AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION STATEMENT NO. 333-65737
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CATHETER TECHNOLOGY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3845 52-2123035
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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ALAN J. RABIN
CHIEF EXECUTIVE OFFICER AND PRESIDENT
CATHETER TECHNOLOGY GROUP, INC.
3 COMMERCE BOULEVARD 3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164 PALM COAST, FLORIDA 32164
(904) 445-5450 (904) 445-5450
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, AND TELEPHONE NUMBER OF
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) 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 practicable 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. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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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PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PROPOSEDAGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
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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 registration fee in
accordance with Rule 457(a) under the Securities Act.
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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 WILL 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.
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1998
PUBLIC OFFERING PROSPECTUS
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 catheters and catheter-related
products, used in connection with the diagnosis and treatment of illnesses of
the heart and circulatory system. The contemplated restructuring and the merger
will result in the two medical device manufacturers becoming our operating
subsidiaries. We have not conducted any business other than matters related to
our 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. If the
minimim is not sold within 60 days from the date of this Prospectus, the escrow
agent will return all funds received from purchasers without interest or
deduction. It is expected that the price range per share of common stock will
be between $5.125 and $6.125.
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.
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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 COMPANY
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Per Share .............................. $ $ $
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Total Minimum (390,245 shares) ......... $ $ $
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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
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TABLE OF CONTENTS
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PAGE
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Special Note About Forward-Looking Statements ...................... 2
Prospectus Summary ................................................. 3
Risk Factors ....................................................... 6
Use of Proceeds .................................................... 16
Dividend Policy .................................................... 18
Capitalization ..................................................... 19
Dilution ........................................................... 20
Unaudited Pro Forma Condensed Consolidated Financial Data .......... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 26
Merger ............................................................. 41
Restructuring Merger ............................................... 46
Business ........................................................... 47
Management ......................................................... 70
Executive Compensation ............................................. 73
Certain Transactions ............................................... 77
Principal Shareholders ............................................. 79
Description of Securities .......................................... 81
Shares Eligible for Future Sale .................................... 83
Plan of Distribution ............................................... 85
Legal Matters ...................................................... 87
Experts ............................................................ 88
Available Information .............................................. 88
Index to Financial Statements ...................................... F-1
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. When considering such
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this Prospectus. The factors contained in the "Risk
Factors" section beginning on page 5 and other factors noted throughout this
Prospectus, including certain risks and uncertainties, could cause our actual
results to differ materially from those contained in any forward-looking
statement.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
Prospectus. It is not complete and may not contain all the information that is
important to you. You should read the entire Prospectus carefully, including
the "Risk Factors" section and the financial statements. Unless stated
otherwise, all information with respect to our common stock has been adjusted
to reflect the reverse split discussed in the paragraph immediately below.
THE COMPANY
We were recently organized as a direct, wholly-owned subsidiary of Cardiac
Control Systems, Inc., ("Cardiac"). Through a merger, Cardiac will become our
direct subsidiary (the "Restructuring Merger"). Simultaneously, through a
different merger of another subsidiary of Cardiac with Electro-Catheter
Corporation ("Electro"), Electro will become our indirect subsidiary and
Cardiac's direct subsidiary ("the Merger"). A condition to the Merger is that
Cardiac must effect a one-for-five reverse stock split of its common stock. As
a result of the Restructuring Merger and the Merger, we will be a holding
company with two operating subsidiaries, Cardiac and Electro.
This offering will occur at the same time, and is conditioned upon, the
completion of the Restructuring Merger and the Merger. We have only conducted
business related to our formation and initial organization. Before the Merger
is completed, we will apply to list our shares for trading on the Philadelphia
Stock Exchange or other regional exchange. This is our initial public offering
and no public market currently exists for our common stock. We cannot assure
you that we can list our shares on the Philadelphia Stock Exchange or other
regional exchange, or that we can maintain any such listing. 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 our company.
CARDIAC. Cardiac designs, developes, manufacturers, markets and sells
implantable leads and cardiac pacing systems, as well as designs, develops and
manufacturers leads for use as components in the products of other companies on
an original equipment manufacturing basis. These systems consist of
single-chamber, dual-chamber and 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
(the "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 Federal Food, Drug
and Costmetics Act, as amended (the "FDA Act"), and thus are subject to Federal
regulations enforced by the FDA, including restrictions on the commercial
introduction of products and clinical testing requirements.
ELECTRO. Electro designs, develops, manufacturers, markets and sells
catheters and related devices used in connection with heart and circulatory
system illnesses. 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 also seeks to expand its
original equipment manufacturing business to capitalize on its catheter
technology expertise and its manufacturing capabilities. Electro produces a
wide range of catheter products intended to be used by doctors and other
trained hospital personnel for diagnostic as well as therapeutic purposes. Like
Cardiac, the products of Electro are "medical devices" and are subject to
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the Federal regulations enforced by the FDA, including restrictions on the
commercial introduction of products and clinical testing requirements relative
to their marketing. 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 STRATEGY
We expect that the combination of Cardiac and Electro with their related
product lines will:
/bullet/ give us the opportunity to improve operations and performance
through the realization of operating synergies and cost savings;
/bullet/ facilitate the commercialization of electrophysiology and other
rhythm-management products from their existing products and new
products developed by them; and
/bullet/ 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 in their efforts to compete effectively in their market and to raise
capital due to their size, market valuations and other factors. We believe that
the Restructuring Merger and the Merger will provide a platform to consolidate
several of these companies into a larger entity that could capitalize on our
existing management and manufacturing capabilities, operating synergies, and a
larger revenue and technology base.
THE OFFERING
Common Stock Offered................. 650,000 shares (maximum)
390,245 shares (minimum)
Shares Outstanding After
the Offering......................... 2,457,926 shares (maximum)(1)
2,198,171 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.
Escrow Agent......................... American Stock Transfer & Trust
Company is acting as escrow agent for
the purpose of receiving and disbursing
to us the proceeds from this offering.
Offering Period and Terms of
Subscription, Sale and Escrow........ Pending the sale of the minimum
390,245 shares offered on a "best
efforts" basis, all subscription
payments, which are irrevocable, will be
deposited in a non-interest bearing
account by the escrow agent. This
offering will close on or before 30 days
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from the date of this Prospectus (which
period may be extended for up to an
additional 30 days at our discretion).
Unless at least the minimum 390,245
shares are sold within that offering
period, this offering will be withdrawn
and the proceeds will be returned to
the subscribers without interest or
deduction. If the minimum 390,245
shares are sold within the offering
period, the remaining 259,755 shares
will be offered for sale on a "best
efforts" basis until the offering
period ends. The escrow agent will not
release the escrowed funds to us
unless, before the end of the offering
period, (1) we have received
subscriptions for the minimum 390,245
shares, (2) the Merger, the
Restructuring Merger and the reverse
stock split have all been approved,
adopted and completed, (3) we have
secured at least $4.0 million in
financing through a combination of this
offering and a loan, and (4) all other
conditions to the Merger and the
Restructuring Merger have been
satisfied.
Subscription Procedures.............. Subscribers purchasing our common
stock directly from us should make
checks payable to "American Stock
Transfer & Trust Company, as Escrow
Agent for Catheter Technology Group,
Inc." Subscribers purchasing our common
stock through selected broker/dealers
should pay for their shares in the
normal and customary manner prescribed
by their broker/dealer. In either case,
all subscribers must provide a completed
subscription agreement along with their
payment.
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 Stock Exchange
(or other regional exchange) Symbol... To be announced.
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(1) Excludes (i) 419,997 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 completion 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
INVESTING IN OUR COMMON STOCK IS HIGHLY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION
IN THIS PROSPECTUS, BEFORE YOU DECIDE TO INVEST IN SHARES OF OUR COMMON STOCK.
HISTORY OF OPERATING LOSSES; GOING CONCERN QUALIFICATION
Cardiac and Electro, the operating companies we will hold 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 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. At times, Cardiac's cash shortages
have caused it to be delinquent in paying its suppliers, and have 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 has an accumulated
deficit which raise substantial doubt about Cardiac's ability to continue as a
going concern.
Similarly, Electro incurred net losses of $1,077,317, $1,354,942 and
$892,940 for the fiscal years ended August 31, 1998 and 1997 and 1996,
respectively. At August 31, 1998, Electro had an accumulated deficit of
$12,533,976. At times, Electro 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 we
cannot assure you that future sales will not be adversely affected. Electro's
auditors have reported that recurring losses from operations, net capital
deficiency and limited working capital resources raise substantial doubt about
Electro's ability to continue as a going concern. Electro's financial
statements do not include any adjustments which might result from the outcome
of this uncertainty.
If we do not obtain sufficient financing from a combination of this
offering and other sources to fund the operations of Cardiac and Electro
post-Merger, the Merger will not occur. 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. These include,
vendor and production delays, marketing difficulties, lack of market acceptance
and superior competitive products. Therefore, we cannot assure you that, even
with the proceeds from this offering and other financing, we will be able to
make the combined companies 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 our
financial statements, the amortization of which would reduce reported earnings
in subsequent years. See "Management's Discussion and 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 partly depend
upon the efficient and effective integration of the operations of Cardiac and
Electro. The inability to successfully combine each company's senior management
or the loss of the services of one or more key persons could materially
adversely affect our company. We (and our 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 our day-to-day
operations. This distraction, as well as any other difficulties which may be
encountered in the transition and
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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
adversely affect our revenues and operating results. See "Business" and
"Management."
UNCERTAINTY OF SUCCESS OF OUR INITIATIVES
We anticipate pursuing many strategic initiatives that either have not
been pursued or have not been fully commercialized by either Cardiac or Electro
to date. These include, 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. These risks include, but are 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 completion of the Restructuring Merger and the Merger, we will have
substantial debt obligations. As of October 31, 1998, Cardiac owed an aggregate
of approximately $3,040,503 (excluding accrued interest) to various lenders.
The terms of the loans vary and include the requirements of (1) lender's
consent to sell or encumber any of Cardiac's property having a total value
exceeding $25,000, (2) lender's consent to incur in any year additional
indebtedness exceeding $200,000, (3) various recurring fees, and (4) lender's
consent prior to merger, consolidation or change in ownership of 20% or more of
the outstanding stock. We cannot assure you that we will meet these debt
obligations. In addition, we will incur additional debt concurrently with this
offering. We plan to borrow approximately $1,500,000. However, in any event, we
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. Failure to meet these debt obligations, or others,
will materially adversely affect our operations. The terms of these debt
obligations could impair our ability to raise additional funds through stock
offerings or additional loans, which could materially adversely affect our
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. Consequently, our 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, we cannot assure you that these funds will be sufficient to fund
operations. If additional funds are needed, (i.e., if we cannot achieve
sufficient cost savings or if additional funds are required for marketing or
other operational efforts), we 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. We cannot assure you that further
financing will be available on acceptable terms, or at all. See
"Business--Business of Cardiac--Debt Obligations."
The borrowings required to satisfy the 4.0 million financing contingency
for the Merger will increase our debt obligations and we will have less working
capital available. Such increased leverage could impair our ability to raise
additional funds through stock offerings or additional loans.
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LOSS OF ROYALTY INCOME
Cardiac granted a license to Sulzer Intermedics, Inc. ("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 the
license agreement, Cardiac recorded $2,063,250 and $2,394,250 in royalty income
during the fiscal years ended March 31, 1998 and 1997, which represented
approximately 35% and 36% of revenues in such years. Intermedics' obligation to
pay royalties ended 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")
Cardiac's NOLs ($18.9 million as of March 31, 1998) can be used against
future taxable income through the fiscal year ending March 2012. The use of the
NOLs will be significantly limited under Section 382 of the Internal Revenue
Code of 1986, as amended, as a result of the Merger with Electro, as the Merger
will create a more than 50% aggregate change in ownership of Cardiac.
Accordingly, the Cardiac NOL limitation is approximately $50,000 per year if
the Merger occurs on November 16, 1998. Furthermore, since Electro would become
the parent for tax purposes (because the Merger is considered a reverse
acquisition by Electro stockholders of Cardiac), 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 use.
As of August 31, 1998, Electro had NOLs of approximately $15.0 million
which may be used against future taxable income through the fiscal year ending
August 31, 2013. If Electro is not the post-merger parent for tax purposes, the
SRLY rules mentioned above may apply.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
As part of our growth strategy, we intend to acquire companies with
cardiology and electrophysiology catheter products and/or complementary
products and technologies. We cannot assure you that we can identify, acquire
or profitably integrate and manage additional companies or complementary
products or technologies into our operations or that such could be done without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of special risks, including possible adverse
effects on our 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 these risks could materially adversely affect
results of operations, financial condition or business. Customer
dissatisfaction or performance problems at a single acquired company could
adversely affect our reputation. In addition, we cannot assure you that the
other companies or complementary products or technologies acquired in the
future will achieve anticipated revenues and earnings. See "Business" and
"Management."
POSSIBLE NEED FOR FUTURE ACQUISITION FINANCING
We intend to finance future acquisitions using cash (which may include
some of this offering's proceeds), incremental debt financing and/or by issuing
additional shares of our common stock for all or a substantial portion of the
consideration to be paid in such future acquisitions. If our common stock does
not maintain a sufficient market value or potential acquisition candidates are
otherwise unwilling to accept our common stock as part of the consideration for
the sale of their businesses, we may have to use more of our cash resources to
initiate and maintain our acquisition program. If we do not have sufficient
cash resources, our growth could be limited unless we are able to obtain
additional capital through loans or sales of our securities. We cannot assure
you that we can obtain the needed
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financing on acceptable terms, 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
COMMON STOCK FROM EXERCISE OF OPTIONS AND WARRANTS; POSSIBLE ADVERSE EFFECT ON
MARKET PRICE
The market price of our common stock could drop because 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 harder
for us to raise funds through future offerings of our common stock. In
addition, the holders of our outstanding derivative securities may be able to
purchase shares of our common stock at prices substantially below the
then-current market price with a resultant dilution in the interests of the
existing stockholders.
Upon the closing of this offering, assuming all 650,000 shares are sold,
there will be 2,457,926 shares of our 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 our "affiliates," as defined under Rule 144 of
the Securities Act. Of the 2,457,926 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
us. We intend to enter into lock-up agreements with our officers and directors
under which they may not sell any shares of our common stock without our
consent for 180 days after the date of this Prospectus. 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 completion of the Merger, there will be outstanding options and
warrants to purchase shares of our common stock exercisable at various prices
from $.05 to $25.00, subject to adjustment per share, pursuant to which an
aggregate of 419,997 shares of our common stock (subject to adjustment) may be
issued. Further, there will be outstanding $300,000 in debentures convertible
upon completion of the Merger into 150,000 shares of our common stock. There
will also be outstanding 1,000 shares of Electro preferred stock convertible
into 151,515 shares of our 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 our common stock (subject to adjustment)
underlying the respective derivative securities. The subsequent registration of
these securities could materially adversely affect the market price of our
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."
IMMEDIATE AND SUBSTANTIAL DILUTION
The public offering price per share of our 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 $5.31 per share in their investment if the minimum offering is
sold and approximately $4.83 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 our common stock or other securities, in connection with acquisitions or
otherwise, may involve substantial dilution to the interests of our then
existing stockholders. See "Dilution."
ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICE; LACK OF PUBLIC MARKET FOR
COMMON STOCK
We arbitrarily determined the public offering price for our common stock
and there is no relationship between the public offering price and the
earnings, book value or other recognized criteria of valuation.
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There has not been a public market for our common stock. We will apply to
list our common stock for trading on the Philadelphia Stock Exchange or other
regional stock exchange. We cannot assure you that we will meet the criteria to
obtain or maintain any such listing. 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. If we do not
satisfy the listing criteria, trading would be conducted in the
over-the-counter market known as the OTC 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 our common stock. However, notwithstanding
the listing of our common stock on any exchange, we cannot assure you that an
active trading market for our common stock will develop.
PENNY STOCK REGULATION
If our common stock is not listed on the Philadelphia Stock Exchange or
other regional exchange, it will be traded on the OTC Bulletin Board. Trading
in the OTC Bulletin Board allows market makers to enter quotes and trade
securities that do not meet listing requirements of the Nasdaq SmallCap Market
or any regional exchange. In such case, sales of our 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, we may not fall within any of the stated exceptions. Thus, a
transaction in our securities would subject the broker-dealer to sales practice
and disclosure requirements that make trading of the stock more cumbersome
which could materially adversely affect the marketability of the stock.
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of our securities may be highly volatile, as has been the
case with the securities of other companies engaged in high technology research
and development. Any announcements we or our competitors make 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 our common stock. Further,
the Merger may result in the recording of significant goodwill on our financial
statements, the amortization of which would reduce reported earnings in
subsequent years. Such an effect on reported earnings could materially
adversely affect the market price of our common stock.
NO UNDERWRITER
Our 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. See "Plan of Distribution." In reviewing the information set forth
under the heading "Capitalization," potential purchasers of our common stock
should note that there is a minimum sale requirement and that the offering will
not close unless the minimum is subscribed for. Consequently, we cannot assure
you that any shares will be sold and, to the extent the minimum is
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<PAGE>
sold but the maximum is not, our ability to implement our initiatives will be
diminished. If we are unable to sell the minimum number of shares of our common
stock offered, we will refund your subscription payments to you without
interest or deduction.
ADVERSE EFFECT OF COMPETITION
The medical device industry is highly competitive. 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 and therapeutic use have a
significant competitive advantage over Electro, whose steerable catheter
products are approved for diagnostic use only. Also, regarding gaining market
acceptance, Electro has had some difficulty in successfully introducing
products where competitors already had similar products on the market, since
physicians' acceptance of and comfort level with the competing products was
already established. 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
Our future success will partly depend on our 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 our company. In
addition, others may assert rights in our company'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 our current or future
products obsolete or less competitive. We must devote continued resources to
enhance our current products and develop new products for the marketplace.
There are many events and factors in connection with the development,
production and sale of our products over which we have no control. It is not
possible to provide any assurance that our 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 in the United States and the
regulatory bodies in other countries. A medical device must be approved of by
the FDA and the regulatory bodies of other countries through an
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<PAGE>
extensive application processes before it can be commercially marketed in each
country. Any delay of approval or rejection of an application could materially
adversely affect our business and results of operations. See
"Business--Business of Cardiac--Government Regulation," "--Business of
Electro--
Government Regulation."
PRODUCT RECALLS
If 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 our company could be significant
and would materially adversely affect our 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. Such
recalls have never 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 regarding noncompliance by Electro with certain regulations
regarding current good manufacturing practices 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 our intention to inform the FDA, before the
end of 1998, that such actions have been completed and that we are ready for
reinspection. We cannot assure you 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 we cannot assure you 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. We believe that it will
have completed the corrective actions by the time a product for which FDA
approval would be required is produced. 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,
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. We will maintain product liability coverage in limits of
coverage which we believe is customary in the industry. We cannot assure you,
however, that such insurance coverage will be adequate to address all costs,
expenses and losses which may be incurred in litigation proceedings.
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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. We will continue to provide the same
warranty policy as currently exists on Cardiac's pacemaker products. We cannot
assure you, however, that such 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 ECONOMIC COMMUNITY WITHOUT
ISO CERTIFICATION
Continued sale of certain of Electro's products in the member nations of
the European Economic Community (the "EEC") beyond June 14, 1998 required
receipt of CE Mark certification from the International Organization for
Standardization (the "ISO"). Since CE Mark certification was not received by
Electro by June 14, 1998, Electro has suffered a loss of sales in the EEC.
Several months ago, Electro and Cardiac submitted an application requesting CE
Mark certification for Cardiac to sell Electro's steerable line of catheters,
as manufacturer, with Electro acting as vendor to Cardiac in such regard. CE
Mark certification was granted on October 26, 1998, and issued in the name of
Cardiac. Cardiac and Electro anticipate having product with CE Mark
certification available for shipment in early 1999. Electro has also recently
submitted applications for CE Mark certification for many of its additional
products. However, we cannot assure you that CE Mark certification for the
additional products will be obtained or that the pre-June 1998 sales levels
will be recaptured. See "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/trademark/, 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 materially adversely affect
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, we cannot assure you that Electro's ability to manufacture certain
products will not be materially affected by single source vendors. See
"Business--Business of Electro--Raw Materials and Production," and "--Sources
of Supply."
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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
We intend 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. If operations overseas and/or
sales of products in foreign markets take place, such will be subject to all of
the risks inherent in international operations and transactions. Those risks
include 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
we determine to do business will significantly affect our operations in such
countries. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Operating Trends and Uncertainties."
DEPENDENCE ON KEY EMPLOYEES
Our future success partly depends upon key managerial, technical and
marketing personnel and upon our ability to continue to attract and retain such
highly talented individuals. Competition for
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qualified personnel is intense in the medical device industry. We cannot assure
you that we will retain the key employees of Cardiac and Electro or that we
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 adversely affect operations. To mitigate this risk, we expect to enter
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. We have applied for
policies of key-man life insurance on the lives of three of our key management
personnel, Messrs. Bart C. Gutekunst ($1.0 million) , Alan J. Rabin ($2.0
million) and Jonathan S. Lee ($250,000). We expect to hire a Chief Financial
Officer and an Acquisition Officer with experience in the consolidation of
companies after the Merger. We cannot assure you 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 materially adversely affect its 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 the
companies from hiring executive marketing personnel and increasing the size of
their sales force. Cardiac's and Electro's marketing success in the future will
partly depend on their ability to recruit and retain additional sales
representatives, which is critical to market acceptance and sales growth. We
expect to hire a Vice President of Marketing with experience in marketing and
use of cardiology products after the Merger. We cannot assure you 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 a two digit suffix to identify a
year in the date field 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 at or
in connection with applications after the year 2000.
Both Cardiac and Electro have assessed the potential impact of the Year
2000 issue to each company's internal operations. 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, we do not anticipate that the Year 2000
issue will impact operations or operating results. We cannot assure you,
however, that our review efforts, when completed, will not result in a
different conclusion or that the inability of third parties on which we rely
(such as suppliers) to implement corrective actions would not materially
adversely affect our operations or operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Operating Trends and Uncertainties."
DIVIDENDS
We do not plan to pay dividends in the foreseeable future. See "Dividend
Policy."
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USE OF PROCEEDS
We anticipate selling a minimum of $2.0 million to a maximum of $3.3
million of our common stock. The offering price range is estimated to be $5.125
to $6.125 per share. Assuming a $5.125 per share offering price, the net
proceeds from this offering will be approximately $2.69 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 $660,000 for the maximum offering and $460,000
for the minimum offering. To complete the Merger, we must obtain an aggregate
of $4.0 million in financing through a combination of this offering and a loan.
To satisfy the $4.0 million financing condition to allow completion of the
Merger, we must obtain a loan commitment in the minimum amount equal to the
difference between $4.0 million and the gross proceeds received from this
offering. In any event, we anticipate borrowing at least $1.5 million. Although
we are discussing loan transactions with two prospective lenders, we do 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 in the approximate amounts
indicated, assuming an offering price of $5.125 per share:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------- -------------
<S> <C> <C>
SOURCES:
Common Stock offering
(net of offering expenses and commissions) ........... $1,540,000 $2,690,000
Loan proceeds(1) ....................................... 2,000,000 1,500,000
---------- ----------
$3,540,000 $4,190,000
USES:
Repayment of debt(2) ................................... 698,500 698,500
Deferred salaries(3) ................................... 142,500 142,500
Consulting Fee(4) ...................................... 100,000 100,000
Litigation Settlement(5) ............................... 200,000 200,000
Legal, accounting and other expenses(6) ................ 1,255,000 1,255,000
Working capital; general corporate purposes(7) ......... 1,144,000 1,794,000
---------- ----------
$3,540,000 $4,190,000
========== ==========
</TABLE>
- ----------------
(1) As a condition to completing the Merger, we must obtain $4.0 million in
gross proceeds through a combination of this offering and a loan.
Therefore, we will borrow at least $2.0 million if only the minimum
offering of $2.0 million is achieved. However, even if the maximum
offering of $3.3 million is achieved, we anticipate borrowing a minimum of
$1.5 million. See "--Proposed Loan Financing," below for a discussion of
the proposed financing.
(2) Represents the following loan, interest and related fee payments; interest
and fee payments assume a Merger closing date of November 30, 1998 and are
subject to adjustment if closing occurs earlier or later:
(a) A Payment of $210,658 to The T Partnership, LLP, a New Jersey limited
liability partnership (the "T Partnership"), and stockholder and
creditor of Electro which holds a total of approximately 30% of the
common stock of Electro (the "Electro Common Stock") representing
repayment of loans plus accrued interest. The loans were made in May and
July 1998, bear interest at 12% per annum and are due on the earlier to
occur of the closing of the Merger, or September 1999. Loan proceeds
were used by Electro for working capital. The payment represents
outstanding principal of $200,000 and $10,658 of interest accrued and
unpaid as of November 30, 1998.
(b) A payment of $235,000 to International Holdings, Inc. ("IHI")
representing payment of $165,000 and $25,000 in fees to be accrued as of
November 12, 1998; plus $45,000 in additional fees of $2,500 per day
after November 12, 1998 until November 30, 1998. The $2,500 will
continue to accrue daily until the loan and all fees are repaid. The
loan from IHI was made in August 1998 and used by Cardiac for working
capital.
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(c) A payment of $252,812 to Coast Business Credit, a division of Southern
Pacific Bank ("Coast") representing repayment in full of a loan in the
principal amount of $250,000 under a bridge loan which matures on
November 30, 1998 and interest of $2,812 accrued and unpaid to November
30, 1998. The loan was made in June 1998 and was used by Cardiac for
working capital. Interest at the prime rate plus 5% per annum is paid
monthly.
(3) As of October 31, 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) Consulting fees owed Tracey E. Young, a director of Cardiac.
(5) Settlement of claim by Japan Crescent, Inc. against Cardiac.
(6) Includes $1,075,000 of estimated expenses payable by Cardiac and Electro in
connection with the Restructuring Merger and the Merger, including legal,
accounting, printing and other 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. We are not a party to any definitive acquisition
agreement, (other than in connection with the Restructuring Merger and the
Merger). Pending such uses, we intend to invest net proceeds of the
offering in money market funds or other interest-bearing obligations.
PROPOSED LOAN FINANCING
We anticipate entering into a loan agreement with one of two lenders who
have submitted proposals to us, described below. Both lenders are currently
involved in due diligence relating to our company and appraisals. We expect to
finalize the loan terms and loan documents just prior to closing the Merger. We
do not anticipate that the loan terms will differ materially from those
described below, and that such differences, if any, will be in our favor.
Proposal from Coast: A credit facility of $4,000,000 comprised of the
following lines: (a) advances up to 80% to 85% of eligible accounts receivable;
accounts of domestic distributors are eligible up to 90 days past the invoice
date, and accounts of hospitals are eligible up to 120 days past the invoice
date; (b) $750,000 subline on foreign accounts receivable that meet certain
criteria; (c) $1,000,000 subline for inventory, subject to certain criteria;
(d) $400,000 term loan amortized over 48 months; and (e) $250,000 capital
expenditure subline, subject to the company meeting certain minimum cash flow
and debt service ratios. The credit facility would mature two years from the
closing date and all loans would bear interest at the prime rate plus 1.50% per
annum, with a minimum charge based on assumed minimum borrowings of $1,500,000.
We have deposited $25,000 with Coast to defray its audit, due diligence,
appraisal expenses and legal expenses. The loan terms require a facility fee of
$3,500 per quarter for the term of the loan and a restructuring fee of $25,000
due upon the closing of the loan. In addition, we will issue common stock
purchase warrants to Coast exercisable in the aggregate for $25,000 (the per
share exercise price to be the market price of the company's common stock at
the closing of the Merger). Coast, one of Cardiac's current lenders, would
retain its secured position with respect to the company's assets.
Proposal from Finova Capital Corporation ("Finova"): A revolving credit
facility of $4,500,000 comprised of the following lines: (a) advances up to 85%
on eligible accounts receivable (i.e., no older than 90 days from invoice
date); and (b) a $1,500,000 revolving inventory subline. The credit facility
would mature two years from the closing date and all loans would bear interest
at the prime rate plus 1.50% per annum. The minimum interest would be $12,500
per month. The loan terms also require us to pay a fee of 0.5% of the unused
portion of the credit facility, payable quarterly. The loan terms require us to
pay Finova a field examination and collateral monitoring fee of $600 per day
per auditor plus expenses for each day of auditing incurred by Finova. Audits
are to be performed at least quarterly. At closing, we will pay Finova a
facility fee of 1.25% of the total credit facility ($56,250 assuming a $4.5
million credit facility). There is a prepayment penalty of 3% of the total
credit facility during the first year and 2% of the total credit facility
during the second year of the term. We have paid Finova a $15,000 application
fee to defray its costs in connection with the loan. If we enter into a loan
agreement with Finova, we plan to retire in full our current loan with Coast
from a draw on the Finova revolving credit facility and grant to Finova a first
lien on our real and personal property, subject to an intercreditor and
subordination agreement similar to the terms of Cardiac's existing
intercreditor and subordination agreement between Sirrom Capital Corporation
("Sirrom") and Coast.
17
<PAGE>
The loan agreement for whichever loan is selected will contain standard
default provisions for loans of that type and certain financial covenants to be
maintained by the company. A default under the financial covenants or failure
to make timely payments could accelerate the maturity date of the loan.
DIVIDEND POLICY
We do not anticipate paying any dividends on our common stock in the
foreseeable future. We will retain any earnings we may realize in the
foreseeable future to finance growth. Our future dividend policy will depend
upon our earnings, operations, capital requirements, financial condition,
restrictions under loan arrangements and other factors considered relevant by
our Board of Directors (the "CTG Board"). See "Description of Securities."
18
<PAGE>
CAPITALIZATION
The following table sets forth, as of August 31, 1998, (i) the actual
capitalization of our company, (ii) the capitalization of our company on a pro
forma basis as if the Merger and Restructuring Merger had occurred at that
date, and (iii) the capitalization of our 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 allowances and the other estimated
expenses of the offering, and the application of the estimated net proceeds as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
AUGUST 31, 1998
------------------------------------------------------------------
PRO FORMA AS ADJUSTED
------------------------------------
ACTUAL PRO FORMA(3) MINIMUM MAXIMUM
-------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Long-term debt, including current portion(4) ......... $ -- $ 6,711,361 $ 6,012,861 $ 5,512,861
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), 1,807,926 shares outstanding
(pro forma), 2,198,171 (pro froma
as adjusted minimum), 2,457,926
(pro forma as adjusted maximum)(2) ................ 10 180,793 219,817 245,793
Additional paid-in capital .......................... -- 12,323,207 13,824,183 14,928,207
Accumulated deficit ................................. -- (12,533,976) $ (12,533,976) (12,533,976)
---- ------------- ------------- -------------
Total stockholders' equity ........................ 10 970,024 2,510,024 3,640,024
---- ------------- ------------- -------------
Total capitalization ................................. $ 10 $ 7,681,385 $ 8,522,885 $ 9,152,885
==== ============= ============= =============
</TABLE>
- ----------------
(1) Shares of preferred stock in Electro are convertible into our common stock
to be issued to The T Partnership upon completion of the Merger.
(2) Excludes (i) 419,997 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 completion of the Merger, and (iv) 151,515 shares issuable upon
conversion of 1,000 shares of Series A 9% preferred stock of Electro (the
"Series A Preferred Stock") 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.)
(4) As a condition to completion of the Merger, we must obtain $4.0 million in
gross proceeds through a combination of this offering and a loan.
Therefore, we will borrow at least $2.0 million if only the minimum
offering is achieved and at least $1.5 million if the maximum offering is
achieved. See "USE OF PROCEEDS." The pro forma financial statements
reflect the sale of the minimum number of shares and, therefore, the
borrowing of $2.0 million.
19
<PAGE>
DILUTION
At August 31, 1998, assuming completion of the Restructuring Merger and
the Merger, our pro forma net tangible book value (deficit) was $(1,935,259),
or $(1.07) per share of our common stock. The following table illustrates the
per share dilution which will be realized by the investors if only the minimum
number of shares are sold, and if the maximum number shares are sold at an
assumed offering price of $5.125 per share.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
--------- ----------
<S> <C> <C>
Assumed offering price per share ...................................... $ 5.125 $ 5.125
Net tangible book value (deficit) per share
before the offering .................................................. (1.07) (1.07)
Increase per share attributable to investors in the offering .......... .89 1.37
Pro forma as adjusted net tangible book value per share(1) ............ (.18) .30
Dilution per share to investors in the offering (1) ................... $ 5.31 4.83
</TABLE>
- ----------------
(1) Excludes (i) 419,997 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 completion 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).
20
<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 August 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
common stock of Cardiac (the "Cardiac Common Stock") and approximately
$1,075,000 in anticipated direct acquisition and registration costs, as if such
acquisition had occurred on August 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 $2.0 million in
debt and the one-for-five reverse stock split of Common Stock (the "Reverse
Split") expected to occur before 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 $1.54 million.
The pro forma financial statements do not give effect to any future cost
savings expected by us as a result of the Merger. The unaudited pro forma
condensed consolidated statement of operations includes Cardiac's consolidated
statements of operations for the fiscal year ended September 30, 1998 and
Electro's statements of operations for the fiscal year ended August 31, 1998
giving effect to the Merger and Restructuring Merger as if they had occurred on
September 1, 1997. 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
consolidated financial statements for the year ended September 30, 1998 which
were derived from the audited consolidated financial statements of Cardiac for
the fiscal year ended March 31, 1998 and the unaudited consolidated financial
statements for the six months ended September 30, 1998 and 1997. Cardiac's
auditors have reported that recurring losses from operations, net capital
deficiency and limited working capital resources raise substantial doubt about
Cardiac's ability to continue as a going concern. The historical information of
Electro has been derived from the audited financial statements for the fiscal
year ended August 31, 1998 (which are included herein and should be read in
conjunction with such financial statements and the notes thereto). Electro's
auditors have reported that recurring losses from operations, net capital
deficiency and limited working capital resources raise substantial doubt about
Electro's ability to continue as a going concern. 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
completed 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.
21
<PAGE>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 31, 1998
-----------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------- -------------------------------------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
------------- --------------- -------------------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash ..................................... $ 132,230 $ 168,762 $ 3,540,000(1) $ 3,840,992
Marketable securities .................... 799 -- 799
Accounts receivable, net ................. 466,232 723,753 1,189,985
Inventories .............................. 1,289,725 1,253,456 2,543,181
Prepaid expenses and other
current assets ......................... 226,332 68,538 294,870
---------- ------------ -----------
Total current assets ................... 2,115,318 2,214,509 3,540,000 7,869,827
Property, plant and equipment, net ........ 1,880,649 653,452 2,534,101
Patent .................................... -- -- 2,603,566 (3) 2,603,566
Other assets .............................. 1217,984 314,986 (792,000)(2) 740,970
---------- ------------ ---------------- -----------
$5,213,951 $ 3,182,947 $ 5,351,566 $13,748,464
========== ============ ================ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..... $1,953,588 $ 1,590,929 $ 283,000(2) $ 3,827,517
Deposits payable ......................... 347,962 -- 347,962
Accrued litigation expenses .............. -- 265,134 265,134
Current portion of long-term debt ........ 1,384,340 73,279 1,457,619
---------- ------------ -----------
Total current liabilities .............. 3,685,890 1,929,342 283,000 5,898,232
Long-term debt, less current portion ...... 1,810,003 2,443,739 1,000,000 (1) 5,253,742
Other liabilities ......................... 86,476 -- 86,476
Stockholders' equity (deficit) ............ (368,418) (1,190,134) 4,068,566 (1)(3) 2,510,014
---------- ------------ ---------------- -----------
$5,213,951 $ 3,182,947 $ 5,351,566 $13,748,464
========== ============ ================ ===========
</TABLE>
- ----------------
(1) Represents the addition of $2.0 million in debt at an assumed interest rate
of 11% per annum to be issued in connection with the merger, 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 $1.54 million.
(2) Represents $1,075,000 of costs of completing the Merger, of which $792,000
had been incurred at August 31, 1998 and $283,000 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 costs of completing the Merger estimated at
$1,075,000 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:
<TABLE>
<S> <C>
Fair value of assets acquired, including $2,603,566
assigned to a pending patent .......................... $7,817,517
Fair value of liabilities assumed ..................... 5,582,369
----------
Total purchase price ............................... $2,235,148
==========
</TABLE>
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.
22
<PAGE>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------- ----------------------------------------
SEPTEMBER 30, AUGUST 31
1998 1998
------------------- ---------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
------------------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 4,082,645(5) $ 5,347,042 $ -- $9,429,687
Cost and expenses:
Cost of goods sold ......................... 1,965,732 3,608,923 -- 5,574,655
Selling, general and administrative
expenses ................................. 2,064,206 1,974,468 260,357 (1) 4,299,031
Engineering, research & development
expenses ................................. 1,549,642 527,007 -- 2,076,649
-------------- ------------ ---------- ----------
5,579,580 6,110,398 260,357 11,950,335
-------------- ------------ ---------- ----------
Loss from operations ........................ (1,496,935) (763,356) (260,357) (2,520,548)
Other income (expense):
Interest expense ........................... (611,649) (313,961) (45,000)(2) (970,610)
Other income ............................... 2,538 -- -- 2,538
-------------- ------------ ---------- ----------
(609,111) (313,961) (45,000) (968,072)
-------------- ------------ ---------- ----------
Net loss .................................... (2,106,046) (1,077,317) (305,357) (3,488,720)
Preferred stock dividends ................... -- -- (90,000)(4) (90,000)
-------------- ------------ ---------- ----------
Net loss applicable to common stock ......... $ (2,106,046) $ (1,077,317) $ (395,357) $(3,578,720)
============== ============ ========== ===========
Net loss per common share ................... $ (0.80) $ (0.17)
============== ============
Pro forma net loss per
common share .............................. $ (1.63)(3)
===========
Weighted average common
shares outstanding ........................ 2,648,740 6,388,000 2,197,593
============== ============ ===========
</TABLE>
- ----------------
(1) Represents amortization of $260,357 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 pro forma weighted average shares for Electro of 1,277,600
for the year ended August 31, 1998, plus 529,748 outstanding Cardiac
shares as adjusted for the Reverse Split and the sale of the minimum
number of shares in the offering of 390,245.
(4) Represents dividends on $1.0 million of The T Partnership debt converted
into 9% convertible preferred stock.
(5) Includes approximately $768,000 royalty income from Intermedics which
ceased in January 1998.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with ours,
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. Our 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 SEPTEMBER 30, 1998 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 1997
OVERVIEW. Cardiac's total revenues for the second quarter of fiscal year
1999 decreased by 53.4% to approximately $765,000 as compared to approximately
$1.6 million for the second quarter of fiscal year 1998. Sales decreased from
approximately $1.0 million in the second quarter of fiscal year 1998 by 26.6%
to approximately $765,000 in the second quarter of fiscal year 1999. Royalty
income, which was $598,500 in the second quarter of fiscal year 1998, was zero
in the second quarter of fiscal year 1999. Royalty income represents 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. Total operating costs in the
second quarter of fiscal year 1999 were $458,064 lower than those incurred
during the second quarter of fiscal year 1998, which, combined with the
decrease in total revenues, resulted in an operating loss of $458,690 in the
second quarter of fiscal year 1999 as compared to an operating loss of $41,727
in the second quarter of fiscal year 1998.
SALES. Total sales decreased from $1,041,490 in the second quarter of
fiscal year 1998 by 26.6% to $764,963 in the second quarter of fiscal year
1999. Pacemaker unit sales decreased by 66% and pacemaker dollar sales
decreased by 66%. 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 leads decreased in
the domestic market by $274,304, but this was largely offset by increased sales
of defibrillator leads to a new original equipment manufacturer ("OEM")
customer and by increased sales of single-pass atrial-controlled pacing leads
used in conjunction with competitive pacing systems. The decline in pacing lead
sales was the result of a 66% decline in units reflecting a sllight 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 through its customers. Sales
of pacing leads in the international market remained stable.
Sales by geographic area for the second quarter of fiscal year 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA 1999 1998
- --------------------------- ----------- -------------
<S> <C> <C>
United States .......... $549,817 $ 732,400
International .......... 215,146 309,090
-------- ----------
$764,963 $1,041,490
======== ==========
</TABLE>
24
<PAGE>
Sales by product line for the second quarter of fiscal year 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
PRODUCT LINES 1999 1998
- ----------------------------- ----------- -------------
<S> <C> <C>
Pacemakers ............... $280,424 $ 601,022
Electrode Leads .......... 415,223 436,970
Other .................... 69,316 3,498
-------- ----------
$764,963 $1,041,490
======== ==========
</TABLE>
ROYALTY INCOME. Royalty income represents 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.
COSTS OF PRODUCTS SOLD. The cost of products sold in the second quarter of
fiscal year 1999 was $451,730, compared to $648,245 in the second quarter of
fiscal year 1998, representing a decrease of 30% as compared with a decrease of
26.6% in sales, which increased the rate of gross margin from 37.8% to 40.9%.
This improvement was due to the substitution in the product mix of
defibrillator leads for pacing leads.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $454,421 in the second quarter of fiscal year
1999, representing a decrease of 26% from $613,053 in the second quarter of
fiscal year 1998. Selling expenses were $152,778 in the second quarter of
fiscal year 1999 compared to $254,926 in the second quarter of fiscal year 1998
as a result of reduced costs in respect of commissions and royalties. General
and administrative expenses were $301,643 in the second quarter of fiscal year
1999 compared to $358,127 in the second quarter of fiscal year 1998
representing a decrease of 16% as a result of reduced costs in respect of
salaries, outside services and professional fees.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development costs were $317,502 in the second quarter of fiscal year 1999,
which was a decrease of 24% from $420,419 in the second quarter of fiscal year
1998 due to reduced salaries, external costs and travel costs.
OTHER INCOME AND EXPENSES. Interest income was $475 during the second
quarter of fiscal year 1999 compared to $1,969 during the second quarter of
fiscal year 1998. Total interest expense increased from $128,421 in the second
quarter of fiscal year 1998 to $142,411 in the second quarter of fiscal year
1999 due to increased borrowings to meet working capital requirements.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1997.
OVERVIEW. Cardiac's total revenues for the first half of fiscal year 1999
decreased by 57% to $1,385,740 as compared to $3,189,404 for the first half of
fiscal year 1998. Sales decreased from $1,893,779 in the first half of fiscal
year 1998 to $1,385,740 in the first half of fiscal year 1999. Royalty income
decreased from $1,295,625 in the first half of fiscal year 1998 to zero in the
first half of fiscal year 1999. Royalty income represents 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. Total operating costs in the first half of
fiscal year 1999 were $1,033,128 lower than those incurred during the first
half of fiscal year 1998, which, combined with the decrease in total revenues,
resulted in an operating loss of $968,009 in the first half of fiscal year 1999
compared to an operating loss of $197,473 in the first half of fiscal year
1998.
SALES. Total sales during the first half of fiscal year 1999 decreased
from $1,893,779 in the first half of fiscal year 1998 by $508,039 or 27% to
$1,385,740. Pacemaker unit sales decreased by 57% and pacemaker dollar sales
decreased by 57%. 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
25
<PAGE>
diagnostic features. Sales of pacing leads decreased in the domestic market by
$481,119, but this was largely offset by increased sales of defibrillator leads
to a new OEM customer and by increased sales of single-pass atrial-controlled
pacing leads used in conjunction with competitive pacing systems. The decline
in pacing lead sales was the result of a 70% decline in units reflecting a
slight reduction both in complete systems sold (pacemaker 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
through its customers. Sales of pacing leads in the international market
remained stable.
Sales by geographic area for the first half of fiscal year 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA 1999 1998
- --------------------------- ------------- -------------
<S> <C> <C>
United States .......... $1,115,138 $1,513,410
International .......... 270,602 380,369
---------- ----------
$1,385,740 $1,893,779
========== ==========
</TABLE>
Sales by product line for the first half of fiscal year 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
PRODUCT LINES 1999 1998
- ----------------------------- ------------- -------------
<S> <C> <C>
Pacemakers ............... $ 524,486 $1,050,534
Electrode Leads .......... 759,247 822,599
Other .................... 102,007 20,646
---------- ----------
$1,385,740 $1,893,779
========== ==========
</TABLE>
ROYALTY INCOME. Royalty income represents 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.
COSTS OF PRODUCTS SOLD. The cost of products sold during the first half of
fiscal year 1999 was $777,819 compared to $1,152,060 in the first half of
fiscal year 1998, representing a decrease of 32% as compared to a decrease of
27% in sales, which increased the rate of gross margin from 39% in the first
half of fiscal year 1998 to 44% in the first half of fiscal year 1999. This
improvement was due to the substitution in the product mix of defibrillator
leads for pacing leads.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $923,513 in the first half of fiscal year 1999,
representing a decrease of $432,612 or 32% from $1,356,125 incurred in the
first half of fiscal year 1998. Selling expenses decreased from $601,303 in the
first half of fiscal year 1998 by $289,754 or 48% to $311,549 in the first half
of fiscal year 1999 as a result of reduced costs in respect of commissions and
royalties. General and administrative expenses decreased from $754,822 in the
first half of fiscal year 1998 by $142,858 or 19% to $611,964 in the first half
of fiscal year 1999 as a result of reduced costs in respect of salaries,
outside services and professional fees.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development costs were $652,417 during the first half of fiscal year 1999
compared to $878,692 during the first half of fiscal year 1998 due to reduced
salaries, external costs and travel costs.
OTHER INCOME AND EXPENSES. Interest income was $792 during the first half
of fiscal year 1999 compared to $7,952 during the first half of fiscal year
1998. Total interest expense increased from $211,006 in the first half of
fiscal year 1998 to $298,706 in the first half of fiscal year 1999 due to
increased borrowings to meet working capital requirements.
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
26
<PAGE>
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 a loan from Coast.
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.
Sales by geographic area for fiscal years 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA 1998 1997
- --------------------------- ------------- -------------
<S> <C> <C>
United States .......... $3,067,963 $3,486,511
International .......... 755,096 714,536
---------- ----------
$3,823,059 $4,201,047
========== ==========
</TABLE>
Sales by product line (including product assemblies) for fiscal years 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
PRODUCT LINE 1998 1997
- ----------------------------- ------------- -------------
<S> <C> <C>
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
========== ==========
</TABLE>
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
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<PAGE>
$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/trademark/ 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 YEAR ENDED AUGUST 31, 1998 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1997
OVERVIEW. Net revenues declined $1,301,396 (19.6%) for the fiscal year
ended August 31, 1998 as compared to the prior fiscal year. Product revenues
declined $751,390 (12.8%) for the fiscal year ended August 31, 1998 as compared
to the fiscal year ended August 31, 1997. Contract research and development
declined $544,293 (100%) for the year. Licensing fees and royalty income also
decreased $22,670 (20.7%) for the same period. For the fiscal year ended August
31, 1998 sales to an OEM customer increased $16,957 (14.0%) as compared to the
fiscal year ended August 31, 1997.
SALES. Domestic sales decreased $462,741 (11.5%) for the twelve months
ended August 31, 1998 as compared to the same periods in the prior year. This
decrease is 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 sales decreased $268,651 (14.7%) in fiscal year 1998 as compared
to the same prior period. The decline in international sales is attributed to
the lack of new products, lower demand for Electro's electrophysiology
products, product redesign problems, and lower prices due to competition and
backorders. Additionally, sales in the fourth quarter were negatively affected
by the inability to obtain CE Mark certification. International sales will
continue to be adversely affected in Europe (approximately 21%, 17% and 14% of
total revenues for fiscal years 1996, 1997 and 1998, respectively) until early
1999 as Electro was not able to obtain CE Mark certification on its products in
a timely manner in order to continue to sell into this market. Several months
ago, Electro and Cardiac submitted an application requesting CE Mark
certification for Cardiac to sell Electro's steerable line of catheters, as
manufacturer, with Electro acting as vendor to Cardiac in such regard. CE Mark
certification was granted on October 26, 1998, and issued in the name of
Cardiac. Cardiac and Electro anticipate having products with CE Mark
certification available for shipment in early 1999. Electro has also recently
submitted applications for CE Mark certification for many of ts additional
products. However, we cannot assure you that CE Mark certification for the
additional products will be obtained or that the pre-June 1998 sales levels
will be recaptured. Electro's lack of financing has severely hampered its
ability to introduce new products to market and correct the re-design issue, in
order to maintain sales.
GROSS PROFITS. Gross profit dollars decreased $868,833 (33.3%) for the
fiscal year ended August 31, 1998 as compared to the fiscal year ended August
31, 1997. This decrease is primarily attributed to decreased production levels
related to the lower sales volume in addition 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 $409,659 (17.2%) for the fiscal year ended
August 31, 1998 as compared to the previous
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<PAGE>
fiscal year. The decrease primarily reflects lower domestic and international
selling expenses substantially attributable to the departure 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 $354,721 (40.2%) for the twelve months ended August 31, 1998
as compared to the same period in the prior fiscal year. This decrease reflects
the lower level of research and development efforts. The decrease is primarily
attributed to the 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.
OTHER INCOME AND EXPENSES. Interest expense increased as a result of the
increased borrowings from The T Partnership and interest on capitalized lease
obligations relative to equipment.
Fiscal year 1997 included expenses in connection with an age
discrimination litigation against Electro. All costs associated with this
litigation were recorded in the financial statements for the fiscal year ended
August 31, 1997. No costs were recorded in fiscal year 1998.
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 month period ended August 31, 1997, Electro has
devoted much of its engineering efforts to its contract research and
development customer and OEM business. 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
29
<PAGE>
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
CARDIAC
Cardiac's liquidity benefited from its $3.5 million credit facility with
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, another lender to Cardiac, subordinating its interests to Coast,
Cardiac issued to Sirrom a warrant to purchase 10,000 shares of our 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 our
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 our 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 October 31, 1998, Cardiac had outstanding indebtedness of
approximately $1,140,000 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 our 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 our 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. We cannot assure you that Cardiac's attempts to obtain financing
will be successful.
30
<PAGE>
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.
On August 26, 1998, Cardiac received $134,000 from 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 our 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
our 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 our 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 completion 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 the
end of November, the expected time of completion of the Merger, the
Restructuring Merger and public offering.
As of October 31, 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
31
<PAGE>
deficit of $21,901,927, as of March 31, 1998. In addition, as discussed below,
royalty payments from Intermedics/trademark/ 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. 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 financing condition to 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. See "Use of Proceeds--Proposed Loan Financing."
Relative to its current operations and the loss of royalty income from
Intermedics, Cardiac has taken the following actions to increase cash
availability:
/bullet/ Reduced its staff and operating expenses;
/bullet/ 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
/bullet/ 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 the Merger is not completed, however, 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 August 31, 1998, working capital decreased $673,007 to $285,167 from
the fiscal year ended August 31, 1997. The current ratio was 1.1 to 1 at August
31, 1998 as compared to 1.6 to 1 at August 31, 1997. Net cash used in operating
activities was $377,173 for the fiscal year ended August 31, 1998 as compared
to $37,025 for the fiscal year ended August 31, 1997. This increase in cash
required for operations is primarily attributed to the increase in Electro's
operating loss for the fiscal year and an increase in deferred merger costs.
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 departed sales personnel have not 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. Under the key terms of the Settlement Agreement, the
matter was 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 on July
1, 1998. The Settlement Agreement provides that a default in any
32
<PAGE>
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. 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. As of August 31, 1998 Electro
owed The T Partnership $293,764 for monthly interest payments dating back to
July 1997. Electro has sent the required interest payments to The T
Partnership. The T Partnership has chosen not to tender such checks for
payment. Therefore, Electro has considered the interest payments unpaid at
August 31, 1998 and has reflected the amount as a liability on the accompanying
1998 balance sheet. The T Partnership has waived the debt agreements provision
for monthly interest payments to be made, until September 1, 1999 and has
agreed not to request acceleration of payment for fiscal 1998 interest payments
or, further, for any fiscal 1999 interest payments. Principal payments of
$25,000 scheduled to begin on September 1, 1996 have, pursuant to several
waivers, with the latest received in October 1998, been deferred to September
1, 1999. 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,
unless The T Partnership and Electro agree otherwise. The Merger Agreement
contemplates that the total indebtedness outstanding and due to The T
Partnership plus interest accrued thereon (totaling approximately $2.5 million)
shall be redeemed at the Merger effective time by: (a) the issuance by the
surviving subsidiary corporation in the merger (the "Surviving Subsidiary") to
The T Partnership of an aggregate of 1,000 shares of 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 the new combined company's
common stock; (b) the delivery to The T Partnership of the new combined
company's 9% conditional promissory note in the amount of $1.0 million pursuant
to which the new combined company 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 the new combined company in an
amount not to exceed $1.3 million (which amount shall be the approximately
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 (the terms of
the security for the note have yet to be agreed upon). As a result of the
issuance of Series A Preferred Stock, The T Partnership shall be entitled to
receive dividends. 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.
Under the provisions of the agreement with The T Partnership, Electro is
obligated to comply with certain 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, 1998,
Electro was not in compliance with certain covenants. However, in October 1998,
The T Partnership agreed not to exercise its right to accelerate the repayment
of indebtedness through September 1, 1999 as a result of non-compliance with
the aforementioned covenants and agreed to defer the principal and interest
payments due in the 1998 and 1999 fiscal years. The T Partnership has also
agreed to a modification to one of the financial covenants. Electro is
currently in compliance with such revised covenant.
The report of Electro's independent auditors on Electro's financial
statements includes an explanatory paragraph which states that Electro's
recurring losses from operations, its net capital deficiency and limited
working capital raise substantial doubt about Electro's ability to continue as
a going concern. The financial statements and financial statement schedule do
not include any adjustments that might result from the outcome of this
uncertainty. Electro's ability to continue with
33
<PAGE>
its plans is contingent upon its ability to obtain sufficient cash flow from
operations or to obtain additional financing from external sources. Electro has
had difficulty in paying its obligations and, as a result, has delayed payments
to vendors and certain others providing services to Electro, such as legal
expenses. Electro continues to evaluate its plans and adopt certain cost-saving
measures, where appropriate. The contemplated Merger is contingent upon both
companies raising sufficient capital to support each company's product
development efforts. The Board of Directors 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.
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 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 these standards set forth
by the EEC which is evidenced by being granted CE Mark certification. 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. 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 consequently, adversely impact its business and
operations.
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Cardiac's ability to successfully compete with Intermedics and other
pacemaker manufacturers will depend on Cardiac's ability to supply product,
recruit and increase a quality sales force and to 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. However, the supply agreement under which Cardiac
sold electrode leads to Intermedics for its new systems expired on August 1,
1998. Nonetheless, 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.
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. 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 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 CE Mark certification from the ISO. Since Electro has not
yet obtained CE Mark certification and is now unable to sell its products in
the nations of the EEC, international sales have and should continue to be
adversely affected in Europe (which account for approximately 14% of total
revenues in fiscal year 1998). Several months ago, Electro and Cardiac
submitted an application requesting CE Mark certification for Cardiac to sell
Electro's steerable line of catheters, as manufacturer, with Electro acting as
vendor to Cardiac in such regard. CE Mark certification was granted on October
26, 1998, and issued in the name of Cardiac. Cardiac and Electro anticipate
having product with CE Mark certification available for shipment in early 1999.
Electro has also recently submitted applications for CE Mark certification for
many of its additional products. However, we cannot assure you that CE Mark
certification for the additional products will be obtained or that the pre-June
1998 sales levels will be recaptured.
SOURCES OF SUPPLY. Two of Cardiac's principal suppliers of materials used
primarily in electrode lead production, Dow Corning Enterprises, Inc. ("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.
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."
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Suppliers of custom Application Specific Integrated Circuits ("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 a two digit
suffix to identify a year in the date field 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 at or in connection with applications after the year 2000.
Cardiac has undertaken to review the potential impact of the Year 2000
issue to its internal operations. 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 calendar quarter of 1998 and expects
that any issues will be resolved by the end of the second calendar quarter of
1999.
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. However, as a
result of its initial assessment, Electro has recently determined that it wil
be required to modify or replace certain information and operational systems so
they will be Year 2000 compliant. These modifications and replacements are
being, and will continue to be, made in conjunction with Electro's overall
systems initiatives. The total cost of these Year 2000 compliance activities is
not anticipated to be material to Electro's financial position or its results
of operations. Furthermore, the estimated cost of Electro's review and
assessment efforts is not anticipated to be material to Electro's financial
position or its results 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
three fiscal years ended August 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
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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.
MERGER
GENERAL
We were 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.
Completion 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 our company of a minimum of $4.0 million from a
combination of this offering and a loan; (iv) consents of certain lenders; and
(iv) no litigation. Prior to the completion of the Merger, Cardiac will
effectuate the Reverse Split on a one-for-five basis. Cardiac will become our
wholly-owned subsidiary, Electro will become a wholly-owned subsidiary of
Cardiac, and all of the stockholders of Cardiac and Electro will become
stockholders of our company. 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).
We expect that the consolidation of Cardiac and Electro with their related
product lines will (i) afford us the opportunity to improve operations and
performance through the realization of operating synergies and cost savings,
(ii) facilitate the commercialization of electrophysiology and
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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. We believe that the Merger
will provide a platform to consolidate several of these companies into a larger
entity that could capitalize on our existing management and the manufacturing
capabilities of our operating entities, 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 our 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 complete the Merger are subject
to the satisfaction of certain conditions, including: (i) 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; (ii) the receipt of all authorizations, permits, consents and
approvals of securities or "Blue Sky" commissions or agencies of any
jurisdiction and of other governmental bodies or agencies that may reasonably
be deemed necessary so that the completion of the Merger and the other
transactions contemplated by the Merger Agreement will comply with applicable
laws; (iii) the effectiveness under the Securities Act of our Registration
Statement on Form S-4, File No. 333-65603 (the "S-4"), and the absence of any
stop order suspending the effectiveness of the S-4 or proceedings seeking a
stop order; (iv) no temporary restraining order, preliminary or permanent
injunction, or other order preventing the completion of the Merger, shall have
been issued, nor shall any statute, rule or regulation have been enacted which
prohibits, restricts or delays completion of the Merger; (v) 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 shall have
been secured; (vi) Cardiac shall have completed the Reverse Split; and (vii)
Cardiac shall have executed and done all things possible to cause a Certificate
of Merger to be filed with the Secretary of State of the State of Delaware,
whereby the Restructuring Merger shall be effectuated, at the same time as the
effective time of the Merger (the "Merger Effective Time").
Additional conditions to the obligations of Cardiac to complete the Merger
include: (i) the accuracy in all material respects of the representations and
warranties of Electro; (ii) the performance, in all material respects, of all
of the obligations required to be performed by Electro under the Merger
Agreement before the completion of the Merger; (iii) all action necessary to
authorize the execution, delivery and performance of the Merger Agreement and
the completion of the transactions contemplated thereby will have been duly and
validly taken by Electro, and Electro shall have the full power and right to
effect the Merger; (iv) the receipt by Cardiac of an opinion of Saiber
Schlesinger Satz & Goldstein, LLC ("Saiber"), counsel for Electro, reasonably
satisfactory in form and substance to Cardiac; (v) the form and substance of
all legal matters contemplated by the merger and all papers delivered
thereunder shall be reasonably acceptable to Greenberg Traurig, P.A.
("Greenberg"), counsel for Cardiac; (vi) Cardiac shall have received duly
executed copies of all consents and approvals contemplated by the Merger; (vii)
all consents, authorizations, orders or approvals of, and filings of
registrations with, any governmental authority which are required for or in
connection with the execution and delivery by Electro of the Merger Agreement
and all related agreements and the
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completion by Electro of the transaction contemplated thereby shall have been
attained or made; (viii) the voting agreement and company affiliate agreements,
which are to be executed in connection with the Merger Agreement (collectively,
the "Related Agreements"), shall each be in full force and effect as of the
Merger Effective Time in accordance with their terms, and each person or entity
who or which are required or contemplated by the parties to the Merger
Agreement to be a party to any Related Agreement who or which did not
previously enter into such Related Agreement shall execute and deliver such
Related Agreement; and (ix) provisions shall have been made for payment at
closing of indebtedness of Cardiac which is due to Greenberg for reasonable
attorneys' fees and expenses outstanding and incurred before and in connection
with the Merger.
Additional conditions to Electro's obligation to complete the Merger
include: (i) the accuracy in all material respects of the representations and
warranties of Cardiac; (ii) the performance, in all material respects, of all
the obligations required to be performed by Cardiac under the Merger Agreement
prior to the completion of the Merger; (iii) all action necessary to authorize
the execution, delivery and performance of the Merger Agreement and the
completion of the transactions contemplated thereby will have been duly and
validly taken by Cardiac; (iv) the receipt by Electro of an opinion of
Greenberg, in form and substance reasonably satisfactory to Electro; (v) the
receipt of an opinion from Saiber in form and substance reasonably satisfactory
to Electro, to the effect that the Merger will be treated for Federal income
tax purposes as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended; (vi) all consents,
authorizations, orders or approvals, and filings or registrations with, any
governmental authority required in connection with the completion of the Merger
by Cardiac; (vii) the form and substance of all legal matters contemplated by
the Merger Agreement and all papers delivered thereunder shall be reasonably
acceptable to Saiber; (viii) Electro shall have received duly executed copies
of all consents and approvals contemplated by the Merger; (ix) our Board of
Directors shall have taken such action as necessary to expand its size and to
appoint Ervin Schoenblum and Abraham Nechemie as directors of our company; (x)
the receipt of an opinion of Compass Capital Partners, Ltd., financial advisor
to Electro, that the Merger is fair to the stockholders of Electro from a
financial point of view; (xi) Electro shall have received a written statement
signed by our President stipulating that we will honor all obligations of
Electro under Article VIII of Electro's Amended and Restated Bylaws pertaining
to indemnification of a corporate agent as that term is defined in such
Article; provided, however, such commitment to honor Electro's indemnification
obligations shall only be applicable to events or actions on the part of such
corporate agent occurring or taken before the closing date; and (xii)
provisions shall have been made for payment at closing of indebtedness of
Electro which is due to The T Partnership in the amount of $200,000, or such
greater amount as may be agreed upon by Electro and Cardiac for the repayment
of loans made by The T Partnership to Electro to finance operations pending the
completion of the Merger and to Saiber for reasonable attorneys' fees and
expenses outstanding and incurred before and in connection with the Merger.
Under the terms of the Merger Agreement, Cardiac has no obligation to
complete the Merger if any condition to their obligations to complete the
Merger is not satisfied on or before the closing date of the Merger and Electro
has no obligation to complete the Merger if any condition to its obligation to
complete the Merger is not satisfied on or before the closing date of the
Merger. None of the material conditions to the obligations of Cardiac or
Electro to complete the Merger may be waived or modified by the party that is,
or whose stockholders are, entitled to the benefits thereof.
Because we cannot satisfy the $4.0 million financing condition solely with
proceeds from this offering, we intend to supplement additional funds needed to
satisfy the financing condition of $4.0 million with additional debt financing.
We have received three proposals for the debt financing from prospective
lenders. All three proposals contemplate a working capital credit facility
secured by accounts receivable, inventory and equipment. If sufficient debt
financing is not available from these prospective lenders to satisfy the
financing condition, we intend to obtain additional financing through
alternative debt financing sources, which may be more costly than the current
proposals.
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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 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 completion of the Merger; the inability to obtain the consent of either
party would preclude completion 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
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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.
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
October 31, 1998 of approximately $2.5 million. Upon completion of the Merger,
The T Partnership will have beneficial ownership of 492,969 shares of our
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 our 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 our company upon the Merger Effective
Time; (ii) Saiber is to be paid legal fees at the closing of the Merger; and
(iii) Greenberg 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 October 31, 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 Preferred Stock, 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 our common
stock; (b) the delivery to The T Partnership of a 9%
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conditional promissory note made by us in the amount of $1.0 million pursuant
to which we are 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; (c) the delivery to The T Partnership of a secured
promissory note made by us 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); and (d) the
reimbursement for cash advances provided to Electro for purposes of operating
capital, since May 1, 1998, in the amount of $200,000, or any greater amount as
may be agreed to by Electro and Cardiac.
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 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 our wholly-owned subsidiary ("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 completion
of the Restructuring Merger, the rights and interests of Cardiac stockholders
as holders of our 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
our common stock. 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
Completion of 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 completion of the Restructuring Merger. The inability to
obtain the consent of either party would preclude the completion 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 our company 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
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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
We were 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 our direct, wholly-owned subsidiary. Pursuant to
the Merger, Electro will become a direct, wholly-owned subsidiary of Cardiac.
As a result, we will be a holding company with two operating companies, Cardiac
and Electro. We have only conducted business related to our formation and
initial organization. See "Merger" and "Restructuring Merger."
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.
OUR BUSINESS
STRATEGY. We 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 us 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.
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Our strategy will be to both consolidate other companies with cardiology
and electrophysiology catheter products that can be manufactured by Cardiac or
Electro, and/or to acquire or license such products. We will endeavor to
capitalize on the operational, marketing and financial synergies inherent in
the development of a larger entity. We will support this strategy 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
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.
Our business plan proposes that the combination of Cardiac and Electro
will be able to achieve a positive operational cash flow at least sufficient to
support normal operating and research and development activity within 12 to 18
months after completion of the Merger. We believe 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 our needs
for the next several years. We cannot assure you that we will achieve the
business plan because the combination of Cardiac and Electro may be
unsuccessful in achieving such sales and/or realizing such savings. See "Risk
Factors." We expect that if we need additional cash for completion of a merger
or specific project, a separate financing would be initiated.
SYNERGIES OF CONSOLIDATION. We believe 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
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/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.
PRODUCTS. We 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 Cardiac's
implantable pacing and defibrillating leads, and on a more acute and temporary
basis as with Electro's temporary pacing and cardiac mapping catheters.
ADDRESS. Our principal executive offices are located at 3 Commerce
Boulevard, Palm Coast, Florida, (904) 445-5450.
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.
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
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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/registered trademark/ II or MAESTRO/registered
trademark/ II SAVVI/trademark/) and 7 electrode lead models (under the trade
names PolySafe/trademark/ or A-Track/trademark/). 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/trademark/ 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.
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 DAB/trademark/ 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
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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 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 CE Mark
certification, 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
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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 October 31, 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.
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 materially adversely affect 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
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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 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.
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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 ISSUANCE
- ----------------------- -------------------------------------------------------------- -----------------
<S> <C> <C>
4,585,004 Heart Pacing and Intracardiac Electrogram Monitoring System
and Associated Method 4/29/86
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 Environments 3/13/90
5,127,403 Pacemaker Catheter Utilizing Bipolar Electrodes Spaced in
Accordance to the Length of a Heart Depolarization Signal 7/7/92
5,630,835 Method and Apparatus for the Suppression of Far Field
Interference Signals for Implantable Device Data Transmission
Systems 5/20/97
5,772,693 Single Preformed Catheter Configuration for a Dual
Chamber Pacemaker System 3/20/96
5,814,076 Apparatus for Improved Cardiac Pacing and Sensing using
Extracardiac Indifferent Electrode Configurations 9/29/98
</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 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, TriFix/trademark/, Trabeculok/trademark/, SAVVI,
DAB, PacePro/trademark/, 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
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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 certain regulations regarding good
manufacturing practices.
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 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 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 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.
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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. We cannot assure you 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 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 October 31, 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
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.
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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 certain regulations regarding good manufacturing practices
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
FDA 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 these standards set forth by the EEC which is evidenced by being
granted CE Mark certification. 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
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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 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
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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
our 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
completion of this offering and the Merger 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 adversely 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 October 31,
1998, the outstanding principal balance of the loan was $1,140,183. 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 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
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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 us with additional debt financing.
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 November 30, 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. We cannot assure you 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. 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 our 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, 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.
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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. We cannot assure you 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 our 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
our 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 our 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.
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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 $1,559,000 in fiscal year 1998,
$1,828,000 in fiscal year 1997, and $2,324,000 in fiscal year 1996,
representing approximately 29%, 27% and 32% 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-seven (37) 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 samples may be
obtained. In addition, Electro's catheters may
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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/registered trademark/ Flow Directed Balloon Catheters,
Pacewedge/registered trademark/ Balloon Guided Catheters and Balwedge/registered
trademark/ 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/registered trademark/ 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/registered trademark/
Flow-Directed Temporary Pacing Kit, Silicore/registered trademark/
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/registered trademark/ One Step/trademark/ 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 October 31, 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. 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
1998 and 1997. 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 1998, 1997, and 1996, 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.
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.
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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 ISSUANCE
- ----------------------- ------------------------------------------------------------ -----------------
<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
Artery 12/13/88
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
</TABLE>
- ----------------
* owned jointly with another party
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, we cannot assure you 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 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
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August 31, 1998, Electro incurred aggregate direct expenses of approximately
$2,419,000 for research and development activities, including new product
development, of which approximately $527,000 was attributable to fiscal year
1998, $882,000 to fiscal year 1997 and $1,010,000 to fiscal year 1996. 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, we cannot
assure you 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. 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 October 31, 1998, Electro had 69 full-time employees. Of the total
employees, 47 were engaged in manufacturing and quality control, 9 in general
administration and executive activities, 8 in
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engineering and research and development, and 5 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, we cannot assure you
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 we cannot assure you 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
certain regulations regarding good manufacturing practices 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.
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 regulations regarding good manufacturing
practices 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
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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%. 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. We
believe that it will have completed the corrective actions by the time a
product for which FDA approval would be required is produced. See
"Business--Business of Electro--Government Regulation."
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. For
Electro to continue to sell certain of its products in the nations of the EEC
after June 14, 1998, it must obtain CE Mark certification, from the ISO.
Several months ago, Electro and Cardiac submitted an application requesting CE
Mark certification for Cardiac to sell Electro's steerable line of catheters,
as manufacturer, with Electro acting as vendor to Cardiac in such regard. CE
Mark certification was granted on October 26, 1998, and issued in the name of
Cardiac. Cardiac and Electro anticipate having product with CE Mark
certification available for shipment in early 1999. Electro has also recently
submitted applications for CE Mark certification for many of its additional
products. However, we cannot assure you that CE Mark certification for the
additional products will be obtained or that the pre-June 1998 sales levels
will be recaptured.
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, 1998 and August 31, 1997 were approximately $81,000 and $87,000,
respectively.
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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.
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
October 31, 1998, Electro had a backlog of orders for its products which,
aggregated, was approximately $305,000, as compared to approximately $716,000
at October 31, 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
October 31, 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, we cannot assure you 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
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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.
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 our executive
officers and directors upon completion of the Restructuring Merger and the
Merger. The first column under "CTG" reflects their respective positions in our
company. The other two columns under "Cardiac" and "Electro" reflect their
respective positions in Cardiac or Electro, as the case may be, before
completion of the Restructuring Merger and the Merger. There are no family
relationships among our directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION CTG CARDIAC(1) ELECTRO(2)
- ---------------------------- ----- ----------------------------------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C>
Bart C. Gutekunst .......... 47 Chairman of the Board * *
President, Chief Executive Officer
Alan J. Rabin .............. 48 and Director * *
Executive Vice President and
W. Alan Walton ............. 64 Chief Operating Officer * *
Vice President--Research and
Jonathan S. Lee ............ 46 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 * *
</TABLE>
- ----------------
(1) Reflects executive officers and directors of Cardiac as of October 7, 1998
and before completion of the Merger. Such persons will hold offices and
directorships in our company substantially consistent with their
respective positions in Cardiac before completion of the Merger.
(2) Reflects certain directors of Electro as of October 7, 1998 and before
completion of the Merger. Such persons will hold directorships in our
company after completion of the Merger.
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 that company. 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
that company'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 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
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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 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
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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 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
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removal, with or without cause, at any duly noticed special meeting of our
stockholders by the affirmative vote of the holders of a majority of the shares
of our common stock present in person or represented by proxy and entitled to
vote at an election of directors.
Under our bylaws, 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 our executive officers or directors is a director of any company
other than ours (or Cardiac or Electro, as the case may be, before completion
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 our company whose aggregate compensation is expected to
exceed $100,000 during our first fiscal year of operation.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- --------------------------------------
AWARDS, SECURITIES
UNDERLYING
FISCAL YEAR OPTIONS(1) ALL OTHER
NAME AND PRINCIPAL POSITION ENDED MARCH 31, SALARY($) BONUS($) (SHS) COMPENSATION($)
- ----------------------------- ----------------- ----------- ----------------- ------------------- ----------------
<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 -- -- -- --
</TABLE>
- ----------------
(1) Common stock listed under this heading and in the footnotes below reflects
the number of shares of our common stock issuable upon exercise of options
after giving effect to the Reverse Split and Merger.
(2) With respect to fiscal year 1998, the 2,512 shares are comprised of
options to purchase 2,400 shares of our common stock at $5.00, exercisable
immediately, and a warrant to purchase 112 shares of our 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 our 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 our 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
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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 our common stock at $5.00, exercisable immediately, and a
warrant to purchase 582 shares of our common stock at $0.90. With respect
to fiscal year 1997, Mr. Gutekunst was awarded options to purchase 2,000
shares of our 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 our 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 our 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 our 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 our 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 our common stock at $17.50 per share, exercisable one-third on
May 5, 1997, one-third on May 5, 1998 and one-third on May 5, 1999.
(12) This represents reimbursement of relocation expenses paid to Mr. Lee
pursuant to the offer of employment.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted by
Cardiac during the fiscal year ended March 31, 1998 to those persons named in
the preceding Summary Compensation Table. The information contained below
reflects the number of shares of our common stock which may be purchased, and
the exercise price with respect thereto, after giving effect to the Reverse
Split and the Merger.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION
OPTIONS GRANTED IN FISCAL YEAR ($/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>
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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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES TABLE
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE 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
</TABLE>
- ----------------
(1) These options have also been adjusted to give effect to Cardiac's
one-for-seven reverse stock split effected December 13, 1994.
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 our common stock with the number
of shares of our common stock being determined by dividing $6,000 by the
average of the bid and asked prices of our 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 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 our 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
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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 our 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.
We intend to enter into employment agreements with Mr. Rabin and Mr.
Gutekunst on 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.
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 completion of the Merger and this offering, there will be outstanding
options to purchase a total of 116,128 shares of our common stock, all of which
will be exercisable at $1.5625 to $18.75 per share.
We intend to adopt a stock option plan for our 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
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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 our company and our affiliates will be negotiated on behalf of our
company by our 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. Ms. Young provided no further
consulting services after 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 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 common
stock of our company 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.
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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 our 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 our common stock at $17.50 per share and the exercise
price of the warrant held by Bradley to purchase 3,363 shares of our 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 each of April 1997 and September 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 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, 1998,
Electro was not in compliance with certain financial covenants. However, in
October 1998, The T Partnership agreed not to exercise its right to accelerate
the repayment of indebtedness through September 1, 1999 as a result of
non-compliance with the aforementioned covenants and agreed to defer the
principal payments due in the 1998 and 1999 fiscal years. The T Partnership has
also agreed to a modification to one of the financial covenants. Electro is
currently in compliance with such revised covenant. 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
promissory notes due in September 1999. 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 October 31, 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
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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 October 31, 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 our common stock at a
conversion price equal to 120% of the price per share of the our 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 us 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 us 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. At October 31,
1998, the amount of such reimbursement, including interest, was $208,658. 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
October 31, 1998, Electro's indebtedness to The T Partnership was $2,585,831.
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 $210,000 as of October 31, 1998. See "Business--Electro--Legal
Proceedings."
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock known by us as of October 31, 1998
after giving effect to: (a) the Reverse Split; (b) the exchange of each share
of Electro Common Stock for one-fifth of a share of our common stock; and (c)
the exchange of each share of Cardiac Common Stock for one share of our common
stock, and as adjusted to reflect the sale of the our common stock offered
hereby. The following table sets forth the information with respect to: (i)
each person or entity known by us to be the beneficial owner of more than 5% of
our common stock; (ii) each of our directors who owns any shares of our common
stock; (iii) each of our named executive officers set forth in the Summary
Compensation Table above who beneficially owns any shares of our common stock;
and (iv) all of our directors and named executive officers as a group. Except
as otherwise indicated, the persons listed below have sole voting and
investment power with respect to all shares of our common stock owned by them,
except to the extent such power may be shared with a spouse.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF CLASS AFTER MERGER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) AND OFFERING(2)
- -------------------------------------- ------------------------- -------------------
<S> <C> <C>
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%
</TABLE>
- ----------------
* 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 our common stock.
(2) Computations of percentage ownership of each individual treats warrants and
options to purchase our 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.
(3) Includes options and warrants exercisable within the next 60 days to
purchase shares of our common stock as follows:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR NUMBER
NUMBER OF PERSONS IN GROUP OF SHARES
- --------------------------------- ----------
<S> <C>
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
</TABLE>
(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 our 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.
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<PAGE>
DESCRIPTION OF SECURITIES
The following description of our securities does not purport to be
complete and is subject in all respects to applicable Delaware law and to the
provisions of our Certificate of Incorporation and Bylaws. Upon approval of the
Restructuring Merger by Cardiac's stockholders, Cardiac will become our direct,
wholly-owned subsidiary. Each share of Cardiac Common Stock outstanding
immediately prior to the Restructuring Merger will be converted into one share
of our 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 consolidated assets and liabilities
of Cardiac and its subsidiary will be the same as the consolidated assets and
liabilities of us and our subsidiaries immediately after the Restructuring
Merger. Cardiac and its subsidiary will continue to conduct all of their
business and operations after the Restructuring Merger, but as our
subsidiaries. Upon completion of the Merger, we 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 our common stock (after
giving effect to the Reverse Split). See "Merger" and "Restructuring Merger."
CTG COMMON STOCK
Our 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 our common stock were issued and outstanding. Upon completion of the
Restructuring Merger and the Merger, holders of Cardiac Common Stock and
Electro Common Stock will automatically become holders of our 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 our stockholders, 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 our 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 our Certificate of Incorporation.
Holders of our 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 our affairs, all of our assets and funds remaining after the
payment of all debts and other liabilities, shall be distributed, pro rata,
among holders of our common stock. Holders of our common stock are not entitled
to preemptive or subscription or conversion rights, and there are no redemption
or sinking fund provisions applicable to our common stock. All outstanding
shares of our common stock are, and the shares of our 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 completion 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 us and automatically converted, on the same terms (except with
respect to actual number of shares of our common stock underlying the warrants
and the exercise prices thereof), into a warrant to purchase shares of our
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.
77
<PAGE>
The exercise prices of the warrants were determined by negotiation and
should not be construed to imply that any price increases in our securities
will occur. We have reserved from its authorized but unissued shares a
sufficient number of shares of our common stock for issuance upon the exercise
of the warrants. Upon notice to the warrantholders, we have 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 our company. 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 our capital structure. Also, the warrants
issued to Sirrom entitle Sirrom to participate in rights offerings made to our
stockholders.
Certain warrantholders are entitled to certain "piggy-back" registration
rights enabling them, under certain conditions, to include the our common stock
underlying the warrants in a registration statement to register the our 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 us 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 completion of the Merger, a three-year redeemable warrant
from us for 27,000 shares of our common stock at an exercise price of $12.50
per share.
BUSINESS COMBINATION PROVISIONS
We are 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. We have not
sought to "elect out" of the statute and, therefore the restrictions imposed by
such statute apply to us.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
If we sell all 650,000 shares offered under this Prospectus, 2,457,926
shares of our common stock will be outstanding. Of that amount, 2,066,828 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 our "affiliates," as defined in Rule 144 of the Securities
Act ("Rule 144").
RESTRICTED SHARES
Upon completion of the Merger, the Restructuring Merger and this offering,
391,098 shares of our 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.
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<PAGE>
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned his shares of
our 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 our common stock (approximately
24,578 shares assuming all shares offered under this Prospectus are sold) or
(ii) the average weekly trading volume in the our common stock during the four
calendar weeks preceding each such sale. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" 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 completion of the Merger and this offering, it is
intended that we and our executive officers and directors, who beneficially own
391,098 shares of our common stock and options, warrants and rights to purchase
an aggregate of 335,379 shares of our common stock will enter into lock-up
agreements. The lock-up agreements will prohibit those stockholders from,
directly or indirectly, without our prior written consent, offering, selling or
otherwise disposing of any shares of our common stock, options or warrants to
acquire shares of our common stock, or any securities exercisable for or
convertible into our common stock for a period of 180 days following the date
of this Prospectus.
WARRANTS
Upon completion of the Merger and this offering, there will be outstanding
warrants to purchase a total of 303,869 shares of our 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 277,400 warrants will be exercisable at prices ranging
from $.05 per share to $7.125 per share. After the expiration of the lock-up
agreements, we intend to register the common stock underlying the warrants for
sale under the Securities Act by the holders of the warrants.
OPTIONS
Upon completion of the Merger and this offering, there will be outstanding
options to purchase a total of 116,128 shares of our common stock, all of which
will be exercisable at exercise prices ranging from $1.5625 to $18.75 per
share. Further, we 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 our common stock underlying options. Shares covered by these
registration statements will thereupon be eligible for sale in the public
market.
DEBENTURES
Upon completion 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 our common stock.
PREFERRED STOCK OF ELECTRO
Upon completion 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 our common stock. The number of shares to be
issued upon conversion is derived by dividing $1,000,000 by the conversion
price. The
79
<PAGE>
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 our common stock. See "Merger--
Redemption of the T Partnership Debt" and "Certain Transactions--Electro."
REGISTRATION RIGHTS
Following the completion of the Merger and this offering and after
expiration of the lock-up agreements, we intend to register under the
Securities Act a total of 598,384 shares of our common stock underlying
currently outstanding warrants and other derivative securities. However, prior
to effecting such registration, if we propose to register any of our securities
under the Securities Act, either for our 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
We are offering a minimum of 390,245 shares ("Minimum Offering") and a
maximum of 650,000 shares ("Maximum Offering") of our common stock. The
estimated price range per share is $5.125 to $6.125. We anticipate that we will
receive gross proceeds of $2.0 million to $3.3 million from this offering,
depending on the offering price and the number of shares sold. Our common stock
is being offered on a "best efforts" basis through this Prospectus only.
Payment for subscriptions of our common stock offered hereby are due in full
upon subscription. Subscriptions 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 on or
before 30 days from the date of this Prospectus if at least the Minimum
Offering is sold, unless extended by us for an additional period not to exceed
30 days (the "Offering Period"). We are 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.
Once the Minimum Offering has been sold and all other Closing Conditions
(as defined immediately below) have been satisfied, we will conduct an initial
closing on the sale of shares of our common stock comprising the Minimum
Offering contemporaneously with the closing of the Restructuring and the
Merger. We will hold a subsequent closing at such time as subscriptions for up
to the Maximum Offering have been accepted by us, if the Offering Period has
not expired. The Escrow Agent will not release the funds relating to the
Minimum Offering held in the Escrow Account to us unless and until the
following conditions have been satisfied on or prior to the termination of the
Offering Period:(i) a minimum of 390,245 shares of our 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 and completed; (iii) the
Reverse Split and the Restructuring Merger shall have been approved, adopted
and completed; (iv) we shall have secured a minimum of $4.0 million in
financing, through a combination of the proceeds of this offering and a loan;
and (v) all other conditions to the Restructuring Merger and the Merger shall
have been satisfied (collectively, the "Closing Conditions"). See
"MERGER--Conditions to the Merger" and "RESTRUCTURING MERGER--Conditions to the
Restructuring Merger." All shares of our 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 termination of the Offering Period, 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 us and allocated to the payment of the Escrow Agent's fees and
costs. In the event that the Minimum Offering is sold and all of the other
Closing Conditions have been satisfied on or before the termination of the
Offering Period, the
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<PAGE>
Escrow Agent will disburse the funds held in the Escrow Account to us
immediately after the filing of the Certificate of Merger with the Secretary of
State of the State of New Jersey relating to the Merger. Once released, the
funds will be used as described in the section entitled "Use of Proceeds."
Upon the effective date of this Prospectus, we expect to engage the
assistance of independent broker-dealers (the "Selected Dealers") who are
members of the National Association of Securities Dealers, Inc. (the "NASD") to
sell the shares of our common stock offered hereby and to accept orders for the
shares. Payment for the purchase price of shares of our common stock sold
directly by us 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 our common stock sold through the Selected
Dealers shall be paid for in the normal and customary manner for such
transactions to each respective Selected Dealer, and will be delivered by such
Selected Dealer to the Escrow Agent by wire transfer, immediately upon receipt
from subscribers. In either case, all payments for the purchase price of our
common stock sold pursuant to this offering must be accompanied by a completed
subscription agreement. We reserve the right to reject any offer of
subscription in whole or in part until the date the shares purchased thereunder
are issued. If all or part of a subscription is not accepted by us, all
subscription funds relating to the unaccepted portion will be promptly returned
to the subscriber without interest or deduction.
This is a self-underwritten offering, and no officer or director of our
company will receive compensation or commission from sales of our common stock
pursuant to this offering. Our officers and directors are indemnified through
our 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 we engage any Selected Dealers to assist us in this
offering, we plan to pay sales commissions to such Selected Dealers of 10%
percent, and a non-accountable expense allowance of 3% of the offering purchase
price of our common stock sold by them. The Selected Dealers will not receive
selling commissions with respect to our common stock sold by us or our officers
or directors. Further, our company 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. We will execute selected
dealer agreements with the Selected Dealers ("Selected Dealer Agreements");
however, such Selected Dealers will be under no obligation to sell any or all
of the our common stock offered hereby. Any broker-dealer that sells securities
in this offering may be deemed an underwriter as defined in Section 2(11) of
the Securities Act. We have not currently entered into any Selected Dealer
Agreements with the Selected Dealers. There is no assurance that, even if any
Selected Dealer sells our 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 our common stock to be immediately forwarded to the
Escrow Agent.
We have engaged the services of Ross, Forster, Scillia & Brooks, Inc.
("Ross"), a NASD registered broker-dealer, for assistance in soliciting an
underwriter and book managers and in coordinating the syndicate of Selected
Dealers. To date, no fees have been paid to Ross for these services or any
other investment banking services related to this offering. Any fees to be paid
to Ross for investment banking services related to this offering will be paid
from the commissions paid to the Selected Dealers. As of October 31, 1998,
Cardiac has paid to Ross approximately $42,000 in fees for services relating to
debt restructuring and merger related activities.
We haven't yet applied for acceptance to trade our common stock on the
Philadelphia Stock Exchange or other regional exchange, but we expect to do so
by November 13, 1998. We cannot assure you that our 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.
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<PAGE>
Prior to the offering, there has been no public market for our common
stock. Accordingly, we arbitrarily determined the public offering price based
primarily on a capitalization analysis of comparable companies. The other
companies we reviewed with similar markets and products had market
capitalizations which were on average greater than our anticipated range of
market capitalization of approximately $12.5-$15.0 million subsequent to this
offering. Based on the approximately 2,310,000 shares of common stock we will
have outstanding on a non-diluted basis after the completion of this offering,
we estimated a public offering price of approximately $5.00-$6.00 per share.
Among the factors we considered in our comparison of similar companies were the
nature of a company's products, both those currently available and those
expected to be marketed in the near future, results of operations, an estimate
of business potential and the experience of the management team. We also
considered the economics of the industry in general, the general condition of
the equities market, and the market conditions for new offerings of securities.
We cannot assure you that any active trading market will develop for our common
stock or as to the price at which our common stock may trade in the public
market from time to time subsequent to the offering made hereby.
The shares of Cardiac Common Stock are traded over-the-counter under the
symbol "CDCS." The shares of Electro Common Stock are traded over-the-counter
under the symbol "ECTH." The following table sets forth, for the periods
indicated, the high and low bid prices of Cardiac Common Stock and Electro
Common Stock, as reported in published financial sources. The quotations
reflect prices between dealers in securities, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
CARDIAC COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal year ended March 31, 1999 ..........
Third quarter(1) ........................ 3/8 5/16
Second quarter .......................... 11/32 9/32
First quarter ........................... 13/32 11/32
Fiscal year ended March 31, 1998 ..........
Fouth quarter ........................... 9/16 13/32
Third quarter ........................... 11/8 9/16
Second quarter .......................... 15/16 15/32
First quarter ........................... 17/32 3/4
Fiscal year ended March 31, 1997 ..........
Fourth quarter .......................... 17/16 13/16
Third quarter ........................... 13/4 13/8
Second quarter .......................... 23/4 11/2
First quarter ........................... 31/4 2
</TABLE>
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ELECTRO COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
Fiscal year ended August 31, 1999 ..........
First quarter(1) ......................... 15/16 5/32
Fiscal year ended August 31, 1998 ..........
Fouth quarter ............................ 1/2 3/8
Third quarter ............................ 9/16 3/8
Second quarter ........................... 1/2 3/8
First quarter ............................ 47/64 1/2
Fiscal year ended August 31, 1997 ..........
Fourth quarter ........................... 15/16 5/16
Third quarter ............................ 11/16 11/16
Second quarter ........................... 13/8 13/16
First quarter ............................ 113/16 47/64
Fiscal year ended August 31, 1996 ..........
Fourth quarter ........................... 27/8 11/16
Third quarter ............................ 27/16 11/4
Second quarter ........................... 19/16 7/16
First quarter ............................ 15/16 7/16
</TABLE>
- ----------------
(1) Through November 5, 1998.
On November 5, 1998, the latest practicable date prior to the printing of
this Prospectus, the closing bid prices per share of Cardiac Commmon Stock and
Electro Common Stock were $0.31 and $0.27, respectively. Electro and Cardiac
stockholders are advised to obtain current market quotations for Cardiac Common
Stock and Electro Common Stock.
As of October 31, 1998 there were 579 record holders of Cardiac Common
Stock and 699 record holders of Electro Common Stock.
Neither Electro nor Cardiac has ever paid a dividend on its common stock
and we do not anticipate paying dividends on our common stock in the forseeable
future.
LEGAL MATTERS
The validity of our common stock being offered hereby will be passed upon
for us by Greenberg Traurig, P.A., Orlando, Florida. Greenberg has warrants to
purchase an aggregate of 28,000 shares of our 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) 7,000 of which are
exercisable at $1.775 per share (expires September 30, 2003) and 7,000 of which
are exercisable at $1.575 per share (expres October 31, 2003). Greenberg has
not exercised any of its warrants to purchase our common stock, which are
currently exercisable.
EXPERTS
The financial statements of our company 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.
83
<PAGE>
The financial statements and schedule of Electro as of August 31, 1998 and
1997, and for each of the years in the three-year period ended August 31, 1998
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, 1998 financial statements contains an explanatory paragraph that
states that Electro's recurring losses from operations, has a net capital
deficiency and limited working capital resources raise substantial doubt about
Electro's ability to continue as a going concern. The financial statements and
financial statement schedule 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 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.
84
<PAGE>
CATHETER TECHNOLOGY GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
------------
<S> <C>
CATHETER TECHNOLOGY GROUP, INC.:
Independent Auditors' Report ...................................................... F-2
Balance Sheet at September 9, 1998 ................................................ F-3
Note to Financial Statement ....................................................... F-4
CARDIAC CONTROL SYSTEMS, INC.:
Balance Sheet at September 30, 1998 (Unaudited) ................................... F-5
Statements of Operations and Accumulated Deficit for the Three Months
and Six Months Ended September 30, 1998 and 1997 (Unaudited) .................... F-6
Statements of Cash Flows for the Six Months Ended
September 30, 1998 and 1997 (Unaudited) ......................................... F-7
Notes to Financial Statements ..................................................... F-8 - F-12
Report of Independent Certified Public Accountants ................................ F-13
Balance Sheet at March 31, 1998 ................................................... F-14 - F-15
Statements of Operations and Accumulated Deficit 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:
Independent Auditors' Report ...................................................... F-34
Balance Sheets--August 31, 1998 and 1997 .......................................... F-35
Statements of Operations--Years Ended August 31, 1998, 1997 and 1996 .............. F-36
Statements of Stockholders' Deficiency/Equity--
Years Ended August 31, 1998, 1997 and 1996 ...................................... F-37
Statements of Cash Flows--Years Ended August 31, 1998, 1997 and 1996 .............. F-38
Notes to Financial Statements ..................................................... F-39 - F-50
Valuation and Qualifying Accounts ................................................. F-51
</TABLE>
F-1
<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-2
<PAGE>
CATHETER TECHNOLOGY GROUP, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 9,
1998
-------------
<S> <C>
ASSETS
Cash ........................................................................ $10
===
LIABILITIES
Common stock, $.10 par value, 30,000,000 shares authorized, 100 shares issued $10
===
</TABLE>
See accompanying note to financial statement.
F-3
<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-owned 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-4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 101,022
Accounts and notes receivable .......................................... 483,134
Inventories ............................................................ 1,218,337
Prepaid expenses ....................................................... 224,347
-------------
TOTAL CURRENT ASSETS .................................................. 2,026,840
-------------
PROPERTY, PLANT AND EQUIPMENT (NET) ..................................... 1,864,763
-------------
OTHER ASSETS:
Deferred financing costs, less accumulated amortization of $307,444..... 391,003
Deferred license fees, less accumulated amortization of $63,333......... 136,667
Deferred merger costs .................................................. 684,538
Other .................................................................. 77,591
TOTAL OTHER ASSETS .................................................... 1,289,799
-------------
TOTAL ASSETS .......................................................... $ 5,181,402
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 1,199,466
Due to related party ................................................... 101,400
Accrued compensation ................................................... 455,563
Accrued royalties ...................................................... 192,468
Other accrued expenses ................................................. 142,567
Deposits payable ....................................................... 342,569
Notes and debt obligations payable within one year ..................... 1,422,504
-------------
TOTAL CURRENT LIABILITIES ............................................. 3,856,537
8% CONVERTIBLE DEBENTURES ................................................ 300,000
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR ........................ 1,502,631
OTHER LIABILITIES ........................................................ 87,413
-------------
TOTAL LIABILITIES ..................................................... 5,746,581
-------------
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 .................................................... (23,167,850)
-------------
TOTAL STOCKHOLDERS' EQUITY ............................................ (565,179)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 5,181,402
=============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUE
Net sales ......................... $ 764,963 $ 1,041,490 $ 1,385,740 $ 1,893,779
Royalty income .................... -- 598,500 -- 1,295,625
------------- ------------- ------------- -------------
Total revenue .................... 764,963 1,639,990 1,385,740 3,189,404
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of products sold ............. 451,730 648,245 777,819 1,152,060
Selling, general and
administrative expenses ......... 454,421 613,053 923,513 1,356,125
Engineering, research and
development expenses ............ 317,502 420,419 652,417 878,692
------------- ------------- ------------- -------------
Total cost and expenses .......... 1,223,653 1,681,717 2,353,749 3,386,877
------------- ------------- ------------- -------------
OPERATING LOSS ..................... (458,690) (41,727) (968,009) (197,473)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest income ................... 475 1,969 792 7,952
Interest expense .................. (142,411) (128,421) (298,706) (211,006)
Other income ...................... -- 940 -- 940
------------- ------------- ------------- -------------
Total other expenses ............. (141,936) (125,512) (297,914) (202,114)
------------- ------------- ------------- -------------
NET LOSS ........................... (600,626) (167,239) (1,265,923) (399,587)
ACCUMULATED DEFICIT--
BEGINNING OF PERIOD ............... (22,567,224) (20,894,565) (21,901,927) (20,662,217)
------------- ------------- ------------- -------------
ACCUMULATED DEFICIT--
END OF PERIOD ..................... $ (23,167,850) (21,061,804) $ (23,167,850) $ (21,061,804)
============= ============= ============= =============
NET LOSS PER COMMON SHARE .......... $ (0.23) $ (0.06) $ (0.48) $ (0.15)
============= ============= ============= =============
AVERAGE NUMBER OF SHARES
OUTSTANDING ....................... 2,648,739 2,646,866 2,648,739 2,630,405
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER
30,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................... $ $
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ......................................... 214,994 218,417
Securities received in lieu of insurance rebate ....................... -- (799)
Stock issued for payment of directors' fees ........................... -- 34,000
Cash provided by (used for):
Accounts receivable .................................................. 190,539 (283,781)
Inventories .......................................................... 205,360 (147,400)
Prepaid expenses ..................................................... (16,783) (142,584)
Accounts payable ..................................................... 172,047 (148,405)
Due to related parties ............................................... (5,622) --
Accrued interest ..................................................... 32,126 11,096
Accrued compensation ................................................. 201,475 13,228
Accrued compensated absences ......................................... (3,824) 10,111
Deposits payable ..................................................... (9,912) 99,559
Other accrued expenses ............................................... 23,582 (42,749)
Other liabilities .................................................... 8,741 10,243
---------- ----------
Net cash (used for) operating activities ................................ (253,200) (768,651)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .............................. (893) (288,643)
Deferred merger costs .................................................. (364,089) --
Increase in other assets ............................................... -- (6,124)
---------- ----------
Net cash (used for) investing activities ................................ (364,982) (294,767)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of stock
warrants, net of issuance costs ...................................... -- 8,928
Proceeds from notes and debt obligations payable ....................... -- 124,343
Repayment of notes and debt obligations payable ........................ -- (193,983)
Proceeds from issuance of 8% convertible debenture ..................... 300,000 --
Net borrowings on line of credit ....................................... 16,529 1,346,282
Net proceeds from short term debt ...................................... 385,084 --
Repayments of long term debt ........................................... (3,821) (1,394)
Deferred financing costs ............................................... -- (226,616)
---------- ----------
Net cash provided by financing activities ............................... 697,792 1,057,560
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................................... 79,610 (5,858)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 21,412 185,463
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 101,022 $ 179,605
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period ........................................ $ 182,236 $ 148,732
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Reduction in accrued compensation in exchange for common stock ......... -- $ 34,000
========== ==========
Reduction in accounts payable in exchange for common stock ............. -- $ 8,928
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-7
<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 September 30, 1998, the related statements of operations and
accumulated deficit for the three months and six months ended September 30,
1998 and 1997, and the statements of cash flows for the six months ended
September 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 for the three months
and six months ended September 30, 1998 and 1997 and the cash flows for the six
months ended September 30, 1998 and 1997.
Certain reclassifications have been made to the unaudited financial
statements previously reported for the three months and six months ended
September 30, 1997 to conform with classifications used in the unaudited
financial statements for the three months and six months ended September 30,
1998.
The accompanying unaudited financial statements as of September 30, 1998
and for the three months and six months ended September 30, 1998 and 1997
should be read in conjunction with the Company's audited financial statements
for the year ended March 31, 1998 contained in the Company's annual report on
Form 10-KSB.
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 six months ended
September 30, 1998 of $1,265,923. 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 and six months ended September 30, 1998 and
1997, as their effect on the loss per share is anti-dilutive.
The FASB has issued SFAS No. 128, "Earnings per Share," which provides
guidance for computing and presenting earnings per share (EPS). This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings per Share." This statement, when adopted, is not expected to have
a material impact on the Company.
F-8
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVENTORIES
Inventories at September 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
<S> <C>
Raw materials and supplies .......... $ 707,657
Work-in-process ..................... 297,785
Finished goods ...................... 249,843
----------
1,255,285
Reserve for obsolescence ............ (36,948)
----------
$1,218,337
==========
</TABLE>
Finished goods inventories include approximately $91,385 of products
consigned to customers and independent sales representatives at September 30,
1998.
NOTE 4--ACCOUNTS PAYABLE
On August 27, 1998, the Company executed a Promissory Note in favor of
Greenberg Traurig, P.A. in the sum of $199,000, due and payable, together with
interest at a rate of 9% per annum, at any time on or after the earlier of the
effective time of the merger with Electro-Catheter Corporation, a New Jersey
corporation ("Electro"), or November 10, 1998. The Company granted to Greenberg
Traurig, P.A. a warrant to purchase 35,000 shares of the Company's common stock
at an exercise price of $0.375 per share, exercisable immediately and expiring
on July 31, 2003 and, in the event that any amount owed under the Promissory
Note shall remain outstanding on August 31, 1998, or on the last day of any
month thereafter, the grant of a right to purchase an additional 35,000 shares
of the Company's common stock expiring five years from the date of grant at an
exercise price per share equal to the average of the bid and asked price on the
date of grant.
NOTE 5--NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
<S> <C>
Sirrom mortgage note, net of discount(A) .......... $1,494,391
Coast Business Credit(B) .......................... 1,029,826
Minrad, Inc. Promissory note(C) ................... 200,000
International Holdings, Inc.(D) ................... 165,000
Other ............................................. 35,918
----------
2,925,135
Amount payable within one year .................... 1,422,504
----------
Amount payable after one year ..................... $1,502,631
==========
</TABLE>
- ----------------
(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 subordinated 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
F-9
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES AND DEBT OBLIGATIONS PAYABLE--(CONTINUED)
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 $5,609 at September
30, 1998.
(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, The Bridge Loan is repayable on November 30,
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.
(C) On July 30, 1998, and August 13, 1998, the Company executed promissory
notes in favor of Minrad, Inc. ("Minrad") in the amount of $75,000 and
$125,000, respectively (collectively, the "Minrad Note"). The Minrad Note
bears 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 (10) days after written demand from Minrad.
(D) On August 26, 1998, the Company 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, the Company 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, the Company has agreed to repay the IHI Note on or
before October 25, 1998. If the Company 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, the Company 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, the Company has agreed to issue up to four
warrants to IHI under certain conditions, each giving IHI the right to
purchase 50,000 shares of the Company's common stock at an exercise price of
$.01 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 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 common stock of the Company at an
exercise price of $.01 per share. As additional consideration for the IHI
Note, IHI received a warrant to purchase 330,000 shares of the Company's
Common Stock at an exercise price of $0.128 per share, exercisable at any
time on or before 5:00 p.m. Eastern Standard Time on August 26, 2003.
Aggregate notes and debt obligations outstanding at September 30, 1998
mature as follows: 1999--$1,422,504; 2000--$3,343; 2001--$1,498,868;
2022--$420.
NOTE 6--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 8%
convertible debentures, convertible to shares of
F-10
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--8% CONVERTIBLE DEBENTURES--(CONTINUED)
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 common 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 common stock at $5.00 a
share was reduced to $0.40 a share. The Company is attempting to obtain an
additional $250,000 on similar terms.
NOTE 7--PROBABLE MERGER
On October 27, 1997, the Company entered into a letter of intent with
Electro 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"). Prior to consummation of the
Merger, the Company will effectuate a 1 for 5 reverse stock split (the "Reverse
Split") whereby the number of outstanding shares of Company Common Stock will
be reduced to approximately 530,000 shares. Simultaneously with the
consummation of 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, 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
CTG 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-11
<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.
BDO SEIDMAN, LLP
Orlando, Florida
June 15, 1998
F-12
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------
<S> <C>
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
=============
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
=============
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-13
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
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
============ ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to financial statements.
F-14
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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-15
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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
============ ==========
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-16
<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 COSTS AND FEES
Deferred financing costs related to a mortgage note payable and other loan
agreements are 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 ASSETS
The Company evaluates impairment of long-lived 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 FOREIGN CURRENCY
The financial statements of the non-U.S. division 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 RECOGNITION
Sales revenue and cost of sales are recognized as 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
F-17
<PAGE>
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.
ENGINEERING, RESEARCH AND DEVELOPMENT COSTS
The Company capitalizes the cost of materials and equipment acquired or
constructed for research and 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 FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial 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.
F-18
<PAGE>
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.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting 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-19
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
CardiacControlSystems,Inc. (the "Company") 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 MANAGEMENT'S PLANS
As shown in the accompanying financial statements, 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-20
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable at March 31, 1998 are summarized as follows:
<TABLE>
<S> <C>
Trade accounts receivable ............... $677,281
Other accounts receivable ............... 2,265
--------
679,546
Allowance for doubtful accounts ......... (5,873)
--------
$673,673
========
</TABLE>
4. INVENTORIES
Inventories at March 31, 1998 consist of the following:
<TABLE>
<S> <C>
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
==========
</TABLE>
Finished goods inventories include approximately $192,000 of products
consigned to customers and independent sales representatives at March 31, 1998.
5. PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment at March 31, 1998 are as
follows:
<TABLE>
<S> <C>
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
============
</TABLE>
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.
F-21
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS--(CONTINUED)
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.
7. LONG-TERM DEBT
Long-term debt consists of the following at March 31, 1998:
<TABLE>
<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:
<TABLE>
<S> <C>
1999 ......... $1,021,682
2000 ......... 1,485,642
2001 ......... 3,539
2002 ......... 2,539
----------
$2,513,402
==========
</TABLE>
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-22
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT--(CONTINUED)
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-23
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES EQUITY--(CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
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)
</TABLE>
F-24
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES EQUITY--(CONTINUED)
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 OUSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -------------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICE MARCH 31, 1998 REMAINING CONTRACTUAL LIFE EXERCISE PRICES 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-25
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES EQUITY--(CONTINUED)
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.
F-26
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES EQUITY--(CONTINUED)
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:
<TABLE>
<S> <C>
Common stock options:
1987/1992 Stock Option Plan ......... 396,407
Non-plan ............................ 31,318
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
-------
</TABLE>
9. INCOME TAXES
Significant components of the Company's deferred income tax assets and
liabilities at March 31, 1998 are as follows:
<TABLE>
<S> <C>
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 ........................... $ --
</TABLE>
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-27
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
GEOGRAPHIC AREA 1998 1997
- --------------------------- ------------- -------------
<S> <C> <C>
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
========== ==========
</TABLE>
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.
11. COMMITMENTS AND CONTINGENCIES
PATENT LICENSING AGREEMENTS
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
F-28
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 EVENT
During April 1998, the Company issued $300,000 of 8% 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.
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-29
<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 also have 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the years in the three-year period ended August 31,
1998 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, has a net capital deficiency 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 and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
Short Hills, New Jersey
October 30, 1998
F-30
<PAGE>
ELECTRO-CATHETER CORPORATION
BALANCE SHEETS
AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 168,762 $ 98,127
Accounts receivable, less allowance for doubtful accounts of
$213,589 in 1998 and $152,070 in 1997.............................. 723,753 988,859
Inventories ......................................................... 1,253,456 1,242,367
Prepaid expenses and other current assets ........................... 68,538 168,781
------------- -------------
Total current assets ............................................... 2,214,509 2,498,134
Property, plant and equipment, net ................................... 653,452 777,663
Deferred merger costs ................................................ 234,253 --
Other assets, net .................................................... 80,733 97,275
------------- -------------
Total assets ....................................................... $ 3,182,947 $ 3,373,072
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current installments of capitalized lease obligations ............... 73,279 50,734
Accounts payable - trade ............................................ 774,200 566,816
Accrued expenses .................................................... 341,646 461,118
Accrued merger costs ................................................ 181,319 --
Accrued interest due to The T Partnership, a related party .......... 293,764 17,472
Accrued litigation expenses ......................................... 265,134 443,820
------------- -------------
Total current liabilities .......................................... 1,929,342 1,539,960
Subordinated debentures and promissory note due to
The T Partnership, a related party .................................. 2,247,125 1,747,125
Capitalized lease obligation, excluding current installments ......... 196,614 222,277
------------- -------------
Total liabilities .................................................. 4,373,081 3,509,362
------------- -------------
STOCKHOLDERS' DEFICIENCY:
Common stock $.10 par value
Authorized 20,000,000 shares; issued 6,390,389 in 1998
and 6,383,611 in 1997 ............................................ 639,039 638,361
Additional paid-in capital ......................................... 10,704,803 10,682,008
Accumulated deficit ................................................ (12,533,976) (11,456,659)
------------- -------------
Total stockholders' deficiency .................................... (1,190,134) (136,290)
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' deficiency ..................... $ 3,182,947 $ 3,373,072
============= =============
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- -------------
<S> <C> <C> <C>
Net revenues, including research and development revenue of
$0 in 1998, $544,293 in 1997 and $155,707 in 1996......... $ 5,347,042 $ 6,648,438 $7,362,436
Cost of goods sold ......................................... 3,608,923 4,041,486 4,079,502
------------ ------------ ----------
Gross profit ........................................... 1,738,119 2,606,952 3,282,934
Operating expenses:
Selling, general and administrative ...................... 1,974,468 2,384,127 2,954,991
Research and development ................................. 527,007 881,728 1,010,073
------------ ------------ ----------
Operating loss ......................................... (763,356) (658,903) (682,130)
Other income (expense):
Interest income .......................................... -- -- 86
Interest expense ......................................... (313,961) (249,384) (210,896)
Litigation expenses ...................................... -- (446,655) --
------------ ------------ ----------
Net loss ............................................... $ (1,077,317) $ (1,354,942) $ (892,940)
============ ============ ==========
Net loss per basic and diluted common share .............. $ (0.17) $ (0.21) (0.14)
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIENCY/EQUITY
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIENCY/EQUITY
----------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C>
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)
======== =========== ============= ============
Employee stock plan ............................... 678 1,483 -- 2,161
Amortization of deferred compensation
expense on stock options ......................... -- 21,312 -- 21,312
Net loss .......................................... -- -- (1,077,317) (1,077,317)
-------- ----------- ------------- ------------
Balances at August 31, 1998 ....................... $639,039 $10,704,803 $ (12,533,976) $ (1,190,134)
======== =========== ============= ============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities: .....................
Net loss ................................................. $ (1,077,317) $ (1,354,942) $ (892,940)
Reconciliation of net loss to
net cash used in operating activities:
Depreciation and amortization ........................... 126,295 145,614 130,524
Amortization of deferred charges ........................ 8,333 8,333 8,333
Changes in assets and liabilities:
Decrease in accounts receivable, net ................... 265,106 27,342 190,087
(Increase) decrease in inventories ..................... (11,089) 619,812 230,900
Decrease (increase) in prepaid expenses and
other current assets ................................ 100,243 (104,437) (21,314)
Decrease in other assets, net .......................... 8,209 17,799 4,207
Decrease (increase) in deferred revenues ............... -- (144,293) 144,293
Increase in deferred merger costs ...................... (52,934) -- --
Increase (decrease) in accounts payable
and accrued expenses ................................ 255,981 747,747 (340,700)
------------ ------------ ----------
Net cash used in operating activities ..................... (377,173) (37,025) (546,610)
------------ ------------ ----------
Cash flows used in investing activities--
Purchases of property, plant and equipment ............... (2,085) (115,292) (34,167)
------------ ------------ ----------
Cash flows from financing activities:
Net proceeds from issuance of subordinated debentures,
promissory notes and warrants .......................... 500,000 100,000 547,125
Proceeds from exercise of stock options .................. -- -- 20,563
Proceeds from employee stock purchase plan ............... 2,161 3,682 1,066
Repayment of debt ........................................ (52,268) (128,521) (17,079)
------------ ------------ ----------
Net cash provided by (used in) financing activities ...... 449,893 24,839 551,675
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents ..... 70,635 (177,156) (29,102)
Cash and cash equivalents at beginning of year .......... 98,127 275,283 304,385
------------ ------------ ----------
Cash and cash equivalents at end of year ................ $ 168,762 $ 98,127 $ 275,283
============ ============ ==========
Interest paid ........................................... $ 308,962 $ 241,049 199,724
Property, plant and equipment acquired under
capitalized lease obligations ......................... $ 49,150 $ 256,287 $ 49,268
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS
Electro-Catheter Corporation ("Company") has been in business for over 37
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 where the right to return exists, Revenue under service
contracts are accounted for as the services are performed.
(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, 1998, 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.
Betterments are capitalized. Leasehold improvements are amortized over the
term of the lease or the useful life of the asset, whichever is shorter.
F-35
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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
Basic and Dilutive loss per share is computed in accordance with SFAS No.
128 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 diluted loss
per share because the result of their inclusion would be anti-dilutive (see
notes 7 and 10).
F-36
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The weighted average number of shares of common stock used in the
computation of loss per share was approximately 6,388,000 in 1998, 6,388,000 in
1997 and 6,354,000 in 1996.
(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 not 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, current liabilities and subordinated debt 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 $1,077,317, $1,354,942 and $892,940 for the
years ended August 31, 1998, 1997 and 1996, respectively, and at August 31,
1998 had an accumulated deficit of $12,533,976. 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 contemplated merger between the Company
and Cardiac Control Systems, Inc. ("CCS") is contingent upon raising sufficient
capital to support each Company's product development efforts (see note 16).
However, there can be no assurance that the merger will occur or the Company
will be able to generate the funding required.
(3) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Finished goods .................. $ 398,503 $ 481,660
Work-in-process ................. 611,300 490,621
Materials and supplies .......... 243,653 270,086
---------- ---------
$1,253,456 1,242,367
========== =========
</TABLE>
F-37
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land ..................................................... $ 38,400 $ 38,400
Building ................................................. 153,597 153,597
Building improvements .................................... 993,168 993,168
Equipment ................................................ 2,252,701 2,307,607
Office furniture and equipment ........................... 534,232 534,232
Leasehold improvements ................................... 340,382 340,382
Sales equipment and diagnostic computers ................. 589,348 587,348
Capitalized leases ...................................... 360,545 305,555
--------- ---------
5,262,373 5,260,289
Less accumulated depreciation and amortization .......... 4,608,921 4,482,626
--------- ---------
Net property, plant and equipment ........................ $ 653,452 777,663
========= =========
</TABLE>
(5) ACCRUED EXPENSES
The components of accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1998
----------- -----------
<S> <C> <C>
Accrued salaries, wages and payroll taxes .......... $194,087 $287,933
Other expenses .................................... 147,559 173,185
-------- --------
$341,646 $461,118
======== ========
</TABLE>
(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 THE T PARTNERSHIP
On October 11, 1993, the Company entered into an agreement with The T
Partnership, a related party, to borrow up to $1,000,000. Ervin Schoenblum, the
Company's Acting President and a 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. The Company repaid $100,000 in
fiscal year 1997. In September 1997, another $100,000 was advanced under this
agreement. In December 1997, January 1998, May 1998 and in July 1998 the
Company borrowed additional amounts from The T Partnership, in each case in the
amount of $100,000, under promissory notes due in September 1999. The total
indebtedness due to The T Partnership at August 31, 1998 was $2,247,125.
F-38
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) SUBORDINATED DEBENTURES DUE TO THE T PARTNERSHIP--(CONTINUED)
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. As of August 31, 1998 the Company owes The T
Partnership $293,764 for monthly interest payments dating back to July 1997.
The Company has sent the required interest payments to The T Partnership. The T
Partnership has chosen not to tender such checks for payment. Therefore, the
Company has considered the interest payments unpaid at August 31, 1998 and has
reflected the amount as a liability on the accompanying 1998 balance sheet.
Interest payments under this agreement continue to be required monthly,
however, The T Partnership has agreed that the failure to make such monthly
payments will not constitute an event of default, as defined in the agreement,
and has agreed not to request acceleration of payment of this outstanding debt
for the fiscal years 1997 and 1998 interest payments or, further, for any
fiscal year 1999 interest payments. Principal payments of $25,000 scheduled to
begin on September 1, 1996 have, pursuant to several waivers, with the latest
received in October 1998, been deferred to September 1, 1999. 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. The CCS merger agreement
contemplates that the total indebtedness outstanding and due to The T
Partnership plus interest accrued thereon (totaling approximately $2.5 million)
shall be redeemed at the merger effective time by: (a) the issuance by the
surviving subsidiary corporation in the merger (the "Surviving Subsidiary") 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 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 the new combined company's Common Stock; (b) the
delivery to The T Partnership of the new combined company's 9% conditional
promissory note in the amount of $1.0 million pursuant to which the new
combined company 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 the new combined company in an amount not to
exceed $1.3 million (which amount shall be the approximately remaining amount
of Electro-Catheter'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). As a result of the issuance of Series
A Preferred Stock, The T Partnership shall be entitled to receive dividends. In
addition, pursuant to the terms of the Merger Agreement, The T Partnership
shall be entitled to reimbursement for cash advances provided to the Company in
the amount of $200,000, or any greater amount as may be agreed to by the
Company and CCS, 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.
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, 1998, the Company was not in compliance with certain covenants.
However, in October 1998, The T Partnership agreed not to exercise its right to
accelerate the repayment of indebtedness through September 1, 1999 as a result
of non-compliance with the aforementioned covenant and agreed to defer the
principal payments due in the 1998 and 1999 fiscal years. The T Partnership has
also agreed to a modification to one of the financial covenants. The Company is
currently in compliance with such revised covenant.
F-39
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) SUBORDINATED DEBENTURES DUE TO THE T PARTNERSHIP--(CONTINUED)
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 1998 and 1997 balance sheets. The
warrants are immediately exercisable and expire on August 1, 2001. As of August
31, 1998 these warrants remain outstanding.
(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 balance sheets (see Note
4). The related obligations are also recorded in the accompanying balance
sheets 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 $265,863 and $264,867,
respectively, at August 31, 1998 and 1997.
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, 1998, are as follows:
<TABLE>
<S> <C>
1999 ............... $ 73,279
2000 ............... 377,227
2001 ............... 377,729
2002 ............... 338,501
2003 ............... 303,157
thereafter ......... $1,047,125
</TABLE>
(9) OTHER DEBT
The Company has borrowed $131,297 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 of $29,903 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.
F-40
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCK OPTIONS--(CONTINUED)
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 the Company's common stock,
affected 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.
A summary of all stock option activity follows:
<TABLE>
<CAPTION>
NUMBER OPTION
OF PRICE
SHARES PER SHARE TOTAL
---------- --------------- ---------
<S> <C> <C> <C>
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
======= ============ =======
Year ended August 31, 1998:
Cancelled or expired .................. 67,800 $ .81 - 2.25 67,261
Outstanding at August 31, 1998 ......... 283,400 $ .88 - 2.75 286,530
======= ============ =======
</TABLE>
Options to acquire 235,420 shares of common stock were exercisable at
August 31, 1998.
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
F-41
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCK OPTIONS--(CONTINUED)
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. No options were granted during 1998. 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
Net loss--as reported ................ $ (1,077,317) $ (1,354,942) $ (892,940)
Net loss--pro forma .................. (1,081,509) (1,357,590) (893,624)
Loss per share--as reported .......... $ (0.17) $ (0.21) $ (0.14)
Loss per share--pro forma ............ $ (0.17) (0.21) (0.14)
</TABLE>
In accordance with SFAS No. 123, pro forma net loss and loss per share
data reflect only options granted in 1996 and subsequent years.
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.
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 1998, 1997 and 1996, 6,778, 9,900, and 2,866 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, 1998, 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, also a member of the Company's Board of Directors, are
members of The T Partnership.
F-42
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(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 not be realized. The
valuation allowance for deferred tax assets as of August 31, 1998 was
$3,426,000 as compared to $3,197,000 at August 31, 1997. The net change in the
total valuation allowance for the year ended August 31, 1998 was an increase of
$229,000 as compared to an increase of $142,000 at August 31, 1997.
At August 31, 1998 and 1997, the tax effects of temporary differences that
give rise to the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventories ......................................................... $ 99,000 $ 93,000
Accounts receivable, due to allowance for doubtful accounts ......... 49,000 23,000
Contribution carryover .............................................. 25,000 25,000
Compensated absences ................................................ 31,000 31,000
Federal and state net operating loss carryforwards .................. 2,653,000 2,390,000
Research and development and investment tax credit
carryforwards ..................................................... 635,000 635,000
--------- ---------
Total gross deferred tax assets .................................... 3,492,000 3,197,000
Less valuation allowance ............................................ 3,426,000 3,137,000
--------- ---------
Net deferred tax assets ............................................. 66,000 60,000
--------- ---------
Deferred tax liabilities:
Excess of tax over financial statement depreciation ................. (66,000) (60,000)
--------- ---------
Net deferred tax .................................................... $ -0- -0-
========= =========
</TABLE>
At August 31, 1998, the Company had available federal net operating loss
carryforwards, research and development and investment tax credit carryforwards
that expire as follows:
<TABLE>
<CAPTION>
NET OPERATING RESEARCH
EXPIRATION LOSS AND INVESTMENT
DATE CARRYFORWARDS DEVELOPMENT CREDITS TAX CREDITS
- -------------------- --------------- --------------------- ------------
<S> <C> <C> <C>
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 -- --
2013 ......... 1,385,000 -- --
----------- ------- ------
Total .......... 14,970,000 557,000 78,000
</TABLE>
F-43
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(14) SEGMENT DATA
The Company operates in one business segment. Export sales were
approximately $1,559,000 in 1998, $1,828,000 in 1997 and $2,324,000 in 1996.
The major areas of export sales are as follows:
<TABLE>
<CAPTION>
REGION 1998 1997 1996
- --------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Asia ................... $401,447 $ 448,507 $ 459,947
Europe ................. 926,026 1,201,036 1,592,469
South America .......... 95,094 76,744 127,151
Other .................. 100,819 101,750 144,724
</TABLE>
(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 $108,000 in 1998, $105,000 in 1997 and $116,000 in
1996.
The following is a schedule of future minimum rental payments for
operating leases which expire through 2001:
<TABLE>
<S> <C>
1999 ............... $ 9,166
2000 ............... 5,016
2001 ............... 2,090
-------
$16,272
=======
</TABLE>
(b) In September 1997, a Superior Court jury in Middlesex County, New
Jersey 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.
On April 8, 1998, the Company entered into a 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 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.
(c) The Company is also 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 the outcome of
such claims and litigation will not have a material effect on the
Company's financial position and results of operations.
(d) The Company's products 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 the Company's facilities and practices as a result of which the FDA
issued a warning letter (the "FDA Warning Letter") regarding
noncompliance by Electro-Catheter Corporation with certain regulations
regarding current good manufacturing practices ("cGMP") in the
manufacture of its products. The areas of noncompliance include
Electro-Catheter Corporation'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-Catheter Corporation's
catheters and other quality assurance and record keeping requirements.
Electro-Catheter Corporation 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-Catheter Corporation's actions have
included the establishment of certain validation protocols, revisions of
the Company'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 had been made, not all
corrective actions had been completed. The Company is continuing in its
efforts to complete such actions and it is the Company's intention to
inform the FDA before the end of 1998 that it has completed such
F-44
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(15) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
actions and is ready for reinspection. There can be no assurance,
however, that the Company will be ready for such reinspection before the
end of 1998 nor that the Company will pass any such reinspection when it
occurs. The voluntary discontinuation of manufacturing of certain
products and the delay in sales of other products has adversely affected
sales by the Company. While the Company is currently under no
restrictions by the FDA regarding the manufacture or sale of its
products, the Company 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. Until all
corrective actions required under the FDA Warning Letter have been taken,
the FDA will not consider new products for approval. However, the
Company'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.
(e) Beginning in June 1998, international sales were adversely affected in
Europe (approximately 21% and 17% of total revenues for the fiscal years
1996 and 1997, respectively) as the Company was not able to obtain the CE
Mark certification on its products on a timely basis, in order to
continue to sell into this market. Several months ago, the Company and
CCS submitted an application requesting CE Mark certification for CCS to
sell the Company's steerable line of catheters, as manufacturer, with the
Company acting as vendor to CCS in such regard. The CE Mark certification
was granted on October 26, 1998, and issued in the name of CCS. Upon the
merger, the CE Mark will belong to CTG (see note 16). CCS and the Company
plan on having product with the CE Mark available for shipment in early
1999. Applications for the CE Mark for many products of the Company have
been submitted recently. However, there can be no assurance that the CE
Mark for the additional products will be obtained, that the merger
between CCS and the Company will be consummated or that the pre-June 1998
sales levels will be recaptured.
(16) THE PROPOSED MERGER
On January 20, 1998, the Company entered into an Agreement and Plan of
Reorganization with Cardiac Control Systems, Inc., 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,
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 (the "CTG Common Stock"). 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 become
stockholders of CTG. Pursuant to the restructuring, it is intended that CCS
will undergo a 1 for 5 reverse stock split reducing the number of shares of
common stock, $.10 par value, of CCS 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 consummation of the merger, CTG plans to issue stock in a public
offering. It is expected that the merger will be accounted for using the
purchase method of accounting as a reverse acquisition with the Company deemed
to be the accounting acquiror as its stockholders will receive the largest
portion of the voting rights in CTG. Accordingly, the Company has deferred
costs associated with the merger. If the merger is not consummated, such cost
will be recognized as expense in that period.
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
F-45
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(16) THE PROPOSED MERGER--(CONTINUED)
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.
The merger is scheduled to be completed on or about November 1998,
although there is no assurance the merger will be completed.
F-46
<PAGE>
SCHEDULE II
ELECTRO-CATHETER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
<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>
1998 Allowance for doubtful accounts ......... $152,070 71,228 9,709 213,589
1997 Allowance for doubtful accounts ......... $ 15,000 142,848 5,778 152,070
1996 Allowance for doubtful accounts ......... $ 76,796 39,383 101,179 15,000
</TABLE>
F-47
<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.
- --------------------------------------------------------------------------------
COMMON STOCK
MAXIMUM--650,000 SHARES
MINIMUM--390,245 SHARES
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.
<TABLE>
<S> <C>
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
============
</TABLE>
- ----------------
* Estimated expenses.
(1) Assumes gross offering proceeds of $3.3 million.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE>
ITEM 27. EXHIBITS
The following Exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED 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 September 23, Statement/Prospectus filed as part of a
1998 by and between Registrant, Cardiac Form S-4 Registration Statement, File
Control Systems, Inc. ("Cardiac") and CTG No. 333-65603 (thereafter referred to as the
Merger Sub, Inc. "Form S-4").
2.1 Agreement and Plan of Reorganization, Included as Appendix A in the Joint Proxy
dated as of January 20, 1998 among Cardiac, Statement/Prospectus in the Form S-4.
CCS Subsidiary, Inc. and Electro-Catheter
Corporation ("Electro").
2.2 First Amendment to Agreement and Plan of Included as Appendix A1 in the Joint Proxy
Reorganization, dated as of May 5, 1998. Statement/Prospectus in the Form S-4.
2.3 Second Amendment to Agreement and Plan Included as Appendix A2 in the Joint Proxy
of Reorganization, dated as of August 7, Statement/Prospectus in the Form S-4.
1998.
2.4 Third Amendment to Agreement and Plan Included as Appendix A3 in the Joint Proxy
of Reorganization, dated as of September 4, Statement/Prospectus in the Form S-4.
1998.
2.5 Form of Plan of Merger, Exhibit 1.2 to the Included as Exhibit 1.2 to Appendix A to
Agreement and Plan of Reorganization. the Joint Proxy Statement/Prospectus in the
Form S-4.
2.6 Form of Fourth Article to Certificate of Included as Exhibit 1.4 to Appendix A to
Incorporation of Electro, Exhibit 1.4 to the the Joint Proxy Statement/Prospectus in the
Agreement and Plan of Reorganization. Form S-4.
2.7 Form of Voting Agreement, Exhibit 5.1 to Included as Exhibit 5.1 to Appendix A to
the Agreement and Plan of Reorganization. the Joint Proxy Statement/Prospectus in the
Form S-4.
2.8 Form of Electro Affiliate Agreement, Included as Exhibit 5.2 to Appendix A to
Exhibit 5.2 to the Agreement and Plan of the Joint Proxy Statement/Prospectus in the
Reorganization. Form S-4.
2.9 Form of Conditional Promissory Note Included as Exhibit 6.16(b) to Appendix A
between the Registrant and The to the Joint Proxy Statement/Prospectus in
T Partnership, Exhibit 6.16(b) to the the Form S-4.
Agreement and Plan of Reorganization.
2.10 Form of Secured Promissory Note between Included as Exhibit 6.16(c) to Appendix A
Registrant and The T Partnership, to the Joint Proxy Statement/Prospectus in
Exhibit 6.16(c) to the Agreement and Plan the Form S-4.
of Reorganization.
3.0 Certificate of Incorporation of the Exhibit 3.0 to the Form S-4.
Registrant.
3.1 Bylaws of the Registrant. Exhibit 3.1 to the Form S-4.
3.2 Certificate of Incorporation of Cardiac, as Exhibit 3.2 to the Form S-4.
amended.
3.3 Restated Bylaws of Cardiac, as amended. Exhibit 3.3 to the Form S-4.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- -------- ---------------------------------------------- ---------------------------------------------
<S> <C> <C>
3.4 Certificate of Incorporation of Electro, as Exhibits 3(a) and 3(b) to Electro's
amended. Form 10-K for the Year Ended August 31,
1997. File No. 0-7578.
3.5 Amended and Restated By-laws of Electro. Exhibit 3(c) to Electro's Form 10-K for the
Year Ended August 31, 1997. File
No. 0-7578.
4.0 Form of Specimen Certificate of Registrant's Filed Herewith.
Common Stock.
4.1 Form of Common Stock Certificate of Exhibit 4.0 to Form S-1 Registration
Cardiac. Statement filed on March 2, 1995,
Registration No 33-89938.
4.2 Form of Sales Representative Stock Option Exhibit 4.13 to Form 10-Q for the Quarter
Agreement Ended September 30, 1988, File No. 0-14653.
4.3 Cardiac 5% Convertible Debenture due Exhibit 4.15 to Form 8-K Current Report
October 31, 1999 dated October 11, 1994, File No. 0-14653.
4.4 Cardiac Combined 1987-1992. Non-Qualified Exhibit 4.8 to Amendment No. 1 to
Stock Option Plan. Form S-1 Registration Statement filed on
April 17, 1995, Registration No. 33-89938.
4.5 Cardiac Stock Purchase Warrant dated Exhibit 4.1 to Form 8-K Current Report,
March 31, 1995 in favor of Sirrom Capital dated March 31, 1995, File No. 0-14653.
Corporation.
4.6 Cardiac Stock Purchase Warrant, dated Exhibit 4.2 to Form 8-K Current Report,
March 31, 1995 in favor of Dow Corning dated March 31, 1995, File No. 0-14653.
Enterprises, Inc.
4.7 Cardiac Stock Purchase Warrant, dated Exhibit 4.6 to Cardiac's Form 10-KSB for the
October 15, 1995 in favor of Sirrom Capital Year Ended March 31, 1996, File
Corporation. No. 0-14653.
4.8 Cardiac Stock Purchase Warrant, dated Exhibit 4.7 to Cardiac's Form 10-KSB for the
March 29, 1996 in favor of Grupo Taper, Year Ended March 31, 1996, File
S.A. No. 0-14653.
4.9 Cardiac Stock Purchase Warrant, dated Exhibit 4.2 to Cardiac's Form 8-K Current
June 6, 1997 in favor of Sirrom Capital Report, dated June 13, 1997, File
Corporation. No. 0-14653.
4.10 Cardiac Stock Purchase Warrant, dated Exhibit 4.1 to Cardiac's Form 8-K Current
June 13, 1997 in favor of Coast Business Report, dated June 13, 1997, File
Credit. No. 0-14653.
4.11 Cardiac 8% Convertible Debenture due Exhibit 4.0 to Cardiac's Form 10-QSB for
April 24, 2003. the Quarter Ended June 30, 1998, File
No. 0-14653.
4.12 Cardiac Stock Purchase Warrant, dated Exhibit 4.12 to the Form S-4.
August 26, 1998 in favor of International
Holdings, Inc.
4.13 Cardiac Stock Purchase dated August 27, Exhibit 4.13 to the Form S-4.
1998 in favor of Greenberg Traurig, P.A.
4.14 Electro's 1984 Employee Stock Purchase Exhibit to Electro's Form 10-Q for the
Plan. Quarter Ended February 9, 1984, File
No. 0-7578.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- -------- --------------------------------------------- ----------------------------------------------
<S> <C> <C>
4.15 Electro's 1987 Incentive Stock Option Plan. Exhibit 10(k) to Electro's Form 10-K for the
Year Ended August 31, 1987, File
No. 0-7578.
4.16 Electro's 1990 Incentive Stock Option Plan. Exhibit to Electro's Form 10-Q for the
Quarter Ended May 31, 1990, File
No. 0-7578.
4.17 Electro's 1992 Incentive Stock Option Plan. Exhibit 10(j) to Electro's Form 10-K for the
Year Ended August 31, 1992, File
No. 0-7578.
5.0 Form of Legal Opinion of Greenberg Previously Filed.
Traurig, P.A.
8.0 Form of Tax Opinion of Greenberg Traurig, Exhibit 8.0 to the Form S-4.
P.A.
8.1 Form of Tax Opinion of Saiber Schlesinger Exhibit 8.1 to the Form S-4.
Satz & Goldstein, LLC.
10.0 License Agreement between Hughes/ Exhibit 10.1 to Cardiac's Form 10-Q for the
Bertolet and Cardiac. Quarter Ended September 30, 1986, File
No. 0-14653.
10.1 Settlement Agreement and Release between Exhibit 10.2 to Cardiac's Form 10-K for the
Applied Cardiac Electro-physiology and Year Ended March 31, 1990, File
Cardiac. No. 0-14653.
10.2 Amended and Restated License Agreement Exhibit 10.19 to Cardiac's Form 8-K Current
between Sulzer Intermedics Inc. and Report dated April 2, 1993, File No. 0-14653.
Cardiac, dated April 2, 1993.
10.3 Amended and Restated Supply Contract Exhibit 10.20 to Cardiac's From 8-K Current
between Sulzer Intermedics Inc. and Report dated April 2, 1992, File No. 0-14653.
Cardiac, dated April 2, 1993.
10.4 Employment Agreement between Bart C. Exhibit 10.24 to Cardiac's Form 8-K Current
Gutekunst and Cardiac, dated October 13, Report dated October 11, 1994, File
1994. No. 0-14653.
10.5 Employment Agreement between Alan J. Exhibit 10.25 to Cardiac's Form 8-K Current
Rabin and Cardiac, dated October 13, 1994. Report dated October 11, 1994, File
No. 0-14653.
10.6 Employment Agreement between Robert S. Exhibit 10.12 to Cardiac's Form 10-Q for the
Miller and Cardiac, dated December 12, Quarter Ended December 31, 1994, File
1994. No. 0-14653.
10.7 Agreement between LEM Biomedica, s.r.l. Exhibit 10.13 to Cardiac's Form 10-Q for the
and Cardiac, dated October 1, 1994. Quarter Ended December 31, 1994, File
0-14653.
10.8 Agreement between Cardiac and Alan J. Exhibit 10.12 to Form S-1 Registration
Rabin and Bart C. Gutekunst dated July 1, Statement of Cardiac filed on March 2, 1995,
1994. Registration No. 33-89938.
10.9 Form of Indemnification Agreement Exhibit 10.13 to Form S-1 Registration
between Cardiac and each Director, Statement of Cardiac filed on March 2, 1995,
executed December 1994. Registration No. 33-89938.
10.10 Employment Agreement between Robert R. Exhibit 10.14 to Form S-1 Registration
Brownlee and Cardiac dated as of Statement of Cardiac filed on March 2, 1995,
October 1, 1994. Registration No. 33-89938.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- -------- ---------------------------------------------- -------------------------------------------
<S> <C> <C>
10.11 Loan and Security Agreement between Exhibit 10.1 to Cardiac's Form 8-K Current
Cardiac and Sirrom Capital Corporation, Report, dated March 31, 1995, File
dated March 31, 1995. No. 0-14653.
10.12 $1,500,000 Secured Promissory Note in favor Exhibit 10.2 to Cardiac's Form 8-K Current
of Sirrom Capital. Report, dated Corporation, dated March 31,
1995. March 31, 1995, File No. 0-14653.
10.13 Mortgage, Assignment of Rents and Leases, Exhibit 10.3 to Cardiac's Form 8-K Current
and Security and Leases, and Security Report, dated March 31, 1995, File
Capital Corporation, dated March 31, 1995. No. 0-14653.
10.14 Second Mortgage and Security Agreement in Exhibit 10.4 to Cardiac's Form 8-K Current
favor of Dow Corning Enterprises, Inc., Report, dated March 31, 1995, File
dated March 31, 1995. No. 0-14653.
10.15 Subordination Agreement between Cardiac Exhibit 10.5 to Cardiac's Form 8-K Current
Sirrom Capital Corporation, and the Report, dated March 31, 1995, File
Debenture holders, dated March 31, 1995. No. 0-14653.
10.16 Promissory Note and Security Agreement Exhibit 10.16 to Cardiac's Form 10-QSB for
between Sulzer Intermedics Inc. and Cardiac the Quarter ended September 30, 1995, File
dated October 20, 1995. No. 0-14653.
10.17 Amendment 2 to Supply Contract between Exhibit 10.17 to Cardiac's Form 10-QSB for
Sulzer Intermedics Inc. and Cardiac, dated the Quarter ended September 30, 1995, File
October 20, 1995. No. 0-14653.
10.18 Amendment 2 to License Agreement Exhibit 10.18 to Cardiac's Form 10-QSB for
between Sulzer Intermedics Inc. and the Quarter ended September 30, 1995, File
Cardiac, dated October 20, 1995. No. 0-14653.
10.19 Distribution Agreement between Grupo Exhibit 10.19 to Cardiac's Form 10-QSB for
Taper S.A. and Cardiac, dated December 20, the Quarter ended December 31, 1995, File
1995. No. 0-14653.
10.20 Distribution Agreement between LEM Exhibit 10.20 to Cardiac's Form 10-QSB for
Biomedica s.r.l. and Cardiac, dated the Quarter ended September 30, 1996, File
October 1, 1996. No. 0-14653.
10.21 Security Agreement and Secured Promissory Exhibit 10.21 to Cardiac's Form 10-QSB for
Note between Bart C. Gutekunst and the Quarter ended December 31, 1996, File
Cardiac, dated October 28, 1996. No. 0-14653.
10.22 Security Agreement and Secured Promissory Exhibit 10.22 to Cardiac's Form 10-QSB for
Note between Bart C. Gutekunst and the Quarter ended December 31, 1997, File
Cardiac, dated March 24, 1997. No. 0-14653.
10.23 Security Agreement and Secured Promissory Exhibit 10.23 to Cardiac's Form 10-QSB for
Note between Alan J. Rabin and Cardiac, the Quarter ended June 30, 1997, File
dated April 15, 1997. No. 0-14653.
10.24 Security Agreement and Secured Promissory Exhibit 10.24 to Cardiac's Form 10-QSB for
Note Between Bart C. Gutekunst and the Quarter ended June 30, 1997, File
Cardiac, dated April 21, 1997. No. 0-14653.
10.25 Loan and Security Agreement Coast Exhibit 10.1 to Cardiac's Form 8-K Current
Business Credit and Cardiac, dated June 13, Report, dated June 13, 1997, File
1997. No. 0-14653.
10.26 $300,000 Secured Promissory Note of Exhibit 10.2 to Cardiac's Form 8-K Current
Cardiac to Coast Business Credit, dated Report, dated June 13, 1997, File
June 13, 1997. No. 0-14653.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- -------- ------------------------------------------------- ---------------------------------------------
<S> <C> <C>
10.27 $500,000 CAPEX Promissory Note of Exhibit 10.3 to Cardiac's Form 8-K Current
Cardiac to Coast Business Credit, dated Report, dated June 13, 1997, File
June 13, 1997. No. 0-14653.
10.28 Intercreditor and Subordination Agreement Exhibit 10.4 to Cardiac's Form 8-K Current
between Coast Business Credit and Sirrom Report, dated June 13, 1997, File
Capital Corporation. No. 0-14653.
10.29 Mortgage and Security Agreement between Exhibit 10.5 to Cardiac's Form 8-K Current
Cardiac and Coast Business Credit. Report, dated June 13, 1997, File
No. 0-14653.
10.30 Security Agreement (Intellectual Property) Exhibit 10.6 to Cardiac's Form 8-K Current
between Cardiac and Coast Business Credit. Report, dated June 13, 1997, File
No. 0-14653.
10.31 Grant of Security Interest Patents in favor of Exhibit 10.7 to Cardiac's Form 8-K Current
Coast Business Credit. Report, dated June 13, 1997, File
No. 0-14653.
10.32 Amendment to Employment Agreement Exhibit 10.32 to the Form S-4.
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
Secured Promissory Note between Cardiac the Quarter Ended June 30, 1998, File
and Coast Business Credit, dated June 11, No. 0-14653.
1998.
10.34 Promissory Note in Favor of Minrad, Inc., Exhibit 10.34 to the Form S-4.
dated July 29, 1998.
10.35 Promissory Note in Favor of Minrad, Inc., Exhibit 10.35 to the Form S-4.
dated August 13, 1998.
10.36 Promissory Note in Favor of International Exhibit 10.36 to the Form S-4.
Holdings, Inc., dated October 6, 1998.
10.37 Promissory Note in favor of Greenberg Exhibit 10.37 to the Form S-4.
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 between Exhibit 10.39 to the Form S-4.
Registrant and Alan J. Rabin, dated as of
September 23, 1998.
10.40 Agreement between Electro and The Exhibit 10(j) to Electro's Form 10-K for the
T Partnership, dated October 11, 1993. Year Ended August 31, 1993, File
No. 0-7578.
10.41 Amendment to Agreement between Electro Exhibit 10(l) to Electro's Form 10-K for the
and The T Partnership, dated November 21, Year Ended August 31, 1995, File
1994. No. 0-7578.
10.42 Lending Agreement between Electro and Exhibit 10(m) to Electro's Form 10-K for the
the T Partnership, dated August 31, 1995. Year Ended August 31, 1995, File
No. 0-7578.
10.43 Composite Modification Agreement between Exhibit 10(n) to Electro's Form 10-K for the
Electro and The T Partnership, dated Year Ended August 31, 1996, File
January 1, 1996. No. 0-7578.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION INCORPORATED BY REFERENCE TO
- -------- ---------------------------------------------- ---------------------------------------------
<S> <C> <C>
10.44 Composite Modification Agreement between Exhibit 10(i) to Electro's Form 10-K for the
Electro and The T Partnership, dated Year Ended August 31, 1997, File
October 23, 1997. No. 0-7578.
10.45 Letter of Intent to Merger between Electro Exhibit 10(j) to Electro's Form 10-K for the
and Cardiac, dated October 23, 1997. Year Ended August 31, 1997, File
No. 0-7578.
21.0 Subsidiaries of Registrant. Previously Filed.
23.0 Consent of BDO Seidman, LLP (relating to Filed Herewith.
financial statements of Registrant).
23.1 Consent of BDO Seidman, LLP (relating to Filed Herewith.
financial statements of Cardiac Control
Systems, Inc.).
23.2 Consent of KPMG Peat Marwick, LLP Filed Herewith.
(relating to financial statements of Electro-
Catheter Corporation).
23.3 Consent of Greenberg Traurig, P.A. Included in Exhibit 5.0.
23.4 Consent of Saiber Schlesinger Satz & Included in Exhibit 8.1 to the Form S-4.
Goldstein, LLC.
23.5 Consent of Compass Capital Partners, Ltd. Exhibit 23.4 to the Form S-4.
27.0 Financial Data Schedule (for SEC use only). Filed Herewith
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 Partners, Ltd. Included as Appendix D in the Joint Proxy
Statement/Prospectus in the Form S-4.
99.3 Form of Escrow Agreement. Filed Herewith.
99.4 Form of Subscription Agreement. Filed Herewith
</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,
II-7
<PAGE>
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-8
<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 amendment to
registration statement to be signed on its behalf by the undersigned in the
City of Palm Coast, State of Florida, on the 10th day of November, 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 amendment to
registration statement has been signed on the 10th day of November, 1998, by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------- -----------------------------------------------------
<S> <C>
* 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
* WILLIAM H. BURNS Director Nominee
------------------------
William H. Burns
* LARRY G. HAIMOVITCH Director Nominee
------------------------
Larry G. Haimovitch
* ROBERT T. RYLEE Director Nominee
------------------------
Robert T. Rylee
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------- --------------------------------------------------
<S> <C>
* ------------------------- Director Nominee
Augusto Ocana
/s/ W. ALAN WALTON Executive Vice President, Chief Operating Officer
------------------------- (Principal Financial and Accounting Officer)
W. Alan Walton
* ERVIN SCHOENBLUM Director Nominee
-------------------------
Ervin Schoenblum
* ABRAHAM NECHEMIE Director Nominee
-------------------------
Abraham Nechemie
* BY: /s/ ALAN J. RABIN
-------------------------------
Alan J. Rabin, Attorney-In-Fact
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------ -------------
<S> <C> <C>
4.0 Form of Specimen Certificate of Registrant's Common Stock.
23.0 Consent of BDO Seidman, LLP (relating to financial statements of Registrant).
23.1 Consent of BDO Seidman, LLP (relating to financial statements of Cardiac
Control Systems, Inc.).
23.2 Consent of KPMG Peat Marwick, LLP (relating to financial statements of
Electro-Catheter Corporation).
27.0 Financial Data Schedule (for SEC use only).
99.3 Form of Escrow Agreement.
99.4 Form of Subscription Agreement.
</TABLE>
EXHIBIT 4.0
[GRAPHIC] CATHETER TECHNOLOGY GROUP, INC. [GRAPHIC]
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE CUSIP 14917A 10 0
STATE OF DELAWARE SEE REVERSE FOR CERTAIN
DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $10 PAR VALUE, OF
Catheter Technology Group, Inc. (hereinafter called the "Corporation"),
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to all of the provisions of the Certificate of
Incorporation, as amended, and the By-Laws of the Corporation, to all of which
the holder of this certificate by acceptance hereof assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. WITNESS the fascimile signatures of its duly
authorized officers.
Dated:
/s/ W. ALAN WALTON /s/ ALAN J. RABIN
Secretary Chief Executive Officer
and President
Countersigned and Registered
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, New York) Transfer Agent,
and Registrar
By Authorized Signature
<PAGE>
CATHETER TECHNOLOGY GROUP, INC.
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof of the Corporation
and the qualifications, limitations, or restrictions of such preferences and/or
rights. Such request may be made to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -______Custodian______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act____________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For value received,_____________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
___________________________
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,___________________
________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:_________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17 Ad-15.
EXHIBIT 23.0
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
November 10, 1998
EXHIBIT 23.1
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 statement 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
November 10, 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 October 30, 1998, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations, has a net
capital deficiency and has limited working capital resources, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements and financial statement schedule 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
November 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> SEP-09-1998
<PERIOD-END> SEP-09-1998
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.3
ESCROW AGREEMENT
ESCROW AGREEMENT (the "Agreement") dated as of this _____ day of
November, 1998 by and between CATHETER TECHNOLOGY GROUP, INC., a Delaware
corporation (the "Corporation"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a
financial institution chartered under the laws of the State of New York (the
"Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Corporation is offering (the "Offering") a minimum of
390,245 shares (the "Minimum Offering") and a maximum of 650,000 shares (the
"Maximum Offering") of the Corporation's common stock, par value $.10 per share
(the "Shares"), pursuant to the Corporation's Registration Statement on Form
SB-2, File No. 333-65737 (the "Registration Statement"); and
WHEREAS, the Registration Statement provides that:
(a) The Offering will commence immediately upon the effectiveness of
the Corporation's Prospectus forming a part of the Registration Statement (the
"Prospectus") and will continue until _________, 1998 (30 days from the date of
the Prospectus), unless extended by the Corporation for an additional period of
30 days from such date (the "Offering Period");
(b) Once the Minimum Offering has been sold, the Corporation will
conduct a closing (the "First Closing") on the sale of the Shares comprising the
Minimum Offering. The Corporation will hold a subsequent closing at such time as
subscriptions for up to the Maximum Offering have been accepted by the
Corporation until the expiration of the Offering Period (the "Subsequent
Closing");
(c) Tendered subscriptions for all of the Shares shall be subject to
acceptance by the Corporation, which subscriptions may be rejected by the
Corporation in its sole discretion; and
(d) Proceeds from the sale of the Shares shall be held in escrow by the
Escrow Agent pending the First Closing, and the Subsequent Closing thereafter,
and will be disbursed to the Corporation upon such closing. If the First Closing
or the Subsequent Closing is not conducted, then such funds shall be returned to
the subscribers, without interest or deduction, to the extent obtained by the
Corporation, after the termination of the Offering Period (the "Termination
Date").
NOW, THEREFORE, in consideration of the mutual promises herein
contained and intending to be legally bound, the parties hereby agree as
follows:
1
<PAGE>
1. APPOINTMENT OF ESCROW AGENT. The Corporation hereby appoints
American Stock Transfer & Trust Company, as escrow agent, in accordance with the
terms and conditions set forth herein, and the Escrow Agent hereby accepts such
appointment.
2. DELIVERY OF SUBSCRIPTION PROCEEDS.
2.1 With respect to sales of Shares by the Corporation (or its
officers and directors) during the Offering Period, all checks, drafts, or other
instruments received from subscribers for the Shares will be delivered by the
Corporation to the Escrow Agent, made payable to "American Stock Transfer &
Trust Company, Escrow Agent for Catheter Technology Group, Inc." together with,
as to each subscriber, his or her name, address, social security number or
employer identification number, the number of Shares subscribed for, and the
amount paid in connection with such subscription. The Escrow Agent is hereby
empowered on behalf of the Corporation to endorse and collect all checks,
drafts, or other instruments received on account of subscriptions for Shares.
2.2 With respect to sales of Shares by independent
broker-dealers during the Offering Period, all monies received from subscribers
for the Shares will be delivered by such broker-dealers to the Escrow Agent by
wire transfer together with, as to each subscriber, his or her name, address,
social security number or employer identification number, the number of Shares
subscribed for, and the amount paid in connection with such subscription.
3. ESCROW AGENT TO HOLD AND DISBURSE FUNDS. The Escrow Agent will hold
and disburse all funds received by it pursuant to the terms of this Escrow
Agreement, as follows:
3.1 All funds received by the Escrow Agent pursuant to the
terms of this Escrow Agreement may be held in a bank money market account or
invested in United States Government instruments (including the U.S.T. Master
Government Fund).
3.2 In the event that prior to the Termination Date the Escrow
Agent has received funds (and such funds are cleared within 10 days of the
Termination Date) aggregating at least $2,390,250.625 from the sale of at least
the Minimum Offering and all of the other Closing Conditions as defined and as
set forth in the Prospectus section entitled "Plan of Distribution" have been
satisfied, the Escrow Agent will, on the date of the First Closing, pursuant to
written instructions signed by the Corporation certifying as to the satisfaction
of said Closing Conditions, pay to the Corporation and/or to any other person
designated in such instructions, the proceeds received by the Escrow Agent from
the sale of such Shares. In the event of the Subsequent Closing, the Escrow
Agent will, pursuant to written instructions signed by the Corporation, pay to
the Corporation and/or to any other person designated in such instructions, the
proceeds received by the Escrow Agent from the sale of shares from subscriptions
for up to the Maximum Offering.
3.3 In the event that by the Termination Date the Escrow Agent
has not received funds (and such funds are cleared within 10 days of the
Termination Date) in the aggregate amount of at least $2,390,250.625 from the
sale of at least the Minimum Offering, then the Escrow
2
<PAGE>
Agent shall, within 15 business days of the Termination Date, return to the
subscribers for the Shares the respective amounts which such subscribers have
paid, without interest.
4. EXCULPATION AND INDEMNIFICATION OF ESCROW AGENT.
4.1 The Escrow Agent shall have no duties or responsibilities
other than those expressly set forth herein. The Escrow Agent shall have no duty
to enforce any obligation of any person to make any payment or delivery, or to
direct or cause any payment or delivery to be made, or enforce any obligation of
any person to perform any act. The Escrow Agent shall be under no liability to
the other party hereto or to anyone else by reason of any failure on the part of
any party hereto or any maker, guarantor, endorser or other signatory of any
document or any other person to perform such person's obligations under such
document. Except for amendment to this Agreement referred to below, and except
for instructions given to the Escrow Agent by the Corporation relating to the
escrow deposit under this Agreement, the Escrow Agent shall not be obligated to
recognize any agreement between any and all of the persons referred to herein,
notwithstanding that references thereto may be made herein and whether or not it
has knowledge thereof.
4.2 The Escrow Agent shall not be liable to the Corporation or
to anyone else for action taken or omitted by it, or any action suffered by it
to be taken or omitted, in good faith in the exercise of its own best judgment,
except for actions or omissions arising from the Escrow Agent's gross negligence
or willful misconduct. The Escrow Agent may rely conclusively and shall be
protected in acting upon any order, notice, demand, certificate, opinion or
advice of counsel (including counsel chosen by the Escrow Agent), statement,
instrument, report or other paper or document (not only as to its due execution
and the validity and effectiveness of its provisions but also as to the truth
and acceptability of any information therein contained), which is believed by
the Escrow Agent to be genuine and to be signed or presented by the proper
person or persons. Escrow Agent shall not be bound by any notice or demand, or
any waiver, modification, termination or rescission of this Agreement or any of
the terms thereof, unless evidenced by a writing delivery to the Escrow Agent
signed by the proper party or parties and, if the duties or rights of the Escrow
Agent and affected, unless it shall give its prior written consent thereto.
4.3 The Escrow Agent shall not be responsible for the
sufficiency or accuracy of the form of, or the execution, validity, value or
genuineness of, any document or property received, held or delivered by it
hereunder, or of any signature or endorsement thereon, or for any lack of
endorsement thereon, or for any description therein; nor shall the Escrow Agent
be responsible or liable to the other party hereto or to anyone else in any
respect on account of the identity, authorizing rights of the persons executing
or delivering or purporting to execute or deliver any document or property or
this Agreement. The Escrow Agent shall have no responsibility with respect to
the use or application of any funds or other property paid or delivered by the
Escrow Agent pursuant to the provisions hereof. The Escrow Agent shall not be
liable to the Corporation or to anyone else for any loss which may be incurred
by reason of any investment of any monies which it holds hereunder provided the
Escrow Agent has complied with the provisions of Section 3.1 hereunder.
3
<PAGE>
4.4 The Escrow Agent shall have the right to assume, in the
absence of written notice to the contrary from the proper person or persons,
that a fact or an event by reason of which action would or might be taken by the
Escrow Agent does not exist or has not occurred, without incurring liability to
the other parties hereto or to anyone else for any action taken or omitted, any
action suffered by it to be taken or omitted, in good faith and in the exercise
of its own judgment, in reliance upon such assumption.
4.5 To the extent that the Escrow Agent becomes liable for the
payment of taxes, including withholding taxes, in respect of income derived from
the investment of funds held hereunder or any payment made hereunder, the Escrow
Agent may pay such taxes. The Escrow Agent may withhold from any payment of
monies held by it hereunder such amount as the Escrow Agent estimates to be
sufficient to provide for the payment of such taxes not yet paid, and may use
the sum withheld for that purpose. The Escrow Agent shall be indemnified and
held harmless against any liability for taxes and for any penalties or interest
in respect of taxes, on such investment income or payments in the manner
provided in Section 4.6.
4.6 The Escrow Agent will be indemnified and held harmless by
the Corporation from and against any and all expenses, including reasonable
counsel fees and disbursements, or loss suffered by the Escrow Agent in
connection with any action, suit or other proceeding involving any claim, or in
connection with any claim or demand, which in any way, directly or indirectly,
arises out of or relates to this Agreement, the services of the Escrow Agent
hereunder, the monies or other property held by it hereunder or any income
earned from investment of such monies, except for any such action, suit or other
claim, which in any way, directly or indirectly, arises out of the Escrow
Agent's gross negligence or willful misconduct. The Escrow Agent shall have a
lien for the amount of any such expenses or loss on the monies and other
property held by it hereunder and shall be entitled to reimburse itself from
such monies or property for the amount of any such expense or loss. Promptly
after the receipt by the Escrow Agent of notice of any demand or claim or the
commencement of any action, suit or proceeding, the Escrow Agent shall, if a
claim in respect thereof is to be made against the Corporation, notify the
Corporation thereof in writing, but the failure by the Escrow Agent to give such
notice shall not relieve the Corporation from any liability which the
Corporation may have to the Escrow Agent hereunder. Notwithstanding any
obligation to make payments and deliveries hereunder, the Escrow Agent may
retain and hold for such time as it deems necessary such amount of monies or
property as it shall, from time to time, in its sole discretion, deem sufficient
to indemnify itself for any such loss or expense and for any amounts due it
under Section 7.
4.7 For the purposes hereof, the term "expense or loss" shall
include all amounts paid or payable to satisfy any claim, demand or liability,
or in settlement of any claim, demand, action, suit or proceeding settled with
the express written consent of the Escrow Agent, and costs and expenses,
including, but not limited to, reasonable counsel fees and disbursements paid or
incurred in investigating or defending against any such claim, demand, action,
suit or proceeding.
4
<PAGE>
5. TERMINATION OF AGREEMENT AND RESIGNATION OF ESCROW AGENT.
5.1 This Agreement shall terminate on the final disposition of
the monies and property held in escrow hereunder, provided that the rights of
the Escrow Agent and obligations of the other parties hereto under Section 4 and
7 shall survive the termination hereof.
5.2 The Escrow Agent may resign at any time and be discharged
from its duties as Escrow Agent hereunder by giving the Corporation at least 10
days notice thereof. Simultaneous with its resignation, the Escrow Agent shall
turn over to a successor escrow agent appointed by the Corporation all monies
and property held hereunder (less such amount as the Escrow Agent is entitled to
retain pursuant to Section 7) upon presentation of the document appointing the
new escrow agent and its acceptance thereof. If no new agent is so appointed
within the 30-day period following such notice of resignation, the Escrow Agent
may deposit the aforesaid monies and property with any court it deems
appropriate.
6. FORM OF PAYMENT BY ESCROW AGENT.
6.1 Any payments by the Escrow Agent to subscribers or to
persons other than the Corporation pursuant to the terms of this Agreement shall
be made by check, payable to in order of each respective subscriber or other
person, or pursuant to wiring instructions supplied in writing to the Escrow
Agent.
6.2 All amounts referred to herein are expressed in United
States Dollars and all payments by the Escrow Agent shall be made in such
dollars.
7. COMPENSATION OF ESCROW AGENT. For services rendered, the Escrow
Agent shall receive as compensation all interest income earned on the funds
received pursuant to this Agreement. The Escrow Agent shall also be entitled to
reimbursement from the Corporation for all expenses paid or incurred by it in
the administration of its duties hereunder, including, but not limited to, all
counsel, advisory's and agents' fees and disbursements and all reasonable taxes
or other governmental charges. It is anticipated that such disbursement shall
not exceed $500 barring any unforeseen circumstances.
8. NOTICES. All notices, requests, demands and other communications
provided for herein shall be in writing, shall be delivered by hand, by
overnight courier, by facsimile transmission or by first-class mail, shall be
deemed given when received and shall be addressed to the parties hereto at their
respective addresses listed below or to such other persons or addresses as the
relevant party shall designate as to itself from time to time in writing
delivered in like manner.
5
<PAGE>
if to the Corporation:
Catheter Technology Group, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Attention: Alan J. Rabin, CEO and President
Telephone number: (800) 227-7223
Fax number: (904) 445-7226
with a copy to:
Greenberg Traurig, P.A.
111 North Orange Avenue, 20th Floor
Orlando, Florida 32801
Attention: Randolph H. Fields, Esq.
Telephone number: (407) 420-1000
Fax number: (407) 420-5909
if to the Escrow Agent:
American Stock Transfer & Trust Co.
40 Wall Street
New York, New York 10005
Attention: Michael Karfunkel
Telephone number: (212) 935-5100
Fax number: (718) 236-2641
9. FURTHER ASSURANCES. From time to time on and after the date hereof,
the Corporation shall deliver or cause to be delivered to the Escrow Agent such
further documents and instruments and shall do and cause to be done such further
acts as the Escrow Agent shall reasonably request (it being understood that the
Escrow Agent shall have no obligation to make any such request) to carry out
more effectively the provisions and purposes of this Agreement, to evidence
compliance herewith or to assure itself that it is protected in acting
hereunder.
10. CONSENT TO SERVICE OF PROCESS. The Corporation hereby irrevocably
consents to the jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action, suit or other
proceeding arising out of or relating to this Agreement or any action taken or
omitted hereunder, and waives personal service of any summons, complaint or
other process and agrees that the service thereof may be made, certified or
registered mail directed to the Corporation at its address for purposes of
notices hereunder.
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<PAGE>
11. MISCELLANEOUS.
11.1 If for any reason the escrow deposit is not received by
the Escrow Agent contemplated herein, the Corporation shall reimburse the Escrow
Agent for all expenses, including reasonable counsel fees and disbursements,
paid or incurred by it in making preparations for providing the services
contemplated hereby, provided, however, that such sum does not exceed $100.00.
11.2 This Agreement shall be construed without regard to any
presumption or other rule requiring construction against the party causing such
instrument to be drafted. The terms "hereby," "hereof," "hereto," "hereunder"
and any similar terms, as used in this Agreement, refer to the Agreement in its
entirety and not only to the particular portion of this Agreement where the term
is used. The word "person" shall mean any natural person, partnership,
corporation, government and any other from of business or legal entity. All
words or terms used in this Agreement, regardless of the number or gender in
which they are used, may be deemed to include any other number and any other
gender as the context may require. This Agreement shall not be admissible in
evidence to construe the provisions of any prior agreement. The rule of EJUSDEM
GENERIS shall not be applicable herein to limit a general statement, which is
followed by or referable to an enumeration of specific matters, to matters
similar to the matters specifically mentioned.
11.3 This Agreement and the rights and obligations hereunder
of the Corporation may be assigned by the Corporation only to a successor to the
Corporation's entire business. This Agreement and the rights and obligations
hereunder of the Escrow Agent may be assigned by the Escrow Agent only to a
successor to its entire business. This Agreement shall be binding upon and inure
to the benefit of each party's respective successors, heirs and permitted
assigns. No other person shall acquire or have any rights under or by virtue of
this Agreement. This Agreement may not be changed orally or modified, amended or
supplemented without an express written agreement executed by the Escrow Agent
and the Corporation. This Agreement is intended to be for the sole benefit of
the parties hereto, and (subject to the provisions of this Section 11.3) the
respective successors, heirs and assigns, and none of the provisions of this
Agreement are intended to be, nor shall they be construed to be, for the benefit
of any third person.
11.4 This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York. The representations
and warranties contained in this Agreement shall survive the execution and
delivery hereof and any investigations made by any party. The headings in this
Agreement are for purposes of reference only and shall not be or otherwise
affect any of the terms hereof.
12. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signature of all of the parties reflected hereon as signatures.
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<PAGE>
IN WITNESS WHEREOF, the parties executed and delivered this Escrow
Agreement on the day and year first above written.
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
CATHETER TECHNOLOGY GROUP, INC.
By:
-------------------------------------
Alan J. Rabin, President
8
EXHIBIT 99.4
SUBSCRIPTION AGREEMENT
Catheter Technology Group, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
The undersigned ("Subscriber") hereby subscribes and agrees to purchase
the number of shares of common stock, $.10 par value (the "Common Stock"), of
Catheter Technology Group, Inc., a Delaware corporation (the "Company"), shown
beside Subscriber's name on the signature page hereof. The undersigned shall pay
the purchase price by check or money order payable to "American Stock Transfer &
Trust, as Escrow Agent for Catheter Technology Group, Inc." or by debit to a
brokerage account with the broker-dealer that solicited the Subscriber's
purchase (or in the normal and customary manner prescribed by that
broker-dealer) in an amount equal to the product of the number of shares set
forth on the signature page hereof multiplied by the $____ per share purchase
price.
Subscriber hereby agrees, represents and warrants as follows with the
intent that the same may be relied upon by the Company:
(1) Subscriber has received the Company's Prospectus dated November __,
1998 (including any amendments or supplements thereto, the "Prospectus")
relating to the offering by the Company of up to 650,000 shares of Common Stock
(the "Offering").
(2) Subscriber understands that no federal or state agency has made any
finding or determination regarding the fairness of the Offering, the accuracy or
adequacy of the Prospectus, or any recommendation or endorsement concerning any
investment in the Common Stock.
(3) If Subscriber is an individual, Subscriber is a bona fide resident
of the state set forth in the Subscriber's address on the signature page hereof.
If Subscriber is an entity, Subscriber's state of organization is the state set
forth in the Subscriber's address on the signature page hereof and Subscriber's
principal office is located in such state. The information regarding Subscriber
set forth on the signature page hereof is correct and complete in all respects.
(4) Subscriber acknowledges and agrees that this Subscription Agreement
merely constitutes an offer to purchase Common Stock, and that the Common Stock
will not be issued by the Company, and Subscriber shall have no rights as a
shareholder in the Company, until this Subscription Agreement is accepted by the
Company.
(5) Subscriber understands and agrees that, as described in the
Prospectus, if fewer than all shares subscribed for by the undersigned are
accepted by the Company, the excess subscription funds will be returned to the
undersigned without interest. The Subscriber understands and agrees that the
Company has, in its sole discretion, the right to allocate shares among
Subscribers, and to accept or reject any subscription in whole or in part.
<PAGE>
(6) The certificate to be issued on behalf of the Subscriber will be
registered as indicated below.
(7) Subscription funds will be placed in a non-interest bearing escrow
account by American Stock Transfer & Trust Company, as escrow agent, and,
accordingly, will be not available for immediate use by the Company.
(8) Subscriber acknowledges and agrees that this Subscription Agreement
is irrevocable, binding and legally enforceable until the date of termination of
the Offering as set forth in the Prospectus, and Subscriber shall not be
entitled to cancel, terminate or revoke this Subscription Agreement prior to
such date. Subscriber understands that the Company reserves the right at any
time to terminate the Offering by rejecting or canceling all Subscription
Agreements and returning all subscription funds, without interest or deduction,
to subscribers.
(9) Subscriber agrees not to transfer or assign this Subscription
Agreement or any of Subscriber's interest herein. This Subscription Agreement
shall be binding upon Subscriber and Subscriber's heirs, successors and assigns
and shall inure to the benefit of the Company and its successors and assigns.
(10) This Subscription Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without regard to its conflicts
of laws principals, and Subscriber hereby consents to the jurisdiction of the
courts of the State of Florida and /or the U.S. District Court for the Middle
District of Florida.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on this ________day of __________, 1998.
___________ (Number of shares of Common Stock subscribed) x $_________
per share = $____________Total subscription price.
Indicated below is the form of ownership the undersigned desires for
the shares subscribed.
1. [ ] Individual
2. [ ] Joint Tenants with Right of Survivorship
3. [ ] Community Property
4. [ ] Tenants in Common
5. [ ] Corporation/Partnership
6. [ ] IRA of _________________________even up with
7. [ ] Trust Date Opened ______________________________
8 [ ] As a Custodian For __________________________________
Under the Uniform Gift to
Minors Act of the State of _______
9. [ ] Married with Separate Property
10. [ ] Keogh of ____________________________
2
<PAGE>
The undersigned wishes to pay for the Common Stock as follows:
( ) Enclosed is a check made payable to "American Stock Transfer & Trust
Company, as Escrow Agent for Catheter Technology Group, Inc."
( ) Debit to brokerage account. If this option is selected, provide the
following information:
Broker Name:___________________ Street Address __________________________
Brokerage Firm: _______________ City/State/Zip Code: _____________________
Account No.: __________________ ( ) Certificate to be issued ___________
EXECUTION BY SUBSCRIBER WHO IS A NATURAL PERSON
- --------------------------------------------------------------------------------
Exact Name in Which Title is to be Held
- --------------------------------------------------------------------------------
* (Signature)
- --------------------------------------------------------------------------------
* (Signature)
- --------------------------------------------------------------------------------
Name (Please Print)
- --------------------------------------------------------------------------------
Residence: Number and Street
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
Social Security Number
* IN CASE OF JOINT OWNERSHIP, EACH JOINT OWNER MUST SIGN.
Accepted as of the ________day of _______, 1998.
Catheter Technology Group, Inc.
By:
-----------------------------------
Alan J. Rabin
President and Chief Executive Officer
3
<PAGE>
EXECUTION BY SUBSCRIBER WHICH IS A CORPORATION, PARTNERSHP, TRUST, ETC.
- --------------------------------------------------------------------------------
Exact Name in Which Title is to be Held
- --------------------------------------------------------------------------------
* (Signature)
- --------------------------------------------------------------------------------
Name (Please Print)
- --------------------------------------------------------------------------------
Title of Person Executing Agreement
- --------------------------------------------------------------------------------
Address: Number and Street
- --------------------------------------------------------------------------------
City State Zip Code
- --------------------------------------------------------------------------------
Tax Identification Number
* IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. WHEN SIGNING AS AUTHORIZED OFFICER, ATTORNEY, TRUSTEE,
ADMINISTRATOR OR GUARDIAN, PLEASE GIVE YOUR FULL TITLE AS SUCH.
Accepted as of the ______day of _______, 1998.
Catheter Technology Group, Inc.
By:
-----------------------------------
Alan J. Rabin
President and Chief Executive Officer
4
<PAGE>
SUBSTITUTE W-9
Under the penalties of perjury, I certify that: (1) the Social Security Number
or Taxpayer Identification Number given above is correct; and (2) I am not
subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF YOU
HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX
RETURNS.
Date: _________________, 1998 Signature: _______________________
Print Name: ______________________
- --------------------------------------------------------------------------------
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