SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CARDIAC CONTROL SYSTEMS, INC.
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(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
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Name of Person(s) Filing Proxy Statement, other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14(a)-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total Fee Paid:
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[X] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$861.32
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2) Form, Schedule or Registration Statement No.:
Schedule 14A
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3) Filing Party:
Catheter Technology Group, Inc.
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4) Date Filed:
January 23, 1998, as amended May 29, 1998, August 10, 1998
September 8, 1998, September 25, 1998 and October 7, 1998.
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(1) Based upon the maximum number of shares of common stock, $.10 par value, of
Catheter Technology Group, Inc. ("CTG") issuable in the Restructuring
Merger to holders of common stock of Cardiac Control Systems, Inc.
("Cardiac") and in the Merger to holders of common stock of Electro
Catheter Corporation.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(f)(1) based upon the market value of the estimated number of
shares of Electro common stock to be exchanged pursuant to the Merger
(6,390,389), at a price of $.3435 per share, the average of the closing bid
and asked prices of Electro common stock reported in over-the- counter
trading on October 5, 1998, plus the estimated number of shares of Cardiac
common stock to be exchanged pursuant to the Restructuring Merger
(2,648,739), at a price of $.37 per share, the average of the closing bid
and asked prices of Cardiac common stock reported in over-the-counter
trading on October 5, 1998.
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164
Dear Stockholder:
You are cordially invited to attend a special meeting of the
stockholders of Cardiac Control Systems, Inc. ("Cardiac") to be held at 12:00
p.m., local time, on November 16, 1998, at the Newark Airport Marriott Hotel,
Newark International Airport, Newark, New Jersey 07114, and any and all
adjournments and postponements thereof (the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote upon
proposals to: (i) approve an amendment to Cardiac's Certificate of Incorporation
providing for a one for five reverse stock split (the "Reverse Split") whereby
the number of shares of Cardiac will be reduced to approximately 530,000 shares;
(ii) ratify, approve and adopt an Agreement and Plan of Reorganization, dated as
of January 20, 1998, as amended by a First Amendment to Agreement and Plan of
Reorganization, dated as of May 5, 1998, a Second Amendment to Agreement and
Plan of Reorganization, dated as of August 7, 1998 and a Third Amendment to
Agreement and Plan of Reorganization, dated as of September 4, 1998
4(collectively, the "Merger Agreement"), among Electro-Catheter Corporation, a
New Jersey Corporation ("Electro"), Cardiac, and CCS Subsidiary, Inc., a New
Jersey corporation and an indirect, wholly-owned subsidiary of Cardiac ("Sub"),
providing for the merger of Sub with and into Electro (the "Merger"), as a
result of which Electro will become a wholly-owned subsidiary of Cardiac and the
stockholders of Electro will become stockholders of Catheter Technology Group,
Inc. ("CTG"), a Delaware corporation and direct, wholly-owned subsidiary of
Cardiac which will become a parent holding company of Cardiac as a result of the
hereinafter referenced Restructuring Merger; (iii) approve and adopt an
Agreement of Merger and Plan of Reorganization, dated as of September 23, 1998
(the "Restructuring Merger Agreement"), among Cardiac, CTG and CTG Merger Sub,
Inc., a Delaware corporation and a direct, wholly-owned subsidiary of CTG
("Merger Sub"), providing for the merger of Merger Sub with and into Cardiac
(the "Restructuring Merger" or the "Restructuring"), as a result of which
Cardiac will become a direct, wholly-owned subsidiary of CTG and the
stockholders of Cardiac will become stockholders of CTG; (iv) authorize
adjournment of the Special Meeting to permit the further solicitation of
proxies, if necessary; and (v) transact such other business as may properly come
before Special Meeting or any postponements or adjournments thereof.
As a result of the occurrence of the Merger and the Restructuring
Merger, CTG will become the parent holding company of Cardiac, and Electro will
become a direct, wholly-owned subsidiary of Cardiac.
By virtue of the Merger and following the Reverse Split, each
outstanding share of common stock, $.10 par value per share, of Electro
("Electro Common Stock") will be converted into the right to receive one-fifth
of a share of common stock, $.10 par value per share, of CTG ("CTG Common
Stock").
By virtue of the Restructuring Merger and following the Reverse Split,
each outstanding share of common stock, $.10 par value per share, of Cardiac
("Cardiac Common Stock") will be converted into the right to receive one share
of CTG Common Stock. Copies of the Merger Agreement, the Restructuring Merger
Agreement and the Amendment to the Certificate of Incorporation effecting the
Reverse Split are attached as Appendices A (including A1, A2 and A3), B and C,
respectively, to the enclosed Joint Proxy Statement/Prospectus.
The Merger will result in the reverse acquisition by Electro
stockholders of CTG (as the parent holding company of Cardiac as a result of the
Restructuring Merger) due to the fact that the number of shares of CTG Common
Stock to be issued to Electro stockholders (approximately 1,278,000 shares) will
represent approximately 53% of the outstanding CTG Common Stock and the number
of shares of CTG Common Stock held by Cardiac stockholders will represent
approximately 22% of the outstanding CTG Common Stock after giving effect to the
approximately 25% interest in CTG consisting of shares of CTG Common Stock to be
issued in connection with the contemplated public offering to occur
contemporaneously with and as a condition to the consummation of the Merger.
<PAGE>
Since the Reverse Split, the Merger and the Restructuring Merger are
all interdependent and the consummation of each action is conditioned upon
receipt of approval for all three proposals, the failure of the stockholders to
approve and adopt any one of the proposals will result in none of the Reverse
Split, the Merger and the Restructuring Merger occurring.
The affirmative vote of the holders of a majority of the outstanding
shares of Cardiac Common Stock entitled to vote at the Special Meeting will be
required to approve each of: (i) the Reverse Split; (ii) the Merger Agreement
and the Merger; and (iii) the Restructuring Merger Agreement and the
Restructuring Merger.
The Boards of Directors of Electro and Cardiac believe that the Merger
and Restructuring Merger will combine complementary strengths of Cardiac and
Electro and create a larger enterprise which would have better economies of
scale, greater operations flexibility, and the enhanced ability to attract
working capital and fund strategic initiatives such as technology development.
CARDIAC'S BOARD OF DIRECTORS HAS APPROVED THE REVERSE SPLIT, THE MERGER
AGREEMENT AND THE MERGER AND THE RESTRUCTURING MERGER AGREEMENT AND
RESTRUCTURING MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND BELIEVES
THAT THE REVERSE SPLIT, THE MERGER AND THE RESTRUCTURING MERGER ARE IN THE BEST
INTEREST OF CARDIAC AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, THE BOARD
OF DIRECTORS RECOMMENDS THAT THE CARDIAC STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
REVERSE SPLIT, RATIFICATION, APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
THE MERGER, AND APPROVAL AND ADOPTION OF THE RESTRUCTURING MERGER AGREEMENT AND
THE RESTRUCTURING MERGER.
Details of the proposed transactions and other important information
concerning Electro and Cardiac are more fully described in the enclosed Joint
Proxy Statement/Prospectus. The determination of whether to vote in favor of the
Reverse Split, the Merger Agreement and the Merger and the Restructuring Merger
Agreement and the Restructuring Merger involves the consideration by you of the
risk factors described therein under "RISK FACTORS." You are urged to read
carefully the Joint Proxy Statement/Prospectus as well as all exhibits thereto.
Your vote is important. Whether or not you plan to attend the Special
Meeting, it is important that your shares be represented. If you are not certain
that you will attend, please complete, sign and date the accompanying proxy card
and return it in the enclosed postage prepaid envelope as soon as possible. You
may revoke your proxy in the manner described in the accompanying Joint Proxy
Statement/Prospectus at any time before it has been voted at the Special
Meeting. If you attend the Special Meeting, you may vote in person even if you
have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Very truly yours,
Alan J. Rabin
Chief Executive Officer and President
October 15, 1998
Palm Coast, Florida
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 1998
TO THE STOCKHOLDERS OF CARDIAC CONTROL SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the
"Special Meeting") of Cardiac Control Systems, Inc., a Delaware corporation
("Cardiac"), will be held at 12:00 p.m., local time, on November 16, 1998, at
the Newark Airport Marriott Hotel, Newark International Airport, Newark, New
Jersey 07114,for the following purposes:
1. To consider and vote upon a proposal to approve a one for five
reverse stock split (the "Reverse Split") to be effectuated by an amendment to
Cardiac's Certificate of Incorporation (the "Reverse Split Amendment") whereby
the number of outstanding shares of common stock, $.10 par value per share, of
Cardiac ("Cardiac Common Stock") will be reduced to approximately 530,000
shares. Upon approval of the Reverse Split, the stockholders of Cardiac will be
entitled to receive one share of Cardiac Common Stock for every five shares of
Cardiac Common Stock held by such stockholder prior to the Reverse Split. No
fractional shares of Cardiac 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 Cardiac 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 Cardiac Common Stock, without interest thereon. The
affirmative vote of the holders of a majority of the shares of Cardiac Common
Stock present in person or represented by proxy and entitled to vote at the
Special Meeting will be required to approve the Reverse Split. A copy of the
Reverse Split Amendment is attached as Appendix C to the Joint Proxy
Statement/Prospectus accompanying this Notice.
2. To consider and vote upon a proposal to ratify, approve and adopt an
Agreement and Plan of Reorganization, dated as of January 20, 1998, as amended
by a First Amendment to Agreement and Plan of Reorganization, dated as of May 5,
1998, a Second Amendment to Agreement and Plan of Reorganization, dated as of
August 7, 1998 and a Third Amendment to Agreement and Plan of Reorganization,
dated as of September 4, 1998 (collectively, the "Merger Agreement"), among
Cardiac, Electro-Catheter Corporation, a New Jersey corporation ("Electro"), and
CCS Subsidiary, Inc., a New Jersey corporation and a wholly-owned subsidiary of
Cardiac ("Sub"), providing for the merger contemplated thereby of Sub with and
into Electro (the "Merger"), as a result of which Electro will become a
wholly-owned subsidiary of Cardiac and the stockholders of Electro will become
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation
and direct, wholly-owned subsidiary of Cardiac which will become a parent
holding company of Cardiac as a result of the hereinafter referenced
Restructuring Merger. By virtue of the Merger, each outstanding share of common
stock, $.10 par value, of Electro ("Electro Common Stock") will be converted
into the right to receive one-fifth of a share of common stock, $.10 par value
per share, of CTG ("CTG Common Stock"). The Merger will result in the reverse
acquisition by Electro stockholders of CTG (as the parent holding company of
Cardiac as a result of the Restructuring Merger) due to the fact that the number
of shares of CTG Common Stock to be issued to Electro stockholders
(approximately 1,278,000 shares) will represent approximately 53% of the
outstanding CTG Common Stock and the stockholders of Cardiac will represent
approximately 22% of the outstanding CTG Common Stock following the Merger after
giving effect to the approximately 25% interest in CTG consisting of shares of
CTG Common Stock to be issued in connection with a contemplated public offering
to occur simultaneously with and as a condition to the Merger. A copy of the
Merger Agreement is attached as Appendix A to the enclosed Joint Proxy
Statement/Prospectus. The affirmative vote of the holders of a majority of the
shares of Cardiac Common Stock present in person or represented by proxy and
entitled to vote at the Special Meeting will be required to ratify, approve and
adopt the Merger Agreement and the Merger.
<PAGE>
3. To consider and vote upon a proposal to approve and adopt an
Agreement of Merger and Plan of Reorganization, dated as of September 23, 1998
(the "Restructuring Merger Agreement") among Cardiac, CTG and CTG Merger Sub,
Inc., a Delaware corporation and a direct, wholly-owned subsidiary of CTG
("Merger Sub"), providing for the merger of Merger Sub with and into Cardiac
(the "Restructuring Merger" or the "Restructuring"), as a result of which
Cardiac will become a direct, wholly-owned subsidiary of CTG. By virtue of the
Restructuring Merger, the stockholders of Cardiac will become stockholders of
CTG, and each outstanding share of Cardiac Common Stock (as adjusted for the
Reverse Split) will be converted into the right to receive one share of CTG
Common Stock. A copy of the Restructuring Merger Agreement is attached as
Appendix B to the enclosed Joint Proxy Statement/Prospectus. The affirmative
vote of the holders of a majority of the outstanding shares of Cardiac Common
Stock entitled to vote at the Special Meeting will be required to approve and
adopt the Restructuring Merger Agreement and the Restructuring Merger. CARDIAC
STOCKHOLDERS MAY BE ENTITLED TO EXERCISE DISSENTERS' APPRAISAL RIGHTS IF THEY DO
NOT VOTE IN FAVOR OF THE RESTRUCTURING MERGER AND OTHERWISE COMPLY WITH THE
REQUIREMENTS OF SECTION 262 OF THE DELAWARE ACT. SEE "DISSENTERS' RIGHTS -
CARDIAC STOCKHOLDERS" IN THE ENCLOSED JOINT PROXY STATEMENT/PROSPECTUS.
4. To authorize the Board of Directors to adjourn the Special Meeting
to a subsequent date and time, if necessary, to permit further solicitation of
proxies if there are insufficient votes to constitute a quorum or to approve the
Reverse Split and the Restructuring Merger, and ratify, approve and adopt the
Merger Agreement and the Merger. The affirmative vote of the holders of a
majority of the shares of Cardiac Common Stock present in person or represented
by proxy and entitled to vote at the Special Meeting will be required for the
authorization to adjourn the Special Meeting.
5. To transact such other business as may properly come before the
Special Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on September 28,
1998 as the record date for the determination of the holders of Cardiac Common
Stock entitled to notice of, and to vote at, the Special Meeting. Accordingly,
only stockholders of record at the close of business on such date are entitled
to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof.
Details of the proposed transaction and other important information
concerning Electro and Cardiac are more fully described in the accompanying
Joint Proxy Statement/Prospectus which is hereby made a part of this notice. You
are urged to give this material your careful attention.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE
REQUESTED TO SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY CARD WHICH IS BEING
SOLICITED ON BEHALF OF THE CARDIAC BOARD OF DIRECTORS. A RETURN ENVELOPE WHICH
REQUIRES NO POSTAGE, IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR THAT
PURPOSE. You may revoke your proxy in the manner described in the accompanying
Joint Proxy Statement/Prospectus at any time before it has been voted at the
Special Meeting. Any stockholder attending the Special Meeting may vote in
person even if he or she has returned a proxy.
By Order of the Board of Directors,
Alan J. Rabin
Officer and President
October 15, 1998
Palm Coast, Florida
<PAGE>
IMPORTANT
STOCKHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS TO
ASSURE THAT A QUORUM IS PRESENT AT THE MEETING BY PROMPTLY RETURNING THE
ENCLOSED PROXY.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
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PROXY STATEMENT OF ELECTRO-CATHETER CORPORATION
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 1998
AND
PROXY STATEMENT OF CARDIAC CONTROL SYSTEMS, INC.
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 16, 1998
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PROSPECTUS OF CATHETER TECHNOLOGY GROUP, INC
FOR SHARES OF COMMON STOCK OF CATHETER TECHNOLOGY GROUP, INC.
TO BE ISSUED IN THE MERGER AND THE RESTRUCTURING MERGER
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This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, $.10 par value per share ("Electro Common Stock"), of
Electro-Catheter Corporation, a New Jersey corporation ("Electro"), in
connection with the solicitation of proxies by the Board of Directors of Electro
(the "Electro Board") for use at the Special Meeting of Stockholders of Electro
to be held at the Newark Airport Marriott Hotel, Newark International Airport,
Newark, New Jersey 07114, on November 16, 1998, at 10:00 a.m., local time, and
at any and all adjournments or postponements thereof (the "Electro Special
Meeting"). Only holders of record of Electro Common Stock as of the close of
business on September 28, 1998 (the "Electro Record Date") will be entitled to
notice of, and to vote at, the Electro Special Meeting.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of common stock, $.10 par value per share ("Cardiac Common Stock"), of
Cardiac Control Systems, Inc., a Delaware corporation ("Cardiac") in connection
with the solicitation of proxies by the Board of Directors of Cardiac (the
"Cardiac Board") for use at the Special Meeting of Stockholders of Cardiac to be
held at 12:00 p.m., local time, on November 16, 1998, at the Newark Airport
Marriott Hotel, Newark International Airport, Newark, New Jersey 07114, and at
any and all adjournments or postponements thereof (the "Cardiac Special
Meeting"). Only holders of record of Cardiac Common Stock as of the close of
business on September 28, 1998 (the "Cardiac Record Date") will be entitled to
notice of, and to vote at, the Cardiac Special Meeting.
PROPOSAL TO BE CONSIDERED AT THE ELECTRO SPECIAL MEETING AND THE CARDIAC SPECIAL
MEETING.
This Joint Proxy Statement/Prospectus relates, among other things, to
the proposed merger (the "Merger") of CCS Subsidiary, Inc. ("Sub"), a
newly-formed New Jersey corporation and an indirect, wholly-owned subsidiary of
Cardiac, with and into Electro pursuant to an Agreement and Plan of
Reorganization, dated as of January 20, 1998, as amended by a First Amendment to
Agreement and Plan of Reorganization, dated as of May 5, 1998, a Second
Amendment to Agreement and Plan of Reorganization, dated as of August 7, 1998,
and a Third Amendment
<PAGE>
to Agreement and Plan of Reorganization, dated as of September 4, 1998
(collectively, the "Merger Agreement"), among Cardiac, Electro and Sub. A copy
of the Merger Agreement is attached as Appendix A (including A1, A2 and A3) to
this Joint Proxy Statement/Prospectus. Upon consummation of the Merger, the
separate corporate existence of Sub will cease and Electro will become a
wholly-owned subsidiary of Cardiac. Pursuant to the Merger Agreement (and after
the occurrence of the hereinafter referenced Reverse Split), each outstanding
share of Electro Common Stock will be converted into the right to receive
one-fifth of a share of common stock, $.10 par value per share ("CTG Common
Stock"), of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation and
direct, wholly-owned subsidiary of Cardiac which will become a parent holding
company of Cardiac as a result of the hereinafter referenced Restructuring
Merger. See "MERGER - Exchange of Shares."
ADDITIONAL PROPOSALS TO BE CONSIDERED AT THE CARDIAC SPECIAL MEETING.
At the Cardiac Special Meeting, the holders of Cardiac Common Stock
will, in addition to the Merger, be asked to consider and vote upon proposals
to: (i) approve a one for five reverse stock split (the "Reverse Split") to be
effectuated by an amendment to Cardiac's Certificate of Incorporation (the
"Reverse Split Amendment") whereby the number of outstanding shares of Cardiac
Common Stock will be reduced to approximately 530,000 shares; (ii) approve and
adopt an Agreement of Merger and Plan of Reorganization dated as of September
23, 1998 (the "Restructuring Merger Agreement") among Cardiac, CTG and CTG
Merger Sub, Inc. ("Merger Sub"), a Delaware corporation and a direct,
wholly-owned subsidiary of CTG, providing for the merger of Merger Sub with and
into Cardiac (the "Restructuring Merger" or the "Restructuring"), as a result of
which Cardiac will become a direct, wholly-owned subsidiary of CTG. By virtue of
the Restructuring Merger, the stockholders of Cardiac will become stockholders
of CTG, and each issued and outstanding share of Cardiac Common Stock (as
adjusted for the Reverse Split) shall be deemed cancelled and converted into and
shall represent the right to receive one share of CTG Common Stock; (iii)
authorize adjournment of the Cardiac Special Meeting to permit the further
solicitation of proxies, if necessary; and (iv) transact such other business as
may properly come before the Cardiac Special Meeting or any postponements or
adjournments thereof. See "REVERSE SPLIT" and "RESTRUCTURING MERGER."
PROSPECTUS
As a result of the occurrence of the Merger and the Restructuring
Merger, CTG will become the parent holding company of Cardiac, and Electro will
become a direct, wholly-owned subsidiary of Cardiac. This Joint Proxy
Statement/Prospectus also constitutes the Prospectus of CTG with respect to an
aggregate of approximately 1,807,825 shares of CTG Common Stock to be issued in
connection with the Merger and the Restructuring Merger (the "Merger Shares").
The Merger will result in: (i) the reverse acquisition by Electro stockholders
of CTG due to the fact that immediately after the consummation of the Merger and
the Restructuring Merger, the Merger Shares to be received by Electro
stockholders will represent an aggregate of approximately 53% of the outstanding
shares of CTG Common Stock (after giving effect to the approximately 25%
interest in CTG to be issued in connection with the contemplated public offering
to occur simultaneously with and as a condition to the consummation of the
Merger), based on the number of shares of CTG Common Stock outstanding after
completion of the Reverse Split and the Restructuring Merger; and (ii) the
combination of the current business operations and management of Cardiac and
Electro.
Cardiac and Electro are currently traded in the over-the-counter market
and are quoted on the OTC Bulletin Board. Upon consummation of the Merger, CTG
intends to apply to list shares of CTG Common Stock on a regional stock exchange
and/or the Nasdaq SmallCap MarketSM. There can be no assurance that CTG will be
able to obtain or maintain any such listings for its shares. On October 8, 1998,
there were 2,648,739 shares of Cardiac Common Stock outstanding and the last
reported sale price as of that date for Cardiac Common Stock was $.39 per share.
On October 8, 1998, there were 6,390,389 shares of Electro Common Stock
outstanding and the last reported sale price as of that date for Electro Common
Stock was $.21875 per share. Based on the last reported sale price of Electro
Common Stock on October 8, 1998, the aggregate consideration of the transaction
is approximately $1,397,897.
-2-
<PAGE>
All information contained in this Joint Proxy Statement/Prospectus with
respect to Cardiac, Sub and Merger Sub has been provided by Cardiac, all
information with respect to CTG has been provided by Cardiac and CTG and all
information with respect to Electro has been provided by Electro.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN
EVALUATING THE PROPOSALS BEFORE VOTING, SEE "RISK FACTORS" BEGINNING ON PAGE 24.
This Joint Proxy Statement/Prospectus and the accompanying forms of
proxy are first being mailed to stockholders of Electro and Cardiac,
respectively, on or about October 15, 1998. A stockholder of either Electro or
Cardiac who has given a proxy may revoke it at any time prior to its exercise.
See "THE SPECIAL MEETINGS - Electro Special Meeting." A stockholder of Cardiac
who has given a proxy may revoke it at anytime prior to its exercise. See "THE
SPECIAL MEETINGS - Cardiac Special Meeting."
Holders of record of shares of Electro Common Stock will not have
appraisal rights with respect to their shares. Section 14A:11-1 of the New
Jersey Business Corporation Act states that a stockholder shall not have the
right to dissent from any plan of merger or consolidation with respect to shares
for which, pursuant to the plan of merger or consolidation, he will receive: (a)
cash; (b) shares, obligations or other securities which, upon consummation of
the merger or consolidation, will either be listed on a national securities
exchange or held of record by not less than one thousand (1,000) holders; or (c)
cash and such securities. Holders of record of shares of Cardiac Common Stock
may be entitled to exercise appraisal rights with respect to their shares if
they do not vote in favor of the Restructuring Merger and otherwise comply with
the requirements of Section 262 of the Delaware Act. See "DISSENTERS' RIGHTS."
As of September 30, 1998, there were 584 holders of record of Cardiac
Common Stock and 699 holders of record of Electro Common Stock.
ALL REFERENCES TO CARDIAC IN THIS PROSPECTUS WHICH RELATE TO TIME
PERIODS SUBSEQUENT TO THE CONSUMMATION OF THE MERGER AND THE RESTRUCTURING
MERGER, SHALL BE DEEMED TO REFER TO CTG.
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THE MERGER AND THE RESTRUCTURING MERGER
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is October 15, 1998.
-3-
<PAGE>
AVAILABLE INFORMATION
Cardiac and Electro are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facility of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained by mail from the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Cardiac Common Stock and Electro Common Stock are traded in the
over-the-counter market and are quoted on the OTC Bulletin Board/registered
trademark/ and such reports, proxy statements and other information concerning
Cardiac and Electro may be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 9801 Washingtonian Boulevard,
Gaithersburg, Maryland 20878. In addition, Cardiac and Electro are required to
file electronic versions of these documents with the SEC through the SEC's
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC.
This Joint Proxy Statement/Prospectus constitutes a part of a
Registration Statement on Form S-4 (herein, together with all amendments and
exhibits thereto, referred to as the "Registration Statement") filed by CTG with
the SEC under the Securities Act. This Joint Proxy Statement/Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to CTG Common Stock offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of the document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY CTG, CARDIAC OR ELECTRO OR ANY OTHER PERSON. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF CTG COMMON STOCK MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF CTG, CARDIAC OR ELECTRO SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. TO THE
EXTENT, HOWEVER, THAT THERE ARE MATERIAL CHANGES WHICH OCCUR PRIOR TO THE
EFFECTIVENESS OF THE MERGER WHICH WOULD MATERIALLY IMPACT A STOCKHOLDER'S
INVESTMENT OR VOTING DECISION, STOCKHOLDERS ELIGIBLE TO VOTE WILL BE RESOLICITED
SO AS TO BE ABLE TO TAKE SUCH CIRCUMSTANCES INTO ACCOUNT.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.............................................................................................4
SUMMARY..........................................................................................................10
General.......................................................................................................10
The Parties...................................................................................................11
Electro Special Meeting.......................................................................................12
Required Vote at Electro Special Meeting......................................................................13
Abstentions and Broker Non-Votes at Electro Special Meeting...................................................13
Adjournment of Electro Special Meeting........................................................................13
Electro Stockholders' Dissenters' Rights......................................................................13
Recommendation of the Electro Board...........................................................................13
Fairness Opinion with Respect to the Merger...................................................................14
Cardiac Special Meeting.......................................................................................14
Abstentions and Broker Non-Votes at Cardiac Special Meeting...................................................15
Adjournment of Cardiac Special Meeting........................................................................15
Required Vote at Cardiac Special Meeting......................................................................15
Cardiac Stockholders' Dissenters' Rights......................................................................16
Recommendation of the Cardiac Board...........................................................................16
Merger........................................................................................................16
Reverse Split.................................................................................................19
Restructuring Merger..........................................................................................19
Regulatory Approval...........................................................................................20
Risk Factors..................................................................................................20
Federal Income Tax Consequences...............................................................................21
Accounting Treatment..........................................................................................21
Market Price And Dividend Data................................................................................21
Resale of CTG Common Stock by Affiliates......................................................................23
RISK FACTORS.....................................................................................................24
Certain Considerations Relating to Acquiring CTG Common Stock.................................................24
Certain Considerations Relating to Merger with Electro........................................................31
Certain Considerations Relating to Future Operations of CTG and its Subsidiaries..............................33
THE SPECIAL MEETINGS.............................................................................................35
Electro Special Meeting.......................................................................................35
Cardiac Special Meeting.......................................................................................37
BACKGROUND OF THE MERGER.........................................................................................38
REASONS FOR THE MERGER...........................................................................................43
Electro's Reasons for the Merger..............................................................................43
Cardiac's Reasons for the Merger..............................................................................46
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS.......................................................................50
Electro Board.................................................................................................50
Cardiac Board.................................................................................................50
OPINION OF COMPASS CAPITAL PARTNERS, LTD.........................................................................50
January Opinion...............................................................................................50
May Opinion...................................................................................................54
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MERGER...........................................................................................................56
General.......................................................................................................56
Merger Effective Time and Effect of the Merger................................................................56
Exchange of Shares............................................................................................57
Treatment of Stock Options and Warrants.......................................................................58
Conditions to the Merger......................................................................................58
Representations, Warranties and Covenants.....................................................................60
Voting Agreement..............................................................................................61
Termination of the Merger Agreement...........................................................................61
Fees and Expenses; Termination Fees...........................................................................62
Amendment of the Merger Agreement.............................................................................62
Interests of Certain Persons in the Merger....................................................................63
Redemption of The T Partnership Debt..........................................................................63
REVERSE SPLIT....................................................................................................64
General.......................................................................................................64
Effective Time and Effect of the Reverse Split................................................................64
Purpose and Background of the Reverse Split...................................................................65
Exchange of Shares............................................................................................65
Reverse Split Amendment.......................................................................................66
RESTRUCTURING MERGER.............................................................................................66
General.......................................................................................................66
Effective Time and Effect of the Restructuring Merger.........................................................67
Reasons for the Restructuring Merger..........................................................................67
Exchange of Shares............................................................................................67
Treatment of Stock Options and Warrants.......................................................................68
Conditions to the Restructuring Merger........................................................................68
Termination of the Restructuring Merger Agreement.............................................................68
Amendment of the Restructuring Merger Agreement...............................................................68
FEDERAL INCOME TAX CONSEQUENCES..................................................................................69
Electro Stockholders..........................................................................................69
Cardiac Stockholders..........................................................................................70
ACCOUNTING TREATMENT.............................................................................................70
RESALE OF CTG COMMON STOCK BY AFFILIATES.........................................................................71
SEQUENCE OF EVENTS...............................................................................................71
OTC BULLETIN BOARD...............................................................................................71
BUSINESS AND MANAGEMENT AFTER THE MERGER AND THE RESTRUCTURING MERGER............................................72
DISSENTERS' RIGHTS...............................................................................................73
Electro Stockholders..........................................................................................73
Cardiac Stockholders..........................................................................................74
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA........................................................77
COMPARATIVE PER SHARE DATA.......................................................................................81
CTG, MERGER SUB AND SUB..........................................................................................82
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BUSINESS OF CARDIAC..............................................................................................82
General.......................................................................................................82
Products......................................................................................................83
Sales, Marketing and Distribution Methods.....................................................................84
Product Warranties............................................................................................86
Certain Patents, Trademarks and Licenses......................................................................86
Research and Development......................................................................................88
Raw Materials and Production..................................................................................88
Sources of Supply.............................................................................................88
Insurance.....................................................................................................89
Employees.....................................................................................................89
Government Regulation.........................................................................................89
Inventory and Backlog.........................................................................................90
Competition in the Industry...................................................................................91
Property......................................................................................................91
Legal Proceedings.............................................................................................91
CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................................................92
Liquidity and Capital Resources...............................................................................92
Results of Operations.........................................................................................94
Operating Trends and Uncertainties............................................................................97
Inflation and Changing Prices.................................................................................99
Recent Accounting Pronouncements..............................................................................99
MANAGEMENT OF CARDIAC............................................................................................99
Directors and Executive Officers of Cardiac...................................................................99
Section 16 (a) Beneficial Ownership Reporting Compliance.....................................................102
CARDIAC DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION.........................................................102
Summary Compensation.........................................................................................102
Option Grants in Last Fiscal Year............................................................................104
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values............................105
Compensation of Directors....................................................................................105
Employment Agreements........................................................................................105
Stock Option Plans...........................................................................................106
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CARDIAC.......................................106
Certain Beneficial Owners....................................................................................106
Management...................................................................................................109
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CARDIAC.......................................................109
BUSINESS OF ELECTRO.............................................................................................111
General......................................................................................................111
Products.....................................................................................................112
Sales, Marketing and Distribution Methods....................................................................113
Product Warranties...........................................................................................113
Certain Patents, Trademarks and Licenses.....................................................................114
Research and Development.....................................................................................115
Production and Sources of Supply.............................................................................115
Insurance....................................................................................................115
Employees....................................................................................................116
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Government Regulation........................................................................................116
Backlog......................................................................................................117
Competition in the Industry..................................................................................118
Property.....................................................................................................118
Legal Proceedings............................................................................................118
ELECTRO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...........................................................................................119
Recent Developments..........................................................................................119
Liquidity and Capital Resources..............................................................................119
Results of Operations........................................................................................121
Operating Trends and Uncertainties...........................................................................124
Inflation and Changing Prices................................................................................124
Recent Accounting Pronouncement..............................................................................124
MANAGEMENT OF ELECTRO...........................................................................................125
Directors and Executive Officers of Electro..................................................................125
Section 16(a) Beneficial Ownership Reporting Compliance......................................................126
ELECTRO DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION.........................................................126
Summary Compensation.........................................................................................126
Option Grants in Last Fiscal Year............................................................................127
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values............................127
Compensation of Directors....................................................................................127
Stock Option Plans...........................................................................................127
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ELECTRO.......................................128
Certain Beneficial Owners....................................................................................128
Management...................................................................................................129
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ELECTRO.......................................................130
DESCRIPTION OF SECURITIES OF CTG, CARDIAC AND SURVIVING SUBSIDIARY..............................................131
Common Stock.................................................................................................131
Preferred Stock of Surviving Subsidiary......................................................................132
Warrants.....................................................................................................133
Business Combination Provisions..............................................................................135
COMPARATIVE RIGHTS OF CTG, CARDIAC AND ELECTRO STOCKHOLDERS.....................................................135
Cumulative Voting............................................................................................136
Stockholder Power to Call Special Stockholders' Meeting......................................................136
Dissolution..................................................................................................136
Size of the Board of Directors...............................................................................136
Classified Board of Directors................................................................................137
Removal of Directors.........................................................................................137
Actions by Written Consent of Stockholders...................................................................137
Advance Notice Requirement for Stockholder Proposals and Director Nominations................................137
Voting Requirements..........................................................................................137
Rights of Dissenting Stockholders............................................................................138
Inspection of Stockholders' List.............................................................................138
Dividends....................................................................................................139
Bylaws.......................................................................................................139
Preemptive Rights............................................................................................139
Transactions Involving Officers or Directors.................................................................139
Filling Vacancies on the Board of Directors..................................................................140
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Limitation of Liability of Directors.........................................................................140
Business Combinations/Reorganizations........................................................................140
Stockholder Derivative Suits.................................................................................141
ADJOURNMENT OF THE SPECIAL MEETINGS.............................................................................141
Electro Special Meeting......................................................................................141
Cardiac Special Meeting......................................................................................142
LEGAL MATTERS...................................................................................................142
EXPERTS.........................................................................................................142
INDEPENDENT ACCOUNTANTS.........................................................................................143
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION..........................................................A-1
APPENDIX A1 FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION......................................A1-1
APPENDIX A2 SECOND AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION.....................................A2-1
APPENDIX A3 THIRD AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION......................................A3-1
APPENDIX B AGREEMENT OF MERGER AND PLAN OF REORGANIZATION................................................B-1
APPENDIX C CERTIFICATE OF AMENDMENT TO CARDIAC'S CERTIFICATE OF
INCORPORATION...............................................................................C-1
APPENDIX D OPINION OF COMPASS CAPITAL PARTNERS, LTD......................................................D-1
APPENDIX E SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW...........................................E-1
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS JOINT PROXY STATEMENT/PROSPECTUS. CERTAIN CAPITALIZED TERMS USED IN THIS
SUMMARY ARE DEFINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE EXHIBITS HERETO. COPIES OF THE MERGER AGREEMENT,
THE RESTRUCTURING MERGER AGREEMENT AND THE REVERSE SPLIT AMENDMENT ARE ATTACHED
AS APPENDICES A (INCLUDING A-1, A-2 AND A-3), B AND C, RESPECTIVELY, TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER, THE RESTRUCTURING MERGER AND THE REVERSE
SPLIT. EACH STOCKHOLDER SHOULD READ CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE EXHIBITS HERETO IN THEIR ENTIRETY.
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS A NUMBER OF
FORWARD-LOOKING STATEMENTS WHICH REFLECT THE CURRENT VIEWS OF CTG, CARDIAC
AND/OR ELECTRO WITH RESPECT TO FUTURE EVENTS THAT MAY HAVE AN EFFECT ON THEIR
FUTURE PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS
RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL OR CURRENTLY ANTICIPATED RESULTS. STOCKHOLDERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.
GENERAL
This Joint Proxy Statement/Prospectus relates to: (i) the proposed
Reverse Split of shares of Cardiac Common Stock to be completed prior to the
Restructuring Merger and as a condition to both the consummation of the Merger
and consummation of the Restructuring Merger; (ii) the proposed Merger of Sub
with and into Electro pursuant to the Merger Agreement, whereby Electro will
become a wholly-owned subsidiary of Cardiac, said Merger to be completed
simultaneously with and as a condition to the consummation of the Restructuring
Merger; and (iii) the proposed Restructuring Merger pursuant to which Cardiac
will become a direct, wholly-owned subsidiary of CTG, said Restructuring Merger
to be completed simultaneously with and as a condition to the consummation of
the Merger (with the result that Electro will become a direct, wholly-owned
subsidiary of Cardiac). See "MERGER," "REVERSE SPLIT" and "RESTRUCTURING
MERGER."
The Merger will result in: (i) the reverse acquisition by Electro
stockholders of CTG due to the fact that immediately after the consummation of
the Merger and the Restructuring Merger, the Merger Shares to be received by
Electro stockholders will represent an aggregate of approximately 53% of the
outstanding shares of CTG Common Stock (after giving effect to the approximately
25% interest in CTG to be issued in connection with the contemplated public
offering to occur simultaneously with and as a condition to the consummation of
the Merger), based on the number of shares of CTG Common Stock after completion
of the Reverse Split and the Restructuring Merger; and (ii) the combination of
the current business operations and management of Cardiac and Electro.
Assuming that the stockholders of both Electro and Cardiac approve all
of the transactions proposed herein, the sequence of events would be as follows:
First, the Reverse Split, whereby the number of outstanding shares of
Cardiac Common Stock would be reduced to approximately 530,000 shares, would be
effectuated by the Reverse Split Amendment; and
Second, the Merger and the Restructuring Merger would both be
effectuated simultaneously resulting in Electro becoming a direct, wholly-owned
subsidiary of Cardiac, with Cardiac in turn being a direct, wholly-owned
subsidiary of CTG.
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Following the completion of the Reverse Split, the Merger and the
Restructuring Merger, CTG intends to apply to list shares of CTG Common Stock on
a regional exchange and/or the Nasdaq SmallCap Market. Prior to the transactions
contemplated herein and the offerings to be made in connection therewith, there
has been no public market for CTG Common Stock and there can be no assurance
that CTG will be able to obtain or maintain any such listings for its shares.
See "MERGER - OTC Bulletin Board."
No fractional shares of Cardiac Common Stock will be issued in the
Reverse Split, and no fractional shares of CTG Common Stock will be issued in
either of the Merger or the Restructuring Merger. In lieu of any such fractional
shares, American Stock Transfer & Trust Company will act as the exchange agent
(the "Exchange Agent") and shall, on behalf of all holders of such fractional
shares, aggregate all such fractional shares and sell the resulting shares 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, without interest
thereon. See "MERGER - Exchange of Shares," "REVERSE SPLIT - Exchange of Shares"
and "RESTRUCTURING MERGER - Exchange of Shares."
THE PARTIES
CARDIAC. Cardiac was incorporated as Supramedics, Inc. on June 20, 1980
under the laws of the State of Delaware and on August 28, 1980 changed its name
to Cardiac Control Systems, Inc. to more accurately reflect the business of the
company. Cardiac is engaged in the design, development, manufacture, marketing
and sale of implantable leads and cardiac pacing systems, as well as the design,
development and manufacture of leads on an original equipment manufacturing
("OEM") basis. These systems consist of single-chamber, dual-chamber and
single-lead atrial-controlled ventricular cardiac pacemakers together with
connecting electrode leads and equipment for the external programming and
monitoring of the pacemakers. Cardiac has received classification (clearance)
from the United States Food and Drug Administration ("FDA") to distribute
commercially products consisting of a line of single-chamber and dual-chamber
pacemaker systems and a single-lead atrial-controlled ventricular cardiac pacing
system. The equipment used for the external programming and monitoring of
Cardiac's pacemaker products is usually loaned without charge to physicians and
other purchasers of Cardiac's products. Cardiac's products are "medical devices"
as defined by the FDA and thus are subject to Federal regulations enforced by
the FDA, including restrictions on the commercial introduction of products and
clinical testing requirements.
Cardiac Common Stock, which historically was listed in the Nasdaq
SmallCap Market, was delisted effective August 30, 1991 as a result of
non-compliance with Nasdaq SmallCap Market's capital and surplus requirement
then in effect of $375,000. However, Cardiac Common Stock is currently quoted on
the OTC Bulletin Board. This service allows market makers to enter quotes and
trade securities that do not meet Nasdaq SmallCap Market qualification
requirements. Upon consummation of the Merger, CTG, as the parent holding
company of Cardiac, intends to apply to list its shares on a regional exchange
and/or the Nasdaq SmallCap Market. Prior to the transactions contemplated herein
and the offerings to be made in connection therewith, there has been no public
market for CTG Common Stock and there can be no assurance that CTG will be able
to obtain or maintain any such listings for its shares. See "OTC BULLETIN
BOARD."
The mailing address of Cardiac's principal executive office is 3
Commerce Boulevard, Palm Coast, Florida 32164 and its telephone number is (904)
445-5450. See "BUSINESS OF CARDIAC."
ELECTRO. Electro was incorporated in New Jersey in 1961. Electro is
engaged in the business of design, development, manufacture, marketing and sale
of catheters and related devices utilized in connection with illnesses of the
heart and circulatory system. Catheters are hollow tubes that can be passed
through veins, arteries and other anatomical passageways. Electro has targeted
electrophysiology as its focal area for future growth, but intends to maintain
and develop products for the emergency care, invasive and non-invasive
cardiology and invasive radiology markets. Electro is also seeking to expand its
OEM business to capitalize on its catheter technology expertise and its
manufacturing capabilities. Electro produces a wide range of catheter products
intended to be utilized by doctors and other trained hospital personnel for
diagnostic as well as therapeutic purposes. Like Cardiac, the products of
Electro are "medical devices" within the meaning of the Federal Food, Drug and
Cosmetics Act, as amended (the "FDA Act"), and are subject to the Federal
regulations enforced by the FDA, including restrictions on the commercial
introduction of products and clinical testing requirements relative to the
marketing thereof. Electro has
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received FDA authorization to market its principal existing products or is
exempt from authorization requirements as provided by law, for certain devices
already in existence prior to amendment of the FDA Act.
Electro Common Stock, which historically was listed in the Nasdaq
SmallCap Market, was delisted effective August 28, 1997 as a result of
non-compliance with the Nasdaq SmallCap Market's bid price requirement then in
effect. However, Electro is currently quoted on the OTC Bulletin Board. This
service allows market makers to enter quotes and trade securities that do not
meet Nasdaq SmallCap Market qualification requirements.
The mailing address of Electro's principal executive offices is 2100
Felver Court, P.O. Box 1214C, Rahway, New Jersey 07065 and its telephone number
is (732) 382-5600.
CTG. CTG was incorporated under the laws of the State of Delaware on
September 9, 1998, as a direct, wholly-owned subsidiary of Cardiac. The address
of CTG's executive offices and telephone number are the same as those of
Cardiac.
MERGER SUB. Merger Sub was incorporated under the laws of the State of
Delaware on September 9, 1998 and is the immediate parent of Sub. Merger Sub is
a direct, wholly-owned subsidiary of CTG. The address of CTG's executive offices
and telephone number are the same as those of Cardiac.
SUB. Sub was incorporated under the laws of New Jersey on December 9,
1997 and is a direct, wholly-owned subsidiary of Merger Sub. The address of
Sub's executive offices and telephone number are the same as those of Cardiac.
ELECTRO SPECIAL MEETING
TIME, DATE AND PLACE. The Electro Special Meeting will be held on
November 16, 1998, at Newark Airport Marriott Hotel, Newark International
Airport, Newark, New Jersey 07114, at 10:00 a.m., local time.
PURPOSE OF ELECTRO SPECIAL MEETING. At the Electro Special Meeting,
stockholders of Electro will be asked to consider and vote upon a proposal to
approve and adopt the Merger Agreement and the Merger and a proposal to
authorize the Electro Board to adjourn the Electro Special Meeting to a
subsequent date and time to permit further solicitation of proxies if there are
insufficient votes to constitute a quorum or to approve the Merger Agreement and
the Merger and such other matters as may be properly brought before the Electro
Special Meeting.
RECORD DATE, QUORUM AND SHARES ENTITLED TO VOTE. Only holders of record
of shares of Electro Common Stock at the close of business on September 28, 1998
are entitled to notice of, and to vote at, the Electro Special Meeting. At the
close of business on September 28, 1998, there were outstanding 6,390,389 shares
of Electro Common Stock which are entitled to vote at the Electro Special
Meeting. Each share of Electro Common Stock is entitled to one vote at the
Electro Special Meeting.
The presence, either in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of Electro Common Stock entitled
to vote at the Electro Special Meeting is necessary to constitute a quorum at
such meeting.
PROXIES AND REVOCATION OF PROXIES. The enclosed Electro proxy card
permits each stockholder to vote "FOR" or "AGAINST" (or "ABSTAIN" from) approval
and adoption of the Merger Agreement and the Merger. If properly executed and
returned, such proxies will be voted in accordance with the choice specified.
Where a signed proxy card is returned, but no choice is specified, the shares
will be voted FOR approval and adoption of the Merger Agreement and the Merger
and for the authorization of the Electro Board to adjourn the Electro Special
Meeting to permit the further solicitation of proxies, if necessary.
A proxy relating to the Electro Special Meeting may be revoked at any
time before it is exercised. A stockholder may revoke a proxy by filing with the
Secretary of Electro written notice of revocation bearing a later date than the
proxy or a duly executed proxy bearing a later date. The proxy may also be
revoked by attending the
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Electro Special Meeting and affirmatively voting in person (although mere
attendance at the Electro Special Meeting will not in and of itself constitute
revocation of a proxy). The name and address of the Secretary of Electro to whom
any notice of revocation should be delivered is Arlene Bell, Electro-Catheter
Corporation, 2100 Felver Court, Rahway, New Jersey 07065.
OTHER MATTERS. Representatives of the independent auditors of Electro
are expected to be present at the Electro Special Meeting. See "INDEPENDENT
ACCOUNTANTS."
REQUIRED VOTE AT ELECTRO SPECIAL MEETING
The holders of a majority of the aggregate outstanding shares of
Electro Common Stock present in person, or by proxy, will constitute a quorum
for the transaction of business at the Electro Special Meeting. The proposal to
approve and adopt the Merger Agreement and the Merger must be approved by the
affirmative vote of two-thirds (2/3) of the votes cast by holders of the
outstanding shares of Electro Common Stock, present in person or represented by
proxy and entitled to vote at the Electro Special Meeting. The proposal to
authorize the Electro Board to adjourn the Electro Special Meeting to permit the
further solicitation of proxies, if necessary, requires the affirmative vote of
a majority of the votes cast by holders of the outstanding shares of Electro
Common Stock, present in person or represented by proxy and entitled to vote at
the Electro Special Meeting. If there are insufficient votes to constitute a
quorum or to approve the Merger Agreement and the Merger at the Electro Special
Meeting, it is contemplated that such meeting would be adjourned in order to
permit further solicitation of proxies. See "ADJOURNMENT OF THE SPECIAL MEETINGS
- - Electro Special Meeting."
Each share of Electro Common Stock is entitled to one vote at the
Electro Special Meeting. The T Partnership, LLP, a New Jersey limited liability
partnership ("The T Partnership") and a stockholder and creditor of Electro
holding an aggregate of approximately 30% of the Electro Common Stock, has
entered into a Voting Agreement and Irrevocable Proxy dated as of January 20,
1998 (the "Voting Agreement") with Cardiac whereby The T Partnership has agreed
to vote in favor of the approval of the Merger Agreement and the Merger. See
"THE SPECIAL MEETINGS - Electro Special Meeting" and "MERGER - Voting
Agreement."
ABSTENTIONS AND BROKER NON-VOTES AT ELECTRO SPECIAL MEETING
At the Electro Special Meeting, abstentions and broker non-votes (as
hereinafter defined) will be counted as present for the purpose of determining
the presence or absence of a quorum for the transaction of business but will not
be counted as a "vote cast" on any matter to which it relates. A "broker
non-vote" refers to shares represented at the Electro Special Meeting in person
or by proxy by a broker or nominee where such broker or nominee (i) has not
received voting instructions on a particular matter from the beneficial owners
or persons entitled to vote; and (ii) the broker or nominee does not have the
discretionary voting power on such matter.
ADJOURNMENT OF ELECTRO SPECIAL MEETING
At the Electro Special Meeting, the Electro stockholders will vote upon
a proposal to authorize the Electro Board to adjourn the Electro Special Meeting
in order to permit further solicitation of proxies, if necessary. See
"ADJOURNMENT OF THE SPECIAL MEETINGS - Electro Special Meeting."
ELECTRO STOCKHOLDERS' DISSENTERS' RIGHTS
Holders of record of shares of Electro Common Stock will not have
appraisal rights with respect to the shares. See "DISSENTERS' RIGHTS - Electro
Stockholders."
RECOMMENDATION OF THE ELECTRO BOARD
The Electro Board has unanimously approved the Merger Agreement and the
Merger and believes the approval of the Merger Agreement, the Merger and the
transactions contemplated thereby are in the best interests of Electro and its
stockholders. The Electro Board unanimously recommends that the Electro
stockholders vote
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"FOR" approval and adoption of the Merger Agreement and the Merger and to
authorize the Electro Board, in its discretion, to adjourn the meeting to
another date and time if deemed necessary by the Board for solicitation of
additional proxies. In considering the recommendation of the Electro Board to
approve and adopt the Merger Agreement and the Merger, Electro stockholders
should be aware that both members of the Electro Board are partners in The T
Partnership, along with three other partners. As of September 30, 1998, Electro
was indebted to The T Partnership in an amount equal to approximately $2.5
million. See "BACKGROUND OF THE MERGER" "REASONS FOR THE MERGER - Electro's
Reasons for the Merger" and "RECOMMENDATIONS OF THE BOARDS OF DIRECTORS -
Electro Board."
FAIRNESS OPINION WITH RESPECT TO THE MERGER
The Electro Board has received an opinion of Compass Capital Partners,
Ltd. ("Compass"), Electro's financial advisor in connection with the Merger, to
the effect that, as of the date of such opinion, the consideration to be
received by holders of shares of Electro Common Stock pursuant to the Merger is
fair to such stockholders from a financial point of view. A copy of such opinion
is attached as Appendix D to this Joint Proxy Statement/Prospectus. See "OPINION
OF COMPASS CAPITAL PARTNERS, LTD."
CARDIAC SPECIAL MEETING
TIME, DATE AND PLACE. The Cardiac Special Meeting will be held at 12:00
p.m., local time, on November 16, 1998, at the Newark Airport Marriott Hotel,
Newark International Airport, Newark, New Jersey 07114.
PURPOSE OF CARDIAC SPECIAL MEETING. At the Cardiac Special Meeting,
stockholders of Cardiac will be asked to consider and vote upon proposals to:
(i) approve the Reverse Split; (ii) ratify, approve and adopt the Merger
Agreement and the Merger; (iii) approve and adopt the Restructuring Merger
Agreement and the Restructuring Merger; and (iv) authorize the Cardiac Board to
adjourn the Cardiac Special Meeting to a subsequent date and time to permit
further solicitation of proxies if there are insufficient votes to constitute a
quorum or to approve the proposed transactions and such other matters as may be
properly brought before such Cardiac Special Meeting.
RECORD DATE, QUORUM AND SHARES ENTITLED TO VOTE. Only holders of record
of shares of Cardiac Common Stock at the close of business on September 28, 1998
are entitled to notice of, and to vote at, the Cardiac Special Meeting. At the
close of business on September 28, 1998, there were outstanding 2,648,739 shares
of Cardiac Common Stock which are entitled to vote at the Cardiac Special
Meeting. Each share of Cardiac Common Stock is entitled to one vote at the
Cardiac Special Meeting.
The presence, either in person or by properly executed proxy, of the
holders of a majority of the shares of Cardiac Common Stock entitled to vote at
the Cardiac Special Meeting is necessary to constitute a quorum at such meeting.
PROXIES AND REVOCATION OF PROXIES. The enclosed Cardiac proxy card
permits each stockholder to vote "FOR" or "AGAINST" (or "ABSTAIN" from) approval
of the Reverse Split, ratification, approval and adoption of the Merger
Agreement and the Merger, approval and adoption of the Restructuring Merger
Agreement and the Restructuring Merger and authorization for adjournment of the
Cardiac Special Meeting. If properly executed and returned, such proxies will be
voted in accordance with the choice specified. Where a signed proxy card is
returned, but no choice is specified, the shares will be voted "FOR" approval of
the Reverse Split, ratification, approval and adoption of the Merger Agreement
and the Merger, approval and adoption of the Restructuring Merger Agreement and
the Restructuring Merger and the authorization of the Cardiac Board to adjourn
the Cardiac Special Meeting to permit the further solicitation of proxies, if
necessary.
A proxy relating to the Cardiac Special Meeting may be revoked at any
time before it is exercised. A stockholder may revoke a proxy by filing with the
Secretary of Cardiac written notice of revocation bearing a later date than the
proxy or a duly executed proxy bearing a later date. The proxy may also be
revoked by attending the Cardiac Special Meeting and affirmatively voting in
person (although mere attendance at the Cardiac Special
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Meeting will not in and of itself constitute revocation of a proxy). The name
and address of the Assistant Secretary of Cardiac to whom any notice of
revocation should be delivered is W. Alan Walton, Cardiac Control Systems, Inc.,
3 Commerce Boulevard, Palm Coast, Florida 32614.
ABSTENTIONS AND BROKER NON-VOTES AT CARDIAC SPECIAL MEETING
At the Cardiac Special Meeting, abstentions and broker non-votes (as
hereinafter defined) will be counted as present for the purpose of determining
the presence or absence of a quorum for the transaction of business. For the
purpose of determining the vote required for approval of matters to be voted on
at such meeting, shares held by stockholders who abstain from voting will be
treated as being "present" and "entitled to vote" on the matter and, thus, an
abstention has the same effect as a vote against the matter. Broker non-votes
will be treated as "present" and "entitled to vote" and will be counted for
purposes of determining a quorum. However, broker non-votes will not be treated
as "present" and "entitled to vote" and will not be counted for any purpose in
determining whether a matter has been approved. A "broker non-vote" refers to
shares represented at the Cardiac Special Meeting in person or by proxy by a
broker or nominee where such broker or nominee (i) has not received voting
instructions on a particular matter from the beneficial owners or persons
entitled to vote; and (ii) the broker or nominee does not have the discretionary
voting power on such matter.
ADJOURNMENT OF CARDIAC SPECIAL MEETING
At the Cardiac Special Meeting, the Cardiac stockholders will vote upon
a proposal to authorize the Cardiac Board to adjourn the Cardiac Special Meeting
in order to permit further solicitation of proxies, if necessary. See
"ADJOURNMENT OF THE SPECIAL MEETINGS - Cardiac Special Meeting."
REQUIRED VOTE AT CARDIAC SPECIAL MEETING
Stockholder ratification, approval and adoption of the Merger Agreement
and the Merger are not required by the Delaware General Corporation Law (the
"Delaware Act"), however, such approvals are a condition precedent to the Merger
becoming effective and the Cardiac Board believes that it is in the best
interests of the stockholders that approval thereof by Cardiac stockholders be a
condition to the consummation of the Merger. The Delaware Act requires that the
Reverse Split and the Restructuring Merger Agreement and the Restructuring
Merger be approved and adopted by the Cardiac stockholders.
The proposals to approve the Reverse Split, ratify, approve and adopt
the Merger Agreement and the Merger, and approve and adopt the Restructuring
Merger Agreement and the Restructuring Merger will be approved if each proposal
receives the affirmative vote of the holders of a majority of the outstanding
shares of Cardiac Common Stock entitled to vote at the Cardiac Special Meeting.
The proposal to authorize adjournment of the Cardiac Special Meeting to permit
the further solicitation of proxies, if necessary, will be approved if such
proposal receives the affirmative vote of the holders of a majority of the
shares of Cardiac Common Stock present in person or represented by proxy and
entitled to vote at the Cardiac Special Meeting. If there are insufficient votes
to constitute a quorum or to approve the Reverse Split, ratify, approve and
adopt the Merger Agreement and the Merger and approve and adopt the
Restructuring Merger Agreement and the Restructuring Merger at the Cardiac
Special Meeting, it is contemplated that such meeting would be adjourned in
order to permit further solicitation of proxies. See "ADJOURNMENT OF THE SPECIAL
MEETINGS - Cardiac Special Meeting."
Each share of Cardiac Common Stock is entitled to one vote at the
Cardiac Special Meeting.
Since the Reverse Split, the Merger and the Restructuring Merger are
all interdependent and the consummation of each action is conditioned upon
receipt of approval for all three proposals, the failure of the Cardiac
stockholders to approve and adopt any one of the proposals will result in the
Reverse Split, the Merger and the Restructuring Merger not occurring.
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CARDIAC STOCKHOLDERS' DISSENTERS' RIGHTS
Holders of record of shares of Cardiac Common Stock are entitled to
exercise dissenters' appraisal rights with respect to their shares if they do
not vote in favor of the Restructuring Merger and otherwise comply with the
requirements of Section 262 of the Delaware Act legal requirements. See
"DISSENTERS' RIGHTS - Cardiac Stockholders."
RECOMMENDATION OF THE CARDIAC BOARD
The Cardiac Board has approved the Reverse Split, the Merger Agreement
and the Merger, and the Restructuring Merger Agreement and the Restructuring
Merger and the transactions contemplated thereby, and believes that the Reverse
Split, the Merger, and the Restructuring Merger are in the best interests of
Cardiac and its stockholders. After careful consideration, the Cardiac Board
recommends that the Cardiac stockholders vote "FOR" approval of the Reverse
Split, ratification, approval and adoption of the Merger Agreement and the
Merger, and approval and adoption of the Restructuring Merger Agreement and the
Restructuring Merger and to authorize the Cardiac Board, in its discretion, to
adjourn the meeting to another date and time if deemed necessary by the Board
for solicitation of additional proxies. See "BACKGROUND OF THE MERGER," "REASONS
FOR THE MERGER - Cardiac's Reasons for the Merger" and "RECOMMENDATIONS OF THE
BOARDS OF DIRECTORS - Cardiac Board."
MERGER
GENERAL. Upon: (i) approval and adoption of the Merger Agreement and
Merger by the Electro stockholders; (ii) approval of the Reverse Split,
ratification, approval and adoption of the Merger Agreement and the Merger, and
approval and adoption of the Restructuring Merger Agreement and the
Restructuring Merger, by the Cardiac stockholders; and (iii) prior to the
consummation of the Merger, Cardiac will effectuate the Reverse Split on a one
for five basis. The Merger and the Restructuring Merger will be effectuated
simultaneously with the result that CTG will become a parent holding company.
Cardiac stockholders will become CTG stockholders and will hold their shares of
capital stock without any change in number, designation, terms or rights from
the shares of Cardiac Common Stock previously held by them. See "COMPARATIVE
RIGHTS OF CTG, CARDIAC AND ELECTRO STOCKHOLDERS." Upon the filing of a
Certificate of Merger with the Secretary of State of the State of New Jersey, or
at such later time as may be provided in the Certificate of Merger (the "Merger
Effective Time"), Sub will be merged with and into Electro, and CTG will thereby
acquire all of the issued and outstanding shares of Electro Common Stock. Sub
will cease to exist as a separate corporation and Electro will be the surviving
subsidiary corporation in the Merger (the "Surviving Subsidiary"). The
Certificate of Incorporation (the "Electro Certificate of Incorporation") and
the Bylaws of Electro (the "Electro Bylaws") as in effect at the Merger
Effective Time will be the Certificate of Incorporation and the Bylaws of the
Surviving Subsidiary, except that the Electro Certificate of Incorporation shall
be amended to decrease its authorized shares to 11,000 shares consisting of
10,000 shares of common stock, $.10 par value per share, and 1,000 shares of
preferred stock, no par value, designated as Series A preferred stock with
certain rights and privileges. For a summary of various differences between the
rights of Electro stockholders and the rights of holders of CTG Common Stock,
see "COMPARATIVE RIGHTS OF CTG, CARDIAC AND ELECTRO STOCKHOLDERS." See also
"DESCRIPTION OF SECURITIES OF CTG, CARDIAC AND SURVIVING SUBSIDIARY." The Merger
will be accounted for as a purchase for accounting and financial reporting
purposes. See "ACCOUNTING TREATMENT."
MERGER EXCHANGE RATIO. Each outstanding share of Electro Common Stock
will be deemed cancelled and converted into and shall represent the right to
receive one-fifth of a share of CTG Common Stock (the "Merger Exchange Ratio")
after giving effect to the Reverse Split. The Merger Exchange Ratio is the
result of arm's-length negotiations between the parties, and was reflective of
the market price of each company's common stock, as well as the current status
and future prospects of the companies. The Merger Exchange Ratio may only be
adjusted by amendment to the Merger Agreement.
CONDITIONS TO THE MERGER. The obligations of Cardiac, Electro and Sub
to consummate the Merger are subject to the satisfaction of certain conditions,
including, among other things: (i) the approval and adoption of the
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Merger Agreement and the Merger by the stockholders of each of Electro and
Cardiac; (ii) the securing of a minimum of $4.0 million in financing, in
addition to any existing debt obligations of both Cardiac and Electro, on terms
acceptable to both Cardiac and Electro; (iii) the completion by Cardiac of the
Reverse Split and the Restructuring Merger; and (iv) other customary conditions.
None of the material conditions to the obligations of Cardiac, Sub or Electro to
consummate the Merger may be waived or modified by the party that is, or whose
stockholders are, entitled to the benefits thereof. See "MERGER - Conditions to
the Merger."
In order to secure the necessary funds to satisfy the financing
condition of $4.0 million contained in the Merger Agreement, CTG intends to
undertake a public offering of its common stock as well as obtaining additional
debt financing. The public offering, as structured, contemplates the offering of
approximately 650,000 shares of CTG Common Stock (the "Newly Offered Shares")
simultaneously with and as a condition to the consummation of the Merger, but
after the Reverse Split. CTG does not intend to engage the services of a
managing underwriter; rather, CTG intends to offer and sell the Newly Offered
Shares on a "best efforts" basis through a syndicate of selected broker-dealers
and/or through its executive officers and directors, who will not be compensated
therefor. A registration statement relating to the Newly Offered Shares will be
filed with the SEC to register the Newly Offered Shares. The Newly Offered
Shares may not be sold nor may offers to buy such shares be accepted prior to
the time that such registration statement becomes effective. This Joint Proxy
Statement/Prospectus shall not constitute an offer to sell or the solicitation
of an offer to buy nor shall there be any sale of the Newly Offered Shares in
any state in which such an offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
See "REASONS FOR THE MERGER - Cardiac's Reasons for the Merger" and "MERGER -
Conditions to the Merger."
CTG intends to obtain $2.5 to $3.3 million in funds through the public
offering and to finance the remainder of the amounts required to satisfy the
financing condition of $4.0 million with debt financing. In the event that CTG
is unsuccessful in obtaining the funds expected through its public offering, CTG
intends to supplement additional funds needed to satisfy the financing condition
with additional debt financing. Three proposals for the debt financing have been
received by Cardiac from prospective lenders. All three proposals contemplate a
working capital credit facility secured by accounts receivable, inventory and
equipment of CTG. If sufficient debt financing is not available from these
prospective lenders to satisfy the financing condition, CTG intends to obtain
additional financing through alternative debt financing sources, which may be
more costly than the current proposals. See "MERGER - Conditions to the Merger."
THIRD PARTY CONSENTS. Pursuant to the terms of a loan and security
agreement between Cardiac and Coast Business Credit, a division of Southern
Pacific Bank ("Coast") dated June 13, 1997 (the "Coast Loan Agreement"), Cardiac
must obtain Coast's written consent prior to merging or consolidating with
another party. The Merger and the transactions contemplated thereby have been
discussed thoroughly with Coast, and Coast is one of the parties that has
proposed to provide the incremental debt funding discussed in the prior
paragraph. However, Cardiac has not yet received consent from Coast and will not
until Coast has completed its due diligence relative to its participation in the
transaction. If Coast participates in the transaction by providing incremental
debt financing, then it will also provide the consent required. If another party
provides the debt financing, then sufficient debt financing will be provided to
pay all obligations to Coast, and thus its consent will not be necessary.
Pursuant to the terms of a loan and security agreement between Cardiac
and Sirrom Capital Corporation ("Sirrom") dated March 31, 1995 (the "Sirrom Loan
Agreement"), Cardiac must obtain Sirrom's written consent in connection with the
transactions contemplated by the Merger and the Restructuring Merger. The Merger
and the Restructuring Merger and the transactions contemplated thereby have been
discussed thoroughly with Sirrom. Sirrom has given its verbal approval to the
Reverse Split, the Merger, the Restructuring Merger and the transactions
contemplated thereby, and has indicated that it will provide its written consent
upon reviewing final documents and arrangements for any incremental debt to be
incurred as part of the financing contingency to the Merger and the
Restructuring Merger. If Sirrom were not to give its final written consent the
Merger could not occur.
SOLICITATION OF THIRD-PARTY OFFERS. In the Merger Agreement, Electro
and Cardiac have agreed not to solicit, initiate or intentionally encourage
proposals or offers, or to take certain other actions, relating to any merger,
consolidation, share exchange, purchase or other acquisition of all or (other
than in the ordinary course of business)
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any substantial portion of the assets or any substantial equity interest in
either party or any business combination with either party; PROVIDED, HOWEVER,
that nothing contained in the Merger Agreement shall prohibit the Electro Board
or the Cardiac Board from furnishing information to, or entering into
discussions or negotiations with: (a) any unaffiliated third party that makes or
is proposing to make an unsolicited written, bona fide offer with respect to an
Acquisition Transaction, if the Electro Board or the Cardiac Board based upon
the written advice of outside legal counsel determines in good faith that such
action is necessary for the Electro Board or the Cardiac Board to comply with
its fiduciary duties under applicable law and prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Electro or Cardiac provides written notice to the other party; and
(b) such parties who have made proposals, formal or informal, which may become a
Superior Proposal as to which either Electro or Cardiac has advised the other,
in writing, prior to the date of the Merger Agreement. The Merger Agreement
provides that if either Cardiac or Electro receives any unsolicited offer or
proposal to enter into negotiations relating to an Acquisition Transaction, such
party shall notify the other party thereof, including information as to the
identity of the party making such offer or proposal and the specific terms
thereof. See "MERGER - Representations, Warranties and Covenants."
VOTING AGREEMENT. To facilitate the consummation of the Merger, Cardiac
entered into the Voting Agreement with The T Partnership, the form of which is
attached as Exhibit 5.1 to Appendix A to this Joint Proxy Statement/Prospectus.
Approximately 30% of the outstanding shares of Electro Common Stock are
represented by the Voting Agreement. The T Partnership has also granted to Ervin
Schoenblum, a director and Acting President of Electro, an irrevocable proxy to
vote its shares of Electro Common Stock as specified in the Voting Agreement in
the event that The T Partnership elects not to so vote such shares. See "MERGER
- - Voting Agreement."
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES. The Merger
Agreement shall be terminated, and the Merger abandoned, notwithstanding the
approval by the respective boards of directors and stockholders of Cardiac, Sub
and Electro of the Merger Agreement and the Merger in the event the conditions
set forth in Article VII of the Merger Agreement shall not have been met by
January 31, 1999. Furthermore, under certain conditions, the Merger Agreement
may be terminated prior to the Merger Effective Time, whether prior to or after
approval by the Electro and Cardiac stockholders. If the Merger Agreement is
terminated, the Merger Agreement provides, in certain specified circumstances,
for the allocation of fees and expenses incurred by the parties in connection
with the transactions contemplated by the Merger. Moreover, in the event that
the Merger Agreement is terminated as a result of the receipt by one party of a
Superior Proposal and a determination (made in accordance with the terms of the
Merger Agreement) that accepting the Superior Proposal is necessary to comply
with the fiduciary duty of the board of directors of such party under applicable
law, the Merger Agreement provides for the payment by the terminating party of a
termination fee to the other party. See "MERGER - Termination of the Merger
Agreement - Fees and Expenses; Termination Fees."
AMENDMENT OF THE MERGER AGREEMENT. At any time prior to the Merger
Effective Time, the parties may, by written agreement, modify or amend the
Merger Agreement, provided that, material provisions may not be amended or
modified: (i) after the Merger Agreement has been approved and adopted by
Electro's stockholders, without the affirmative vote of two-thirds (2/3) of the
votes cast by holders of the outstanding shares of Electro Common Stock, present
in person or represented by proxy and entitled to vote at the Electro Special
Meeting; or (ii) after the Merger Agreement has been approved and adopted by
Cardiac's stockholders, without the affirmative vote of the holders of a
majority of the shares of Cardiac Common Stock present in person or represented
by proxy and entitled to vote at the Cardiac Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Ervin Schoenblum and
Abraham Nechemie, who comprise the entire Electro Board, are two of the five
partners constituting The T Partnership, which owns approximately 30% of the
outstanding shares of Electro Common Stock and which is a creditor of Electro,
with total indebtedness due to The T Partnership at September 30, 1998 of
approximately $2.5 million. The T Partnership has beneficial ownership of
2,464,844 shares of Electro Common Stock, which includes 83,344 and 500,000
shares which The T Partnership has the right to acquire pursuant to outstanding
warrants. In addition to the shares held by The T Partnership, Messrs.
Schoenblum and Nechemie also hold currently exercisable stock options with
respect to 64,000 and 5,000 shares of Electro Common Stock, respectively.
Messrs. Fred Lafer, Stephen Shapiro and Henry Taub are the three other partners
constituting The T Partnership. See "MERGER - Interests of Certain Persons in
the Merger."
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Tracey E. Young, a director of Cardiac, has provided Cardiac with
consulting services on clinical studies and other matters. As of December 26,
1997, Ms. Young has invoiced Cardiac approximately $100,000 for consulting
services performed by her through such date. She provided no further consulting
services after such date. Cardiac intends to pay Ms. Young for her consulting
services with funds obtained through its public offering in connection with the
Merger. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CARDIAC."
Pursuant to the terms of the Merger Agreement: (i) Messrs. Schoenblum
and Nechemie are to be appointed directors of CTG upon the Merger Effective
Time; (ii) Saiber Schlesinger Satz & Goldstein, LLC ("Saiber"), Electro's legal
counsel, is to be paid legal fees at the closing of the Merger; and (iii)
Greenberg Traurig, P.A. ("Greenberg"), Cardiac's legal counsel, is to be paid
legal fees at the closing of the Merger. See "MERGER - Interests of Certain
Persons in the Merger" and "LEGAL MATTERS."
REDEMPTION OF THE T PARTNERSHIP DEBT. The Merger Agreement contemplates
that the total indebtedness outstanding and due to The T Partnership as of
September 30, 1998 plus interest accrued thereon (totaling approximately $2.5
million) shall be redeemed at the Merger Effective Time by: (a) the issuance by
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; (b) the delivery to The T
Partnership of CTG's 9% conditional promissory note in the amount of $1.0
million pursuant to which CTG is obligated to pay only those amounts which are
due but not paid to the holders of the Series A Preferred Stock, or in the event
of certain other non-monetary defaults; and (c) the delivery to The T
Partnership of a secured promissory note made by CTG in an amount not to exceed
$1.3 million (which amount shall be the remaining amount of Electro's secured
indebtedness to The T Partnership exclusive of the amount redeemed under (a)
above). See "MERGER - Redemption of The T Partnership Debt" and "DESCRIPTION OF
SECURITIES OF CTG, CARDIAC AND SURVIVING SUBSIDIARY - Preferred Stock of
Surviving Subsidiary."
REVERSE SPLIT
The Cardiac Board unanimously determined that the Reverse Split is in
the best interests of the stockholders of Cardiac and has authorized the Reverse
Split subject to the approval of the holders of a majority of the outstanding
shares of Cardiac Common Stock entitled to vote thereon. The Reverse Split shall
take place as soon as practical after approval by Cardiac's stockholders of all
of the proposals before them. The Cardiac Board shall fix the effective time of
the Reverse Split (the "Split Effective Time") as of the earliest practical date
which shall be prior to the Merger and the Restructuring Merger. At the Split
Effective Time, each share of Cardiac Common Stock will become one-fifth of a
share of Cardiac Common Stock.
Instructions with regard to surrender of certificates, will be mailed
to Cardiac stockholders as soon as practicable after the Split Effective Time.
Assuming that the Restructuring Merger will have been approved by Cardiac
stockholders, the stockholders of Cardiac will receive shares of CTG Common
Stock, giving effect to both the Reverse Split and the Restructuring Merger.
No certificates or script representing fractional shares of Cardiac
Common Stock will be issued in the Reverse Split. See "REVERSE SPLIT - Exchange
of Shares."
RESTRUCTURING MERGER
GENERAL. In accordance with the provisions of the Restructuring Merger
Agreement and Section 251 of the Delaware Act, upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware, or at such later
time as may be provided in the Certificate of Merger (the "Restructuring
Effective Time"), Merger Sub shall be merged with and into Cardiac, which, at,
and after the Restructuring Effective Time, it shall be, and sometimes is
referred herein as, the "Surviving Corporation." At the Restructuring Effective
Time, each issued and
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outstanding share of common stock of Merger Sub shall immediately prior to the
Restructuring Effective Time be deemed cancelled and converted into and shall
represent the right to receive one share of common stock of the Surviving
Corporation. Upon consummation of the Restructuring Merger, the rights and
interests of Cardiac stockholders as holders of CTG Common Stock will be the
same as the rights and interests previously as holders of Cardiac Common Stock.
RESTRUCTURING EXCHANGE RATIO. At the Restructuring Effective Time, each
issued and outstanding share of Cardiac Common Stock shall immediately prior to
the Restructuring Effective Time be deemed cancelled and converted into and
shall represent the right to receive one share of CTG Common Stock (the
"Restructuring Exchange Ratio"). Pursuant to the terms of the Restructuring
Merger, the authorized capital stock of the Surviving Corporation will be
reduced at the Restructuring Effective Time to one hundred shares of common
stock.
CONDITIONS TO THE RESTRUCTURING MERGER. The obligations of Cardiac, CTG
and Merger Sub to consummate the Restructuring Merger are subject to the
approval and adoption of the Merger Agreement and the Merger by the stockholders
of Electro and the approval of the Reverse Split, ratification, approval and
adoption of the Merger Agreement and the Merger and approval and adoption of the
Restructuring Merger Agreement and the Restructuring Merger by the stockholders
of Cardiac.
THIRD PARTY CONSENT. The written consent of both Coast and Sirrom must
be obtained in connection with the transactions contemplated by the Merger and
the Restructuring Merger. The Merger and the Restructuring Merger have been
discussed thoroughly with both Coast and Sirrom. See "-Merger-Third Party
Consents."
TERMINATION OF THE RESTRUCTURING MERGER AGREEMENT. The Restructuring
Merger Agreement shall be terminated, and the Restructuring Merger abandoned,
notwithstanding the approval by the respective boards of directors and
stockholders of Cardiac, CTG and Merger Sub of the Restructuring Merger
Agreement and the Restructuring Merger in the event of and simultaneously with a
termination (at or at any time prior to the Restructuring Effective Time) of the
Merger Agreement.
AMENDMENT OF THE RESTRUCTURING MERGER AGREEMENT. At any time prior to
the Restructuring Effective Time, the parties may, by written agreement, modify
or amend the Restructuring Merger Agreement, provided that, material provisions
may not be amended or modified after the Merger Agreement has been approved and
adopted by Cardiac's stockholders and Electro's stockholders, without the
affirmative vote of the holders of a majority of the outstanding shares of
Cardiac Common Stock entitled to vote at the Cardiac Special Meeting.
REGULATORY APPROVAL
Except as noted below, Cardiac and Electro are not aware of any
governmental or regulatory approvals required for the consummation of the
Merger, the Reverse Split or the Restructuring Merger other than compliance with
the Federal securities laws and applicable securities and "blue sky" laws of the
various states. Under the New Jersey Industrial Site Recovery Act and the
regulations promulgated thereunder (collectively, "ISRA"), owners and/or
operators of "industrial establishments" (as such term is defined under ISRA)
may be subject to compliance with ISRA upon the occurrence of certain triggering
events, which events include, without limitation, the sale, transfer or
cessation of the industrial establishment's operations. Electro, as a
corporation with operations in the State of New Jersey falling within the
definition of an industrial establishment, submitted an application to the New
Jersey Department of Environmental Protection (the "NJDEP") on June 19, 1998
seeking the NJDEP's confirmation that the Merger and the transactions
contemplated by the Merger Agreement are exempt transactions which do not
constitute events which are subject to ISRA, i.e. a letter of Non-Applicability.
By letter dated July 13, 1998, the NJDEP confirmed to Electro that the
contemplated transactions are exempt transactions not subject to ISRA.
RISK FACTORS
Ownership of CTG Common Stock and the business to be conducted by the
combined companies after the Merger and the Restructuring Merger involve certain
substantial risks to be considered by the stockholders of Electro and Cardiac in
determining whether to vote to approve the Merger Agreement and the Merger and
the
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Restructuring Merger Agreement and the Restructuring Merger, including, but not
limited to, the uncertainty of future profitability, the need for additional
financing to achieve profitability, limited acceptance of products to date and
risks associated with combining the two companies. See "RISK FACTORS."
FEDERAL INCOME TAX CONSEQUENCES
Saiber, Electro's legal counsel, has delivered its legal opinion to
Electro to the effect that, assuming the Merger occurs in accordance with the
Merger Agreement and conditioned upon the accuracy of certain representations
made by Electro and Cardiac, the Merger will constitute "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), for Federal income tax purposes, so that no gain or loss will be
recognized by Electro stockholders on the exchange of Electro Common Stock for
CTG Common Stock in the Merger. Each Electro stockholder is urged to consult his
or her own tax advisors to ascertain the specific tax consequences of the Merger
to such stockholder, including the applicability of various state, local and
foreign tax laws. See "FEDERAL INCOME TAX CONSEQUENCES - Electro Stockholders."
It is the opinion of Greenberg, Cardiac's legal counsel, that, assuming
the Merger and the Restructuring Merger both occur in accordance with the Merger
Agreement and the Restructuring Merger Agreement, respectively, and conditioned
upon the accuracy of certain representations made by Cardiac and CTG, both the
Merger and the Restructuring Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, for Federal income tax purposes, so
that no gain or loss will be recognized by Cardiac stockholders as a result of
the Reverse Split or the Restructuring Merger. Each Cardiac stockholder is urged
to consult his or her own tax advisors to ascertain the specific tax
consequences of the Merger and the Restructuring Merger to such stockholder,
including the applicability of various state, local and foreign tax laws. See
"FEDERAL INCOME TAX CONSEQUENCES - Cardiac Stockholders."
ACCOUNTING TREATMENT
Since the Merger and the Restructuring Merger will be effectuated
simultaneously with the result that CTG will become a parent holding company,
and based upon the controlling interests in CTG, as parent of Cardiac, to be
obtained by Electro stockholders as a result of the Merger, the Merger and the
Restructuring Merger will be accounted for as an acquisition of CTG by Electro
stockholders (a reverse acquisition in which Electro is considered the acquirer
for accounting purposes). Electro intends that the excess purchase price over
the fair value of Cardiac's identifiable tangible assets acquired, less the fair
value of Cardiac's liabilities assumed, will be allocated to a patent. This is a
United States patent that is titled "Single Preformed Catheter Configuration for
a Dual Chamber Pacemaker System." The patent was approved in September 1997 and
was issued on June 30, 1998. A product life of 10 years is expected from the
product underlying the patent. The value of the consideration to be issued will
be determined based upon the approximate market value of Cardiac Common Stock on
May 5, 1998, the date of the first amendment to the Merger Agreement. Based upon
an approximate market value of $2.19 (the May 5, 1998 market value adjusted to
reflect the impact of the proposed Reverse Split) for Cardiac Common Stock on
May 5, 1998, the amount allocated to the patent will be approximately $1,467,737
and will be amortized over a 10-year period, resulting in an annual non-cash
charge to earnings that will not be deductible for income tax purposes. Based
upon the May 5, 1998 approximate value of $2.19 for Cardiac Common Stock, such
annual charge will be $146,774.
MARKET PRICE AND DIVIDEND DATA
The shares of Cardiac Common Stock are traded over-the-counter under
the symbol "CDCS." The shares of Electro Common Stock are traded
over-the-counter under the symbol "ECTH." The following table sets forth for the
periods indicated the high and low bid prices of Cardiac Common Stock and
Electro Common Stock, as reported in published financial sources. The quotations
reflect prices between dealers in securities, without retail mark-up, mark-down
or commission, and may not represent actual transactions. Upon consummation of
the Merger, CTG intends to apply to list its shares on a regional exchange
and/or the Nasdaq SmallCap Market, whereupon it would cease to be quoted on the
OTC Bulletin Board. There can be no assurance that CTG will be able to obtain or
maintain any such listings for its shares. See "OTC BULLETIN BOARD."
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CARDIAC
COMMON STOCK
--------------------
HIGH LOW
---- ---
Fiscal Year Ended
March 31, 1999
Third Quarter(1) -- 23/64 23/64
Second Quarter -- 11/32 9/32
First Quarter -- 13/32 11/32
Fiscal Year Ended
March 31, 1998
Fourth Quarter -- 9/16 13/32
Third Quarter -- 1-1/8 9/16
Second Quarter -- 15/16 15/32
First Quarter -- 1-7/32 3/4
Fiscal Year Ended
March 31, 1997
Fourth Quarter -- 1-7/16 1-3/16
Third Quarter -- 1-3/4 1-3/8
Second Quarter -- 2-3/4 1-1/2
First Quarter -- 3-1/4 2
ELECTRO
COMMON STOCK
-------------------
HIGH LOW
---- ---
Fiscal Year Ended
August 31, 1999
First Quarter(1) -- 20/64 10/64
Fiscal Year Ended
August 31, 1998
Fourth Quarter -- 1/2 3/8
Third Quarter -- 9/16 3/8
Second Quarter -- 1/2 3/8
First Quarter -- 47/64 1/2
Fiscal Year Ended
August 31, 1997
Fourth Quarter -- 15/16 5/16
Third Quarter -- 1-1/16 11/16
Second Quarter -- 1-3/8 13/16
First Quarter -- 1-13/16 47/64
Fiscal Year Ended
August 31, 1996
Fourth Quarter -- 2-7/8 1-1/16
Third Quarter -- 2-7/16 1-1/4
Second Quarter -- 1-9/16 7/16
First Quarter -- 15/16 7/16
- --------------
(1) Through October 8, 1998.
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On October 24, 1997, the last trading day prior to the announcement of
the proposed Merger, the closing bid price per share of Cardiac Common Stock in
over-the-counter trading was $.6875 and the closing bid price per share of
Electro Common Stock in over-the-counter trading was $.68. On October 8, 1998,
the latest practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing bid prices per share of Cardiac Common Stock
and Electro Common Stock were $.36 and $0.15625, respectively. Electro and
Cardiac stockholders are advised to obtain current market quotations for Cardiac
Common Stock and Electro Common Stock.
As of September 30, 1998 there were 584 record holders of Cardiac
Common Stock and 699 record holders of Electro Common Stock.
Neither Electro nor Cardiac has ever paid a dividend on its Common
Stock and CTG does not anticipate paying dividends on its Common Stock in the
foreseeable future.
RESALE OF CTG COMMON STOCK BY AFFILIATES
The shares of CTG Common Stock to be issued in the Merger and the
Restructuring Merger will be registered under the Securities Act and will be
freely transferable under the Securities Act, except for shares issued pursuant
to the terms of the Merger Agreement to any holder of Electro Common Stock who
may be deemed to be an "affiliate" of Electro for purposes of Rule 145 under the
Securities Act ("Rule 145"). See "MERGER - Resale of CTG Common Stock by
Affiliates."
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RISK FACTORS
EACH STOCKHOLDER OF ELECTRO SHOULD CAREFULLY CONSIDER AND EVALUATE THE
FOLLOWING FACTORS RELATING TO CTG, CARDIAC, AND THE MERGER AND RESTRUCTURING
MERGER, AMONG OTHER THINGS, BEFORE VOTING ON THE MERGER AGREEMENT AND THE
MERGER. EACH STOCKHOLDER OF CARDIAC SHOULD CAREFULLY CONSIDER AND EVALUATE THE
FOLLOWING FACTORS RELATING TO ELECTRO, CTG, AND THE REVERSE SPLIT, THE MERGER
AND THE RESTRUCTURING MERGER, AMONG OTHER THINGS, BEFORE VOTING ON THE REVERSE
SPLIT, THE MERGER AGREEMENT AND THE MERGER AND THE RESTRUCTURING MERGER
AGREEMENT AND THE RESTRUCTURING MERGER. ALL REFERENCES TO CARDIAC IN THIS
SECTION ENTITLED "RISK FACTORS" WHICH RELATE TO TIME PERIODS SUBSEQUENT TO THE
CONSUMMATION OF THE MERGER, SHALL BE DEEMED TO REFER TO CTG.
CERTAIN CONSIDERATIONS RELATING TO ACQUIRING CTG COMMON STOCK
HISTORY OF OPERATING LOSSES; GOING CONCERN QUALIFICATION. Cardiac has
had a history of net losses and has experienced cash flow deficiencies and has
been unable to pay many of its obligations as they became due. During historical
cash shortages, Cardiac was delinquent in paying suppliers. Cardiac was also at
the time, delinquent and in default with its obligations relative to the
mortgage held by Dow Corning Enterprises, Inc. ("Dow"). Cash shortages impaired
Cardiac's ability to purchase components which caused production delays
resulting in backorders and lost sales. Cash shortages also impacted Cardiac's
ability to build a sales organization and conduct aggressive marketing and
advertising campaigns. The lack of resources further hindered Cardiac's
development efforts with regard to its pacemakers and the addition of some of
the ancillary features desired by physician users. Through the infusion of
capital over the past three years, suppliers have been paid. Further the
obligation to Dow Corning was satisfied through payment of $1.0 million and a
concurrent debt forgiveness. Cardiac is not currently in default on any of its
obligations.
As noted in Cardiac's Report of Independent Certified Public
Accountants, Cardiac has experienced significant operating losses and an
accumulated deficit which raise substantial doubt about Cardiac's ability to
continue as a going concern. Cardiac incurred net losses of $1,239,710 and
$881,240 for the fiscal years ended March 31, 1998, and 1997, respectively. At
March 31, 1998, Cardiac had an accumulated deficit of $21,901,927. Cardiac is
continuing its efforts to increase its sales volume and attain a profitable
level of operations. However, there is no assurance that Cardiac's efforts will
be successful. There are many events and factors in connection with the
development, manufacture and sale of Cardiac's products over which Cardiac has
little or no control, including, without limitation, production delays,
marketing difficulties, lack of market acceptance, and superior competitive
products based on future technological innovation. There can be no assurance
that future operations will be profitable or will satisfy future cash flow
requirements. There can be no assurance that consummation of the Merger will
yield positive operating results in the future for Cardiac. See "CARDIAC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RELIANCE ON INDEPENDENT SALES REPRESENTATIVES. Cardiac's operations,
sales and ability to attain a profitable level of operations are dependent upon
maintaining its relationships with its principal sales representatives and upon
ongoing expansion of its business volume. These representatives have entered
into contracts with Cardiac. Termination of any of these contractual agreements
between Cardiac and its key independent sales representatives could have a
material adverse effect on Cardiac's sales volume and operations. Furthermore,
Cardiac's ability to achieve a profitable level of operations would be adversely
affected if Cardiac's sales representatives were unable to expand the volume of
their business.
LOSS OF ROYALTY INCOME. Cardiac was the licensor under a license
agreement with Sulzer Intermedics, Inc. ("Intermedics") allowing Intermedics to
manufacture and sell certain pacemaker products described by United States
patents (Patent Nos. 4,962,767 and 5,127,403) owned by Cardiac. Under that
agreement, Cardiac recorded $2,063,250 and $2,394,250 in royalty income during
the fiscal years ended March 31, 1998 and 1997, respectively, which represented
approximately 35% and 36% of revenues in such years, respectively. Intermedics'
obligation to pay royalties under the license terminated on January 22, 1998.
The loss of such royalty income adversely impacts Cardiac's working capital and
revenue. See "BUSINESS OF CARDIAC - Sales, Marketing and Distribution Methods."
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DEPENDENCE ON PROPER INVENTORY MANAGEMENT. Cardiac's operations are
capital intensive. Cardiac is required to carry significant amounts of inventory
in order to meet rapid delivery requirements of customers and assure itself a
continuous supply of key components and parts from its suppliers. There is also
a several-month lead time between the time that Cardiac acquires parts until
such time that a product is completed and available for sale. In addition,
Cardiac's domestic business is consignment in nature insofar as Cardiac provides
customers with the right to return products that are not implanted or sold.
Accordingly, inventory management is an important business concern with respect
to Cardiac's liquidity. The amount of product returned to Cardiac is negligible,
typically less than 1 unit every 2 years with respect to all units sold in the
U.S. and approximately 1 unit per year with respect to all units sold to
distributors internationally. Product is sold to distributors with payment terms
of net 90 - 120 days. When product is returned from a distributor, it is
credited against gross sales.
CONSEQUENCES OF DEFAULT UNDER DEBT OBLIGATIONS. Cardiac has certain
outstanding financial obligations pursuant to the Sirrom Loan Agreement,
pursuant to which Cardiac borrowed $1.5 million from Sirrom (the "Sirrom Loan")
evidenced by a $1.5 million promissory note (the "Sirrom Note"). The Sirrom Note
is secured by a first mortgage and an assignment of rents and leases on
Cardiac's headquarters subject to subordination of up to a maximum of $500,000
under an Intercreditor and Subordination Agreement hereinafter referenced, and
by a first lien subject to subordination under such Intercreditor and
Subordination Agreement hereinafter referenced on all of Cardiac's personal
property and proceeds thereof, including general intangibles such as Cardiac's
patents and royalties, but excluding Cardiac's inventory and accounts
receivable. The Sirrom Note bears interest at the rate of 13.5% annually,
matures on March 31, 2000 and is payable monthly, interest only, with a balloon
payment of principal and accrued and unpaid interest due on the maturity date.
Interest payments on the Sirrom Note in each of the fiscal years ended March 31,
1998 and 1997 were $202,500. The Sirrom Loan Agreement imposes certain
constraints on Cardiac's business including, among other things, that Sirrom's
consent is required to sell or encumber Sirrom's collateral having an aggregate
fair market value exceeding $25,000. Additionally, Cardiac may license its
intellectual property in the ordinary course of business so long as Cardiac's
interest in the license agreements are freely assignable to Sirrom. Also,
Cardiac may not incur certain additional indebtedness in excess of $200,000
annually without Sirrom's consent (which consent may not be unreasonably
withheld or delayed). Such consent and notice requirements could impede
Cardiac's ability to act expeditiously in its operations or corporate matters,
which may have an adverse impact on Cardiac's business and corporate affairs. In
connection with the Sirrom Loan, Cardiac issued to Sirrom a warrant (the "Sirrom
Warrant") to purchase a minimum of 100,000 shares of Cardiac Common Stock,
exercisable at an exercise price of $.01 per share, subject to increases of
50,000 shares annually commencing on March 31, 1997 so long as there is an
outstanding balance under the Sirrom Note. Under the Sirrom Warrant, Cardiac
must give Sirrom written notice of any changes in the capitalization of Cardiac
as a result of any recapitalization, reclassification, stock dividend, stock
split, combination of shares, exchange of shares or any other similar change in
Cardiac's capital structure which affects holders of Cardiac Common Stock
generally.
On June 13, 1997, Cardiac closed on a maximum $3.5 million credit
facility with Coast pursuant to the Coast Loan Agreement. Under the Coast Loan
Agreement, Cardiac may borrow for the purpose of, among other things, working
capital, up to the lesser of $3.5 million or the sum of: (a) receivable loans of
up to 80% of certain eligible accounts receivable; (b) inventory loans not to
exceed the lesser of $500,000 or 40% of eligible raw materials and 50% of
eligible finished goods of eligible inventory; (c) a maximum aggregate of
$500,000 for the purchase of new or used equipment; and (d) a $300,000 term loan
(collectively the "Coast Loan"). The interest rate on the receivable and
inventory borrowing is the prime rate plus 2% per annum, and on the equipment
borrowing and term loans, the interest is the prime rate plus 2.25% per annum;
PROVIDED HOWEVER, all loans are subject to a minimum interest rate of 9% per
annum. Interest is payable monthly and calculated on the outstanding principal,
but not less than a deemed minimum loan balance of $1 million. Cardiac is
obligated to pay a $35,000 commitment fee on each anniversary of the date of the
closing of the Coast Loan, a quarterly facility fee of $3,500, and a renewal fee
equal to $17,500 upon the renewal of the Coast Loan Agreement. The maturity date
for payment of any outstanding principal balance is June 30, 2000, subject to
automatic renewal for successive one-year terms, continuing until one party
gives advance written notice to the other that such party wishes to terminate
the Coast Loan Agreement. The Coast Loan is subject to an early termination fee
of $70,000 if terminated from June 14, 1998 to June 12, 1999; and $35,000 if
terminated on or after June 14, 1999. In addition, the Coast Loan Agreement
imposes certain constraints on Cardiac's business including, among other things,
the requirement that Cardiac obtain Coast's written consent prior to merging or
consolidating with another party, or paying or declaring
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<PAGE>
dividends. Cardiac has discussed the Merger with Coast and Coast has indicated
it will provide such written consent. Cardiac and Coast have also discussed the
possibility of Coast providing additional debt financing for the combined
companies.
The Coast Loan is secured by: (a) a first priority lien on (1) all the
personal property of Cardiac located at its principal executive offices at 3
Commerce Boulevard, Palm Coast, Florida (the "Mortgaged Property"), including,
among other things, all fixtures, building materials, inventory, goods,
equipment, and machinery, and (2) Cardiac's operating bank account; (b) a first
priority lien on all of Cardiac's intellectual property, including copyrights,
patents, trademarks, goodwill, etc.; and (c) a mortgage on the Mortgaged
Property, of which Coast receives a first priority lien up to $500,000 (plus
Coast's costs and expenses of collection and enforcement of such mortgage on the
Mortgaged Property) and a second priority lien on the remainder of Cardiac's
indebtedness to it. In order to obtain its first priority liens on Cardiac's
property as described above, Coast entered into an Intercreditor and
Subordination Agreement with Sirrom which holds a $1.5 million promissory note
of Cardiac. Sirrom agreed to subordinate its security interest, and take a
second priority lien, with respect to: (1) the Mortgaged Property only up to a
maximum of $500,000 (plus Coast's costs and expenses of collection and
enforcement of such mortgage on the Mortgaged Property) of Cardiac's
indebtedness to Coast; and (2) all other assets of Cardiac in which it has a
security interest up to the full amount of the indebtedness of Cardiac to Coast.
As consideration for such subordination, Sirrom received a warrant to purchase
50,000 shares of Cardiac Common Stock at an exercise price of $5.00 per share
and exercisable at any time during the period beginning June 6, 1997 and ending
on June 6, 2002. In connection with the Coast Loan, Coast received a warrant to
purchase 37,500 shares of Cardiac Common Stock exercisable at $4.00 per share
until June 30, 2002.
On June 11, 1998, Cardiac and Coast amended the Coast Loan Agreement to
provide for a term loan in the amount of $250,000 (the "Bridge Loan"). In
connection with the Bridge Loan: (i) Cardiac executed a promissory note in the
amount of $250,000; (ii) Coast received a warrant to purchase 25,000 shares of
Cardiac Common Stock exercisable at $.40 per share; and (iii) the exercise price
per share of the warrant to purchase 37,500 shares issued to Coast in connection
with the Coast Loan was reduced from $4.00 per share to $.40 per share. The
Bridge Loan will accrue interest at the prime rate plus 5% per annum and is due
and payable on August 31, 1998. Cardiac and Coast have executed an amendment to
the Bridge Loan providing for the repayment of the Bridge Loan on September 30,
1998, and have verbally agreed to extend the date of repayment of the Bridge
Loan to October 31, 1998.
Cardiac is current with regard to its monetary obligations under the
Sirrom Note and the Coast Loan, the latter of which had an outstanding balance
of $1,046,296 as of September 30, 1998. Nonetheless, in order to ultimately
fully service the debt and make full payment thereof on the scheduled maturity
dates provided above, Cardiac would need to refinance or renegotiate such loans
and/or obtain new debt or equity financing. There can be no assurance that
Cardiac will be able to do so. It is a condition of the Merger that Cardiac
obtain a minimum of $4.0 million in financing. See "MERGER - Conditions of the
Merger." If Cardiac is unable to obtain such financing, Cardiac may default
under its current loan agreements and be faced with proceedings wherein such
lenders could foreclose upon substantially all of Cardiac's assets, in which
case stockholders would be unlikely to realize any value with respect to their
shares of Cardiac Common Stock.
Pursuant to the Sirrom Loan Agreement, the occurrence of any of the
following shall constitute an event of default: (1) default of the payment of
this loan or any other indebtedness of Cardiac which exceeds $50,000 in the
aggregate, which is not actively contested by Cardiac; (2) any misrepresentation
of or any failure to perform by Cardiac any material matter or obligation; (3)
the admission by Cardiac in writing of its inability to pay its debts generally
as they become due; (4) any proceeding pursuant to which Cardiac is or has a
petition against it for it to be liquidated, dissolved, partitioned or
terminated, under bankruptcy or any similar action; or (5) the failure to cure
any default under the loan or otherwise. Cardiac shall have thirty (30) business
days (or ten (10) business days if the default may be cured by payment of a sum
of money) to cure a default. Upon the occurrence of an event of default, any
indebtedness of Cardiac to Sirrom shall either be immediately due and payable in
full, or Sirrom may, at its option, accelerate the maturity of any indebtedness
of Cardiac to Sirrom.
Pursuant to the Coast Loan Agreement, the occurrence of any of the
following shall constitute an event of default: (1) any material
misrepresentation or any failure to perform any material obligation of Cardiac
to Coast; (2)
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default in the payment of any indebtedness when due; (3) the loans and other
obligations of Cardiac exceed the credit limit established by Coast in its sole
discretion; (4) the failure of Cardiac to perform its security obligations; (5)
the breach by Cardiac of any material obligation which has or may have a
material adverse affect on Cardiac's business or financial condition; (6) any
proceeding pursuant to which Cardiac is or has a petition against it for it to
be liquidated, dissolved, partitioned or terminated, under bankruptcy or any
similar action; (7) a change in the record or beneficial ownership of an
aggregate of more than twenty percent (20%) of the outstanding shares of Cardiac
(as compared to the ownership of outstanding shares of Cardiac in effect on June
13, 1997), without the prior written consent of Coast; or (8) if Coast, acting
in good faith and in a commercially reasonable manner, deems itself insecure
because of the occurrence of any event. Upon the occurrence of any event of
default, Coast may cease making loans or otherwise extending credit to Cardiac
or may accelerate any financial obligations of Cardiac to Coast. Cardiac must
pay all reasonable attorneys' fees, expenses, costs, liabilities and other
obligations incurred by Coast in exercising Coast's right upon an event of
default.
On August 26, 1998, Cardiac received $134,000 from International
Holdings, Inc. ("IHI") and executed a promissory note in the amount of $165,000
(the "IHI Note") in favor of IHI. Concurrently with execution of the IHI Note,
Cardiac paid Goodbody International, Inc., a related company of IHI
("Goodbody"), a $34,000 consulting fee for services relating to the obtaining of
additional debt financing. Pursuant to the terms of the IHI Note, Cardiac has
agreed to repay the IHI Note on or before October 25, 1998. If Cardiac does not
repay the IHI Note on or before October 25, 1998, but does so on or before
November 12, 1998, in addition to repayment of the IHI Note, Cardiac has agreed
to pay Goodbody a $25,000 fee (the "Goodbody Fee"). If repayment of the IHI Note
and the Goodbody Fee have not been received by IHI on or before November 12,
1998, an immediate penalty fee of $2,500 shall be incurred at 12:01 a.m. on
November 13, 1998, and an additional $2,500 fee will accrue and be imposed at
12:01 a.m. every 24 hours, until the IHI Note, the Goodbody Fee and all penalty
fees have been paid in full.
In connection with the IHI Note, Cardiac has agreed to issue up to four
warrants to IHI under certain conditions, each giving IHI the right to purchase
50,000 shares of Cardiac Common Stock at an exercise price of $.01 per share. If
repayment of the IHI Note and the Goodbody Fee have not been received by IHI on
or before November 12, 1998, at 12:01 a.m. on November 13, 1998, the first of
the four warrants will be deemed issued to and earned by IHI. At 12:01 a.m. on
the 13th day of each month thereafter for up to three months, one additional
warrant shall be issued and deemed earned, if the IHI Note, the Goodbody Fee and
all penalty fees have not been paid in full. Furthermore, if the IHI Note, the
Goodbody Fee and all penalty fees have not been paid in full by January 1, 1999,
IHI will have the option to convert any or all of the amounts due into Cardiac
Common Stock at an exercise price of $.01 per share. As additional consideration
for the IHI Note, IHI received a warrant to purchase 330,000 shares of Cardiac
Common Stock at an exercise price of $0.128 per share, exercisable at any time
on or before 5:00 p.m. Eastern Standard Time on August 26, 2003.
ABSENCE OF DIVIDENDS. Cardiac has never paid cash dividends on its
Common Stock and has no plans to do so in the foreseeable future. In addition,
provisions requiring notice and consent in the above-referenced loan agreements
restrict Cardiac's ability to pay dividends.
DILUTION FROM POSSIBLE FUTURE ISSUANCE OF ADDITIONAL SHARES. The
Cardiac Board has the power to issue Cardiac Common Stock without stockholder
approval, up to the number of authorized shares set forth in Cardiac's
Certificate of Incorporation, as amended. As of September 30, 1998, Cardiac had
issued and outstanding 2,648,739 shares of Cardiac Common Stock out of a total
of 30,000,000 shares authorized in its Certificate of Incorporation, as amended.
In addition, Cardiac is authorized to issue options to employees, officers and
directors to purchase up to a maximum of 400,000 shares of Cardiac Common Stock.
As of September 30 1998, there were outstanding options for 373,927 shares under
a stock option plan granting options to officers, directors and employees of
Cardiac, of which 309,857 shares were subject to options held by officers and
directors at exercise prices ranging from $1.00 to $3.75 per share. In
connection with the Sirrom Loan, Cardiac issued warrants to Sirrom to purchase a
minimum of 100,000 shares of Cardiac Common Stock at an exercise price of $.01
per share (This is subject to increases of 50,000 shares annually commencing
March 31, 1997 provided the Sirrom Loan is still outstanding. As a result of
such increases, Sirrom now holds warrants with respect to a total of 200,000
shares.). In connection with the Coast Loan and the Bridge Loan, Cardiac issued
warrants to Coast to purchase 62,500 shares of Cardiac Common Stock at an
exercise price of $.40 per share. See " - Consequences of Default Under Debt
Obligations." In connection with
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the obtaining of interim financing pending the consummation of the Merger and
the Restructuring Merger, Cardiac has issued convertible debentures to various
individuals, and a warrant to IHI. Cardiac has also issued a warrant to
Greenberg. See "CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION - Liquidity and Capital Resources" and
"DESCRIPTION OF SECURITIES OF CTG, CARDIAC AND SURVIVING SUBSIDIARY - Warrants."
The issuance of any additional shares by Cardiac in the future may result in a
reduction of the book value or market price, if any, of the then-outstanding
Cardiac Common Stock. Issuance of additional shares of Cardiac Common Stock may
reduce the proportionate ownership and voting power of then-existing
stockholders. Further, if Cardiac were to issue additional securities in the
future in equity financings or otherwise, the interest of investors who acquired
Cardiac Common Stock pursuant to this Joint Proxy Statement/Prospectus could be
further diluted.
LIMITATIONS ON THE USE OF NET OPERATING LOSS CARRYFORWARDS ("NOLS"). As
of March 31, 1998, Cardiac had NOLs of approximately $18.9 million. These NOLs
can be utilized against future taxable income through fiscal year ending March
31, 2012. The utilization of the NOLs will be significantly limited under the
provisions of Section 382 of the Internal Revenue Code of 1986, as amended, as a
consequence of the Merger with Electro, as the Merger will create a more than
50% aggregate change in ownership of Cardiac. Accordingly, assuming a November
16, 1998 effective date of the Merger with Electro, the Cardiac NOL limitation
under Section 382 is approximately $50,000 per year. Furthermore, since Electro
would become the parent for tax purposes as a result of a reverse acquisition by
Electro stockholders, Cardiac's NOLs will be further limited under the
provisions of Treasury Regulation Section 1.1502-21T regarding Separate Return
Limitation Years ("SRLYs"). Unless Cardiac contributes to consolidated taxable
income (before any NOL deduction), the SRLY rules will apply and Cardiac's NOLs
may not be available to offset consolidated taxable income. As a result of these
limitations, it is possible that Cardiac's NOLs will expire prior to their
utilization.
As of August 31, 1997, Electro had NOLs of approximately $13 million
which may be utilized against future taxable income through fiscal year ending
August 31, 2012. Should Electro not be the post-merger parent for tax purposes,
the SRLY rules mentioned above may apply.
DEPENDENCE ON KEY EMPLOYEES. Cardiac's future success depends, in part,
upon key managerial, technical and marketing personnel and upon its ability to
continue to attract and retain such highly talented individuals. Competition for
qualified personnel is intense in the medical device industry. There can be no
assurance that Cardiac will retain its key employees or that it will attract and
assimilate such employees in the future. To mitigate this risk, Cardiac entered
into employment agreements with certain executive officers. Any of the
employment agreements could be terminated prematurely in the event of the
resignation, disability or death of such employees. Cardiac has applied for
policies of key-man life insurance on the lives of three (3) of its key
management personnel, Messrs. Bart C. Gutekunst, Alan J. Rabin and Jonathan S.
Lee. It is intended that both a Chief Financial Officer with experience in
consolidating public companies and an Acquisition Officer with experience in
consolidating the operations of public and private companies will be hired after
the Merger. There can be no assurance that such individuals will be identified
and hired in a timely manner.
TECHNOLOGICAL AND PRODUCT OBSOLESCENCE. The medical device industry is
characterized by extensive research and development and rapid technological
change. Development by competitors of new or improved products, processes or
technologies may make Cardiac's current products or any future products obsolete
or less competitive. Cardiac will be required to devote continued resources to
enhance its current products and develop new products for the medical
marketplace. There are many events and factors in connection with the
development, production and sale of such products over which Cardiac has no
control. It is not possible to provide any assurance that Cardiac's business
will be successful.
ADVERSE EFFECT OF GOVERNMENT REGULATION. Cardiac's products are
classified as medical devices and, as such, are subject to extensive regulation
by the FDA. A medical device must be cleared by the FDA through an extensive
application process before it can be commercially marketed by Cardiac. Any delay
of clearance or rejection of an application could have a material adverse effect
on Cardiac's business and results of operations. All of the pacemaker systems
marketed by Cardiac (including related electrode leads and ancillary equipment)
are in
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commercial distribution under the FDA's 510(k) Premarket Notification
regulations or Premarket Approval regulations.
PRODUCT RECALLS. In the event problems arise with Cardiac's products
after commercial introduction, Cardiac might be required to recall the defective
products. In any such event, the costs and potential liability to Cardiac could
be significant and would have a material adverse effect on Cardiac's business
and operations. Cardiac recalled products in September 1990, August 1991, March
1994 and December 1996. The 1996 recall involved two (2) pacemakers removed from
hospital shelves. In no instances have recalls involved removal of a product
from a patient.
UNDERSIZED SALES FORCE. Historically, Cardiac's cash flow deficiencies
impeded its ability to hire executive marketing personnel and to increase the
size of its sales force. Cardiac's marketing success in the future will depend,
at least in part, on its ability to recruit and retain additional sales
representatives, which is critical to market acceptance and sales growth. It is
intended that a Vice President of Marketing with experience in marketing and use
of cardiac products will be hired after the Merger. There can be no assurance
that such an individual will be identified and hired in a timely manner.
ADVERSE EFFECT OF COMPETITION. There are a number of established
companies engaged in the design, manufacture, marketing and sale of cardiac
pacemaker systems which have greater financial resources, research and
development facilities, manufacturing capabilities and marketing organizations
than Cardiac. Intermedics and Medtronics, Inc. have developed a single-lead
atrial-controlled ventricular cardiac pacing system. Intermedics received FDA
clearance for such a pacing system and commenced marketing its system in March
1995. A successful introduction of any such new system could dramatically impact
Cardiac's competitive position and its ability to become a viable entity in the
cardiac pacemaker industry.
EXPOSURE TO CLAIMS AND LITIGATION. The nature of the medical device
industry subjects participants therein to the risk of litigation in several
areas, including claims for personal injuries resulting from the use of products
similar to those manufactured by Cardiac as well as for patent, licensing or
trademark infringement. Cardiac's products can be used in high risk medical
situations where the risk of serious injury and/or death is great. Cardiac
maintains product liability coverage in limits of coverage which it believes is
customary in the industry. There can be no assurance, however, that Cardiac's
insurance coverage is adequate to address all costs, expenses and losses which
may be incurred in litigation proceedings. In accordance with industry practice,
Cardiac has attempted to limit its product warranty obligations (associated with
defective pacemakers) to replacement of any defective pacemakers and some
patient out-of-pocket expenses up to $500.00. Cardiac will continue to provide
the same warranty policy as currently exists on its products. There can be no
assurance that Cardiac's warranty policy will be adequate to address all
expenses and losses.
SINGLE SOURCES OF SUPPLIES AND PRODUCTION RISKS. Single sources are
relied upon by Cardiac for certain critical materials used in Cardiac's
products, including medical adhesives, integrated circuits, hybrid
microelectronic circuitry, lithium batteries and a material used to produce
Surethane/trademark/, a substance utilized in the manufacture of Cardiac's
leads. A delay in delivery of such critical materials or the loss of one of the
suppliers of such materials could have a significant adverse effect on Cardiac's
business. Two of Cardiac's principal suppliers of materials used primarily in
electrode lead production have indicated that they will no longer supply their
materials to the medical device industry presumably because such suppliers
perceive these and other implantable medical products to be unacceptable risks
as a result of possible product liability claims from patients. These companies
have reportedly stopped allowing the use of any of their materials in products
to be implanted in humans for medical use. Cardiac does not believe that the
material that it has used for leads has been alleged to have caused any bodily
harm in the past or that there is any present litigation. Cardiac believes it
has an adequate supply of one such material to meet demand for the next several
years and has identified alternate sources for both materials, which Cardiac may
use unless the FDA reviews and withdraws approval for those alternate materials.
RELIANCE ON THIRD-PARTY REIMBURSEMENT. Hospitals, physicians and other
health care providers that purchase medical devices for use in furnishing care
to their patients typically rely on third-party payers, principally Medicare,
Medicaid, and private health insurance plans, to reimburse all or part of the
costs or fees associated with
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the medical procedures performed with those devices, and of the costs of
acquiring those devices. Medicare pays the hospital / physician between $13,000
and $15,000 per pacemaker implant. The precise amount is determined in
accordance with state regulatory provisions which vary from state to state. This
reimbursement is intended to cover the total cost of the procedure (including
all physicians, nursing personnel, etc.), cost of the patient stay in the
hospital and cost of all materials used. The most expensive materials used are
the pacemaker and lead. Depending upon the hospital (prices to hospitals vary
based on bids and contracts) the price of a pacemaker and lead can vary from
$3,000 to $6,000.
Medicare reimbursement is not made to Cardiac. Cardiac is paid by the
hospitals based on negotiated contracts. The hospitals are reimbursed by
Medicare based on a fixed price per clinical procedure. It is from this
reimbursement that all procedural costs are deducted. Reimbursement is not
dependent on the manufacturer of the pacemaker used, i.e.: all brands of
pacemakers are reimbursed at the same rate. Cost control measures adopted by
third-party payers in recent years have had and may continue to have a
significant effect on the purchasing practices of many providers, generally
causing them to be more selective in the purchase of medical devices.
Limitations may be imposed upon the conditions for which procedures may be
performed or on the cost of procedures for which third-party reimbursement is
available, which could adversely affect the market for Cardiac's current or
future products.
NO PUBLIC MARKET FOR CTG`S SECURITIES; LISTING AND MAINTENANCE CRITERIA
FOR NASDAQ SMALLCAP MARKET; DISCLOSURE RELATING TO LOW-PRICED STOCKS. Prior to
the transactions contemplated herein and the offerings to be made in connection
therewith, there has been no public market for CTG Common Stock and only a
limited public market for Cardiac Common Stock has existed. Cardiac Common Stock
had been listed in the Nasdaq SmallCap Market System. On August 30, 1991,
Cardiac Common Stock was deleted from the Nasdaq SmallCap Market for failing to
meet the listing maintenance criteria in effect at that time. Cardiac is
currently quoted on the OTC Bulletin Board. This allows market makers to enter
quotes and trade securities that do not meet the Nasdaq SmallCap Market
qualification requirements. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of,
Cardiac Common Stock. CTG intends to apply to list its shares on a regional
exchange and/or the Nasdaq SmallCap Market. There is no assurance that CTG will
meet the criteria to obtain such listing and, in the event CTG does meet the
criteria and its stock is listed, there is no assurance that CTG will maintain
sufficient qualifications to maintain the listing. In order for a company's
securities to be listed on the Nasdaq SmallCap Market, it must meet certain
criteria among which are $4,000,000 in net tangible assets, a $5,000,000 market
value of the public float, three market makers and a minimum bid price of $4.00
per share. Continued inclusion on the Nasdaq SmallCap Market requires, among
other things, $2,000,000 in net tangible assets, a $4,000,000 market value of
public float, two market makers and a minimum bid price of $1.00 per share.
Sales of Cardiac Common Stock are subject to rules promulgated by the
SEC that impose various sales practice requirements on broker-dealers who sell
securities governed by the rules (i.e., "penny stocks") to persons other than
established customers and certain accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The rules further require the delivery by the
broker-dealer of a disclosure schedule prescribed by the SEC relating to the
penny stock market. Disclosure must also be made about all commissions and about
current quotations for the securities. Finally, monthly statements must be
furnished to the SEC disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
The SEC's regulations generally define a "penny stock" as any equity
security that has a market price (as defined) of less than $5.00 per share.
Although the regulations provide several exceptions to or exemptions from the
penny stock rules based on, for example, specified minimum revenues or
asset-value, Cardiac does not fall within any of the stated exceptions. Thus, a
transaction in Cardiac's securities will subject the broker-dealer to sales
practice and disclosure requirements under the penny stock rules. Such rules
cause the trading of the stock to be more cumbersome and could have a material
and adverse effect on the marketability of the stock.
POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of Cardiac's
securities may be highly volatile, as has been the case with the securities of
other companies engaged in high technology research and development.
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Factors such as announcements by Cardiac or its competitors concerning
technological innovations, new commercial products or procedures, proposed
government regulations and developments, disputes relating to patents or
proprietary rights, operating results, market conditions and economic factors
may have a significant impact on the market price of Cardiac's securities.
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Cardiac intends to market
its products and services, including products and services to be provided by
Electro, internationally, either independently or through joint ventures or
other collaborative arrangements with strategic partners. To date, Cardiac has
made sales of its products to a limited number of distributors in Europe, the
Middle East and Japan. To the extent that Cardiac operates its business overseas
and/or sells its products in foreign markets, it will be subject to all of the
risks inherent in international operations and transactions, including the
burdens of complying with a wide variety of foreign laws and regulations,
exposure to fluctuations in currency exchange rates and tariff regulations,
potential economic instability and export license requirements. The political,
economic and regulatory environments of the countries in which Cardiac
determines to do business will significantly affect its operations in such
countries.
CARDIAC'S DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF
INFRINGEMENT OF THIRD-PARTY PATENTS. Cardiac's success will depend, in part, on
its ability to maintain protection for its products and manufacturing processes
under United States and foreign patent laws, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. Cardiac
has six issued U.S. patents, two U.S. patent applications pending and one
exclusive license for a U.S. patent that is owned by a third party. There can be
no assurance that any patent applications will result in issued patents, that
any issued patents will afford adequate protection to Cardiac or will not be
challenged, invalidated, infringed or circumvented or that any rights thereunder
will afford competitive advantages to Cardiac. There can be no assurance that
others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of Cardiac's
products and technologies.
There can be no assurance that the validity of any patent issued to
Cardiac would be upheld if challenged by others in litigation or that Cardiac's
activities would not infringe patents owned by others. Cardiac could incur
substantial costs in defending itself in suits brought against it, or in suits
in which Cardiac seeks to enforce its patent rights against others. Should
Cardiac's products or technologies be found to infringe patents issued to third
parties, Cardiac would be required to cease the manufacture, use and sale of
Cardiac's products and Cardiac could be required to pay substantial damages. In
such event, a judicial determination of invalidity or the expiration of a patent
could adversely affect Cardiac's business. In addition, Cardiac may be required
to obtain licenses to patents or other proprietary rights of third parties in
connection with the development and use of its products and technologies. No
assurance can be given that any such licenses required would be made available
on terms acceptable to Cardiac, or at all.
Cardiac also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its university
research partners, employees, consultants, advisors and others. There can be no
assurance that such parties will maintain the confidentiality of such trade
secrets or proprietary information, or that the trade secret or proprietary
information of Cardiac will not otherwise become known or be independently
developed by competitors in a manner that would have a material adverse effect
on Cardiac's business, financial condition and results of operations.
CERTAIN CONSIDERATIONS RELATING TO ELECTRO
ELECTRO'S HISTORY OF OPERATING LOSSES; GOING CONCERN QUALIFICATION.
Electro has had a history of net losses and cash flow deficiencies and has, at
times, been unable to pay its obligations as they become due resulting in delays
in payments to vendors. While Electro is not in default of any of its
contractual obligations, its payments to vendors have been significantly
extended which at times, has, affected the delivery of certain components of its
products due to the unwillingness or inability of certain vendors to ship such
components until payment is made. The delivery delays have caused backorders and
delayed shipments to customers and could ultimately result in the loss of sales
should customers choose to obtain the affected products from companies
competitive with Electro. Electro believes that significant sales have not been
lost to date, but there can be no assurance that future sales will not be
adversely affected.
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Electro's auditors have reported that recurring losses from operations
and limited working capital resources raise substantial doubt about Electro's
ability to continue as a going concern and have qualified Electro's financial
statements by the assumption that Electro will continue as a going concern
without including any adjustment which might result from the outcome of this
uncertainty. Electro incurred net losses of $851,109, $1,354,942 and $892,940
for the nine months ended May 31, 1998 and the fiscal years ended August 31,
1997 and 1996, respectively. At May 31, 1998, Electro had an accumulated deficit
of $12,307,768.
The closing of the Merger is contingent upon Electro and Cardiac
obtaining sufficient financing to fund their joint operations. Due to the
various events and factors relative to Electro's and Cardiac's operations which
the companies have little or no control over, such as vendor delays, superior
competitive products and lack of market acceptability, there can be no assurance
that even with additional financing, the companies will be profitable or will be
able to generate sufficient revenues to satisfy its cash flow requirements.
Cardiac also has had a history of net losses and experienced cash flow
deficiencies and has been unable to pay many of its obligations as they become
due. There is no assurance that the future operations of the combined companies
will attain profitability or satisfy future cash flow requirements. See "ELECTRO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
UNDERSIZED SALES FORCE. Historically, Electro's cash flow deficiencies
impeded its ability to hire executive marketing personnel and to increase the
size of its sales force. Electro's marketing success in the future will depend,
at least in part, on its ability to recruit and retain additional sales
representatives, or to sell through a sales organization which is critical to
market acceptance and sales growth.
EXPOSURE TO CLAIMS AND LITIGATION. The nature of the medical device
industry subjects participants therein to the risk of litigation in several
areas, including claims for personal injuries resulting from the use of products
similar to those manufactured by Electro as well as for patent, licensing or
trademark infringement. Electro's products may be used in high risk medical
situations where the risk of serious injury is great. Electro maintains product
liability coverage in limits of coverage which it believes is customary in the
industry. There can be no assurance however, that Electro's insurance coverage
is adequate to address all costs, expenses and losses which may be incurred in
litigation proceedings. Electro is currently a party to certain litigation
incident to the normal conduct of its business. See "BUSINESS OF ELECTRO - Legal
Proceedings."
ADVERSE EFFECT OF COMPETITION. In Electro's experience, competitors who
market steerable catheters for which they have FDA approval for both diagnostic
as well as therapeutic use have a significant competitive advantage over
Electro, whose steerable catheter products are approved for diagnostic use only.
Also, with regard to gaining market acceptance, Electro has had some difficulty
relative to products introduced after competitors already had similar products
on the market; due to physicians' acceptance of and comfort with the competing
products. In such circumstances, Electro's ability to gain acceptance was
limited.
PROHIBITION ON SALES OF ELECTRO PRODUCTS TO EUROPEAN COMMUNITY WITHOUT
ISO CERTIFICATION. Continued sale by Electro of certain of its products in the
member nations of the European Economic Community (the "EEC") beyond June 14,
1998 required receipt of certification, the CE Mark, from the International
Organization for Standardization (the "ISO"). As this certification was not
obtained prior to such date, Electro and Cardiac have submitted an application
requesting CE Mark certification for Cardiac to sell such products, as
manufacturer, with Electro acting as vendor to Cardiac in such regard. Since the
CE Mark was not received by Electro by June 14, 1998, Electro has suffered a
loss of sales in the EEC. Additionally, while Electro and Cardiac believe that
certification will be granted for Cardiac's sale of such products, there can be
no assurance as to when or if such certification will be granted. Should such
certification not be received for some key products by calendar year-end, the
loss of sales of those products in the EEC could be as high as 15% of Electro's
sales, having a material adverse effect on Electro's revenues.
FDA WARNING LETTER. Electro's products, like those of Cardiac, are
classified as medical devices under the FDA Act and, as such, are subject to
extensive regulatory compliance requirements. In February, 1997, the FDA
conducted an inspection and audit of Electro's facilities and practices as a
result of which the FDA issued a
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warning letter (the "FDA Warning Letter") regarding noncompliance by Electro
with certain regulations regarding current good manufacturing practices ("cGMP")
in the manufacture of its products. The areas of noncompliance include Electro's
methods of investigation of device complaints, methods of validation of device
sterilization, environmental monitoring procedures, methods of validation of
extrusion processes which are used in the manufacture of certain of Electro's
catheters and other quality assurance and record keeping requirements. Electro
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 Electro's
intention to inform the FDA before the end of 1998 that it has completed such
actions and is ready for reinspection. There can be no assurance, however, that
Electro will be ready for such reinspection before the end of 1998 nor that
Electro will pass any such reinspection when it occurs. While Electro is
currently under no restrictions by the FDA regarding the manufacture or sale of
its products, Electro is unable to determine precisely the short-term economic
impact of instituting the required corrective actions and there can be no
assurance that the FDA will not take further action, including seizure of
products, injunction and/or civil penalties, if the necessary corrective actions
are not completed on a timely basis. The voluntary discontinuation of
manufacturing of certain products and the delay in the sale of other products
has adversely affected sales by an estimated 10%. Until all corrective actions
required under the Warning Letter have been taken, the FDA will not consider new
products for approval. However, Electro's insufficient financing for research
and development efforts over the last few years have limited its ability to
produce new products and, consequently, no FDA approvals are currently sought.
Electro believes that it will have completed the corrective actions by the time
it produces a product for which FDA approval would be required.
CERTAIN CONSIDERATIONS RELATING TO FUTURE OPERATIONS OF CTG AND ITS SUBSIDIARIES
UNCERTAINTY OF SUCCESS OF INITIATIVES OF CTG. Realization of the
anticipated benefits of the Merger will depend, in part, upon the efficient and
effective integration of the two companies' operations. The inability to
successfully combine such senior management or the loss of the services of one
or more key persons could have a material adverse effect on CTG. The senior
management of CTG and its subsidiaries also must continue to attract and retain
qualified management level employees and continue to motivate employees in light
of organizational changes resulting from the Merger. The integration of the two
companies will require the dedication of management resources which may distract
attention from the day-to-day operations of CTG and its subsidiaries. The
diversion of management's attention required by the integration process, as well
as any other difficulties which may be encountered in the transition and
integration process, such as unforeseen capital and operating expenses or other
difficulties and complications and unanticipated delays frequently encountered
in connection with the expansion and integration of acquired operations, could
have an adverse effect on the revenue and operating results of CTG. Further, the
Merger may result in the recording of significant goodwill on CTG's financial
statements, the amortization of which would reduce reported earnings in
subsequent years.
It is anticipated that CTG will pursue a number of strategic
initiatives that either have not been pursued or have not been fully
commercialized by either Cardiac or Electro to date, including, among others, a
single-lead DDD system, a single-pass pace monitor and defibrillation lead, an
atrial fibrillation ablation system and a temporary cardioversion lead. Such
initiatives will involve the risks associated with new businesses generally,
including, but not limited to, risks associated with marketing medical devices
and implementing such initiatives and engineering, design and construction risks
in constructing and operating new facilities. See "MERGER - Business and
Management after the Merger."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. As part of its growth
strategy, CTG intends to acquire additional companies with cardiology and
electrophysiology catheter products and/or complementary products and
technologies. Increased competition for acquisition candidates may develop, in
which event there may be fewer acquisition opportunities available to CTG as
well as higher acquisition prices. There can be no assurance that CTG
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will be able to identify, acquire or profitably integrate and manage additional
companies or complementary products or technologies, if any, into CTG without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of special risks, including possible adverse
effects on CTG's operating results, diversion of management's attention, failure
to retain key personnel of the acquired companies, amortization of acquired
intangible assets and risks associated with unanticipated events or liabilities,
some or all of which could have a material adverse effect on CTG's results of
operations, financial condition or business. Customer dissatisfaction or
performance problems at a single acquired company could have an adverse effect
on the reputation of the Company. In addition, there can be no assurance that
the other companies or complementary products or technologies acquired in the
future will achieve anticipated revenue and earnings. See "MERGER - Business and
Management after the Merger."
POSSIBLE NEED FOR FUTURE ACQUISITION FINANCING. CTG intends to finance
future acquisitions by using the remaining net proceeds from the public offering
of the Newly Offered Shares and/or issuing shares of CTG Common Stock for all or
a substantial portion of the consideration to be paid. In the event that CTG
Common Stock does not maintain a sufficient market value or potential
acquisition candidates are otherwise unwilling to accept CTG Common Stock as
part of the consideration for the sale of their businesses, CTG may be required
to utilize more of its cash resources, if available, in order to initiate and
maintain its acquisition program. If CTG does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. There can be no assurance that CTG
will be able to obtain the financing it will need on terms it deems acceptable,
or at all.
POSSIBLE NEED FOR ADDITIONAL OPERATING CAPITAL. Both Cardiac and
Electro have a history of operating losses and have exhausted current capital
resources. Cardiac's and Electro's capital requirements in connection with
carrying inventory, designing, developing and marketing products have been
significant, and CTG's will continue to be significant. Further, additional
costs will be incurred related to the integration of the two companies'
operations. Although the closing of the Merger is contingent upon Cardiac and
Electro obtaining additional financing, there is no assurance that these funds
will be sufficient to fund operations. If CTG were to need additional funds
(i.e., if CTG is not able to achieve cost savings or if additional funds are
required for marketing or other operational efforts), CTG could be required to
seek additional financing. There can be no assurance that further financing will
be available on acceptable terms, or at all. Additional equity financing may
involve substantial dilution to the interests of CTG's then existing
stockholders.
POTENTIAL LOSS OF KEY PERSONNEL. As is the case in many acquisition
transactions, the Merger may result in the loss of key personnel from CTG or its
subsidiaries through attrition or restructuring. Such a loss of key personnel
could have an adverse effect on operations.
YEAR 2000 ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the year 2000. Some
older computer systems stored dates with only a two-digit year with an assumed
prefix of "19". Consequently, this limits those systems to dates between 1900
and 1999. If not corrected, many computer systems and applications could fail or
create erroneous results by or at the year 2000 (the "Year 2000 issue").
Both companies have undertaken to assess the potential impact of the
Year 2000 issue. Such assessment has included a review of the impact of the
issue in primarily four areas: products, manufacturing systems, business systems
and miscellaneous/other areas. Based on the results of its initial review,
neither company anticipates that the Year 2000 issue will impact operations or
operating results. See, "CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Operating Trends and
Uncertainties" and "ELECTRO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Operating Trends and Uncertainties."
CONFLICTS OF INTEREST. Under the terms of the Merger Agreement,
Electro's indebtedness to The T Partnership will be redeemed by: (a) issuance to
The T Partnership by the Surviving Subsidiary of an aggregate of 1,000 shares of
Series A Preferred Stock with a liquidation value equal to $1.0 million,
convertible into shares of CTG Common Stock at a conversion price equal to 120%
of the price per share of the CTG Common Stock used as the basis for the
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consideration given in exchange for any capital raised in satisfaction of the
financing contingency to the Merger; (b) the delivery to The T Partnership of a
conditional promissory note made by CTG in the amount of $1.0 million, at an
interest rate of 9% per annum, with the principal and interest thereon due only
upon the occurrence of certain events related to the failure to pay amounts
which are due but not paid on the Series A Preferred Stock (or in the event of
certain other non-monetary defaults); and (c) the delivery to The T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of Electro's secured indebtedness to
The T Partnership exclusive of the amount redeemed under (a) above), bearing
interest at the rate of 12% per annum payable quarterly, the principal amount of
which shall be due and payable three years from the date of execution of such
note. As a result of the issuance of Series A Preferred Stock, The T Partnership
shall be entitled to receive dividends. See "DESCRIPTION OF SECURITIES OF CTG,
CARDIAC AND SURVIVING SUBSIDIARY - Preferred Stock of Surviving Subsidiary" and
"MERGER - Redemption of The T Partnership Debt." In addition, pursuant to the
terms of the Merger Agreement, The T Partnership shall be entitled to
reimbursement for cash advances provided to Electro in the amount of $200,000,
or any greater amount as may be agreed to by Electro and Cardiac, in writing,
which may have been extended by The T Partnership between May 1, 1998 and the
completion of the Merger for the purpose of operating capital. Ervin Schoenblum
and Abraham Nechemie, who comprise the entire Electro Board, are also partners
in The T Partnership. Mr. Schoenblum is also Electro's Acting President. See
"MERGER - Interests of Certain Persons in the Merger." As of September 30, 1998,
Electro's indebtedness to The T Partnership was approximately $2.5 million. The
indebtedness to The T Partnership is secured by Electro's headquarters, its
accounts receivable, inventories, machinery and equipment and is subordinated
only to one creditor who has priority in payment to The T Partnership in the
amount of $220,000 as of September 30, 1998. See "BUSINESS OF ELECTRO - Legal
Proceedings." Since the indebtedness to The T Partnership is secured by all of
Electro's assets, including the headquarters facility valued at approximately
$1.2 million, management believes that the obligation is fully collateralized.
The redemption of $1.0 million of the indebtedness to The T Partnership by
issuance of Series A Preferred Stock provides The T Partnership with an
unsecured obligation as compared with its currently secured position and allows
for payments in the form of a 9% dividend as compared to the 12% interest rate
currently being received on the indebtedness. However, the convertible aspect of
the Series A Preferred Stock, which is convertible into CTG Common Stock for a
period of five years at 120% of the price per share of the CTG Common Stock used
as the basis for consideration given in exchange for any capital raised in
satisfaction of the financing contingency to the Merger could be beneficial to
The T Partnership though such benefit is diminished as a result of CTG's right
to redeem the Series A Preferred Stock at any time. Accordingly, the benefit
afforded The T Partnership by virtue of the redemption of a portion of its
indebtedness in the form of higher-yielding secure debt obligation to a
lower-yielding obligation is wholly dependent upon the successful operations of
CTG and the reflection of such successful operations in the stock price of CTG
Common Stock.
The T Partnership will own approximately 16% of CTG after the Merger.
However, if The T Partnership converts its 1,000 shares of Series A Preferred
Stock into shares of CTG Common Stock, it would own a larger percentage of CTG,
such percentage being determined by the conversion price of the preferred stock.
See "MERGER - Redemption of The T Partnership Debt."
THE SPECIAL MEETINGS
ELECTRO SPECIAL MEETING
INTRODUCTION. This Joint Proxy Statement/Prospectus is provided to the
stockholders of Electro in connection with the Electro Special Meeting to be
held on November 16, 1998 and any adjournments or postponements thereof. The
approximate date that this Joint Proxy Statement/Prospectus is first being sent
to Electro stockholders is October 15, 1998.
ACTION TO BE TAKEN AT THE ELECTRO SPECIAL MEETING. At the Electro
Special Meeting, the Electro stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Merger Agreement and the Merger and a
proposal to authorize the Electro Board to adjourn the Electro Special Meeting
if there are insufficient votes to constitute a quorum or to approve the Merger
Agreement and the Merger and to transact any
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other business that properly comes before the meeting. The Merger Agreement is
attached as Appendix A to this Joint Proxy Statement/Prospectus and is
incorporated herein by reference.
VOTING AT THE ELECTRO SPECIAL MEETING. Only stockholders of record at
the close of business on September 28, 1998 (the "Electro Record Date") will be
entitled to vote at the Electro Special Meeting. As of the close of business on
the Electro Record Date, 6,390,389 shares of Electro Common Stock were
outstanding and entitled to vote at the Electro Special Meeting.
Any person giving a proxy in the form accompanying this Joint Proxy
Statement/Prospectus has the power to revoke it at any time before it is
exercised. A stockholder may revoke a proxy by filing with the Secretary of
Electro written notice of revocation bearing a later date than the proxy or a
duly executed proxy bearing a later date. The proxy may also be revoked by
attending the Electro Special Meeting and affirmatively voting in person
(although mere attendance at the Electro Special Meeting will not in and of
itself constitute revocation of a proxy). A stockholder who attends the meeting,
however, need not revoke the proxy and vote in person unless the stockholder
wishes to do so. All valid, non-revoked proxies will be voted at the Electro
Special Meeting in accordance with the instructions given. IF THE SIGNED PROXY
IS RETURNED WITHOUT INSTRUCTIONS, IT WILL BE VOTED FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE MERGER AND FOR THE AUTHORIZATION OF THE ELECTRO
BOARD TO ADJOURN THE ELECTRO SPECIAL MEETING TO PERMIT THE FURTHER SOLICITATION
OF PROXIES IF NECESSARY. The holders of a majority of the aggregate outstanding
shares of Electro Common Stock, present in person or represented by proxy, will
constitute a quorum for the transaction of business at the Electro Special
Meeting. The affirmative vote of two-thirds (2/3) of the votes cast by holders
of the outstanding shares of Electro Common Stock, present in person or
represented by proxy and entitled to vote at the Electro Special Meeting is
required to approve and adopt the Merger Agreement and the Merger. The
affirmative vote of a majority of the votes cast by holders of the outstanding
shares of Electro Common Stock, present in person or represented by proxy and
entitled to vote at the Electro Special Meeting is required for authorization of
the Electro Board to adjourn the Electro Special Meeting. At the Electro Special
Meeting, abstentions and broker non-votes will be counted as present for the
purpose of determining the presence or absence of a quorum but will not be
counted as a "vote cast" on any matter to which it relates. Although the Notice
of Electro Special Meeting of Electro Stockholders provides for transaction of
such other business as may properly come before the meeting, the Electro Board
has no knowledge of any matters to be presented at the meeting other than those
referred to herein. The accompanying proxy, however, gives discretionary
authority to the proxy holders to vote in accordance with the recommendation of
management if any other matters are presented.
The T Partnership, holder of approximately 30% of Electro Common Stock,
has entered into the Voting Agreement with Cardiac agreeing to vote in favor of
approval and adoption of the Merger Agreement and the Merger.
PROPOSALS BY ELECTRO STOCKHOLDERS. If the Merger is approved, the other
conditions to the Merger are satisfied and the Merger is consummated,
stockholders of Electro will become stockholders of CTG at the Merger Effective
Time. In order to be eligible for inclusion in CTG proxy materials for the 1998
Annual Meeting of Stockholders of CTG, any stockholder proposal to take action
at such meeting must be received at the principal executive offices of CTG, 3
Commerce Boulevard, Palm Coast, Florida 32164 no later than June 12, 1998,
unless the month and day of the next Annual Meeting of Stockholders are advanced
by more than thirty calendar days, or delayed by more than ninety calendar days
from November 12, 1998, the month and day contemplated for the 1998 Annual
Meeting. If the Merger is not consummated, Electro would plan to hold a 1998
Annual Meeting of Stockholders as soon as convenient after termination of the
Merger Agreement and any stockholder who wishes to present a proposal for
inclusion in the proxy materials for Electro's 1998 Annual Meeting of
Stockholders must have submitted such proposal to Electro within a reasonable
time before Electro begins to print and mail its proxy materials.
SOLICITATION OF PROXIES. A proxy in the form accompanying this Joint
Proxy Statement/Prospectus is solicited on behalf of the Electro Board. Proxies
will be solicited by use of the mails, and officers and employees of Electro
may, without additional compensation, also solicit proxies by telephone or
personal contacts. Copies of solicitation materials will be furnished to
fiduciaries, custodians and brokerage houses for forwarding to beneficial
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owners of Electro Common Stock held in their names and Electro will, on request,
reimburse such persons for their expenses in forwarding proxies and accompanying
materials and in obtaining authorization from beneficial owners of Electro
Common Stock to execute proxies. In the event that there is any material change
in the business or financial condition of either Cardiac or Electro prior to the
Merger Effective Time of the Merger, and the Merger is not abandoned, the
Electro Board intends to re-solicit the approval of Electro stockholders to the
Merger.
NO DISSENTER'S RIGHTS. Holders of record of shares of Electro Common
Stock will not have appraisal rights with respect to the shares. Section
14A:11-1 of the New Jersey Business Corporation Act states that a stockholder
shall not have the right to dissent from any plan of merger or consolidation
with respect to shares for which, pursuant to the plan of merger or
consolidation, he will receive: (a) cash, (b) shares, obligations or other
securities which, upon consummation of the merger or consolidation, will either
be listed on a national securities exchange or held of record by not less than
one thousand (1,000) holders; or (c) cash and such securities. As of September
30, 1998, there were 584 holders of record of Cardiac Common Stock, and 584
holders of record of Electro Common Stock.
CARDIAC SPECIAL MEETING
INTRODUCTION. This Joint Proxy Statement/Prospectus is provided to the
stockholders of Cardiac in connection with the Cardiac Special Meeting to be
held on November 16, 1998 and any adjournments or postponements thereof. The
approximate date that this Joint Proxy Statement/Prospectus is first being sent
to Cardiac stockholders is October 15, 1998.
ACTION TO BE TAKEN AT THE CARDIAC SPECIAL MEETING. At the Cardiac
Special Meeting, the Cardiac stockholders will be asked to consider and vote
upon proposals to: (i) approve the Reverse Split; (ii) ratify, approve and adopt
the Merger Agreement and the Merger; (iii) approve and adopt the Restructuring
Merger Agreement and the Restructuring Merger; and (iv) authorize the Cardiac
Board adjourn the Cardiac Special Meeting if there are insufficient votes to
constitute a quorum or to approve the proposals and to transact any other
business that properly comes before the meeting.
VOTING AT THE CARDIAC SPECIAL MEETING. Only stockholders of record at
the close of business on September 28, 1998 (the "Cardiac Record Date") are
entitled to notice of, and to vote at, the Cardiac Special Meeting. As of the
close of business on the Cardiac Record Date, 2,648,739 shares of Cardiac Common
Stock were outstanding and entitled to vote at the Cardiac Special Meeting.
Any person giving a proxy in the form accompanying this Joint Proxy
Statement/Prospectus has the power to revoke it at any time before it is
exercised. A stockholder may revoke a proxy by filing with the Secretary of
Cardiac written notice of revocation bearing a later date than the proxy or a
duly executed proxy bearing a later date. The proxy may also be revoked by
attending the Cardiac Special Meeting and affirmatively voting in person
(although mere attendance at the Cardiac Special Meeting will not in and of
itself constitute revocation of a proxy). A stockholder who attends the meeting,
however, need not revoke the proxy and vote in person unless the stockholder
wishes to do so. All valid, non-revoked proxies will be voted at the Cardiac
Special Meeting in accordance with the instructions given. IF THE SIGNED PROXY
IS RETURNED WITHOUT INSTRUCTIONS, IT WILL BE VOTED FOR APPROVAL AND ADOPTION OF
THE REVERSE SPLIT, THE RESTRUCTURING, THE MERGER AGREEMENT AND THE MERGER AND
FOR THE AUTHORIZATION OF THE CARDIAC BOARD TO ADJOURN THE CARDIAC SPECIAL
MEETING TO PERMIT THE FURTHER SOLICITATION OF PROXIES IF NECESSARY. The holders
of a majority of the shares of Cardiac Common Stock entitled to vote, present in
person or represented by proxy, shall constitute a quorum at the Cardiac Special
Meeting. The affirmative vote of the holders of a majority of the outstanding
shares of Cardiac Common Stock entitled to vote at the Cardiac Special Meeting
will be required to approve the Reverse Split, ratify, approve and adopt the
Merger Agreement and the Merger, and approve and adopt the Restructuring Merger
Agreement and Restructuring Merger. The affirmative vote of the holders of a
majority of the shares of Cardiac Common Stock present in person or represented
by proxy and entitled to vote at the Cardiac Special Meeting will be required to
authorize the Cardiac Board to adjourn the Cardiac Special Meeting. The Reverse
Split, the Merger and the Restructuring Merger are all interdependent and
conditions precedent to the occurrence of each other. Accordingly,
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the failure of the Cardiac stockholders to approve and adopt any one of such
transactions will mean that the Merger will not occur. For the purpose of
determining the vote required for approval of matters to be voted on at such
meeting, shares held by stockholders who abstain from voting will be treated as
being "present" and "entitled to vote" on the matter and, thus, an abstention
has the same effect as a vote against the matter. Broker non-votes will be
treated as "present" and "entitled to vote" and will be counted for purposes of
determining a quorum. However, broker non-votes will not be counted for any
purpose in determining whether a matter has been approved at the Cardiac Special
Meeting. Although the Notice of Cardiac Special Meeting of Cardiac Stockholders
provides for transaction of such other business as may properly come before the
meeting, the Cardiac Board has no knowledge of any matters to be presented at
the meeting other than those referred to herein. The accompanying proxy,
however, gives discretionary authority to the proxy holders to vote in
accordance with the recommendation of management if any other matters are
presented.
SOLICITATION OF PROXIES. A proxy in the form accompanying this Joint
Proxy Statement/Prospectus is solicited on behalf of the Cardiac Board. Proxies
will be solicited by use of the mails, and officers and employees of Cardiac
may, without additional compensation, also solicit proxies by telephone or
personal contacts. Copies of solicitation materials will be furnished to
fiduciaries, custodians and brokerage houses for forwarding to beneficial owners
of Cardiac Common Stock held in their names and Cardiac will, on request,
reimburse such persons for their expenses in forwarding proxies and accompanying
materials and in obtaining authorization from beneficial owners of Cardiac
Common Stock to execute proxies. In the event that there is any material change
in the business of financial condition of either Cardiac or Electro prior to the
Merger Effective Time, and the Merger is not abandoned, the Cardiac Board
intends to re-solicit the approval of Cardiac stockholders to the Merger.
DISSENTERS' RIGHTS. If the Restructuring Merger is approved by the
required vote of Cardiac stockholders and is not abandoned or terminated,
holders of Cardiac Common Stock who file a written notice of dissent before the
vote and who do not vote in favor of the Restructuring Merger will have the
right to dissent to the Restructuring Merger and to receive the "fair value" of
their shares of Cardiac Common Stock in cash provides such holders comply with
the requirements of Section 262 of the Delaware Act, and will be entitled to
dissenters' appraisal rights as described therein. See "DISSENTERS' RIGHTS -
Cardiac Stockholders."
BACKGROUND OF THE MERGER
The terms and conditions of the Merger were determined through
arm's-length negotiations between the senior management and board of directors
of each of Cardiac and Electro. In determining the form and amount of
consideration to be paid in the transaction, numerous factors were reviewed by
the senior management and board of directors of each of Cardiac and Electro. See
"REASONS FOR THE MERGER - Electro's Reasons for the Merger - Cardiac's Reasons
for the Merger." and "RECOMMENDATIONS OF THE BOARDS OF DIRECTORS - Electro Board
- - Cardiac Board." The following is a brief discussion of the contacts and
negotiations that have occurred between the two companies. For purposes of this
section and "REASONS FOR THE MERGER - Electro's Reasons for the Merger -
Cardiac's Reasons for the Merger" and "RECOMMENDATIONS OF THE BOARDS OF
DIRECTORS - Electro Board - Cardiac Board" references to the "Initial Merger
Agreement" shall mean and refer to the Agreement and Plan of Reorganization
dated as of January 20, 1998 prior to any amendment thereto; references to the
"Merger Agreement" in such sections, as in all other sections hereof, shall mean
and refer to the Agreement and Plan of Reorganization, dated as of January 20,
1998, as amended by a First Amendment to Agreement and Plan of Reorganization,
dated as of May 5, 1998, a Second Amendment to Agreement and Plan of
Reorganization, dated as of August 7, 1998, and a Third Amendment to Agreement
and Plan of Reorganization, dated as of September 4, 1998.
On May 9, 1997, Larry Haimovitch, a member of the Cardiac Board made
initial contact with Ervin Schoenblum, Acting President of Electro, at the North
American Society for Pacing and Electrophysiology trade conference in New
Orleans at which time preliminary discussions regarding the general business of
each organization and of the potential merits of combining the two companies
took place. On the same day, Alan Rabin, CEO and President of Cardiac,
approached Mr. Schoenblum separately and Messrs. Rabin and Schoenblum engaged
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in discussions relative to the general business of their respective companies
focusing on the synergies of the companies.
On May 13, 1997, Mr. Rabin sent a letter to Mr. Schoenblum expressing
interest in pursuing the initial discussions further, and providing further
detail on the business prospects for Cardiac, the most significant of which
related to the opportunities for sales of leads on an OEM basis. Thereafter, a
series of telephone conversations took place between representatives of each
company's senior management and board of directors wherein the parties attempted
to exchange additional information to broaden their respective general
understanding of each other's operations.
On May 22, 1997, Mr. Rabin visited the headquarters of Electro, and on
June 19, 1997, Mr. Schoenblum visited Cardiac's headquarters. The purpose of the
visits was for each party to meet each company's management team, tour the
facilities and observe operations.
By letter dated July 5, 1997 to Mr. Schoenblum, Mr. Rabin delineated
the benefits of a combination of the companies including the cost-savings
opportunities, the increased likelihood of obtaining financing and the greater
potential for technological advances. A meeting took place in Fairfield, New
Jersey on July 15, 1997, among Bart Gutekunst, Chairman of the Cardiac Board,
Mr. Rabin, Mr. Schoenblum, Donald Muntz, a director of Electro at that time,
Abraham Nechemie, a director of Electro, and a representative of The T
Partnership, a stockholder and creditor of Electro. The discussions focused on
the potential operating and strategic synergies which could result from a
merger, and the then current business conditions of each company. At the
conclusion of the meeting, the Electro representatives indicated a desire to
further explore a potential merger. See "REASONS FOR THE MERGER - Electro's
Reasons for the Merger - Cardiac's Reasons for the Merger" and "RECOMMENDATIONS
OF THE BOARDS OF DIRECTORS - Electro Board - Cardiac Board."
On July 23, 1997, Cardiac executed and delivered to Electro a letter of
intent proposing a merger of the two companies by an exchange of common shares.
This original letter of intent was not acted upon.
The Electro Board met informally on several occasions to discuss
various issues relative to a merger with Cardiac and to consider alternatives
thereto. Electro had been experiencing financial difficulties for a significant
period of time and the outlook for continuing operations for the long-term was
poor. Electro had insufficient financing to pursue the new product development
efforts required to remain an effective competitor in the electrophysiology
catheter business and management's efforts to obtain financing on reasonable
terms had been fruitless. Concluding that obtaining funding on its own was not
likely to occur upon acceptable terms, the Electro Board came to believe that a
combination with or an acquisition by another company was Electro's best option
for continued operation.
During the time frame that the Electro Board considered a merger with
Cardiac, it also considered other opportunities. One opportunity was a
stock-for-stock merger with another company engaged in the electrophysiology
field under the terms of which the stockholders of Electro would receive one
share of stock of the other company for every three shares of Electro Common
Stock tendered. Once management determined that the merger candidate appeared to
be a significant cash consumer and had few capital resources, it was resolved
that this opportunity was not in the best interest of Electro stockholders. The
merger candidate's stock price had decreased prior to its merger discussions
with Electro and decreased further during such discussions, from approximately
$2.25 per share at the time of the commencement of such discussions (placing a
value on shares of Electro Common Stock at approximately $0.75 per share) to
approximately $0.75 per share when discussions were terminated (suggesting that,
all other things being constant, each former share of Electro Common Stock would
have had a value of approximately $0.25 per share).
In September 1997, Electro resumed negotiations with Cardiac and a
series of meetings and telephone conversations took place involving
representatives of the two companies until October 6, 1997 when a meeting took
place involving, among others, Messrs. Gutekunst, Rabin and Schoenblum to
negotiate the letter of intent (the "Letter of Intent") which would outline the
terms of a merger and list a number of contingencies to closing that were to be
mutually addressed by both management teams.
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An initial exchange ratio was arrived at by arm's-length negotiation
among the parties after analyzing the relative values of the two companies.
Cardiac's initial proposal to Electro relative to the exchange ratio was based
upon the generally equal size of the two companies which brought about generally
equal value to the combination, and thereby to the stockholders of each company,
who should own approximately one-half of the shares of the combined companies.
This would have called for an exchange ratio of approximately two shares of
Electro for every one share of Cardiac. After further negotiation, the parties
agreed that Electro stockholders should receive two-thirds (2/3) of a share of
Cardiac Common Stock for each share of Electro Common Stock, which would give
existing Electro stockholders approximately 62% of the total shares of the
combined companies. The Electro Board considered that, in light of the fact that
this exchange ratio would result in Electro stockholders owning approximately
62% of the combined companies, the Merger was fair to such stockholders.
After the exchange ratio was determined, a +/-50% spread was applied to
the bid price relationship as the acceptable parameters within which the parties
would proceed with the transaction before either company could terminate the
transaction and "walk away." Specifically, if the bid price of a share of
Cardiac Common Stock was greater than 2.25 times that of Electro Common Stock,
for at least 10 consecutive days, Cardiac could walk away; similarly, if the bid
price of a share of Cardiac Common Stock was less than 0.75 times that of a
share of Electro Common Stock, for at least 10 consecutive days, Electro could
walk away.
The fees and expenses to be paid in the event of a termination of the
transaction after a merger agreement had been signed were negotiated by the
parties to provide equitable reimbursement for the efforts expended. The amounts
agreed upon were intended to reflect a reasonable compromise between an actual
disincentive to termination and provision of flexibility to the Boards for the
fulfillment of their fiduciary responsibilities to their respective stockholders
by allowing consideration of possible Superior Proposals.
In an effort to convert debt to equity, Cardiac requested that The T
Partnership agree to the redemption of $1.85 million of Electro's secured debt
to The T Partnership by accepting: (a) the issuance to The T Partnership of
1,000 shares of Series A Preferred Stock of the Surviving Subsidiary, which
shares shall have a liquidation value equal to $1.0 million of the indebtedness
and shall be convertible into shares of CTG Common Stock; (b) the delivery to
The T Partnership of CTG's 9% conditional promissory note in the amount of $1.0
million pursuant to which CTG is obligated to pay only those amounts which are
due but not paid to the holders of the Series A Preferred Stock, or in the event
of certain 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 hereinbelow mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and in the 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 CTG 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 amount of Electro's indebtedness to The
T Partnership that will be outstanding after the Closing of the Merger, at an
interest 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). See
"DESCRIPTION OF CTG, CARDIAC AND SURVIVING SUBSIDIARY SECURITIES - Preferred
Stock of Surviving Subsidiary" and "MERGER - Redemption of The T Partnership
Debt." The two directors comprising the Electro Board are also partners in The T
Partnership and because of their awareness of the existence of a conflict of
interest and of their fiduciary obligations to the Electro stockholders, they
informed Cardiac that The T Partnership would not require terms more favorable
than the best terms available to Cardiac for similar capital for the combined
companies from third party lenders. Cardiac management made their proposal to
The T Partnership based on their knowledge from discussions and other offers
from several potential investors. The T Partnership accepted Cardiac's original
proposal.
The terms agreed upon included a five-year right to convert the Series
A Preferred Stock of the Surviving Subsidiary issued to The T Partnership at the
Merger Effective Time into shares of Cardiac Common Stock at a conversion price
of the greater of $1.00 or 120% of the stock price used as a basis for the
consideration given in exchange for any capital raised by Cardiac to satisfy the
financing condition to the Merger. It was further agreed
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that the promissory note would bear interest at the rate of 9% per annum, with
principal and interest thereon due only upon the occurrence of certain events
related to the failure to realize the preferred distribution on the Series A
Preferred Stock.
Members of both the Electro Board and the Cardiac Board were informally
apprised of the progress of discussions between the companies, and reviewed the
terms proposed in the Letter of Intent and, after thorough review and
consideration thereof, authorized its execution. The Letter of Intent was
entered into by both companies on October 23, 1997. A joint press release was
issued on October 27, 1997 to advise the public of the proposed merger and of
the execution of the Letter of Intent in such regard.
After signing the Letter of Intent, a due diligence process was
initiated by both companies and a joint business plan was developed,
concentrating on issues affecting cash flow, liquidity, operating and strategic
synergies, and future value. A formal review of the results of these studies,
due diligence issues and analyses were presented to each board of directors by
their respective management. While the Electro Board believed that, in light of
Electro's financial condition and limited opportunities for financing and
combination and the terms negotiated, the Merger was a fair transaction, it
determined that it would be in the best interests of the Electro stockholders to
obtain an independent assessment of the fairness of the transaction to the
Electro stockholders. Compass Capital Partners, Ltd. was introduced to the
Electro Board by Saiber, Electro's legal counsel, on November 18, 1997, as an
investment banking firm which has performed many fairness opinion assessments.
The Electro Board obtained Compass' credentials and during December 1997, each
member of the Electro Board reviewed the qualifications of Compass and
interviewed the investment banker who would perform the review and was satisfied
that he was capable of undertaking the necessary analyses and furnishing the
fairness opinion and had no conflict of interest in doing so. Subsequent
discussions with representatives of Compass took place in December 1997.
On December 15, 1997, the Cardiac Board held a telephonic board meeting
to discuss the Merger issues. At that time, the directors of Cardiac unanimously
approved the terms of the Initial Merger Agreement and the transactions
contemplated thereby and authorized the execution of the Initial Merger
Agreement by the appropriate officers of Cardiac.
On January 8, 1998, Electro retained Compass to undertake the services
of providing a fairness opinion, and on January 14, 1998, the Electro Board
received a report from Compass containing its observations and conclusions for
review and subsequent discussion.
On January 15, 1998, the Electro Board held a telephonic board meeting
to discuss the report received from Compass and Compass made a presentation to
the Electro Board of its analysis of the considerations attendant to the
proposed Merger and advised the Electro Board that the consideration proposed to
be paid by Cardiac pursuant to the terms of the Letter of Intent is fair, from a
financial point of view, to the stockholders of Electro. At that time, the
directors of Electro unanimously approved the terms of the Initial Merger
Agreement and the transactions contemplated thereby and authorized the execution
of the Initial Merger Agreement by the appropriate officers of Electro.
Cardiac and Electro entered into the Initial Merger Agreement as of
January 20, 1998 and, thereafter, issued a joint press release informing the
public of such action.
During December 1997 and January 1998, the management of Electro had
discussions with a foreign third party entity (the "Foreign Acquirer")
professing interest in an acquisition of Electro. The initial contact had been
made through a business broker who had knowledge of the proposed merger with
Cardiac and believed that he could assist the parties in obtaining financing for
the combination, which discussions led to the introduction of Mr. Schoenblum to
the Foreign Acquirer. Mr. Schoenblum introduced the Foreign Acquirer to Mr.
Rabin in an effort to determine if a transaction could be structured including
all three parties. The Foreign Acquirer was not interested in implantable
devices and rejected the possibility of a combination involving Cardiac and
Electro because his business plans did not include involvement in implantable
products. The Foreign Acquirer continued to have an interest in Electro
proposing an acquisition of all the outstanding shares of Electro Common Stock
for cash consideration. The Electro Board, considering its fiduciary obligation
to its stockholders, pursued negotiations with the Foreign Acquirer in the
interest of determining whether any resultant offer would constitute a Superior
Proposal.
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Initial meetings with representatives of the Foreign Acquirer suggested
a stock acquisition of Electro by the Foreign Acquirer for cash consideration in
an amount which, after subsequent meetings, was substantially reduced. The
initial consideration discussed was approximately $0.45 per share at closing
with a post-closing payment of another $0.15 per share in a year, and another
payment tied to Electro's future operations in an amount of as much as $0.15 per
share. In later meetings the structure of the transaction was revised to reflect
an asset purchase of Electro with assumption of all attendant liabilities, to
effectively mimic a stock transaction, at a purchase price to be paid, in part,
at closing and, in part, over a two-year period, with a portion of the price
payable being contingent on future operations. Later discussions among the
parties resulted in constant adjustment of the liabilities of Electro that would
be assumed by the Foreign Acquirer and the offset of subsequent liabilities
against post-closing payments and indemnification obligations which, together,
could have reduced the purchase price to a level of approximately zero. Such
revisions to the initial offer caused the Electro Board to question the
seriousness of the offer, the likelihood of full appreciation of the purchase
price by the Electro stockholders and the determination of whether the offer
was, in fact, a Superior Proposal. After serious deliberation, in early April
1998, the Electro Board rejected the Foreign Acquirer's proposal.
Management of Electro had kept management of Cardiac apprised of
developments in connection with their discussions with the Foreign Acquirer and
with the possibility of a Superior Proposal from such party, and, in early April
1998, advised Mr. Rabin that Electro had terminated negotiations with the
Foreign Acquirer whereupon discussions with Cardiac resumed.
As a result of further negotiations between representatives of the
Cardiac Board and the Electro Board, certain revisions to the Initial Merger
Agreement were proposed (the "First Amendment"). The parties agreed to revise
the exchange ratio to reflect the market prices of the stock of the two
companies, and, accordingly, agreed to the Merger Exchange Ratio, resulting in
existing stockholders of Electro owning approximately 71% of the shares of the
combined companies (prior to giving effect to shares of Electro Common Stock to
be issued in connection with the contemplated financing to occur immediately
prior to the Merger). The termination provisions were also revised to reflect
that either company could terminate the Merger Agreement if the ratio of the
closing bid price of a share of Cardiac Common Stock to a share of Electro
Common Stock were greater than 2.00 or less than .50 prior to giving effect to
the Reverse Split. Additionally, with regard to the conversion price of the
Series A Preferred Stock to be issued to The T Partnership, the $1.00 minimum
price per share was removed allowing The T Partnership to be in a similar
position as other potential third party lenders. The First Amendment also
provided for the Reverse Split and the Restructuring Merger.
On April 10, 1998, the Cardiac Board held a telephonic board meeting to
discuss the proposed terms of the First Amendment to the Initial Merger
Agreement. Six of the seven Cardiac board members were in attendance, and they
unanimously approved and adopted the First Amendment to the Initial Merger
Agreement and the transactions contemplated thereby and authorized the execution
of the First Amendment to the Initial Merger Agreement by the appropriate
officers of Cardiac.
While Compass had previously concluded that the Merger was fair to the
Electro stockholders when such stockholders were obtaining shares of the
combined companies equal to about 62% of the shares in the combined companies,
the Merger Exchange Ratio (pursuant to which the Electro stockholders now obtain
approximately 71% of the shares of the combined companies prior to giving effect
to shares of CTG Common Stock to be issued in connection with the completion of
the public offering of the Newly Offered Shares simultaneously with and as a
condition to the Merger) and the passage of time could alter the results
achieved by the fairness analysis. Consequently, Compass was approached about
updating its analysis.
On May 5, 1998, the Electro Board held a board meeting and unanimously
approved, subject to receipt of a fairness opinion to be presented by Compass,
the First Amendment to the Initial Merger Agreement.
On May 5, 1998, the parties executed the First Amendment to the Initial
Merger Agreement.
On May 19, 1998, Compass delivered an updated fairness opinion wherein
Compass again concluded that the Merger is fair to the Electro Stockholders.
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As a result of further discussions between the parties relative to the
issues of securing financing sufficient to satisfy the condition to the Merger
and of clarifying certain procedural aspects of the transactions contemplated in
connection with the Merger, the parties determined that it was advisable to
amend the Initial Merger Agreement, as amended by the First Amendment. On August
7, 1998, the parties executed the Second Amendment to Agreement and Plan of
Reorganization (the "Second Amendment"), which action was ratified by the
Cardiac Board and the Electro Board in telephonic meetings held on September 4,
1998 and August 7, 1998, respectively.
As a result of a change in the structure of the transactions
contemplated by the Merger and the Restructuring Merger, the parties determined
that it was advisable to amend the Initial Merger Agreement, as amended by the
First Amendment and the Second Amendment (the "Third Amendment"). On September
4, 1998, each of the Cardiac Board and the Electro Board held a telephone board
meeting and unanimously approved the Third Amendment to the Initial Merger
Agreement. The parties then executed the Third Amendment which is dated as of
September 4, 1998.
Management of Cardiac had consulted with representatives from
Fahnestock & Co., Inc., a member of the New York Stock Exchange ("Fahnestock"),
regarding corporate opportunities in the development of Cardiac. As part of its
consulting services, Fahnestock provided general investment banking advice, as
well as a review of Electro's past financial performance and funding history and
the perspective of the investment community regarding Electro. Fahnestock also
provided advice regarding the structure of the transaction between Cardiac and
Electro and future funding alternatives. In consideration for providing such
consulting services, Fahnestock shall receive at the Merger Effective Time a
three (3) year redeemable warrant from CTG for 27,000 shares of CTG Common Stock
at $12.50 per share. See "DESCRIPTION OF CTG, CARDIAC AND SURVIVING SUBSIDIARY
SECURITIES - Warrants."
REASONS FOR THE MERGER
ELECTRO'S REASONS FOR THE MERGER
The Electro Board has determined that the Merger is fair to, and in the
best interest of, Electro and its stockholders. Accordingly, the Electro Board
has approved the Merger Agreement and the Merger and the transactions
contemplated thereby, including the Merger Exchange Ratio. This approval
followed, and was based upon discussions and prior meetings of the Electro Board
at which matters relating to Electro and Cardiac were considered. See
"BACKGROUND OF THE MERGER." In arriving at its conclusion, the Electro Board
received presentations from, and reviewed carefully the terms and conditions of
the Merger Agreement with, its management, its legal counsel and its financial
advisor.
The Electro Board had been advised by Electro's management of the
difficulties experienced by management in obtaining additional capital for its
operations over several years as management's numerous efforts to obtain such
financing to support working capital requirements, and investments for research
and development programs proved fruitless. Discussions had been held with
commercial banks, investment banks, potential acquirers, potential merger
partners and potential investors with the intent of obtaining funding. After
considerable efforts over a substantial period of time, management had advised
the Electro Board of the low probability of Electro obtaining financing upon
reasonable terms and conditions, on its own. Management indicated the following
reasons as obstacles to a transaction:
/bullet/ the years of operating losses experienced by Electro, together
with its inability to demonstrate sufficient financial returns
to service and repay debt, prevented management from securing
a more traditional, lower-cost line of credit from a
commercial lender;
/bullet/ Electro was unable to effectuate a private placement of equity
or equity-related capital on acceptable terms and other
potential financing vehicles were not available due to the
lack of assets not already subject to security interests;
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/bullet/ after investigating Electro, potential acquirers found Electro
not to be an attractive opportunity or offered prices below
market capitalization at the time of the offer; and
/bullet/ merger candidates did not possess sufficient synergies with
Electro to bring about enough economies of scale to make the
combination financially appealing.
The management of Electro and the Electro Board discussed the prospect
of continuing on a stand-alone basis and operating Electro within the existing
parameters of its limited working capital line of credit, but management
informed the Electro Board that, although recent developments (included interest
in Electro by some prominent medical centers in joint research and development
efforts, and interest by several medical device companies using Electro for
contract research and development services and OEM work) might have enhanced the
value of Electro, such developments could not be exploited without additional
working capital. The discussions revealed that Electro had limited choices
available. The Electro Board could consider cessation of operations, dissolution
and liquidation or continuation with another party.
Investigation of Cardiac as a potential merger candidate led the
Electro Board to identify certain synergies between the two companies and to
conclude that, as a result of such synergies, financing of the combined
companies was more likely to be available since the exploitation of such
synergies offered the possibility that the combined companies could be brought
to profitability sooner. The synergies identified include the following:
/bullet/ the two companies' operations, sales functions, markets and
services would justify a strategy of consolidating certain
functions to make them more efficient and cost effective;
/bullet/ since a broader product line would result by combining the two
companies' product offerings, the likelihood for qualifying
for certain purchasing contracts would increase as would the
opportunity for bundling cardiovascular products to hospitals
and hospital-purchasing groups. In efforts to reduce costs,
hospitals are limiting the number of vendors. Preferences are
given to those companies that offer a full line of products,
including those that encompass both of those of Cardiac and
Electro. The broader product lines offer a greater chance of
acceptance by individual hospital and buying group purchasing
departments;
/bullet/ the combined know-how in diagnostic and therapeutic technology
related to the electrical problems in the heart, combined with
adequate funding, would provide the opportunity of more rapid
development of proprietary technology leading to the
attainment of patents and potential increase in stockholder
value;
/bullet/ the combination would create a larger company with better
economies of scale, through, among other things, elimination
of at least one manufacturing facility and vertical
integration of selected manufacturing processes,
internalization of the manufacture of selected products and
elimination of the duplication of selected services and
managerial functions;
/bullet/ Electro would benefit from the experienced and knowledgeable
management and the Cardiac Board; and
/bullet/ the combined companies would join at a revenue level
approximately double that of Electro alone providing the
combined companies with better access to the capital markets
than Electro would have on a stand-alone basis.
The management of Electro identified for the Electro Board the
following negative factors relative to Cardiac and the risks of a combination
with Cardiac:
/bullet/ Cardiac's competition with several very large and well-funded
companies in the pacemaker field;
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/bullet/ the cessation in January, 1998 of royalty payments from
Intermedics to Cardiac pursuant to a license agreement;
/bullet/ the current operating losses generated by both Cardiac and
Electro which will need to be funded until the combined
companies' operations begin to generate a profit; and
/bullet/ the various other factors related to Cardiac's operations set
forth under "RISK FACTORS," including, among others, Cardiac's
debt obligations, limited sources of supply for product
components, potential product recalls and product liability,
and time and expense of integrating the operations of the two
companies. See "RISK FACTORS."
The Electro Board evaluated the factors, both positive and negative,
listed above in light of their knowledge of the business and alternatives
available to Electro and of their business judgment. The Electro Board
considered these factors in their totality and did not quantify or otherwise
attempt to assign relative weights to the specific factors considered in making
its determinations. The Electro Board considered the exchange ratio which
provided for two-thirds (2/3) of a share of Cardiac Common Stock for each share
of Electro Common Stock resulting in the stockholders of Electro receiving a 62%
interest in the combined companies as fair. The Electro Board believes that the
subsequent adjustment of the exchange ratio, resulting in Electro stockholders
receiving approximately a 71% interest in the outstanding stock of the combined
companies (53% after giving effect to the Reverse Split and issuance of CTG
Common Stock to be issued in connection with the equity financing to occur
immediately prior to the Merger), further increases value to Electro
stockholders. The Board acknowledges that many factors need to be evaluated in
order to determine whether a transaction is fair, in addition to the current
market price, particularly when both companies' shares are traded in an
inefficient market such as the OTC Bulletin Board, where shares are
lightly-traded and have no following of any consequence.
Although the transaction, as initially structured, contemplated the
Electro stockholders receiving shares of Cardiac Common Stock of lesser value,
due to the fact that each share of Electro Common Stock would be exchanged for
2/3 of a share of Cardiac Common Stock at a time when both stocks were trading
at about the same price, the Electro Board had determined that, of all the
alternatives available to it, the Merger offered the best opportunity for
Electro's survival and for value to the Electro stockholders. None of the other
alternatives provided for a higher valuation of the Electro shares. The revision
in the initial exchange ratio to one-for-one (prior to giving effect to the
Reverse Split of Cardiac Common Stock) allows the Electro stockholders to obtain
stock of approximately equal value to that of the stock they currently own.
The Electro Board reviewed the report, analyses and conclusions of
Compass and the presentation of Compass to the Electro Board wherein Compass
indicated that it found the consideration to be received by holders of shares of
Electro Common Stock pursuant to the Merger Agreement was fair from a financial
point of view. Compass has confirmed this opinion in its written statement
delivered to the Electro Board on May 19, 1998. A copy of this opinion is
attached as Appendix D to this Joint Proxy Statement/Prospectus and the
stockholders of Electro are urged to read such opinion carefully.
The Electro Board concluded that after taking into consideration all of
the factors set forth above, the potential benefits of a merger with Cardiac
outweigh the potential negative consequences, particularly in light of the
alternatives available to Electro. As such, the Electro Board unanimously
determined that the Merger was in the best interest of Electro and its
stockholders, and that Electro should proceed with the Merger.
In considering the recommendation of the Electro Board to approve and
adopt the Merger Agreement and the Merger, Electro stockholders should be aware
and should consider in their analysis of how to vote their shares that Ervin
Schoenblum and Abraham Nechemie, who comprise the entire Electro Board, are
partners in The T Partnership, which owns approximately 30% of the outstanding
shares of Electro Common Stock and which is a creditor of Electro, with total
indebtedness due to The T Partnership at September 30, 1998 of approximately
$2.5 million. Mr. Schoenblum is also Electro's Acting President. In evaluating
all of the alternatives available to Electro,
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the Electro Board had considered the liquidation of the company, which, in light
of The T Partnership's secured position as a lender, would likely allow The T
Partnership to recover most, if not all, of the amounts owed to it by Electro
but would also likely result in little or no return to Electro stockholders.
The T Partnership has beneficial ownership of 2,464,844 shares of
Electro Common Stock, which includes 83,344 and 500,000 shares which The T
Partnership has the right to acquire pursuant to outstanding warrants,
immediately exercisable at prices of $1.425 and $.9875 per share, respectively.
In addition to the shares held by The T Partnership, Messrs. Schoenblum and
Nechemie also hold currently exercisable stock options with respect to 64,000
and 5,000 shares of Electro Common Stock, respectively. The T Partnership is
comprised of five partners, Messrs. Schoenblum and Nechemie, who each hold a 5%
equity interest in the partnership, Messrs. Fred Lafer and Stephen Shapiro, who
each hold a 10% equity interest therein, and Mr. Henry Taub, who holds a 70%
equity interest in the partnership and may be said to control The T Partnership.
In an effort to facilitate the consummation of the Merger, The T Partnership has
entered into the Voting Agreement with Cardiac, which was described previously.
The T Partnership will own approximately 16% of CTG after the Merger.
CARDIAC'S REASONS FOR THE MERGER
The Cardiac Board believes that the Merger with Electro provides an
opportunity for Cardiac to create a combined company with greater financial
resources and flexibility, competitive strengths and business opportunities that
would not be possible for Cardiac alone. The Cardiac Board has determined that
the Merger is fair to, and in the best interest of, Cardiac and its
stockholders. Accordingly, the Cardiac Board has approved the Merger Agreement
and the Merger and the transactions contemplated thereby. This approval was
based upon discussions and prior meetings of the Cardiac Board at which matters
relating to Electro and Cardiac were considered. See "BACKGROUND OF THE MERGER."
In arriving at its conclusion, the Cardiac Board received presentations from,
and reviewed carefully the terms and conditions of, the Reverse Split, the
Merger and the Restructuring Merger with its management and its legal counsel.
Under the Delaware Act, directors are accorded broad discretion in
making business decisions, hence the so-called "business judgment rule."(1) The
business judgment rule has a practical effect of protecting a board of directors
from liability.(2) Pursuant to this rule, Delaware courts will not second-guess
business decisions made in good faith by an independent and fully informed board
of directors. The test of whether a board is fully informed, and therefore has
met its duty of care, is one of gross negligence.
Basically, a board of director's decision will not be disturbed if such
decision can be attributed to any rational business purpose. Under Section
141(e) of the Delaware Act, directors are fully protected if they rely in good
faith on information from certain specified sources, including corporate records
and opinions, reports or statements presented to the corporation by any person
who has been selected with reasonable care by or on behalf of the corporation
and as to matters which the directors reasonably believe are within such
person's professional or expert competence.
Cardiac has experienced increased difficulty in attempting to compete
in the pacemaker generator side of its business. Cardiac's generators do not
have some of the advanced technologies, such as rate response and selected
diagnostic capabilities desired by physicians for newer pacemakers. Further,
Cardiac does not have the cash resources required to license and effectively
develop these technologies into its products.
Based upon the above problems, the Cardiac Board decided to focus
Cardiac's growth and resources on the lead and catheter portion of its business.
The intent was to increase both direct and OEM sales of pacemaker and
defibrillator leads, as well as expand into other cardiac related catheters. The
Cardiac Board decided that Cardiac should focus on the growing cardiac and
electrophysiology catheter market, and decided to explore merger
- ------------
(1) SEE, E.G., ARONSON V. LEWIS, 473 A.2d 805, 812 (Del. 1984).
(2) SEE, E.G., JOY V. NORTH, 692 F.2d 880, 885 (2d Cir. 1982).
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possibilities in the hopes of obtaining a broader product line and revenue base
and additional opportunities to attract financing.
The Cardiac Board evaluated a number of other companies (whose
identities cannot be disclosed pursuant to the terms of certain confidentiality
agreements entered into in connection with such negotiations), and chose Electro
because of the following synergies:
/bullet/ Electro had developed a business franchise with a broad line
of products in the cardiac catheter market. The Cardiac Board
believed that many of these products would fit well with
Cardiac's product line because of similarities in technology,
customer and clinical use.
/bullet/ Both companies manufacture products that performed essentially
the same function. Electro's catheters or leads are also used
to carry electrical signals to and from the heart and for
therapeutic and diagnostic functions. Although there are some
differences in materials and in physical characteristics
between the products, the differences were determined by the
Cardiac Board to be an advantage because they expand on the
technology base of both companies.
/bullet/ By combining the companies, resources and personnel could be
better utilized, allowing operational cost savings and
eventually profitability.
More specifically:
/diamond/ the companies could be consolidated under one group
of senior management;
/diamond/ the companies could take advantage of manufacturing
efficiencies by eliminating redundancies and the
combined entity ultimately plans to eliminate one
manufacturing facility); and
/diamond/ the larger revenue base could better and more
efficiently support a sales group for the products.
/bullet/ The markets for Cardiac and Electro are similar as both are
directed at corporate OEM sales. Some of the larger actual and
potential OEM customers of Electro require the same type of
products as those manufactured by Cardiac, providing
additional sales opportunities for both companies.
/bullet/ The larger revenue base, broader product line and anticipated
better profit performance of the combined entity are more
desirable to the financial markets and may offer greater
access to additional capital required to build these
companies.
The Cardiac Board discussed the prospect of continuing on a stand-alone
basis and operating Cardiac within the existing parameters of its limited
working capital line of credit. However, the Cardiac Board decided that if
Cardiac was going to focus primarily on its lead and catheter business, its best
opportunity for growth would be realized through external acquisition and that
Electro provided the best opportunity for realization of its objectives.
As mentioned above, other companies were considered and evaluated.
However, they were rejected because Electro has already developed a business
franchise with a broad line of products in the cardiac catheter market and
either: (i) they had significantly lower revenues; or (ii) the cost requirements
for merging the companies and bringing them to profitability were greater.
In addition to the above factors, the Cardiac Board considered certain
negative factors in determining the fairness of the Merger and the Restructuring
Merger, including:
/bullet/ The current operating losses generated by both Cardiac and
Electro, which will require funding until the combined
companies' operations begin to generate a profit.
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/bullet/ Electro is currently operating under an FDA Warning Letter
and, unless progress is made on satisfying the requirements of
that letter, Electro is at risk of further action by the FDA.
/bullet/ Electro does not currently have the necessary CE Mark
approvals required to allow continued sales of product in
certain countries in Europe.
The Cardiac Board evaluated the above factors, both positive and
negative, in light of their knowledge of the medical device industry and the
lack of other strategic or funding alternatives available to Cardiac. The
Cardiac Board also considered the initial exchange ratio which provided for
two-thirds (2/3) of a share of Cardiac Common Stock for each share of Electro
Common Stock, resulting in the stockholders of Cardiac receiving a 38% interest
in the combined companies (prior to giving effect to the issuance of the Newly
Offered Shares). The Cardiac Board evaluated the initial exchange ratio in light
of the foregoing information, the companies' respective equity market valuations
as defined by the price per share of each company's common stock multiplied by
the number of outstanding shares of common stock (the "Equity Market Value") as
well as the comparable financial performance of both companies.
The Cardiac Board reviewed pricing information concerning Electro's
Common Stock and Cardiac's Common Stock for the three months preceding its
proposal. Although the price per share of both companies' common stock had
declined, both companies traded within a relatively consistent range of each
other. With minor exceptions, Electro's Common Stock typically traded at prices
approximately 15% to 30% below Cardiac's Common Stock during this period. The
Cardiac Board recognized that both Electro Common Stock and Cardiac Common Stock
are traded on the OTC Bulletin Board where volume is light and the spreads
between bid and asked prices are relatively large, which suggests an inefficient
market. However, this range remained steady on a relative basis during the prior
three months.
During the last week of August 1997, approximately one week prior to
the signing of the Letter of Intent, the average closing bid price for Electro's
Common Stock was $0.55 per share and the average closing bid price for Cardiac's
Common Stock was $0.70. At that time, the Equity Market Value of Electro was
approximately $3.515 million, while Cardiac's Equity Market Value was
approximately 50% of this at approximately $1.854 million. This supported the
initial exchange ratio whereby Electro's stockholders would receive
approximately 62% of the combined companies. Further, Electro's annual revenue
base as of August 1997 was approximately $6.6 million, slightly larger than
Cardiac's then current annualized revenue base of approximately $6.2 million.
Electro's net loss was also slightly larger than Cardiac's ($1.4 million versus
a then projected $0.8 million for Cardiac). This was mitigated by the fact that
a significant portion of Cardiac's revenue (almost 25%) and income were from
royalty fees from Intermedics, and such fees were going to terminate in January
1998.
In consideration of these factors, the Cardiac Board determined that
the initial exchange ratio was fair to and in the best interest of Cardiac and
its stockholders.
In April 1998, two additional factors contributed to a reevaluation of
the initial exchange ratio.
/bullet/ Cardiac's royalty fees from Intermedics had ended, reducing
Cardiac's revenue base and increasing its net loss.
/bullet/ The price of the two companies' common stock was now
approximately equal at $0.38 per share, thus increasing the
difference in the Equity Market Values of the two companies.
Electro's Equity Market Value was now approximately $2.6
million, while Cardiac's was at less than 40% of this, or
approximately $1 million.
Based on the foregoing factors and in reaction to interests in Electro
from a competitive company, the Electro Board required an adjustment in the
initial exchange ratio, and the Cardiac Board determined that a modification of
the initial exchange ratio to one share of Cardiac Common Stock for each share
of Electro Common Stock was in the best interest of Cardiac and its
stockholders.
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Based on the foregoing, the Cardiac Board concluded that the potential
benefits of a merger with Electro outweighed the potential negative
consequences. After taking into consideration all of the factors set forth
above, the Cardiac Board determined, by a six to one vote, that the Merger was
in the best interest of Cardiac and its stockholders, and that Cardiac should
proceed with the Merger.
The Cardiac Board considered the proposed terms of the First Amendment
to the Initial Merger Agreement. In light of the changes that had taken place
concerning the business and financial condition of each company, the Cardiac
Board determined that the amendment was in the best interests of Cardiac's
stockholders and unanimously adopted the terms of the First Amendment to the
Initial Merger Agreement. The Cardiac Board considered the following factors:
/bullet/ The Restructuring Merger would provide the combined entity
(CTG) with the flexibility to diversify its business in the
future and to consider possible future acquisitions when
appropriate, and with the best possibilities to operate on an
on-going basis.
/bullet/ An important objective of CTG would be to apply to list shares
of CTG Common Stock on a regional exchange and/or the Nasdaq
SmallCap Market as soon as possible after consummation of the
Restructuring Merger.
/bullet/ The Reverse Split would provide support for the CTG Common
Stock after consummation of the Restructuring Merger.
The Cardiac Board and Cardiac's management identified one potential
negative factor to the Reverse Split: that subsequent to the Reverse Split,
CTG's performance or other factors may influence a decline in the stock price.
Based on the foregoing, the Cardiac Board concluded that the potential
benefits of the Reverse Split outweighed the potential negative consequences.
After taking into consideration all of the factors set forth above, the Cardiac
Board unanimously determined that: (i) the Reverse Split was in the best
interests of Cardiac and its stockholders; (ii) the Restructuring Merger was in
the best interests of Cardiac and its stockholders; and (iii) the Agreement and
Plan of Reorganization should be amended to reflect the above and the Merger
should proceed in accordance therewith.
The Cardiac Board consists of directors experienced in the medical and
financial industries. Larry Haimovitch formerly worked as a securities analyst
in the medical device sector of each of Furman Selz and Wells Fargo & Company.
Likewise, Tracey Young has worked with Sulzer Intermedics, Inc. and Teletronics
International, and was a senior consultant with The Wilkerson Group, a medical
device consulting firm, before joining the Cardiac Board. The additional other
combined have experience as senior management in medical corporations, and have
all made similar determinations of fairness in the past. For a more detailed
description of the Cardiac Board and certain members of management, see
"MANAGEMENT OF CARDIAC - Directors and Executive Officers of Cardiac."
Based upon the experience of the Cardiac Board, the Cardiac Board
believes that it can carry out the duties and responsibilities placed upon a
board of directors under the Delaware Act. The Cardiac Board considered
obtaining a professional investment advisor to deliver a formal fairness
opinion, but concluded that such an expense was not warranted and would not, in
any event, change the considered judgment of the Cardiac Board members who
believe themselves to be fully capable of considering and evaluating the
alternatives and values pertaining to Cardiac.
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RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
ELECTRO BOARD
THE ELECTRO BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE MERGER, AND BELIEVES THAT THE MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE IN THE BEST INTERESTS OF, AND ARE ON TERMS THAT ARE
FAIR TO, ELECTRO AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT ELECTRO
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
CARDIAC BOARD
THE CARDIAC BOARD HAS APPROVED THE REVERSE SPLIT, THE MERGER AGREEMENT
AND THE MERGER AND THE RESTRUCTURING MERGER AGREEMENT AND THE RESTRUCTURING
MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND BELIEVES THAT THE REVERSE
SPLIT, THE MERGER AND THE RESTRUCTURING MERGER ARE IN THE BEST INTERESTS OF, AND
ARE ON TERMS THAT ARE FAIR TO, CARDIAC AND ITS STOCKHOLDERS. AFTER CAREFUL
CONSIDERATION, THE CARDIAC BOARD RECOMMENDS THAT THE CARDIAC STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE REVERSE SPLIT, RATIFICATION, APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE MERGER, AND APPROVAL AND ADOPTION OF THE RESTRUCTURING
MERGER AGREEMENT AND THE RESTRUCTURING MERGER.
OPINION OF COMPASS CAPITAL PARTNERS, LTD.
Compass Capital Partners, Ltd. (previously defined as "Compass") has
delivered a written opinion to the Electro Board that the consideration to be
paid by Cardiac pursuant to the Merger is fair, from a financial point of view,
to Electro stockholders. No limitations were imposed by the Electro Board upon
Compass with respect to the investigations made, procedures followed or
otherwise in connection with Compass rendering its opinion.
JANUARY OPINION
A copy of the full text of Compass' opinion, dated January 21, 1998, is
attached as Appendix D to this Joint Proxy Statement/Prospectus. Electro
stockholders are urged to read the opinion in its entirety for the assumptions
made, matters considered and limits on the review undertaken by Compass.
Compass' opinion is directed only to the fairness of the consideration to be
received by Electro stockholders, from a financial point of view, and does not
constitute a recommendation to any Electro stockholder as to how such
stockholder should vote such stockholder's shares of Electro Common Stock
regarding approval of the Merger. The summary of the opinion of Compass set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinion, Compass
/bullet/ reviewed and relied upon a description of the Merger contained
in the joint press release of Electro and Cardiac dated
October 27, 1997;
/bullet/ reviewed and relied upon Electro's and Cardiac's filings with
the SEC on Forms 10-K for the 1995, 1996 and 1997 fiscal
years, and on Forms 10-Q for the interim periods ended October
31, 1997 and November 30, 1997 for Cardiac and Electro,
respectively;
/bullet/ reviewed and relied upon a business plan internally prepared
by Cardiac which reflects the Merger and projects segment and
combined results of operations for the fiscal years 1998
through 2002;
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/bullet/ reviewed press releases issued by Electro and Cardiac between
February 1995 and the date of the opinion, identified by
Electro and Cardiac as constituting all press releases issued
by either of them during such period;
/bullet/ reviewed price and volume information relating to trading in
Common Stock of each of Electro and Cardiac in 1997 and
year-to-date 1998;
/bullet/ reviewed and analyzed market trading and financial information
about certain publicly-traded companies engaged in businesses
deemed reasonably comparable to those of Electro and Cardiac;
/bullet/ reviewed publicly-available information with respect to
announced acquisitions of businesses deemed reasonably
comparable to Electro and Cardiac;
/bullet/ conducted discussions with members of Electro's senior
management relating to the business and prospects of Electro;
/bullet/ conducted discussions with members of Electro's senior
management concerning Electro's capital needs and the means of
addressing such needs, including potential synergies to be
realized as a result of the Merger;
/bullet/ undertook such other reviews and analyses as Compass deemed
appropriate, including an analysis of the relative
contributions of Electro's and Cardiac's historical and
projected operations to pro forma combined results of
operations; and
/bullet/ reviewed all of the foregoing with the Electro Board before
forming its opinion.
In connection with its review, Compass did not independently verify any
of the foregoing information and relied on the completeness and accuracy of all
such information in all material respects. In addition, Compass did not make an
independent evaluation or appraisal of the assets of Electro or Cardiac, nor was
it furnished with any such appraisals.
In arriving at its opinion and delivering its opinion to the Electro
Board, Compass performed a variety of financial analyses, including those
summarized below. The summary set forth below includes summaries of all of the
material financial analyses discussed by Compass with the Electro Board, but
does not purport to be a complete description of the analyses performed by
Compass in arriving at its opinion. Arriving at a fairness opinion is a complex
process that involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not necessarily
susceptible to partial analysis or summary description. In performing its
analyses, Compass made numerous assumptions with respect to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond Electro's control. Any estimates
incorporated in the analyses performed by Compass are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, estimates of the value
of businesses and securities neither purport to be appraisals nor necessarily
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. No public company utilized as a comparison is identical to Electro
or Cardiac, and none of the acquisition transactions utilized as a comparison is
identical to the Merger. Accordingly, an analysis of publicly-traded comparable
companies and comparable acquisition transactions is not mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
or company to which they are being compared.
The following is a summary of the material financial analyses performed
by Compass in connection with its fairness opinion:
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MARKET PRICE ANALYSIS
Compass reviewed pricing and volume information concerning Electro
Common Stock and Cardiac Common Stock for 1997 and 1998 year-to-date. Compass
focused on the trading ranges of Electro Common Stock and Cardiac Common Stock
immediately before and after significant announcements, including announcements
regarding quarterly and annual financial information. In particular, Compass
reviewed the reported daily price and volume activities of Electro Common Stock
and Cardiac Common Stock for the period October 20, 1997 through November 3,
1997, which are the fifth trading days preceding and following the announcement
of the signing of the Letter of Intent relating to the Merger, respectively.
Compass noted that both Electro and Cardiac Common Stock are traded on
the OTC Bulletin Board where volume is very light and the spreads between bid
and asked prices are relatively large, and each trades at prices well under one
dollar, all of which suggests an inefficient market. On October 24, 1997, the
day before the announcement of the Merger and when no trades were reported for
either company's common stock, the spread on Electro's Common Stock was $0.125,
or 19% of the bid price. The spread on Cardiac Common Stock was $0.188, or 27%
of its bid price. Furthermore, changes in volume and price following Electro and
Cardiac announcement seemed to bear little relationship to the nature of the
announcement.
Compass calculated trading multiples for Electro and Cardiac Common
Stock as of January 9, 1998 (which it compared to market multiples for more
actively traded comparable companies, as discussed below) to assess the market's
valuation of such stocks. Compass calculated for Electro Common Stock "Total
Capital" (defined as stock price times primary shares outstanding plus
interest-bearing debt) to latest twelve-month revenues (TC/REV), Total Capital
to latest twelve-month EBITDA (defined as earnings before interest expense,
taxes, depreciation and amortization) (TC/EBITDA), Total Capital to latest
twelve month EBIT (defined as earnings before interest expense and taxes)
(TC/EBIT (defined as earnings before interest expense and taxes) (TC/EBIT),
Market Value (defined as current market price of all outstanding shares) to
latest reported common equity (MV/EQUITY), and Market Value to latest reported
net income (MV/NET INCOME). The calculated values for Electro were:
TC/REV = 0.7x,
TC/EBITDA = NEGATIVE,
TC/EBIT = NEGATIVE,
MV/EQUITY = NEGATIVE,
MV/NET INCOME = NEGATIVE
Compass calculated for Cardiac Common Stock Total Capital to latest
twelve-month revenues (TC/REV), Total Capital to latest twelve EBITDA
(TC/EBITDA), Total Capital to latest twelve-month EBIT (TC/EBIT), Total Capital
to latest twelve-month EBIT (TC/EBIT), Market Value to latest reported common
equity (MV/EQUITY), and Market Value to latest reported net income (MV/NET
INCOME). The calculated values for Cardiac were:
TC/REV = 0.7x
TC/EBITDA = 31.7x
TC/EBIT = NEGATIVE,
MV/EQUITY = 1.0x,
MV/NET INCOME = NEGATIVE
Compass compared these multiples to those it calculated for comparable
public companies (See "Comparable Companies Analysis," below) and concluded that
the revenue multiple (0.7x, the only possibly meaningful multiple applicable to
both companies) was considerably under the revenue multiples for the Comparables
(which ranged from 1.4x to 20.0x), reflecting continued losses of Electro and
Cardiac, as well as the inefficiency of the market in which both Electro and
Cardiac Common Stock trade.
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MEDIAN MULTIPLES FOR MANUFACTURERS
----------------------------------
ANALYSIS CATHETERS PACEMAKERS
-------- --------- ----------
TC/REV 5.9 5.3
TC/EBITDA (2.2) 14.3
TC/EBIT (2.2) 19.2
MV/EQUITY 3.2 5.1
MV/NET INCOME (1.9) 21.3
Compass also calculated the value to be received both by Electro
stockholders in relation to the value of their holdings prior to the Merger, in
terms of the respective stock prices of Electro and Cardiac Common Stock.
Compass noted that Electro stockholders would receive either 3% or 11% less in
market value of Cardiac Common Stock than the market value of their Electro
Common Stock, depending on whether prices immediately prior to the announcement
of the Merger or current prices were used as the benchmark. Those percentages
are well within the spreads for both Electro (19%) and Cardiac (27%) Common
Stock and, therefore, are not meaningful indicators.
COMPARABLE COMPANIES ANALYSIS
Compass reviewed financial information for the latest twelve-month
period and current market price information with respect to nine public
companies that are in the catheter business and five public companies that are
in the pacemaker business which, collectively, are referred to as Comparables.
The catheter manufacturers selected are American BioMed Inc., Arrow
International, Arterial Vascular Engineering, Cardiovascular Dynamics, Echocath
Inc., EP MedSystems, Inc., Luther Medical Products Inc., Novoste Corp., and
Rochester Medical Corp., Medtronic Inc., Pace Medical Inc., St. Jude Medical
Inc., and World Heart Corp. No significant publicly-traded competitor of either
Electro or Cardiac was excluded and no publicly-traded manufacturer was
excluded.
Compass derived for the Comparables multiples of Total Capital at
January 9, 1998 to the latest reported (i) revenue, (ii) EBITDA and (iii) EBIT;
and Market Value at such date to (a) net income and (b) equity. The range of
such multiples for catheter manufacturers was 1.9x to 20.0x for TC/REV; NEGATIVE
to 57.58x for TC/EBITDA; NEGATIVE to 6.19x for TC/EBIT; NEGATIVE to 82.8x for
MV/NET INCOME; and NEGATIVE to 11.8x for MV/EQUITY. The range of such multiples
for pacemaker manufacturers was 1.4x to 8.9x for TC/REV; NEGATIVE to 32.5x for
TC/EBITDA; NEGATIVE to 44.4x for TC/EBIT; NEGATIVE to 92.9x for MV/NET INCOME;
and 1.4x to 14.5x for MV/EQUITY.
As was noted in the Market Price Analysis above, the range of multiples
for both Electro and Cardiac Common Stock was below the range of TC/REV
multiples (the only meaningful multiple that could be used for comparison
purposes for all companies) calculated for the Comparables. Compass noted that
the median TC/REV multiple for the Comparables was 5.9x for the catheter
manufacturers and 5.3x for the pacemaker manufacturers. Applying these multiples
to Electro's and Cardiac's latest revenues and deducting their respective debt
indicates that Electro stockholders are entitled to 54.1% of the combined
companies' equity, but will be receiving 61.6% based on outstanding shares and
57.0% on a fully-diluted basis. Compass considered the Comparables analysis as
being relevant in calculating relative values for Electro and Cardiac in the
combined companies.
COMPARABLE ACQUISITIONS ANALYSIS
Compass analyzed the market information available with respect to
recent reported acquisitions of companies with less than $100 million in
revenues and engaged in the manufacture of medical devices. This analysis was
limited by the scarcity of financial information available because nearly all
the transactions were private, and the lack of comparability of the companies
since none of the acquired companies was engaged in the manufacture of either
catheters or pacemakers. The only information that Compass could find for
publicly-announced acquisitions of such smaller manufacturers of medical devices
was the transaction price, the seller's net earnings, the seller's revenues and
the seller's net worth. No detail of information was available to show
historical growth rates or lack thereof. Furthermore, no information was
available with respect to the amount of debt assumed
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in the price paid. All of such information would be required to arrive at a
reasonable conclusion as to the applicability of the calculated multiples to
Electro.
Compass did not calculate values for Electro using these multiples, but
merely compared these multiples to the multiples it calculated in its comparable
companies analysis. It did not give any weight to this analysis in reaching its
conclusion.
CONTRIBUTION ANALYSIS
Compass analyzed Electro's percentage contribution to pro forma
combined revenues and gross profits for the latest twelve months and for the
fiscal years ended March 31, 1998 through 2002, using Cardiac's business plan,
which contained projections for the indicated years. Inasmuch as general and
administrative expenses were to be shared, an analysis of income after such
expenses was deemed not to add anything to the analysis. Compass noted that,
following the Merger, Electro stockholders would hold 61.6% of Cardiac's
currently outstanding shares and 57.0% of Cardiac's fully diluted shares.
Compass' calculations indicated that Electro's contribution to both revenues and
gross profit for all years of the projection period generated a percentage
contribution that was not greater than 56.3%. Accordingly, Compass concluded
that Electro stockholders would participate in the combined companies' equity by
not less than Electro's contribution to projected pro forma combined results.
OTHER ANALYSES
Compass considered other analyses, but did not rely on any others
because it concluded that such analyses were of limited usefulness or
meaningfulness.
MAY OPINION
On May 19, 1998, Compass delivered a written opinion to the Electro
Board that, as of May 19, 1998, the Merger, as amended by the First Amendment to
Agreement and Plan of Reorganization, is fair, from a financial point of view,
to the Electro stockholders (the "May Opinion"). A copy of the full text of
Compass's opinion, dated May 19, 1998, is attached as Appendix D to this Joint
Proxy Statement/Prospectus.
In arriving at its May Opinion, Compass
/bullet/ reviewed a copy of the First Amendment to the Initial Merger
Agreement, which describes the Merger as revised;
/bullet/ reviewed press releases issued by Electro and Cardiac since
January 20, 1998;
/bullet/ reviewed financial and market information with respect to
Electro and Cardiac published between January 21, 1998 and May
15, 1998;
/bullet/ reviewed current financials and market information with
respect to the comparable public companies it reviewed in
connection with its analysis of the Merger;
/bullet/ reviewed Cardiac's internally prepared Business Plan, as
amended since January 21, 1998, which contains the combined
projections for Electro's and Cardiac's businesses for the
fiscal years 1998 through 2002 (the "Revised Business Plan");
and
/bullet/ reviewed all of the foregoing with the Electro Board before
forming its opinion.
In connection with its review, Compass did not independently verify any
of the foregoing information and relied on the completeness and accuracy of all
such information in all material respects.
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The following is a summary of the material financial analyses performed
by Compass in connection with its May Opinion:
MARKET PRICE ANALYSIS
Compass reviewed pricing and volume information concerning Electro
Common Stock and Cardiac Common Stock between January 21, 1998 and May 15, 1998.
The market for Electro's and Cardiac's Common Stock continued to exhibit the
characteristics of light volume and large spreads that Compass noted in
connection with its January Opinion.
Compass again calculated the value to be received by Electro
stockholders in relation to the value of their holdings prior to the Merger and
at present, in terms of the respective stock prices of Electro and Cardiac
Common Stocks. Compass noted that Electro stockholders would receive either 46%
more or 11% less in market value in terms of Cardiac Common Stock than the
market value in terms of Electro Common Stock, depending on whether prices
immediately prior to the announcement of the Merger or current prices were used
as the benchmark. The 11% shortfall is well within the bid and ask price spreads
for both Electro's (19%) and Cardiac's (27%) Common Stocks prior to the Merger
announcement and also within the spreads for both Electro's (22%) and Cardiac's
(13%) Common Stocks on May 15, 1998; accordingly, market prices were not
meaningful indicators.
COMPARABLE COMPANIES ANALYSIS
Compass reviewed financial information for the latest twelve-month
period and current market price information with respect to the Comparables that
it reviewed for its January opinion.
As was also noted in the January Opinion, the TC/REV analysis was the
only market multiple that was applicable to both Electro and Catheter. Compass
noted that the current median TC/REV multiple for the Comparables was 6.0x for
the catheter manufacturers and 5.3x for the pacemaker manufacturers. Applying
these multiples to Electro's and Cardiac's latest revenues and deducting their
respective debt indicates that Electro stockholders are entitled to 52.1% of the
combined companies' equity, but will be receiving 70.7% based on outstanding
shares and 62.3% on a fully-diluted basis before giving effect to the issuance
of shares to be issued in connection with the contemplated financing to occur
immediately prior to the Merger. Compass considered the Comparables analysis as
being relevant in calculating relative values for Electro and Cardiac in the
combined companies.
COMPARABLE ACQUISITIONS ANALYSIS
Compass found no more recent market information available with respect
to recent reported acquisitions of companies with less than $100 million in
revenues and engaged in the manufacture of medical devices than it had
identified for the January Opinion. It did not give any weight to this analysis
in reaching its conclusion.
CONTRIBUTION ANALYSIS
Compass again analyzed Electro's percentage contribution to pro forma
combined revenues and gross profits for the latest twelve months and for the
fiscal years ended March 31, 1998 through 2002, using the Revised Business Plan.
Compass noted that, following the Merger, Electro stockholders would hold 62.3%,
and Cardiac stockholders would hold 37.7%, on a fully-diluted basis before
giving effect to the issuance of shares to be issued in connection with the
contemplated financing to occur immediately prior to the Merger, of the
aggregate shares issued to Electro and Cardiac stockholders. Compass'
calculations indicated that Electro's contribution to both revenues and gross
profit for all years of the projection period generated a percentage
contribution that was not greater than 55.0%. Accordingly, Compass concluded
that Electro stockholders would participate in the combined companies' equity by
not less than Electro's contribution to projected pro forma combined results.
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CONCLUSION
On the basis of the Market Price Analysis, Compass concluded that the
market for both Electro and Cardiac Common Stock was inefficient and thus an
analysis based on trading in such securities was not meaningful. Compass was
unable to arrive at any conclusion based on its Comparable Acquisitions
Analysis. Compass considered the Comparable Companies Analysis and the
Contribution Analysis to be meaningful in reaching its conclusion, with the
Contribution Analysis being the most meaningful, inasmuch as it was based on a
business plan (and projections) developed by Cardiac and into which Electro had
input.
Based upon its analyses and assumptions, Compass concluded that, as of
January 21, 1998, the Merger was fair, from a financial point of view, to
Electro stockholders, and that, as of May 19, 1998, the Merger, as revised, was
fair, from a financial point of view, to the Electro stockholders. The Electro
Board determined that since the receipt of the May opinion, neither company had
experienced a significant enough change to warrant obtaining an updated fairness
opinion.
Compass, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, employee benefit plans and valuations for corporate,
estate and other purposes. Compass is not affiliated with either Electro or
Cardiac, and prior to being retained by Electro to render the foregoing opinion,
had never been employed by either Electro or Cardiac.
Electro has agreed to pay Compass a fee of $35,000 for its January
Opinion and an additional fee, based on Compass' time charges, for its work in
the preparation and delivery of the May Opinion. Compass has received
approximately $4,000 for its work in preparing and delivering the May Opinion.
Electro has also agreed to reimburse Compass for its reasonable out-of-pocket
expenses, including all reasonable fees and disbursements of counsel, and to
indemnify Compass and certain related persons against certain liabilities
relating to or arising out of its engagement, including certain liabilities
under the federal securities laws. The fee is payable to Compass without regard
to the opinion rendered by Compass and whether or not the Merger is consummated.
MERGER
GENERAL
The Cardiac Board and the Electro Board, meeting separately, each
approved and adopted the Merger Agreement and the Merger and authorized the
execution and performance of the Merger Agreement. At any time prior to the
Merger Effective Time, the parties may, by written agreement, modify or amend
the Merger Agreement; provided that, material provisions may not be amended or
modified: (i) after the Merger Agreement has been approved and adopted by
Electro's stockholders, without the affirmative vote of two-thirds (2/3) of the
votes cast by holders of the outstanding shares of Electro Common Stock, present
in person or represented by proxy and entitled to vote at the Electro Special
Meeting; and (ii) after the Merger Agreement has been ratified, approved and
adopted by Cardiac's stockholders, without the affirmative vote of the holders
of a majority of the shares of Cardiac Common Stock present in person or
represented by proxy and entitled to vote at the Cardiac Special Meeting.
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE MERGER
AGREEMENT, WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. ALL CAPITALIZED
TERMS NOT DEFINED HAVE THE MEANING AS SET FORTH IN THE MERGER AGREEMENT.
MERGER EFFECTIVE TIME AND EFFECT OF THE MERGER
The Merger Agreement provides that, following the approval and adoption
of the Merger Agreement and the Merger by Electro's and Cardiac's respective
stockholders, and the satisfaction of the other conditions to the Merger
(including the condition providing that financing of at least $4.0 million is to
be arranged), Sub will be
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merged with and into Electro, with Electro continuing as the surviving
subsidiary as a direct, wholly-owned subsidiary of Cardiac (the "Surviving
Subsidiary").
The Merger Effective Time is expected to occur as promptly as
practicable after the approval of the Merger Agreement and the Merger by
Electro's and Cardiac's respective stockholders, subject to satisfaction of the
conditions to the Merger. See "- Conditions to the Merger." The management of
each of Cardiac and Electro believe that the conditions, other than the
financing condition, can be satisfied in October and that the financing
condition will be satisfied upon closing of the public offering of the Newly
Offered Shares in November. Therefore, management of each of Cardiac and Electro
expect the Merger Effective Time to occur in November. The separate corporate
existence of Sub will terminate upon consummation of the Merger and, pursuant to
the Merger Agreement and applicable law, each issued and outstanding share of
Electro Common Stock will be converted automatically into the right to receive
one-fifth of a share of CTG Common Stock after giving effect to the Reverse
Split.
EXCHANGE OF SHARES
Instructions with regard to the surrender of Electro Common Stock
certificates, together with a letter of transmittal to be used for this purpose,
will be mailed to Electro stockholders as soon as practicable after the Merger
Effective Time, but in no event later than twenty (20) business days after the
Merger Effective Time. In order to receive certificates evidencing CTG Common
Stock, each Electro stockholder will be required to surrender his or her stock
certificate(s) after the Merger Effective Time, together with a duly completed
and executed letter of transmittal, to the Exchange Agent in connection with the
Merger. As of the Merger Effective Time, CTG will deposit in trust with the
Exchange Agent certificates representing the number of shares of CTG Common
Stock which the holders of Electro Common Stock are entitled to receive in the
Merger. Upon receipt of such stock certificates and letters of transmittal, the
Exchange Agent will issue stock certificates evidencing whole shares of CTG
Common Stock to the registered holder or his or her transferee for the number of
shares of CTG Common Stock each such person is entitled to receive as a result
of the Merger, together with cash in lieu of any fractional shares. No
fractional shares of CTG Common Stock will be issued in the Merger. In lieu of
any such fractional shares, the Exchange Agent shall, on behalf of all holders
of such fractional shares, aggregate all such fractional shares and sell the
resulting shares of CTG 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 CTG Common Stock, without interest thereon.
If any certificate for CTG Common Stock is to be issued or any cash
payment in lieu of a fractional share is to be made to a person other than the
person in whose name the certificate for the Electro Common Stock surrendered in
exchange therefor is registered, it will be a condition of such issuance or
payment that the stock certificate so surrendered be properly endorsed and
otherwise in proper form for transfer, and accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid.
After the Merger Effective Time, there will be no further transfers on
the stock transfer books of Electro of the shares of Electro Common Stock that
were outstanding immediately prior to the Merger Effective Time. If a
certificate representing such shares is presented for transfer, subject to
compliance with the requisite transmittal procedures, it will be canceled and
exchanged for the applicable whole number of shares of CTG Common Stock and cash
in lieu of any fractional share amount.
Each certificate representing Electro Common Stock immediately prior to
the Merger Effective Time will, at the Merger Effective Time, be deemed for all
purposes to represent only the right to receive the number of whole shares of
CTG Common Stock (and the right to receive cash in lieu of any fractional share
of CTG Common Stock) into which the shares of Electro Common Stock represented
by such certificate were converted in the Merger.
Until a certificate which formerly represented Electro Common Stock is
actually surrendered for exchange and received by the Exchange Agent, the holder
thereof will not be entitled to receive any dividends or other distributions
with respect to CTG Common Stock payable to holders of record after the Merger
Effective Time.
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Subject to applicable law, upon such surrender of Electro Common Stock
certificates, such dividends or other distributions will be remitted (without
interest) to the record holder of certificates for the shares of CTG Common
Stock issued in exchange therefor.
Any certificates for CTG Common Stock and cash to pay for fractional
shares delivered to or held by the Exchange Agent and not exchanged for Electro
Common Stock certificates within six months after the Merger Effective Time will
be returned by the Exchange Agent to CTG, which will thereafter act as Exchange
Agent. None of CTG, Electro or the Exchange Agent will be liable to a holder of
Electro Common Stock for any of CTG Common Stock, dividends or other
distributions thereon, or cash in lieu of fractional shares, delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
No certificates or scrip representing fractional shares of CTG Common
Stock shall be issued upon the surrender for exchange of old certificates, and
such fractional share interest shall not entitle the owner thereof to vote or to
any rights of a stockholder of CTG such as rights to dividends, stock splits or
interest in lieu of issuing certificates for fractional shares.
The holders of CTG Common Stock will continue to hold their shares
without any change in number, designation, terms or rights.
TREATMENT OF STOCK OPTIONS AND WARRANTS
At the Merger Effective Time, each of Electro's then outstanding
warrants, options and conversion rights, by virtue of the Merger and without any
further action on the part of any holder thereof, shall be assumed by CTG and
automatically converted, on the same terms, into a warrant, option or conversion
right to purchase a number of shares of CTG Common Stock (to be registered
shares to the extent the warrant, option or conversion right holder is, by the
terms of the warrant, option plan or conversion right in effect, entitled upon
exercise of the warrant, option or conversion right, to receive registered
stock) determined by multiplying the number of shares of Electro Common Stock
covered by such warrants, options and conversion rights immediately prior to the
Merger Effective Time by one-fifth (rounded up to the nearest whole number of
shares), at an exercise price per share of CTG Common Stock equal to the
exercise price in effect under such warrants, options or conversion rights
immediately prior to the Merger Effective Time divided by one-fifth (rounded up
to the nearest cent). The converted warrants, options or conversion rights shall
be exercisable on the same terms and conditions as the existing warrants,
options or conversion rights without, however, giving effect to any mandatory or
permissive exercise arising by virtue of the Merger.
CONDITIONS TO THE MERGER
The obligations of Cardiac, Electro and Sub to consummate the Merger
are subject to the satisfaction of certain conditions, including: (i) the
approval and adoption of the Merger Agreement and the Merger by the stockholders
of Electro and the approval of the Reverse Split, ratification, approval and
adoption of the Merger Agreement and the Merger and approval and adoption of the
Restructuring Merger Agreement and the Restructuring Merger by the stockholders
of Cardiac; (ii) the receipt of all authorizations, permits, consents and
approvals of securities or "Blue Sky" commissions or agencies of any
jurisdiction and of other governmental bodies or agencies that may reasonably be
deemed necessary so that the consummation of the Merger and the other
transactions contemplated by the Merger Agreement will comply with applicable
laws; (iii) the effectiveness under the Securities Act of the Registration
Statement (of which this Joint Proxy Statement/Prospectus constitutes a part)
and the absence of any stop order suspending the effectiveness of the
Registration Statement or proceedings seeking a stop order; (iv) no temporary
restraining order, preliminary or permanent injunction, or other order
preventing the consummation of the Merger, shall have been issued, nor shall any
statute, rule or regulation have been enacted which prohibits, restricts or
delays consummation of the Merger; (v) a minimum of $4.0 million in financing,
in addition to any existing debt obligations of both Cardiac and Electro, on
terms acceptable to both Cardiac and Electro shall have been secured; (vi)
Cardiac shall have completed the Reverse Split; and (vii) Cardiac and 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, at the
same time as the Merger Effective Time.
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Additional conditions to the obligations of Cardiac and Sub to
consummate the Merger include: (i) the accuracy in all material respects of the
representations and warranties of Electro; (ii) the performance, in all material
respects, of all of the obligations required to be performed by Electro under
the Merger Agreement prior to the consummation of the Merger; (iii) all action
necessary to authorize the execution, delivery and performance of the Merger
Agreement and the consummation of the transactions contemplated thereby will
have been duly and validly taken by Electro, and Electro shall have the full
power and right to effect the Merger; (iv) the receipt by Cardiac of an opinion
of Saiber, counsel for Electro, reasonably satisfactory in form and substance to
Cardiac; (v) the form and substance of all legal matters contemplated by the
merger and all papers delivered thereunder shall be reasonably acceptable to
Greenberg, counsel for Cardiac and Sub; (vi) Cardiac and Sub shall have received
duly executed copies of all consents and approvals contemplated by the Merger;
(vii) all consents, authorizations, orders or approvals of, and filings of
registrations with, any governmental authority which are required for or in
connection with the execution and delivery by Electro of the Merger Agreement
and all related agreements and the consummation by Electro of the transaction
contemplated thereby shall have been attained or made; (viii) the Voting
Agreement and company affiliate agreements, a copy of which is included as
Exhibit 5.2 to Appendix A to this Joint Proxy Statement/Prospectus
(collectively, the "Related Agreements"), shall each be in full force and effect
as of the Merger Effective Time in accordance with the respective terms thereof
and each person or entity who or which are required or contemplated by the
parties to the Merger Agreement to be a party to any Related Agreement who or
which did not theretofore enter into such Related Agreement shall execute and
deliver such Related Agreement; and (ix) provisions shall have been made for
payment at Closing of indebtedness of Cardiac which is due to Greenberg for
reasonable attorneys' fees and expenses outstanding and incurred prior to and in
connection with the Merger.
Additional conditions to Electro's obligation to consummate the Merger
include: (i) the accuracy in all material respects of the representations and
warranties of Cardiac and Sub; (ii) the performance, in all material respects,
of all the obligations required to be performed by Cardiac and Sub under the
Merger Agreement prior to the consummation of the Merger; (iii) all action
necessary to authorize the execution, delivery and performance of the Merger
Agreement and the consummation of the transactions contemplated thereby will
have been duly and validly taken by Cardiac and Sub; (iv) the receipt by Electro
of an opinion of Greenberg, in form and substance reasonably satisfactory to
Electro; (v) the receipt of an opinion from Saiber in form and substance
reasonably satisfactory to Electro, to the effect that the Merger will be
treated for Federal income tax purposes as a tax-free reorganization within the
meaning of Section 368(a) of the Code; (vi) all consents, authorizations, orders
or approvals, and filings or registrations with, any governmental authority
required in connection with the consummation of the Merger by Cardiac and Sub;
(vii) the form and substance of all legal matters contemplated by the Merger
Agreement and all papers delivered thereunder shall be reasonably acceptable to
Saiber; (viii) Electro shall have received duly executed copies of all consents
and approvals contemplated by the Merger; (ix) the Cardiac Board shall have
taken such action as necessary to expand the size of Cardiac's Board and to
appoint Ervin Schoenblum and Abraham Nechemie as directors of Cardiac; (x) the
receipt of an opinion of Compass, financial advisor to Electro, that the Merger
is fair to the stockholders of Electro from a financial point of view; (xi)
Electro shall have received a written statement signed by the President of
Cardiac stipulating that Cardiac will honor all obligations of Electro under
Article VIII of Electro's Amended and Restated Bylaws pertaining to
indemnification of a corporate agent as that term is defined in such Article;
PROVIDED, HOWEVER, such commitment to honor Electro's indemnification
obligations shall only be applicable to events or actions on the part of such
corporate agent occurring or taken prior to the Closing Date; and (xii)
provisions shall have been made for payment at Closing of indebtedness of
Electro which is due to The T Partnership in the amount of $200,000, or such
greater amount as may be agreed upon by Electro and Cardiac for the repayment of
loans made by The T Partnership to Electro to finance operations pending the
consummation of the Merger and to Saiber for reasonable attorneys' fees and
expenses outstanding and incurred prior to and in connection with the Merger.
Under the terms of the Merger Agreement, Cardiac and Sub have no
obligation to consummate the Merger if any condition to their obligations to
consummate the Merger is not satisfied on or prior to the closing date of the
Merger and Electro has no obligation to consummate the Merger if any condition
to its obligation to consummate the Merger is not satisfied on or prior to the
closing date of the Merger. None of the material conditions to the
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obligations of Cardiac, Sub or Electro to consummate the Merger may be waived or
modified by the party that is, or whose stockholders are, entitled to the
benefits thereof.
Reference is made to Articles VII, VIII and IX of the Merger Agreement
for a complete statement of the conditions precedent to the obligations of the
respective parties to consummate the Merger.
In order to secure the necessary funds to satisfy the financing
condition of $4.0 million contained in the Merger Agreement, CTG intends to
undertake a public offering of its common stock as well as obtaining additional
debt financing. The public offering, as structured, contemplates the completion
of the public offering of the Newly Offered Shares simultaneously with and as a
condition to the consummation of the Merger, but after the Reverse Split. CTG
does not intend to engage the services of a managing underwriter; rather, CTG
intends to offer and sell the Newly Offered Shares on a "best efforts" basis
through a syndicate of selected broker-dealers and/or through its executive
officers and directors, who will not be compensated therefor. A registration
statement relating to the Newly Offered Shares will be filed with the SEC to
register the Newly Offered Shares. The Newly Offered Shares may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Joint Proxy Statement/Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of the Newly Offered Shares in any state in which such an offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such state. CTG intends to establish an escrow
arrangement pursuant to which the funds received in connection with the public
offering will be held in escrow pending the completion such public offering and
satisfaction of all other conditions to the Merger. In the event that, for any
reason such conditions are not satisfied or the Reverse Split and Restructuring
Merger are not effectuated and the Merger is not consummated, investors in the
public offering shall receive a refund of all consideration paid.
CTG intends to obtain $2.5 to $3.3 million in funds through the public
offering and to finance the remainder of the amounts required to satisfy the
financing condition of $4.0 million with debt financing. In the event that CTG
is unsuccessful in obtaining the funds expected through its public offering, CTG
intends to supplement additional funds needed to satisfy the financing condition
with additional debt financing. Three proposals for the additional debt
financing have been received from prospective lenders. One proposal is from
Coast who is contemplating providing an additional $1.5 million in debt
financing on terms equivalent to the current Coast Loan, which is approximately
a four (4) year term with interest charged at a prime rate plus 1.5% to 2%. The
other two proposals are from prospective lenders who are contemplating providing
approximately $2.6 million in debt financing also on terms equivalent to the
terms of the current Coast Loan. Under these two proposals, the current Coast
Loan would be paid off and the approximately $1.5 million remaining would be
available for working capital. All three proposals contemplate securing the debt
with a security interest in the accounts receivable, inventory and equipment of
CTG. All three companies are currently performing due diligence and will provide
a definitive proposal upon completion thereof. If sufficient debt financing is
not available from these prospective lenders to satisfy the financing condition,
CTG intends to obtain additional financing through alternative debt financing
sources, which may be more costly than current proposals.
REPRESENTATIONS, WARRANTIES AND COVENANTS
In the Merger Agreement, Cardiac, Sub and Electro have made various
representations, warranties, covenants and agreements relating to, among other
things, their respective organization, capital structure, business and financial
condition and the satisfaction of certain legal requirements for the Merger.
The Merger Agreement provides that during the Executory Period, neither
Party (which solely for purposes of this covenant shall include The T
Partnership or any of its members) shall, and neither Party shall permit any
agent or other representative of such Party to, directly or indirectly: (i)
solicit, initiate or engage in discussions or engage in negotiations with any
person (whether such negotiations are initiated by the Party or otherwise) or
take any other action to facilitate the efforts of any person, relating to the
possible acquisition of a Party (whether by way of merger, purchase of capital
stock, purchase of assets or otherwise) or any material portion of its capital
stock or assets (any such acquisition being referred to as an "Acquisition
Transaction"); (ii) provide information to any person, other than a Party,
relating to a possible Acquisition Transaction; (iii) enter into an agreement
with any
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person, other than a Party, relating to a possible Acquisition Transaction; (iv)
consummate an Acquisition Transaction with any person other than a Party or
enter into an agreement with any person, other than a Party, providing for a
possible Acquisition Transaction; or (v) make or authorize any statement,
recommendation or solicitation in support of any possible Acquisition
Transaction, unless all Parties are a party to such Acquisition Transaction;
PROVIDED, HOWEVER, that nothing contained in the Merger Agreement shall prohibit
the Electro Board or the Cardiac Board, respectively, from furnishing
information to, or entering into discussions or negotiations with: (a) any
unaffiliated third party that makes or is proposing to make an unsolicited
written, bona fide offer with respect to an Acquisition Transaction, if the
Electro Board or the Cardiac Board, respectively, based upon the written advice
of outside legal counsel, respectively, determines in good faith that such
action is necessary for the Electro Board or the Cardiac Board, respectively, to
comply with its fiduciary duties under applicable law (any such unsolicited
written, bona fide offer being referred to as a "Superior Proposal") and prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Electro or Cardiac provides, respectively, written
notice to the other Party; and (b) such parties who have made proposals, formal
or informal, which may become a Superior Proposal as to which either Electro or
Cardiac has advised the other, in writing, prior to the date of the Merger
Agreement. If either Cardiac or Electro receives any unsolicited offer or
proposal to enter into negotiations relating to an Acquisition Transaction, such
party shall notify the other party thereof, including information as to the
identity of the party making such offer or proposal and the specific terms
thereof.
Under the Merger Agreement, each of Cardiac and Electro is generally
obligated prior to the Merger Effective Time to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, and to preserve intact its present business organization,
the services of the officers and employees and its relationships with suppliers,
customers and others. Each of the parties has agreed to notify the other of
changes in the normal course of its business and to refrain from taking certain
actions without the prior written consent of the other.
VOTING AGREEMENT
In connection with the execution of the Merger Agreement, and to
facilitate the consummation of the Merger, Cardiac entered into the Voting
Agreement with The T Partnership on January 20, 1998. Approximately 30% of the
outstanding shares of Electro Common Stock are represented by the Voting
Agreement. The T Partnership agreed that, unless there shall exist a Superior
Proposal, at any meeting of the stockholders of Electro, and in any action by
written consent of the stockholders of Electro, The T Partnership will vote all
shares of Electro Common Stock held by it: (a) in favor of the approval of the
Merger Agreement, the Merger and the other transactions contemplated by the
Merger Agreement; and (b) against any other merger, consolidation or similar
transaction pursuant to which control of Electro would be transferred to any
person other than Cardiac or any sale or other disposition of 50% or more of the
assets of Electro to any party other than Cardiac. The T Partnership has also
granted Ervin Schoenblum, a director and Acting President of Electro, an
irrevocable proxy to vote its shares of Electro Common Stock as specified above
in the event that The T Partnership fails to so vote such shares.
Notwithstanding the obligations of The T Partnership thereunder, as previously
noted, the Voting Agreement provides for such vote only if no Superior Proposal
exists. There are no other circumstances under the Voting Agreement allowing The
T Partnership to elect not to vote its shares of Electro Common Stock in favor
of the Merger. The irrevocable proxy granted to Mr. Schoenblum relative to
voting the shares of Electro Common Stock held by The T Partnership is also
limited in its effectiveness to the extent that the proxy can not be utilized if
a Superior Proposal exists.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement shall be terminated, and the Merger abandoned,
notwithstanding the approval by the respective boards of directors and
stockholders of Cardiac, Sub and Electro of the Merger Agreement and the Merger
in the event the conditions set forth in Article VII of the Merger Agreement
shall not have been met by January 31, 1999. Furthermore, the Merger Agreement
may be terminated, and the Merger abandoned, notwithstanding the approval by the
respective boards of directors and stockholders of Cardiac, Sub and Electro of
the Merger Agreement and the Merger, at any time prior to the Merger Effective
Time, by: (i) the mutual consent of Cardiac, Sub and Electro; (ii) Cardiac, Sub
or Electro if the other party or parties have materially breached any
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material covenant or agreement set forth in the Merger Agreement and such breach
is not cured, if curable, within fifteen (15) days following written notice
thereof; (iii) Cardiac and Sub if the conditions set forth in Article VIII of
the Merger Agreement shall not have been met, and Electro if the conditions set
forth in Article IX of the Merger Agreement shall not have been met, in either
case by January 31, 1999, except if such conditions have not been met solely as
a result of the action or inaction of the party seeking to terminate; (iv)
Cardiac and Sub, on the one hand, or Electro, on the other hand, if such party
or parties shall have determined in its or their sole discretion, exercised in
good faith, that the Merger contemplated by this Agreement and the Merger
Agreement has become impracticable by reason of the institution of any
litigation, proceeding or investigation to restrain or prohibit the consummation
of the Merger, or which questions the validity or legality of the transactions
contemplated by the Merger Agreement; (v) Cardiac and Sub, on the one hand, or
Electro, on the other hand, if such party or parties shall determine in its or
their sole discretion, exercised in good faith, that the respective observations
made during their due diligence process disclosed information regarding the
other party unsatisfactory to the party performing the due diligence, and such
information is: (a) material; (b) adverse; and (c) not disclosed in the Merger
Agreement or the other party's Disclosure Schedule; (vi) Cardiac and Sub if any
statute, rule, regulation or other legislation shall have been enacted which, in
the sole judgment of Cardiac and Sub, exercised reasonably and in good faith,
materially adversely impairs the conduct or operation of Electro as presently
conducted and is contemplated to be conducted; (vii) Electro if any statute,
rule, regulation or other legislation shall have been enacted which, in the sole
judgment of Electro, exercised reasonably and in good faith, materially
adversely impairs the conduct or operation of Cardiac's business as presently
conducted; (viii) Cardiac and Sub, on the one hand, or Electro, on the other
hand, if such party or parties shall have received a Superior Proposal, and the
Electro Board or the Cardiac Board, based upon the written advice of outside
legal counsel, determines in good faith that accepting such Superior Proposal is
necessary for the Electro Board or the Cardiac Board, respectively to comply
with its fiduciary duties to its respective stockholders under applicable law;
and (ix) Cardiac and Sub, on the one hand, or Electro on the other hand, if the
board of directors of the other party or parties shall have withdrawn, modified
or amended in any adverse respect its approval or recommendation of the Merger
Agreement or the transactions contemplated thereby or recommended to its
stockholders an Acquisition Transaction with any party other than Cardiac or
Electro, respectively.
FEES AND EXPENSES; TERMINATION FEES
Cardiac and Electro shall pay its own expenses that are incidental to
negotiations, preparation of agreements and the closing, whether or not the
Merger Agreement and the transactions contemplated thereby are actually
consummated. Cardiac, on the one hand, and Electro, on the other hand, must pay
the other a termination fee of $225,000 plus all out-of-pocket expenses
(including, without limitation, all attorneys', investment banking and
commitment fees and expenses) incurred by the non-terminating party in
connection with the transaction contemplated by the Merger Agreement if the
terminating party terminates the Merger Agreement after receiving a Superior
Proposal and, based upon the written advice of its outside legal counsel,
determines in good faith that accepting such an offer is necessary to comply
with the fiduciary duties of the respective boards of directors under applicable
law. In addition, Cardiac and Electro will split evenly the aggregate of all
attorneys', investment banking and commitment fees and expenses incurred by both
parties in relation to the transactions contemplated by the Merger Agreement if
the Merger Agreement is terminated for any reason other than: (i) the receipt of
a Superior Proposal by a party and the good faith determination by such party's
board of directors, based upon the written advice of its outside legal counsel,
that accepting such an offer is necessary to comply with the fiduciary duty of
such board of directors under applicable law; or (ii) because the
non-terminating party has materially breached any material covenant or agreement
set forth in the Merger Agreement and such party who is in breach has not cured
such breach, if curable, within fifteen (15) days following written notice
thereof.
AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the Merger Effective Time, the parties may, by
written agreement, modify or amend the Merger Agreement, provided that, material
provisions may not be amended or modified: (i) after the Merger Agreement has
been approved and adopted by Electro's stockholders, without the affirmative
vote of two-thirds (2/3) of the votes cast by holders of the outstanding shares
of Electro Common Stock, present in person or represented by proxy and entitled
to vote at the Electro Special Meeting; and (ii) after the Merger Agreement has
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been approved and adopted by Cardiac's stockholders, without the affirmative
vote of the holders of a majority of the outstanding shares of Cardiac Common
Stock entitled to vote at the Cardiac Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Ervin Schoenblum and Abraham Nechemie, who comprise the entire Electro
Board, are two of the five partners constituting The T Partnership, which owns
approximately 30% of the outstanding shares of Electro Common Stock and which is
a creditor of Electro, with total indebtedness due to The T Partnership at
September 30, 1998 of approximately $2.5 million. Mr. Schoenblum is also
Electro's Acting President. Pursuant to the terms of the Merger Agreement,
Messrs. Schoenblum and Nechemie are to be appointed directors of CTG upon the
Merger Effective Time to serve on the board of directors of CTG (the "CTG
Board") until the next annual meeting of stockholders of CTG and are to be
nominated at the next three successive annual meetings of stockholders of CTG
for reelection to such positions.
The T Partnership has beneficial ownership of 2,464,844 shares of
Electro Common Stock, which includes 83,344 and 500,000 shares which The T
Partnership has the right to acquire pursuant to outstanding warrants,
immediately exercisable at prices of $1.425 and $.9875 per share, respectively.
Upon consummation of the Merger, The T Partnership will have beneficial
ownership of 492,968 shares of CTG Common Stock, which includes outstanding
warrants for 16,668 and 100,000 shares immediately exercisable at $7.125 and
$4.9375, respectively. In addition to the shares held by The T Partnership,
Messrs. Schoenblum and Nechemie also hold currently exercisable stock options
with respect to 64,000 and 5,000 shares of Electro Common Stock, respectively.
Upon consummation of the Merger, Messrs. Schoenblum and Nechemie will hold
exercisable stock options with respect to 16,000 and 1,000 shares of CTG Common
Stock, respectively. The T Partnership is comprised of five partners, Messrs.
Schoenblum and Nechemie, who each hold a 5% equity interest in the partnership,
Messrs. Fred Lafer and Stephen Shapiro, who each hold a 10% equity interest
therein, and Mr. Henry Taub, who holds a 70% equity interest in the partnership
and may be said to control The T Partnership. In an effort to facilitate the
consummation of the Merger, The T Partnership has entered into the Voting
Agreement with Cardiac, which is described above.
Pursuant to the terms of the Merger Agreement: (i) Saiber, Electro's
legal counsel, is to be paid, at the closing of the Merger, all outstanding
reasonable attorneys' fees and expenses incurred in connection with its prior
representation of Electro, together with all reasonable attorneys' fees and
expenses incurred in connection with its representation of Electro relative to
the Merger; and (ii) Greenberg, Cardiac's legal counsel, is to be paid, at the
closing of the Merger, all outstanding reasonable attorneys' fees and expenses
incurred in connection with its prior representation of Cardiac, together with
all reasonable attorneys' fees and expenses incurred in connection with its
representation of Cardiac relative to the Reverse Split, the Merger and the
Restructuring Merger. Furthermore, as consideration for payment of a portion of
the outstanding attorneys' fees and expenses incurred by Cardiac to date, on
August 27, 1998 Cardiac executed a promissory note in the amount of $199,000 and
issued Greenberg a warrant granting a right to purchase 35,000 shares (with
provisions for 35,000 additional shares to be granted on the last business day
of each month until the promissory note is paid in full) exercisable immediately
and expiring five (5) years from the date of such grant at an exercise price per
share equal to the average of the bid and asked price of a share of Cardiac
Common Stock (or a successor corporation) as of the close of business on the
date of such grant. See "LEGAL MATTERS."
REDEMPTION OF THE T PARTNERSHIP DEBT
The Merger Agreement contemplates that the total indebtedness
outstanding and due to The T Partnership as of September 30, 1998 plus interest
accrued thereon totaling (approximately $2.5 million) shall be redeemed at the
Merger Effective Time by: (a) the issuance by 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
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to The T Partnership of a conditional promissory note made by CTG in the amount
of $1.0 million, at an interest rate of 9% per annum, with the principal and
interest thereon due only upon the occurrence of certain events related to the
failure to realize dividends on the Series A Preferred Stock; and (c) the
delivery to The T Partnership of a secured promissory note made by CTG in an
amount not to exceed $1.3 million (which amount shall be the remaining amount of
Electro's secured indebtedness to The T Partnership exclusive of the amount
redeemed under (a) above), bearing interest at the rate of 12% per annum payable
quarterly, the principal amount of which shall be due and payable three years
from the date of execution of such note (the terms of the security for the note
have yet to be agreed upon). The T Partnership will own approximately 16% of CTG
after the Merger. However, if The T Partnership converts its 1,000 shares of
Series A Preferred Stock into shares of CTG Common Stock, it would own a larger
percentage of CTG, such percentage being determined by using a conversion price
of between $6.15 and $7.35 (120% of the anticipated range of the price per share
of the Newly Offered Shares of between $5.125 and $6.125). For example, with a
conversion price of between $6.15 and $7.35 per share, the Series A Preferred
Stock would be converted into between approximately 163,000 and 136,000 shares,
respectively, of CTG Common Stock, and The T Partnership ownership percentage
would be between 21% and 20%, respectively. See "DESCRIPTION OF SECURITIES OF
CTG, CARDIAC AND SURVIVING SUBSIDIARY - Preferred Stock of Surviving
Subsidiary."
REVERSE SPLIT
GENERAL
The Cardiac Board unanimously determined that the Reverse Split is in
the best interests of Cardiac and its stockholders and has authorized the
Reverse Split subject to the approval of the affirmative vote of the holders of
a majority of the outstanding shares of Cardiac Common Stock entitled to vote
thereon. The Reverse Split, the Merger and the Restructuring Merger are all
interdependent and the consummation of each action is conditioned upon receipt
of approval for all three proposals. Accordingly, the failure of the
stockholders to approve and adopt any one of such transactions will mean that
the Reverse Split will not occur. The following is a summary of the material
terms of the Reverse Split.
EFFECTIVE TIME AND EFFECT OF THE REVERSE SPLIT
The Reverse Split shall take place as soon as practicable after
approval by Cardiac's stockholders of all the proposals before them. The Cardiac
Board shall fix the effective time of the Reverse Split (the "Split Effective
Time") as of the earliest practicable date which shall be prior to the Merger
and the Restructuring Merger. At the Split Effective Time, each share of Cardiac
Common Stock will become one-fifth of a share of Cardiac Common Stock. The pro
rata interests of holders of Cardiac Common Stock will be unchanged as a result
of the Reverse Split.
The Reverse Split will have the incidental effect of creating
additional authorized and unreserved shares of Cardiac's Common Stock. Cardiac
has no current plans to issue such shares and, in fact, if the Restructuring
Merger is approved and effected, the authorized shares of Cardiac Common Stock
will be subsequently reduced to a nominal level and Cardiac will be a direct,
wholly-owned subsidiary of CTG.
Holders of Cardiac Common Stock will continue to be entitled to receive
such dividends as may be declared by the Cardiac Board. To date, however, no
dividends on the Cardiac Common Stock have been paid by Cardiac.
Outstanding warrants and stock options of Cardiac will be adjusted to
reflect the ratio of the Reverse Split, if such transaction is effected.
For a discussion of the federal income tax consequences of the Reverse
Split see "FEDERAL INCOME TAX CONSEQUENCES."
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PURPOSE AND BACKGROUND OF THE REVERSE SPLIT
The Cardiac Board believes that the decrease in the number of shares of
Cardiac Common Stock outstanding as a consequence of the Reverse Split will
result in a corresponding increase in the price per share of Cardiac Common
Stock. There can be no assurance, however, that the Reverse Split will result in
any change in the price of Cardiac's Common Stock or that, if the price of
Cardiac Common Stock does increase as a result of the Reverse Split, such
increase will be significant or sustainable. An important objective of CTG after
the Merger will be to apply to list the shares of CTG Common Stock on a regional
exchange and/or the Nasdaq SmallCap Market as soon as possible after
consummation of the Merger. See "REASONS FOR THE MERGER - Cardiac's Reasons for
the Merger." One of the initial listing requirements of the Nasdaq SmallCap
Market is a minimum bid price of $4 per share. Other regional exchanges have
minimum listing requirements ranging from $2 per share to $5 per share. Although
the minimum bid price is only one criteria for listing and there can be no
assurance that CTG will be successful in its application for listing on any
exchange, the Cardiac Board has determined that the Reverse Split will increase
the likelihood that, after the Restructuring Merger, CTG will be successful in
its application to list its stock on a regional exchange and/or the Nasdaq
SmallCap Market.
The Cardiac Board also believes that certain securities firms fail to
follow and research companies having lower-priced securities. Such securities
firms may also discourage their registered representatives from recommending the
purchase of lower-priced corporate securities. Additionally, the policies and
practices of a number of brokerage houses tend to discourage individual brokers
within those firms from dealing in lower-priced stocks. Some of these policies
and practices relate to the payment of brokers' commissions and to
time-consuming procedures that operate to make the handling of lower-priced
stocks economically unattractive to brokers. Consequentially, the Cardiac Board
believes that this limits the marketability of Cardiac Common Stock at its
current per share price. For instance, the Cardiac Board believes that the lower
per share market price of Cardiac Common Stock impairs the marketability and
acceptance of its Common Stock to institutional investors and other members of
the investing public and creates a negative impression with respect to Cardiac.
Theoretically, the number of shares outstanding should not, by itself, effect
the marketability of such shares, the type of investor who acquires them or
Cardiac's reputation in the financial community. In practice, however, many
investors and market makers consider low-priced stock as unduly speculative in
nature and, as a matter of policy, avoid investment and trading in such stocks.
The foregoing factors may adversely affect not only the pricing of Cardiac
Common Stock but also the liquidity of Cardiac Common Stock and Cardiac's
ability to raise additional capital through the sale of equity securities. The
Cardiac Board is hopeful that the decrease in the number of shares of Cardiac
Common Stock outstanding as a consequence of the proposed Reverse Split and the
anticipated increase in the price per share will encourage greater interest in
Cardiac Common Stock (and CTG Common Stock issuable in exchange therefor in the
Restructuring Merger) by the financial community and the investing public and
possibly promote greater liquidity for Cardiac's stockholders with respect to
those shares presently held by them. However, there can be no assurance that the
proposed Reverse Split will achieve any of these desired results. There can also
be no assurance that the price per share of Cardiac Common Stock immediately
after the proposed Reverse Split will increase proportionately with the Reverse
Split, or that any increase can be sustained for any period of time. In
addition, the market price of Cardiac Common Stock may neither exceed nor remain
in excess of the current market price.
EXCHANGE OF SHARES
Instructions with regard to surrender of Cardiac stock certificates,
together with a letter of transmittal to be used for this purpose, will be
mailed to Cardiac stockholders as soon as practicable after the Split Effective
Time, but in no event later than 20 business days after the Split Effective
Time. Assuming that Restructuring Merger will have been approved by Cardiac
stockholders, the stockholders of Cardiac will receive shares of CTG Common
Stock giving effect to both the Reverse Split and the Restructuring Merger. See
"RESTRUCTURING MERGER." In order to receive certificates evidencing CTG Common
Stock, each Cardiac stockholder will be required to surrender his or her stock
certificate(s) after the Split Effective Time and after the Restructuring
Effective Time, together with a duly completed and executed letter of
transmittal, to the Exchange Agent. As of the Restructuring Effective Time, CTG
will deposit in trust with the Exchange Agent certificates representing the
number of shares of CTG Common Stock which the holders of Cardiac Common Stock
are entitled to receive after giving effect to the Reverse Split and the
Restructuring Merger. Upon receipt of such stock certificates and letters of
transmittal, the
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Exchange Agent will issue stock certificates evidencing the whole shares of CTG
Common Stock to the registered holder or his or her transferee for the number of
shares of CTG Common Stock each such person is entitled to receive as a result
of the Reverse Split and the Restructuring Merger.
No certificates or scrip representing fractional shares of Cardiac
Common Stock will be issued in the Reverse Split. In lieu of any such fractional
shares, the Exchange Agent shall, on behalf of all holders of such fractional
shares, aggregate all such fractional shares and sell the resulting shares of
Cardiac 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 Cardiac Common Stock, without interest thereon, in accordance with the
following procedures:
(a) As soon as practicable following the Split Effective Time, the
Exchange Agent shall: (i) determine each stockholder's fractional share interest
by multiplying the number of full shares of issued and outstanding Cardiac
Common Stock held by such stockholder by one-fifth (each resulting fraction of a
share shall be herein called the "Excess Shares"); and (ii) aggregate the Excess
Shares of all stockholders and sell them at then prevailing prices in the
over-the-counter market, all in the manner provided in paragraph (b) below;
PROVIDED, HOWEVER, that, upon approval of the Restructuring Merger, prior to
such sale the Exchange Agent shall be authorized and empowered to exchange such
Excess Shares for shares of CTG Common Stock. All references to Excess Shares
herein shall be deemed to include any Excess Shares which shall have been
exchanged for CTG Common Stock pursuant to the Restructuring Merger.
(b) The sale of the Excess Shares by the Exchange Agent shall be
executed in the over-the-counter market through one or more member firms of the
National Association of Securities Dealers, Inc. and shall be executed in round
lots to the extent practicable. Until the net proceeds of such sale or sales
shall have been distributed to the holders of Cardiac Common Stock, the Exchange
Agent shall hold such proceeds in trust for the holders of Cardiac Common Stock
(the "Common Shares Trust"). Cardiac shall pay all commissions, transfer taxes
and other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with the sale of the
Excess Shares. The Exchange Agent shall determine the portion of the Common
Shares Trust to which each holder of Cardiac Common Stock shall be entitled, if
any, by multiplying the amount of the aggregate net proceeds comprising the
Common Shares Trust by a fraction, the numerator of which is the amount of the
fractional shares interest to which such holder of Cardiac Common Stock is
entitled and the denominator of which is the aggregate amount of fractional
share interests to which all holders of Cardiac Common Stock are entitled.
(c) An soon as practicable following the determination of the amount of
cash, if any, to be paid to the holders of Cardiac Common Stock in lieu of any
fractional share interests, the Exchange Agent shall make available such
amounts, without interest, to such holders of Cardiac Common Stock.
REVERSE SPLIT AMENDMENT
The Reverse Split will be effectuated by the Reverse Split Amendment.
The full text of the Reverse Split Amendment is set forth in the proposed
Certificate of Amendment to Cardiac's Certificate of Incorporation which is
attached as Appendix C to this Joint Proxy Statement/Prospectus.
RESTRUCTURING MERGER
GENERAL
The Cardiac Board unanimously determined that the Restructuring Merger
is in the best interests of Cardiac and its stockholders and has approved the
Restructuring Merger subject to the approval of the affirmative vote of the
holders of a majority of the outstanding shares of Cardiac Common Stock entitled
to vote thereon. Since the Restructuring Merger, the Merger and the Reverse
Split are all interdependent and the consummation of each action is conditioned
upon receipt of approval for all three proposals, the failure of the
stockholders to approve and
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adopt any one of such transactions will mean that the Restructuring Merger will
not occur. The following is a summary of the material terms of the Restructuring
Merger.
EFFECTIVE TIME AND EFFECT OF THE RESTRUCTURING MERGER
The Restructuring Merger is expected to occur as promptly as practical
after the approval of the Reverse Split, ratification, approval and adoption of
the Merger Agreement and the Merger and approval and adoption of the
Restructuring Merger Agreement and the Restructuring Merger by the Cardiac
stockholders, and approval and adoption of the Merger Agreement and the Merger
by Electro's stockholders, subject to satisfaction of the conditions to the
Merger. See "MERGER - Conditions to the Merger."
In accordance with the provisions of the Restructuring Merger Agreement
and Section 251 of the Delaware Act, Merger Sub shall be merged with and into
Cardiac, which, at, and after the Restructuring Effective Time, shall be the
Surviving Corporation. At the Restructuring Effective Time, each issued and
outstanding share of Cardiac Common Stock shall be deemed cancelled and
converted into and shall represent the right to receive one share of CTG Common
Stock. Pursuant to the terms of the Restructuring Merger, the authorized capital
stock of the Surviving Corporation will be reduced at the Restructuring
Effective Time to one hundred shares of common stock. Upon consummation of the
Restructuring Merger, the rights and interests of Cardiac stockholders as
holders of CTG Common Stock will be the same as the rights and interests
previously as holders of Cardiac Common Stock.
Prior to the Restructuring Merger, each of CTG and CTG Merger Sub will
have a nominal amount of stock outstanding and will have no business or
properties of its own.
As a result of the occurrence of the Merger and the Restructuring
Merger, CTG will become the parent holding company of Cardiac, and Electro will,
in turn, become a direct, wholly-owned subsidiary of Cardiac. A copy of the
Restructuring Merger Agreement is attached as APPENDIX B to this Joint Proxy
Statement/Prospectus.
After the Restructuring Merger, all of the business and operations now
conducted by Cardiac will continue to be conducted by Cardiac as a subsidiary of
CTG and the assets and liabilities of Cardiac immediately after the
Restructuring Merger will be the same as the assets and liabilities of Cardiac
immediately before the Restructuring Merger.
REASONS FOR THE RESTRUCTURING MERGER
The Cardiac Board has determined that the formation of CTG as a parent
holding company, which will own Cardiac as a direct, wholly-owned subsidiary and
Electro as an indirect, wholly-owned subsidiary, will facilitate efforts to
obtain financing by presenting a new image to investors and analysts in the
medical device market of an entity not with a new business plan and new focus.
The Cardiac Board also believes that the formation of CTG will assist Cardiac in
achieving its strategic plan by presenting to customers a new company image and
business plan. However, there can be no assurance that the Restructuring Merger
will achieve the desired result. See "REASONS FOR THE MERGER."
EXCHANGE OF SHARES
Instructions with regard to surrender of stock certificates
representing Cardiac Common Stock, together with a letter of transmittal to be
used for this purpose, will be mailed to Cardiac stockholders as soon as
practicable after the Restructuring Effective Time, but, in no event later than
twenty (20) business days after the Restructuring Effective Time. Upon Cardiac
stockholders' approval of both the Reverse Split and the Restructuring Merger,
the stockholders of Cardiac will receive shares of CTG Common Stock giving
effect to both the Reverse Split and the Restructuring Merger. See "REVERSE
SPLIT." In order to receive certificates evidencing CTG Common Stock, each
Cardiac stockholder will be required to surrender his or her stock
certificate(s) after the Restructuring Effective Time, together with a duly
completed and executed letter of transmittal to the Exchange Agent.
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As of the Restructuring Effective Time, CTG will deposit in trust with
the Exchange Agent certificates representing the number of shares of CTG Common
Stock which the holders of Cardiac Common Stock are entitled to receive after
giving effect to the Reverse Split and the Restructuring Merger. Upon receipt of
such stock certificates and letters of transmittal, the Exchange Agent will
issue stock certificates evidencing the whole number of shares of CTG Common
Stock to the registered holder or his or her transferee for the number of shares
of CTG Common Stock each such person is entitled to receive as a result of the
Reverse Split and the Restructuring Merger. No certificates or scrip
representing fractional shares of CTG Common Stock will be issued in the
Restructuring Merger. All fractional shares of Cardiac Common Stock will be
eliminated as a result of the Reverse Split. See "REVERSE SPLIT." Accordingly,
no fractional shares will result from a one for one exchange of Cardiac Common
Stock for CTG Common Stock in the Restructuring Merger.
TREATMENT OF STOCK OPTIONS AND WARRANTS
At the Restructuring Effective Time, each of Cardiac's then outstanding
warrants, options and conversion rights, by virtue of the Restructuring Merger
and without any further action on the part of any holder thereof, shall be
assumed by CTG and automatically converted, on the same terms, into a warrant,
option or conversion right to purchase a number of shares of CTG Common Stock
(to be registered shares to the extent the warrant, option or conversion right
holder is, by the terms of the warrant, option plan or conversion right in
effect, entitled upon exercise of the warrant, option or conversion right, to
receive registered stock) equal to the number of shares of Cardiac Common Stock
covered by such warrants, options and conversion rights immediately prior to the
Restructuring Effective Time, at an exercise price per share of CTG Common Stock
equal to the exercise price in effect under such warrants, options or conversion
rights immediately prior to the Restructuring Effective Time. The converted
warrants, options or conversion rights shall be exercisable on the same terms
and conditions as the existing warrants, options or conversion rights without,
however, giving effect to any mandatory or permissive exercise arising by virtue
of the Restructuring Merger.
CONDITIONS TO THE RESTRUCTURING MERGER
The obligations of Cardiac, CTG and Merger Sub to consummate the
Restructuring Merger are subject to the approval and adoption of the Merger
Agreement and the Merger by the stockholders of Electro and the approval of the
Reverse Split, ratification, approval and adoption of the Merger Agreement and
the Merger and approval and adoption of the Restructuring Merger Agreement and
the Restructuring Merger by the stockholders of Cardiac.
TERMINATION OF THE RESTRUCTURING MERGER AGREEMENT
The Restructuring Merger Agreement shall be terminated, and the
Restructuring Merger abandoned, notwithstanding the approval by the respective
boards of directors and stockholders of Cardiac, CTG and Merger Sub of the
Restructuring Merger Agreement and the Restructuring Merger in the event of and
simultaneously with a termination (at or at any time prior to the Restructuring
Effective Time) of the Merger Agreement.
AMENDMENT OF THE RESTRUCTURING MERGER AGREEMENT
At any time prior to the Restructuring Effective Time, the parties may,
by written agreement, modify or amend the Restructuring Merger Agreement,
provided that, material provisions may not be amended or modified after the
Merger Agreement has been approved and adopted by Cardiac's stockholders and
Electro's stockholders, without the affirmative vote of the holders of a
majority of the outstanding shares of Cardiac Common Stock entitled to vote at
the Cardiac Special Meeting.
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FEDERAL INCOME TAX CONSEQUENCES
ELECTRO STOCKHOLDERS
The following discussion has been prepared by Saiber and, except as
otherwise indicated, summarizes Saiber's opinion of the material Federal income
tax consequences of the Merger that are generally applicable to stockholders of
Electro and does not purport to be a complete analysis or listing of all
potential tax considerations or consequences relevant to a decision whether to
vote for the approval of the Merger Agreement and the Merger and the
transactions contemplated thereby. The discussion does not address all aspects
of Federal income taxation that may be applicable to the stockholders of Electro
subject to special Federal income tax treatment including, without limitation,
foreign persons, insurance companies, tax-exempt entities, retirement plans,
dealers in securities and persons who acquired their Electro Common Stock
pursuant to the exercise of employee stock options or otherwise as compensation.
The discussion addresses neither the effect of any applicable state, local or
foreign tax laws, nor the effect of any Federal tax laws other than those
pertaining to the Federal income tax. IN VIEW OF THE INDIVIDUAL NATURE OF
FEDERAL INCOME TAX CONSEQUENCES, THE STOCKHOLDERS OF ELECTRO ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO THEM.
The discussion is based on the Internal Revenue Code of 1986, as
amended, regulations proposed or promulgated thereunder, and administrative
interpretations and judicial precedents relating thereto, all of which are
subject to change. Any such change, which may or may not be retroactive, could
alter the tax consequences discussed herein. The discussion is also based on
certain assumptions regarding the factual circumstances that will exist at the
Merger Effective Time, including certain representation of Electro and Cardiac.
If any of the factual assumptions is inaccurate, the tax consequences of the
Merger could differ from those described herein.
For Federal income tax purposes the merger of Sub with and into
Electro, in accordance with the terms of the Merger Agreement, will qualify as a
"reorganization" within the meaning of Section 368(a) of the Code, and CTG, Sub
and Electro will each be a party to a reorganization within the meaning of
Section 368(b) of the Code. Accordingly: (i) no gain or loss will be recognized
by a stockholder of Electro upon the receipt by such stockholder solely of
shares of CTG Common Stock (including any fractional share interest treated as
received) in exchange for such stockholder's shares of Electro Common Stock in
accordance with the terms of the Merger Agreement; (ii) the aggregate tax bases
of the shares of CTG Common Stock received by a stockholder of Electro
(including any fractional share interest treated as received) will be the same
as the aggregate tax bases of the shares of Electro Common Stock surrendered in
exchange therefor decreased by the amount of any cash received and increased by
the amount of any gain recognized; and (iii) the holding period of the shares of
CTG Common Stock received by an Electro stockholder (including any fractional
share interest treated as received) in exchange for shares of Electro Common
Stock will include the period during which the shares of Electro Common Stock
surrendered in exchange therefor were held, provided the shares of Electro
Common Stock were held as capital assets at the Merger Effective Time. In
addition, no gain or loss will be recognized by either Electro, CTG or Cardiac
as a result of the consummation of the Merger.
An Electro stockholder who receives cash in the Merger in lieu of a
fractional share interest in CTG Common Stock will be treated as having received
and then sold such fractional share of CTG Common Stock. An Electro stockholder
would recognize gain or loss measured by the difference between the cash
received and the portion of the stockholder's adjusted tax basis in the shares
of Electro Common Stock allocable to the fractional share. Any capital gain or
loss recognized by an Electro stockholder will be long-term capital gain or loss
if the stockholder has held such stockholder's shares of Electro Common Stock
for longer than one year.
It is a condition to the obligations of Electro to consummate the
Merger that the foregoing opinion be confirmed in writing to Electro as of the
Closing Date. See "- Conditions to the Merger."
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CARDIAC STOCKHOLDERS
The following discussion has been prepared by Greenberg and, except as
otherwise indicated, summarizes Greenberg's opinion of the material Federal
income tax consequences to the Cardiac stockholders of the Reverse Split and of
the Restructuring Merger.
The Reverse Split, pursuant to which each Cardiac stockholder will
receive one new share of Cardiac Common Stock in exchange for each five existing
shares of Cardiac Common Stock held by that Cardiac stockholder, will be treated
as a recapitalization within the meaning of Section 368(a)(1)(E) of the Code.
Accordingly: (i) no gain or loss will be recognized by a Cardiac stockholder
upon the receipt by such stockholder of new Cardiac Common Stock in exchange for
existing Cardiac Common Stock; (ii) the aggregate tax bases of the new shares of
Cardiac Common Stock received by a Cardiac stockholder will be the same as the
aggregate tax bases of the existing shares of Cardiac Common Stock surrendered
in exchange therefor; and (iii) the holding period of the new shares of Cardiac
Common Stock received by a Cardiac stockholder in exchange for existing shares
of Cardiac Common Stock will include the period during which the existing shares
of Cardiac Common Stock surrendered in exchange therefor were held, provided the
existing shares of Cardiac Common Stock were held as capital assets at the time
of the Reverse Split.
The Restructuring Merger, pursuant to which Cardiac will become a
wholly-owned subsidiary of CTG, will be treated as a reorganization within the
meaning of Section 368(a) of the Code. Accordingly: (i) no gain or loss will be
recognized by a Cardiac stockholder upon the receipt by such stockholder solely
of shares of CTG Common Stock in exchange for such stockholder's shares of
Cardiac Common Stock in accordance with the terms of the Restructuring Merger;
(ii) the aggregate tax bases of the shares of CTG Common Stock received by a
Cardiac stockholder will be the same as the aggregate tax bases of the shares of
Cardiac Common Stock surrendered in exchange therefor; and (iii) the holding
period of the shares of CTG Common Stock received by a Cardiac stockholder in
exchange for shares of Cardiac Common Stock will include the period during which
the shares of Cardiac Common Stock surrendered in exchange therefor were held,
provided the shares of Cardiac Common Stock were held as capital assets at the
time of the Restructuring Merger. In addition, no gain or loss will be
recognized by either Cardiac or CTG as a result of the consummation of the
Restructuring Merger.
A Cardiac stockholder who receives cash in the Reverse Split in lieu of
a fractional share interest in Cardiac Common Stock will be treated as having
received and then sold such fractional share of Cardiac Common Stock. A Cardiac
stockholder would recognize gain or loss measured by the difference between the
cash received and the portion of the stockholder's adjusted tax basis in the
shares of Cardiac Common Stock allocable to the fractional share. Any capital
gain or loss recognized by a Cardiac stockholder will be long-term capital gain
or loss if the stockholder has held such stockholder's shares of Cardiac Common
Stock for longer than one year.
SINCE THE FOREGOING IS A SUMMARY AND DOES NOT TAKE INTO ACCOUNT THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING
DISCUSSION MAY NOT APPLY TO EACH STOCKHOLDER. IN VIEW OF THE INDIVIDUAL NATURE
OF INCOME TAX CONSEQUENCES, EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, THE REVERSE
SPLIT AND THE RESTRUCTURING TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
Since the Merger and the Restructuring Merger will be effectuated
simultaneously with the result that CTG will become a parent holding company,
and based upon the controlling interests in CTG, as parent of Cardiac, to be
obtained by Electro stockholders as a result of the Merger, the Merger and the
Restructuring Merger will be accounted for as an acquisition of CTG by Electro
stockholders (a reverse acquisition in which Electro is considered
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the acquirer for accounting purposes). Electro intends that the excess purchase
price over the fair value of Cardiac's identifiable tangible assets acquired,
less the fair value of Cardiac's liabilities assumed, will be allocated to a
patent. This is a United States patent that is titled "Single Preformed Catheter
Configuration for a Dual Chamber Pacemaker System." The patent was approved in
September 1997 and was issued on June 30, 1998. A product life of 10 years is
expected from the product underlying the patent. The value of the consideration
to be issued will be determined based upon the approximate market value of
Cardiac Common Stock on May 5, 1998, the date the Merger Agreement was amended.
Based on an approximate market value of $2.19 for Cardiac Common Stock on May 5,
1998, the amount allocated to the patent will be approximately $1,467,737 and
will be amortized over a 10-year period, resulting in an annual non-cash charge
to earnings that will not be deductible for income tax purposes. Based on the
May 5, 1998 approximate value of $2.19 for Cardiac Common Stock, such annual
charge will be $146,774.
RESALE OF CTG COMMON STOCK BY AFFILIATES
The shares of CTG Common Stock to be issued in the Merger and the
Restructuring Merger will be registered under the Securities Act and will be
freely transferable without restriction by those holders of Electro Common Stock
who are not deemed to be "affiliates" of Electro or Cardiac within the meaning
of Rule 145 under the Securities Act. Persons who may be deemed to be affiliates
may not sell their shares of CTG Common Stock acquired in connection with the
Merger, except pursuant to an effective registration statement under the
Securities Act covering such shares, or in compliance with Rule 145, Rule 144 or
another applicable exemption from the registration requirements of the
Securities Act. Persons who may be deemed to be affiliates of an entity
generally include individuals or entities that control, are controlled by or are
under common control with such entity, and includes the directors, the executive
officers and the principal stockholders of such entity.
Electro agreed in the Merger Agreement to use its best efforts to cause
each director, executive officer and other person who may be deemed an affiliate
(for purposes of Rule 145) of Electro to execute and deliver a written agreement
intended to ensure compliance with the Securities Act.
This Joint Proxy Statement/Prospectus cannot be used for resale of CTG
Common Stock received by any person who may be deemed an affiliate of Electro.
SEQUENCE OF EVENTS
Assuming that the stockholders of both Electro and Cardiac approve all
of the transactions proposed herein, the sequence of events would be as follows:
First, the Reverse Split, whereby the number of outstanding shares of
Cardiac Common Stock would be reduced to approximately 530,000 shares, would be
effectuated by the Reverse Split Amendment; and
Second, the Merger and the Restructuring Merger would both be
effectuated simultaneously resulting in Electro becoming a direct, wholly-owned
subsidiary of Cardiac, with Cardiac in turn being a direct, wholly-owned
subsidiary of CTG.
OTC BULLETIN BOARD
Shares of Cardiac Common Stock and Electro Common Stock are both
currently quoted on the OTC Bulletin Board. Upon consummation of the Merger, CTG
intends to apply to list its shares on a regional exchange and/or the Nasdaq
SmallCap Market in conjunction with the initiation of trading in its shares in
the public market place. Prior to the transactions contemplated herein and the
offerings to be made in connection therewith, there has been no public market
for CTG Common Stock and there can be no assurance that CTG will be able to
obtain or maintain any such listings for its shares. Even though CTG will meet
the quantitative requirements of such
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exchanges, these exchanges maintain qualitative requirements and discretionary
review standards which CTG may be unable to comply with immediately after the
consummation of the Merger.
BUSINESS AND MANAGEMENT AFTER THE MERGER AND THE RESTRUCTURING MERGER
Following the Merger and the Restructuring Merger, management of the
combined companies will endeavor to finalize and implement operational
strategies designed to maximize return on capital and position the combined
companies for growth. The objective is to build a company specializing in the
development and promotion of differentiated, niche products to address the
cardiac catheter market. The combined companies will utilize current,
proprietary products, an acquisition/industry consolidation strategy, as well as
newly-developed technologies, to provide more effective treatment for cardiac
dysrhythmias and improve safety and reduce cost for the patient, physician and
hospital. Emphasis will be on the combined companies' catheter and lead
technology, providing products which allow:
/bullet/ more accurate and faster placement within the heart and
circulatory system;
/bullet/ more sensitive reception of cardiac signals to aid in
diagnosis; and
/bullet/ more accurate and faster delivery of electrical signals to
cardiac tissue to aid in treatment.
Three targeted market segments with existing products and new technologies
include bradycardia (pacing), tachycardia (defibrillation) and atrial
fibrillation (defibrillation and ablation). Combined, these address a worldwide
population of almost 1 million newly-diagnosed patients each year.
To the extent that the combined companies are successful in achieving
projected growth and adding new products either through product development or
acquisition, the combined companies may then be positioned either as a
stand-alone cardiac rhythm management company with a portfolio of clinically
advanced, strategically-linked, niche products, or for acquisition by one of the
larger cardiac device manufacturers lacking one or more of the combined
companies' specific product technologies.
Management's strategy will be to consolidate other companies with
cardiology and electrophysiology catheter products that can be manufactured by
CTG, and where CTG will be able to capitalize on the operational, marketing and
financial synergies inherent in the development of a larger entity. This
strategy will be supported by three primary activities:
1. the consolidation of two companies with related product lines, based
on proprietary technology, which will have the opportunity to
improve operations and profit performance through the realization of
approximately $1.5 million in annual operating synergies and cost
savings;
2. the commercialization of electrophysiology and other
rhythm-management products, from the existing new product
development portfolio; and
3. acquisition of and consolidation with other companies with related
products.
There are over 2,000 public and private specialty niche companies
worldwide according to Standard & Poor's, Dun and Bradstreet, The American
College of Cardiology and the American Heart Association that constitute the
cardiac catheter market. Many of these are either private or small-cap/micro-cap
public companies whose capitalization and/or access to funding hinders rapid
product development or sales expansion. Consolidation will enable these
companies to improve performance and provide greater opportunity by: (i)
reducing costs through elimination of redundant operations; (ii) making more
efficient use of sales forces and other corporate resources; and (iii) gaining
better access to capital markets.
The business plan proposes that the combined companies will, within 12
to 18 months after consummation of the Merger, be able to achieve a positive
operational cash flow at least sufficient to support normal operating and
research and development activity. Management of the combined companies
anticipates that this may be achieved
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assuming the realization of projected sales growth and the savings expected from
the consolidation of operations. If this plan proves to be successful, the cash
raised concurrent with this Merger should be sufficient to satisfy the combined
companies' needs for the next several years. There can be no assurance that the
combined companies will achieve the business plan as the combined companies may
be unsuccessful in achieving such sales and/or realizing such savings. See "RISK
FACTORS." Should additional cash be required for completion of a merger or
specific project, a separate financing would be initiated.
Following the Merger and the Restructuring Merger, the CTG Board will
be comprised of the currently installed members of the Cardiac Board as expanded
to include Ervin Schoenblum and Abraham Nechemie. Furthermore, pursuant to
Cardiac's engagement agreement with the investment banker assisting Cardiac in
connection with the CTG public offering, Cardiac shall cause the CTG Board to
further expand and the investment banker and a representative of the syndicate
formed to facilitate the offering of the Newly Offered Shares shall each have
the right to appoint one member to fill the vacancies created by such expansion.
Accordingly, following the Merger and the Restructuring Merger, the CTG Board
shall consist of the following persons, plus a director designee of the
investment banker and a director designee of a representative of the syndicate:
Chairman of the Board of Directors Bart C. Gutekunst
Director William H. Burns
Director Larry Haimovitch
Director Abraham Nechemie
Director Augusto Ocana
Director Alan J. Rabin
Director Robert Rylee
Director Ervin Schoenblum
Director Tracey Young
Management of CTG, identified to date, shall consist of the following
persons who shall hold the office listed opposite their respective names:
President, Chief Executive Officer Alan J. Rabin
Executive Vice President, Chief Operating Officer W. Alan Walton
Vice President Research and Development Jonathan S. Lee
Vice President Sales Kirk D. Kamsler
In addition to the above officers, CTG intends to hire a Chief
Financial Officer with experience in consolidating public companies and an
Acquisition Officer with experience in consolidating the operations of public
and private companies.
The directors of both Cardiac and Electro following the Merger
Effective Time will be Alan J. Rabin, W. Alan Walton and Ervin Schoenblum. The
executive officers of Cardiac will be Alan J. Rabin, as president, and W. Alan
Walton, as secretary. The executive officers of Electro will be Jonathan S. Lee,
as president, and W. Alan Walton, as secretary.
DISSENTERS' RIGHTS
ELECTRO STOCKHOLDERS
Holders of record of shares of Electro Common Stock will not have
appraisal rights with respect to their shares. Section 14A:11-1 of the New
Jersey Business Corporation Act states a stockholder shall not have the right to
dissent from any plan of merger or consolidation with respect to shares for
which, pursuant to the plan of merger or consolidation, he will receive: (a)
cash; (b) shares, obligations or other securities which, upon consummation of
the merger or consolidation, will either be listed on a national securities
exchange or held of record by not less than
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one thousand (1,000) holders; or (c) cash and such securities. As of September
30, 1998 there were 584 holders of record of Cardiac Common Stock, and 699
holders of record of Electro Common Stock.
CARDIAC STOCKHOLDERS
Under Section 262 of the Delaware Act, the holders of Cardiac Common
Stock are entitled to appraisal rights with respect to the Restructuring Merger
only, and not with respect to the other proposals. In the event that the
Restructuring Merger is consummated, record holders of Cardiac Common Stock who
meet and comply with the requirements of Section 262 of the Delaware Act will be
entitled to dissenters' appraisal rights with respect to their shares of Cardiac
Common Stock. Such Cardiac stockholders will have the right to obtain a cash
payment for the "fair value" of their shares (excluding any element of value
arising from the accomplishment or expectation of the Restructuring Merger).
Such "fair value" would be determined in judicial proceedings, the result of
which cannot be predicted.
In order to exercise dissenters' appraisal rights, dissenting Cardiac
stockholders must comply with the procedural requirements of Section 262 of the
Delaware Act, a description of which is provided immediately below and the full
text of which is attached to this Joint Proxy Statement/Prospectus as Appendix
E. Failure to take any of the steps required under Section 262 of the Delaware
Act on a timely basis may result in the loss of dissenters' appraisal rights.
Except as set forth herein, Cardiac stockholders will have no appraisal
rights in connection with the Restructuring Merger. The dissenters' appraisal
rights described herein are available to holders of record of Cardiac Common
Stock. A person having a beneficial interest in shares of Cardiac Common Stock
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect whatever dissenters' appraisal rights
the beneficial owner may have.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO DISSENTERS' APPRAISAL RIGHTS UNDER THE DELAWARE ACT AND IS
QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN
ITS ENTIRETY AS APPENDIX E TO THIS JOINT PROXY STATEMENT/PROSPECTUS. ALL
REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" ARE TO THE
RECORD HOLDER OF THE SHARES OF CARDIAC COMMON STOCK AS TO WHICH DISSENTERS'
APPRAISAL RIGHTS ARE ASSERTED.
Under the Delaware Act, holders of shares of Cardiac Common Stock who
follow the procedures set forth in Section 262 will be entitled to have their
shares of Cardiac Common Stock appraised by the Delaware Court of Chancery and
to receive payment of the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the Restructuring
Merger, together with a fair rate of interest, as determined by such court.
Under Section 262, a corporation, not less than twenty (20) days prior
to the meeting at which a proposed merger is to be voted on, must notify each of
its stockholders entitled to dissenters' appraisal rights as of the record date
set for the meeting that such appraisal rights are available, and include in
such notice a copy of Section 262. This Joint Proxy Statement/Prospectus shall
constitute such notice to the holders of shares of Cardiac Common Stock and
delivery of such copy of Section 262 which is attached to this Joint Proxy
Statement/Prospectus as Appendix E. Other than this notice, Cardiac will not
provide reminder notices to its stockholders of the requirements of Section 262
of the Delaware Act or of the expiration of the time period during which
stockholders must demand their dissenters' rights.
Therefore, stockholders who wish to exercise their appraisal rights or
who wish to preserve their right to do so should review the following discussion
and Appendix E carefully because failure to comply timely and properly with the
specified procedure will result in a loss of dissenters' appraisal rights under
the Delaware Act. Moreover, because of the complexity of the procedures for
exercising the right to seek appraisal of Cardiac Common Stock, Cardiac
stockholders who consider exercising such rights should seek the advise of legal
counsel.
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Cardiac stockholders wishing to exercise their dissenters' appraisal
rights must deliver to Cardiac, the Surviving Corporation in the Restructuring
Merger, prior to the vote on the Restructuring Merger proposal at the Cardiac
Special Meeting, a written demand for appraisal of their shares of Cardiac
Common Stock. A proxy or vote against the Restructuring Merger will not
constitute such a demand.
In addition, a holder of shares of Cardiac Common Stock wishing to
exercise dissenters' appraisal rights must hold of record such shares on the
date the written demand for appraisal is made, must continue to hold such shares
until the date of consummation of the Restructuring Merger and must not vote in
favor of the Restructuring Merger proposal or consent thereto in writing
pursuant to Section 228 of the Delaware Act. However, a failure to vote against
the Restructuring Merger or an abstention from voting will not constitute a
waiver of dissenters' rights. Only a holder of record of shares of Cardiac
Common Stock is entitled to assert appraisal rights for the shares of Cardiac
Common Stock registered in that holder's name. A demand for appraisal should be
executed by or on behalf of the holder of record, fully and correctly, as such
holder's name appears on the stock certificate(s).
If the shares of Cardiac Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and if the shares of Cardiac Common
Stock are owned of record by more than one (1) person, as in a joint tenancy or
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including one or more joint owners, may execute a
demand for appraisal on behalf of a holder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is an agent for such owner or owners.
A record holder, such as a broker, who holds shares of Cardiac Common
Stock as nominee for several beneficial owners may exercise appraisal rights
with respect to the shares of Cardiac Common Stock held for one or more
beneficial owners while not exercising such rights with respect to the shares of
Cardiac Common Stock held for other beneficial owners; in such case, the written
demand should set forth the number of shares of Cardiac Common Stock as to which
appraisal is sought, and where no number of shares of Cardiac Common Stock is
expressly mentioned, that demand will be presumed to cover all shares of Cardiac
Common Stock held in the name of the record owner. Stockholders who hold their
shares of Cardiac Common Stock in brokerage accounts or other nominee forms and
who wish to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
such a nominee.
All written demands for appraisal should be sent or delivered to
Cardiac Control Systems, Inc. at 3 Commerce Boulevard, Palm Coast, Florida
32164, Attention: W. Alan Walton. Within one hundred twenty (120) days after the
consummation of the Restructuring Merger, but not thereafter, Cardiac or any
stockholder entitled to dissenters' appraisal rights under Section 262 may file
a petition in the Delaware Court of Chancery demanding a determination of the
"fair value" of the shares of Cardiac Common Stock held by any such
stockholders.
Cardiac is under no obligation and has no present intention to file a
petition with respect to the appraisal of the fair value of the shares of
Cardiac Common Stock. Accordingly, it is the obligation of the Cardiac
stockholders to initiate all actions to perfect their dissenters' appraisal
rights within the time prescribed in Section 262. Within one hundred twenty
(120) days after the consummation of the Restructuring Merger, any Cardiac
stockholder who has complied with the requirements of exercise of dissenters'
appraisal rights will be entitled, upon written request, to receive from Cardiac
a statement setting forth the aggregate number of shares of Cardiac Common Stock
with respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such statement must be mailed to such holders
of the Cardiac Common Stock within ten (10) days after a written request
therefore has been received by Cardiac or within ten (10) days after the
expiration of the twenty (20) day period for delivery of demands for appraisal
by holders of the Cardiac Common Stock outlined above, whichever is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the Cardiac stockholders
entitled to appraisal rights and will appraise the "fair value" of their shares
of Cardiac Common Stock, exclusive of any element of value arising from the
accomplishment or
-75-
<PAGE>
expectation of the Restructuring Merger, together with a fair rate of interest,
if any, to be paid upon the amount determined to be the "fair value."
Stockholders considering seeking appraisal should be aware that the "fair value"
of their shares of Cardiac Common Stock as determined under Section 262 could be
more than, the same as or less than the consideration they would receive
pursuant to the Restructuring Merger Agreement if they do not seek appraisal of
their shares of Cardiac Common Stock.
In determining "fair value," the Delaware Court of Chancery is to take
into account all relevant factors. In WEINBERGER V. UOP, INC. ("Weinberger"),
the Delaware Supreme Court discussed the factors that could be considered in
determining "fair value" in an appraisal proceeding, stating that "proof of
value by any techniques or methods which are generally considered acceptable in
the financial community and otherwise admissible in court" should be considered
and that "fair price" obviously requires consideration of all relevant factors
involving the value of a company. The Delaware Supreme Court stated that, in
making this determination of "fair value," the court must consider a market
value, asset value, dividends, earnings prospects, the nature of the enterprise
and any other facts which could be ascertained as of the date of the
Restructuring Merger that throw any light on future prospects of the merged
corporation.
In WEINBERGER, the Delaware Supreme Court further stated that "elements
of future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the Restructuring Merger and are not the
product of speculation, may be considered." In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual circumstances,
may or may not be a dissenters' exclusive remedy. The cost of the action may be
determined by the court and taxed upon the parties as the court deems equitable.
The court may also order that all or a portion of the expenses incurred by a
stockholder in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all of the shares
of Cardiac Common Stock entitled to appraisal.
Any holder of shares of Cardiac Common Stock who has duly demanded an
appraisal in compliance with Section 262 will not, after the consummation of the
Restructuring Merger, be entitled to vote the shares of Cardiac Common Stock
subject to such demand for any purpose or be entitled to the payment of
dividends or other distribution on those shares (except dividends or other
distributions payable to holders of record of shares of Cardiac Common Stock as
of a date on or prior to the consummation of the Restructuring Merger).
If any Cardiac stockholder who demands appraisal of shares of Cardiac
Common Stock under Section 262 fails to perfect, or effectively withdraws or
loses, the right to appraisal, as provided in the Delaware Act, each share of
Cardiac Common Stock of such stockholder will be converted into the right to
receive one share of CTG Common Stock in accordance with the Restructuring
Merger Agreement.
A stockholder will fail to perfect, or effectively lose or withdraw,
the right to appraisal if no petition for appraisal is filed within one hundred
twenty (120) days after the consummation of the Restructuring Merger, or if the
Cardiac stockholder delivers to Cardiac a written withdrawal of his demand for
appraisal and acceptance of the Restructuring Merger, except that any such
attempt to withdraw made more than sixty (60) days after the consummation of the
Restructuring Merger will require the written approval of Cardiac.
ANY HOLDER OF CARDIAC COMMON STOCK WISHING TO EXERCISE APPRAISAL RIGHTS
IS URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
-76-
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet
includes Cardiac's consolidated balance sheet as of May 31, 1998 and Electro's
balance sheet as of that same date, giving effect to the acquisition of the
Electro Common Stock in exchange for approximately 1,278,000 shares of Cardiac
Common Stock and approximately $550,000 in anticipated direct acquisition and
registration costs, as if such acquisition had occurred on May 31, 1998. The pro
forma financial statements also give effect to the conversion of $1,000,000 of
debt due to The T Partnership into convertible preferred stock, the issuance of
$1,500,000 in debt and the Reverse Split expected to occur prior to consummation
of the Merger. The pro forma financial statements do not give effect to the
proceeds from financing which must be obtained as a condition of the Merger
consisting of $4,000,000 through a combination of proceeds from the sale of
common stock and proceeds from a loan or line of credit. The unaudited pro forma
condensed consolidated statement of operations includes Cardiac's consolidated
statements of operations for the nine months ended March 31, 1998 and the fiscal
year ended September 30, 1997 and Electro's statements of operations for the
nine months ended May 31, 1998 and the fiscal year ended August 31, 1997 giving
effect to the Merger and Restructuring Merger as if they had occurred on
September 1, 1996. The Merger has been accounted for on the purchase basis in
such pro forma statements. Based upon the controlling interest in Cardiac to be
obtained by Electro stockholders as a result of the Merger, the Merger will be
accounted for as an acquisition of Cardiac by Electro (a reverse acquisition in
which Electro is considered the acquirer for accounting purposes). The
historical information of Cardiac has been derived from the unaudited condensed
consolidated financial statements for the nine months ended March 31, 1998 and
the unaudited consolidated financial statements for the year ended September 30,
1997 which were derived from the audited consolidated financial statements of
Cardiac for the fiscal year ended March 31, 1997 and the unaudited consolidated
financial statements for the six months ended September 30, 1997 and 1996. The
historical information of Electro has been derived from the unaudited financial
statements for the nine months ended May 31, 1998 and the audited financial
statements for the fiscal year ended August 31, 1997 (which are included herein
and should be read in conjunction with such financial statements and the notes
thereto). In the opinion of the management of Cardiac and Electro, the
above-mentioned unaudited pro forma condensed consolidated financial statements
of the respective companies include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for
unaudited interim periods. The unaudited pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
financial position or operating results that would have occurred had the Merger
and Restructuring Merger been consummated on the date specified, nor is it
indicative of future operating results or financial position. In the opinion of
the managements of Cardiac and Electro, all adjustments necessary to present
fairly this unaudited pro forma information have been made.
-77-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
MAY 31, 1998
--------------------------------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------- -------------------------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $ 78,915 $ - $1,500,000 (1) $ 1,578,915
Marketable securities 799 - 799
Accounts receivable, net 581,168 759,133 1,340,301
Inventories 1,438,226 1,333,086 2,771,312
Prepaid expenses and other current assets 234,185 64,885 299,070
---------- ---------- ---------- -----------
Total current assets 2,333,293 2,157,104 1,500,000 5,990,397
Property, plant and equipment, net 1,933,155 684,002 2,617,157
Patent - - 1,467,737 (3) 1,467,737
Other assets 1,056,442 276,238 (340,000) (2) 992,680
---------- ---------- ---------- -----------
$5,322,890 $3,117,344 $2,627,737 $11,067,971
========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $1,670,012 $1,382,143 $ 210,000 (2) $ 3,262,155
Deposits payable 352,482 - 352,482
Accrued litigation expenses - 288,400 288,400
Current portion of long-term debt 1,175,901 290,629 1,466,530
---------- ---------- ---------- -----------
Total current liabilities 3,198,395 1,961,172 210,000 5,369,567
Long-term debt, less current portion 1,798,550 2,141,410 500,000 (1) 4,439,960
Other liabilities 83,534 - 83,534
Stockholders' equity (deficit) 242,411 (985,238) 1,917,737 (1)(3) 1,174,910
---------- ---------- ---------- -----------
$5,322,890 $3,117,344 $2,627,737 $11,067,971
========== ========== ========== ===========
</TABLE>
- --------------------------------------------
(1) Represents the addition of $1,500,000 in debt at an assumed interest rate of
11% per annum to be issued in connection with the merger and the conversion
of $1,000,000 of The T Partnership debt into 9% convertible preferred stock.
(2) Represents $550,000 of costs of completing Merger, of which $340,000 had
been incurred at May 31, 1998 and $210,000 is a pro forma accrual.
(3) The acquisition of Electro by Cardiac will be accounted for as an
acquisition of Cardiac by Electro (a reverse acquisition in which Electro is
considered the acquirer for accounting purposes). The purchase price for
Cardiac is computed by valuing the outstanding common shares of Cardiac
before the acquisition (529,748 as adjusted for the Reverse Split) at $2.19
or $1,160,148 plus acquisition costs estimated at $550,000 and will be
allocated to the fair value of assets acquired and liabilities assumed. The
purchase price for Cardiac is anticipated to be allocated as follows:
<TABLE>
<S> <C>
Fair value of assets acquired, including $1,467,737 assigned to a patent $6,790,627
Fair value of liabilities assumed 5,080,479
----------
Total purchase price $1,710,148
==========
</TABLE>
The purchase price was allocated to assets and liabilities based on
management's current estimate of their value. The final allocation of the
purchase price when the Merger is completed may vary from the estimated
allocation above.
-78-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
-------------------------------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------- -----------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, 1998 MAY 31, 1998
-------------- ------------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $4,336,896 (5)(6) $4,152,546 $ $ 8,489,442
Cost and expenses:
Cost of goods sold 1,836,158 2,836,541 4,672,699
Selling, general and administrative expenses 1,753,746 1,525,871 110,081 (1) 3,389,689
Engineering, research & development expenses 1,317,645 416,224 1,733,869
----------- ---------- --------- -----------
4,907,549 4,778,636 110,081 9,796,266
----------- ---------- --------- -----------
Income (loss) from operations (570,653) (626,090) (110,081) (1,306,824)
Other income (expense):
Interest expense (441,363) (225,019) (33,750)(2) (700,132)
Other income 4,655 - 4,655
----------- ---------- --------- -----------
(436,708) (225,019) (33,750) (695,477)
----------- ---------- --------- -----------
Net loss (1,007,361) (851,109) (143,831) (2,002,301)
Preferred stock dividends - - (67,500)(4) (67,500)
----------- ---------- --------- -----------
Net loss applicable to common stock $(1,007,361)(6) $ (851,109) $(211,331) $(2,069,801)
=========== ========== ========= ===========
Net loss per common share $(1.90) $(0.67)
=========== ==========
Pro forma net loss per common share $(1.15)(3)
===========
Weighted average common shares outstanding 530,000 1,277,400 1,807,148
=========== ========== ===========
</TABLE>
- -------------------------------------------------
(1) Represents amortization of $1,467,737 of a patent over 10 years, which
represents the expected life of the product underlying the patent.
(2) Represents (a) reduction in interest expense of $90,000 related to the
conversion of $1,000,000 of the 12% T Partnership debt into 9% convertible
preferred stock, and (b) the addition of interest expense of $123,750
related to $1,500,000 debt issued in connection with the Merger at an
assumed interest rate of 11%.
(3) Calculated using Electro's historical weighted average shares of 1,277,400
for the nine months ended March 31, 1998, plus 529,748 outstanding Cardiac
shares as adjusted for the Reverse Split.
(4) Represents dividends on $1,000,000 of The T Partnership debt converted into
9% convertible preferred stock.
(5) Includes approximately $1,366,000 royalty income from Intermedics which
ceased in January 1998.
(6) Revenues of $1,639,990 and net loss of $167,239 of Cardiac for the three
months ended September 30, 1997, have been included in the pro forma
statement of operations for the nine months ended March 31, 1998 and the
year ended September 30, 1997.
-79-
<PAGE>
<TABLE>
<CAPTION>
CTG
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED
---------------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------------- -------------------------
SEPTEMBER 30, AUGUST 31,
1997 1997
------------- -----------
CARDIAC ELECTRO ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $6,399,651 (5)(6) $ 6,648,438 $ - $13,048,089
Cost and expenses:
Cost of goods sold 2,418,274 4,041,486 - 6,459,760
Selling, general and administrative expenses 2,819,814 2,384,127 146,774 (1) 5,350,715
Engineering, research & development expenses 1,672,824 881,728 - 2,554,552
---------- ----------- --------- -----------
6,910,912 7,307,341 146,774 14,365,027
---------- ----------- --------- -----------
Loss from operations (511,261) (658,903) (146,774) (1,316,938)
Other income (expense):
Interest expense (435,631) (249,384) (45,000)(2) (730,015)
Litigation expense - (446,655) - (446,655)
Other income 152,351 - - 152,351
---------- ----------- --------- -----------
(283,280) (696,039) (45,000) (1,024,319)
---------- ----------- --------- -----------
Net loss (794,541)(6) (1,354,942) (191,774) (2,341,257)
Preferred stock dividends - - (90,000)(4) (90,000)
---------- ----------- --------- -----------
Net loss applicable to common stock $ (794,541)(6) $(1,354,942) $(281,774) $(2,431,257)
========== =========== ========= ===========
Net loss per common share $(1.52) $(1.06)
========== ===========
Pro forma net loss per common share $(1.35)(3)
===========
Weighted average common shares outstanding 522,271 1,276,000 1,805,748
========== =========== ===========
</TABLE>
- -----------------------------------------------------
(1) Represents amortization of $1,467,737 a patent over 10 years, which
represents the expected life of the product underlying the patent.
(2) Represents (a) reduction in interest expense of $120,000 related to the
conversion of $1,000,000 of the 12% T Partnership debt into 9% convertible
preferred stock, and (b) the addition of interest expense of $165,000
related to $1,500,000 debt issued in connection with the Merger at an
assumed interest rate of 11%.
(3) Calculated using Electro's historical weighted average shares of 1,276,000
for the year ended August 31, 1997, plus 529,748 outstanding Cardiac shares
as adjusted for the Reverse Split.
(4) Represents dividends on $1,000,000 of The T Partnership debt converted into
9% convertible preferred stock.
(5) Includes approximately $2,476,000 royalty income from Intermedics which
ceased in January 1998.
(6) Revenues of $1,639,990 and net loss of $167,239 of Cardiac for the three
months ended September 30, 1997, have been included in the pro forma
statement of operations for the nine months ended March 31, 1998 and the
year ended September 30, 1997.
-80-
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Cardiac and Electro and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a purchase method of accounting, assuming
that one share of CTG Common Stock is issued in exchange for each share of
Electro Common Stock in the Merger. This data should be read in conjunction with
the unaudited pro forma condensed consolidated financial information and the
separate historical consolidated financial statements of Cardiac and Electro and
notes thereto, incorporated by reference herein or included elsewhere in this
Joint Proxy Statement/Prospectus. The unaudited pro forma financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented and
should not be construed as representative of future operations.
NINE MONTHS ENDED
YEAR ENDED MARCH 31, MARCH 31,
1998 1998
-------------------- -----------------
Historical - Cardiac
Net income (loss) per share...... $(2.35) $ (1.90)
Book value per share ............ $ 1.32 $ 1.32
NINE MONTHS ENDED
YEAR ENDED AUGUST 31, MAY 31,
1997 1998
-------------------- -----------------
Historical - Electro
Net income (loss) per share...... $ (1.06) $ (.67)
Book value per share............ $ (.11) $ (.77)
NINE MONTHS ENDED
YEAR ENDED AUGUST 31, MAY 31,
1997 1998
-------------------- -----------------
Pro forma net income (loss)
Per Electro share................ $ (1.44) $ (1.21)
Equivalent per Cardiac share.... N/A $ (1.21)
MAY 31,
1998
-----------------
Pro Forma Combined Book Value
Per Share
Per Electro share.................. $ .67
Equivalent per Cardiac share....... $ .67
-81-
<PAGE>
CTG, MERGER SUB AND SUB
CTG. CTG was incorporated under the laws of Delaware on September 9,
1998 and is a direct, wholly-owned subsidiary of Cardiac. The address of CTG's
executive offices and telephone number are the same as those of Cardiac.
MERGER SUB. Merger Sub was incorporated under the laws of Delaware on
September 9, 1998 and is the immediate parent of Sub. Merger Sub is a direct,
wholly-owned subsidiary of CTG. The address of Merger Sub's executive offices
and telephone number are the same as those of Cardiac.
SUB. Sub was incorporated under the laws of New Jersey on December 9,
1997 and is a direct, wholly-owned subsidiary of Merger Sub. The address of
Sub's executive offices and telephone number are the same as those of Cardiac.
BUSINESS OF CARDIAC
GENERAL
Cardiac was incorporated as Supramedics, Inc. on June 20, 1980 under
the laws of the State of Delaware and on August 28, 1980 changed its name to
Cardiac Control Systems, Inc. to more accurately reflect the business of
Cardiac. Cardiac is engaged in the design, development, manufacture, marketing,
and sale of implantable cardiac pacing systems. These systems consist of
single-chamber, dual-chamber and single-lead, atrial-controlled ventricular
cardiac pacemakers together with connecting electrode leads and equipment for
the external programming and monitoring of the pacemakers. Cardiac has received
classification (clearance) from the FDA to distribute commercially a line of
single-chamber and dual-chamber pacemaker systems and a single-lead
atrial-controlled ventricular cardiac pacing system. The equipment used for the
external programming and monitoring of Cardiac's pacemaker products is usually
loaned without charge to physicians and other purchasers of Cardiac's products.
Cardiac's products are "medical devices" as defined by the FDA and thus are
subject to Federal regulations enforced by the FDA, including restrictions on
the commercial introduction of products and clinical testing requirements.
Cardiac Common Stock was listed on Nasdaq SmallCap Market; however, on
August 29, 1991 Cardiac was advised by the Nasdaq SmallCap Market that its
Common Stock would be delisted effective August 30, 1991. Cardiac was not in
compliance with the Nasdaq SmallCap Market's capital and surplus requirement
then in effect of $375,000. Shares of Cardiac Common Stock are currently traded
over-the-counter under the symbol "CDCS" and are quoted on the OTC Bulletin
Board/registered trademark/. This service allows market makers to enter quotes
and trade securities that do not meet Nasdaq SmallCap Market qualification
requirements.
Cardiac has had a prior history of net losses and had experienced cash
flow deficiencies and had been unable to pay many of its obligations as they
became due. Cardiac is continuing its efforts to increase its sales volume and
attain a profitable level of operations. However, there is no assurance that
Cardiac's efforts will be successful. There are many events and factors in
connection with the development, manufacture and sale of Cardiac's products over
which Cardiac has little or no control, including, without limitation,
production delays, marketing difficulties, lack of market acceptance, and
superior competitive products based on future technological innovation. There
can be no assurance that future operations will be profitable or will satisfy
future cash-flow requirements.
As a condition of this Merger, additional financing will be obtained
for the combined companies which will be Cardiac and its wholly-owned
subsidiary, Electro (the Surviving Subsidiary). It is believed by management
that these incremental funds will be sufficient to satisfy cash flow
requirements, build sales and marketing and complete development of necessary
products that would allow the combined companies to become cash flow positive.
However, there is no assurance that management's expectations will be realized.
Any such occurrence
-82-
<PAGE>
may necessitate additional financing in the future. There is no assurance that
such financing will be available or that it will be available on favorable
terms. See "RISK FACTORS."
PRODUCTS
Cardiac currently manufactures and commercially distributes a line of
single- and dual-chamber implantable pacemakers and a single-lead, dual-chamber
atrial-controlled ventricular ("VDD") pacing system, as well as electrode leads
and programming equipment developed by Cardiac. Pacemaker systems are prescribed
by physicians for patients who suffer arrhythmias or impairments of the natural
electrical conduction system of the heart that render the heart incapable of
pumping blood throughout the body at a rate and rhythm suitable for the body's
needs. The pacemaker system treats the condition by electrically stimulating the
heart to restore proper rhythmic contractions of the heart muscle.
Cardiac's pacemakers and electrode leads encompass 8 pacemaker models
(under the trade names MAESTRO/registered trademark/ II or MAESTRO/registered
trademark/ II SAVVI/trademark/) and 7 electrode lead models (under the trade
names PolySafe/trademark/ or A-Track/trademark/). Cardiac's first single-and
dual-chamber pacemaker products were sold under the MAESTRO trade name. This
generation of products, however, is no longer manufactured and marketed by
Cardiac. Instead, a second generation of more streamlined single-and
dual-chamber models are being sold under the MAESTRO II trade name. Cardiac
received FDA clearance to market its most recent dual-chamber pacemaker, the
MAESTRO Series 500 Model 534 dual chamber, bipolar DDD pacing system in October
1997. Cardiac also received FDA market clearance for a new design on a temporary
cardiac pacing lead, the INTERIM/trademark/ AV is designed to allow atrial
sensing and ventricular pacing through the same lead.
Cardiac further developed a single-pass atrial-controlled ventricular
(VDD) pacing system and received FDA clearance in 1993 for two VDD models which
Cardiac sells under the trade name MAESTRO II SAVVI. These pacing systems were
unique in the industry until Intermedics, a competitor of Cardiac at that time,
received FDA approval of its single-pass, atrial-controlled ventricular pacing
system. Intermedics commenced marketing its new product in March 1995. One
additional competitor (Medtronic, Inc.) has also recently entered the United
States market with a competitive single-lead product.
In addition, Cardiac markets certain electrode leads and pacing
accessories manufactured by other medical companies. Further, Cardiac sells
other implantable leads for implantable pacemakers and defibrillators on an OEM
basis to implantable cardiac device manufacturers and hybrid circuit components
to an Italian manufacturer and to an Indian manufacturer. See "- Sales,
Marketing and Distribution Methods."
Cardiac's products are classified as "medical devices" under the FDA
Act and, as such, are subject to extensive domestic regulation by the FDA and
European regulation by the ISO. All of the pacemaker systems marketed in the
United States by Cardiac (including related electrode leads) are in commercial
distribution under the FDA's 510(k) Premarket Notification regulations or
Premarket Approval ("PMA") regulations. European regulations now include the ISO
9000 series of standards developed by the ISO as adopted by the member nations
of the EEC. Cardiac is certified to ISO 9001 by the Notified Body, TUV Product
Services, of Munich, Germany See "CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Operating Trends And
Uncertainties."
Cardiac's MAESTRO II anti-bradycardia cardiac pacemakers are
electronically based with an integrated circuit design, and include
multi-programmable single-chamber, dual-chamber and atrial-controlled
ventricular pacemakers. They are non-invasively programmable to multiple
operating modes and functions for prescriptive flexibility, provide a wide range
of sensitivity values and incorporate programmable high- and low-frequency
bandpass filters. This extensive programmability permits the physician the
flexibility required to provide truly prescriptive, individualized pacing
therapy for a wide range of patients.
Cardiac's pacemakers are generally sold together with electrode leads,
most of which are manufactured by Cardiac. Cardiac's PolySafe electrode leads
include various models of its specialized single-pass A-Track leads.
-83-
<PAGE>
The A-Track leads, developed and patented by Cardiac, are triaxial pacing leads
in which the inner coil connects to a ventricular tip electrode for pacing and
sensing in the ventricle, and the two other coils connect to two diagonal atrial
bipolar ("DAB") electrodes positioned so as to provide sensing data from the
atrium. The DAB/trademark/ electrodes transmit sensed atrial signals to the
pacemaker, which then stimulates the ventricle at an appropriate rate, providing
atrial-synchronous ventricular pacing, mimicking the normal action of the heart.
The MAESTRO II SAVVI system incorporating the A-Track lead represents an
important advance in technology, combining atrial-controlled ventricular pacing
with the convenience and reliability of a single-lead implant procedure. This
system is appropriate for the many patients with conduction disorders and a
physiologically responsive sino-atrial node.
Cardiac has developed an upgrade to its single pass pacing technology.
This upgrade expands the capability of the current A-Track leads to allow both
sensing of electrical signals and transmission of a pacing pulse to both the
upper and lower chambers of the heart. If proven effective, this technology
could expand the potential for usage of Cardiac's single pass technology into
all dual chamber, (two lead) pacemaker implants. The first implant of this lead
in a human for clinical study purposes took place in Italy on September 25,
1998. The first commercial sale of this lead for a more limited application
(sensing in one chamber and pacing and sensing in the other chamber of the
heart) took place in Japan during the week of September 21, 1998. There can be
no assurance that this technology will be proven effective, nor can there be any
assurance that this technology will be accepted by customers as a substitute for
current two lead technology.
Cardiac's electrode leads are insulated with Surethane, Cardiac's
proprietary urethane compound and are manufactured using a patented coating
process, rights to which are held exclusively by Cardiac see "- Certain Patents,
Trademarks and Licenses". The Surethane is applied in solution to the pacing
coil using a non-thermosetting coating process that results in non-stratified
bonding of each layer of the Surethane upon curing and a "unitized" construction
of coil and insulation. This process results in extremely slender and durable
leads. There has been some industry bias toward using urethane, primarily for
bipolar leads because of problems with insulation. However, Cardiac has not
manufactured bipolar leads of urethane material. Cardiac only manufactures
unipolar urethane leads. Its bipolar leads are manufactured with silicone
material. Cardiac is not aware of any historical problems with its leads
manufactured of urethane.
Both of Cardiac's portable programmer models enable bi-directional
communication between the clinician and the implanted pacemaker. Programming and
telemetry messages are transmitted to the pacemaker via a lightweight wand.
Prior to transmitting a new program to the pacemaker, the programmer
automatically provides validation of the selected mode/parameter value
combination as a safety step. One model incorporates an integral printer, and
the other provides for connection of a printer, for generating hard copy
records. Both provide for connection of a strip chart recorder, for generating
hard copy records of pacemaker performance. A programmer carrying the CE Mark
label, as required in Europe, has been developed and commercialized. In
addition, Cardiac is nearing completion on a new computer-based programming
system.
SALES, MARKETING AND DISTRIBUTION METHODS
The primary markets for Cardiac's products are hospitals, other medical
institutions, and physicians both in the United States and abroad. Cardiac
currently markets its products primarily through independent sales
representatives in the United States and independent distributors in the
international markets. Also, Cardiac sells selected components and products on
an OEM basis to various U.S. and non-U.S. companies. Independent representatives
are paid by commission; independent distributors generally purchase Cardiac's
products at discounted prices. Cardiac advertises in scientific publications and
also uses trade shows and convention demonstrations, direct mail advertising,
telephone solicitations and direct sales to selected customers as part of its
marketing efforts.
Pricing of Cardiac's products is generally similar to that for
competing products. Cardiac focuses its marketing attention on the technological
advantages of its pacemakers rather than on price considerations. Cardiac bases
its appeal to physicians on Cardiac's belief in the relative simplicity with
which its reliable and therapeutically effective pacemaker systems can be
implanted, programmed and monitored. Cardiac focuses its marketing attention on
the issue of price sensitivity only when necessary. For example, under Medicare
legislation, the amount of
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reimbursement that a hospital and a physician receive from Medicare for a
pacemaker implant does not vary with the cost of the implanted pacemaker, and
Cardiac must consider this in its pricing decisions. See "- Government
Regulation."
Cardiac maintains inventories of pacing systems at many hospitals to
facilitate the immediate availability of these products when required. In
addition, Cardiac's independent sales representatives hold a supply of pacemaker
systems on consignment. A portion of Cardiac's sales in the United States are
filled by withdrawing products from consigned inventories, whereupon the
hospital is billed for the product.
Independent sales representatives, organizations and distributors
selling Cardiac's products are free to sell products not produced by Cardiac
that do not compete with Cardiac's products. As of September 30, 1998, 12
independent sales representatives (or organizations) are actively selling
Cardiac's products in the United States. Cardiac has executed long-term
contracts with most of its sales representatives in the United States.
Generally, the contractual agreements executed between Cardiac and its
independent sales representatives provide each representative the exclusive
right to sell Cardiac's products in a specified area of the United States for a
three- or five-year period, are renewable for a second three- or five-year
period, and provide Cardiac with certain termination rights.
Cardiac's operations, sales and ability to attain a profitable level of
operations are dependent upon expansion of its OEM business and maintaining the
contractual relationships with its principal sales representatives and upon
on-going expansion of their business volume. Termination of any of these
contractual agreements between Cardiac and its key independent sales
representatives could have a material adverse effect on Cardiac's sales volume
and operations. Furthermore, Cardiac's ability to achieve a profitable level of
operations would be adversely affected if Cardiac's sales representatives were
unable to expand the volume of their business.
On December 20, 1995, Cardiac signed a distribution agreement with
Grupo Taper, S.A. of Madrid, Spain under which, subject to certain pre-existing
distribution agreements, Grupo Taper became the sole agent for the purchase,
import and distribution and sales of Cardiac's product in Europe and certain
specified non-European countries. The agreement is for an initial period of
ten-years and will automatically renew for a five-year period unless terminated
by either party upon six month's prior notice.
In August 1996, Cardiac opened a Japanese sales office and received
Japanese approvals and a license to import and sell Cardiac's single-lead VDD
product. A major Japanese distributor, The Herz Co., has begun distributing the
product throughout Japan. Cardiac expects that these efforts will enable Cardiac
to expand sales in the Japanese market, where the average unit price is
significantly higher than in the rest of the world.
During the year ended March 31, 1998, two of Cardiac's independent
sales representatives each accounted for in excess of 10% of Cardiac's sales,
accounting for $897,492 (23%) of the total. With the exception of Intermedics
and a manufacturer of implantable Cardiac defibrillators, as disclosed below,
during the year ended March 31, 1998, no single domestic or international
customer accounted for in excess of 10% of Cardiac's sales. Accordingly, Cardiac
believes that the loss of any single customer in the United States, excluding
its OEM customers, would not have a material adverse effect on its business.
However, Cardiac's ability to maintain a profitable level of operations is
dependent upon its ability to increase its sales volume. Therefore, the loss of
any important customer in the United States could unfavorably impact Cardiac's
sales volume and its ability to achieve a profitable level of operations.
On August 1, 1990, Cardiac executed a license agreement and a supply
agreement with Intermedics. Pursuant to the license agreement, Cardiac received
initial license fees aggregating $1.5 million. The license agreement also
provided for the payment of royalties to Cardiac based upon net sales of
Intermedics products incorporating the licensed (single-pass lead) technology.
On April 2, 1993, Cardiac amended and restated both its license agreement and
supply agreement with Intermedics. Pursuant to the amended and restated license
agreement, Cardiac received prepayment of royalties in the amount of $850,000.
The prepayment was applied against royalties at a rate of 2/1 per pacing system
sold, reducing the potential aggregate royalties to be received over the life of
the agreement from $7,031,250 to $6,181,250. Further, pursuant to a subsequent
amendment, a $100,000 prepayment
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of future royalties was received in February 1994, which was applied against the
next 1,000 pacing systems sold at a rate of $100 per unit. The entire prepaid
royalties of $950,000 were earned by Cardiac as of March 31, 1997. Intermedic's
obligation to pay royalties under this license agreement terminated on January
22, 1998, however, the license agreement, which grants Intermedics the right to
manufacture and sell the technology, does not terminate until the expiration of
Cardiac's patent in July 2009. The supply agreement, which was to expire on July
31, 1993, was extended until August 1, 1998 and provided for Cardiac to supply
its specialized single-pass leads to Intermedics at specified prices. Sales to
Intermedics under the supply agreement accounted for 29% and 47% of total sales
for the years ended March 31, 1998 and 1997, respectively.
Cardiac executed a supply agreement and a joint development agreement,
both effective as of January 1, 1997, for defibrillation leads with a major
implantable defibrillator manufacturer. The supply agreement allows for the OEM
sale of defibrillation leads to this manufacturer, while the development
agreement contemplates the development and eventual supply of a second
proprietary lead. Sales and shipments of the first lead commenced in October
1997, and accounted for 13% of Cardiac's sales for the year ended March 31,
1998. In addition, a third lead was developed for this manufacturer and a supply
agreement for this product was executed on September 17, 1997, with the first
shipment of this product occurring in the second quarter of fiscal year 1999.
Cardiac expects total sales volume attributable to this customer to grow in
fiscal year 1999. Pursuant to the terms of the joint development agreement,
during fiscal year 1997, Cardiac received $200,000 from the manufacturer,
$60,000 of which was recorded as equity financing for the purchase by such
manufacturer of 40,000 shares of Cardiac's Common Stock, and $140,000 was
recorded as other income for the purchase of the defibrillation leads
technology.
On April 24, 1998, Cardiac executed a development agreement with a
privately held corporation to develop a new implantable lead for use with a new
hearing restoration system to be developed and marketed by the other
corporation. This new implantable system is expected to substantially improve
hearing for those patients with moderate to severe hearing loss for whom hearing
aids are ineffective. Based on verbal commitments and current purchase orders,
upon completion of the development of this new lead, Cardiac expects to
manufacture and supply this product on an OEM basis to the other corporation.
Historically, Cardiac encountered many difficulties in connection with
its efforts to develop a distribution network of independent sales
representative in the United States large enough to attain enough sales to
generate profitability. Cardiac believes that these difficulties are
attributable to Cardiac's lack of a complete product line as well as the
competitive environment, and Cardiac's financial position. With the Merger and
the combined product line, the new products being developed and released to the
market and the financing associated with the Merger, Cardiac expects to expand
its distribution. Further, Cardiac estimates its market share of pacing products
to be about 0.25% of an estimated worldwide pacing systems market of $2.0
billion. Cardiac considers the market large enough to accommodate Cardiac's
products.
PRODUCT WARRANTIES
Cardiac's pacemakers and electrode leads are both covered by a limited
warranty. Specific terms and conditions of the warranties vary according to the
pacemaker model and electrode lead. Generally, however, the warranty on a
pacemaker extends from 5 to 6 years, and the warranty on an electrode lead
continues for the patient's lifetime. All warranties provide for replacement
with a comparable Cardiac product and for partial reimbursement of medical
expenses not covered by third parties.
CERTAIN PATENTS, TRADEMARKS AND LICENSES
Cardiac's policy is to obtain patents on its inventions whenever
practical and to obtain licenses from others with regard to technology that it
deems necessary to its business. Technological advance has been
characteristically rapid in the industry in which Cardiac competes, and Cardiac
believes its business is not materially dependent upon any individual patent or
license. However, should certain of Cardiac's licenses be terminated for any
reason, Cardiac's operations and competitive ability could be adversely
affected.
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On June 12, 1984, Mr. Robert R. Brownlee, a former director and former
officer of Cardiac, assigned all rights, title and interest in United States
Patent No. 4,585,004, titled "Heart Pacing and Intracardiac Electrogram
Monitoring System and Associated Method," to Cardiac. The patent, issued on
April 29, 1986, applies to the specialized A-V Data/trademark/ ventricular leads
developed by Cardiac.
On November 14, 1985, all rights, title and interest in United States
Patent No. 4,726,379, titled "Cardiac Pacer with Switching Circuit for
Isolation," were assigned to Cardiac by two of its employees. The patent, issued
on February 23, 1988, applies to bipolar dual-chamber pacing methods.
On June 28, 1988, Mr. Robert R. Brownlee, assigned all rights, title
and interest in United States Patent No. 4,962,767, titled "Pacemaker Catheter"
to Cardiac. The patent, issued on October 16, 1990, applies to the A-Track
electrode leads used with Cardiac's SAVVI VDD pacing system.
On December 12, 1988, all rights, title and interest in United States
Patent No. 4,907,592, titled "Self-Sealing Connector for Electrical Leads for
Use in Wet Environments," were assigned to Cardiac by one of its employees. The
patent was issued on March 13, 1990.
On August 15, 1990, Mr. Robert R. Brownlee assigned all rights, title
and interest in United States Patent No. 5,127,403, titled "Pacemaker Catheter
Utilizing Bipolar Electrodes Spaced in Accordance to the Length of a Heart
Depolarization Signal" to Cardiac. The patent, issued on July 7, 1992, applies
to the A-Track electrode leads used with Cardiac's SAVVI VDD pacing system.
On July 11, 1995, Mr. Robert R. Brownlee assigned all rights, title and
interest in United States Patent No. 5,630,835, titled "Method and Apparatus for
the Suppression of Far Field Interference Signals for Implantable Device Data
Transmission Systems" to Cardiac. The patent, issued on May 20, 1997, applies to
the SAVVI VDD pacing system.
On March 20, 1996, Mr. Robert R. Brownlee assigned all rights, title
and interest in United States Patent No. 5,772,693, titled "Single Preformed
Catheter Configuration for a Dual Chamber Pacemaker System" to Cardiac. The
patent, issued on June 30, 1998, applies to the single-pass pacing leads
developed by Cardiac.
On March 4, 1996, Mr. Robert R. Brownlee assigned all rights, title and
interest in United States Patent No. 5,814,076, titled "Apparatus for Improved
Cardiac Pacing and Sensing using Extracardiac Indifferent Electrode
Configurations" to Cardiac. The patent, issued on September 29, 1998, applies to
selected pacing leads in research and development by Cardiac.
Cardiac obtained from Howard C. Hughes and Roy D. Bertolet, the latter
an employee of Cardiac, an exclusive license to an extrusion technique for
coating pacemaker leads and other wires with polyurethane, for which a patent
was granted on February 5, 1985. The term of the license expires on February 17,
2002. The license provides for payment of royalties for each contract year based
on a percentage of net sales of products produced using the licensed technology.
On March 29, 1993 the licensor executed a sublicense agreement with Cardiac,
pursuant to which Cardiac granted a limited sublicense allowing Intermedics to
use the extrusion technique to manufacture leads pursuant to the terms of the
amended and restated license agreement between Cardiac and Intermedics.
On March 5, 1997, an objection to Cardiac European Patent No. 0350282
relating to single-pass diagonal atrial bipolar pacemaker catheter technology
was heard in Munich, Germany. On March 24, 1997, Cardiac was advised that the
objection was rejected by the Patent Court. An appeal has been filed.
Cardiac uses various trademarks in association with marketing and sale
of its product lines. The MAESTRO trademark, used with Cardiac's pacemakers and
programmers, has been registered with the U.S. Patent and Trademark Office.
PolySafe, A-Track, A-V Data, TriFix/trademark/, Trabeculok/trademark/, SAVVI,
DAB, PacePro/trademark/, INTERIM and Surethane are unregistered trademarks of
Cardiac.
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RESEARCH AND DEVELOPMENT
Cardiac expended approximately $975,100 and $1,087,000 on research and
development activities during the fiscal years ended March 31, 1998 and 1997,
respectively. Research and development activity previously reported as
culminating in FDA submission was rewarded with FDA approval in October 1997 of
the MAESTRO Series 500 Model 534 dual-chamber, bipolar DDD pacing system and in
December 1997 of the INTERIM single-lead temporary pacing system.
Continued development of Cardiac's single-lead technology included the
development of a preshaped single-pass lead for VDD and DDD pacing. These leads
are believed to expand capability and use, as well as offer further enhancement
of performance relative to Cardiac's current single-lead products. Cardiac is
currently performing animal and human studies and plans to initiate chronic
human clinical studies in the second quarter of fiscal year 1999. This lead is
believed to offer further enhancement of performance with completion of limited
acute and chronic animal studies. In November 1996, a development relationship
was formally established with a manufacturer of implantable defibrillators for
the application of Cardiac's unique lead technology to the special challenges of
implantable defibrillation leads. See "- Sales, Marketing and Distribution
Methods."
The fiscal year ended March 31, 1998 included on-going activity in the
area of implementing design controls in compliance with Section 4.4, ISO 9001
Quality Standard and similar requirements of cGMP regulations.
RAW MATERIALS AND PRODUCTION
Although Cardiac endeavors to have alternative supply sources for parts
and materials used in manufacturing its products, single sources are used for
certain critical materials, including medical adhesives, integrated circuits,
hybrid microelectronic circuitry, lithium batteries, various other components,
and a material used to produce Surethane. The loss of any one of these single
sources or significant delivery delays could cause a costly delay in production.
Although Cardiac believes that various design or material alternatives could be
used, qualification of these could prove time-consuming and could require
notification to and clearance by the FDA.
SOURCES OF SUPPLY
Two of Cardiac's principal suppliers of materials used primarily in
electrode lead production, Dow and E.I. DuPont de Nemours & Co. ("DuPont"),
indicated that they will no longer supply their materials to the medical device
industry for use in implantable devices. In July 1993, the FDA published in the
Federal Register a one-time-only requirement for medical device manufacturers to
file a special notification of material supplier changes resulting from the
decision of Dow to discontinue supplying its materials to medical device
manufacturers. Cardiac filed the "Special Silicone Notification" for its
products effected by the Dow decision in September 1993. In this notification,
alternate suppliers and materials were identified and supporting technical
biological test data were provided for the alternate materials. The FDA
acknowledged receiving Cardiac's notification and indicated that, unless
otherwise notified by FDA, the alternate materials identified in the
notification may be used in Cardiac's products in place of the comparable Dow
materials. No further FDA approvals of the alternate materials of such suppliers
were required.
With respect to other material changes resulting from decisions by the
material suppliers to discontinue supplying the medical device industry, e.g.
DuPont, the FDA has indicated that such changes shall be handled on a
case-by-case basis through the established product approval processes within the
FDA. The availability of materials suitable for use in implantable medical
devices is an industry-wide problem and is not unique to Cardiac or to the
cardiovascular device segment of the industry. The Polymer Technology Group
produces a product that meets manufacturing requirements and has been identified
as a tentative replacement for the DuPont supplied material. Biocompatibility
studies have been completed. Since the candidate replacement material is
comprised of the same chemical composition as the DuPont material, it is
expected that it will be comparable with respect to the performance
characteristics and biocompatibility of the current material in use. Similarly,
FDA approval of this replacement material is anticipated to be forthcoming based
upon a satisfactory outcome of the testing performed.
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Cardiac believes, however, that it has a sufficient supply of the DuPont
material to meet Cardiac's anticipated demand for the next several years.
Suppliers of custom Application Specific Integrated Circuits ("ASICs")
have advised Cardiac that the technology used to produce these ASICs will no
longer be supported. As such, Cardiac placed one last bulk order to ensure the
availability of sufficient ASICs to satisfy projected demands for product. The
new pacing system under development will utilize appropriate new ASICs for the
new system obviating the need for perpetual supply of the currently used ASICs.
INSURANCE
Cardiac maintains what it believes to be an adequate amount of
comprehensive general liability insurance in an amount of $2,000,000 and what it
believes to be a reasonable amount of products liability coverage in an amount
of $1,000,000. No assurance can be given that the products liability coverage
will be sufficient to protect Cardiac's assets against claims by users of its
products or that Cardiac will be able to maintain such coverage (or obtain
additional coverage) in the future at reasonable premium rates or at all, in
which case its assets will be at risk in the event of successful claims by users
of its products. Furthermore, Cardiac's liability coverage may not cover costs
incurred by Cardiac under its product warranties (see - "Product Warranties") or
costs incurred by Cardiac in the event of a product recall.
Cardiac has no pending, threatened or actual claims as of this date,
nor is Cardiac aware of any current circumstances that might give rise to such
claims. However, Cardiac could be exposed to possible claims for personal injury
or death resulting from the sale or subsequent malfunction of allegedly
defective products.
EMPLOYEES
As of September 30, 1998, Cardiac employed 47 persons full-time. Of the
total employees, 23 were engaged in manufacturing and quality control, 7 in
general administration and executive activities, 14 in engineering and research
and development, and 3 in sales and marketing. Cardiac is not a party to any
collective bargaining agreement and considers its relations with its employees
to be good.
GOVERNMENT REGULATION
FEDERAL REGULATIONS. In the United States, the FDA, among other
government agencies, is charged with regulating the introduction to the
marketplace of new medical devices, related manufacturing and laboratory
practices, and labeling and record keeping for such devices. The FDA has the
authority to ban, detain or seize "adulterated or misbranded" medical devices,
and may also order repair, replacement or refund and require notification of
health professionals and others with regard to medical devices that present
unreasonable risks or substantial harm to the public health. The FDA may also
proceed through court action to enjoin and restrain or initiate action for
criminal prosecution of certain violations of the FDA Act pertaining to medical
devices.
Most implantable cardiac pacemakers fall within a category for which
the FDA has stringent clinical investigation and premarket clearance
requirements. Such regulation tends to lengthen the time for introducing new
products in the United States, and to increase the expense of developing and
marketing such products. Moreover, the FDA administers certain controls over
approvals for exporting such devices from the United States.
FDA regulations require a company to file a 510(k) Premarket
Notification for certain products demonstrating that the products are
substantially equivalent to products that were introduced into interstate
commerce for commercial distribution before May 28, 1976 (pre-enactment devices)
or to products which the FDA has already found to be substantially equivalent to
pre-enactment devices. The FDA has also issued regulations for the PMA of
medical devices that are not substantially equivalent to pre-enactment devices
(such as Cardiac's dual-chamber and single-lead atrial-controlled ventricular
devices). These must be cleared for commercial distribution through a PMA
submission or a PMA supplement. The regulations will eventually require a PMA
submission for all products (such as Cardiac's single-chamber devices)
previously cleared for commercial distribution through
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premarket notifications. Prior to seeking PMA clearance for a medical device, a
company is generally required to complete a clinical evaluation in accordance
with Investigational Device Exemption ("IDE") regulations. The time and expense
associated with the clinical investigation and premarket clearance requirements
of the FDA are substantial.
Many of the new products developed by Cardiac in the future most likely
will be subject to the IDE and/or PMA regulations of the FDA. Accordingly,
Cardiac will continue to devote significant time to the FDA regulatory process
leading to FDA market clearance of new products developed by Cardiac.
FDA regulations require Cardiac to register its manufacturing
establishment with the FDA, list all medical devices that are manufactured and
distributed by Cardiac, observe certain production and labeling standards and
submit to unscheduled inspections by the FDA. Other FDA regulations relate to
repair and replacement of devices, refund of purchase price and notification of
risks, record keeping and reporting, and restrictions on the sale, distribution
or use of certain devices.
In recent years the FDA has implemented product tracking and electrode
lead post-market surveillance regulations. These regulations require Cardiac to
track and maintain information regarding the location of product not in its
direct possession. The post-market surveillance regulations require Cardiac to
collect and analyze clinical data to complete product longevity analysis. The
expense to Cardiac to meet these regulations has been minimal to date. The
potential for a material expense due to these regulations remains a possibility.
The average pacemaker recipient in the United States is of advanced
age. Most pacemaker recipients thus are eligible for Medicare. Therefore, in
addition to FDA and similar foreign regulations, Cardiac may also be affected by
changes in the laws and regulations relating to Medicare.
Cardiac's products are manufactured by Cardiac under closely controlled
environmental conditions with processes developed by engineering personnel and
monitored by quality assurance personnel. These processes are designed to be
consistent with cGMP regulations audited by the FDA. FDA conducted an audit of
Cardiac operations in December 1996 citing only minor deficiencies which have
since been corrected.
STATE REGULATION. In addition to Federal law, Cardiac is subject to the
Florida Drug and Cosmetic Act. In particular, Cardiac is required to maintain a
permit to operate a medical device manufacturing facility and must register its
medical devices with the appropriate Florida authority. All such required
permits have been received, and registrations made, by Cardiac.
EUROPEAN REGULATION. The EEC nations have adopted universal standards
as developed by the ISO in order to provide simplified trade among the member
nations and to assure free access to trade while maintaining quality standards
for products sold. All companies doing business in these nations must be
certified to these standards set forth by the EEC which is evidenced by being
granted the CE Mark. See "CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Operating Trends And
Uncertainties."
INVENTORY AND BACKLOG
There is a several-month lead time between the time that Cardiac
acquires parts until such time that a product is completed and available for
sale. Cardiac is required to carry significant amounts of inventory in order to
meet rapid delivery requirements of customers and assure itself a continuous
supply of key components and parts from its suppliers. In addition, a portion of
Cardiac's business is consignment in nature where Cardiac provides customers
with the right to return products that are not implanted or sold. As a result of
the nature in which Cardiac runs its business, it does not carry a significant
backlog, however inventory management is an important business concern both with
respect to Cardiac's liquidity and due to the potential for rapidly changing
business conditions and technological advances within the industry.
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COMPETITION IN THE INDUSTRY
Cardiac competes with many other domestic and foreign companies, many
of which have significantly greater financial and other resources than Cardiac.
The industry is currently dominated by Medtronic, Inc., Intermedics, Cardiac
Pacemakers, Inc. (a division of Guidant Corporation), and Pacesetter Systems,
Inc. (a division of St. Jude Medical, Inc.). Although many of the larger
companies have a group of loyal physicians who use their products exclusively,
most physicians use more than one pacemaker supplier.
Technological innovation and sales ability are important with respect
to market entry and penetration. Cardiac believes that the primary competitive
factors determining the buying decision in the marketplace today include the
ability to reduce procedural cost, increase patient safety and improve product
effectiveness. Other factors include product reliability, product capability,
technical support provided by the manufacturer, price, and credibility of the
manufacturer. Nevertheless, Cardiac's products are subject to the risk of being
rendered obsolete by the introduction of new products or techniques by others.
Some of the conditions and diseases that Cardiac's pacemakers are
designed to treat may, in certain cases, also be treated by drug therapy.
Cardiac does not deem itself to be in substantial direct competition with
pharmaceutical companies because, at present, drug therapy is only infrequently
a viable alternative to use of a pacemaker. However, new drugs and methods of
therapy that might compete with Cardiac's pacemaker products may be developed by
pharmaceutical or other health care companies. Many such companies are larger
than Cardiac and possess more substantial research facilities and other
resources.
Companies that are already well established can be expected to protect
their existing market shares. This is coupled with increasing marketing costs
under heavier competition, and escalating regulatory burdens. In addition, there
is an overriding necessity to increase research and development expenditures in
order to remain competitive.
PROPERTY
Cardiac owns and occupies a 50,000 square foot building on 4.11 acres
of land in Palm Coast, Florida. The facility houses Cardiac's headquarters and
its research and development, manufacturing, administrative and marketing
divisions. The facility includes a 3,000 square-foot controlled environment area
for the manufacture of Cardiac's medical products, and 18,000 square feet of
unimproved space that is not in use. The production capacity of Cardiac's
existing facility is greater than current production levels and should be
sufficient to meet Cardiac's needs for at least the next several years. In the
opinion of management, the property is adequately covered by insurance.
Sirrom holds a first mortgage on Cardiac's premises and a first lien
against all of Cardiac's real and personal property (including patents and
royalties) but, excluding inventory and accounts receivable. In June 1997,
Cardiac obtained additional financing from Coast, pursuant to which Sirrom
subordinated its first priority security interest in Cardiac's real and personal
property to Coast; however, the priority interest of Coast in Cardiac's real
estate is limited to $500,000. See "RISK FACTORS - Consequences of Default under
Debt Obligations."
LEGAL PROCEEDINGS
On January 4, 1994, Strategica Group, Inc., a Miami-based financial
brokering firm ("SGI"), filed suit against Cardiac in the Circuit Court of the
11th Judicial Circuit in and for Dade County, Florida (the "Court"), alleging
that Cardiac had breached certain contractual duties and obligations arising
under an agreement (the "Agreement"), dated October 16, 1992. The suit seeks a
judgment requiring Cardiac to deliver warrants to purchase shares of Cardiac
Common Stock representing 15% of the total outstanding shares of Cardiac, and
damages in excess of $15,000. Cardiac has denied liability and filed a
counterclaim alleging that SGI fraudulently induced Cardiac into the Agreement
then breached the Agreement and certain fiduciary duties. Management has
vigorously defended the lawsuit and filed counterclaims, and believes the
ultimate outcome would not be expected to materially affect Cardiac's financial
position. Management has had settlement discussions with SGI and in April 1998
reached an agreement-in-principle regarding settlement with SGI. The final terms
have not yet been reduced to writing.
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The settlement, as proposed, contemplates the reciprocal dismissal of all claims
asserted by each party and the grants by Cardiac to SGI of a warrant exercisable
within five (5) years for 125,000 shares at an exercise price of $.20 per share.
In December, 1997, Japan Crescent, Inc. and Shinji Hara filed a civil
action against Cardiac in the Circuit Court of the 9th Judicial Circuit in and
for Orange County, Florida. The suit alleges that Cardiac is indebted to the
plaintiffs for approximately $200,000 for services rendered in connection with
the acquisition of import approvals for certain of Cardiac's products. Cardiac
has answered the complaint and has informed the plaintiffs that Cardiac intends
to pay for the total value of the services rendered of approximately $200,000
with funds obtained through its public offering in connection with the Merger,
however, if a judgment were to be entered against Cardiac prior to the
consummation of the public offering requiring Cardiac to pay in excess of a few
thousand dollars in any lump-sum payment before Cardiac has obtained additional
financing, Cardiac could, depending upon the amount of such lump-sum payment, be
unable to make such a payment and this could have a material adverse effect on
Cardiac's business.
CARDIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cardiac's liquidity benefited from the Coast Loan whereby Coast agreed
to lend Cardiac an amount not to exceed $3,500,000, subject to limitations
relating to the value of receivables and inventories and including a capital
expenditure sub-line up to $500,000 and a term loan in the sum of $300,000, of
which the latter two are repayable over a forty-eight month period. On June 6,
1997, as consideration for Sirrom subordinating its interests to Coast, Cardiac
issued to Sirrom a warrant to purchase 50,000 shares of Cardiac Common Stock
exercisable commencing immediately and expiring June 6, 2002 at an exercise
price of $5.00 per share. In connection with the Coast Loan, on June 13, 1997,
Cardiac issued to Coast a warrant to purchase 37,500 shares of Cardiac Common
Stock exercisable commencing immediately and expiring June 30, 2002 at an
exercise price of $4.00 per share. On June 11, 1998, Cardiac and Coast executed
the Bridge Loan, pursuant to which Cardiac received an additional $250,000. In
connection with the Bridge Loan, Cardiac issued to Coast a warrant to purchase
25,000 shares of Cardiac Common Stock exercisable commencing immediately and
expiring June 30, 2002 at an exercise price of $.40 per share and the exercise
price per share of the warrant issued to Coast in connection with the Coast Loan
was reduced from $4.00 per share to $.40 per share. As of September 30, 1998,
Cardiac had outstanding indebtedness of approximately $1,046,000 under the loan.
From April 22 through May 4, 1998, Cardiac obtained $300,000 in interim
financing from selected current investors through issuance of an 8% convertible
debenture, convertible at current market price of $0.40 per share. In
consideration for this investment Cardiac lowered the exercise price of
previously issued options to purchase 3,571 shares of Cardiac Common Stock from
$3.50 per share and lowered the exercise price of certain warrants to purchase
16,811 shares of Cardiac Common Stock from $5.00 per share, to $.40 per share.
Cardiac is also attempting to obtain an additional $250,000 on similar terms.
There can be no assurance that Cardiac's attempts to obtain additional financing
will be successful.
On July 30, 1998, and August 13, 1998, Cardiac executed promissory
notes in favor of Minrad, Inc. ("Minrad") in the amount of $75,000 and $125,000,
respectively (collectively, the "Minrad Note"). The Minrad Note bears interest
at the rate of 15% annually, and the principal amount and all interest due
thereunder is due and payable, after September 29, 1998, within ten (10) days
after written demand from Minrad.
On August 26, 1998, Cardiac received $134,000 from IHI and executed the
IHI Note in favor of IHI. Concurrently with execution of the IHI Note, Cardiac
paid Goodbody International, Inc., a related company of IHI ("Goodbody"), a
$34,000 consulting fee for services relating to the obtaining of additional debt
financing. Pursuant to the terms of the IHI Note, Cardiac has agreed to repay
the IHI Note the day after the receipt of funds from the
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contemplated public offering to be undertaken by CTG in connection with the
Merger and the Restructuring Merger, or October 25, 1998, whichever comes first.
If Cardiac does not repay the IHI Note on or before October 25, 1998, but does
so on or before November 12, 1998, in addition to repayment of the IHI Note,
Cardiac has agreed to pay the Goodbody Fee. If repayment of the IHI Note and the
Goodbody Fee have not been received by IHI on or before November 12, 1998, an
immediate penalty fee of $2,500 shall be incurred at 12:01 a.m. on November 13,
1998, and an additional $2,500 fee will accrue and be imposed at 12:01 a.m.
every 24 hours, until the IHI Note, the Goodbody Fee and all penalty fees have
been paid in full.
In connection with the IHI Note, Cardiac has agreed to issue up to four
warrants to IHI under certain conditions, each giving IHI the right to purchase
50,000 shares of Cardiac Common Stock at an exercise price of $.01 per share. If
repayment of the IHI Note and the Goodbody Fee have not been received by IHI on
or before November 12, 1998, at 12:01 a.m. on November 13, 1998, the first of
the four warrants will be deemed issued to and earned by IHI. At 12:01 a.m. on
the 13th day of each month thereafter for up to three months, one additional
warrant shall be issued and deemed earned, if the IHI Note, the Goodbody Fee and
all penalty fees have not been paid in full. Furthermore, if the IHI Note, the
Goodbody Fee and all penalty fees have not been paid in full by January 1, 1999,
IHI will have the option to convert any or all of the amounts due into Cardiac
Common Stock at an exercise price of $.01 per share. As additional consideration
for the IHI Note, IHI received a warrant to purchase 330,000 shares of Cardiac
Common Stock at an exercise price of $0.128 per share, exercisable at any time
on or before 5:00 p.m. Eastern Standard Time on August 26, 2003.
The interest and warrant provisions and other inducements which Cardiac
is required to offer to obtain capital are becoming increasingly more
burdensome. Interim financing of Cardiac pending the consummation of the Merger
and the Restructuring Merger is extremely difficult to obtain. If Cardiac is
unable to obtain additional interim financing it might not be able to survive
until November, the expected time of the consummation of the Merger, the
Restructuring Merger and public offering.
As of September 30, 1998, Cardiac had no commitments for the
acquisition of capital assets. As of that date, it did have material commitments
pursuant to certain inventory procurement contracts of $859,397. Cardiac does
not anticipate any significant capital expenditures during the next twelve
months.
Cash used by operations during fiscal year 1998 approximated $49,000.
Capital expenditures and repayment of long-term debt obligations additionally
utilized approximated $472,000 and $330,000, respectively. Proceeds under the
line of credit and long-term borrowings approximated $1,239,000. Deferred
financing and Merger costs absorbed approximately $575,000. Overall, negative
cash flow for fiscal year 1998 approximated $164,000.
Cash generated by operations during fiscal year 1997 approximated
$57,000. Capital expenditures and repayment of debt obligations during fiscal
year 1997 approximated $545,000 and $875,000 respectively. Net proceeds from the
issue of common stock and stock warrants during fiscal year 1997 approximated
$301,000. Proceeds from notes and debt obligations approximated $163,000.
Overall, negative cash flow for fiscal year 1997 approximated $982,000.
As indicated by the independent public accountants in the report and as
shown in the financial statements, Cardiac has experienced significant operating
losses which have resulted in an accumulated deficit of $21,901,927, as of March
31, 1998. In addition, as discussed below, royalty payments from
Intermedics/trademark/ ceased in January 1998. These conditions raise
substantial doubt about Cardiac's ability to continue as a going concern.
Intermedic's obligation to pay royalties under its license agreement
with Cardiac terminated on January 22, 1998, however, the license agreement
which grants Intermedics the right to manufacture and sell the technology does
not terminate until the expiration of Cardiac's patent in July 2009. During the
fiscal years ended March 31, 1998 and 1997, Cardiac recorded $2,063,250 and
$2,394,250 in royalty income, respectively, from Intermedics. The termination of
those royalty obligations will have and has had a material adverse effect on
Cardiac's working capital.
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The financing proposed to satisfy the condition to consummation of the
Merger is intended to enable the combined companies to meet their obligations
for at least the first 24 months post closing of the Merger. The business plan
anticipates that the combined companies will, within 12 to 18 months after
completion of the Merger, be able to achieve a positive operational cash flow at
least sufficient to support normal operating and research and development
activity.
Relative to its current operations and the loss of royalty income from
Intermedics, Cardiac has taken the following actions to increase cash
availability:
a. Cardiac reduced its staff and operating expenses;
b. Cardiac expanded its revenue base by adding additional OEM
customers, and providing leads to a new implantable defibrillator
customer and to a new manufacturer of otologic implants; and
c. Obtained $915,000 in additional cash through the Bridge Loan, the
issuance of 8% convertible debentures, execution of both the Minrad
Note and the IHI Note, and is attempting to issue more 8%
convertible debentures for an additional $250,000.
These steps should be adequate to address liquidity needs until closing
of the Merger. If however, the Merger is not consummated, then additional cash
will have to be raised and significant additional staff and operating expense
cuts will have to be made to conserve cash. Cardiac would attempt to acquire
another entity or to be acquired itself by another entity. If another merger did
not occur, then without an additional infusion of cash, a significant increase
in revenue and a substantial reduction in operating expenses, Cardiac could not
survive.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED JUNE 30, 1998 COMPARED TO FISCAL QUARTER ENDED JUNE 30,
1997.
OVERVIEW. Cardiac's total revenues for the first quarter of fiscal year
1999 decreased 60% to approximately $621,000 from approximately $1.5 million for
the first quarter of fiscal year 1998. Sales decreased from approximately
$852,000 to approximately $621,000 and royalties decreased from approximately
$697,000 to zero. Costs and expenses in the first quarter of fiscal year 1999
decreased 32% to approximately $1.13 million from approximately $1.71 million in
the first quarter of fiscal year 1998, which, with the decrease in total
revenues, resulted in an operating loss of $509,319 in the first quarter of
fiscal year 1999 as compared to an operating loss of $155,746 in the first
quarter of fiscal year 1998. The net loss in the first quarter of fiscal year
1999 increased to $665,297 from $232,348 in the first quarter of fiscal year
1998.
SALES. Total Sales in the first quarter of fiscal year 1999 decreased
by $257,340 or 27% to $620,777 from the level of $852,288 achieved in the first
quarter of fiscal year 1998. Pacemaker unit sales decreased by 49% and pacemaker
dollar sales decreased by 46%. This decline reflects sales worldwide, and is due
to loss of sales to competition because of Cardiac's lack of a pacemaker
generator with rate response and other diagnostic features. Sales of pacing
electrode leads decreased by $208,230, which was largely offset by sales of
$166,625 for Cardiac's newly-introduced defibrillation electrode leads to a new
OEM customer. The decline in pacing lead sales was the result of a 59% decline
in units reflecting a reduction both in complete systems sold (pacemakers with
leads), as well as in leads sold to Intermedics. The reduction in sales to
Intermedics is perceived to be due to the reduction of internal inventories
maintained by Intermedics, as well as a reduction of sales of this product by
Intermedics to its customers. Penetration of the Japanese market has, so far,
been below expectations, but management believes that the long-term potential of
the Japanese and Asian markets and the more effective marketing and distribution
process intended to result from the proposed Merger warrant further perseverance
in this area.
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Sales by geographic area for the first quarters of fiscal years 1999
and 1998 are as follows:
GEOGRAPHIC AREA 1999 1998
--------------- ---- ----
United States $565,321 $781,009
International $ 55,456 $ 71,279
-------- --------
$620,777 $852,288
======== ========
Sales by product line for the first quarters of fiscal years 1999 and
1998 are as follows:
PRODUCT LINE 1999 1998
------------ ---- ----
Pacemakers $244,062 $449,512
Electrode Leads $344,024 $385,629
Other $ 32,691 $ 17,147
-------- --------
$620,777 $852,288
======== ========
ROYALTY INCOME. Royalty income represented royalty fees from
Intermedics pursuant to a license agreement between the Company and Intermedics,
whereby Cardiac licensed certain technology relating to its single-pass
atrial-controlled ventricular pacing system. Royalty fees under this agreement
terminated on January 22, 1998.
COST OF PRODUCTS SOLD. Cost of products sold in the first quarter of
fiscal year 1999 was $326,090, compared to $503,815 in the first quarter of
fiscal year 1998, representing a decrease of 35% as compared with a sales
decrease of 27%, which improved the rate of gross margin from 41% to 47%. This
improvement was largely due to improved overall selling prices in both the
domestic and the international markets and manufacturing efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $469,091 in the first quarter of fiscal year 1999,
representing a decrease of 37% from $743,072 in the first quarter of fiscal year
1998. Selling expenses were $158,770 in the first quarter of fiscal year 1999
compared to $346,377 in the first quarter of fiscal year 1998, representing a
decrease of 54%, largely due to a decrease of $137,764 in volume dependent sales
commissions and royalty expenses. General and administrative expenses were
$310,321 in the first quarter of fiscal year 1999 compared to $396,695 in the
first quarter of fiscal year 1998 representing an decrease of 22% due largely to
reduced employment costs.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research
and development expenses were $334,915 in the first quarter of fiscal year 1999,
representing a reduction of 27% from the level of $458,272 in the first quarter
of fiscal year 1998 due to reduced activity and employment costs.
OTHER INCOME AND EXPENSES. Interest income was $317 in the first
quarter of fiscal year 1999, compared to $5,983 in the first quarter of fiscal
year 1998. Total interest expense in the first quarter of fiscal year 1999
increased to $156,295 from the level of $82,586 incurred during the first
quarter of fiscal year 1998, due largely to additional interest arising in the
first quarter of fiscal year 1999 on the Coast Loan.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
OVERVIEW. Cardiac's total revenues for fiscal year 1998 decreased 11%
to approximately $5.9 million from approximately $6.6 million for fiscal year
1997. Sales decreased from approximately $4.2 million to approximately $3.8
million and royalties decreased from approximately $2.4 million to approximately
$2.1 million. Royalty income represented royalties from Intermedics pursuant to
a license agreement between Cardiac and Intermedics;
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royalty income under this agreement ceased on January 22, 1998. The decrease in
revenue, partially offset by a 8% decrease in costs and expenses to
approximately $6.6 million as compared to approximately $7.2 million in fiscal
year 1997, resulted in an operating loss of $726,399 as compared to an operating
loss of $575,464 in fiscal year 1997. Interest expense in fiscal year 1998
increased to $523,949 as compared to $490,508 in fiscal year 1997 due to an
increase in the amount borrowed under the Coast Loan. Other Income decreased to
$941 in fiscal year 1998 from $167,300 in fiscal year 1997. The net loss in
fiscal year 1998 increased to $1,239,710 from $881,240 in fiscal year 1997.
SALES. Total Sales in the fiscal year ended March 31, 1998 decreased by
$377,988 or 9.0% to $3,823,059 from the level of $4,201,047 achieved in the
prior year. Pacemaker unit sales decreased by 1.6% and pacemaker dollar sales
decreased by 3.8%, as pacemaker average selling prices declined by 2.2% due to
competitive pressures. The average selling prices of pacing electrode leads
improved by 6.0%, but their unit sales declined by 40%, due to reduced demand
from an established OEM customer, resulting in a net revenue reduction of
$808,421, which was largely offset by initial sales of $503,500 for Cardiac's
newly introduced defibrillation electrode leads to a new OEM customer.
Penetration of the Japanese market has, so far, been below expectations, but
management believes that the long-term potential of the Japanese and Asian
markets and the more effective marketing and distribution process intended to
result from the Merger warrant continued perseverance in this area.
Sales by geographic area for fiscal years 1998 and 1997 are as follows:
GEOGRAPHIC AREA 1998 1997
--------------- ---------- ----------
United States $3,067,963 $3,486,511
International 755,096 714,536
---------- ----------
$3,823,059 $4,201,047
========== ==========
Sales by product line (including product assemblies) for fiscal years
1998 and 1997 are as follows:
PRODUCT LINE 1998 1997
------------ ---- ----
Pacemakers $1,678,905 $1,744,528
Hybrid Circuits 258,250 222,303
Electrode Leads 1,866,721 2,171,641
Other 19,183 62,575
---------- ----------
$3,823,059 $4,201,047
========== ==========
ROYALTY INCOME. Royalty income represented royalty fees from
Intermedics pursuant to a license agreement between Cardiac and Intermedics,
whereby Cardiac licensed the technology relating to its single-pass
atrial-controlled ventricular pacing system. Royalty fees under this agreement
terminated on January 22, 1998.
COST OF PRODUCTS SOLD. Cost of products sold in fiscal year 1998 was
$2,339,973, compared to $2,378,743 in fiscal year 1997, representing a decrease
of 1.6% as compared with the sales decrease of 9%, which reduced the gross
margin from 43% to 39%. This reduction was largely due to lower selling prices
for pacers and pacer assemblies in the European markets due to competitive
pressures and increased rates of manufacturing overhead cost arising from
reduced production volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,496,818 in fiscal year 1998, representing a
decrease of 17% from $3,013,724 in fiscal year 1997. Selling expenses were
$1,052,038 in fiscal year 1998 compared to $1,591,807 in fiscal year 1997,
representing a decrease
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of 34%, largely due to a decrease of $312,327 in volume dependent sales
commission and royalty expenses, employment costs reductions of $141,944, and
additional cost reductions. General and administrative expenses were $1,444,780
in fiscal year 1998 compared to $1,421,917 in fiscal year 1997, representing an
increase of 1.6%, despite increases totaling $74,000 in bank and finance
charges, insurance costs and overseas taxes.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research
and development expenses were $1,775,917 in fiscal year 1998, representing no
significant change from $1,778,294 in fiscal year 1997 due to the continued
development activities in the areas of single pass electrode leads, bipolar
dual-chamber operation, light weight pulse generator, rate responsive pacing and
the PacePro/trademark/ programmer.
OTHER INCOME AND EXPENSES. Interest income was $9,697 during fiscal
year 1998, compared to $17,432 during fiscal year 1997. Interest expense
increased in fiscal year 1998 to $523,949 from $490,508 in fiscal year 1997 due
largely to additional interest arising in fiscal year 1998 since June 13, 1997
on the loan from Coast.
OPERATING TRENDS AND UNCERTAINTIES
SALES. The ability of Cardiac to attain a profitable level of
operations is dependent upon expansion of sales volume, both domestically and
internationally, and continued development of new, advanced products. Cardiac
believes that with the continued release of new products, its world-wide market
expansion, and the addition of new OEM corporate customers, it will have the
potential to increase sales.
EEC nations have adopted universal standards as developed by the ISO in
order to provide simplified trade among the member nations and to assure free
access to trade while maintaining quality standards for products sold. All
companies doing business in these nations must be certified to these standards
set forth by the EEC which is evidenced by being granted the CE Mark. Standards
for active implantable medical products were implemented January 1, 1993 with a
transition period ending December 31, 1994. Cardiac Quality System received
certification to the ISO 9002 on November 19, 1996. The CE Mark certification
was issued by the Notified Body, TUV Product Services, of Munich, Germany,
during the second quarter of fiscal 1996 for Cardiac's products intended for
sale in Europe. Cardiac was audited in July 1997 by TUV Product Services as part
of the annual review of the certified Quality System. As a result of the TUV
Product Services audit the Quality System certificate was renewed. After renewal
of the ISO 9002 certificate, Cardiac developed improved design control processes
for its Quality System and received certification to the ISO 9001 on September
15, 1998. ISO 9001 certification means Cardiac meets the highest and most
stringent International product quality standards.
Until March 1995, Cardiac was the only manufacturer commercially
marketing single-lead atrial-controlled ventricular pacemakers. However,
Intermedics, a competitor of Cardiac, received FDA clearance to commercially
market a single-lead atrial-controlled ventricular pacemaker that it developed
utilizing Cardiac's technology pursuant to license and supply agreements with
Cardiac. Intermedics commenced marketing its new pacemakers in March 1995. In
addition, other competitors have also commenced marketing competitive
single-lead products.
Although the introduction of the new single-lead pacemakers poses
competition for Cardiac, management believes that Cardiac will benefit from such
competition since the new competition will increase the visibility of
single-lead, atrial-controlled ventricular pacemakers in the marketplace and
thereby increase market acceptance of the product. Further, management believes
that there is a sufficient market to accommodate both Cardiac's and other
competitive pacemakers. Cardiac estimates its market share of pacing products to
be about 0.25% of an estimated worldwide pacing systems market of $2.0 billion.
Various factors impact on a firm's ability to increase market share
including, but not limited to, the financial strength of the firm, the ability
of the firm and its competitors, and the time involved in obtaining FDA
clearance for new or improved products. Therefore, although management believes
that Cardiac is well poised for viable growth, management cannot predict the
degree of market share Cardiac can obtain. Factors beyond Cardiac's control may
impede its progress and in such event, its business and operations would be
adversely impacted.
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Cardiac's ability to successfully compete with Intermedics and other
pacemaker manufacturers will depend on Cardiac's ability to supply product and
recruit and increase a quality sales force and continue to develop and release
new advanced products. Cardiac historically has been restricted in its marketing
capabilities due to financial constraints impeding its ability to supply
products and recruit and train a sales force. However, Cardiac believes that the
resources and products available with the Merger, and the associated funding to
be obtained in connection with the Merger, will position the combined companies
to be able to develop effective sales and marketing, and research and
development programs.
As discussed above, the manufacture for and sale of leads to
Intermedics produce income for Cardiac. Cardiac sells electrode leads to
Intermedics for its new systems under an amended and restated supply agreement
that expired on August 1, 1998.
It is anticipated that Intermedics will eventually develop its own
manufacturing capability for electrode leads necessary for its new pacemakers.
However, any such development will take time. Although Cardiac does not know how
long it will take Intermedics to develop its own manufacturing capability, added
to any such development period would be the time necessary to obtain FDA
clearance of its manufacturing process. Thus, although Cardiac cannot guarantee
that it will continue to supply Intermedics with products, Cardiac anticipates
providing Intermedics with existing or new leads for the next few years without
a supply agreement on the same or similar terms and conditions that Cardiac
sells to other similar customers. However, in the event Intermedics receives FDA
approval in a shorter time-frame than anticipated, or other events occur which
causes a decrease in Intermedics' orders, Cardiac's business and operating
results would be adversely affected.
SOURCES OF SUPPLY. Two of Cardiac's principal suppliers of materials
used primarily in electrode lead production, Dow and DuPont, indicated that they
will no longer supply their materials to the medical device industry for use in
implantable devices.
The availability of materials suitable for use in implantable medical
devices is an industry-wide problem and is not unique to Cardiac or to the
cardiovascular device segment of the industry. The Polymer Technology Group
produces a product that meets manufacturing requirements and has been identified
as a tentative replacement for the DuPont supplied material. FDA approval of
this replacement material is anticipated to be forthcoming based upon a
satisfactory outcome of testing performed on the product. Cardiac believes,
however, that it has a sufficient supply of the DuPont material to meet
Cardiac's anticipated demand for the next several years. See "BUSINESS OF
CARDIAC - Sources of Supply."
Suppliers of custom ASICs have advised that the technology used to
produce these ASICs will no longer be supported. As such, Cardiac placed one
last bulk order to ensure the availability of sufficient ASICs to satisfy
projected demands for product. The new pacing system under development will
utilize appropriate ASICs for the new system obviating the need for perpetual
supply of the currently used ASICs.
YEAR 2000 ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the year 2000. Some
older computer systems stored dates with only a two-digit year with an assumed
prefix of "19". Consequently, this limits those systems to dates between 1900
and 1999. If not corrected, many computer systems and applications could fail or
create erroneous results by or at the year 2000.
Cardiac has undertaken to review the potential impact of the Year 2000
issue. Such assessment has included a review of the impact of the issue in
primarily four areas: products, manufacturing systems, business systems and
miscellaneous/ other areas. Based on the results of its initial review, Cardiac
does not anticipate that the Year 2000 issue will impact operations or operating
results. Cardiac is in the process of testing its systems which may be affected
by the Year 2000 issue and estimates that all affected systems can be tested,
upgraded and replaced before they cause any operational problems. This upgrading
is estimated to take less than four man-months of effort. In order to insure
Year 2000 compliance, Cardiac has created a task force to periodically review
their areas of concern. This task force is to meet on a quarterly basis through
the middle of year 2000.
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Management believes that the incremental costs associated with achieving Year
2000 compliance will not be material to Cardiac's operating results.
Cardiac relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
operations. At this time, it is impossible to assess the impact of the Year 2000
issue on each of these organizations. There can be no guarantee that the systems
of other unrelated entities on which Cardiac relies will be corrected on a
timely basis and will not have a material adverse effect on Cardiac. Cardiac's
task force has identified the other organizations which are critical to
Cardiac's continued operations. Cardiac intends to survey these organizations to
determine the impact of the Year 2000 on their operations and their plans for
addressing any potential concerns. Cardiac expects that this assessment will be
completed in the fourth quarter of 1998 and expects that any issues will be
resolved by the end of the second calendar quarter of 1999.
INFLATION AND CHANGING PRICES
In the opinion of Cardiac's management, the rate of inflation during
the past two fiscal years has not had any material impact on Cardiac's
operations. Because of the implementation of cost containment and new Medicare
regulations, any increase in sales revenues is expected to result from an
increase in the volume of business rather than from an increase in selling
prices. Cardiac's pricing structure may not reflect inflation rates, due to
constraints of Medicare regulations, market conditions and competition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130") and No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 130 establishes standards
for reporting and displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. Both FAS 130 and
FAS 131 are effective for periods beginning after December 15, 1997. Because of
the recent issuance of the standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial statement
disclosures.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("FAS 133"). FAS 133 requires companies to
recognize ALL derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may specifically be designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of: (i) the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk; or (ii) the earnings effect of the hedged transaction. For a derivative
NOT designated as a hedging instrument, the gain or loss is recognized as income
in the period of change. FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
MANAGEMENT OF CARDIAC
DIRECTORS AND EXECUTIVE OFFICERS OF CARDIAC
The following sets forth the names and ages of the directors and
executive officers of Cardiac as of September 30, 1998, in addition to
information respecting their positions and offices with Cardiac, their periods
of service in such capacities, and their business experience for at least the
past five years. There are no family relationships among the directors and
executive officers of Cardiac.
William H. Burns Jr., age 48, has been a member of the Cardiac Board
since September 1995. Mr. Burns is a health care entrepreneur and is a director
and president of five health care businesses (Biosight Inc., BioVector Inc.,
Minrad Inc., Medical Infusion Inc., and Fertility Acoustics Inc., and is a fund
manager of Platform
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Technologies Holdings, LLC, a venture capital fund). From July 1988 through
March 1994, he was Founder, President and CEO of Matrx Medical Inc., a medical
product design and distribution company. His efforts in building Matrx Medical,
Inc. earned him an award as Entrepreneur of the Year in New York State in 1993.
From 1975 through 1988, Mr. Burns held various positions with the BOC group,
including Vice President and General Manager of Ohmeda, DVE Care Products.
Bart C. Gutekunst, age 47, has been a member of the Cardiac Board since
July 1994 and became Chairman of the Board in October 1994. Mr. Gutekunst
focuses on growing businesses with a view toward enhancing value through
strategic, managerial and financial advisory involvement, with a particular
emphasis on the medical sector. In July 1995 he became Chairman and CEO of
NovaVision, Inc., an eye care technology company. In May 1997, NovaVision Inc.
was merged with American Consolidated Laboratories, Inc., a specialty vision
products company, and Mr. Gutekunst was Chairman of the Board from May 1997
until January 1998. Also, since August 1997, Mr. Gutekunst has been a director
of Platform Technologies, LLC, a venture capital fund. From September 1992 to
September 1994, he was Vice Chairman and Chief Financial Officer of R-2 Medical
Systems, Inc., a cardiac care device company, with responsibility for strategic
and corporate development as well as overseeing the financial functions of the
company. From February 1994 to March 1996, Mr. Gutekunst served as Chairman of
the board of directors of United Education and Software, Inc., a multi-state
operator of nursing and vocational schools operating under Chapter 11 of the
United States Bankruptcy Code where he was retained to oversee the voluntary
liquidation of the company's assets. From 1988 to 1990, he was a senior member
of an investment firm, Entrecanales, Inc., funded by a major European family,
making equity investments and leveraged buyouts. From 1981 to 1987, he was
Executive Vice President and a member of the board of directors, as well as the
Management and Investment Committees of Laidlaw, Adams & Peck Inc., where he
supervised the investment banking department and completed over 50 public and
private transactions. From 1976 to 1981, he was a member of Chemical Bank's
Merchant Banking Group. Mr. Gutekunst has been a member of the board of
directors or advisor to the board for many companies.
Larry Haimovitch, age 51, has been a member of the Cardiac Board since
November 1994. He is President of Haimovitch Medical Technology Consultants, a
San Francisco, California based healthcare consulting firm which specializes in
the medical device and technology industry with a particular emphasis on
cardiology-related areas and whose clients have included a major hospital chain,
numerous medical device companies, venture capital firms, investment groups, and
investment bankers. Prior to forming his firm in 1991, Mr. Haimovitch spent over
20 years as a healthcare industry analyst for a number of leading research firms
and financial institutions such as Furman Selz, Sutro & Co., and Wells Fargo
Investment Advisors. He also serves as a director to Electro- Pharmacology, Inc.
and ORBTEC, Inc.
Augusto Ocana, age 54, was appointed to the Cardiac Board in April
1996. He has over 20 years experience in building, turning around and managing
international health care businesses. Until December 31, 1997, he was Executive
Vice President of Grupo Taper International., S.A., a Spanish based holding
group of companies engaging in distribution of state-of-the-art medical
products. Prior to Grupo Taper, Dr. Ocana had been President and Chairman of
Rempak International and Marketing Director of Abbott Laboratories. Dr. Ocana
has also been trained as a physician and has a degree in international law.
Alan J. Rabin, age 48, joined Cardiac in October 1994 as President,
Chief Executive Officer and a member of the Cardiac Board. Mr. Rabin has 26
years experience in the management and growth of medical companies, with
emphasis on internal business development through marketing, sales, new product
development and building strategic relationships. Prior to joining Cardiac, Mr.
Rabin held an array of management positions, including:
/bullet/ From 1992 to September 1994, President and Chief Executive
Officer of R-2 Medical Systems, Inc., a manufacturer of
cardiac care devices, including disposables used in cardiac
pacing. In partnership with Bart Gutekunst, this
underperforming company was successfully turned around and
sold to an industry participant.
/bullet/ Vice President of Marketing and Sales for Stereo Optical
Company, a manufacturer of disposable and capital ophthalmic
diagnostic devices from 1987 to 1992.
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<PAGE>
/bullet/ Director of Marketing and Sales of Tycos Life Sciences, Inc.,
a manufacturer of cardiovascular diagnostic and monitoring
devices from 1985 to 1986 and was instrumental in the
turnaround and ultimate sale of the company.
/bullet/ From 1980 to 1985, various marketing, new business development
and product management positions with Davol, Inc., a division
of C.R. Bard in the surgical and cardiovascular equipment
area.
Mr. Rabin currently serves as a director of BioVector, Inc., a medical
distribution company. He received a Bachelor of Science degree in biology and a
Master in Business Administration degree from the University of Illinois and
Northwestern University, respectively.
Robert T. Rylee, age 67, has been a member of the Cardiac Board since
November 1988. He practiced law from 1958 to 1969 and was a partner in the firm
of Wood, Boykin, Rylee, and Walter from 1965 to 1969. In 1969, Mr. Rylee became
the President and CEO of Wright Manufacturing Company, a manufacturer of
orthopedic implants and instruments, a position he held until 1981 when he
became a Dow U.S. Area Vice President and the General Manager of Health Care
Business. On May 31, 1993, he retired as Vice President and Chairman of Health
Care Business, a position he had held with Dow since 1986 He is currently a
director of Clarus Medical Systems, which position he has held since September
1993.
Tracey E. Young, age 43, has been a member of the Cardiac Board since
September 1995. She is the Founder and President of Elliot Young & Associates,
Inc., a proprietary health care consulting concern, formed in 1987 to assist
companies and investors in identifying, evaluating, capturing and managing
strategic growth and financing opportunities in high technology health care
markets. Ms. Young also held key consulting positions with The Wilkerson Group,
both as the founding Associate Director of its Cardiovascular Market
Intelligence Service and as an independent consultant to the firm. She also
spent seven years in the pacemaker industry in senior marketing and strategic
planning positions with Telectronics Pacing Systems and Intermedics.
William Wharton, age 51, was appointed Vice President of Manufacturing
and Facilities in March 1996. Mr. Wharton had previously served Cardiac as Vice
President of Operations since February 1994 and as Vice President of Quality
Assurance since 1985. Mr. Wharton joined Cardiac in 1982 as Director of Quality
Assurance. Before joining Cardiac, he was employed as a Quality Assurance
Supervisor for at least five years by Medtronic, Inc., a major competitor in the
cardiac pacing industry.
W. Alan Walton, age 64, joined Cardiac Control Systems, Inc. in March,
1996 as Executive Vice President and Chief Operating Officer. Mr. Walton is a
fellow of the Institute of Chartered Accountants in England and from March, 1995
to February, 1996 was engaged as a financial and operations consultant with
Biosight Inc. of Orchard Park, New York, a firm specializing in helping health
care businesses enhance their performance. Prior to his experience with
Biosight, he spent 19 years in senior financial and systems management positions
with Dunlop Holdings PLC in the United Kingdom and the United States, including
a position as General Manager, Group Information System with responsibility for
Dunlop's global computing and communications.
Jonathan S. Lee, age 46, a biomedical engineer, joined the management
team at Cardiac, Inc. in May, 1996 and serves as Vice President - Research and
Development. Prior to joining Cardiac, Mr. Lee spent 18 years in Research and
Development, Regulatory Affairs and Marketing with Telectronics Pacing Systems,
a leading pacemaker manufacturer. He established and managed Telectronics'
worldwide service facilities and established Telectronic's US research and
development presence in Denver, Colorado. Mr. Lee was also involved in
International Marketing Management with Telectronics. Mr. Lee received a
Bachelor of Engineering degree in Biomedical Engineering from the University NSW
in Sidney, Australia. He also completed two years post graduate work in computer
studies at the University NSW. He has been a member of the North American
Society of Pacing and Electrophysiology since 1984.
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<PAGE>
Kirk Kamsler, age 47, joined Cardiac in April 1996 as Director of
Marketing and Sales. He has over 20 years of sales, sales management and
marketing management experience with a variety of medical device companies,
including Davis & Geck Inc., Matrix Medical Inc. and Marquette Electronics Inc.
Mr. Kamsler received a Bachelor of Arts degree from St. Lawrence University in
Canton, New York.
The Cardiac Board is elected at each annual meeting of the
stockholders. Each director holds office until his successor is duly elected and
qualified or until his earlier resignation or removal, with or without cause, at
any duly noticed special meeting of the stockholders of Cardiac by the
affirmative vote of the holders of a majority of the shares of Cardiac Common
Stock present in person or represented by proxy and entitled to vote at an
election of directors.
Under the bylaws of Cardiac, officers are elected annually by the
Cardiac Board at the meeting of the Cardiac Board following the annual meeting
of the stockholders. Each officer holds office until his or her successor has
been chosen and qualified, or until his or her death, resignation or removal,
with or without cause, by the Cardiac Board.
None of the directors or executive officers of Cardiac is a director of
any company, other than Cardiac, with a class of equity securities registered
pursuant to Section 12 of the Securities and Exchange Act of 1934, as amended,
or subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended except for Larry Haimovitch who is a director of Electro-Pharmacology,
Inc. and Alan J. Rabin and William H. Burns who are directors of American
Consolidated Laboratories, Inc.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and executive officer, and each person owning
beneficially more than ten (10) percent of a registered class of Cardiac's
equity securities, is required to file reports of ownership and changes in
ownership with the SEC, and furnish Cardiac with copies of all such reports.
A late report was filed for each of Messrs. Gutekunst and Rabin,
officers and directors, Messrs. Burns, Haimovitch and Rylee, directors, and
Messrs. Lee, Kamsler and McMahon, officers, with respect to one stock option
grant to each of them, late reports were filed for Ms. Young, director, with
respect to two stock option grants, a late report was filed for Mr. Rylee,
director, with respect to the expiration of a stock option grant and a late
report was filed for Mr. Lee, officer, with respect to a purchase of shares of
common stock. A late report was filed for Dr. Ocana, director, with respect to
his appointment to the Cardiac Board in April 1996.
CARDIAC DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION
SUMMARY COMPENSATION
The following table sets forth information about the compensation
earned by, awarded or paid to Cardiac's Chief Executive Officer, Chairman of the
Board and any other Executive Officer whose aggregate compensation exceeded
$100,000 in fiscal year 1998 during the fiscal years ended March 31, 1998, 1997,
and 1996.
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
FISCAL YEAR ANNUAL COMPENSATION
NAME AND PRINCIPAL ENDED COMPENSATION AWARDS SECURITIES ALL OTHER
POSITION MARCH 31 SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alan J. Rabin 1998 $150,624 - 12,559(1) $ 559(2)
(President, CEO, 1997 $146,000 - 12,000(3) $ 521(4)
Director) 1996 $110,000 $10,000(5) 20,000(6) $ 26,349(7)
- ---------------------------------------------------------------------------------------------------------------------------------
Bart C. Gutekunst 1998 $48,624 - 10,906(8) $ 15,934(9)
(Chairman of the Board) 1997 $48,000 - 10,000(3) $ 11,313(10)
1996 $48,000 - 15,000(6) $ 8,700(11)
- ---------------------------------------------------------------------------------------------------------------------------------
Kirk D. Kamsler 1998 $93,928 $10,200(12) 8,000(13) -
(Vice President 1997 $81,104 - 10,000(14) $ 45,000(15)
Sales) 1996 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Jonathan S. Lee 1998 $100,514 $10,920(16) 8,000(13) -
(Vice President 1997 $80,596 - 10,000(17) $ 33,460(15)
Research and Development) 1996 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This includes options to purchase 12,000 shares of Cardiac Common Stock at
$1.00 exercisable immediately and a warrant to purchase 559 shares of
Cardiac Common Stock at $.0.18.
(2) This represents interest on a Security Agreement and Promissory Note
between Alan J. Rabin and Cardiac dated April 15, 1997.
(3) On August 22, 1996, the Cardiac Board awarded these options to purchase
shares of Cardiac Common Stock at $3.50 per share, exercisable after March
31, 1997.
(4) This represents interest received prior to conversion of the debentures to
stock.
(5) In addition to his salary, Mr. Rabin is entitled to a performance bonus.
This represents the performance bonus paid in respect of Mr. Rabin's
services during the year ended March 31, 1996.
(6) On May 5, 1995, the Cardiac Board awarded these options to purchase shares
of Cardiac Common Stock at $3.63 per share. The options are now
exercisable.
(7) This represents reimbursement of relocation expenses, $21,549, paid to Mr.
Rabin pursuant to his employment agreement and consulting fees in
connection with debenture financing, $4,800.
(8) These include options to purchase 8,000 shares of Cardiac Common Stock at
$1.00 exercisable immediately and a warrant to purchase 2,906 shares of
Cardiac Common Stock at $0.18.
(9) This represents interest of $2,906 on two security agreements and
promissory notes between Bart C. Gutekunst and Cardiac dated March 24, 1997
and April 21, 1997, and consulting fees related to the Coast financing in
the amount of $13,028.
(10) This includes $7,500 in connection with his facilitating the Grupo Taper
Distributor and Sirrom mortgage agreements. It also includes $3,292 of
interest paid on a $100,000 secured promissory note, and $521 of interest
paid on debentures held prior to the conversion of the debentures to stock.
(11) This represents consulting fees in connection with the debenture financing.
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<PAGE>
(12) In addition to his salary, Mr. Kamsler received a performance bonus. This
represents the performance bonus paid in respect of Mr. Kamsler's services
during the year ended March 31, 1997.
(13) This represents options to purchase 8,000 shares of Cardiac Common Stock at
$1.00 exercisable immediately.
(14) Upon commencement of his employment with Cardiac, Mr. Kamsler was granted
options to purchase 10,000 shares of Cardiac Common Stock at $3.50 per
share, exercisable one third on April 21, 1997, one third on April 21, 1998
and one third on April 21, 1999.
(15) This represents reimbursement of relocation expenses paid pursuant to the
offer of employment.
(16) In addition to his salary, Mr. Lee received a performance bonus. This
represents the performance bonus paid in respect of Mr. Lee's services
during the year ended March 31, 1997.
(17) Upon commencement of his employment with Cardiac, Mr. Lee was granted
options to purchase 10,000 shares of Cardiac Common Stock at $3.50 per
share, exercisable one third on May 5, 1997, one third on May 5, 1998 and
one third on May 5, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during the fiscal year ended March 31, 1998 to those persons named in the
preceding Summary Compensation Table.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bart C. Gutekunst 8,000(1) 9% $1.00 5/08/2002
Alan J. Rabin 12,000(1) 14% $1.00 5/08/2002
Kirk D. Kamsler 8,000(1) 9% $1.00 5/08/2002
Jonathan S. Lee 8,000(1) 9% $1.00 5/08/2002
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These options are subject to immediate exercise.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the value of
unexercised stock options at March 31, 1997 for those persons named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES TABLE
--------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END FISCAL YEAR END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bart C. Gutekunst - - 54,429/0 $0/$0
Alan J. Rabin - - 72,571/0 $0/$0
Jonathan S. Lee - - 11,333/6,667 $0/$0
Kirk D. Kamsler - - 11,333/6,667 $0/$0
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These options have been adjusted to give effect to Cardiac's one for seven
reverse stock split effected December 13, 1994.
COMPENSATION OF DIRECTORS
For their service on the Cardiac Board, each outside director is
entitled to receive annually the sum of $3,000 and such number of shares of
Cardiac Common Stock that have a total value of $6,000 based on the average of
the bid and ask prices of Cardiac Common Stock on the OTC Bulletin Board as
quoted on March 31, 1998. Cardiac accrued in respect of each of William Burns,
Larry Haimovitch, Augusto Ocana, Robert Rylee and Tracey Young the sum of $3,000
and 13,953 shares of Cardiac Common Stock for their services through fiscal year
1998.
EMPLOYMENT AGREEMENTS
Mr. Alan J. Rabin is employed as the President and Chief Executive
Officer of Cardiac pursuant to a three-year employment agreement dated as of
October 13, 1994 amended by the Cardiac Board at its meeting of May 15, 1996 and
which provides for one year renewal periods following the initial three-year
period. As compensation thereunder, Mr. Rabin receives an annual salary of
$150,000; reimbursement for business travel and other business expenses; and a
bonus of up to 50% of his annual salary based on the performance of Cardiac. The
employment agreement also provided reimbursement for Mr. Rabin's relocation and
temporary living expenses, not to exceed $38,000 plus the cost associated with
the moving of personal possessions and his family. His employment agreement
provides a severance package under certain specified circumstances equal to the
balance of the salary due under the employment agreement (payable in accordance
with Cardiac's payroll practices) and a lump sum payment equal to nine months of
his annual base salary then in effect, plus maintenance by Cardiac (to the
extent permitted under plan documents) for nine months from the date of
termination all benefit plans in which he was entitled to participate while an
employee, or the equivalent. The nine-month lump sum severance payment is also
payable to Mr. Rabin in the event his employment agreement is not renewed by
Cardiac at the end of its term. Pursuant to his employment agreement, Cardiac
awarded to Mr. Rabin a stock option for 28,571 shares of Cardiac Common Stock at
an exercise price of $3.50 per share, 23,809 of which were exercisable
immediately and the remaining 4,762 shares became exercisable in October 1997.
Mr. Rabin's stock option agreement contains a change of control provision
whereby in the event of a change in control of Cardiac, all outstanding options
become immediately exercisable.
Mr. Bart C. Gutekunst is employed as the Chairman of the Cardiac Board
pursuant to a three year employment agreement dated as of October 13, 1994, and
which provides for one year renewal periods following the initial three year
period. As compensation thereunder, Mr. Gutekunst receives an annual salary of
$48,000; reimbursement for business travel and other business expenses; and a
bonus related to Cardiac's financial, capital
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<PAGE>
raising and corporate development and acquisition activities in the form of the
following transactional fees: 1% for debt and equity source, and 1% of the gross
consideration for asset acquisitions or sales, which fees are payable to Mr.
Gutekunst upon closing by Cardiac or its successor-in-interest of the applicable
transaction. Pursuant to his employment agreement, Mr. Gutekunst will receive as
a bonus 1% of the value of the Merger transaction which will be an amount equal
to $25,000, and 1% of the total value of any new capital raised pursuant to the
Merger. Previously under his employment agreement, Mr. Gutekunst received an
option to purchase 21,429 shares of the Cardiac Common Stock at an exercise
price of $3.50 per share, 17,858 of which were exercisable immediately and the
remaining 3,571 became exercisable in October 1997. His employment agreement
contains the same severance provisions as Mr. Rabin's employment agreement and
his stock option contains the same change of control provision as Mr. Rabin's
stock option agreement.
STOCK OPTION PLANS
On September 9, 1987, the Cardiac Board adopted the 1987 Non-Qualified
Stock Option Plan (the "1987 Plan"). The 1987 Plan authorized the Cardiac Board
to grant to officers, directors, and employees of Cardiac non-qualified options
to purchase up to a maximum of 142,857 shares of Cardiac Common Stock.
On February 7, 1992, the Cardiac Board adopted the 1992 Non-Qualified
Stock Option Plan (the "1992 Plan"). The 1992 Plan authorized the Cardiac Board
to grant officers, directors, and employees of Cardiac non-qualified options to
purchase up to a maximum of 42,857 shares of Cardiac's common stock. On March
17, 1994 the Cardiac Board amended and restated the 1992 Plan increasing the
number of shares subject to option to a maximum of 157,143 shares of Cardiac's
Common Stock.
On January 19, 1995, the Cardiac Board authorized the combination of
the 1987 Plan and the 1992 Plan into one plan now known as the Combined
1987-1992 Non-Qualified Stock Option Plan ("Combined Option Plan"). The Combined
Option Plan provides that all issued and outstanding stock option agreements
under the previous plans shall be governed by the Combined Option Plan. Under
the Combined Option Plan, Cardiac is authorized to issue options to officers,
directors and employees to purchase up to a maximum of 400,000 shares of Cardiac
Common Stock. As of December 31, 1997 there were outstanding options for 373,356
shares under the Combined Option Plan, of which 309,857 shares were subject to
options held by officers and directors at exercise prices ranging from $1.00 to
$3.75 per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CARDIAC
CERTAIN BENEFICIAL OWNERS
In accordance with Rule 13d-3, promulgated under the Exchange Act,
shares that are not outstanding but that are issuable upon exercise of
outstanding options, warrants, rights or conversion privileges exercisable
within the next sixty (60) days have been deemed to be outstanding for the
purpose of computing the percentage of outstanding shares owned by the person
owning such right, but have not been deemed outstanding for the purpose of
computing the percentage for any other person.
As of September 30, 1998, eighteen (18) stockholders were known by
Cardiac to beneficially own five percent (5%) or more of the outstanding voting
securities of Cardiac. The following table, together with the footnotes, sets
forth the indicated information as of September 30, 1998 with respect to each
person known by Cardiac to own beneficially more than five percent (5%)
(calculated in accordance with the guidelines promulgated by the Securities and
Exchange Commission) of the 2,648,739 issued and outstanding shares of Cardiac
Common Stock on that date.
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<PAGE>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2)
- ----------------------------- ------------------------- -------------------
Phillip R. Beutel(3) 277,351 10.38%
3 Chase Lane
Colorado Springs, CO 80906
Penfield Partners, L. P.(4) 159,856 6.00%
c/o William D. Witter, Inc.
150 E. 53rd Street
New York, New York 10022
Bradley Resources Company(5) 452,280 15.49%
107 John Street
Southport, CT 06490
ROI Partners(6) 143,399 5.39%
353 Sacramento Street
San Francisco, CA 94111
Austin W. Marxe(7) 541,194 20.28%
153 East 53rd Street, Room 5101
New York, New York 10022
Irwin Gruverman(8) 187,500 6.61%
16 Tanglewood Rd.
Needham, Ma. 02194
Sirrom Capital Corporation(9) 350,000 11.87%
St. Cloud Corner
500 Church Street, Suite 200
Nashville, TN 37219
Paul F. Glenn(10) 250,000 8.62%
St. Cloud Corner
500 Church Street, Suite 200
Nashville, TN 37219
International Holdings Inc.(11) 330,000 11.08%
One Buckhead Plaza, Suite 1750
3060 Peachtree Road, NW
Atlanta, Georgia 30305
(1) Except as otherwise indicated, each person is the record owner of the
shares indicated and possesses the sole voting and investment power with
respect to such shares of common stock.
(2) Computations of percentage ownership of each individual treats warrants and
options to purchase common stock exercisable within the next sixty (60)
days as though the shares subject thereto were issued and outstanding.
(3) Includes options to purchase 14,286 shares and warrants to purchase 8,665
shares.
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<PAGE>
(4) Includes warrants to purchase 17,331 shares. Penfield Partners, L.P. is a
Delaware limited partnership. Pine Creek Advisors, L.P., a Delaware limited
partnership, having its address c/o William D. Witter, Inc., 153 East 53rd
Street, New York, New York 10022 is the general partner of Penfield
Partners, L.P. The general partners of Pine Creek Advisors, L.P. are Mr.
Jeffrey Schuss and William D. Witter, Inc., 153 East 53rd Street, New York,
New York 10022. Mr. William D. Witter is the President of William D.
Witter, Inc. and controls all shares controlled by William D. Witter, Inc.
Through their control of Pine Creek Advisors, L.P., each of Mr. Schuss and
Mr. Witter, acting individually, may vote and/ or dispose of the shares
held by Penfield Partners, L.P. The address of Mr. Schuss and Mr. Witter is
c/o William D. Witter, Inc.
(5) Bradley Resources Company ("Bradley") is a partnership. George W. Holbrook,
Jr., Mr. James R. McGoogan, and Mr. Richard V. Traister are the general
partners of Bradley. Each general partner, acting individually, may vote
and/or dispose of all the shares held by Bradley. Bradley's shares include
181,898 shares held by Bradley directly, warrants to purchase 16,811 shares
held by Bradley, options to purchase 3,571 shares held by Mr. Holbrook but
beneficially owned by Bradley, and 250,000 convertible debentures held by
Bradley. The address of each general partner is c/o Bradley.
(6) Mr. Mitchell J. Soboleski and Mr. Mark T. Boyer are the general partners in
the partnerships holding Cardiac Common Stock as follows: 143,399 shares,
including warrants to purchase 12,132 shares are held by ROI Partners,
12,000 shares are held by ROI Offshore Fund, 6,000 shares are held by NAV
LLC, 7,000 shares are held by Pleiades Investment Partners, and 7,000
shares are held by ROI & Lane, L.P. The address of each of Mr. Soboleski,
Mr. Boyer and the foregoing partnerships is 353 Sacramento Street, San
Francisco, CA 94111. Each general partner, acting individually, may vote
and/or dispose of all of the shares held by any of the foregoing
partnerships.
(7) Mr. Marxe owns 28,111 shares directly. Special Situations Fund III, L.P.
("Special"), 153 East 53rd Street, Room 5101, New York, New York 10022.
owns 327,770 shares, including warrants to purchase 27,730 shares. Special
Situations Cayman Fund ("Cayman"), 153 East 53rd Street, Room 5101, New
York, New York 10022 owns 182,713 shares, including warrants to purchase
10,399 shares. Mr. Marxe is President and Chief Executive Officer of AWM
Investment Company, Inc. ("AWM"), 153 East 53rd Street, Room 5101, New
York, New York 10022. MGP Advisers Limited Partnership ("MGP"), 153 East
53rd Street, Room 5101, New York, New York 10022 is the general partner of
Special and AWM, in turn, is the general partner of MGP. Mr. Marxe, through
AWM and MGP, has control over all shares held by Special. AWM is also the
general partner of Cayman. Through AWM, Mr. Marxe has control over all
shares held by Cayman. Control of shares held by Special and Cayman is
shared with Mr. David Greenhouse, the Executive Vice President of AWM. Mr.
Greenhouse's address is 153 East 53rd Street, Room 5101, New York, New York
10022. Each of Mr. Marxe and Mr. Greenhouse may, individually, vote and/or
dispose of all shares held by Special and/or Cayman. Mr. Greenhouse owns
10,242 shares directly, including warrants to purchase 866 shares. Mr.
Greenhouse is the Executive Vice President of AWM. Through MGP and AWM, Mr.
Greenhouse has control over all shares held by Special. Through AWM, Mr.
Greenhouse has control over all shares held by Cayman. Control is shared
with Mr. Marxe.
(8) Includes convertible debentures convertible into 187,500 shares, of which
62,500 shares are held by Mr. Gruverman directly and 125,000 shares are
held by G&G Diagnostics, L. P. II, a limited partnership ("G& G"). Mr.
Gruverman is the general partner of G&G and has control of all shares held
by G&G.
(9) Includes warrants to purchase 300,000 shares.
(10) Includes convertible debentures convertible into 250,000 shares.
(11) Includes warrants to purchase 330,000 shares. Joseph H. Hale is the
president, sole shareholder and director.
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<PAGE>
MANAGEMENT
The following table sets forth the number of shares of Cardiac Common
Stock beneficially owned by each director of Cardiac, each of the named
executive officers named in the Summary Compensation Table set forth above as of
September 30, 1998, and the percentage of the outstanding shares such ownership
represented at the close of business on September 30, 1998, together with
information as to stock ownership of all directors and executive officers of
Cardiac as a group as of September 30, 1998. Except as otherwise indicated, each
person is the record owner of the shares indicated and possesses the sole voting
and investment power. Computations of percentage ownership of each individual
and of the group treat options to purchase common stock exercisable within the
next sixty (60) days as though the shares subject thereto were issued and
outstanding.
NAME OF INDIVIDUAL OR NUMBER OF AMOUNT AND NATURE OF PERCENT OF
PERSONS IN GROUP BENEFICIAL OWNERSHIP (1) CLASS
- -------------------------------- ------------------------ -------------
William H. Burns 24,274 0.91%
Bart C. Gutekunst 67,577 2.50%
Larry G. Haimovitch 33,841 1.27%
Alan J. Rabin 85,572 3.14%
Robert T. Rylee 43,699 1.63%
Tracey E. Young 23,491 0.88%
Augusto Ocana 11,174 0.42%
Kirk D. Kamsler 15,667 0.59%
Jonathan S. Lee 19,667 0.74%
All directors and executive
officers as a group (11 persons) 364,530 12.42%
- -----------------
(1) Includes options and warrants exercisable within the next sixty (60) days
to purchase shares of Cardiac Common Stock as follows:
NAME OF INDIVIDUAL OR NUMBER
NUMBER OF PERSONS IN GROUP OF SHARES
- -------------------------------------------- -----------------
William H. Burns 13,000
Bart C. Gutekunst 58,201
Larry G. Haimovitch 15,000
Alan J. Rabin 73,996
Robert T. Rylee 36,429
Tracey E. Young 18,000
Augusto Ocana 7,000
Kirk D. Kamsler 14,667
Jonathan S. Lee 14,667
All directors and executive officers as a
group (11 persons) 285,389
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF CARDIAC
See "CARDIAC DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION -
Employment Agreements" for a description of certain compensation arrangements.
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During the last calendar quarter of 1994, Cardiac raised $2,885,000
through a private placement of 5% Convertible Debentures (the "Debentures").
Interest payments have been made on March 31 and October 31 of each year,
commencing March 31, 1995. The Debentures were to mature October 31, 1999.
Effective March 31, 1996, the holders of the Debentures converted their
Debentures into Cardiac Common Stock at a conversion rate of $2.80 per share.
Alan Rabin and Bart Gutekunst, President/Chief Executive Officer and Chairman of
the Board, respectively, of Cardiac, each received 8,928 shares of Cardiac
Common Stock as a result of the conversion of the Debentures owned by them.
Those beneficial owners holding 5% or more of Cardiac issued and outstanding
Common Stock and the Common Stock they received upon conversion of their
Debentures is as follows: Phillip R. Beutel, 89,285 shares; Special Situation
Fund III, L.P., 285,714 shares; Penfield Partners, 178,571 shares; Bradley
Resources Company, 173,214 shares; and ROI Partners, 125,000 shares. Pursuant to
the terms of the Debentures, Cardiac filed with the SEC a registration statement
on Form S-1 registering the Cardiac Common Stock underlying the Debentures,
which registration statement was declared effective by the SEC on April 27,
1995.
In respect of their conversion of the Debentures, Cardiac issued
warrants to the Debenture holders for an aggregate of 100,000 warrants (to be
divided among the Debenture holders pro rata in accordance with their percentage
interests in the Debentures). The warrants have a term of three years and are
exercisable commencing March 31, 1996 at $5.00 per share.
Upon the closing of the minimum offering of the Debentures, Alan J.
Rabin and Bart C. Gutekunst entered into employment agreements with Cardiac on
October 13, 1994. Previously, Mr. Gutekunst and Mr. Rabin had been consulting
with and assisting Cardiac in preparing its business plan and in obtaining
additional financing. On July 31, 1994, Mr. Gutekunst was appointed to the
Cardiac Board to fill a vacancy. On October 13, 1994, Mr. Gutekunst was
appointed Chairman of the Board and Mr. Rabin was appointed Cardiac's President
and Chief Executive Officer pursuant to their respective employment agreements.
For consulting services rendered to Cardiac in connection with the development
of Cardiac's new business plan and Cardiac's financing, Mr. Rabin and Mr.
Gutekunst were paid consulting fees in the aggregate amount of $130,750. Mr.
Gutekunst and Mr. Rabin also participated in the Debenture financing discussed
above, and each acquired Debentures in the amount of $25,000.
In November 1995, Cardiac entered into an agreement with Biosight Inc.,
of which William H. Burns, Jr., a director of Cardiac, is President and
principal stockholder. Under the agreement, Biosight Inc. provided consulting
services regarding Cardiac's manufacturing processes and inventory planning. The
agreement provided for payment of $30,000 in fees during the year ended March
31, 1996 plus reimbursement of approved out-of-pocket expenses, and future
performance-related payments to be paid in stock and cash, provided certain
goals are met. Upon earning $30,000 in performance-related payments (in combined
cash and stock), the agreement provides for subsequent performance-based
payments to be made in Cardiac Common Stock. On September 12, 1997, Cardiac
issued 5,714 shares of Cardiac Common Stock at $3.50 per share to William H.
Burns, Jr., for performance-based payments of $20,000.
During fiscal 1996, Tracey E. Young, a director of Cardiac, provided
consulting services to Cardiac regarding development of international markets
for Cardiac's products. In March 1996, the Cardiac Board approved payment of
$5,000 in consulting fees to Ms. Young together with a grant of a stock option
for 5,000 shares, exercisable at $3.75 per share. In respect of consulting
services, the Cardiac Board approved royalty payments to Ms. Young of $100 per
unit (each unit comprised of a pacemaker and lead) sold in Japan for the three
year period following approval of the product by regulatory authorities in that
country. As of December 26, 1997, Ms. Young has accrued approximately $1,000 in
royalty fees, however, Cardiac has not made any royalty payments to her. Ms.
Young has also provided Cardiac with consulting services on clinical studies and
other matters which included assisting Cardiac in implementing its clinical
studies for its single-lead DDD system, as well as performing due diligence on
Cardiac's merger with Electro. As of December 26, 1997, Ms. Young has invoiced
Cardiac approximately $100,000 for consulting services performed by her through
such date. Cardiac intends to pay Ms. Young for her consulting services with
funds obtained through its equity financing in connection with the Merger.
During fiscal 1996, Cardiac entered into a distribution agreement for
the European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). As
part of the distribution agreement, Grupo Taper was permitted to designate a
member of the Cardiac Board. Through December 31, 1997, that member of the
Cardiac Board
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designated by Grupo Taper was Dr. Augusto Ocana, an executive officer of Grupo
Taper. On January 1, 1998, Dr. Augusto Ocana left Grupo Taper's employ, and is
therefore no longer Grupo Taper's designate on the Cardiac Board. Dr. Augusto
Ocano has, however, remained on the Cardiac Board as an independent director.
Grupo Taper does not have a right to designate another individual as a member
of the Cardiac Board, but does currently have the right to have an observer at
all Cardiac Board meetings.
On October 28, 1996, Cardiac executed a Security Agreement and
Promissory Note with Bart C. Gutekunst, director and Chairman of the Board.
Under the agreement and note, Mr. Gutekunst advanced Cardiac $108,247 at an
annual interest rate of ten per cent (10%). This advance, plus accrued interest,
was repaid to Mr. Gutekunst on February 14, 1997.
On March 24, 1997, Cardiac executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced Cardiac $100,000 at an annual
interest rate of ten per cent (10%) plus the right to purchase one (1) share of
restricted Cardiac Common Stock of Cardiac at an exercise price of eighteen
cents ($0.18) per share for each one dollar ($1.00) of interest earned under the
note. This advance, plus accrued interest, was repaid to Mr. Gutekunst on June
16, 1997.
On April 21, 1997, Cardiac executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced Cardiac $61,553.65 at an annual
interest rate of ten percent (10%) plus the right to purchase one (1) share of
restricted common stock of Cardiac at an exercise price of eighteen cents
($0.18) per share for each one dollar ($1.00) of interest earned under the note.
This advance, plus accrued interest, was repaid to Mr. Gutekunst on June 16,
1997.
On April 15, 1997, Cardiac executed a Security Agreement and Promissory
Note with Alan J. Rabin, a director and President. Under the agreement and note,
Mr. Rabin advanced Cardiac $32,429.18 at an annual interest rate of ten percent
(10%) plus the right to purchase one (1) share of restricted common stock of
Cardiac at an exercise price of eighteen cents ($0.18) per share for each one
dollar ($1.00) of interest earned under the note. This advance, plus accrued
interest, was repaid to Mr. Rabin on June 16, 1997.
From April 22, 1998 through May 4, 1998, Cardiac obtained $300,000 in
interim financing from selected current investors through the issuance of an 8%
convertible debenture, convertible into shares of Cardiac Common Stock at $0.40
per share. Bradley Resources Company ("Bradley"), beneficial owner of over 5% of
Cardiac Common Stock, purchased $100,000 worth of such convertible debentures.
In return for its investment, the exercise price of the option controlled by Mr.
Holbrook, but beneficially owned by Bradley, to purchase 3,571 shares of Cardiac
Common Stock at $3.50 per share and the exercise price of the warrant held by
Bradley to purchase 16,811 shares of Cardiac Common Stock at $5.00 per share
were each reduced to $0.40 a share.
On July 30, 1998, and August 13, 1998, Cardiac executed the Minrad Note
in favor of Minrad, of which William H. Burns, Jr., a director of Cardiac, is a
director and president. The Minrad Note bears interest at the rate of 15%
annually, and the principal amount and all interest due thereunder is due and
payable, after September 29, 1998, within ten (10) days after written demand
from Minrad.
The foregoing transactions between Cardiac and its affiliates were
negotiated on behalf of Cardiac by its management. Cardiac believes that such
transactions are in compliance with Cardiac's policy that transactions with
affiliates be on terms at least as favorable as could have been reasonably
obtained from an unaffiliated third party.
BUSINESS OF ELECTRO
GENERAL
Electro is engaged in the business of design, development, manufacture,
marketing and sale of products utilized in connection with illnesses of the
heart and circulatory system and make use of catheters and related
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devices. Electro was incorporated in New Jersey in 1961. Electro has targeted
electrophysiology as its focal area for future growth, but intends to maintain
and develop products for the emergency care, invasive and non-invasive
cardiology and invasive radiology markets. Electro also continues to explore
opportunities to expand its OEM business and contract research and development
business to capitalize on its catheter technology expertise and its
manufacturing capabilities. Electro produces a wide range of catheter products
intended to be utilized by doctors and other trained hospital personnel for
diagnostic as well as therapeutic purposes.
Electro markets its cardiovascular catheters and other catheters
worldwide. Export sales were approximately $1,828,000 in fiscal year 1997,
$2,324,000 in fiscal year 1996 and $1,964,000 in fiscal year 1995, representing
approximately 27%, 32% and 27% of net sales in such fiscal years, respectively.
PRODUCTS
Electro produces a wide range of catheter products intended to be
utilized by doctors and other trained hospital personnel for diagnostic or
therapeutic purposes. Catheters are hollow tubes that can be passed through
veins, arteries and other anatomical passageways. Electro considers the market
within which it sells its present and proposed products as a single industry
segment.
In over thirty-six (36) years of business, Electro has sold well over
two (2) million catheters. The current selling prices for the catheters marketed
by Electro typically range from thirty-five dollars to five hundred dollars.
ELECTROPHYSIOLOGY CATHETERS. The field of cardiac electrophysiology
(EP) is one of the most rapidly growing areas of medical technology. Cardiac
electrophysiology is the study of the electrical system of the heart. Cardiac
electrophysiologists are concerned with electrical disorders in the heart, their
etiology, diagnosis and treatment. The medical problems on which cardiac
electrophysiologists focus are conduction problems of the heart, which include
tachyarrhythmic episodes which can lead to sudden cardiac death. The development
of transcatheter diagnosis of the heart's conduction system and transcatheter
correction of certain conduction dysfunctions have increasingly attracted the
attention of cardiologists.
Electro's line of diagnostic EP catheters is comprised of three
categories, the Detector, the Investigator and the Cloverleaf, and each category
has its unique characteristics requested by physicians that desire different
handling features. In addition, Electro has a Genesis line of steerable EP
catheters that provides the physicians with a more sophisticated mapping tool
for difficult diagnostic procedures. These catheters are available in many curve
and electrode configurations.
Electro markets its Circuit Breaker steerable catheters with
temperature control for catheter ablation for international distribution only.
These catheters are compatible with most radio frequency generators. Due to
certain development issues, clinical trials scheduled to have commenced were
delayed. Electro plans to begin clinical trials in the U.S. in fiscal year 1999
in order to seek approval to market these catheters domestically.
PACING AND MONITORING CATHETERS. Electro's line of monitoring catheters
are made of flexible radiopaque materials which are visible in use through
fluoroscopy. The catheters have a variety of tips, shapes and internal
configurations and can be manipulated by an experienced physician through the
anatomy to the desired location. Through the use of these catheters,
electrophysiological data, pressure and flow readings and blood samples may be
obtained. In addition, Electro's catheters may be utilized as conduits for the
injection of radiopaque materials into the bloodstream to permit fluoroscopic
observation of abnormalities in the vasculature.
Monitoring catheters are marketed under the following names:
Baltherm/registered trademark/ Flow Directed Balloon Catheters,
Pacewedge/registered trademark/ Balloon Guided Catheters and Balwedge/registered
trademark/ Catheters.
Electro's pacing catheters are fabricated from a number of materials
and frequently consist of an electrode-bearing tube. The tube is guided into the
body and the electrode is delivered through the venous system to the heart where
it is then used for pacing. This procedure involves the delivery to the heart
muscle, from a source outside the
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body, of an electrical stimulus causing contractions like the natural heartbeat.
Such pacing is necessary where there is a conduction blockage in the heart
causing the heart to beat at a slow or irregular rate.
One of the pacing catheters manufactured by Electro is the
Balectrode/registered trademark/ Bipolar Pacing Probe. With this product, both
the amount of manipulation of the catheter required to cause the stimulating
electrode to be positioned in the proper location within the heart and the time
required from the commencement of the procedure until it is completed, are
substantially less than they would be if a non-balloon catheter were used as the
delivery system.
The pacing products usually are sold in kits containing the catheter, a
placement needle, connectors and various other devices. These kits are sold
under various names, including the following: Balectrode/registered trademark/
Flow-Directed Temporary Pacing Kit, Silicore/registered trademark/ Semi-Floating
Pacing Kit and Multipace.
MULTI-PURPOSE CATHETERS. Multi-Purpose catheters have features or uses
which, under certain circumstances, result in the combination of pacing and
monitoring functions. Further, Electro manufactures certain electrode-bearing
catheters used to make electrical measurements within the heart and provide
electrical stimulation for both therapeutic and diagnostic purposes.
DRAINAGE CATHETERS. Although Electro's principal activities have been
in the cardiovascular area, it currently is manufacturing and marketing the
Elecath/registered trademark/ One Step(/trademark/) Fluid Drainage System which
is used for draining fluid collections from various locations in the body. This
system consists of a catheter, composed of a unique formulation developed by
Electro, mounted on a simple penetration apparatus. In Electro management's
opinion, the product is useful to a broad range of physicians, and results in
more complete and safer drainage.
SALES, MARKETING AND DISTRIBUTION METHODS
Electro markets, sells and distributes its products domestically
through its own sales force. As of September 30, 1998, Electro employed 2
salespersons in the field and maintained a home office staff of marketing and
sales support of 3 people. Electro also employs an International Marketing
Manager based in Europe on an independent contractor basis. In previous years,
Electro had one significant distributor in the United States which was
responsible for sales in all or part of thirteen Eastern states plus the
District of Columbia. This distributor accounted for approximately 11% of net
sales for fiscal year 1995. Electro terminated its arrangement with this
distributor on May 31, 1995 and Electro now markets its products directly in
this territory. As such, there were no sales through this distributor in fiscal
years 1997 and 1996. The principal customers for Electro's products are
hospitals whose purchasing decisions are determined on the basis of assessment
of the products by the physicians. No one customer accounted for more than ten
percent of Electro's net revenues for fiscal years 1997 and 1996. International
markets are serviced by a network of independent distributors. Electro also
sells its products to OEM customers, performs contract research and development
work for third parties and engages in licensing of its technology to third
parties.
While export sales have contributed significantly to Electro's net
sales in fiscal years 1997, 1996 and 1995, Electro has not effected substantial
penetration of the domestic electrophysiology market which is attributable, in
part, to its lack of an FDA-approved ablation catheter. Electro's focus on
engineering efforts in contract research and development and its OEM business
has also contributed to lower domestic sales together with a lower demand for
older products in pacing and monitoring.
Advertising of Electro's products consists primarily of displays at
medical conventions and meetings, advertisements in medical journals and direct
mail. Electro also cooperates in the publication of technical papers written by
medical authorities in areas relating to Electro's products.
PRODUCT WARRANTIES
Electro's catheters are covered by a limited warranty, the duration of
which is tied to product expiration dates. Generally, however, the warranties
extend for five years. All warranties provide for replacement with a
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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:
UNITED STATES PATENTS DESCRIPTION DATE OF ISSUE
- --------------------- ----------- -------------
4,699,157 Pacing Catheter and Method for 10/13/87
Making Same
4,790,825 Closed Chest Cannulation Method 12/13/88
and Device for Atrial Major
Artery
5,190,050 Tip Deflectable Steerable Catheter 3/2/93
5,358,479 Multiform Twistable Tip 10/25/94
Deflectable Catheter
5,571,085 Steerable Open Lumen Catheter 11/5/96
5,718,701* Ablation Electrode 2/17/98
- ----------------
* owned jointly with another party
Although Electro holds such patents, it believes that its business as a
whole is not or will not be materially dependent upon patent protection.
However, Electro will continue to seek such patents as it deems advisable to
protect its research and development efforts and to market its products. Electro
believes that it is not infringing on any other party's patent. However, there
can be no assurance that current and potential competitors will not file
applications or apply for patents or additional proprietary rights relating to
materials or processes used by Electro.
Electro develops new products as a result of its own analysis of the
needs of the market which it serves and as a result of needs perceived by
physicians and researchers who work with Electro on the design and development
of the devices and systems needed by them. In certain instances, Electro pays
the cooperating physician or researcher a royalty based upon the revenues
derived from the sales of the product to others.
Electro also relies upon technical know-how and continuing
technological innovation to develop and maintain its position in the market and
believes that the success of its operations will depend largely upon such
know-how and innovation. Electro requires employees and consultants to execute
appropriate confidentiality agreements and assignments of inventions in
connection with their employment or consulting arrangement with Electro.
There can be no assurance that trade secrets will be established, that
secrecy obligations will be honored or that competition will not independently
develop superior or similar technology.
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RESEARCH AND DEVELOPMENT
Electro's research and development activities are devoted primarily to
the design and development of new products and enhancements to existing
products. For the three years ended August 31, 1997, Electro incurred aggregate
direct expenses of approximately $2,824,000 for research and development
activities, including new product development, of which approximately $882,000
was attributable to fiscal year 1997, $1,010,000 to fiscal year 1996 and
$932,000 to fiscal year 1995. All of such activities were sponsored by Electro.
The major portion of such expenses was related to salaries and other expenses of
personnel employed on a regular basis in research and development efforts.
During fiscal years 1997 and 1996, Electro performed research and development
and pre-production planning for an unrelated medical device company for which
services Electro recognized $544,293 and $155,707 in revenues in such years,
respectively. The costs associated with these revenues are shown in cost of
sales and, as such, are not included in research and development expenses. In
May 1997, the agreement-in-principle to perform contract research and
development work for the medical device company, which work commenced in June
1996, was terminated at the request of the other company. The terms of the
agreement-in-principle called for the other company to pay Electro a monthly fee
of $150,000 for a period of one year. A definitive agreement was never executed.
Electro received $600,000 for the work it had performed prior to termination and
an additional $100,000 termination fee. As a result of the termination,
Electro's revenues were adversely affected.
PRODUCTION AND SOURCES OF SUPPLY
Electro manufactures its products in a 25,000 square foot facility it
owns and another 10,000 square foot facility which it leases. Electro believes
that these facilities have sufficient capacity to meet Electro's anticipated
catheter needs for several years. The manufacturing of catheters is a complex
process and each catheter is assembled and tested. Electro designs its catheters
and manufactures a portion of the tubing, balloons, and many components with
tooling and formulations developed by it or especially for it. Electro maintains
facilities to manufacture tubing and balloons and for the production of
catheters in the unique configurations required for their use. In addition,
where more convenient or when the level of sophistication warrants it, Electro
uses outside suppliers for certain components. Electro contracts out for the
performance of sterilization. Although most components and processes are
available from more than one vendor, certain components and processes are
manufactured or provided by single vendors, some involving molds owned by
Electro. Significant components for which Electro has only one source include
tubing for catheters, connector pins used in pacing catheters, latex used in
balloons, needles and certain packaging. Electro attempts to maintain an
adequate supply of the components on hand in order to minimize any supply
interruption from single source vendors to allow for time to locate and qualify
a new vendor or to find a substitute for a single source. As such, there can be
no assurance that Electro's ability to manufacture certain products will not be
materially affected by single source vendors.
INSURANCE
Electro maintains comprehensive general liability insurance coverage in
the amount of $5,000,000 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.
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EMPLOYEES
As of September 30, 1998, Electro had 69 full-time employees. Of the
total employees, 48 were engaged in manufacturing and quality control, 9 in
general administration and executive activities, 8 in engineering and research
and development, and 4 in sales and marketing. Electro is not a party to any
collective bargaining agreement and considers its relations with its employees
to be good.
GOVERNMENT REGULATION
FEDERAL REGULATIONS. The products developed by Electro come under the
jurisdiction of the FDA of the United States Department of Health and Human
Services, as well as other Federal, state and local agencies and similar health
authorities in foreign countries. The regulations promulgated by such agencies
govern the introduction of new medical devices and modifications to approved
devices, the observances of certain standards with respect to the manufacture
and labeling of such devices, the maintenance of certain records and the
reporting of potential product defects.
The FDA Act regulates manufacturers of "medical devices." Electro's
products are medical devices within the meaning of such Act. An amendment to the
FDA Act providing for the classification of medical devices and the
establishment of standards relating to their safety and effectiveness,
scientific review of certain devices and the registration of manufacturers and
others has been in effect since 1976 and has been supplemented by the Safe
Medical Devices Act of 1991. Under these provisions, a manufacturer must obtain
approval from the FDA of a new medical device before it can be marketed, which
approval process requires, in the case of certain classes of medical devices,
that the safety and efficacy of such devices be demonstrated by the manufacturer
to the FDA through the conduct of an FDA approved clinical evaluation program.
Under certain circumstances, the cost of obtaining such approval may be high and
the process lengthy and no assurance can be given that approval will be
obtained. Although Electro has received FDA approval to market its principal
existing products, or is exempt from formal approval requirements as provided by
law for those devices already in distribution before May 28, 1976, there can be
no assurance that Electro will receive the requisite approvals to market
additional products. Furthermore, any substitution by Electro of its current
sources for certain raw materials utilized in its production processes will, if
such substitution results in a change in the composition of the material, be
subject to FDA approval, and there can be no assurance that such approvals will
be obtained.
Since the devices developed by Electro are intended for "human use", as
defined by the FDA, Electro and such devices are subject to FDA regulations
which, among other things, allow for the conduct of routine detailed inspections
of device manufacturing establishments and require adherence to cGMP in the
manufacture of medical devices which include testing, quality control, design
and documentation requirements.
In addition, certain other classes of medical devices must comply with
industry-wide performance standards with respect to safety and efficacy
promulgated by the FDA. The FDA has not yet developed industry-wide performance
standards with respect to the safety and efficacy of those products manufactured
by Electro which will be subject to such standards. When and if such standards
are adopted, Electro will be required to submit data demonstrating compliance
with the standards (during which period Electro may be permitted to continue to
market products which have been previously approved by the FDA).
In recent years, the FDA has pursued a more rigorous enforcement
program to ensure that regulated businesses, like Electro, comply with
applicable laws and regulations. Noncompliance with applicable requirements can
result in fines, penalties, recall of products, suspension of production or the
inability to obtain premarket clearance or approval for new products. Electro
cannot predict the extent or impact of future Federal, State or local
legislation or regulation.
In February 1997, the FDA conducted an inspection and audit of Electro.
At the conclusion of the audit, the FDA issued a number of observations
regarding noncompliance by Electro with certain cGMP in the manufacture of its
products. On March 11, 1997, the FDA issued a Warning Letter to Electro
requesting that prompt action be taken to correct the violations. The areas of
noncompliance include Electro's methods of
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investigation of device complaints, methods of validation of device
sterilization, environmental monitoring procedures, methods of validation of
extrusion processes which are used in the manufacture of certain of Electro's
catheters and other quality assurance and record keeping requirements. Electro
has communicated with the FDA its intentions to remedy the noncompliance, has
established a plan and timetable to effectuate such remediation and has
diligently worked to take the necessary corrective actions; Electro's actions
have included the establishment of certain validation protocols, revisions to
Electro's Quality System and Quality System Manual, the implementation of a
program for environmental testing, the purchase of equipment for extrusion
process validation and the institution of file and record keeping protocols. A
subsequent FDA inspection in September 1997 indicated that while substantial
progress has been made, not all corrective actions have been completed. Electro
is continuing in its efforts to complete such actions and it is Electro's
intention to inform the FDA by late October 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 by late October 1998 nor that
Electro will pass any such reinspection when it occurs. While Electro is
currently under no restrictions by the FDA regarding the manufacture or sale of
its products, Electro is unable to precisely determine the short-term economic
impact of instituting the required corrective actions and there can be no
assurance that the FDA will not take further action, including seizure of
products, injunction and/or civil penalties, if the necessary corrective actions
are not completed on a timely basis. At this time, Electro is unable to
precisely determine the short-term adverse economic impact which will result
from instituting the corrective actions, but the voluntary discontinuation of
manufacturing of certain products and the delay in the sale of other products
has adversely affected sales by an estimated 10%.
EUROPEAN REGULATION. Many countries in which Electro markets its
products regulate the manufacture, marketing and use of medical devices. Electro
intends to pursue product approval or registration procedures for its new
products in countries where it is marketing existing products as well as for new
and existing products in additional countries where it believes there is a
market for its products. The international registration and approval process is
normally accomplished in coordination with its international distributors. In
order for Electro to continue to sell certain of its products in the nations of
the EEC after June 14, 1998, it must obtain certification, the CE Mark, from
ISO. Since Electro has not yet obtained the CE Mark and is now unable to sell
certain of its products in the Nations of the EEC (which account for
approximately 17% of total revenues), international sales should be adversely
affected in Europe for about the next six months or more. The effort to obtain
the CE Mark is continuing and management of Electro is hopeful of obtaining this
designation before the end of the calendar year on its major products in order
to allow sales into this market. However, there can be no assurance that Electro
will obtain the CE Mark or maintain the same level of revenue upon receiving the
CE Mark as it did previously.
Export sales of devices that have not received FDA marketing clearance
generally are subject to export permit requirements. In order to obtain such a
permit, Electro must provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located, stating
that the sale of the device is not in violation of that country's medical device
laws. In April 1996, new legislation was enacted to permit the export of devices
unapproved in the U.S., if the product complies with the laws of the country and
as long as the products are approved by any of the industrialized countries
specified in the export reform legislation. Electro has received such clearance
for its Circuit Breaker steerable catheter with temperature control for ablation
and is currently distributing it outside the U.S.; sales of Electro's Circuit
Breaker steerable catheter for the fiscal years ended August 31, 1997 and August
31, 1996 were approximately $87,000 and $180,000, respectively.
Electro is also subject to various Federal, state and local laws
pertaining to such matters as safe working conditions, environmental protection,
fire hazard control and other regulations. Electro is not aware of any
regulations with which it is not in compliance.
BACKLOG
Electro typically does not operate with a significant backlog. The
majority of product shipments in a quarter relate to orders received in that
quarter. Electro's actual product shipments depend on its production capacity,
manufacturing yields and component availability, among other factors. At
September 30, 1998, Electro had a backlog of orders for its products which,
aggregated, was approximately $206,000, as compared to approximately $661,000 at
September 30, 1997. The prior year's total included orders totalling $312,000
from one
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customer which had placed an annual order but now orders on a monthly basis.
Electro anticipates that substantially all of the backlog recorded at September
30, 1998 will be completed within the next twelve months.
COMPETITION IN THE INDUSTRY
The medical technology industry is a highly competitive field,
characterized by rapid technological advances, and Electro competes with many
other companies on current products and products in the development stages. Many
of these competitors have significantly greater financial, marketing, sales,
distribution and technical resources than Electro. Rapid technological advances
by Electro's competitors could at any time require that Electro redesign a
portion of its product line. Accordingly, there can be no assurance as to the
success of Electro's products in competition with such companies.
Electro's older products compete primarily with those of larger
companies that have greater resources and better distribution capabilities. The
current principal basis of competition in these markets is price. Electro's
limited resources make it less capable than larger competitors to offer
aggressive pricing to meet competition. In addition, certain customers purchase
catheters in blanket contracts which include products offered by Electro's
larger competitors but not by Electro. For these reasons, Electro has not been
able to compete effectively during recent years in the market for non-EP
products.
The electrophysiology market is also highly competitive and competition
is expected to increase. These competitors currently include USCI, a division of
C.R. Bard, Inc.; Mansfield and EP Technologies, divisions of Boston Scientific
Corporation; CardioRhythm, Inc., a division of Medtronic, Inc.; Cordis-Webster
Laboratories, a division of Johnson & Johnson, Inc. and Daig Corporation, a
division of St. Jude Medical, Inc. These companies are more capable of offering
a broader range of products to the cardiologist. Electro's ability to compete
effectively in the future could be dependent upon broadening its range of
products and/or forging an alliance with another company which would effect
greater product diversity. Electro's electrophysiology products compete with
other treatments, including prescription drugs, implantable cardiac
defibrillators and open heart surgery.
Electro's catheter ablation product is not yet approved for marketing
in the U.S., but some competitors have developed products, specifically for use
in catheter ablation, which are approved in the U.S. Due to certain development
issues, clinical trials scheduled for 1997 were delayed. Electro plans to begin
its clinical trials for ablation in fiscal year 1999 in order to seek approval
to market these catheters domestically. The costs to perform such clinical
trials are estimated at $150,000 which Electro anticipates would be funded from
financing obtained in connection with the Merger. The primary competitive
factors relative to other catheter ablation products are technical superiority,
financial resources, the timing of regulatory approval, commercial introduction
and quality. Electro's competitive position also depends on its ability to
attract and retain qualified personnel, develop effective proprietary products
and implement production and marketing plans. Electro hopes that it can
effectively compete in this market.
PROPERTY
Electro's principal manufacturing facilities and executive offices are
located at 2100 Felver Court, Rahway, New Jersey, in premises which it purchased
in 1976. This property secures part of the indebtedness to The T Partnership.
Electro also leases a 10,000 square foot facility located in Avenel, New Jersey.
The lease for the Avenel facility is on a month-to-month basis. These premises
are suitable for all of Electro's current and foreseeable production,
development and administrative functions.
LEGAL PROCEEDINGS
In September 1997, a Superior Court jury in Middlesex County, New
Jersey found Electro liable for age discrimination in connection with its
termination of an employee in April 1994. The jury awarded the terminated
employee $283,000 plus attorney's fees and expenses and prejudgment interest in
the combined amount of approximately $47,990. Electro also incurred legal costs
from September 1996 through September 1997 in the
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amount of approximately $115,665 which is also included in the litigation
expense in the accompanying 1997 Statements of Operations. Electro filed an
appeal of the judgment.
Pending Electro's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied on certain of Electro's bank
accounts, thereby freezing the available funds. Notwithstanding management's
belief that Electro had arguments supporting its appeal, management weighed the
considerable cash requirements of an appeal bond, the costs of continued efforts
relative to the appeal, and the need to vacate the levies to satisfy Electro's
immediate cash requirements, against the likelihood of prevailing on its appeal
and the terms of a possible settlement and, on April 8, 1998, Electro entered
into a settlement agreement (the "Settlement Agreement") with the plaintiff.
Under the key terms of the Settlement Agreement, the matter has been
settled for the sum of $305,000 payable as follows: (i) by a lump sum payment of
$65,000 within five business days of the date of the Settlement Agreement; and
(ii) the remaining balance, bearing interest at the rate of 6% per annum,
payable in monthly installments of $10,000, plus interest, commencing July 1,
1998. The Settlement Agreement provides that a default in any monthly payment
which remains unpaid for a period of ten days after notification of not having
been received by the plaintiff, shall allow the plaintiff to declare a default
and accelerate the payment of the entire outstanding balance with interest.
Electro has made the payments due to date on a timely basis.
Electro is currently a party to certain litigation incident to the
normal conduct of its business. In March 1997, a female employee of Electro,
holding the position of field sales representative, filed a complaint against
Electro with the Equal Employment Opportunity Commission (the "EEOC") alleging
sex discrimination. In October 1997, subsequent to Electro's response to the
allegations and to the EEOC's investigation thereof, the EEOC dismissed the
complaint upon a finding that no violation had occurred. In February 1998, the
employee filed a lawsuit against Electro making the same allegations as in her
EEOC complaint. In light of the foregoing and based upon management's
discussions with its counsel on this matter, it believes that the allegations
are groundless and that the final outcome of such litigation will not have a
material adverse effect on Electro's financial position.
ELECTRO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
For each of the first three quarters of fiscal year 1998, the average
sales were approximately $1,400,000 and the average loss was approximately
$300,000. The preliminary unaudited results for the fourth quarter indicate a
decrease of about $200,000 from the average quarterly sales and about a $100,000
decrease from the average quarterly loss. Electro instituted a major cost
reduction program including personnel cutbacks that resulted in considerable
savings that more than offset the reduction in sales. A sizeable portion of the
decrease in sales is attributable to not having the CE Mark for sales in
certain European countries. Electro is in the process of working to obtain the
CE Mark. Management continues its endeavors to implement cost reduction
programs. Management believes that there has not been a material adverse change
in the financial position of Electro during the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, working capital decreased $762,242 to $195,932 from
fiscal year ended August 31, 1997. The current ratio was 1.1 to 1 at May 31,
1998 as compared to 1.6 to 1 at fiscal year ended August 31, 1997. Net cash used
in operating activities was $460,956 for the nine months ended May 31, 1998 as
compared to $103,613 used in operating activities for the nine months ended May
31, 1997. This increase in cash required for operations is primarily attributed
to the increase in Electro's losses for the nine-month period, increase in other
assets which is primarily associated with the expenses in connection with the
proposed Merger, higher inventories and increase in accounts payable offset by a
decrease in accounts receivable and other current assets. Electro was able to
satisfy its cash requirements with borrowings from The T Partnership, cost
saving measures (especially in
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the sales and marketing area, where field sales personnel have not yet been
replaced), cash on hand and extension of its accounts payable.
In April 1998, rather than await a decision of its appeal, Electro
settled a certain age-discrimination lawsuit to which it was a party and under
which judgment, at the trial level, had been entered against it in the amount of
approximately $330,990. See "BUSINESS OF ELECTRO - Legal Proceedings." The
settlement, in the amount of $305,000, provides for a lump sum payment of
$65,000, with the balance, bearing interest at the rate of 6% per annum, payable
in monthly installments of $10,000, plus interest, commencing on July 1, 1998.
The settlement further provides that a default in any monthly payment remaining
unpaid for a period of ten days after notification of not having been received
by the plaintiff, allows the plaintiff to declare a default and accelerate the
payment of the entire outstanding balance with interest. Electro has made the
payments due to date on a timely basis.
The rate of interest on the debt to the T Partnership is 12% per annum
on any outstanding balance and is payable monthly. Electro made scheduled
monthly principal payments of $25,000 for four months beginning on September 1,
1996. The scheduled monthly principal payments were then deferred to September
1, 1998. Any remaining balance is due on August 1, 2003. The loan is secured by
Electro's property, building, accounts receivable, inventories and machinery and
equipment. Electro is to prepay the outstanding balance in the event Electro is
merged into or consolidated with another corporation or Electro sells all or
substantially all of its assets, unless The T Partnership and Electro agree
otherwise. The T Partnership has waived the prepayment of the outstanding
balance in order to facilitate the Merger. See "MERGER - Redemption of The T
Partnership Debt."
Under the provisions of the agreement with The T Partnership, Electro
is obligated to comply with certain financial covenants, to be tested on a
monthly basis. Non-compliance by Electro allows The T Partnership to declare an
Event of Default and accelerate repayment of indebtedness. As of August 31,
1997, Electro was not in compliance with this financial covenant. However, in
November 1997, The T Partnership agreed not to exercise its right to accelerate
the repayment of indebtedness through September 1, 1998 as a result of
non-compliance with the aforementioned financial covenant and the nonpayment of
principal payments in the 1998 fiscal year. The T Partnership has also agreed to
a modification to the financial covenant. Electro is currently in compliance
with such covenant. In September 1997, in December 1997, in January 1998, in May
1998, and in July 1998 Electro borrowed additional amounts from The T
Partnership, in each case in the amount of $100,000, under substantially the
same terms and conditions as its previous borrowings, without issuing any
additional warrants. Under the current arrangement, Electro is obligated to
comply with a financial covenant to be tested on a monthly basis. Non-compliance
by Electro with such covenant would allow The T Partnership to declare an event
of default and accelerate repayment of indebtedness. Electro is currently in
compliance with the covenant. The total indebtedness due to The T Partnership at
September 30, 1998 was approximately $2.5 million.
Under the provisions of the original agreement, The T Partnership was
granted warrants which permit The T Partnership to purchase 166,667 shares of
Electro's Common Stock at a price of $3.25 per share. The August 1995 Lending
Agreement provides that The T Partnership surrender its warrants and be granted
a new warrant to purchase 500,000 shares of Electro's Common Stock at a price of
$0.9875 per share in exchange for the surrendered warrant. No additional
warrants were issued as a result of subsequent borrowings. A value has been
allocated to the warrants based upon their estimated fair market value at the
date of the agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is shown in
other assets in the accompanying 1997 and 1996 balance sheets. The warrants are
immediately exercisable and expire on August 1, 2001. As of September 30, 1998,
these warrants remain outstanding.
The report of Electro's independent auditors on Electro's financial
statements, included elsewhere herein, includes an explanatory paragraph which
states that Electro's recurring losses and limited working capital raise
substantial doubt about Electro's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. During fiscal year 1997, Electro was able to
satisfy its cash shortfall from operating activities with the borrowings from
The T Partnership, and advances from an unrelated company to perform contract
research and development, as well as cash on hand. Electro's ability to continue
with its plans is contingent upon its ability to obtain sufficient cash flow
from operations or to obtain additional financing. Electro has had difficulty in
paying its obligations and, as a result, has delayed payments to
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vendors. Electro continues to re-evaluate its plans to obtain funds. The
contemplated Merger is contingent upon Electro and Cardiac raising sufficient
capital to support each company's product development efforts. Management
believes that this Merger can offer advantages to both companies by, among other
benefits, providing economies of scale and elimination of redundancies. However,
there can be no assurance that the Merger will occur or that Electro will be
able to generate the funding required. Further, there can be no assurance that
consummation of the Merger will yield positive operating results in the future.
Electro does not plan to pay dividends in the near future.
RESULTS OF OPERATIONS
FISCAL QUARTER AND NINE MONTHS ENDED MAY 31, 1998 COMPARED TO FISCAL QUARTER AND
NINE MONTHS ENDED MAY 31, 1997
OVERVIEW. Net revenues declined $216,417 (12.6%) and $985,713 (19.2%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the three and nine months ended May 31, 1997. Product revenues increased $31,210
(2.1%) for the three months ended May 31, 1998 as compared to the same three
month period in the prior fiscal year. However, product revenues decreased
$471,238 (10.7%) for the nine months ended May 31, 1998 as compared to the same
period in the prior fiscal year. Contract research and development declined
$240,529 (100%) and $544,293 (100%), respectively, for the three and nine months
ended May 31, 1998 as compared to the three and nine months ended May 31, 1997.
Licensing fees and royalty income increased $11,902 for the three months ended
May 31, 1998 and declined $33,309 for the nine-month period. For the nine months
ended May 31, 1998 sales to an OEM customer increased $63,727, however, revenues
from this customer declined $19,000 for the three-month period ended May 31,
1998.
SALES. Domestic sales decreased $74,266 (7.4%) and $353,934 (11.6%) for
the three and nine months ended May 31, 1998, respectively, as compared to the
same periods in the prior year. These decreases are primarily due to Electro not
having an approved electrophysiology ablation catheter, lack of new products, a
continued decline in demand for Electro's older products in pacing and
monitoring, backorders, as well as the impact of not replacing sales
representatives who have left Electro. International revenues decreased $117,304
(8.6%) for the first nine months of fiscal year 1998 as compared to the first
nine months of fiscal year 1997. The decline in international revenues for the
nine-month period is attributed to the lack of new products, lower demand for
Electro's electrophysiology products, product redesign problems, lower prices
due to competition and backorders. For the three months ended May 31, 1998,
international revenues increased $105,476 (23.5%) as compared to the three
months ended May 31, 1997. This increase is attributed to new business in
countries where Electro has had representation and the timing of orders from
distributors. This increasing trend is not expected to continue in the near
term. International sales should be adversely affected in Europe (approximately
17% of total revenues) for the next six months or more as Electro was not able
to obtain the CE Mark on its products on a timely basis, in order to continue to
sell into this market. The effort to obtain the CE Mark is continuing and
management of Electro is hopeful of obtaining this designation before the end of
the calendar year on its major products in order to continue selling into this
market. However, there can be no assurance that Electro will obtain the CE Mark
or maintain the same level of revenue upon receiving the CE Mark as it did
previously.
Electro's insufficient financing has hampered its ability to introduce
new products to market and to correct the redesign issues, in order to maintain
sales at its prior levels.
GROSS PROFITS. Gross profit dollars decreased $253,622 (39.8%) and
$963,846 (42.3%), respectively, for the three and nine months ended May 31, 1998
as compared to the three and nine months ended May 31, 1997. This decrease is
primarily attributed to decreased production levels related to the lower sales
volume. The decreased production levels caused the cost of goods sold of the
catheters to increase due to less efficient labor utilization and a greater
amount of fixed overhead allocated to each catheter produced. The increased cost
of goods sold is also attributable to write-offs of certain inventories which
were scrapped for sterilization samples, evaluation and testing failures and the
increased cost associated with regulatory compliance. The lower volume continues
to negatively impact gross profit.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $151,670 (27.0%) and $234,018 (13.3%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the same periods last year. The three months ended May 31, 1998 includes an
adjustment of $144,068 to reclassify expenses associated with the Merger to
other assets. Excluding this adjustment, selling, general and administrative
expenses decreased only $35,602 (6.3%) for the three months ended May 31, 1998
as compared to the three months ended May 31, 1997. The decreases primarily
reflects lower domestic and international selling expenses substantially
attributable to the loss of field sales personnel that have not yet been
replaced and to cutbacks in international activities.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and
development expenses decreased $106,464 (47.3%) and $256,755 (38.2%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the same periods in the prior fiscal year. This decrease reflects the lower
level of research and development efforts. The decrease is primarily attributed
to decreased personnel and lower material, supply, consulting and recruiting
expenses. In the prior fiscal year, costs associated with billable research and
development activities were charged to cost of revenues. There were no contract
research and development activities during the nine months ended May 31, 1998.
OTHER INCOME AND EXPENSES. Interest expense increased as a result of
the increased borrowings from The T Partnership and interest on capitalized
lease obligations.
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
OVERVIEW. Net revenues declined $713,998 (9.7%) for the fiscal year
ended August 31, 1997 as compared to the fiscal year ended August 31, 1996.
Product revenues declined $1,148,149 (16.4%) for the fiscal year ended August
31, 1997 in addition to a decline in revenues from an OEM customer of $64,133.
These declines were partially offset by an increase in contract research and
development revenues of $388,586, which included a $100,000 termination fee from
a contract research and development effort and $109,698 received from licensing
certain of Electro's technology. Gross profit dollars decreased $675,982 (20.6%)
for the fiscal year ended August 31, 1997 as compared to the fiscal year ended
August 31, 1996. This decrease is primarily attributed to decreased production
levels related to the lower sales volume as well as the write-off of certain
inventories. The gross profit percentage for the fiscal year ended August 31,
1997 was 39.2% as compared to 44.6% for the fiscal year ended August 31, 1996.
The lower volume continues to adversely impact gross profit. The net loss for
the fiscal year ended August 31, 1997 was $1,354,942 or $0.21 per share as
compared to a net loss of $892,940 or $0.14 per share for the fiscal year ended
August 31, 1996.
During the past eighteen months, Electro has devoted much of its
engineering efforts to its contract research and development customer and OEM
business. This strategy has adversely affected product sales, but Electro hopes
that this strategy will yield more positive results in the long-term as Electro
continues to investigate opportunities to capitalize on its catheter technology
and manufacturing capabilities. In May 1997, the agreement-in-principle to
perform contract research and development work for a medical device company,
which work commenced in June 1996, was terminated at the request of the other
company. The terms of the agreement-in-principle called for the other company to
pay Electro a monthly fee of $150,000 for a period of one year. A definitive
agreement was never executed. Electro received $600,000 for the work it had
performed and also received a $100,000 termination fee. As a result of the
termination, Electro's revenues were adversely affected in the short-term.
Electro's OEM business may partially offset the lost revenues from the
termination.
SALES. Direct domestic sales decreased $678,405 (14.4%) for the fiscal
year ended August 31, 1997 as compared to the fiscal year ended August 31, 1996.
This decrease is primarily due to Electro not having an approved
electrophysiology ablation catheter, lack of new products as Electro had focused
its attention on the contract research and development and OEM business, a
continued decline in demand for Electro's older products in pacing and
monitoring, backorders, as well as the impact of not replacing sales
representatives who have left Electro. International revenues decreased $496,254
(21.4%) for 1997 as compared to 1996. The decline in international revenues is
attributed to the insufficiency of new products as Electro had focused its
attention on the
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contract research and development and OEM business, lower demand for Electro's
electrophysiology products, product redesign requirements, lower prices due to
competition and backorders.
GROSS PROFITS. Gross profit dollars decreased $675,982 (20.6%) for the
year ended August 31, 1997 as compared to the prior year. This decrease is
primarily attributed to decrease production levels related to the lower sales
volume as well as the write-off of certain inventories. The decreased production
levels caused the cost of goods sold of the catheters to increase due to less
efficient labor utilization and a greater amount of fixed overhead allocated to
each catheter produced. The gross profit percentage for the year ended August
31, 1997 was 39.2% as compared to 44.6% for the year ended August 31, 1996. The
lower volume continues to adversely impact gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $570,864 (19.3%) for the fiscal year ended
August 31, 1997 as compared to the fiscal year ended August 31, 1996. This
decrease primarily reflects lower domestic marketing and selling expenses of
$641,690 (32.5%), mostly attributed to the departure of field sales personnel
that have not yet been replaced. This decrease was partially offset by an
increase in the provision for bad debt which resulted from non-payments by an
international distributor experiencing cash flow problems.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and
development expenses decreased $128,345 (12.7%) for the fiscal year ended August
31, 1997 as compared to the fiscal year ended August 31, 1996. The decrease is
primarily attributed to the transfer of expenses to costs of revenues associated
with billable research and development activities in addition to lower material
purchases and consulting fees. These decreases were partially offset by higher
expenses for new personnel.
OTHER INCOME AND EXPENSES. Interest expense increased primarily as a
result of the increased borrowings from The T Partnership and interest
associated with capitalized leases for equipment. Litigation expense for 1997
represents the jury award to a terminated employee as a result of an age
discrimination suit and Electro's legal costs from September 1996 to defend this
action.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995
OVERVIEW. During 1996, Electro entered into a joint venture arrangement
with one of the leading centers for electrophysiology in the U.S. to develop
products for the diagnosis of ventricular tachycardia. Electro also began to
develop products in the therapeutic area of atrial fibrillation. In June 1996,
Electro received an advance of $300,000 from an unrelated party to perform
research and development and pre-production planning. In September 1996, Electro
reached a verbal agreement-in-principle to perform further research and
development and production for this company pursuant to which Electro was to
receive a monthly fee of $150,000 for a period of one year for this effort. As
noted above, this arrangement was never formalized and has now been terminated.
In October 1996, Electro reached a formal agreement to license certain of its
technology to another medical device company that is in a market segment in
which Electro does not participate.
SALES. Net revenues increased $99,012 (1.4%) for the fiscal year ended
August 31, 1996 to $7,362,436 as compared to the fiscal year ended August 31,
1995. Total domestic sales decreased $416,351 (7.9%) while international sales
increased $359,656 (18.3%) for fiscal year 1996 as compared to fiscal year 1995.
In addition, Electro had revenues of $155,707 in fiscal year 1996 related to the
performance of research and development activities for a third party. The
decline in domestic sales is attributed to a decline in sales in several of
Electro's product lines, especially Electro's steerable catheters, and the loss
of field sales personnel that have not yet been replaced. The increase in
international sales is attributed to an increase in sales of Electro's
traditional and electrophysiology products, including sales to distributors in
countries where Electro had not previously been represented.
GROSS PROFITS. Gross profit dollars decreased $118,899 (3.5%) in fiscal
year 1996 as compared to the prior year. This decrease in gross profit is
attributed primarily to the increased fourth quarter production costs and
write-offs of certain inventories. The gross profit percentage for fiscal year
1996 was 44.6% as compared to 46.8% for
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fiscal year 1995. Gross profit for fiscal year 1996 also included the positive
impact of selling directly to hospitals in the northeast region rather than
through a distributor, as previously accomplished, which required discounts. In
December 1995, Electro reduced its manufacturing staff as a result of lower than
anticipated demand. Gross profit was also negatively affected as a result of
this labor reduction, since overhead expenses were allocated over a smaller
direct labor pool. In October 1996, Electro again reduced its workforce.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $483,820 (14.1%) for fiscal year 1996 as
compared to fiscal year 1995. This decrease primarily reflects lower
domestic marketing and selling expenses. This decrease is attributed to the
departure of some of Electro's sales representatives and the Director of
Clinical Development who have not been replaced. This decrease was offset
partially by hiring an International Marketing Manager.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Research and
development expense increased by $78,117 (8.4%) for fiscal year 1996 as compared
to the prior fiscal year. The increase is attributed to an increase in
personnel, consulting fees and purchases of materials and supplies for new
product development.
OTHER INCOME AND EXPENSES. Interest expense increased in fiscal year
1996 as a result of increased borrowings from The T Partnership (see Note 7 of
the Notes to the Financial Statements included in response to "Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K").
The net loss for fiscal year 1996 was $892,940 or $.14 per share as
compared to a loss of $1,135,890 or $.18 per share for fiscal year 1995.
OPERATING TRENDS AND UNCERTAINTIES
SALES. The ability of Electro to attain a profitable level of
operations is dependant upon expansion of sales volume, both domestically and
internationally, and continued development of new and advanced products. Many
countries in which Electro markets its products regulate the manufacture,
marketing and use of medical devices. Electro intends to pursue product approval
or registration procedures in countries where it is marketing its products. The
international registration and approval process is normally accomplished in
coordination with its international distributors. In order for Electro to
continue to sell certain of its products in the nations of the EEC, Electro must
obtain certification, the CE Mark, from ISO. Since Electro has not yet obtained
the CE Mark and is now unable to sell certain of its products in the notions of
the EEC, international sales should be adversely affected in Europe (which
account for approximately 17% of total revenues) for about the next six months
or more. The effort to obtain the CE Mark is continuing and Electro is hopeful
of obtaining this designation before the end of the calendar year on its major
products in order to continue selling into this market. However, there can be no
assurance that Electro will obtain the CE Mark or maintain the same level of
revenue upon receiving the CE Mark as it did previously.
YEAR 2000 ISSUE. Electro is reviewing its computer programs and systems
to ensure that the programs and systems will function properly and be Year 2000
compliant. Management of Electro presently believes that the Year 2000 issue
will not pose significant operational problems for Electro's computer systems.
The estimated cost of Electro's review and assessment efforts is not expected to
be material to Electro's financial position or any year's result of operations,
although there can be no assurance of this result. In addition, the Year 2000
issue may impact other entities with which Electro transacts business, and
Electro cannot predict the effect of the Year 2000 issue on such entities.
Electro is contacting its major vendors to ascertain if any potential problems
exist.
INFLATION AND CHANGING PRICES
In the opinion of Electro's management, the rate of inflation during
the past two fiscal years and for the nine months ended May 31, 1998 has not had
any material impact on Electro's operations. Because of the implementation of
cost containment and new Medicare regulations, any increase in sales revenues is
expected to result from an increase in the volume of business rather than from
an increase in selling prices. Electro's pricing
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structure may not reflect inflation rates, due to constraints of Medicare
regulations, market conditions and competition.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued FAS 130 and FAS 131. FAS 130 establishes
standards for reporting and displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. Both FAS 130 and
FAS 131 are effective for periods beginning after December 15, 1997. Because of
the recent issuance of the standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial statement
disclosures.
In June 1998, the FASB issued FAS No. 133. FAS 133 requires companies
to recognize ALL derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may specifically be designated as a hedge, the objective of which
is to match the timing of gain or loss recognition of: (i) the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk; or (ii) the earnings effect of the hedged transaction. For a derivative
NOT designated as a hedging instrument, the gain or loss is recognized as income
in the period of change. FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
MANAGEMENT OF ELECTRO
DIRECTORS AND EXECUTIVE OFFICERS OF ELECTRO
<TABLE>
<CAPTION>
NAME, AGE, AS OF SEPTEMBER 30, 1998
AND POSITIONS AND OFFICES HELD BUSINESS EXPERIENCE DURING PAST 5 YEARS AND
WITH ELECTRO PRINCIPAL OCCUPATION
- ------------------------------------ ----------------------------------------------------
<S> <C>
Abraham H. Nechemie, Age 74; Business Consultant. Formerly a partner in Wiss &
Director since 1992(1) Company, a certified public accounting firm.
Retired from the firm in 1985.
Ervin Schoenblum, Age 58; Acting President and Chief Operating Officer since
Director since 1992 December 1993. Management Consultant for over
five years. Advisor to Electro since February
1989.
Lee W. Affonso, Age 49; Vice President of Electro since July 1992 except
Vice President for the period from September, 1993 to December
1993 when he served as Senior Sales Specialist.
Robert W. Kokowitz, Age 43; Vice President of Electro since July 1992.
Vice President
Joseph P. Macaluso, Age 46; Chief Financial Officer since May 1987.
Treasurer and Chief Financial
Officer
Susan J. Steiner, Ph.D., Age 48; Vice President of Electro since September 1997.
Vice President Director of Regulatory Affairs and Quality
Assurance since January 1997.
Vice President of Regulatory
Affairs at Biosearch Medical
Products, Inc., 1994 to 1997;
Visiting Professor at Rutgers
University 1992 to 1993.
Nicholas G. Accisano, Age 45; Vice President of Electro since September 1997.
Vice President Director of New Product Development for over
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<PAGE>
the past five years.
</TABLE>
- -------------------
(1) Member of audit committee.
Electro's directors' terms will expire when their successors are
elected and qualify at the annual meeting of stockholders. Electro's Officers
serve for a period of one year and until their successors are elected by the
Electro Board.
On December 6, 1993, the Electro Board elected Mr. Ervin Schoenblum
Acting President replacing Mr. Max Lee Hibbs, former President, who resigned in
September, 1993.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each Director and Executive Officer, and each person owning
beneficially more than ten (10) percent of a registered class of Electro's
equity securities, is required to file reports of ownership and changes in
ownership with the SEC, and furnish Electro with copies of all such reports.
Based solely upon Electro'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 Electro Common
Stock, Electro believes that, during the period September 1, 1996 to August 31,
1997, all filing requirements applicable to its directors, officers and owners
of more then 10% of Electro Common Stock were complied with.
ELECTRO DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION
SUMMARY COMPENSATION
The following table sets forth information about the compensation earned
by, awarded or paid to Electro's officers (whose total compensation for the
fiscal year ended August 31, 1997 exceeded $100,000) for services rendered in
all capacities to Electro during each of the fiscal years ended August 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
FISCAL
YEAR SECURITIES
NAME AND ENDED ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION AUGUST 31, SALARY OPTIONS (1) COMPENSATION
- -------------------------- -------------- ----------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Ervin Schoenblum 1997 $ 105,000 - -
Acting President 1996 $ 102,000 - -
1995 $ 86,000 25,000 -
Lee W. Affonso 1997 $ 105,000 - -
Vice President 1996 $ 112,000 - -
1995 $ 117,000 - -
Joseph P. Macaluso(2) 1997 $ 83,000 - $19,000
Treasurer & Chief 1996 $ 83,000 - $19,000
Financial Officer 1995 $ 83,000 - $18,000
</TABLE>
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<PAGE>
- -------------------
(1) The table reflects the number of options granted under Electro's Incentive
Stock Option Plans.
(2) All other compensation represents commissions on international sales.
Stock options are also granted to officers and are determined by the
Electro Board based upon the individual's contribution to Electro. During fiscal
year 1997, no options were granted to the named executive officers.
Electro has no compensation committee, nor does the Electro Board have
a committee performing similar functions. Ervin Schoenblum, Electro's Acting
President, participated in deliberations of the Electro Board concerning
executive officer compensation.
OPTION GRANTS IN LAST FISCAL YEAR
During fiscal year 1997, no options were granted to those persons named
in the preceding Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the value of
unexercised stock options at August 30, 1997 for those persons named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES TABLE
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END FY-END(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---------------------- --------------------- -------------------- ------------------------ -----------------
<S> <C> <C> <C> <C>
Ervin Schoenblum - - 48,000/32,000 $0/$0
Lee W. Affonso - - 21,900/14,600 $0/$0
Joseph P. Macaluso - - 21,900/14,600 $0/$0
</TABLE>
- -------------------
(1) Calculated on the basis of fair market value of the underlying securities
at August 31, 1997 less the exercise price.
COMPENSATION OF DIRECTORS
For their service on the Electro Board, each outside director is
entitled to receive the sum of $1,000 for each of the Electro Board meetings
attended.
STOCK OPTION PLANS
On May 20, 1987, Electro'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 Electro Common Stock were
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<PAGE>
set aside for the issuance of options to be granted to officers and other key
employees rendering services and making contributions to Electro. Pursuant to
the 1987 Plan, 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, Electro'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. Under the 1990 Plan,
225,000 shares of Electro Common Stock were reserved for issuance.
On July 15, 1992, Electro's stockholders approved the 1992 Incentive
Stock Option Plan (the "1992 Plan"). The terms of the 1992 Plan are
substantially the same as the terms of the 1987 and 1990 Plans. Under the 1992
Plan, 225,000 shares of Electro Common Stock were reserved for issuance.
On April 1, 1992, the Electro Board adopted the 1992 Non-Qualified
Stock Option Plan (the "Non-Qualified Plan") pursuant to which options to
purchase 200,000 shares of Electro Common Stock may be granted to directors,
officers and key employees. Options under the Non-Qualified Plan may be granted
at a price determined by the Electro Board, which price may not be 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 later
than five years after the date of grant.
In July 1994, Electro extended the expiration date of certain
outstanding options held by two members of the Electro Board. The extension
relating to a total of 44,500 shares of Electro 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 its
extension has been recorded as compensation expense and is being amortized over
the extension period.
In October 1994, the Electro Board 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 an
exercise price of $1.00 per share, representing the fair market value thereof at
that time. Accordingly, options to purchase 384,300 shares of Electro Common
Stock were terminated and an equal number of new options were issued. In
addition, Electro also granted an option to purchase 25,000 shares of Electro
Common Stock to Electro's Acting President at an exercise price of $1.00 per
share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF ELECTRO
CERTAIN BENEFICIAL OWNERS
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 Electro to own more than 5% of the common stock, of Electro as
of September 30, 1998.
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS (1)
- ------------------------- ----------------------- -------------
The T Partnership, L.L.P. 2,464,844 (3) 35.3%
c/o Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039 (2)
Fred Lafer 2,464,844 35.3%
c/o The Taub Foundation
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<PAGE>
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP CLASS (1)
- --------------------- ----------------------- -------------
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
Abraham H. Nechemie 2,469,844 (4) 35.3%
Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039
Ervin Schoenblum 2,528,844 (5) 35.9%
c/o Electro-Catheter Corporation
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 58,400 10.3%
1 Hampton Road
Purchase, NY 10577
- --------------------
(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.
(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 64,000 shares issuable upon the exercise of currently exercisable
stock options.
MANAGEMENT
The following table sets forth the number of shares of common stock
beneficially owned by each Director of Electro, each of the named executive
officers named in the Summary Compensation Table set forth above as of
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<PAGE>
September 30, 1998, and the percentage of the outstanding shares such ownership
represented at the close of business on September 30, 1998, together with
information as to stock ownership of all directors and executive officers of
Electro as a group as of September 30, 1998.
AMOUNT AND NATURE OF PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS(4)
- ------------------------ -------------------- -----------
Abraham H. Nechemie 2,469,844(1) 35.4%
Ervin Schoenblum 2,528,844(1) 35.9%
Lee W. Affonso 29,200(2) 0.5%
Joseph P. Macaluso 29,200(2) 0.5%
All executive officers and
directors as a group (6 persons) 2,638,644(1)(3) 36.9%
- -----------------
(1) Messrs. Nechemie and Schoenblum are partners in The T Partnership, which
owns 1,881,500 shares of Electro Common Stock 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 64,000 shares held by Messrs. Nechemie and Schoenblum,
respectively.
(2) All 29,200 shares subject to currently exercisable options.
(3) Includes 184,200 shares subject to currently exercisable options held by
all executive officers and directors of Electro (including those
individually named in the table above).
(4) 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ELECTRO
Electro has no compensation committee, nor does the Electro Board have
a committee performing similar functions. Ervin Schoenblum, Electro's Acting
President, participated in deliberations of the Electro Board concerning
executive officer compensation.
On October 11, 1993, Electro entered into an agreement with The T
Partnership to borrow up to $1,000,000. Ervin Schoenblum, Electro's Acting
President and Director, and Abraham Nechemie, also a Director of Electro, are
partners in The T Partnership. On August 31, 1995, after Electro had drawn down
all of the $1,000,000, Electro entered into an agreement with The T Partnership
to borrow an additional $500,000 ("Lending Agreement"). In January 1996, Electro
and The T Partnership agreed to a restructuring of its financing agreement. The
T Partnership advanced an additional $200,000 to Electro and agreed to defer
interest payments for a period of three months (interest payments were added to
the outstanding principal on The T Partnership indebtedness) and in April 1997,
Electro borrowed an additional $100,000 from The T Partnership under the same
terms and conditions as its previous borrowing.
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. Electro made scheduled monthly principal
payments of $25,000 for four months beginning on September 1, 1996. The
scheduled monthly payments were then deferred to September 1, 1998. Any
remaining balance is due on August 1, 2003. The loan is secured by Electro's
property, building, accounts receivable, inventories and machinery and
equipment. Electro is to prepay the outstanding balance in the event it is
merged into or consolidated with another corporation or it sells all or
substantially all of its assets, unless The T Partnership and Electro agree
otherwise. The T Partnership has waived the prepayment of the outstanding
balance in order to facilitate the Merger. See "MERGER - Redemption of The T
Partnership Debt."
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<PAGE>
Under the provisions of the agreement with The T Partnership, Electro
is obligated to comply with certain financial covenants, to be tested on a
monthly basis. Non-compliance by Electro shall allow The T Partnership to
declare an Event of Default and accelerate repayment of indebtedness. As of
August 31, 1997, Electro was not in compliance with this financial covenant.
However, in November 1997, The T Partnership agreed not to exercise its right to
accelerate the repayment of indebtedness through September 1, 1998 as a result
of non-compliance with the aforementioned financial covenant and the nonpayment
of principal payments in the 1998 fiscal year. The T Partnership has also agreed
to a modification of the financial covenant. Electro is currently in compliance
with such covenant. In September 1997, in December 1997, in January 1998, in May
1998, and in July 1998, Electro borrowed additional amounts from The T
Partnership, in each case in the amount of $100,000, under substantially the
same terms and conditions as its previous borrowings, without issuing any
additional warrants. Under the current arrangement, Electro is obligated to
comply with a financial covenant to be tested on a monthly basis. Non-compliance
by Electro with such covenant would allow The T Partnership to declare an event
of default and accelerate repayment of indebtedness. Electro is currently in
compliance with the covenant. The total indebtedness due to The T Partnership at
September 30, 1998 was approximately $2.5 million.
Under the provisions of the original agreement, The T Partnership was
granted warrants which permit The T Partnership to purchase 166,667 shares of
Electro Common Stock at a price of $3.25 per share. The August 1995 Lending
Agreement provides that The T Partnership surrender its warrants and be granted
a new warrant to purchase 500,000 shares of Electro Common Stock at a price of
$0.9875 per share in exchange for the surrendered warrant. No additional
warrants were issued as a result of subsequent borrowings. A value has been
allocated to the warrants based upon their estimated fair market value at the
date of the agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is shown in
other assets in the accompanying 1997 and 1996 balance sheets. The warrants are
immediately exercisable and expire on August 1, 2001. As of September 30, 1998,
these warrants remain outstanding.
DESCRIPTION OF SECURITIES OF CTG, CARDIAC AND SURVIVING SUBSIDIARY
The following description of securities of CTG and Cardiac and the
Series A preferred stock of the Surviving Subsidiary does not purport to be
complete and is subject in all respects to applicable Delaware and New Jersey
law and to the provisions of Cardiac's Certificate of Incorporation, as amended,
and Restated Bylaws, as amended, and the Certificate of Incorporation and Bylaws
of CTG and the Surviving Subsidiary. Upon approval of the Restructuring Merger
by Cardiac's stockholders and the completion of the Restructuring, Cardiac will
become a direct, wholly-owned subsidiary of CTG. Each share of Cardiac Common
Stock outstanding immediately prior to the Restructuring Merger will be
converted into a share of CTG Common Stock having the same designations, rights,
powers and preferences, and the qualifications, limitations and restrictions
thereof. The consolidated assets and liabilities of Cardiac and its subsidiary
will be the same as the consolidated assets and liabilities of CTG and its
subsidiaries immediately after the Restructuring Merger. All the business and
operations conducted immediately prior to the Restructuring Merger by Cardiac
and its subsidiary will be conducted after the Restructuring Merger by Cardiac
and its subsidiary, as subsidiaries of CTG.
COMMON STOCK
Cardiac's authorized capital stock consists of 30,000,000 shares of
common stock, $.10 par value per share. As of September 30, 1998, 2,648,739
shares of Cardiac Common Stock were issued and outstanding. CTG's authorized
capital stock consists of 30,000,000 shares of common stock, $.10 par value per
share. As of the effective time of the Merger and the Restructuring Merger, only
100 shares of CTG Common Stock will be issued and outstanding, all of which will
be held by Cardiac. Upon approval of the Restructuring Merger by Cardiac's
stockholders, holders of Cardiac Common Stock will automatically become holders
of CTG Common Stock and will have the right to cast one vote for each share held
of record on all matters submitted to a vote of holders of CTG, including the
election of directors. There is no right to cumulate votes for the election of
directors. Stockholders holding a majority of the voting power of the capital
stock issued and outstanding and entitled to vote, represented in person or by
proxy, are necessary to constitute a quorum at any meeting of CTG's
stockholders, and
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<PAGE>
the vote by the holders of a majority of such outstanding shares is required to
effect certain fundamental corporate changes such as liquidation, merger or
amendment of CTG's Certificate of Incorporation.
Holders of CTG Common Stock are entitled to receive dividends pro rata
based on the number of shares held, when, as and if declared by the CTG Board,
from funds legally available therefor, subject to the rights of holders of any
outstanding Preferred Stock. In the event of the liquidation, dissolution or
winding up of the affairs of CTG, all assets and funds of CTG remaining after
the payment of all debts and other liabilities, shall be distributed, pro rata,
among the holders of CTG Common Stock. Holders of CTG Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to CTG Common Stock. All
outstanding shares of CTG Common Stock are, and the shares of CTG Common Stock
offered hereby will be when issued, fully paid and non-assessable.
PREFERRED STOCK OF SURVIVING SUBSIDIARY
At the Merger Effective Time, $1.0 million of Electro's obligation to
The T Partnership will be redeemed by: (i) 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 be convertible
into shares of CTG Common Stock; and (ii) the delivery of The T Partnership of
CTG's 9% conditional promissory note in the amount of $1.0 million pursuant to
which CTG is obligated to pay only those amounts which are due but not paid to
the holders of the Series A Preferred Stock, or in the event of certain other
non-monetary defaults such as bankruptcy, liquidation, a sale of substantially
all assets, a change of ownership of the Surviving Subsidiary, or a default in
the hereinbelow mentioned secured promissory note (any payment or conversion of
the 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).
Following is a description of certain terms of the Preferred Shares
which is intended as a summary only, and is qualified in its entirety by
reference to the complete text of the Surviving Subsidiary's Certificate of
Incorporation, as amended, which contains the designation, powers, preferences
and rights of the Preferred Shares, a copy of which is included as an Exhibit
1.4 to Appendix A to this Joint Proxy Statement/Prospectus. The Preferred Shares
are a series of preferred stock of the Surviving Subsidiary. The Preferred
Shares will not be subject to any sinking fund or other obligation of the
Surviving Subsidiary to redeem or retire the Preferred Shares. The Preferred
Shares will be fully paid and nonassessable upon issuance in connection with the
Merger and upon consummation of the Merger, will be the only preferred stock of
the Surviving Subsidiary outstanding.
RANKING. The Preferred Shares will, with respect to dividend rights and
rights upon liquidation, dissolution and winding up, rank senior to the common
stock of the Surviving Subsidiary which will be entirely held by Cardiac.
DIVIDENDS. The holders of the Preferred Shares will be entitled to
receive annual dividends equal to $90.00 per share of Series A Preferred Stock
on the first day of January in each year (the "Preferred Dividend Payment Date")
commencing on January 1, 1999. Dividends accrue annually from the issuance date
and shall be cumulative. Accrued and unpaid dividends shall not bear interest.
LIQUIDATION. In the event of any liquidation, dissolution , sale of
substantially all of the Surviving Subsidiary's assets or winding up of the
Surviving Subsidiary, the holders of the Preferred Shares will be entitled to be
paid $1,000 per share, plus all accrued and unpaid dividends (in cash or in
kind, or combination thereof) of Series A Preferred Stock (the "Liquidation
Value"), before any distribution or payment out of the assets of the Surviving
Subsidiary is made to the holders of the Surviving Subsidiary's common stock or
any holders of any other stock. If the amounts payable to holders of Preferred
Shares are not paid in full, the entire assets of the Surviving Subsidiary shall
be distributed ratably among the holders of Preferred Shares. After payment of
the full amount of the liquidating distribution to which they are entitled,
holders of Preferred Shares will not be entitled to any remaining distribution
of corporate assets.
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<PAGE>
REDEMPTION. The Surviving Subsidiary, at its option, may redeem all of
the outstanding Preferred Shares at any time after the date of original
issuance, provided the holders of Preferred Shares have received a notice of
redemption at least twenty (20) days prior to the redemption date. The
redemption price shall be $1,000 per share of Series A Preferred Stock, plus all
accrued and unpaid dividends.
CONVERSION. For a period of five (5) years from the date of original
issuance of the Preferred Shares, each Preferred Share shall be convertible, at
the option of the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock of CTG as is determined by dividing (x)
$1,000 plus any accrued but unpaid dividends on the date the notice of
conversion is given, by (y) the Conversion Price (defined below). The Conversion
Price shall be equal to the product of 120% if any, or 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 CTG Common Stock, or otherwise)
in exchange for any capital raised in satisfaction of the financing contingency
to the Merger. In lieu of fractional shares of Common Stock which would
otherwise be deliverable upon conversion, Cardiac will pay such holder cash
equal to such fraction multiplied by the Conversion Price. The conversion right
is subject to certain notice provisions and any notice of conversion must be
given to the Surviving Subsidiary and Cardiac at any time during the day up to
11:00 a.m. Orlando, Florida time.
REGISTRATION RIGHTS. The holders of the Preferred Shares have
incidental registration rights relative to Cardiac Common Stock issued upon
conversion of the Preferred Shares with regard to any registration statement
filed by Cardiac to register any Cardiac Common Stock (other than in connection
with a merger or pursuant to Form S-4 or Form S-8 or other comparable form not
available for registering Cardiac Common Stock for sale to the public). Such
registration rights shall terminate three (3) years after the date of the
conversion of the Preferred Shares into Cardiac Common Stock and are subject to:
(i) Cardiac's right, subsequent to giving notice to such holders, to delay
filing or not file at all; (ii) underwriter's cutback or lock up, if any; (iii)
such holder's acceptance of all of the terms of the underwritten offering as
agreed between Cardiac and the underwriter; and (iv) Cardiac's right to withdraw
the registration statement.
VOTING RIGHTS. The holders of the Preferred Shares will be entitled to
the same voting rights as the holder of the common stock of the Surviving
Subsidiary.
WARRANTS
Cardiac has issued warrants (the "Warrants") representing the right to
purchase shares of its Common Stock to the warrantholders set forth below for
the number of shares of Common Stock and at the exercise price set forth
opposite each warrantholder's name. Except as otherwise indicated, all Warrants
are currently exercisable and will expire on the date set forth opposite each
warrantholder's name.
The exercise price of the Warrants was determined by negotiation and
should not be construed to imply that any price increases in Cardiac's
securities will occur. Cardiac has reserved from its authorized but unissued
shares a sufficient number of shares of Cardiac Common Stock for issuance upon
the exercise of the Warrants. Upon notice to the warrantholders, Cardiac has the
right to reduce the exercise price or extend the expiration date of the
Warrants.
The Warrants do not confer upon the warrantholder any voting or other
rights of a stockholder of Cardiac. The Warrants provide for customary
anti-dilution provisions in the event of certain events which may include
mergers, consolidations, reorganizations, recapitalizations, stock dividends,
stock splits and other changes in Cardiac's capital structure. Also, the
Warrants issued to Sirrom entitle Sirrom to participate in rights offerings made
to stockholders of Cardiac.
The warrantholders are entitled to certain "piggy-back" registration
rights enabling them, under certain conditions, to include the Cardiac Common
Stock underlying the Warrants in a registration statement in the event that
Cardiac proposes to register its Common Stock under the Securities Act.
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<PAGE>
The foregoing is a summary of the terms generally applicable to the
Warrants as of September 30, 1998. The terms of the individual Warrants may vary
according to negotiation between Cardiac and the various warrantholders.
The following table provides certain information with respect to the
Warrants as of September 30, 1998.
<TABLE>
<CAPTION>
HOLDER AMOUNT OF SHARES EXERCISE PRICE PER SHARE EXPIRATION DATE
- ---------------------------------- ---------------- ------------------------ ---------------
<S> <C> <C> <C>
Coast 62,500 $0.40(5) June 30, 2002
Sirrom 250,000(1) $0.01(6) March 31, 2000
50,000 $5.00(6) June 6, 2002
Alan J. Rabin 559 $0.18(7) June 16, 2002
866 $5.00(7) March 31, 1999
Bart C. Gutekunst 2,906 $0.18(7) June 16, 2002
866 $5.00(7) March 31, 1999
Phil Beutel 8,665 $5.00(7) March 31, 1999
Special Situation Fund III, L.P. 27,730 $5.00(7) March 31, 1999
Special Situations Cayman Fund 10,399 $5.00(7) March 31, 1999
Penfield Partners 17,331 $5.00(7) March 31, 1999
Bradley Resources 16,811 $0.40(7) March 31, 1999
ROI Partners 12,132 $5.00(7) March 31, 1999
Austin W. Marxe 2,600 $5.00(7) March 31, 1999
Bruce Brackenridge 866 $0.40(7) March 31, 1999
John Dunagan 866 $5.00(7) March 31, 1999
David Greenhouse 866 $5.00(7) March 31, 1999
Grupo Taper(2) 25,000 $0.80(8) March 29, 2006
Greenberg(3) 105,000 various(5)(9) July 31, 2003
IHI(4) 330,000 $0.128(5) August 26, 2003
</TABLE>
- -------------------
(1) The amount of shares increases by 50,000 shares annually on each March 31
so long as the Sirrom Loan is outstanding.
(2) Warrants are exercisable only if Grupo Taper achieves its forecasted sales
commitment of 5,500 units over a two-year period ended December 20, 1998.
(3) A Warrant granting a right to purchase 35,000 shares was issued on July 31,
1998. On August 31, 1998, Greenberg received the right to purchase an
additional 35,000 shares under the terms of such Warrant. Furthermore, the
right to purchase shares under such Warrant increases by 35,000 shares on
the last day of each month so long as any amount is owed under a promissory
note executed by Cardiac in favor of Greenberg in the amount of $199,000.
Each grant of right to purchase Common Stock expires five (5) years from
the date of such grant.
(4) If Cardiac has not repaid the IHI Note and the Goodbody Fee in full on or
before November 12, 1998, then at 12:01 a.m. on November 13, 1998, IHI will
receive a warrant to purchase 50,000 shares of Cardiac Common Stock, and
unless and until the full amount of the IHI Note, the Goodbody Fee and any
penalty fees are paid in full, on the 13th of each month thereafter for up
to three months, IHI will receive an additional warrant to purchase 50,000
shares of Cardiac Common Stock.
(5) The exercise price is payable in cash or any other form of consideration
agreed by Cardiac and the Warrant holder. The exercise price is also
payable in Warrants valued at the current market price of the Cardiac
Common Stock underlying such Warrants.
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(6) The exercise price is payable in cash or by delivery of shares of Cardiac
Common Stock having a fair market value equal to the exercise price.
(7) The exercise price is payable in cash or by delivery of shares of Cardiac
Common Stock having a fair market value equal to the exercise price or by a
combination of cash and such Cardiac Common Stock.
(8) The exercise price is payable only in cash.
(9) The exercise price per share under the July, August and September Warrants
is 0.375, 0.34 and 0.355, respectively. The exercise price per share under
any additional Warrants is equal to the average of the bid and asked price
of a share of Cardiac Common Stock as of the close of business on the date
such Warrant is issued.
At the Restructuring Effective Time, all outstanding Warrants by virtue
of the Restructuring Merger and without any further action on the part of any
holder thereof, shall be assumed by CTG and automatically converted, on the same
terms, into Warrants to purchase a number of shares of CTG Common Stock to be
registered shares, to the extent the Warrant is, by the terms of the Warrant,
entitled upon exercise of the Warrant, to receive registered stock, the number
of shares of Cardiac Common Stock covered by such Warrants immediately prior to
the Restructuring Effective Time, at an exercise price per share of CTG Common
Stock equal to the exercise price in effect under such Warrants immediately
prior to the Restructuring Effective Time. The converted Warrants shall be
exercisable on the same terms and conditions as the existing Warrants without,
however, giving effect to any mandatory or permissive exercise arising by virtue
of the Restructuring Merger.
BUSINESS COMBINATION PROVISIONS
Cardiac is subject to a statute under the Delaware Act regulating
"business combinations," defined to include a broad range of transactions,
between Delaware corporations and "interested stockholders," defined as persons
who have acquired at least 15% of a corporation's stock. Under the law, a
corporation may not engage in any business combination with any interested
stockholder for a period of three years from the date such person became an
interested stockholder unless certain conditions are satisfied. Cardiac has not
sought to "elect out" of the statute and, therefore the restrictions imposed by
such statute apply to Cardiac. Following the Restructuring Merger, CTG will be
subject to the same business combination provisions.
COMPARATIVE RIGHTS OF CTG, CARDIAC AND ELECTRO STOCKHOLDERS
Cardiac and CTG are incorporated in the State of Delaware, and Electro
is incorporated in the State of New Jersey. Simultaneously with the consummation
of the Merger, Cardiac will consummate the Restructuring Merger whereby: (i)
Cardiac will become a direct, wholly-owned subsidiary of CTG; (ii) each share of
Cardiac Common Stock shall be converted into a share of CTG Common Stock having
the same designation, rights, powers and preferences and qualifications,
limitations and restrictions as the shares of Cardiac Common Stock; (iii) the
Certificate of Incorporation and Bylaws of CTG will be identical to the
Certificate of Incorporation and Bylaws of Cardiac, except that CTG's Bylaws
shall state that the minimum number of directors shall be one, and (iv) the
Certificate of Incorporation of Cardiac post-Restructuring Merger shall be
identical to the Certificate of Incorporation of Cardiac immediately prior to
the Restructuring Effective Time, except that the number of classes and shares
of capital stock may be reduced. Upon consummation of the Merger, Electro will
become a wholly-owned subsidiary of Cardiac and the stockholders of Electro will
become stockholders of CTG. Cardiac stockholders will represent approximately
22% of the outstanding shares of CTG Common Stock after giving effect to the
approximately 25% interest in CTG consisting of shares of CTG Common Stock to be
issued in connection with the contemplated financing to occur immediately prior
to the Merger, resulting in dilution of the voting rights of Cardiac
stockholders in CTG after the completion of the contemplated financing and the
consummation of the Merger. The rights of Electro stockholders are currently
governed by its Certificate of Incorporation, as amended, its Bylaws and the New
Jersey Business Corporation Act (the "New Jersey Act"). After the Merger
Effective Time, the rights of Electro stockholders who become CTG stockholders
will be governed by CTG's Certificate of
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Incorporation, CTG's Bylaws and the Delaware Act, which such Certificate of
Incorporation and Bylaws are identical to Cardiac's current Certificate of
Incorporation and Cardiac's current Bylaws, except for certain changes as set
forth above.
The following is a summary comparison of certain differences between
the rights of Electro stockholders under the New Jersey Act, its Certificate of
Incorporation, as amended, and its Bylaws, and the rights of CTG and Cardiac
stockholders under the Delaware Act, their Certificate of Incorporation and
Bylaws. This summary does not purport to be complete and is qualified in its
entirety by reference to the corporate statutes of New Jersey and Delaware, and
the corporate charters and bylaws of Electro and Cardiac.
CUMULATIVE VOTING. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A stockholder may cast all such
votes for a single candidate or may allocate them among as many candidates as
the stockholder may choose (up to the number of directors to be elected).
Without cumulative voting, the holders of a majority of the shares present at an
annual meeting or any special meeting held to elect directors would have the
power to elect all the directors to be elected at that meeting, and no person
could be elected without the support of holders of a majority of the shares
voting at such meeting.
Under the New Jersey Act and the Delaware Act, stockholders are
entitled to cumulative voting if so provided in the certificate of
incorporation. Neither Cardiac's, CTG's nor Electro's Certificate of
Incorporation provides for cumulative voting.
STOCKHOLDER POWER TO CALL SPECIAL STOCKHOLDERS' MEETING. Under the New
Jersey Act, Section 14A:5-3, special meetings of the stockholders may be called
by the president or the board, or by such other officers, directors or
stockholders as may be provided in the bylaws. Notwithstanding any such
provision, upon the application of the holders of not less than ten (10%)
percent of all shares entitled to vote at such meeting, the Superior Court, for
good cause shown, may order a special meeting of the stockholders. Electro's
Bylaws provide that special stockholders' meetings can be called by a majority
of the Electro Board, the President, the Chairman of the Board, or the Secretary
if the holders of at least twenty-five percent of the shares entitled to vote at
such meeting request such a meeting in writing, stating the purpose and the
matters proposed to be acted on.
Under the Delaware Act, Section 211, special meetings of the
stockholders may be called by the board of directors or by such person or
persons as may be authorized by the certificate of incorporation or the bylaws.
Cardiac's Bylaws provide that special meetings of the stockholders can be called
by the Chairman of the Board, the President, any one of the directors, or the
holders of not less than ten (10%) percent of all the shares having voting power
at such meeting.
DISSOLUTION. Under the New Jersey Act, Section 14A:12-3, a corporation
may be dissolved by the consent of all its stockholders entitled to vote
thereon. Section 14A:12-4 further provides that a corporation may also be
dissolved by action of its board and its stockholders if the board recommends
that the corporation be dissolved, directs that the question of dissolution be
submitted to a vote at a meeting of stockholders, and the dissolution is
approved by the affirmative vote of two-thirds (2/3) of the votes cast by
holders of the outstanding shares of common stock, present in person or
represented by proxy and entitled to vote at such meeting. The certificate of
incorporation may provide for greater requirements. Electro's Certificate of
Incorporation does not so provide.
Under the Delaware Act, Section 275, the board of directors may, by a
majority of the whole board at any meeting called for that purpose, cause notice
of dissolution to be mailed to each stockholder entitled to vote thereon, and
the majority of the outstanding stock of the corporation entitled to vote must
vote for the proposed dissolution. Dissolution may also be authorized without
action of the directors if all of the stockholders entitled to vote thereon
consent in writing and a certificate of dissolution is filed with the Secretary
of State. Neither Cardiac's nor CTG's Certificates of Incorporation provide
otherwise with regard to dissolution.
SIZE OF THE BOARD OF DIRECTORS. Under the New Jersey Act, Section
14A:6-2, subject to any provisions contained in the certificate of
incorporation, the bylaws shall specify the number of directors or that the
number of
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directors shall not be less than a stated minimum nor more than a stated
maximum, but that the actual number shall be determined in the manner prescribed
in the bylaws, except as to the number constituting the first board of
directors. Electro's Bylaws provide for no less than three and no more than
seven directors. Electro's Certificate of Incorporation does not provide for any
number of directors.
The Delaware Act permits the board of directors of a Delaware
corporation to change the authorized number of directors by amendment to the
corporation's bylaws or in the manner provided in the bylaws, unless the number
of directors is fixed in the corporation's certificate of incorporation, in
which case a change in the number of directors may be made only by an amendment
to the certificate of incorporation. The Bylaws of CTG and Cardiac provide that
their boards of directors shall set the number of directors, but that Cardiac
shall not have less than three and CTG shall not have less than one without an
amendment to each such Bylaws.
CLASSIFIED BOARD OF DIRECTORS. The Certificates of Incorporation of
CTG, Cardiac and Electro do not provide for classified boards of directors.
REMOVAL OF DIRECTORS. Under the New Jersey Act, Section 14A:6-6, one or
more or all the directors of a corporation may be removed for cause or, unless
otherwise provided in the certificate of incorporation, without cause by the
stockholders by the affirmative vote of a majority of the votes cast by the
holders of shares entitled to vote for the election of such directors. However,
if the certificate of incorporation requires a greater vote than a plurality of
the votes cast for the election of directors, no director may be removed except
by the greater vote required to elect him. Electro's Certificate of
Incorporation does not change the voting requirements of the New Jersey Act.
Electro's Bylaws contain no provision with respect to the election or removal of
directors.
Under the Delaware Act, Section 141, any director or the entire board
of directors may be removed, with or without cause, by the holders of a majority
of the shares then entitled to vote at an election of directors. The Bylaws of
CTG and Cardiac provide that any director or the entire board of directors may
be removed with or without cause by the affirmative vote of a majority of the
shares then entitled to vote at an election of directors, if notice of the
intention to act upon such matter is given in the notice calling such meeting.
ACTIONS BY WRITTEN CONSENT OF STOCKHOLDERS. Under the New Jersey Act,
Section 14A:5-6, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting if all the stockholders entitled to
vote thereon consent thereto in writing. Furthermore, except as otherwise
provided in the certificate of incorporation, any action required or permitted
to be taken at a meeting of stockholders, other than the annual election of
directors, may be taken without a meeting, without prior notice and without a
vote, upon the written consent of the stockholders who would have been entitled
to cast the minimum number of votes necessary to authorize such action at a
meeting at which all stockholders entitled to vote thereon were present and
voted. Electro's Certificate of Incorporation in no way references actions by
written consent.
Under the Delaware Act, Section 211, stockholders may, unless the
certificate of incorporation otherwise provides, act by written consent to elect
directors. However, if such consent is less than unanimous, such action by
written consent may be in lieu of holding an annual meeting only if all of the
directorships to which directors could be elected at an annual meeting are
vacant and are filled by such action. The Bylaws of CTG and Cardiac provide that
vacancies and newly created directorships shall be filled by a majority of the
directors then in office, although less than a quorum. If a director resigns
while in office, a majority of the directors then in office, including those who
have resigned, shall have the power to fill such vacancies.
ADVANCE NOTICE REQUIREMENT FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Electro's Bylaws provide that notice shall be given not less than
ten (10) and not more than sixty (60) days before the date of every
stockholders' meeting, (which provision directly parallels Section 14A:5-4 of
the New Jersey Act).
The Bylaws of CTG and Cardiac require that notice of meetings be
delivered to stockholders not less than fifteen (15) nor more than sixty (60)
days before the date of such meeting, unless earlier notice is required by law.
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VOTING REQUIREMENTS. Both the New Jersey Act and the Delaware Act
provide that whenever any action, other than the election of directors, is to be
taken by vote of the stockholders, it shall be authorized by a majority of the
votes cast at a meeting of stockholders by the holders of shares entitled to
vote thereon, unless a greater plurality is required by the certificate of
incorporation or another section of either Act. The New Jersey Act, Section
14A:9-2, provides that an amendment to the certificate of incorporation shall be
made in the following manner: first, the board shall approve the proposed
amendment and direct that it be submitted to a vote at a meeting of the
stockholders; second, written notice setting forth the proposed amendment or a
summary of the changes to be effected thereby shall be given to each stockholder
of record entitled to vote thereon within the time and in the manner provided
for in New Jersey Act; and, third, at such meeting a vote of stockholders
entitled to vote thereon shall be taken on the proposed amendment, and the
proposed amendment shall be adopted upon receiving the affirmative vote of a
majority of the votes so cast by the holders of shares entitled to vote thereon,
except that, in the case of a corporation organized prior to January 1, 1969,
(as Electro was) the proposed amendment shall be adopted upon receiving the
affirmative vote of two-thirds (2/3) of the votes cast by the holders of the
outstanding shares of common stock, present in person or represented by proxy
and entitled to vote thereon. For mergers or plans of consolidation, the voting
requirements are the same as laid out above, unless otherwise provided in the
certificate of incorporation. Electro's Certificate of Incorporation does not
otherwise provide.
The Delaware Act states that, unless otherwise provided in the
corporation's certificate of incorporation, an amendment to the certificate of
incorporation requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon. The holders of the outstanding shares of the
class are entitled to vote as a class upon any proposed amendment to the
certificate of incorporation, whether or not entitled to vote thereon by the
provisions of the corporation's certificate of incorporation, if the amendment
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class or alter
or change the powers, preferences or specific rights of the shares of such class
so as to adversely affect them. Also under the Delaware Act, any merger,
consolidation or sale of all or substantially all of the corporation's assets
must be approved by the corporation's board of directors and a majority of the
outstanding shares entitled to vote thereon. The Certificates of Incorporation
of CTG and Cardiac do not provide otherwise.
RIGHTS OF DISSENTING STOCKHOLDERS. The New Jersey Act, Section
14A:11-1, provides that any stockholder shall have the right to dissent from any
of the following corporate actions: (1) any plan of merger or consolidation to
which the corporation is a party; provided, that unless the certificate of
incorporation otherwise provides, the stockholder shall not have the right to
dissent from any plan of merger or consolidation with respect to shares of a
class or series which is listed on a national securities exchange or is held of
record by not less than 1,000 holders on the record date or for which, pursuant
to the plan of merger or consolidation, he will receive cash, shares,
obligations or other securities which, upon consummation of the merger or
consolidation, will either be listed on a national securities exchange or held
of record by not less than 1,000 holders; and (2) any sale, lease, exchange or
other disposition of all or substantially all of the assets of the corporation
not in the usual or regular course of business as conducted by such corporation;
provided, that unless the certificate of incorporation otherwise provides, the
stockholder shall not have the right to dissent as specified in (1) above.
Electro's Certificate of Incorporation does not provide otherwise.
The Delaware Act, Section 262, states that stockholders of a Delaware
corporation who dissent from a merger or consolidation of the corporation for
which a stockholders' vote is required are entitled to appraisal rights,
requiring the surviving corporation to purchase the dissenting shares at fair
value. There are, however, generally no statutory rights of appraisal with
respect to stockholders of a Delaware corporation whose shares of stock are
either listed on the national securities exchange or designated as a national
market system security on an inter-dealer quotation system by the National
Association of Securities Dealers Inc., or held of record by more than 2,000
stockholders where such stockholders receive only shares of stock of the
corporation surviving or resulting from the merger or consolidation. The
Certificates of Incorporation of CTG and Cardiac do not provide otherwise.
INSPECTION OF STOCKHOLDERS' LIST. Section 14A:5-8 of the New Jersey Act
provides for inspection of a list of stockholders entitled to vote at a
stockholders' meeting , prepared prior to the meeting, by any stockholder for a
reasonable period during the meeting, and such list shall be prima facie
evidence as to which stockholders are
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entitled to examine such lists or to vote at such meetings. Electro's
Certificate of Incorporation and Bylaws do not provide otherwise with respect to
stockholders' lists.
Under the Delaware Act, Section 219 and Cardiac's Bylaws, a
stockholders list shall be prepared at least ten (10) days prior to the
stockholders' meeting and shall be available for inspection for any reasonable
purpose germane to such meeting. The stock ledger shall be the only evidence as
to who are the stockholders entitled to examine the stock ledger, the list
required by this Section 219, or the books of the corporation, or to vote in
person or by proxy at any meeting of stockholders.
DIVIDENDS. Under the New Jersey Act, Section 14A:7-15, and subject to
any restrictions contained in the certificate of incorporation, a corporation
may, from time to time by resolution of its board, pay dividends on its shares
in cash, in its own shares and in its bonds or in other property, including the
shares or bonds of other corporations. A share dividend, a division or a
combination may be effectuated by action of the board alone, except that any
division which adversely affects the shares of another class shall be made by
amendment. Electro's charter documents give the Electro Board the authority to
declare dividends.
The Delaware Act, Section 170, provides that the directors of any
corporation, subject to any restrictions contained in the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock either out of its surplus or, in the case where there is no such surplus,
out of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. The charter documents of CTG and Cardiac give
their boards of directors the authority to declare dividends.
BYLAWS. Under the New Jersey Act, Section 14A:2-9, the initial bylaws
of a corporation shall be adopted by the board at its organizational meeting.
Thereafter, the board shall have the power to make, alter and repeal bylaws
unless such power is reserved to the stockholders in the certificate of
incorporation, but bylaws made by the board may be altered or repealed, and new
bylaws made, by the stockholders. The stockholders may then prescribe in the
bylaws that any bylaw made by them shall not be altered or repealed by the
board. Electro's Bylaws provide that the Electro Board may alter or repeal any
bylaws of the corporation and make new ones, except for bylaws made by the
stockholders. The stockholders, by a majority vote, may alter, repeal and make
new bylaws.
Under the Delaware Act, Section 109, the original or other bylaws of a
corporation may be adopted, amended or repealed by the corporation, by the
initial directors if they were named in the certificate of incorporation or,
before a corporation has received any payment for its stock, by its board of
directors. After a corporation has received any payment for any of its stock,
the power to adopt, amend or repeal bylaws shall be in the stockholders who are
entitled to vote. However, any corporation may, in its certificate of
incorporation, confer the power to adopt, amend or repeal bylaws upon the
directors, and the fact that such power has been so conferred upon the directors
or governing body shall not divest the stockholders nor limit their power to
adopt, amend or repeal bylaws. The Bylaws of CTG and Cardiac provide for
amendment by a majority of the board of directors or by the holders of a
majority of the shares represented at a duly-held meting, if notice of the
meeting is properly provided.
PREEMPTIVE RIGHTS. Under the New Jersey Act, Section 14A:5-29, the
stockholders of corporations organized prior to January 1, 1969 (which includes
Electro) shall have preemptive rights unless bylaws duly adopted by the
stockholders prior to that date or the certificate of incorporation provide
otherwise. Any corporation may alter or abolish preemptive rights by amendment
to its certificate of incorporation. Electro's Certificate of Incorporation
eliminates preemptive rights.
Under the Delaware Act, stockholders only have preemptive rights as may
be provided in the certificate of incorporation. The Certificates of
Incorporation of CTG and Cardiac do not provide for preemptive rights.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS. Under the New Jersey Act,
Section 14A:6-8, no contract or other transaction between a corporation and one
or more of its directors shall be void or voidable solely by reason of common
directorship or interest or solely because such director or directors are
present at the meeting of the board or a committee thereof which authorizes or
approves the contract or transaction, or solely because his or their votes are
counted for such purpose, if any one of the following are true: the contract or
other transaction is fair and
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reasonable as to the corporation at the time it is authorized, approved or
ratified; or the fact of the common directorship or interest is disclosed or
known to the board or committee and the board or committee authorizes, approves,
or ratifies the contract or transaction by unanimous written consent, provided
that at least one director soconsenting is disinterested, or by affirmative vote
of a majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or the fact of the common directorship or
interest is disclosed or known to the stockholders, and they authorize, approve
or ratify the contract or transaction. Furthermore, under Section 14A:6-11, a
corporation may lend money to or guarantee any obligation of, or otherwise
assist, any director, officer or employee of the corporation whenever, in the
judgment of the directors, such loan, guarantee or assistance may be reasonably
expected to benefit the corporation. The loan, guarantee or other assistance may
be made with or without interest, and may be unsecured, or secured in such
manner as the board shall approve. Electro's charter documents do not otherwise
provide.
Sections 8-143 and 8-144 of the Delaware Act are substantially similar
to the New Jersey Act. Additionally, under Delaware law, common or interested
directors may be counted in determining the presence of a quorum. The charter
documents of CTG and Cardiac do not otherwise provide.
FILLING VACANCIES ON THE BOARD OF DIRECTORS.. Under the New Jersey Act,
unless otherwise provided in the certificate of incorporation or the bylaws, any
directorship not filled at the annual meeting, any vacancy however caused and
newly created directorships resulting from an increase in the authorized number
of directors may be filled by the affirmative vote of a majority of the
remaining directors, even though less than a quorum, or by a sole remaining
director. A director so elected by the board shall hold office until the next
succeeding annual meeting of stockholders or until his successor shall have been
duly elected and qualified. Any directorship not filled by the board may be
filled by the stockholders at an annual meeting or at a special meeting of
stockholders called for that purpose. Electro's charter documents do not
otherwise provide.
Under the Delaware Act, Section 142, any vacancy occurring in any
office of the corporation by death, resignation, removal or otherwise, shall be
filled as the bylaws provide. In the absence of such provision, the vacancy
shall be filled by the board of directors or other governing body. The Bylaws of
CTG and Cardiac provide for vacancies to be filled by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director.
LIMITATION OF LIABILITY OF DIRECTORS. Section 14A:3-5 of the New Jersey
Act provides that any corporation shall have the power to indemnify a corporate
agent against his expenses and liabilities in connection with any proceeding
involving the corporate agent by reason of his being or having been such a
corporate agent, other than a proceeding by or in the right of the corporation,
if such corporate agent acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the corporation and,
with respect to any criminal proceeding, such corporate agent had no reasonable
cause to believe his conduct was unlawful. Furthermore, any corporation shall
indemnify a corporate agent against expenses to the extent that such corporate
agent has been successful on the merits or otherwise in any proceeding referred
to above, or in defense of any claim, issue or matter therein. Unless otherwise
provided in the certificate of incorporation or bylaws, such determination shall
be made by the board of directors or a committee thereof, acting by a majority
vote of a quorum consisting of directors who are not parties to or otherwise
involved in the proceeding, by independent legal counsel, by the stockholders if
the certificate of incorporation, bylaws, resolution of the board of directors,
or the stockholders so direct. Electro's Bylaws provide for limitation of
liability to the fullest extent permitted by law.
Section 145 of the Delaware Act does not limit indemnification to
corporate agents, but includes directors, officers, employees and agents.
Otherwise, the Delaware Act is substantially identical to the New Jersey Act.
The charter documents of CTG and Cardiac limit director liability to the fullest
extent permitted by law.
BUSINESS COMBINATIONS/REORGANIZATIONS. Section 14A:10A-4 of the New
Jersey Act states that no resident domestic corporation shall engage in any
business combination with any interested stockholder (defined as a stockholder
owning ten (10%) percent or more of a corporation's outstanding shares) of that
corporation for a period of five (5) years following that interested
stockholder's stock acquisition date unless the business combination is approved
by the board of directors of the corporation prior to the interested
stockholder's stock
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acquisition date. Also, no corporation shall engage at any time in any business
combination with any interested stockholder, other than (1) a business
combination approved by the board of directors prior to the interested
stockholder's stock acquisition date; (2) a business combination approved by the
affirmative vote of the holders of two-thirds (2/3) of the voting stock not
beneficially owned by that interested stockholder at a meeting called for such
purpose; (3) a business combination that meets the requirements of this section.
The provisions of Section 14A:10A-4 and 5 do not apply to any business
combination with an interested stockholder if the corporation does not have a
class of voting stock registered or traded on a national securities exchange or
registered with the Securities and Exchange Commission pursuant to Section 12(g)
of the Exchange Act on that interested stockholder's stock acquisition date, or
to any business combination with an interested stockholder who was an interested
stockholder prior to the effective date of the New Jersey Act unless subsequent
thereto that interested stockholder increased his or its interested
stockholder's portion of the voting power of the corporation's outstanding
voting stock to a proportion in excess of the proportion of voting power that
interested stockholder held prior to the effective date; (4) to an interested
stockholder who became an interested stockholder inadvertently, if such
interested stockholder, as soon as practicable, divests himself or itself of a
sufficient amount of the voting stock so that he or it no longer is the
beneficial owner, directly or indirectly, of ten (10%) percent or more of the
voting power of the outstanding stock of that corporation, and would not at any
time within the five (5) year period preceding the announcement date with
respect to that business combination have been an interested stockholder but for
that inadvertent acquisition; or (5) to an interested stockholder which, prior
to August 5, 1986 became the beneficial owner of more than fifty (50%) percent
of the voting power of the outstanding voting stock of that resident domestic
corporation by reason of a purchase of voting stock directly from the
corporation in a transaction approved by the board of directors of that
corporation; provided, that at the time of the approval, none of the directors
of the corporation was an employee, officer, director, stockholder, affiliate or
associate of the interested stockholder.
Section 203 of the Delaware Act prohibits the same transactions between
a Delaware corporation and an "interested stockholder" for a period of three (3)
years following the interested stockholder's stock acquisition date. However, an
"interested stockholder" for purposes of this section is a stockholder that is
directly or indirectly a beneficial owner of fifteen (15%) percent or more of
the voting power at the outstanding voting stock of the corporation (or its
affiliate or associate). Additionally, Section 203 changes subsection (5) of the
paragraph above to eighty-five (85%) percent.
STOCKHOLDER DERIVATIVE SUITS. Under the New Jersey Act, Section
14A:3-6, no action shall be brought by a stockholder in the right of a
corporation unless the plaintiff was a holder of shares or of voting trust
certificates at the time of the transaction of which he complains, or his shares
or voting trust certificates thereafter devolved upon him by operation of law
from a person who was a holder at such time.
Delaware law also provides that a stockholder may only bring a
derivative action on behalf of the corporation if the stockholder was a
stockholder of the corporation at the time of the transaction in question or his
or her stock thereafter devolved upon him or her by operation of law.
ADJOURNMENT OF THE SPECIAL MEETINGS
ELECTRO SPECIAL MEETING
In the event that sufficient votes to constitute a quorum or sufficient
votes in favor of approving the Merger Agreement and the Merger are not received
by the time scheduled for the Electro Special Meeting, the Electro Board intends
to recommend that the Electro Special Meeting be adjourned to permit the further
solicitation of proxies. A resolution will be proposed at the Electro Special
Meeting authorizing the Electro Board, at its discretion, to adjourn the Electro
Special Meeting for the purpose of further soliciting proxies, if necessary, to
obtain a sufficient number of votes to constitute a quorum or sufficient votes
in favor of approving the Merger Agreement and the Merger. Pursuant to the
By-laws of Electro, no notice of an adjourned meeting need be given other than
the announcement at the Electro Special Meeting of the time and place of the
adjourned meeting. The proposal to authorize the Electro Board to adjourn the
Electro Special Meeting in order to permit further solicitation of proxies, if
necessary, must be approved by an
-141-
<PAGE>
affirmative vote of a majority of the votes cast by holders of the outstanding
shares of Electro Common Stock, present in person or represented by proxy and
entitled to vote at the Electro Special Meeting. The proxy solicited by Electro
hereby, if properly signed and returned, and not revoked prior to its use, will
be voted on any motion for adjournment in accordance with the instructions
contained therein. The Electro Board believes that such proposal is in the best
interests of Electro and the Electro stockholders and recommends that the
Electro stockholders vote FOR approval of such proposal.
CARDIAC SPECIAL MEETING
In the event that sufficient votes to constitute a quorum or sufficient
votes in favor of approving the Reverse Split, the Merger Agreement and the
Merger and the Restructuring Merger Agreement and the Restructuring Merger are
not received by the time scheduled for the Cardiac Special Meeting, the Cardiac
Board intends to recommend that the Cardiac Special Meeting be adjourned to
permit the further solicitation of proxies. A resolution will be proposed at the
Cardiac Special Meeting authorizing the Cardiac Board, at its discretion, to
adjourn the Cardiac Special Meeting for the purpose of further soliciting
proxies, if necessary to obtain a sufficient number of votes to constitute a
quorum or sufficient votes in favor of approving the Reverse Split, the Merger
Agreement and the Merger and the Restructuring Merger Agreement and the
Restructuring Merger. Pursuant to the By-laws of Cardiac, no notice of an
adjourned meeting need be given other than the announcement at the Cardiac
Special Meeting of the time and place of the adjourned meeting. The proposal to
authorize the Cardiac Board to adjourn the Cardiac Special Meeting in order to
permit further solicitation of proxies, if necessary, must be approved by an
affirmative vote of the holders of a majority of the shares of Cardiac Common
Stock present in person or represented by proxy and entitled to vote at the
Cardiac Special Meeting. The proxy solicited by Cardiac hereby, if properly
signed and returned, and not revoked prior to its use, will be voted on any
motion for adjournment in accordance with the instructions contained therein.
The Cardiac Board believes that such proposal is in the best interests of
Cardiac and the Cardiac stockholders and recommends that the Cardiac
stockholders vote FOR approval of such proposal.
LEGAL MATTERS
The validity of the securities to be issued in the Merger and certain
tax consequences of the Merger regarding Cardiac stockholders will be passed
upon by Greenberg. Certain tax consequences of the Merger regarding Electro
stockholders will be passed upon by Saiber. Pursuant to the terms of the Merger
Agreement: (i) Saiber is to be paid, at the closing of the Merger, all
outstanding reasonable attorneys' fees and expenses incurred in connection with
its prior representation of Electro, together with all reasonable attorneys'
fees and expenses incurred in connection with its representation of Electro
relative to the Merger; and (ii) Greenberg is to be paid, at the closing of the
Merger, all outstanding reasonable attorneys' fees and expenses incurred in
connection with its prior representation of Cardiac, together with all
reasonable attorneys' fees and expenses incurred in connection with its
representation of Cardiac relative to the Reverse Split, the Merger and the
Restructuring Merger.
On August 27, 1998 Cardiac executed a promissory note in the amount of
$199,000 in favor of Greenberg and due and payable on demand at any time on or
after the earlier of: (i) the effective time of the Merger; or (ii) November 11,
1998 for payment of a portion of the outstanding attorneys' fees and expenses
Cardiac has incurred in connection with the Merger and the Restructuring Merger.
Cardiac has also issued Greenberg a warrant granting a right to purchase 35,000
shares, with provisions for 35,000 additional shares at the end of each month
any amount is owed under the promissory note described above, exercisable
immediately and expiring five (5) years from the date of such grant at an
exercise price per share equal to the average of the bid and asked price of a
share of Cardiac Common Stock (or a successor corporation) as of the close of
business on the date of such grant. Terms of the warrant are similar to the
initial warrant Coast was granted in connection with the Coast Loan.
EXPERTS
The financial statements of Cardiac included and incorporated herein by
reference in this Prospectus and in the Registration Statement have been audited
by BDO Seidman, LLP, independent certified public accountants, to
-142-
<PAGE>
the extent and for the periods set forth in their report thereon appearing
elsewhere herein and in the Registration Statement and are included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing. The report of BDO Seidman, LLP covering the March 31, 1998
financial statements contains an explanatory paragraph that states that
Cardiac's significant operating losses and accumulated deficit raise substantial
doubt about Cardiac's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
The financial statements and schedule of Electro as of August 31, 1997
and 1996, and for each of the years in the three-year period ended August 31,
1997 have been incorporated by reference herein and in the Registration
Statement of which this Joint Proxy Statement/Prospectus forms a part, and, in
each case, are included in reliance upon such report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of such firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP covering the August 31, 1997 financial
statements contains an explanatory paragraph that states that Electro's
recurring losses from operations and limited working capital resources raise
substantial doubt about Electro's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
INDEPENDENT ACCOUNTANTS
One or more representatives of BDO Seidman, LLP are expected to be
present at the Cardiac Special Meeting and will have the opportunity to make a
statement if they desire to do so and will be available to response to
appropriate questions of Cardiac stockholders.
One or more representatives of KPMG Peat Marwick LLP are expected to be
present at the Electro Special Meeting and will have the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions of Electro stockholders.
-143-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------
PAGE NO.
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Cardiac Control Systems, Inc.:
Balance Sheet at June 30, 1998 (Unaudited)................................................................F-2
Statements of Operations and Accumulated Deficit for the Three Months
Ended June 30, 1998 and 1997 (Unaudited)..............................................................F-3
Statements of Cash Flows for the Three Months Ended June 30, 1998 and 1997 (Unaudited)....................F-4
Notes to Financial Statements (Unaudited)...........................................................F-5 - F-8
Report of Independent Certified Public Accountants........................................................F-9
Balance Sheet at March 31, 1998...................................................................F-10 - F-11
Statements of Operations and Accumulated Deficit for the Years Ended March 31, 1998 and 1997............F-12
Statements of Stockholders' Equity for the Years Ended March 31, 1998 and 1997...........................F-13
Statements of Cash Flows for the Years Ended March 31, 1998 and 1997..............................F-14 - F-15
Summary of Significant Accounting Policies........................................................F-16 - F-18
Notes to Financial Statements ....................................................................F-19 - F-29
Electro-Catheter Corporation:
Condensed Comparative Balance Sheets at May 31, 1998 and August 31, 1997 (Unaudited).....................F-30
Condensed Comparative Statements of Operations for
Three Months Ended May 31, 1998 and Nine Months Ended May 31, 1997 (Unaudited).......................F-31
Condensed Comparative Statements of Cash Flows for
Nine Months Ended May 31, 1998 and 1997 (Unaudited)..................................................F-32
Notes to Condensed Financial Statements (Unaudited)...............................................F-33 - F-36
Independent Auditors' Report ............................................................................F-37
Balance Sheets - August 31, 1997 and 1996................................................................F-38
Statements of Operations -Years Ended August 31, 1997, 1996 and 1995.....................................F-39
Statements of Stockholders' Deficiency/Equity -
Years Ended August 31, 1997, 1996 and 1995...........................................................F-40
Statements of Cash Flows - Years Ended August 31, 1997, 1996 and 1995....................................F-41
Notes to Financial Statements.....................................................................F-42 - F-52
Valuation and Qualifying Accounts........................................................................F-53
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
- -----------------------------------------------------------------------------------------------------
JUNE 30,
1998
- -----------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 33,527
Accounts and notes receivable 560,529
Inventories 1,396,572
Prepaid expenses 254,710
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,245,338
- -----------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (NET) 1,918,680
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $272,177 426,270
Deferred license fees, less accumulated
amortization of $53,333 146,667
Deferred merger costs 427,372
Other 80,010
- -----------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,080,319
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,244,337
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,160,095
Due to related party 102,522
Accrued compensation 308,874
Accrued royalties 210,111
Other accrued expenses 74,285
Deposits payable 352,481
Notes and debt obligations payable within one year 1,112,862
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,321,230
8% CONVERTIBLE DEBENTURES 300,000
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR 1,503,038
OTHER LIABILITIES 84,622
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,208,890
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 30,000,000 shares authorized,
2,648,739 shares issued 264,874
Additional paid in capital 22,337,797
Accumulated deficit (22,567,224)
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,447
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,244,337
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Net sales $ 620,777 $ 852,288
Royalty income 0 697,125
-----------------------------------------------
Total revenue 620,777 1,549,413
-----------------------------------------------
COSTS AND EXPENSES
Cost of products sold 326,090 503,815
Selling, general and administrative expenses 469,091 743,072
Engineering, research and development expenses 334,915 458,272
-----------------------------------------------
Total cost and expenses 1,130,096 1,705,159
-----------------------------------------------
OPERATING INCOME (LOSS) (509,319) (155,746)
-----------------------------------------------
OTHER INCOME (EXPENSES)
Interest income 317 5,983
Interest expense (156,295) (82,586)
Other income
-----------------------------------------------
Total other income (expenses) (155,978) (76,602)
-----------------------------------------------
NET INCOME (LOSS) (665,297) (232,348)
ACCUMULATED DEFICIT - BEGINNING OF PERIOD (21,901,927) (20,662,217)
-----------------------------------------------
ACCUMULATED DEFICIT - END OF PERIOD $ (22,567,224) $ (20,894,565)
===============================================
NET INCOME (LOSS) PER COMMON SHARE - BASIC ($0.25) ($0.09)
AVERAGE NUMBER OF SHARES OUTSTANDING 2,648,739 2,619,371
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (665,297) $ (232,348)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 114,263 104,579
Gain (loss) on fixed asset disposals - (671)
Cash provided by (used for):
Accounts receivable 113,143 (273,180)
Inventories 27,124 (118,157)
Prepaid expenses (47,147) (158,281)
Other assets (2,026) -
Accounts payable 132,677 (199,755)
Due to related parties (4,500) -
Accrued interest 3,054 -
Accrued compensation 50,356 36,253
Accrued compensated absences 606 22,694
Deposits payable - 184,011
Other accrued expenses 6,736 (7,359)
Other liabilities 1,230 15,455
-----------------------------
Net cash provided by (used for) operating activities (269,781) (626,758)
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES;
Purchase of property, plant and equipment (1,180) (186,640)
Deferred merger costs (106,922) -
Proceeds from sale of equipment - 4,260
Increase in other assets - (2,600)
-----------------------------
Net cash provided by (used for) investing activities (108,102) (184,980)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and debt obligations payable - 93,893
Repayment of notes and debt obligations payable - (193,983)
Proceeds from issuance of 8% convertible debenture 300,000 -
Net borrowings on line of credit 56,225 (93,893)
Proceeds from short term debt 35,745 -
Repayments of long term debt (1,973) (1,534)
Debt issuance costs - (165,288)
-----------------------------
Net cash provided by (used for) financing activities 389,998 (360,804)
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,115 (34,184)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,412 185,463
-----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,527 $ 151,279
=============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 109,344 $ 57,071
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of June 30, 1998, the related statements of operations and accumulated
deficit for the three months ended June 30, 1998 and 1997, and the statements of
cash flows for the three months ended June 30, 1998 and 1997 are unaudited. In
the opinion of management, such financial statements reflect all adjustments,
consisting only of normal recurring items, necessary to present fairly the
financial position of the Company at June 30, 1998, and the results of
operations and the cash flows for the three months ended June 30, 1998.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1997 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1998.
The accompanying unaudited financial statements as of June 30, 1998 and for the
three months ended June 30, 1998 and 1997 should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 1998.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company has a history of net losses
and incurred a net loss for the three months ended June 30, 1998 of $665,297.
The Company's ability to continue as a going concern is dependent upon the
consummation of the proposed merger with Electro-Catheter Corporation (see Note
6 below) and the attainment of a profitable level of operations. The Company
believes that continual development of new product and resultant sales growth is
critical to attaining a profitable level of operations. Therefore, the Company
is continuing its efforts to invest in development of its single lead technology
and expand its sales volume, both domestically and internationally. Management
believes that the Company has the potential to increase sales and ultimately
achieve a profitable level of operations. Also, the Company is pursuing
additional working capital to expand its market position and pursue development
of new technologies. However, there is no assurance that the Company will be
able to attain profitable operations and continue operations as a going concern.
NOTE 2 - LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included for the three months ended June 30, 1998 and 1997, as their effect on
the loss per share is anti-dilutive.
F-5
<PAGE>
NOTE 3 - INVENTORIES
Inventories at June 30, 1998 are summarized as follows:
- -----------------------------------------------------------------------------
JUNE 30, 1998
-------------------
(unaudited)
Raw materials and supplies............................ $ 812,251
Work-in-process....................................... 341,668
Finished goods........................................ 279,601
-------------
1,433,520
Reserve for obsolescence.............................. 36,948
-------------
$ 1,396,572
- -----------------------------------------------------------------------
Finished goods inventories include approximately $135,427 of products consigned
to customers and independent sales representatives at June 30, 1998.
NOTE 4 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at June 30, 1998:
- --------------------------------------------------------------------------
JUNE 30, 1998
-------------
Sirrom mortgage note, net of discount (A)................... $ 1,492,950
Coast Business Credit (B)................................... 1,069,523
Other....................................................... 53,427
-------------
2,615,900
Amount payable within one year............................. 1,112,862
-------------
Amount payable after one year............................... $ 1,503,038
- --------------------------------------------------------------------------
(A) On March 31, 1995, the Company entered into a Loan and Security
Agreement (the "Loan Agreement") with Sirrom Capital Corporation
("Sirrom") and executed a $1,500,000 secured promissory note. Interest
on the note is payable monthly at 13.5% per annum and principal is due
on March 31, 2000. The note is secured by a first mortgage lien on all
the Company's real and personal property, excluding inventory and
accounts receivable, but including general intangibles such as its
patents and royalties. The Loan Agreement restricts the Company from
incurring additional indebtedness in excess of $200,000 annually
without the lender's consent. In addition, the Company must give the
lender advance notice of certain events, such as dividend payments,
certain new stock issues, reorganizations, and merger or sale of
substantially all assets.
In connection with the Loan Agreement, the Company granted Sirrom
warrants to purchase, initially, 100,000 shares of the Company's common
stock at $.01 per share. An additional 50,000 warrants to purchase
shares of common stock at $.01 per share will be granted to the lender
upon each anniversary date, beginning March 31, 1997 through March 31,
1999, that any amount owed to Sirrom shall be outstanding. On March 31,
1997 and, again, on March 31, 1998, the Company granted Sirrom 50,000
additional warrants pursuant to the Loan Agreement. The Company
recorded $279,000 (100,000 shares) in fiscal 1995, $71,376 (50,000
shares) in fiscal 1997 and $19,550 (50,000 shares) in fiscal 1998 as a
debt discount with the offset to additional paid-in capital,
representing the difference between the estimated fair market value of
the underlying stock at the date of grant and $.01 per share. This has
resulted in an effective interest rate of approximately 30% per annum
on the Sirrom debt. The Sirrom note includes an unamortized debt
discount of $7,050 at June 30, 1998.
F-6
<PAGE>
(B) On June 13, 1997, the Company entered into a Loan Agreement
("Agreement") with Coast Business Credit ("CBC") for a maximum
borrowing of $3.5 million which includes a line of credit up to $2.7
million, a $500,000 sub line for capital expenditures ("CAPEX"), and a
$300,000 term loan ("Term Loan"). The maximum borrowing base available
under the line of credit is based upon eligible receivables and
inventory as defined in the Agreement. The maturity date for the
Agreement is June 30, 2000. The CAPEX and the Term Loan are based upon
a 48 month amortization period. The interest rate on the line of credit
is equal to the prime rate plus 2%, and the interest rate for the Term
Loan and the CAPEX Subline is equal to prime rate plus 2.25%.
Borrowings under the Agreement are collateralized by a first security
interest in substantially all of the assets of the Company. The
Agreement also contains a minimum tangible net worth requirement. In
addition, CBC was granted warrants to purchase 37,500 shares of stock
at $4 per share, expiring June 30, 2002.
In conjunction with the Agreement, the Company obtained an
Intercreditor and Subordination Agreement between CBC and Sirrom. This
agreement provides that Sirrom subordinate its first security interest
in the assets of the Company to CBC, however, the priority interest of
CBC in the Company's real estate is limited to $500,000. As
consideration for its waiver of its first security interest in the
assets of the Company, Sirrom was granted warrants to purchase 50,000
shares of stock at $5 per share, exercisable at any time from June 6,
1997 and expiring on June 6, 2002.
On June 11, 1998, the Company and CBC executed an amendment to the
original Loan Agreement whereby CBC agreed to advance the Company a
further Bridge Loan in the sum of $250,000 repayable on August 31,
1998. The interest rate on the Bridge Loan is equal to prime rate plus
5% per annum , calculated on the basis of a 360-day year for the actual
number of days elapsed. The exercise price of the warrants to purchase
37,500 shares of stock granted under the Agreement dated June 13, 1997
was reduced from $4.00 to $0.40 and, in addition, CBC was granted
warrants to purchase 25,000 shares of stock at $0.40, expiring June 30,
2002.
Aggregate notes and debt obligations outstanding at June 30, 1998 mature as
follows: 1999 - $ 1,112,862; 2000 - $ 4,153; 2001 - $ 1,497,251; 002 - $ 1,634.
NOTE 5 - 8% CONVERTIBLE DEBENTURES From April 22 through May 4, 1998, the
Company obtained $300,000 in interim financing from selected current investors
through the issuance of an 8% convertible debenture, convertible to shares of
stock at $0.40 per share. The debenture holders include two stockholders of
Cardiac Control Systems, Inc., Mr. George Holbrook and Mr. A. Bruce
Brackenridge. In return for their efforts, the exercise price of the option
controlled by Mr. Holbrook to purchase 3,571 shares of the Company stock at
$3.50 a share and the exercise price of the warrant controlled by Mr. Holbrook
to purchase 16,811 shares of the Company stock at $5.00 a share were each
reduced to $0.40 a share and the exercise price of the warrant held by Mr.
Brackenridge to purchase 866 shares of the Company stock at $5.00 was reduced to
$0.40. The Company is attempting to obtain an additional $250,000 on similar
terms.
NOTE 6 - PROBABLE MERGER...On October 27, 1997, the Company entered into a
letter of intent with Electro Catheter Corporation, Inc (Electro), a New Jersey
corporation, to effect a merger of a wholly-owned subsidiary of the Company
("Sub"), into and with Electro (the "Merger") as a result of which Electro will
become a wholly-owned subsidiary of the Company.
To effectuate the Merger, the Company, Electro and Sub executed an Agreement and
Plan of Reorganization dated January 20, 1998, as amended by a First Amendment
to Agreement and Plan of Reorganization, dated May 5, 1998 and a Second
Amendment to Agreement and Plan of Reorganization, dated August 7, 1998
(collectively, the "Merger Agreement"). Simultaneously with the Merger, the
Company will reorganize into a holding company structure, whereby the Company
will become a direct wholly-owned subsidiary of Catheter Technology Group, Inc.,
a Delaware corporation and a holding company ("CTG"). The stockholders of the
Company will become stockholders of CTG and will continue to hold their shares
of common stock without any change in number, designation, terms or rights. The
structure of the transaction contemplates that upon effectiveness of the Merger,
F-7
<PAGE>
holders of Electro's common stock, $.10 par value per share ("Electro Common
Stock"), will receive one-fifth of a share of common stock, $.10 par value, of
CTG for each share of Electro Common Stock held. No fractional shares will be
issued in the Merger.
Consummation of the Merger and transactions contemplated thereby are subject to
the satisfaction of certain conditions, including, among other things: (i) The
approval and adoption of the Merger Agreement and the Merger by the stockholders
of Electro; and (ii) the registration under the Securities Act of 1933, as
amended, and all applicable state securities laws, of the shares of Cardiac
Common Stock to be issued pursuant to the Merger.
Electro is based in Rahway, New Jersey, and is engaged in the business of the
design, development, manufacture, marketing and sale of catheters and related
devices utilized in connection with illnesses of the heart and circulatory
system. The Company believes the Merger may allow certain efficiencies to
improve operating performance and that the broader product line may provide for
a more effective marketing and distribution process. There can be no assurance,
however, that consummation of the Merger will occur, or that if it does, it will
yield positive operating results in the future.
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Cardiac Control Systems, Inc.
We have audited the accompanying balance sheet of Cardiac Control Systems, Inc.
as of March 31, 1998 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiac Control Systems, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has experienced significant operating losses
and has an accumulated deficit at March 31, 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Orlando, Florida
June 15, 1998
F-9
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
- ----------------------------------------------------------------------------
MARCH 31, 1998
- ----------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents............................. $ 21,412
Accounts receivable, net (Note 3)..................... 673,673
Inventories (Note 4).................................. 1,423,697
Prepaid expenses...................................... 207,563
- ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS........................... 2,326,345
- ----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT NET (NOTES 5 AND 7)............ 1,974,096
- ----------------------------------------------------------------------------
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $238,248 (Note 8)................... 460,200
Deferred license fees, less accumulated
amortization of $43,333............................. 156,667
Deferred merger costs (Note 13)....................... 320,450
Other ............................................... 79,220
- ----------------------------------------------------------------------------
TOTAL OTHER ASSETS............................. 1,016,537
- ----------------------------------------------------------------------------
$5,316,978
- ----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-10
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
MARCH 31, 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $1,028,440
Due to related party (Note 6).............................. 106,000
Accrued compensation....................................... 257,912
Accrued royalties (Note 11) 226,906
Other accrued expenses..................................... 48,372
Deposits payable........................................... 352,482
Current portion of long-term debt (Note 7)................. 1,021,682
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES........................... 3,041,794
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 7).............. 1,491,720
OTHER LIABILITIES.......................................... 82,720
- --------------------------------------------------------------------------------
TOTAL LIABILITIES................................... 4,616,234
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (NOTES 7 AND 8):
Common stock, $.10 par value, 30,000,000 shares authorized,
2,648,739 shares issued ................................ 264,874
Additional paid-in capital................................. 22,350,756
Accumulated deficit........................................(21,901,927)
Cumulative translation adjustment.......................... (12,959)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY.......................... 700,744
- --------------------------------------------------------------------------------
$5,316,978
- --------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-11
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
- -----------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- -----------------------------------------------------------------------------
REVENUE:
Sales (Note 10)................................. $3,823,059 $4,201,047
Royalty income.................................. 2,063,250 2,394,250
- -----------------------------------------------------------------------------
Total revenue.............................. 5,886,309 6,595,297
- -----------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold........................... 2,339,973 2,378,743
Selling, general and administrative expenses.... 2,496,818 3,013,724
Engineering, research and development expenses.. 1,775,917 1,778,294
- -----------------------------------------------------------------------------
Total cost and expenses.................... 6,612,708 7,170,761
- -----------------------------------------------------------------------------
OPERATING INCOME (LOSS)............................. (726,399) (575,464)
- -----------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
Interest income................................. 9,697 17,432
Interest expense................................ (523,949) (490,508)
Other income.................................... 941 167,300
- -----------------------------------------------------------------------------
Total other income (expenses).............. (513,311) (305,776)
- -----------------------------------------------------------------------------
NET LOSS (1,239,710) (881,240)
- -----------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE -BASIC........... $(.47) $(.34)
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,636,954 2,585,212
- -----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-12
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------- ADDITIONAL CUMULATIVE
NUMBER PAR PAID-IN TREASURY ACCUMULATED TRANSLATION
OF SHARES VALUE CAPITAL STOCK DEFICIT ADJUSTMENT
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 2,532,942 $253,294 $21,857,388 $ (10,938) $(19,780,977) $ -
Common shares issued, net of
costs of $8,968 91,428 9,143 296,889 - - -
Stock warrants issued - - 152,376 - - -
Acquisition of treasury stock - - - (5,000) -
Retirement of treasury stock (4,999) (500) (15,438) 15,938 -
Translation adjustment - - - - - (7,055)
Net loss - - - - (881,240) -
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
BALANCE, March 31, 1997 2,619,371 261,937 22,291,215 - (20,662,217) (7,055)
Common shares issued 29,368 2,937 39,991 - - -
Stock warrants issued - - 19,550 - - -
Translation adjustment - - - - - $ (5,904)
Net loss - - - - (1,239,710) -
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
BALANCE, March 31, 1998 2,648,739 $264,874 $22,350,756 $ - $(21,901,927) $(12,959)
- --------------------------------- ------------ ------------- -------------- -------------- ------------------ ----------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-13
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................................$(1,239,710) $(881,240)
Adjustment to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization......................................................... 506,675 551,225
Gain on fixed asset disposals......................................................... (12,935) (12,957)
Stock issued for payment of director's fees........................................... 34,000 -
Stock issued for payment of consulting fees........................................... 8,928 -
Cash provided by (used for):
Accounts receivable............................................................... 279,169 382,515
Inventories....................................................................... 95,941 514,807
Prepaid expenses.................................................................. 48,549 (192,039)
Other assets...................................................................... (10,811) (50,588)
Accounts payable.................................................................. 200,197 327,535
Due to related parties............................................................ 106,000 -
Accrued expenses.................................................................. (36,648) (13,957)
Deposits payable.................................................................. (40,150) (126,962)
Other liabilities................................................................. 12,046 (112,717)
Deferred royalties................................................................ - (328,250)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ........................................ (48,749) 57,372
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................................................ (471,992) (544,628)
Deferred merger costs.................................................................... (320,450) -
Proceeds from sale of equipment.......................................................... 29,458 22,633
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ........................................ (762,984) (521,995)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and stock warrants, net of issuance costs......... - 301,032
Deferred financing costs................................................................. (254,878) (99,149)
Net borrowings on line of credit......................................................... 775,798 -
Proceeds from long-term debt............................................................. 463,149 163,253
Repayments of long-term debt............................................................. (330,483) (875,174)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities......................................... 653,586 (510,038)
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH...................................................... (5,904) (7,055)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... (164,051) (981,716)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR................................................ 185,463 1,167,179
CASH AND CASH EQUIVALENTS - END OF YEAR...................................................... $21,412 $185,463
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-14
<PAGE>
<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the year............................................................ $317,356 $283,676
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred financing costs incurred by issuance of stock warrants.......................... $ - $ 81,000
Treasury stock acquired for reinstatement of accounts payable............................ - 5,000
Reduction in accounts payable in exchange for common stock............................... - 5,000
Accounts payable incurred for costs of license fees...................................... - 200,000
Debt discount incurred by issuance of stock warrants..................................... 19,550 71,376
Debt incurred for purchase of property and equipment..................................... - 15,345
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES
TO FINANCIAL STATEMENTS.
F-15
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES Inventories are stated at the lower of cost or
market. Cost is determined by the first-in, first-out
(FIFO) method for raw material and supply
inventories. Cost of work-in-process and finished
goods inventories is determined based upon standard
cost, which approximates cost on a FIFO basis.
PROPERTY, PLANT
AND EQUIPMENT Property, plant and equipment are stated at cost.
Additions,improvements and expenditures that
significantly extend the useful life of an asset are
capitalized.
Expenditures for repairs and maintenance are charged
to operations as incurred. Depreciation and
amortization are provided on the straight-line method
for financial reporting purposes and accelerated
methods for tax purposes over the estimated useful
lives of the assets as follows:
<TABLE>
<S> <C>
Building and building improvements 10 - 30 years
Land improvements 20 years
Machinery and equipment 5 - 6 years
Office equipment and furniture and fixtures 5 - 10 years
Vehicles 3 - 5 years
Ancillary equipment 2 years
</TABLE>
DEFERRED Deferred financing costs related to a mortgage
COSTS note payable and other loan agreements are
AND FEES capitalized and amortized over the term of the
loans (see Note 7). Deferred license fees related to
a license to distribute products in Japan are
capitalized and amortized over five years, the life
of the license. Deferred merger costs relate to the
proposed merger with Electro and will be a cost of
the transaction when the merger occurs or charged to
operations if the merger does not occur (see Note
13).
IMPAIRMENT OF LONG-LIVED The Company evaluates impairment of long-lived
ASSETS assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," (SFAS 121).
SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are
less than the assets' carrying amount.
TRANSLATION OF The financial statements of the non-U.S. division
FOREIGN CURRENCY are translated into U.S. dollars as follows: all
assets and liabilities at the year-end exchange rate
and revenue and expenses at the average exchange
rate. Adjustments resulting from the translation of
financial statements are reflected as a separate
component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are
included in income currently and were not significant
for the years ended March 31, 1998 and 1997.
REVENUE Sales revenue and cost of sales are recognized as
RECOGNITION products are shipped and title passes, unless the
buyer has a right to return the products. Sales
revenue and cost of sales attributable to shipments
that the buyer has the right to return are recognized
when the return privilege has expired, usually upon
resale (implant) of the products.
Pursuant to a license agreement with a third-party
distributor, the Company recognizes royalty income as
leads are sold by the distributor.
F-16
<PAGE>
ENGINEERING, The Company capitalizes the cost of materials and
RESEARCH AND equipment acquired or constructed for research and
DEVELOPMENT COSTS development activities that have alternative
future uses. All other costs incurred for the purpose
of product research, design, and development are
charged to operations as incurred. Research and
development costs included in engineering, research
and development expenses on the statements of
operations for the years ended March 31, 1998 and
1997 approximate $975,100 and $1,086,800,
respectively.
INCOME TAXES The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). FAS
109 is an asset and liability approach that requires
the recognition of deferred tax assets and
liabilities for the expected future tax consequences
of events that have been recognized in the Company's
financial statements or tax returns. Measurement of
deferred income tax is based on enacted tax laws
including tax rates, with the measurement of deferred
income tax assets being reduced by available tax
benefits not expected to be realized.
LOSS PER
COMMON SHARE Loss per share is based upon the weighted average
number of common shares outstanding during each
period. Potential common shares have not been
included since their effect would be anti-dilutive.
Potential common shares include 397,475 stock options
and 465,965 warrants.
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (FAS 128),
which is effective for financial statements issued
for periods ending after December 15, 1997. FAS 128
simplifies the standards for computing earnings per
share and makes them comparable to international
earnings per share standards. This statement replaces
the presentation of primary EPS and fully diluted EPS
with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is
computed by dividing earnings available to common
stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the
earnings. Adoption of this statement did not have a
material effect on the Company's reported loss per
share amounts.
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," requires disclosure of fair value
information about financial instruments. Fair value
estimates discussed herein are based upon certain
market assumptions and pertinent information
available to management as of March 31, 1998.
The respective carrying value of certain
on-balance-sheet financial instruments approximated
their fair values. These financial instruments
include cash, accounts receivable, accounts payable,
accrued expenses and deposits payable. Fair values
were assumed to approximate carrying values for these
financial instruments since they are short term in
nature and their carrying amounts approximate fair
values or they are receivable or payable on demand.
The fair value of the Company's long-term debt is
estimated based upon the quoted market prices for the
same or similar issues or on the current rates
offered to the Company for debt of the same remaining
maturities.
USE OF
ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
F-17
<PAGE>
RECENT In June 1997, the Financial Accounting Standards
ACCOUNTING Board issued Statement of Financial Accounting
PRONOUNCEMENT Standards No. 130, "Reporting Comprehensive Income"
(FAS 130), and No. 131, "Disclosure about Segments of
an Enterprise and Related Information" (FAS 131). FAS
130 establishes standards for reporting and
displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards
for the way that public companies report information
about operating segments in annual financial
statements and requires reporting of selected
information about operating segments in interim
financial statements issued to the public. Both FAS
130 and FAS 131 are effective for periods beginning
after December 15, 1997. The Company has not
determined the impact that the adoption of these new
accounting standards will have on its future
financial statements and disclosures.
RECLASSIFICATIONS Certain reclassifications have been made to the
financial statements previously reported for the year
ended March 31, 1997 to conform with classifications
used in the financial statements for the year ended
March 31, 1998.
F-18
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF Cardiac Control Systems, Inc. (the "Company")
OPERATIONS was incorporated in June 1980 as a Delaware
Corporation. The Company is engaged in the design,
development, manufacture and marketing of implantable
cardiac pacemaker systems, consisting of implantable
pacemakers, connecting electrode leads and devices
used for programming and monitoring the pacemaker
systems. The Company commenced its principal business
operations during the year ended March 31, 1986 after
the commercial release of its initial single-chamber
pacemaker system. The Company has received clearance
from the United States Food and Drug Administration
(the "FDA") to commercially distribute and market a
line of the Company's pacemaker systems.
In August 1996, the Company formed a division in
Tokyo, Japan to distribute and market the Company's
products in Japan. The Company has obtained the
appropriate licensing for the sale of several of its
products in Japan.
2. GOING CONCERN AND As shown in the accompanying financial statements,
MANAGEMENT'S PLANS the Company has experienced significant losses which
have resulted in an accumulated deficit of
$21,901,927. The Company has also experienced severe
cash flow shortages which have resulted in a decrease
in operating activity and have caused the Company to
significantly reduce its labor force. In addition,
royalties of $2,063,250 and $2,394,250 during fiscal
1998 and 1997, respectively, received under a license
agreement ceased in January 1998. These conditions
raise substantial doubt about the Company's ability
to continue as a going concern.
The Company has executed a letter of intent to merge
with Electro-Catheter Corporation (see Note 13). It
is believed that as a result of this merger, the
combined entity will be able to generate significant
volume and cost savings, allowing the realization of
profitable operations and positive cash flow within a
12- to 18-month period post completion of the merger.
It is also believed that this merger will also
provide the vehicle and opportunity for additional
acquisitions of like companies, further building
critical mass and enhancing growth potential.
As a condition of this merger, the Company is
planning to raise a minimum of $4 million in a
combination of debt and equity. This capital will be
utilized to fund the ongoing operations of the two
companies, as well as the research and development of
new technologies. Management believes that such
financing will occur and that sufficient funds will
be provided to overcome its financial difficulties.
However, no assurances can be given that the Company
will be successful in obtaining financing and
completing the merger, and if the Company is unable
to obtain adequate financing, there remains
substantial doubt concerning the Company's ability to
continue as a going concern.
F-19
<PAGE>
3. ACCOUNTS RECEIVABLE Accounts receivable at March 31, 1998 are summarized
as follows:
Trade accounts receivable $ 677,281
Other accounts receivable 2,265
-------------
679,546
Allowance for doubtful accounts (5,873)
-------------
$ 673,673
=============
4. INVENTORIES Inventories at March 31, 1998 consist of the
following:
Raw materials and supplies $ 859,836
Work-in-process 315,643
Finished goods 285,166
-------------
1,460,645
Reserve for obsolescence (36,948)
-------------
$ 1,423,697
=============
Finished goods inventories include approximately
$192,000 of products consigned to customers and
independent sales representatives at March 31,
1998.
5. PROPERTY, PLANT AND Components of property, plant and equipment at
EQUIPMENT March 31, 1998 are as follows:
Land $ 123,300
Building and building improvements 1,788,251
Land improvements 29,450
Machinery and equipment 1,147,277
Office equipment 559,593
Furniture and fixtures 149,620
Ancillary equipment 1,250,743
Construction in progress (estimated costs
to complete $300,000) 577,620
------------
5,625,854
Accumulated depreciation (3,651,758)
------------
$ 1,974,096
============
Depreciation expense for the years ended March 31,
1998 and 1997 was $268,697 and $310,797,
respectively.
6. RELATED PARTY
TRANSACTIONS As of March 31, 1998, $106,000 was due to an
affiliate owned by a director of the Company for
consulting services provided to the Company during
fiscal 1998.
During the year ended March 31, 1998, the Company
repaid in full $200,983 of advances from the Chairman
of the Board and President of the Company under
certain promissory notes.
F-20
<PAGE>
7. LONG-TERM DEBT Long-term debt consists of the following at March 31,
1998:
<TABLE>
<S> <C>
Sirrom mortgage note, net of discount (see note below) $ 1,480,450
CBC line of credit (see note below) 775,798
CBC term note (see note below) 237,500
Other 19,654
2,513,402
Less current portion (1,021,682)
-------------
Total $ 1,491,720
=============
</TABLE>
Aggregate maturities of long-term debt over future
years are as follows:
1999 $ 1,021,682
2000 1,485,642
2001 3,539
2002 2,539
-------------
$ 2,513,402
=============
SIRROM
On March 31, 1995, the Company entered into a Loan
and Security Agreement (the "Loan Agreement") with
Sirrom Capital Corporation ("Sirrom") and executed a
$1,500,000 secured promissory note. Interest on the
note is payable monthly at 13.5% and principal is due
on March 31, 2000. The note is secured by a first
mortgage lien on all the Company's real and personal
property, excluding inventory and accounts
receivable, but including general intangibles such as
its patents and royalties. The Loan Agreement
restricts the Company from incurring additional
indebtedness in excess of $200,000 annually without
the lender's consent. In addition, the Company must
give the lender advance notice of certain events,
such as dividend payments, certain new stock issues,
reorganizations, and merger or sale of substantially
all assets.
In connection with the Loan Agreement, the Company
originally granted the lender warrants to purchase
100,000 shares of the Company's common stock at $.01
per share. An additional 50,000 warrants to purchase
shares of common stock at $.01 per share will be
granted to the lender upon each anniversary date,
beginning March 31, 1997 through March 31, 1999, that
any amount owed to Sirrom shall be outstanding. On
March 31, 1997 and 1998, the Company granted Sirrom
50,000 additional warrants pursuant to this
agreement. The Company recorded $279,000 (100,000
shares) in fiscal 1995, $71,376 (50,000 shares) in
fiscal 1997 and $19,550 (50,000 shares) in fiscal
1998 as a debt discount with the offset to additional
paid-in capital, representing the difference between
the estimated fair market value of the underlying
stock at the date of grant and $.01 per share (see
Note 8). This has resulted in an effective interest
rate of approximately 24% on the Sirrom debt. The
Sirrom note includes an unamortized debt discount of
$19,550 at March 31, 1998.
F-21
<PAGE>
CBC
On June 13, 1997, the Company entered into a Loan
Agreement ("Agreement") with Coast Business Credit
("CBC") for a maximum borrowing of $3.5 million,
which includes a line of credit up to $2.7 million, a
$500,000 Subline for capital expenditures ("CAPEX"),
which was unused at March 31, 1998, and a $300,000
Term Loan. The maximum borrowing base available under
the line of credit is based upon eligible receivables
and inventory as defined in the Agreement. The
maturity date for the Agreement is June 30, 2000. The
CAPEX and the term loan are based upon a 48-month
amortization period. The interest rate on the line of
credit is equal to the prime rate plus 2% (10.5% at
March 31, 1998), and the interest rate for the Term
Loan and the CAPEX Subline is equal to the prime rate
plus 2.25% (10.75% at March 31, 1998). Borrowings
under the Agreement are collateralized by a first
security interest in substantially all of the assets
of the Company. The agreement also contains a minimum
tangible net worth requirement, of which the Company
was in violation as of March 31, 1998. Accordingly,
the amounts due under the CBC agreement as of March
31, 1998 amounting to $1,013,298 have been classified
as current. In addition, CBC was granted a warrant to
purchase 37,500 shares of stock at $4 per share,
expiring June 30, 2002.
In conjunction with the Agreement, Company obtained
an Intercreditor and Subordination Agreement between
CBC and Sirrom. This agreement provided that Sirrom
subordinate its first security interest in the
Company's real estate to CBC limited however to
$500,000 secured by the Sirrom mortgage. As
consideration for its waiver of its first security
interest in the assets of the Company, Sirrom was
granted warrants to purchase 50,000 shares of stock
at $5 per share, exercisable at any time and expiring
five years from the date of the Warrant Agreement.
On June 11, 1998, the CBC Loan Agreement was amended
to include an additional $250,000 bridge loan bearing
interest at prime plus 5% and due on August 31, 1998.
The warrant originally granted to CBC to purchase
37,500 shares of stock was also amended. The exercise
price was reduced from $4 per share to $.40 per
share. In addition, CBC was granted a second warrant
to purchase 25,000 shares of stock at $.40 per share.
The warrant expires June 30, 2002.
8. STOCKHOLDERS' ISSUANCE OF COMMON SHARES
EQUITY
In May 1996, Sirrom purchased 50,000 shares of common
stock for $5.00 per share. In June 1996, the Company
issued 1,428 shares of common stock as payment for
accounts payable of $5,000 to a third party. The
accounts payable balance was then reinstated in March
1997, in conjunction with the Company's purchase of
1,428 shares of treasury stock.
In January 1997, the Company entered into a supply
agreement with a major defibrillator manufacturer
whereby the Company will be the exclusive outside
supplier of a defibrillation lead. The agreement
expires in December 1999. In connection with this
agreement, the manufacturer paid the Company $200,000
and received 40,000 shares of common stock valued at
$60,000, representing the quoted market price of the
common shares. The difference between the purchase
price and the value assigned to the common stock of
$140,000 was recorded as a gain on sale of the
technology underlying the supply agreement included
in other income.
During the year ended March 31, 1998, the Company
issued 23,654 shares of common stock as payment of
directors' fees, which were valued at $34,000 and
5,714 shares of common stock as payment for
consulting services which were valued at $8,928.
F-22
<PAGE>
STOCK OPTION PLAN
On September 9, 1987, the Company's Board of
Directors adopted the 1987 Non-Qualified Stock Option
Plan (the "1987 Plan"). On February 7, 1992, the
Company's Board of Directors adopted the 1992
Non-Qualified Stock Option Plan (the "1992 Plan"). In
fiscal 1995, the Company combined the 1987 Plan and
the 1992 Plan. This Plan provides the Board of
Directors with the authority to grant officers,
directors, and employees of the Company non-qualified
options to purchase up to a maximum of 400,000 shares
of the Company's common stock. Options granted under
the Plan expire five years after the date the options
are granted or upon termination of employment.
The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related
interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been
recognized for options granted to employees at
exercise prices which equal or exceed the market
price of the Company's common stock at the date of
grant. Options granted at exercise prices below
market prices are recognized as compensation cost
measured as the difference between market price and
exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123
(FAS 123) "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information
regarding net income and earnings per share as if
compensation cost for the Company's employee stock
options had been determined in accordance with the
fair value based method prescribed in FAS 123. The
Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for grants in 1998
and 1997, respectively: no dividend yield for both
years, an expected life of five years for both years,
expected volatility of 60% and 44% and risk-free
interest rates of 6.6% and 6.4%.
Under the accounting provisions of FAS 123, the
Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
1998 1997
NET LOSS
As reported $ (1,239,710) $ (881,240)
Pro forma (1,264,723) (952,300)
LOSS PER SHARE
As reported $ (.47) $ (.34)
Pro forma (.48) (.37)
F-23
<PAGE>
A summary of the status of options under this plan as of March 31, 1998 and 1997
and changes during the years ending on those dates are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 309,969 $ 3.72 305,186 $ 4.02
Granted 88,500 1.04 84,429 3.50
Forfeited or expired (24,542) 5.25 (79,646) 4.55
------------ --------- ---------- ----------
Balance at end of year 373,927 $ 2.93 309,969 $ 3.72
============ ========= ========== ==========
Options exercisable at year end 350,617 $ 2.89 244,658 $ 3.69
Options granted during the year
at exercise prices which exceed
market price of stock at date of
grant:
Weighted average exercise price 88,500 $ 1.04 74,429 $ 3.50
Weighted average fair value 88,500 .47 74,429 .73
Options granted during the year at
exercise prices which equal market
price of stock at date of grant:
Weighted average exercise price - $ - 10,000 $ 3.50
Weighted average fair value - - 10,000 1.66
</TABLE>
The following table summarizes information about fixed stock options at March
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES MARCH 31, 1998 REMAINING CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1998
- ---------------------- ------------------ -------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
$1.00 87,000 4.1 YEARS $ 1.00 87,000 $ 1.00
$3.50 TO 3.63 286,927 2.1 YEARS 3.52 263,617 3.52
------- -------
373,927 350,617
======= =======
</TABLE>
NON-PLAN STOCK OPTIONS
The Company has granted options to independent sales
representatives, Board of Directors and others. The
total number of non-plan stock options outstanding at
March 31, 1998 and 1997 were 23,548 and 31,406,
respectively. The total number of exercisable
non-plan stock options at March 31, 1998 and 1997
were 21,548 and 24,073, respectively. The exercise
price for these options range from $.40 to $10.50 per
share. These options are exercisable over five-year
periods and expire five years from the date of grant.
The value of these options was not material, and
accordingly, no compensation cost has been recognized
by the Company.
F-24
<PAGE>
COMMON STOCK PURCHASE WARRANTS
Common stock purchase warrants outstanding at March
31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
UNDERLYING PRICE EXPIRATION
SHARES PER SHARE DATE
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Converted debenture holders 100,000 $ 5.00 3/31/99
Sirrom (Note 7) 200,000 $ .01 3/31/00
Sirrom (see note below) 50,000 $ .01 10/18/00
Sirrom (Note 7) 50,000 $ 5.00 6/6/02
Coast Business Credit (Note 7) 37,500 $ 4.00 6/30/02
Employees 3,465 $ .18 8/21/02
Grupo Taper (see note below) 25,000 $ .80 8/5/07
-------------------------------------------------------------------------------------
</TABLE>
All of the above warrants were exercisable at March
31, 1998, except for Grupo Taper, of which 25,000 are
unexercisable. The warrants issued to Grupo Taper
become exercisable according to the following
schedule: (i) 50,000 shares shall be exercisable one
year after the Company achieves ISO and CE approval
if the Distribution Agreement is still in force and
if Grupo has achieved at least 60% of its forecasted
sales commitment; (ii) 25,000 shares shall be
exercisable after December 20, 1997 if the
Distribution Agreement is in force and Grupo has
achieved 60% of its forecasted sales commitment for
the year ended December 20, 1997; and (iii) 25,000
shares shall be exercisable after December 20, 1998
if the Distribution Agreement is in force and if
Grupo has achieved its forecasted sales commitment
over the two-year period ending December 20, 1998.
Certain of the above warrants contain "piggy-back"
registration rights and anti-dilution provisions.
The Company granted Sirrom 25,000 warrants in October
1995 and 25,000 in May 1996 at an exercise price of
$.01 per share. These warrants were issued under an
agreement whereby Sirrom gave up a first security
interest as a result of the issuance of a note
payable. The Company recorded $81,000 during the year
ended March 31, 1997 as deferred financing costs and
additional paid-in capital, representing the
difference between the estimated fair market value of
the underlying stock at the date of grant and $.01
per share.
COMMON STOCK RESERVED
The aggregate number of shares of the Company's
common stock reserved for future issuance at March
31, 1998 is summarized as follows:
Common stock options:
1987/1992 Stock Option Plan 396,407
Non-plan 31,318
F-25
<PAGE>
Common stock purchase warrants:
Sirrom Capital Corporation 300,000
Grupo Taper 25,000
Converted debenture holders 100,000
Coast Business Credit 37,500
Employees 3,465
Directors' compensation 69,765
-------
963,455
-------
9. INCOME TAXES Significant components of the Company's deferred
income tax assets and liabilities at March 31, 1998
are as follows:
Deferred tax assets:
Accrued liabilities $ 99,000
Net operating loss carryforwards 6,785,000
Inventory 148,000
Amortization 42,000
Other 3,000
Gross deferred tax assets 7,077,000
Deferred tax liability - depreciation (409,000)
Valuation allowance (6,668,000)
Net deferred taxes $ -
The net change in the valuation allowance for
deferred tax assets was a decrease of $178,000 in
fiscal 1998. As of March 31, 1998, the Company has
approximately $18,900,000 of tax net operating loss
carryforwards (NOLs) available that expire from 1998
through 2011. The tax benefit of these losses of
approximately $6,426,000 has been offset by a
valuation allowance sufficient to reduce the deferred
tax asset to an amount management believes is more
likely than not to be realized.
The provision for income taxes differs from the
amounts computed by applying the Federal statutory
rates to loss before taxes due to the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
<S> <C> <C>
Provisions for Federal income taxes
at the statutory rate (34.0%) (34.0%)
Loss producing no current tax benefit 34.0% 34.0%
------------------------------------------------------------------------------------
Taxes on income - -
====================================================================================
</TABLE>
F-26
<PAGE>
10. SEGMENT DATA
AND SIGNIFICANT
CUSTOMERS The Company operates in a single industry segment,
that of providing implantable medical products to the
health care industry. During the years ended March
31, 1998 and 1997, the Company exported its products
to European, Japanese and Asian distributors and
exported components and assemblies to certain
European manufacturers. Sales by geographic area for
the years ended March 31, 1998 and 1997 are as
follows:
GEOGRAPHIC AREA 1998 1997
United States $ 3,047,963 $ 3,486,511
Europe 605,440 626,508
Japan/Asia 169,656 88,028
---------- ------------
$ 3,823,059 $ 4,201,047
=========== =============
The Company's products are primarily distributed
through independent sales representatives in the
United States. During the year ended March 31, 1998,
two of the Company's independent sales
representatives each accounted for in excess of 10%
of the Company's sales and in the aggregate accounted
for $897,492 (23%) of the Company's sales. During the
year ended March 31, 1997, two of the Company's
independent sales representatives each accounted for
in excess of 10% of the Company's sales and in the
aggregate accounted for $892,279 (21%) of the
Company's sales.
Further, pursuant to an electrode lead Supply
Agreement with Intermedics Inc., the Company sold
$1,095,076 and $1,954,408 of product to Intermedics
Inc. for the years ended March 31, 1998 and 1997,
respectively, which accounted for 29% and 47% of the
Company's sales.
F-27
<PAGE>
11. COMMITMENTS AND PATENT LICENSING AGREEMENTS
CONTINGENCIES
Effective July 1, 1986, the Company renegotiated its
exclusive license to a patented electrode-wire
coating system that was originally acquired by the
Company on July 1, 1981. The modified license
agreement requires the payment of royalties equal to
a percentage of sales of products manufactured using
the patented technology. The license became
non-exclusive on July 1, 1994. The term of the
license agreement expires upon the expiration date of
the patent, July, 2009. Royalty expense under the
terms of the agreement for the years ended March 31,
1998 and 1997 was $39,564 and $62,655 respectively.
Further, on March 29, 1993, the licensor executed a
sublicense agreement with the Company, enabling an
unrelated company to manufacture the licensed
product.
PURCHASE OBLIGATIONS
During the year ended March 31, 1989, the Company
entered into an agreement for the procurement of
hybrid microelectronic circuits. The development of
circuits for the Company's atrial-controlled
ventricular and single-chamber pacing products was
completed in fiscal 1992. Development of the circuits
for the Company's dual-chamber devices was completed
in fiscal 1993. As of March 31, 1998, the Company's
future maximum purchase obligation approximated
$629,000.
During the year ended March 31, 1990, the Company
entered into an agreement for the procurement of
integrated circuits. The development of these
circuits was completed in fiscal 1992. As of March
31, 1998, the Company's future maximum purchase
obligation approximated $235,000, of which
approximately $165,000 has been prepaid by the
Company.
LEGAL PROCEEDINGS
The Company is party to various legal proceedings
arising in the normal conduct of business. Management
believes that the final outcome of these proceedings
will not have a material adverse effect upon the
Company's financial position or results of
operations.
12. SUBSEQUENT During April 1998, the Company issued $300,000 of 8%
EVENT convertible debentures. Interest is payable in cash
or stock, or a combination thereof, on each April 30
and October 31 commencing October 31, 1998 and ending
April 24, 2003, at which time all outstanding
principal and interest is due. The debentures are
convertible from April 24, 1998 through the day
immediately prior to the maturity date at a rate of
one share of common stock for each $.40 of
outstanding principal. The conversion price is
adjustable upon the occurrence of certain events.
F-28
<PAGE>
13. PROPOSED MERGER In October 1997, the Company executed a letter of
intent to merge with Electro-Catheter Corporation
("Electro"), wherein CCS Subsidiary, Inc. ("Sub") a
newly-formed New Jersey corporation and wholly-owned
subsidiary of the Company will merge into Electro
pursuant to an Agreement and Plan of Reorganization
among the Company, Electro and Sub. If the merger is
consummated, of which there can be no assurance, the
separate corporate existence of Sub will cease and
Electro will become a wholly-owned subsidiary of the
Company. Simultaneously with the merger, the Company
will reorganize into a holding company structure,
whereby the Company will become a direct,
wholly-owned subsidiary of Catheter Technology Group,
a Delaware corporation and a holding company ("CTG").
The stockholders of the Company will become
stockholders of CTG and will continue to hold their
shares of capital stock without any change in number,
designation, terms or rights. Pursuant to the merger,
each outstanding share of Electro common stock will
be converted into the right to receive one share of
common stock, $.10 par value, of CTG. The proposed
merger will result in the reverse acquisition by
Electro stockholders of CTG due to the fact that the
number of shares of CTG common stock to be issued to
Electro's current stockholders will represent
approximately 55% of the outstanding CTG common
stock.
F-29
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
MAY 31, 1998 AND AUGUST 31, 1997
(UNAUDITED)
MAY 31, AUGUST 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- 98,127
Accounts receivable, net 759,133 988,859
Inventories
Finished goods 447,388 481,660
Work-in-process 575,201 490,621
Materials and supplies 310,497 270,086
------------ ------------
Total inventories 1,333,086 1,242,367
Prepaid expenses and other current assets 64,885 168,781
------------ ------------
Total current assets 2,157,104 2,498,134
Property, plant and equipment, net 684,002 777,663
Other assets, net 276,238 97,275
------------ ------------
Total assets 3,117,344 3,373,072
============ ============
LIABILITIES AND STOCKHOLDERS DEFICIENCY
Current liabilities:
Current installments of subordinated debentures due to 225,000 --
T Partnership
Current installments of capitalized lease obligations 65,629 50,734
Accounts payable and accrued expenses 1,382,143 1,045,406
Accrued litigation expenses 288,400 443,820
------------ ------------
Total current liabilities 1,961,172 1,539,960
Subordinated debentures due to T Partnership, excluding 1,922,125 1,747,125
current installments
Capitalized lease obligation, excluding current installments 219,285 222,277
------------ ------------
Total liabilities 4,102,582 3,509,362
------------ ------------
Stockholders' deficiency:
Common stock 639,039 638,361
Additional paid-in capital 10,683,491 10,682,008
Accumulated deficit (12,307,768) (11,456,659)
------------ ------------
Total stockholders' deficiency (985,238) (136,290)
------------ ------------
Total liabilities and stockholders' deficiency $ 3,117,344 $ 3,373,072
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-30
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $1,502,537 $1,718,954 $4,152,546 $5,138,259
Cost of goods sold 1,119,482 1,082,277 2,836,541 2,858,408
---------- ---------- ---------- ----------
Gross profit 383,055 636,677 1,316,005 2,279,851
Operating expenses:
Selling, general and administrative 409,404 561,074 1,525,871 1,759,889
Research and development 118,734 225,198 416,224 672,979
---------- ---------- ---------- ----------
Operating loss (145,083) (149,595) (626,090) (153,017)
Other expense:
Interest expense (77,607) (70,073) (225,019) (185,562)
---------- ---------- ---------- ----------
Net loss $ (222,690) $ (219,668) $ (851,109) $ (338,579)
========== ========== ========== ==========
Basic and diluted loss per share $(0.03) $(0.03) $(0.13) $(0.05)
========== ========== ========== ==========
Dividends per share None None None None
Weighted average shares outstanding 6,390,389 6,383,611 6,387,000 6,378,661
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-31
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MAY 31, MAY 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (851,109) $ (338,579)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 95,746 107,658
Amortization 6,250 6,250
Changes in assets and liabilities:
Decrease in accounts receivable, net 229,726 (131,067)
(Increase) decrease in inventories (90,719) 393,392
Decrease (increase) in prepaid expenses and other
current assets 103,896 (174,642)
(Increase) decrease in other assets (185,213) 14,105
Decrease in deferred revenues - (144,293)
Increase (decrease) in accounts payable and accrued
expenses 230,467 163,563
------------ ------------
Net cash used in operating activities $ (460,956) (103,613)
------------ ------------
Cash flows from investing activities -
Cash purchases of property, plant and equipment (2,085) (66,756)
------------ ------------
Net cash used in investing activities (2,085) (66,756)
------------ ------------
Cash flows from financing activities:
Proceeds from Stock Purchase Plan 2,161 3,682
Proceeds from loan from T Partnership 400,000 100,000
Reductions of debt and capitalized lease obligations (37,247) (119,384)
------------ ------------
Net cash (used in) provided by financing activities 364,914 (15,702)
Net decrease in cash (98,127) (186,071)
Cash at beginning of period 98,127 275,283
------------ ------------
Cash at end of period $ -0- $ 89,212
============ ============
Interest paid $ 144,413 $ 185,561
Property, plan and equipment acquired under capitalized
lease obligations $ 49,150 $ 196,125
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-32
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Electro-Catheter
Corporation as of May 31, 1998, the results of operations for the three and nine
months ended May 31, 1998 and May 31, 1997 and statements of cash flows for the
nine months ended May 31, 1998 and May 31, 1997, but are not necessarily
indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. Accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1997.
NOTE 2 OTHER ASSETS
In connection with the proposed merger (see Note 4 to Notes to Condensed
Financial Statements), the Company has incurred $174,290 of expenses through May
31,1998. These expenses are included in Other Assets in the accompanying balance
sheet at May 31, 1998. Consummation of the merger is subject to, among other
things, raising capital. Upon consummation of the merger, these costs will
either be included as a cost of the acquisition, charged to additional paid-in
capital with equity financing, amortized over the term of any debt or charged to
operations if the merger does not occur.
NOTE 3 SUBORDINATED DEBENTURES
In September 1997, in December 1997, in January 1998, and in May 1998, the
Company borrowed additional amounts from the T Partnership, in each case in the
amount of $100,000, under substantially the same terms and conditions as its
previous borrowings, without issuing any additional warrants. Under the current
arrangement, the Company is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by the Company with such covenant
would allow the T Partnership to declare an event of default and accelerate
repayment of indebtedness. The Company is currently in compliance with the
covenant. The total indebtedness due to the T Partnership at May 31, 1998 was
$2,147,125.
NOTE 4 COMMITMENTS AND CONTINGENCIES
FDA WARNING LETTER
The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration ("FDA") of the United States
Department of Health and Human Services. Since the devices manufactured by the
Company are intended for "human use", as defined by the FDA, the Company and
said devices are subject to FDA regulations, which, among other things, allow
for the conduct of routine detailed inspections of device manufacturing
establishments and confirmation of adherence to "current good manufacturing
practices" ("cGMP") in the manufacture of medical devices.
In February 1997, the FDA conducted an inspection and audit of the Company's
facilities and practices as a result of which the FDA issued a Warning Letter
regarding non-compliance by the Company with certain cGMPs in the manufacture of
its products. Electro-Catheter Corporation communicated with the FDA its
intentions to remedy the non-compliance, established a plan and timetable to
effectuate such remediation and has diligently worked to take the necessary
corrective actions. A subsequent FDA inspection in September 1997, indicated
that while substantial progress had been made, not all corrective actions have
been completed. The Company is continuing in its efforts to complete such
actions and it is Electro-Catheter Corporation's intention to inform the FDA by
late September
F-33
<PAGE>
1998 that it has completed such actions and is ready for reinspection. There can
be no assurance, however, that the Company will be ready for such reinspection
in September 1998 nor that it will pass any such reinspection when it occurs.
While the Company is currently under no restrictions by the FDA regarding the
manufacture or sale of its products, the Company is unable to precisely
determine the short-term economic impact of instituting the required corrective
actions, and there can be no assurance that the FDA will not take further action
including seizure of products, injunction and/or civil penalties, if the
necessary corrective actions are not completed on a timely basis. At this time,
the Company is unable to precisely determine the short-term adverse economic
impact which will result from instituting the corrective actions, but the
voluntary discontinuation of manufacturing of certain products and the delay in
the sale of other products has adversely affected sales by an estimated 10%.
LITIGATION
In September 1997, a Superior Court jury in Middlesex County found the Company
liable for age discrimination in connection with its termination of an employee
in April 1994. The jury awarded the terminated employee $283,000 plus attorney's
fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997. The Company filed an appeal of the judgment.
Pending the Company's appeal, the plaintiff, in an effort to execute upon the
judgment rendered in his favor, levied on certain of the Company's bank
accounts, thereby freezing the available funds. Notwithstanding management's
belief that the Company had arguments supporting its appeal, management weighed
the considerable cash requirements of an appeal bond, the costs of continued
efforts relative to the appeal, and the need to vacate the levies to satisfy the
Company's immediate cash requirements against the likelihood of prevailing on
its appeal and the terms of a possible settlement, and on April 8, 1998, the
Company entered into a Settlement Agreement with the plaintiff. Under the key
terms of the Settlement Agreement, the matter is deemed settled for the sum of
$305,000 payable as follows: (i) by a lump sum payment of $65,000 within five
business days of the date of the Settlement Agreement; and (ii) the balance,
bearing interest at the rate of 6% per annum, payable in monthly installments of
$10,000, plus interest, commencing July 1, 1998. The Settlement Agreement
provides that a default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest. The Company has made the
payments due to date on a timely basis.
MERGER
On January 20, 1998, the Company entered into an Agreement and Plan of
Reorganization with Cardiac Control Systems, Inc. ("CCS"), a Delaware
corporation located in Palm Coast, Florida, to effect a merger of the two
companies targeted toward the development and marketing of advanced specialty
electrophysiology products. Currently, the structure of the transaction
contemplates the merger of a newly-created, wholly-owned subsidiary of CCS into
and with the Company as a result of which the Company shall become a
wholly-owned subsidiary of CCS and the stockholders of the Company will become
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation
and parent holding company of CCS, to be formed as part of a restructuring in
connection with the merger. By virtue of the merger, each outstanding share of
common stock, $.10 par value, of the Company will be converted into the right to
receive one-fifth of a share of common stock $.10 par value of CTG. Pursuant to
the restructuring, CTG will succeed to all rights and obligations of CCS and
will become the successor issuer of CCS such that stockholders of CCS will be
come stockholders of CTG. Subsequent to the restructuring, it is intended that
CTG will undergo a 1 for 5 reverse stock split reducing the number of shares of
common stock, $.10 par value, of CTG (the "CTG Common Stock") outstanding to
approximately 529,748 shares. By virtue of the merger, subsequent to the reverse
stock split, each outstanding share of common stock, $.10 par value, of the
Company will be converted into the right to receive one-fifth of a share of CTG
Common Stock, effectively equal to an even exchange of shares prior to such
reverse stock split.
Upon closing of the transaction, $1,000,000 of the Company's senior debt is
intended to be redeemed by: (a) the issuance by a surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an
F-34
<PAGE>
aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to the T Partnership of a CTG 9% condition promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock, or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that CCS shall not be obligated to make aggregate payments
with respect to both the Series A Preferred Stock and conditional note, in
excess of $1.0 million plus interest); and (c) the delivery to the T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of the Company's secured
indebtedness to the T Partnership, exclusive of the amount redeemed under (a)
above), bearing interest at the rate of 12% per annum payable quarterly, the
principal amount of which shall be due and payable three years from the date of
execution of such note (the terms of the security for the note have yet to be
agreed upon).
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; and (iv) the receipt of
all required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
International sales should be adversely affected in Europe (approximately 17% of
total revenues) for about the next six months as the Company was not able to
obtain the "CE" Mark on its products on a timely basis, in order to continue to
sell into this market. The effort to obtain the "CE" Mark is continuing and the
Company is hopeful of obtaining this designation before the end of the calendar
year on its major products in order to continue selling into this market.
However, there can be no assurance that the Company will obtain the "CE" Mark or
maintain the same level of revenue upon receiving the "CE" Mark as it did
previously.
NOTE 5 RECLASSIFICATIONS
Certain reclassifications have been made to conform to the fiscal year 1998
presentation.
NOTE 6 EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997.
F-35
<PAGE>
Basic loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Diluted loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Common share equivalents, such as outstanding stock options, are not included in
the calculation since the effect would be antidilutive.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electro-Catheter Corporation:
We have audited the financial statements of Electro-Catheter
Corporation as listed in the accompanying index. In connection with our audits
of the financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Electro-Catheter
Corporation at August 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended August 31,
1997 in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has limited working capital resources which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1997
F-37
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
BALANCE SHEETS
AUGUST 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 98,127 275,283
Accounts receivable, less allowance for doubtful
accounts of $152,070 in 1997 and $15,000 in 1996 988,859 1,016,201
Inventories 1,242,367 1,862,179
Prepaid expenses and other current assets 168,781 64,344
------------ ------------
Total current assets 2,498,134 3,218,007
Property, plant and equipment, net 777,663 551,698
Other assets, net 97,275 123,407
------------ ------------
Total assets $ 3,373,072 3,893,112
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt 300,000
Current installments of capitalized lease obligations 50,734 7,489
Accounts payable, trade 566,816 345,888
Deferred revenues -- 144,293
Accrued expenses 478,590 395,591
Accrued litigation expenses 443,820 --
------------ ------------
Total current liabilities 1,539,960 1,193,261
Subordinated debentures due to T-Partnership, excluding current portion 1,747,125 1,447,125
Capitalized lease obligation, excluding current installments 222,277 37,756
------------ ------------
Total liabilities 3,509,362 2,678,142
------------ ------------
Stockholders'(deficiency) equity:
Common stock $.10 par value Authorized 20,000,000 shares;
issued 6,383,611 in 1997 and 6,373,711 in 1996 638,361 637,371
638,361
Additional paid-in capital 10,682,008 10,679,316
Accumulated deficit (11,456,659) (10,101,717)
------------ ------------
Total stockholders' (deficiency) equity (136,290) 1,214,970
------------ ------------
Commitments and contingencies -- --
------------ ------------
Total liabilities and stockholders' deficiency/equity $ 3,373,072 3,893,112
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-38
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Net revenues, including research and development revenue of
$544,293 in 1997 and $155,707 in 1996 $ 6,648,438 7,362,436 7,263,424
Cost of goods sold 4,041,486 4,079,502 3,861,591
----------- --------- ----------
Gross profit 2,606,952 3,282,934 3,401,833
Operating expenses:
Selling, general and administrative 2,384,127 2,954,991 3,438,811
Research and development 881,728 1,010,073 931,956
----------- --------- ----------
Operating loss (658,903) (682,130) (968,934)
Other income (expense):
Interest income - 86 1,102
Interest expense (249,384) (210,896) (168,058)
Litigation expenses (446,655) - -
----------- --------- ----------
Net loss $(1,354,942) (892,940) (1,135,890)
=========== ========= ==========
Net loss per common share $ (0.21) (0.14) (0.18)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-39
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIENCY/EQUITY
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
ADDITIONAL
COMMON PAID-IN ACCUMULATED TOTAL STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIENCY/EQUITY
----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Balances at August 31, 1994 $ 576,232 10,106,647 (8,072,887) 2,609,992
Employee stock plan 248 1,988 -- 2,236
Common Stock issued under private placement 57,150 442,913 -- 500,063
Proceeds from issuance of stock warrants -- 63,750 -- 63,750
Net loss -- -- (1,135,890) (1,135,890)
----------- ----------- ----------- -----------
Balances at August 31, 1995 633,630 10,615,298 (9,208,777) 2,040,151
Stock options exercised 2,350 18,213 -- 20,563
Employee stock plan 287 779 -- 1,066
Common stock issued for services rendered 1,104 10,631 -- 11,735
Amortization of deferred compensation
expense on stock options -- 34,395 -- 34,395
Net loss -- -- (892,940) (892,940)
----------- ----------- ----------- -----------
Balances at August 31, 1996 637,371 10,679,316 (10,101,717) 1,214,970
Employee stock plan 990 2,692 -- 3,682
Net loss -- -- (1,354,942) (1,354,942)
----------- ----------- ----------- -----------
Balances at August 31, 1997 $ 638,361 10,682,008 (11,456,659) (136,290)
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-40
<PAGE>
<TABLE>
<CAPTION>
ELECTRO-CATHETER CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,354,942) (892,940) (1,135,890)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization 145,614 130,524 137,106
Amortization of deferred charges 8,333 8,333 61,708
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 27,342 190,087 (141,514)
Decrease (increase) in inventories 619,812 230,900 (289,789)
(Increase) decrease in prepaid
expenses and other current assets (104,437) (21,314) 96,749
Decrease in other assets, net 17,799 4,207 3,527
Decrease (increase) in deferred
revenues (144,293) 144,293 --
Increase (decrease) in accounts
payable and accrued expenses 747,747 (340,700) 124,128
----------- ----------- -----------
Net cash used in
operating activities $ (37,025) (546,610) (1,143,975)
----------- ----------- -----------
Cash flows used in investing activities -
Purchases of property, plant
and equipment (115,292) (34,167) (12,143)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock -- -- 500,063
Net proceeds from issuance of
subordinated debentures and warrants 100,000 547,125 575,000
Proceeds from exercise of
stock options -- 20,563 --
Proceeds from employee stock
purchase plan 3,682 1,066 2,236
Proceeds from loan on officer's
life insurance policy -- -- 25,000
Repayment of debt (128,521) (17,079) (18,184)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (24,839) 551,675 1,084,115
----------- ----------- -----------
Net decrease in cash (177,156) (29,102) (72,003)
Cash and cash equivalents
at beginning of year 275,283 304,385 376,388
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 98,127 275,283 304,385
=========== =========== ===========
Interest paid $ 241,049 199,724 101,967
Property, plant & equipment acquired
under capitalized lease obligations $ 256,287 49,268 --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-41
<PAGE>
ELECTRO-CATHETER CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Electro-Catheter Corporation ("Company") has been in business
for over 36 years. The Company develops, manufactures,
markets, and sells products for hospitals and physicians.
These products are diagnostic and therapeutic catheters which
are utilized in connection with illnesses of the heart and
circulatory system. The Company has targeted electrophysiology
as its focal area for future growth, but intends to maintain
and develop products for emergency care, cardiac surgery,
invasive and non-invasive cardiology and invasive radiology.
(b) REVENUE RECOGNITION
Revenues are recognized at the time of shipment and
provisions, when appropriate, are made when the right to
return exists in accordance with SFAS No. 48. Revenues under
service contracts are accounted for as the services are
performed in accordance with the terms of the contract and are
not refundable if the research effort is unsuccessful.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are carried at cost which
approximates market value.
(d) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
accounts receivable. The Company's customer base is primarily
comprised of hospitals in the U.S. and distributors outside
the U.S. As of August 31, 1997, the Company believes it has no
significant concentration of credit risk with its accounts
receivable.
(e) INVENTORY VALUATION
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(f) PATENTS AND TRADEMARKS
Patents and trademarks are recorded at cost and are amortized
on a straight-line basis over their useful lives. Such costs,
net of accumulated amortization, are included in other assets,
net in the accompanying balance sheets.
(g) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Plant and
equipment is depreciated using the straight-line method over
the estimated useful lives of the assets.
Repairs and maintenance costs are charged to operations as
incurred.
F-42
<PAGE>
Betterments are capitalized. Leasehold improvements are
amortized over the term of the lease or the useful life of the
asset, whichever is shorter.
When assets are retired or otherwise disposed, the cost and
related accumulated depreciation are removed from the related
accounts, and any resulting gain or loss is recognized in
operations for the period.
(h) RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense when
incurred.
(i) ACCOUNTING FOR INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences
are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for
any tax benefits which are not expected to be realized. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period in which such tax rate
changes are enacted.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(k) STOCK-BASED COMPENSATION
Prior to September 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On
September 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years
as if the fair-value based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(l) LOSS PER SHARE
Loss per share is computed using the weighted average number
of shares outstanding during each year. Shares issuable upon
exercise of outstanding stock options, warrants and conversion
of debentures are not included in the computation of loss per
share because the result of their inclusion would be
anti-dilutive.
The weighted average number of shares of common stock used in
the computation of loss per share was approximately 6,380,000
in 1997, 6,354,000 in 1996 and 6,027,000 in 1995.
F-43
<PAGE>
(m) LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 121, the Company reviews
long-lived assets for impairment whenever events or changes in
business circumstances occur that indicate that the carrying
amount of the assets may be recoverable. The Company assesses
the recoverability of long-lived assets held and to be used
based on undiscounted cash flows, and measures the impairment,
if any, using discounted cash flows. Adoption of SFAS No. 121
in fiscal 1997 did not have any impact on the Company's
financial position, operating results or cash flows.
(n) FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and other
current assets and current liabilities approximate fair value
due to the short-term maturity of these instruments.
(2) LIQUIDITY
The accompanying financial statements have been prepared on a going
concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary
course of business. The Company incurred net losses of $1,354,942,
$892,940 and $1,135,890 for the years ended August 31, 1997, 1996 and
1995 respectively, and at August 31, 1997 had an accumulated deficit of
$11,456,659. The net losses incurred by the Company have consumed
working capital and weakened the Company's financial position. The
Company's ability to continue in business is dependent upon its success
in generating sufficient cash flow from operations or obtaining
additional financing. The Company continues to re-evaluate its plans
and adopt certain cost reduction measures. The Company is attempting to
increase sales by examining and, where appropriate, modifying its
distribution network, utilizing aggressive pricing and introducing new
products to market. The Company's ability to continue as a going
concern is dependent upon the successful implementation of the
aforementioned programs. There can be no assurances that these programs
can be successfully implemented. The financial statements do not
include any adjustments relating to the recoverability and
classifications of reported asset amounts or the amounts of liabilities
that might result from the outcome of this uncertainty.
(3) INVENTORIES
Inventories consisted of the following:
1997 1996
---------- ---------
Finished goods $ 481,660 954,997
Work-in-process 490,621 490,396
Materials and supplies 270,086 416,786
------- -------
1,242,367 1,862,179
========= =========
F-44
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 38,400 38,400
Building 153,597 153,597
Building improvements 993,168 952,837
Equipment 2,307,607 2,244,694
Office furniture and
equipment 534,232 519,319
Leasehold improvements 340,382 340,382
Sales equipment and
diagnostic computers 587,348 589,348
Capitalized leases 305,555 49,268
---------- ----------
5,260,289 4,887,845
Less accumulated deprecia-
tion and amortization 4,482,626 4,336,147
---------- ----------
Net property, plant
and equipment $ 777,663 551,698
========== ==========
</TABLE>
(5) ACCRUED EXPENSES
The components of accrued expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued salaries, wages and
payroll taxes $287,933 278,263
Accrued audit fees 52,500 60,000
Other expenses 138,157 57,328
-------- --------
$478,590 395,591
======== ========
</TABLE>
(6) DEFERRED REVENUES
In June 1996, the Company received an advance of $300,000 from an
unrelated company to perform research and development and
pre-production planning for it. For services performed, the Company
recognized $155,707 in revenues in 1996 and such amount was reported in
net revenues in the statement of operations. The remaining $144,293 was
recorded as deferred revenues in the accompanying 1996 balance sheet
and was recognized as revenue in fiscal year 1997.
(7) SUBORDINATED DEBENTURES DUE TO T PARTNERSHIP
On October 11, 1993, the Company entered into an agreement with the T
Partnership to borrow up to $1,000,000. Ervin Schoenblum, the Company's
Acting President and Director, and Abraham Nechemie, also a Director of
the Company, are members of the T Partnership. On August 31, 1995,
after the Company had drawn down all of the $1,000,000, the Company
entered into an agreement with the T Partnership to borrow an
additional $500,000 ("Lending Agreement"). In January 1996, the Company
and the T Partnership agreed to a restructuring of its financing
agreement. The T Partnership advanced an additional $200,000 to the
Company and agreed to defer interest payments for a period of three
months (interest payments were added to the outstanding principal on
the T Partnership indebtedness) and in April 1997, the Company borrowed
an additional $100,000 from the T Partnership under the same terms and
conditions as its previous borrowing.
F-45
<PAGE>
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. Principal payments of $25,000 scheduled
to begin on September 1, 1996 have been deferred to September 1, 1998.
Any remaining balance is due on August 1, 2003. The loan is secured by
the Company's property, building, accounts receivable, inventories and
machinery and equipment. The Company is to prepay the outstanding
balance in the event the Company is merged into or consolidated with
another corporation or the Company sells all or substantially all of
its assets, unless the T Partnership and Company agree otherwise.
Under the provisions of the agreement with the T Partnership, the
Company is obligated to comply with certain financial covenants, to be
tested on a monthly basis. Non-compliance by the Company shall allow
the T Partnership to declare an Event of Default and accelerate
repayment of indebtedness. As of August 31, 1997, the Company was not
in compliance with this financial covenant. However, in November 1997,
the T Partnership agreed not to exercise its right to accelerate the
repayment of indebtedness through September 1, 1998 as a result of
non-compliance with the aforementioned financial covenant and the
nonpayment of principal payments in the 1998 fiscal year. The T
Partnership has also agreed to a modification to the financial
covenant. The Company is currently in compliance with such covenant.
The total indebtedness due to the T Partnership at August 31, 1997 was
$1,747,125.
Under the provisions of the original agreement, the T Partnership was
granted warrants which permit the T Partnership to purchase 166,667
shares of the Company's common stock at a price of $3.25 per share. The
August 1995 agreement provides that the T Partnership surrender its
warrants and be granted a new warrant to purchase 500,000 shares of the
Company's common stock at a price of $0.9875 per share in exchange for
the surrendered warrant. No additional warrants were issued as a result
of subsequent borrowings. A value has been allocated to the warrants
based upon their estimated fair market value at the date of the
agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is
shown in other assets in the accompanying 1997 and 1996 balance sheets.
The warrants are immediately exercisable and expire on August 1, 2001.
As of August 31, 1997 these warrants remain outstanding.
In September 1997, the Company borrowed an additional $100,000 from the
T Partnership.
(8) CAPITALIZED LEASE OBLIGATIONS
The Company has entered into lease commitments for equipment that meet
the requirements for capitalization. The equipment has been capitalized
and shown in property, plant and equipment in the accompanying 1997
balance sheet (see Note 3). The related obligations are also recorded
in the accompanying balance sheet and are based upon the present value
of the future minimum lease payments with interest rates of 13.7% to
17.1%. The net book value of equipment acquired under capitalized lease
obligations was $264,867 and $43,520, respectively for the years ended
August 31, 1997 and 1996.
The annual maturities for capitalized lease obligations as well as
subordinated debentures due to the T Partnership for the five years
subsequent to August 31, 1997, are as follows:
1998 $ 51,010
1999 359,186
2000 367,778
2001 367,187
2002 and thereafter 874,975
(9) OTHER DEBT
The Company has borrowed $125,000 against the cash surrender value of a
life insurance policy of the former Chairman of the Board of the
Company. Interest on the loan is 6%. The loan plus accrued interest
F-46
<PAGE>
is recorded as a reduction in the policy's cash surrender value, which
is included in other assets in the accompanying balance sheets.
(10) STOCK OPTIONS
On May 20, 1987, the Company's stockholders approved the 1987 Incentive
Stock Option Plan (the "1987 Plan"). Under the 1987 Plan, 225,000
shares of authorized but unissued shares of common stock, $.10 par
value, of the Company were set aside to provide an incentive for
officers and other key employees to render services and make
contributions to the Company. Options may be granted at not less than
their fair market value at the date of grant and are exercisable at
such time provided by the grants during the five-year period beginning
on the date of grant.
On May 23, 1990, the Company's stockholders approved the 1990 Incentive
Stock Option Plan (the "1990 Plan"). The terms of the 1990 Plan are
substantially the same as the terms of the 1987 Plan. The 1990 Plan
provides for the reservation of 225,000 shares of common stock for
issuance thereunder.
On July 15, 1992, the Company's stockholders approved the 1992
Incentive Stock Option Plan (the "1992 Plan"). The terms of the 1992
Plan are substantially the same as the terms of the 1987 and 1990
Plans. The 1992 Plan likewise provides for the reservation of 225,000
shares of common stock for issuance thereunder.
On April 1, 1992, the Board of Directors adopted the 1992 Non-Qualified
Stock Option Plan pursuant to which options to purchase 200,000 shares
of common stock may be granted to directors, officers and key
employees. Options may be granted at a price determined by the Board of
Directors, but not less than 80% of the fair market value at the date
of grant. Options are exercisable at such time provided by the grants,
but each option granted shall terminate no longer than five years after
the date of grant.
In July 1994, the Company extended the expiration date of certain
outstanding options held by two members of its Board of Directors. The
extension, relating to a total of 44,500 shares of Electro common
stock, effected options having an exercise price per share of $.875 at
the date of grant and a fair market value of $1.25 per share at the
date of extension. The difference between the price at the date of
grant and the fair market value at the date of the extension has been
recorded as compensation expense and is being amortized over the
extension period.
In October 1994, the Board of Directors voted in favor of offering all
employees, officers and directors holding options at a price greater
than $1.00 per share the opportunity to have those options replaced by
stock options at a price of $1.00 per share, representing the fair
market value at that time. Accordingly, options to purchase 384,300
shares were terminated and an equal number of new options were issued,
which is reflected in the table below. In addition, the Company also
granted 25,000 stock options to the Company's Acting President at $1.00
per share.
F-47
<PAGE>
A summary of all stock option activity follows:
NUMBER OPTION
OF PRICE
SHARES PER SHARE TOTAL
------- -------------- -------
Year ended August 31, 1995:
Granted 405,300 $ .81 - 1.14 407,025
Cancelled or expired 395,800 1.19 - 2.75 791,338
Outstanding at August 31, 1995 490,300 .81 - 5.00 698,761
======= =========== =======
Year ended August 31, 1996:
Granted 12,900 $ .81 - .88 10,794
Exercised 23,500 .88 20,563
Canceled or expired 129,700 .81 - 5.00 330,231
Outstanding at August 31, 1996 350,000 .81 - 2.75 358,761
======= =========== =======
Year ended August 31, 1997:
Granted 23,500 $ .81 - 1.13 21,643
Cancelled or expired 22,300 .81 - 1.50 20,113
Outstanding at August 31, 1997 351,200 .81 - 2.75 353,791
======= =========== =======
Options to acquire 216,260 shares of common stock were exercisable at
August 31, 1997.
The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $.59 and $.55, respectively on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 5%, volatility factor of 73% and an expected
life of 5 years. The Company applies APB Opinion No. 25 in accounting
for its stock options and, accordingly, no compensation expense has
been recognized for its stock options in the financial statements. Had
the Company determined compensation cost based on the fair market value
at the grant date for its stock options under SFAS No. 123, the
Company's net income would not have been materially affected. The pro
forma amounts are indicated below:
1997 1996
------------ ----------
Net loss - as reported $(1,354,942) $(892,940)
Net loss - pro forma (1,357,590) (893,624)
Loss per share - as reported $ (0.21) $ (0.14)
Loss per share - pro forma (0.21) (0.14)
In accordance with SFAS No. 123, pro forma net income and earnings per
share data reflect only options granted in 1996 and 1997. Therefore,
the full impact of calculating compensation expense for stock options
under SFAS No. 123 is not reflected in the pro forma amounts presented
above since compensation expense for options granted prior to September
1, 1995 was not considered.
(11) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Plan") which
provides for the issuance of a maximum of 75,000 shares of the
Company's common stock which were made available for sale under the
Plan's first offering.
F-48
<PAGE>
After the first offering, subsequent offerings were made upon the
recommendation of the committee administering the Plan. Common stock
can be purchased through employee-authorized payroll deductions at the
lower of 85% of the fair market value of the common stock on either the
first or last day of trading of the stock during the calendar year. It
is the intention of the Company that the Plan qualify under Section 423
of the Internal Revenue Code. The Company's Board of Directors
authorized extension of the Plan to January 1, 1998. During 1997, 1996
and 1995, 9,900, 2,866 and 2,476 shares, respectively, were purchased
under the Plan.
(12) PREFERRED STOCK, COMMON STOCK AND PAID-IN CAPITAL
The Company is authorized to issue up to 1,000,000 shares of preferred
stock. As of August 31, 1997, no preferred shares have been issued.
In March 1995, the T Partnership purchased 571,500 shares of the
Company's restricted common stock, $.10 par value, in a private
placement at $.875 per share for gross proceeds of approximately
$500,000. In connection with this private placement, the Company also
issued to the T Partnership a purchase warrant to purchase 83,344
shares of the Company's common stock at an exercise price of $1.425 per
share. This warrant will expire five years from the date of the
agreement. Ervin Schoenblum, the Company's Acting President and
director, and Abraham H. Nechemie, the other member of the Company's
Board of Directors, are members of the T Partnership.
(13) INCOME TAXES
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will be realized. The
valuation allowance for deferred tax assets as of September 1, 1997 was
$3,197,000 as compared to $2,983,000 at September 1, 1996. The net
change in the total valuation allowance for the year ended August 31,
1997 was an increase of $142,000 as compared to a decrease of $536,000
at August 31, 1996.
F-49
<PAGE>
At August 31, 1997 and 1996, the tax effects of temporary differences that give
rise to the deferred tax assets and deferred tax liabilities are as follows:
Deferred tax assets: 1997 1996
----------- ----------
Inventories $ 93,000 155,000
Accounts receivable,
due to allowance for
doubtful accounts 23,000 3,000
Contribution carryover 25,000 23,000
Compensated absences 31,000 30,000
Federal and state net
operating loss carryforwards 2,390,000 2,209,000
Research and development
and investment tax credit
carryforwards 635,000 635,000
---------- ---------
Total gross deferred
tax assets 3,197,000 3,055,000
Less valuation allowance 3,137,000 2,983,000
---------- ---------
Net deferred tax assets 60,000 72,000
Deferred tax liabilities:
Excess of tax over financial
statement depreciation (60,000) (72,000)
---------- ---------
Net deferred tax $ -0- -0-
=========== =========
At August 31, 1997, the Company had available federal net operating loss
carryforwards, research and development and investment tax credit carryforwards
that expire as follows:
F-50
<PAGE>
NET OPERATING RESEARCH
EXPIRATION LOSS AND INVESTMENT
DATE CARRYFORWARDS DEVELOPMENT CREDITS TAX CREDITS
- ---------- ------------- ------------------- -----------
1999 $ - 25,000 -
2000 - 275,000 35,000
2001 4,417,000 246,000 43,000
2002 2,063,000 - -
2003 690,000 - -
2004 268,000 - -
2005 46,000 - -
2006 223,000 - -
2007 454,000 - -
2008 854,000 11,000 -
2009 1,368,000 - -
2010 1,178,000 - -
2011 589,000 - -
2012 1,435,000 - -
----------- ------- ------
Total 13,585,000 557,000 78,000
(14) SEGMENT DATA
The Company operates in one business segment. Export sales were
approximately $1,828,000 in 1997, $2,324,000 in 1996 and $1,964,000 in
1995. The major areas of export sales are as follows:
REGION 1997 1996 1995
------------- --------- --------- ---------
Asia 448,507 459,947 419,601
Europe 1,201,036 1,592,469 1,301,582
South America 76,744 127,151 149,621
Other 101,750 144,724 93,831
Sales to the only domestic distributor of the Company's products
totaled approximately $765,000 in 1995, representing approximately 11%
of net sales. The agreement with this distributor was terminated on May
31, 1995 and, as such, there were no sales to this distributor in 1996
and 1997.
(15) COMMITMENTS AND CONTINGENCIES
(a) The Company has agreements to lease equipment for use in the operations
of the business under operating leases. The Company incurred rental
expenses of approximately $105,000 in 1997, $116,000 in 1996 and
$148,000 in 1995.
The following is a schedule of future minimum rental payments for
operating leases which expire through 2000:
1998 8,294
1999 4,150
2000 4,150
-----
16,594
======
F-51
<PAGE>
(b) The Company is involved in certain claims and litigation arising in the
normal course of business. Management believes, based on the opinion of
counsel representing the Company in such matters, that, except for one
claim, the outcome of such claims and litigation will not have a
material effect on the Company's financial position and results of
operations. The one exception is that in September 1997, a jury in
Middlesex County of the Superior Court of New Jersey found the Company
liable for age discrimination when it terminated an employee in April
1994. The jury awarded the terminated employee $283,000. In addition to
the $283,000, the court awarded the plaintiff attorney's fees and
expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from
September 1996 in the amount of approximately $115,665. The Company is
considering taking an appeal, but has accrued all related costs to date
in the accompanying financial statements.
(c) In February 1997, the FDA conducted an inspection and audit of the
Company. At the conclusion of the audit, the FDA issued a number of
observations regarding violations of CGMP. On March 11, 1997, the FDA
issued a Warning Letter to the Company requesting that prompt action be
taken to correct the violations.
In response to the observations and the Warning Letter, the Company has
provided the FDA with a plan and timetable for instituting corrective
actions. The Company has been working diligently in its efforts to
correct these violations.
In September 1997, the FDA conducted another audit of the Company's
facilities. While the Company has made progress towards correcting the
violations, at the conclusion of this audit, the FDA issued a report
which included no additional violations of CGMP but listed violations
which are in the process of correction by the Company. At this time,
the Company is unable to precisely determine the short-term adverse
economic impact which will result from instituting the corrective
actions.
(d) On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., a Delaware corporation ("CCS"), to
effect a merger of the two companies targeted toward the development
and marketing of advanced specialty electrophysiology products. The
structure of the transaction contemplates the merger of a wholly-owned
subsidiary of CCS into and with the Company as a result of which the
Company shall become a wholly-owned subsidiary of CCS. The transaction
further contemplates an exchange of common stock of the two companies,
with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10
par value per share.
Consummation of the merger is subject, among other things, to: (i)
raising sufficient capital to support the product development efforts
of both companies; (ii) the execution of a definitive agreement
reflecting the intentions of the parties; (iii) the approval of the
transaction by the Board of Directors of each company; (iv) the
approval of the transaction by the shareholders of Electro-Catheter
Corporation; and (v) the receipt of all required regulatory approvals
by each company.
CCS develops, manufactures and sells a broad line of implantable
cardiac pacemakers, pacemaker leads and related products which Company
management believes are complementary to its own product lines. The
Company believes the merger may allow certain efficiencies to improve
operating performance and that the broader product line may provide for
a more effective marketing and distribution process. There can be no
assurance, however, that consummation of the merger will yield positive
operating results in the future.
F-52
<PAGE>
SCHEDULE II
ELECTRO-CATHETER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITION CHARGED
BALANCE AT TO COST AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES WRITE-OFFS END OF YEAR
----------- ----------------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
1997 Allowance for doubtful account $15,000 142,848 5,778 152,070
1996 Allowance for doubtful accounts $76,796 39,383 101,179 15,000
1995 Allowance for doubtful accounts $21,776 55,020 - 76,796
</TABLE>
F-53
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF
JANUARY 20, 1998,
AMONG
CARDIAC CONTROL SYSTEMS, INC.,
CCS SUBSIDIARY, INC.
AND
ELECTRO-CATHETER CORPORATION
<PAGE>
GLOSSARY
The following terms used in this Agreement are defined in the following
Sections:
<TABLE>
<CAPTION>
SECTION OR
TERM OTHER LOCATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Acquisition Transaction......................................................................................6.4(a)
Acquisition Sub............................................................................................Preamble
Actions........................................................................................................3.14
Agreement...........................................................................................First paragraph
Plan of Merger......................................................................................First paragraph
Benefit Arrangements........................................................................................3.17(d)
Break-up Fee................................................................................................10.1(b)
Business Day....................................................................................................1.7
CCSFE...........................................................................................................4.2
Certificate.....................................................................................................3.1
Closing.........................................................................................................1.7
Closing Date....................................................................................................1.7
Code............................................................................................................1.6
Common Shares Trust......................................................................................2.2(d)(ii)
Company....................................................................................................Preamble
Company Affiliate Agreements....................................................................................5.2
Company Common Stock................................................................................First paragraph
Company Disclosure Schedule.......................................................................................3
Company Financial Statements....................................................................................3.6
Company Options..............................................................................................2.3(a)
Company Returns.................................................................................................3.9
Company SEC Documents...........................................................................................3.5
Company Sub.....................................................................................................3.1
Company Warrants................................................................................................3.3
Constituent Corporations........................................................................................1.1
Effective Time..................................................................................................1.2
Employee....................................................................................................3.17(a)
Employee Plans..............................................................................................3.17(a)
Encumbrances...................................................................................................3.10
ERISA.......................................................................................................3.17(a)
ERISA Affiliate.............................................................................................3.17(a)
Excess Shares.............................................................................................2.2(d)(i)
Exchange Act....................................................................................................3.4
Exchange Agent...............................................................................................2.2(a)
Exchange Fund................................................................................................2.2(a)
Executory Period.............................................................................................6.1(a)
FAS No. 5.......................................................................................................3.7
FDA............................................................................................................3.15
GAAP............................................................................................................3.6
Governmental Authority.........................................................................................3.14
GTH.............................................................................................................8.6
Intellectual Property Rights...................................................................................3.11
Liability.......................................................................................................3.7
Material Adverse Effect.........................................................................................3.1
Merger..........................................................................................................1.1
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Merger Shares................................................................................................2.1(c)
Multiemployer Plan..........................................................................................3.17(c)
New Jersey Statute..................................................................................First Paragraph
Old Certificates.............................................................................................2.2(a)
Other Filings...................................................................................................6.5
Parent.....................................................................................................Preamble
Parent Common Stock.................................................................................First paragraph
Parent Disclosure Schedule........................................................................................4
Parent Financial Statements.....................................................................................4.6
Parent Options..................................................................................................4.3
Parent SEC Documents............................................................................................4.5
Parent Warrants.................................................................................................4.3
Party........................................................................................................6.1(a)
Pension Plans...............................................................................................3.17(a)
Related Agreements..............................................................................................5.2
Rule 145........................................................................................................5.2
Rule 145 Affiliate..............................................................................................5.2
S-4.............................................................................................................6.5
SEC.............................................................................................................3.4
SSS&G...........................................................................................................8.5
Stockholder Action..............................................................................................6.9
Stockholder Statement...........................................................................................6.9
Stockholders.................................................................................................2.2(a)
Stockholders' Materials.........................................................................................6.9
Stockholders' Meeting...........................................................................................6.9
Subsidiary...................................................................................................2.1(b)
Superior Proposal............................................................................................6.4(a)
Surviving Corporation...........................................................................................1.1
Tax.............................................................................................................3.9
Taxes...........................................................................................................3.9
Unvested Company Option......................................................................................2.3(b)
Vested Company Option........................................................................................2.3(c)
Voting Agreement................................................................................................5.1
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
ARTICLE I. GENERAL...........................................................................................A-8
1.1. THE MERGER........................................................................................A-8
1.2. THE EFFECTIVE TIME OF THE MERGER..................................................................A-8
1.3. EFFECT OF MERGER..................................................................................A-8
1.4. CERTIFICATE AND BY-LAWS OF SURVIVING CORPORATION..................................................A-8
1.5. TAKING OF NECESSARY ACTION........................................................................A-9
1.6. TAX-FREE REORGANIZATION...........................................................................A-9
1.7. CLOSING...........................................................................................A-9
ARTICLE II. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES......................................................................A-9
2.1. EFFECT ON CAPITAL STOCK...........................................................................A-9
2.2. EXCHANGE OF CERTIFICATES.........................................................................A-10
2.3. COMPANY WARRANTS.................................................................................A-12
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................A-12
3.1. ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER.............................................A-12
3.2. EQUITY INVESTMENTS...............................................................................A-13
3.3. CAPITAL STOCK; SECURITIES........................................................................A-13
3.4. AUTHORITY; NO CONSENTS...........................................................................A-13
3.5. SEC DOCUMENTS....................................................................................A-14
3.6. FINANCIAL STATEMENTS.............................................................................A-14
3.7. ABSENCE OF UNDISCLOSED LIABILITIES...............................................................A-14
3.8. ABSENCE OF CHANGES...............................................................................A-15
3.9. TAX MATTERS......................................................................................A-16
3.10. TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS......................................A-16
3.11. INTELLECTUAL PROPERTY...........................................................................A-17
3.12. AGREEMENTS, ETC.................................................................................A-17
3.13. NO DEFAULTS, ETC................................................................................A-18
3.14. LITIGATION, ETC.................................................................................A-18
3.15. COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS.........................................................A-18
3.16. LABOR RELATIONS; EMPLOYEES......................................................................A-18
3.17. EMPLOYEE BENEFIT PLANS AND CONTRACTS............................................................A-19
3.18. CERTAIN AGREEMENTS..............................................................................A-20
3.19. INSURANCE.......................................................................................A-20
3.20. BROKERS.........................................................................................A-20
3.21. RELATED TRANSACTIONS............................................................................A-20
3.22. BOARD APPROVAL..................................................................................A-20
3.23. VOTE REQUIRED...................................................................................A-20
3.24. INFORMATION SUPPLIED............................................................................A-20
3.25. COMPANY NOT AN INTERESTED STOCKHOLDER...........................................................A-21
3.26. DISCLOSURE......................................................................................A-21
3.27. KNOWLEDGE DEFINITION............................................................................A-21
3.28. COMPANY REFERENCE INCLUDES COMPANY SUBS.........................................................A-21
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION SUB.....................................A-21
4.1. ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER.............................................A-21
4.2. EQUITY INVESTMENTS...............................................................................A-21
4.3. CAPITAL STOCK; SECURITIES........................................................................A-22
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.4. AUTHORITY; NO CONSENTS...........................................................................A-22
4.5. SEC DOCUMENTS....................................................................................A-23
4.6. FINANCIAL STATEMENTS.............................................................................A-23
4.7. ABSENCE OF UNDISCLOSED LIABILITIES...............................................................A-23
4.8. ABSENCE OF CHANGES...............................................................................A-23
4.9. TAX MATTERS......................................................................................A-24
4.10. TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS......................................A-25
4.11. INTELLECTUAL PROPERTY...........................................................................A-25
4.12. AGREEMENTS, ETC.................................................................................A-25
4.13. NO DEFAULTS, ETC................................................................................A-26
4.14. LITIGATION, ETC.................................................................................A-26
4.15. COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS.........................................................A-26
4.16. LABOR RELATIONS; EMPLOYEES......................................................................A-27
4.17. EMPLOYEE BENEFIT PLANS AND CONTRACTS............................................................A-27
4.18. CERTAIN AGREEMENTS..............................................................................A-28
4.19. INSURANCE.......................................................................................A-28
4.20. BROKERS.........................................................................................A-28
4.21. RELATED TRANSACTIONS............................................................................A-28
4.22. BOARD APPROVAL..................................................................................A-28
4.23. INFORMATION SUPPLIED............................................................................A-29
4.24. ACQUISITION SUB.................................................................................A-29
4.25. DISCLOSURE......................................................................................A-29
4.26. KNOWLEDGE DEFINITION............................................................................A-29
4.27. PARENT REFERENCE INCLUDES CCSFE.................................................................A-29
ARTICLE V. RELATED AGREEMENTS...............................................................................A-29
5.1. VOTING AGREEMENT.................................................................................A-29
5.2. AFFILIATE AGREEMENTS.............................................................................A-29
ARTICLE VI. CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; ADDITIONAL AGREEMENTS..........................A-30
6.1. ACCESS TO RECORDS AND PROPERTIES OF EACH PARTY; CONFIDENTIALITY..................................A-30
6.2. OPERATION OF BUSINESS OF THE COMPANY.............................................................A-30
6.3. OPERATION OF BUSINESS OF THE PARENT..............................................................A-30
6.4. NEGOTIATION WITH OTHERS..........................................................................A-31
6.5. PREPARATION OF S-4; OTHER FILINGS................................................................A-31
6.6. ADVICE OF CHANGES................................................................................A-32
6.7. LETTER OF THE COMPANY'S ACCOUNTANTS..............................................................A-32
6.8. LETTER OF PARENT'S ACCOUNTANTS...................................................................A-32
6.9. STOCKHOLDERS' APPROVAL...........................................................................A-32
6.10. LEGAL CONDITIONS TO MERGER......................................................................A-32
6.11. CONSENTS........................................................................................A-33
6.12. EFFORTS TO CONSUMMATE...........................................................................A-33
6.13. NOTICE OF PROSPECTIVE BREACH....................................................................A-33
6.14. PUBLIC ANNOUNCEMENTS............................................................................A-33
6.15. AFFILIATES......................................................................................A-33
6.16. PREFERRED STOCK; SECURED PROMISSORY NOTE........................................................A-33
ARTICLE VII. CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS.................................................A-34
7.1. STOCKHOLDER APPROVAL; AGREEMENT OF MERGER........................................................A-34
7.2. APPROVALS........................................................................................A-34
7.3. LEGAL ACTION.....................................................................................A-34
7.4. S-4..............................................................................................A-34
7.5. LEGISLATION......................................................................................A-34
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.6. BID PRICE RATIO..................................................................................A-34
7.7. FINANCING........................................................................................A-34
ARTICLE VIII. CONDITIONS TO OBLIGATIONS OF PARENT AND ACQUISITION SUB..........................................A-34
8.1. REPRESENTATIONS AND WARRANTIES...................................................................A-34
8.2. PERFORMANCE OF OBLIGATIONS OF THE COMPANY........................................................A-35
8.3. AUTHORIZATION OF MERGER..........................................................................A-35
8.4. CERTIFICATE......................................................................................A-35
8.5. OPINION OF THE COMPANY'S COUNSEL.................................................................A-35
8.6. ACCEPTANCE BY COUNSEL TO PARENT AND ACQUISITION SUB..............................................A-35
8.7. CONSENTS AND APPROVALS...........................................................................A-35
8.8. GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC.........................................................A-35
8.9. RELATED AGREEMENTS...............................................................................A-35
ARTICLE IX. CONDITIONS TO OBLIGATIONS OF THE COMPANY.........................................................A-35
9.1. REPRESENTATIONS AND WARRANTIES...................................................................A-35
9.2. PERFORMANCE OF OBLIGATIONS OF PARENT AND ACQUISITION SUB.........................................A-36
9.3. AUTHORIZATION OF MERGER..........................................................................A-36
9.4. CERTIFICATE......................................................................................A-36
9.5. OPINION OF COUNSEL TO PARENT AND ACQUISITION SUB.................................................A-36
9.6. TAX OPINION......................................................................................A-36
9.7. ACCEPTANCE BY COUNSEL TO THE COMPANY.............................................................A-36
9.8. CONSENTS AND APPROVALS...........................................................................A-36
9.9. GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC.........................................................A-36
9.10. APPOINTMENT OF DIRECTORS........................................................................A-36
9.11. FAIRNESS OPINION................................................................................A-36
9.12. DIRECTOR INDEMNITY..............................................................................A-37
9.13. COMPANY INDEBTEDNESS............................................................................A-37
ARTICLE X. PAYMENT OF CERTAIN FEES AND EXPENSES............................................................A-37
10.1. PAYMENT OF CERTAIN FEES AND EXPENSES............................................................A-37
ARTICLE XI. TERMINATION, AMENDMENT, MODIFICATION AND WAIVER.................................................A-37
11.1. TERMINATION.....................................................................................A-37
11.2. EFFECT OF TERMINATION...........................................................................A-38
ARTICLE XII. MISCELLANEOUS.....................................................................................A-39
12.1. ENTIRE AGREEMENT................................................................................A-39
12.2. DESCRIPTIVE HEADINGS............................................................................A-39
12.3. NOTICES.........................................................................................A-39
12.4. COUNTERPARTS....................................................................................A-40
12.5. GOVERNING LAW...................................................................................A-40
12.6. BENEFITS OF AGREEMENT...........................................................................A-40
12.7. PRONOUNS........................................................................................A-40
12.8. AMENDMENT, MODIFICATION AND WAIVER..............................................................A-40
12.9. SEVERABILITY....................................................................................A-40
EXHIBIT 1.2 PLAN OF MERGER.....................................................................................A-42
EXHIBIT 1.4 FOURTH ARTICLE TO CERTIFICATE OF INCORPORATION.....................................................A-51
EXHIBIT 5.1 VOTING AGREEMENTS AND IRREVOCABLE PROXY............................................................A-57
EXHIBIT 5.2 COMPANY AFFILIATE AGREEMENT........................................................................A-61
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT 6.16(b) CONDITIONAL NOTE...............................................................................A-70
EXHIBIT 6.16(c) SECURED PROMISSORY NOTE........................................................................A-73
SCHEDULE 5.2 AFFILIATES OF THE COMPANY.........................................................................A-75
</TABLE>
A-7
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION dated as of January 20, 1998,
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
(the "Company").
The Boards of Directors of Parent, Acquisition Sub and the Company have
each duly approved and adopted this Agreement and Plan of Reorganization (this
"Agreement"), the plan of merger (the "Plan of Merger") and the proposed merger
of Acquisition Sub with and into the Company in accordance with this Agreement,
the Plan of Merger and the New Jersey Business Corporation Act (the "New Jersey
Statute"), whereby, among other things, the issued and outstanding shares of
common stock, $.10 par value, of the Company (the "Company Common Stock"), will
be exchanged and converted into shares of common stock, $.10 par value, of
Parent (the "Parent Common Stock") in the manner set forth in Article II hereof
and in the Plan of Merger, upon the terms and subject to the conditions set
forth in this Agreement and the Plan of Merger.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement and the Plan of Merger and the representations, warranties,
covenants, agreements, conditions and promises contained herein and therein, the
parties hereby agree as follows:
ARTICLE I.
GENERAL
1.1 THE MERGER. In accordance with the provisions of this Agreement,
the Plan of Merger and the New Jersey Statute, Acquisition Sub shall be merged
with and into the Company (the "Merger"), which at and after the Effective Time
shall be, and is sometimes herein referred to as, the "Surviving Corporation".
Acquisition Sub and the Company are sometimes referred to as the "Constituent
Corporations".
1.2 THE EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, the Plan of Merger in substantially the form of EXHIBIT 1.2
attached hereto shall be executed, delivered and filed with the Secretary of
State of the State of New Jersey by each of the Constituent Corporations on the
Closing Date in the manner provided under Section 14A:10-4.1 of the New Jersey
Statute. The Merger shall become effective (the "Effective Time") upon the
filing of the Certificate of Merger (to which the Plan of Merger is an exhibit)
with the Secretary of State of the State of New Jersey.
1.3 EFFECT OF MERGER. At the Effective Time the separate existence
of Acquisition Sub shall cease and Acquisition Sub shall be merged with and into
the Surviving Corporation, and the Surviving Corporation shall possess all of
the rights, privileges, powers and franchises as well of a public as of a
private nature, and be subject to all the restrictions, disabilities and duties
of each of the Constituent Corporations and shall have such other effects as
provided by the New Jersey Statute.
1.4 CERTIFICATE AND BY-LAWS OF SURVIVING CORPORATION. From and after
the Effective Time: (a) the Certificate of the Company shall be amended so that
the Fourth Article thereof shall read in its entirety as set forth in EXHIBIT
1.4 attached hereto, and the Certificate of the Company, as so amended, shall be
the Certificate of the Surviving Corporation, unless and until altered, amended
or repealed as provided in the New Jersey Statute; (b) the current amended and
restated by-laws of the Company shall be the by-laws of the Surviving
Corporation, unless and until altered, amended or repealed as provided in the
New Jersey Statute, the Certificate or such by-laws; (c) the directors of
Acquisition Sub shall be Alan J. Rabin, W. Alan Walton and Ervin Schoenblum each
of whom shall be the directors of the Surviving Corporation, unless and until
removed, or until their respective terms of office shall have expired, in
accordance with the New Jersey Statute, the Certificate or the by-laws of the
Surviving Corporation, as applicable; and (d) the officers of the Company shall
be the officers of the Surviving Corporation, unless and until removed, or until
their terms of office shall have expired, in accordance with the New Jersey
Statute, the Certificate or the by-laws of the Surviving Corporation, as
applicable.
A-8
<PAGE>
1.5 TAKING OF NECESSARY ACTION. Prior to the Effective Time, the
parties hereto shall do or cause to be done all such acts and things as may be
necessary or appropriate in order to effectuate the Merger as expeditiously as
reasonably practicable, in accordance with this Agreement, the Plan of Merger,
and the New Jersey Statute. In case at any time after the Effective Time, any
further action is necessary or desirable to carry out the purpose of this
Agreement and to vest in the Surviving Corporation full title to all assets,
privileges, etc. of either Constituent Corporations, the officers and directors
of such corporations shall take all such lawful and necessary action.
1.6 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)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), by reason of Section 368(a)(2)(E) of the Code.
1.7 CLOSING. Unless this Agreement shall have been terminated and
the transactions contemplated by this Agreement abandoned pursuant to the
provisions of Article XI, and subject to this Agreement, the closing of the
Merger (the "Closing") will take place at 10:00 a.m. (Florida time) on a date
(the "Closing Date") to be mutually agreed upon by the parties, which date shall
be not later than the third (3rd) Business Day after all the conditions set
forth in Articles VII, VIII and IX shall have been satisfied (or waived to the
extent the same may be waived), unless another date is agreed to in writing by
the parties. The Closing shall take place at the offices of Greenberg Traurig
Hoffman Lipoff Rosen & Quentel, P.A., 111 North Orange Avenue, 20th Floor,
Orlando, Florida 32801, unless another place is agreed to in writing by the
parties. As used herein, the term "Business Day" shall mean any day other than a
Saturday, Sunday or day on which banks are permitted to close in New Jersey or
Florida.
ARTICLE II.
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, subject and
pursuant to the terms and conditions of this Agreement and the Plan of Merger,
by virtue of the Merger and without any action on the part of the Constituent
Corporations or the holders of the capital stock of the Constituent
Corporations:
(a) CAPITAL STOCK OF ACQUISITION SUB. Each issued and
outstanding share of common stock, par value $.01 per share, of Acquisition Sub
shall immediately prior to the Effective Time be deemed cancelled and converted
into and shall represent the right to receive one share of common stock, par
value $.10 per share, of the Surviving Corporation.
(b) CANCELLATION OF CERTAIN SHARES OF COMPANY COMMON
STOCK. Each share of Company Common Stock that is immediately prior to the
Effective Time: (i) owned by the Company as treasury stock; (ii) owned by any
Subsidiary of the Company; or (iii) owned by Parent or any subsidiary of Parent,
shall be cancelled and no Parent Common Stock or other consideration shall be
delivered in exchange therefor. As used in this Agreement, a "Subsidiary" of any
corporation means another corporation an amount of whose voting securities
sufficient to elect at least a majority of its Board of Directors is owned
directly or indirectly by such corporation.
(c) EXCHANGE RATIO FOR COMPANY COMMON STOCK. 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 two-thirds (2/3) of a share of Parent Common Stock in
accordance with Section 2.2. For convenience of reference, the shares of Parent
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".
(d) ADJUSTMENTS FOR CAPITAL CHANGES. If, prior to the
Effective Time, Parent or the Company recapitalizes through a subdivision of its
outstanding shares into a greater number of shares, or a
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combination of its outstanding shares into a lesser number of shares, or
reorganizes, reclassifies or otherwise changes its outstanding shares into the
same or a different number of shares or other classes, or declares a dividend on
its outstanding shares payable in shares of its capital stock or securities
convertible into shares of its capital stock, then the applicable exchange ratio
for Company Common Stock will be adjusted appropriately so as to maintain the
relative proportionate interests of the holders of shares of Company Common
Stock and the holders of shares of Parent Common Stock.
2.2 EXCHANGE OF CERTIFICATES.
(a) PROCEDURE FOR EXCHANGE. Prior to the Closing Date,
Parent shall select an exchange agent (the "Exchange Agent") reasonably
satisfactory to Company to act in such capacity in connection with the Merger.
As of the Effective Time, Parent shall deposit with the Exchange Agent, for the
benefit of the holders of shares of Company Common Stock (the "Stockholders"),
for exchange in accordance with this Article II and the Plan of Merger,
certificates representing the shares of Parent Common Stock contemplated to be
issued as Merger Shares (which shares of Parent Common Stock, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund"). As soon as practicable after the Effective Time but in
no event later than twenty (20) Business Days after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately before the Effective Time represented issued and
outstanding shares of Company Common Stock (collectively, the "Old
Certificates"): (i) a letter of transmittal advising such holders of the terms
of the exchange effected by the Merger (and specifying how delivery shall be
effected, and risk of loss and title to the Old Certificates shall pass, only
upon delivery of the Old Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Parent may reasonably specify); and (ii)
instructions for use in effecting the surrender of Old Certificates in exchange
for certificates representing Merger Shares. Upon surrender of an Old
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as may be reasonably
required by the Exchange Agent, the holder of such Old Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of Parent Common Stock which such holder has the right to
receive pursuant to the provisions of this Article II and the Plan of Merger and
the Old Certificate so surrendered shall forthwith be cancelled. In the event of
a transfer of ownership of shares of Company Common Stock which are not
registered on the transfer records of the Company, it shall be a condition of
the exchange thereof that the Old Certificate representing such Company Common
Stock is presented to the Exchange Agent properly endorsed and otherwise in
proper form for transfer and accompanied by all documents required to evidence
and effect such transfer and by evidence that any applicable stock transfer
taxes have been paid. Until surrendered as contemplated by this Section 2.2(a)
and the Plan of Merger, each Old Certificate shall be deemed, on and after the
Effective Time, to represent only the right to receive upon such surrender the
certificate representing shares of Parent Common Stock and cash in lieu of
fractional shares (as hereinafter provided) of Parent Common Stock as
contemplated by this Article II and the Plan of Merger.
(b) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED
CERTIFICATES. No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Old Certificate
with respect to the shares of Parent Common Stock represented thereby and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.2(d) or the Plan of Merger until the holder of record of
such Old Certificate shall surrender such Old Certificate. Subject to the effect
of applicable laws, following surrender of any such Old Certificate, there shall
be paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest: (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of Parent Common Stock to which such holder is entitled pursuant to
Section 2.2(d) and the Plan of Merger and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Parent Common Stock; and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Parent Common Stock.
(c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK.
All shares of Parent Common Stock issued upon the surrender for exchange of
shares of Company Common Stock in
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accordance with the terms of this Article II and the Plan of Merger (including
any cash paid pursuant to Section 2.2(b) or 2.2(d)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
Common Stock and there shall be no further registration or transfers on the
stock transfer books of the Surviving Corporation of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, any Old Certificate is presented to the Surviving
Corporation for any reason, such Old Certificate shall be cancelled and
exchanged as provided in this Article II and the Plan of Merger.
(d) NO ISSUANCE OF FRACTIONAL SHARES. No certificates or
scrip representing fractional shares of Parent Common Stock shall be issued upon
the surrender for exchange of Old Certificates, and such fractional share
interests shall not entitle the owner thereof to vote or to any rights of a
stockholder of Parent such as rights to dividends, stock splits or interest in
lieu of issuing certificates for fractional shares.
(i) As promptly as practicable following the
Effective Time, the Exchange Agent shall determine the excess of (x) the number
of full shares of Parent Common Stock delivered to the Exchange Agent by Parent
pursuant to Section 2.2(a) over (y) the maximum number of full shares of Parent
Common Stock distributable to holders of Company Common Stock pursuant to
Section 2.2(a) (such excess being herein called the "Excess Shares"). As soon
after the Effective Time as practicable, the Exchange Agent, as agent for the
holders of Company Common Stock, shall aggregate and sell the Excess Shares at
then prevailing prices in the over-the-counter market, all in the manner
provided in subsection (ii) of this Section 2.2(d).
(ii) The sale of the Excess Shares by the Exchange
Agent shall be executed in the over-the-counter market through one or more
member firms of the National Association of Securities Dealers, Inc. and shall
be executed in round lots to the extent practicable. Until the net proceeds of
such sale or sales have been distributed to the holders of Company Common Stock
as contemplated in subsection (iii) of this Section 2.2(d), the Exchange Agent
shall hold such proceeds in trust for the holders of Company Common Stock (the
"Common Shares Trust"). Parent shall pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and compensation
of the Exchange Agent, incurred in connection with such sale of the Excess
Shares. The Exchange Agent shall determine the portion of the Common Shares
Trust to which each holder of Company Common Stock shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Common
Shares Trust by a fraction, the numerator of which is the amount of the
fractional share interest to which such holder of Company Common Stock is
entitled and the denominator of which is the aggregate amount of fractional
share interests to which all holders of Company Common Stock are entitled.
(iii) As soon as practicable after the determination
of the amount of cash, if any, to be paid to the holders of Company Common Stock
in lieu of any fractional share interests, the Exchange Agent shall make
available such amounts without interest to such holders of Company Common Stock.
(e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event
any Old Certificates shall have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming such Old Certificate to be
lost, stolen or destroyed, the Exchange Agent shall issue an exchange for such
loss, stolen or destroyed Old Certificate the consideration payable and exchange
therefor pursuant to this Article II. The Exchange Agent or the Surviving
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Old Certificate to
give the Exchange Agent a bond in such reasonable sum as it may direct as
indemnity against any claim that may be made against the Surviving Corporation
with respect to the Old Certificate alleged to have been lost, stolen or
destroyed.
(f) TERMINATION OF EXCHANGE FUND AND COMMON SHARES TRUST.
Any portion of the Exchange Fund and Common Shares Trust which remains
undistributed to the stockholders of the Company for six (6) months after the
Effective Time shall be delivered to Parent, upon demand, and any former
Stockholders of the Company who have not theretofore complied with this Article
II and the Plan of Merger shall thereafter look only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock (and Parent shall remain obligated to so pay and/or distribute).
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(g) NO LIABILITY. Neither the Exchange Agent, Parent,
Acquisition Sub nor the Company shall be liable to any holder of shares of
Company Common Stock or Parent Common Stock, as the case may be, for shares (or
dividends or distributions with respect thereto) of Parent Common Stock to be
issued in exchange for Company Common Stock pursuant to this Section 2.2, if, on
or after the expiration of twelve (12) months following the Effective Date, such
shares are delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
2.3 COMPANY WARRANTS AND OPTIONS. At the Effective Time, each of the
Company's then outstanding Company Warrants and Company Options (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 Parent and
automatically converted, on the same terms, into a warrant or option to purchase
a number of shares of Parent Common Stock (to be registered shares to the extent
the option or warrant holder is, by the terms of the Company option plan or
warrant in effect, entitled upon exercise of the option or warrant, to receive
registered stock) determined by multiplying the number of shares of Company
Common Stock covered by such Company Warrants and Company Options immediately
prior to the Effective Time by two-thirds (2/3) (rounded up to the nearest whole
number of shares), at an exercise price per share of Parent Common Stock equal
to the exercise price in effect under such Company Warrants or Company Options
immediately prior to the Effective Time divided by two-thirds (2/3) (rounded up
to the nearest cent). The converted warrants and options shall be exercisable on
the same terms and conditions as the existing Company Warrants and Company
Options without however giving effect to any mandatory or permissive exercise
arising by virtue of the Merger of the Company with the Subsidiary provided for
herein.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Company Options" shall mean and include any
Unvested Company Option and any Vested Company Option.
(b) "Unvested Company Option" shall mean each of the
options to purchase Company Common Stock that is outstanding at the Effective
Time, which is not exercisable immediately prior to the Effective Time pursuant
to its terms in effect as of the date hereof.
(c) "Vested Company Option" shall mean each of the
options to purchase Company Common Stock that is outstanding at the Effective
Time, which is exercisable immediately prior to the Effective Time pursuant to
its terms in effect as of the date hereof.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Acquisition Sub that,
except as disclosed in the Company SEC Documents or the disclosure schedule
dated the date hereof, certified by the President or Acting President of the
Company and delivered by the Company to Parent and Acquisition Sub
simultaneously herewith (which disclosure schedule shall contain specific
references to the representations and warranties to which the disclosures
contained therein relate) (the "Company Disclosure Schedule"):
3.1 ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER. Each of
the Company and the wholly-owned subsidiary of the Company set forth in the
Company Disclosure Schedule (the "Company Sub"): (a) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey; (b) has all requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business as now being
conducted and as currently proposed to be conducted; and (c) is duly qualified
and in good standing to do business in all jurisdictions in which the failure to
be so qualified and in good standing could reasonably be expected to have a
material adverse effect on the business, properties, Liabilities, assets,
operations, results of operations, condition (financial or otherwise), prospects
or affairs (a "Material Adverse
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Effect") of the Company. The Company has all requisite corporate power and
authority to enter into this Agreement and the Plan of Merger and each of the
Related Agreements to which it is a party, to perform its obligations hereunder
and thereunder and to consummate the transactions contemplated hereby and
thereby. The Company has delivered to Parent true and complete copies of the
Charter and by-laws of the Company and the Company Sub, respectively, in each
case as amended to the date hereof. As used in this Agreement, "Certificate"
shall mean, with respect to any corporation, those instruments that at the time
constitute its corporate charter as filed or recorded under the general
corporation law of the jurisdiction of its incorporation, including the articles
or certificate of incorporation or organization, and any amendments thereto, as
the same may have been restated, and any amendments thereto (including any
articles or certificates of merger or consolidation or certificates of
designation or similar instruments which effect any such amendment) which became
effective after the most recent such restatement.
3.2 EQUITY INVESTMENTS. The Company does not currently own any
capital stock or other proprietary interest, directly or indirectly, in any
corporation, association, trust, partnership, joint venture or other entity
other than the Company Sub. Other than the Company Sub, the Company does not
currently have any Subsidiaries. The Company owns 100% of the issued and
outstanding capital stock of the Company Sub, free and clear of all
Encumbrances. Except for the Company Options and the Company Warrants, there are
no options, warrants, rights, calls, commitments or agreements of any character
to which the Company or the Company Sub is a party or by which the Company or
the Company Sub is bound calling for the issuance of shares of capital stock of
the Company or the Company Sub or any securities convertible into or exercisable
or exchangeable for, or representing the right to purchase or otherwise receive,
any such capital stock, or other arrangement to acquire, at any time or under
any circumstance, capital stock of the Company or any such other securities of
the Company or the Company Sub.
3.3 CAPITAL STOCK; SECURITIES. The authorized capital stock of the
Company consists of 20,000,000 shares of Company Common Stock, of which
6,383,611 shares are outstanding as of November 18, 1997 and 1,000,000 shares of
preferred stock with no par value, of which no shares are outstanding. As of
November 30, 1997, the Company has outstanding warrants for 583,344 shares of
Company Common Stock (with no shares of Company Common Stock reserved for such
purpose) (collectively, the "Company Warrants") and (y) 675,000 shares of
Company Common Stock reserved for issuance upon the exercise of 351,200
outstanding Company Options, of which 274,700 are Vested Company Options and
76,500 are Unvested Company Options. Other than the 583,344 outstanding Company
Warrants and the 351,200 outstanding Company Options, the Company does not have
outstanding any options to purchase, or any pre-emptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. All outstanding
shares of Company Common Stock are validly issued and outstanding, fully paid
and non-assessable and not subject to preemptive rights. There are no voting
trusts, voting agreements (except in favor of the Merger), proxies (except as a
part of voting agreements in favor of the Merger), first refusal rights, first
offer rights, co-sale rights, transfer restrictions (other than restrictions
imposed by federal or state securities laws) or other agreements, instruments or
understandings (whether written or oral, formal or informal) with respect to the
voting, transfer or disposition of Company Common Stock to which the Company is
a party or by which it is bound, or, to the best knowledge of the Company, among
or between any persons other than the Company.
3.4 AUTHORITY; NO CONSENTS. The execution, delivery and performance by
the Company of this Agreement, the Plan of Merger and the Related Agreements to
which it is a party and the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary corporate
action on the part of the Company; and this Agreement and the Related Agreements
to which it is a party have been, and the Plan of Merger when executed and
delivered by the Company will be, duly and validly executed and delivered by the
Company, and this Agreement and the Related Agreements to which it is a party
are, and the Plan of Merger when executed and delivered by the parties thereto
will be, the valid and binding obligations of the Company, enforceable against
the Company in accordance with their respective terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or other similar laws affecting the enforcement of creditors' rights
generally and general equitable principles. Neither the execution, delivery and
performance of this Agreement, the Plan of Merger or Related Agreements to which
it is a party nor the
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consummation by the Company of the transactions contemplated hereby or thereby
nor compliance by the Company with any provision hereof or thereof will: (a)
conflict with; (b) result in any violations of; (c) cause a default under (with
or without due notice, lapse of time or both); (d) give rise to any right of
termination, amendment, cancellation or acceleration of any obligation contained
in or the loss of any material benefit under; or (e) result in the creation of
any Encumbrance on or against any assets, right or property of the Company under
any term, condition or provision of: (x) any instrument or agreement to which
the Company is a party, or, to the best knowledge of the Company, by which the
Company or any of its properties, assets or rights may be bound (except as shall
have been waived or with respect to which consent shall have been obtained prior
to the Closing); (y) any law, statute, rule, regulation, order, writ,
injunction, decree, permit, concession, license or franchise of any Governmental
Authority applicable to the Company or any of its properties, assets or rights;
or (z) the Company's Certificate or by-laws, as amended through the date hereof.
Except as contemplated by this Agreement or the Plan of Merger, no permit,
authorization, consent or approval of or by, or any notification of or filing
with, any Governmental Authority is required in connection with the execution,
delivery and performance by the Company of this Agreement, the Plan of Merger or
the Related Agreements to which the Company is a party or the consummation of
the transactions contemplated hereby or thereby, except for: (i) the filing with
the Securities and Exchange Commission (the "SEC") of (A) the S-4 and (B) such
reports and information under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated by the
SEC thereunder, as may be required in connection with this Agreement, the Plan
of Merger and the transactions contemplated hereby and thereby; (ii) such
filings as may be required by the Over the Counter Bulletin Board Service with
respect to Parent Common Stock to be issued in connection with the Merger and
the Company Warrants to be assumed by Parent in the Merger; (iii) the filing of
such documents with, and the obtaining of such orders from, various state
securities and blue-sky authorities as are required in connection with the
transactions contemplated hereby; (iv) the distribution of the Stockholders'
Materials with respect to the adoption by the Stockholders of this Agreement and
the Plan of Merger; (v) the filing of the Plan of Merger with the Secretary of
State of the State of New Jersey and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business;
and (vi) such other consents, waivers, authorizations, filings, approvals and
registrations which if not obtained or made would not have a Material Adverse
Effect on the Company or materially impair the ability of the Company and the
Stockholders to consummate the transactions contemplated by this Agreement or
the Plan of Merger, including, without limitation, the Merger.
3.5 SEC DOCUMENTS. The Company has furnished Parent with a correct and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed by the Company with the SEC on or after August 31, 1996
(the "Company SEC Documents"), which are all the documents (other than
preliminary material) that the Company was required to file (or otherwise did
file) with the SEC on or after August 31, 1996. As of their respective dates,
none of the Company SEC Documents (including all exhibits and schedules thereto
and documents incorporated by reference therein) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and the Company SEC
Documents complied when filed in all material respects with the then applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations promulgated by the SEC thereunder.
3.6 FINANCIAL STATEMENTS. The financial statements of the Company
included in the Company SEC Documents (the "Company Financial Statements"): (a)
complied as to form in all material respects with the then applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, were prepared in accordance with generally accepted accounting
principals ("GAAP"), consistently applied (except as may have been indicated in
the notes thereto or, in the case of the unaudited statements, as permitted by
Form 10-Q promulgated by the SEC); (b) were in accordance with the books and
records of the Company; and (c) fairly present (subject, in the case of the
unaudited statements, to normal, nonrecurring audit adjustments) the
consolidated financial position of the Company and its consolidated subsidiaries
as at the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended.
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. At August 31, 1997: (a) the
Company had no liability or obligation of any nature (whether known or unknown,
matured or unmatured, fixed or contingent ("Liability")), which was not provided
for or disclosed on the Company SEC Documents for the fiscal year ended
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August 31, 1997; and (b) all liability reserves established by the Company and
set forth on the Company Financial Statements were adequate, in the good faith
judgment of the Company, for all such Liabilities at the date thereof. There
were no material loss contingencies (as such term is used in Statement of
Financial Accounting Standards No. 5 issued by the Financial Accounting
Standards Board in March 1975 ("FAS No. 5")) which were not adequately provided
for on the Company Financial Statements as required by FAS No. 5.
3.8 ABSENCE OF CHANGES. Since August 31, 1997, the Company has been
operated in the ordinary course, consistent with past practice, and there has
not been:
(a) to the best knowledge of the Company, any damage,
destruction or loss, whether or not covered by insurance, having or which could
reasonably be expected to have a Material Adverse Effect;
(b) to the best knowledge of the Company, any Liability
created, assumed, guaranteed or incurred, or any material transaction, contract
or commitment entered into, by the Company, other than the license, sale or
transfer of the Company's products to customers in the ordinary course of
business;
(c) any declaration, setting aside or payment of any
dividend or other distribution of any assets of any kind whatsoever with respect
to any shares of the capital stock of the Company, or any direct or indirect
redemption, purchase or other acquisition of any such shares of the capital
stock of the Company;
(d) any payment, discharge or satisfaction of any material
Encumbrance or Liability or any cancellation by the Company of any material
debts or claims or any amendment, termination or waiver of any right of material
value to the Company;
(e) any stock split, reverse stock split, combination,
reclassification or recapitalization of any Company Common Stock, or any
issuance of any other security in respect of or in exchange for, any shares of
Company Common Stock;
(f) any issuance by the Company of any shares of its
capital stock or any debt security or securities, rights, options or warrants
convertible into or exercisable or exchangeable for any shares of its capital
stock or debt security (other than shares of Company Common Stock issued upon
exercise of Company Options in accordance with the present terms thereof);
(g) any termination of, or, to the best knowledge of the
Company, indication of an intention to terminate or not renew, any material
contract, license, commitment or other agreement between the Company and any
other person, or the assignment by the Company of any interest in any contract
to which the Company is a party;
(h) any material write-down or write-up of the value of any
asset of the Company, or any material write-off of any accounts receivable or
notes receivable of the Company or any portion thereof;
(i) any increase in or modification or acceleration of
compensation or benefits payable or to become payable to any officer, employee,
consultant or agent of the Company other than in the ordinary course, or the
entering into of any employment contract with any officer or employee;
(j) the making of any loan, advance or capital contribution
to or investment in any person or the engagement in any transaction with any
employee, officer, director or stockholder of the Company, other than advances
to employees in the ordinary course of business for travel and similar business
expenses;
(k) any change in the accounting methods or practices
followed by the Company, or any change in depreciation or amortization policies
or rates theretofore adopted by the Company;
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(l) any termination of employment of any officer or key
employee of the Company or, to the best knowledge of the Company, any expression
of intention by any officer or key employee of the Company to terminate such
office or employment with the Company;
(m) any amendments or changes in the Company's Certificate
or by-laws;
(n) to the best knowledge of the Company, the commencement
of any litigation or other action by or against the Company; or
(o) any agreement, understanding, authorization or
proposal, whether in writing or otherwise, for the Company to take any of the
actions specified in items (a) through (n) above.
3.9 TAX MATTERS. The Company and each other corporation included in any
consolidated or combined tax return in which the Company has been included: (a)
have filed and will file, in a timely and proper manner, consistent with
applicable laws, all Federal, state and local Tax returns and Tax reports
required to be filed by them through the Closing Date (the "Company Returns")
with the appropriate governmental agencies in all jurisdictions in which Company
Returns are required to be filed and have paid or will pay all amounts shown
thereon to be due; and (b) have paid and shall timely pay all Taxes required to
have been paid on or before the Closing Date. All Taxes attributable to all
taxable periods ending on or before the Closing Date, to the extent not required
to have been previously paid have been adequately provided for on the Company
Financial Statements and the Company will not accrue a Tax liability from the
date of the Company Financial Statements up to and including the Closing Date,
other than a Tax liability accrued in the ordinary course of business. The
Company has not been notified by the Internal Revenue Service or any state,
local or foreign taxing authority that any issues have been raised (and are
currently pending) in connection with any Company Return, and no waivers of
statutes of limitations have been given or requested with respect to the
Company. Except as contested in good faith and disclosed in the Company
Disclosure Schedule, any deficiencies asserted or assessments (including
interest and penalties) made as a result of any examination by the Internal
Revenue Service or by any other taxing authorities of any Company Return have
been fully paid or are adequately provided for on the Company Financial
Statements and no proposed additional Taxes have been asserted. The Company has
not made an election to be treated as a "consenting corporation" under Section
341(f) of the Code nor is it a "personal holding company" within the meaning of
Section 542 of the Code. The Company has not agreed to, nor is required to make
any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise. The Company will not incur a Tax liability
resulting from the Company ceasing to be a member of a consolidated or combined
group that had previously filed consolidated, combined or unitary Tax returns.
As used in this Agreement, "Tax" means any of the Taxes and "Taxes" means, with
respect to any entity: (x) all income taxes (including any tax on or based upon
net income, gross income, income as specially defined, earnings, profits or
selected items of income, earnings or profits) and all gross receipts, sales,
use, ad valorem, transfer, franchise, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property or windfall profits
taxes, alternative or add-on minimum taxes, customs duties and other taxes,
fees, assessments or charges of any kind whatsoever, together with all interest
and penalties, additions to tax and other additional amounts imposed by any
taxing authority (domestic or foreign) on such entity; and (y) any liability for
the payment of any amount of the type described in the immediately preceding
clause (x) as a result of: (i) being a "transferee" (within the meaning of
Section 6901 of the Code or any other applicable law) of another entity; (ii)
being a member of an affiliated or combined group; or (iii) any contractual
obligations or otherwise.
3.10 TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. The
Company has good and marketable title to all assets, properties and interests in
properties, real, personal or mixed, reflected on the Company SEC Documents or
acquired after August 31, 1997, except for: (a) those Encumbrances set forth in
the Company Disclosure Schedule; (b) liens for current taxes not yet due and
payable; (c) statutory mechanics and materialmen's liens; and (d) utility
easements. As used in this Agreement, the term "Encumbrances" shall mean and
include security interests, mortgages, liens, pledges, guarantees, charges,
easements, reservations, restrictions, clouds, equities, rights of way, options,
rights of first refusal and all other encumbrances, whether or not relating to
the extension of credit or the borrowing of money.
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3.11 INTELLECTUAL PROPERTY. The Company Disclosure Schedule sets forth
a list of all patents, copyrights, trademarks, tradenames and service marks and
any licensed intellectual property rights (other than commercial or
"shrink-wrap" licenses covering software generally available to the public on a
retail basis) (collectively, "Intellectual Property Rights") of the Company. To
the best knowledge of the Company, the ownership or use of such Intellectual
Property Rights by the Company does not infringe on the intellectual property
rights of others and the Company has not received notice alleging any such
infringement, and, to the best knowledge of the Company, no third party is
infringing on the Intellectual Property Rights of the Company. The Company is
not obligated to pay any third party any royalty or fee for the use of the
Intellectual Property Rights used in its business.
3.12 AGREEMENTS, ETC. The Company Disclosure Schedule sets forth a true
and complete list of all written or oral contracts, agreements and other
instruments to which the Company is a party and not made in the ordinary course
of business, or made in the ordinary course of business and referred to in
clauses (a) through (i) of this Section 3.12:
(a) any joint venture, partnership or other agreement or
arrangement for the sharing of profits;
(b) any collective bargaining contract or other contract
with or commitment to any labor union;
(c) the future purchase, sale or license of products,
material, supplies, equipment or services requiring payments to or from the
Company in an amount in excess of $25,000 per annum, which agreement,
arrangement or understanding is not terminable on thirty (30) days' notice
without cost or other liability at or at any time after the Effective Time, or
in which the Company has granted or received manufacturing rights, most favored
nations pricing provisions or exclusive marketing or other rights relating to
any product, group of products, services, technology, assets or territory;
(d) the employment of any officer, employee, consultant
or agent or any other type of contract, commitment or understanding with any
officer, employee, consultant or agent which (except as otherwise generally
provided by applicable law) is not immediately terminable without cost or other
liability at or at any time after the Effective Time;
(e) an indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment for the borrowing of
money, for a line of credit or, if involving payments in excess of $25,000 per
annum, for a leasing transaction of a type required to be capitalized in
accordance with Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board;
(f) a contract or commitment for capital expenditures
individually in excess of $25,000;
(g) any agreement or contract with a "disqualified
individual" (as defined in Section 280G(c) of the Code), which could result in a
disallowance of the deduction for any "excess parachute payment" (as defined in
Section 280G(b)(i) of the Code) under Section 280G of the Code;
(h) an agreement or arrangement for the sale of any assets,
properties or rights having a value in excess of $25,000; or
(i) an agreement which restricts the Company from engaging
in any aspect of its business or competing in any line of business in any
geographic area.
The Company has furnished to Parent true and complete copies of all such
agreements listed in the Company Disclosure Schedule and each such agreement:
(i) is the legal, valid and binding obligation of the Company and, to the best
knowledge of the Company, the legal, valid and binding obligation of each other
party thereto, in each case enforceable in accordance with its terms, except as
such enforcement may be limited by applicable bankruptcy,
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insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and general equitable principles;
(ii) to the best knowledge of the Company is in full force and effect; and (iii)
to the best knowledge of the Company, the other party or parties thereto is or
are not in material default thereunder.
3.13 NO DEFAULTS, ETC. The Company has in all material respects
performed all the obligations required to be performed by it to date and is not
in material default or, to the best knowledge of the Company, alleged to be in
material default under: (a) its Certificate or by-laws; or (b) any material
agreement, lease, contract, commitment, instrument or obligation to which the
Company is a party or by which any of its properties, assets or rights are or
may be bound or affected, and, to the best knowledge of the Company, there
exists no event, condition or occurrence which, with or without due notice or
lapse of time, or both, would constitute such a default by it of any of the
foregoing. To the best knowledge of the Company, no current customer has
notified, or expressed an intention to notify, the Company that such customer
will materially reduce the dollar amount of business it will do with the Company
or cease doing business with the Company under circumstances where such
notification or intention has been reported to an officer of the Company.
3.14 LITIGATION, ETC. There are no: (a) actions, suits, claims,
investigations or legal or administrative or arbitration proceedings
(collectively, "Actions") pending, or to the best knowledge of the Company,
threatened against the Company, whether at law or in equity, or before or by any
Federal, state, municipal, foreign or other governmental court, department,
commission, board, bureau, agency or instrumentality ("Governmental Authority");
(b) judgments, decrees, injunctions or orders of any Governmental Authority or
arbitrator against the Company; or (c) to the best knowledge of the Company,
material disputes with customers or vendors, in each case, except for any such
matter which would not have a material adverse effect on the Company.
3.15 COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS. To the best knowledge of
the Company, the Company has complied within the last five (5) years and is
presently in compliance in all material respects with all material Federal,
state, local or foreign laws, ordinances, regulations and orders applicable to
it or its business, including, without limitation, the Food and Drug
Administration of the United States Department of Health and Human Services
("FDA"), all Federal and state securities or "blue sky" laws and all laws and
regulations relating to occupational safety and health and the environment. To
the best knowledge of the Company, the Company has all material Federal, state,
local and foreign governmental authorizations, security clearances, consents,
approvals, licenses and permits necessary in the conduct of its business as
presently conducted and as currently proposed to be conducted, such
authorizations, consents, approvals, licenses and permits are in full force and
effect, no material violations are or have been recorded in respect of any
thereof and no proceeding is pending or, to the best knowledge of the Company,
threatened to revoke or limit any thereof. To the best knowledge of the Company,
all of the Company's full-time and temporary personnel who provide services in a
manner or of the type that require specific certifications or clearances have
provided such services at all times while having such certifications or
clearances in full force and effect. Neither the Company nor, to the best
knowledge of the Company, any of its full-time or part-time personnel has been
cited or alleged by the FDA or other regulatory authority within the last five
(5) years as failing to comply with regulatory requirements or guidelines in the
performance of services.
3.16 LABOR RELATIONS; EMPLOYEES. The Company Disclosure Schedule sets
forth the number of full-time and part-time employees of the Company and the
primary locations at which such employees provide their services as of November
30, 1997. To the best knowledge of the Company: (a) the Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to date or amounts required to be reimbursed to such employees; (b)
Acquisition Sub nor the Surviving Corporation will by reason of anything done
prior to the Closing be liable to any of such employees for severance pay or any
other payments; (c) the Company is in compliance in all material respects with
all material Federal, state, local and foreign laws and regulations respecting
labor, employment and employment practices, terms and conditions of employment
and wages and hours; and (d) there is no unfair labor practice, sexual
harassment or other employment-related complaint pending or, to the best
knowledge of the Company, threatened against the Company or any employee of the
Company. To the best knowledge of the Company, no employee of the Company is in
material violation of any term of any employment contract, confidentiality
agreement or any other contract or agreement relating to the relationship of
such employee with the Company or any other party
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because of the nature of the business conducted or proposed to be conducted by
the Company or the execution and delivery of such agreement or contract by such
employee.
3.17 EMPLOYEE BENEFIT PLANS AND CONTRACTS.
(a) The Company Disclosure Schedule identifies each
"employee benefit plan," as defined in Section 1002(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and all other
material written or formal plans or agreements involving direct or indirect
compensation (including any employment agreements entered into between the
Company and any Employee of the Company, but excluding workers' compensation,
unemployment compensation, other government-mandated programs and the Company's
salary and wage arrangements) currently or previously maintained, contributed to
or entered into by the Company or any ERISA Affiliate thereof for the benefit of
any Employee or former Employee under which the Company or any ERISA Affiliate
thereof has any present or future obligation or liability (the "Employee
Plans"). The Company has provided to Parent true and complete copies of all
Employee Plans (and, if applicable, related trust agreements) and all amendments
thereto and written interpretations thereof. For purposes of the preceding
sentence, "ERISA Affiliate" shall mean any entity which is a member of (A) a
"controlled group of corporations," as defined in Section 414(b) of the Code,
(B) a group of entities under "common control," as defined in Section 414(c) of
the Code or (C) an "affiliated service group," as defined in Section 414(m) of
the Code or treasury regulations promulgated under Section 414(o) of the Code,
any of which includes the Company. Any Employee Plans which individually or
collectively would constitute an "employee pension benefit plan," as defined in
Section 3(2) of ERISA, but which are not Multiemployer Plans (collectively, the
"Pension Plans"), are identified as such in the Company Disclosure Schedule. For
purposes of this Section 3.17 and Section 4.17, "Employee" means any common law
employee, consultant or director as to Section 3.17 of the Company, and as to
Section 4.17, Parent.
(b) Each Employee Plan that is intended to be qualified
under Section 401(a) of the Code is so qualified and has been so qualified
during the period from its adoption to the date hereof, and each trust forming a
part thereof is exempt from tax pursuant to Section 501(a) of the Code. The
Company has provided Parent with copies of the most recent Internal Revenue
Service determination letters with respect to any such Employee Plans. Each
Employee Plan has been maintained substantially in compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations, including, without limitation, ERISA and the Code, which are
applicable to such Employee Plans.
(c) No Employee Plan constitutes or since the enactment of
ERISA has constituted a "multiemployer plan," as defined in Section 3(37) of
ERISA (a "Multiemployer Plan"). The Company has not within the past five (5)
years incurred any material liability under Title IV of ERISA arising in
connection with the termination of any Pension Plan or the complete or partial
withdrawal from any Multiemployer Plan. If a "complete withdrawal" by the
Company were to occur as of the Closing with respect to all Multiemployer Plans,
the Company would not incur any withdrawal liability under Title IV of ERISA.
(d) The Company Disclosure Schedule lists each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which: (i) is not an Employee Plan; (ii) is
entered into, maintained or contributed to, as the case may be, by the Company;
(iii) covers any Employee or former Employee; and (iv) under which the Company
has any present or future obligation or liability (excluding workers'
compensation, unemployment compensation or other government-mandated programs
and the Company's salary and wage arrangements). Such contracts, plans and
arrangements as are described above are hereinafter referred to collectively as
the "Benefit Arrangements". Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all material laws, statutes, rules, regulations, orders and judgments
which are applicable to such Benefit Arrangements.
(e) The Company has provided, or will have provided, to
individuals entitled thereto who are current or former Employees of the Company
all required notices within the applicable time period and coverage
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pursuant to Section 4980B of the Code with respect to any "qualifying event" (as
defined in Section 4980B(f)(3) of the Code) occurring prior to and including the
Closing Date, and no tax payable on account of Section 4980B of the Code has
been incurred with respect to any current or former Employees of the Company.
3.18 CERTAIN AGREEMENTS. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will: (a)
result in any payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any director
or employee of the Company from the Company, under any Employee Plan, Benefit
Arrangement or otherwise; (b) materially increase any benefits otherwise payable
under any Employee Plan or the Benefit Arrangement; or (c) result in the
acceleration of the time of payment or vesting of any such benefits.
3.19 INSURANCE. The Company maintains policies of liability, theft,
fidelity, fire, product liability, workmen's compensation, indemnification of
directors and officers and other similar forms of insurance. The Company
Disclosure Schedule sets forth a history of all claims within the last five (5)
years in excess of $50,000 made by the Company thereunder and the status
thereof. All such policies of insurance are in full force and effect and all
premiums with respect thereto are currently paid and, to the best knowledge of
the Company, no basis exists for termination of any thereof on the part of the
insurer. The amounts of coverage under such policies conform to the requirements
set forth in the Company's customer contracts. The Company has not, during the
last three fiscal years, been denied or had revoked or rescinded any policy of
insurance.
3.20 BROKERS. The Company has not, nor have any of its officers,
directors, stockholders or employees, employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated by this Agreement, the Plan of Merger or any
of the Related Agreements.
3.21 RELATED TRANSACTIONS. Except for compensation to regular employees
of the Company, no current or former director, officer or stockholder that is an
affiliate of the Company or any associate (as defined in the rules promulgated
under the Exchange Act) thereof, is now, or has been during the last five (5)
fiscal years: (a) a party to any transaction with the Company (including, but
not limited to, any contract, agreement or other arrangement providing for the
furnishing of services by, or rental of real or personal property from, or
borrowing money from, or otherwise requiring payments to, any such director,
officer or affiliated stockholder of the Company or associate thereof); or (b)
the direct or indirect owner of an interest in any corporation, firm,
association or business organization which is a present or potential competitor,
supplier or customer of the Company (other than non-affiliated holdings in
publicly-held companies), nor does any such person receive income from any
source other than the Company which relates to the business of, or should
properly accrue to, the Company.
3.22 BOARD APPROVAL. The Board of Directors of the Company has
unanimously: (a) approved this Agreement, the Plan of Merger and each of the
Related Agreements to which the Company is a party and the transactions
contemplated hereby and thereby; (b) determined that the Merger is in the best
interests of the Stockholders of the Company and, subject to receipt of a
fairness opinion, is on terms that are fair to such Stockholders; and (c)
recommended that the Stockholders of the Company approve the Merger in
accordance with the Plan of Merger and the New Jersey Statute. No other
approvals are required other than that of the Board of Directors and
Stockholders of the Company.
3.23 VOTE REQUIRED. The affirmative vote of two-thirds (2/3) of the
outstanding shares voting of the Company Common Stock approving the Merger, this
Agreement, the Plan of Merger, and the transactions contemplated hereby and
thereby are the only votes of the holders of any class or series of the
Company's capital stock necessary to approve this Agreement, the Plan of Merger
and each of the Related Agreements to which the Company is a party and the
transactions contemplated hereby and thereby.
3.24 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company or any Stockholder for inclusion in: (a) the S-4 will,
at the time that the S-4 is filed with the SEC and at the time that the S-4
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein not
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misleading; and (b) the Stockholders' Materials will, at the dates mailed to the
Stockholders and at the effective date of the Stockholder Action, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Stockholders'
Materials will comply as to form in all material respects with the provisions of
all applicable laws, rules and regulations of all Governmental Authorities.
3.25 COMPANY NOT AN INTERESTED STOCKHOLDER. As of the date of this
Agreement, neither the Company nor, to the best of the Company's knowledge, any
of its Affiliates is an "Interested Stockholder" of Parent as such term is
defined in Section 203 of the Delaware General Corporation Law.
3.26 DISCLOSURE. No part of Article III of this Agreement (including
the Company Disclosure Schedule) nor any document, written information,
statement, financial statement, certificate or exhibit furnished or to be
furnished to Parent or Acquisition Sub by or on behalf of the Company or any
Stockholder pursuant hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements or facts contained herein and therein not misleading in light of the
circumstances under which they were made.
3.27 KNOWLEDGE DEFINITION. As used in this Agreement, "to the best
knowledge of the Company" and like phrases shall mean and include: (a) actual
knowledge; and (b) that knowledge which a prudent businessperson (including the
officers, directors and other key employees of the Company) would have obtained
in the management of his or her business affairs after making due inquiry and
exercising reasonable diligence with respect thereto. In connection therewith,
the knowledge (both actual and constructive) of any officer, director or other
key employee of the Company shall be imputed to be the knowledge of the Company.
3.28 COMPANY REFERENCE INCLUDES COMPANY SUBS. Each reference to the
Company in this Article III shall be deemed to be a reference to the Company and
the Company Sub, unless the context requires otherwise. Accordingly, the Company
Disclosure Schedule shall include disclosures with respect to the Company Sub,
as well as the Company, in response to the representations and warranties set
forth in this Article III, as applicable.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION SUB
Parent and Acquisition Sub, jointly and severally, represent and
warrant to the Company that, except as disclosed in the Parent SEC Documents or
the disclosure schedule dated the date hereof, certified by the President of
Parent and delivered by Parent to the Company simultaneously herewith (which
disclosure schedule shall contain specific references to the representations and
warranties to which the disclosures contained therein relate) (the "Parent
Disclosure Schedule"):
4.1 ORGANIZATION; GOOD STANDING; QUALIFICATION AND POWER. Each of
Parent and Acquisition Sub: (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and New
Jersey, respectively; (b) has all requisite corporate power and authority to
own, lease and operate its properties and assets and to carry on its business as
now being conducted and as currently proposed to be conducted, to enter into
this Agreement, the Plan of Merger (in the case of Acquisition Sub) and each of
the Related Agreements to which either is a party, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby; and (c) is duly qualified and in good standing in all jurisdictions
in which the failure to be so qualified and in good standing could reasonably be
expected to have a Material Adverse Effect on the Parent or Acquisition Sub.
Parent has delivered to the Company true and complete copies of the Certificate
and by-laws of each of Parent and Acquisition Sub.
4.2 EQUITY INVESTMENTS. Other than Cardiac Control Systems Far East,
Ltd. ("CCSFE") and Acquisition Sub, the Company does not currently have any
Subsidiaries, nor does it currently own any capital stock or other proprietary
interest, directly or indirectly, in any corporation, association, trust,
partnership, joint venture or
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other entity. Parent owns 100% of the issued and outstanding capital stock of
CCSFE, free and clear of all Encumbrances. Except for the Parent Options and the
Parent Warrants, there are no options, warrants, rights, calls, commitments or
agreements of any character to which Parent or Acquisition Sub is a party or by
which Parent or Acquisition Sub is bound calling for the issuance of shares of
capital stock of Parent or Acquisition Sub or any securities convertible into or
exercisable or exchangeable for, or representing the right to purchase or
otherwise receive, any such capital stock, or other arrangement to acquire, at
any time or under any circumstance, capital stock of Parent or any such other
securities of Parent or Acquisition Sub.
4.3 CAPITAL STOCK; SECURITIES. The authorized capital stock of Parent
consists of 30,000,000 shares of Parent Common Stock, of which 2,648,739 shares
are outstanding as of November 30, 1997. As of November 30, 1997, Parent has
reserved (x) 690,965 shares of Parent Common Stock for issuance upon exercise of
outstanding warrants (collectively, the "Parent Warrants") and (y) 413,165
shares of Parent Common Stock for issuance upon the exercise of outstanding
options (the "Parent Options"), of which 373,356 are vested Parent Options and
39,809 are unvested Parent Options. Other than the 690,965 outstanding Parent
Warrants and the 413,165 outstanding Parent Options, Parent does not have
outstanding any options to purchase, or any pre-emptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. There are no
voting trusts, voting agreements, proxies, first refusal rights, first offer
rights, co-sale rights, transfer restrictions (other than restrictions imposed
by federal or state securities laws) or other agreements, instruments or
understandings (whether written or oral, formal or informal) with respect to the
voting, transfer or disposition of Parent Common Stock to which Parent is a
party or by which it is bound, or, to the best knowledge of Parent, among or
between any persons other than Parent. All outstanding shares of Parent Common
Stock are validly issued, fully paid and non-assessable and not subject to
preemptive rights. Parent has duly authorized and reserved for issuance the
Merger Shares, and, when issued in accordance with the terms of Article II and
the Plan of Merger, the Merger Shares will be validly issued, fully paid and
nonassessable and free of preemptive rights. Parent owns all the outstanding
shares of capital stock of Acquisition Sub, and all of such shares are validly
issued, fully paid and nonassessable and not subject to preemptive rights.
4.4 AUTHORITY; NO CONSENTS. The execution, delivery and performance by
Parent of this Agreement and each of the Related Agreements to which it is a
party, the execution, delivery and performance of this Agreement and the Plan of
Merger by Acquisition Sub and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Acquisition Sub. This Agreement and each of the
Related Agreements to which Parent is a party are valid and binding obligations
of Parent, enforceable against Parent in accordance with their respective terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting the enforcement of
creditors' rights generally and general equitable principles; and this Agreement
is, and the Plan of Merger when executed and delivered by Acquisition Sub, as
contemplated hereby, will be, the valid and binding obligations of Acquisition
Sub, enforceable against Acquisition Sub in accordance with their respective
terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally and general equitable principles.
Neither the execution, delivery and performance by Parent of this Agreement and
the Related Agreements to which it is a party, the execution, delivery and
performance of this Agreement and the Plan of Merger by Acquisition Sub, nor the
consummation of the transactions contemplated hereby or thereby, will: (a)
conflict with; (b) result in any violations of; (c) cause a default under (with
or without due notice, lapse of time or both); (d) give rise to any right of
termination, amendment, cancellation or acceleration of any obligation contained
in or the loss of any material benefit under; or (e) result in the creation of
any Encumbrance on or against any assets, rights or property of Parent or
Acquisition Sub, as the case may be, under any term, condition or provision of:
(x) any instrument or agreement to which Parent or Acquisition Sub is a party,
or, to the best knowledge of Parent, by which Parent or Acquisition Sub or any
of their respective properties, assets or rights may be bound (except as shall
have been waived or with respect to which consent shall have been obtained prior
to the Closing); (y) any law, statute, rule, regulation, order, writ,
injunction, decree, permit, concession, license or franchise of any Governmental
Authority applicable to Parent or Acquisition Sub or any of their respective
properties, assets or rights; or (z) Parent's or Acquisition Sub's Certificate
or by-laws, as amended through the date hereof. Except as contemplated by this
Agreement or the Plan of Merger, no permit, authorization, consent or approval
of or by, or any notification
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of or filing with, any Governmental Authority is required in connection with the
execution, delivery and performance by Parent or Acquisition Sub of this
Agreement, the Plan of Merger or the Related Agreements to which they are party
or the consummation of the transactions contemplated hereby or thereby, except
for: (i) the filing with the SEC of (A) the S-4 and (B) such reports and
information under the Exchange Act, and the rules and regulations promulgated by
the SEC thereunder, as may be required in connection with this Agreement and the
Plan of Merger and the transactions contemplated hereby and thereby; (ii) such
filings as may be required by the Over the Counter Bulletin Board Service with
respect to Parent Common Stock to be issued in connection with the Merger and
the Company Warrants to be assumed by Parent in the Merger; (iii) the filing of
such documents with, and the obtaining of such orders from, various state
securities and blue-sky authorities as are required in connection with the
transactions contemplated hereby; (iv) the filing of the Plan of Merger with the
Secretary of State of the State of New Jersey; and (v) such other consents,
waivers, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on Parent or
materially impair the ability of Parent or Acquisition Sub to consummate the
transactions contemplated by this Agreement and the Plan of Merger, including,
without limitation, the Merger.
4.5 SEC DOCUMENTS. Parent has furnished the Company with a correct and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed by Parent with the SEC on or after March 31, 1996 (the
"Parent SEC Documents"), which are all the documents (other than preliminary
material) that Parent was required to file (or otherwise did file) with the SEC
on or after March 31, 1996. As of their respective dates, none of the Parent SEC
Documents (including all exhibits and schedules thereto and documents
incorporated by reference therein) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, and the Parent SEC Documents
complied when filed in all material respects with the then applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations promulgated by the SEC thereunder.
4.6 FINANCIAL STATEMENTS. The financial statements of Parent included
in the Parent SEC Documents (the "Parent Financial Statements"): (a) complied as
to form in all material respects with the then applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, were prepared in accordance with GAAP, consistently applied (except as
may have been indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Form 10-QSB promulgated by the SEC); (b) were in
accordance with the books and records of Parent; and (c) fairly present
(subject, in the case of the unaudited statements, to normal, nonrecurring audit
adjustments) the consolidated financial position of Parent and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended.
4.7 ABSENCE OF UNDISCLOSED LIABILITIES. At September 30, 1997: (a)
Parent had no Liability which was not provided for or disclosed on the Parent
SEC Documents for the quarter period ended for September 30, 1997; and (b)
liability reserves established by Parent and set forth thereon were adequate, in
the good faith judgment of Parent, for all such Liabilities at the date thereof.
There were no material loss contingencies (as such term is used in FAS No. 5)
which were not adequately provided on the Parent Financial Statements as
required by FAS No. 5.
4.8 ABSENCE OF CHANGES. Since September 30, 1997, Parent has been
operated in the ordinary course, consistent with past practice, and there has
not been:
(a) to the best knowledge of Parent, any damage,
destruction or loss, whether or not covered by insurance, having or which could
reasonably be expected to have a Material Adverse Effect;
(b) to the best knowledge of Parent, any Liability created,
assumed, guaranteed or incurred, or any material transaction, contract or
commitment entered into, by Parent, other than the license, sale or transfer of
Parent's products to customers in the ordinary course of business;
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(c) any declaration, setting aside or payment of any
dividend or other distribution of any assets of any kind whatsoever with respect
to any shares of the capital stock of Parent, or any direct or indirect
redemption, purchase or other acquisition of any such shares of the capital
stock of Parent;
(d) any payment, discharge or satisfaction of any material
Encumbrance or Liability or any cancellation by Parent of any material debts or
claims or any amendment, termination or waiver of any right of material value to
Parent;
(e) any stock split, reverse stock split, combination,
reclassification or recapitalization of any Parent Common Stock, or any issuance
of any other security in respect of or in exchange for, any shares of Parent
Common Stock;
(f) any issuance by Parent of any shares of its capital
stock or any debt security or securities, rights, options or warrants
convertible into or exercisable or exchangeable for any shares of its capital
stock or debt security;
(g) any termination of, or, to the best knowledge of
Parent, indication of an intention to terminate or not renew, any material
contract, license, commitment or other agreement between Parent and any other
person, or the assignment by Parent of any interest in any contract to which
Parent is a party;
(h) any material write-down or write-up of the value of any
asset of Parent, or any material write-off of any accounts receivable or notes
receivable of Parent or any portion thereof;
(i) any increase in or modification or acceleration of
compensation or benefits payable or to become payable to any officer, employee,
consultant or agent of Parent other than in the ordinary course, or the entering
into of any employment contract with any officer or employee;
(j) the making of any loan, advance or capital contribution
to or investment in any person or the engagement in any transaction with any
employee, officer, director or stockholder of Parent, other than advances to
employees in the ordinary course of business for travel and similar business
expenses;
(k) any change in the accounting methods or practices
followed by Parent, or any change in depreciation or amortization policies or
rates theretofore adopted by Parent;
(l) any termination of employment of any officer or key
employee of Parent or, to the best knowledge of Parent, any expression of
intention by any officer or key employee of Parent to terminate such office or
employment with Parent;
(m) any amendments or changes in Parent's Certificate or
by-laws;
(n) to the best knowledge of Parent, the commencement of
any litigation or other action by or against Parent; or
(o) any agreement, understanding, authorization or
proposal, whether in writing or otherwise, for Parent to take any of the actions
specified in items (a) through (i) above.
4.9 TAX MATTERS. Parent and each other corporation included in any
consolidated or combined tax return in which Parent has been included: (a) have
filed and will file, in a timely and proper manner, consistent with applicable
laws, all Federal, state and local Tax returns and Tax reports required to be
filed by them through the Closing Date (the "Parent Returns") with the
appropriate governmental agencies in all jurisdictions in which Parent Returns
are required to be filed and have paid or will pay all amounts shown thereon to
be due; and (b) have paid and shall timely pay all Taxes required to have been
paid on or before the Closing Date. All Taxes attributable to all taxable
periods ending on or before the Closing Date, to the extent not required to have
been previously paid have been adequately provided for on the Parent Financial
Statements and Parent will not accrue a Tax liability
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from the date of the Parent Financial Statements up to and including the Closing
Date, other than a Tax liability accrued in the ordinary course of business.
Parent has not been notified by the Internal Revenue Service or any state, local
or foreign taxing authority that any issues have been raised (and are currently
pending) in connection with any Parent Return, and no waivers of statutes of
limitations have been given or requested with respect to Parent. Except as
contested in good faith and disclosed in the Parent Disclosure Schedule, any
deficiencies asserted or assessments (including interest and penalties) made as
a result of any examination by the Internal Revenue Service or by any other
taxing authorities of any Parent Return have been fully paid or are adequately
provided for on the Parent Financial Statements and no proposed additional Taxes
have been asserted. Parent has not made an election to be treated as a
"consenting corporation" under Section 341(f) of the Code nor is it a "personal
holding company" within the meaning of Section 542 of the Code. Parent has not
agreed to, nor is required to make any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise. Parent will not
incur a Tax liability resulting from Parent ceasing to be a member of a
consolidated or combined group that had previously filed consolidated, combined
or unitary Tax returns.
4.10 TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. Parent
has good and marketable title to all assets, properties and interests in
properties, real, personal or mixed, reflected on the Parent SEC Documents or
acquired after September 30, 1997, except for: (a) those Encumbrances set forth
in the Parent Disclosure Schedule; (b) liens for current taxes not yet due and
payable; (c) statutory mechanics and materialmen's liens; and (d) utility
easements.
4.11. INTELLECTUAL PROPERTY. The Parent Disclosure Schedule sets forth
a list of all Intellectual Property Rights of Parent. To the best knowledge of
Parent, the ownership or use of such Intellectual Property Rights by Parent does
not infringe on the intellectual property rights of others and Parent has not
received notice alleging any such infringement, and, to the best knowledge of
Parent, no third party is infringing on the Intellectual Property Rights of
Parent. Parent is not obligated to pay any third party any royalty or fee for
the use of the Intellectual Property Rights used in its business.
4.12 AGREEMENTS, ETC. The Parent Disclosure Schedule sets forth a true
and complete list of all written or oral contracts, agreements and other
instruments to which Parent is a party and not made in the ordinary course of
business, or made in the ordinary course of business and referred to in clauses
(a) through (i) of this Section 4.12:
(a) any joint venture, partnership or other agreement or
arrangement for the sharing of profits;
(b) any collective bargaining contract or other contract
with or commitment to any labor union;
(c) the future purchase, sale or license of products,
material, supplies, equipment or services requiring payments to or from Parent
in an amount in excess of $25,000 per annum, which agreement, arrangement or
understanding is not terminable on thirty (30) days' notice without cost or
other liability at or at any time after the Effective Time, or in which Parent
has granted or received manufacturing rights, most favored nations pricing
provisions or exclusive marketing or other rights relating to any product, group
of products, services, technology, assets or territory;
(d) the employment of any officer, employee, consultant or
agent or any other type of contract, commitment or understanding with any
officer, employee, consultant or agent which (except as otherwise generally
provided by applicable law) is not immediately terminable without cost or other
liability at or at any time after the Effective Time;
(e) an indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment for the borrowing of
money, for a line of credit or, if involving payments in excess of $25,000 per
annum, for a leasing transaction of a type required to be capitalized in
accordance with Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board;
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(f) a contract or commitment for capital expenditures
individually in excess of $25,000;
(g) any agreement or contract with a "disqualified
individual" (as defined in Section 280G(c) of the Code), which could result in a
disallowance of the deduction for any "excess parachute payment" (as defined in
Section 280G(b)(i) of the Code) under Section 280G of the Code;
(h) an agreement or arrangement for the sale of any assets,
properties or rights having a value in excess of $25,000; or
(i) an agreement which restricts Parent from engaging in
any aspect of its business or competing in any line of business in any
geographic area. Parent has furnished to the Company true and complete copies of
all such agreements listed in the Parent Disclosure Schedule and each such
agreement: (i) is the legal, valid and binding obligation of Parent and, to the
best knowledge of Parent, the legal, valid and binding obligation of each other
party thereto, in each case enforceable in accordance with its terms except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting the enforcement of
creditors' rights generally and general equitable principles; (ii) to the best
knowledge of Parent is in full force and effect; and (iii) to the best knowledge
of Parent, the other party or parties thereto is or are not in material default
thereunder.
4.13 NO DEFAULTS, ETC. Parent has in all material respects performed
all the obligations required to be performed by it to date and is not in
material default or, to the best knowledge of Parent, alleged to be in material
default under: (a) its Certificate or by-laws; or (b) any material agreement,
lease, contract, commitment, instrument or obligation to which Parent is a party
or by which any of its properties, assets or rights are or may be bound or
affected, and, to the best knowledge of Parent, there exists no event, condition
or occurrence which, with or without due notice or lapse of time, or both, would
constitute such a default by it of any of the foregoing. To the best knowledge
of Parent, no current customer has notified, or expressed an intention to notify
Parent that such customer will materially reduce the dollar amount of business
it will do with Parent or cease doing business with Parent.
4.14 LITIGATION, ETC. There are no: (a) Actions pending, or to the best
knowledge of Parent, threatened against Parent, whether at law or in equity, or
before or by any Governmental Authority; (b) judgments, decrees, injunctions or
orders of any Governmental Authority or arbitrator against the Parent; or (c) to
the best knowledge of the Parent, material disputes with customers or vendors,
in each case, except for any such matter which would not have a material adverse
effect of Parent.
4.15 COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS. To the best knowledge of
Parent, Parent has complied within the last five (5) years and is presently in
compliance in all material respects with all material Federal, state, local or
foreign laws, ordinances, regulations and orders applicable to it or its
business, including, without limitation, the FDA, all Federal and state
securities or "blue sky" laws and all laws and regulations relating to
occupational safety and health and the environment. To the best knowledge of
Parent, Parent has all material Federal, state, local and foreign governmental
authorizations, security clearances, consents, approvals, licenses and permits
necessary in the conduct of its business as presently conducted and as currently
proposed to be conducted, such authorizations, consents, approvals, licenses and
permits are in full force and effect, no material violations are or have been
recorded in respect of any thereof and no proceeding is pending or, to the best
knowledge of Parent, threatened to revoke or limit any thereof. To the best
knowledge of Parent, all of Parent's full-time and temporary personnel who
provide services in a manner or of the type that require specific certifications
or clearances have provided such services at all times while having such
certifications or clearances in full force and effect. Neither Parent nor, to
the best knowledge of Parent, any of its full-time or part-time personnel has
been cited or alleged by the FDA or other regulatory authority within the last
five (5) years as failing to comply with regulatory requirements or guidelines
in the performance of services.
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4.16 LABOR RELATIONS; EMPLOYEES. The Parent Disclosure Schedule sets
forth the number of full-time and part-time employees of Parent and the primary
locations at which such employees provide their services as of November 30,
1997. To the best knowledge of Parent: (a) Parent is not delinquent in payments
to any of its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed by them to date or amounts
required to be reimbursed to such employees; (b) Acquisition Sub nor the
Surviving Corporation will by reason of anything done prior to the Closing be
liable to any of such employees for severance pay or any other payments; (c)
Parent is in compliance in all material respects with all material Federal,
state, local and foreign laws and regulations respecting labor, employment and
employment practices, terms and conditions of employment and wages and hours;
and (d) there is no unfair labor practice, sexual harassment or other
employment-related complaint pending or, to the best knowledge of Parent,
threatened against Parent or any employee of Parent. To the best knowledge of
Parent, no employee of Parent is in material violation of any term of any
employment contract, confidentiality agreement or any other contract or
agreement relating to the relationship of such employee with Parent or any other
party because of the nature of the business conducted or proposed to be
conducted by Parent or the execution and delivery of such agreement or contract
by such employee.
4.17 EMPLOYEE BENEFIT PLANS AND CONTRACTS
(a) The Parent Disclosure Schedule identifies each
"employee benefit plan," as defined in Section 1002(3) of ERISA, and all other
material written or formal plans or agreements involving direct or indirect
compensation (including any employment agreements entered into between Parent
and any Employee of Parent, but excluding workers' compensation, unemployment
compensation, other government-mandated programs and Parent's salary and wage
arrangements) currently or previously maintained, contributed to or entered into
by Parent or any ERISA Affiliate thereof for the benefit of any Employee or
former Employee under which Parent or any ERISA Affiliate thereof has any
present or future obligation or liability (the "Employee Plans"). Parent has
provided to the Company true and complete copies of all Employee Plans (and, if
applicable, related trust agreements) and all amendments thereto and written
interpretations thereof. For purposes of the preceding sentence, "ERISA
Affiliate" shall mean any entity which is a member of (A) a "controlled group of
corporations," as defined in Section 414(b) of the Code, (B) a group of entities
under "common control," as defined in Section 414(c) of the Code or (C) an
"affiliated service group," as defined in Section 414(m) of the Code or treasury
regulations promulgated under Section 414(o) of the Code, any of which includes
Parent. Any Employee Plans which individually or collectively would constitute
an "employee pension benefit plan," as defined in Section 3(2) of ERISA, but
which are not Multiemployer Plans (collectively, the "Pension Plans"), are
identified as such in the Parent Disclosure Schedule.
(b) Each Employee Plan that is intended to be qualified
under Section 401(a) of the Code is so qualified and has been so qualified
during the period from its adoption to the date hereof, and each trust forming a
part thereof is exempt from tax pursuant to Section 501(a) of the Code. Parent
has provided the Company with copies of the most recent Internal Revenue Service
determination letters with respect to any such Employee Plans. Each Employee
Plan has been maintained substantially in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including, without limitation, ERISA and the Code, which are applicable to such
Employee Plans.
(c) No Employee Plan constitutes or since the enactment of
ERISA has constituted a "multiemployer plan," as defined in Section 3(37) of
ERISA (a "Multiemployer Plan"). Parent has not within the past five (5) years
incurred any material liability under Title IV of ERISA arising in connection
with the termination of any Pension Plan or the complete or partial withdrawal
from any Multiemployer Plan. If a "complete withdrawal" by Parent were to occur
as of the Closing with respect to all Multiemployer Plans, Parent would not
incur any withdrawal liability under Title IV of ERISA.
(d) The Parent Disclosure Schedule lists each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' benefits, vacation benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which: (i) is not an Employee Plan; (ii) is
entered into,
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maintained or contributed to, as the case may be, by Parent; (iii) covers any
Employee or former Employee; and (iv) under which Parent has any present or
future obligation or liability (excluding workers' compensation, unemployment
compensation or other government-mandated programs and Parent's salary and wage
arrangements). Such contracts, plans and arrangements as are described above are
hereinafter referred to collectively as the "Benefit Arrangements". Each Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all material laws, statutes, rules,
regulations, orders and judgments which are applicable to such Benefit
Arrangements.
(e) Parent has provided, or will have provided, to
individuals entitled thereto who are current or former Employees of Parent all
required notices within the applicable time period and coverage pursuant to
Section 4980B of the Code with respect to any "qualifying event" (as defined in
Section 4980B(f)(3) of the Code) occurring prior to and including the Closing
Date, and no tax payable on account of Section 4980B of the Code has been
incurred with respect to any current or former Employees of Parent.
4.18 CERTAIN AGREEMENTS. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will: (a)
result in any payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any director
or employee of Parent from Parent, under any Employee Plan, Benefit Arrangement
or otherwise; (b) materially increase any benefits otherwise payable under any
Employee Plan or the Benefit Arrangement; or (c) result in the acceleration of
the time of payment or vesting of any such benefits.
4.19 INSURANCE. Parent maintains policies of liability, theft,
fidelity, fire, product liability, workmen's compensation, indemnification of
directors and officers and other similar forms of insurance. The Parent
Disclosure Schedule sets forth a history of all claims within the last five (5)
years in excess of $50,000 made by Parent thereunder and the status thereof. All
such policies of insurance are in full force and effect and all premiums with
respect thereto are currently paid and, to the best knowledge of Parent, no
basis exists for termination of any thereof on the part of the insurer. The
amounts of coverage under such policies conform to the requirements set forth in
the Parent's customer contracts. Parent has not, during the last three fiscal
years, been denied or had revoked or rescinded any policy of insurance.
4.20 BROKERS. Neither Parent, Acquisition Sub, nor any of their
respective officers, directors or employees have employed any broker or finder
or incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated by this Agreement, the Plan of
Merger or any of the Related Agreements.
4.21 RELATED TRANSACTIONS. Except for compensation to regular employees
of Parent, no current or former director, officer or stockholder that is an
affiliate of Parent or any associate (as defined in the rules promulgated under
the Exchange Act) thereof, is now, or has been during the last five (5) fiscal
years: (a) a party to any transaction with Parent (including, but not limited
to, any contract, agreement or other arrangement providing for the furnishing of
services by, or rental of real or personal property from, or borrowing money
from, or otherwise requiring payments to, any such director, officer or
affiliated stockholder of Parent or associate thereof); or (b) the direct or
indirect owner of an interest in any corporation, firm, association or business
organization which is a present or potential competitor, supplier or customer of
Parent (other than non-affiliated holdings in publicly-held companies), nor does
any such person receive income from any source other than Parent which relates
to the business of, or should properly accrue to Parent.
4.22 BOARD APPROVAL. The Board of Directors of Parent and Acquisition
Sub have: (a) approved this Agreement, the Plan of Merger and each of the
Related Agreements to which either is a party and the transactions contemplated
hereby and thereby; (b) determined that the Merger is in the best interests of
the stockholders of Parent and Acquisition Sub and is on terms that are fair to
such stockholders; and (c) recommended that the stockholders of Acquisition Sub
approve the Merger in accordance with the Plan of Merger and the New Jersey
statute. No other approvals are required other than that of the Board of
Directors of Parent and the Board of Directors and stockholder of Acquisition
Sub.
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4.23 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Parent or Acquisition Sub for inclusion or incorporation by
reference in the S-4 will, at the time the S-4 is filed with the SEC and at the
time the S-4 becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
4.24 ACQUISITION SUB. Acquisition Sub is a newly formed wholly-owned
subsidiary of Parent, currently is not and has not engaged in business and
currently has no assets or liabilities of a material nature.
4.25 DISCLOSURE. No part of Article IV of this Agreement nor any
document, written information, statement, financial statement, certificate or
exhibit furnished or to be furnished to the Company by or on behalf of Parent or
Acquisition Sub pursuant hereto or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary in order to make
the statements or facts contained herein and therein not misleading in light of
the circumstances under which they were made.
4.26 KNOWLEDGE DEFINITION. As used in this Agreement, "to the best
knowledge of Parent" and like phrases shall mean and include: (a) actual
knowledge; and (b) that knowledge which a prudent businessperson (including the
officers, directors and other key employees of Parent) would have obtained in
the management of his or her business affairs after making due inquiry and
exercising reasonable diligence with respect thereto. In connection therewith,
the knowledge (both actual and constructive) of any officer, director or other
key employee of Parent shall be imputed to be the knowledge of Parent.
4.27 PARENT REFERENCE INCLUDES CCSFE. Each reference to Parent in this
Article IV shall be deemed to be a reference to Parent and CCSFE, unless the
context requires otherwise. Accordingly, the Parent Disclosure Schedule shall
include disclosures with respect to CCSFE, as well as Parent, in response to the
representations and warranties set forth in this Article IV, as applicable.
ARTICLE V.
RELATED AGREEMENTS
5.1 VOTING AGREEMENT. The T Partnership, LLP, a New Jersey limited
liability partnership ("The T Partnership") shall enter into a Voting Agreement
and Irrevocable Proxy with Parent and the Company in the form of EXHIBIT 5.1
attached hereto (the "Voting Agreement"), providing, among other things, that
such Stockholder shall vote in favor of or consent in writing to the Merger and
shall not transfer its shares of Company Common Stock prior to the Effective
Date (as defined therein).
5.2 AFFILIATE AGREEMENTS. The Company shall use its best efforts to
cause each of the persons (within the meaning of Rule 145) who or which are, in
Parent's reasonable judgment on the date hereof, "affiliates" of the Company
within the meaning of Rule 145 of the rules and regulations promulgated by the
SEC under the Securities Act ("Rule 145") and identified as such on SCHEDULE 5.2
attached hereto (each such person, together with the persons identified pursuant
to Section 6.16 hereof after the date hereof, a "Rule 145 Affiliate"), to, on or
prior to the date of filing of the S-4 with the SEC, enter into a Company
Affiliate Agreement with Parent, effective as of the Effective Time
(collectively, the "Company Affiliate Agreements"; together with the Voting
Agreement, the "Related Agreements"), in the form of EXHIBIT 5.2 attached
hereto; providing, among other things, that such persons shall receive certain
registration rights, and not transfer their shares of Company Common Stock
following the Effective Time, except as provided therein. The Company shall
provide Parent such information and documents as Parent shall reasonably request
for purposes of creating SCHEDULE 5.2. Parent and Acquisition Sub shall be
entitled to place legends on the certificates evidencing any Parent Common Stock
to be received by each Rule 145 Affiliate pursuant to the terms of this
Agreement and the Plan of Merger, and to issue appropriate stop transfer
instructions to the transfer agent for Parent Common Stock, consistent with the
terms of the Company Affiliate Agreements, whether or not the Company Affiliate
Agreements are actually delivered to Parent.
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ARTICLE VI.
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; ADDITIONAL AGREEMENTS
6.1 ACCESS TO RECORDS AND PROPERTIES OF EACH PARTY; CONFIDENTIALITY.
(a) From and after the date hereof until the Effective
Time or the earlier termination of this Agreement pursuant to Section 11.1
hereof (the "Executory Period"), each Party shall afford: (i) to the officers,
independent certified public accountants, counsel and other representatives of
the other Party, free and full access at all reasonable times to all properties,
books and records (including tax returns filed and those in preparation) of such
Party, in order that the other Party and such other persons may have full
opportunity to make such investigations as they shall reasonably desire to make
of the business and affairs of such Party; and (ii) to the independent certified
public accountants of the other Party, free and full access at all reasonable
times to the work papers of the independent certified public accountants for
such Party. Additionally, each Party will permit the other Party to make such
reasonable inspections of such Party and its respective operations during normal
business hours as the other Party may reasonably require and each Party will
cause its officers to furnish to the other Party and such other persons, such
additional financial and operating data and other information as to the business
and properties of such Party as the other Party or such other persons shall from
time to time reasonably request. No investigation pursuant to this Section 6.1,
or made prior to the date hereof, shall affect or otherwise diminish or obviate
in any respect any of the representations and warranties of any Party made in
this Agreement. As used in this Agreement, except as modified in Section 6.4,
the term "Party" shall mean and refer to the Company, on the one hand, and
Parent and Acquisition Sub, on the other hand.
(b) Reference is made to the Confidentiality Agreement
dated September 11, 1997, between the Company and Parent, which is hereby
confirmed by the parties hereto and is and shall remain in full force and effect
in accordance with its terms, and each of Parent and Company shall observe and
perform its respective obligations thereunder. Acquisition Sub hereby affirms as
if original signatory to the Confidentiality Agreement referenced above.
6.2 OPERATION OF BUSINESS OF THE COMPANY. During the Executory
Period, the Company will operate its business as now operated and only in the
normal and ordinary course and, consistent with such operation, will use its
best efforts to preserve intact its present business organization, to keep
available the services of its officers and employees and to maintain
satisfactory relationships with licensors, franchisees, licensees, suppliers,
contractors, distributors, customers and other persons having business dealings
with it. Without limiting the generality of the foregoing, during the Executory
Period, the Company shall not, without the prior written consent of Parent,
except as legally required and as required under Section 7.7 or 7.8: (a) take
any action that would result in any of the representations and warranties of the
Company herein becoming untrue or in any of the conditions to the Merger not
being satisfied; or (b) take or cause to occur any of the actions or
transactions described in Section 3.8 hereof.
6.3 OPERATION OF BUSINESS OF THE PARENT. During the Executory
Period, Parent will operate its business as now operated and only in the normal
and ordinary course and, consistent with such operation, will use its best
efforts to preserve intact its present business organization, to keep available
the services of its officers and employees and to maintain satisfactory
relationships with licensors, franchisees, licensees, suppliers, contractors,
distributors, customers and other persons having business dealings with it.
Without limiting the generality of the foregoing, during the Executory Period,
Parent shall not, without the prior written consent of the Company, except as
legally required and as required under Section 7.7 or 7.8: (a) take any action
that would result in any of the representations and warranties of Parent herein
becoming untrue or in any of the conditions to the Merger not being satisfied;
or (b) take or cause to occur any of the actions or transactions described in
Section 4.8 hereof.
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6.4 NEGOTIATION WITH OTHERS.
(a) During the Executory Period, neither Party (which
solely for purposes of this Section 6.4 shall include The T Partnership or any
of its partners) shall, and neither Party shall permit any agent or other
representative of such Party to, directly or indirectly: (i) solicit, initiate
or engage in discussions or engage in negotiations with any person (whether such
negotiations are initiated by the Party or otherwise) or take any other action
to facilitate the efforts of any person, relating to the possible acquisition of
a Party (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its capital stock or assets (any such
acquisition being referred to as an "Acquisition Transaction"); (ii) provide
information to any person, other than a Party, relating to a possible
Acquisition Transaction; (iii) enter into an agreement with any person, other
than a Party, relating to a possible Acquisition Transaction; (iv) consummate an
Acquisition Transaction with any person other than a Party or enter into an
agreement with any person, other than a Party, providing for a possible
Acquisition Transaction; or (v) make or authorize any statement, recommendation
or solicitation in support of any possible Acquisition Transaction, unless all
Parties are a party to such Acquisition Transaction; PROVIDED, HOWEVER, that
nothing contained herein shall prohibit the Board of Directors of the Company or
Parent, respectively, from furnishing information to, or entering into
discussions or negotiations with (i) any unaffiliated third party that makes or
is proposing to make an unsolicited written, bona fide offer with respect to an
Acquisition Transaction, if the Board of Directors of the Company or Parent,
respectively, based upon the written advice of outside legal counsel,
respectively, determines in good faith that such action is necessary for the
Board of Directors of the Company or Parent, respectively, to comply with its
fiduciary duties under applicable law (such unsolicited written, bona fide offer
being referred to herein as a "Superior Proposal") and prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, the Company or Parent provides, respectively, written notice to the
other Party, and (ii) such parties who have made proposals, formal or informal,
which may become a Superior Proposal as to which either Company or Parent has
advised the other, in writing, prior to the date of this Agreement. If either
the Company or Parent receives any unsolicited offer or proposal to enter
negotiations relating to an Acquisition Transaction, such Party shall notify the
other Party thereof, including information as to the identity of the party
making such offer or proposal and the specific terms of such offer or proposal,
as the case may be.
(b) During the Executory Period, notwithstanding anything
contained herein to the contrary, neither Party shall enter into or consummate
an Acquisition Transaction with a party other than the other Party unless it
shall have terminated this Agreement pursuant to Section 11.1(h).
6.5 PREPARATION OF S-4; OTHER FILINGS. As promptly as practicable
after the date of this Agreement, Parent and the Company shall properly prepare
and file with the SEC a Registration Statement on Form S-4 with respect to the
Merger Shares, the shares of Parent Common Stock to be issued in exchange for
Vested Company Options and the shares of Parent Common Stock reserved for
issuance upon exercise of the assumed Unvested Company Options and Company
Warrants (as to which the option or warrant holder is, by the terms of the
Company option plan or warrant in effect, entitled upon exercise of the option
or warrant, to receive registered stock) (the "S-4"), in which the Stockholder
Statement will be included as a prospectus. Each of Parent and the Company shall
use its best efforts to respond to any comments of the SEC, to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing and to cause the Stockholder Statement to be mailed to the
Stockholders at the earliest practicable time, but in any event within five (5)
Business Days after the S-4 has been declared effective by the SEC. As promptly
as practicable after the date of this Agreement, Parent and the Company shall
properly prepare and file any other filings required under the Exchange Act, the
Securities Act or any other Federal or state laws and Parent shall properly
prepare and file any filings required under state securities or "blue sky" laws,
in each case, relating to the Merger and the transactions contemplated by this
Agreement and the Plan of Merger (collectively, the "Other Filings"). The
Company shall promptly furnish Parent with all information concerning the
Company and the Stockholders as may be reasonably required in connection with
any action contemplated by this Section 6.5. Each Party will notify the other
Party promptly of the receipt of any comments from the SEC or its staff and of
any request by the SEC or its staff or any other government officials for
amendments or supplements to the S-4 or any Other Filing or for additional
information and will supply the other Party with copies of all correspondence
between such Party or any of its representatives, on the one hand, and the SEC,
or its staff or any other government officials, on the other hand, with respect
to the S-4, the Merger or any
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Other Filing. Each Party shall promptly provide the other Party (or its counsel)
copies of all filings made by such Party with any Governmental Authority in
connection with this Agreement, the Plan of Merger and the transactions
contemplated hereby and thereby. The S-4 and the Other Filings shall comply in
all material respects with all applicable requirements of law. Whenever any
event occurs which should be set forth in an amendment or supplement to the S-4
or any Other Filing, Parent or the Company, as the case may be, shall promptly
inform the other Party of such occurrence and cooperate in filing with the SEC
or its staff or any other government officials, and/or mailing to Stockholders
of the Company, such amendment or supplement.
6.6 ADVICE OF CHANGES. The Company and Parent shall confer on a
regular and frequent basis with the other, report on operational matters and
promptly advise the other orally and in writing of any change, event or
circumstance having, or which, insofar as can reasonably be foreseen, could
have, a Material Adverse Effect on itself or which could impair (negatively or
positively) its financial projections or forecasts.
6.7 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall use its
best efforts to cause to be delivered to Parent a letter of KPMG Peat Marwick,
LLP, the Company's independent accountant, dated a date within two (2) Business
Days before the date on which the S-4 shall become effective and addressed to
Parent, in form and substance reasonably satisfactory to Parent and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the S-4 (and, if requested, a
bring-down comfort letter at the closing of the Merger).
6.8 LETTER OF PARENT'S ACCOUNTANTS. Parent shall use its best
efforts to cause to be delivered to the Company a letter of BDO Seidman, LLP,
Parent's independent public accountants, dated a date within two (2) Business
Days before the date on which the S-4 shall become effective and addressed to
the Company, in form and substance reasonably satisfactory to the Company and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the S-4 (and,
if requested, a bring-down comfort letter at the closing of the Merger).
6.9 STOCKHOLDERS' APPROVAL. The Company shall: (a) call a special
meeting of the Stockholders (the "Stockholders' Meeting") within 20 days (or
such other period as may be required by applicable law) after the S-4 shall have
been declared effective by the SEC for the purpose of obtaining the approval of
the Merger, this Agreement and the Plan of Merger and the transactions
contemplated hereby and thereby (the "Stockholder Action"); and (b) recommend
(provided there has been no Superior Proposal) that the Stockholders vote in
favor of the Merger and approve this Agreement and the Plan of Merger and take
or cause to be taken all such other action as may be required by the New Jersey
Statute and any other applicable law in connection with the Merger, this
Agreement and the Plan of Merger, in each case as promptly as possible. The
Company shall prepare and distribute any written notice and other materials
relating to the Stockholder Action, including, without limitation, a proxy
statement (the "Stockholder Statement"), in accordance with the Certificate and
by-laws of the Company, the New Jersey Statute and any other Federal and state
laws relating to the Merger, such Stockholders' Meeting or any other transaction
relating to or contemplated by this Agreement (collectively, the "Stockholders'
Materials"); PROVIDED, HOWEVER, that Parent and its counsel shall have the
opportunity to review all Stockholders' Materials prior to delivery to the
Stockholders, and all Stockholders' Materials shall be in form and substance
reasonably satisfactory to Parent and its counsel; PROVIDED, FURTHER, HOWEVER,
that if any event occurs which should be set forth in an amendment or supplement
to any Stockholders' Materials, the Company shall promptly inform Parent thereof
(or, if such event relates solely to Parent, Parent shall promptly inform the
Company thereof), and the Company shall promptly prepare an amendment or
supplement in form and substance satisfactory to Parent in accordance with the
Certificate and by-laws of the Company, the New Jersey Statute and any other
Federal or state laws.
6.10 LEGAL CONDITIONS TO MERGER. Each Party shall take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on such Party with respect to the Merger and will take all
reasonable action necessary to cooperate with and furnish information to the
other Party in connection with any such requirements imposed upon such other
Party in connection with the Merger. Each Party shall take all reasonable
actions necessary: (a) to obtain (and will take all reasonable actions necessary
to promptly cooperate with the other Party in obtaining) any consent,
authorization, order or approval of, or any exemption by, any
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Governmental Authority, or other third party, required to be obtained or made by
such Party (or by the other Party) in connection with the Merger or the taking
of any action contemplated by this Agreement or the Plan of Merger; (b) to
defend, lift, rescind or mitigate the effect of any lawsuit, order, injunction
or other action adversely affecting the ability of such Party to consummate the
transactions contemplated hereby; and (c) to fulfill all conditions precedent
applicable to such Party pursuant to this Agreement.
6.11 CONSENTS. Each Party shall use its best efforts, and the other
Party shall cooperate with such efforts, to obtain any consents and approvals
of, or effect the notification of or filing with, each person or authority,
whether private or governmental, whose consent or approval is required in order
to permit the consummation of the Merger and the transactions contemplated
hereby and to enable the Surviving Corporation to conduct and operate the
business of the Company substantially as presently conducted and as proposed to
be conducted.
6.12 EFFORTS TO CONSUMMATE. Subject to the terms and conditions
herein provided, each of the Parties hereto shall, in good faith, use reasonable
effort to do or cause to be done all such acts and things as may be necessary,
proper or advisable, consistent with all applicable laws and regulations, to
consummate and make effective the transactions contemplated hereby and by the
Plan of Merger and to satisfy or cause to be satisfied all conditions precedent
that are applicable to each such Party that are set forth in this Agreement as
soon as reasonably practicable.
6.13 NOTICE OF PROSPECTIVE BREACH. Each Party hereto shall
immediately notify the other Party in writing upon the occurrence of any act,
event, circumstance or thing that is reasonably likely to cause or result in a
representation or warranty hereunder to be untrue at the Closing, the failure of
a closing condition to be achieved at the Closing, or any other breach or
violation hereof or default hereunder.
6.14 PUBLIC ANNOUNCEMENTS. Each Party hereto agrees that, subject
to public disclosure and other legal and regulatory obligations, none of them
shall issue any report, statement or release pertaining to this Agreement or any
transaction contemplated hereby, without the prior written consent of the other
Parties. Each Party further agrees that no Party shall unreasonably withhold
their written consent to the issuance of a public disclosure referred to in this
Section 6.14.
6.15 AFFILIATES. Within ten (10) Business Days prior to the
effective date of the Stockholder Action, Parent and the Company shall amend
SCHEDULE 5.2 hereto to add the names and addresses of any other person (within
the meaning of Rule 145) that Parent reasonably identifies as being a person who
may be deemed to be a Rule 145 Affiliate of the Company within the meaning of
Rule 145; PROVIDED, HOWEVER, that no such person identified by Parent shall be
added to the list of Rule 145 Affiliates of the Company if Parent shall receive
from the Company, on or before the Effective Time, an opinion of counsel
reasonably satisfactory to Parent to the effect that such person is not a Rule
145 Affiliate. The Company shall use its best efforts to deliver or cause to be
delivered to Parent, prior to the Effective Time, from each of such additional
Rule 145 Affiliates a Company Affiliate Agreement.
6.16 PREFERRED STOCK; SECURED PROMISSORY NOTE. Parent and The T
Partnership agree that: (a) the designation of the Series A Preferred Stock of
the Surviving Corporation, which shall be convertible into shares of Parent
Common Stock, shall be as set forth in EXHIBIT 1.4 attached hereto, and such
number of shares of Preferred Stock having a liquidation value equal to
$1,000,000 of the Company's indebtedness outstanding and due to The T
Partnership at the time of the Closing shall be issued in redemption of
$1,000,000 of such indebtedness; (b) Parent shall execute a conditional note for
the benefit of The T Partnership in the form set forth in EXHIBIT 6.16(b)
attached hereto; and (c) Parent shall execute a secured promissory note for the
remaining amount of the Company's indebtedness to The T Partnership
substantially in the form set forth in EXHIBIT 6.16(c) attached hereto.
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ARTICLE VII.
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS
The obligations of each Party to perform this Agreement and the Plan of
Merger and to consummate the transactions contemplated hereby and thereby will
be subject to the satisfaction of the following conditions unless waived (to the
extent such conditions can be waived) by each other Party:
7.1 STOCKHOLDER APPROVAL; AGREEMENT OF MERGER. This Agreement, the
Plan of Merger and the Merger shall have been approved and adopted by at least
two-thirds (2/3) of the outstanding shares voting of Company Common Stock, and
the Plan of Merger shall have been executed and delivered by Acquisition Sub and
the Company and filed with and accepted by the Secretary of State of the State
of New Jersey.
7.2 APPROVALS. All authorizations, consents, orders or approvals of, or
declarations or filings with or expiration of waiting periods imposed by any
Governmental Authority necessary for the consummation of the transactions
contemplated hereby shall have been obtained or made or shall have occurred.
7.3 LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any Federal or state court or
other Governmental Authority and remain in effect.
7.4 S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
7.5 LEGISLATION. No Federal, state, local or foreign statute, rule or
regulation shall have been enacted which prohibits, restricts or delays the
consummation of the transactions contemplated by this Agreement or the Plan of
Merger or any of the conditions to the consummation of such transactions.
7.6 BID PRICE RATIO. The ratio of the closing bid price of a share of
Parent Common Stock to a share of Company Common Stock shall not be greater than
2.25 nor less than .75 based on the average of closing bid prices for any ten
(10) day period ending on and including the second NASDAQ trading day
immediately preceding the Closing Date and rounding the result of such average
to the nearest 1/100ths; PROVIDED, HOWEVER, this condition shall be deemed
satisfied if, notwithstanding the ratio, the Board of Directors of both Parent
and Company: (i) elect to proceed with the Plan of Merger; and (ii) agree upon a
revised exchange ratio under Section 2.1(c) which reasonably reflects the change
in values having caused the applicable increase or decrease in the ratio.
7.7 FINANCING. A minimum of $7,000,000 in financing on terms acceptable
to both Parent and the Company shall have been obtained; PROVIDED, HOWEVER, that
if Parent's current senior lenders, Sirrom Capital Corporation and Coast
Business Credit, both agree to remain creditors of Parent after the Effective
Time, then a minimum of $4,000,000 must be obtained in addition to a minimum of
$2,500,000 of existing financing.
ARTICLE VIII.
CONDITIONS TO OBLIGATIONS OF PARENT AND ACQUISITION SUB.
The obligations of Parent to perform this Agreement and to consummate
the transactions contemplated hereby and of Acquisition Sub to perform this
Agreement and the Plan of Merger and to consummate the transactions contemplated
hereby and thereby will be subject to the satisfaction of the following
conditions unless waived (to the extent such conditions can be waived) by Parent
and Acquisition Sub:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company set forth in Article III hereof shall in each case be true and
correct in all material respects (except for any representation or warranty that
by its terms is qualified by materiality, in which case it shall be true and
correct in all
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respects) as of the date of this Agreement, and as of the effective date of the
Stockholder Action and as of the Closing Date as though made at and as of such
dates, respectively.
8.2 PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects the obligations required to be performed by
it under this Agreement and the Plan of Merger prior to or as of the Closing
Date.
8.3 AUTHORIZATION OF MERGER. All action necessary to authorize the
execution, delivery and performance of this Agreement, the Plan of Merger and
the Related Agreements by the Company and the consummation of the transactions
contemplated hereby and thereby shall have been duly and validly taken by the
board of directors and the Stockholders of the Company, and the Parent shall
have received copies of all such resolutions certified by the Secretary of the
Company. The Company and the Stockholders of the Company shall have full power
and right to effect the Merger on the terms provided herein.
8.4 CERTIFICATE. Parent and Acquisition Sub shall have received a
certificate dated the Closing Date, signed by the President or Acting President
of the Company as to the satisfaction of the conditions contained in Sections
8.1 through 8.3, except to the extent waived by Parent and Acquisition Sub.
8.5 OPINION OF THE COMPANY'S COUNSEL. Parent and Acquisition Sub shall
have received an opinion dated the Closing Date of Saiber Schlesinger Satz &
Goldstein ("SSS&G"), counsel to the Company, reasonably satisfactory in form and
substance to Parent and Acquisition Sub.
8.6 ACCEPTANCE BY COUNSEL TO PARENT AND ACQUISITION SUB. The form and
substance of all legal matters contemplated hereby and of all papers delivered
hereunder shall be reasonably acceptable to Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A. ("GTH"), counsel for Parent and Acquisition Sub.
8.7 CONSENTS AND APPROVALS. Parent and Acquisition Sub shall have
received duly executed copies of all consents and approvals contemplated by this
Agreement or the Company Disclosure Schedule, in form and substance satisfactory
to Parent and Acquisition Sub.
8.8 GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC. All consents,
authorizations, orders or approvals of, and filings or registrations with, any
Governmental Authority which are required for or in connection with the
execution and delivery by the Company of this Agreement, the Plan of Merger and
the Related Agreements and the consummation by the Company of the transactions
contemplated hereby and thereby shall have been obtained or made.
8.9 RELATED AGREEMENTS. Each of the Related Agreements shall be in full
force and effect as of the Effective Time in accordance with the respective
terms thereof, and each person or entity who or which is required or
contemplated by the parties hereto to be a party to any Related Agreement who or
which did not theretofore enter into such Related Agreement shall execute and
deliver such Related Agreement.
ARTICLE IX.
CONDITIONS TO OBLIGATIONS OF THE COMPANY.
The obligations of the Company to perform this Agreement and the Plan
of Merger, and to consummate the transactions contemplated hereby and thereby
will be subject to the satisfaction of the following conditions unless waived
(to the extent such conditions can be waived) by the Company:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Parent and Acquisition Sub set forth in Article IV hereof shall be true and
correct in all material respects (except for any representation or warranty that
by its terms is qualified by materiality, in which case it shall be true and
correct in all
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respects) as of the date of this Agreement, and as of the Closing Date as though
made at and as of such dates, respectively.
9.2 PERFORMANCE OF OBLIGATIONS OF PARENT AND ACQUISITION SUB. Parent
and Acquisition Sub shall have performed in all material respects their
respective obligations required to be performed by them under this Agreement and
the Plan of Merger prior to or as of the Closing Date.
9.3 AUTHORIZATION OF MERGER. All action necessary to authorize the
execution, delivery and performance of this Agreement and the Related Agreements
by Parent, the execution, delivery and performance of this Agreement and the
Plan of Merger by Acquisition Sub, and the consummation of the transactions
contemplated hereby and by the Plan of Merger shall have been duly and validly
taken by the board of directors of Parent and Acquisition Sub and by Parent as
the sole stockholder of Acquisition Sub, and the Company shall have received
copies of all such resolutions certified by the respective Secretary of Parent
and Acquisition Sub.
9.4 CERTIFICATE. The Company shall have received a certificate dated
the Closing Date, signed by the President of each of Parent and Acquisition Sub
as to the satisfaction of the conditions contained in Sections 9.1 through 9.3,
except to the extent waived by the Company.
9.5 OPINION OF COUNSEL TO PARENT AND ACQUISITION SUB. The Company
shall have received an opinion dated the Closing Date of GTH in form and
substance reasonably satisfactory to the Company.
9.6 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 Parent,
Acquisition Sub 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, Acquisition Sub and the Company and certain stockholders of the Company.
9.7 ACCEPTANCE BY COUNSEL TO THE COMPANY. The form and substance of all
legal matters contemplated herein and of all papers delivered hereunder shall be
reasonably acceptable to SSSG.
9.8 CONSENTS AND APPROVALS. The Company shall have received duly
executed copies of all consents and approvals contemplated by this Agreement or
the Parent Disclosure Schedule, in form and substance satisfactory to the
Company.
9.9 GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC. All consents,
authorizations, orders or approvals of, and filings or registrations with, any
Governmental Authority which are required for or in connection with the
execution and delivery by Parent and Acquisition Sub of this Agreement and the
Related Agreements and by Acquisition Sub of the Plan of Merger and the
consummation by Parent and Acquisition Sub of the transactions contemplated
hereby and thereby shall have been obtained or made.
9.10 APPOINTMENT OF DIRECTORS. The Board of Directors of Parent shall
have taken such action as shall be necessary to expand the size of Parent's
Board of Directors and to appoint two (2) individuals designated by the Company
and reasonably acceptable to Parent as directors of Parent to serve on Parent's
Board of Directors until the next annual meeting of the stockholders of Parent.
Parent shall continue to nominate such individuals at the next three (3)
successive annual meetings of the stockholders immediately following the next
annual meeting of the stockholders in the same manner and on equal standing as
other director nominees comprising management's slate.
9.11 FAIRNESS OPINION. The Company shall have received an opinion of
Compass Capital Partners, Ltd. or other financial advisor acceptable to it and
Parent with respect to the fairness, from a financial point of view, to the
stockholders of the Company of the Merger, and such opinion shall remain in full
force and effect as of the Closing Date.
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9.12 DIRECTOR INDEMNITY. The Company shall have received a written
statement signed by the President of Parent that Parent will honor all
obligations of the Company under Article VIII of the Company's Amended and
Restated Bylaws pertaining to indemnification of a corporate agent as that term
is defined in such Article; PROVIDED, HOWEVER, such commitment to honor
Company's indemnification obligations shall only be applicable to events or
actions on the part of such corporate agent occurring or taken prior to the
Closing Date.
9.13 COMPANY INDEBTEDNESS. Provisions shall have been made for payment
at Closing of indebtedness of the Company which is due at Closing to The T
Partnership in the amount of $100,000, which amount may be increased upon
agreement of both Parent and the Company, and SSSG in an additional amount not
to exceed $160,000.
ARTICLE X.
PAYMENT OF CERTAIN FEES AND EXPENSES
10.1 PAYMENT OF CERTAIN FEES AND EXPENSES.
(a) Except as set forth below, Parent and the Company
shall pay its own expenses that are incidental to negotiations, preparation of
agreements and the Closing whether or not this Agreement and the transactions
contemplated hereby are actually consummated.
(b) If this Agreement is terminated by either Parent or
the Company pursuant to Section 11.1(h), the terminating party shall pay the
non-terminating party within sixty (60) days following such termination a fee of
$225,000 plus all out-of-pocket expenses (including, without limitation, all
attorneys', investment banking and commitment fees and expenses) incurred by the
non-terminating party in connection with the transactions contemplated by this
Agreement (the "Break-up Fee"). The Break-up Fee shall also be payable by the
Company if there exists a Superior Proposal and, at any meeting of the
stockholders of the Company, however called, or in any action by written consent
of the stockholders of the Company, The T Partnership does not vote in favor of
the approval and adoption of this Agreement, the Plan of Merger, the Merger and
the other transactions contemplated thereby (in which case the Break-up Fee will
be paid by the Company to Parent within sixty (60) days following such meeting
or action).
(c) If this Agreement is terminated by either Parent or
the Company, other than pursuant to Section 11.1(h) or 11.1(b)(ii), Parent and
the Company will split evenly the aggregate of all attorneys', investment
banking and commitment fees and expenses incurred by both parties in relation to
the transaction prior to the date of such termination.
ARTICLE XI.
TERMINATION; AMENDMENT, MODIFICATION AND WAIVER
11.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, notwithstanding the approval by Parent, Acquisition Sub and the
Company of this Agreement, at any time prior to the Effective Time, by:
(a) the mutual consent of Parent, Acquisition Sub and the
Company;
(b) Parent, Acquisition Sub or the Company, if: (i) the
conditions set forth in Article VII hereof shall not have been met by April 17,
1998, except if such conditions have not been met solely as a result of the
action or inaction of the party seeking to terminate; or (ii) the other party or
parties have materially breached any material covenant or agreement set forth
herein and such breach is not cured (if curable) within 15 days following
written notice thereof;
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(c) Parent and Acquisition Sub if the conditions set forth
in Article VIII hereof shall not have been met, and the Company if the
conditions set forth in Article IX hereof shall not have been met, in either
case by April 17, 1998, except if such conditions have not been met solely as a
result of the action or inaction of the party seeking to terminate;
(d) Parent and Acquisition Sub on the one hand, or the
Company on the other hand, if such party or parties shall have determined in its
or their sole discretion, exercised in good faith, that the Merger contemplated
by this Agreement and the Plan of Merger has become impracticable by reason of
the institution of any litigation, proceeding or investigation to restrain or
prohibit the consummation of the Merger, or which questions the validity or
legality of the transactions contemplated by this Agreement and the Plan of
Merger;
(e) Parent and Acquisition Sub on the one hand, or the
Company on the other hand, if such party or parties shall have determined in
their or its sole discretion, exercised in good faith, that the respective
observations made during their due diligence process disclosed information
regarding the other party unsatisfactory to the party performing the due
diligence, and such information is: (i) material; (ii) adverse; and (iii) not
disclosed in this Agreement or the other party's Disclosure Schedule.
(f) Parent and Acquisition Sub if any statute, rule,
regulation or other legislation shall have been enacted which, in the sole
judgment of Parent and Acquisition Sub, exercised reasonably and in good faith,
materially adversely impairs the conduct or operation of the Company as
presently conducted and as contemplated to be conducted;
(g) the Company if any statute, rule, regulation or other
legislation shall have been enacted which, in the sole judgment of the Company,
exercised reasonably and in good faith, materially adversely impairs the conduct
or operation of Parent's business as presently conducted;
(h) Parent and Acquisition Sub on the one hand, or the
Company on the other hand, if such parties or party shall have received a
Superior Proposal, and Parent's or the Company's Board of Directors, based upon
the written advice of outside legal counsel, determines in good faith that
accepting such Superior Proposal is necessary for the Board of Directors of
Parent or the Company to comply with its fiduciary duties to its stockholders
under applicable law;
(i) Parent and Acquisition Sub on the one hand, or the
Company on the other hand, if the Board of Directors of the other party or
parties shall have: (i) withdrawn, modified or amended in any adverse respect
its approval or recommendation of this Agreement, the Merger or the transactions
contemplated hereby; or (ii) recommended to its stockholders an Acquisition
Transaction with any party other than Parent or the Company, respectively.
Any termination pursuant to this Section 11.1 (other than a termination pursuant
to Section 11.1(a) hereof) shall be effected by written notice from the party or
parties so terminating to the other parties hereto.
11.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 11.1, this Agreement shall be of no further
force or effect and no party hereto, nor its stockholders, directors, officers
or affiliates, shall have any liability in connection herewith; PROVIDED,
HOWEVER, that, Section 6.1(b), Article X, this Section 11.2 and Article XII
shall survive the termination of this Agreement. Notwithstanding the foregoing,
this Section 11.2 shall not relieve any party from liability in connection with
an intentional or willful material breach of this Agreement prior to its
termination; PROVIDED, HOWEVER, that the payment set forth in Section 10.1(d)
shall be the sole and exclusive remedy of either Parent or the Company in
connection with the consummation of an Acquisition Transaction with a party
other than the other Party or the termination of this Agreement by the Company
or Parent pursuant to Section 6.4(b) in connection therewith.
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ARTICLE XII.
MISCELLANEOUS
12.1 ENTIRE AGREEMENT. This Agreement and the Plan of Merger
(including the Company Disclosure Schedule, the Parent Disclosure Schedule and
the Exhibits attached hereto) and the other writings referred to herein contain
the entire agreement among the parties hereto with respect to the transactions
contemplated hereby and supersede all prior agreements or understandings,
written or oral, among the parties with respect thereto (including, but not
limited to, the Letter of Intent dated October 23, 1997, as amended, between
Parent and the Company).
12.2 DESCRIPTIVE HEADINGS. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
12.3 NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by nationally-recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested or by telecopier, with
confirmation as provided above addressed as follows:
if to Parent or Acquisition Sub, to:
Cardiac Control Systems, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Attention: Alan J. Rabin
Telephone: 800-227-7223
Telecopier: 904-445-7226; and
with a copy to:
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
111 North Orange Avenue
20th Floor
Orlando, Florida 32801
Attention: Randolph H. Fields, Esq.
Telephone: (407) 420-1000
Telecopier: (407) 420-5909
if to the Company, to:
Electro-Catheter Corporation
2100 Felver Court
Rahway, New Jersey 07065
Attention: Ervin Schoenblum
Telephone: (732) 382-5600
Telecopier: (732) 382-7107; and
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with a copy to:
Saiber Schlesinger Satz & Goldstein
One Gateway Center, 13th Floor
Newark, New Jersey 07102-5311
Attention: John L. Conover, Esq.
Telephone: (973) 622-3333
Telecopier: (973) 622-3349
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be received: (a) in the case of personal
delivery or telecopy, on the date of such delivery; (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent; and (c) in the case of mailing, on the third business day following
the date on which the piece of mail containing such communication was posted.
12.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by original or facsimile signature, each such counterpart shall be
an original instrument, and all such counterparts together shall constitute one
and the same agreement.
12.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the New Jersey Statute and with the laws of the
State of New Jersey applicable to contracts made and to be performed wholly
therein.
12.6 BENEFITS OF AGREEMENT. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, and shall not confer any
rights or benefits on any other persons or entities. This Agreement shall not be
assignable by any party hereto without the consent of the other parties hereto;
PROVIDED, HOWEVER, that anything contained herein to the contrary
notwithstanding, Acquisition Sub may assign and delegate any or all of its
rights and obligations hereunder to any other direct or indirect wholly-owned
subsidiary of Parent.
12.7 PRONOUNS. As used herein, all pronouns shall include the
masculine, feminine, neuter, singular and plural thereof whenever the context
and facts require such construction.
12.8 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. The
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.
12.9 SEVERABILITY. If any provision of this Agreement is held
illegal, invalid or unenforceable, such illegality, invalidity, or
unenforceability will not affect any other provision hereof. This Agreement
will, in such circumstances, be deemed modified to the extent necessary to
render enforceable the provisions hereof.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
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: /s/ ALAN J. RABIN
--------------------------
Alan J. Rabin
President
CCS SUBSIDIARY, INC.
By: /s/ ALAN J. RABIN
--------------------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By: /s/ ERVIN SCHOENBLUM
--------------------------
Ervin Schoenblum
Acting President
The T Partnership hereby executes this Agreement for the limited and
sole purpose of agreeing to abide by its obligations under Sections 5.1, 6.4 and
6.16 hereof.
THE T PARTNERSHIP, LLP
By: /s/ ABRAHAM H. NECHEMIE
--------------------------------
Name: Abraham H. Nechemie
--------------------------------
Its Partner
--------------------------------
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<PAGE>
EXHIBIT 1.2
PLAN OF MERGER
THIS PLAN OF MERGER dated as of ___________ __, 1998, by and between
CCS Subsidiary, Inc., a New Jersey corporation ("Acquisition Sub") and
Electro-Catheter Corporation, a New Jersey corporation (the "Company").
The Boards of Directors of Acquisition Sub and the Company have duly
adopted and approved this Plan of Merger (this "Agreement"), the 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
(the "Reorganization Agreement"), among Cardiac Control Systems, Inc., a
Delaware corporation ("Parent"), Acquisition Sub, which is a direct,
wholly-owned subsidiary of Parent, and the Company and the merger of Acquisition
Sub with and into the Company, pursuant and subject to the terms and conditions
of this Agreement, the Reorganization Agreement and the New Jersey Business
Corporation Act (the "New Jersey Statute") whereby, among other things, the
issued and outstanding share of common stock, $.10 par value, of the Company
("Company Common Stock") will be exchanged and converted into the right to
receive shares of common stock, $.10 par value, of Catheter Technology Group,
Inc., a to be organized parent holding company of Parent ("Holdings") ("Holdings
Common Stock") in the manner set forth in Article II of this Agreement and the
Reorganization Agreement, upon the terms and conditions set forth in this
Agreement and the Reorganization Agreement.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement and the Reorganization Agreement and the representations,
warranties, covenants, agreements, conditions and promises contained herein and
therein, the parties hereby agree as follows:
ARTICLE I
GENERAL
1.1 THE MERGER. In accordance with the provisions of this Agreement,
the Reorganization Agreement and the New Jersey Statute, Acquisition Sub shall
be merged with and into the Company (the "Merger"), which at and after the
Effective Time shall be, and is sometimes herein referred to as, the "Surviving
Corporation". Acquisition Sub and the Company are sometimes referred to as the
"Constituent Corporations".
1.2 THE EFFECTIVE TIME OF THE MERGER. Subject to the provisions of the
Reorganization Agreement, this Agreement shall be executed, delivered and filed
along with a copy hereof with the Secretary of State of the State of New Jersey
by each of the Constituent Corporations on the Closing Date in the manner
provided under Section 14A:10-4.1 of the New Jersey Statute. The Merger shall
become effective (the "Effective Time") upon the filing of the Certificate of
Merger (to which this Agreement is an exhibit) with the Secretary of State of
the State of New Jersey.
1.3 EFFECT OF MERGER. At the Effective Time the separate existence of
Acquisition Sub shall cease and Acquisition Sub shall be merged with and into
the Surviving Corporation, and the Surviving Corporation shall possess all of
the rights, privileges, powers and franchises as well of a public as of a
private nature, and shall be subject to all of the restrictions, disabilities
and duties of each of the Constituent Corporations and shall have such other
effects as provided by the New Jersey Statute.
1.4 ARTICLES OF INCORPORATION AND BY-LAWS OF SURVIVING CORPORATION.
From and after the Effective Time: (a) the Certificate of Incorporation (the
"Certificate") of the Company shall be amended so that the Fourth Article shall
read in its entirety as set forth in EXHIBIT 1.4 attached hereto and made a part
hereof, and the Certificate of the Company, as so amended, shall be the
Certificate of the Surviving Corporation, unless and until altered, amended or
repealed as provided in the New Jersey Statute; (b) the current amended and
restated by-laws of the Company shall be the by-laws of the Surviving
Corporation, unless and
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until altered, amended or repealed as provided in the New Jersey Statute, the
Certificate or such by-laws; (c) the directors of Acquisition Sub shall be Alan
J. Rabin, W. Alan Walton and Ervin Schoenblum, each of whom shall be the
directors of the Surviving Corporation, unless and until removed, or until their
respective terms of office shall have expired, in accordance with the New Jersey
Statute, the Certificate or the by-laws of the Surviving Corporation, as
applicable; and (d) the officers of the Company shall be the officers of the
Surviving Corporation, unless and until removed, or until their respective terms
of office shall have expired, in accordance with the New Jersey Statute, the
Certificate or the by-laws of the Surviving Corporation, as applicable.
1.5 TAKING OF NECESSARY ACTION. Prior to the Effective Time, the
parties hereto shall do, or cause to be done all such acts and things as may be
necessary or appropriate in order to effectuate the Merger as expeditiously as
reasonably practicable in accordance with this Agreement, the Reorganization
Agreement and the New Jersey Statute. In case at any time after the Effective
Time, any further action is necessary or desirable to carry out the purpose of
this Agreement and the Reorganization Agreement and to vest in the Surviving
Corporation full title to all assets, privileges, etc. of either Constituent
Corporations, the officers and directors of such corporations shall take all
such lawful and necessary action.
1.6 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) (1) (A) of the Internal Revenue Code of 1986, as
amended (the "Code").
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, subject and
pursuant to the terms and conditions of this Agreement and the Reorganization
Agreement, by virtue of the Merger and without any action on the part of the
Constituent Corporations or the holders of the capital stock of the Constituent
Corporations:
(a) CAPITAL STOCK OF ACQUISITION SUB. Each issued and
outstanding share of common stock, par value $.0l per share, of Acquisition Sub
shall immediately prior to the Effective Time be deemed cancelled and converted
into and shall represent the right to receive one share of common stock, par
value $.l0 per share, of the Surviving Corporation.
(b) CANCELLATION OF CERTAIN SHARES OF COMPANY COMMON STOCK.
Each share of Company Common Stock that is immediately prior to the Effective
Time: (i) owned by the Company as treasury stock; (ii) owned by any subsidiary
of the Company; or (iii) owned by Holdings or any subsidiary of Holdings, shall
be cancelled and no Holdings Common Stock or other consideration shall be
delivered in exchange therefor. As used herein, a "Subsidiary" of any
corporation means another corporation an amount of whose voting securities
sufficient to elect at least a majority of its Board of Directors is owned
directly or indirectly by such corporation.
(c) EXCHANGE RATIO FOR COMPANY COMMON STOCK. Subject to
Section 2.2, each share of Company Common Stock issued and outstanding at the
Effective Time (other than shares cancelled pursuant to Section 2.1(b)) shall be
deemed cancelled and converted into the right to receive one-fifth (1/5th) 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".
2.2 EXCHANGE OF CERTIFICATES.
(a) PROCEDURE FOR EXCHANGE. Prior to the Closing Date,
Holdings shall select an exchange agent (the "Exchange Agent") reasonably
satisfactory to Company to act in such capacity in connection with the Merger.
As of the Effective Time, Holdings shall deposit with the Exchange Agent, for
the
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benefit of the holders of shares of Company Common Stock (the "Stockholders"),
for exchange in accordance with this Article II and the Reorganization
Agreement, certificates representing the shares of Holdings Common Stock
contemplated to be issued as Merger Shares (which shares of Holdings Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). As soon as practicable after
the Effective Time but in no event later than twenty (20) business days after
the Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately before the Effective Time
represented issued and outstanding shares of Company Common Stock (collectively,
the "Old Certificates"): (i) a letter of transmittal advising such holders of
the terms of the exchange effected by the Merger (and specifying how delivery
shall be effected, and risk of loss and title to the Old Certificates shall
pass, only upon delivery of the Old Certificates to the Exchange Agent and shall
be in such form and have such other provisions as Holdings may reasonably
specify); and (ii) instructions for use in effecting the surrender of Old
Certificates in exchange for certificates representing Merger Shares. Upon
surrender of an Old Certificate for cancellation to the Exchange Agent, together
with a duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent, the holder of such Old Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of Holdings Common Stock which such holder has the
right to receive pursuant to the provisions of this Article II and the
Reorganization Agreement and the Old Certificate so surrendered shall forthwith
be cancelled. In the event of a transfer of ownership of shares of Company
Common Stock which are not registered on the transfer records of the Company, it
shall be a condition of the exchange thereof that the Old Certificate
representing such Company Common Stock is presented to the Exchange Agent
properly endorsed and otherwise in proper form for transfer and accompanied by
all documents required to evidence and effect such transfer and by evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2(a) and the Reorganization Agreement, each Old
Certificate shall be deemed, on and after the Effective Time, to represent only
the right to receive upon such surrender the certificate representing shares of
Holdings Common Stock and cash in lieu of fractional shares (as hereinafter
provided) of Holdings Common Stock as contemplated by this Article II and the
Reorganization Agreement.
(b) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED
CERTIFICATES. No dividends or other distributions declared or made after the
Effective Time with respect to Holdings Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Old
Certificate with respect to the shares of Holdings Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.2(d) or the Reorganization Agreement until the
holder of record of such Old Certificate shall surrender such Old Certificate.
Subject to the effect of applicable laws, following surrender of any such Old
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Holdings Common Stock issued in exchange therefor,
without interest: (i) at the time of such surrender, the amount of any cash
payable in lieu of a fractional share of Holdings Common Stock to which such
holder is entitled pursuant to Section 2.2(d) and the Reorganization Agreement
and the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Holdings
Common Stock; and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Holdings Common Stock.
(c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All
shares of Holdings Common Stock issued upon the surrender for exchange of shares
of Company Common Stock in accordance with the terms of this Article II and the
Reorganization Agreement (including any cash paid pursuant to Section 2.2(b) or
2.2(d)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock and there shall be no further
registration or transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, any Old
Certificate is presented to the Surviving Corporation for any reason, such Old
Certificate shall be cancelled and exchanged as provided in this Article II and
the Reorganization Agreement.
(d) NO ISSUANCE OF FRACTIONAL SHARES. No certificates or scrip
representing fractional shares of Holdings Common Stock shall be issued upon the
surrender for exchange of Old Certificates, and such fractional share interests
shall not entitle the owner thereof to vote or to any rights of a
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stockholder of Holdings such as rights to dividends, stock splits or interest in
lieu of issuing certificates for fractional shares.
(i) As promptly as practicable following the
Effective Time, the Exchange Agent shall determine the excess of (x) the number
of full shares of Holdings Common Stock delivered to the Exchange Agent by
Holdings pursuant to Section 2.2(a) over (y) the maximum number of full shares
of Holdings Common Stock distributable to holders of Company Common Stock
pursuant to Section 2.2(a) (such excess being herein called the "Excess
Shares"). As soon after the Effective Time as practicable, the Exchange Agent,
as agent for the holders of Company Common Stock, shall aggregate and sell the
Excess Shares at then prevailing prices in either the over-the-counter market,
regional exchange or Nasdaq SmallCap Market, as applicable, all in the manner
provided in subsection (ii) of this Section 2.2(d).
(ii) The sale of the Excess Shares by the Exchange
Agent shall be executed in either the over-the-counter market, regional exchange
or Nasdaq SmallCap Market, as applicable, through one or more member firms of
the National Association of Securities Dealers, Inc. and shall be executed in
round lots to the extent practicable. Until the net proceeds of such sale or
sales have been distributed to the holders of Company Common Stock as
contemplated in subsection (iii) of this Section 2.2(d), the Exchange Agent
shall hold such proceeds in trust for the holders of Company Common Stock (the
"Common Shares Trust"). Holdings shall pay all commissions, transfer taxes and
other out-of-pocket transaction costs, including the expenses and compensation
of the Exchange Agent, incurred in connection with such sale of the Excess
Shares. The Exchange Agent shall determine the portion of the Common Shares
Trust to which each holder of Company Common Stock shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Common
Shares Trust by a fraction, the numerator of which is the amount of the
fractional share interest to which such holder of Company Common Stock is
entitled and the denominator of which is the aggregate amount of fractional
share interests to which all holders of Company Common Stock are entitled.
(iii) As soon as practicable after the determination
of the amount of cash, if any, to be paid to the holders of Company Common Stock
in lieu of any fractional share interests, the Exchange Agent shall make
available such amounts without interest to such holders of Company Common Stock.
(e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Old Certificates shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming such Old Certificate to be
lost, stolen or destroyed, the Exchange Agent shall issue an exchange for such
loss, stolen or destroyed Old Certificate the consideration payable and exchange
therefor pursuant to this Article II. The Exchange Agent or the Surviving
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Old Certificate to
give the Exchange Agent a bond in such reasonable sum as it may direct as
indemnity against any claim that may be made against the Surviving Corporation
with respect to the Old Certificate alleged to have been lost, stolen or
destroyed.
(f) TERMINATION OF EXCHANGE FUND AND COMMON SHARES TRUST. Any
portion of the Exchange Fund and Common Shares Trust which remains undistributed
to the stockholders of the Company for six (6) months after the Effective Time
shall be delivered to Holdings, upon demand, and any former Stockholders of the
Company who have not theretofore complied with this Article II and the
Reorganization Agreement shall thereafter look only to Holdings for payment of
their claim for Holdings Common Stock, any cash in lieu of fractional shares of
Holdings Common Stock and any dividends or distributions with respect to
Holdings Common Stock (and Holdings shall remain obligated to so pay and/or
distribute).
(g) NO LIABILITY. Neither the Exchange Agent, Holdings,
Acquisition Sub nor the Company shall be liable to any holder of shares of
Company Common Stock or Holdings Common Stock, as the case may be, for shares
(or dividends or distributions with respect thereto) of Holdings Common Stock to
be issued in exchange for Company Common Stock pursuant to this Section 2.2, if,
on or after the expiration of twelve (12) months following the Effective Date,
such shares are delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
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2.3 COMPANY WARRANTS AND OPTIONS. 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).
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Company Options" shall mean and include any Unvested
Company Option and any Vested Company Option.
(b) "Unvested Company Option" shall mean each of the options
to purchase Company Common Stock that is outstanding at the Effective Time,
which is not exercisable immediately prior to the Effective Time pursuant to its
terms in effect as of the date hereof.
(c) "Vested Company Option" shall mean each of the options to
purchase Company Common Stock that is outstanding at the Effective Time, which
is exercisable immediately prior to the Effective Time pursuant to its terms in
effect as of the date hereof.
(d) "Company Warrants" shall mean each of the warrants to
purchase Company Common Stock that is outstanding at the Effective Time, which
is exercisable immediately prior to the Effective Time pursuant to its terms in
effect as of the date hereof.
ARTICLE III
TERMINATION
This Agreement shall be terminated, and the Merger abandoned,
notwithstanding the approval by the respective boards of directors and
stockholders of Acquisition Sub and the Company of this Agreement, the
Reorganization Agreement and the Merger, in the event of and simultaneously with
a termination (at any time prior to the Effective Time) of the Reorganization
Agreement in accordance with and as provided in Article XI thereof.
ARTICLE IV
APPROVAL OF AGREEMENT;
FILING THEREOF
The respective boards of directors of the Constituent Corporations
have, by resolutions duly adopted, unanimously approved and adopted the Merger,
this Agreement and the Reorganization Agreement. The holders of at least
two-thirds of the outstanding shares voting of Company Common Stock have
approved and adopted the Merger, this Agreement and the Reorganization Agreement
at a meeting duly convened and held on _______, 1998, in accordance with Section
14A:10-3 of the New Jersey Statute. Parent, as the sole shareholder of
Acquisition Sub, has approved and adopted the Merger, this Agreement and the
Reorganization Agreement by executing a written consent dated ______, 1998, in
accordance with Section 14A:10-3 of the New Jersey Statute. Upon satisfaction of
all conditions of the Merger contained in Articles VII, VIII and IX of the
Reorganization Agreement (or appropriate waiver thereof by the party or parties
entitled to satisfaction of such conditions or any of them), but subject to the
provisions of Article III hereof, the parties shall cause this Agreement to be
attached as an
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exhibit to a Certificate of Merger setting forth the information required by
Section 14A:10-4.1 of the New Jersey Statute and to be delivered to and filed
with the Secretary of State of the State of New Jersey in accordance with
Section 14A:10-4.1 of the New Jersey Statute and the Merger shall thereupon
become effective.
ARTICLE V
MISCELLANEOUS
5.1 AMENDMENT. This Agreement may be amended by the parties, by action
taken by their respective boards of directors, at any time prior to the
Effective Time. No amendment of this Agreement shall be made which pursuant to
the New Jersey Statute or other law requires the further approval of the
stockholders of either or both of the Constituent Corporations unless such
approval has been obtained. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
5.2 ENTIRE AGREEMENT. This Agreement and the Reorganization Agreement
and the other documents referenced therein contain the entire agreement among
the parties hereto with respect to the transactions contemplated hereby and
supersede all prior arrangements or understandings, written or oral, with
respect thereto (including, but not limited to, the Letter of Intent dated
October 23, 1997, as amended, between Parent and the Company).
5.3 NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by nationally recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested or by telecopier, with
confirmation as provided above addressed as follows:
if to Parent, Acquisition Sub or Holdings, to:
Cardiac Control Systems, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Attention: Alan J. Rabin
Telephone: 800-227-7223
Telecopier: 904-445-7226; and
with a copy to:
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
111 North Orange Avenue
20th Floor
Orlando, Florida 32801
Attention: Randolph H. Fields, Esq.
Telephone: (407) 420-1000
Telecopier: (407) 420-5909
if to the Company, to:
Electro-Catheter Corporation
2100 Felver Court
Rahway, New Jersey 07065
Attention: Ervin Schoenblum
Telephone: (732) 382-5600
Telecopier: (732) 382-7107; and
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<PAGE>
with a copy to:
Saiber Schlesinger Satz & Goldstein
One Gateway Center, 13th Floor
Newark, New Jersey 07102-5311
Attention: John L. Conover, Esq.
Telephone: (973) 622-3333
Telecopier: (973) 622-3349
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be received: (a) in the case of personal
delivery or telecopy, on the date of such delivery; (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent; and (c) in the case of mailing, on the third business day following
the date on which the piece of mail containing such communication was posted.
5.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts by original or facsimile signature, each such counterpart shall be
an original instrument, and all such counterparts together shall constitute one
and the same agreement.
5.5 BENEFITS OF AGREEMENT. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. This Agreement shall not
be assignable by any party hereto without the consent of the other parties
hereto; PROVIDED, HOWEVER, that anything contained herein to the contrary
notwithstanding , Acquisition Sub may assign and delegate any or all of its
rights and obligations hereunder to any other direct or indirect wholly-owned
subsidiary of Parent.
5.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the New Jersey Statute and the laws of the State of New Jersey
applicable to contracts made and to be performed wholly therein.
5.7 PRONOUNS. As used herein, all pronouns shall include the masculine,
feminine, neuter, singular and plural thereof whenever the context and facts
require such construction.
5.8 DESCRIPTIVE HEADINGS. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement of Merger to be executed and delivered on its behalf as of the date
first above written.
CCS SUBSIDIARY, INC.
By:
------------------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By:
-------------------------
Ervin Schoenblum
Acting President
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CERTIFICATE OF SECRETARY
OF
CCS SUBSIDIARY, INC.
(A New Jersey corporation)
------------------------
I, Robert T. Rylee, Secretary of CCS SUBSIDIARY, INC., a New Jersey
corporation (the "Corporation"), do hereby certify that the Plan of Merger to
which this certificate is attached, having been duly approved by the Board of
Directors of the Corporation, was then submitted to the sole stockholder of the
Corporation for approval and adoption by written consent in lieu of a
stockholder meeting, and that the sole stockholder of the Corporation adopted
and approved the Plan of Merger by executing a written consent dated _______,
1998, all in accordance with Section 14A:5-6 of the New Jersey Business
Corporations Act.
IN WITNESS WHEREOF, I, Robert T. Rylee, Secretary of CCS SUBSIDIARY,
INC., acting for and on behalf of the Corporation, have hereunto subscribed my
name this ____ day of ___________, 1998.
---------------------------
Secretary
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CERTIFICATE OF SECRETARY
OF
ELECTRO-CATHETER CORPORATION
(A New Jersey corporation)
---------------------
I, Arlene C. Bell, Secretary of ELECTRO-CATHETER CORPORATION, a New
Jersey corporation (the "Company"), do hereby certify that the Plan of Merger to
which this certificate is attached, having been duly approved by the Board of
Directors of the Company, was then submitted to the stockholders of the Company
for approval and adoption at a duly convened and held stockholder meeting, and
the stockholders of the Company representing at least two-thirds of the
outstanding shares voting of Company Common Stock, adopted and approved the
Agreement of Merger, on ______________ 1998, all in accordance with Section
14A:10-3 of the New Jersey Business Corporation Act.
IN WITNESS WHEREOF, I, Arlene C. Bell, Secretary of ELECTRO-CATHETER
CORPORATION, have hereunto subscribed my name this _____day of ________, 1998.
-----------------------------
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EXHIBIT 1.4
FOURTH ARTICLE TO CERTIFICATE OF INCORPORATION
FOURTH: The aggregate number of shares of stock which the corporation
shall have authority to issue is 10,000 shares of common stock of the par value
of $.10 per share (hereinafter "Common Stock"), and 1,000 shares of preferred
stock with no par value. The board of directors of the corporation is authorized
to: (i) divide the preferred stock into series; (ii) determine the designation
and number of shares of any such series; (iii) determine the relative rights,
preferences and limitations of any such series; and (iv) change the designation
or number of shares or the relative rights, preferences and limitations of the
shares of any previously authorized series, no shares of which have been issued.
Notwithstanding the fact that the board of directors may from time to
time establish and designate separate series of preferred stock, the board of
directors and the corporation do hereby and herewith establish, determine and
designate the corporation's Series A Preferred Stock to be the first series of
such preferred stock, as follows:
SERIES A PREFERRED STOCK
1. NUMBER; DESIGNATION. One thousand (1,000) shares of the authorized
and unissued shares of no par value preferred stock of the corporation
are hereby designated as "Series A Preferred Stock" ("Series A
Preferred Stock"). Such number of shares may not be increased or
decreased. The Series A Preferred Stock shall have the following
powers, preferences and rights, and the qualifications, limitations and
restrictions thereon:
2. DIVIDEND RIGHTS.
(a) The holders of shares of Series A Preferred Stock (a
"Holder"), in preference to the holders of Common Stock and of all
other stock, shall be entitled to receive, when, as, if and to be
declared by the board of directors out of funds legally available for
that purpose, annual dividends, payable in cash on the first day of
January in each year (each such date being referred to herein as a
"Preferred Dividend Payment Date"), commencing on the first Preferred
Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, equal to $90.00 per share of
Series A Preferred Stock.
(b) Dividends on the Series A Preferred Stock shall accrue
annually (and to the date of payment for any partial twelve month
period) from the issuance date of each share of Series A Preferred
Stock and shall be cumulative so that if, for any previous or then
current dividend period, dividends shall not have been paid or set
apart for payment, upon all outstanding shares of Series A Preferred
Stock, the deficiency shall be paid and/or set apart for payment before
any dividends are paid and/or declared on the Common Stock of the
corporation. Accrued but unpaid dividends shall not bear interest. The
board of directors may fix a record date for the determination of a
Holder entitled to receive payment of a dividend declared, which record
date shall not be more than 60 days prior to the date fixed for the
payment thereof. Notwithstanding the foregoing, no payment of dividends
upon the Series A Preferred Stock shall be made if prohibited by any
provision of the New Jersey Business Corporation Act.
3. RIGHTS ON LIQUIDATION; RANKING; REDEMPTION.
(a) In the event of any voluntary or involuntary dissolution,
liquidation, sale of substantially all of the corporation's assets or
winding-up of the affairs of the corporation and after payment or
provision for payment of the debts and other liabilities of the
corporation, a Holder shall be entitled, before any distribution is
made upon any other capital stock of the corporation, to receive
payment in an amount equal to $1,000.00 per share of Series A Preferred
Stock (the "Preferred Liquidation Payment"), together with all accrued
but unpaid dividends, if any, computed to the date of payment. Such
amounts shall be payable in cash only to the extent that the
corporation has available cash or cash is being paid for or made
available
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with respect to some or all of the capital stock of the corporation in
such underlying transaction. A Holder will have the first right of
refusal to such cash equal to the sum of the Preferred Liquidation
Payment and the accrued dividends and shall be otherwise entitled to
receive the balance thereof in such other consideration made available
with respect to each share of capital stock of the corporation pursuant
to the underlying transaction. Notwithstanding anything herein to the
contrary, upon an event described in this subsection 3(a), a Holder
shall be paid in full prior to any payments being made to the holders
of any other class of the corporation's capital stock. All such
payments shall be made to the extent, and only to the extent, allowed
by applicable law. After such payments to a Holder in the full amount
of the Preferred Liquidation Payment and accrued dividends, all
dividends on the Series A Preferred Stock shall cease to accrue, and
from and after such date of payment, a Holder shall have no claim to
any of the remaining assets of the corporation, and all rights of such
Holder as a stockholder of the corporation shall cease and terminate.
(b) If upon any voluntary or involuntary dissolution,
liquidation, sale of all or substantially all of the assets or winding
up of the affairs of the corporation, the assets of the corporation
distributable as aforesaid among a Holder shall be insufficient to
permit the payment of the Preferred Liquidation Payment and accrued but
unpaid dividends to which such Holder is entitled, then, to the extent
allowed by applicable law, the entire assets of the corporation shall
be distributed ratably among the outstanding shares of the Series A
Preferred Stock. After distribution of the entire assets of the
corporation to a Holder, all dividends on the Series A Preferred Stock
shall cease to accrue, and from and after such date of distribution,
all rights of a Holder as a stockholder of the corporation shall cease
and terminate.
(c) The corporation, at its option, may cause all outstanding
shares of the Series A Preferred Stock to be redeemed at any time after
the date of original issuance thereof ("Issuance Date"), provided the
corporation has given notice of its intention to redeem to a Holder at
least twenty (20) days prior to the redemption date. On the redemption
date, the corporation shall pay such Holders by cashier's check or wire
transfer in immediately available funds the amount of $1,000 per share,
plus all accrued but unpaid dividends. Promptly thereafter, such Holder
shall surrender the certificate or certificates representing the Series
A Preferred Stock, duly endorsed, at the office of the corporation or
of any transfer agent for such shares, or at such other place
designated by the corporation.
4. CONVERSION RIGHTS - COMMON STOCK
(a) RIGHT TO CONVERT. During the period beginning on the Issuance Date
and ending five years after the Issuance Date, each share of Series A
Preferred Stock shall be convertible, at the option of a Holder
thereof, into such number of fully paid and nonassessable shares of
common stock of Catheter Technology Group, Inc. ("CTG"), the parent
holding company of Cardiac Control Systems, Inc. ("Cardiac"), the
present parent corporation and sole holder of the Common Stock of the
corporation, as is determined by dividing (x) $1,000 plus any accrued
but unpaid dividends on the date the notice of conversion is given, by
(y) the Conversion Price determined as hereinafter provided in effect
on the applicable conversion date.
(b) CONVERSION METHOD. To convert Series A Preferred Stock
into the shares of common stock of CTG hereunder, a Holder shall give
written notice to the corporation and CTG (which notice may be given by
facsimile transmission) that such Holder irrevocably elects to convert
all its shares of Series A Preferred Stock and shall state therein the
date of the conversion, the name or names in which such Holder wishes
the certificate or certificates for shares of common stock to be
issued, and reasonable delivery instructions with respect thereto
("Notice of Conversion"). Promptly thereafter, such Holder shall
surrender the certificate or certificates representing the shares to be
converted, duly endorsed, at the office of CTG or of any transfer agent
for such shares, or at such other place designated by CTG. CTG shall
promptly as practicable issue and deliver to or upon the order of such
Holder, against delivery of the certificates representing the shares
which have been converted, a certificate or certificates for the number
of shares of common stock of CTG to which such Holder shall be
entitled. The Notice of Conversion may be given by a Holder at any time
during the day up to 11:00 a.m. Orlando, Florida time and such
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conversion shall be deemed to have been made immediately prior to the
close of business on the date such Notice of Conversion is given. The
person or persons entitled to receive the shares of common stock of CTG
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of common stock of CTG at the
close of business on such date.
(c) Conversion Price. The Conversion Price shall be equal to
the product of one hundred twenty (120%) percent multiplied by the
price per share of the common stock of CTG used as the basis for the
consideration given (either in the form of issued stock, if any, or
warrants, provided the exercise price of the warrant reflects the
current market value of common stock, or otherwise) in exchange for any
capital raised by CTG necessary to effect a merger transaction between
CTG, and Electro-Catheter Corporation.
(d) Fractional Shares of Common Stock. No fractional shares of
common stock of CTG or scrip shall be issued upon conversion of shares
of Series A Preferred Stock in accordance with this Section 4. In lieu
of any fractional interest in a share of common stock which would
otherwise be deliverable to such Holder upon the conversion of the
Series A Preferred Stock, CTG shall pay such Holder cash equal to such
fraction multiplied by the Conversion Price.
(e) Taxes. All shares of the common stock of CTG issued upon
conversion of shares of Series A Preferred Stock shall be validly
issued, fully paid and non-assessable. The corporation shall pay any
and all documentary stamp or similar issue or transfer taxes (but
excluding any income, franchise or similar taxes) that may be payable
in respect of any issue or delivery of shares of common stock on
conversion of Series A Preferred Stock pursuant hereto. The corporation
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of shares of
common stock in a name other than that in which the Series A Preferred
Stock so converted were registered, and no such issue or delivery shall
be made unless and until the person requesting such transfer has paid
to the corporation the amount of any such tax or has established to the
satisfaction of the corporation that such tax has been paid or that no
such tax is payable.
(f) Surrendered Shares of Series A Preferred Stock. All
certificates representing Series A Preferred Stock converted shall be
appropriately canceled on the books of the corporation and the Series A
Preferred Stock so converted represented by such certificates shall be
restored to the status of authorized but unissued Series A Preferred
Stock.
5. REGISTRATION RIGHTS.
(a) If at any time after the first anniversary of the Issuance
Date, CTG proposes to file a registration statement to register any of
its shares of common stock issued upon conversion of the Series A
Preferred Stock (the "Registrable Stock") under the Securities Act of
1933, as amended (the "Securities Act"), (other than in connection with
a merger or pursuant to Form S-4 or Form S-8 or other comparable form
not available for registering the Registrable Stock for sale to the
public), whether such registration is for CTG's own account or the
account of others, and provided the managing underwriter for the
proposed offering, if any, advises CTG that the inclusion of the
Registrable Stock in such registration statement would not jeopardize
the successful marketing of the common stock of CTG, in the managing
underwriter's exercise of reasonable judgment, then CTG shall at such
time give prompt written notice to a Holder of its intention to effect
such registration setting forth a description of intended method of
distribution and indicating Holder's right under such proposed
registration, and upon the request of a Holder, delivered to CTG within
twenty (20) days after giving such notice (which request shall specify
the Registrable Stock intended to be disposed of by a Holder), CTG
shall include such Registrable Stock held by a Holder and requested to
be included in such registration subject to any underwriter's cutback
or lock-up.
(i) If, at any time after giving such written
notice of CTG's intention to register any of the Registrable Stock and
prior to the effective date of the registration statement filed in
connection with such registration, CTG shall determine for any reason
not to file the registration statement wherein the
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Registrable Stock would be registered or to delay the registration of
such Registrable Stock, at its sole election, CTG may give written
notice of such determination to a Holder and thereupon shall be
relieved of its obligation to register any Registrable Stock issued or
issuable in connection with such registration (but not from its
obligation to pay registration expenses in connection therewith or to
register the Registrable Stock in a subsequent registration); and in
the case of a determination to delay a registration, CTG shall
thereupon be permitted to delay registering any Registrable Stock for
the same period as the delay in respect of securities being registered
for CTG's own account.
(ii) A Holder shall be permitted to withdraw all
or any part of the Registrable Stock at any time prior to the effective
date of such registration.
(iii) CTG shall not be required to include any of
the Registrable Stock in the registration statement relating to an
underwritten offering of CTG's securities unless a Holder accepts the
terms of the underwriting as agreed upon between CTG and the
underwriters selected by it (provided such terms are usual and
customary for selling stockholders) and a Holder agrees to execute
and/or deliver such documents in connection with such registration as
CTG or the managing underwriter may reasonably request.
(iv) CTG may, in its sole discretion and without
the consent of a Holder, withdraw such registration statement and
abandon the proposed offering in which a Holder had requested to
participate, but such abandonment shall not preclude subsequent request
for registration pursuant to this Section 5.
(b) EXPIRATION OF REGISTRATION RIGHTS. The obligations of CTG
to register shares of the Registrable Stock shall terminate five (5)
years after the Issuance Date, unless such obligations terminate
earlier in accordance with the terms stated above.
(c) COOPERATION WITH CTG. A Holder will cooperate with CTG in
all respects in connection with this Agreement, including, without
limitation, timely supplying all information reasonably requested by
CTG and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Stock.
(d) EXPENSES. All expenses incurred by CTG in connection with
each registration of the Registrable Stock, including, without
limitation, all registration and filing fees, printing expenses, fees
and disbursements of any counsel and independent public accountants for
CTG, fees and expenses (including counsel fees) incurred in connection
with complying with state securities or "blue sky" laws, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees
of transfer agents and registrars and costs of insurance ("Registration
Expenses") shall be borne by CTG. However, Registration Expenses shall
not include expenses of counsel for a Holder, any underwriting
discounts, selling commissions and underwriter expense reimbursement
allowances applicable to the sale of the Registrable Stock ("Selling
Expenses"). CTG will pay all Registration Expenses in connection with
each registration of the Registrable Stock. All Selling Expenses in
connection with each such registration statement shall be borne by the
participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than CTG (except to the
extent CTG shall be a seller) as they may agree.
(e) INDEMNIFICATION AND CONTRIBUTION.
(i) CTG INDEMNITY. In the event of a registration of
any of the Registrable Stock under the Securities Act pursuant to the
provisions stated herein, CTG shall indemnify and hold harmless, to the
extent permitted by law, a Holder, each underwriter of such Registrable
Stock thereunder and each other person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act, against
any losses, claims, damages, liabilities and expenses, joint or
several, to which such Holder, underwriter or controlling person may
become subject to under the Securities Act or otherwise, insofar as
such losses, claims, damages, liabilities and expenses (or actions in
respect thereof) arise out of or are
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based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
Registrable Stock was registered under the Securities Act pursuant to
the provisions stated herein, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse each such Holder, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability, and expense or action; provided that CTG will
not be liable in any such case if and to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon: (A)
an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by any such
Holder, any such underwriter or any such controlling person in writing
specifically for use in such registration statement or prospectus; or
(B) a Holder's failure to deliver a copy of the final prospectus as
then amended or supplemented after CTG has furnished such Holder with a
sufficient number of copies of the same, but only if delivery of same
is required by law and the same would have cured the defect giving rise
to any such loss, claim, damage, liability or expense.
(ii) HOLDER INDEMNITY. In the event of a registration
of any of the Registrable Stock under the Securities Act pursuant to
the provisions stated herein, a Holder will indemnify and hold harmless
CTG, each person, if any, who controls CTG within the meaning of the
Securities Act, each officer of CTG who signs the registration
statement, each director of CTG, each underwriter and each person who
controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages, liabilities and expenses, joint or
several, to which CTG or such officer, director, underwriter or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities and
expenses (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement under which such
Registrable Stock was registered under the Securities Act pursuant to
the provisions stated herein, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse CTG and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damages, liability, expense or action; provided that such Holder
will be liable hereunder in an amount not to exceed the net proceeds
received by such seller in the sale of its Registrable Stock pursuant
to such registration statement and, in any such case, if and only to
the extent that any such loss, claim, damage, liability, expense or
action arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such Holder furnished
in writing to CTG by such Holder specifically for use in such
registration statement or prospectus.
(iii) NOTICE; RIGHT TO DEFEND. Promptly after receipt
by an indemnified party hereunder of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party hereunder, notify the
indemnifying party, in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any such liability and
shall only relieve it from any liability which it may have to such
indemnified party if such indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party under this subsection 2(e) to such effect, the
indemnifying party shall not be liable for any legal expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected; provided that if the defendants in
any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that
there may be reasonable defenses available to it which are different
from or additional to those available to the indemnifying party, the
indemnified party shall have the right to select a separate counsel and
to assume such legal defenses and otherwise participate
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in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred.
(iv) CONTRIBUTION. In order to provide for just and
equitable contribution to joint liability under the Securities Act in
any case in which either: (A) a Holder of Registrable Stock exercising
rights under this Agreement, or any controlling person of a Holder,
makes a claim for indemnification pursuant to this subsection 5(e) but
it is judicially determined (by entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that this
subsection 5(e) provides for indemnification in such case; or (B)
contribution under the Securities Act may be required on the part of a
Holder or any such controlling person in circumstances for which
indemnification is provided under this subsection 5(e), then, and in
each such case, CTG and such Holder will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder
is responsible for the portion represented by the percentage that the
public offering price of its Registrable Stock offered by the
registration statement bears to the public offering price of all
securities offered by such registration statement (in an amount in any
case not to exceed the net proceeds received by such Stockholder in the
sale of its Registrable Stock pursuant to such registration statement),
and CTG is responsible for the remaining portion; provided that, in any
such case, no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be
entitled to contribution from any person or entity who was not guilty
of such fraudulent misrepresentation.
6. VOTING RIGHTS. A Holder of the Series A Preferred Stock will be
entitled to the same voting rights as the holder of Common Stock of the
corporation.
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EXHIBIT 5.1
VOTING AGREEMENT AND IRREVOCABLE PROXY
THIS VOTING AGREEMENT AND IRREVOCABLE PROXY (the "Agreement"), dated as
of January 20, 1998 as amended, by and among The T Partnership, LLP, a New
Jersey limited liability partnership (the "Stockholder"), the Electro-Catheter
Corporation, a New Jersey corporation (the "Company"), and Cardiac Control
Systems, Inc., a Delaware corporation ("Parent").
R E C I T A L S:
WHEREAS, Parent, CCS Subsidiary, Inc., a New Jersey corporation and
wholly-owned subsidiary of Parent ("Acquisition Sub") and the Company have
entered into an Agreement and Plan of Reorganization dated as of January 20,
1998 (the "Reorganization Agreement") providing for, among other things, the
merger (the "Merger") of Acquisition Sub with and into the Company, whereby,
among other things, each issued and outstanding share of Common Stock, $.10 par
value, of the Company (the "Company Common Stock") will be deemed cancelled and
converted into and shall represent the right to receive one share of common
stock, $.10 par value, of a to be organized parent holding company of Parent
("Holdings Common Stock"); and
WHEREAS, the Stockholder owns, of record and beneficially, 1,881,500
shares of the Company's Common Stock (all such shares, together with any
additional shares of the Company's Common Stock that the Stockholder may acquire
during the term hereof, being referred to herein as the "Shares"); and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained and other good and valuable
consideration, it is hereby agreed as follows:
1. AGREEMENT TO VOTE AND IRREVOCABLE PROXY.
1.1 AGREEMENT TO VOTE. The Stockholder hereby agrees that
unless there shall exist a Superior Proposal (as such is defined in Section 6.4
of the Reorganization Agreement), at any meeting of the stockholders of the
Company, however called, or in any action by written consent of the stockholders
of the Company, the Stockholder shall: (a) vote all of the Shares in favor of
the approval of the Merger, the related plan of merger and the other
transactions contemplated thereby, provided that the Board of Directors of the
Company shall have approved such Merger; and (b) until the termination of this
Agreement, vote such Shares against any (i) merger, consolidation, share
exchange, business combination or other similar transaction pursuant to which
control of the Company would be transferred to any person other than Parent, or
(ii) sale, lease, exchange, mortgage, pledge, transfer or other disposition of
50% or more of the assets of the Company and its subsidiaries taken as a whole,
in a single transaction or in a series of transactions. Notwithstanding the
foregoing, this Section 1.1 shall be null and void and not binding on the
Stockholder unless the Stockholder will receive in the Merger shares of Holdings
Common Stock in the same proportion or ratio as all other holders of the Company
Common Stock.
1.2 IRREVOCABLE PROXY. The Stockholder hereby constitutes,
appoints and instructs Ervin Schoenblum, as proxy (the "Proxy Holder"), with
full power of substitution, the Stockholder's true and lawful proxy and
attorney-in-fact, to: (a) vote at the meeting of stockholders of the Company all
Shares which the Stockholder owned as of the record date for such meeting (or to
execute any consent of the stockholders of the Company in lieu of such meeting
for the number of Shares that the Stockholder owned as of the date of or record
date for such consent) in favor of the approval of the Merger, the related plan
of merger and the other transactions contemplated thereby, provided that the
Board of Directors of the Company shall have approved such Merger; and (b) until
the termination of this Agreement to vote at any meeting of the stockholders of
the Company, however called, all Shares which the Stockholder owned as of the
record date for such meeting (or to execute any consent of the stockholders of
the Company in lieu of such meeting for the number of Shares that the
Stockholder owned as of the date of or record date for such consent) against any
matter referred to in Section 1.1(b) hereof. Such proxy shall be limited
strictly to the power to vote such Shares in the manner set forth in the
preceding sentence and shall not
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extend to any other matters presented for vote at such meeting, and the
Stockholder shall have the right to vote the Shares on any other matter
whatsoever in the Stockholders' sole discretion. The Stockholder acknowledges
that the proxy granted hereby is coupled with an interest and is irrevocable to
the full extent permitted by the New Jersey Business Corporation Act.
In the event that the Stockholder fails for any reason to vote the
Stockholder's Shares in accordance with the requirements of Section 1.1 hereof,
then the Proxy Holder shall have the right to vote such Shares in accordance
with the provisions of this Section 1.2. The vote of the Proxy Holder shall
control in any conflict between the vote by the Proxy Holder of such Shares and
a vote by the Stockholder of such Shares.
Notwithstanding the foregoing, this Section 1.2 shall be null and void
and not binding on the Stockholder unless the Stockholder will receive in the
Merger shares of Holdings Common Stock in the same proportion or ratio as all
other holders of the Company Common Stock.
2. CERTAIN COVENANTS OF THE STOCKHOLDER. The Stockholder agrees,
until this Agreement is terminated in accordance with Section 4 hereof, not to:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, encumbrance,
assignment or other disposition of, any Shares;
(b) grant any proxies, deposit any Shares into a voting trust
or enter into a voting agreement with respect to any Shares; or
(c) directly or indirectly solicit or enter into any
negotiations with, or furnish or cause to be furnished any information
concerning the business or assets of the Company or its subsidiaries to, any
person or entity (other than Parent) in connection with any potential
acquisition of the Company; PROVIDED, HOWEVER, that the Stockholder will
promptly communicate to Parent any solicitation or inquiry or proposal relating
to a potential acquisition of the Company received by the Stockholder in
writing.
3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
represents and warrants to Parent as follows:
3.1 OWNERSHIP OF SHARES. The Shares are owned of record and
beneficially by the Stockholder free and clear of all liens, encumbrances,
rights to purchase, restrictions and claims of any kind whatsoever and
constitute all the shares of Common Stock owned of record and beneficially by
such Stockholder. The Stockholder does not have any rights to acquire any
additional shares of the Company Common Stock except, if applicable, pursuant to
existing stock options that have been disclosed to Parent.
3.2 POWER; BINDING AGREEMENT. The Stockholder has full legal
right, power and authority to enter into and perform all of his obligations
under this Agreement. The execution and delivery of this Agreement by the
Stockholder will not violate any other agreement to which the Stockholder is a
party, including, without limitation, any voting agreement, stockholders
agreement or voting trust. This Agreement has been duly executed and delivered
by the Stockholder and constitutes a legal, valid and binding agreement,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws, now or
hereafter in effect, affecting creditors' rights and remedies generally and to
general principles of equity.
4. TERMINATION. Anything contained herein to the contrary
notwithstanding, this Agreement (other than the provisions of Section 5) shall
terminate and be of no further force or effect on the termination of the
definitive Reorganization Agreement, as the same may be amended from time to
time by the parties thereto, in accordance with its terms.
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5. EXPENSES. Each party hereto will pay all of its or his own
expenses in connection with the transaction contemplated by this Agreement,
including, without limitation, the fees and expenses of its and his counsel and
other advisers.
6. AMENDMENT; ASSIGNS. This Agreement may not be modified, amended,
altered or supplemented except by an agreement in writing executed by each of
the parties hereto. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, but
none of the parties hereto may assign any of its rights, interests or
obligations under this Agreement without the prior written consent of the other
party.
7. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall have been duly given when
delivered in person, by telecopy or overnight courier or sent by registered or
certified mail (postage prepaid, return receipt requested), to the respective
parties as follows:
if to Parent
Cardiac Control Systems, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Attention: Alan J. Rabin
Telephone: (800) 227-7223
Telecopier: (904) 445-7226
if to the Company:
Electro-Catheter Corporation
2100 Felver Court
Rahway, New Jersey 07065
Attention: Ervin Schoenblum
Telephone: (732) 382-5600
Telecopier: (732) 382-7107
if to the Stockholder
The T Partnership, LLP
c/o Wiss & Co.
354 Eisenhower Parkway
Livingston, New Jersey 07039
Attention: Abraham H. Nechemie
Telephone: (973) 994-9400
Telecopier: (973) 992-6760
or to such other address as any party may designate in writing in accordance
herewith, except that notices of changes of address will only be effective upon
receipt. All such notices or communications shall be deemed to be received: (a)
in the case of personal delivery, or telecopy, on the date of such delivery; (b)
in the case of overnight courier, on the next business day after the date when
sent; and (c) in the case of registered or certified mailing, on the third
business day following the date on which the piece or mail containing such
communication was posted.
8. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same document.
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9. GOVERNING LAW. This Agreement, and all matters relating hereto,
shall be governed by and construed and enforced in accordance with the laws of
the State of New Jersey without regard to any principles of choice of laws or
conflicts of law.
10. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement is so broad as to be unenforceable, such provision
shall be interpreted to be only so broad as is enforceable.
11. THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed
or implied, shall be construed to give any person other than the parties hereto
any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter contained
herein and supersedes all prior agreements and understandings, express or
implied, among the parties with respect to such subject matter.
13. INJUNCTIVE RELIEF. The parties agree that in the event of a
breach of any provision of this Agreement by the Stockholder, Parent may be
without an adequate remedy at law. The parties therefore agree that in the event
of a breach by the Stockholder of any provision of this Agreement, Parent may
elect to institute and prosecute proceedings in any court of competent
jurisdiction to enforce specific performance or to enjoin the continuing breach
of such provision, as well as to obtain damages for breach of this Agreement. By
seeking or obtaining any such relief, Parent will not be precluded from seeking
or obtaining any other relief to which it may be entitled.
IN WITNESS WHEREOF, each of the parties have caused this Voting
Agreement and Irrevocable Proxy to be duly executed and delivered on the day and
year first above written.
CARDIAC CONTROL SYSTEMS, INC.
By:
-------------------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By:
-------------------------
Ervin Schoenblum
Acting President
THE T PARTNERSHIP, LLP
By:
-------------------------
Name:
-----------------------
Title:
----------------------
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EXHIBIT 5.2
COMPANY AFFILIATE AGREEMENT
THIS COMPANY AFFILIATE AGREEMENT (the "Agreement") dated as of , 1998,
between Cardiac Control Systems, Inc., a Delaware corporation ("Parent"), and
the stockholder (the "Stockholder") of Electro-Catheter Corporation, a New
Jersey corporation (the "Company"), who is a signatory hereto.
R E C I T A L S:
WHEREAS, Parent, CCS Subsidiary, Inc., a New Jersey corporation and
wholly-owned subsidiary of Parent ("Acquisition Sub"), and the Company have
entered into an 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 (the "Reorganization Agreement"), providing
for, among other things, the merger (the "Merger") of Acquisition Sub with and
into the Company, with the Company surviving the Merger as a direct,
wholly-owned subsidiary of Catheter Technology Group, Inc., parent holding
company of Parent ("Holdings") and the stockholders of the Company receiving
shares of common stock of Parent in exchange for shares of stock of the Company,
in the manner provided in the Reorganization Agreement. As used herein, the term
"Reorganization Agreement" shall be deemed to mean and include the
Reorganization Agreement and any Plan of Merger executed and delivered in
connection therewith. All capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Reorganization Agreement.
WHEREAS, upon the consummation of the Merger and in connection
therewith, the Stockholder will receive _________ shares of Holdings Common
Stock (the "Registrable Stock").
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from the Merger and of the mutual covenants contained in this Agreement, the
parties agree as follows:
1. AFFILIATE; TRANSFER RESTRICTIONS. The Stockholder may be
deemed to be an "affiliate" of the Company within the meaning of Rule 145
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and Accounting Series Release No. 130, as amended, Accounting Series Release No.
135 and Staff Accounting Bulletin No. 76 of the Securities and Exchange
Commission (the "SEC"), although nothing contained herein should be construed as
an admission thereof. If upon the Effective Date of the Merger, the Stockholder
were to be deemed an "affiliate" of Holdings, the Stockholder's ability to sell,
exchange, transfer, pledge or otherwise dispose of the Registrable Stock may be
restricted unless such transaction is registered under the Securities Act or an
exemption from such registration is available. The Stockholder understands that
such exemptions are limited and has obtained advice of counsel as to the nature
and conditions of such exemptions, including information with respect to the
applicability to the transfer of such securities of Rules 144 and 145(d)
promulgated under the Securities Act.
2. REGISTRATION RIGHTS. As to this Section 2 only, Parent,
Stockholder and Holdings, as successor issuer to Parent in any registration
statement referred to herein, agree as follows:
(a) If at any time after the first anniversary of this
Agreement, Holdings proposes to file a registration statement to register any of
the Holdings Common Stock under the Securities Act (other than in connection
with a merger or pursuant to Form S-4 or Form S-8 or other comparable form not
available for registering the Registrable Stock for sale to the public), whether
such registration is for Holdings own account or the account of others, and
provided the managing underwriter for the proposed offering, if any, advises
Holdings that the inclusion of the Registrable Stock in such registration
statement would not jeopardize the successful marketing of the Holdings Common
Stock, in the managing underwriter's exercise of reasonable judgment, then
Holdings shall at such time give prompt written notice to the Stockholder of its
intention to effect such registration setting
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forth a description of intended method of distribution and indicating
Stockholder's right under such proposed registration, and upon the request of
the Stockholder, delivered to Holdings within twenty (20) days after giving such
notice (which request shall specify the Registrable Stock intended to be
disposed of by the Stockholder), Holdings shall include such Registrable Stock
held by the Stockholder and requested to be included in such registration
subject to any underwriter's cutback or lock-up.
(i) If, at any time after giving such
written notice of Holdings intention to register any of the Registrable Stock
and prior to the effective date of the registration statement filed in
connection with such registration, Holdings shall determine for any reason not
to file the registration statement wherein the Registrable Stock would be
registered or to delay the registration of such Registrable Stock, at its sole
election, Holdings may give written notice of such determination to the
Stockholder and thereupon shall be relieved of its obligation to register any
Registrable Stock issued or issuable in connection with such registration (but
not from its obligation to pay registration expenses in connection therewith or
to register the Registrable Stock in a subsequent registration); and in the case
of a determination to delay a registration, Holdings shall thereupon be
permitted to delay registering any Registrable Stock for the same period as the
delay in respect of securities being registered for Holdings own account.
(ii) The Stockholder shall be permitted to withdraw
all or any part of the Registrable Stock at any time prior to the effective date
of such registration.
(iii) Holdings shall not be required to include any
of the Registrable Stock in the registration statement relating to an
underwritten offering of Holdings securities unless the Stockholder accepts the
terms of the underwriting as agreed upon between Holdings and the underwriters
selected by it (provided such terms are usual and customary for selling
stockholders) and the Stockholder agrees to execute and/or deliver such
documents in connection with such registration as Holdings or the managing
underwriter may reasonably request.
(iv) Holdings may, in its sole discretion and without
the consent of the Stockholder, withdraw such registration statement and abandon
the proposed offering in which the Stockholder had requested to participate, but
such abandonment shall not preclude subsequent request for registration pursuant
to this Section 2.
(b) EXPIRATION OF REGISTRATION RIGHTS. The obligations of
Holdings to register shares of the Registrable Stock under this Section 2 of
this Agreement shall terminate three (3) years after the date of this Agreement,
unless such obligations terminate earlier in accordance with the terms of this
Agreement.
(c) COOPERATION WITH PARENT. The Stockholder will cooperate
with Holdings in all respects in connection with this Agreement, including,
without limitation, timely supplying all information reasonably requested by
Holdings and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Stock.
(d) EXPENSES. All expenses incurred by Holdings in complying
with the provisions of this Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of any
counsel and independent public accountants for Holdings, fees and expenses
(including counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars and costs
of insurance ("Registration Expenses") shall be borne by Holdings. However,
Registration Expenses shall not include expenses of counsel for the Stockholder,
any underwriting discounts, selling commissions and underwriter expense
reimbursement allowances applicable to the sale of the Registrable Stock
("Selling Expenses"). Holdings will pay all Registration Expenses in connection
with each registration of the Registrable Stock pursuant to the provisions of
this Agreement. All Selling Expenses in connection with each such registration
statement shall be borne by the participating sellers in proportion to the
number of shares sold by each, or by such participating sellers other than
Holdings (except to the extent Parent shall be a seller) as they may agree.
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(e) INDEMNIFICATION AND CONTRIBUTION.
(i) HOLDINGS INDEMNITY. In the event of a
registration of any of the Registrable Stock under the Securities Act pursuant
to the provisions of this Agreement, Holdings shall indemnify and hold harmless,
to the extent permitted by law, the Stockholder, each underwriter of such
Registrable Stock thereunder and each other person, if any, who controls such
Stockholder or underwriter within the meaning of the Securities Act, against any
losses, claims, damages, liabilities and expenses, joint or several, to which
such Stockholder, underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities and expenses (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Stock was
registered under the Securities Act pursuant to the provisions of this
Agreement, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each such Stockholder, each such underwriter and each such
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, and expense or action; provided that Holdings will not be liable in
any such case if and to the extent that any such loss, claim, damage, liability
or expense arises out of or is based upon: (A) an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by any such seller, any such underwriter or any such
controlling person in writing specifically for use in such registration
statement or prospectus; or (B) the Stockholder's failure to deliver a copy of
the final prospectus as then amended or supplemented after Holdings has
furnished the Stockholder with a sufficient number of copies of the same, but
only if delivery of same is required by law and the same would have cured the
defect giving rise to any such loss, claim, damage, liability or expense.
(ii) STOCKHOLDER INDEMNITY. In the event of a
registration of any of the Registrable Stock under the Securities Act pursuant
to the provisions of this Agreement, the Stockholder will indemnify and hold
harmless Holdings, each person, if any, who controls Holdings within the meaning
of the Securities Act, each officer of Holdings who signs the registration
statement, each director of Holdings, each underwriter and each person who
controls any underwriter within the meaning of the Securities Act, against all
losses, claims, damages, liabilities and expenses, joint or several, to which
Holdings or such officer, director, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages, liabilities and expenses (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement under which
such Registrable Stock was registered under the Securities Act pursuant to the
provisions of this Agreement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse Holdings and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damages, liability, expense or action; provided that such Stockholder
will be liable hereunder in an amount not to exceed the net proceeds received by
such seller in the sale of its Registrable Stock pursuant to such registration
statement and, in any such case, if and only to the extent that any such loss,
claim, damage, liability, expense or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with information pertaining to such
Stockholder furnished in writing to Holdings by such Stockholder specifically
for use in such registration statement or prospectus.
(iii) NOTICE; RIGHT TO DEFEND. Promptly after receipt
by an indemnified party hereunder of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party hereunder, notify the indemnifying party, in
writing thereof, but the omission so to notify the indemnifying party shall not
relieve it from any such liability and shall only relieve it from any liability
which it may have to such indemnified party if such indemnifying party is
prejudiced by such omission. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party under this subsection 2(e) to such
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effect, the indemnifying party shall not be liable for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected; provided that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise participate in the defense of
such action, with the expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the indemnifying
party as incurred.
(iv) CONTRIBUTION. In order to provide for just and
equitable contribution to joint liability under the Securities Act in any case
in which either: (A) the Stockholder of Registrable Stock exercising rights
under this Agreement, or any controlling person of the Stockholder, makes a
claim for indemnification pursuant to this subsection 2(e) but it is judicially
determined (by entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this subsection 2(e) provides for indemnification
in such case; or (B) contribution under the Securities Act may be required on
the part of the Stockholder or any such controlling person in circumstances for
which indemnification is provided under this subsection 2(e), then, and in each
such case, Holdings and the Stockholder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Stockholder is responsible for the
portion represented by the percentage that the public offering price of its
Registrable Stock offered by the registration statement bears to the public
offering price of all securities offered by such registration statement (in an
amount in any case not to exceed the net proceeds received by such Stockholder
in the sale of its Registrable Stock pursuant to such registration statement),
and Holdings is responsible for the remaining portion; provided that, in any
such case, no person or entity guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
3. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS. The
Stockholder understands and agrees that it is intended that the Merger will be
treated as a "reorganization" for federal income tax purposes. The Stockholder
has been informed that the treatment of the Merger as a reorganization for
federal income tax purposes requires that a sufficient number of former
Stockholders of the Company maintain a meaningful continuing equity ownership
interest in Holdings after the Merger. The Stockholder understands that the
representations, warranties and covenants of the Stockholder set forth herein
will be relied upon by Holdings, Parent, the Company and their respective
counsel and accounting firms.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. The
Stockholder represents, warrants and covenants as follows:
(a) The Stockholder has full power and authority to execute
this Agreement, to make the representations, warranties and covenants
herein contained and to perform the Stockholder's obligations
hereunder.
(b) APPENDIX A attached hereto sets forth all shares of
Company Common Stock owned by the Stockholder, including all Company Common
Stock as to which the Stockholder has sole or shared voting or investment power
and all rights, options and warrants to acquire Company Common Stock owned or
held by the Stockholder.
(c) The Stockholder has, and as of the Effective Time will
have, no plan or intent to engage in a sale, exchange, transfer, pledge,
disposition (including a distribution by a partnership to its partners or a
corporation to its shareholders) or any other transaction that would result in a
reduction in the risk of ownership (collectively, a "Sale") with respect to any
of the Registrable Stock, or any securities that may be paid as a dividend or
otherwise distributed thereon or with respect thereto or issued or delivered in
exchange or substitution therefor. The Stockholder is not aware of, or
participating in, any plan or intent on the part of the Company's stockholders
(a "Plan") to engage in a Sale of Parent Common Stock to be issued in the Merger
such that the aggregate fair market
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value, as of the effective time of the Merger (the "Effective Time"), of the
shares subject to such Sale would exceed fifty percent (50%) of the aggregate
fair market value of all outstanding shares of the common stock, $.10 par value,
of the Company immediately prior to the Merger (collectively, the "Outstanding
Company Shares"). A Sale of Holdings Common Stock shall be considered to have
occurred pursuant to a Plan if, among other things, such Sale occurs in a
transaction that is in contemplation of, or related or pursuant to, the Merger
or the Reorganization Agreement (a "Related Transaction"). In addition,
Outstanding Company Shares: (i) exchanged in the Merger for cash in lieu of
fractional shares of Holdings Common Stock; or (ii) with respect to which a Sale
occurs in a Related Transaction prior to the Effective Time shall be considered
to be Outstanding Company Shares that are exchanged for Holdings Common Stock
and that are disposed of pursuant to a Plan. If any of the Stockholder's
representations and warranties in this subsection 4(c) cease to be true at any
time prior to the Effective Time of the Merger, the Stockholder will deliver to
each of the Company and Holdings, prior to the Effective Time of the Merger, a
written statement to that effect, signed by the Stockholder.
(d) The Stockholder shall not offer, sell, exchange, transfer,
pledge or otherwise dispose of any of the Registrable Stock, or any securities
that may be paid as a dividend or otherwise distributed thereon or with respect
thereto or issued or delivered in exchange or substitution therefor (all such
shares and other securities of Holdings being herein sometimes collectively
referred to as "Restricted Securities"), or any option, right or other interest
with respect to any Restricted Securities unless at such time either:
(i) such transaction shall be permitted pursuant to
the provisions of Rule 145(d) promulgated under the Securities Act;
(ii) counsel representing the Stockholder,
satisfactory to Holdings, shall have advised Holdings in a written opinion
letter satisfactory to Holdings, that no registration under the Securities Act
is required in connection with the proposed transaction;
(iii) a registration statement under the Securities
Act covering the Registrable Stock proposed to be sold, exchanged, transferred
or otherwise disposed of, describing the manner and terms of the proposed sale,
transfer, exchange or other disposition, and containing a current prospectus,
shall have been filed with the SEC and become effective under the Securities
Act; or
(iv) an authorized representative of the SEC shall
have rendered written advice to the Stockholder (sought in writing by the
Stockholder or counsel to the Stockholder, with copies thereof and of all other
related communications delivered to Holdings) to the effect that the SEC would
take no action, or that the staff of the SEC would not recommend that the SBC
take action, with respect to the proposed sale, transfer or other disposition of
such Registrable Stock if consummated.
(e) The Stockholder understands and agrees that all
certificates representing the Registrable Stock owned by the Stockholder and any
certificates subsequently issued with respect thereto or in substitution
therefor shall, unless one or more of the alternative conditions set forth in
clauses (i) through (iv) of subsection (d) of this Section 4 shall have been
satisfied, bear a legend substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD,
EXCHANGED, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND OTHER CONDITIONS SPECIFIED IN THE COMPANY AFFILIATE
AGREEMENT DATED AS OF _______________________, 1998, BETWEEN CARDIAC
CONTROL SYSTEMS, INC. AND THE HOLDER OF THIS CERTIFICATE, A COPY OF
WHICH MAY BE INSPECTED BY THE HOLDER OF THIS CERTIFICATE AT THE OFFICES
OF CARDIAC CONTROL SYSTEMS, INC., OR WHICH WILL BE FURNISHED BY CARDIAC
CONTROL SYSTEMS, INC., WITHOUT
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CHARGE, TO THE HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST."
(f) The Stockholder also understands and agrees that Holdings,
at its discretion, may cause stop transfer orders to be placed with its transfer
agent with respect to certificates for the Registrable Stock owned by the
Stockholder but not as to certificates for such Registrable Stock as to which
the legend set forth in subsection (e) of this Section 4 is no longer required
because one or more of the alternative conditions set forth in clauses (i)
through (iv) of subsection (d) of this Section 4 shall have been satisfied.
Holdings agrees that, upon the request of the Stockholder, it shall remove such
legend when one or more of such alternative conditions shall have been
satisfied.
(g) The Stockholder shall observe and comply with the
Securities Act and the rules and regulations promulgated by the SEC thereunder
as now in effect or hereafter enacted or promulgated, and as from time to time
amended, in connection with any offer, sale, exchange, transfer, pledge or other
disposition of the Registrable Stock beneficially owned by the Stockholder.
5. REPORTS. From and after the Effective Time (as defined in the
Reorganization Agreement) and for so long as necessary in order to permit the
Stockholder to sell the Registrable Stock pursuant to Rule 145 and, to the
extent applicable, Rule 144 under the Securities Act, Holdings shall use
reasonable efforts to file on a timely basis all reports required to be filed by
it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended,
referred to in paragraph (c)(1) of Rule 144 promulgated by the SEC under the
Securities Act (or, if applicable, Holdings shall use reasonable efforts to make
publicly available the information regarding itself referred to in paragraph
(c)(2) of Rule 144), in order to permit the Stockholder to sell, pursuant to the
terms and conditions of Rule 145 and the applicable provisions of Rule 144, the
Registrable Stock beneficially owned by the Stockholder. Upon the request of the
Stockholder, the Holdings shall deliver to the Stockholder a written statement
as to whether it has complied with such requirement.
6. WAIVER. No waiver by any party of any condition or of any breach of
any provision of this Agreement shall be effective unless in writing.
7. NOTICES. All notices and other communications pursuant to this
Agreement shall be deemed to be sufficient if contained in a written instrument
and shall be deemed given if delivered personally, telecopied, sent by
nationally-recognized, overnight courier or mailed by registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent or Holdings, to:
Cardiac Control Systems, Inc.
3 Commerce Boulevard
Palm Coast, Florida 32164
Attention: Alan J. Rabin
Telephone: 800-227-7223
Telecopier: 904-445-7226
with a copy to:
Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
111 North Orange Avenue
20th Floor
Orlando, Florida 32801
Attention: Randolph H. Fields, Esq.
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(b) if to the Stockholder, to the address set forth below
the Stockholder's signature on the last page of this
Agreement.
All such notices and other communications shall be deemed to have been received:
(a) in the case of personal delivery, on the date of such delivery; (b) in the
case of a telecopy, when the party receiving such telecopy shall have confirmed
receipt of the communication; (c) in the case of delivery by
nationally-recognized, overnight courier, on the Business Day (as defined in the
Reorganization Agreement) following dispatch; and (d) in the case of mailing, on
the third Business Day following such mailing.
8. EFFECTIVENESS OF AGREEMENT. This Agreement shall become effective at
the Effective Time. In the event that the Reorganization Agreement shall be
terminated, and the Merger shall be abandoned, in accordance with Section 11.1
of the Reorganization Agreement, this Agreement shall simultaneously therewith
cease and terminate and be of no further force or effect and no party hereunder
shall have any rights or obligations of any nature whatsoever hereunder.
9. ENTIRE AGREEMENT. This Agreement, the Reorganization Agreement, the
Exhibits thereto and any other document delivered in connection therewith
contain the entire understanding of the parties hereto in respect of the subject
matter hereof, and supersede all prior negotiations and understandings, oral or
written, between the parties with respect to the subject matter hereof.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be enforceable by, and
shall inure to the benefit of and be binding upon, the parties and their
respective successors and assigns. As used herein, the term "successors and
assigns" shall mean, where the context so permits, heirs, executors,
administrators, trustees and successor trustees and personal and other
representatives.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey applicable to contracts made
and to be performed therein.
13. ATTORNEY'S FEES. In the event of any legal action or proceeding to
enforce or interpret the provisions of this Agreement, the prevailing party
shall be entitled to reasonable attorneys' fees, whether or not the proceeding
results in a final judgment.
14. EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
15. THIRD PARTY RELIANCE. Counsel to and accountants for the parties
shall be entitled to rely upon this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Company
Affiliate Agreement to be executed and delivered as of the date first above
written.
CARDIAC CONTROL SYSTEMS, INC.
By:
--------------------------
Alan J. Rabin
President
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STOCKHOLDER
-----------------------
(Signature)
-----------------------
(Print Name)
-----------------------
(Print Title)*
-----------------------
(Print Name of Company)*
-----------------------
-----------------------
(Print Address)
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APPENDIX "A"
Number of Shares of Company Common Stock Owned ____________
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EXHIBIT 6.16(b)
CONDITIONAL NOTE
$1,000,000 _________, 1998
_______________
A. GENERAL; TERMS OF PAYMENT
1. FOR VALUE RECEIVED, CATHETER TECHNOLOGY GROUP, INC., with an address
at 3 Commerce Boulevard, Palm Coast, Florida 37404 (the "Maker"), hereby
promises to pay on a conditional basis as hereinafter set forth to the order of
THE T PARTNERSHIP, a New Jersey limited liability partnership (the "Payee"),
with an address at c/o Abraham Nechemie, Wiss & Co., 354 Eisenhower Parkway,
Livingston, New Jersey 07039, or at such other place as may be designated by the
Payee in writing, the principal sum of ONE MILLION ($1,000,000) DOLLARS,
together with interest thereon, (the "Loan"). All principal and interest due
with respect to the Loan and all additional amounts due hereunder are
hereinafter designated the "Obligations".
The principal amount due hereunder and interest thereon shall only be
due in the event of a Payment Event or Event of Default as hereafter set forth.
Interest on the unpaid principal amount of the Loan, computed on the basis of a
360-day year, shall accrue at the rate of nine (9%) percent per annum.
This Conditional Promissory Note is delivered with the issuance to
Payee of 1000 shares of Series A Preferred Stock of Electro-Catheter Corporation
("EC"). The preferences afforded such stock are as set forth on Exhibit A
annexed ("Designation"). Capitalized terms used and not defined herein shall
have the meanings ascribed to such terms in the Designation.
2. CREDIT OF PAYMENTS; TERMINATION. Any amount received by Payee as a
dividend under Section 2 of the Designation or as a Preferred Liquidation
Payment under Section 3 of the Designation shall be credited as a payment made
by Maker to Payee for purposes of this Conditional Promissory Note as and when
such dividend and/or distribution is received by Payee. This Conditional
Promissory Note shall be deemed paid in full in the event Payee shall exercise
its conversion right pursuant to Section 4 of the Designation, or in the event
EC shall exercise its redemption right pursuant to Section 3(c) of the
Designation.
3. OPTIONAL PREPAYMENT. Maker shall have the right to prepay this
Conditional Promissory Note in whole at any time or in part from time to time,
provided that on each prepayment Maker shall pay accrued interest on the
principal amount so prepaid to the date of such prepayment. Any such prepayment
shall further be credited toward the obligations of EC to Maker under Section 3
of the Designation.
4. PAYMENT EVENT. Maker shall make mandatory prepayments (the
"Mandatory Prepayment") of any accrued and unpaid interest at such time and to
the extent Maker shall have funds legally available such that Maker would be in
a position to make annual dividends to its shareholders, such Mandatory
Prepayment to be paid in cash on the first day of January in each year
commencing on the first Preferred Dividend Payment Date after the first issuance
of the Series A Preferred Stock. Any such Mandatory Prepayment, when made, shall
be credited toward EC's dividend obligations under Section 2 of the Designation.
5. MANNER OF PAYMENT. All payments on account of principal, interest or
fees hereunder shall be made in lawful money of the United States of America, in
immediately available funds.
6. DEFAULT RATE OF INTEREST. After an Event of Default (as defined
below), all obligations due hereunder shall bear interest at the rate of
fourteen percent (14%) per annum.
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B. DEFAULT
The Obligations shall, at the option of the Payee hereof become immediately due
and payable, without further notice or demand, upon the happening of any one or
more of the following specified events (each an "Event of Default"):
(a) Maker shall fail to pay when due any amount of principal
or any amount of interest, any Mandatory Prepayment or any fee, charge, expense
or any other payment due hereunder;
(b) Proceedings in bankruptcy, or for reorganization of or for
the readjustment of debts, under the Bankruptcy Code, as amended, or any part
thereof, or under any other laws, whether state or federal, for the relief of
debtors, now or hereafter existing, shall be commenced by or against Maker or EC
and if commenced against Maker or EC shall not be stayed or discharged within
sixty (60) days of commencement;
(c) A receiver or trustee shall be appointed for Maker or EC
or any substantial part of either's assets, and such receiver or trustee shall
not be discharged within sixty (60) days of their commencement.
(d) Maker or EC shall discontinue business or materially
change the nature of its business, or any proceedings shall be instituted for
the dissolution of the full or partial liquidation of Maker or EC; .
(e) Maker or EC shall sell substantially all of its assets
other than in the ordinary course of business;
(f) EC shall cease to be wholly owned by Maker;
(g) EC shall be in default of any of its obligations to Payee
under the Designation, or Maker shall be in default of its obligations to Payee
under its Promissory Note given to Payee of even date herewith;
(h) There shall occur an event described in Subsection 3(a) of
the Designation.
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 Payee in this Conditional
Promissory Note, or otherwise available under applicable law, and in such cases
Payee reasonable attorneys' fees for collection. Any such payment or remedy
hereunder shall be credited toward EC's obligations under Section 3 of the
Designation (in the case of a principal payment) and Section 2 of the
Designation (in the case of the interest payment).
C. MISCELLANEOUS
1. NO WAIVER: RIGHTS AND REMEDIES CUMULATIVE. No failure on the part
of the Payee to exercise, and no delay in exercising any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise by the
Payee of any right hereunder preclude any other or further exercise thereof or
the exercise of any other right. The rights and remedies herein provided are
cumulative and not exclusive of any remedies or rights provided by law, and by
any other agreement between Maker and Payee.
2. COSTS AND EXPENSES. Maker shall reimburse the Payee for all costs
and expenses, including reasonable attorneys' fees, incurred in connection with
the enforcement of the Payee's rights hereunder.
3. AMENDMENTS. No amendment, modification or waiver of any provision
of this Conditional Promissory Note nor consent to any departure by Maker
therefrom shall be effective unless the same shall be in writing and signed by
the Payee and then such waiver or consent shall be effective only in the
specified instance and for the specified purpose for which given.
4. CONSTRUCTION; CONSENT TO JURISDICTION. Maker consents to the
personal jurisdiction of the Federal or State courts located in the State of New
Jersey if suit is filed to enforce, interpret or construe this Conditional
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<PAGE>
Promissory Note. This Conditional Promissory Note shall be deemed to be a
contract made under the laws of the State of New Jersey and shall be construed
in accordance with the laws of said State.
5. SUCCESSORS AND ASSIGNS. This Conditional Promissory Note shall be
binding upon Maker and its successors and assigns and the terms hereof shall
inure to the benefit of the Payee and its successors and assigns, including
subsequent holders hereof.
6. SEVERABILITY. The provisions of this Conditional Promissory Note
are severable, and if any provision shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or unenforceability
shall not in any manner affect such provision in any other jurisdiction or any
other provision of this Conditional Promissory Note in any jurisdiction.
7. WAIVER OF NOTICE, ETC. Maker hereby waives and releases all
errors, defects and imperfections in any proceeding instituted by Payee under
the terms of this Conditional Promissory Note, as well as all benefits that
might accrue to Maker by virtue of any present or future laws exempting any
property, real or personal, arising from any sale of any such property, from
attachment, levy, or sale under execution, or providing for any stay of
execution, exemption from civil process, or extension of time for payment; and
Maker agrees that any property that may be levied pursuant to a judgment
obtained by virtue hereof, or any writ of execution issued thereon, may be sold
upon any such writ in whole or in part in any order desired by Payee.
Maker and any endorsers, sureties and guarantors of this Conditional
Promissory Note hereby, jointly and severally waive presentment for payment,
demand, protest, notice of protest, and for dishonor and non-payment of this
Conditional Promissory Note, and consent that Payee 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 Conditional Promissory Note, and may release, surrender,
or exchange any property with respect thereto, at the request of any person
liable thereon, and such consent shall not alter or diminish the liability of
any person hereunder.
8. WAIVER OF JURY TRIAL. Maker hereby knowingly, voluntarily and
intentionally waives any right to a jury trial in any action, suit or proceeding
arising out of or relating to this Conditional Promissory Note.
IN WITNESS WHEREOF, the Maker has caused this Conditional Promissory
Note to be duly executed effective as of the day and year first above written.
CATHETER TECHNOLOGY GROUP, INC.
By: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
A-72
<PAGE>
EXHIBIT 6.16(c)
SECURED PROMISSORY NOTE
$______________ ________, 1998
______________
FOR VALUE RECEIVED, the undersigned, Catheter Technology Group, Inc., a
Delaware corporation (the "Maker"), hereby promises to pay to The T Partnership,
a New Jersey limited liability partnership (the "Payee"), at Payee's principal
place of business or such other place as Payee may from time to time designate
in writing, the principal amount of
__________________________________________________________ Dollars and 00/100
($US __________), together with interest on unpaid principal from time to time
outstanding computed from the date of this Note, at the rate provided herein.
1. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Commencing on the date of this Note, the unpaid principal
balance from time to time outstanding hereunder shall bear interest at the rate
of twelve percent (12%) per annum, which interest shall accrue to
________________, 2001 (the "Maturity Date"), at which time the entire amount of
unpaid principal and any accrued but unpaid interest shall be paid in full.
(b) All accrued interest under the Note shall be due and
payable quarterly, on the first business day of each quarter, beginning on _____
1, 1999.
2. PREPAYMENT.
The Maker shall have the right to prepay, without premium or
penalty, at any time or times after the date hereof, all or any portion of the
outstanding principal balance of and/or accrued interest under this Note.
3. EVENTS OF DEFAULT.
The term "Event of Default", as used herein, shall mean the
occurrence and continuation of any one or more of the following events: (a) the
failure of Maker to pay in full this Note on the Maturity Date; (b) the
adjudication of Maker as a bankrupt or insolvent, or an assignment by Maker for
the benefit of creditors; (c) the voluntary, or involuntary, appointment of a
receiver, trustee or similar officer for Maker or for any substantial part of
its property or business, and which appointment, if involuntary, shall have
continued for a period of ninety (90) days; (d) the voluntary, or involuntary,
institution of bankruptcy, insolvency, reorganization, arrangement, dissolution,
liquidation or similar proceeding relating to the Maker, and which, if
involuntary, shall have continued for as period of ninety (90) days; (e) a
greater than 50% change of control in the Maker in the event of a merger,
consolidation, recapitalization, combination or exchange of shares; or (f) the
sale of substantially all assets.
4. REMEDIES UPON DEFAULT.
(a) The entire unpaid amount of this Note, inclusive of
principal and interest, shall become immediately due and payable upon the
occurrence of an Event of Default.
(b) Notwithstanding the provisions of Section 1 of this Note,
from and after the date of an Event of Default, the outstanding principal and
accrued and unpaid interest shall together be deemed outstanding principal and
the interest on such principal shall be computed at the rate of fifteen percent
(15%) per annum, which interest shall be payable monthly commencing on the first
day of the calendar month following the date of an Event of Default, and
continuing thereafter until the outstanding principal balance and any accrued
and unpaid interest is paid in full.
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<PAGE>
5. GOVERNING LAW.
This Note shall be governed by and construed in accordance
with the laws of the State of Florida.
6. SECURITY.
The payment of this Note will be secured by a security
agreement and UCC-1 financing statement, of even date herewith, providing for a
first priority interest in all inventory and equipment of Electro-Catheter
Corporation ("Electro"), a wholly-owned subsidiary of Maker, located at its
principal place of business in Raway, New Jersey and up to $500,000 worth of
inventory and equipment of Maker located at Maker's principal place of business
in Palm Coast, Florida.
CATHETER TECHNOLOGY GROUP, INC.
By:
----------------------------
Alan J. Rabin
President
A-74
<PAGE>
SCHEDULE 5.2
AFFILIATES OF THE COMPANY
1. The T. Partnership
2. Bruce Paul
3. Ervin Schoenblum
4. Abraham H. Nechemie
5. Lee W. Affonso
6. Joseph P. Macaluso
A-75
<PAGE>
APPENDIX A1
FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 5th day of May 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 (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 desire to remove the ability to waive certain
conditions to the Closing and the consummation of the Merger; and
WHEREAS, due to changes in market conditions the parties desire to
change the Exchange Ratio; and
WHEREAS, Parent desires to reorganize through a holding company
structure pursuant to Section 251(g) of the General Corporation Law of the State
of Delaware, whereby Parent would form a direct, wholly-owned subsidiary
("Holdings"), which will form a direct, wholly-owned subsidiary ("Holdings
Merger Sub"), whereby Merger Sub will merge with and into Parent so that Parent
will become a direct, wholly-owned subsidiary of Holdings; and
WHEREAS, in order to obtain the required financing for the Merger, the
Company shall issue approximately 2,500,000 shares of Common Stock to
prospective investors immediately prior to the Effective Time of the Merger and
such shares of the Company Common Stock will be exchanged for shares of Holdings
common stock at the same ratio as all other shares of the Company Common Stock
are exchanged for shares of Holdings common stock (the "Financing Shares"); and
WHEREAS, the Company shareholders shall no longer exchange their issued
and outstanding shares of Common Stock for shares of Parent Common Stock, but
instead shall exchange such shares for shares of Holdings common stock at an
applicable ratio which shall result in the Company shareholders holding
approximately 71% of the issued and outstanding shares of Holdings common stock
other than the Financing Shares (the "Non-Financing Shares"), and the
shareholders of Parent will hold the remaining approximately 29% of the issued
and outstanding shares of Holdings Common Stock other than the Financing Shares;
and
WHEREAS, subsequent to the Effective Time of the Merger, Holdings will
effectuate a reverse stock split at a 1 for 5 ratio whereby the number of
Non-Financing Shares will be reduced to approximately 1.8 million, and the
number of Financing Shares will be reduced to approximately 500,000; and
WHEREAS, all Company Options, Company Warrants and conversion rights:
(1) shall be converted into options, warrants and conversion rights for shares
of Holdings common stock and will be added to the capital structure of Holdings;
(2) shall be adjusted in regards to the number and exercise price in accordance
to the same exchange ratio as the Company's Common Stock; (3) shall be subject
to the same reverse stock split ratio as the Holdings common stock; and (4) are
not included in the Company shareholders' 71% interest in shares of Holdings
outstanding common stock; and
A1-1
<PAGE>
WHEREAS, the parties hereby agree to amend the Reorganization Agreement
to effectuate the foregoing in accordance with the terms set forth herein below.
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 as follows:
1. The first paragraph on the first page shall be deleted in its
entirety and replaced with the following:
The Boards of Directors of Parent, Acquisition Sub
and the Company have each duly approved and adopted this
Agreement and Plan of Reorganization (this "Agreement"), the
plan of merger (the "Plan of Merger") and the proposed merger
of Acquisition Sub with and into the Company in accordance
with this Agreement, the Plan of Merger and the New Jersey
Business Corporation Act (the "New Jersey Statute"), whereby,
among other things, the issued and outstanding shares of
common stock, $.10 par value, of the Company (the "Company
Common Stock"), will be exchanged and converted into shares of
common stock, $.10 par value, of a to be organized parent
holding company of Parent ("Holdings") (the "Holdings Common
Stock") in the manner set forth in Article II hereof and in
the Plan of Merger, upon the terms and subject to the
conditions set forth in this Agreement and the Plan of Merger.
2. Subsection 2.1(b)(iii) shall be deleted in its entirety and replaced
with the following:
owned by Holdings or any subsidiary of Holdings,
shall be cancelled and no Holdings Common Stock or other
consideration shall be delivered in exchange therefore.
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 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. Subsection 2.1(d) shall be deleted in its entirety.
5. For purposes of Sections 2.2(a) - (g), 3.4(ii), 4.4(ii), 5.2, 6.5
and 6.16, all references to the defined phrase Parent Common Stock shall be
deleted in their entirety and replaced with the phrase Holdings Common Stock.
6. For purposes of Sections 2.2(a) - (g), 3.4(ii), 4.4(ii), 5.2 and
6.16, all references to the defined word Parent shall be deleted in their
entirety and replaced with the word Holdings.
7. 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
A1-2
<PAGE>
the 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 the
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) equal to the
number of shares of Company Common Stock covered by such
Company Warrants, Company Options and conversion rights
immediately prior to the Effective Time, 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.
8. The reference to Section 7.8 in the second sentence of Section
6.2 shall be deleted.
9. Section 6.16 shall be deleted in its entirety and replaced with
the following:
PREFERRED STOCK; SECURED PROMISSORY NOTE. Holdings
and The T Partnership agree that: (a) the designation of
Series A Preferred Stock of the Surviving Corporation, which
shall be convertible into the shares of Holdings Common Stock
at a conversion price equal to the product of 120% multiplied
by the price per share of the common stock of Holdings used as
the basis for the consideration given (either in the form of
issued stock, if any, or warrants, provided the exercise price
of the warrant reflects the current market value of common
stock, or otherwise) in exchange for any capital raised
pursuant to Section 7.7 of this Agreement, shall be as set
forth in EXHIBIT 1.4 attached hereto, and such number of
shares of Preferred Stock having a liquidation value equal to
$1,000,000 of the Company's indebtedness outstanding and due
to The T Partnership at the time of the Closing shall be
issued in redemption of $1,000,000 of such indebtedness; (b)
Holdings shall execute a conditional note for the benefit of
The T Partnership in the form set forth in EXHIBIT 6.16(b)
attached hereto; and (c) Holdings shall execute a secured
promissory note in an amount not to exceed $1,300,000, which
amount shall include interest up through Closing on the
Company's current indebtedness to The T Partnership, but such
amount shall not include any amount described under Section
9.13(b) which shall be payable at Closing, substantially in
the form set forth in EXHIBIT 6.16(c) attached hereto.
10. The introductory phrase under ARTICLE VII shall be deleted in
its entirety and replaced with the following:
The obligations of each Party to perform this
Agreement and the Plan of Merger and to consummate the
transactions contemplated hereby and thereby will be subject
to the satisfaction of the following conditions:
11. Section 7.1 shall be deleted in its entirety and replaced with
the following:
STOCKHOLDER APPROVAL. This Agreement, the Plan of
Merger and the Merger shall have been approved and adopted by
at least two-thirds (2/3) of the outstanding shares voting of
the Company Common Stock.
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<PAGE>
12. Section 7.6 shall be deleted in its entirety and replaced with the
following:
BID PRICE RATIO. The ratio of the closing bid price
of a share of Parent Common Stock to a share of Company Common
Stock shall not be greater than 2.00 nor less than .50 based
on the average of closing bid prices for any ten (10) day
period ending on and including the second NASDAQ trading day
immediately preceding the Closing Date and rounding the result
of such average to the nearest 1/100ths.
13. Section 7.8 shall be inserted and read as follows:
HOLDING COMPANY REORGANIZATION. Immediately prior to
the Effective Time, Parent shall reorganize through a holding
company structure pursuant to Section 251(g) of the General
Corporation Law of the State of Delaware and an Agreement of
Merger substantially in the form of EXHIBIT 7.8 attached
hereto, whereby Parent would form a direct, wholly-owned
Delaware subsidiary, which will also form a direct,
wholly-owned Delaware subsidiary ("Holdings Merger Sub")
whereby Holdings Merger Sub will merge with and into Parent so
that Parent will become a direct, wholly-owned subsidiary of
Holdings.
14. Introductory phrase to ARTICLE VIII shall be deleted in its
entirety and replaced with the following:
The obligations of Parent to perform this Agreement
and to consummate the transactions contemplated hereby and of
Acquisition Sub to perform this Agreement and the Plan of
Merger and to consummate the transactions contemplated hereby
and thereby will be subject to the satisfaction of the
following conditions, unless waived by Parent and Acquisition
Sub; PROVIDED, HOWEVER, only non-material approvals may be
waived under Section 8.8 by Parent and Acquisition Sub:
15. The introductory phrase to ARTICLE IX shall be deleted in its
entirety and replaced with the following:
The obligations of the Company to perform this
Agreement and the Plan of Merger and to consummate the
transactions contemplated hereby and thereby will be subject
to the satisfaction of the following conditions, unless waived
by the Company; PROVIDED, HOWEVER, Sections 9.6, and 9.9
through 9.13 may not be waived by the Company, except any
non-material approvals under Section 9.9 may be waived by the
Company:
16. Section 9.10 shall be deleted in its entirety and replaced with the
following:
APPOINTMENT OF DIRECTORS The Board of Directors of
Holdings shall have taken such action as shall be necessary to
expand the size of Holdings' Board of Directors and to appoint
Ervin Schoenblum and Abraham Nechemie as directors of Holdings
to serve on Holdings' Board of Directors until the next annual
meeting of the stockholders of Holdings. Holdings shall
continue to nominate such individuals at the next three (3)
successive annual meetings of the stockholders immediately
following the next annual meeting of the stockholders in the
same manner and on equal standing as other director nominees
comprising management's slate.
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<PAGE>
17. 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 reasonable attorneys' fees
and expenses; and (b) which may be incurred subsequent to May
1, 1998 in an amount of $100,000, 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.
18. The date set forth in Sections 11.1(b)(i) and 11.1(c) shall be
changed from May 1, 1998 to August 14, 1998.
19. The Section reference set forth in the proviso of the second
sentence in Section 11.2 shall be changed from 10.1(d) to 10.1(b).
20. The following shall be inserted after the first sentence of
Section 12.6:
Without limiting the foregoing, the rights and
obligations of Parent under this Agreement shall be binding
upon and inure to the benefit of Holdings.
21. 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
$600,000 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 and such terms are reasonably acceptable to the
other party, except that the issuance of convertible debt securities by Parent
in the amount of $580,000 with an effective conversion price per share of not
less than $.30, or on terms more favorable than those specified, are hereby
acceptable to the Company and such a financing arrangement may be consummated by
Parent without further disclosure or consent. 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.
22. Sections 3.8 and 3.14 of the Company Disclosure Schedule shall
be amended to reflect the settlement of the Ternyila Judgment.
23. All Exhibits and the Glossary to the Reorganization Agreement
shall be amended to reflect the amendments to the Reorganization Agreement set
forth herein.
24. 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.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this First
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: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
CCS SUBSIDIARY, INC.
By: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By: /s/ ERVIN SCHOENBLUM
---------------------------
Ervin Schoenblum
Acting President
The T Partnership hereby executes this Agreement for the limited and
sole purpose amending its obligations under Section 6.16 of the Reorganization
Agreement as set forth in Section 9 above.
THE T PARTNERSHIP, LLP
By: /s/ ABRAHAM H. NECHEMIE
-------------------------------
Name: Abraham H. Nechemie
-----------------------------
Its Partner
-------------------------------
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<PAGE>
APPENDIX A2
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 eight 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:
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".
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<PAGE>
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).
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 existing debt obligations of both Parent and
the Company, 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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
CCS SUBSIDIARY, INC.
By: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By: /s/ ERVIN SCHOENBLUM
---------------------------
Ervin Schoenblum
Acting President
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<PAGE>
APPENDIX A3
THIRD AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS THIRD AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 4th 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.
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<PAGE>
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.
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. ELECTRO-CATHETER CORPORATION
By: /s/ ALAN J. RABIN By: /s/ ERVIN SCHOENBLUM
--------------------------- ----------------------------------
Alan J. Rabin, President Ervin Schoenblum, Acting President
CCS SUBSIDIARY, INC.
By: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin, President
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<PAGE>
APPENDIX B
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION (this "Agreement")
dated as of September 23, 1998, by and between Cardiac Control Systems, Inc., a
Delaware corporation ("Cardiac"), Catheter Technology Group, Inc., a Delaware
corporation ("CTG") and CTG Merger Sub, Inc., a Delaware corporation ("Merger
Sub").
WHEREAS, Cardiac proposes to reorganize its operations into a holding
company structure whereby Cardiac will become a direct, wholly-owned subsidiary
of CTG (the "Reorganization"); and
WHEREAS, to reflect the Reorganization, Cardiac will cause CTG to be
incorporated as a direct, wholly-owned subsidiary of Cardiac, and Merger Sub to
be incorporated as a direct, wholly-owned subsidiary of CTG; and
WHEREAS, prior to the Reorganization, each of CTG and Merger Sub would
have a nominal amount of stock outstanding and would have no assets (other than
minimal amounts of cash and cash equivalent representing their initial
capitalizations) and would conduct no business operations; and
WHEREAS, the respective boards of directors of Cardiac, CTG and Merger
Sub, and CTG, as sole shareholder of Merger Sub, have duly adopted and approved
this Agreement and the merger of Merger Sub with and into Cardiac, pursuant and
subject to the terms and conditions of this Agreement and Section 251 of the
General Corporation Law of the State of Delaware ("DGCL") whereby, among other
things, each issued and outstanding share of common stock, $.10 par value per
share, of Cardiac ("Cardiac Common Stock") will be exchanged and converted into
the right to receive shares of common stock, $.10 par value per share, of CTG
("CTG Common Stock") in the manner and upon the terms and conditions set forth
in Article II of this Agreement.
NOW, THEREFORE, for the reasons set forth hereinabove, and in
consideration of the mutual promises contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
GENERAL
1.1 THE MERGER. In accordance with the provisions of this Agreement
and the DGCL, Merger Sub shall be merged with and into Cardiac (the "Merger"),
which at and after the Effective Time shall be, and is sometimes herein referred
to as, the "Surviving Corporation". Merger Sub and Cardiac are sometimes
referred to as the "Constituent Corporations".
1.2 THE EFFECTIVE TIME OF THE MERGER. This Agreement shall be
delivered and filed with the Secretary of State of the State of Delaware by each
of the Constituent Corporations on the Closing Date in the manner provided under
Section 103 of the DGCL. The Merger shall become effective (the "Effective
Time") upon the filing of the Certificate of Merger (to which this Agreement is
an exhibit) with the Secretary of State of the State of Delaware.
1.3 EFFECT OF MERGER. At the Effective Time the separate existence of
Merger Sub shall cease and Merger Sub shall be merged with and into the
Surviving Corporation, and the Surviving Corporation shall possess all of the
rights, privileges, powers and franchises as well of a public as of a private
nature, and shall be
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subject to all of the restrictions, disabilities and duties of each of the
Constituent Corporations and shall have such other effects as provided by the
DGCL.
1.4 ARTICLES OF INCORPORATION AND BY-LAWS OF SURVIVING CORPORATION.
From and after the Effective Time: (a) the certificate of incorporation (the
"Certificate") of Cardiac immediately prior to the Effective Time shall be the
Certificate of the Surviving Corporation, except that the Fourth Article shall
read in its entirety as set forth in EXHIBIT 1.4 attached hereto and made a part
hereof, unless and until altered, amended or repealed as provided in the DGCL or
the Certificate; (b) the current amended and restated by-laws of Cardiac shall
be the by-laws of the Surviving Corporation, unless and until altered, amended
or repealed as provided in the DGCL, the Certificate or such by-laws, as
applicable; (c) the sole director of Merger Sub, Alan J. Rabin, and W. Alan
Walton and Ervin Schoenblum shall each be a director of the Surviving
Corporation, unless and until removed, or until their respective terms of office
shall have expired, in accordance with the DGCL, the Certificate or the by-laws
of the Surviving Corporation; and (d) the executive officers of Cardiac shall be
the officers of the Surviving Corporation, unless and until removed, or until
their respective terms of office shall have expired, in accordance with the
DGCL, the Certificate or the by-laws of the Surviving Corporation, as
applicable.
1.5 DIRECTORS AND EXECUTIVE OFFICERS OF CTG. From and after the
Effective Time: (a) the board of directors of CTG shall be expanded to include
the current directors of Cardiac, Ervin Schoenblum, Abraham Nechemie and two
designees , one each to be appointed by Cardiac's investment banker and the
syndicate formed to facilitate a public offering of CTG Common Stock to occur in
conjunction with the Reorganization, unless and until removed, or until their
respective terms of office shall expire, in accordance with the DGCL, the
Certificate or the by-laws of CTG, as applicable; (c) the executive officers of
Cardiac shall be the executive officers of CTG, unless and until removed, or
until the respective terms of office shall expire, in accordance with the DGCL,
the Certificate or the by-laws of CTG, as applicable.
1.6 TAKING OF NECESSARY ACTION. Prior to the Effective Time, the
parties hereto shall do, or cause to be done all such acts and things as may be
necessary or appropriate in order to effectuate the Merger as expeditiously as
reasonably practicable in accordance with this Agreement, and the DGCL. In case
at any time after the Effective Time, any further action is necessary or
desirable to carry out the purpose of this Agreement and to vest in the
Surviving Corporation full title to all assets, privileges, etc. of either
Constituent Corporations, the officers and directors of such corporations shall
take all such lawful and necessary action.
1.7 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").
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, subject and
pursuant to the terms and conditions of this Agreement and, by virtue of the
Merger and without any action on the part of the Constituent Corporations or the
holders of the capital stock of the Constituent Corporations:
(a) CAPITAL STOCK OF MERGER SUB. Each issued and outstanding
share of common stock, par value of $.10 per share, of Merger Sub shall
immediately prior to the Effective Time be deemed cancelled and converted into
and shall represent the right to receive one share of common stock, par value of
$.10 per share, of the Surviving Corporation.
(b) CANCELLATION OF CERTAIN SHARES OF CARDIAC COMMON STOCK.
Each share of Cardiac Common Stock that is immediately prior to the Effective
Time: (i) owned by Cardiac as
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<PAGE>
treasury stock; (ii) owned by any subsidiary of Cardiac; or (iii) owned by CTG
or any subsidiary of CTG, shall be cancelled and no CTG Common Stock or other
consideration shall be delivered in exchange therefor. As used in this
subsection 2.1(b), a "Subsidiary" of any corporation means another corporation
an amount of whose voting securities sufficient to elect at least a majority of
its board of directors is owned directly or indirectly by such corporation.
(c) EXCHANGE RATIO FOR CARDIAC COMMON STOCK. Subject to
Section 2.2, each share of Cardiac Common Stock issued and outstanding at the
Effective Time (other than shares cancelled pursuant to Section 2.1(b)) shall be
deemed cancelled and converted into the right to receive one share of CTG Common
Stock in accordance with Section 2.2. For convenience of reference, the shares
of CTG Common Stock to be issued upon the exchange and conversion of Cardiac
Common Stock in accordance with this Section 2.1(c) are sometimes hereinafter
collectively referred to as the "Merger Shares".
2.2 EXCHANGE OF CERTIFICATES.
(a) PROCEDURE FOR EXCHANGE. Prior to the Closing Date, CTG
shall select an exchange agent (the "Exchange Agent") reasonably satisfactory to
Cardiac to act in such capacity in connection with the Merger. As of the
Effective Time, CTG shall deposit with the Exchange Agent, for the benefit of
the holders of shares of Cardiac Common Stock (the "Stockholders"), for exchange
in accordance with this Article II, certificates representing the shares of CTG
Common Stock contemplated to be issued as Merger Shares (which shares of CTG
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund"). As soon as practicable
after the Effective Time but in no event later than twenty (20) business days
after the Effective Time, the Exchange Agent shall mail to each holder of record
of a certificate or certificates which immediately before the Effective Time
represented issued and outstanding shares of Cardiac Common Stock (collectively,
the "Old Certificates"): (i) a letter of transmittal advising such holders of
the terms of the exchange effected by the Merger (and specifying how delivery
shall be effected, and risk of loss and title to the Old Certificates shall
pass, only upon delivery of the Old Certificates to the Exchange Agent and shall
be in such form and have such other provisions as CTG may reasonably specify);
and (ii) instructions for use in effecting the surrender of Old Certificates in
exchange for certificates representing Merger Shares. Upon surrender of an Old
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as may be reasonably
required by the Exchange Agent, the holder of such Old Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of CTG Common Stock which such holder has the right to receive
pursuant to the provisions of this Article II and the Old Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of shares of Cardiac Common Stock which are not registered on the
transfer records of Cardiac, it shall be a condition of the exchange thereof
that the Old Certificate representing such Cardiac Common Stock is presented to
the Exchange Agent properly endorsed and otherwise in proper form for transfer
and accompanied by all documents required to evidence and effect such transfer
and by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.2(a), each Old Certificate shall
be deemed, on and after the Effective Time, to represent only the right to
receive upon such surrender the certificate representing shares of CTG Common
Stock and cash in lieu of fractional shares (as hereinafter provided) of CTG
Common Stock as contemplated by this Article II.
(b) DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED
CERTIFICATES. No dividends or other distributions declared or made after the
Effective Time with respect to CTG Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Old Certificate
with respect to the shares of CTG Common Stock represented thereby and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 2.2(d) until the holder of record of such Old Certificate shall
surrender such Old Certificate. Subject to the effect of applicable laws,
following surrender of any such Old Certificate, there shall be paid to the
record holder of the certificates representing whole shares of CTG Common Stock
issued in exchange therefor, without interest: (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of CTG
Common Stock to which such holder is entitled pursuant to Section 2.2(d) and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of CTG Common
Stock; and (ii) at the appropriate payment date, the amount of dividends or
other
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distributions with a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such whole
shares of CTG Common Stock.
(c) NO FURTHER OWNERSHIP RIGHTS IN CARDIAC COMMON STOCK. All
shares of CTG Common Stock issued upon the surrender for exchange of shares of
Cardiac Common Stock in accordance with the terms of this Article II (including
any cash paid pursuant to Section 2.2(b) or 2.2(d)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Cardiac
Common Stock and there shall be no further registration or transfers on the
stock transfer books of the Surviving Corporation of the shares of Cardiac
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, any Old Certificate is presented to the Surviving
Corporation for any reason, such Old Certificate shall be cancelled and
exchanged as provided in this Article II.
(d) NO ISSUANCE OF FRACTIONAL SHARES. No certificates or
scrip representing fractional shares of CTG Common Stock shall be issued upon
the surrender for exchange of Old Certificates, and such fractional share
interests shall not entitle the owner thereof to vote or to any rights of a
stockholder of CTG such as rights to dividends, stock splits or interest in lieu
of issuing certificates for fractional shares.
(i) As promptly as practicable following the0
Effective Time, the Exchange Agent shall determine the excess of (x) the number
of full shares of CTG Common Stock delivered to the Exchange Agent by CTG
pursuant to Section 2.2(a) over (y) the maximum number of full shares of CTG
Common Stock distributable to holders of Cardiac Common Stock pursuant to
Section 2.2(a) (such excess being herein called the "Excess Shares"). As soon
after the Effective Time as practicable, the Exchange Agent, as agent for the
holders of Cardiac Common Stock, shall aggregate and sell the Excess Shares at
then prevailing prices in the appropriate market, all in the manner provided in
subsection (ii) of this Section 2.2(d).
(ii) The sale of the Excess Shares by the Exchange
Agent shall be executed in the appropriate market through one or more member
firms of the National Association of Securities Dealers, Inc. and shall be
executed in round lots to the extent practicable. Until the net proceeds of such
sale or sales have been distributed to the holders of Cardiac Common Stock as
contemplated in subsection (iii) of this Section 2.2(d), the Exchange Agent
shall hold such proceeds in trust for the holders of Cardiac Common Stock (the
"Common Shares Trust"). CTG shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent, incurred in connection with such sale of the Excess Shares. The
Exchange Agent shall determine the portion of the Common Shares Trust to which
each holder of Cardiac Common Stock shall be entitled, if any, by multiplying
the amount of the aggregate net proceeds comprising the Common Shares Trust by a
fraction, the numerator of which is the amount of the fractional share interest
to which such holder of Cardiac Common Stock is entitled and the denominator of
which is the aggregate amount of fractional share interests to which all holders
of Cardiac Common Stock are entitled.
(iii) As soon as practicable after the determination
of the amount of cash, if any, to be paid to the holders of Cardiac Common Stock
in lieu of any fractional share interests, the Exchange Agent shall make
available such amounts without interest to such holders of Cardiac Common Stock.
(e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Old Certificates shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming such Old Certificate to be
lost, stolen or destroyed, the Exchange Agent shall issue an exchange for such
loss, stolen or destroyed Old Certificate the consideration payable and exchange
therefor pursuant to this Article II. The Exchange Agent or the Surviving
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Old Certificate to
give the Exchange Agent a bond in such reasonable sum as it may direct as
indemnity against any claim that may be made against the Surviving Corporation
with respect to the Old Certificate alleged to have been lost, stolen or
destroyed.
(f) TERMINATION OF EXCHANGE FUND AND COMMON SHARES TRUST. Any
portion of the Exchange Fund and Common Shares Trust which remains undistributed
to the stockholders of Cardiac for six (6) months after the Effective Time shall
be delivered to CTG, upon demand, and any former
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Stockholders of Cardiac who have not theretofore complied with this Article II
shall thereafter look only to CTG for payment of their claim for CTG Common
Stock, any cash in lieu of fractional shares of CTG Common Stock and any
dividends or distributions with respect to CTG Common Stock (and CTG shall
remain obligated to so pay and/or distribute).
(g) NO LIABILITY. Neither the Exchange Agent, CTG, Merger Sub
nor Cardiac shall be liable to any holder of shares of Cardiac Common Stock or
CTG Common Stock, as the case may be, for shares (or dividends or distributions
with respect thereto) of CTG Common Stock to be issued in exchange for Cardiac
Common Stock pursuant to this Section 2.2, if, on or after the expiration of
twelve (12) months following the Effective Date, such shares are delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
2.3 CARDIAC WARRANTS AND OPTIONS. At the Effective Time, each of
Cardiac's then outstanding Cardiac Warrants, Cardiac 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 the holder thereof, shall
be assumed by CTG and automatically converted, on the same terms, into a
warrant, option or conversion right to purchase a number of shares of CTG Common
Stock (to be registered shares to the extent the option, warrant or conversion
right holder is, by the terms of the Cardiac option plan, warrant or conversion
right in effect, entitled upon exercise of the option, warrant or conversion
right, to receive registered stock) equal to the number of shares of Cardiac
Common Stock covered by such Cardiac Warrants, Cardiac Options and conversion
rights immediately prior to the Effective Time, at an exercise price per share
of CTG Common Stock equal to the exercise price in effect under such Cardiac
Warrants, Cardiac Options or conversion rights immediately prior to the
Effective Time.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Cardiac Options" shall mean and include any Unvested
Cardiac Option and any Vested Cardiac Option.
(b) "Unvested Cardiac Option" shall mean each of the options
to purchase Cardiac Common Stock that is outstanding at the Effective Time,
which is not exercisable immediately prior to the Effective Time pursuant to its
terms in effect as of the date hereof.
(c) "Vested Cardiac Option" shall mean each of the options
to purchase Cardiac Common Stock that is outstanding at the Effective Time,
which is exercisable immediately prior to the Effective Time pursuant to its
terms in effect as of the date hereof.
(d) "Cardiac Warrants" shall mean each of the warrants to
purchase Cardiac Common Stock that is outstanding at the Effective Time, which
is exercisable immediately prior to the Effective Time pursuant to its terms in
effect as of the date hereof.
ARTICLE III
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS
The obligations of each party to perform this Agreement and consummate
the transactions contemplated hereby will be subject to the satisfaction of the
following conditions:
3.1 STOCKHOLDER APPROVAL. The affirmative vote of the holders of a
majority of the outstanding shares of Cardiac Common Stock entitled to vote at a
special meeting of the stockholders of Cardiac shall have: (a) approved a
reverse split of the Cardiac Common Stock at a one for five basis; (b) approved
and adopted this Agreement and the Merger; and (c) ratified, approved and
adopted the merger of CCS Subsidiary, Inc., a direct, wholly-owned subsidiary of
Merger Sub with and into Electro-Catheter Corporation ("Electro"), a New Jersey
corporation (the "Electro Merger") and an agreement and plan of reorganization,
as amended, pursuant to which the Electro Merger will be effectuated.
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ARTICLE IV
MISCELLANEOUS
4.1 TERMINATION. This Agreement shall be terminated, and the Merger
abandoned, notwithstanding the approval by the respective boards of directors
and stockholders of Cardiac, CTG and Merger Sub of this Agreement and the Merger
in the event of and simultaneous with a termination (at or at any time prior to
the Effective Time) of the Electro Merger.
4.2 AMENDMENT AND MODIFICATION. At any time prior to the Effective
Time, the parties may, by written agreement, modify or amend this Agreement,
provided that, material provisions may not be amended or modified after this
Agreement has been approved and adopted by Cardiac stockholders, without the
affirmative vote of the holders of a majority of the outstanding shares of
Cardiac Common Stock entitled to vote at a special meeting of the stockholders
of Cardiac.
4.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
among the parties hereto with respect to the transactions contemplated hereby
and supersede all prior arrangements or understandings, written or oral, with
respect thereto.
4.4 BENEFITS OF AGREEMENT. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. This Agreement shall not
be assignable by any party hereto without the consent of the other parties
hereto; provided, however, that anything contained herein to the contrary
notwithstanding, Merger Sub may assign and delegate any or all of its rights and
obligations hereunder to any other direct or indirect wholly-owned subsidiary of
CTG.
4.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the DGCL and the laws of the State of Delaware applicable to
contracts made and to be performed wholly therein.
4.6 DESCRIPTIVE HEADINGS. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement of Merger and Plan of Reorganization to be executed and delivered on
its behalf as of the date first above written.
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ ALAN J. RABIN
--------------------------
Alan J. Rabin
President
CATHETER TECHNOLOGY GROUP, INC.
By: /s/ ALAN J. RABIN
--------------------------
Alan J. Rabin
President
CTG MERGER SUB, INC.
By: /s/ ALAN J. RABIN
---------------------------
Alan J. Rabin
President
B-6
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EXHIBIT 1.4
"4. The total number of shares of stock which the corporation shall
have authority to issue is One Hundred (100) shares of common stock, par value
of $.10 per share ("Common Stock")."
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APPENDIX C
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CARDIAC CONTROL SYSTEMS, INC.
CARDIAC CONTROL SYSTEMS, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify that the Board of Directors of said corporation adopted
resolutions proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said corporation:
RESOLVED, that Article 4 of the Certificate of Incorporation be amended
and restated by adding the following provisions thereto:
"4. Effective as of the date this Certificate of Amendment to
the Certificate of Incorporation is duly filed with the
Secretary of State of the State of Delaware, each five (5)
shares of Common Stock, par value $.10 per share, issued and
outstanding immediately prior to the Effective Date (the "Old
Common Stock") shall be exchanged for one (1) share of the
Corporation's Common Stock, par value $.10 per share (the "New
Common Stock"), subject to the treatment of fractional share
interests as described below. Each holder of a certificate or
certificates which immediately prior to the Effective Date
represented outstanding shares of Old Common Stock (the "Old
Certificates", whether one or more) shall be entitled to
receive upon surrender of such Old Certificates to the
exchange agent duly appointed by the Corporation (the
"Exchange Agent") for cancellation, a certificate or
certificates (the "New Certificates", whether one or more)
representing the number of whole shares of the New Common
Stock into which and for which the shares of the Old Common
Stock formerly represented by such Old Certificates so
surrendered are reclassified under the terms hereof. From and
after the Effective Date, Old Certificates shall represent
only the right to receive New Certificates (and, where
applicable, cash in lieu of fractional shares, as provided
below) pursuant to the provisions hereof. No certificates or
scrip representing fractional share interests in New Common
Stock will be issued, and no such fractional share interest
will entitle the holder thereof to vote, or to any rights of a
stockholder of the Corporation. A holder of Old Certificates
shall receive, in lieu of any fraction of a share of New
Common Stock to which the holder would otherwise be entitled,
a cash payment therefor on the basis of the last sale price
quoted of the Old Common Stock on the OTC Bulletin Board on
the Effective Date (or in the event the Corporation's Common
Stock is not so traded on the Effective Date, such closing
price on the next preceding day on which such stock was
traded). The Corporation may retain a third party to collect
and pool fractional share interests, sell the same and return
payment to the holders of the interests. If more than one Old
Certificate shall be surrendered at one time for the account
of the same stockholder, the number of full shares of New
Common Stock for which New Certificates shall be issued shall
be computed on the basis of the
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aggregate number of shares represented by the Old Certificates
so surrendered. In the event that the Corporation's Exchange
Agent determines that a holder of Old Certificates has not
tendered all his certificates for exchange, the Exchange Agent
shall carry forward any fractional share until all
certificates of that holder have been presented for exchange
such that payment for fractional shares to any one person
shall not exceed the value of one share. If any New
Certificate is to be issued in a name other than that in which
the Old Certificates surrendered for exchange are issued, the
Old Certificates so surrendered shall be properly endorsed and
otherwise in proper form for transfer, and the person or
persons requesting such exchange shall affix any requisite
stock transfer tax stamps to the Old Certificates surrendered,
to provide funds for their purchase or establish to the
satisfaction of the Exchange Agent that such taxes are not
payable."
RESOLVED, that any share of New Common Stock to be issued in exchange
for shares of Old Common Stock and any cash to be paid in lieu of fractional
share interests in New Common Stock shall revert in full ownership to the
Corporation one year after the Effective Date if such shares and cash are not
claimed by the persons entitled thereto.
RESOLVED, that the shares of New Common Stock to be issued in exchange
for shares of Old Common Stock shall, upon such issuance, be deemed to have been
duly authorized and will be fully paid, validly issued and nonassessable.
RESOLVED, that the appropriate officers of the Company be, and they
hereby are, authorized and directed to adjust the capital accounts of the
Corporation to transfer an amount from capital to surplus to cover the aggregate
decrease in the par value of the issued shares of New Common Stock in light of
the adoption of the foregoing resolutions.
RESOLVED, that the appropriate officers of the Corporation are hereby
authorized and directed to do all things and to prepare, execute, deliver, file,
record and affix the Corporate seal to all agreements, documents and other
instruments, their execution thereof to be conclusive evidence of their approval
thereof and their authority to so do, including, without limitation, subject to
the receipt of the requisite approval of the stockholders, which in their sole
judgement are deemed necessary or advisable to implement the foregoing
resolutions.
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APPENDIX D
COMPASS CAPITAL PARTNERS, LTD.
January 21, 1998
Board of Directors
Electro-Catheter Corporation
2100 Felver Court
Rahway, NJ 07065
Members of the Board:
You have asked Compass Capital Partners, Ltd. to render its opinion as
to the fairness from a financial point of view to the current stockholders of
Electro-Catheter Corporation ("Electro") of a proposed merger with Cardiac
Control Systems, Inc. ("Cardiac") whereby Electro's stockholders will receive
two shares of Cardiac common stock for each three shares of Electro common stock
held by them and their Electro shares will be cancelled (the "Merger").
Compass Capital Partners, Ltd. ("CCP"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, employee benefit plans,
and valuations for corporate, estate, and other purposes. Neither CCP nor any of
its officers or employees has any interest in Electro or Cardiac, and all of
such persons are otherwise independent with respect to the Merger.
In arriving at its opinion, CCP:
/bullet/ reviewed and relied upon a description of the Merger contained
in the joint press release of Electro and Cardiac dated
October 27, 1997;
/bullet/ reviewed and relied upon Electro's and Cardiac's filings with
the Securities and Exchange Commission on Form 10-K for the
1995, 1996 and 1997 fiscal years, and on Form 10-Q for the
interim periods ended October 31, 1997 and November 30, 1997
for Cardiac and Electro, respectively;
/bullet/ reviewed and relied upon an internally prepared Cardiac
Business Plan which reflects the Merger and projects segment
and combined results of operations for the fiscal years 1998
through 2002;
/bullet/ reviewed press releases issued by Electro and Cardiac between
February 1995 and the date of this opinion, identified by
Electro and Cardiac as constituting all press releases issued
by either of them during such period;
/bullet/ reviewed price and volume information relating to trading in
the common stocks of each of Electro and Cardiac in 1997 and
year-to-date 1998;
/bullet/ reviewed and analyzed market trading and financial information
about certain publicly-traded companies engaged in businesses
that we deemed reasonably comparable to those of Electro and
Cardiac;
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/bullet/ reviewed publicly available information with respect to
announced acquisitions of businesses that we deemed reasonably
comparable to Electro and Cardiac;
/bullet/ conducted discussions with members of Electro's senior
management relating to the business and prospects of Electro;
/bullet/ conducted discussions with members of Electro's senior
management concerning Electro's capital needs and the means of
addressing such needs, including potential synergies to be
realized as a result of the Merger;
/bullet/ undertook such other reviews and analyses as we deemed
appropriate, including an analysis of the relative
contributions of Electro's and Cardiac's historical and
projected operations to pro forma combined results of
operations; and
/bullet/ reviewed all of the foregoing with Electro's Board of
Directors before forming our opinion.
In preparing our opinion, we have relied on the accuracy and
completeness of all information supplied or otherwise made available to us by
Electro and Cardiac, and we have not independently verified such information or
undertaken an independent appraisal of the assets of Electro or Cardiac, nor
were we furnished with any such appraisal. We assume no responsibility to revise
or update our opinion if there is a change in the financial condition or
prospects of Electro or Cardiac from that disclosed or projected in the
information we reviewed and set forth above or in general economic or market
conditions. This opinion does not constitute a recommendation to any Electro
stockholder as to how any such stockholder should vote on the Merger. This
opinion does not address the relative merits of the Merger and any other
transactions or business strategies that may have been discussed by Electro's
Board of Directors as alternatives to the Merger or the decision of Electro's
Board of Directors to proceed with the Merger. Our opinion has been prepared for
the use of Electro's Board of Directors in its consideration of the Merger and
may not be reproduced, summarized, described or referred to or given to any
other person or otherwise made public without CCP's prior written consent,
except for inclusion in full in the proxy statement to be sent to Electro's
stockholders in connection with obtaining stockholder approval of the Merger,
and in any other filings made by Electro under applicable securities laws. No
opinion is expressed herein as to the price at which the securities to be issued
in the Merger may trade at any time.
Based upon and subject to the foregoing, it is CCP's opinion that, as
of the date hereof, the Merger is fair, from a financial point of view, to the
current stockholders of Electro.
COMPASS CAPITAL PARTNERS, LTD.
By: /s/ GABRIEL F. NAGY
--------------------------
Gabriel F. Nagy
Principal
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COMPASS CAPITAL PARTNERS, LTD.
May 19, 1998
Board of Directors
Electro-Catheter Corporation
2100 Felver Court
Rahway, NJ 07065
Members of the Board:
On January 21, 1998, Compass Capital Partners, Ltd. ("CCP") issued to
you its opinion (the "January Opinion") as to the fairness from a financial
point of view to the stockholders of Electro-Catheter Corporation ("Electro") of
a proposed merger of Electro with Cardiac Control Systems, Inc. ("Cardiac")
whereby Electro's stockholders were to receive two Cardiac shares for each three
Electro shares held by them (the "Merger").
Subsequently to the issuance of the January Opinion, Electro and
Cardiac renegotiated the terms of the Merger. The parties executed a First
Amendment to Agreement and Plan of Reorganization dated May 5, 1998 whereunder
Electro will become an indirect subsidiary and Cardiac will become a direct
subsidiary of a new company ("Holdings"), and each Electro and Cardiac share
will be converted into one Holdings share (the "Revised Merger"). We are advised
that the Revised Merger will change no other material terms of the Merger.
You have asked CCP to express its opinion as to whether the Revised
Merger is fair, from a financial point of view, to the current Electro
stockholders.
In arriving at its opinion, CCP:
/bullet/ reviewed a copy of the First Amendment to Agreement And Plan
of Reorganization, which describes the Revised Merger;
/bullet/ reviewed press releases issued by Electro and Cardiac since
January 20, 1998;
/bullet/ reviewed financial and market information with respect to
Electro and Cardiac published between January 21, 1998 and May
15, 1998;
/bullet/ reviewed current financials and market information with
respect to the comparable public companies it reviewed in
connection with its analysis of the Merger;
/bullet/ reviewed Cardiac's internally prepared Business Plan, as
amended since January 21, 1998, which contains the combined
projections for Electro's and Cardiac's businesses for the
fiscal years 1998 through 2002; and
/bullet/ reviewed all of the foregoing with Electro's Board of
Directors before forming our opinion.
In preparing our opinion, we have relied on the accuracy and
completeness of all information supplied or otherwise made available to us by
Electro and Cardiac, and we have not independently verified such information or
undertaken an independent appraisal of the assets of Electro or Cardiac, nor
were we furnished with any such appraisal. We assume no responsibility to revise
or update our opinion if there is a change in the financial condition
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or prospects of Electro or Cardiac from that disclosed or projected in the
information we reviewed and set forth above or in general economic or market
conditions. This opinion does not constitute a recommendation to any Electro
stockholder as to how any such stockholder should vote on the Revised Merger.
This opinion does not address the relative merits of the Revised Merger and any
other transactions or business strategies that may have been discussed by
Electro's Board of Directors as alternatives to the Revised Merger or the
decision of Electro's Board of Directors to proceed with the Revised Merger. Our
opinion has been prepared for the use of Electro's Board of Directors in its
consideration of the Revised Merger and may not be reproduced, summarized,
described or referred to or given to any other person or otherwise made public
without CCP's prior written consent, except for inclusion in full in the proxy
statement to be sent to Electro's stockholders in connection with obtaining
stockholder approval of the Revised Merger, and in any other filings made by
Electro under applicable securities laws. No opinion is expressed herein as to
the price at which the securities to be issued in the Revised Merger may trade
at any time.
Based upon and subject to the foregoing, it is CCP's opinion that, as
of the date hereof, the Revised Merger is fair, from a financial point of view,
to the current stockholders of Electro.
COMPASS CAPITAL PARTNERS, LTD.
By: /s/ GABRIEL F. NAGY
----------------------
Gabriel F. Nagy
Principal
D-4
<PAGE>
APPENDIX E
SS. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation, the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation, and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of' stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders, and further provided that no appraisal rights shall be
available for any shares of stock of' the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of ss. 251 of thiS title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of' stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to ss.ss. 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof',
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph;
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal
of his shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A
proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or ss. 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of' the merger or consolidation and
that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include
in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation.
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each constituent
corporation may fix, in
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advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
E-3
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
<PAGE>
PROXY
CARDIAC CONTROL SYSTEMS, INC.
3 COMMERCE BOULEVARD
PALM COAST, FLORIDA 32164
THIS STOCKHOLDER PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby: (1) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Cardiac Control Systems, Inc. (the "Company"), to be
held at 12:00 p.m., local time, on November 16, 1998, at the Newark Airport
Marriott Hotel, Newark International Airport, Newark, New Jersey 07114, and the
Joint Proxy Statement/Prospectus in connection therewith; and (2) appoints Alan
J. Rabin and Bart C. Gutekunst, as proxies, with the power to appoint their
respective substitutes, to represent the undersigned at the Special Meeting of
Stockholders and at any adjournment thereof, to vote and act with respect to all
shares of common stock, $.10 par value per share, of the Company ("Company
Common Stock") standing in the name of the undersigned or with respect to which
the undersigned is entitled to vote and act, if personally present, as
designated below, hereby revoking any proxy heretofore given by the undersigned.
YOUR BOARD OF DIRECTORS RECOMMENDS PLEASE MARK YOUR VOTES
A VOTE "FOR" THESE PROPOSALS. AS INDICATED IN THIS EXAMPLE [x]
THE APPROVAL OF PROPOSALS 1, 2 AND 3 IS CONTINGENT UPON THE APPROVAL OF ALL
THREE PROPOSALS, NONE OF WHICH SHALL BECOME EFFECTIVE UNLESS ALL ARE APPROVED.
1. To approve a one for five reverse stock split (the "Reverse Split") of
Company Common Stock to be effectuated by an amendment to the Company's
certificate of incorporation whereby each stockholder of the Company will be
entitled to receive one share of Company Common Stock for every five shares of
Company Common Stock held by such stockholder. No fractional shares of Company
Common Stock will be issued in the Reverse Split. Pursuant to the Reverse Split,
the number of outstanding shares of Company Common Stock will be reduced to
approximately 530,000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To ratify, approve and adopt the Agreement and Plan of Reorganization,
dated as of January 20, 1998, as amended by a First Amendment to Agreement and
Plan of Reorganization, dated as of May 5, 1998, a Second Amendment to Agreement
and Plan of Reorganization, dated as of August 7, 1998 and a Third Amendment to
Agreement and Plan of Reorganization, dated as of September 4, 1998
(collectively, the "Merger Agreement") among the Company, Electro-Catheter
Corporation, a New Jersey corporation ("Electro"), and CCS Subsidiary, Inc., a
New Jersey corporation and a wholly-owned subsidiary of the Company ("Sub"),
providing for the merger of Sub with and into Electro (the "Merger"), as a
result of which Electro will become a wholly-owned subsidiary of the Company.
Also pursuant to the Merger Agreement, the stockholders of Electro will become
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation
and a direct, wholly-owned subsidiary of the Company which will become the
Company's parent holding company formed as part of the Restructuring Merger
described in Proposal 3 below, as each outstanding share of common stock, $.10
par value per share, of Electro will be converted into the right to receive
one-fifth of a share of common stock, $.10 par value per share, of CTG ("CTG
Common Stock").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve and adopt an Agreement of Merger and Plan of Reorganization,
dated as of September 23, 1998 (the "Restructuring Merger Agreement") among
Cardiac, CTG and CTG Merger Sub, Inc., a direct, wholly-owned subsidiary of CTG
("Merger Sub"), providing for the merger of Merger Sub with and into Cardiac
(the "Restructuring Merger"), as a result of which Cardiac will become a direct,
wholly-owned subsidiary of CTG. By virtue of the Restructuring Merger, the
stockholders of the Company will become stockholders of CTG, and each
outstanding share of the Company Common Stock (as adjusted for the Reverse
Split) will be converted into the right to receive one share of CTG Common
Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
4. To authorize the Board of Directors to adjourn the Special Meeting of
Stockholders to permit further solicitation of proxies, if necessary.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. To transact such other business as may properly come before the Special
Meeting or any postponements or adjournments thereof.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
PLEASE MARK, SIGN AND DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE
ENCLOSED ENVELOPE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS INDICATED, THE PROXY
WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS DESCRIBED.
THIS PROXY IS SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
Date: ______________________, 1998
__________________________________
Signature
__________________________________
Signature if held jointly
PLEASE DATE, SIGN AS NAME(S) APPEAR(S) ABOVE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE, NO POSTAGE IS REQUIRED. If shares are held in the name of two or more
persons, all must sign. When signing as Attorney, Executor, Administrator,
Personal Representative, Trustee, or Guardian, give full title as such. If
signer is a corporation, sign full corporate name by duly authorized officer.
