrical conduction system of the heart that render the heart incapable of
pumping blood throughout the body at a rate and rhythm suitable for the body's
needs. The pacemaker system treats the condition by electrically stimulating the
heart to restore proper rhythmic contractions of the heart muscle.
Cardiac's pacemakers and electrode leads encompass 8 pacemaker models
(under the trade names MAESTRO(R) II or MAESTRO(R) II SAVVI(TM)) and 7 electrode
lead models (under the trade names PolySafe(TM) or A-Track(TM)). Cardiac
received FDA clearance to market its most recent dual-chamber pacemaker, the
MAESTRO Series 500 Model 534 dual chamber, bipolar DDD pacing system in October
1997. Cardiac also received FDA market clearance for a new design on a temporary
cardiac pacing lead, the INTERIM(TM) AV is designed to allow atrial sensing and
ventricular pacing through the same lead.
Cardiac further developed a single-pass atrial-controlled ventricular (VDD)
pacing system and received FDA clearance in 1993 for two VDD models which
Cardiac sells under the trade name MAESTRO II SAVVI. These pacing systems were
unique in the industry until Intermedics, a competitor of Cardiac at that time,
received FDA approval of its single-pass, atrial-controlled ventricular pacing
system. Intermedics commenced marketing its new product in March 1995. One
additional competitor (Medtronics, Inc.) has also recently entered the United
States market with a competitive single-lead product.
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In addition, Cardiac markets certain electrode leads and pacing accessories
manufactured by other medical companies. Further, Cardiac sells other
implantable leads for implantable pacemakers and defibrillators on an OEM basis
to implantable cardiac device manufacturers and hybrid circuit components to an
Italian manufacturer and to an Indian manufacturer. See "- Sales, Marketing and
Distribution Methods."
Cardiac's products are classified as "medical devices" under the FDA Act
and, as such, are subject to extensive domestic regulation by the FDA and
European regulation by the ISO. All of the pacemaker systems marketed in the
United States by Cardiac (including related electrode leads) are in commercial
distribution under the FDA's 510(k) Premarket Notification regulations or
Premarket Approval ("PMA") regulations. European regulations now include the ISO
9000 series of standards developed by the ISO as adopted by the member nations
of the EEC. Cardiac is certified to ISO 9001 by the Notified Body, TUV Product
Services, of Munich, Germany. See "- - Government Regulation." Also see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Operating Trends and Uncertainties."
Cardiac's MAESTRO II anti-bradycardia cardiac pacemakers are electronically
based with an integrated circuit design, and include multi-programmable
single-chamber, dual-chamber and atrial-controlled ventricular pacemakers. They
are non-invasively programmable to multiple operating modes and functions for
prescriptive flexibility, provide a wide range of sensitivity values and
incorporate programmable high- and low-frequency bandpass filters. This
extensive programmability permits the physician the flexibility required to
provide truly prescriptive, individualized pacing therapy for a wide range of
patients.
Cardiac's pacemakers are generally sold together with electrode leads, most
of which are manufactured by Cardiac. Cardiac's PolySafe electrode leads include
various models of its specialized single-pass A-Track leads. The A-Track leads,
developed and patented by Cardiac, are triaxial pacing leads in which the inner
coil connects to a ventricular tip electrode for pacing and sensing in the
ventricle, and the two other coils connect to two diagonal atrial bipolar
("DAB") electrodes positioned so as to provide sensing data from the atrium. The
DABTM electrodes transmit sensed atrial signals to the pacemaker, which then
stimulates the ventricle at an appropriate rate, providing atrial-synchronous
ventricular pacing, mimicking the normal action of the heart. The MAESTRO II
SAVVI system incorporating the A-Track lead represents an important advance in
technology, combining atrial-controlled ventricular pacing with the convenience
and reliability of a single-lead implant procedure. This system is appropriate
for the many patients with conduction disorders and a physiologically responsive
sino-atrial node.
Cardiac has developed an upgrade to its single pass pacing technology. This
upgrade expands the capability of the current A-Track leads to allow both
sensing of electrical signals and transmission of a pacing pulse to both the
upper and lower chambers of the heart. If proven effective, this technology
could expand the potential for usage of Cardiac's single pass technology into
all dual chamber, (two lead) pacemaker implants. The first implant of this lead
in a human for clinical study purposes took place in Italy on September 25,
1998. The first commercial sale of this lead for a more limited application
(sensing in one chamber and pacing and sensing in the other chamber of the
heart) took place in Japan during the week of September 21, 1998. There can be
no assurance that this technology will be proven effective, nor can there be any
assurance that this technology will be accepted by customers as a substitute for
current two lead technology.
Cardiac's electrode leads are insulated with Surethane, Cardiac's
proprietary urethane compound and are manufactured using a patented coating
process, rights to which are held exclusively by Cardiac. See "- Certain
Patents, Trademarks and Licenses." The Surethane is applied in solution to the
pacing coil using a non-thermosetting coating process that results in
non-stratified bonding of each layer of the Surethane upon curing and a
"unitized" construction of coil and insulation. This process results in
extremely slender and durable leads. There has been some industry bias toward
using urethane, primarily for bipolar leads because of problems with insulation.
However, Cardiac has not manufactured bipolar leads of urethane material.
Cardiac only manufactures unipolar urethane leads. Its bipolar leads are
manufactured with silicone material. Cardiac is not aware of any historical
problems with its leads manufactured of urethane.
Both of Cardiac's portable programmer models enable bi-directional
communication between the clinician and the implanted pacemaker. Programming and
telemetry messages are transmitted to the pacemaker via a
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lightweight wand. Prior to transmitting a new program to the pacemaker, the
programmer automatically provides validation of the selected mode/parameter
value combination as a safety step. One model incorporates an integral printer,
and the other provides for connection of a printer, for generating hard copy
records. Both provide for connection of a strip chart recorder, for generating
hard copy records of pacemaker performance. A programmer carrying the CE Mark
label, as required in Europe, has been developed and commercialized. In
addition, Cardiac is nearing completion on a new computer-based programming
system.
SALES, MARKETING AND DISTRIBUTION METHODS
The primary markets for Cardiac's products are hospitals, other medical
institutions, and physicians both in the United States and abroad. Cardiac
currently markets its products primarily through independent sales
representatives in the United States and independent distributors in the
international markets. Also, Cardiac sells selected components and products on
an OEM basis to various U.S. and non-U.S. companies. Independent representatives
are paid by commission; independent distributors generally purchase Cardiac's
products at discounted prices. Cardiac advertises in scientific publications and
also uses trade shows and convention demonstrations, direct mail advertising,
telephone solicitations and direct sales to selected customers as part of its
marketing efforts.
Pricing of Cardiac's products is generally similar to that for competing
products. Cardiac focuses its marketing attention on the technological
advantages of its pacemakers rather than on price considerations. Cardiac bases
its appeal to physicians on Cardiac's belief in the relative simplicity with
which its reliable and therapeutically effective pacemaker systems can be
implanted, programmed and monitored. Cardiac focuses its marketing attention on
the issue of price sensitivity only when necessary. For example, under Medicare
legislation, the amount of reimbursement that a hospital and a physician receive
from Medicare for a pacemaker implant does not vary with the cost of the
implanted pacemaker, and Cardiac must consider this in its pricing decisions.
See "- Government Regulation."
Cardiac maintains inventories of pacing systems at many hospitals to
facilitate the immediate availability of these products when required. In
addition, Cardiac's independent sales representatives hold a supply of pacemaker
systems on consignment. A portion of Cardiac's sales in the United States are
filled by withdrawing products from consigned inventories, whereupon the
hospital is billed for the product.
Independent sales representatives, organizations and distributors selling
Cardiac's products are free to sell products not produced by Cardiac that do not
compete with Cardiac's products. As of September 30, 1998, 12 independent sales
representatives (or organizations) are actively selling Cardiac's products in
the United States. Cardiac has executed long-term contracts with most of its
sales representatives in the United States. Generally, the contractual
agreements executed between Cardiac and its independent sales representatives
provide each representative the exclusive right to sell Cardiac's products in a
specified area of the United States for a three- or five-year period, are
renewable for a second three- or five-year period, and provide Cardiac with
certain termination rights.
Cardiac's operations, sales and ability to attain a profitable level of
operations are dependent upon expansion of its OEM business and maintaining the
contractual relationships with its principal sales representatives and upon
on-going expansion of their business volume. Termination of any of these
contractual agreements between Cardiac and its key independent sales
representatives could have a material adverse effect on Cardiac's sales volume
and operations. Furthermore, Cardiac's ability to achieve a profitable level of
operations would be adversely affected if Cardiac's sales representatives were
unable to expand the volume of their business.
On December 20, 1995, Cardiac signed a distribution agreement with Grupo
Taper, S.A. of Madrid, Spain under which, subject to certain pre-existing
distribution agreements, Grupo Taper became the sole agent for the purchase,
import and distribution and sales of Cardiac's product in Europe and certain
specified non-European countries. The agreement is for an initial period of ten
years and will automatically renew for a five-year period unless terminated by
either party upon six month's prior notice.
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In August 1996, Cardiac opened a Japanese sales office and received
Japanese approvals and a license to import and sell Cardiac's single-lead VDD
product. A major Japanese distributor, The Herz Co., has begun distributing the
product throughout Japan. Cardiac expects that these efforts will enable Cardiac
to expand sales in the Japanese market, where the average unit price is
significantly higher than in the rest of the world.
During the year ended March 31, 1998, two of Cardiac's independent sales
representatives each accounted for in excess of 10% of Cardiac's sales,
accounting for $897,492 (23%) of the total. With the exception of Intermedics
and a manufacturer of implantable Cardiac defibrillators, as disclosed below,
during the year ended March 31, 1998, no single domestic or international
customer accounted for in excess of 10% of Cardiac's sales. Accordingly, Cardiac
believes that the loss of any single customer in the United States, excluding
its OEM customers, would not have a material adverse effect on its business.
However, Cardiac's ability to maintain a profitable level of operations is
dependent upon its ability to increase its sales volume. Therefore, the loss of
any important customer in the United States could unfavorably impact Cardiac's
sales volume and its ability to achieve a profitable level of operations.
On August 1, 1990, Cardiac executed a license agreement and a supply
agreement with Intermedics. Pursuant to the license agreement, Cardiac received
initial license fees aggregating $1.5 million. The license agreement also
provided for the payment of royalties to Cardiac based upon net sales of
Intermedics products incorporating the licensed (single-pass lead) technology.
On April 2, 1993, Cardiac amended and restated both its license agreement and
supply agreement with Intermedics. Pursuant to the amended and restated license
agreement, Cardiac received prepayment of royalties in the amount of $850,000.
The prepayment was applied against royalties at a rate of 2/1 per pacing system
sold, reducing the potential aggregate royalties to be received over the life of
the agreement from $7,031,250 to $6,181,250. Further, pursuant to a subsequent
amendment, a $100,000 prepayment of future royalties was received in February
1994, which was applied against the next 1,000 pacing systems sold at a rate of
$100 per unit. The entire prepaid royalties of $950,000 were earned by Cardiac
as of March 31, 1997. Intermedic's obligation to pay royalties under this
license agreement terminated on January 22, 1998, however, the license
agreement, which grants Intermedics the right to manufacture and sell the
technology, does not terminate until the expiration of Cardiac's patent in July
2009. The supply agreement, which was to expire on July 31, 1993, was extended
until August 1, 1998 and provided for Cardiac to supply its specialized
single-pass leads to Intermedics at specified prices. Sales to Intermedics under
the supply agreement accounted for 29% and 47% of total sales for the years
ended March 31, 1998 and 1997, respectively.
Cardiac executed a supply agreement and a joint development agreement, both
effective as of January 1, 1997, for defibrillation leads with a major
implantable defibrillator manufacturer. The supply agreement allows for the OEM
sale of defibrillation leads to this manufacturer, while the development
agreement contemplates the development and eventual supply of a second
proprietary lead. Sales and shipments of the first lead commenced in October
1997, and accounted for 13% of Cardiac's sales for the year ended March 31,
1998. In addition, a third lead was developed for this manufacturer and a supply
agreement for this product was executed on September 17, 1997; the first
shipment of this product occurred in the second quarter of fiscal year 1999.
Cardiac expects total sales volume attributable to this customer to grow in
fiscal year 1999. Pursuant to the terms of the joint development agreement,
during fiscal year 1997, Cardiac received $200,000 from the manufacturer,
$60,000 of which was recorded as equity financing for the purchase by such
manufacturer of 40,000 shares of Cardiac's Common Stock, and $140,000 was
recorded as other income for the purchase of the defibrillation leads
technology.
On April 24, 1998, Cardiac executed a development agreement with a
privately-held corporation to develop a new implantable lead for use with a new
hearing restoration system to be developed and marketed by the other
corporation. This new implantable system is expected to substantially improve
hearing for those patients with moderate-to-severe hearing loss for whom hearing
aids are ineffective. Based on verbal commitments and current purchase orders,
upon completion of the development of this new lead, Cardiac expects to
manufacture and supply this product on an OEM basis to the other corporation.
Historically, Cardiac encountered many difficulties in connection with its
efforts to develop a distribution network of independent sales representative in
the United States large enough to attain enough sales to generate profitability.
Cardiac believes that these difficulties are attributable to Cardiac's lack of a
complete product line as
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well as the competitive environment, and Cardiac's financial position. With the
Merger and the combined product line, the new products being developed and
released to the market and the financing associated with the Merger, Cardiac
expects to expand its distribution. Further, Cardiac estimates its market share
of pacing products to be about 0.25% of an estimated worldwide pacing systems
market of $2.0 billion. Cardiac considers the market large enough to accommodate
Cardiac's products.
PRODUCT WARRANTIES
Cardiac's pacemakers and electrode leads are both covered by a limited
warranty. Specific terms and conditions of the warranties vary according to the
pacemaker model and electrode lead. Generally, however, the warranty on a
pacemaker extends from 5 to 6 years, and the warranty on an electrode lead
continues for the patient's lifetime. All warranties provide for replacement
with a comparable Cardiac product and for partial reimbursement of medical
expenses not covered by third parties.
CERTAIN PATENTS, TRADEMARKS AND LICENSES
Cardiac's policy is to obtain patents on its inventions whenever practical
and to obtain licenses from others with regard to technology that it deems
necessary to its business. Technological advance has been characteristically
rapid in the industry in which Cardiac competes, and Cardiac believes its
business is not materially dependent upon any individual patent or license.
However, should certain of Cardiac's licenses be terminated for any reason,
Cardiac's operations and competitive ability could be adversely affected.
<TABLE>
<CAPTION>
UNITED STATES PATENTS DESCRIPTION DATE OF ISSUE
<S> <C> <C>
4,585,004 Heart Pacing and Intracardiac Electrogram Monitoring System 4/29/86
and Associated Method
4,726,379 Cardiac Pacer with Switching Circuit for Isolation 2/23/88
4,962,767 Pacemaker Catheter 10/16/90
4,907,592 Self-Sealing Connector for Electrical Leads for Use in Wet 3/13/90
Environments
5,127,403 Pacemaker Catheter Utilizing Bipolar Electrodes Spaced in 7/7/92
Accordance to the Length of a Heart Depolarization Signal
5,630,835 Method and Apparatus for the Suppression of Far Field 5/20/97
Interference Signals for Implantable Device Data
Transmission Systems
5,772,693 Single Preformed Catheter Configuration for a Dual Chamber 3/20/96
Pacemaker System
5,814,076 Apparatus for Improved Cardiac Pacing and Sensing using 9/29/98
Extracardiac Indifferent Electrode Configurations
</TABLE>
Cardiac obtained from Howard C. Hughes and Roy D. Bertolet, the latter an
employee of Cardiac, an exclusive license to an extrusion technique for coating
pacemaker leads and other wires with polyurethane, for which a patent was
granted on February 5, 1985. The term of the license expires on February 17,
2002. The license provides for payment of royalties for each contract year based
on a percentage of net sales of products produced using the licensed technology.
On March 29, 1993 the licensor executed a sublicense agreement with Cardiac,
pursuant to which Cardiac granted a limited sublicense allowing Intermedics to
use the extrusion technique to
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manufacture leads pursuant to the terms of the amended and restated license
agreement between Cardiac and Intermedics.
On March 5, 1997, an objection to Cardiac European Patent No. 0350282
relating to single-pass diagonal atrial bipolar pacemaker catheter technology
was heard in Munich, Germany. On March 24, 1997, Cardiac was advised that the
objection was rejected by the Patent Court. An appeal has been filed.
Cardiac uses various trademarks in association with marketing and sale of
its product lines. The MAESTRO trademark, used with Cardiac's pacemakers and
programmers, has been registered with the U.S. Patent and Trademark Office.
PolySafe, A-Track, A-V Data, TriFixTM, TrabeculokTM, SAVVI, DAB, PaceProTM,
INTERIM and Surethane are unregistered trademarks of Cardiac.
RESEARCH AND DEVELOPMENT
Cardiac expended approximately $975,100 and $1,087,000 on research and
development activities during the fiscal years ended March 31, 1998 and 1997,
respectively. Research and development activity previously reported as
culminating in FDA submission was rewarded with FDA approval in October 1997 of
the MAESTRO Series 500 Model 534 dual-chamber, bipolar DDD pacing system and in
December 1997 of the INTERIM single-lead temporary pacing system.
Continued development of Cardiac's single-lead technology included the
development of a preshaped single-pass lead for VDD and DDD pacing. These leads
are believed to expand capability and use, as well as offer further enhancement
of performance relative to Cardiac's current single-lead products. Cardiac is
currently performing animal and human studies and plans to initiate chronic
human clinical studies with this lead in the second quarter of fiscal year 1999.
This lead is believed to offer further enhancement of performance with
completion of limited acute and chronic animal studies. In November 1996, a
development relationship was formally established with a manufacturer of
implantable defibrillators for the application of Cardiac's unique lead
technology to the special challenges of implantable defibrillation leads. See "-
- - Sales, Marketing and Distribution Methods."
The fiscal year ended March 31, 1998 included on-going activity in the area
of implementing design controls in compliance with Section 4.4, ISO 9001 Quality
Standard and similar requirements of cGMP regulations.
RAW MATERIALS AND PRODUCTION
Although Cardiac endeavors to have alternative supply sources for parts and
materials used in manufacturing its products, single sources are used for
certain critical materials, including medical adhesives, integrated circuits,
hybrid microelectronic circuitry, lithium batteries, various other components,
and a material used to produce Surethane. The loss of any one of these single
sources or significant delivery delays could cause a costly delay in production.
Although Cardiac believes that various design or material alternatives could be
used, qualification of these could prove time-consuming and could require
notification to and clearance by the FDA.
SOURCES OF SUPPLY
Two of Cardiac's principal suppliers of materials used primarily in
electrode lead production, Dow Corning and E.I. DuPont de Nemours & Co.
("DuPont"), indicated that they will no longer supply their materials to the
medical device industry for use in implantable devices. In July 1993, the FDA
published in the Federal Register a one-time-only requirement for medical device
manufacturers to file a special notification of material supplier changes
resulting from the decision of Dow Corning to discontinue supplying its
materials to medical device manufacturers. Cardiac filed the "Special Silicone
Notification" for its products effected by the Dow Corning decision in September
1993. In this notification, alternate suppliers and materials were identified
and supporting technical biological test data were provided for the alternate
materials. The FDA acknowledged receiving Cardiac's notification and indicated
that, unless otherwise notified by FDA, the alternate materials identified in
the
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notification may be used in Cardiac's products in place of the comparable Dow
Corning materials. No further FDA approvals of the alternate materials of such
suppliers were required.
With respect to other material changes resulting from decisions by the
material suppliers to discontinue supplying the medical device industry (e.g.
DuPont), the FDA has indicated that such changes shall be handled on a
case-by-case basis through the established product approval processes within the
FDA. The availability of materials suitable for use in implantable medical
devices is an industry-wide problem and is not unique to Cardiac or to the
cardiovascular device segment of the industry. The Polymer Technology Group
produces a product that meets manufacturing requirements and has been identified
as a tentative replacement for the DuPont supplied material. Biocompatibility
studies have been completed. Since the candidate replacement material is
comprised of the same chemical composition as the DuPont material, it is
expected that it will be comparable with respect to the performance
characteristics and biocompatibility of the current material in use. Similarly,
FDA approval of this replacement material is anticipated to be forthcoming based
upon a satisfactory outcome of the testing performed. Cardiac believes, however,
that it has a sufficient supply of the DuPont material to meet Cardiac's
anticipated demand for the next several years.
Suppliers of custom Application Specific Integrated Circuits ("ASICs") have
advised Cardiac that the technology used to produce these ASICs will no longer
be supported. As such, Cardiac placed one last bulk order to ensure the
availability of sufficient ASICs to satisfy projected demands for product. The
new pacing system under development will utilize appropriate new ASICs for the
new system obviating the need for perpetual supply of the currently used ASICs.
INSURANCE
Cardiac maintains what it believes to be an adequate amount of
comprehensive general liability insurance in an amount of $2.0 million and what
it believes to be a reasonable amount of products liability coverage in an
amount of $1.0 million. No assurance can be given that the products liability
coverage will be sufficient to protect Cardiac's assets against claims by users
of its products or that Cardiac will be able to maintain such coverage (or
obtain additional coverage) in the future at reasonable premium rates or at all,
in which case its assets will be at risk in the event of successful claims by
users of its products. Furthermore, Cardiac's liability coverage may not cover
costs incurred by Cardiac under its product warranties (see - - "Product
Warranties") or costs incurred by Cardiac in the event of a product recall.
Cardiac has applied for policies of key-man life insurance on the lives of three
of its key management personnel, Messrs. Bart C. Gutekunst ($1.0 million), Alan
J. Rabin ($2.0 million) and Jonathan S. Lee ($250,000).
Cardiac has no pending, threatened or actual claims as of this date, nor is
Cardiac aware of any current circumstances that might give rise to such claims.
However, Cardiac could be exposed to possible claims for personal injury or
death resulting from the sale or subsequent malfunction of allegedly defective
products.
EMPLOYEES
As of September 30, 1998, Cardiac employed 47 persons full-time. Of the
total employees, 23 were engaged in manufacturing and quality control, 7 in
general administration and executive activities, 14 in engineering and research
and development, and 3 in sales and marketing. Cardiac is not a party to any
collective bargaining agreement and considers its relations with its employees
to be good.
GOVERNMENT REGULATION
FEDERAL REGULATIONS. In the United States, the FDA, among other government
agencies, is charged with regulating the introduction to the marketplace of new
medical devices, related manufacturing and laboratory practices, and labeling
and record keeping for such devices. The FDA has the authority to ban, detain or
seize "adulterated or misbranded" medical devices, and may also order repair,
replacement or refund and require notification of health professionals and
others with regard to medical devices that present unreasonable risks or
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substantial harm to the public health. The FDA may also proceed through court
action to enjoin and restrain or initiate action for criminal prosecution of
certain violations of the FDA Act pertaining to medical devices.
Most implantable cardiac pacemakers fall within a category for which the
FDA has stringent clinical investigation and premarket clearance requirements.
Such regulation tends to lengthen the time for introducing new products in the
United States, and to increase the expense of developing and marketing such
products. Moreover, the FDA administers certain controls over approvals for
exporting such devices from the United States.
FDA regulations require a company to file a 510(k) Premarket Notification
for certain products demonstrating that the products are substantially
equivalent to products that were introduced into interstate commerce for
commercial distribution before May 28, 1976 (pre-enactment devices) or to
products which the FDA has already found to be substantially equivalent to
pre-enactment devices. The FDA has also issued regulations for the PMA of
medical devices that are not substantially equivalent to pre-enactment devices
(such as Cardiac's dual-chamber and single-lead atrial-controlled ventricular
devices). These must be cleared for commercial distribution through a PMA
submission or a PMA supplement. The regulations will eventually require a PMA
submission for all products (such as Cardiac's single-chamber devices)
previously cleared for commercial distribution through premarket notifications.
Prior to seeking PMA clearance for a medical device, a company is generally
required to complete a clinical evaluation in accordance with Investigational
Device Exemption ("IDE") regulations. The time and expense associated with the
clinical investigation and premarket clearance requirements of the FDA are
substantial.
Many of the new products developed by Cardiac in the future most likely
will be subject to the IDE and/or PMA regulations of the FDA. Accordingly,
Cardiac will continue to devote significant time to the FDA regulatory process
leading to FDA market clearance of new products developed by Cardiac.
FDA regulations require Cardiac to register its manufacturing establishment
with the FDA, list all medical devices that are manufactured and distributed by
Cardiac, observe certain production and labeling standards and submit to
unscheduled inspections by the FDA. Other FDA regulations relate to repair and
replacement of devices, refund of purchase price and notification of risks,
record keeping and reporting, and restrictions on the sale, distribution or use
of certain devices.
In recent years, the FDA has implemented product tracking and electrode
lead post-market surveillance regulations. These regulations require Cardiac to
track and maintain information regarding the location of product not in its
direct possession. The post-market surveillance regulations require Cardiac to
collect and analyze clinical data to complete product longevity analysis. The
expense to Cardiac to meet these regulations has been minimal to date. The
potential for a material expense due to these regulations remains a possibility.
Most pacemaker recipients are of advanced age and, thus, are eligible for
Medicare in the United States. Therefore, in addition to FDA and similar foreign
regulations, Cardiac may also be affected by changes in the laws and regulations
relating to Medicare.
Cardiac's products are manufactured by Cardiac under closely controlled
environmental conditions with processes developed by engineering personnel and
monitored by quality assurance personnel. These processes are designed to be
consistent with cGMP regulations audited by the FDA. FDA conducted an audit of
Cardiac operations in December 1996 citing only minor deficiencies which have
since been corrected.
STATE REGULATION. In addition to Federal law, Cardiac is subject to the
Florida Drug and Cosmetic Act. In particular, Cardiac is required to maintain a
permit to operate a medical device manufacturing facility and must register its
medical devices with the appropriate Florida authority. All such required
permits have been received, and registrations made, by Cardiac.
EUROPEAN REGULATION. The EEC nations have adopted universal standards as
developed by the ISO in order to provide simplified trade among the member
nations and to assure free access to trade while maintaining quality standards
for products sold. All companies doing business in these nations must be
certified to
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these standards set forth by the EEC which is evidenced by being granted the CE
Mark. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Operating Trends And Uncertainties."
INVENTORY AND BACKLOG
There is a several-month lead time between the time that Cardiac acquires
parts until such time that a product is completed and available for sale.
Cardiac is required to carry significant amounts of inventory in order to meet
rapid delivery requirements of customers and assure itself a continuous supply
of key components and parts from its suppliers. In addition, a portion of
Cardiac's business is consignment in nature where Cardiac provides customers
with the right to return products that are not implanted or sold. As a result of
the nature in which Cardiac runs its business, it does not carry a significant
backlog, however inventory management is an important business concern both with
respect to Cardiac's liquidity and due to the potential for rapidly changing
business conditions and technological advances within the industry.
COMPETITION IN THE INDUSTRY
Cardiac competes with many other domestic and foreign companies, many of
which have significantly greater financial and other resources than Cardiac. The
industry is currently dominated by Medtronic, Inc., Intermedics, Cardiac
Pacemakers, Inc. (a division of Guidant Corporation), and Pacesetter Systems,
Inc. (a division of St. Jude Medical, Inc.). Although many of the larger
companies have a group of loyal physicians who use their products exclusively,
most physicians use more than one pacemaker supplier.
Technological innovation and sales ability are important with respect to
market entry and penetration. Cardiac believes that the primary competitive
factors determining the buying decision in the marketplace today include the
ability to reduce procedural cost, increase patient safety and improve product
effectiveness. Other factors include product reliability, product capability,
technical support provided by the manufacturer, price, and credibility of the
manufacturer. Nevertheless, Cardiac's products are subject to the risk of being
rendered obsolete by the introduction of new products or techniques by others.
Some of the conditions and diseases that Cardiac's pacemakers are designed
to treat may, in certain cases, also be treated by drug therapy. Cardiac does
not deem itself to be in substantial direct competition with pharmaceutical
companies because, at present, drug therapy is only infrequently a viable
alternative to use of a pacemaker. However, new drugs and methods of therapy
that might compete with Cardiac's pacemaker products may be developed by
pharmaceutical or other health care companies. Many such companies are larger
than Cardiac and possess more substantial research facilities and other
resources.
Companies that are already well established can be expected to protect
their existing market shares. This is coupled with increasing marketing costs
under heavier competition and escalating regulatory burdens. In addition, there
is an overriding necessity to increase research and development expenditures in
order to remain competitive.
PROPERTY
Cardiac owns and occupies a 50,000 square foot building on 4.11 acres of
land in Palm Coast, Florida. The facility houses Cardiac's headquarters and its
research and development, manufacturing, administrative and marketing divisions.
The facility includes a 3,000 square-foot controlled environment area for the
manufacture of Cardiac's medical products, and 18,000 square feet of unimproved
space that is not in use. The production capacity of Cardiac's existing facility
is greater than current production levels and should be sufficient to meet
Cardiac's needs for at least the next several years. In the opinion of
management, the property is adequately covered by insurance.
Sirrom holds a first mortgage on Cardiac's premises and a first lien
against all of Cardiac's real and personal property (including patents and
royalties), but excluding inventory and accounts receivable. In June 1997,
Cardiac obtained additional financing from Coast, pursuant to which Sirrom
subordinated its first priority security
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interest in Cardiac's real and personal property to Coast; however, the priority
interest of Coast in Cardiac's real estate is limited to $500,000. See "RISK
FACTORS - Debt Obligations and Consequences of Default."
LEGAL PROCEEDINGS
On January 4, 1994, Strategica Group, Inc., a Miami-based financial
brokering firm ("SGI"), filed suit against Cardiac in the Circuit Court of the
11th Judicial Circuit in and for Dade County, Florida, alleging that Cardiac had
breached certain contractual duties and obligations arising under an agreement
(the "Agreement"), dated October 16, 1992. The suit seeks a judgment requiring
Cardiac to deliver warrants to purchase shares of Cardiac Common Stock
representing 15% of the total outstanding shares of Cardiac, and damages in
excess of $15,000. Cardiac has denied liability and filed a counterclaim
alleging that SGI fraudulently induced Cardiac into the Agreement then breached
the Agreement and certain fiduciary duties. Management has vigorously defended
the lawsuit and filed counterclaims, and believes the ultimate outcome would not
be expected to materially affect Cardiac's financial position. Management has
had settlement discussions with SGI and, in April 1998, reached an
agreement-in-principle regarding settlement with SGI. The final terms have not
yet been reduced to writing. The settlement, as proposed, contemplates the
reciprocal dismissal of all claims asserted by each party and the grants by
Cardiac to SGI of a warrant exercisable within five years for 25,000 shares of
CTG Common Stock at an exercise price of $1.00 per share.
In December, 1997, Japan Crescent, Inc. and Shinji Hara filed a civil
action against Cardiac in the Circuit Court of the 9th Judicial Circuit in and
for Orange County, Florida. The suit alleges that Cardiac is indebted to the
plaintiffs for approximately $200,000 for services rendered in connection with
the acquisition of import approvals for certain of Cardiac's products. Cardiac
has answered the complaint and has informed the plaintiffs that Cardiac intends
to pay for the total value of the services rendered of approximately $200,000
with funds obtained through its public offering in connection with the Merger,
however, if a judgment were to be entered against Cardiac prior to the
consummation of the public offering requiring Cardiac to pay in excess of a few
thousand dollars in any lump-sum payment before Cardiac has obtained additional
financing, Cardiac could, depending upon the amount of such lump-sum payment, be
unable to make such a payment and this could have a material adverse effect on
Cardiac's business.
DEBT OBLIGATIONS
Cardiac has certain outstanding financial obligations. In March 1995,
Cardiac borrowed $1.5 million from Sirrom evidenced by a $1.5 million promissory
note (the "Sirrom Note"). The Sirrom Note is secured by a first mortgage and an
assignment of rents and leases on Cardiac's headquarters, subject to Sirrom's
subordination to another lender of up to a maximum of $500,000. The Sirrom Note
is also secured by a first lien (also subject to subordination to another
lender) on all of Cardiac's personal property and proceeds thereof, including
general intangibles such as Cardiac's patents and royalties, but excluding
Cardiac's inventory and accounts receivable. The Sirrom Note bears interest at
the rate of 13.5% annually and is payable monthly, interest only, with a balloon
payment of principal and accrued and unpaid interest due on March 31, 2000.
Interest payments on the Sirrom Note in each of the fiscal years ended March 31,
1998 and 1997 were $202,500. The Sirrom Loan Agreement imposes certain
constraints on Cardiac's business including, among other things, that Sirrom's
consent is required to sell or encumber Sirrom's collateral having an aggregate
fair market value exceeding $25,000. Additionally, Cardiac may license its
intellectual property in the ordinary course of business so long as Cardiac's
interest in the license agreements are freely assignable to Sirrom. Also,
Cardiac may not incur certain additional indebtedness in excess of $200,000
annually without Sirrom's consent (which consent may not be unreasonably
withheld or delayed). Such consent and notice requirements could impede
Cardiac's ability to act expeditiously in its operations or corporate matters,
which may have an adverse impact on Cardiac's business and corporate affairs.
Cardiac issued common stock purchase warrants to Sirrom in connection with this
loan. See "PRINCIPAL SHAREHOLDERS."
On June 13, 1997, Cardiac closed on the Coast Loan. As of September 30,
1998, the outstanding principal balance of the loan was $1,046,296. Under the
Coast Loan Agreement, Cardiac may borrow for working capital and other purposes,
up to the lesser of $3.5 million or the sum of: (a) receivable loans of up to
80% of certain eligible accounts receivable; (b) inventory loans not to exceed
the lesser of $500,000 or 40% of eligible raw
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materials and 50% of eligible finished goods of eligible inventory; (c) a
maximum aggregate of $500,000 for the purchase of new or used equipment; and (d)
a $300,000 term loan. The interest rate on the receivable and inventory
borrowing is the prime rate plus 2% per annum, and on the equipment borrowing
and term loans, the prime rate plus 2.25% per annum; PROVIDED, HOWEVER, all
loans are subject to a minimum interest rate of 9% per annum. Interest is
payable monthly and calculated on the outstanding principal, but not less than a
deemed minimum loan balance of $1 million. Cardiac is obligated to pay a $35,000
commitment fee on each June 13, a quarterly facility fee of $3,500, and a
renewal fee equal to $17,500 upon the renewal of the Coast Loan. Payment in full
of the principal balance of the Coast Loan is due on June 30, 2000, subject to
automatic renewal for successive one-year terms, continuing until one party
gives advance written notice to the other that such party wishes to terminate
the Coast Loan. The Coast Loan is subject to an early termination fee of $70,000
if terminated on or before June 12, 1999; and $35,000 if terminated on or after
June 14, 1999. In addition, the Coast Loan imposes certain constraints on
Cardiac's business including, among other things, the requirement that Cardiac
obtain Coast's written consent prior to merging or consolidating with another
party, or paying or declaring dividends. Cardiac has discussed the Merger with
Coast and Coast has indicated it will provide such written consent. Cardiac and
Coast have also discussed the possibility of Coast providing additional debt
financing for CTG.
The Coast Loan is secured by: (a) a first priority lien on (1) all the
personal property of Cardiac located at its headquarters, including, among other
things, all fixtures, building materials, inventory, goods, equipment, and
machinery, and (2) Cardiac's operating bank account; (b) a first priority lien
on all of Cardiac's intellectual property, including copyrights, patents,
trademarks, goodwill, etc.; and (c) a mortgage on Cardiac's headquarters, of
which Coast receives a first priority lien up to $500,000 (plus Coast's costs
and expenses of collection and enforcement of such mortgage). Coast's remaining
lien on Cardiac's headquarters is second to Sirrom's lien. In order to obtain
its first priority liens on Cardiac's property as described above, Coast entered
into an Intercreditor and Subordination Agreement with Sirrom which holds a $1.5
million promissory note of Cardiac. Sirrom agreed to subordinate its security
interest, and take a second priority lien, with respect to: (1) Cardiac's
headquarters only up to a maximum of $500,000 (plus Coast's costs and expenses
of collection and enforcement of such mortgage) of Cardiac's indebtedness to
Coast; and (2) all other assets of Cardiac in which it has a security interest
up to the full amount of the indebtedness of Cardiac to Coast. Cardiac issued
common stock purchase warrants to both Coast and Sirrom in connection with this
loan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Liquidity and Capital Resources - Cardiac" and
"PRINCIPAL SHAREHOLDERS."
On June 11, 1998, Cardiac and Coast amended the Coast Loan Agreement to
provide for the Bridge Loan. In connection with the Bridge Loan: (i) Cardiac
executed a promissory note in the amount of $250,000; (ii) Coast received a
warrant to purchase 5,000 shares of Cardiac Common Stock exercisable at $2.00
per share; and (iii) the exercise price per share of the warrant to purchase
7,500 shares issued to Coast in connection with the Coast Loan was reduced from
$20.00 per share to $2.00 per share. The Bridge Loan accrues interest at the
prime rate plus 5% per annum and is due and payable on August 31, 1998. Cardiac
and Coast executed an amendment to the Bridge Loan providing for the repayment
of the Bridge Loan on September 30, 1998, and subsequently verbally agreed to
extend the date of repayment of the Bridge Loan to October 31, 1998.
Cardiac is current with regard to its monetary obligations under the Sirrom
Note and the Coast Loan. Nonetheless, in order to ultimately fully service the
debt and pay in full when due the outstanding principal and any accrued and
unpaid interest, Cardiac must refinance or renegotiate such loans and/or obtain
new financing in the form of sales of securities and/or obtaining new loans.
There can be no assurance that Cardiac will be able to do so. It is a condition
of the Merger that Cardiac obtain a minimum of $4.0 million in financing through
a combination of this offering and a loan or line of credit. Cardiac's ability
to continue operations will depend on its ability to service its debt from
operations. If the terms of Cardiac's loans are too burdensome, Cardiac may
default under its loan agreements and be faced with proceedings wherein lenders
could foreclose upon substantially all of Cardiac's assets, in which case
stockholders would be unlikely to realize any value with respect to their shares
of CTG Common Stock.
Under the Sirrom Loan Agreement, the occurrence of any of the following
constitutes an event of default: (1) default of the payment of this loan or any
other indebtedness of Cardiac which exceeds $50,000 in the aggregate,
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which is not actively contested by Cardiac; (2) any misrepresentation of or any
failure to perform by Cardiac any material matter or obligation; (3) the
admission by Cardiac in writing of its inability to pay its debts generally as
they become due; (4) any proceeding pursuant to which Cardiac is or has a
petition against it for it to be liquidated, dissolved, partitioned or
terminated, under bankruptcy or any similar action; or (5) the failure to cure
any default under the loan or otherwise. Cardiac has 30 business days (or ten
business days if the default may be cured by payment of a sum of money) to cure
a default. Upon the occurrence of an event of default, any indebtedness of
Cardiac to Sirrom shall either be immediately due and payable in full, or Sirrom
may, at its option, accelerate the maturity of any indebtedness of Cardiac to
Sirrom.
Under the Coast Loan Agreement, the occurrence of any of the following
shall constitute an event of default: (1) any material misrepresentation or any
failure to perform any material obligation of Cardiac to Coast; (2) default in
the payment of any indebtedness when due; (3) the loans and other obligations of
Cardiac exceed the credit limit established by Coast in its sole discretion; (4)
the failure of Cardiac to perform its security obligations; (5) the breach by
Cardiac of any material obligation which has or may have a material adverse
affect on Cardiac's business or financial condition; (6) any proceeding pursuant
to which Cardiac is the subject of a petition for liquidation, dissolution,
partition or termination, under bankruptcy or any similar action; (7) a change
in the record or beneficial ownership of an aggregate of more than 20% of the
outstanding shares of Cardiac (as compared to the ownership of outstanding
shares of Cardiac in effect on June 13, 1997), without the prior written consent
of Coast; or (8) if Coast, acting in good faith and in a commercially reasonable
manner, deems itself insecure because of the occurrence of any event. Upon the
occurrence of any event of default, Coast may cease making loans or otherwise
extending credit to Cardiac or may accelerate any financial obligations of
Cardiac to Coast. Cardiac must pay all reasonable attorneys' fees, expenses,
costs, liabilities and other obligations incurred by Coast in exercising Coast's
right upon an event of default.
From April 22 through May 4, 1998, Cardiac obtained $300,000 in interim
financing from selected current investors through the issuance of 8% convertible
debentures, convertible at the conversion rate of $2.00 per share. In
consideration for this investment, Cardiac lowered the exercise price of
previously issued options to purchase 715 shares of Cardiac Common Stock from
$17.50 per share to $2.00 per share and lowered the exercise price of certain
warrants to purchase 3,363 shares of Cardiac Common Stock from $25.00 per share
to $2.00 per share. Cardiac is also attempting to obtain an additional loan for
$250,000 on similar terms. There can be no assurance that Cardiac's attempts to
obtain additional financing will be successful.
On July 30, 1998, and August 13, 1998, Cardiac executed the Minrad Notes,
which bear interest at the rate of 15% annually. The principal amount and all
interest due thereunder is due and payable, after September 29, 1998, within ten
days after written demand from Minrad.
On August 26, 1998, Cardiac received $134,000 from IHI and executed the IHI
Note in favor of IHI. Concurrently with execution of the IHI Note, Cardiac paid
Goodbody a $34,000 consulting fee for services relating to the obtaining of
additional debt financing. Pursuant to the terms of the IHI Note, Cardiac has
agreed to repay the IHI Note on October 25, 1998. If Cardiac does not repay the
IHI Note on or before October 25, 1998, but does so on or before November 12,
1998, in addition to repayment of the IHI Note, Cardiac has agreed to pay the
Goodbody Fee. If repayment of the IHI Note and the Goodbody Fee have not been
received by IHI on or before November 12, 1998, an immediate penalty fee of
$2,500 shall be incurred at 12:01 a.m. On November 13, 1998, and an additional
$2,500 fee will accrue and be imposed at 12:01 a.m. every 24 hours, until the
IHI Note, the Goodbody Fee and all penalty fees have been paid in full.
In connection with the IHI Note, Cardiac has agreed to issue up to four
warrants to IHI under certain conditions, each giving IHI the right to purchase
10,000 shares of CTG Common Stock at an exercise price of $.05 per share. If
repayment of the IHI Note and the Goodbody Fee have not been received by IHI on
or before November 12, 1998, at 12:01 a.m. On November 13, 1998, the first of
the four warrants will be deemed issued to and earned by IHI. At 12:01 a.m. on
the 13th day of each month thereafter for up to three months, one additional
warrant shall be issued and deemed earned, if the IHI Note, the Goodbody Fee and
all penalty fees have not been paid in full. Furthermore, if the IHI Note, the
Goodbody Fee and all penalty fees have not been paid in full by January 1, 1999,
IHI will have the option to convert any or all of the amounts due into CTG
Common Stock at an
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exercise price of $.05 per share. As additional consideration for the IHI Note,
IHI received a warrant to purchase 66,000 shares of CTG Common Stock at an
exercise price of $0.64 per share, exercisable at any time on or before 5:00
p.m. Eastern Standard Time on August 26, 2003.
BUSINESS OF ELECTRO
GENERAL
Electro is engaged in the business of design, development, manufacture,
marketing and sale of products utilized in connection with illnesses of the
heart and circulatory system and make use of catheters and related devices.
Electro was incorporated in New Jersey in 1961. Electro has targeted
electrophysiology as its focal area for future growth, but intends to maintain
and develop products for the emergency care, invasive and non-invasive
cardiology and invasive radiology markets. Electro also continues to explore
opportunities to expand its OEM business and contract research and development
business to capitalize on its catheter technology expertise and its
manufacturing capabilities. Electro produces a wide range of catheter products
intended to be utilized by doctors and other trained hospital personnel for
diagnostic as well as therapeutic purposes.
Electro markets its cardiovascular catheters and other catheters worldwide.
Export sales were approximately $1,828,000 in fiscal year 1997, $2,324,000 in
fiscal year 1996 and $1,964,000 in fiscal year 1995, representing approximately
27%, 32% and 27% of net sales in such fiscal years, respectively.
PRODUCTS
Electro produces a wide range of catheter products intended to be utilized
by doctors and other trained hospital personnel for diagnostic or therapeutic
purposes. Catheters are hollow tubes that can be passed through veins, arteries
and other anatomical passageways. Electro considers the market within which it
sells its present and proposed products as a single industry segment.
In over thirty-six (36) years of business, Electro has sold well over two
(2) million catheters. The current selling prices for the catheters marketed by
Electro typically range from thirty-five dollars to five hundred dollars.
ELECTROPHYSIOLOGY CATHETERS. The field of cardiac electrophysiology
(EP) is one of the most rapidly growing areas of medical technology. Cardiac
electrophysiology is the study of the electrical system of the heart. Cardiac
electrophysiologists are concerned with electrical disorders in the heart, their
etiology, diagnosis and treatment. The medical problems on which cardiac
electrophysiologists focus are conduction problems of the heart, which include
tachyarrhythmic episodes which can lead to sudden cardiac death. The development
of transcatheter diagnosis of the heart's conduction system and transcatheter
correction of certain conduction dysfunctions have increasingly attracted the
attention of cardiologists.
Electro's line of diagnostic EP catheters is comprised of three
categories, the Detector, the Investigator and the Cloverleaf, and each category
has its unique characteristics requested by physicians that desire different
handling features. In addition, Electro has a Genesis line of steerable EP
catheters that provides the physicians with a more sophisticated mapping tool
for difficult diagnostic procedures. These catheters are available in many curve
and electrode configurations.
Electro markets its Circuit Breaker steerable catheters with temperature
control for catheter ablation for international distribution only. These
catheters are compatible with most radio frequency generators. Due to certain
development issues, clinical trials scheduled to have commenced were delayed.
Electro plans to begin clinical trials in the U.S. in fiscal year 1999 in order
to seek approval to market these catheters domestically.
PACING AND MONITORING CATHETERS. Electro's line of monitoring
catheters are made of flexible radiopaque materials which are visible in use
through fluoroscopy. The catheters have a variety of tips, shapes and internal
configurations and can be manipulated by an experienced physician through the
anatomy to the desired location. Through the use of these catheters,
electrophysiological data, pressure and flow readings and blood
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samples may be obtained. In addition, Electro's catheters may be utilized as
conduits for the injection of radiopaque materials into the bloodstream to
permit fluoroscopic observation of abnormalities in the vasculature.
Monitoring catheters are marketed under the following names: Baltherm(R)
Flow Directed Balloon Catheters, Pacewedge(R) Balloon Guided Catheters and
Balwedge(R) Catheters.
Electro's pacing catheters are fabricated from a number of materials and
frequently consist of an electrode-bearing tube. The tube is guided into the
body and the electrode is delivered through the venous system to the heart where
it is then used for pacing. This procedure involves the delivery to the heart
muscle, from a source outside the body, of an electrical stimulus causing
contractions like the natural heartbeat. Such pacing is necessary where there is
a conduction blockage in the heart causing the heart to beat at a slow or
irregular rate.
One of the pacing catheters manufactured by Electro is the Balectrode(R)
Bipolar Pacing Probe. With this product, both the amount of manipulation of the
catheter required to cause the stimulating electrode to be positioned in the
proper location within the heart and the time required from the commencement of
the procedure until it is completed, are substantially less than they would be
if a non-balloon catheter were used as the delivery system.
The pacing products usually are sold in kits containing the catheter, a
placement needle, connectors and various other devices. These kits are sold
under various names, including the following: Balectrode(R) Flow-Directed
Temporary Pacing Kit, Silicore(R) Semi-Floating Pacing Kit and Multipace.
MULTI-PURPOSE CATHETERS. Multi-Purpose catheters have features or
uses which, under certain circumstances, result in the combination of pacing and
monitoring functions. Further, Electro manufactures certain electrode-bearing
catheters used to make electrical measurements within the heart and provide
electrical stimulation for both therapeutic and diagnostic purposes.
DRAINAGE CATHETERS. Although Electro's principal activities have been
in the cardiovascular area, it currently is manufacturing and marketing the
Elecath(R) One Step(TM) Fluid Drainage System which is used for draining fluid
collections from various locations in the body. This system consists of a
catheter, composed of a unique formulation developed by Electro, mounted on a
simple penetration apparatus. In Electro management's opinion, the product is
useful to a broad range of physicians, and results in more complete and safer
drainage.
SALES, MARKETING AND DISTRIBUTION METHODS
Electro markets, sells and distributes its products domestically through
its own sales force. As of September 30, 1998, Electro employed 2 salespersons
in the field and maintained a home office staff of marketing and sales support
of 3 people. Electro also employs an International Marketing Manager based in
Europe on an independent contractor basis. In previous years, Electro had one
significant distributor in the United States which was responsible for sales in
all or part of thirteen Eastern states plus the District of Columbia. This
distributor accounted for approximately 11% of net sales for fiscal year 1995.
Electro terminated its arrangement with this distributor on May 31, 1995 and
Electro now markets its products directly in this territory. As such, there were
no sales through this distributor in fiscal years 1997 and 1996. The principal
customers for Electro's products are hospitals whose purchasing decisions are
determined on the basis of assessment of the products by the physicians. No one
customer accounted for more than ten percent of Electro's net revenues for
fiscal years 1997 and 1996. International markets are serviced by a network of
independent distributors. Electro also sells its products to OEM customers,
performs contract research and development work for third parties and engages in
licensing of its technology to third parties.
While export sales have contributed significantly to Electro's net sales
in fiscal years 1997, 1996 and 1995, Electro has not effected substantial
penetration of the domestic electrophysiology market which is attributable, in
part, to its lack of an FDA-approved ablation catheter. Electro's focus on
engineering efforts in contract research and development and its OEM business
has also contributed to lower domestic sales together with a lower demand for
older products in pacing and monitoring.
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Advertising of Electro's products consists primarily of displays at
medical conventions and meetings, advertisements in medical journals and direct
mail. Electro also cooperates in the publication of technical papers written by
medical authorities in areas relating to Electro's products.
PRODUCT WARRANTIES
Electro's catheters are covered by a limited warranty, the duration of
which is tied to product expiration dates. Generally, however, the warranties
extend for five years. All warranties provide for replacement with a comparable
Electro product or issuance of a credit at Electro's discretion. Product returns
are not material to Electro's results of operations.
CERTAIN PATENTS, TRADEMARKS AND LICENSES
Electro's policy is to protect its proprietary position by, among other
methods, filing United States and select foreign patent applications to protect
the technology that is important to the development of the business. Pursuant to
provisions adopted under the General Agreement on Tariffs and Trade, patents in
force on June 8, 1995, are entitled to a patent term of the longer of 17 years
from issuance or 20 years from the earliest filing date of the patent. Electro
currently holds six patents in the U.S. (one of which is owned jointly with
another party) and has one application pending. The last to expire of Electro's
patents will remain in effect until 2015. Electro has also obtained certain
patents in its principal overseas markets. The following are Electro's current
material patents:
<TABLE>
<CAPTION>
UNITED STATES PATENTS DESCRIPTION DATE OF ISSUE
- --------------------- ----------- -------------
<S> <C> <C>
4,699,157 Pacing Catheter and Method for Making Same 10/13/87
4,790,825 Closed Chest Cannulation Method and Device for Atrial Major 12/13/88
Artery
5,190,050 Tip Deflectable Steerable Catheter 3/2/93
5,358,479 Multiform Twistable Tip Deflectable Catheter 10/25/94
5,571,085 Steerable Open Lumen Catheter 11/5/96
5,718,701* Ablation Electrode 2/17/98
<FN>
- ----------------
*owned jointly with another party
</FN>
</TABLE>
Although Electro holds such patents, it believes that its business as a
whole is not or will not be materially dependent upon patent protection.
However, Electro will continue to seek such patents as it deems advisable to
protect its research and development efforts and to market its products. Electro
believes that it is not infringing on any other party's patent. However, there
can be no assurance that current and potential competitors will not file
applications or apply for patents or additional proprietary rights relating to
materials or processes used by Electro.
Electro develops new products as a result of its own analysis of the needs
of the market which it serves and as a result of needs perceived by physicians
and researchers who work with Electro on the design and development of the
devices and systems needed by them. In certain instances, Electro pays the
cooperating physician or researcher a royalty based upon the revenues derived
from the sales of the product to others.
Electro also relies upon technical know-how and continuing technological
innovation to develop and maintain its position in the market and believes that
the success of its operations will depend largely upon such know-how and
innovation. Electro requires employees and consultants to execute appropriate
confidentiality
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<PAGE>
agreements and assignments of inventions in connection with their employment or
consulting arrangement with Electro.
There can be no assurance that trade secrets will be established, that
secrecy obligations will be honored or that competition will not independently
develop superior or similar technology.
RESEARCH AND DEVELOPMENT
Electro's research and development activities are devoted primarily to the
design and development of new products and enhancements to existing products.
For the three years ended August 31, 1997, Electro incurred aggregate direct
expenses of approximately $2,824,000 for research and development activities,
including new product development, of which approximately $882,000 was
attributable to fiscal year 1997, $1,010,000 to fiscal year 1996 and $932,000 to
fiscal year 1995. All of such activities were sponsored by Electro. The major
portion of such expenses was related to salaries and other expenses of personnel
employed on a regular basis in research and development efforts. During fiscal
years 1997 and 1996, Electro performed research and development and
pre-production planning for an unrelated medical device company for which
services Electro recognized $544,293 and $155,707 in revenues in such years,
respectively. The costs associated with these revenues are shown in cost of
sales and, as such, are not included in research and development expenses. In
May 1997, the agreement-in-principle to perform contract research and
development work for the medical device company, which work commenced in June
1996, was terminated at the request of the other company. The terms of the
agreement-in-principle called for the other company to pay Electro a monthly fee
of $150,000 for a period of one year. A definitive agreement was never executed.
Electro received $600,000 for the work it had performed prior to termination and
an additional $100,000 termination fee. As a result of the termination,
Electro's revenues were adversely affected.
PRODUCTION AND SOURCES OF SUPPLY
Electro manufactures its products in a 25,000 square foot facility it owns
and another 10,000 square foot facility which it leases. Electro believes that
these facilities have sufficient capacity to meet Electro's anticipated catheter
needs for several years. The manufacturing of catheters is a complex process and
each catheter is assembled and tested. Electro designs its catheters and
manufactures a portion of the tubing, balloons, and many components with tooling
and formulations developed by it or especially for it. Electro maintains
facilities to manufacture tubing and balloons and for the production of
catheters in the unique configurations required for their use. In addition,
where more convenient or when the level of sophistication warrants it, Electro
uses outside suppliers for certain components. Electro contracts out for the
performance of sterilization. Although most components and processes are
available from more than one vendor, certain components and processes are
manufactured or provided by single vendors, some involving molds owned by
Electro. Significant components for which Electro has only one source include
tubing for catheters, connector pins used in pacing catheters, latex used in
balloons, needles and certain packaging. Electro attempts to maintain an
adequate supply of the components on hand in order to minimize any supply
interruption from single source vendors to allow for time to locate and qualify
a new vendor or to find a substitute for a single source. As such, there can be
no assurance that Electro's ability to manufacture certain products will not be
materially affected by single source vendors.
INSURANCE
Electro maintains comprehensive general liability insurance coverage in
the amount of $5.0 million and products liability coverage in the amount of $2.0
million. Electro believes that such coverages are adequate and reasonable,
however, no assurance can be given that the products liability coverage will be
sufficient to protect Electro's assets against claims by users of its products
or that Electro will be able to maintain such coverage (or obtain additional
coverage) in the future at reasonable premium rates or at all, in which case its
assets will be at risk in the event of successful claims by users of its
products. Furthermore, Electro's liability coverage may not cover costs incurred
by Electro under its product warranties (see "- - Product Warranties" ) or costs
incurred by Electro in the event of a product recall.
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<PAGE>
Electro has no pending, threatened or actual claims as of this date, nor
is Electro aware of any current circumstances that might give rise to such
claims. However, Electro could be exposed to possible claims for personal injury
or death resulting from the sale or subsequent malfunction of allegedly
defective products.
EMPLOYEES
As of September 30, 1998, Electro had 69 full-time employees. Of the total
employees, 48 were engaged in manufacturing and quality control, 9 in general
administration and executive activities, 8 in engineering and research and
development, and 4 in sales and marketing. Electro is not a party to any
collective bargaining agreement and considers its relations with its employees
to be good.
GOVERNMENT REGULATION
FEDERAL REGULATIONS. The products developed by Electro come under the
jurisdiction of the FDA of the United States Department of Health and Human
Services, as well as other Federal, state and local agencies and similar health
authorities in foreign countries. The regulations promulgated by such agencies
govern the introduction of new medical devices and modifications to approved
devices, the observances of certain standards with respect to the manufacture
and labeling of such devices, the maintenance of certain records and the
reporting of potential product defects.
The FDA Act regulates manufacturers of "medical devices." Electro's
products are medical devices within the meaning of such Act. An amendment to the
FDA Act providing for the classification of medical devices and the
establishment of standards relating to their safety and effectiveness,
scientific review of certain devices and the registration of manufacturers and
others has been in effect since 1976 and has been supplemented by the Safe
Medical Devices Act of 1991. Under these provisions, a manufacturer must obtain
approval from the FDA of a new medical device before it can be marketed, which
approval process requires, in the case of certain classes of medical devices,
that the safety and efficacy of such devices be demonstrated by the manufacturer
to the FDA through the conduct of an FDA approved clinical evaluation program.
Under certain circumstances, the cost of obtaining such approval may be high and
the process lengthy and no assurance can be given that approval will be
obtained. Although Electro has received FDA approval to market its principal
existing products, or is exempt from formal approval requirements as provided by
law for those devices already in distribution before May 28, 1976, there can be
no assurance that Electro will receive the requisite approvals to market
additional products. Furthermore, any substitution by Electro of its current
sources for certain raw materials utilized in its production processes will, if
such substitution results in a change in the composition of the material, be
subject to FDA approval, and there can be no assurance that such approvals will
be obtained.
Since the devices developed by Electro are intended for "human use", as
defined by the FDA, Electro and such devices are subject to FDA regulations
which, among other things, allow for the conduct of routine detailed inspections
of device manufacturing establishments and require adherence to cGMP in the
manufacture of medical devices which include testing, quality control, design
and documentation requirements.
In addition, certain other classes of medical devices must comply with
industry-wide performance standards with respect to safety and efficacy
promulgated by the FDA. The FDA has not yet developed industry-wide performance
standards with respect to the safety and efficacy of those products manufactured
by Electro which will be subject to such standards. When and if such standards
are adopted, Electro will be required to submit data demonstrating compliance
with the standards (during which period Electro may be permitted to continue to
market products which have been previously approved by the FDA).
In recent years, the FDA has pursued a more rigorous enforcement program
to ensure that regulated businesses, like Electro, comply with applicable laws
and regulations. Noncompliance with applicable requirements can result in fines,
penalties, recall of products, suspension of production or the inability to
obtain premarket clearance or approval for new products. Electro cannot predict
the extent or impact of future Federal, State or local legislation or
regulation.
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<PAGE>
In February 1997, the FDA conducted an inspection and audit of Electro. At
the conclusion of the audit, the FDA issued a number of observations regarding
noncompliance by Electro with certain cGMP in the manufacture of its products.
On March 11, 1997, the FDA issued a Warning Letter to Electro requesting that
prompt action be taken to correct the violations. The areas of noncompliance
include Electro's methods of investigation of device complaints, methods of
validation of device sterilization, environmental monitoring procedures, methods
of validation of extrusion processes which are used in the manufacture of
certain of Electro's catheters and other quality assurance and record keeping
requirements. Electro has communicated with the FDA its intentions to remedy the
noncompliance, has established a plan and timetable to effectuate such
remediation and has diligently worked to take the necessary corrective actions;
Electro's actions have included the establishment of certain validation
protocols, revisions to Electro's Quality System and Quality System Manual, the
implementation of a program for environmental testing, the purchase of equipment
for extrusion process validation and the institution of file and record keeping
protocols. A subsequent FDA inspection in September 1997 indicated that while
substantial progress has been made, not all corrective actions have been
completed. Electro is continuing in its efforts to complete such actions and it
is Electro's intention to inform the FDA before the end of 1998 that it has
completed such actions and is ready for reinspection. There can be no assurance,
however, that Electro will be ready for such reinspection before the end of 1998
nor that Electro will pass any such reinspection when it occurs. While Electro
is currently under no restrictions by the FDA regarding the manufacture or sale
of its products, Electro is unable to precisely determine the short-term
economic impact of instituting the required corrective actions and there can be
no assurance that the FDA will not take further action, including seizure of
products, injunction and/or civil penalties, if the necessary corrective actions
are not completed on a timely basis. At this time, Electro is unable to
precisely determine the short-term adverse economic impact which will result
from instituting the corrective actions, but the voluntary discontinuation of
manufacturing of certain products and the delay in the sale of other products
has adversely affected sales by an estimated 10%.
EUROPEAN REGULATION. Many countries in which Electro markets its
products regulate the manufacture, marketing and use of medical devices. Electro
intends to pursue product approval or registration procedures for its new
products in countries where it is marketing existing products as well as for new
and existing products in additional countries where it believes there is a
market for its products. The international registration and approval process is
normally accomplished in coordination with its international distributors. In
order for Electro to continue to sell certain of its products in the nations of
the EEC after June 14, 1998, it must obtain certification, the CE Mark, from
ISO. Since Electro has not yet obtained the CE Mark and is now unable to sell
certain of its products in the Nations of the EEC (which account for
approximately 17% of total revenues), international sales should be adversely
affected in Europe for about the next six months or more. The effort to obtain
the CE Mark is continuing and management of Electro is hopeful of obtaining this
designation before the end of the calendar year on its major products in order
to allow sales into this market. However, there can be no assurance that Electro
will obtain the CE Mark or maintain the same level of revenue upon receiving the
CE Mark as it did previously.
Export sales of devices that have not received FDA marketing clearance
generally are subject to export permit requirements. In order to obtain such a
permit, Electro must provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located, stating
that the sale of the device is not in violation of that country's medical device
laws. In April 1996, new legislation was enacted to permit the export of devices
unapproved in the U.S., if the product complies with the laws of the country and
as long as the products are approved by any of the industrialized countries
specified in the export reform legislation. Electro has received such clearance
for its Circuit Breaker steerable catheter with temperature control for ablation
and is currently distributing it outside the U.S.; sales of Electro's Circuit
Breaker steerable catheter for the fiscal years ended August 31, 1997 and August
31, 1996 were approximately $87,000 and $180,000, respectively.
Electro is also subject to various Federal, state and local laws
pertaining to such matters as safe working conditions, environmental protection,
fire hazard control and other regulations. Electro is not aware of any
regulations with which it is not in compliance.
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<PAGE>
BACKLOG
Electro typically does not operate with a significant backlog. The
majority of product shipments in a quarter relate to orders received in that
quarter. Electro's actual product shipments depend on its production capacity,
manufacturing yields and component availability, among other factors. At
September 30, 1998, Electro had a backlog of orders for its products which,
aggregated, was approximately $206,000, as compared to approximately $745,000 at
September 30, 1997. The prior year's total included orders totaling $312,000
from one customer which had placed an annual order but now orders on a monthly
basis. Electro anticipates that substantially all of the backlog recorded at
September 30, 1998 will be completed within the next twelve months.
COMPETITION IN THE INDUSTRY
The medical technology industry is a highly competitive field,
characterized by rapid technological advances, and Electro competes with many
other companies on current products and products in the development stages. Many
of these competitors have significantly greater financial, marketing, sales,
distribution and technical resources than Electro. Rapid technological advances
by Electro's competitors could at any time require that Electro redesign a
portion of its product line. Accordingly, there can be no assurance as to the
success of Electro's products in competition with such companies.
Electro's older products compete primarily with those of larger companies
that have greater resources and better distribution capabilities. The current
principal basis of competition in these markets is price. Electro's limited
resources make it less capable than larger competitors to offer aggressive
pricing to meet competition. In addition, certain customers purchase catheters
in blanket contracts which include products offered by Electro's larger
competitors but not by Electro. For these reasons, Electro has not been able to
compete effectively during recent years in the market for non-EP products.
The electrophysiology market is also highly competitive and competition is
expected to increase. These competitors currently include USCI, a division of
C.R. Bard, Inc.; Mansfield and EP Technologies, divisions of Boston Scientific
Corporation; CardioRhythm, Inc., a division of Medtronic, Inc.; Cordis-Webster
Laboratories, a division of Johnson & Johnson, Inc. and Daig Corporation, a
division of St. Jude Medical, Inc. These companies are more capable of offering
a broader range of products to the cardiologist. Electro's ability to compete
effectively in the future could be dependent upon broadening its range of
products and/or forging an alliance with another company which would effect
greater product diversity. Electro's electrophysiology products compete with
other treatments, including prescription drugs, implantable cardiac
defibrillators and open heart surgery.
Electro's catheter ablation product is not yet approved for marketing in
the U.S., but some competitors have developed products, specifically for use in
catheter ablation, which are approved in the U.S. Due to certain development
issues, clinical trials scheduled for 1997 were delayed. Electro plans to begin
its clinical trials for ablation in fiscal year 1999 in order to seek approval
to market these catheters domestically. The costs to perform such clinical
trials are estimated at $150,000 which Electro anticipates would be funded from
financing obtained in connection with the Merger. The primary competitive
factors relative to other catheter ablation products are technical superiority,
financial resources, the timing of regulatory approval, commercial introduction
and quality. Electro's competitive position also depends on its ability to
attract and retain qualified personnel, develop effective proprietary products
and implement production and marketing plans. Electro hopes that it can
effectively compete in this market.
PROPERTY
Electro's principal manufacturing facilities and executive offices are
located at 2100 Felver Court, Rahway, New Jersey, in premises which it purchased
in 1976. This property secures part of the indebtedness to The T Partnership.
Electro also leases a 10,000 square foot facility located in Avenel, New Jersey.
The lease for the Avenel facility is on a month-to-month basis. These premises
are suitable for all of Electro's current and foreseeable production,
development and administrative functions.
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LEGAL PROCEEDINGS
In September 1997, a Superior Court jury in Middlesex County, New Jersey
found Electro liable for age discrimination in connection with its termination
of an employee in April 1994. The jury awarded the terminated employee $283,000
plus attorney's fees and expenses and prejudgment interest in the combined
amount of approximately $47,990. Electro also incurred legal costs from
September 1996 through September 1997 in the amount of approximately $115,665
which is also included in the litigation expense in the accompanying 1997
Statements of Operations. Electro filed an appeal of the judgment.
Pending Electro's appeal, the plaintiff, in an effort to execute upon the
judgment rendered in his favor, levied on certain of Electro's bank accounts,
thereby freezing the available funds. Notwithstanding management's belief that
Electro had arguments supporting its appeal, management weighed the considerable
cash requirements of an appeal bond, the costs of continued efforts relative to
the appeal, and the need to vacate the levies to satisfy Electro's immediate
cash requirements, against the likelihood of prevailing on its appeal and the
terms of a possible settlement and, on April 8, 1998, Electro entered into a
settlement agreement (the "Settlement Agreement") with the plaintiff.
Under the key terms of the Settlement Agreement, the matter has been
settled for the sum of $305,000 payable as follows: (i) by a lump sum payment of
$65,000 within five business days of the date of the Settlement Agreement; and
(ii) the remaining balance, bearing interest at the rate of 6% per annum,
payable in monthly installments of $10,000, plus interest, commencing July 1,
1998. The Settlement Agreement provides that a default in any monthly payment
which remains unpaid for a period of ten days after notification of not having
been received by the plaintiff, shall allow the plaintiff to declare a default
and accelerate the payment of the entire outstanding balance with interest.
Electro has made the payments due to date on a timely basis.
Electro is currently a party to certain litigation incident to the normal
conduct of its business. In March 1997, a female employee of Electro, holding
the position of field sales representative, filed a complaint against Electro
with the Equal Employment Opportunity Commission (the "EEOC") alleging sex
discrimination. In October 1997, subsequent to Electro's response to the
allegations and to the EEOC's investigation thereof, the EEOC dismissed the
complaint upon a finding that no violation had occurred. In February 1998, the
employee filed a lawsuit against Electro making the same allegations as in her
EEOC complaint. In light of the foregoing and based upon management's
discussions with its counsel on this matter, it believes that the allegations
are groundless and that the final outcome of such litigation will not have a
material adverse effect on Electro's financial position.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of CTG upon consummation of the Restructuring Merger and
the Merger. The first column under "CTG" reflects their respective positions in
CTG. The other two columns under "Cardiac" and "Electro" reflect their
respective positions in Cardiac or Electro, as the case may be, prior to the
consummation of the Restructuring Merger and the Merger. There are no family
relationships among the directors and executive officers of CTG.
<TABLE>
<CAPTION>
NAME AGE POSITION CTG CARDIAC(1) ELECTRO(2)
- ---- --- -------- --- ---------- ----------
<S> <C> <C> <C> <C> <C>
Bart C. Gutekunst 47 Chairman of the Board * *
Alan J. Rabin 48 President, Chief Executive Officer * *
and Director
W. Alan Walton 64 Executive Vice President and Chief * *
Operating Officer
Jonathan S. Lee 46 Vice President - Research and * *
Development
Kirk D. Kamsler 47 Vice President - Sales * *
William H. Burns 48 Director * *
Larry Haimovitch 51 Director * *
Abraham Nechemie 74 Director * *
Augusto Ocana 54 Director * *
Robert T. Rylee 67 Director * *
Ervin Schoenblum 58 Director * *
Tracey E. Young 43 Director * *
<FN>
- --------------------
(1) Reflects executive officers and directors of Cardiac as of October 7, 1998
and prior to the consummation of the Merger. Such persons will hold offices
and directorships in CTG substantially consistent with their respective
positions in Cardiac prior to the consummation of the Merger.
(2) Reflects certain directors of Electro as of October 7, 1998 and prior to
the consummation of the Merger. Such persons will hold directorships in CTG
after the consummation of the Merger.
</FN>
</TABLE>
BART C. GUTEKUNST has been a member of the Cardiac Board since July 1994
and became Chairman of the Board in October 1994. In July 1995 he became
Chairman and CEO of NovaVision, Inc., an eye care technology company. In May
1997, NovaVision Inc. was merged with American Consolidated Laboratories, Inc.,
a specialty vision products company, and Mr. Gutekunst was Chairman of the Board
of the resulting company from May 1997 until January 1998. Also, since August
1997, Mr. Gutekunst has been a director of Platform Technologies, LLC, a venture
capital fund. From September 1992 to September 1994, he was Vice Chairman and
Chief Financial Officer of R-2 Medical Systems, Inc., a cardiac care device
company, with responsibility for strategic and corporate development as well as
overseeing the financial functions of CTG. From February 1994 to March 1996, Mr.
Gutekunst served as Chairman of the board of directors of United Education and
Software, Inc., a multi-state operator of nursing and vocational schools
operating under Chapter 11 of the United States Bankruptcy Code, where he was
retained to oversee the voluntary liquidation of CTG's assets. From 1988 to
1990, he was a senior member of an investment firm, Entrecanales, Inc., funded
by a major European family, making equity investments and leveraged buyouts.
From 1981 to 1987, he was Executive Vice President and a member of the board of
directors, as well as the Management and Investment Committees of Laidlaw, Adams
& Peck Inc., where he supervised the investment banking department and completed
over 50 public and private transactions. From 1976 to 1981, he was
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a member of Chemical Bank's Merchant Banking Group. Mr. Gutekunst has been a
member of the board of directors or advisor to the board for many companies.
ALAN J. RABIN joined Cardiac in October 1994 as President, Chief
Executive Officer and a member of the Board of Directors. Mr. Rabin has 26 years
experience in the management and growth of medical companies, with emphasis on
internal business development through marketing, sales, new product development
and building strategic relationships. Prior to joining Cardiac, Mr. Rabin held
an array of management positions. From 1992 to September 1994, he served as
President and Chief Executive Officer of R-2 Medical Systems, Inc., a
manufacturer of cardiac care devices, including disposables used in cardiac
pacing. He was Vice President of Marketing and Sales for Stereo Optical Company,
a manufacturer of disposable and capital ophthalmic diagnostic devices from 1987
to 1992. Mr. Rabin was Director of Marketing and Sales of Tycos Life Sciences,
Inc., a manufacturer of cardiovascular diagnostic and monitoring devices from
1985 to 1986. From 1980 to 1985, Mr. Rabin held various marketing, new business
development and product management positions with Davol, Inc., a division of
C.R. Bard, in the surgical and cardiovascular equipment area.
Mr. Rabin currently serves as a director of BioVector, Inc., a medical
distribution company. He received a Bachelor of Science degree in biology and a
Master in Business Administration degree from the University of Illinois and
Northwestern University, respectively.
W. ALAN WALTON joined Cardiac in March, 1996 as Executive Vice
President and Chief Operating Officer. Mr. Walton is a fellow of the Institute
of Chartered Accountants in England and from March, 1995 to February, 1996 was
engaged as a financial and operations consultant with Biosight Inc. of Orchard
Park, New York, a firm specializing in helping health care businesses enhance
their performance. Prior to his experience with Biosight, he spent 19 years in
senior financial and systems management positions with Dunlop Holdings PLC in
the United Kingdom and the United States, including a position as General
Manager, Group Information System with responsibility for Dunlop's global
computing and communications.
JONATHAN S. LEE a biomedical engineer, joined the management team at
Cardiac in May, 1996 and serves as Vice President - Research and Development.
Prior to joining Cardiac, Mr. Lee spent 18 years in Research and Development,
Regulatory Affairs and Marketing with Telectronics Pacing Systems, a leading
pacemaker manufacturer. He established and managed Telectronics' worldwide
service facilities and established Telectronic's US research and development
presence in Denver, Colorado. Mr. Lee was also involved in International
Marketing Management with Telectronics. Mr. Lee received a Bachelor of
Engineering degree in Biomedical Engineering from the University NSW in Sidney,
Australia. He also completed two years post graduate work in computer studies at
the University NSW. He has been a member of the North American Society of Pacing
and Electrophysiology since 1984.
KIRK D. KAMSLER joined Cardiac in April 1996 as Director of Marketing
and Sales. He has over 20 years of sales, sales management and marketing
management experience with a variety of medical device companies, including
Davis & Geck Inc., Matrix Medical Inc. and Marquette Electronics Inc. Mr.
Kamsler received a Bachelor of Arts degree from St. Lawrence University in
Canton, New York.
WILLIAM H. BURNS JR. has been a member of the Cardiac Board since
September 1995. Mr. Burns is a health care entrepreneur and is a director and
president of five health care businesses (Biosight Inc., BioVector Inc., Minrad
Inc., Medical Infusion Inc., and Fertility Acoustics Inc.), and is a fund
manager of Platform Technologies Holdings, LLC, a venture capital fund. From
July 1988 through March 1994, he was Founder, President and CEO of Matrx Medical
Inc., a medical product design and distribution company. His efforts in building
Matrx Medical, Inc. earned him an award as Entrepreneur of the Year in New York
State in 1993. From 1975 through 1988, Mr. Burns held various positions with the
BOC Group, including Vice President and General Manager of Ohmeda, DVE Care
Products.
LARRY HAIMOVITCH has been a member of the Cardiac Board since November
1994. He is President of Haimovitch Medical Technology Consultants, a San
Francisco, California based healthcare consulting firm which specializes in the
medical device and technology industry with a particular emphasis on
cardiology-related areas and
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whose clients have included a major hospital chain, numerous medical device
companies, venture capital firms, investment groups, and investment bankers.
Prior to forming his firm in 1991, Mr. Haimovitch spent over 20 years as a
healthcare industry analyst for a number of leading research firms and financial
institutions such as Furman Selz, Sutro & Co., and Wells Fargo Investment
Advisors. He also serves as a director to Electro- Pharmacology, Inc. and
ORBTEC, Inc.
ABRAHAM H. NECHEMIE has been a member of the Electro Board since April
1992. He is a 5% equity owner in The T Partnership. Mr. Nechemie serves as a
business consultant. He was a founding partner in Wiss & Company, a regional
certified public accounting firm, from which he retired in 1985. He also serves
on the board of directors of Phytotech Inc., a New Jersey company. Mr. Nechemie
received an accounting degree from Rutgers University.
AUGUSTO OCANA was appointed to the Cardiac Board in April 1996. He has
over 20 years experience in building, turning around and managing international
health care businesses. Until December 31, 1997, he was Executive Vice President
of Grupo Taper International., S.A., a Spanish based holding group of companies
engaging in distribution of state-of-the-art medical products. Prior to Grupo
Taper, Dr. Ocana had been President and Chairman of Rempak International and
Marketing Director of Abbott Laboratories. Dr. Ocana has also been trained as a
physician and has a degree in international law.
ROBERT T. RYLEE has been a member of the Cardiac Board since November
1988. He practiced law from 1958 to 1969 and was a partner in the firm of Wood,
Boykin, Rylee, and Walter from 1965 to 1969. In 1969, Mr. Rylee became the
President and CEO of Wright Manufacturing Company, a manufacturer of orthopedic
implants and instruments, a position he held until 1981 when he became a Dow
U.S. Area Vice President and the General Manager of Health Care Business. On May
31, 1993, he retired as Vice President and Chairman of Health Care Business, a
position he had held with Dow since 1986. He is currently a director of Clarus
Medical Systems, which position he has held since September 1993.
ERVIN SCHOENBLUM has been Acting President and Chief Operating Officer of
Electro since December 1993. He has been a member of the Electro Board since
April 1992. He is a 5% equity owner in The T Partnership. Mr. Schoenblum was a
Manager in the Management Consulting Department of KPMG Peat Marwick from 1968
to 1981. He was Director of Operations and Acquisitions for Page Mill Management
Group, a leveraged buyout firm, from 1981 to 1982. From 1982 through 1993 he was
an independent management consultant. He continues to provide consulting
services to some clients on a part-time basis. He has undergraduate and graduate
degrees in electrical engineering from New Jersey Institute of Technology and a
Master of Business Administration degree from Harvard Business School.
TRACEY E. YOUNG has been a member of the Cardiac Board since September
1995. She is the Founder and President of Elliot Young & Associates, Inc., a
proprietary health care consulting concern, formed in 1987 to assist companies
and investors in identifying, evaluating, capturing and managing strategic
growth and financing opportunities in high technology health care markets. Ms.
Young also held key consulting positions with The Wilkerson Group, both as the
founding Associate Director of its Cardiovascular Market Intelligence Service
and as an independent consultant to the firm. She also spent seven years in the
pacemaker industry in senior marketing and strategic planning positions with
Telectronics Pacing Systems and Intermedics.
In addition to the directors listed in the above table, following the
Merger and the Restructuring Merger, the CTG Board will be expanded to include
(i) a representative from Ross, Foster, Scillia & Brooks, Inc., the investment
banking firm assisting Cardiac in connection with the Merger, the Restructuring
Merger and this offering; (ii) a representative from the syndicate of
independent broker-dealers to be formed to assist in this offering; and (iii) a
representative of the new lender providing financing to CTG pursuant to the
financing condition of the Merger, if so required by such lender.
The CTG Board is elected at each annual meeting of the stockholders. Each
director holds office until his or her successor is duly elected and qualified
or until his or her earlier resignation or removal, with or without cause, at
any duly noticed special meeting of the stockholders of CTG by the affirmative
vote of the holders of a majority
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of the shares of CTG Common Stock present in person or represented by proxy and
entitled to vote at an election of directors.
Under the bylaws of CTG, officers are elected annually by the CTG Board at
the meeting of the CTG Board following the annual meeting of the stockholders.
Each officer holds office until his or her successor has been chosen and
qualified, or until his or her death, resignation or removal, with or without
cause, by the CTG Board.
None of the executive officers or directors of CTG is a director of any
company other than CTG (or Cardiac or Electro, as the case may be, prior to the
consummation of the Merger), with a class of equity securities registered
pursuant to Section 12 of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), or subject to the requirements of Section 15(d) of the
Exchange Act or any company registered as an investment company under the
Investment Company Act of 1940, as amended except for Larry Haimovitch who is a
director of Electro-Pharmacology, Inc.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation earned
by, awarded or paid to Cardiac's Chief Executive Officer, Chairman of the Board
and any other executive officer whose aggregate compensation in Cardiac exceeded
$100,000 in fiscal years ended March 31, 1998, 1997 and 1996. As of the date of
this Prospectus, the persons listed below will be the only executive officers of
CTG whose aggregate compensation is expected to exceed $100,000 during CTG's
first fiscal year of operation.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- ----------------------------------
AWARDS, SECURITIES
FISCAL YEAR UNDERLYING ALL OTHER
ENDED SALARY BONUS OPTIONS(1) COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31 ($) ($) (SHS) ($)
- --------------------------- ----------- ------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Alan J. Rabin................ 1998 150,624 -- 2,512(2) $559(3)
(President and CEO) 1997 146,000 -- 2,400(2) 521(3)
1996 110,000 10,000(4) 4,000(2) 26,349(3)
Bart C. Gutekunst............ 1998 48,624 -- 2,182(5) 15,934(6)
(Chairman of the Board) 1997 48,000 -- 2,000(5) 11,313(6)
1996 48,000 -- 3,000(5) 8,700(6)
Kirk D. Kamsler.............. 1998 93,928 10,200(7) 1,600(8) --
(Vice President - Sales) 1997 81,104 -- 2,000(8) 45,000(9)
1996 -- -- -- --
Jonathan S. Lee.............. 1998 100,514 10,920(10) 1,600(11) --
(Vice President - Research 1997 80,596 -- 2,000(11) 33,460(12)
and Development) 1996 -- -- -- --
<FN>
- ----------------
(1) CTG Common Stock listed under this heading and in the footnotes below
reflects the number of shares of CTG Common Stock issuable upon exercise
of options after giving effect to the Reverse Split and Merger.
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<PAGE>
(2) With respect to fiscal year 1998, the 2,512 shares are comprised of
options to purchase 2,400 shares of CTG Common Stock at $5.00,
exercisable immediately, and a warrant to purchase 112 shares of CTG
Common Stock at $0.90. With respect to fiscal year 1997, the Cardiac
Board, on August 22, 1996, awarded Mr. Rabin options to purchase 2,400
shares of CTG Common Stock at $17.50 per share, exercisable after March
31, 1997 (the "1996 Options"). With respect to fiscal year 1996, the
Cardiac Board, on May 5, 1995, awarded
Mr. Rabin options to purchase 4,000 shares of CTG Common Stock at $18.15
per share, which options are currently exercisable (the "1995 Options").
(3) The $559 represents interest on a Security Agreement and Promissory Note
between Mr. Rabin and Cardiac, dated April 15, 1997. The $521 represents
interest received prior to conversion of the debentures to stock. The
$26,349 represents reimbursement of $21,549 in relocation expenses paid
pursuant to Mr. Rabin's employment agreement and $4,800 in consulting
fees paid to Mr. Rabin in connection with the debenture financing.
(4) In addition to salary, Mr. Rabin is entitled to a performance bonus
(under the terms of his employment agreement). This represents the
performance bonus paid to Mr. Rabin during the fiscal year ended March
31, 1996.
(5) With respect to fiscal year 1998, the 2,182 shares are comprised of 1,600
shares of CTG Common Stock at $5.00, exercisable immediately, and a
warrant to purchase 582 shares of CTG Common Stock at $0.90. With respect
to fiscal year 1997, Mr. Gutekunst was awarded options to purchase 2,000
shares of CTG Common Stock pursuant to the terms of the 1996 Options.
With respect to fiscal year 1996, Mr. Gutekunst was awarded options to
purchase 3,000 shares of CTG Common Stock pursuant to the terms of the
1995 Options.
(6) The $15,934 represents interest of $2,906 on two security agreements and
promissory notes between Mr. Gutekunst and Cardiac dated March 24, 1997
and April 21, 1997, and consulting fees related to the Coast financing in
the amount of $13,028. The $11,313 is comprised of (i) $7,500 paid to Mr.
Gutekunst in connection with his facilitation of the Grupo Taper
Distributor and Sirrom mortgage agreements, (ii) $3,292 of interest paid
on a $100,000 secured promissory note, and (iii) $521 of interest paid on
debentures held prior to the conversion of the debentures to stock. The
$8,700 represents consulting fees paid to Mr. Gutekunst in connection
with the debenture financing.
(7) This represents the performance bonus paid to Mr. Kamsler during the
fiscal year ended March 31, 1997.
(8) This represents options to purchase 1,600 shares of CTG Common Stock at
$5.00, exercisable immediately. In addition, upon commencement of his
employment with Cardiac, Mr. Kamsler was granted options to purchase
2,000 shares of CTG Common Stock at $17.50 per share, exercisable
one-third on April 21, 1997, one-third on April 21, 1998 and one-third on
April 21, 1999.
(9) This represents reimbursement of relocation expenses paid to Mr. Kamsler
pursuant to the offer of employment.
(10) This represents the performance bonus paid to Mr. Lee during the fiscal
year ended March 31, 1997.
(11) This represents options to purchase 1,600 shares of CTG Common Stock at
$5.00, exercisable immediately. In addition, upon commencement of his
employment with Cardiac, Mr. Lee was granted options to purchase 2,000
shares of CTG Common Stock at $17.50 per share, exercisable one-third on
May 5, 1997, one-third on May 5, 1998 and one-third on May 5, 1999.
(12) This represents reimbursement of relocation expenses paid to Mr. Lee
pursuant to the offer of employment.
</FN>
</TABLE>
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted by
Cardiac during the fiscal year ended March 31, 1998 to those persons named in
the preceding Summary Compensation Table. The information contained below
reflects the number of shares of CTG Common Stock which may be purchased, and
the exercise price with respect thereto, after giving effect to the Reverse
Split and the Merger.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION
GRANTED IN FISCAL YEAR ($/SHARE) DATE
------------------ -------------------- -------------- ----------
<S> <C> <C> <C> <C>
Bart C. Gutekunst 1,600 9% $5.00 5/08/2002
Alan J. Rabin 2,400 14% $5.00 5/08/2002
Kirk D. Kamsler 1,600 9% $5.00 5/08/2002
Jonathan S. Lee 1,600 9% $5.00 5/08/2002
</TABLE>
The following table sets forth information concerning the value of
unexercised stock options at March 31, 1998 for those persons named in the
Summary Compensation Table. The number of shares listed below gives effect to
the Reverse Split and the Merger.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES TABLE
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
----------- -------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Bart C. Gutekunst - - 10,886/0 $0/$0
Alan J. Rabin - - 14,515/0 $0/$0
Jonathan S. Lee - - 2,267/1,333 $0/$0
Kirk D. Kamsler - - 2,267/1,333 $0/$0
<FN>
(1) These options have also been adjusted to give effect to Cardiac's
one-for-seven reverse stock split effected December 13, 1994.
</FN>
</TABLE>
COMPENSATION OF DIRECTORS
For their service on the CTG Board, each outside director is entitled
to receive a total of $9,000 annually, $3,000 of which is paid in cash, and the
remaining $6,000 of which is paid in shares of CTG Common Stock with the number
of shares of CTG Common Stock being determined by dividing $6,000 by the average
of the bid and asked prices of CTG's Common Stock on the last day of the
appropriate fiscal year.
EMPLOYMENT AGREEMENTS
Mr. Alan J. Rabin is employed as the President and Chief Executive
Officer of Cardiac pursuant to a three-year employment agreement, dated as of
October 13, 1994 and amended by the Cardiac Board of Directors at its meeting of
May 15, 1996, which provides for one year renewal periods following the initial
three-year period. As compensation thereunder, Mr. Rabin receives an annual
salary of $150,000; reimbursement for business travel and other business
expenses; and a bonus of up to 50% of his annual salary based on the performance
of Cardiac. The employment agreement also provided reimbursement for Mr. Rabin's
relocation and temporary living
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expenses, not to exceed $38,000 plus the cost associated with the moving of
personal possessions and his family. Under certain specified circumstances, his
employment agreement provides a severance package equal to the balance of the
salary due under the employment agreement (payable in accordance with Cardiac's
payroll practices) and a lump sum payment equal to nine months of his annual
base salary then in effect, plus maintenance by Cardiac (to the extent permitted
under plan documents) for nine months from the date of termination of all
benefit plans in which he was entitled to participate while an employee, or the
equivalent. The nine-month lump sum severance payment is also payable to Mr.
Rabin in the event his employment agreement is not renewed by Cardiac at the end
of its term. Pursuant to his employment agreement, Cardiac awarded to Mr. Rabin
a stock option for 5,715 shares of CTG Common Stock at an exercise price of
$17.50 per share, 4,762 of which were exercisable immediately and the remaining
953 shares became exercisable in October 1997. Mr. Rabin's stock option
agreement contains a change of control provision whereby in the event of a
change in control of Cardiac, all outstanding options become immediately
exercisable.
Mr. Bart C. Gutekunst is employed as the Chairman of the Cardiac Board
pursuant to a three year employment agreement dated as of October 13, 1994,
which provides for one year renewal periods following the initial three year
period. As compensation thereunder, Mr. Gutekunst receives an annual salary of
$48,000, reimbursement for business travel and other business expenses and a
bonus related to Cardiac's financial, capital raising and corporate development
and acquisition activities in the form of the following transactional fees: 1%
for debt and equity source and 1% of the gross consideration for asset
acquisitions or sales, which fees are payable to Mr. Gutekunst upon closing by
Cardiac or its successor-in-interest of the applicable transaction. Pursuant to
his employment agreement, Mr. Gutekunst is entitled to receive a bonus of 1% of
the value of the Merger (which is an amount equal to $25,000), however, Mr.
Gutekunst has agreed to waive his right to receive a bonus of 1% of the total
value of any new capital raised pursuant to the Merger and the offering.
Previously under his employment agreement, Mr. Gutekunst received an option to
purchase 4,286 shares of CTG Common Stock at an exercise price of $17.50 per
share, 3,572 of which were exercisable immediately and the remaining 715 became
exercisable in October 1997. His employment agreement contains the same
severance provisions as Mr. Rabin's employment agreement and his stock option
agreement contains the same change of control provision as Mr. Rabin's.
Mr. Rabin and Mr. Gutekunst will enter into employment agreements with
CTG containing substantially the same terms as their respective employment
agreements with Cardiac.
STOCK OPTION PLANS
On January 19, 1995, the Cardiac Board authorized the combination of
two then existing stock option plans into one combined plan known as the
Combined 1987-1992 Non-Qualified Stock Option Plan ("Combined Option Plan"). The
Combined Option Plan provides that all issued and outstanding stock option
agreements under the previous plans shall be governed by the Combined Option
Plan. Under the Combined Option Plan, 80,000 shares of Cardiac Common Stock were
set aside for issuance of options to officers, directors and employees.
On May 20, 1987, Electro's stockholders approved the 1987 Incentive
Stock Option Plan (the "1987 Plan"). Under the 1987 Plan, 45,000 shares of
authorized but unissued shares of Electro Common Stock were set aside for the
issuance of options to officers, directors and employees.
On May 23, 1990, Electro's stockholders approved the 1990 Incentive
Stock Option (the "1990 Plan"). The terms of the 1990 Plan are substantially the
same as the terms of the 1987 Plan. Under the 1990 Plan, 45,000 shares of
Electro Common Stock were reserved for issuance of options to officers,
directors and employees.
On July 15, 1992, Electro's stockholders approved the 1992 Incentive
Stock Option Plan (the "1992 Plan"). The terms of the 1992 Plan are
substantially the same as the terms of the 1987 and 1990 Plans. Under the 1992
Plan. 45,000 shares of Electro Common Stock were reserved for issuance of
options to officers, directors and employees.
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<PAGE>
On April 1, 1992, the Electro Board adopted the 1992 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan") pursuant to which 40,000 shares of
Electro Common Stock were reserved for issuance of options to directors,
officers and key employees.
Upon consummation of the Merger and this offering, there will be
outstanding options to purchase a total of 116,128 shares of CTG Common Stock,
all of which will be exercisable at $1.5625 to $18.75 per share.
CTG intends to adopt a stock option plan for its officers, directors and
key employees.
CERTAIN TRANSACTIONS
The information set forth herein briefly describes transactions over the
past two (2) years between: (i) Cardiac and its directors, officers and 5%
stockholders; and (ii) Electro and its directors, officers and 5% stockholders.
The foregoing transactions between Cardiac and its affiliates were negotiated on
behalf of Cardiac by its management. Cardiac believes that such transactions are
in compliance with Cardiac's policy that transactions with affiliates be on
terms at least as favorable as could have been reasonably obtained from an
unaffiliated third party. The foregoing transactions between Electro and its
affiliates were negotiated on behalf of Electro by its management. Electro
believes that such transactions are in compliance with Electro's policy that
transactions with affiliates be on terms at least as favorable as could have
been reasonably obtained from an unaffiliated third party. Future transactions
between CTG and its affiliates will be negotiated on behalf of CTG by its
management, and such transactions will be on terms at least as favorable as
could have been reasonably obtained from an unaffiliated third party.
CARDIAC
During fiscal 1996, Tracey E. Young, a director of Cardiac, provided
consulting services to Cardiac regarding development of international markets
for Cardiac's products. In March 1996, the Cardiac Board approved payment of
$5,000 in consulting fees to Ms. Young together with a grant of a stock option
for 1,000 shares of Cardiac Common Stock, exercisable at $18.75 per share. In
respect of consulting services, the Cardiac Board approved royalty payments to
Ms. Young of $100 per unit (each unit comprised of a pacemaker and lead) sold in
Japan for the three year period following approval of the product by regulatory
authorities in that country. As of December 26, 1997, Ms. Young has accrued
approximately $1,000 in royalty fees, however, Cardiac has not made any royalty
payments to her. Ms. Young has also provided Cardiac with consulting services on
clinical studies and other matters which included assisting Cardiac in
implementing its clinical studies for its single-lead DDD system, as well as
performing due diligence on Cardiac's merger with Electro. As of December 26,
1997, Ms. Young has invoiced Cardiac approximately $100,000 for consulting
services performed by her through such date. Cardiac intends to pay Ms. Young
for her consulting services with funds obtained in connection with this
offering.
During fiscal 1996, Cardiac entered into a distribution agreement for the
European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). As part
of the distribution agreement, Grupo Taper was permitted to designate a member
of the Cardiac Board. Through December 31, 1997, that member of the Cardiac
Board designated by Grupo Taper was Dr. Augusto Ocana, an executive officer of
Grupo Taper. On January 1, 1998, Dr. Augusto Ocana left Grupo Taper's employ,
and is therefore no longer Grupo Taper's designate on the Cardiac Board. Dr.
Augusto Ocano has, however, remained on the Cardiac Board as an independent
director. Grupo Taper does not have a right to designate another individual as a
non-voting member of the Cardiac board of directors, but does currently have the
right to have an observer at all board of directors meetings.
On October 28, 1996, Cardiac executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced Cardiac $108,247 at an annual
interest rate of 10%. This advance, plus accrued interest, was repaid to Mr.
Gutekunst on February 14, 1997.
On March 24, 1997, Cardiac executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced Cardiac $100,000 at
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an annual interest rate of 10% plus the right to purchase one share of
restricted Common Stock of Cardiac at an exercise price of $0.90 per share for
each $5.00 of interest earned under the note. This advance, plus accrued
interest, was repaid to Mr. Gutekunst on June 16, 1997.
On April 21, 1997, Cardiac executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced Cardiac $61,554 at an annual interest
rate of 10% plus the right to purchase one share of restricted CTG Common Stock
at an exercise price of $0.90 per share for each $5.00 of interest earned under
the note. This advance, plus accrued interest, was repaid to Mr. Gutekunst on
June 16, 1997.
From April 22, 1998 through May 4, 1998, Cardiac obtained $300,000 in
interim financing from selected current investors through the issuance of an 8%
convertible debenture, convertible into shares of CTG Common Stock at $2.00 per
share. Bradley Resources Company, a partnership and beneficial owner of over 5%
of Cardiac Common Stock ("Bradley"), purchased $100,000 worth of convertible
debentures. In return for its investment, the exercise price of the option
controlled by Mr. George Holbrook, but beneficially owned by Bradley, to
purchase 715 shares of CTG Common Stock at $17.50 per share and the exercise
price of the warrant held by Bradley to purchase 3,363 shares of CTG Common
Stock at $25.00 per share were each reduced to $2.00 a share.
On July 30, 1998 Cardiac executed a $75,000 promissory note in favor of
Minrad, Inc., and on August 13, 1998 Cardiac executed another promissory note in
favor of Minrad, Inc. in the amount of $125,000. William H. Burns, Jr., a
director of Cardiac, is a director and president of Minrad. The Minrad Notes
bear interest at the rate of 15% annually, and the principal amount and all
interest due thereunder is due and payable, after September 29, 1998, within 10
days after written demand from Minrad.
ELECTRO
On October 11, 1993, Electro entered into an agreement with The T
Partnership to borrow up to $1.0 million. Ervin Schoenblum, Electro's Acting
President and a director, and Abraham Nechemie, also a director of Electro, are
partners in The T Partnership. On August 31, 1995, after Electro had drawn down
all of the $1.0 million, Electro entered into an agreement with The T
Partnership to borrow an additional $500,000 ("Lending Agreement"). In January
1996, Electro and The T Partnership agreed to a restructuring of its financing
agreement. The T Partnership advanced an additional $200,000 to Electro and
agreed to defer interest payments for a period of three months (interest
payments were added to the outstanding principal on The T Partnership
indebtedness) and in April 1997, Electro borrowed an additional $100,000 from
The T Partnership under the same terms and conditions as its previous borrowing.
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. Electro made scheduled monthly principal
payments of $25,000 for four months beginning on September 1, 1996. The
scheduled monthly payments were then deferred to September 1, 1998. Any
remaining balance is due on August 1, 2003. The loan is secured by Electro's
property, building, accounts receivable, inventories and machinery and
equipment. Electro is to prepay the outstanding balance in the event it is
merged into or consolidated with another corporation or it sells all or
substantially all of its assets, unless The T Partnership and Electro agree
otherwise. The T Partnership has waived the prepayment of the outstanding
balance in order to facilitate the Merger.
Under the provisions of the agreement with The T Partnership, Electro is
obligated to comply with certain financial covenants, to be tested on a monthly
basis. Non-compliance by Electro shall allow The T Partnership to declare an
Event of Default and accelerate repayment of indebtedness. As of August 31,
1997, Electro was not in compliance with this financial covenant. However, in
November 1997, The T Partnership agreed not to exercise its right to accelerate
the repayment of indebtedness through September 1, 1998 as a result of
non-compliance with the aforementioned financial covenant and the nonpayment of
principal payments in the 1998 fiscal year. The T Partnership has also agreed to
a modification of the financial covenant. Electro is currently in compliance
with such covenant. In September 1997, in December 1997, in January 1998, in May
1998, and in July 1998, Electro
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borrowed additional amounts from The T Partnership, in each case in the amount
of $100,000, under substantially the same terms and conditions as its previous
borrowings, without issuing any additional warrants. Under the current
arrangement, Electro is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by Electro with such covenant would
allow The T Partnership to declare an event of default and accelerate repayment
of indebtedness. Electro is currently in compliance with the covenant. The total
indebtedness due to The T Partnership at September 30, 1998 was approximately
$2.5 million.
Under the provisions of the original agreement, The T Partnership was
granted warrants which permit The T Partnership to purchase 33,334 shares of
Electro Common Stock at a price of $16.25 per share. The August 1995 Lending
Agreement provides that The T Partnership surrender its warrants and be granted
a new warrant to purchase 100,000 shares of Electro Common Stock at an exercise
price of $4.938 per share in exchange for the surrendered warrant. No additional
warrants were issued as a result of subsequent borrowings. A value has been
allocated to the warrants based upon their estimated fair market value at the
date of the agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is shown in
other assets in the accompanying 1997 and 1996 balance sheets. The warrants are
immediately exercisable and expire on August 1, 2001. As of September 30, 1998,
these warrants remain outstanding.
Under the terms of the Merger Agreement, Electro's secured indebtedness
to The T Partnership will be redeemed by: (a) issuance to The T Partnership of
an aggregate of 1,000 shares of Series A Preferred Stock with a liquidation
value equal to $1.0 million, convertible into shares of CTG Common Stock at a
conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given in exchange for any capital raised
in satisfaction of the financing condition of the Merger; (b) the delivery to
The T Partnership of a conditional promissory note made by CTG in the amount of
$1.0 million, at an interest rate of 9% per annum, with the principal and
interest thereon due only upon the occurrence of certain events related to the
failure to pay amounts which are due but not paid on the Series A Preferred
Stock (or in the event of certain other non-monetary defaults); and (c) the
delivery to The T Partnership of a secured promissory note made by CTG in an
amount not to exceed $1.3 million (which amount shall be the remaining amount of
Electro's secured indebtedness to The T Partnership exclusive of the amount
redeemed under (a) above), bearing interest at the rate of 12% per annum payable
quarterly, the principal amount of which shall be due and payable three years
from the date of execution of such note. As a result of the issuance of Series A
Preferred Stock, The T Partnership shall be entitled to receive dividends. See
"MERGER - Redemption of The T Partnership Debt." In addition, pursuant to the
terms of the Merger Agreement, The T Partnership shall be entitled to
reimbursement for cash advances provided to Electro in the amount of $200,000,
or any greater amount as may be agreed to by Electro and Cardiac, in writing,
which may have been extended by The T Partnership between May 1, 1998 and the
completion of the Merger for the purpose of operating capital. Ervin Schoenblum
and Abraham Nechemie, who comprise the entire Electro Board, are also partners
in The T Partnership. Mr. Schoenblum is also Electro's Acting President. See
"MERGER - Interests of Certain Persons in the Merger." As of September 30, 1998,
Electro's indebtedness to The T Partnership was $2,269,596. The indebtedness to
The T Partnership is secured by Electro's headquarters, its accounts receivable,
inventories, machinery and equipment and is subordinated only to one creditor
who has priority in payment to The T Partnership in the amount of $220,000 as of
September 30, 1998. See "BUSINESS - Electro - - Legal Proceedings."
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of outstanding CTG Common Stock known by CTG as of
September 30, 1998 after giving effect to: (a) the one-for-five Reverse Split of
Cardiac Common Stock; (b) the exchange of each share of Electro Common Stock for
one-fifth of a share of CTG Common Stock; and (c) the exchange of each share of
Cardiac Common Stock for one share of CTG Common Stock, and as adjusted to
reflect the sale of the CTG Common Stock offered hereby. The following table
sets forth the information with respect to: (i) each person or entity known by
CTG to be the beneficial owner of more than 5% of the CTG Common Stock; (ii)
each director of CTG who owns any shares of CTG Common Stock; (iii) each named
executive officer of CTG set forth in the Summary Compensation Table above who
beneficially owns any shares of CTG Common Stock; and (iv) all directors and
named executive officers of CTG as a group. Except as
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otherwise indicated, the persons listed below have sole voting and investment
power with respect to all shares of CTG Common Stock owned by them, except to
the extent such power may be shared with a spouse.
PERCENT OF CLASS
NAME AND ADDRESS AMOUNT AND NATURE OF AFTER MERGER AND
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OFFERING (2)
------------------- ------------------------ ----------------
William H. Burns 7,644(3)(4) *
Bart C. Gutekunst 13,516(3) *
Larry G. Haimovitch 9,558(3)(4) *
Alan J. Rabin 17,115(3) *
Robert T. Rylee 11,530(3)(4) *
Tracey E. Young 7,488(3)(4) *
Augusto Ocana 5,024(3)(4) *
Kirk D. Kamsler 3,134(3) *
Jonathan S. Lee 3,934(3) *
The T Partnership, L.L.P.(5) 644,484(6) 23.8%
Fred Lafer(5) 644,484(6) 23.8%
Abraham H. Nechemie(5) 645,484(6)(7) 23.8%
Ervin Schoenblum(5) 660,484(6)(8) 24.2%
Stephen D. Shapiro(5) 644,484(6) 23.8%
Henry Taub(5) 644,484(6) 23.8%
Bruce Paul(9) 131,680 5.4%
All directors and executive officers
as a group (12 persons) 740,027 26.8%
- --------------------
* Less than 1%.
(1) Except as otherwise indicated, each person is the record owner of the
shares indicated and possesses the sole voting and investment power with
respect to such shares of CTG Common Stock.
(2) Computations of percentage ownership of each individual treats warrants
and options to purchase CTG Common Stock exercisable within the next 60
days as though the shares subject thereto were issued and outstanding.
Assumes sale of all 650,000 shares in this offering.
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(3) Includes options and warrants exercisable within the next 60 days to
purchase shares of CTG Common Stock as follows:
NAME OF INDIVIDUAL OR NUMBER
NUMBER OF PERSONS IN GROUP OF SHARES
-------------------------- ---------
William H. Burns 2,600
Bart C. Gutekunst 11,641
Larry G. Haimovitch 3,000
Alan J. Rabin 14,800
Robert T. Rylee 7,286
Tracey E. Young 3,600
Augusto Ocana 1,400
Kirk D. Kamsler 2,934
Jonathan S. Lee 2,934
Ervin Schoenblum 16,000
Abraham H. Nechemie 1,000
(4) Includes 2,790 accrued and unissued shares for director fees.
(5) The T Partnership, L.L.P. is a New Jersey limited liability partnership
(formerly The T Partnership, a New Jersey general partnership) whose
address is c/o Wiss & Co. 354 Eisenhower Pkwy., Livingston, NJ 07039. The
partnership consists of five individuals with varying equity interests.
Fred Lafer (10% equity interest) and Henry Taub (70% equity interest)
each of whose address is c/o The Taub Foundation 300 Frank W. Burr Blvd.
Teaneck, NJ 07666; Abraham H. Nechemie at Wiss & Co. 354 Eisenhower
Pkwy., Livingston, NJ 07039 (5% equity interest); Ervin Schoenblum c/o
Electro-Catheter Corporation 2100 Felver Court, Rahway, NJ 07065 (5%
equity interest); and Stephen D. Shapiro 20 Old Post Road E., Setauket,
NY 11733 (10% equity interest). The T Partnership disclaims any
beneficial ownership of shares issuable upon currently exercisable stock
options held by each of Messrs. Nechemie and Schoenblum.
(6) Includes 16,669 and 100,000 shares which The T Partnership has the right
to acquire pursuant to outstanding warrants, which warrants are
immediately exercisable at prices of $7.125 and $4.9375 per share,
respectively. Also includes 151,515 shares which are issuable upon the
conversion of the Series A Preferred Stock issued by Electro to The T
Partnership, assuming a conversion price of $5.50 per share, which is
subject to adjustment in accordance with the offering price for the CTG
Common Stock offered hereby.
(7) Includes 1,000 shares issuable upon the exercise of currently exercisable
stock options.
(8) Includes 16,000 shares issuable upon the exercise of currently
exercisable stock options.
(9) Mr. Paul's address is 1 Hampton Road, Purchase, NY 10577.
- -----------------
DESCRIPTION OF SECURITIES
The following description of securities of CTG does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of CTG's Certificate of Incorporation and Bylaws. Upon approval of
the Restructuring Merger by Cardiac's stockholders, Cardiac will become a
direct, wholly-owned subsidiary of CTG. Each share of Cardiac Common Stock
outstanding immediately prior to the Restructuring Merger will be converted into
one share of CTG Common Stock (after giving effect to the Reverse Split) having
the same designations, rights, powers and preferences, and the qualifications,
limitations and restrictions thereof. The
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consolidated assets and liabilities of Cardiac and its subsidiary will be the
same as the consolidated assets and liabilities of CTG and its subsidiaries
immediately after the Restructuring Merger. All of the business and operations
conducted immediately prior to the Restructuring Merger by Cardiac and its
subsidiary will be conducted after the Restructuring Merger by Cardiac and its
subsidiary, as subsidiaries of CTG. Upon consummation of the Merger, CTG will
acquire all of the issued and outstanding shares of Electro Common Stock and
Electro will become a subsidiary of Cardiac. Each outstanding share of Electro
Common Stock will be cancelled and converted into one-fifth of a share of CTG
Common Stock (after giving effect to the Reverse Split). See "MERGER" and
"RESTRUCTURING MERGER."
CTG COMMON STOCK
CTG's authorized capital stock consists of 30,000,000 shares of common
stock, $.10 par value per share. As of the date of this Prospectus, 100 shares
of CTG Common Stock were issued and outstanding. Upon consummation of the
Restructuring Merger and the Merger, holders of Cardiac Common Stock and Electro
Common Stock will automatically become holders of CTG Common Stock and will have
the right to cast one vote for each share held of record on all matters
submitted to a vote of holders of CTG, including the election of directors.
There is no right to cumulate votes for the election of directors. Stockholders
holding a majority of the voting power of the capital stock issued and
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of CTG's stockholders, and the
vote by the holders of a majority of such outstanding shares is required to
effect certain fundamental corporate changes such as liquidation, merger or
amendment of CTG's Certificate of Incorporation.
Holders of CTG Common Stock are entitled to receive dividends pro rata
based on the number of shares held, when, as and if declared by the CTG Board,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of CTG, all assets and funds of CTG remaining after
the payment of all debts and other liabilities, shall be distributed, pro rata,
among the holders of CTG Common Stock. Holders of CTG Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to CTG Common Stock. All
outstanding shares of CTG Common Stock are, and the shares of CTG Common Stock
offered hereby will be when issued, fully paid and non-assessable.
WARRANTS
Prior to the Merger, each of Cardiac and Electro issued warrants
representing the right to purchase shares of their respective common stock. Upon
consummation of the Merger and without any further action on the part of any
holder thereof, each of Cardiac's and Electro's then outstanding warrants will
be assumed by CTG and automatically converted, on the same terms (except with
respect to actual number of shares of CTG Common Stock underlying the warrants
and the exercise prices thereof), into a warrant to purchase shares of CTG
Common Stock. There will be 301,869 shares underlying the Warrants at exercise
prices ranging from $.05 to $25.00, all of which gives effect to the Reverse
Split. The converted warrants shall be exercisable in the same terms and
conditions as the warrants existing prior to the Merger without, however, giving
any effect to any mandatory or permissive exercise arising by virtue of the
Merger. The expiration dates are March 31, 1999 as to 20,006 warrants, March 31,
2000 as to 66,669 warrants, August 1, 2001 as to 100,000 warrants, June 6, 2002
to June 30, 2002 for 22,194 warrants, July 31, 2003 to September 30, 2003 for
21,000 warrants, August 26, 2003 for 66,000 warrants, and March 29, 2006 for
5,000 warrants.
The exercise prices of the warrants were determined by negotiation and
should not be construed to imply that any price increases in CTG's securities
will occur. CTG has reserved from its authorized but unissued shares a
sufficient number of shares of CTG Common Stock for issuance upon the exercise
of the warrants. Upon notice to the warrantholders, CTG has the right to reduce
the exercise price or extend the expiration date of the warrants.
The warrants do not confer upon the warrantholder any voting or other
rights of a stockholder of CTG. The warrants provide for customary anti-dilution
provisions in the event of certain events which may include mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits and other changes in CTG's
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capital structure. Also, the warrants issued to Sirrom entitle Sirrom to
participate in rights offerings made to stockholders of CTG.
Certain warrantholders are entitled to certain "piggy-back" registration
rights enabling them, under certain conditions, to include the CTG Common Stock
underlying the warrants in a registration statement to register the CTG Common
Stock under the Securities Act.
The foregoing is a summary of the terms generally applicable to the
warrants as of the date of this Prospectus. The terms of the individual Warrants
may vary according to negotiation between CTG and the various warrantholders.
Management of Cardiac consulted with representatives from Fahnestock &
Co., Inc., a member of the New York Stock Exchange, regarding corporate
opportunities in the development of Cardiac, as well as certain aspects of the
merger transaction. In consideration for such sources, Fahnestock & Co., Inc.
will receive, upon consummation of the Merger, a three-year redeemable warrant
from CTG for 27,000 shares of CTG Common Stock at an exercise price of $12.50
per share.
BUSINESS COMBINATION PROVISIONS
CTG is subject to a statute under the Delaware Act regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the statute, a corporation
may not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. CTG has not sought to "elect out" of
the statute and, therefore the restrictions imposed by such statute apply to
CTG.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar of the CTG Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
If CTG sells all 650,000 shares offered under this Prospectus, CTG will
have outstanding 2,457,826 shares of CTG Common Stock. Of that amount, 2,066,728
of those shares (including the 650,000 offered hereby) will be freely tradable
without restriction or further registration under the Securities Act, unless
purchased or held by "affiliates" of CTG, as defined in Rule 144 of the
Securities Act.
RESTRICTED SHARES
Upon consummation of the Merger, the Restructuring Merger and this
offering, 391,098 shares of outstanding CTG Common Stock will be deemed
"restricted securities" under Rule 144 (the "Restricted Shares") and may not be
sold unless they are registered under the Securities Act or unless an exemption,
such as the exemption provided by Rule 144, is available. All of these shares
may be eligible for sale in the public market in accordance with Rule 144 under
the Securities Act; however, it is anticipated that all of such shares will be
subject to the terms of the Lock-up Agreements described below.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned his shares of
CTG Common Stock for at least one year (including the prior holding period of
any prior owner other than an affiliate) may resell within any three-month
period that number of such shares which does not exceed the greater of (i) one
percent of the then outstanding shares of CTG Common Stock (approximately 24,578
shares assuming all shares offered under this Prospectus are sold) or (ii) the
average weekly trading volume in the CTG Common Stock during the four calendar
weeks preceding each such sale. A person (or persons whose
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<PAGE>
shares are aggregated) who is not deemed an "affiliate" of CTG for at least
three months, and who has beneficially owned his shares for at least two years
(including the holding period of any prior owner other than an affiliate) would
be entitled to sell such shares under Rule 144 without regard to the limitations
described above. Rule 144 defines "affiliate" of a company as a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such company. Affiliates of a
company generally include its directors, officers and principal shareholders.
LOCK-UP AGREEMENTS
Concurrently with the consummation of the Merger and this offering, it is
intended that CTG and its executive officers and directors, who beneficially own
391,098 shares of CTG Common Stock and options, warrants and rights to purchase
an aggregate of 335,379 shares of CTG Common Stock will enter into Lock-up
Agreements under which those stockholders may not, directly or indirectly,
without the prior written consent of the Company, offer, sell or otherwise
dispose of any shares of CTG Common Stock, options or warrants to acquire shares
of CTG Common Stock, or any securities exercisable for or convertible into CTG
Common Stock for a period of 180 days following the date of this Prospectus.
WARRANTS
Upon consummation of the Merger and this offering, there will be
outstanding warrants to purchase a total of 301,869 shares of CTG Common Stock,
all of which will be exercisable and have expiration dates ranging from March
31, 1999 to March 29, 2006. Warrants for 26,469 shares will be exercisable at
$25.00 per share and the remaining 275,400 warrants will be exercisable at
prices ranging from $.05 per share to $7.125 per share. After the expiration of
the Lock-up Agreements, CTG intends to register the common stock underlying the
warrants for sale under the Securities Act by the holders of the warrants.
OPTIONS
Upon consummation of the Merger and this offering, there will be
outstanding options to purchase a total of 116,128 shares of CTG Common Stock,
all of which will be exercisable at exercise prices ranging from $1.5625 to
$18.75 per share. Further, CTG may in the future implement a stock option plan
for its officers, directors and employees and in connection therewith may file
one or more registration statements on Form S-8 under the Securities Act to
register shares of CTG Common Stock underlying options. Shares covered by these
registration statements will thereupon be eligible for sale in the public
market.
DEBENTURES
Upon consummation of the Merger and this offering, there will be
outstanding $300,000 in 8% convertible debentures, convertible at $2.00 per
share into 150,000 shares of CTG Common Stock.
PREFERRED STOCK OF ELECTRO
Upon consummation of the Merger and this offering, The T Partnership will
beneficially own 1,000 shares of the Series A Preferred Stock of Electro, which
will be convertible at any time beginning on the date such stock is issued and
ending five years thereafter into CTG Common Stock. The number of shares to be
issued upon conversion is derived by dividing $1,000,000 by the conversion
price. The conversion price is equal to 120% of the per share offering price in
this offering. Assuming an offering price of $5.50 per share and a conversion
price of $6.60 ($5.50 x 120%), the 1,000 shares of the Series A Preferred Stock
would be convertible into 151,515 shares of CTG Common Stock. See "MERGER -
Redemption of the T Partnership Debt" and "CERTAIN TRANSACTIONS -Electro."
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<PAGE>
REGISTRATION RIGHTS
Following the consummation of the Merger and this offering and after
expiration of the Lock-up Agreements, CTG intends to register under the
Securities Act a total of 598,384 shares of CTG Common Stock underlying
currently outstanding warrants and other derivative securities. However, prior
to effecting such registration, if CTG proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of a security holder, the holders of the warrants may be entitled to
include the shares underlying their warrants in such registration, subject to
certain limitations on the number of shares to be included in the registration
if the offering is an underwritten offering.
PLAN OF DISTRIBUTION
CTG is offering a minimum of 390,245 and a maximum of 650,000 shares of
CTG Common Stock. The estimated price range per share is $5.125 to $6.125. The
Company anticipates that it will receive gross proceeds of $2.0 million to $3.3
million from this Offering, depending on the offering price and number of shares
sold. The CTG Common Stock is being offered on a "best efforts" basis through
this Prospectus only. Payment for subscriptions of CTG Common Stock offered
hereby are due in full upon subscription. Subscription funds are irrevocable and
will initially be held in an escrow account (the "Escrow Account") by American
Stock Transfer & Trust Company, as escrow agent (the "Escrow Agent"). This
Offering will close 30 days from the date of this Prospectus, unless extended by
CTG for an additional period not to exceed 30 days (in either case, the "Closing
Date"). CTG is not obligated to provide written notice of any such extension to
persons who are subscribers at the time of the extension, and any such extension
will not alter the binding nature of the subscriptions already executed and
delivered.
Upon the effective date of this Prospectus, CTG expects to engage the
assistance of independent broker-dealers ("Selected Dealers") who are members of
the National Association of Securities Dealers, Inc. (the "NASD") to sell the
shares of CTG Common Stock offered hereby and to accept orders for the shares.
Payment for the purchase price of shares of CTG Common Stock sold directly by
CTG shall be made by check payable to "American Stock Transfer & Trust Company,
as Escrow Agent for Catheter Technology Group, Inc." Payment for the purchase
price of shares of CTG Common Stock sold through Selected Dealers shall be paid
for in the normal and customary manner for such transactions at each respective
Selected Dealer, and will be delivered by such Selected Dealer to the Escrow
Agent by wire transfer, immediately upon receipt from subscribers. to the Escrow
Agent. The Escrow Agent will not release the funds held in the Escrow Account to
CTG unless and until the following conditions have been satisfied on or prior to
the Closing Date:(i) a minimum of 390,245 shares of CTG Common Stock have been
sold; (ii) the Merger Agreement and the Merger shall have been approved and
adopted by the stockholders of Cardiac and Electro; (iii) the Reverse Split and
the Restructuring Merger shall have been approved, adopted and completed; (iv)
CTG shall have secured a minimum of $4.0 million in financing, through a
combination of the proceeds of this offering and a loan or line of credit; and
(v) all other conditions to the Restructuring Merger and the Merger shall have
been satisfied (collectively, the "Closing Conditions"). All shares of CTG
Common Stock subscribed for and whose subscriptions have cleared the banking
system will be considered sold for purposes of determining whether the financing
condition set forth in subsection (iv) above has been satisfied. In the event
that all of the Closing Conditions have not been satisfied on or before the
Closing Date, or if the offering is terminated on or before the Closing Date,
all funds held in the Escrow Account will be promptly returned to the investors
without deduction or interest. Any interest earned on the funds in the Escrow
Account will be paid to CTG and allocated to the payment of the Escrow Agent's
fees and costs. In the event that all of the Closing Conditions have been
satisfied on or before the Closing Date, the Escrow Agent will disburse the
funds held in the Escrow Account to CTG immediately after the filing of the
Certificate of Merger with the Secretary of State of the State of New Jersey
relating to the Merger.
This is a self-underwritten offering, and no officer or director of CTG
will receive compensation or commission from sales of the CTG Common Stock of
this offering. The officers and directors of CTG are indemnified through CTG's
Certificate of Incorporation and are relying on Rule 3a4-1 of the Securities
Exchange Act of 1934, as amended, as the exemption from registration as a
broker-dealer. Should CTG engage Selected Dealers to assist it in this offering,
CTG plans to pay sales commissions to Selected Dealers of 10% percent, and a
non-accountable expense allowance of 3% of the offering purchase price of the
CTG Common Stock sold by
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them. Selected Dealers will not receive selling commissions with respect to
CTG Common Stock sold by CTG or its officers or directors. Further, CTG and the
selected Dealers may agree to indemnify each other against certain
liabilities, including liabilities under the Securities Act, which may arise in
connection with this offering.
There is no lead underwriter for this offering. Selected Dealers will
execute selected dealer agreements with CTG ("Selected Dealer Agreements");
however, such Selected Dealers will be under no obligation to sell any or all of
the CTG Common Stock offered hereby. Any broker/dealer that sells securities in
the offering may be deemed an underwriter as defined in Section 2(11) of the
Securities Act. CTG currently has not entered into any Selected Dealer
Agreements with Selected Dealers. There is no assurance that, even if any
Selected Dealer sells the CTG Common Stock, a court of competent
jurisdiction or arbitration panel would deem any such Selected Dealer to be an
underwriter as so defined.
Any Selected Dealers will agree, in accordance with the provisions of Rule
15c2-4 promulgated by the SEC under the Exchange Act, to cause all funds
received upon the sale of Securities to be immediately forwarded to the Escrow
Agent.
It is the intention of CTG to apply for acceptance to trade the CTG Common
Stock on the Philadelphia Exchange or other regional exchange. There can be no
assurance that the CTG Common Stock will be accepted for listing or that if
listed it will be able to continue to meet the requirements for continued
quotation, or that a public trading market will develop or that if such a market
develops, it will be sustained.
Prior to the offering, there has been no public market for the CTG Common
Stock. Accordingly, the initial public offering price has been arbitrarily
determined by CTG. Among the factors considered were CTG's results of
operations, current financial conditions, estimates of business potential and
prospects of CTG, the experience of CTG's management, the economics of the
industry in general, the general condition of the equities market, market
conditions for new offerings of securities, the prices of similar securities of
comparable companies and other relevant factors. There can be no assurance that
any active trading market will develop for the CTG Common Stock or as to the
price at which the CTG Common Stock may trade in the public market from time to
time subsequent to the offering made hereby.
LEGAL MATTERS
The validity of the CTG Common Stock being offered hereby will be passed
upon for CTG by Greenberg Traurig, P.A., Orlando, Florida. Greenberg has
warrants to purchase an aggregate of 21,000 shares of CTG Common Stock, 7,000 of
which are exercisable at $1.875 per share (expires July 31, 2003), 7,000 of
which are exercisable at $1.70 per share (expires August 31, 2003) and 7,000 of
which are exercisable at $1.775 per share (expires September 30, 2003).
Greenberg has not exercised any of its warrants to purchase CTG Common Stock,
which are currently exercisable.
EXPERTS
The financial statements of CTG and Cardiac included in this Prospectus
and in the Registration Statement have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their reports (which Cardiac's report contains an explanatory paragraph
regarding Cardiac's ability to continue as a going concern) appearing elsewhere
herein and in the Registration Statement and are included in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
The financial statements and schedule of Electro as of August 31, 1997 and
1996, and for each of the years in the three-year period ended August 31, 1997
have been included herein and in the Registration Statement of which this
Prospectus forms a part, and, in each case, are included in reliance upon such
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere, and upon the authority of such firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the August
31, 1997
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financial statements contains an explanatory paragraph that states that
Electro's recurring losses from operations and limited working capital resources
raise substantial doubt about Electro's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
AVAILABLE INFORMATION
We filed a registration statement with the SEC on Form SB-2 relating to
the shares offered in this Prospectus. This Prospectus does not contain all of
the information included in the registration statement. For further information
about us and the shares we are offering in this Prospectus, refer to the
registration statement and its exhibits. The statements we make in this
Prospectus regarding the content of any contract or other document are
necessarily not complete, and you may examine the copy of the contract or other
document that we filed as an exhibit to the registration statement. All our
statements about those contracts or other documents are qualified in their
entirety by referring you to the exhibits to the registration statement.
You should rely only on the information contained in this document or that
we have referred you to. We have not authorized anyone to provide you with
information that is different. The information contained in this document is
current as of the date this document was filed with the SEC. If any material
changes occur after such date, then we will notify you of the changes by an
amendment to this document. We are not offering to sell you securities if you
live in a jurisdiction where such an offer would be unlawful.
After the effective date of this offering, we intend to furnish to our
stockholders annual reports containing audited financial statements and interim
reports. Cardiac and Electro currently file annual, quarterly and special
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information can be inspected and copied at the public
reference facility of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained by mail from the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Cardiac Common Stock and Electro Common Stock are traded in the
over-the-counter market and are quoted on the OTC Bulletin Board(R) and such
reports, proxy statements and other information concerning Cardiac and Electro
may be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 9801 Washingtonian Boulevard, Gaithersburg, Maryland
20878. In addition, Cardiac and Electro are required to file electronic versions
of these documents with the SEC through the SEC's Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system. The SEC maintains a World Wide Web site
at http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC.
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<TABLE>
<CAPTION>
CATHETER TECHNOLOGY GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
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<S> <C>
Catheter Technology Group, Inc.:
Independent Auditors' Report..............................................................................F-3
Balance Sheet at September 9, 1998........................................................................F-4
Note to Financial Statement...............................................................................F-5
Cardiac Control Systems, Inc.:
Balance Sheet at June 30, 1998 (Unaudited)................................................................F-6
Statements of Operations and Accumulated Deficit for the Three Months
Ended June 30, 1998 and 1997 (Unaudited)..............................................................F-7
Statements of Cash Flows for the Three Months Ended June 30, 1998 and 1997 (Unaudited)....................F-8
Notes to Financial Statements (Unaudited)..........................................................F-9 - F-12
Report of Independent Certified Public Accountants.......................................................F-13
Balance Sheet at March 31, 1998...................................................................F-14 - F-15
Statements of Operations for the Years Ended March 31, 1998 and 1997.....................................F-16
Statements of Stockholders' Equity for the Years Ended March 31, 1998 and 1997...........................F-17
Statements of Cash Flows for the Years Ended March 31, 1998 and 1997..............................F-18 - F-19
Summary of Significant Accounting Policies........................................................F-20 - F-22
Notes to Financial Statements ....................................................................F-23 - F-33
Electro-Catheter Corporation:
Condensed Comparative Balance Sheets at May 31, 1998 and August 31, 1997 (Unaudited).....................F-34
Condensed Comparative Statements of Operations for
Three Months Ended May 31, 1998 and Nine Months Ended May 31, 1997 (Unaudited).......................F-35
Condensed Comparative Statements of Cash Flows for
Nine Months Ended May 31, 1998 and 1997 (Unaudited)..................................................F-36
Notes to Condensed Financial Statements (Unaudited)...............................................F-37 - F-40
Independent Auditors' Report ............................................................................F-41
Balance Sheets - August 31, 1997 and 1996................................................................F-42
Statements of Operations -Years Ended August 31, 1997, 1996 and 1995.....................................F-43
F-1
<PAGE>
Statements of Stockholders' Deficiency/Equity -
Years Ended August 31, 1997, 1996 and 1995...........................................................F-44
Statements of Cash Flows - Years Ended August 31, 1997, 1996 and 1995....................................F-45
Notes to Financial Statements.....................................................................F-46 - F-56
Valuation and Qualifying Accounts........................................................................F-57
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Catheter Technology Group, Inc.
We have audited the accompanying balance sheet of Catheter Technology Group,
Inc. as of September 9, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the balance sheet. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Catheter Technology Group, Inc. as
of September 9, 1998 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Orlando, Florida
October 6, 1998
F-3
<PAGE>
CATHETER TECHNOLOGY GROUP, INC.
BALANCE SHEET
SEPTEMBER 9, 1998
- ------------ ----
ASSETS
Cash $ 10
----
LIABILITIES
Common stock, $.10 par value, 30,000,000 shares
authorized, 100 shares issued $ 10
----
SEE ACCOMPANYING NOTE TO FINANCIAL STATEMENT.
F-4
<PAGE>
CATHETER TECHNOLOGY GROUP, INC.
NOTE TO FINANCIAL STATEMENT
1. BUSINESS Catheter Technology Group, Inc. ("CTG") was
incorporated on September 3, 1998 under the laws of the
State of Delaware and was organized as a directly
wholly-owned subsidiary of Cardiac Control Systems, Inc.
("Cardiac") for the purpose of restructuring into a holding
company which is intended to hold both Cardiac and
Electro-Catheter Corporation ("Electro"). It is intended
that through the merger of a direct, wholly-owned subsidiary
of CTG with and into Cardiac (the "Restructuring Merger"),
Cardiac will become a direct, wholly-owned subsidiary of
CTG. It is further intended that through the merger of an
indirect, wholly-owned subsidiary of CTG with and into
Electro (the "Merger"), Electro will become an indirect,
wholly-0owned subsidiary of CTG and a direct, wholly-owned
subsidiary of Cardiac. The result of the Restructuring
Merger and Merger will be the formation of a holding
company, CTG, which holds two operating companies, Cardiac
and Electro. Prior to the effectiveness of the Merger and as
a condition to the Merger, Cardiac will effectuate a
one-for-five reverse stock split (the "Reverse Split") of
its Common Stock. All share information has been adjusted to
reflect the Reverse Split.
F-5
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
- -----------------------------------------------------------------------------------------------------
JUNE 30,
1998
- -----------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 33,527
Accounts and notes receivable 560,529
Inventories 1,396,572
Prepaid expenses 254,710
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,245,338
- -----------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NET) 1,918,680
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $272,177 426,270
Deferred license fees, less accumulated
amortization of $53,333 146,667
Deferred merger costs 427,372
Other 80,010
- -----------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,080,319
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,244,337
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,160,095
Due to related party 102,522
Accrued compensation 308,874
Accrued royalties 210,111
Other accrued expenses 74,285
Deposits payable 352,481
Notes and debt obligations payable within one year 1,112,862
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,321,230
8% CONVERTIBLE DEBENTURES 300,000
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR 1,503,038
OTHER LIABILITIES 84,622
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,208,890
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 30,000,000 shares authorized,
2,648,739 shares issued 264,874
Additional paid in capital 22,337,797
Accumulated deficit (22,567,224)
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,447
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,244,337
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Net sales $ 620,777 $ 852,288
Royalty income 0 697,125
-----------------------------------------------
Total revenue 620,777 1,549,413
-----------------------------------------------
COSTS AND EXPENSES
Cost of products sold 326,090 503,815
Selling, general and administrative expenses 469,091 743,072
Engineering, research and development expenses 334,915 458,272
-----------------------------------------------
Total cost and expenses 1,130,096 1,705,159
-----------------------------------------------
OPERATING INCOME (LOSS) (509,319) (155,746)
-----------------------------------------------
OTHER INCOME (EXPENSES)
Interest income 317 5,983
Interest expense (156,295) (82,586)
Other income
-----------------------------------------------
Total other income (expenses) (155,978) (76,602)
-----------------------------------------------
NET INCOME (LOSS) (665,297) (232,348)
ACCUMULATED DEFICIT - BEGINNING OF PERIOD (21,901,927) (20,662,217)
-----------------------------------------------
ACCUMULATED DEFICIT - END OF PERIOD $ (22,567,224) $ (20,894,565)
===============================================
NET INCOME (LOSS) PER COMMON SHARE - BASIC ($0.25) ($0.09)
AVERAGE NUMBER OF SHARES OUTSTANDING 2,648,739 2,619,371
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (665,297) $ (232,348)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 114,263 104,579
Gain (loss) on fixed asset disposals - (671)
Cash provided by (used for):
Accounts receivable 113,143 (273,180)
Inventories 27,124 (118,157)
Prepaid expenses (47,147) (158,281)
Other assets (2,026) -
Accounts payable 132,677 (199,755)
Due to related parties (4,500) -
Accrued interest 3,054 -
Accrued compensation 50,356 36,253
Accrued compensated absences 606 22,694
Deposits payable - 184,011
Other accrued expenses 6,736 (7,359)
Other liabilities 1,230 15,455
-----------------------------
Net cash provided by (used for) operating activities (269,781) (626,758)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES;
Purchase of property, plant and equipment (1,180) (186,640)
Deferred merger costs (106,922) -
Proceeds from sale of equipment - 4,260
Increase in other assets - (2,600)
-----------------------------
Net cash provided by (used for) investing activities (108,102) (184,980)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and debt obligations payable - 93,893
Repayment of notes and debt obligations payable - (193,983)
Proceeds from issuance of 8% convertible debenture 300,000 -
Net borrowings on line of credit 56,225 (93,893)
Proceeds from short term debt 35,745 -
Repayments of long term debt (1,973) (1,534)
Debt issuance costs - (165,288)
-----------------------------
Net cash provided by (used for) financing activities 389,998 (360,804)
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,115 (34,184)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,412 185,463
-----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,527 $ 151,279
=============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 109,344 $ 57,071
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of June 30, 1998, the related statements of operations and accumulated
deficit for the three months ended June 30, 1998 and 1997, and the statements of
cash flows for the three months ended June 30, 1998 and 1997 are unaudited. In
the opinion of management, such financial statements reflect all adjustments,
consisting only of normal recurring items, necessary to present fairly the
financial position of the Company at June 30, 1998, and the results of
operations and the cash flows for the three months ended June 30, 1998.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1997 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1998.
The accompanying unaudited financial statements as of June 30, 1998 and for the
three months ended June 30, 1998 and 1997 should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 1998.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company has a history of net losses
and incurred a net loss for the three months ended June 30, 1998 of $665,297.
The Company's ability to continue as a going concern is dependent upon the
consummation of the proposed merger with Electro-Catheter Corporation (see Note
6 below) and the attainment of a profitable level of operations. The Company
believes that continual development of new product and resultant sales growth is
critical to attaining a profitable level of operations. Therefore, the Company
is continuing its efforts to invest in development of its single lead technology
and expand its sales volume, both domestically and internationally. Management
believes that the Company has the potential to increase sales and ultimately
achieve a profitable level of operations. Also, the Company is pursuing
additional working capital to expand its market position and pursue development
of new technologies. However, there is no assurance that the Company will be
able to attain profitable operations and continue operations as a going concern.
NOTE 2 - LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included for the three months ended June 30, 1998 and 1997, as their effect on
the loss per share is anti-dilutive.
F-9
<PAGE>
NOTE 3 - INVENTORIES
Inventories at June 30, 1998 are summarized as follows:
- -----------------------------------------------------------------------------
JUNE 30, 1998
-------------------
(unaudited)
Raw materials and supplies............................ $ 812,251
Work-in-process....................................... 341,668
Finished goods........................................ 279,601
-------------
1,433,520
Reserve for obsolescence.............................. 36,948
-------------
$ 1,396,572
- -----------------------------------------------------------------------
Finished goods inventories include approximately $135,427 of products consigned
to customers and independent sales representatives at June 30, 1998.
NOTE 4 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at June 30, 1998:
- --------------------------------------------------------------------------
JUNE 30, 1998
-------------
Sirrom mortgage note, net of discount (A)................... $ 1,492,950
Coast Business Credit (B)................................... 1,069,523
Other....................................................... 53,427
-------------
2,615,900
Amount payable within one year............................. 1,112,862
-------------
Amount payable after one year............................... $ 1,503,038
- --------------------------------------------------------------------------
(A) On March 31, 1995, the Company entered into a Loan and Security
Agreement (the "Loan Agreement") with Sirrom Capital Corporation
("Sirrom") and executed a $1,500,000 secured promissory note. Interest
on the note is payable monthly at 13.5% per annum and principal is due
on March 31, 2000. The note is secured by a first mortgage lien on all
the Company's real and personal property, excluding inventory and
accounts receivable, but including general intangibles such as its
patents and royalties. The Loan Agreement restricts the Company from
incurring additional indebtedness in excess of $200,000 annually
without the lender's consent. In addition, the Company must give the
lender advance notice of certain events, such as dividend payments,
certain new stock issues, reorganizations, and merger or sale of
substantially all assets.
In connection with the Loan Agreement, the Company granted Sirrom
warrants to purchase, initially, 100,000 shares of the Company's common
stock at $.01 per share. An additional 50,000 warrants to purchase
shares of common stock at $.01 per share will be granted to the lender
upon each anniversary date, beginning March 31, 1997 through March 31,
1999, that any amount owed to Sirrom shall be outstanding. On March 31,
1997 and, again, on March 31, 1998, the Company granted Sirrom 50,000
additional warrants pursuant to the Loan Agreement. The Company
recorded $279,000 (100,000 shares) in fiscal 1995, $71,376 (50,000
shares) in fiscal 1997 and $19,550 (50,000 shares) in fiscal 1998 as a
debt discount with the offset to additional paid-in capital,
representing the difference between the estimated fair market value of
the underlying stock at the date of grant and $.01 per share. This has
resulted in an effective interest rate of approximately 30% per annum
on the Sirrom debt. The Sirrom note includes an unamortized debt
discount of $7,050 at June 30, 1998.
F-10
<PAGE>
(B) On June 13, 1997, the Company entered into a Loan Agreement
("Agreement") with Coast Business Credit ("CBC") for a maximum
borrowing of $3.5 million which includes a line of credit up to $2.7
million, a $500,000 sub line for capital expenditures ("CAPEX"), and a
$300,000 term loan ("Term Loan"). The maximum borrowing base available
under the line of credit is based upon eligible receivables and
inventory as defined in the Agreement. The maturity date for the
Agreement is June 30, 2000. The CAPEX and the Term Loan are based upon
a 48 month amortization period. The interest rate on the line of credit
is equal to the prime rate plus 2%, and the interest rate for the Term
Loan and the CAPEX Subline is equal to prime rate plus 2.25%.
Borrowings under the Agreement are collateralized by a first security
interest in substantially all of the assets of the Company. The
Agreement also contains a minimum tangible net worth requirement. In
addition, CBC was granted warrants to purchase 37,500 shares of stock
at $4 per share, expiring June 30, 2002.
In conjunction with the Agreement, the Company obtained an
Intercreditor and Subordination Agreement between CBC and Sirrom. This
agreement provides that Sirrom subordinate its first security interest
in the assets of the Company to CBC, however, the priority interest of
CBC in the Company's real estate is limited to $500,000. As
consideration for its waiver of its first security interest in the
assets of the Company, Sirrom was granted warrants to purchase 50,000
shares of stock at $5 per share, exercisable at any time from June 6,
1997 and expiring on June 6, 2002.
On June 11, 1998, the Company and CBC executed an amendment to the
original Loan Agreement whereby CBC agreed to advance the Company a
further Bridge Loan in the sum of $250,000 repayable on August 31,
1998. The interest rate on the Bridge Loan is equal to prime rate plus
5% per annum , calculated on the basis of a 360-day year for the actual
number of days elapsed. The exercise price of the warrants to purchase
37,500 shares of stock granted under the Agreement dated June 13, 1997
was reduced from $4.00 to $0.40 and, in addition, CBC was granted
warrants to purchase 25,000 shares of stock at $0.40, expiring June 30,
2002.
Aggregate notes and debt obligations outstanding at June 30, 1998 mature as
follows: 1999 - $ 1,112,862; 2000 - $ 4,153; 2001 - $ 1,497,251; 002 - $ 1,634.
NOTE 5 - 8% CONVERTIBLE DEBENTURES From April 22 through May 4, 1998, the
Company obtained $300,000 in interim financing from selected current investors
through the issuance of an 8% convertible debenture, convertible to shares of
stock at $0.40 per share. The debenture holders include two stockholders of
Cardiac Control Systems, Inc., Mr. George Holbrook and Mr. A. Bruce
Brackenridge. In return for their efforts, the exercise price of the option
controlled by Mr. Holbrook to purchase 3,571 shares of the Company stock at
$3.50 a share and the exercise price of the warrant controlled by Mr. Holbrook
to purchase 16,811 shares of the Company stock at $5.00 a share were each
reduced to $0.40 a share and the exercise price of the warrant held by Mr.
Brackenridge to purchase 866 shares of the Company stock at $5.00 was reduced to
$0.40. The Company is attempting to obtain an additional $250,000 on similar
terms.
NOTE 6 - PROBABLE MERGER...On October 27, 1997, the Company entered into a
letter of intent with Electro Catheter Corporation, Inc (Electro), a New Jersey
corporation, to effect a merger of a wholly-owned subsidiary of the Company
("Sub"), into and with Electro (the "Merger") as a result of which Electro will
become a wholly-owned subsidiary of the Company.
To effectuate the Merger, the Company, Electro and Sub executed an Agreement and
Plan of Reorganization dated January 20, 1998, as amended by a First Amendment
to Agreement and Plan of Reorganization, dated May 5, 1998 and a Second
Amendment to Agreement and Plan of Reorganization, dated August 7, 1998
(collectively, the "Merger Agreement"). Simultaneously with the Merger, the
Company will reorganize into a holding company structure, whereby the Company
will become a direct wholly-owned subsidiary of Catheter Technology Group, Inc.,
a Delaware corporation and a holding company ("CTG"). The stockholders of the
Company will become stockholders of CTG and will continue to hold their shares
of common stock without any change in number, designation, terms or rights. The
structure of the transaction contemplates that upon effectiveness of the Merger,
F-11
<PAGE>
holders of Electro's common stock, $.10 par value per share ("Electro Common
Stock"), will receive one-fifth of a share of common stock, $.10 par value, of
CTG for each share of Electro Common Stock held. No fractional shares will be
issued in the Merger.
Consummation of the Merger and transactions contemplated thereby are subject to
the satisfaction of certain conditions, including, among other things: (i) The
approval and adoption of the Merger Agreement and the Merger by the stockholders
of Electro; and (ii) the registration under the Securities Act of 1933, as
amended, and all applicable state securities laws, of the shares of Cardiac
Common Stock to be issued pursuant to the Merger.
Electro is based in Rahway, New Jersey, and is engaged in the business of the
design, development, manufacture, marketing and sale of catheters and related
devices utilized in connection with illnesses of the heart and circulatory
system. The Company believes the Merger may allow certain efficiencies to
improve operating performance and that the broader product line may provide for
a more effective marketing and distribution process. There can be no assurance,
however, that consummation of the Merger will occur, or that if it does, it will
yield positive operating results in the future.
F-12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Cardiac Control Systems, Inc.
We have audited the accompanying balance sheet of Cardiac Control Systems, Inc.
as of March 31, 1998 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiac Control Systems, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has experienced significant operating losses
and has an accumulated deficit at March 31, 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Orlando, Florida
June 15, 1998
F-13
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
- ----------------------------------------------------------------------------
MARCH 31, 1998
- ----------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents............................. $ 21,412
Accounts receivable, net (Note 3)..................... 673,673
Inventories (Note 4).................................. 1,423,697
Prepaid expenses...................................... 207,563
- ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS........................... 2,326,345
- ----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT NET (NOTES 5 AND 7)............ 1,974,096
- ----------------------------------------------------------------------------
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $238,248 (Note 8)................... 460,200
Deferred license fees, less accumulated
amortization of $43,333............................. 156,667
Deferred merger costs (Note 13)....................... 320,450
Other ............................................... 79,220
- ----------------------------------------------------------------------------
TOTAL OTHER ASSETS............................. 1,016,537
- ----------------------------------------------------------------------------
$5,316,978
- ----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-14
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
MARCH 31, 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $1,028,440
Due to related party (Note 6).............................. 106,000
Accrued compensation....................................... 257,912
Accrued royalties (Note 11) 226,906
Other accrued expenses..................................... 48,372
Deposits payable........................................... 352,482
Current portion of long-term debt (Note 7)................. 1,021,682
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES........................... 3,041,794
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 7).............. 1,491,720
OTHER LIABILITIES.......................................... 82,720
- --------------------------------------------------------------------------------
TOTAL LIABILITIES................................... 4,616,234
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (NOTES 7 AND 8):
Common stock, $.10 par value, 30,000,000 shares authorized,
2,648,739 shares issued ................................ 264,874
Additional paid-in capital................................. 22,350,756
Accumulated deficit........................................(21,901,927)
Cumulative translation adjustment.......................... (12,959)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY.......................... 700,744
- --------------------------------------------------------------------------------
$5,316,978
- --------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-15
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
- -----------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- -----------------------------------------------------------------------------
REVENUE:
Sales (Note 10)................................. $3,823,059 $4,201,047
Royalty income.................................. 2,063,250 2,394,250
- -----------------------------------------------------------------------------
Total revenue.............................. 5,886,309 6,595,297
- -----------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold........................... 2,339,973 2,378,743
Selling, general and administrative expenses.... 2,496,818 3,013,724
Engineering, research and development expenses.. 1,775,917 1,778,294
- -----------------------------------------------------------------------------
Total cost and expenses.................... 6,612,708 7,170,761
- -----------------------------------------------------------------------------
OPERATING INCOME (LOSS)............................. (726,399) (575,464)
- -----------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
Interest income................................. 9,697 17,432
Interest expense................................ (523,949) (490,508)
Other income.................................... 941 167,300
- -----------------------------------------------------------------------------
Total other income (expenses).............. (513,311) (305,776)
- -----------------------------------------------------------------------------
NET LOSS (1,239,710) (881,240)
- -----------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE -BASIC........... $(.47) $(.34)
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,636,954 2,585,212
- -----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-16
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------- ADDITIONAL CUMULATIVE
NUMBER PAR PAID-IN TREASURY ACCUMULATED TRANSLATION
OF SHARES VALUE CAPITAL STOCK DEFICIT ADJUSTMENT
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 2,532,942 $253,294 $21,857,388 $ (10,938) $(19,780,977) $ -
Common shares issued, net of
costs of $8,968 91,428 9,143 296,889 - - -
Stock warrants issued - - 152,376 - - -
Acquisition of treasury stock - - - (5,000) -
Retirement of treasury stock (4,999) (500) (15,438) 15,938 -
Translation adjustment - - - - - (7,055)
Net loss - - - - (881,240) -
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
BALANCE, March 31, 1997 2,619,371 261,937 22,291,215 - (20,662,217) (7,055)
Common shares issued 29,368 2,937 39,991 - - -
Stock warrants issued - - 19,550 - - -
Translation adjustment - - - - - $ (5,904)
Net loss - - - - (1,239,710) -
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
BALANCE, March 31, 1998 2,648,739 $264,874 $22,350,756 $ - $(21,901,927) $(12,959)
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-17
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................................$(1,239,710) $(881,240)
Adjustment to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization......................................................... 506,675 551,225
Gain on fixed asset disposals......................................................... (12,935) (12,957)
Stock issued for payment of director's fees........................................... 34,000 -
Stock issued for payment of consulting fees........................................... 8,928 -
Cash provided by (used for):
Accounts receivable............................................................... 279,169 382,515
Inventories....................................................................... 95,941 514,807
Prepaid expenses.................................................................. 48,549 (192,039)
Other assets...................................................................... (10,811) (50,588)
Accounts payable.................................................................. 200,197 327,535
Due to related parties............................................................ 106,000 -
Accrued expenses.................................................................. (36,648) (13,957)
Deposits payable.................................................................. (40,150) (126,962)
Other liabilities................................................................. 12,046 (112,717)
Deferred royalties................................................................ - (328,250)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ........................................ (48,749) 57,372
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................................ (471,992) (544,628)
Deferred merger costs.................................................................... (320,450) -
Proceeds from sale of equipment.......................................................... 29,458 22,633
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ........................................ (762,984) (521,995)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and stock warrants, net of issuance costs......... - 301,032
Deferred financing costs................................................................. (254,878) (99,149)
Net borrowings on line of credit......................................................... 775,798 -
Proceeds from long-term debt............................................................. 463,149 163,253
Repayments of long-term debt............................................................. (330,483) (875,174)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities......................................... 653,586 (510,038)
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH...................................................... (5,904) (7,055)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... (164,051) (981,716)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR................................................ 185,463 1,167,179
CASH AND CASH EQUIVALENTS - END OF YEAR...................................................... $21,412 $185,463
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-18
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the year............................................................ $317,356 $283,676
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred financing costs incurred by issuance of stock warrants.......................... $ - $ 81,000
Treasury stock acquired for reinstatement of accounts payable............................ - 5,000
Reduction in accounts payable in exchange for common stock............................... - 5,000
Accounts payable incurred for costs of license fees...................................... - 200,000
Debt discount incurred by issuance of stock warrants..................................... 19,550 71,376
Debt incurred for purchase of property and equipment..................................... - 15,345
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-19
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES Inventories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out
(FIFO) method for raw material and supply
inventories. Cost of work-in-process and finished
goods inventories is determined based upon standard
cost, which approximates cost on a FIFO basis.
PROPERTY, PLANT
AND EQUIPMENT Property, plant and equipment are stated at cost.
Additions,improvements and expenditures that
significantly extend the useful life of an asset are
capitalized.
Expenditures for repairs and maintenance are charged
to operations as incurred. Depreciation and
amortization are provided on the straight-line method
for financial reporting purposes and accelerated
methods for tax purposes over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Building and building improvements 10 - 30 years
Land improvements 20 years
Machinery and equipment 5 - 6 years
Office equipment and furniture and fixtures 5 - 10 years
Vehicles 3 - 5 years
Ancillary equipment 2 years
</TABLE>
DEFERRED Deferred financing costs related to a mortgage
COSTS note payable and other loan agreements are
AND FEES capitalized and amortized over the term of the
loans (see Note 7). Deferred license fees related to
a license to distribute products in Japan are
capitalized and amortized over five years, the life
of the license. Deferred merger costs relate to the
proposed merger with Electro and will be a cost of
the transaction when the merger occurs or charged to
operations if the merger does not occur (see Note
13).
IMPAIRMENT OF LONG-LIVED The Company evaluates impairment of long-lived
ASSETS assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," (SFAS 121).
SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are
less than the assets' carrying amount.
TRANSLATION OF The financial statements of the non-U.S. division
FOREIGN CURRENCY are translated into U.S. dollars as follows: all
assets and liabilities at the year-end exchange rate
and revenue and expenses at the average exchange
rate. Adjustments resulting from the translation of
financial statements are reflected as a separate
component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are
included in income currently and were not significant
for the years ended March 31, 1998 and 1997.
REVENUE Sales revenue and cost of sales are recognized as
RECOGNITION products are shipped and title passes, unless the
buyer has a right to return the products. Sales
revenue and cost of sales attributable to shipments
that the buyer has the right to return are recognized
when the return privilege has expired, usually upon
resale (implant) of the products.
Pursuant to a license agreement with a third-party
distributor, the Company recognizes royalty income as
leads are sold by the distributor.
F-20
<PAGE>
ENGINEERING, The Company capitalizes the cost of materials and
RESEARCH AND equipment acquired or constructed for research and
DEVELOPMENT COSTS development activities that have alternative
future uses. All other costs incurred for the purpose
of product research, design, and development are
charged to operations as incurred. Research and
development costs included in engineering, research
and development expenses on the statements of
operations for the years ended March 31, 1998 and
1997 approximate $975,100 and $1,086,800,
respectively.
INCOME TAXES The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). FAS
109 is an asset and liability approach that requires
the recognition of deferred tax assets and
liabilities for the expected future tax consequences
of events that have been recognized in the Company's
financial statements or tax returns. Measurement of
deferred income tax is based on enacted tax laws
including tax rates, with the measurement of deferred
income tax assets being reduced by available tax
benefits not expected to be realized.
LOSS PER
COMMON SHARE Loss per share is based upon the weighted average
number of common shares outstanding during each
period. Potential common shares have not been
included since their effect would be anti-dilutive.
Potential common shares include 397,475 stock options
and 465,965 warrants.
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (FAS 128),
which is effective for financial statements issued
for periods ending after December 15, 1997. FAS 128
simplifies the standards for computing earnings per
share and makes them comparable to international
earnings per share standards. This statement replaces
the presentation of primary EPS and fully diluted EPS
with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common
stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the
earnings. Adoption of this statement did not have a
material effect on the Company's reported loss per
share amounts.
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," requires disclosure of fair value
information about financial instruments. Fair value
estimates discussed herein are based upon certain
market assumptions and pertinent information
available to management as of March 31, 1998.
The respective carrying value of certain
on-balance-sheet financial instruments approximated
their fair values. These financial instruments
include cash, accounts receivable, accounts payable,
accrued expenses and deposits payable. Fair values
were assumed to approximate carrying values for these
financial instruments since they are short term in
nature and their carrying amounts approximate fair
values or they are receivable or payable on demand.
The fair value of the Company's long-term debt is
estimated based upon the quoted market prices for the
same or similar issues or on the current rates
offered to the Company for debt of the same remaining
maturities.
USE OF
ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
F-21
<PAGE>
RECENT In June 1997, the Financial Accounting Standards
ACCOUNTING Board issued Statement of Financial Accounting
PRONOUNCEMENT Standards No. 130, "Reporting Comprehensive Income"
(FAS 130), and No. 131, "Disclosure about Segments of
an Enterprise and Related Information" (FAS 131). FAS
130 establishes standards for reporting and
displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards
for the way that public companies report information
about operating segments in annual financial
statements and requires reporting of selected
information about operating segments in interim
financial statements issued to the public. Both FAS
130 and FAS 131 are effective for periods beginning
after December 15, 1997. The Company has not
determined the impact that the adoption of these new
accounting standards will have on its future
financial statements and disclosures.
RECLASSIFICATIONS Certain reclassifications have been made to the
financial statements previously reported for the year
ended March 31, 1997 to conform with classifications
used in the financial statements for the year ended
March 31, 1998.
F-22
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF Cardiac Control Systems, Inc. (the "Company")
OPERATIONS was incorporated in June 1980 as a Delaware
Corporation. The Company is engaged in the design,
development, manufacture and marketing of implantable
cardiac pacemaker systems, consisting of implantable
pacemakers, connecting electrode leads and devices
used for programming and monitoring the pacemaker
systems. The Company commenced its principal business
operations during the year ended March 31, 1986 after
the commercial release of its initial single-chamber
pacemaker system. The Company has received clearance
from the United States Food and Drug Administration
(the "FDA") to commercially distribute and market a
line of the Company's pacemaker systems.
In August 1996, the Company formed a division in
Tokyo, Japan to distribute and market the Company's
products in Japan. The Company has obtained the
appropriate licensing for the sale of several of its
products in Japan.
2. GOING CONCERN AND As shown in the accompanying financial statements,
MANAGEMENT'S PLANS the Company has experienced significant losses which
have resulted in an accumulated deficit of
$21,901,927. The Company has also experienced severe
cash flow shortages which have resulted in a decrease
in operating activity and have caused the Company to
significantly reduce its labor force. In addition,
royalties of $2,063,250 and $2,394,250 during fiscal
1998 and 1997, respectively, received under a license
agreement ceased in January 1998. These conditions
raise substantial doubt about the Company's ability
to continue as a going concern.
The Company has executed a letter of intent to merge
with Electro-Catheter Corporation (see Note 13). It
is believed that as a result of this merger, the
combined entity will be able to generate significant
volume and cost savings, allowing the realization of
profitable operations and positive cash flow within a
12- to 18-month period post completion of the merger.
It is also believed that this merger will also
provide the vehicle and opportunity for additional
acquisitions of like companies, further building
critical mass and enhancing growth potential.
As a condition of this merger, the Company is
planning to raise a minimum of $4 million in a
combination of debt and equity. This capital will be
utilized to fund the ongoing operations of the two
companies, as well as the research and development of
new technologies. Management believes that such
financing will occur and that sufficient funds will
be provided to overcome its financial difficulties.
However, no assurances can be given that the Company
will be successful in obtaining financing and
completing the merger, and if the Company is unable
to obtain adequate financing, there remains
substantial doubt concerning the Company's ability to
continue as a going concern.
F-23
<PAGE>
3. ACCOUNTS RECEIVABLE Accounts receivable at March 31, 1998 are summarized
as follows:
Trade accounts receivable $ 677,281
Other accounts receivable 2,265
-------------
679,546
Allowance for doubtful accounts (5,873)
-------------
$ 673,673
=============
4. INVENTORIES Inventories at March 31, 1998 consist of the
following:
Raw materials and supplies $ 859,836
Work-in-process 315,643
Finished goods 285,166
-------------
1,460,645
Reserve for obsolescence (36,948)
-------------
$ 1,423,697
=============
Finished goods inventories include approximately
$192,000 of products consigned to customers and
independent sales representatives at March 31,
1998.
5. PROPERTY, PLANT AND Components of property, plant and equipment at
EQUIPMENT March 31, 1998 are as follows:
Land $ 123,300
Building and building improvements 1,788,251
Land improvements 29,450
Machinery and equipment 1,147,277
Office equipment 559,593
Furniture and fixtures 149,620
Ancillary equipment 1,250,743
Construction in progress (estimated costs
to complete $300,000) 577,620
------------
5,625,854
Accumulated depreciation (3,651,758)
------------
$ 1,974,096
============
Depreciation expense for the years ended March 31,
1998 and 1997 was $268,697 and $310,797,
respectively.
6. RELATED PARTY
TRANSACTIONS As of March 31, 1998, $106,000 was due to an
affiliate owned by a director of the Company for
consulting services provided to the Company during
fiscal 1998.
During the year ended March 31, 1998, the Company
repaid in full $200,983 of advances from the Chairman
of the Board and President of the Company under
certain promissory notes.
F-24
<PAGE>
7. LONG-TERM DEBT Long-term debt consists of the following at March 31,
1998:
<TABLE>
<CAPTION>
<S> <C>
Sirrom mortgage note, net of discount (see note below) $ 1,480,450
CBC line of credit (see note below) 775,798
CBC term note (see note below) 237,500
Other 19,654
2,513,402
Less current portion (1,021,682)
-------------
Total $ 1,491,720
=============
</TABLE>
Aggregate maturities of long-term debt over future
years are as follows:
1999 $ 1,021,682
2000 1,485,642
2001 3,539
2002 2,539
-------------
$ 2,513,402
=============
SIRROM
On March 31, 1995, the Company entered into a Loan
and Security Agreement (the "Loan Agreement") with
Sirrom Capital Corporation ("Sirrom") and executed a
$1,500,000 secured promissory note. Interest on the
note is payable monthly at 13.5% and principal is due
on March 31, 2000. The note is secured by a first
mortgage lien on all the Company's real and personal
property, excluding inventory and accounts
receivable, but including general intangibles such as
its patents and royalties. The Loan Agreement
restricts the Company from incurring additional
indebtedness in excess of $200,000 annually without
the lender's consent. In addition, the Company must
give the lender advance notice of certain events,
such as dividend payments, certain new stock issues,
reorganizations, and merger or sale of substantially
all assets.
In connection with the Loan Agreement, the Company
originally granted the lender warrants to purchase
100,000 shares of the Company's common stock at $.01
per share. An additional 50,000 warrants to purchase
shares of common stock at $.01 per share will be
granted to the lender upon each anniversary date,
beginning March 31, 1997 through March 31, 1999, that
any amount owed to Sirrom shall be outstanding. On
March 31, 1997 and 1998, the Company granted Sirrom
50,000 additional warrants pursuant to this
agreement. The Company recorded $279,000 (100,000
shares) in fiscal 1995, $71,376 (50,000 shares) in
fiscal 1997 and $19,550 (50,000 shares) in fiscal
1998 as a debt discount with the offset to additional
paid-in capital, representing the difference between
the estimated fair market value of the underlying
stock at the date of grant and $.01 per share (see
Note 8). This has resulted in an effective interest
rate of approximately 24% on the Sirrom debt. The
Sirrom note includes an unamortized debt discount of
$19,550 at March 31, 1998.
F-25
<PAGE>
CBC
On June 13, 1997, the Company entered into a Loan
Agreement ("Agreement") with Coast Business Credit
("CBC") for a maximum borrowing of $3.5 million,
which includes a line of credit up to $2.7 million, a
$500,000 Subline for capital expenditures ("CAPEX"),
which was unused at March 31, 1998, and a $300,000
Term Loan. The maximum borrowing base available under
the line of credit is based upon eligible receivables
and inventory as defined in the Agreement. The
maturity date for the Agreement is June 30, 2000. The
CAPEX and the term loan are based upon a 48-month
amortization period. The interest rate on the line of
credit is equal to the prime rate plus 2% (10.5% at
March 31, 1998), and the interest rate for the Term
Loan and the CAPEX Subline is equal to the prime rate
plus 2.25% (10.75% at March 31, 1998). Borrowings
under the Agreement are collateralized by a first
security interest in substantially all of the assets
of the Company. The agreement also contains a minimum
tangible net worth requirement, of which the Company
was in violation as of March 31, 1998. Accordingly,
the amounts due under the CBC agreement as of March
31, 1998 amounting to $1,013,298 have been classified
as current. In addition, CBC was granted a warrant to
purchase 37,500 shares of stock at $4 per share,
expiring June 30, 2002.
In conjunction with the Agreement, Company obtained
an Intercreditor and Subordination Agreement between
CBC and Sirrom. This agreement provided that Sirrom
subordinate its first security interest in the
Company's real estate to CBC limited however to
$500,000 secured by the Sirrom mortgage. As
consideration for its waiver of its first security
interest in the assets of the Company, Sirrom was
granted warrants to purchase 50,000 shares of stock
at $5 per share, exercisable at any time and expiring
five years from the date of the Warrant Agreement.
On June 11, 1998, the CBC Loan Agreement was amended
to include an additional $250,000 bridge loan bearing
interest at prime plus 5% and due on August 31, 1998.
The warrant originally granted to CBC to purchase
37,500 shares of stock was also amended. The exercise
price was reduced from $4 per share to $.40 per
share. In addition, CBC was granted a second warrant
to purchase 25,000 shares of stock at $.40 per share.
The warrant expires June 30, 2002.
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES
EQUITY
In May 1996, Sirrom purchased 50,000 shares of common
stock for $5.00 per share. In June 1996, the Company
issued 1,428 shares of common stock as payment for
accounts payable of $5,000 to a third party. The
accounts payable balance was then reinstated in March
1997, in conjunction with the Company's purchase of
1,428 shares of treasury stock.
In January 1997, the Company entered into a supply
agreement with a major defibrillator manufacturer
whereby the Company will be the exclusive outside
supplier of a defibrillation lead. The agreement
expires in December 1999. In connection with this
agreement, the manufacturer paid the Company $200,000
and received 40,000 shares of common stock valued at
$60,000, representing the quoted market price of the
common shares. The difference between the purchase
price and the value assigned to the common stock of
$140,000 was recorded as a gain on sale of the
technology underlying the supply agreement included
in other income.
During the year ended March 31, 1998, the Company
issued 23,654 shares of common stock as payment of
directors' fees, which were valued at $34,000 and
5,714 shares of common stock as payment for
consulting services which were valued at $8,928.
F-26
<PAGE>
STOCK OPTION PLAN
On September 9, 1987, the Company's Board of
Directors adopted the 1987 Non-Qualified Stock Option
Plan (the "1987 Plan"). On February 7, 1992, the
Company's Board of Directors adopted the 1992
Non-Qualified Stock Option Plan (the "1992 Plan"). In
fiscal 1995, the Company combined the 1987 Plan and
the 1992 Plan. This Plan provides the Board of
Directors with the authority to grant officers,
directors, and employees of the Company non-qualified
options to purchase up to a maximum of 400,000 shares
of the Company's common stock. Options granted under
the Plan expire five years after the date the options
are granted or upon termination of employment.
The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related
interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been
recognized for options granted to employees at
exercise prices which equal or exceed the market
price of the Company's common stock at the date of
grant. Options granted at exercise prices below
market prices are recognized as compensation cost
measured as the difference between market price and
exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123
(FAS 123) "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information
regarding net income and earnings per share as if
compensation cost for the Company's employee stock
options had been determined in accordance with the
fair value based method prescribed in FAS 123. The
Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for grants in 1998
and 1997, respectively: no dividend yield for both
years, an expected life of five years for both years,
expected volatility of 60% and 44% and risk-free
interest rates of 6.6% and 6.4%.
Under the accounting provisions of FAS 123, the
Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
1998 1997
NET LOSS
As reported $ (1,239,710) $ (881,240)
Pro forma (1,264,723) (952,300)
LOSS PER SHARE
As reported $ (.47) $ (.34)
Pro forma (.48) (.37)
F-27
<PAGE>
A summary of the status of options under this plan as of March 31, 1998 and 1997
and changes during the years ending on those dates are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 309,969 $ 3.72 305,186 $ 4.02
Granted 88,500 1.04 84,429 3.50
Forfeited or expired (24,542) 5.25 (79,646) 4.55
------------ --------- ---------- ----------
Balance at end of year 373,927 $ 2.93 309,969 $ 3.72
============ ========= ========== ==========
Options exercisable at year end 350,617 $ 2.89 244,658 $ 3.69
Options granted during the year
at exercise prices which exceed
market price of stock at date of
grant:
Weighted average exercise price 88,500 $ 1.04 74,429 $ 3.50
Weighted average fair value 88,500 .47 74,429 .73
Options granted during the year at
exercise prices which equal market
price of stock at date of grant:
Weighted average exercise price - $ - 10,000 $ 3.50
Weighted average fair value - - 10,000 1.66
</TABLE>
The following table summarizes information about fixed stock options at March
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES MARCH 31, 1998 REMAINING CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1998
- ---------------------- ------------------ -------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
$1.00 87,000 4.1 YEARS $ 1.00 87,000 $ 1.00
$3.50 TO 3.63 286,927 2.1 YEARS 3.52 263,617 3.52
------- -------
373,927 350,617
======= =======
</TABLE>
NON-PLAN STOCK OPTIONS
The Company has granted options to independent sales
representatives, Board of Directors and others. The
total number of non-plan stock options outstanding at
March 31, 1998 and 1997 were 23,548 and 31,406,
respectively. The total number of exercisable
non-plan stock options at March 31, 1998 and 1997
were 21,548 and 24,073, respectively. The exercise
price for these options range from $.40 to $10.50 per
share. These options are exercisable over five-year
periods and expire five years from the date of grant.
The value of these options was not material, and
accordingly, no compensation cost has been recognized
by the Company.
F-28
<PAGE>
COMMON STOCK PURCHASE WARRANTS
Common stock purchase warrants outstanding at March
31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
UNDERLYING PRICE EXPIRATION
SHARES PER SHARE DATE
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Converted debenture holders 100,000 $ 5.00 3/31/99
Sirrom (Note 7) 200,000 $ .01 3/31/00
Sirrom (see note below) 50,000 $ .01 10/18/00
Sirrom (Note 7) 50,000 $ 5.00 6/6/02
Coast Business Credit (Note 7) 37,500 $ 4.00 6/30/02
Employees 3,465 $ .18 8/21/02
Grupo Taper (see note below) 25,000 $ .80 8/5/07
-------------------------------------------------------------------------------------
</TABLE>
All of the above warrants were exercisable at March
31, 1998, except for Grupo Taper, of which 25,000 are
unexercisable. The warrants issued to Grupo Taper
become exercisable according to the following
schedule: (i) 50,000 shares shall be exercisable one
year after the Company achieves ISO and CE approval
if the Distribution Agreement is still in force and
if Grupo has achieved at least 60% of its forecasted
sales commitment; (ii) 25,000 shares shall be
exercisable after December 20, 1997 if the
Distribution Agreement is in force and Grupo has
achieved 60% of its forecasted sales commitment for
the year ended December 20, 1997; and (iii) 25,000
shares shall be exercisable after December 20, 1998
if the Distribution Agreement is in force and if
Grupo has achieved its forecasted sales commitment
over the two-year period ending December 20, 1998.
Certain of the above warrants contain "piggy-back"
registration rights and anti-dilution provisions.
The Company granted Sirrom 25,000 warrants in October
1995 and 25,000 in May 1996 at an exercise price of
$.01 per share. These warrants were issued under an
agreement whereby Sirrom gave up a first security
interest as a result of the issuance of a note
payable. The Company recorded $81,000 during the year
ended March 31, 1997 as deferred financing costs and
additional paid-in capital, representing the
difference between the estimated fair market value of
the underlying stock at the date of grant and $.01
per share.
COMMON STOCK RESERVED
The aggregate number of shares of the Company's
common stock reserved for future issuance at March
31, 1998 is summarized as follows:
Common stock options:
1987/1992 Stock Option Plan 396,407
Non-plan 31,318
F-29
<PAGE>
Common stock purchase warrants:
Sirrom Capital Corporation 300,000
Grupo Taper 25,000
Converted debenture holders 100,000
Coast Business Credit 37,500
Employees 3,465
Directors' compensation 69,765
-------
963,455
-------
9. INCOME TAXES Significant components of the Company's deferred
income tax assets and liabilities at March 31, 1998
are as follows:
Deferred tax assets:
Accrued liabilities $ 99,000
Net operating loss carryforwards 6,785,000
Inventory 148,000
Amortization 42,000
Other 3,000
Gross deferred tax assets 7,077,000
Deferred tax liability - depreciation (409,000)
Valuation allowance (6,668,000)
Net deferred taxes $ -
The net change in the valuation allowance for
deferred tax assets was a decrease of $178,000 in
fiscal 1998. As of March 31, 1998, the Company has
approximately $18,900,000 of tax net operating loss
carryforwards (NOLs) available that expire from 1998
through 2011. The tax benefit of these losses of
approximately $6,426,000 has been offset by a
valuation allowance sufficient to reduce the deferred
tax asset to an amount management believes is more
likely than not to be realized.
The provision for income taxes differs from the
amounts computed by applying the Federal statutory
rates to loss before taxes due to the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
<S> <C> <C>
Provisions for Federal income taxes
at the statutory rate (34.0%) (34.0%)
Loss producing no current tax benefit 34.0% 34.0%
------------------------------------------------------------------------------------
Taxes on income - -
====================================================================================
</TABLE>
F-30
<PAGE>
10. SEGMENT DATA
AND SIGNIFICANT
CUSTOMERS The Company operates in a single industry segment,
that of providing implantable medical products to the
health care industry. During the years ended March
31, 1998 and 1997, the Company exported its products
to European, Japanese and Asian distributors and
exported components and assemblies to certain
European manufacturers. Sales by geographic area for
the years ended March 31, 1998 and 1997 are as
follows:
GEOGRAPHIC AREA 1998 1997
United States $ 3,047,963 $ 3,486,511
Europe 605,440 626,508
Japan/Asia 169,656 88,028
---------- ------------
$ 3,823,059 $ 4,201,047
=========== =============
The Company's products are primarily distributed
through independent sales representatives in the
United States. During the year ended March 31, 1998,
two of the Company's independent sales
representatives each accounted for in excess of 10%
of the Company's sales and in the aggregate accounted
for $897,492 (23%) of the Company's sales. During the
year ended March 31, 1997, two of the Company's
independent sales representatives each accounted for
in excess of 10% of the Company's sales and in the
aggregate accounted for $892,279 (21%) of the
Company's sales.
Further, pursuant to an electrode lead Supply
Agreement with Intermedics Inc., the Company sold
$1,095,076 and $1,954,408 of product to Intermedics
Inc. for the years ended March 31, 1998 and 1997,
respectively, which accounted for 29% and 47% of the
Company's sales.
F-31
<PAGE>
11. COMMITMENTS AND PATENT LICENSING AGREEMENTS
CONTINGENCIES
Effective July 1, 1986, the Company renegotiated its
exclusive license to a patented electrode-wire
coating system that was originally acquired by the
Company on July 1, 1981. The modified license
agreement requires the payment of royalties equal to
a percentage of sales of products manufactured using
the patented technology. The license became
non-exclusive on July 1, 1994. The term of the
license agreement expires upon the expiration date of
the patent, July, 2009. Royalty expense under the
terms of the agreement for the years ended March 31,
1998 and 1997 was $39,564 and $62,655 respectively.
Further, on March 29, 1993, the licensor executed a
sublicense agreement with the Company, enabling an
unrelated company to manufacture the licensed
product.
PURCHASE OBLIGATIONS
During the year ended March 31, 1989, the Company
entered into an agreement for the procurement of
hybrid microelectronic circuits. The development of
circuits for the Company's atrial-controlled
ventricular and single-chamber pacing products was
completed in fiscal 1992. Development of the circuits
for the Company's dual-chamber devices was completed
in fiscal 1993. As of March 31, 1998, the Company's
future maximum purchase obligation approximated
$629,000.
During the year ended March 31, 1990, the Company
entered into an agreement for the procurement of
integrated circuits. The development of these
circuits was completed in fiscal 1992. As of March
31, 1998, the Company's future maximum purchase
obligation approximated $235,000, of which
approximately $165,000 has been prepaid by the
Company.
LEGAL PROCEEDINGS
The Company is party to various legal proceedings
arising in the normal conduct of business. Management
believes that the final outcome of these proceedings
will not have a material adverse effect upon the
Company's financial position or results of
operations.
12. SUBSEQUENT During April 1998, the Company issued $300,000 of 8%
EVENT convertible debentures. Interest is payable in cash
or stock, or a combination thereof, on each April 30
and October 31 commencing October 31, 1998 and ending
April 24, 2003, at which time all outstanding
principal and interest is due. The debentures are
convertible from April 24, 1998 through the day
immediately prior to the maturity date at a rate of
one share of common stock for each $.40 of
outstanding principal. The conversion price is
adjustable upon the occurrence of certain events.
F-32
<PAGE>
13. PROPOSED MERGER In October 1997, the Company executed a letter of
intent to merge with Electro-Catheter Corporation
("Electro"), wherein CCS Subsidiary, Inc. ("Sub") a
newly-formed New Jersey corporation and wholly-owned
subsidiary of the Company will merge into Electro
pursuant to an Agreement and Plan of Reorganization
among the Company, Electro and Sub. If the merger is
consummated, of which there can be no assurance, the
separate corporate existence of Sub will cease and
Electro will become a wholly-owned subsidiary of the
Company. Simultaneously with the merger, the Company
will reorganize into a holding company structure,
whereby the Company will become a direct,
wholly-owned subsidiary of Catheter Technology Group,
a Delaware corporation and a holding company ("CTG").
The stockholders of the Company will become
stockholders of CTG and will continue to hold their
shares of capital stock without any change in number,
designation, terms or rights. Pursuant to the merger,
each outstanding share of Electro common stock will
be converted into the right to receive one share of
common stock, $.10 par value, of CTG. The proposed
merger will result in the reverse acquisition by
Electro stockholders of CTG due to the fact that the
number of shares of CTG common stock to be issued to
Electro's current stockholders will represent
approximately 55% of the outstanding CTG common
stock.
F-33
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
MAY 31, 1998 AND AUGUST 31, 1997
(UNAUDITED)
MAY 31, AUGUST 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- 98,127
Accounts receivable, net 759,133 988,859
Inventories
Finished goods 447,388 481,660
Work-in-process 575,201 490,621
Materials and supplies 310,497 270,086
------------ ------------
Total inventories 1,333,086 1,242,367
Prepaid expenses and other current assets 64,885 168,781
------------ ------------
Total current assets 2,157,104 2,498,134
Property, plant and equipment, net 684,002 777,663
Other assets, net 276,238 97,275
------------ ------------
Total assets 3,117,344 3,373,072
============ ============
LIABILITIES AND STOCKHOLDERS DEFICIENCY
Current liabilities:
Current installments of subordinated debentures due to 225,000 --
T Partnership
Current installments of capitalized lease obligations 65,629 50,734
Accounts payable and accrued expenses 1,382,143 1,045,406
Accrued litigation expenses 288,400 443,820
------------ ------------
Total current liabilities 1,961,172 1,539,960
Subordinated debentures due to T Partnership, excluding 1,922,125 1,747,125
current installments
Capitalized lease obligation, excluding current installments 219,285 222,277
------------ ------------
Total liabilities 4,102,582 3,509,362
------------ ------------
Stockholders' deficiency:
Common stock 639,039 638,361
Additional paid-in capital 10,683,491 10,682,008
Accumulated deficit (12,307,768) (11,456,659)
------------ ------------
Total stockholders' deficiency (985,238) (136,290)
------------ ------------
Total liabilities and stockholders' deficiency $ 3,117,344 $ 3,373,072
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-34
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $1,502,537 $1,718,954 $4,152,546 $5,138,259
Cost of goods sold 1,119,482 1,082,277 2,836,541 2,858,408
---------- ---------- ---------- ----------
Gross profit 383,055 636,677 1,316,005 2,279,851
Operating expenses:
Selling, general and administrative 409,404 561,074 1,525,871 1,759,889
Research and development 118,734 225,198 416,224 672,979
---------- ---------- ---------- ----------
Operating loss (145,083) (149,595) (626,090) (153,017)
Other expense:
Interest expense (77,607) (70,073) (225,019) (185,562)
---------- ---------- ---------- ----------
Net loss $ (222,690) $ (219,668) $ (851,109) $ (338,579)
========== ========== ========== ==========
Basic and diluted loss per share $(0.03) $(0.03) $(0.13) $(0.05)
========== ========== ========== ==========
Dividends per share None None None None
Weighted average shares outstanding 6,390,389 6,383,611 6,387,000 6,378,661
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-35
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MAY 31, MAY 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (851,109) $ (338,579)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 95,746 107,658
Amortization 6,250 6,250
Changes in assets and liabilities:
Decrease in accounts receivable, net 229,726 (131,067)
(Increase) decrease in inventories (90,719) 393,392
Decrease (increase) in prepaid expenses and other
current assets 103,896 (174,642)
(Increase) decrease in other assets (185,213) 14,105
Decrease in deferred revenues - (144,293)
Increase (decrease) in accounts payable and accrued
expenses 230,467 163,563
------------ ------------
Net cash used in operating activities $ (460,956) (103,613)
------------ ------------
Cash flows from investing activities -
Cash purchases of property, plant and equipment (2,085) (66,756)
------------ ------------
Net cash used in investing activities (2,085) (66,756)
------------ ------------
Cash flows from financing activities:
Proceeds from Stock Purchase Plan 2,161 3,682
Proceeds from loan from T Partnership 400,000 100,000
Reductions of debt and capitalized lease obligations (37,247) (119,384)
------------ ------------
Net cash (used in) provided by financing activities 364,914 (15,702)
Net decrease in cash (98,127) (186,071)
Cash at beginning of period 98,127 275,283
------------ ------------
Cash at end of period $ -0- $ 89,212
============ ============
Interest paid $ 144,413 $ 185,561
Property, plan and equipment acquired under capitalized
lease obligations $ 49,150 $ 196,125
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-36
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Electro-Catheter
Corporation as of May 31, 1998, the results of operations for the three and nine
months ended May 31, 1998 and May 31, 1997 and statements of cash flows for the
nine months ended May 31, 1998 and May 31, 1997, but are not necessarily
indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. Accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1997.
NOTE 2 OTHER ASSETS
In connection with the proposed merger (see Note 4 to Notes to Condensed
Financial Statements), the Company has incurred $174,290 of expenses through May
31,1998. These expenses are included in Other Assets in the accompanying balance
sheet at May 31, 1998. Consummation of the merger is subject to, among other
things, raising capital. Upon consummation of the merger, these costs will
either be included as a cost of the acquisition, charged to additional paid-in
capital with equity financing, amortized over the term of any debt or charged to
operations if the merger does not occur.
NOTE 3 SUBORDINATED DEBENTURES
In September 1997, in December 1997, in January 1998, and in May 1998, the
Company borrowed additional amounts from the T Partnership, in each case in the
amount of $100,000, under substantially the same terms and conditions as its
previous borrowings, without issuing any additional warrants. Under the current
arrangement, the Company is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by the Company with such covenant
would allow the T Partnership to declare an event of default and accelerate
repayment of indebtedness. The Company is currently in compliance with the
covenant. The total indebtedness due to the T Partnership at May 31, 1998 was
$2,147,125.
NOTE 4 COMMITMENTS AND CONTINGENCIES
FDA WARNING LETTER
The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration ("FDA") of the United States
Department of Health and Human Services. Since the devices manufactured by the
Company are intended for "human use", as defined by the FDA, the Company and
said devices are subject to FDA regulations, which, among other things, allow
for the conduct of routine detailed inspections of device manufacturing
establishments and confirmation of adherence to "current good manufacturing
practices" ("cGMP") in the manufacture of medical devices.
In February 1997, the FDA conducted an inspection and audit of the Company's
facilities and practices as a result of which the FDA issued a Warning Letter
regarding non-compliance by the Company with certain cGMPs in the manufacture of
its products. Electro-Catheter Corporation communicated with the FDA its
intentions to remedy the non-compliance, established a plan and timetable to
effectuate such remediation and has diligently worked to take the necessary
corrective actions. A subsequent FDA inspection in September 1997, indicated
that while substantial progress had been made, not all corrective actions have
been completed. The Company is continuing in its efforts to complete such
actions and it is Electro-Catheter Corporation's intention to inform the FDA by
late September
F-37
<PAGE>
1998 that it has completed such actions and is ready for reinspection. There can
be no assurance, however, that the Company will be ready for such reinspection
in September 1998 nor that it will pass any such reinspection when it occurs.
While the Company is currently under no restrictions by the FDA regarding the
manufacture or sale of its products, the Company is unable to precisely
determine the short-term economic impact of instituting the required corrective
actions, and there can be no assurance that the FDA will not take further action
including seizure of products, injunction and/or civil penalties, if the
necessary corrective actions are not completed on a timely basis. At this time,
the Company is unable to precisely determine the short-term adverse economic
impact which will result from instituting the corrective actions, but the
voluntary discontinuation of manufacturing of certain products and the delay in
the sale of other products has adversely affected sales by an estimated 10%.
LITIGATION
In September 1997, a Superior Court jury in Middlesex County found the Company
liable for age discrimination in connection with its termination of an employee
in April 1994. The jury awarded the terminated employee $283,000 plus attorney's
fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997. The Company filed an appeal of the judgment.
Pending the Company's appeal, the plaintiff, in an effort to execute upon the
judgment rendered in his favor, levied on certain of the Company's bank
accounts, thereby freezing the available funds. Notwithstanding management's
belief that the Company had arguments supporting its appeal, management weighed
the considerable cash requirements of an appeal bond, the costs of continued
efforts relative to the appeal, and the need to vacate the levies to satisfy the
Company's immediate cash requirements against the likelihood of prevailing on
its appeal and the terms of a possible settlement, and on April 8, 1998, the
Company entered into a Settlement Agreement with the plaintiff. Under the key
terms of the Settlement Agreement, the matter is deemed settled for the sum of
$305,000 payable as follows: (i) by a lump sum payment of $65,000 within five
business days of the date of the Settlement Agreement; and (ii) the balance,
bearing interest at the rate of 6% per annum, payable in monthly installments of
$10,000, plus interest, commencing July 1, 1998. The Settlement Agreement
provides that a default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest. The Company has made the
payments due to date on a timely basis.
MERGER
On January 20, 1998, the Company entered into an Agreement and Plan of
Reorganization with Cardiac Control Systems, Inc. ("CCS"), a Delaware
corporation located in Palm Coast, Florida, to effect a merger of the two
companies targeted toward the development and marketing of advanced specialty
electrophysiology products. Currently, the structure of the transaction
contemplates the merger of a newly-created, wholly-owned subsidiary of CCS into
and with the Company as a result of which the Company shall become a
wholly-owned subsidiary of CCS and the stockholders of the Company will become
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation
and parent holding company of CCS, to be formed as part of a restructuring in
connection with the merger. By virtue of the merger, each outstanding share of
common stock, $.10 par value, of the Company will be converted into the right to
receive one-fifth of a share of common stock $.10 par value of CTG. Pursuant to
the restructuring, CTG will succeed to all rights and obligations of CCS and
will become the successor issuer of CCS such that stockholders of CCS will be
come stockholders of CTG. Subsequent to the restructuring, it is intended that
CTG will undergo a 1 for 5 reverse stock split reducing the number of shares of
common stock, $.10 par value, of CTG (the "CTG Common Stock") outstanding to
approximately 529,748 shares. By virtue of the merger, subsequent to the reverse
stock split, each outstanding share of common stock, $.10 par value, of the
Company will be converted into the right to receive one-fifth of a share of CTG
Common Stock, effectively equal to an even exchange of shares prior to such
reverse stock split.
Upon closing of the transaction, $1,000,000 of the Company's senior debt is
intended to be redeemed by: (a) the issuance by a surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an
F-38
<PAGE>
aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to the T Partnership of a CTG 9% condition promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock, or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that CCS shall not be obligated to make aggregate payments
with respect to both the Series A Preferred Stock and conditional note, in
excess of $1.0 million plus interest); and (c) the delivery to the T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of the Company's secured
indebtedness to the T Partnership, exclusive of the amount redeemed under (a)
above), bearing interest at the rate of 12% per annum payable quarterly, the
principal amount of which shall be due and payable three years from the date of
execution of such note (the terms of the security for the note have yet to be
agreed upon).
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; and (iv) the receipt of
all required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
International sales should be adversely affected in Europe (approximately 17% of
total revenues) for about the next six months as the Company was not able to
obtain the "CE" Mark on its products on a timely basis, in order to continue to
sell into this market. The effort to obtain the "CE" Mark is continuing and the
Company is hopeful of obtaining this designation before the end of the calendar
year on its major products in order to continue selling into this market.
However, there can be no assurance that the Company will obtain the "CE" Mark or
maintain the same level of revenue upon receiving the "CE" Mark as it did
previously.
NOTE 5 RECLASSIFICATIONS
Certain reclassifications have been made to conform to the fiscal year 1998
presentation.
NOTE 6 EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997.
F-39
<PAGE>
Basic loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Diluted loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Common share equivalents, such as outstanding stock options, are not included in
the calculation since the effect would be antidilutive.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electro-Catheter Corporation:
We have audited the financial statements of Electro-Catheter
Corporation as listed in the accompanying index. In connection with our audits
of the financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Electro-Catheter
Corporation at August 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended August 31,
1997 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has limited working capital resources which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1997
F-41
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
BALANCE SHEETS
AUGUST 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 98,127 275,283
Accounts receivable, less allowance for doubtful
accounts of $152,070 in 1997 and $15,000 in 1996 988,859 1,016,201
Inventories 1,242,367 1,862,179
Prepaid expenses and other current assets 168,781 64,344
------------ ------------
Total current assets 2,498,134 3,218,007
Property, plant and equipment, net 777,663 551,698
Other assets, net 97,275 123,407
------------ ------------
Total assets $ 3,373,072 3,893,112
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt 300,000
Current installments of capitalized lease obligations 50,734 7,489
Accounts payable, trade 566,816 345,888
Deferred revenues -- 144,293
Accrued expenses 478,590 395,591
Accrued litigation expenses 443,820 --
------------ ------------
Total current liabilities 1,539,960 1,193,261
Subordinated debentures due to T-Partnership, excluding current portion 1,747,125 1,447,125
Capitalized lease obligation, excluding current installments 222,277 37,756
------------ ------------
Total liabilities 3,509,362 2,678,142
------------ ------------
Stockholders'(deficiency) equity:
Common stock $.10 par value Authorized 20,000,000 shares;
issued 6,383,611 in 1997 and 6,373,711 in 1996 638,361 637,371
638,361
Additional paid-in capital 10,682,008 10,679,316
Accumulated deficit (11,456,659) (10,101,717)
------------ ------------
Total stockholders' (deficiency) equity (136,290) 1,214,970
------------ ------------
Commitments and contingencies -- --
------------ ------------
Total liabilities and stockholders' deficiency/equity $ 3,373,072 3,893,112
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-42
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Net revenues, including research and development revenue of
$544,293 in 1997 and $155,707 in 1996 $ 6,648,438 7,362,436 7,263,424
Cost of goods sold 4,041,486 4,079,502 3,861,591
----------- --------- ----------
Gross profit 2,606,952 3,282,934 3,401,833
Operating expenses:
Selling, general and administrative 2,384,127 2,954,991 3,438,811
Research and development 881,728 1,010,073 931,956
----------- --------- ----------
Operating loss (658,903) (682,130) (968,934)
Other income (expense):
Interest income - 86 1,102
Interest expense (249,384) (210,896) (168,058)
Litigation expenses (446,655) - -
----------- --------- ----------
Net loss $(1,354,942) (892,940) (1,135,890)
=========== ========= ==========
Net loss per common share $ (0.21) (0.14) (0.18)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-43
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIENCY/EQUITY
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
ADDITIONAL
COMMON PAID-IN ACCUMULATED TOTAL STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIENCY/EQUITY
----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Balances at August 31, 1994 $ 576,232 10,106,647 (8,072,887) 2,609,992
Employee stock plan 248 1,988 -- 2,236
Common Stock issued under private placement 57,150 442,913 -- 500,063
Proceeds from issuance of stock warrants -- 63,750 -- 63,750
Net loss -- -- (1,135,890) (1,135,890)
----------- ----------- ----------- -----------
Balances at August 31, 1995 633,630 10,615,298 (9,208,777) 2,040,151
Stock options exercised 2,350 18,213 -- 20,563
Employee stock plan 287 779 -- 1,066
Common stock issued for services rendered 1,104 10,631 -- 11,735
Amortization of deferred compensation
expense on stock options -- 34,395 -- 34,395
Net loss -- -- (892,940) (892,940)
----------- ----------- ----------- -----------
Balances at August 31, 1996 637,371 10,679,316 (10,101,717) 1,214,970
Employee stock plan 990 2,692 -- 3,682
Net loss -- -- (1,354,942) (1,354,942)
----------- ----------- ----------- -----------
Balances at August 31, 1997 $ 638,361 10,682,008 (11,456,659) (136,290)
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-44
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,354,942) (892,940) (1,135,890)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 145,614 130,524 137,106
Amortization of deferred charges 8,333 8,333 61,708
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 27,342 190,087 (141,514)
Decrease (increase) in inventories 619,812 230,900 (289,789)
(Increase) decrease in prepaid
expenses and other current assets (104,437) (21,314) 96,749
Decrease in other assets, net 17,799 4,207 3,527
Decrease (increase) in deferred
revenues (144,293) 144,293 --
Increase (decrease) in accounts
payable and accrued expenses 747,747 (340,700) 124,128
----------- ----------- -----------
Net cash used in
operating activities $ (37,025) (546,610) (1,143,975)
----------- ----------- -----------
Cash flows used in investing activities -
Purchases of property, plant
and equipment (115,292) (34,167) (12,143)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock -- -- 500,063
Net proceeds from issuance of
subordinated debentures and warrants 100,000 547,125 575,000
Proceeds from exercise of
stock options -- 20,563 --
Proceeds from employee stock
purchase plan 3,682 1,066 2,236
Proceeds from loan on officer's
life insurance policy -- -- 25,000
Repayment of debt (128,521) (17,079) (18,184)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (24,839) 551,675 1,084,115
----------- ----------- -----------
Net decrease in cash (177,156) (29,102) (72,003)
Cash and cash equivalents
at beginning of year 275,283 304,385 376,388
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 98,127 275,283 304,385
=========== =========== ===========
Interest paid $ 241,049 199,724 101,967
Property, plant & equipment acquired
under capitalized lease obligations $ 256,287 49,268 --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-45
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Electro-Catheter Corporation ("Company") has been in business
for over 36 years. The Company develops, manufactures,
markets, and sells products for hospitals and physicians.
These products are diagnostic and therapeutic catheters which
are utilized in connection with illnesses of the heart and
circulatory system. The Company has targeted electrophysiology
as its focal area for future growth, but intends to maintain
and develop products for emergency care, cardiac surgery,
invasive and non-invasive cardiology and invasive radiology.
(b) REVENUE RECOGNITION
Revenues are recognized at the time of shipment and
provisions, when appropriate, are made when the right to
return exists in accordance with SFAS No. 48. Revenues under
service contracts are accounted for as the services are
performed in accordance with the terms of the contract and are
not refundable if the research effort is unsuccessful.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are carried at cost which
approximates market value.
(d) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
accounts receivable. The Company's customer base is primarily
comprised of hospitals in the U.S. and distributors outside
the U.S. As of August 31, 1997, the Company believes it has no
significant concentration of credit risk with its accounts
receivable.
(e) INVENTORY VALUATION
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(f) PATENTS AND TRADEMARKS
Patents and trademarks are recorded at cost and are amortized
on a straight-line basis over their useful lives. Such costs,
net of accumulated amortization, are included in other assets,
net in the accompanying balance sheets.
(g) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Plant and
equipment is depreciated using the straight-line method over
the estimated useful lives of the assets.
Repairs and maintenance costs are charged to operations as
incurred.
F-46
<PAGE>
Betterments are capitalized. Leasehold improvements are
amortized over the term of the lease or the useful life of the
asset, whichever is shorter.
When assets are retired or otherwise disposed, the cost and
related accumulated depreciation are removed from the related
accounts, and any resulting gain or loss is recognized in
operations for the period.
(h) RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense when
incurred.
(i) ACCOUNTING FOR INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences
are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for
any tax benefits which are not expected to be realized. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period in which such tax rate
changes are enacted.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(k) STOCK-BASED COMPENSATION
Prior to September 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On
September 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years
as if the fair-value based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(l) LOSS PER SHARE
Loss per share is computed using the weighted average number
of shares outstanding during each year. Shares issuable upon
exercise of outstanding stock options, warrants and conversion
of debentures are not included in the computation of loss per
share because the result of their inclusion would be
anti-dilutive.
The weighted average number of shares of common stock used in
the computation of loss per share was approximately 6,380,000
in 1997, 6,354,000 in 1996 and 6,027,000 in 1995.
F-47
<PAGE>
(m) LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 121, the Company reviews
long-lived assets for impairment whenever events or changes in
business circumstances occur that indicate that the carrying
amount of the assets may be recoverable. The Company assesses
the recoverability of long-lived assets held and to be used
based on undiscounted cash flows, and measures the impairment,
if any, using discounted cash flows. Adoption of SFAS No. 121
in fiscal 1997 did not have any impact on the Company's
financial position, operating results or cash flows.
(n) FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and other
current assets and current liabilities approximate fair value
due to the short-term maturity of these instruments.
(2) LIQUIDITY
The accompanying financial statements have been prepared on a going
concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary
course of business. The Company incurred net losses of $1,354,942,
$892,940 and $1,135,890 for the years ended August 31, 1997, 1996 and
1995 respectively, and at August 31, 1997 had an accumulated deficit of
$11,456,659. The net losses incurred by the Company have consumed
working capital and weakened the Company's financial position. The
Company's ability to continue in business is dependent upon its success
in generating sufficient cash flow from operations or obtaining
additional financing. The Company continues to re-evaluate its plans
and adopt certain cost reduction measures. The Company is attempting to
increase sales by examining and, where appropriate, modifying its
distribution network, utilizing aggressive pricing and introducing new
products to market. The Company's ability to continue as a going
concern is dependent upon the successful implementation of the
aforementioned programs. There can be no assurances that these programs
can be successfully implemented. The financial statements do not
include any adjustments relating to the recoverability and
classifications of reported asset amounts or the amounts of liabilities
that might result from the outcome of this uncertainty.
(3) INVENTORIES
Inventories consisted of the following:
1997 1996
---------- ---------
Finished goods $ 481,660 954,997
Work-in-process 490,621 490,396
Materials and supplies 270,086 416,786
------- -------
1,242,367 1,862,179
========= =========
F-48
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
1997 1996
---------- ----------
Land $ 38,400 38,400
Building 153,597 153,597
Building improvements 993,168 952,837
Equipment 2,307,607 2,244,694
Office furniture and
equipment 534,232 519,319
Leasehold improvements 340,382 340,382
Sales equipment and
diagnostic computers 587,348 589,348
Capitalized leases 305,555 49,268
---------- ----------
5,260,289 4,887,845
Less accumulated deprecia-
tion and amortization 4,482,626 4,336,147
---------- ----------
Net property, plant
and equipment $ 777,663 551,698
========== ==========
(5) ACCRUED EXPENSES
The components of accrued expenses consisted of the following:
1997 1996
-------- --------
Accrued salaries, wages and
payroll taxes $287,933 278,263
Accrued audit fees 52,500 60,000
Other expenses 138,157 57,328
-------- --------
$478,590 395,591
======== ========
(6) DEFERRED REVENUES
In June 1996, the Company received an advance of $300,000 from an
unrelated company to perform research and development and
pre-production planning for it. For services performed, the Company
recognized $155,707 in revenues in 1996 and such amount was reported in
net revenues in the statement of operations. The remaining $144,293 was
recorded as deferred revenues in the accompanying 1996 balance sheet
and was recognized as revenue in fiscal year 1997.
(7) SUBORDINATED DEBENTURES DUE TO T PARTNERSHIP
On October 11, 1993, the Company entered into an agreement with the T
Partnership to borrow up to $1,000,000. Ervin Schoenblum, the Company's
Acting President and Director, and Abraham Nechemie, also a Director of
the Company, are members of the T Partnership. On August 31, 1995,
after the Company had drawn down all of the $1,000,000, the Company
entered into an agreement with the T Partnership to borrow an
additional $500,000 ("Lending Agreement"). In January 1996, the Company
and the T Partnership agreed to a restructuring of its financing
agreement. The T Partnership advanced an additional $200,000 to the
Company and agreed to defer interest payments for a period of three
months (interest payments were added to the outstanding principal on
the T Partnership indebtedness) and in April 1997, the Company borrowed
an additional $100,000 from the T Partnership under the same terms and
conditions as its previous borrowing.
F-49
<PAGE>
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. Principal payments of $25,000 scheduled
to begin on September 1, 1996 have been deferred to September 1, 1998.
Any remaining balance is due on August 1, 2003. The loan is secured by
the Company's property, building, accounts receivable, inventories and
machinery and equipment. The Company is to prepay the outstanding
balance in the event the Company is merged into or consolidated with
another corporation or the Company sells all or substantially all of
its assets, unless the T Partnership and Company agree otherwise.
Under the provisions of the agreement with the T Partnership, the
Company is obligated to comply with certain financial covenants, to be
tested on a monthly basis. Non-compliance by the Company shall allow
the T Partnership to declare an Event of Default and accelerate
repayment of indebtedness. As of August 31, 1997, the Company was not
in compliance with this financial covenant. However, in November 1997,
the T Partnership agreed not to exercise its right to accelerate the
repayment of indebtedness through September 1, 1998 as a result of
non-compliance with the aforementioned financial covenant and the
nonpayment of principal payments in the 1998 fiscal year. The T
Partnership has also agreed to a modification to the financial
covenant. The Company is currently in compliance with such covenant.
The total indebtedness due to the T Partnership at August 31, 1997 was
$1,747,125.
Under the provisions of the original agreement, the T Partnership was
granted warrants which permit the T Partnership to purchase 166,667
shares of the Company's common stock at a price of $3.25 per share. The
August 1995 agreement provides that the T Partnership surrender its
warrants and be granted a new warrant to purchase 500,000 shares of the
Company's common stock at a price of $0.9875 per share in exchange for
the surrendered warrant. No additional warrants were issued as a result
of subsequent borrowings. A value has been allocated to the warrants
based upon their estimated fair market value at the date of the
agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is
shown in other assets in the accompanying 1997 and 1996 balance sheets.
The warrants are immediately exercisable and expire on August 1, 2001.
As of August 31, 1997 these warrants remain outstanding.
In September 1997, the Company borrowed an additional $100,000 from the
T Partnership.
(8) CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease commitments for equipment that meet
the requirements for capitalization. The equipment has been capitalized
and shown in property, plant and equipment in the accompanying 1997
balance sheet (see Note 3). The related obligations are also recorded
in the accompanying balance sheet and are based upon the present value
of the future minimum lease payments with interest rates of 13.7% to
17.1%. The net book value of equipment acquired under capitalized lease
obligations was $264,867 and $43,520, respectively for the years ended
August 31, 1997 and 1996.
The annual maturities for capitalized lease obligations as well as
subordinated debentures due to the T Partnership for the five years
subsequent to August 31, 1997, are as follows:
1998 $ 51,010
1999 359,186
2000 367,778
2001 367,187
2002 and thereafter 874,975
(9) OTHER DEBT
The Company has borrowed $125,000 against the cash surrender value of a
life insurance policy of the former Chairman of the Board of the
Company. Interest on the loan is 6%. The loan plus accrued interest
F-50
<PAGE>
is recorded as a reduction in the policy's cash surrender value, which
is included in other assets in the accompanying balance sheets.
(10) STOCK OPTIONS
On May 20, 1987, the Company's stockholders approved the 1987 Incentive
Stock Option Plan (the "1987 Plan"). Under the 1987 Plan, 225,000
shares of authorized but unissued shares of common stock, $.10 par
value, of the Company were set aside to provide an incentive for
officers and other key employees to render services and make
contributions to the Company. Options may be granted at not less than
their fair market value at the date of grant and are exercisable at
such time provided by the grants during the five-year period beginning
on the date of grant.
On May 23, 1990, the Company's stockholders approved the 1990 Incentive
Stock Option Plan (the "1990 Plan"). The terms of the 1990 Plan are
substantially the same as the terms of the 1987 Plan. The 1990 Plan
provides for the reservation of 225,000 shares of common stock for
issuance thereunder.
On July 15, 1992, the Company's stockholders approved the 1992
Incentive Stock Option Plan (the "1992 Plan"). The terms of the 1992
Plan are substantially the same as the terms of the 1987 and 1990
Plans. The 1992 Plan likewise provides for the reservation of 225,000
shares of common stock for issuance thereunder.
On April 1, 1992, the Board of Directors adopted the 1992 Non-Qualified
Stock Option Plan pursuant to which options to purchase 200,000 shares
of common stock may be granted to directors, officers and key
employees. Options may be granted at a price determined by the Board of
Directors, but not less than 80% of the fair market value at the date
of grant. Options are exercisable at such time provided by the grants,
but each option granted shall terminate no longer than five years after
the date of grant.
In July 1994, the Company extended the expiration date of certain
outstanding options held by two members of its Board of Directors. The
extension, relating to a total of 44,500 shares of Electro common
stock, effected options having an exercise price per share of $.875 at
the date of grant and a fair market value of $1.25 per share at the
date of extension. The difference between the price at the date of
grant and the fair market value at the date of the extension has been
recorded as compensation expense and is being amortized over the
extension period.
In October 1994, the Board of Directors voted in favor of offering all
employees, officers and directors holding options at a price greater
than $1.00 per share the opportunity to have those options replaced by
stock options at a price of $1.00 per share, representing the fair
market value at that time. Accordingly, options to purchase 384,300
shares were terminated and an equal number of new options were issued,
which is reflected in the table below. In addition, the Company also
granted 25,000 stock options to the Company's Acting President at $1.00
per share.
F-51
<PAGE>
A summary of all stock option activity follows:
NUMBER OPTION
OF PRICE
SHARES PER SHARE TOTAL
------- -------------- -------
Year ended August 31, 1995:
Granted 405,300 $ .81 - 1.14 407,025
Cancelled or expired 395,800 1.19 - 2.75 791,338
Outstanding at August 31, 1995 490,300 .81 - 5.00 698,761
======= =========== =======
Year ended August 31, 1996:
Granted 12,900 $ .81 - .88 10,794
Exercised 23,500 .88 20,563
Canceled or expired 129,700 .81 - 5.00 330,231
Outstanding at August 31, 1996 350,000 .81 - 2.75 358,761
======= =========== =======
Year ended August 31, 1997:
Granted 23,500 $ .81 - 1.13 21,643
Cancelled or expired 22,300 .81 - 1.50 20,113
Outstanding at August 31, 1997 351,200 .81 - 2.75 353,791
======= =========== =======
Options to acquire 216,260 shares of common stock were exercisable at
August 31, 1997.
The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $.59 and $.55, respectively on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 5%, volatility factor of 73% and an expected
life of 5 years. The Company applies APB Opinion No. 25 in accounting
for its stock options and, accordingly, no compensation expense has
been recognized for its stock options in the financial statements. Had
the Company determined compensation cost based on the fair market value
at the grant date for its stock options under SFAS No. 123, the
Company's net income would not have been materially affected. The pro
forma amounts are indicated below:
1997 1996
------------ ----------
Net loss - as reported $(1,354,942) $(892,940)
Net loss - pro forma (1,357,590) (893,624)
Loss per share - as reported $ (0.21) $ (0.14)
Loss per share - pro forma (0.21) (0.14)
In accordance with SFAS No. 123, pro forma net income and earnings per
share data reflect only options granted in 1996 and 1997. Therefore,
the full impact of calculating compensation expense for stock options
under SFAS No. 123 is not reflected in the pro forma amounts presented
above since compensation expense for options granted prior to September
1, 1995 was not considered.
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Plan") which
provides for the issuance of a maximum of 75,000 shares of the
Company's common stock which were made available for sale under the
Plan's first offering.
F-52
<PAGE>
After the first offering, subsequent offerings were made upon the
recommendation of the committee administering the Plan. Common stock
can be purchased through employee-authorized payroll deductions at the
lower of 85% of the fair market value of the common stock on either the
first or last day of trading of the stock during the calendar year. It
is the intention of the Company that the Plan qualify under Section 423
of the Internal Revenue Code. The Company's Board of Directors
authorized extension of the Plan to January 1, 1998. During 1997, 1996
and 1995, 9,900, 2,866 and 2,476 shares, respectively, were purchased
under the Plan.
(12) PREFERRED STOCK, COMMON STOCK AND PAID-IN CAPITAL
The Company is authorized to issue up to 1,000,000 shares of preferred
stock. As of August 31, 1997, no preferred shares have been issued.
In March 1995, the T Partnership purchased 571,500 shares of the
Company's restricted common stock, $.10 par value, in a private
placement at $.875 per share for gross proceeds of approximately
$500,000. In connection with this private placement, the Company also
issued to the T Partnership a purchase warrant to purchase 83,344
shares of the Company's common stock at an exercise price of $1.425 per
share. This warrant will expire five years from the date of the
agreement. Ervin Schoenblum, the Company's Acting President and
director, and Abraham H. Nechemie, the other member of the Company's
Board of Directors, are members of the T Partnership.
(13) INCOME TAXES
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will be realized. The
valuation allowance for deferred tax assets as of September 1, 1997 was
$3,197,000 as compared to $2,983,000 at September 1, 1996. The net
change in the total valuation allowance for the year ended August 31,
1997 was an increase of $142,000 as compared to a decrease of $536,000
at August 31, 1996.
F-53
<PAGE>
At August 31, 1997 and 1996, the tax effects of temporary differences that give
rise to the deferred tax assets and deferred tax liabilities are as follows:
Deferred tax assets: 1997 1996
----------- ----------
Inventories $ 93,000 155,000
Accounts receivable,
due to allowance for
doubtful accounts 23,000 3,000
Contribution carryover 25,000 23,000
Compensated absences 31,000 30,000
Federal and state net
operating loss carryforwards 2,390,000 2,209,000
Research and development
and investment tax credit
carryforwards 635,000 635,000
---------- ---------
Total gross deferred
tax assets 3,197,000 3,055,000
Less valuation allowance 3,137,000 2,983,000
---------- ---------
Net deferred tax assets 60,000 72,000
Deferred tax liabilities:
Excess of tax over financial
statement depreciation (60,000) (72,000)
---------- ---------
Net deferred tax $ -0- -0-
=========== =========
At August 31, 1997, the Company had available federal net operating loss
carryforwards, research and development and investment tax credit carryforwards
that expire as follows:
F-54
<PAGE>
NET OPERATING RESEARCH
EXPIRATION LOSS AND INVESTMENT
DATE CARRYFORWARDS DEVELOPMENT CREDITS TAX CREDITS
- ---------- ------------- ------------------- -----------
1999 $ - 25,000 -
2000 - 275,000 35,000
2001 4,417,000 246,000 43,000
2002 2,063,000 - -
2003 690,000 - -
2004 268,000 - -
2005 46,000 - -
2006 223,000 - -
2007 454,000 - -
2008 854,000 11,000 -
2009 1,368,000 - -
2010 1,178,000 - -
2011 589,000 - -
2012 1,435,000 - -
----------- ------- ------
Total 13,585,000 557,000 78,000
(14) SEGMENT DATA
The Company operates in one business segment. Export sales were
approximately $1,828,000 in 1997, $2,324,000 in 1996 and $1,964,000 in
1995. The major areas of export sales are as follows:
REGION 1997 1996 1995
------------- --------- --------- ---------
Asia 448,507 459,947 419,601
Europe 1,201,036 1,592,469 1,301,582
South America 76,744 127,151 149,621
Other 101,750 144,724 93,831
Sales to the only domestic distributor of the Company's products
totaled approximately $765,000 in 1995, representing approximately 11%
of net sales. The agreement with this distributor was terminated on May
31, 1995 and, as such, there were no sales to this distributor in 1996
and 1997.
(15) COMMITMENTS AND CONTINGENCIES
(a) The Company has agreements to lease equipment for use in the operations
of the business under operating leases. The Company incurred rental
expenses of approximately $105,000 in 1997, $116,000 in 1996 and
$148,000 in 1995.
The following is a schedule of future minimum rental payments for
operating leases which expire through 2000:
1998 8,294
1999 4,150
2000 4,150
-----
16,594
======
F-55
<PAGE>
(b) The Company is involved in certain claims and litigation arising in the
normal course of business. Management believes, based on the opinion of
counsel representing the Company in such matters, that, except for one
claim, the outcome of such claims and litigation will not have a
material effect on the Company's financial position and results of
operations. The one exception is that in September 1997, a jury in
Middlesex County of the Superior Court of New Jersey found the Company
liable for age discrimination when it terminated an employee in April
1994. The jury awarded the terminated employee $283,000. In addition to
the $283,000, the court awarded the plaintiff attorney's fees and
expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from
September 1996 in the amount of approximately $115,665. The Company is
considering taking an appeal, but has accrued all related costs to date
in the accompanying financial statements.
(c) In February 1997, the FDA conducted an inspection and audit of the
Company. At the conclusion of the audit, the FDA issued a number of
observations regarding violations of CGMP. On March 11, 1997, the FDA
issued a Warning Letter to the Company requesting that prompt action be
taken to correct the violations.
In response to the observations and the Warning Letter, the Company has
provided the FDA with a plan and timetable for instituting corrective
actions. The Company has been working diligently in its efforts to
correct these violations.
In September 1997, the FDA conducted another audit of the Company's
facilities. While the Company has made progress towards correcting the
violations, at the conclusion of this audit, the FDA issued a report
which included no additional violations of CGMP but listed violations
which are in the process of correction by the Company. At this time,
the Company is unable to precisely determine the short-term adverse
economic impact which will result from instituting the corrective
actions.
(d) On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., a Delaware corporation ("CCS"), to
effect a merger of the two companies targeted toward the development
and marketing of advanced specialty electrophysiology products. The
structure of the transaction contemplates the merger of a wholly-owned
subsidiary of CCS into and with the Company as a result of which the
Company shall become a wholly-owned subsidiary of CCS. The transaction
further contemplates an exchange of common stock of the two companies,
with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10
par value per share.
Consummation of the merger is subject, among other things, to: (i)
raising sufficient capital to support the product development efforts
of both companies; (ii) the execution of a definitive agreement
reflecting the intentions of the parties; (iii) the approval of the
transaction by the Board of Directors of each company; (iv) the
approval of the transaction by the shareholders of Electro-Catheter
Corporation; and (v) the receipt of all required regulatory approvals
by each company.
CCS develops, manufactures and sells a broad line of implantable
cardiac pacemakers, pacemaker leads and related products which Company
management believes are complementary to its own product lines. The
Company believes the merger may allow certain efficiencies to improve
operating performance and that the broader product line may provide for
a more effective marketing and distribution process. There can be no
assurance, however, that consummation of the merger will yield positive
operating results in the future.
F-56
<PAGE>
SCHEDULE II
ELECTRO-CATHETER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITION CHARGED
BALANCE AT TO COST AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES WRITE-OFFS END OF YEAR
----------- ----------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
1997 Allowance for doubtful account $15,000 142,848 5,778 152,070
1996 Allowance for doubtful accounts $76,796 39,383 101,179 15,000
1995 Allowance for doubtful accounts $21,776 55,020 - 76,796
</TABLE>
F-57
<PAGE>
================================================================================
Prospective investors may rely only on the information contained in
this prospectus. Neither Catheter Technology Group, Inc., Cardiac Control
Systems, Inc. nor Electro-Catheter Corporation has authorized anyone to provide
prospective investors with information different from that contained in this
prospectus. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
-----------------
Until ___________, 1998, all dealers that buy, sell or trade the
shares, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
================================================================================
650,000 SHARES OF COMMON STOCK
MAXIMUM - 650,000 SHARES
MINIMUM - 390,245 SHARES
[LOGO]
CATHETER TECHNOLOGY GROUP, INC.
-------------------
PROSPECTUS
-------------------
______________________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Bylaws and the Delaware General Corporation Law
("DGCL") provide for indemnification of directors and officers against certain
liabilities. Pursuant to Registrant's Bylaws, officers and directors are
indemnified against expenses actually and reasonably incurred in connection with
threatened, pending or completed proceedings, whether civil, criminal or
administrative, to which an officer or director is, was or is threatened to be
made a party by reasons of the fact that he or she is or was an officer,
director, employee or agent of Registrant. Registrant may advance expenses in
connection with defending any such proceeding, provided the indemnitee undertake
to repay any such amounts if it is later determined that he or she was not
entitled to be indemnified by Registrant.
Each member of Registrant's Board of Directors has entered into an
indemnification agreement with Registrant. The terms of indemnification and
advancement of expenses follow the indemnification and expense advancement
provisions of the DGCL. In addition, the indemnitee under the agreement is
entitled to indemnification against all expenses actually and reasonably
incurred by him or on his behalf in connection with serving as a witness in any
proceeding (as defined in the agreements) by virtue of his status with
Registrant. The agreements also provide a procedural mechanism under which the
indemnitee can claim and obtain indemnification, including a procedure for the
Board or independent counsel to determine entitlement to indemnification under
specific situations. In the event the indemnitee does not receive the
indemnification to which he would otherwise be entitled under the terms of the
agreement, the indemnitee is entitled to seek a judicial determination. In the
event an indemnitee seeks a judicial adjudication to enforce his rights under,
or to recover damages for breach of, the agreement, he is entitled to recover
from Registrant his reasonable legal fees and other expenses in connection with
the legal proceeding, subject to proration in the event the amount of the award
is less than the amount of indemnification sought.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration fee $ 1,175
NASD Fee $ 5,000
Philadelphia Exchange listing fee $ 7,500*
Printing and engraving expenses $ 20,000*
Accounting fees and expenses $ 40,000*
Legal fees and expenses $ 100,000*
Blue sky fees and expenses $ 12,000*
Transfer agent, escrow agent and registrar fees $ 3,500*
Non-Accountable expense allowance $ 99,000*(1)
Miscellaneous $ 11,825
-----------
Total. $300,000.00
===========
- -----------
* Estimated expenses.
(1) Assumes gross offering proceeds of $3.3 million.
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 27. EXHIBITS
The following Exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.0 Agreement of Merger and Plan of Included as Appendix B in the Joint Proxy
Reorganization, dated as of Statement/Prospectus filed as part of a Form S-4
September 23, 1998 by and Registration Statement, File No. 333-_________
between Registrant, Cardiac (thereafter referred to as "Form S-4").
Control Systems, Inc.
("Cardiac") and CTG Merger Sub,
Inc.
2.1 Agreement and Plan of Included as Appendix A in the Joint Proxy
Reorganization, dated as of Statement/Prospectus in the Form S-4.
January 20, 1998 among Cardiac,
CCS Subsidiary, Inc. and
Electro-Catheter Corporation
("Electro").
2.2 First Amendment to Agreement Included as Appendix A1 in the Joint Proxy
and Plan of Reorganization, Statement/Prospectus in the Form S-4.
dated as of May 5, 1998.
2.3 Second Amendment to Agreement Included as Appendix A2 in the Joint Proxy
and Plan of Reorganization, Statement/Prospectus in the Form S-4.
dated as of August 7, 1998.
2.4 Third Amendment to Agreement Included as Appendix A3 in the Joint Proxy
and Plan of Reorganization, Statement/Prospectus in the Form S-4.
dated as of September 4, 1998.
2.5 Form of Plan of Merger, Exhibit Included as Exhibit 1.2 to Appendix A to the Joint
1.2 to the Agreement and Plan Proxy Statement/Prospectus in the Form S-4.
of Reorganization.
2.6 Form of Fourth Article to Included as Exhibit 1.4 to Appendix A to the Joint
Certificate of Incorporation of Proxy Statement/Prospectus in the Form S-4.
Electro, Exhibit 1.4 to the
Agreement and Plan of
Reorganization.
2.7 Form of Voting Agreement, Included as Exhibit 5.1 to Appendix A to the Joint
Exhibit 5.1 to the Agreement Proxy Statement/Prospectus in the Form S-4.
and Plan of Reorganization.
2.8 Form of Electro Affiliate Included as Exhibit 5.2 to Appendix A to the Joint
Agreement, Exhibit 5.2 to the Proxy Statement/Prospectus in the Form S-4.
Agreement and Plan of
Reorganization.
II-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.9 Form of Conditional Promissory Included as Exhibit 6.16(b) to Appendix A to the
Note between Registrant and The Joint Proxy Statement/Prospectus in the Form S-4.
T Partnership, Exhibit 6.16(b)
to the Agreement and Plan
of Reorganization.
2.10 Form of Secured Promissory Note Included as Exhibit 6.16(c) to Appendix A to the
between Registrant and The T Joint Proxy Statement/Prospectus in the Form S-4.
Partnership, Exhibit 6.16(c) to
the Agreement and Plan of
Reorganization.
3.0 Certificate of Incorporation of Exhibit 3.0 to the Form S-4.
the Registrant.
3.1 Bylaws of the Registrant. Exhibit 3.1 to the Form S-4.
3.2 Certificate of Incorporation of Exhibit 3.2 to the Form S-4.
Cardiac, as amended.
3.3 Restated Bylaws of Cardiac, as Exhibit 3.3 to the Form S-4.
amended.
3.4 Certificate of Incorporation of Exhibits 3(a) and 3(b) to Electro's Form 10-K for the
Electro, as amended. Year Ended August 31, 1997. File No. 0-7578.
3.5 Amended and Restated By-laws Exhibit 3(c) to Electro's Form 10-K for the Year Ended
of Electro. August 31, 1997. File No. 0-7578.
4.0 Form of Specimen Certificate To be filed by amendment.
of Registrant's Common Stock.
4.1 Form of Common Stock Exhibit 4.0 to Form S-1 Registration Statement filed on
Certificate of Cardiac. March 2, 1995, Registration No. 33-89938.
4.2 Form of Sales Representative Exhibit 4.13 to Form 10-Q for the Quarter Ended
Stock Option Agreement. September 30, 1988, File No. 0-14653.
4.3 Cardiac 5% Convertible Exhibit 4.15 to Form 8-K Current Report dated October
Debenture due October 31, 1999. 11, 1994, File No. 0-14653.
4.4 Cardiac Combined 1987-1992 Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
Non-Qualified Stock Option Plan. Statement filed on April 17, 1995, Registration No.
33-89938.
4.5 Cardiac Stock Purchase Warrant Exhibit 4.1 to Form 8-K Current Report, dated March 31,
dated March 31, 1995 in favor 1995, File No. 0-14653.
of Sirrom Capital Corporation.
4.6 Cardiac Stock Purchase Warrant, Exhibit 4.2 to Form 8-K Current Report, dated March 31,
dated March 31, 1995 in favor 1995, File No. 0-14653.
of Dow Corning Enterprises, Inc.
II-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.7 Cardiac Stock Purchase Warrant, Exhibit 4.6 to Cardiac's Form 10-KSB for the Year Ended
dated October 15, 1995 in favor March 31, 1996, File No. 0-14653.
of Sirrom Capital Corporation.
4.8 Cardiac Stock Purchase Warrant, Exhibit 4.7 to Cardiac's Form 10-KSB for the Year Ended
dated March 29, 1996 in favor March 31, 1996, File No. 0-14653.
of Grupo Taper, S.A.
4.9 Cardiac Stock Purchase Warrant, Exhibit 4.2 to Cardiac's Form 8-K Current Report, dated
dated June 6, 1997 in favor of June 13, 1997, File No. 0-14653.
Sirrom Capital Corporation.
4.10 Cardiac Stock Purchase Warrant, Exhibit 4.1 to Cardiac's Form 8-K Current Report, dated
dated June 13, 1997 in favor of June 13, 1997, File No. 0-14653.
Coast Business Credit.
4.11 Cardiac 8% Convertible Exhibit 4.0 to Cardiac's Form 10-QSB for the Quarter
Debenture due April 24, 2003. Ended June 30, 1998, File No. 0-14653.
4.12 Cardiac Stock Purchase Exhibit 4.12 to the Form S-4.
Warrant, dated August 26, 1998
in favor of International
Holdings, Inc.
4.13 Cardiac Stock Purchase Exhibit 4.13 to the Form S-4.
Warrant, dated August 27, 1998
in favor of Greenberg Traurig,
P.A.
4.14 Electro's 1984 Employee Stock Exhibit to Electro's Form 10-Q for the Quarter Ended
Purchase Plan. February 9, 1984, File No. 0-7578.
4.15 Electro's 1987 Incentive Stock Exhibit 10(k) to Electro's Form 10-K for the Year Ended
Option Plan. August 31, 1987, File No. 0-7578.
4.16 Electro's 1990 Incentive Stock Exhibit to Electro's Form 10-Q for the Quarter Ended May
Option Plan. 31, 1990, File No. 0-7578.
4.17 Electro's 1992 Incentive Stock Exhibit 10(j) to Electro's Form 10-K for the Year Ended
Option Plan. August 31, 1992, File No. 0-7578.
5.0 Form of Legal Opinion of Filed Herewith.
Greenberg Traurig, P.A.
8.0 Form of Tax Opinion of Exhibit 8.0 to the Form S-4.
Greenberg Traurig, P.A.
8.1 Form of Tax Opinion of Saiber Exhibit 8.1 to the Form S-4.
Schlesinger Satz & Goldstein,
LLC.
10.0 License Agreement between Exhibit 10.1 to Cardiac's Form 10-Q for the Quarter
Hughes/Bertolet and Cardiac. Ended September 30, 1986, File No. 0-14653.
II-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1 Settlement Agreement and Exhibit 10.2 to Cardiac's Form 10-K for the Year Ended
Release between Applied Cardiac March 31, 1990, File No. 0-14653.
Electro-physiology and Cardiac.
10.2 Amended and Restated License Exhibit 10.19 to Cardiac's Form 8-K Current Report dated
Agreement between Sulzer April 2, 1993, File No. 0.14653.
Intermedics Inc. and Cardiac,
dated April 2, 1993.
10.3 Amended and Restated Supply Exhibit 10.20 to Cardiac's From 8-K Current Report dated
Contract between Sulzer April 2, 1992, File No. 0-14653.
Intermedics Inc. and Cardiac,
dated April 2, 1993.
10.4 Employment Agreement between Exhibit 10.24 to Cardiac's Form 8-K Current Report dated
Bart C. Gutekunst and Cardiac, October 11, 1994, File No. 0-14653.
dated October 13, 1994.
10.5 Employment Agreement between Exhibit 10.25 to Cardiac's Form 8-K Current Report dated
Alan J. Rabin and Cardiac, October 11, 1994, File No. 0-14653.
dated October 13, 1994.
10.6 Employment Agreement between Exhibit 10.12 to Cardiac's Form 10-Q for the Quarter
Robert S. Miller and Cardiac, Ended December 31, 1994, File No. 0-14653.
dated December 12, 1994.
10.7 Agreement between LEM Exhibit 10.13 to Cardiac's Form 10-Q for the Quarter
Biomedica, s.r.l. and Cardiac, Ended December 31, 1994, File 0-14653.
dated October 1, 1994.
10.8 Agreement between Cardiac and Exhibit 10.12 to Form S-1 Registration Statement of
Alan J. Rabin and Bart C. Cardiac filed on March 2, 1995, Registration No.
Gutekunst dated July 1, 1994. 33-89938.
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Statement of
Agreement between Cardiac and Cardiac filed on March 2, 1995, Registration No.
each Director, executed 33-89938.
December 1994.
10.10 Employment Agreement between Exhibit 10.14 to Form S-1 Registration Statement of
Robert R. Brownlee and Cardiac Cardiac filed on March 2, 1995, Registration No.
dated as of October 1, 1994. 33-89938.
10.11 Loan and Security Agreement Exhibit 10.1 to Cardiac's Form 8-K Current Report, dated
between Cardiac and Sirrom March 31, 1995, File No. 0-14653.
Capital Corporation, dated
March 31, 1995.
10.12 $1,500,000 Secured Promissory Exhibit 10.2 to Cardiac's Form 8-K Current Report, dated
Note in favor of Sirrom Capital March 31, 1995, File No. 0-14653.
Corporation, dated March 31, 1995.
II-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.13 Mortgage, Assignment of Rents Exhibit 10.3 to Cardiac's Form 8-K Current Report, dated
and Leases, and Security March 31, 1995, File No. 0-14653.
Agreement in favor of Sirrom
Capital Corporation, dated
March 31, 1995.
10.14 Second Mortgage and Security Exhibit 10.4 to Cardiac's Form 8-K Current Report, dated
Agreement in favor of Dow March 31, 1995, File No. 0-14653.
Corning Enterprises, Inc.,
dated March 31, 1995.
10.15 Subordination Agreement between Exhibit 10.5 to Cardiac's Form 8-K Current Report, dated
Cardiac Sirrom Capital March 31, 1995, File No. 0-14653.
Corporation, and the
Debentureholders, dated March
31, 1995.
10.16 Promissory Note and Security Exhibit 10.16 to Cardiac's Form 10-QSB for the Quarter
Agreement between Sulzer ended September 30, 1995, File No. 0-14653.
Intermedics Inc. and Cardiac
dated October 20, 1995.
10.17 Amendment 2 to Supply Contract Exhibit 10.17 to Cardiac's Form 10-QSB for the Quarter
between Sulzer Intermedics ended September 30, 1995, File No. 0-14653.
Inc. and Cardiac, dated
October 20, 1995.
10.18 Amendment 2 to License Exhibit 10.18 to Cardiac's Form 10-QSB for the Quarter
Agreement between Sulzer ended September 30, 1995, File No. 0-14653.
Intermedics Inc. and Cardiac,
dated October 20, 1995.
10.19 Distribution Agreement between Exhibit 10.19 to Cardiac's Form 10-QSB for the Quarter
Grupo Taper S.A. and Cardiac, ended December 31, 1995, File No. 0-14653.
dated December 20, 1995.
10.20 Distribution Agreement between Exhibit 10.20 to Cardiac's Form 10-QSB for the Quarter
LEM Biomedica s.r.l. and ended September 30, 1996, File No. 0-14653.
Cardiac, dated October 1, 1996.
10.21 Security Agreement and Secured Exhibit 10.21 to Cardiac's Form 10-QSB for the Quarter
Promissory Note between Bart ended December 31, 1996, File No. 0-14653.
C. Gutekunst and Cardiac,
dated October 28, 1996.
10.22 Security Agreement and Secured Exhibit 10.22 to Cardiac's Form 10-QSB for the Quarter
Promissory Note between Bart ended December 31, 1997, File No. 0-14653.
C. Gutekunst and Cardiac,
dated March 24, 1997.
10.23 Security Agreement and Secured Exhibit 10.23 to Cardiac's Form 10-QSB for the Quarter
Promissory Note between Alan ended June 30, 1997, File No. 0-14653.
J. Rabin and Cardiac, dated
April 15, 1997.
II-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.24 Security Agreement and Secured Exhibit 10.24 to Cardiac's Form 10-QSB for the Quarter
Promissory Note Between Bart ended June 30, 1997, File No. 0-14653.
C. Gutekunst and Cardiac,
dated April 21, 1997.
10.25 Loan and Security Agreement Exhibit 10.1 to Cardiac's Form 8-K Current Report, dated
Coast Business Credit and June 13, 1997, File No. 0-14653.
Cardiac, dated June 13, 1997.
10.26 $300,000 Secured Promissory Exhibit 10.2 to Cardiac's Form 8-K Current Report, dated
Note of Cardiac to Coast June 13, 1997, File No. 0-14653.
Business Credit, dated June 13,
1997.
10.27 $500,000 CAPEX Promissory Note Exhibit 10.3 to Cardiac's Form 8-K Current Report, dated
of Cardiac to Coast Business June 13, 1997, File No. 0-14653.
Credit, dated June 13, 1997.
10.28 Intercreditor and Subordination Exhibit 10.4 to Cardiac's Form 8-K Current Report, dated
Agreement between Coast June 13, 1997, File No. 0-14653.
Business Credit and Sirrom
Capital Corporation.
10.29 Mortgage and Security Agreement Exhibit 10.5 to Cardiac's Form 8-K Current Report, dated
between Cardiac and Coast June 13, 1997, File No. 0-14653.
Business Credit.
10.30 Security Agreement Exhibit 10.6 to Cardiac's Form 8-K Current Report, dated
(Intellectual Property) between June 13, 1997, File No. 0-14653.
Cardiac and Coast Business
Credit.
10.31 Grant of Security Interest Exhibit 10.7 to Cardiac's Form 8-K Current Report, dated
Patents in favor of Coast June 13, 1997, File No. 0-14653.
Business Credit.
10.32 Amendment to Employment Exhibit 10.32 to the Form S-4.
Agreement between Alan J.
Rabin and Cardiac, effective as
of May 1, 1996.
10.33 Amendment to Loan Documents and Exhibit 10.0 to Cardiac's Form 10-QSB for the
Secured Promissory Note between Quarter Ended June 30, 1998, File No. 0-14653.
Cardiac and Coast Business
Credit, dated June 11, 1998.
10.34 Promissory Note in Favor of Exhibit 10.34 to the Form S-4.
Minrad, Inc., dated July 29,
1998.
10.35 Promissory Note in Favor of Exhibit 10.35 to the Form S-4.
Minrad, Inc., dated August 13,
1998.
II-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.36 Promissory Note in Favor of Exhibit 10.36 to the Form S-4.
International Holdings, Inc.,
dated August 26, 1998.
10.37 Promissory Note in favor of Exhibit 10.37 to the Form S-4.
Greenberg Traurig, P.A. dated
August 27, 1998.
10.38 Amendment to Loan and Security Exhibit 10.38 to the Form S-4.
Agreement between Cardiac and
Coast Business Credit, dated
September 15, 1998
10.39 Indemnification Agreement Exhibit 10.39 to the Form S-4.
between Registrant and Alan J.
Rabin, dated as of September
23, 1998
10.40 Agreement between Electro and Exhibit 10(j) to Electro's Form 10-K for the Year Ended
The T Partnership, dated August 31, 1993, File No. 0-7578.
October 11, 1993
10.41 Amendment to Agreement between Exhibit 10(l) to Electro's Form 10-K for the Year Ended
Electro and The T Partnership, August 31, 1995, File No. 0-7578.
dated November 21, 1994.
10.42 Lending Agreement between Exhibit 10(m) to Electro's Form 10-K for the Year Ended
Electro and the T Partnership, August 31, 1995, File No. 0-7578.
dated August 31, 1995.
10.43 Composite Modification Exhibit 10(n) to Electro's Form 10-K for the Year Ended
Agreement between Electro and August 31, 1996, File No. 0-7578.
The T Partnership, dated
January 1, 1996.
10.44 Composite Modification Exhibit 10(i) to Electro's Form 10-K for the Year Ended
Agreement between Electro and August 31, 1997, File No. 0-7578.
The T Partnership, dated
October 23, 1997.
10.45 Letter of Intent to Merger Exhibit 10(j) to Electro's Form 10-K for the Year Ended
between Electro and Cardiac, August 31, 1997, File No. 0-7578.
dated October 23, 1997.
21.0 Subsidiaries of Registrant. Filed Herewith.
23.0 Consent of BDO Seidman, LLP Filed Herewith.
(relating to financial
statements of Registrant).
23.1 Consent of BDO Seidman, LLP Filed Herewith.
(relating to financial statements
of Cardiac Control Systems, Inc.).
23.2 Consent of KPMG Peat Marwick, Filed Herewith.
LLP (relating to financial
statements of Electro-Catheter
Corporation).
II-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
23.3 Consent of Greenberg Traurig, Included in Exhibit 5.0.
P.A.
23.4 Consent of Saiber Schlesinger Included in Exhibit 8.1 to the Form S-4.
Satz & Goldstein, LLC.
23.5 Consent of Compass Capital Exhibit 23.4 to the Form S-4.
Partners, Ltd.
27.0 Financial Data Schedule Filed Herewith
(for SEC use only).
99.0 Form of Proxy of Electro. Exhibit 99.0 to the Form S-4.
99.1 Form of Proxy of Cardiac. Exhibit 99.1 to the Form S-4.
99.2 Opinion of Compass Capital Included as Appendix D in the Joint Proxy
Partners, Ltd. Statement/Prospectus in the Form S-4.
99.3 Form of Escrow Agreement To be filed by amendment.
</TABLE>
ITEM 28. UNDERTAKINGS.
RULE 415 OFFERING. The undersigned Registrant hereby undertakes that if
the securities registered pursuant to this registration statement are offered or
sold pursuant to Rule 415, Registrant will: (1) file, during any period in which
it offers or sells securities, a post-effective amendment to this registration
statement to: (i) include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a twenty percent (20%) change and the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (iii) include any additional or changed material
information; (2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of the securities at that time to be the
initial BONA FIDE offering; and (3) file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of
Registrant in the successful defense of any action, suite or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The small business issuer will: (1) for determining any liability under
the Act, treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule 424(b)(l) or
(4) or 497(h) under the Act as part of this registration statement as of the
time the Commission declared it effective; and (2) for determining any liability
under the Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned in the City of Palm Coast, State
of Florida, on the 15th day of October, 1998.
CATHETER TECHNOLOGY GROUP, INC.
By: /s/ ALAN J. RABIN
-------------------------------------
Alan J. Rabin
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Alan J. Rabin such person's true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution for such person and in such
person's name, place and stead, in any and all capacities, to sign on any or all
amendments (including post-effective amendments) to the Registration Statement
on Form SB-2 of Catheter Technology Group, Inc., and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and each of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed on the 15th day of October, 1998, by the following
persons in the capacities indicated:
/s/ BART C. GUTEKUNST NOMINEE FOR DIRECTOR AND CHAIRMAN OF THE BOARD
- ------------------------------
BART C. GUTEKUNST
/s/ ALAN J. RABIN PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
- ------------------------------ A DIRECTOR
ALAN J. RABIN
DIRECTOR NOMINEE
- ------------------------------
TRACEY E. YOUNG
/s/ WILLIAM H. BURNS DIRECTOR NOMINEE
- ------------------------------
WILLIAM H. BURNS
/s/ LARRY G. HAIMOVITCH DIRECTOR NOMINEE
- ------------------------------
LARRY G. HAIMOVITCH
/s/ ROBERT T. RYLEE DIRECTOR NOMINEE
- ------------------------------
ROBERT T. RYLEE
DIRECTOR NOMINEE
- ------------------------------
AUGUSTO OCANA
II-10
<PAGE>
/s/ W. ALAN WALTON EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
- ------------------------------ OFFICER (PRINCIPAL FINANCIAL AND
W. ALAN WALTON ACCOUNTING OFFICER)
/s/ ERVIN SCHOENBLUM DIRECTOR NOMINEE
- ------------------------------
ERVIN SCHOENBLUM
/s/ ABRAHAM NECHEMIE DIRECTOR NOMINEE
- ------------------------------
ABRAHAM NECHEMIE
II-11
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
5.0 Form of Legal Opinion of
Greenberg Traurig, P.A.
21.0 Subsidiaries of Registrant.
23.0 Consent of BDO Seidman, LLP
(relating to financial
statements of Registrant and
Cardiac Control Systems, Inc.).
23.1 Consent of KPMG Peat Marwick,
LLP (relating to financial
statements of Electro-Catheter
Corporation).
27.0 Financial Data Schedule (for SEC use only)
EXHIBIT 5
October 15, 1998
Catheter Technology Group, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have examined: (i) the registration statement on Form SB-2 (the
"Registration Statement") filed by Catheter Technology Group, Inc. ("CTG"), a
Delaware corporation and a direct, wholly-owned subsidiary of Cardiac Control
Systems, Inc., a Delaware corporation, with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"); (ii) the public offering prospectus (the "Prospectus"),
relating to the issuance by CTG of up to 650,000 shares of common stock, par
value $.10 per share (the "Common Stock"), in the manner set forth in the
Registration Statement and the Prospectus; (iii) CTG's Certificate of
Incorporation and Bylaws; and (iv) records of CTG's corporate proceedings
relative to its organization and to the issuance of the Common Stock.
We have examined originals, or copies identified to our satisfaction, of
such corporate records of CTG and have made such examinations of law as we have
deemed relevant. In our examination, we have assumed and have not verified: (i)
the genuineness of all signatures; (ii) the authenticity of all documents
submitted to us as originals; (iii) the conformity with the originals of all
documents supplied to us as copies; and (iv) the accuracy and completeness of
all corporate records and documents and all certificates and statements of fact,
in each case given or made available to us by CTG.
Based upon the foregoing, and having a regard for such legal considerations
as we deem relevant, we are of the opinion that the Common Stock will be, when
issued in the manner set forth in the Registration Statement and the Prospectus,
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the use of our name under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement, and
all amendments thereto. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act or the rules and regulations of the Commission promulgated
thereunder.
Very truly yours,
/s/ GREENBERG TRAURIG, P.A.
EXHIBIT 21.0
SUBSIDIARIES OF REGISTRANT
(Upon consummation of the transactions contemplated in the Prospectus)
1. Cardiac Control Systems, Inc., a Delaware corporation ("Cardiac"), a direct,
wholly-owned subsidiary of Registrant.
2. Electro-Catheter Corporation, a New Jersey corporation ("Electro"), an
indirect, wholly-owned subsidiary of Registrant and a direct, wholly-owned
subsidiary of Cardiac.
3. Cardiac Control Systems Far East, Inc., A Delaware corporation, an indirect,
wholly-owned subsidiary of Registrant and a direct, wholly -owned subsidiary of
Cardiac.
EXHIBIT 23.0
Consent of Independent
Certified Public Accountants
Catheter Technology Group. Inc.
Palm Coast, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated October 6, 1998, relating to the
financial statements of Catheter Technology Group, Inc. which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
---------------------
BDO Seidman, LLP
Orlando, Florida
October 15, 1998
EXHIBIT 23.1
Consent of Independent
Certified Public Accountants
Cardiac Control Systems, Inc.
Palm Coast, Florida
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated June 15, 1998, relating to the
financial statements of Cardiac Control Systems, Inc. which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
---------------------
BDO Seidman, LLP
Orlando, Florida
October 15, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Electro-Catheter Corporation
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
Our report dated November 12, 1997, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations and has
limited working capital resources, which raise substantial doubt about its
ability to continue as a going concern. The financial statements and financial
schedules do not include any adjustments that might result from the outcome of
that uncertainty.
/s/ KPMG PEAT MARWICK LLP
--------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 14, 1998
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