UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended August 31, 1997.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 0-7578
ELECTRO-CATHETER CORPORATION
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1733406
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(State of Incorporation) (I.R.S. Employer ID Number)
2100 Felver Court, Rahway, New Jersey 07065
- ------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number including Area Code: 732-382-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT
Common Stock
$.10 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
ask prices of such stock, as of a specified date within 60 days prior to the
date of filing.
The aggregate market value of the Registrant's common stock, $.10 par
value, held by non-affiliates as of November 18, 1997 is $2,661,185.
As of November 18, 1997, the number of shares outstanding of the
Registrant's common stock was 6,383,611 shares, $.10 par value.
PART I
Item 1. Business
General
Electro-Catheter Corporation ("Company") is engaged in the business
of developing, manufacturing and marketing products for hospitals and
physicians. The majority of these products are utilized in connection with
illnesses of the heart and circulatory system and make use of catheters and
related devices. The Company was incorporated in New Jersey in 1961. The Company
has targeted electrophysiology as its focal area for future growth, but intends
to maintain and develop products for the emergency care, invasive and
non-invasive cardiology and invasive radiology markets. The Company also
continues to explore opportunities to expand its Original Equipment
Manufacturing ("OEM") business and contract research and development business to
capitalize on its catheter technology expertise and its manufacturing
capabilities.
The Company operates in one business segment, and markets its
products worldwide. Export sales were approximately $1,828,000 in 1997,
$2,324,000 in 1996 and $1,964,000 in 1995, representing approximately 27%, 32%
and 27% of net sales for the years 1997, 1996 and 1995, respectively.
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. 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. 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. It is intended that upon the closing of
the transaction, 50% of the Company's senior debt would be redeemed and the
remaining 50% of such debt would be converted to convertible preferred stock.
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.
Products
The Company produces a wide range of catheter products intended to be
utilized by doctors and other trained hospital personnel for
2
diagnostic and therapeutic purposes. Catheters are hollow tubes that can be
passed through veins, arteries and other anatomical passageways. The Company
considers the market within which it sells its present and proposed products as
a single industry segment.
The selling prices for the products marketed by the Company typically
range from thirty-five to five hundred dollars.
Electrophysiology Catheters
The field of cardiac electrophysiology (EP) is one of the most
rapidly growing areas of medical technology. The development of transcatheter
diagnosis of the heart's conduction system and transcatheter correction of
certain conduction dysfunctions have increasingly attracted the attention of
cardiologists. The Company believes that its extensive experience in pacing and
mapping the heart's conduction system, as well as designing and manufacturing
cardiovascular catheters, places the Company in a position to take advantage of
this developing market. However, there can be no assurance that the Company will
be successful in this endeavor.
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 Company's diagnostic catheters are called the Detector,
Investigator and Cloverleaf EP catheters and each line has its unique
characteristics requested by physicians that desire different handling features.
The Genesis line of steerable catheters provides the physicians with a more
sophisticated mapping tool for difficult diagnostic procedures. These catheters
are available in many curve and electrode configurations.
The Company markets its Circuit Breaker steerable catheters with
temperature control for catheter ablation for international distribution only.
These catheters are compatible with most radiofrequency generators. Due to
certain development issues, clinical trials scheduled for 1997 were delayed. The
Company plans to begin clinical trials in the U.S. in 1998 in order to seek
approval to market these catheters domestically.
Monitoring and Pacing Catheters
The Company's line of monitoring catheters are made of flexible
radiopaque materials which are visible in use through fluoroscopy. The catheters
have a variety of tips, shapes and internal configurations and can be
manipulated by an experienced physician through the anatomy to the desired
location. Through the use of these catheters, electrophysiological data,
pressure and flow readings and blood samples may be obtained. In addition, the
Company's catheters may be utilized as conduits for the injection of radiopaque
materials into the bloodstream to permit fluoroscopic observation of
abnormalities in the vasculature.
Monitoring catheters are marketed under the following names:
Baltherm(R) Flow Directed Balloon Catheters, Pacewedge(R) Balloon Guided
Catheters and Balwedge(R) Catheters.
3
The Company's pacing catheters are fabricated from a number of
materials and frequently consist of an electrode-bearing tube. The tube is
guided into the body and the electrode is delivered through the venous system to
the heart where it is then used for pacing. This procedure involves the delivery
to the heart muscle, from a source outside the body, of an electrical stimulus
causing contractions like the natural heartbeat. Such pacing is necessary where
there is a conduction blockage in the heart causing the heart to beat at a slow
or irregular rate.
One of the pacing catheters manufactured by the Company is the
Balectrode(R) Bipolar Pacing Probe. With this product, both the amount of
manipulation of the catheter required to cause the stimulating electrode to be
positioned in the proper location within the heart and the time required from
the commencement of the procedure until it is completed, are substantially less
than they would be if a non-balloon catheter were used as the delivery system.
The pacing products usually are sold in kits containing the catheter, a
placement needle, connectors and various other devices. These kits are sold
under various names, including the following: Balectrode(R) Flow-Directed
Temporary Pacing Kit, Silicore(R) Semi-Floating Pacing Kit and Multipace.
Multi-Purpose Catheters
Multi-Purpose catheters have features or uses which, under certain
circumstances, result in the combination of pacing and monitoring functions.
Further, the Company manufactures certain electrode-bearing catheters used to
make electrical measurements within the heart and provide electrical stimulation
for both therapeutic and diagnostic purposes.
Drainage Catheters
Although the Company's principal activities have been in the
cardiovascular area, it currently is manufacturing and marketing the Elecath(R)
One Step(TM) Fluid Drainage System which is used for draining fluid collections
from various locations in the body. This system consists of a catheter, composed
of a unique formulation developed by the Company, mounted on a simple
penetration apparatus. In the Company's opinion, the product is useful to many
physicians, in addition to radiologists, and results in more complete and safer
drainage.
Production
The Company manufactures its products in a 25,000 square foot facility
it owns and another 10,000 square foot facility which it leases. The Company
believes that these facilities have sufficient capacity to meet the Company's
anticipated catheter needs for several years. The manufacturing of catheters is
a complex process and each catheter is assembled and tested. The Company designs
its catheters and manufactures a portion of the tubing, balloons, and many
components with tooling and formulations developed by it or especially for it.
The Company maintains facilities to manufacture tubing and balloons and for the
production of catheters in the unique configurations required for their use. In
addition, where more convenient or when the level of sophistication warrants it,
the Company uses outside suppliers for certain components. The Company 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
4
vendors, some involving molds owned by the Company. The Company attempts to
maintain an adequate supply of the components on hand in order to minimize any
supply interruption from single source vendors to allow for time to find a
replacement. There can be no assurance that the Company's ability to manufacture
certain products will not be materially affected by single source vendors.
Research and Development
The Company's research and development activities are devoted primarily
to the design and development of new products and enhancements to existing
products. For the three years ended August 31, 1997, the Company 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 1997, $1,010,000 to fiscal year 1996
and $932,000 to fiscal year 1995. All of such activities were sponsored by the
Company. The major portion of such expenses was related to salaries and other
expenses of personnel employed on a regular basis in research and development
efforts. During 1997 and 1996, the Company performed research and development
and pre-production planning for an unrelated medical device company for which
services the Company recognized $544,293 and $155,707 in revenues in such years,
respectively. The costs associated with these revenues are shown in cost of
sales and, as such, are not included in research and development expenses. In
May 1997, the agreement-in-principle to perform contracted 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-Catheter
Corporation a monthly fee of $150,000 for a period of one year. A definitive
agreement was never executed. Electro-Catheter Corporation received $600,000
for the work it had performed prior to termination and an additional $100,000
termination fee. As a result of the termination, the Company's revenues were
adversely affected.
Sales and Marketing
The Company markets, sells and distributes its products domestically
through its own sales force. At November 18, 1997 the Company employed 4
salespersons in the field and a home office staff of marketing and sales support
of 6 people. The Company also employs an International Marketing Manager based
in Europe on an independent contractor basis. In previous years, the Company 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 the year 1995. The
Company terminated its arrangement with this distributor on May 31, 1995 and the
Company now markets its products directly in this territory. As such, there were
no sales to this distributor in 1997 and 1996. The principal customers for the
Company's products are hospitals whose purchasing decisions are determined on
the basis of assessment of the products by the physicians. No one customer
accounted for more than ten percent of the Company's net revenues for 1997 and
1996. International markets are serviced by a network of independent
distributors.
Advertising of the Company's products consists primarily of displays at
medical conventions and meetings, advertisements in medical journals and direct
mail. The Company also cooperates in the publication of technical papers written
by medical authorities in areas relating to the Company's products.
5
Personnel
At November 18, 1997 the Company had approximately 104 full-time
employees. Of the total employees, 74 were engaged in manufacturing and quality
control, 10 in general administration and executive activities, 10 in
engineering and research and development, and 10 in sales and marketing. The
Company is not a party to any collective bargaining agreement and considers its
relations with its employees to be good.
Backlog
At October 31, 1997, the Company had a backlog of orders for its
products which aggregated to approximately $716,000, as compared to
approximately $389,000 at October 31, 1996. The Company typically does not
operate with a significant backlog. The majority of product shipments in a
quarter relate to orders received in that quarter. The Company's actual product
shipments depend on its production capacity, manufacturing yields and component
availability, among other factors.
Competition
The medical technology industry is a highly competitive field,
characterized by rapid technological advances, and the Company competes with
many other companies on current products and products in the development stages.
Many of these competitors have significantly greater financial, marketing,
sales, distribution and technical resources than the Company. Rapid
technological advances by the Company's competitors could at any time require
that the Company redesign a portion of its product line. Accordingly, there can
be no assurance as to the success of the Company's products in competition with
such companies.
The Company's older products compete primarily with those of larger
companies that have greater resources and better distribution capabilities. The
current principal basis of competition in these markets is price. The Company's
limited resources make it less capable than larger competitors to offer
aggressive pricing to meet competition. In addition, certain customers purchase
catheters in blanket contracts which include products offered by the Company's
larger competitors but not by the Company. For these reasons, the Company has
not been able to compete effectively during recent years in the market for
non-EP products.
The electrophysiology market is also highly competitive and competition
is expected to increase. These competitors currently include USCI, a division of
C.R. Bard, Inc.; Mansfield and EP Technologies, divisions of Boston Scientific
Corporation; CardioRhythm, Inc., a division of Medtronic, Inc.; Cordis-Webster
Laboratories, a division of Johnson & Johnson, Inc. and Daig Corporation, a
division of St. Jude Medical, Inc. These companies are more capable of offering
a broader range of products to the cardiologist. The Company's ability to
compete effectively in the future could be dependent upon broadening its range
of products and/or forging an alliance with another company which would effect
greater product diversity. The Company's electrophysiology products compete with
other treatments, including prescription drugs, implantable cardiac
defibrillators and open heart surgery.
The Company's catheter ablation product is not yet approved for
marketing in the U.S., but some competitors have developed products,
specifically for use in catheter ablation, which are approved in the U.S.
6
Due to certain development issues, clinical trials scheduled for 1997 were
delayed. The Company plans to begin its clinical trials for ablation in 1998 in
order to seek approval to market these catheters domestically. The primary
competitive factors are technical superiority, financial resources, the timing
of regulatory approval, commercial introduction and quality. The Company's
competitive position also depends on its ability to attract and retain qualified
personnel, develop effective proprietary products and implement production and
marketing plans. The Company hopes that it can effectively compete in this
market.
Patents and New Products
The Company'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.
Although the Company holds patents or has patents pending related to several of
its products, it believes that its business as a whole is not or will not be
materially dependent upon patent protection. However, the Company will continue
to seek such patents as it deems advisable to protect its research and
development efforts and to market its products. The Company 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 the Company.
The Company 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 the Company on the design and
development of the devices and systems needed by them. In certain instances, the
Company pays the cooperating physician or researcher a royalty based upon the
revenues derived from the sales of the product to others.
The Company 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. The Company requires employees and consultants to
execute appropriate confidentiality agreements and assignments of inventions in
connection with their employment or consulting arrangement with the Company.
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.
Government Regulation
The products developed by the Company come under the jurisdiction of
the Food and Drug Administration (the "FDA") of the United States Department of
Health and Human Services, as well as other Federal, state and local agencies
and similar health authorities in foreign countries. The regulations promulgated
by such agencies govern the introduction of new medical devices and
modifications to approved devices, the observances of certain standards with
respect to the manufacture and labeling of such devices, the maintenance of
certain records and the reporting of potential product defects.
The Federal Food, Drug and Cosmetics Act, as amended, regulates
manufacturers of "medical devices". The Company's products are medical devices
within the meaning of such Act. An amendment to the Federal Food, Drug and
7
Cosmetics Act providing for the classification of medical devices and the
establishment of standards relating to their safety and effectiveness,
scientific review of certain devices and the registration of manufacturers and
others has been in effect since 1976 and has been supplemented by the Safe
Medical Devices Act of 1991. Under these provisions, a manufacturer must obtain
approval from the FDA of a new medical device before it can be marketed, which
approval process requires, in the case of certain classes of medical devices,
that the safety and efficacy of such devices be demonstrated by the manufacturer
to the FDA through the conduct of an FDA approved clinical evaluation program.
Under certain circumstances, the cost of obtaining such approval may be high and
the process lengthy and no assurance can be given that approval will be
obtained. Although the Company has received FDA approval to market its principal
existing products, or is exempt from formal approval requirements as provided by
law for those devices already in distribution before May 28, 1976, there can be
no assurance that the Company will receive the requisite approvals to market
additional products. Furthermore, any substitution by the Company of its current
sources for certain raw materials utilized in its production processes will, if
such substitution results in a change in the composition of the material, be
subject to FDA approval, and there can be no assurance that such approvals will
be obtained.
Since the devices developed by the Company are intended for "human
use", as defined by the FDA, the Company and such devices are subject to FDA
regulations which, among other things, allow for the conduct of routine detailed
inspections of device manufacturing establishments and require adherence to
"current good manufacturing practices" ("cGMP") in the manufacture of medical
devices which include testing, quality control, design and documentation
requirements.
In addition, certain other classes of medical devices must comply with
industry-wide performance standards with respect to safety and efficacy
promulgated by the FDA. The FDA has not yet developed industry-wide performance
standards with respect to the safety and efficacy of those products manufactured
by the Company which will be subject to such standards. When and if such
standards are adopted, the Company will be required to submit data demonstrating
compliance with the standards (during which period the Company may be permitted
to continue to market products which have been previously approved by the FDA).
In recent years, the FDA has pursued a more rigorous enforcement
program to ensure that regulated businesses, like the Company, comply with
applicable laws and regulations. Noncompliance with applicable requirements can
result in fines, penalties, recall of products, suspension of production or the
inability to obtain premarket clearance or approval for new products. The
Company cannot predict the extent or impact of future Federal, State or local
legislation or regulation.
In February 1997, the FDA conducted an inspection and audit of the
Company. At the conclusion of the audit, the FDA issued a number of observations
regarding violations of cGMP. On March 11, 1997, the FDA issued a Warning Letter
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.
8
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.
Many countries in which the Company markets its products regulate the
manufacture, marketing and use of medical devices. The Company intends to pursue
product approval or registration procedures in countries where it is marketing
its products. The registration and approval process is normally accomplished in
coordination with its international distributors. To date, foreign regulations
have not adversely affected the Company's business. The Company intends to make
every effort to comply with applicable foreign regulations. By June 1998, the
Company is required to have the "CE" Mark on its products to continue to sell
into the European Union. The Company is working towards obtaining this
designation for its products. However, there can be no assurance that the
Company will be able to obtain the "CE" Mark by that date in order for it to
continue to sell its products without a lapse to the European Union.
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, the Company 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. The Company
has received such clearance for its Circuit Breaker steerable catheter with
temperature control for ablation and is currently distributing it outside the
U.S.
The Company is also subject to various Federal, state and local laws
pertaining to such matters as safe working conditions, environmental protection,
fire hazard control and other regulations. The Company is not aware of any
regulations with which it is not in compliance.
Item 2. Properties
The Company's principal manufacturing facilities and executive offices
are located at 2100 Felver Court, Rahway, New Jersey, in premises which it
purchased in fiscal year 1976. This property secures part of the indebtedness to
the T Partnership (see Note 7 of the Notes to the Financial Statements). The
Company also leases a 10,000 square foot facility located in Avenel, New Jersey.
The lease for the Avenel facility is on a month-to-month basis. These premises
are suitable for all of the Company's current and foreseeable production,
development and administrative functions.
Item 3. Legal Proceedings
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
9
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 which is also included in
the litigation expense in the accompanying 1997 Statements of Operations. The
Company is considering taking an appeal.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on June 12, 1997 (the
"Annual Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934;
(ii) there was no solicitation in opposition to management's nominees as listed
in the Company's proxy statement; and (iii) all of such nominees were elected.
(c) At the Annual Meeting, the Company's shareholders voted in favor of
management's nominees for election as directors of the Company as follows:
For Against
Donald W. Muntz* 5,352,690 52,112
George M. Pavia, Esq.* 5,372,257 32,445
Abraham H. Nechemie 5,372,257 32,445
Ervin Schoenblum 5,372,257 32,445
*Resigned in October 1997.
(d) Not applicable.
10
PART II
Item 5. Market for the Company's Common Stock and Related
Security Holder Matters
The Company's common stock has historically been listed on The NASDAQ
Stock Market ("NASDAQ") and traded in the over-the-counter market under the
symbol "ECTH". However, on March 3, 1997, the Company was advised by The NASDAQ
Stock Market that the Company's common stock listing would be deleted because
the Company was not in compliance with NASDAQ's bid price or, in the
alternative, book value requirements. The Company is currently listed on the
NASD OTC Bulletin Board Service which allows makers to enter quotes and trade
securities that do not meet NASDAQ qualification requirements. The table below
shows for the periods indicated the closing figures of the Company's stock, for
each of the quarters.
FISCAL 1997 FISCAL 1996
Quarter High Low High Low
1 1 13/16 47/64 15/16 7/16
2 1 3/8 13/16 1 9/16 7/16
3 1 1/16 11/16 2 7/16 1 1/4
4 15/16 5/16 2 7/8 1 1/16
On November 18, 1997, the number of shareholders of record was 740.
No cash dividends have been declared by the Registrant during the last
five fiscal years nor does the Company plan to pay dividends in the near future.
11
Item 6. Selected Financial Data
The selected financial data set forth below have been derived from the
Company's financial statements referred to under "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" of this Annual Report on Form
10-K, and previously published historical financial statements not included in
this Annual Report on Form 10-K. The selected financial data set forth below
should be read in connection with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's financial
statements, including the notes thereto, referred to herein.
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share data)
Net revenues........... $6,648 $ 7,362 $ 7,263 $ 7,248 $ 8,155
Net loss............ (1,355) (892) (1,136) (1,372) (804)
Working capital..... 958 2,025 2,505 2,362 2,798
Total assets........ 3,373 3,893 4,382 4,270 4,956
Long term liabilities...... 1,969 1,485 1,200 638 32
Loss per share...... ($0.21) ($0.14) ($0.18) ($0.24) ($0.14)
Dividends on common stock none none none none none
Weighted average number
of shares of common
stock and common stock
equivalents outstand-
ing............... 6,380 6,354 6,027 5,711 5,572
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Year Ended August 31, 1997 Compared to Year Ended August 31, 1996
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. 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. 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. It is intended that upon the closing of
the transaction, 50% of the Company's senior debt would be redeemed and the
remaining 50% of such debt would be converted to convertible preferred stock.
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.
12
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.
During the past eighteen months, the Company has devoted much of its
engineering efforts to its contract research and development customer and
original equipment manufacturing (OEM) business. This strategy has adversely
affected product sales, but the Company hopes that this strategy will yield more
positive results in the long-term as the Company 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-Catheter
Corporation a monthly fee of $150,000 for a period of one year. A definitive
agreement was never executed. Electro-Catheter Corporation received $600,000 for
the work it had performed and also received a $100,000 termination fee. As a
result of the termination, the Company's revenues were adversely affected in the
short-term. The Company's OEM business may partially offset the lost revenues
from the termination.
Net revenues declined $713,998 (9.7%) for the fiscal year ended August
31, 1997 as compared to the fiscal year ended August 31, 1996. Product revenues
declined $1,148,149 (16.4%) for the year in addition to a decline in revenues
from an OEM customer of $64,133. These declines were partially offset by an
increase in contract research and development revenues of $388,586, which
included the $100,000 termination fee described above and $109,698 received from
licensing certain of the Company's technology.
Direct domestic sales decreased $678,405 (14.4%) for the fiscal year
ended August 31, 1997 as compared to the prior fiscal year. This decrease is
primarily due to the Company not having an approved electrophysiology ablation
catheter, lack of new products as the Company had focused its attention on the
contract research and development and OEM business, a continued decline in
demand for the Company's older products in pacing and monitoring, backorders, as
well as the impact of not replacing sales representatives who have left the
Company. International revenues decreased $496,254 (21.4%) for 1997 as compared
to 1996. The decline in international revenues is attributed to the
insufficiency of new products as the Company had focused its attention on the
contract research and development and OEM business, lower demand for the
Company's electrophysiology products, product redesign requirements, lower
prices due to competition and backorders.
Gross 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 decreased production levels related to the lower sales volume as
well as the write-off of certain inventories. 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 decreased $570,864 (19.3%)
for the current year as compared to the prior year. This decrease primarily
reflects lower domestic marketing and selling expenses of $641,690 (32.5%)
primarily attributed to the departure of field sales
13
personnel that have not yet been replaced. This decrease was partially offset by
an increase in the provision for bad debts.
Research and development expenses decreased $128,345 (12.7%) for the
year ended August 31, 1997 as compared to the prior year. The decrease is
primarily attributed to the transfer of expenses to costs of revenues associated
with billable research and development activities in addition to lower material
purchases and consulting fees. These decreases were partially offset by higher
expenses for new personnel.
Interest expense increased primarily as a result of the increased
borrowings from the T Partnership (see Note 7 of the Financial Statements
included in response to Item 14) and interest associated with capitalized leases
for equipment.
Litigation expense for 1997 represents the Jury award to a terminated
employee as a result of an age discrimination suit and the Company's legal costs
from September 1996 to defend this action (see Note 15 of the Financial
Statements included in response to Item 14).
The net loss for the fiscal year ended August 31, 1997 was $1,354,942
or $0.21 per share as compared to a net loss of $892,940 or $0.14 per share for
the year ended August 31, 1996.
Year Ended August 31, 1996 Compared to Year Ended August 31, 1995
- -----------------------------------------------------------------
During 1996, the Company 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. The Company also began to develop
products in the therapeutic area of atrial fibrillation. In June 1996, the
Company received an advance of $300,000 from an unrelated party to perform
research and development and pre-production planning. In September 1996, the
Company reached a verbal agreement-in-principle to perform further research and
development and production for this company pursuant to which the Company 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, the Company reached a formal agreement to license certain of
its technology to another medical device company that is in a market segment in
which the Company does not participate.
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 1996 as compared to fiscal 1995. In
addition, the Company had revenues of $155,707 in 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 the
Company's product lines, especially the Company'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 the Company's
traditional and electrophysiology products, including sales to distributors in
countries where the Company had not previously been represented.
Gross profit dollars decreased $118,899 (3.5%) in fiscal 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 1996 was 44.6% as compared
to 46.8% for 1995. Gross profit for 1996 also included the positive impact of
selling directly to hospitals in the northeast region
14
rather than through a distributor, as previously accomplished, which required
discounts. In December 1995, the Company 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, the Company again
reduced its workforce.
Selling, general and administrative expenses decreased by $483,820
(14.1%) for fiscal 1996 as compared to fiscal 1995. This decrease primarily
reflects lower domestic marketing and selling expenses. This decrease is
attributed to the departure of some of the Company'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.
Research and development expense increased by $78,117 (8.4%) for fiscal
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.
Interest expense increased in fiscal 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.
Liquidity and Capital Resources
- -------------------------------
At August 31, 1997, working capital decreased $1,066,572 to $958,174
from August 31, 1996. The current ratio was 1.6 to 1 at August 31, 1997 as
compared to 2.7 to 1 at August 31, 1996. Net cash used in operating activities
was $37,025 for the fiscal year ended August 31, 1997 as compared to $546,610
used in operating activities for the prior fiscal year. This decrease in cash
used in operating activities is primarily a result of the decline in inventories
and the increase in accounts payable and accrued expenses and accrued litigation
costs which has yet to be paid. The Company is considering taking an appeal.
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.
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
15
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.
The report of the Company's independent auditors on the Company's
financial statements, included elsewhere herein, includes an explanatory
paragraph which states that the Company's recurring losses and limited working
capital raise substantial doubt about the Company'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, the
Company 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. The
Company's ability to continue with its plans is contingent upon its ability to
obtain sufficient cash flow from operations or to obtain additional financing.
The Company has had difficulty in paying its obligations and, as a result, has
delayed payments to vendors. The Company continues to re-evaluate its plans to
obtain funds. The contemplated merger is contingent upon the Company and CCS
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 the Company will be able to generate the funding required.
The Company does not plan to pay dividends in the near future.
16
Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Acounting 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. The Company does not expect
the adoption of SFAS 128 to have a material impact on the Company.
Inflation
Inflation did not have a material impact on the results of the
Company's operations during the last three fiscal years.
Item 8. Financial Statements and Supplementary Data
Response to this Item is contained in "Item 14 - Exhibits, Financial
Statement Schedules and Reports on Form 8-K", which information is incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
17
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth certain information concerning the
Company's directors and executive officers:
Name, Age, as of November 18,
1997 and Positions and
Offices Held with Business Experience During Past 5
the Company Years and Principal Occupation
----------- ------------------------------
Abraham H. Nechemie Business Consultant. Formerly a partner
Age 73; Director since in Wiss & Company, a certified public
1992(1) accounting firm. Retired from the firm
in 1985.
Ervin Schoenblum Acting President and Chief Operating
Age 57; Director since Officer since December 1993.Management
1992 Consultant for over five years. Advisor
to the Company since February 1989.
Lee W. Affonso, Age 48; Vice President of the Company since July
Vice President 1992 except for the period from
September, 1993 to December 1993 when he
served as Senior Sales Specialist.
Robert W. Kokowitz Vice President of the Company since July
Age 42; Vice President 1992.
Joseph P. Macaluso Chief Financial Officer since May 1987.
Age 45; Treasurer and
Chief Financial Officer
Susan J. Steiner, Ph.D. Vice President of the Company since
Age 47; Vice President September 1997. Director of Regulatory
Affairs and Quality Assurance since
January 1997. Vice President of Regula-
tory Affairs at Biosearch Medical
Products, Inc., 1994 to 1997; Visiting
Professor at Rutgers University 1992 to
1993.
Nicholas G. Accisano Vice President of the Company since
Age 44; Vice President September 1997. Director of New Product
Development for over the past five
years.
Arlene C. Bell Secretary since May 1987. Executive
Age 52; Secretary Assistant to the Chairman since 1981,
and to the Acting President since
March 1, 1994.
- ----------------------
(1)Member of audit committee.
The Company's directors' terms will expire when their successors are
elected and qualify at the annual meeting of shareholders. The Company's
officers serve for a period of one year and until their successors are elected
by the Board of Directors.
18
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely upon the Company's review of the copies of such forms
received by it, pursuant to Section 16(a) and to written representations of its
incumbent directors, officers and beneficial owners of more than 10% of the
Company's common stock, the Company believes that, during the period September
1, 1996 to August 31, 1997 all filing requirements applicable to its officers,
directors and owners of more then 10% of the Company's common stock were
complied with.
Item 11. Executive Compensation
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth all compensation earned by, awarded or
paid to the Company's officers (whose total compensation for the fiscal year
ended August 31, 1997 exceeded $100,000) for services rendered in all capacities
to the Company during each of the fiscal years ended August 31, 1997, 1996 and
1995
Summary Compensation Table
Long-Term
Compensation
Awards
------
Annual Securities
Compensation Underlying Other
--------------
Name and Salary Options(1) Compensation
Principal Position Year #
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
(1) The table reflects the number of options granted under the Company's
Incentive Stock Option Plan.
(2) Other compensation represents commissions on international sales.
Stock options are also granted to officers and are determined by the
Board of Directors based upon the individual's contribution to the Company.
During fiscal year 1997, no options were granted to the named executive
officers.
19
Aggregate Option Exercises and Year-End Option Table
The following table provides information on option exercises during the
fiscal year 1997 by the named executive officers and the value of each of their
respective unexercised options at August 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
(A) (B) (C) (D) (E)
Number of Value of
Unexercised Unexercised
Options In-the-Money
FY-End (#) Options
FY-End ($) (1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
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-
- ------------
(1) Calculated on the basis of fair market value of the underlying securities at
August 31, 1997 less the exercise price
Remuneration of Directors
Each non-officer director is compensated $1,000 for each Board of
Directors meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee or Board Committee performing
similar functions. Ervin Schoenblum, the Company's Acting President,
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation.
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.
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.
20
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.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
A. Set forth below is information concerning persons (including any
"group" as that term is used in Section 13(d) (3) of the Securities Exchange Act
of 1934) known to the Company to own more than 5% of the common stock, of the
Company as of November 18, 1997.
Amount and
Nature of
Name and Address of Beneficial Percentage
Beneficial Owner Ownership of Class(1)
T Partnership 2,464,844 shares(2) 35.4%
c/o Wiss & Co.
354 Eisenhower Parkway
Livingston, NJ 07039
Bruce Paul 658,400 shares 10.3%
1 Hampton Road
Purchase, NY 10577
- ----------------------
(1)The common stock deemed to be owned which is not outstanding but subject to
currently exercisable options is deemed to be outstanding for the purpose of
determining the percentage of all outstanding common stock owned.
(2)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.
21
B. The following table sets forth, as of November 18, 1997, the equity
securities of the Company beneficially owned, directly or indirectly, by all
Directors of the Company, each of the named executive officers named in the
Summary Compensation Table set forth in Item 11 and by the Directors and
executive officers of the Company as a group as of November 18, 1997.
Name of Beneficial Amount and Nature of Percentage
Owner Beneficial Ownership of Class(4)
Abraham H. Nechemie 133,242 shares(1) 2.1%
Ervin Schoenblum 171,242 shares(1) 2.7%
Lee W. Affonso 35,300 shares(2) 0.6%
Joseph P. Macaluso 29,400 shares(2) 0.5%
All executive officers
and directors as a group 441,294 shares(3)(1) 6.7%
(8 persons)
- ----------------------
(1)Messrs. Nechemie and Schoenblum each have a 5% equity interest in the T
Partnership, which owns 1,881,500 shares of the Company's common stock.
Accordingly, Messrs. Nechemie and Schoenblum each reports beneficial ownership
of 94,075 shares of the Company's common stock. In addition, Messrs. Nechemie
and Schoenblum each reports beneficial ownership of 25,000 warrants that were
issued to the T Partnership pursuant to the August 31, 1995 Lending Agreement
with the Company and beneficial ownership of 4,167 warrants in connection with
the March 1995 private placement. Also included in the table above are currently
exercisable options for 10,000 and 48,000 shares held by Messrs. Nechemie and
Schoenblum, respectively.
(2)Includes 21,900 shares subject to currently exercisable options.
(3)Includes 145,400 shares subject to currently exercisable options held by all
executive officers and directors of the Company (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.
BOARD COMPENSATION REPORT ON EXECUTIVE COMPENSATION
The Company has no compensation committee or other committee of the Board
of Directors performing similar functions. All members of the Board of Directors
review and determine executive compensation for all executive officers on an
annual basis. Ervin Schoenblum, the Company's Acting President, is the only
executive officer of the Company also serving on the Board. Mr. Schoenblum's
compensation as Acting President was negotiated between the parties and was
based in part on the amount of compensation paid to him while he was a
consultant to the Company and the level of compensation historically paid by the
Company for this position.
The Board of Directors has implemented an executive compensation
philosophy that seeks to relate executive compensation to corporate performance,
individual performance and creation of stockholder value. Historically, this has
been achieved through compensation programs which focus on both short and long
term results.
22
In accordance with the Board of Directors' executive compensation
philosophy, the major component of executive compensation has been base salary.
Salaries for executive officers are based on current individual and
organizational performance, affordability and competitive market trends.
Additional incentives are provided through issuance of incentive stock options.
Board of Directors: Abraham H. Nechemie
Ervin Schoenblum
PERFORMANCE GRAPH
The following performance graph compares the five-year cumulative total
return on the Company's Common Stock to the S & P 500 Index and the S & P
Medical Products and Supplies Index assuming $100 was invested on August 31,
1992 and all dividends were reinvested.
TOTAL SHAREHOLDERS RETURN
ELECTRO-CATHETER CORPORATION
INDEXED \ CUMULATIVE RETURNS
Base
Period Return Return Return Return Return
Company\Index Name Aug 92 Aug 93 Aug 94 Aug 95 Aug 96 Aug 97
ELECTRO-CATHETER CORP. 100 125.00 62.50 40.60 81.25 34.00
S&P 500 INDEX 100 115.21 121.52 147.58 175.22 246.44
HLTH CARE (MED PDS&SUPP) 100 76.73 89.69 138.08 157.11 224.95
Notwithstanding anything set forth in any of the Company's previous
filings under the Securities Act of 1933 or the Securities Exchange Act of 1934
which might incorporate future filings, the preceding performance graph and the
Report of the Compensation Committee herein above provided shall not be deemed
incorporated by reference into any such filings.
Item 13. Certain Relationships and Related Transactions
The Company has no compensation committee or Board committee performing
similar functions. Ervin Schoenblum, the Company's Acting President,
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation.
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
23
T Partnership agreed to a restructuring of its financing agreement. The T
Partnership advanced an additional $200,000 to the Company and agreed to defer
interest payments for a period of three months (interest payments were added to
the outstanding principal on the T Partnership indebtedness) and in April 1997,
the Company borrowed an additional $100,000 from the T Partnership under the
same terms and conditions as its previous borrowing.
The 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.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(a) The following documents are filed as a part of the Report:
1. Financial Statements
See: Index to Financial Statements
2. Financial Statement Schedules
See: Index to Financial Statements
All other schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements and the notes thereto.
3. Exhibits(1)
(3)(a) Registrant's Certificate of Incorporation as amended
through April 11, 1978 - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1981, and incorporated by reference herein as an
exhibit hereto.
(3)(b) Amendment to Registrant's Certificate of Incorporation,
dated March 20, 1985 - filed as an Exhibit to Registrant's
Report on Form 10-Q for fiscal quarter ended May 31, 1985,
and incorporated by reference herein as an exhibit hereto.
(3)(c) Amended and Restated By-laws - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1989, and incorporated by reference herein as an
exhibit hereto.
(10)(a) Registrant's 1984 Employee Stock Purchase Plan, filed as an
Exhibit to Registrant's Report on Form 10-Q for the second
quarter of fiscal year 1984 ended February 29, 1984, and
incorporated by reference herein as an exhibit hereto.
(10)(b) Registrant's 1987 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1987, and incorporated by
refer ence as an exhibit hereto.(2)
(10)(c) Registrant's 1990 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1990, and incorporated by
refer ence as an exhibit hereto.(2)
(10)(d) Registrant's 1992 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1992, and incorporated by
refer ence as an exhibit hereto.(2)
(1) The Company's current, quarterly and annual reports are filed with the
Securities and Exchange Commission under file No. 0-7578. (2) Management
contract or compensatory plan or arrangement.
25
(10)(e) Agreement dated October 11, 1993 between Registrant and the
T Partnership filed as an exhibit to Registrant's Report on
Form 10-K for the fiscal year ended August 31, 1993, and
incorporated by reference as an exhibit hereto.
(10)(f) Amendment dated November 21, 1994 to Agreement between
Registrant and the T Partnership filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1994, and incorporated by reference as an
exhibit hereto.
(10)(g) Lending Agreement dated August 31, 1995 between Registrant
and the T Partnership filed as an exhibit to the
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1995 and incorporated by reference as an exhibit
hereto.
(10)(h) Composite Modification Agreement between Registrant and the
T Partnership dated January 1, 1996 filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1996, and incorporated by reference as an
exhibit hereto.
(10)(i) Composite Modification Agreement between Registrant and the
T Partnership dated April 15, 1997 filed as an exhibit
hereto.
(10)(j) Letter of Intent to Merge between Registrant and Cardiac
Control Systems, Inc. dated October 23, 1997 filed as an
exhibit hereto.
(21) Subsidiaries - Electro-Catheter International Corp.
(23) Consent of KPMG Peat Marwick LLP filed as an exhibit
hereto.
(27) Financial Data Schedule which is submitted electronically
to the Securities and Exchange Commission for information
only and is not filed.
(b) Reports on Form 8-K :
The Company filed a Current Report on Form 8-K dated
October 7, 1997, which, under "Item 5. Other Events"
thereunder reported a verdict in certain litigation in
which the Company has been involved. Also, the Company has
filed a Current Report on Form 8-K dated November 7, 1997,
which, under "Item 5. Other Events" thereunder, reported
the execution of a letter of intent with Cardiac Control
Systems, Inc. contemplating the merger of the two
companies.
(c) Exhibits: Reference is made to the list of
exhibits contained in Item 14(a) 3 above.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
(Registrant)
By: /s/Ervin Schoenblum
Ervin Schoenblum
Acting President
Dated: December 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company
and the capacities and on the dates indicated:
Dated: December 15, 1997 /s/Ervin Schoenblum
Ervin Schoenblum, Acting President
& Director
Dated: December 15, 1997 /s/Joseph P. Macaluso
Joseph P. Macaluso
Principal Accounting Officer
Dated: December 15, 1997 /s/Abraham H. Nechemie
Abraham H. Nechemie, Director
27
Exhibits(1)
(3)(a) Registrant's Certificate of Incorporation as amended
through April 11, 1978 - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1981, and incorporated by reference herein as an
exhibit hereto.
(3)(b) Amendment to Registrant's Certificate of Incorporation,
dated March 20, 1985 - filed as an Exhibit to Registrant's
Report on Form 10-Q for fiscal quarter ended May 31, 1985,
and incorporated by reference herein as an exhibit hereto.
(3)(c) Amended and Restated By-laws - filed as an Exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1989, and incorporated by reference herein as an
exhibit hereto.
(10)(a) Registrant's 1984 Employee Stock Purchase Plan, filed as an
Exhibit to Registrant's Report on Form 10-Q for the second
quarter of fiscal year 1984 ended February 29, 1984, and
incorporated by reference herein as an exhibit hereto.
(10)(b) Registrant's 1987 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1987, and incorporated by
reference as an exhibit hereto.(2)
(10)(c) Registrant's 1990 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1990, and incorporated by
reference as an exhibit hereto.(2)
(10)(d) Registrant's 1992 Incentive Stock Option Plan filed as an
Exhibit to the Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1992, and incorporated by
reference as an exhibit hereto.(2)
(1) The Company's current, quarterly and annual reports are filed with the
Securities and Exchange Commission under file No. 0-7578.
(2) Management contract or compensatory plan or arrangement.
E-1
(10)(e) Agreement dated October 11, 1993 between Registrant and the
T Partnership filed as an exhibit to Registrant's Report on
Form 10-K for the fiscal year ended August 31, 1993, and
incorporated by reference as an exhibit hereto.
(10)(f) Amendment dated November 21, 1994 to Agreement between
Registrant and the T Partnership filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1994, and incorporated by reference as an
exhibit hereto.
(10)(g) Lending Agreement dated August 31, 1995 between Registrant
and the T Partnership filed as an exhibit to the
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1995 and incorporated by reference as an exhibit
hereto.
(10)(h) Composite Modification Agreement between Registrant and the
T Partnership dated January 1, 1996 filed as an exhibit to
Registrant's Report on Form 10-K for the fiscal year ended
August 31, 1996, and incorporated by reference as an
exhibit hereto.
(10)(i) Composite Modification Agreement between Registrant and the
T Partnership dated April 15, 1997 filed as an exhibit
hereto.
(10)(j) Letter of Intent to Merge between Registrant and Cardiac
Control Systems, Inc. dated October 23, 1997 filed as an
exhibit hereto.
(21) Subsidiaries - Electro-Catheter International Corp.
(23) Consent of KPMG Peat Marwick LLP filed as an exhibit hereto.
(27) Financial Data Schedule which is submitted electronically
to the Securities and Exchange Commission for information
only and is not filed.
(b) Reports on Form 8-K :
The Company filed a Current Report on Form 8-K dated
October 7, 1997, which, under "Item 5. Other Events"
thereunder reported a verdict in certain litigation in
which the Company has been involved. Also, the Company has
filed a Current Report on Form 8-K dated November 7, 1997,
which, under "Item 5. Other Events" thereunder, reported
the execution of a letter of intent with Cardiac Control
Systems, Inc. contemplating the merger of the two
companies.
(c) Exhibits: Reference is made to the list of exhibits
contained in Item 14(a) 3 above.
E-2
ELECTRO-CATHETER CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report F-1
Financial Statements:
Balance Sheets - August 31, 1997 and 1996 F-2
Statements of Operations - Years ended August 31, 1997,
1996 and 1995 F-3
Statements of Stockholders' Deficiency/Equity
Years ended August 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows - Years ended August 31, 1997,
1996 and 1995 F-5
Notes to Financial Statements F-6
Financial Statement Schedule:
II - Valuation and Qualifying Accounts F-20
All other schedules are omitted for the reason that they are not required or are
not applicable or the required information is shown in the financial statements
or notes thereto.
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 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.
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1997.
F-1
ELECTRO-CATHETER CORPORATION
Balance Sheets
August 31, 1997 and 1996
1997 1996
---- ----
Assets
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' Deficiency/Equity
Current liabilities:
Current installments of long-term debt - 300,000
Current installments of capitalized
lease obligations 50,734 7,489
Accounts payable 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
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
=========== =========
See accompanying notes to financial statements.
F-2
ELECTRO-CATHETER CORPORATION
Statements of Operations
Years ended August 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
>
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)
======== ===== =====
See accompanying notes to financial statements.
F-3
ELECTRO-CATHETER CORPORATION
Statements of Stockholders' Deficiency/Equity
Years ended August 31, 1997, 1996 and 1995
Additional Total
Common paid-in Accumulated stockholders'
stock capital deficit deficiency/equity
----- ------- ------- -----------------
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)
======= ========== =========== ========
See accompanying notes to financial statements.
F-4
ELECTRO-CATHETER CORPORATION
Statements of Cash Flows
Years ended August 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
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 -
See accompanying notes to financial statements.
F-5
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 where the right to
return exists. Revenue under service contracts are
accounted for as the services are performed.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are carried at cost which
approximates market value.
(d) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
accounts receivable. The Company's customer base is
primarily comprised of hospitals in the U.S. and
distributors outside the U.S. As of August 31, 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.
(Continued)
F-6
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
(f) Patents and Trademarks
Patents and trademarks are recorded at cost and are amortized
on a straight-line basis over their useful lives. Such
costs, net of accumulated amortization, are included in
other assets, net in the accompanying balance sheets.
(g) Property, Plant and Equipment
Property, plant and equipment is carried at cost. Plant and
equipment is depreciated using the straight-line method
over the estimated useful lives of the assets.
Repairs and maintenance costs are charged to operations as
incurred.
Betterments are capitalized. Leasehold improvements are
amortized over the term of the lease or the useful life of
the asset, whichever is shorter.
When assets are retired or otherwise disposed, the cost and
related accumulated depreciation are removed from the
related accounts, and any resulting gain or loss is
recognized in operations for the period.
(h) Research and Development
Research and development costs are charged to expense when
incurred.
(i) Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases
of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when such
differences are expected to reverse. The measurement of
deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not
expected to be realized. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
the period in which such tax rate changes are enacted.
(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.
(Continued)
F-7
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, cont.
(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.
(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.
(Continued)
F-8
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(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
============ =========
(Continued)
F-9
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(4) Property, Plant and Equipment
Property, plant and equipment consisted of the following:
1997 1996
---- ----
Land $ 38,400 38,400
Building 153,597 153,597
Building improvements 993,168 952,837
Equipment 2,307,607 2,244,694
Office furniture and
equipment 534,232 519,319
Leasehold improvements 340,382 340,382
Sales equipment and
diagnostic computers 587,348 589,348
Capitalized leases 305,555 49,268
------- ------
5,260,289 4,887,845
Less accumulated deprecia-
tion and amortization 4,482,626 4,336,147
--------- ---------
Net property, plant
and equipment $ 777,663 551,698
============ =======
(5) Accrued Expenses
The components of accrued expenses consisted of the following:
1997 1996
---- ----
Accrued salaries, wages and
payroll taxes $ 287,933 278,263
Accrued audit fees 52,500 60,000
Other expenses 138,157 57,328
------- ------
$ 478,590 395,591
========= =======
(6) Deferred Revenues
In June 1996, the Company received an advance of $300,000 from an
unrelated company to perform research and development and
pre-production planning for it. For services performed, the Company
recognized $155,707 in revenues in 1996 and such amount was reported
in net revenues in the statement of operations. The remaining
$144,293 was recorded as deferred revenues in the accompanying 1996
balance sheet and was recognized as revenue in fiscal year 1997.
(Continued)
F-10
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(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.
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
(Continued)
F-11
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(7) Subordinated Debentures Due to T Partnership, cont.
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, repectively 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
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.
(Continued)
F-12
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(10) Stock Options, cont.
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.
OnJuly 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 resulting compensation expense 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.
(Continued)
F-13
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(10) Stock Options, cont.
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.
(Continued)
F-14
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(11) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Plan") which
provides for the issuance of a maximum of 75,000 shares of the
Company's common stock which were made available for sale under the
Plan's first offering.
After the first offering, subsequent offerings were made upon the
recommendation of the committee administering the Plan. Common stock
can be purchased through employee-authorized payroll deductions at
the lower of 85% of the fair market value of the common stock on
either the first or last day of trading of the stock during the
calendar year. It is the intention of the Company that the Plan
qualify under Section 423 of the Internal Revenue Code. The Company's
Board of Directors authorized extension of the Plan to January 1,
1998. During 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.
(Continued)
F-15
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(13) Income Taxes, cont.
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-
======== ========
(Continued)
F-16
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(13) Income Taxes, cont.
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:
Net Research
operating and Invest-
loss develop- ment
Expiration carry- ment tax
date forwards credits 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. Sales to the only domestic distributor of the Company's
products totalled 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 1999:
1998 8,294
1999 4,150
2000 4,150
-----
16,594
======
(Continued)
F-17
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(15) Commitments and Contingencies, cont.
(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. 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. 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.
It is intended that upon the closing of the transaction, 50% of the
Company's senior debt would be redeemed and the remaining 50% of such
debt would be converted to convertible preferred stock.
(Continued)
F-18
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
(15) Commitments and Contingencies, cont.
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.
(Continued)
F-19
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements, Continued
Schedule II
ELECTRO-CATHETER CORPORATION
Valuation and Qualifying Accounts
Addition
Balance charged
at begin- to cost Balance
ing of and Write- at end
Description year expenses offs of year
----------- ---- -------- ---- -------
1997 Allowance for doubtful accounts $ 15,000 142,848 5,778 152,070
======== ======= ===== =======
1996 Allowance for doubtful accounts $ 76,796 39,383 101,179 15,000
======== ====== ======= ======
1995 Allowance for doubtful accounts $ 21,776 55,020 - 76,796
======== ====== ====== ======
F-20
Exhibit 10 (i)
SECOND COMPOSITE MODIFICATION AGREEMENT
THIS SECOND COMPOSITE MODIFICATION ("Modification Agreement") dated as of April
15, 1997 between ELECTRO-CATHETER CORPORATION, a New Jersey corporation with
offices at 2100 Felver Court, Rahway, New Jersey 07065 ("Borrower") and THE T
PARTNERSHIP, a New Jersey partnership with offices c/o Wiss & Co., 354
Eisenhower Parkway, Livingston, New Jersey 07039 ("Lender"),
WITNESSETH:
WHEREAS, the Borrower and the Lender entered into a Lending Agreement
(as amended "Lending Agreement") dated August 31, 1995, whereby the Lender
loaned to the Borrower the sum of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00); and
WHEREAS, to evidence such indebtedness the Borrower issued a 12%
Debenture (as amended "Debenture") to the Lender dated August 31, 1995; and
WHEREAS, the Borrower and the lender entered into a Security Agreement
(as amended "Security Agreement") dated as of August 31, 1995, to secure the due
and punctual payment and performance of all obligations of the Borrower under
the Loan Documents (as such term is defined in the Lending Agreement); and
WHEREAS, the obligations of the borrower under the Loan Documents are
further secured by a Mortgage (as amended "Mortgage") dated October 31, 1995,
which Mortgage is a first lien mortgage on Borrower's real property located in
the City of Rahway, County of Union, State of New Jersey, commonly known and
designated as 2100 Felver Court; and
WHEREAS, the Borrower and the Lender entered into a Composite
Modification Agreement and Amendment to Mortgage dated as of January 1, 1996 and
Borrower issued an Amended and Restated Debenture dated January 1, 1996
evidencing additional borrowings by Borrower from Lender with aggregate
borrowings equivalent to
- 1 -
$1,750,000 ("Loan"); and
WHEREAS, the Borrower and the Lender have agreed to modify the Loan
Documents on certain terms and conditions as hereinafter provided.
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. LOAN. The Lender has advanced an additional One Hundred
Thousand Dollars ($100,000.000) to Borrower.
2. MODIFICATION OF LOAN DOCUMENTS. The Loan Documents are
hereby modified and amended as follows:
(a) Principal Amount of Loan. All references to the sum One
Million Seven Hundred Fifty Thousand and 00/100 Dollars ($1,750,000.00) in the
Loan Documents and Mortgage shall be deleted in its entirety and substituted in
its place and stead shall be the sum of all advances up to One Million Eight
Hundred Fifty Thousand
and 00/100 Dollars ($1,850,000.00).
(b) Additional Composite Modifications. References in any Loan
Document to the Debenture, Mortgage or Lending Agreement shall be deemed to
refer to respectively the Second Amended and Restated Debenture, the Mortgage as
modified by the Second Amendment to Mortgage and the Lending Agreement as
modified by the First Composite and this Second Composite Modification
Agreement.
3. CONTINUED VALIDITY OF ORIGINAL LOAN DOCUMENTATION. Except as
otherwise provided herein, the Loan Documents shall continue in full force and
effect, in accordance with their respective terms, and the parties hereto hereby
expressly ratify, confirm and reaffirm all of their respective liabilities,
obligations, duties and responsibilities under and pursuant to the Loan
Documents, as modified by this Modification Agreement, and Borrower agrees that
the same shall constitute valid and binding agreements of Borrower, enforceable
in accordance with their respective terms.
4. MODIFICATION AGREEMENT CONTROLS. In the event of a conflict between
the terms and conditions of this Modification
- 2 -
Agreement and the terms and conditions of the Loan Documents, the terms and
conditions of this Modification Agreement shall control.
5. NO NOVATION. This Modification Agreement does not represent new
indebtedness (except to the extent of the Current New Advances) and does not in
any way represent satisfaction of the indebtedness. It is the intention of the
parties hereto that this Modification Agreement shall not constitute a novation
and shall in no way adversely affect or impair the lien priority of the
Mortgage, the Security Agreement or any other instrument securing the Loan.
6. ADDITIONAL DELIVERIES. Borrower is delivering to Lender
simultaneously herewith a substitute Second Amended and Restated Debenture and
Second Amendment to Mortgage. The T Partnership shall return to Borrower within
45 days of the date of this Modification Agreement the Amended and Restated
Debenture.
IN WITNESS WHEREOF, the parties have executed this Modification
Agreement as of the date first above written.
ELECTRO-CATHETER CORPORATION
By:/s/ Ervin Schoenblum
Ervin Schoenblum,
Acting President
THE T PARTNERSHIP
By: /s/Abraham H. Nechemie
- 3 -
Exhibit 10 (j)
CARDIAC CONTROL SYSTEMS
3 Commerce Boulevard
Palm Coast, Florida
Telephone: (904) 445-5450
Fax: (904) 445-7226
October 23, 1997
Ervin Schoenblum
Acting President
Electro-Catheter Corporation
2100 Felver Court
Rahway, NJ 07065
Dear Erv:
The purpose of this letter is to set forth the intention of Cardiac Control
Systems, Inc., ("CCS"), to enter into an agreement with Electro-Catheter
Corporation ("Elecath"), whereby CCS would merge with Elecath, subject to the
following terms and conditions:
1. It is contemplated that this would be a stock for stock merger
transaction, payable as follows:
a. Two shares of CCS common stock for every three shares of Elecath common
stock,
b. A cash payment of $1.00 per share for single, uneven shares of Elecath
common stock in lieu of partial payments of CCS common stock.
c. If the ratio of the bid price of CCS shares to Elecath shares becomes
greater than 2.25 or less than 0.75 based on a 10-day moving average
prior to closing, an adjustment of the exchange ratio may be negotiated.
CCS common shares trade on the NASDAQ OTC Bulletin Board. The thirty day
average between the closing bid and ask prior to the date of this Letter of
Intent has been $ 0.82 per share. CCS has also completed a series of private
institutional financings at prices ranging from $2.80 to $5.00 per common share,
with the most recent financing completed June 13, 1997, whereby warrants were
granted to two parties at exercise prices of $4.00 and $5.00 per common share in
conjunction with a debt financing.
2. As a result of the merger and in consideration for the transaction
exchange:
a. All the issued and outstanding shares of Elecath will be acquired by CCS
or canceled such that CCS shall own 100% of Elecath common stock
following the merger.
b. All the outstanding options and warrants to purchase shares of Elecath
common stock will be converted into CCS options and warrants with the
number of new options or warrants and the exercise price to be adjusted
accordingly to reflect the exchange ratio.
Page 1 of 4
After the transaction, it is estimated that there will be approximately
6,875,000 shares of CCS common stock outstanding. This is based on
approximately 2,619,000 outstanding common shares currently held by
existing CCS shareholders and approximately 4,256,000 CCS common shares
to be received by Elecath shareholders in exchange for their Elecath
common stock (this assumes that there are approximately 6,384,000
Elecath common shares currently outstanding.) This is, of course, prior
to any potential dilution related to any funding activities
contemplated as part of this transaction.
In addition, there will be approximately 1,760,700 options and warrants
outstanding. This is based on approximately 1,132,000 existing options
and warrants for CCS common stock (currently at exercise prices ranging
from $0.18 to $5.25 per share, with 74% at $1.00 or more per share),
and 628,700 new CCS options or warrants (exchanged for 943,044 Elecath
options or warrants on a 2 for 3 basis).
Upon consummation of the transaction, there will be approximately
8,635,700 shares fully diluted, with the former CCS shareholders
holding 3,751,000 shares, options or warrants and the former Elecath
shareholders holding 4,884,700 shares, options or warrants. This is
subject to paragraph 1c not becoming effective.
3. CCS will redeem for cash one-half of all indebtedness outstanding at
the time of closing to a maximum of $1.0 million due to the T
Partnership. The remaining half would be converted to a 5 year 9%
convertible preferred stock, convertible at the holders' option at the
greater of $1.00 per common stock or a 20% premium to any equity raised
as part of this transaction.
4. Commencing with the execution of this Letter of Intent, each company
shall be permitted to make a full due diligence investigation of the
other company and to have full access to all information thereto. The
Companies have already executed mutual confidentiality agreements. If
the observations made during the due diligence process by either company
are substantially different than it had been previously led to believe,
that Company may terminate this letter, without triggering the break-up
fee indicated in paragraph 8, however legal fees incurred to date will
be split evenly among the two Companies.
5. In good faith, a formal agreement (the "Agreement") will be negotiated,
executed, and delivered by CCS and Elecath containing the terms and
conditions in this letter and representations, warranties, covenants,
indemnities and conditions usual and customary in a transaction of this
kind. The Agreement also will provide, among other customary covenants,
for (a) the conduct of the business of Elecath and CCS in the ordinary
course prior to closing, in such manner as to maintain the business,
employees and good will of Elecath and CCS and as is consistent with
sound business practices; (b) the provision to each Company of complete
and on-going information about the other Company prior to closing; (c)
nonpayment of dividends, options or other distributions or repurchase of
any capital stock or option of Elecath or CCS or issuance of additional
debt; (d) the agreement of both Companies' Boards of Directors to submit
to shareholders to approve the merger and (e) the provision that both
Companies, to the best of
Page 2 of 4
their knowledge, are in full compliance with all regulatory agencies,
most notably the United States Food and Drug Administration (FDA) or
adequate disclosure by either company as to areas of noncompliance.
6. At the time of the execution of the Agreement, it is intended that there
will be delivered to CCS an agreement by the T Partnership and the Board
of Elecath and to Elecath an agreement by the Board of CCS committing
such holders to vote in favor of the acquisition.
7. From the date hereof, and so long as this letter or the Agreement
remains in effect, neither CCS or Elecath or either one's agents, nor
any member of the T Partnership, shall, so long as not in violation of
legal obligations, solicit or entertain an offer engaging in discussion
or otherwise negotiate with, or provide information to any other party
with respect to the sale or merger of their respective Company,
provided, in the event either company shall engage in such discussions,
the other Company's damages shall be limited to the breakup fee, to the
extent due in paragraph 8.
8. Except as set forth in paragraphs 4 and 11, each party shall pay its own
expenses, incidental to negotiations, preparation of agreements, and the
closing whether or not the purchase transaction is finally consummated.
However, in the event that this Letter of Intent or the Agreement is
signed and either party does not proceed because of its acceptance of an
alternative offer within six months of a termination, then the other
party will be entitled to a break-up fee of $225,000, plus legal fees,
investment banking and commitment fees incurred to that point. If either
Company needs to borrow additional capital to continue normal business
operations or finish due diligence prior to closing of the transaction,
if approved by both Companies, this new debt will become the obligation
of the consolidated Company after the merger.
9. Closing of the transaction described herein shall be subject to
customary closing conditions, including the following:
a. All required regulatory approvals shall have been obtained by each
Company, and shall contain only such conditions as are not burdensome to
the other Company.
b. The Agreement and merger shall have been approved by holders of not less
than a sufficient percent of each Conmpany's common stock as is legally
required for the consummation of the merger.
c. All of the issued and outstanding shares of Elecath's common stock and
preferred stock, as well as common stock options or warrants, shall
either have been acquired by CCS or canceled.
d. There shall be no litigation pending seeking to enjoin or question the
validity of the transactions contemplated by the Agreement.
e. There shall not have occurred any material adverse change in the
business operations, financial condition, capital structure, or
prospects of Elecath or CCS.
Page 3 of 4
f. Approval of the Board of Directors of CCS and Elecath
10.Any public announcements of the proposed merger or any subsequent
termination thereof shall be in a form which has been approved in
writing by both CCS and Elecath, which in any event shall comply as to
content and timing of applicable securities laws. It is understood that
neither CCS or Elecath shall, within reason, prevent the other from
issuing any applicable public disclosures.
11.It is contemplated that a total of $10.0 million in financing on terms
acceptable to both Companies is to be obtained. Completion of this
transaction is contingent on the receipt of a minimum $7,000,000 in
financing on terms acceptable to both Companies (a minimum of
$4,000,000, if CCS's current senior lenders and debt instruments
transition with the consolidated Companies). If sufficient funding is
not obtained on acceptable terms to close the transaction, then the two
Companies agree to split evenly the legal, investment banking and
commitment fees incurred to that time.
12.The parties hereto agree that it is their intent that they will pursue
diligently the negotiation and preparation of the Agreement and the
closing contemplated therein, and it is the aim of the parties that the
Agreement (subject to shareholder approval) will be signed not later
than November 21, 1997. If the Agreement is not signed by that date, or
such other date as may be mutually acceptable to the parties, the Letter
of Intent shall thereafter be of no further force and effect except for
paragraphs 4 and 8 above.
Except with respect to paragraphs 4, 7, 8, and 10 this letter is not intended to
be a binding contract. Acceptance of the general principles set forth in the
Letter of Intent shall not constitute an agreement to consummate the transaction
described herein. Such agreement will be contained only in the Agreement. Nor
shall this letter constitute an agreement to enter into a definitive agreement.
This letter is an expression of mutual intent to proceed with a drafting of a
definitive agreement in accordance with the principles stated herein.
If the forgoing accurately reflects your understanding and present intent,
please execute and return to the undersigned a copy of this letter. This letter
shall not be effective unless countersigned and delivered to the undersigned on
or before October 24, 1997.
By: /s/ Bart C. Gutekunst
Chairman of the Board
By: /s/ Alan J. Rabin
President and CEO
Agreed to this 24th day of October, l997
By: /s/ Ervin Schoenblum
Acting President and COO Elecath
Page 4 of 4
Exhibit 23
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Independent Auditors' Consent
The Board of Directors
Electro-Catheter Corporation:
We consent to incorporation by reference in the Registration Statement
(No.33-56016) on Form S-8 of Electro-Catheter Corporation of our report dated
November 12, 1997 relating to the balance sheets of Electro-Catheter
Corporation as of August 31, 1997 and 1996, and the related statements of
operations, stockholders' deficiency/equity and cash flows and related financial
statement schedule for each of the years in the three-year period ended August
31, 1997, which report appears in the August 31, 1997 annual report on Form 10-K
of Electro-Catheter Corporation.
KPMG Peat Marwick LLP
Short Hills, New Jersey
December 15, 1997