UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended August 31, 1998. OR TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the transition period from_________to__________
Commission File No. 0-7578
ELECTRO-CATHETER CORPORATION
----------------------------
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1733406
---------- ----------
(State or other jurisdiction (I.R.S. Employer ID Number)
of Incorporation or organization)
2100 Felver Court, Rahway, New Jersey 07065
- ------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 732-382-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock
$.10 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and ask prices of such
stock, as of a specified date within 60 days prior to the date of filing.
The aggregate market value of the Registrant's common stock, $.10 par value,
held by non-affiliates as of November 30, 1998 is $1,684,830.
As of November 30, 1998, the number of shares outstanding of the Registrant's
common stock was 6,390,389 shares, $.10 par value.
<PAGE>
PART I
FORWARD LOOKING INFORMATION
- ---------------------------
Electro-Catheter Corporation ("Electro" or the "Company") desires to provide
investors with meaningful and useful information. As a result, this Report
contains certain statements which describe the Company's belief concerning
future business conditions and the outlook for the Company based on currently
available information. Many of the statements, other than statements of
historical facts, included in this report are forward-looking statements,
including, without limitation, those regarding the Company's future financial
position, business strategy, budgets, projected costs and plans and objectives
of management for future operations. Wherever possible, the Company has
identified these "forward-looking" statements (as defined in Section 21E of the
Securities Exchange Act of 1934) by words such as "anticipates," "believes,"
"estimates," "expects," and similar expressions. These forward-looking
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance and achievements to differ materially from
those expressed in, or implied by, these statements. These risks and
uncertainties include, but are not limited to, the following: the financial
strength of the industry, demand for the Company's products, the competitive
pricing environment within the industry and the Company's ability to develop,
market and sell new products. The Company assumes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 1. BUSINESS
- ------- --------
General
- -------
Electro-Catheter Corporation 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 products. The Company was incorporated in New Jersey in 1961. The
Company 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. The Company also
continues to explore opportunities to expand its Original Equipment
Manufacturing ("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.
The Company 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 revenues in such fiscal years, respectively.
Merger
- ------
The Company entered into an Agreement and Plan of Reorganization dated as of
January 20, 1998, with Cardiac Control Systems, Inc. ("Cardiac" or "CCS"), a
Delaware corporation located in Palm Coast, Florida, to effect a merger of the
two companies targeted toward the development and marketing of advanced
specialty electrophysiology products. 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. Pursuant to
the restructuring, CTG will succeed to all rights and obligations of CCS and
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 costs will be recognized as expense in that period.
Consummation of the merger is subject to a number of conditions, many of which
have already been met. Among conditions remaining to be satisfied are: (i) the
securing of a minimum of $4.0 million in financing in addition to any existing
debt obligations of both Cardiac and Electro; and (ii) the receipt of all
required regulatory approvals by the two companies. The stockholders of each of
Electro and Cardiac approved the merger at the respective Special Meetings of
such Stockholders held on November 16, 1998.
The merger is scheduled to be completed on or about the end of December 1998,
although there is no assurance the merger will be completed by then, or at all.
Products
- --------
The Company produces a wide range of catheter products intended to be utilized
by doctors and other trained hospital personnel for diagnostic and therapeutic
purposes. Catheters are hollow tubes that can be passed through veins, arteries
and other anatomical passageways. The Company considers the market within which
it sells its present and proposed products as a single industry segment.
In over thirty-seven years of business, Electro has sold well over two million
catheters. The current selling prices for the products marketed by the Company
typically range from thirty-five 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.
The Company'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
2
<PAGE>
configurations.
The Company markets its Circuit Breaker steerable catheters with temperature
control for catheter ablation for international distribution only. These
catheters are compatible with most radiofrequency generators. Due to certain
development issues, clinical trials scheduled for 1998 were delayed. The Company
plans to begin clinical trials in the U.S. in 1999 in order to seek approval to
market these catheters domestically.
Monitoring and Pacing Catheters. The Company'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, the Company's catheters may be utilized as conduits for
the injection of radiopaque materials into the bloodstream to permit
fluoroscopic observation of abnormalities in the vasculature.
Monitoring catheters are marketed under the following names: Baltherm(R) Flow
Directed Balloon Catheters, Pacewedge(R) Balloon Guided Catheters and
Balwedge(R) Catheters.
The Company'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 the Company is the Balectrode(R)
Bipolar Pacing Probe. With this product, both the amount of manipulation of the
catheter required to cause the stimulating electrode to be positioned in the
proper location within the heart and the time required from the commencement of
the procedure until it is completed, are substantially reduced over what would
result if a non-balloon catheter were used as the delivery system.
The pacing products usually are sold in kits containing the catheter, a
placement needle, connectors and various other devices. These kits are sold
under various names, including the following: Balectrode(R) Flow-Directed
Temporary Pacing Kit, Silicore(R) Semi-Floating Pacing Kit and Multipace.
Multi-Purpose Catheters. Multi-Purpose catheters have features or uses which,
under certain circumstances, result in the combination of pacing and monitoring
functions. Further, the Company 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 the Company's principal activities have been in the
cardiovascular area, it currently is manufacturing and marketing the Elecath(R)
One Step(TM) Fluid Drainage System which is used for draining fluid collections
from various locations in the body. This system consists of a catheter, composed
of a unique formulation developed by the Company, mounted on a simple
penetration apparatus. In the opinion of the Company's management, the product
may be useful to a broad range of physicians, in addition to radiologists, and
the use thereof may result in more complete and safer drainage.
3
<PAGE>
Sales, Marketing and Distribution Methods
- -----------------------------------------
The Company markets, sells and distributes its products domestically through its
own sales force. At November 30, 1998, the Company employed 2 salespersons in
the field and a home office staff of marketing and sales support of 3 people.
The Company also employs an International Marketing Manager based in Europe on
an independent contractor basis. The principal customers for the Company'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 the Company's net revenues for fiscal years 1998, 1997 and
1996. International markets are serviced by a network of independent
distributors. Electro also sells its products to OEM customers, performs
contract research and development work for third parties and engages in
licensing of its technology to third parties.
While export sales have contributed significantly to Electro's net sales in
fiscal years 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 lower demand for
older products in pacing and monitoring.
Advertising of the Company's products consists primarily of displays at medical
conventions and meetings, advertisements in medical journals and direct mail.
The Company also cooperates in the publication of technical papers written by
medical authorities in areas relating to the Company's products.
Product Warranties
- ------------------
Electro's catheters are covered by a limited warranty, the duration of which is
tied to product expiration dates. Generally, however, the warranties extend for
five years. All warranties provide for replacement with a comparable Electro
product or issuance of a credit at Electro's discretion. Product returns are not
material to Electro's results of operations.
Certain Patents, Trademarks and Licenses
- ----------------------------------------
Electro's policy is to protect its proprietary position by, among other methods,
filing United States and select foreign patent applications to protect the
technology that is important to the development of the business. Pursuant to
provisions adopted under the General Agreement on Tariffs and Trade, patents in
force on June 8, 1995, are entitled to a patent term of the longer of 17 years
from issuance or 20 years from the earliest filing date of the patent. Electro
currently holds six patents in the U.S. (one of which is owned jointly with
another party) and has one application pending. The last to expire of Electro's
patents will remain in effect until 2015. Electro has also obtained certain
patents in its principal overseas markets. The following are Electro's current
material patents:
<TABLE>
<CAPTION>
United States Patents Description Date of Issue
- --------------------- ----------- -------------
<S> <C> <C>
4,699,157 Pacing Catheter and 10/13/87
Method for Making
Same
4,790,825 Closed Chest Cannulation 12/13/88
Method and Device for
Atrial Major Artery
5,190,050 Tip Deflectable 3/2/93
Steerable Catheter
5,358,479 Multiform Twistable Tip 10/25/94
Deflectable Catheter
5,571,085 Steerable Open Lumen 11/5/96
Catheter
5,718,701* Ablation Electrode 2/17/98
- ---------------
*owned jointly with another party
</TABLE>
Although Electro holds such patents, it believes that its business as a whole is
not materially dependent upon patent protection. However, Electro will continue
to seek such patents as it deems advisable to protect its research and
development efforts and to market its products. Electro believes that it is not
infringing on any other party's patent. However, there can be no assurance that
current and potential competitors will not 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 researchers 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.
6
<PAGE>
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
- ------------------------
The Company's research and development activities are devoted primarily to the
design and development of new products and enhancements to existing products.
For the three years ended August 31, 1998, the Company 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 the Company. 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, the Company performed research and
development and pre-production planning for an unrelated medical device company
for which services the Company 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, the
Company's revenues were adversely affected.
Production and Sources of Supply
- --------------------------------
The Company manufactures its products in a 25,000 square foot facility which it
owns and another 10,000 square foot facility which it leases. The Company
believes that these facilities have sufficient capacity to meet the Company's
anticipated catheter needs for several years. The manufacturing of catheters is
a complex process and each catheter is assembled and tested. The Company 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.
The Company 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,
the Company uses outside suppliers for certain components. The Company utilizes
the services of outside contractors for the performance of sterilization.
Although most of the components and processes necessary for Electro's production
activities are available from more than one vendor, certain components and
processes are manufactured or provided by single vendors, some involving molds
owned by the Company. 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. The Company attempts to
maintain an adequate supply of the components on hand in order to minimize any
supply interruption from single source vendors to allow sufficient time to
locate and qualify a new vendor or to find a substitute for a single source. As
such, there can be no assurance that the Company's ability to manufacture
certain products will not be materially affected by single source vendors.
7
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Insurance
- ---------
Electro maintains comprehensive general liability insurance coverage in the
amount of $5,000,000 and products liability coverage in the amount of
$2,000,000. 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
- ---------
At November 30, 1998, the Company had 68 full-time employees. Of the total
employees, 46 were engaged in manufacturing and quality control, 9 in general
administration and executive activities, 8 in engineering and research and
development, and 5 in sales and marketing. The Company 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 the Company come under the
---------------------jurisdiction of the Food and Drug Administration (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 Federal Food, Drug and Cosmetics Act, as amended (the "FDA Act"), regulates
manufacturers of medical devices. The Company'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 the Company has received
FDA approval to market its principal existing products, or is exempt from formal
approval requirements as provided by law for those devices already in
distribution before May 28, 1976, there can be no assurance that the Company
will receive the requisite approvals to market additional products. Furthermore,
any substitution by the Company of its current sources for certain raw materials
utilized in its production processes will, if such substitution results in a
change in the composition of the material, be subject to FDA approval, and there
can be no assurance that such approvals will be obtained.
8
<PAGE>
Since the devices developed by the Company are intended for "human use", as
defined by the FDA, the Company 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 "current good
manufacturing practices" ("cGMP") in the manufacture of medical devices which
include testing, quality control, design and documentation requirements.
In addition, certain other classes of medical devices must comply with
industry-wide performance standards with respect to safety and efficacy
promulgated by the FDA. The FDA has not yet developed industry-wide performance
standards with respect to the safety and efficacy of those products manufactured
by the Company which will be subject to such standards. When, and if, such
standards are adopted, the Company will be required to submit data demonstrating
compliance with the standards (during which period the Company 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 the Company, 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. The Company 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 the Company. At
the conclusion of the audit, the FDA issued a number of observations regarding
violations of cGMP. On March 11, 1997, the FDA issued a Warning Letter (the "FDA
Warning Letter") to the Company requesting that prompt action be taken to
correct the violations.
The areas of noncompliance include Electro's methods of investigation of device
complaints, methods of validation of device sterilization, environmental
monitoring procedures, methods of validation of extrusion processes which are
used in the manufacture of certain of Electro's catheters and other quality
assurance and record keeping requirements. Electro has communicated with the FDA
its intentions to remedy the noncompliance, has established a plan and timetable
to effectuate such remediation and has diligently worked to take the necessary
corrective actions; Electro's actions have included the establishment of certain
validation protocols, revisions to Electro's Quality System and Quality System
Manual, the implementation of a program for environmental testing, the purchase
of equipment for extrusion process validation and the institution of file and
record keeping protocols. A subsequent FDA inspection in September 1997
indicated that, while substantial progress 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 the Company is ready for
reinspection. There can be no assurance 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. While Electro is unable to precisely estimate whether and to what extent
adverse economic impact may result from instituting the corrective actions, 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%.
9
<PAGE>
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.
Foreign Regulations. 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. Continued sale of certain of Electro's products in the member
nations of the European Economic Community ("EEC") after June 14, 1998, required
receipt of the CE Mark certification from the International Organization of
Standardization ("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 and Cardiac have
also recently submitted applications for CE Mark certification for many of
Electro's additional products. However, there can be no assurance 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 the country's medical device
laws. In April 1996, new legislation was enacted to permit the export of devices
not approved 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, 1997 and
1996 were approximately $81,000, $87,000 and $180,000, respectively.
The Company 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. The Company is not aware of any
such regulations with which it is not in compliance.
Backlog
- -------
Electro does not operate with significant backlog. The majority of product
shipments in a quarter relate to orders received in that quarter. The Company's
actual product shipments depend on its production capacity, manufacturing yields
and component availability, among other factors. At November 30, 1998, the
Company had a backlog of orders for its products which aggregated to
approximately $275,000, as compared to approximately $772,000 at November 30,
1997. The prior year's total included orders totaling $308,000 from two
hospitals which had placed an annual order but now order on a monthly basis.
10
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Competition in the Industry
- ---------------------------
The medical technology industry is a highly competitive field, characterized by
rapid technological advances, and the Company 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 the Company. Rapid technological advances by the
Company's competitors could at any time require that the Company redesign a
portion of its product line. Accordingly, there can be no assurance as to the
success of the Company's products in competition with such companies.
The Company'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. The Company'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 the Company's larger
competitors but not by the Company. For these reasons, the Company 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. The Company'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. The Company's electrophysiology products compete with
other treatments, including prescription drugs, implantable cardiac
defibrillators and open heart surgery.
The Company'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 1998 were delayed. The Company plans to
begin its clinical trials for ablation in 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. The Company's competitive position also depends on its ability to
attract and retain qualified personnel, develop effective proprietary products
and implement production and marketing plans. The Company hopes that it can
effectively compete in this market.
Item 2. Properties
- ------- ----------
The Company's principal manufacturing facility and executive offices are located
at 2100 Felver Court, Rahway, New Jersey, in premises which it purchased in
1976. This property secures part of the indebtedness to The T Partnership (see
Note 7 of the Notes to the Financial Statements). The Company 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 two premises are suitable
for all of the Company's current and foreseeable production, development and
administrative functions.
11
<PAGE>
Item 3. Legal Proceedings
- ------- -----------------
The Company 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 the Company 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, management 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.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) A Special Meeting of Stockholders was held on November 16, 1998
(the "Special Meeting").
(b) Not applicable because the meeting did not involve the election of
directors.
(c) At the Special Meeting, the Company's Stockholders voted in favor
of the approval and adoption of the Agreement and Plan of Reorganization dated
as of January 20, 1998, as amended, and in favor of authorizing the Board of
Directors to adjourn the Special Meeting to further solicit proxies, if
necessary. The vote was as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
Proposal to Approve 3,851,025 83,972 5,605 111,074
and adopt the Agreement
and Plan of Reorganization
Proposal to Authorize Board
of Directors to Adjourn 3,982,667 28,034 10,975
</TABLE>
(d) Not applicable
13
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related
- ------- -------------------------------------------------
Security Holder Matters
-----------------------
The Company's common stock has been listed historically on The NASDAQ Stock
Market ("NASDAQ") and traded in the over-the-counter market under the symbol
"ECTH". However, on March 3, 1997, the Company was advised by The NASDAQ Stock
Market that the Company's common stock listing would be deleted because the
Company was not in compliance with NASDAQ's bid price or, in the alternative,
book value requirements. The delisting was effected on August 27, 1997. The
Company is currently listed on the NASD OTC Bulletin Board Service which allows
market makers to enter quotes and trade securities that do not meet NASDAQ
qualification requirements. The table below shows for the periods indicated the
closing figures of the Company's stock, for each of the fiscal quarters.
<TABLE>
FISCAL 1998 FISCAL 1997
----------- -----------
<CAPTION>
Quarter High Low High Low
<S> <C> <C> <C> <C>
1 47/64 1/2 1 13/16 47/64
2 1/2 3/8 1 3/8 13/16
3 9/16 3/8 1 1/16 11/16
4 1/2 3/8 15/16 5/16
</TABLE>
Through November 30, 1998, the end of the first quarter of fiscal year
1999, the high and low prices during the quarter were 3/8 and 5/32 respectively.
On November 30, 1998, the number of shareholders of record was 693.
No cash dividends have been declared by the Registrant during the last
five fiscal years nor does the Company plan to pay dividends in the near future.
Item 6. Selected Financial Data
- ------- -----------------------
The selected financial data set forth below have been derived from the
Company's financial statements referred to under "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" of this Annual Report on Form 10-
K, and previously published historical financial statements not included in this
Annual Report on Form 10-K. The selected financial data set forth below should
be read in connection with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements, including the notes thereto, referred to herein.
<TABLE>
YEAR ENDED AUGUST 31,
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- -----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues........... $5,347 $ 6,648 $ 7,362 $ 7,263 $ 7,248
Net loss............ (1,077) (1,355) (892) (1,136) (1,372)
Working capital..... 285 958 2,025 2,505 2,362
Total assets........ 3,183 3,373 3,893 4,382 4,270
Long term liabilities...... 2,444 1,969 1,485 1,200 638
Loss per share...... ($0.17) ($0.21) ($0.14) ($0.18) ($0.24)
Dividends on common stock none none none none none
Weighted average number
of shares of common
stock and common stock
equivalents outstanding 6,388 6,380 6,354 6,027 5,711
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
- ---------------------
Year Ended August 31, 1998 Compared to Year Ended August 31, 1997
General. The following is management's discussion and analysis of certain
- ------- significant factors which have affected Electro's financial condition
and results of operations during the periods included in the accompanying
financial statements.
Statements contained in and preceding management's discussion and analysis
include various forward-looking information that is based on data currently
available to management and management's beliefs and assumptions. When used in
this report, the words "anticipates," "estimates," "believes," "plans," and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Such statements are
subject to risks and uncertainties, and Electro's actual results may vary
materially from those anticipated, estimated or projected due to a number of
factors, including, without limitation, the competitive environment for
Electro's products and services, and other factors set forth in reports and
other documents filed by Electro with the Securities and Exchange Commission
from time to time.
Merger. Electro entered into an Agreement and Plan of Reorganization dated as of
- ------ January 20, 1998 with Cardiac, 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 Cardiac
into and with Electro as a result of which Electro shall become a wholly-owned
subsidiary of Cardiac and the stockholders of Electro will become stockholders
of CTG, a Delaware corporation and parent holding company of Cardiac, to be
formed as part of a restructuring in connection with the merger. By virtue of
the merger, each outstanding share of common stock of Electro will be
converted into the right to receive one-fifth of a share of common stock of CTG.
Pursuant to the restructuring, CTG will succeed to all rights and obligations of
Cardiac and will become the successor issuer of Cardiac such that stockholders
of Cardiac will become stockholders of CTG. Pursuant to the restructuring, it is
intended that Cardiac will undergo a 1 for 5 reverse stock split reducing the
number of shares of common stock of Cardiac outstanding to approximately 529,748
shares. By virtue of the merger, subsequent to the reverse stock split, each
outstanding share of common stock of Electro will be converted into the right to
receive one-fifth of a share of CTG common stock, effectively equal to an even
exchange of shares prior to such reverse stock split.
Upon closing of the transaction, $1,000,000 of Electro's senior debt is
intended to be redeemed 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 CTG common stock at
a conversion price equal to 120% of the price per share of the CTG common stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG common stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to The T Partnership of a CTG 9% conditional promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock or in the event of
14
<PAGE>
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the Surviving Subsidiary, or
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that Cardiac shall not be obligated to make aggregate
payments with respect to both the Series A Preferred Stock and conditional note,
in excess of $1.0 million plus interest); and (c) the delivery to The T
Partnership of a secured promissory note made by CTG in an amount not to exceed
$1.3 million (which amount shall be the approximate remaining amount of the
Company's secured indebtedness to The T Partnership exclusive of the amount
redeemed under (a) above), bearing interest at the rate of 12% per annum payable
quarterly, the principal amount of which shall be due and payable three years
from the date of execution of such note (the terms of the security for the note
have yet to be agreed upon). 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.
Consummation of the merger is subject to a number of conditions, many of which
have already been met. Among conditions remaining to be satisfied are: (i) the
securing of a minimum of $4.0 million in financing in addition to any existing
debt obligations of both Cardiac and Electro; and (ii) the receipt of all
required regulatory approvals by the two companies. The stockholders of each of
Electro and Cardiac approved the merger at the respective Special Meetings of
such stockholders held on November 16, 1998.
Cardiac develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Electro management
believes are complementary to its own product lines. Electro believes the merger
may allow certain efficiencies to improve operating performance and that the
broader product line may provide for a more effective marketing and distribution
process. There can be no assurance, however, that consummation of the merger
will yield positive operating results in the future.
Sales. 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.
Domestic sales decreased $462,741 (11.5%) for the twelve months ended August 31,
1998 as compared to the same period in the prior fiscal 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 the CE Mark. Since Electro has not yet obtained the CE Mark
15
<PAGE>
certification and is now unable to sell certain of its products in the nations
of the EEC (which accounted for approximately 14%, 17% and 21% of total revenues
for fiscal years 1998, 1997 and 1996, respectively), international sales have
been adversely affected in Europe. 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 and Cardiac have also recently submitted applications for CE Mark
certification for many of Electro's additional products. However, there can be
no assurances 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 redesign issues in order to maintain previous sales
levels.
Gross Profit. 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 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 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.
Year Ended August 31, 1997 Compared to Year Ended August 31, 1996
Results of Operations
- ---------------------
Sales. 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 year 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 the $100,000 termination fee described previously and $109,698 received
from licensing certain of the Company's technology.
16
<PAGE>
Direct domestic sales decreased $678,405 (14.4%) for the fiscal year ended
August 31, 1997 as compared to the prior fiscal year. This decrease is primarily
due to the Company not having an approved electrophysiology ablation catheter,
lack of new products as the Company had focused its attention on the contract
research and development and OEM business, a continued decline in demand for the
Company's older products in pacing and monitoring, backorders, as well as the
impact of not replacing sales representatives who have left the Company.
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 the Company had focused its attention on the contract research and
development and OEM business, lower demand for the Company'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 fiscal
- ------------- year ended August 31, 1997 as compared to the prior year. 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
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 current year as compared to the prior year.
This decrease primarily reflects lower domestic marketing and selling expenses
of $641,690 (32.5%) primarily 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 year ended August 31, 1997 as compared to the prior year. 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 (see
Note 7 of the Financial Statements included in response to Item 14) and interest
associated with capitalized leases for equipment.
Litigation expense for fiscal year 1997 represents the jury award to a
terminated employee as a result of an age discrimination suit and the Company's
legal costs from September 1996 to defend this action (see Note 15 of the
Financial Statements included in response to Item 14).
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 year
ended August 31, 1996.
Liquidity and Capital Resources
- -------------------------------
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
17
<PAGE>
$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 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 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. 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 owes
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.
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 for the fiscal 1998 interest payments or,
further, for any fiscal 1999 interest payments. Monthly 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 to
The T Partnership of an aggregate of 1,000 shares of 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 approximate 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
18
<PAGE>
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 schedules do not include any
adjustments that might result from the outcome of this uncertainty. Electro's
ability to continue with its plans is contingent upon its ability to obtain
sufficient cash flow from operations or to obtain additional financing 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. The ability of Electro to attain profitable operations is dependent 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 process and approval process is normally accomplished in
coordination with its international distributors. In order for Electro to
continue to sell its products in the nations of the EEC, Electro was required to
obtain the CE Mark certification,from ISO. Since Electro has not yet obtained
the CE Mark certification and is now unable to sell certain of its products in
the Nations of the EEC (which accounted for approximately 14%, 17% and 21% of
total revenues for fiscal years 1998, 1997 and 1996, respectively),
international sales have been adversely affected in Europe. 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
19
<PAGE>
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 and Cardiac have also recently submitted
applications for CE Mark certification for many of Electro's additional
products. However, there can be no assurances that CE Mark certification for the
additional products will be obtained or that the pre-June 1998 sales levels will
be recaptured.
FDA Warning Letter. Electro'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 Electro's facilities and practices as a result of which the FDA issued
the FDA Warning Letter regarding noncompliance by Electro with certain
regulations regarding cGMP in the manufacture of its products. The areas of
noncompliance include Electro's methods of investigation of device complaints,
methods of validation of device sterilization, environmental monitoring
procedures, methods of validation of extrusion processes which are used in the
manufacture of certain of Electro's catheters and other quality assurance and
record keeping requirements. Electro 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 of 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 had been made, not all
corrective actions had been completed. Electro is continuing in its efforts to
complete such actions and it is Electro's intention to inform the FDA on or
about 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 on or about the end of 1998 nor that Electro will pass any
such reinspection when it occurs. While Electro is currently under no
restrictions by the FDA regarding the manufacture or sale of its products,
Electro is unable to determine precisely the short-term economic impact of
instituting the required corrective actions and there can be no assurance that
the FDA will not take further action, including seizure of products, injunction
and/or civil penalties, if the necessary corrective actions are not completed on
a timely basis. 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.
Year 2000 Issue. Many currently installed computer systems use a two-digit
- ---------------- suffix to identify year references with an assumed prefix of
"19". This limits those systems to recognizing dates between 1900 and 1999. As a
result, in a little more than a year, computer systems and/or software used by
many companies in a very wide variety of applications will experience operating
difficulties unless they are modified or upgraded to adequately process
information involving, related to or dependent upon the century change. If not
corrected, systems and/or applications could fail or create erroneous results at
or in connection with applications after December 31, 1999. Significant
uncertainty exists concerning the scope and magnitude of problems associated
with the century change.
Electro has established a project team to address Year 2000 risks. Electro is
currently assessing the impact of Year 2000 on its computer systems and
financial applications although a plan has not been implemented. Electro is also
assessing the potential overall impact of the impending century change on its
business, results of operations and financial position.
20
<PAGE>
Electro has reviewed its information and operational systems and manufacturing
processes in order to identify those products, services or systems that are not
Year 2000 compliant. As a result of its initial assessment, Electro has
determined that it will 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. Electro expects to complete its Year 2000
project during 1999. Based on available information, Electro does not believe
any material exposure to significant business interruption exist as a result of
Year 2000 compliance issues. Accordingly, Electro has not adopted any formal
contingency plan in the event its Year 2000 project is not completed in a timely
manner. These costs and the timing in which Electro plans to complete its Year
2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that Electro will timely identify
and remediate all significant Year 2000 problems, that remedial efforts will not
involve significant time and expense, or that such problems will not have a
material adverse effect on Electro's business, results of operations or
financial position.
Electro also faces risk to the extent that suppliers of products, services and
systems purchased by Electro and others with whom Electro transacts business on
a worldwide basis do not comply with Year 2000 requirements. Electro will
initiate written communications with significant suppliers and customers to
determine the extent to which Electro is vulnerable to these third parties'
failure to remediate their own Year 2000 issues. In the event any such third
parties cannot provide Electro with products, services or systems that meet the
Year 2000 requirements on a timely basis, or in the event Year 2000 issues
prevent such third parties from timely delivery of products or services required
by Electro, Electro's results of operations could be materially adversely
affected. To the extent Year 2000 issues cause significant delays in, or
cancellation of, decisions to purchase Electro's products or services, Electro's
business, results of operations and financial position could be materially
adversely affected. Due to the general uncertainty, both internally and
externally, inherent in the Year 2000 problem resulting, in part, from the
uncertainty of its Year 2000 readiness of third parties, suppliers and
customers, the Company is unable to accurately predict at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The discussion of Electro's efforts, and management's expectations, relating to
Year 2000 compliance are forward-looking statements. Electro's ability to
achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
Inflation and Changing Prices
- -----------------------------
Inflation did not have a material impact on the results of Electro's operations
for the three years ended August 31, 1998. Because of the implementation of cost
containment by the hospitals and new Medicare regulations, any increase in sales
revenues is expected to result from an increase in the volume of business rather
than from an increase in selling prices. Electro's pricing structure may not
reflect inflation rates, due to constraints of competition market conditions and
Medicare regulations
21
<PAGE>
Recent Accounting Pronouncements
- --------------------------------
Statement of Financial Accounting Standards NO. 133, Accounting for Derivative
Instruments and Hedging Activities was issued in June 1998 and is effective for
all fiscal quarters beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. Electro does not expect its implementation will have a material
effect on Electro's financial statements.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Response to this Item is contained in "Item 14 - Exhibits, Financial
Statement Schedules and Reports on Form 8-K", which information is incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
-------------------------
Not applicable.
22
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company
- -------- -----------------------------------------------
The following table sets forth certain information concerning the
Company's directors and executive officers:
Name, Age, as of November 30,
1998 and Positions and
Offices Held with Business Experience During Past 5
the Company Years and Principal Occupation
----------- ------------------------------
Abraham H. Nechemie Business Consultant. Formerly a partner
Age 74; Director since in Wiss & Company, a certified public
1992(1) accounting firm. Retired from the firm
in 1985.
Ervin Schoenblum Acting President and Chief Operating Officer
Age 58; Director since since December 1993. Management Consultant
1992 for over five years. Advisor to the Company
since February 1989.
Lee W. Affonso, Age 49; Vice President of the Company since July 1992
Vice President except for the period from September 1993 to
December 1993 when he served as Senior Sales
Specialist.
Robert W. Kokowitz Vice President of the Company since July
Age 43; Vice President 1992.
Joseph P. Macaluso Chief Financial Officer since May 1987.
Age 46; Treasurer and
Chief Financial Officer
Nicholas G. Accisano Vice President of the Company since September
Age 45; Vice President 1997. Director of New Product Development
for over the past five years.
Arlene C. Bell Secretary since May 1987. Executive Assistant
Age 53; Secretary to the Chairman since 1981, and to the Acting
President since March 1, 1994.
- ----------------------
(1)Member of audit committee.
The Company's directors' terms will expire when their successors are
elected and qualify at the annual meeting of shareholders. The Company's
officers serve for a period of one year and until their successors are elected
by the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
23
<PAGE>
Based solely upon the Company's review of the copies of such forms
received by it, pursuant to Section 16(a) and to written representations of its
incumbent directors, officers and beneficial owners of more than 10% of the
Company's common stock, the Company believes that, during the period September
1, 1997 to August 31, 1998 all filing requirements applicable to its officers,
directors and owners of more then 10% of the Company's common stock were
complied with.
Item 11. Executive Compensation
- -------- ----------------------
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth all compensation earned by, awarded or paid
to the Company's officers (whose total compensation for the fiscal year ended
August 31, 1998 exceeded $100,000) for services rendered in all capacities to
the Company during each of the fiscal years ended August 31, 1998, 1997 and 1996
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term
Awards
Annual Securities
Compensation Underlying Other
Name and Salary Options(1) Compensation
Principal Position Year #
<S> <C> <C> <C> <C>
Ervin Schoenblum 1998 $ 105,000 - $ -
Acting President 1997 105,000 - -
1996 102,000 - -
Lee W. Affonso 1998 $ 102,000 - $ -
Vice President 1997 105,000 - -
1996 112,000 - -
Joseph P. Macaluso(2) 1998 $ 80,000 - 17,000
Treasurer & Chief 1997 83,000 - 19,000
Financial Officer 1996 83,000 - 19,000
</TABLE>
- ------------
(1) The table reflects the number of options granted under the Company's
Incentive Stock Option Plan. (2) Other compensation represents commissions on
international sales.
Stock options are also granted to officers and are determined by the Board
of Directors based upon the individual's contribution to the Company. During
fiscal year 1998, no options were granted to the named executive officers.
24
<PAGE>
Aggregate Option Exercises and Year-End Option Table
The following table provides information on option exercises during the
fiscal year 1998 by the named executive officers and the value of each of their
respective unexercised options at August 31, 1998.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
(A) (B) (C) (D) (E)
Number of Value of
Unexercised Unexercised
Options In-the-Money
FY-End (#) Options
FY-End ($) (1)
<CAPTION>
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ----- --------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Ervin Schoenblum - - 64,000/16,000 -0-/-0-
Lee W. Affonso - - 29,200/ 7,300 -0-/-0-
Joseph P. Macaluso - - 29,200/ 7,300 -0-/-0-
</TABLE>
- ------------
(1) Calculated on the basis of fair market value of the underlying securities at
August 31, 1998 less the exercise price
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- -----------------------------------------------------------
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.
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. The T Partnership
has waived the debt agreement provision for monthly interest payments to be made
until September 1, 1999 and has agreed not to request acceleration of payment
for the fiscal year 1998 interest payments or, further, for any fiscal year 1999
interest payments. Monthly 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
25
<PAGE>
sells all or substantially all of its assets, unless The T Partnership and
Company agree otherwise. Pursuant to the terms of the Agreement and Plan of
Reorganization with CCS, 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 to The T Partnership of an aggregate of 1,000 shares of
Series A Preferred Stock of the Surviving Subsidiary, which shares shall have a
liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock;
(b) the delivery to The T Partnership of a CTG 9% conditional promissory note in
the amount of $1.0 million pursuant to which CTG is obligated to pay only those
amounts which are due but not paid to the holders of the Series A Preferred
Stock, or in the event of certain other non-monetary defaults; and (c) the
delivery to The T Partnership of a secured promissory note made by CTG in an
amount not to exceed $1.3 million (which amount shall be the approximate
remaining amount of the Company's secured indebtedness to The T Partnership
exclusive of the amount redeemed under (a) above), bearing interest at the rate
of 12% per annum payable quarterly, the principal amount of which shall be due
and payable three years from the date of execution of such note (the terms of
the security for the note have yet to be agreed upon). 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 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 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. The Company is currently in
compliance with such revised covenant.
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.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
- -------- ----------------------------------------
OWNERS AND MANAGEMENT
---------------------
Certain Beneficial Owners
- -------------------------
A. Set forth below is information concerning persons (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934) known to the Company to own more than 5% of the common stock of Electro
as of November 30, 1998.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class(1)
- ---------------- -------------------- -----------
<S> <C> <C>
The T Partnership, L.L.P. 2,464,844(3) 35.3%
c/o Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039(2)
Fred S. Lafer 2,464,844 35.3%
c/o The Taub Foundation
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
Abraham H. Nechemie 2,469,844(4) 35.4%
Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039
Ervin Schoenblum 2,544,844(5) 36.1%
c/o Electro Catheter Corp.
2100 Felver Court
Rahway, NJ 07065
Stephen D. Shapiro 2,464,844 35.3%
20 Old Post Road
E. Setauket, NY 11733
Henry Taub 2,464,844 35.3%
c/o The Taub Foundation
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
Bruce Paul 658,400 10.3%
1 Hampton Road
Purchase, NY 10577
- ----------------------------
</TABLE>
(1) The common stock deemed to be owned which is not outstanding but
subject to warrants and currently exercisable options is deemed to be
outstanding for the purpose of determining the percentage of all
outstanding common stock owned. The same shares may be held
beneficially by more than one owner resulting in the total percentage
being greater than 100%.
(2) The T Partnership, L.L.P. is a New Jersey limited liability partnership
(formerly The T Partnership, a New Jersey general partnership)
consisting of Fred Lafer (10% equity interest), Abraham H. Nechemie (5%
equity interest), Ervin Schoenblum (5% equity interest), Stephen D.
Shapiro (10% equity interest) and Henry Taub (70% 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.
27
<PAGE>
(3) Includes 83,344 and 500,000 shares which The T Partnership has the
right to acquire pursuant to outstanding warrants, which warrants are
immediately exercisable at prices of $1.425 and $.9875 per share,
respectively.
(4) Includes 5,000 shares issuable upon the exercise of currently
exercisable stock options.
(5) Includes 80,000 shares issuable upon the exercise of currently
exercisable stock options.
Management
- ----------
B. The following table sets forth the number of shares of common stock
of Electro beneficially owned by each Director of Electro, each of the named
executive officers named in the Summary Compensation Table set forth above as of
November 30, 1998, and the percentage of the outstanding shares of such
ownership represented at the close of business on November 30, 1998, together
with information as to stock ownership of all Directors and Executive Officers
of Electro as a group as of November 30, 1998.
<TABLE>
<CAPTION>
Amount and Nature of Percentage
Name of Beneficial Owner Beneficial Ownership of Class(1)
<S> <C> <C>
Abraham H. Nechemie 2,469,844(2) 35.4%
Ervin Schoenblum 2,544,844(2) 36.1%
Lee W. Affonso 36,500(3) 0.6%
Joseph P. Macaluso 36,500(3) 0.6%
All executive officers and 2,709,854(2)(4) 37.6%
directors as group
(8 persons)
- ----------------------------
(1) The common stock subject to currently exercisable options is deemed to
be outstanding for the purpose of determining the percentage of all
outstanding common stock owned.
(2) Messers. Nechemie and Schoenblum are partners in The T Partnership,
which owns 1,881,500 shares of common stock of Electro and has the
right to acquire 583,344 shares pursuant to immediately exercisable
warrants. Also included in the table above are currently exercisable
options for the purchase of 5,000 and 80,000 shares held by Messrs.
Nechemie and Schoenblum, respectively.
(3) All 36,500 shares are subject to currently exercisable options.
(4) Includes 229,000 shares subject to currently exercisable options held
by all executive officers and directors of Electro (including those
individually named in the table above).
</TABLE>
28
<PAGE>
BOARD COMPENSATION REPORT ON EXECUTIVE COMPENSATION
- ---------------------------------------------------
The Company has no compensation committee or other committee of the Board of
Directors performing similar functions. All members of the Board of Directors
review and determine executive compensation for all executive officers on an
annual basis. Ervin Schoenblum, the Company's Acting President, is the only
executive officer of the Company also serving on the Board. Mr. Schoenblum's
compensation as Acting President was negotiated between the parties and was
based in part on the amount of compensation paid to him while he was a
consultant to the Company and the level of compensation historically paid by the
Company for this position.
The Board of Directors has implemented an executive compensation philosophy that
seeks to relate executive compensation to corporate performance, individual
performance and creation of stockholder value. Historically, this has been
achieved through compensation programs which focus on both short- and long-term
results.
In accordance with the Board of Directors' executive compensation philosophy,
the major component of executive compensation has been base salary. Salaries for
executive officers are based on current individual and organizational
performance, affordability and competitive market trends. Additional incentives
are provided through issuance of incentive stock options.
Board of Directors: Abraham H. Nechemie
Ervin Schoenblum
29
<PAGE>
PERFORMANCE GRAPH
- -----------------
The following performance graph compares the five-year cumulative total
return on the Company's Common Stock to the S&P 500 Index and the S&P Medical
Products and Supplies Index assuming $100 was invested on August 31, 1993 and
all dividends were reinvested.
[Graphic presentation omitted in EDGAR filed document]
<TABLE>
INDEXED RETURNS
Years Ending
<CAPTION>
Base
Period
Company / Index Aug93 Aug94 Aug95 Aug96 Aug97 Aug98
<S> <C> <C> <C> <C> <C> <C>
ELECTRO CATHETER CORP 100 50.00 32.48 65.00 27.20 13.76
S&P 500 INDEX 100 105.47 128.09 152.08 213.90 231.21
HLTH CARE(MED PDS&SUPP)-500 100 116.89 179.95 204.75 293.15 324.75
</TABLE>
Notwithstanding anything set forth in any of the Company's previous filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934 which
might incorporate future filings, the preceding performance graph and the Report
of the Compensation Committee herein above provided shall not be deemed
incorporated by reference into any such filings.
30
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and
- -------- -------------------------------------------
Reports on Form 8-K
-------------------
(a) The following documents are filed as a part of the Report:
1. Financial Statements
--------------------
See: Index to Financial Statements
2. Financial Statement Schedules
-----------------------------
See: Index to Financial Statements
All other schedules are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the financial statements and the notes thereto.
3. Exhibits
--------
(3)(a) Registrant's Certificate of Incorporation as amended
through April 11, 1978 - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1981, and incorporated by reference herein as an
exhibit hereto.
(3)(b) Amendment to Registrant's Certificate of Incorporation,
dated March 20, 1985 - filed as an Exhibit to Registrant's
Report on Form 10-Q for fiscal quarter ended May 31, 1985,
and incorporated by reference herein as an exhibit hereto.
(3)(c) Amended and Restated Bylaws - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1989, and incorporated by reference herein as an
exhibit hereto.
(10)(a) Registrant's 1984 Employee Stock Purchase Plan, filed as an
Exhibit to Registrant's Report on Form 10-Q for the second
quarter of fiscal year 1984 ended February 29, 1984, and
incorporated by reference herein as an exhibit hereto.
(10)(b) Registrant's 1987 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1987, and incorporated by
reference as an exhibit hereto.(2)
(10)(c) Registrant's 1990 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1990, and incorporated by
reference as an exhibit hereto.(2)
(10)(d) Registrant's 1992 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1992, and incorporated by
reference as an exhibit hereto.
31
<PAGE>
(10)(e) Agreement dated October 11, 1993 between Registrant and The
T Partnership filed as an exhibit to Registrant's Report on
Form 10-K for the fiscal year ended August 31, 1993, and
incorporated by reference as an exhibit hereto.
(10)(f) Amendment dated November 21, 1994 to Agreement between
Registrant and The T Partnership filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1994, and incorporated by reference as an
exhibit hereto.
(10)(g) Lending Agreement dated August 31, 1995 between Registrant
and The T Partnership filed as an exhibit to the
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1995 and incorporated by reference as an exhibit
hereto.
(10)(h) Composite Modification Agreement between Registrant and The
T Partnership dated January 1, 1996 filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1996, and incorporated by reference as an
exhibit hereto.
(10)(i) Composite Modification Agreement between Registrant and The
T Partnership dated April 15, 1997 filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1997, and incorporated by reference as an
exhibit hereto.
(10)(j) Composite Modification Agreement between Registrant and The
T Partnership dated September 17, 1997 filed as an exhibit
hereto.
(10)(k) Promissory Note issued to The T Partnership dated December
17, 1997 and filed as an exhibit hereto.
(10)(l) Promissory Note issued to The T Partnership dated January
26, 1998 and filed as an exhibit hereto.
(10)(m) Promissory Note issued to The T Partnership dated May 14,
1998 and filed as an exhibit hereto.
(10)(n) Promissory Note issued to The T Partnership dated July 30,
1998 and filed as an exhibit hereto.
(10)(o) Agreement and Plan of Reorganization dated January 20, 1998
among Registrant, Cardiac Control Systems, Inc. and CCS
Subsidiary, Inc. filed as an exhibit to the Registrant's
Amendment to Annual Report on Form 10-K for the fiscal year
ended August 31, 1997 and incorporated by reference as an
exhibit hereto.
(10)(p) First Amendment to the Agreement and Plan of Reorganization
dated May 5, 1998 among Registrant, Cardiac Control
Systems, Inc. and CCS Subsidiary, Inc. filed as an exhibit
to the Registrant's Amendment to Quarterly Report on Form
10-Q for the quarter ended May 31, 1998 and incorporated by
reference as an exhibit hereto.
(10)(q) Second Amendment to the Agreement and Plan of
Reorganization dated August 7, 1998 among Registrant,
Cardiac Control Systems, Inc. and CCS Subsidiary, Inc. and
filed as an exhibit hereto.
32
<PAGE>
(10)(r) Third Amendment to the Agreement and Plan of Reorganization
dated September 4, 1998 among Registrant, Cardiac Control
Systems, Inc. and CCS Subsidiary, Inc. and filed as an
exhibit hereto.
(21) Subsidiaries - Electro-Catheter International Corp.
(23) Consent of KPMG Peat Marwick LLP filed as an exhibit hereto
(27) Financial Data Schedule which is submitted electronically
to the Securities and Exchange Commission for information
only and is not filed.
(b) Reports on Form 8-K :
--------------------
The Company filed a Current Report on Form 8-K dated
October 7, 1997, which, under "Item 5. Other Events"
thereunder reported a verdict in certain litigation in
which the Company has been involved. Also, the Company has
filed a Current Report on Form 8-K dated November 7, 1997,
which, under "Item 5. Other Events" thereunder, reported
the execution of a letter of intent with Cardiac Control
Systems, Inc. contemplating the merger of the two
companies.
(c) Exhibits: Reference is made to the list of
-------- exhibits contained in Item 14(a) 3 above.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
Dated: December 4, 1998 By: s/Ervin Schoenblum
---------------- ------------------
Ervin Schoenblum
Acting President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company
and the capacities and on the dates indicated:
Dated: December 4, 1998 /s/Ervin Schoenblum
----------------- -------------------
Ervin Schoenblum, Acting President
& Director
Dated: December 4, 1998 /s/Joseph P. Macaluso
----------------- ---------------------
Joseph P. Macaluso
Principal Accounting Officer
Dated: December 4, 1998 /s/Abraham H. Nechemie
----------------- ----------------------
Abraham H. Nechemie, Director
34
<PAGE>
ELECTRO-CATHETER CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report F-1
Financial Statements:
Balance Sheets - August 31, 1998 and 1997 F-2
Statements of Operations -
Years ended August 31, 1998,
1997 and 1996 F-3
Statements of Stockholders' Deficiency/Equity -
Years ended August 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows
Years ended August 31, 1998, 1997 and 1996 F-5
Notes to Financial Statements F-6
Financial Statement Schedule:
II - Valuation and Qualifying Accounts F-25
All other schedules are omitted for the reason that they are not required or are
not applicable or the required information is shown in the financial statements
or notes thereto.
<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.
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 30, 1998 F-1
<PAGE>
ELECTRO-CATHETER CORPORATION
Balance Sheets
August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- -------
Assets
<S> <C> <C>
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-2
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
Statements of Operations
Years ended August 31, 1998, 1997 and 1996
<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-3
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
Statements of Stockholders' Deficiency/Equity
Years ended August 31, 1998, 1997 and 1996
<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)
======== ========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
Statements of Cash Flows
Years ended August 31, 1998, 1997 and 1996
<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 & equipment acquired
under capitalized lease obligations $ 49,150 256,287 49,268
</TABLE>
See accompanying notes to financial statements.
F-5
<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.
(Continued)
F-6
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
-------------------------------------------------
(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.
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.
(Continued)
F-7
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
-------------------------------------------------
(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).
(Continued)
F-8
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
-------------------------------------------------
The weighted average number of shares of common stock used in
the computation of loss per share was approximately
6,388,000 in 1998, 6,380,000 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 year 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).
(Continued)
F-9
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(2) Liquidity, cont.
----------------
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>
(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>
(Continued)
F-10
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(5) Accrued Expenses
----------------
The components of accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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 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
(Continued)
F-11
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(7) Subordinated Debentures Due to The T Partnership, cont.
-------------------------------------------------------
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.
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
(Continued)
F-12
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(7) Subordinated Debentures Due to The T Partnership, cont.
-------------------------------------------------------
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 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 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. The Company is currently in compliance with
such revised covenant.
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
(Continued)
F-13
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(7) Subordinated Debentures Due to The T Partnership, cont.
------------------------------------------------------
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:
1999 $ 73,279
2000 377,227
2001 377,729
2002 338,501
2003 303,157
thereafter 1,047,125
=========
(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.
(Continued)
F-14
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(10) Stock Options
-------------
On May 20, 1987, the Company's stockholders approved the 1987 Incentive
Stock Option Plan (the "1987 Plan"). Under the 1987 Plan, 225,000
shares of authorized but unissued shares of common stock, $.10 par
value, of the Company were set aside to provide an incentive for
officers and other key employees to render services and make
contributions to the Company. Options may be granted at not less than
their fair market value at the date of grant and are exercisable at
such time provided by the grants during the five-year period
beginning on the date of grant.
On May 23, 1990, the Company's stockholders approved the 1990 Incentive
Stock Option Plan (the "1990 Plan"). The terms of the 1990 Plan are
substantially the same as the terms of the 1987 Plan. The 1990 Plan
provides for the reservation of 225,000 shares of common stock for
issuance thereunder.
On July 15, 1992, the Company's stockholders approved the 1992
Incentive Stock Option Plan (the "1992 Plan"). The terms of the 1992
Plan are substantially the same as the terms of the 1987 and 1990
Plans. The 1992 Plan likewise provides for the reservation of 225,000
shares of common stock for issuance thereunder.
On April 1, 1992, the Board of Directors adopted the 1992 Non-Qualified
Stock Option Plan pursuant to which options to purchase 200,000
shares of common stock may be granted to directors, officers and key
employees. Options may be granted at a price determined by the Board
of Directors, but not less than 80% of the fair market value at the
date of grant. Options are exercisable at such time provided by the
grants, but each option granted shall terminate no longer than five
years after the date of grant.
In July 1994, the Company extended the expiration date of certain
outstanding options held by two members of its Board of Directors.
The extension, relating to a total of 44,500 shares of 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 extension has
(Continued)
F-15
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(10) Stock Options, cont.
--------------------
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 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
(Continued)
F-16
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(10) Stock Options, cont.
--------------------
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.
(Continued)
F-17
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(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 a
director, and Abraham H. Nechemie, also a member of the Company's
Board of Directors, are members of The T Partnership.
(13) Income Taxes
------------
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will 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:
(Continued)
F-18
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(13) Income Taxes, cont.
-------------------
<TABLE>
Deferred tax assets: 1998 1997
---- ----
<CAPTION>
<S> <C> <C>
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:
(Continued)
F-19
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(13) Income Taxes, cont.
------------------
<TABLE>
<CAPTION>
Net Research
operating and Invest-
loss develop- ment
Expiration carry- ment tax
date forwards credits 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>
(14) Segment Data
------------
The Company operates in one business segment. Export sales were
$1,559,386 in 1998, $1,828,000 in 1997 and $2,324,000 in 1996. The
major areas of export sales are as follows:
Region 1998 1997 1996
------ ---- ---- ----
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
======= ======= =======
(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.
(Continued)
F-20
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(15) Commitments and Contingencies, cont.
------------------------------------
The following is a schedule of future minimum rental payments for
operating leases which expire through 2001:
1999 $ 9,166
2000 5,016
2001 2,090
-------
$ 16,272
(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
(Continued)
F-21
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(15) Commitments and Contingencies, cont.
-----------------------------------
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 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. 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.
(Continued)
F-22
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(15) Commitments and Contingencies, cont.
------------------------------------
(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, 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 additional 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. 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
(Continued)
F-23
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(16) The Proposed Merger cont.
------------------------
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. The merger will be accounted for using
the purchase method of accounting. In accordance with the provisions
of Staff Accounting Bulletin No. 97, the Company is 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 costs 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
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 the end of December
1998, although there is no assurance the merger will be completed.
(Continued)
F-24
<PAGE>
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
<TABLE>
Schedule II
ELECTRO-CATHETER CORPORATION
Valuation and Qualifying Accounts
Years Ended August 31, 1998, 1997 and 1996
<CAPTION>
Addition
Balance charged
at begin- to cost Balance
ing of and Write- at end
Description year expenses offs 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-25
<PAGE>
Exhibit (10)(j)
THIRD COMPOSITE MODIFICATION AGREEMENT
THIS THIRD COMPOSITE MODIFICATION ("Modification Agreement") dated as
of September 17, 1997 between ELECTRO-CATHETER CORPORATION, a New Jersey
corporation with offices at 2100 Felver Court, Rahway, New Jersey 07065
("Borrower") and THE T PARTNERSHIP, a New Jersey partnership with offices c/o
Wiss & Co., 354 Eisenhower Parkway, Livingston, New Jersey 07039 ("Lender"),
WITNESSETH:
WHEREAS, the Borrower and the Lender entered into a Lending Agreement
(as amended "Lending Agreement") dated August 31, 1995, whereby the Lender
loaned to the Borrower the sum of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00); and
WHEREAS, to evidence such indebtedness the Borrower issued a 12%
Debenture (as amended "Debenture") to the Lender dated August 31, 1995; and
WHEREAS, the Borrower and the Lender entered into a Security Agreement (as
amended "Security Agreement") dated as of August 31, 1995, to secure the due and
punctual payment and performance of all obligations of the Borrower under the
Loan Documents (as such term is defined in the Lending Agreement); and
WHEREAS, the obligations of the Borrower under the Loan Documents are
further secured by a Mortgage (as amended "Mortgage") dated October 31, 1995,
which Mortgage is a first lien mortgage on Borrower's real property located in
the City of Rahway, County of Union, State of New Jersey, commonly known and
designated as 2100 Felver Court; and
WHEREAS, the Borrower and the Lender entered into a Composite
Modification Agreement and Amendment to Mortgage dated as of January 1, 1996 and
a Second Composite Modification Agreement dated as of April 15, 1997 and
Borrower issued an Amended and Restated Debenture dated January 1, 1996 and a
Second Amended and Restated Debenture dated April 15, 1997 evidencing additional
borrowings by Borrower from Lender with aggregate borrowings equivalent to
$1,850,000 ("Loan"); and
WHEREAS, the Borrower and the Lender have agreed to modify the Loan
Documents on certain terms and conditions as hereinafter provided.
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. LOAN. The Lender has advanced an additional One Hundred
Thousand Dollars ($100,000.00) to Borrower.
2. MODIFICATION OF LOAN DOCUMENTS. The Loan Documents are hereby
modified and amended as follows:
(a) Principal Amount of Loan. All references to the sum One
Million Eight Hundred Fifty Thousand and 00/100 Dollars ($1,850,000.00) in the
Loan Documents and Mortgage shall be deleted in its entirety and substituted in
its place and stead shall be the sum of all advances up to One Million Nine
Hundred Fifty Thousand and 00/100 Dollars ($1,950,000.00).
(b) Additional Composite Modifications. References in any Loan
Document to the Debenture, Mortgage or Lending Agreement shall be deemed to
refer to respectively the Third Amended and Restated Debenture, the Mortgage as
modified by the Third Amendment to Mortgage and the Lending Agreement as
modified by the First Composite, Second Composite and this Third Composite
Modification Agreement.
3. CONTINUED VALIDITY OF ORIGINAL LOAN DOCUMENTATION. Except as
otherwise provided herein, the Loan Documents shall continue in full force and
effect, in accordance with their respective terms, and the parties hereto hereby
expressly ratify, confirm and reaffirm all of their respective liabilities,
obligations, duties and responsibilities under and pursuant to the Loan
Documents, as modified by this Modification Agreement, and Borrower agrees that
the same shall constitute valid and binding agreements of Borrower, enforceable
in accordance with their respective terms.
4. MODIFICATION AGREEMENT CONTROLS. In the event of a conflict between
the terms and conditions of this Modification Agreement and the terms and
conditions of the Loan Documents, the terms and conditions of this Modification
Agreement shall control.
5. NO NOVATION. This Modification Agreement does not represent new
indebtedness (except to the extent of the Current New Advances) and does not in
any way represent satisfaction of the indebtedness. It is the intention of the
parties hereto that this Modification Agreement shall not constitute a novation
and shall in no way adversely affect or impair the lien priority of the
Mortgage, the Security Agreement or any other instrument securing the Loan.
6. ADDITIONAL DELIVERIES. Borrower is delivering to Lender
simultaneously herewith a substitute Third Amended and Restated Debenture and
Third Amendment to Mortgage. The T Partnership shall return to Borrower within
45 days of the date of this Modification Agreement the Second Amended and
Restated Debenture.
IN WITNESS WHEREOF, the parties have executed this Modification Agreement
as of the date first above written.
ELECTRO-CATHETER CORPORATION
By:___________________________
Ervin Schoenblum,
Acting President
THE T PARTNERSHIP
By:____________________________
Abraham H. Nechemie,
Partner
<PAGE>
Exhibit (10)(k)
ELECTRO-CATHETER CORPORATION
PROMISSORY NOTE
$100,000 as of December 17, 1997
FOR VALUE RECEIVED, ELECTRO-CATHETER CORPORATION, a New Jersey
corporation ("Maker") promises to pay to the order of The T Partnership, a
partnership organized under the laws of the State of New Jersey, its successors
and assigns (the "Holder"), in lawful money of the United States of America, the
principal sum of One Hundred Thousand Dollars ($100,000), together with interest
thereon, upon the following terms.
The principal sum evidenced hereby shall bear interest at the fixed
rate (the "Rate") of twelve percent (12%) per annum. Interest shall be
calculated on a 360-day year for the actual number of days elapsed in each
calendar year.
Accrued interest shall be payable monthly on or before the first day of
each calendar month. The entire outstanding balance of principal, and accrued
and unpaid interest thereon, shall be due and payable, on the earlier of (i)
September 1, 1999, (ii) the occurrence of an Event of Default (as hereinafter
defined) and acceleration of the due date hereunder, or (iii) the closing on a
transaction whereby Maker sells substantially all of its assets, or whereby by
merger, stock sale or other transaction, the ownership composition of Maker
changes by over 25% at which time Maker shall pay to Holder the entire
outstanding principal balance due hereunder together with all accrued and unpaid
interest thereon and all other unpaid fees, expenses, and other sums.
All sums payable to Holder hereunder shall be paid in immediately
available funds at the offices of Holder, c/o Fred Lafer, The Taub Foundation,
300 Frank W. Burr Blvd., Teaneck, New Jersey 07666, or elsewhere as Holder shall
designate.
Maker may prepay this Note in full at any time without fee or penalty.
This Note is secured by and entitled to the benefits of, inter alia, a
Security Agreement between Maker and Holder dated as of August 31, 1995, as
amended, it being the intent of the parties that this Note constitutes a "Loan
Document" under the "Loan Agreement", as such terms are defined in the Security
Agreement.
"Event of Default", wherever used in this Note, means any one
of the following events:
<PAGE>
(a) default in the payment of any installment of interest
under this Note and continuance of such default for a period of fifteen (15)
days; or
(b) failure to pay the principal when due and continuance of
such default for a period of fifteen (15) days; or
(c) a default under any document evidencing indebtedness due
from Maker to Holder.
Upon demand, after an Event of Default, the entire unpaid balance of
the principal debt, and all other liabilities, indebtedness and obligations of
Maker to Holder (however acquired or evidenced) together with unpaid interest
thereon, and all costs of collection (including reasonable attorney's fees),
shall at the option of the Holder and without notice become immediately due and
payable. Payment of the foregoing sums may be recovered in whole or in part at
any time by one or more of the remedies provided to Holder in this Note or
otherwise available under applicable law, and in such case Holder may recover
all costs of suit and reasonable attorneys' fees for collection. After an Event
of Default, all amounts due hereunder shall bear interest at a rate equal to the
Rate plus two percentage points.
Maker hereby waives presentment for payment, demand, protest, and of
dishonor and non-payment of this Note, and consents that Holder may extend the
time of payment or otherwise modify the terms of payment of any part or the
whole of the debt evidenced by this Note, and such consent shall not alter or
diminish the liability of any person hereunder.
The remedies of this Note providing for the enforcement of the payment
of the principal sum hereby secured, together with interest thereon, and for the
performance of the covenants, conditions, and agreements, matters and things
herein and therein contained, are cumulative and concurrent and may be pursued
singly or successively, or together, at the sole discretion of Holder and may be
exercised as often as occasion therefore shall occur. The waiver by Holder or
failure to enforce any covenant or condition of this Note or to declare any
default thereunder or hereunder, shall not operate as a waiver of any subsequent
default or affect the right of Holder to exercise any right or remedy not
expressly waived in writing.
This Note shall bind Maker and Maker's respective successors and
assigns, and the benefit hereof shall inure to Holder and its successors and
assigns. The word "Holder" whenever occurring herein shall be deemed and taken
to include each successive holder hereof or any interest herein.
The parties intend that this Note shall be governed by and construed in
accordance with the law of the State of New Jersey.
<PAGE>
MAKER CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR NEW JERSEY OR ANY NEW JERSEY STATE COURT FOR PURPOSES OF ALL
LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE. MAKER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. ALL PARTIES HEREBY MUTUALLY AND
RECIPROCALLY WAIVE ANY RIGHT TO A JURY TRIAL IN ANY PROCEEDING HEREON OR RELATED
HERETO.
IN WITNESS WHEREOF, Maker has caused the due execution hereof, as of
the date and year first above written.
ATTEST: ELECTRO-CATHETER CORPORATION
_______________________ By:_____________________________
Arlene Bell, Secretary Name: Ervin Schoenblum
Title: Acting President
<PAGE>
Exhibit (10)(l)
ELECTRO-CATHETER CORPORATION
PROMISSORY NOTE
$100,000 as of January 26, 1998
FOR VALUE RECEIVED, ELECTRO-CATHETER CORPORATION, a New Jersey
corporation ("Maker"), promises to pay to the order of The T Partnership, a
partnership organized under the laws of the State of New Jersey, its successors
and assigns (the "Holder"), in lawful money of the United States of America, the
principal sum of One Hundred Thousand Dollars ($100,000), together with interest
thereon, upon the following terms.
The principal sum evidenced hereby shall bear interest at the fixed
rate (the "Rate") of twelve percent (12%) per annum. Interest shall be
calculated on a 360-day year for the actual number of days elapsed in each
calendar year.
Accrued interest shall be payable monthly on or before the first day of
each calendar month. The entire outstanding balance of principal, and accrued
and unpaid interest thereon, shall be due and payable, on the earlier of (i) the
date six months from the date of this Note, (ii) the occurrence of an Event of
Default (as hereinafter defined) and acceleration of the due date hereunder, or
(iii) the closing on a transaction whereby Maker sells substantially all of its
assets, or whereby by merger, stock sale or other transaction, the ownership
composition of Maker changes by over 25% at which time Maker shall pay to Holder
the entire outstanding principal balance due hereunder together with all accrued
and unpaid interest thereon and all other unpaid fees, expenses, and other sums.
All sums payable to Holder hereunder shall be paid in immediately
available funds at the offices of Holder, c/o Fred Lafer, The Taub Foundation,
300 Frank W. Burr Blvd., Teaneck, New Jersey 07666, or elsewhere as Holder shall
designate.
Maker may prepay this Note in full at any time without fee or penalty.
<PAGE>
This Note is secured by and entitled to the benefits of, inter alia, a
Security Agreement between Maker and Holder dated as of August 31, 1995, as
amended, it being the intent of the parties that this Note constitutes a "Loan
Document" under the "Loan Agreement", as such terms are defined in the Security
Agreement.
"Event of Default", wherever used in this Note, means any one of the
following events:
(a) default in the payment of any installment of interest
under this Note and continuance of such default for a period of fifteen (15)
days; or
(b) failure to pay the principal when due and continuance of
such default for a period of fifteen (15) days; or
(c) a default under any document evidencing indebtedness due
from Maker to Holder.
Upon demand, after an Event of Default, the entire unpaid balance of
the principal debt, and all other liabilities, indebtedness and obligations of
Maker to Holder (however acquired or evidenced) together with unpaid interest
thereon, and all costs of collection (including reasonable attorney's fees),
shall at the option of the Holder and without notice become immediately due and
payable. Payment of the foregoing sums may be recovered in whole or in part at
any time by one or more of the remedies provided to Holder in this Note or
otherwise available under applicable law, and in such case Holder may recover
all costs of suit and reasonable attorneys' fees for collection. After an Event
of Default, all amounts due hereunder shall bear interest at a rate equal to the
Rate plus two percentage points.
Maker hereby waives presentment for payment, demand, protest, and of
dishonor and non-payment of this Note, and consents that Holder may extend the
time of payment or otherwise modify the terms of payment of any part or the
whole of the debt evidenced by this Note, and such consent shall not alter or
diminish the liability of any person hereunder.
The remedies of this Note providing for the enforcement of the payment
of the principal sum hereby secured, together with interest thereon, and for the
performance of the covenants, conditions, and agreements, matters and things
herein and therein contained, are cumulative and concurrent and may be pursued
singly or successively, or together, at the sole discretion of Holder and may be
exercised as often as occasion therefore shall occur. The waiver by Holder or
failure to enforce any covenant or condition of this Note or to declare any
default thereunder or hereunder, shall not operate as a waiver of any subsequent
default or affect the right of Holder to exercise any right or remedy not
expressly waived in writing.
This Note shall bind Maker and Maker's respective successors and
assigns, and the benefit hereof shall inure to Holder and its successors and
assigns. The word "Holder" whenever occurring herein shall be deemed and taken
to include each successive holder hereof or any interest herein.
The parties intend that this Note shall be governed by and construed in
accordance with the law of the State of New Jersey.
MAKER CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR NEW JERSEY OR ANY NEW JERSEY STATE COURT FOR PURPOSES OF ALL
LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE. MAKER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. ALL PARTIES HEREBY MUTUALLY AND
RECIPROCALLY WAIVE ANY RIGHT TO A JURY TRIAL IN ANY PROCEEDING HEREON OR RELATED
HERETO.
IN WITNESS WHEREOF, Maker has caused the due execution hereof, as of
the date and year first above written.
ATTEST: ELECTRO-CATHETER CORPORATION
_______________________ By: _____________________________
Arlene Bell, Secretary Name: Ervin Schoenblum
Title: Acting President
<PAGE>
Exhibit (10)(m)
ELECTRO-CATHETER CORPORATION
PROMISSORY NOTE
$100,000 as of May 14, 1998
FOR VALUE RECEIVED, ELECTRO-CATHETER CORPORATION, a New Jersey
corporation ("Maker") promises to pay to the order of The T Partnership, a
partnership organized under the laws of the State of New Jersey, its successors
and assigns (the "Holder"), in lawful money of the United States of America, the
principal sum of One Hundred Thousand Dollars ($100,000), together with interest
thereon, upon the following terms.
The principal sum evidenced hereby shall bear interest at the fixed
rate (the "Rate") of twelve percent (12%) per annum. Interest shall be
calculated on a 360-day year for the actual number of days elapsed in each
calendar year.
Accrued interest shall be payable monthly on or before the first day of
each calendar month. The entire outstanding balance of principal, and accrued
and unpaid interest thereon, shall be due and payable, on the earlier of (i)
September 1, 1999, (ii) the occurrence of an Event of Default (as hereinafter
defined) and acceleration of the due date hereunder, or (iii) the closing on a
transaction whereby Maker sells substantially all of its assets, or whereby by
merger, stock sale or other transaction, the ownership composition of Maker
changes by over 25% at which time Maker shall pay to Holder the entire
outstanding principal balance due hereunder together with all accrued and unpaid
interest thereon and all other unpaid fees, expenses, and other sums.
All sums payable to Holder hereunder shall be paid in immediately
available funds at the offices of Holder, c/o Fred Lafer, The Taub Foundation,
300 Frank W. Burr Blvd., Teaneck, New Jersey 07666, or elsewhere as Holder shall
designate.
Maker may prepay this Note in full at any time without fee or penalty.
This Note is secured by and entitled to the benefits of, inter alia, a
Security Agreement between Maker and Holder dated as of August 31, 1995, as
amended, it being the intent of the parties that this Note constitutes a "Loan
Document" under the "Loan Agreement", as such terms are defined in the Security
Agreement.
"Event of Default", wherever used in this Note, means any one
of the following events:
<PAGE>
(a) default in the payment of any installment of interest
under this Note and continuance of such default for a period of fifteen (15)
days; or
(b) failure to pay the principal when due and continuance of
such default for a period of fifteen (15) days; or
(c) a default under any document evidencing indebtedness due
from Maker to Holder.
Upon demand, after an Event of Default, the entire unpaid balance of
the principal debt, and all other liabilities, indebtedness and obligations of
Maker to Holder (however acquired or evidenced) together with unpaid interest
thereon, and all costs of collection (including reasonable attorney's fees),
shall at the option of the Holder and without notice become immediately due and
payable. Payment of the foregoing sums may be recovered in whole or in part at
any time by one or more of the remedies provided to Holder in this Note or
otherwise available under applicable law, and in such case Holder may recover
all costs of suit and reasonable attorneys' fees for collection. After an Event
of Default, all amounts due hereunder shall bear interest at a rate equal to the
Rate plus two percentage points.
Maker hereby waives presentment for payment, demand, protest, and of
dishonor and non-payment of this Note, and consents that Holder may extend the
time of payment or otherwise modify the terms of payment of any part or the
whole of the debt evidenced by this Note, and such consent shall not alter or
diminish the liability of any person hereunder.
The remedies of this Note providing for the enforcement of the payment
of the principal sum hereby secured, together with interest thereon, and for the
performance of the covenants, conditions, and agreements, matters and things
herein and therein contained, are cumulative and concurrent and may be pursued
singly or successively, or together, at the sole discretion of Holder and may be
exercised as often as occasion therefore shall occur. The waiver by Holder or
failure to enforce any covenant or condition of this Note or to declare any
default thereunder or hereunder, shall not operate as a waiver of any subsequent
default or affect the right of Holder to exercise any right or remedy not
expressly waived in writing.
This Note shall bind Maker and Maker's respective successors and
assigns, and the benefit hereof shall inure to Holder and its successors and
assigns. The word "Holder" whenever occurring herein shall be deemed and taken
to include each successive holder hereof or any interest herein.
<PAGE>
The parties intend that this Note shall be governed by and construed in
accordance with the law of the State of New Jersey.
MAKER CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR NEW JERSEY OR ANY NEW JERSEY STATE COURT FOR PURPOSES OF ALL
LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE. MAKER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. ALL PARTIES HEREBY MUTUALLY AND
RECIPROCALLY WAIVE ANY RIGHT TO A JURY TRIAL IN ANY PROCEEDING HEREON OR RELATED
HERETO.
IN WITNESS WHEREOF, Maker has caused the due execution hereof, as of
the date and year first above written.
ATTEST: ELECTRO-CATHETER CORPORATION
_______________________ By:_____________________________
Arlene Bell, Secretary Name: Ervin Schoenblum
Title: Acting President
<PAGE>
Exhibit (10)(n)
ELECTRO-CATHETER CORPORATION
PROMISSORY NOTE
$100,000 as of July 30, 1998
FOR VALUE RECEIVED, ELECTRO-CATHETER CORPORATION, a New Jersey
corporation ("Maker") promises to pay to the order of The T Partnership, a
partnership organized under the laws of the State of New Jersey, its successors
and assigns (the "Holder"), in lawful money of the United States of America, the
principal sum of One Hundred Thousand Dollars ($100,000), together with interest
thereon, upon the following terms.
The principal sum evidenced hereby shall bear interest at the fixed
rate (the "Rate") of twelve percent (12%) per annum. Interest shall be
calculated on a 360-day year for the actual number of days elapsed in each
calendar year.
Accrued interest shall be payable monthly on or before the first day of
each calendar month. The entire outstanding balance of principal, and accrued
and unpaid interest thereon, shall be due and payable, on the earlier of (i)
September 1, 1999, (ii) the occurrence of an Event of Default (as hereinafter
defined) and acceleration of the due date hereunder, or (iii) the closing on a
transaction whereby Maker sells substantially all of its assets, or whereby by
merger, stock sale or other transaction, the ownership composition of Maker
changes by over 25% at which time Maker shall pay to Holder the entire
outstanding principal balance due hereunder together with all accrued and unpaid
interest thereon and all other unpaid fees, expenses, and other sums.
All sums payable to Holder hereunder shall be paid in immediately
available funds at the offices of Holder, c/o Fred Lafer, The Taub Foundation,
300 Frank W. Burr Blvd., Teaneck, New Jersey 07666, or elsewhere as Holder shall
designate.
Maker may prepay this Note in full at any time without fee or penalty.
This Note is secured by and entitled to the benefits of, inter alia, a
Security Agreement between Maker and Holder dated as of August 31, 1995, as
amended, it being the intent of the parties that this Note constitutes a "Loan
Document" under the "Loan Agreement", as such terms are defined in the Security
Agreement.
"Event of Default", wherever used in this Note, means any one
of the following events:
<PAGE>
(a) default in the payment of any installment of interest
under this Note and continuance of such default for a period of fifteen (15)
days; or
(b) failure to pay the principal when due and continuance of
such default for a period of fifteen (15) days; or
(c) a default under any document evidencing indebtedness due
from Maker to Holder.
Upon demand, after an Event of Default, the entire unpaid balance of
the principal debt, and all other liabilities, indebtedness and obligations of
Maker to Holder (however acquired or evidenced) together with unpaid interest
thereon, and all costs of collection (including reasonable attorney's fees),
shall at the option of the Holder and without notice become immediately due and
payable. Payment of the foregoing sums may be recovered in whole or in part at
any time by one or more of the remedies provided to Holder in this Note or
otherwise available under applicable law, and in such case Holder may recover
all costs of suit and reasonable attorneys' fees for collection. After an Event
of Default, all amounts due hereunder shall bear interest at a rate equal to the
Rate plus two percentage points.
Maker hereby waives presentment for payment, demand, protest, and of
dishonor and non-payment of this Note, and consents that Holder may extend the
time of payment or otherwise modify the terms of payment of any part or the
whole of the debt evidenced by this Note, and such consent shall not alter or
diminish the liability of any person hereunder.
The remedies of this Note providing for the enforcement of the payment
of the principal sum hereby secured, together with interest thereon, and for the
performance of the covenants, conditions, and agreements, matters and things
herein and therein contained, are cumulative and concurrent and may be pursued
singly or successively, or together, at the sole discretion of Holder and may be
exercised as often as occasion therefore shall occur. The waiver by Holder or
failure to enforce any covenant or condition of this Note or to declare any
default thereunder or hereunder, shall not operate as a waiver of any subsequent
default or affect the right of Holder to exercise any right or remedy not
expressly waived in writing.
This Note shall bind Maker and Maker's respective successors and
assigns, and the benefit hereof shall inure to Holder and its successors and
assigns. The word "Holder" whenever occurring herein shall be deemed and taken
to include each successive holder hereof or any interest herein.
<PAGE>
The parties intend that this Note shall be governed by and construed in
accordance with the law of the State of New Jersey.
MAKER CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT FOR NEW JERSEY OR ANY NEW JERSEY STATE COURT FOR PURPOSES OF ALL
LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE. MAKER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. ALL PARTIES HEREBY MUTUALLY AND
RECIPROCALLY WAIVE ANY RIGHT TO A JURY TRIAL IN ANY PROCEEDING HEREON OR RELATED
HERETO.
IN WITNESS WHEREOF, Maker has caused the due execution hereof, as of
the date and year first above written.
ATTEST: ELECTRO-CATHETER CORPORATION
_______________________ By:_____________________________
Arlene Bell, Secretary Name: Ervin Schoenblum
Title: Acting President
<PAGE>
Exhibit (10)(q)
SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 7th day of August, 1998, by and among
CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation ("Parent"), CCS
SUBSIDIARY, INC., a New Jersey corporation and wholly-owned subsidiary of Parent
("Acquisition Sub"), and ELECTRO-CATHETER CORPORATION, a New Jersey corporation
('Company").
R E C I T A L S:
----------------
WHEREAS, Parent, Acquisition Sub and the Company entered into that
certain Agreement and Plan of Reorganization dated as of January 20, 1998, as
amended by a First Amendment to Agreement and Plan of Reorganization dated May
5, 1998 (the "First Amendment")(collectively, the "Reorganization Agreement";
terms used herein and as otherwise defined shall have the meanings given to them
in the Reorganization Agreement); and
WHEREAS, the parties have made certain determinations relative to the
structuring and financing of the transactions contemplated under the
Reorganization Agreement; and
WHEREAS, the parties believe it to be advisable to amend the
Reorganization Agreement in order to clarify and correct certain aspects thereof
to reflect such determinations.
NOW, THEREFORE, for the reasons set forth hereinbelow, and in
consideration of the mutual promises contained herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree to amend the Reorganization Agreement as
follows:
1. The fifth, sixth, seventh and eighth paragraphs of the recitals of
the First Amendment shall be deleted in their entirety and replaced with the
following:
WHEREAS, prior to the Effective Time of the Merger, Parent
will effectuate a reverse stock split at a 1 for 5 ratio; and
2. Section 1.6 shall be deleted in its entirety and replaced with the
following:
<PAGE>
TAX-FREE REORGANIZATION. For Federal income tax purposes, the
----------------------- parties intend that the Merger be
treated as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
3. Subsection 2.1(c) shall be deleted in its entirety and replaced with
the following:
Subject to Section 2.2, each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time (other
than shares cancelled pursuant to Section 2.1(b)) shall be deemed
cancelled and converted into and shall represent the right to receive
one-fifth of a share of Holdings Common Stock in accordance with
Section 2.2. For convenience of reference, the shares of Holdings
Common Stock to be issued upon the exchange and conversion of Company
Common Stock in accordance with this Section 2.1(c) are sometimes
hereinafter collectively referred to as the "Merger Shares".
4. The first sentence of Section 2.3 shall be deleted in its entirety
and replaced with the following:
At the Effective Time, each of the Company's then outstanding
Company Warrants, Company Options and conversion rights (whether or not
exercisable at the Effective Time) by virtue of the Merger and without
any further action on the part of any holder thereof, shall be assumed
by Holdings and automatically converted, on the same terms, into a
warrant, option or conversion right to purchase a number of shares of
Holdings Common Stock (to be registered shares to the extent the
option, warrant or conversion right holder is, by terms of the Company
option plan, warrant or conversion right in effect, entitled upon
exercise of the option, warrant or conversion right, to receive
registered stock) determined by multiplying the number of shares of
Company Common Stock covered by such Company Warrants, Company Options
and conversion rights immediately prior to the Effective Time by
one-fifth (1/5th) (rounded up to the nearest whole number of shares),
at an exercise price per share of Holdings Common Stock equal to the
exercise price in effect under such Company Warrants, Company Options
or conversion rights immediately prior to the Effective Time divided by
one-fifth (1/5th) (rounded up to the nearest cent).
<PAGE>
5. The first sentence of Section 4.3 shall be deleted in its entirety
and replaced with the following:
The authorized capital stock of Parent consists of 30,000,000
shares of common stock, $.10 par value, of Parent (the "Parent Common
Stock"), of which 2,648,739 shares are outstanding as of November 30,
1997.
6. Section 7.1 shall be deleted in its entirety and replaced with the
following:
STOCKHOLDER APPROVAL. At least two-thirds (2/3) of the votes
---------------------cast by holders of the outstanding shares
of the Company Common Stock present in person or represented by proxy
and entitled to vote at a special meeting of the stockholders of the
Company shall have approved and adopted the Agreement and the Merger.
The affirmative vote of the holders of a majority of the shares of
Parent Common Stock present in person or represented by proxy and
entitled to vote at a special meeting of the stockholders of Parent
shall have: (i) approved a reverse stock split of the Parent Common
Stock at a 1 for 5 ratio (the "Reverse Split"); (ii) approved the
reorganization of Parent into a holding company structure (the
"Restructuring"); and (iii) approved and adopted the Agreement and the
Merger.
7. Section 7.6 shall be deleted in its entirety and replaced with the
following:
[INTENTIONALLY LEFT BLANK]
8. Section 7.7 shall be deleted in its entirety and replaced with the
following:
FINANCING. A minimum of $4,000,000 in financing, in addition
---------to any debt obligation of both Parent and the Company
existing as of January 20, 1998, on terms acceptable to both Parent
and the Company shall have been secured.
9. Section 7.8 shall be deleted in its entirety and replaced with the
following:
HOLDING COMPANY REORGANIZATION. Parent shall have effectuated
------------------------------ the Restructuring pursuant to
Section 251(g) of the General Corporation Law of the State of Delaware
and approved and adopted an Agreement of Merger substantially in the
form of Exhibit 7.8 attached hereto, whereby Parent shall have formed
a direct, wholly-owned Delaware subsidiary, which shall also have
formed a direct, wholly-owned Delaware subsidiary ("Holdings Merger
Sub") which will have merged with and into Parent so that Parent will
have become a direct, wholly-owned subsidiary of Holdings.
10. Section 7.9 shall be inserted and shall read as follows:
REVERSE SPLIT. The Parent shall have effectuated the Reverse
-------------Split whereby each stockholder shall have received
one share of Parent Common Stock for every five shares of Parent Common
Stock held by such stockholder prior to the Reverse Split. No
fractional shares of Parent Common Stock will be issued in the Reverse
Split. In lieu of any such fractional shares, an Exchange Agent shall,
on behalf of all holders of such fractional shares, aggregate all such
fractional shares and sell the resulting shares of Parent Common Stock
for the account of such holders who thereafter shall be entitled to
receive, on a pro rata basis, the proceeds of the sale of such shares
of Parent Common Stock, without interest thereon.
11. Section 8.10 shall be inserted and shall read as follows:
PARENT INDEBTEDNESS. Provisions shall have been made for
-------------------- payment at Closing of indebtedness
of Parent due to GTH for all outstanding reasonable attorneys' fees
and expenses incurred in connection with its prior representation of
Parent, together with all reasonable attorneys' fees and expenses
incurred in connection with its representation of Parent relative to
the Reverse Split, the Restructuring, and the Merger.
12. Section 9.6 shall be deleted in its entirety and replaced with the
following:
TAX OPINION. The Company shall have received an opinion in
-------------form and substance satisfactory to the Company or
SSSG, counsel for the Company, to the effect that the Merger will be
treated for Federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code and that Holdings, Parent and
the Company will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. In connection with such opinion,
counsel shall be entitled to rely upon certain representations of
Parent, Holdings, Acquisition Sub and the Company and certain
stockholders of the Company.
13. Section 9.13 shall be deleted in its entirety and replaced with the
following:
COMPANY INDEBTEDNESS. Provisions shall have been made for
---------------------- payment at Closing of indebtedness
of the Company: (a) which is due at Closing to SSSG for all outstanding
reasonable attorneys' fees and expenses incurred in connection with
its prior representation of the Company, together with all reasonable
attorneys' fees and expenses incurred in connection with its
representation of the Company relative to the Merger; and (b) which may
be incurred subsequent to May 1, 1998 in an amount of $200,000, or any
greater amount as agreed to by the Company and Parent in writing, for
the purpose of operating capital pending completion of the Merger, and
owed to The T Partnership.
14. The date set forth in Sections 11.1(b)(i) and 11.1(c) shall be
changed from August 14, 1998 to October 31, 1998.
15. Section 12.8 shall be deleted in its entirety and replaced with the
following:
AMENDMENT, MODIFICATION AND WAIVER. This Agreement shall not
----------------------------------- be altered or otherwise
amended except pursuant to an instrument in writing signed by Parent
and the Company; provided, however, that any party to this Agreement
may waive any obligation owed to it by any other party under this
Agreement. Notwithstanding the foregoing, no material provision of
this Agreement may be altered or otherwise amended, nor may material
obligations of either party be waived after this Agreement has been
approved and adopted by the respective stockholders of Parent and
the Company, without the further approval of such stockholders of such
alteration, amendment or waiver. Any waiver by any party hereto of
a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
16. Notwithstanding any provision in the Reorganization Agreement to
the contrary, each of Parent and the Company may take such actions as shall
allow each of them to secure interim financing in an amount not to exceed
$900,000 to be used for operating capital pending completion of the transactions
contemplated under the Reorganization Agreement; provided, however, that, prior
to consummating such financing arrangement, the material terms thereof are
disclosed to the other party. No action on the part of either party in securing
financing contemplated by this Agreement and in accordance herewith shall result
in a breach of the Reorganization Agreement or constitute default under such
Reorganization Agreement and each party hereby consents to such actions by the
other party. Parent and the Company shall cause each of their respective
Disclosure Schedules to be amended to reflect any such interim financing that
they may obtain in accordance with this Agreement.
17. Section 4.12(c) of the Parent Disclosure Schedule shall be amended
to reflect execution of a supply agreement entered into with Angeion Corporation
which is effective as of September 17, 1997.
18. All Exhibits and the Glossary to the Reorganization Agreement shall
be amended to reflect the amendments to the Reorganization Agreement set forth
herein.
19. Except to the extent amended hereby, all terms, provisions and
conditions of the Reorganization Agreement shall continue in full force and
effect and shall remain enforceable and binding in accordance with their
respective terms.
IN WITNESS WHEREOF, each of the parties hereto has caused this Second
Amendment to Agreement and Plan of Reorganization to be executed on its behalf
as of the day and year first above written.
CARDIAC CONTROL SYSTEMS, INC.
By:________________________________
Alan J. Rabin, President
CCS SUBSIDIARY, INC.
By:________________________________
Alan J. Rabin, President
ELECTRO-CATHETER CORPORATION
By:________________________________
Ervin Schoenblum, Acting President
<PAGE>
Exhibit (10)(r)
THIRD AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS THIRD AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 23rd day of September, 1998, by and
among CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation ("Parent"), CCS
SUBSIDIARY, INC., a New Jersey corporation and wholly-owned subsidiary of Parent
("Acquisition Sub"), and ELECTRO-CATHETER CORPORATION, a New Jersey corporation
('Company").
R E C I T A L S:
----------------
WHEREAS, Parent, Acquisition Sub and the Company entered into that
certain Agreement and Plan of Reorganization dated as of 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 "Reorganization Agreement"; terms used herein
and as otherwise defined shall have the meanings given to them in the
Reorganization Agreement); and
WHEREAS, the parties have made certain determinations relative to the
structuring and financing of the transactions contemplated under the
Reorganization Agreement; and
WHEREAS, the parties believe it to be advisable to amend the
Reorganization Agreement in order to clarify and correct certain aspects thereof
to reflect such determinations.
NOW, THEREFORE, for the reasons set forth hereinbelow, and in
consideration of the mutual promises contained herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree to amend the Reorganization Agreement as
follows:
1. Section 7.1 shall be deleted in its entirety and replaced with the
following:
STOCKHOLDER APPROVAL. At least two-thirds (2/3) of the votes
---------------------cast by holders of the outstanding shares
of the Company Common Stock present in person or represented by proxy
and entitled to vote at a special meeting of the stockholders of the
Company shall have approved and adopted the Agreement and the Merger.
The affirmative vote of the holders of a majority of the outstanding
shares of Parent Common Stock entitled to vote at a special meeting
of the stockholders of Parent shall have: (i) approved a reverse stock
split of the Parent Common Stock at a 1 for 5 ratio (the "Reverse
Split"); (ii) approved and adopted an Agreement of Merger and Plan
of Reorganization (the "Restructuring Merger Agreement") among Parent,
Holdings and a to be organized indirect, wholly-owned subsidiary of
Parent ("Holdings Merger Sub) providing for the merger of Holdings
Merger Sub with and into Parent (the "Restructuring Merger"); and (iii)
ratified, approved and adopted the Agreement and the Merger.
2. Section 7.8 shall be deleted in its entirety and replaced with the
following:
HOLDING COMPANY REORGANIZATION. Parent and Holdings Merger Sub
------------------------------ 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.
3. The first three words of Section 9.4 shall be changed from "Parent
and Acquisition Sub" to "The Company".
4. In the second line of Section 11.1, the following language shall be
inserted between the words "by" and "Parent": "the respective boards of
directors and stockholders of".
5. In the third line of Section 11.1, the following language shall be
inserted after the word "Agreement": "and the Merger".
6. Section 11.1(b)(i) shall be deleted in its entirety.
7. Section 11.3 shall be inserted and read as follows:
AUTOMATIC TERMINATION. This Agreement shall be terminated and
--------------------- the merger abandoned, notwithstanding
the approval by the respective boards of directors and stockholders of
Parent, Acquisition Sub and the Company of this Agreement and the
Merger, in the event that the conditions set forth in Article VII
hereof shall not have been met by January 31, 1999.
<PAGE>
8. The date set forth in Section 11.1(c) shall be changed
from October 31, 1998 to January 31, 1999.
9. The appropriate sections of Article IV and the Parent Disclosure
Schedule shall be amended to reflect execution of a promissory note and issuance
of a warrant to GTH, execution of a promissory note in favor of Mirand, Inc.,
execution of a promissory note and issuance of a warrant to International
Holdings, Inc., and an amendment to the Coast Business Credit loan and security
agreement and issuance of a warrant in conjunction therewith.
10. The appropriate sections of Article III and the Company Disclosure
Schedule shall be amended to reflect additional borrowings from the T
Partnership and recent litigation matters, respectively.
11. All Exhibits and the Glossary to the Reorganization Agreement shall
be amended to reflect the amendments to the Reorganization Agreement set forth
herein.
12. Except to the extent amended hereby, all terms, provisions and
conditions of the Reorganization Agreement shall continue in full force and
effect and shall remain enforceable and binding in accordance with their
respective terms.
IN WITNESS WHEREOF, each of the parties hereto has caused this Third
Amendment to Agreement and Plan of Reorganization to be executed on its behalf
as of the day and year first above written.
CARDIAC CONTROL SYSTEMS, INC.
By:________________________________
Alan J. Rabin, President
CCS SUBSIDIARY, INC.
By:________________________________
Alan J. Rabin, President
ELECTRO-CATHETER CORPORATION
By:________________________________
Ervin Schoenblum, Acting
President
<PAGE>
Exhibit 23
Independent Auditors' Consent
The Board of Directors
Electro-Catheter Corporation:
We consent to incorporation by reference in the Registration Statement
(No.33-56016) on Form S-8 of Electro-Catheter Corporation of our report dated
October 30, 1998 relating to the balance sheets of Electro-Catheter Corporation
as of August 31, 1998 and 1997, and the related statements of operations,
stockholders' deficiency/equity and cash flows and related financial statement
schedule for each of the years in the three-year period ended August 31, 1998,
which report appears in the August 31, 1998 annual report on Form 10-K of
Electro-Catheter Corporation. 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.
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 30, 1998
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