<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 0-14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
_____________________________
DELAWARE 74-2119162
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3 COMMERCE BOULEVARD, PALM COAST, FLORIDA 32164
(Address of Principal Executive Offices) (Zip Code)
_____________________________
Registrant's telephone number, including area code: (904) 445-5450
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 for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
As of October 31, 1995, 1,373,824 shares of the Registrant's common stock, $.10
par value, were issued and outstanding.
===============================================================================
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
SEPTEMBER 30, 1995
INDEX
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Page No.
- ----------------------------------------------------------------------------------------------------
<S> <C>
PART I. FINANCIAL INFORMATION
Balance Sheets at September 30, 1995 (Unaudited)
and March 31, 1995................................................................ 3
Statements of Operations and Accumulated Deficit for the Three Months and Six Months
Ended September 30, 1995 and 1994 (Unaudited)..................................... 4
Statements of Cash Flows for the Six Months Ended
September 30, 1995 and 1994 (Unaudited)............................................ 5
Notes to Financial Statements......................................................... 6
Management's Discussion and Analysis of Financial Position
and Results of Operations......................................................... 10
PART II. OTHER INFORMATION.............................................................. 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
September 30, March 31,
1995 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 77,064 $ 667,490
Certificate of deposit............................................. 40,000 40,000
Accounts and notes receivable...................................... 1,208,788 1,403,276
Inventories........................................................ 2,110,815 1,755,432
Prepaid expenses................................................... 102,737 57,659
------------ ------------
Total current assets.................................. 3,539,404 3,923,857
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation of $3,115,460 and $3,039,211.......................... 1,526,785 1,410,259
OTHER ASSETS........................................................... 382,908 463,822
------------ ------------
Total assets............................................ $ 5,449,097 $ 5,797,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Other notes and debt obligations payable within one year.......... $ 72,858 $ 46,538
Accounts payable.................................................. 459,152 474,877
Accrued interest.................................................. 72,323 555
Accrued compensation.............................................. 178,197 279,367
Accrued compensated absences...................................... 124,030 112,477
Deposits payable.................................................. 200,585 351,147
Other accrued expenses............................................ 321,133 213,594
------------ ------------
Total current liabilities............................... 1,428,278 1,478,555
------------ ------------
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR...................... 4,187,643 4,119,782
------------ ------------
OTHER LIABILITIES...................................................... 179,611 169,311
------------ ------------
DEFERRED ROYALTIES..................................................... 537,950 690,050
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES................................. - -
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.10 par value, 30,000,000 shares authorized,
1,343,619 and 1,342,819 shares issued and outstanding....... 134,362 134,282
Capital in excess of par value..................................... 18,664,011 18,725,430
Accumulated deficit................................................ (19,682,758) (19,519,472)
------------ ------------
Total stockholders' equity (deficit).................... (884,385) (659,760)
------------ ------------
Total liabilities and stockholders' equity (deficit).... $ 5,449,097 $ 5,797,938
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Net sales..................................... $ 1,314,899 $ 1,376,752 $ 2,586,902 $ 2,443,525
Royalty income................................ 486,850 422,175 988,650 449,150
------------ ------------ ------------ ------------
Total revenue......................... 1,801,749 1,798,927 3,575,552 2,892,675
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of products sold......................... 591,325 695,643 1,224,715 1,330,060
Selling, general and administrative expenses.. 881,868 595,169 1,851,698 1,104,501
Engineering, research and development expenses 265,879 114,496 463,488 229,967
------------ ------------ ------------ ------------
Total cost and expenses............... 1,739,072 1,405,308 3,539,901 2,664,528
------------ ------------ ------------ ------------
OPERATING INCOME..................................... 62,677 393,619 35,651 228,147
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income............................... 1,492 583 8,019 1,060
Interest expense.............................. (145,083) (64,211) (282,010) (122,053)
Other income.................................. 75,006 724 75,054 832
------------ ------------ ------------ ------------
Total other income (expenses)......... (68,585) (62,904) (198,937) (120,161)
------------ ------------ ------------ ------------
NET INCOME (LOSS).................................... (5,908) 330,715 (163,286) 107,986
ACCUMULATED DEFICIT - BEGINNING OF PERIOD............ (19,676,850) (21,117,172) (19,519,472) (20,894,443)
------------ ------------ ------------ ------------
ACCUMULATED DEFICIT - END OF PERIOD.................. $(19,682,758) $(20,786,457) $(19,682,758) $(20,786,457)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE................... $.00 $.27 $(.12) $.09
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.......... 1,343,280 1,207,705 1,343,051 1,207,596
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended September 30, 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................................... $(163,286) $ 107,986
Adjustment to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation....................................................................... 120,433 82,913
Amortization....................................................................... 112,734 -
Gain on sale of equipment.......................................................... (4,274) -
(Increase) decrease in accounts receivable......................................... 194,488 (278,435)
Increase in inventories............................................................ (355,383) (46,080)
(Increase) decrease in prepaid expenses............................................ (45,078) 53,603
Increase in other assets........................................................... (2,775) -
Decrease in accounts payable....................................................... (15,725) (34,151)
Increase in stockholder advances.................................................. - 127,558
Increase in accrued interest....................................................... 71,768 113,789
Increase (decrease) in accrued compensation........................................ (99,170) 56,673
Increase in accrued compensated absences........................................... 11,553 8,671
Decrease in deposits payable...................................................... (150,562) (18,606)
Increase in other accrued expenses................................................ 107,539 55,143
Increase (decrease) in other liabilities........................................... 10,300 (1,398)
Decrease in deferred royalties..................................................... (152,100) (156,600)
Debt issuance costs................................................................ (22,634) -
--------- ---------
Net cash provided (used) by operating activities............................. (382,172) 71,066
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment............................................... (252,881) (33,867)
Proceeds from the sale of equipment..................................................... 20,196 -
--------- ---------
Net cash used by investing activities.............................................. (232,685) (33,867)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes and debt obligations payable........................................ 68,490 58,995
Repayment of notes and debt obligations payable......................................... (40,677) (111,163)
Principal payments under capital lease obligations...................................... (1,654) (1,448)
Principal payments under installment purchase obligations............................... (1,728) (1,423)
--------- ---------
Net cash provided (used) by financing activities................................... 24,431 (55,039)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (590,426) (17,840)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD............................................. 667,490 106,231
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................................... $ 77,064 $ 88,391
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period......................................................... $ 107,756 $ 8,264
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Reduction in accounts payable in exchange for common stock.............................. $ - $ 2,344
Reduction in accrued compensation in exchange for common stock.......................... 2,000 -
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of September 30, 1995, the related statements of operations and accumulated
deficit for the three months and six months ended September 30, 1995 and 1994,
and the statements of cash flows for the six months ended September 30, 1995 and
1994 are unaudited. In the opinion of management, such financial statements
reflect all adjustments, consisting only of normal recurring items, necessary to
present fairly the financial position of the Company at September 30, 1995 and
the results of operations and cash flows for the three months and six months
ended September 30, 1995 and 1994.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months and six months ended September 30, 1994
to conform with classifications used in the unaudited financial statements for
the three months and six months ended September 30, 1995. Also, all share
information for the three months and six months ended September 30, 1994 has
been restated as if the one for seven reverse stock split effective December 13,
1994 had been in effect at the time.
The accompanying unaudited financial statements as of September 30, 1995 and for
the three months and six months ended September 30, 1995 and 1994 should be read
in conjunction with the Company's audited financial statements for the year
ended March 31, 1995.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company has a history of net losses
and incurred a net loss for the six months ended September 30, 1995 of $163,286.
The Company's ability to continue as a going concern is dependent upon the
attainment of a profitable level of operations. The Company believes that sales
growth is critical to attaining a profitable level of operations. Therefore, the
Company is continuing its efforts to expand its sales volume, both domestically
and internationally. Management believes that the Company has the potential to
increase sales and ultimately achieve a profitable level of operations. However,
there is no assurance that the Company will be able to attain profitable
operations and continue operations as a going concern.
NOTE 2 - INVENTORIES
Inventories at September 30, 1995 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
September 30, March 31,
1995 1995
------------- ----------
(unaudited)
<S> <C> <C>
Raw materials and supplies.. $1,049,123 $ 867,492
Work-in-process............. 562,507 436,647
Finished goods.............. 619,185 571,293
---------- ----------
2,230,815 1,875,432
Reserve for obsolescence.... (120,000) (120,000)
---------- ----------
$2,110,815 $1,755,432
--------------------------------------------------------
</TABLE>
Finished goods inventories include approximately $385,000 and $306,000 of
products consigned to customers and independent sales representatives at
September 30, 1995 and March 31, 1995, respectively.
6
<PAGE>
NOTE 3 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations payable at September 30, 1995 and March 31, 1995
consist primarily of a $1.5 million promissory note dated March 31, 1995 (the
"Sirrom mortgage note") payable to Sirrom Capital Corporation; and $2,885,000 in
5% Convertible Debentures. Notes and debt obligations payable at September 30,
1995 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
September 30, March 31,
1995 1995
------------- ----------
(unaudited)
<S> <C> <C>
Sirrom mortgage note, net of discount.. $1,290,750 $1,221,000
5% Convertible Debentures.............. 2,885,000 2,885,000
Other.................................. 84,751 60,320
---------- ----------
4,260,501 4,166,320
Amount payable within one year........ (72,858) (46,538)
---------- ----------
Amount payable after one year.......... $4,187,643 $4,119,782
-------------------------------------------------------------------
</TABLE>
Pursuant to a private placement, the Company sought to raise up to $3.5 million
pursuant to a Convertible Debenture offering. Between October 11, 1994, and
December 31, 1994, the Company issued $2,885,000 in 5% Convertible Debentures
(the "Debentures") due October 31, 1999. Interest is payable in cash or, at the
Company's option, common stock of the Company on each March 31 and October 31
commencing March 31, 1995. At September 30, 1995, accrued interest outstanding
pursuant to the Debentures approximated $72,000, and there was no accrued
interest outstanding pursuant to the Debentures at March 31, 1995. The cash
value of any interest payments made in common stock will be at the conversion
price of $2.80. The conversion price of the debenture is $2.80, which is
subject to adjustment in accordance with certain anti-dilution terms of the
Debenture. The Debentures may be converted to common stock at anytime at the
option of the Debenture holder. Under the terms of the Debenture, the Company
was obligated to file a registration statement with the SEC registering the
common stock into which the Debentures are convertible and to keep such
registration statement effective for a maximum of three years from its effective
date. The Company filed such Registration Statement and it became effective
April 27, 1995. The Debentures will be automatically converted to common stock
in the event the Company has in effect with the SEC a registration statement
registering the Common Stock underlying the Debentures and one of the following
events occurs: (i) the Company effects a registration statement with the SEC for
the sale of common stock or securities convertible to common stock, which equals
or exceeds $5 million, and the price per share (or the conversion, exchange or
exercise price per share, if Convertible Securities) is not less than 120% of
the conversion price for the Debentures, or (ii) the Company's common stock
closes at a price per share not less than 2.5 times the conversion price for
thirty consecutive days within twelve months of the date of issuance of the last
Debenture, or (iii) 66 2/3% of the Debenture principal amount has been converted
to common stock. As long as more than 25% of the principal amount of the
Debentures are outstanding, the Company must obtain consent of the holders of
51% of such principal amount to effect a merger, consolidation, or sale of
substantially all of the assets of the Company. Further, the Company shall use
its best efforts to seek shareholder approval of a director designated by those
holders.
On March 31, 1995, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with Sirrom Capital Corporation, a Tennessee corporation
("Sirrom") and executed a $1,500,000 secured promissory note. Interest on the
note is payable monthly at 13.5% and principal is due on March 31, 2000. The
note is secured by a first mortgage lien on all the Company's real and personal
property, excluding inventory and accounts receivable, but including general
intangibles such as its patents and royalties from Intermedics Inc. The Loan
Agreement restricts the Company from incurring additional indebtedness in excess
of $200,000 annually without the lender's consent. In addition, the Company must
give the lender advance notice of certain events,
7
<PAGE>
such as dividend payments, certain new stock issues, reorganization, and merger
or sale of substantially all assets.
In connection with the Loan Agreement, the Company granted the lender a warrant
to purchase, initially, 100,000 shares of the Company's common stock at $.01 per
share. Upon issuance of the warrant in March 1995, the Company recorded
$279,000 as a discount, representing the difference between the estimated fair
market value of the underlying stock and $.01 per share. This resulted in an
effective interest rate of 28% on the Sirrom debt. The warrant expires on March
31, 2000. The Loan Agreement also provides that in the event the loan is not
paid off by March 31, 1997, or any anniversary thereafter, the lender has the
right to purchase an additional 50,000 shares of common stock at $.01 per share
upon such date and upon each anniversary that any amount is owed under the Loan
Agreement through March 31, 1999. The warrant also provides for certain piggy-
back registration rights regarding the underlying shares in the event the
Company files a registration statement of a form suitable for a secondary
offering.
Under the terms of the Company's outstanding 5% Convertible Debentures (the
"Debentures"), the Company had given a negative pledge not to encumber its
patents or royalties while the Debentures were outstanding. To consummate the
mortgage financing, the Company obtained a consent and waiver from the
Debentureholders and in exchange therefor, under a certain Second Mortgage and
Security Agreement dated March 31, 1995 ("Second Mortgage") and pursuant to
related documentation, the Company gave the Debentureholders a second lien on
the same collateral in which Sirrom took a first security interest. The
Debentureholders' security interest in the Company's real and personal property
will terminate upon the first to occur of: (a) the payment in full of the Sirrom
loan, or (b) at such time as there remains no amount owing to Debentureholders
under the Debentures.
Pursuant to a Subordination Agreement between the Debentureholders, the Company
and Sirrom dated March 31, 1995 (the "Subordination Agreement"), the
Debentureholders agreed with Sirrom to subordinate their Debentures to Sirrom's
Loan Agreement with the Company. Under the Subordination Agreement, the Company
may not make payments on the Debentures (interest or principal) if the Company
is in default of its obligations to Sirrom which default would subject the
Sirrom Note to acceleration. Further, in the event of the acceleration of the
amounts owed on the Debentures (as a result of the Company's default
thereunder), or in the event of any payment or distribution of assets of the
Company to creditors upon any dissolution, winding up, or total or partial
liquidation or reorganization of the Company, the principal and interest owed to
Sirrom shall be paid in full prior to any assets being retained by, or payments
made to Debentureholders.
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES
PURCHASE CONTRACTS
During the year ended March 31, 1989, the Company entered into an agreement for
the procurement of hybrid microelectronic circuits. The development of circuits
for the Company's atrial-controlled ventricular and single-chamber pacing
products was completed in fiscal 1992. Development of the circuits for the
Company's dual-chamber devices was completed in fiscal 1993. As of September 30,
1995, the Company's future maximum purchase obligation approximated $1,571,000.
During the year ended March 31, 1990, the Company entered into an agreement for
the procurement of integrated circuits. The development of these circuits was
completed in fiscal 1992. As of September 30, 1995, the Company's future maximum
purchase obligation approximated $96,000.
DESIGN AND DEVELOPMENT CONTRACT
In August 1995, the Company entered into a fixed-cost contract for the
development of technological enhancements to its second generation of hybrid
microelectronic circuits. Total development costs under the
8
<PAGE>
terms of the contract approximate $63,000. As of September 30, 1995, the
Company's remaining outstanding commitment under the development contract
approximates $10,000.
FINANCIAL CONSULTING AGREEMENT
In October 1992, the Company entered into an agreement (the "Agreement") with a
financial brokering and consulting firm to assist the Company in its financing
efforts. Pursuant to this Agreement, the Company was required to pay the
broker/consultant $8,000 per month for a period of 24 months. The Company
deferred payment of 50% of the monthly fee and accrued interest thereon at a
rate of 10%, pursuant to the Agreement. If at the end of 12 months the
broker/consultant had not performed a financial service as defined in the
Agreement, the Company could terminate this Agreement, including the remaining
monthly accrued fees and interest thereon. In October 1993, the Company
terminated this Agreement, based on non-performance as defined in the Agreement.
On January 4, 1994, the financial brokering and consulting firm filed suit
against the Company in the Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida (the "Court"), alleging that the Company had breached
certain contractual duties and obligations. The suit requests a judgment
requiring the Company to deliver warrants to purchase 15% of the Company's
common stock, and damages in excess of $15,000. The Company has denied
liability and filed a counterclaim alleging that the brokering firm fraudulently
induced the Company into the Agreement then breached the Agreement and certain
fiduciary duties. Management plans to vigorously defend the lawsuit and pursue
its counterclaims. In the opinion of management, this action has no merit and
the ultimate outcome is not expected to materially affect the financial position
of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
FINANCIAL POSITION AND LIQUIDITY
The Company's continuing efforts towards building a sales and marketing
organization, expanding its research and design efforts, and its capital
expenditure and debt service requirements continue to have an unfavorable impact
on the Company's financial position and liquidity. Historically, the Company's
operating losses, capital expenditure and debt service requirements have been
financed through external sources, consisting primarily of equity and debt
placements. The Company's external sources of funds during the first six months
of fiscal 1996 consisted of short-term borrowings aggregating $68,000. The
Company's operating and capital expenditure cash requirements exceeded its
external sources of liquidity during the first six months of fiscal 1996.
Accordingly, the Company experienced negative cash flow.
Cash used by operations during the first six months of fiscal 1996 approximated
$382,000. Capital expenditures and repayment of debt obligations during the
first six months of fiscal 1996 approximated $253,000 and $44,000, respectively.
Short-term borrowings during the first six months of fiscal 1996 aggregated
$68,000. Overall, negative cash flow for the first six months of fiscal 1996
approximated $590,000.
Cash provided by operations during the first six months of fiscal 1995
approximated $71,000. Capital expenditures and repayment of debt obligations
during the first six months of fiscal 1995 approximated $34,000 and $114,000,
respectively. Short-term borrowings during the first six months of fiscal 1995
aggregated $59,000. Overall, negative cash flow for the first six months of
fiscal 1995 approximated $18,000.
The Company has no significant commitments for the acquisition of capital
assets. It has, however, entered into material commitments pursuant to certain
development and inventory procurement contracts with a remaining obligation
aggregating approximately $1,677,000 at September 30, 1995. As of September 30,
1995, the Company's incurred and unpaid obligations pursuant to these contracts
approximates $170,000 (see "Note 4 - Commitments and Contingent Liabilities" of
the "Notes to Financial Statements").
Subsequent to September 30, 1995, in October 1995, the Company executed a $1
million promissory note with Intermedics Inc. to assist the Company in meeting
the demand of Intermedics future electrode lead orders pursuant to the Supply
Contract between Intermedics and the Company. The loan will be amortized at a
given ratio against future lead sales to Intermedics. The note bears interest
at 24.5% annually and is secured by future proceeds from sales to Intermedics
and royalties to be received from Intermedics pursuant to the License Agreement
with Intermedics. Any unpaid principal and accrued interest will be due and
payable September 1, 1998. The Company believes this will meet its working
capital requirements for the remainder of fiscal 1996.
The ability of the Company to generate adequate amounts of cash either through
external financing sources or operations to meet its working capital, capital
expenditure and debt service requirements on a long-term basis is dependent upon
the attainment of a profitable level of operations. The Company believes that
sales growth is critical to the attainment of a profitable level of operations.
Accordingly, the Company is continuing its efforts to expand the volume of its
business, both domestically and internationally. The Company believes that it
has the potential to increase its sales and ultimately achieve a profitable
level of operations. However, there is no assurance that the Company's
operations will improve and/or generate the cash flow required to meet the
Company's liquidity needs, or that the Company will be able to continue its
operations as a going concern.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1994
OVERVIEW. Overall, the Company's total revenues for the second quarter of fiscal
1996 remained constant at $1.8 million as compared to the same for the second
quarter of fiscal 1995. Sales declined 4% from $1.4 million to $1.3 million and
royalties increased from $422,000 to $487,000 for the second quarter of fiscal
1996 as compared to the second quarter of fiscal 1995. Royalty income represents
royalties from Intermedics Inc. pursuant to a License Agreement between the
Company and Intermedics. However, as a result of increases in operating expenses
due to increased investments in sales and marketing and research and design, and
increased interest expense, the Company incurred a net loss of $6,000 for the
second quarter of fiscal 1996, as compared to net income of $331,000 for the
second quarter of fiscal 1995.
SALES. Although overall sales have declined 4%, pacer unit sales declined
51%. However, this decline in pacer unit sales was somewhat offset by a 32%
increase in lead unit sales and increased sales of hybrid circuits to an Italian
manufacturer. The decline in overall pacer unit sales for the second quarter of
fiscal 1996 as compared to the second quarter of fiscal 1995 is primarily the
result of a decline in international sales. The decline in international sales
is the result of the Company not having obtained the CE Mark required to sell
product in Europe. The increased lead sales are a result of increased lead
sales to Intermedics Inc. pursuant to a Supply Agreement between the Company and
Intermedics.
Sales by geographic area for the second quarter of fiscal 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------
Geographic Area 1996 1995
-----------------------------------------
<S> <C> <C>
United States.... $1,145,449 $1,046,799
Europe........... 169,450 329,953
---------- ----------
$1,314,899 $1,376,752
-----------------------------------------
</TABLE>
The Company's domestic sales for the second quarter of fiscal 1996 increased 9%
as compared to the second quarter of fiscal 1995. The increase in domestic
sales is a result of a 36% increase in lead unit sales resulting from increased
lead sales to Intermedics Inc. European sales declined 49% for the second
quarter of fiscal 1996 as compared to the second quarter of fiscal 1995. The
Company ceased sales of pacers to European distributors effective January 1,
1995 as the Company has not yet obtained the CE Mark required to sell product in
Europe. Although there is no assurance the Company will succeed in obtaining the
CE Mark, the Company is preparing to obtain the CE Mark by the end of fiscal
1996. However, the Company executed a new contract with its Italian distributor
and the Company now sells hybrid circuits to this supplier instead of the
pacemaker sub-assemblies it historically sold to this distributor. The Company
is not required to have the CE Mark in order to sell components to European
suppliers.
11
<PAGE>
Sales by product line (including product assemblies) for the second quarter of
fiscal 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Product Line 1996 1995
------------------------------------------------------------------
<S> <C> <C>
Single-chamber pacemakers................. $ 167,586 $ 341,778
Dual-chamber pacemakers................... - 12,290
Atrial-controlled ventricular pacemakers.. 437,763 569,717
Hybrid circuits........................... 99,500 21,500
Electrode leads........................... 586,367 393,135
Other..................................... 23,683 38,332
---------- ----------
$1,314,899 $1,376,752
------------------------------------------------------------------
</TABLE>
The Company received approval from the Food and Drug Administration ("FDA") for
its downsized dual-chamber device at the end of September 1995. Sales of the new
downsized dual-chamber device are expected to have a significant impact on
domestic sales in the second half of fiscal 1996. The Company is continuing its
efforts to increase its sales domestically through the recruitment of new sales
representatives. Further, the Company is also continuing its efforts to obtain
the CE Mark in order to re-establish its presence in the European market; and it
continues to pursue other international markets. The Company believes that its
new line of ultra-thin, longer-lived pacing products, along with the atrial-
controlled ventricular pacing system should provide the Company a very
competitive position in the market.
ROYALTY INCOME. Royalty income increased 15% in the second quarter of fiscal
1996 as compared to the second quarter of fiscal 1995. Royalty income represents
royalty fees from Intermedics Inc. pursuant to a License Agreement between the
Company and Intermedics, whereby the Company licensed the technology relating to
its single-pass atrial-controlled ventricular pacing system. Intermedics began
marketing this pacing system domestically in March 1995. The future potential
royalties to be recorded over the life of the License Agreement are estimated at
$4.1 million.
COSTS OF PRODUCTS SOLD. As compared to the 4% decline in sales, cost of products
sold declined 15% to $591,000 for the second quarter of fiscal 1996 as compared
to $696,000 for the second quarter of fiscal 1995, resulting in an increase in
the gross margin to 55% for the second quarter of fiscal 1996 as compared to 49%
for the same period last year. Increased production levels are having a
favorable impact on the Company's manufacturing costs, reducing overhead and
scrap rates; further, the Company is incurring reduced per-unit manufacturing
costs for the downsized generation pacers. However, these factors are being
slightly offset by the less favorable margin being incurred for lead sales to
Intermedics which account for 38% of sales for the second quarter of fiscal 1996
as compared to 24% for the second quarter of fiscal 1995. However, the Company
also receives a $325 royalty per lead unit sold by Intermedics which
incorporates the Company's single-pass technology, pursuant to the License
Agreement with Intermedics.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 48% for the second quarter of fiscal 1996 as
compared to the second quarter of fiscal 1995 primarily as a result of increased
salary and benefits expense for new senior management and sales and marketing
personnel; increased commission expense as a result of the support of new sales
representatives; and increased travel expense for the new senior management and
sales and marketing personnel as they recruit, train and manage the new sales
force.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. The 132% increase in
engineering, research and development expenses for the second quarter of fiscal
1996 as compared to the second quarter of fiscal 1995 is a result of the Company
hiring new engineering personnel to resume its developments in single-pass lead,
dual-chamber operation and rate-responsive pacing, and related outside
professional services for those development projects.
12
<PAGE>
OTHER INCOME AND EXPENSES. Interest expense for second quarter of fiscal 1996
increased 126% as compared to the second quarter of fiscal 1995 as a result of
higher debt balances, primarily due to the $2,885,000, 5% debenture financing,
and the amortization of debt costs associated with the debenture and mortgage
financings.
SIX MONTHS ENDED SEPTEMBER 30, 1995 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1994
OVERVIEW. Overall, the Company's total revenues for the first half of fiscal
1996 increased 24% to $3.6 mllion as compared to $2.9 million for the first half
of fiscal 1995. Sales increased 6% for the first half of fiscal 1996 to $2.6
million as compared to $2.4 million for the same period last year. Royalty
income increased 120% to $989,000 for the first half of fiscal 1996 as compared
to $449,000 for the first half of fiscal 1995. However, as a result of increases
in operating expenses due to increased investments in sales and marketing and
research and design, and increased interest expense, the Company incurred a net
loss of $163,000 for the six months ended September 30, 1995, as compared to net
income of $108,000 for the same period last year.
SALES. Although overall sales increased 6%, pacer unit sales declined 48%.
However, this decline in pacer unit sales was offset by a 39% increase in lead
unit sales and increased sales of hybrid circuits to an Italian manufacturer.
The decline in overall pacer unit sales for the first half of fiscal 1996 as
compared to the first half of fiscal 1995 is primarily the result of a decline
in international sales. The decline in international sales is the result of the
Company not having obtained the CE Mark required to sell product in Europe. The
increased lead sales are a result of increased lead sales to Intermedics Inc.
pursuant to a Supply Agreement between the Company and Intermedics. Sales by
geographic area for the first half of fiscal 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
-----------------------------------------
Geographic Area 1996 1995
-----------------------------------------
<S> <C> <C>
United States.... $2,294,064 $1,915,822
Europe........... 292,838 527,703
---------- ----------
$2,586,902 $2,443,525
-----------------------------------------
</TABLE>
The Company's domestic sales for the first half of fiscal 1996 increased 20% as
compared to the first half of fiscal 1995. The increase in domestic sales is a
result of a 41% increase in lead unit sales resulting from increased lead sales
to Intermedics Inc. European sales declined 45% for the first half of fiscal
1996 as compared to the same period last year. The Company ceased sales of
pacers to European distributors effective January 1, 1995 as the Company has not
yet obtained the CE Mark required to sell product in Europe. Although there is
no assurance the Company will succeed in obtaining the CE Mark, the Company is
preparing to obtain the CE Mark by the end of fiscal 1996. However, the Company
executed a new contract with its Italian distributor and the Company now sells
hybrid circuits to this supplier instead of the pacemaker sub-assemblies it
historically sold to this distributor. The Company is not required to have the
CE Mark in order to sell components to European suppliers.
Sales by product line (including product assemblies) for the first half of
fiscal 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Product Line 1996 1995
------------------------------------------------------------------
<S> <C> <C>
Single-chamber pacemakers................. $ 298,459 $ 572,226
Dual-chamber pacemakers................... - 78,590
Atrial-controlled ventricular pacemakers.. 892,527 949,879
Hybrid circuits........................... 199,625 21,500
Electrode leads........................... 1,168,032 732,258
Other..................................... 28,259 89,072
---------- ----------
$2,586,902 $2,443,525
------------------------------------------------------------------
</TABLE>
13
<PAGE>
The Company received approval from the Food and Drug Administration ("FDA") for
its downsized dual-chamber device at the end of September 1995. Sales of the
new downsized dual-chamber device are expected to have a significant impact on
domestic sales in the second half of fiscal 1996. The Company is continuing its
efforts to increase its sales domestically through the recruitment of new sales
representatives. Further, the Company is also continuing its efforts to obtain
the CE Mark in order to re-establish its presence in the European market; and
it continues to pursue other international markets. The Company believes that
its new line of ultra-thin, longer-lived pacing products, along with the atrial-
controlled ventricular pacing system should provide the Company a very
competitive position in the market.
ROYALTY INCOME. Royalty income increased 120% for the first half of fiscal 1996
as compared to the fist half of fiscal 1995. Royalty income represents royalty
fees from Intermedics Inc. pursuant to a License Agreement between the Company
and Intermedics, whereby the Company licensed the technology relating to its
single-pass atrial-controlled ventricular pacing system. Intermedics began
marketing this pacing system in March 1995. The future potential royalties to
be recorded over the life of the License Agreement are estimated at $4.1
million.
COSTS OF PRODUCTS SOLD. As compared to the 6% increase in sales, cost of
products sold declined 8% to $1.2 million for the first half of fiscal 1996 as
compared to $1.3 million for the first half of fiscal 1995, resulting in an
increase in the gross margin to 53% for the first half of fiscal 1996 as
compared to 46% for the same period last year. Increased production levels are
having a favorable impact on the Company's manufacturing costs, reducing
overhead and scrap rates; further, the Company is incurring reduced per-unit
manufacturing costs for the downsized generation pacers. However, these factors
are being slightly offset by the less favorable margin being incurred for lead
sales to Intermedics which account for 39% of sales for the first half of fiscal
1996 as compared to 27% for the first half of fiscal 1995. However, the Company
also receives a $325 royalty per lead unit sold by Intermedics which
incorporates the Company's single-pass technology, pursuant to the License
Agreement with Intermedics.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 68% for the first half of fiscal 1996 as
compared to the first half of fiscal 1995 primarily as a result of increased
salary and benefits expense for new senior management and sales and marketing
personnel; increased commission expense as a result of the support of new sales
representatives; and increased travel expense for the new senior management and
sales and marketing personnel as they recruit, train and manage the new sales
force and market the Company's product at trade conventions.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. The 102% increase in
engineering, research and development expenses for the first half of fiscal
1996 as compared to the first half of fiscal 1995 is a result of of the Company
hiring new engineering personnel to resume its developments in single-pass lead,
dual-chamber operation and rate-responsive pacing, and related outside
professional services for those development projects..
OTHER INCOME AND EXPENSES. Interest expense for the first half of fiscal 1996
increased 131% as compared to the first half of fiscal 1995 as a result of
higher debt balances, primarily due to the $2,885,000, 5% debenture financing,
and the amortization of debt costs associated with the debenture and mortgage
financings.
OPERATING TRENDS AND UNCERTAINTIES
SALES. The ability of the Company to attain a profitable level of operations is
dependent upon expansion of sales volume, both domestically and internationally.
The Company believes that with the commercial release of its atrial -controlled
ventricular pacing system, which is a system capable of attracting a significant
market share, and the introduction of its new line of smaller, more competitive
pacing products, it now has the potential
14
<PAGE>
to improve its sales and the recruitment of sales representatives. The Company
received clearance by the FDA to commercially distribute this new line of
products in fiscal 1994 for its single-chamber and atrial-controlled ventricular
devices. The PMA Supplement for the new dual-chamber device was submitted to the
FDA in February 1995 and clearance was received in September 1995. Working
capital constraints had delayed the procurement of sufficient quantities of the
dual-chamber hybrid circuits to complete testing and production requirements for
the submission to the FDA prior to that time. The availability of the new dual-
chamber device is expected to have a significant impact on domestic sales in the
second half of fiscal 1996.
The Company's sales during fiscal 1995 had been restricted as a result of
production limitations resulting from working capital constraints. However, the
Company has secured financing that management believes will enable it to meet
and expand its demand in the domestic market, and expand into additional
international markets.
The European Community ("EC") nations have adopted universal standards in order
to provide simplified trade among the member nations and to assure free access
to trade while maintaining quality standards for products sold. All companies
doing business in these nations must be certified to these standards set forth
by the EC which is evidenced by being granted the CE Mark. Standards for active
implantable medical products were implemented January 1, 1993, with a transition
period ending December 31, 1994. In order for the Company to resume the sale of
its product in the EC, it must obtain certification, the CE Mark. These
standards have been developed by the International Organization for
Standardization ("ISO"). The Company is preparing for certification during
fiscal 1996. From January 1, 1995, until it receives such certification, the
Company will lose sales to its European distributors, to which the Company sells
completed devices. However, the Company anticipates that increased sales in the
domestic market will reduce the overall adverse effect of this loss of European
sales. Further, the Company continues to sell hybrid circuit components to its
customer in Italy and continues to export its products to Greece.
Until recently, the Company was the only manufacturer commercially marketing
single-lead atrial-controlled ventricular pacemakers. However, Intermedics
Inc., a competitor of the Company, received FDA clearance to commercially market
a single-lead atrial-controlled ventricular pacemaker that it developed
utilizing the Company's technology pursuant to license and supply agreements
with the Company. Intermedics commenced marketing its new pacemakers in March
1995.
Although the introduction of the new Intermedics pacemakers poses competition
for the Company, management believes that the Company will benefit from such
competition since the new Intermedics pacemaker will increase the visibility of
single-lead atrial-controlled ventricular pacemakers in the marketplace and
thereby increase market acceptance of the product. Further, management
believes that there is a sufficient market to accommodate both the Company's and
Intermedics pacemakers. The Company estimates that its market share of
pacemakers generally is less than 1% of an estimated total worldwide market of
$2 billion per year.
Various factors impact on a firm's ability to increase market share including,
but not limited to, the financial strength of the firm, the ability of the firm
and its competitors, and the time involved in obtaining FDA clearance for new or
improved products. Therefore, although management believes that the Company is
well poised for viable growth, management cannot predict the degree of market
share the Company can obtain. Factors beyond the Company's control may impede
its progress and in such event, its business and operations would be adversely
impacted.
15
<PAGE>
The Company's ability to successfully compete with Intermedics and other
pacemaker manufacturers will depend on the Company's ability to supply product
and recruit and increase a quality sales force. The Company historically
has been restricted in its marketing capabilities due to financial constraints
impeding its ability to supply products and recruit and train a sales force.
However, the availability of capital from the Debenture financing, the resulting
reduction in debt made possible from those funds and from the Sirrom loan, and
the cash flow generated from Intermedics' orders and royalties have positioned
the Company to increase its sales force and provide an uninterrupted supply of
products.
As discussed above, the manufacture and sale of leads to Intermedics produce
income for the Company. The Company sells electrode leads to Intermedics for
its new systems under an Amended and Restated Supply Contract that terminates on
August 1, 1998, unless renewed for an additional two year period. The Company
also receives royalties from Intermedics sales of its products incorporating
the licensed technology under an Amended and Restated License Agreement. The
Company anticipates supplying components to Intermedics under the supply
agreement for the next several years. An increase in demand for components by
Intermedics will put further demands on the Company to supply the products;
however, with the anticipated cash flow from such orders that would be generated
under the license and supply agreements, plus anticipated positive cash flow
from sales of other products by the Company, management believes that the
Company could be in a position to accommodate an increase in orders. Further,
in October 1995, Intermedics loaned the Company $1,000,000 to assist the Company
in meeting the demand of its future orders, such loan to be amortized at a given
ratio against future orders. (See "Financial Position and Liquidity").
It is anticipated that Intermedics will eventually develop its own manufacturing
capability for electrode leads necessary for its new pacemakers. However, any
such development will take time. Although the Company does not know how long it
will take Intermedics to develop its own manufacturing capability, added to any
such development period would be the time necessary to obtain FDA clearance of
its manufacturing process. Thus, although the Company cannot guarantee that it
will continue to supply Intermedics with products, the Company anticipates
providing Intermedics with components for the next few years. However, in the
event Intermedics receives FDA approval in a shorter time-frame than
anticipated, or other events occur which causes a decrease in Intermedics'
orders, the Company's business and operating results would be adversely
affected.
SOURCES OF SUPPLY. One of the Company's principal suppliers of material used
primarily in electrode lead production, E.I. DuPont de Nemours & Company, has
indicated that they will no longer supply their material to the medical device
industry for use in implantable devices. The availability of this material
suitable for use in implantable medical devices is an industry-wide problem and
is not unique to the Company or to the cardiovascular device segment of the
industry. A tentative replacement for the DuPont supplied material has been
identified which meets manufacturing requirements. Biocompatibility studies
have been initiated on the replacement candidate. Since the candidate
replacement material is comprised of the same chemical composition as the DuPont
material, it is expected that it will be comparable with respect to the
performance characteristics and Biocompatibility of the current material in use.
Similarly, FDA approval of this replacement material is anticipated to be
forthcoming based upon a satisfactory outcome of the testing in progress. The
Company believes, however, that it has a sufficient quantity of the DuPont
material on supply to meet the Company's anticipated demand for the next several
years.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 4, 1994, a financial brokering and consulting firm filed suit
against the Company in the Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida (the "Court"), alleging that the Company had breached
certain contractual duties and obligations. The suit requests a judgment
requiring the Company to deliver warrants to purchase 15% of the Company's
common stock, and damages in excess of $15,000. The Company has denied
liability and filed a counterclaim alleging that the brokering firm fraudulently
induced the Company into the Agreement then breached the Agreement and certain
fiduciary duties. Management plans to vigorously defend the lawsuit and pursue
its counterclaims. In the opinion of management, this action has no merit and
the ultimate outcome is not expected to materially effect the financial position
of the Company.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(A). EXHIBITS
Exhibits filed in Part II of this Report are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.0 Certificate of Incorporation of Exhibit 3.0 to Amendment No. 1 to Form S-1 Registration
the Company, as amended Statement filed on February 1, 1988, Registration No. 33-
16490 and Form 10-K for the year ended March 31, 1990,
File No. 0-14653
3.1 Amendment to Certificate of Exhibit 3.1 to Form S-1 Registration Statement filed on
Incorporation March 2, 1995, Registration No. 33-89938
3.2 By-Laws of the Company Exhibit 3.1 to Form S-18 Registration Statement filed on
October 16, 1985, Registration No. 33-9208
3.3 Amendment to Bylaws Exhibit 3.3 to Form S-1 Registration Statement filed on
March 2, 1995, Registration No. 33-89938
4.0 Form of Common Stock Exhibit 4.0 to Form S-1 Registration Statement filed on
Certificate March 2, 1995, Registration No. 33-89938
4.1 Form of Sales Representative Exhibit 4.13 to Form 10-Q for the Quarter Ended
Stock Option Agreement September 30, 1988, File No. 0-14653
4.2 Cardiac Control Systems, Inc. Exhibit 4.15 to Form 8-K Current Report dated October 11,
5% Convertible Debenture due 1994, File No. 0-14653
October 31, 1999
4.3 Combined 1987-1992 Non- Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
Qualified Stock Option Plan Statement filed on April 17, 1995, Registration No. 33-
89938
4.4 Stock Purchase Warrant dated Exhibit 4.1 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of 1995, File No. 0-14653
Sirrom Capital Corporation
4.5 Stock Purchase Warrant, dated Exhibit 4.2 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of Dow 1995, File No. 0-14653
Corning Enterprises, Inc.
10.0 License Agreement between Exhibit 10.1 to Form 10-Q for the Quarter Ended
Hughes/Bertolet and the September 30, 1986, File No. 0-14653
Company
10.1 Settlement Agreement and Exhibit 10.2 to Form 10-K for the Year Ended March 31,
Release between Applied Cardiac 1990, File No. 0-14653
Electro-physiology and the
Company
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.2 Amended and Restated License Exhibit 10.19 to Form 8-K Current Report, dated April 2,
Agreement between Intermedics 1993, File No. 0-14653
Inc. and the Company, dated
April 2, 1993
10.3 Amended and Restated Supply Exhibit 10.20 to From 8-K Current Report, dated April 2,
Contract between Intermedics 1992, File No. 0-14653
Inc. and the Company, dated
April 2, 1993
10.4 Employment Agreement between Exhibit 10.24 to Form 8-K Current Report, dated October
Bart C. Gutekunst and the 11, 1994, File No. 0-14653
Company, dated October 13,
1994
10.5 Employment Agreement between Exhibit 10.25 to Form 8-K Current Report, dated October
Alan J. Rabin and the Company, 11, 1994, File No. 0-14653
dated October 13, 1994
10.6 Employment Agreement between Exhibit 10.12 to Form 10-Q for the Quarter Ended
Robert S. Miller and the December 31, 1994, File No. 0-14653
Company, dated December 12,
1994
10.7 Agreement between LEM Exhibit 10.13 to Form 10-Q for the Quarter Ended
Biomedica, s.r.l. and the December 31, 1994, File 0-14653
Company, dated October 1, 1994
10.8 Agreement between the Exhibit 10.12 to Form S-1 Registration Statement filed on
Company and Alan J. Rabin and March 2, 1995, Registration No. 33-89938
Bart C. Gutekunst, dated July 1,
1994
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Statement filed on
Agreement between the March 2, 1995, Registration No. 33-89938
Company and each Director,
executed December 1994
10.10 Employment Agreement between Exhibit 10.14 to Form S-1 Registration Statement filed on
Robert R. Brownlee and the March 2, 1995, Registration No. 33-89938
Company dated as of October 1,
1994
10.11 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated March 31,
between the Company and 1995, File No. 0-14653
Sirrom Capital Corporation,
dated March 31, 1995
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.12 $1,500,000 Secured Promissory Exhibit 10.2 to Form 8-K Current Report, dated March 31,
Note in favor of Sirrom Capital 1995, File No. 0-14653
Corporation, dated March 31,
1995
10.13 Mortgage, Assignment of Rents Exhibit 10.3 to Form 8-K Current Report, dated March 31,
and Leases, and Security 1995, File No. 0-14653
Agreement in favor of Sirrom
Capital Corporation, dated
March 31, 1995
10.14 Second Mortgage and Security Exhibit 10.4 to Form 8-K Current Report, dated March 31,
Agreement in favor of Bart 1995, File No. 0-14653
Gutekunst, as trustee, dated
March 31, 1995
10.15 Subordination Agreement Exhibit 10.5 to Form 8-K Current Report, dated March 31,
between the Company Sirrom 1995, File No. 0-14653
Capital Corporation, and the
Debentureholders, dated March
31, 1995
10.16 Promissory Note and Security Page 22 - Page 28
Agreement between Intermedics
Inc. and the Company, dated
October 20, 1995
10.17 Amendment 2 to Supply Page 29 - Page 31
Contract between Intermedics
Inc. and the Company, dated
October 20, 1995
10.18 Amendment 2 to License Page 32 - Page 34
Agreement between Intermedics
Inc. and the Company, dated
October 20, 1995
11.0 Statement re Computation of Page 35 - Page 36
Income (Loss) per share
- --------------------------------------------------------------------------------------------------------
</TABLE>
6(B). REPORTS ON FORM 8-K
The Company did not file a current report on Form 8-K in the quarter ended
September 30, 1995.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CARDIAC CONTROL SYSTEMS, INC.
(Registrant)
Date: November 14, 1995 By: /s/ Alan J. Rabin
------------------- -------------------------------------
Alan J. Rabin
President and Chief Executive Officer
Date: November 14, 1995 By: /s/ Lauri Mitchell
------------------- -------------------------------------
Lauri Mitchell
Controller
21
<PAGE>
EXHIBIT 10.16
PROMISSORY NOTE AND SECURITY AGREEMENT BETWEEN
INTERMEDICS INC. AND THE COMPANY
DATED OCTOBER 20, 1995
22
<PAGE>
PROMISSORY NOTE AND SECURITY AGREEMENT
$1,000,000 Palm Coast, Florida October 20, 1995
WHEREAS Intermedics Inc. ("Intermedics") and Cardiac Control Systems,
Inc. ("CCS") are parties to an amended and restated supply contract dated
April 2, 1993 (the "Supply Contract") under which CCS supplies leads to
Intermedics and
WHEREAS Intermedics and CCS are also parties to an amended and restated
license agreement also dated April 2, 1993 (the "License Agreement") and
WHEREAS Intermedics has agreed to loan CCS $1.0 million although
Intermedics is not in the business of making loans and
WHEREAS the purpose of the loan is to assist CCS in its refinancing
efforts and to ensure Intermedics an uninterrupted supply of leads under the
Supply Contract and
WHEREAS CCS will repay the loan by way of certain withholdings which
Intermedics will make from the price of packaged Leads which Intermedics
purchases under the Supply Contract or, under certain circumstances set forth
below, by a reduction of royalty payments under the License Agreement,
NOW THEREFORE FOR VALUE RECEIVED, after date, without grace, in the
manner, on the dates, and in the amounts herein stipulated, CCS (the "Borrower")
promises to pay to the order of Intermedics (the "Holder") the principal sum of
$1 million.
1. The Borrower will pay 24.5% per annum simple interest on the unpaid
and outstanding principal, computed and payable monthly. Principal and accrued
interest will be due and payable as Holder purchases leads.
2. Holder will retain $250 per lead from the price it pays Borrower
under the Supply Contract for the first 4,000 packaged leads ordered after
October 15, 1995, and $90 per packaged lead thereafter until CCS satisfies its
obligations under the promissory note and security agreement. Holder will apply
the amounts so retained first to interest and then to principal.
3. If for any reason Borrower cannot or will not supply leads Holder
under the Supply Contract, then Holder will retain from the royalty payments it
owes under the License Agreement $250 per lead for the first 4,000 leads sold
after such failure or refusal to supply and $90 per lead thereafter until CCS
satisfies its obligations under the promissory note and
-1-
<PAGE>
security agreement. Holder will apply the amount so retained first to interest,
then to principal.
4. The attached schedules 1, 2 and 3 illustrate the allocation.
5. The entire unpaid balance of principal and accrued interest, will be due
and payable September 1, 1998. In addition, if a "current competitor of
Intermedics," acquires a greater than 50 percent interest in Borrower, the
entire unpaid balance (principal and accrued interest) will become immediately
due and payable. For purposes of this Promissory Note and Security Agreement,
"current competitor of Intermedics" has the same meaning as set forth in section
4.3 of the License Agreement. Also in addition, if Borrower should fail or
refuse to supply Holder with leads under the Supply Agreement, the entire unpaid
balance (principal and accrued interest) will become immediately due and
payable. If Holder's ability to collect such balance under paragraph 3, above,
appears doubtful, Holder may pursue any other remedy available to it to collect
such balance.
6. Each maker, surety, guarantor, and endorser waives demand, grace,
notice, notice of intent to accelerate, presentment for payment, notice of
acceleration and protest, and agrees and consents that this Promissory Note and
Security Agreement may be renewed and the time of payment extended without
notice and without releasing any of the parties.
7. Borrower will have the right at any time to prepay this Promissory Note
and Security Agreement in whole or in part without penalty.
8. In the event of default in the making of any payment, either of
principal or interest, interest will accrue at the maximum rate permitted by
law.
9. The Borrower hereby agrees to pay all of Holder's expenses incurred
including reasonable attorney's fees, all of which will become a part of the
principal hereof, if this Promissory Note and Security Agreement is placed in
the hands of an attorney for collection or if collected by suit or through any
probate, bankruptcy, or any other legal proceedings.
10. Any deposits or other sums credited by or due from Holder to Borrower,
and any other property of Borrower in the possession of Holder may be applied to
or setoff, without limitation, against the payment of any obligations of
Borrower due and payable under this Promissory Note and Security Agreement.
-2-
<PAGE>
11. If, from any circumstance, Holder will receive an amount that would
exceed the highest lawful rate of interest, such amount that would be excessive
interest will be applied to the reduction of the principal amount owing
hereunder or will be refunded but will not be applied to the payment of interest
or deemed interest.
12. Borrower hereby grants to Holder a security interest in the
proceeds of the sale to Holder of packaged leads ordered after October 15, 1995,
to the extent of the amount Holder may retain under paragraph 2 above (whether
such retention is allocated to interest or principal). Borrower further grants
to Holder a security interest in the royalties Holder pays for leads sold after
October 15, 1995, to the extent of the amount Holder may retain under paragraph
3 above (whether such retention is allocated to interest or principal). Such
proceeds and such royalty are hereinafter called the "Collateral".
13. The security interest granted hereunder will secure the payment and
performance of all debts, liabilities and obligations of Borrower to Holder
under this Promissory Note and Security Agreement. Borrower agrees to sign all
documents Holder may reasonably require to perfect the security interest given
under this Agreement.
14. Borrower hereby represents and warrants that Holder will have first
priority in the Collateral pledged as security hereunder. Borrower agrees to
obtain any subordinations or partial subordinations, in a form reasonably
acceptable to Holder, necessary ensure such priority.
15. This Promissory Note and Security Agreement will be governed by and
interpreted under the laws of the State of Florida.
16. No waiver of any right or default by Holder will constitute a
waiver of a subsequent right or default.
17. This Promissory Note and Security Agreement is for the benefit of
Holder and its successors and assigns and may be freely assigned by Holder.
18. The recitals set forth above are hereby incorporated by reference
herein.
Cardiac Control Systems, Inc.
By: /s/ Alan J. Rabin
---------------------------------
Alan J. Rabin, President
3
<PAGE>
Schedule 1
CARDIAC CONTROL SYSTEMS $1,000,000 LOAN
(Loan Calculations For Illustrative Purposes Only)
<TABLE>
<CAPTION>
Revenue
-----------------------------
Quantity Beginning 300 leads/mth 300 leads/mth Ending
Leads Loan 4000 leads 4000 leads 24.50% Principal Loan
Month Purchased Balance @$250/lead @$90/lead Interest Reduction Balance
- ----- --------- ------------ ------------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 300 1,000,000.00 75,000.00 20,416.67 54,583.33 945,416.67
2 300 945,416.67 75,000.00 19,302.26 55,697.74 889,718.92
3 300 889,718.92 75,000.00 18,165.09 56,834.91 832,884.02
4 300 832,884.02 75,000.00 17,004.72 57,995.28 774,888.73
5 300 774,888.73 75,000.00 15,820.64 59,179.36 715,709.38
6 300 715,709.38 75,000.00 14,612.40 60,387.60 655,321.78
7 300 655,321.78 75,000.00 13,379.49 61,620.51 593,701.26
8 300 593,701.26 75,000.00 12,121.40 62,878.60 530,822.67
9 300 530,822.67 75,000.00 10,837.63 64,162.37 466,660.30
10 300 466,660.30 75,000.00 9,527.65 65,472.35 401,187.94
11 300 401,187.94 75,000.00 8,190.92 66,809.08 334,378.86
12 300 334,378.86 75,000.00 6,826.90 68,173.10 266,205.77
13 300 266,205.77 75,000.00 5,435.03 69,564.97 196,640.80
14 300 196,640.80 25,000.00 18,000.00 4,014.75 38,985.25 157,655.55
15 300 157,655.55 27,000.00 3,218.80 23,781.20 133,874.35
16 300 133,874.35 27,000.00 2,733.27 24,266.73 109,607.62
17 300 109,607.62 27,000.00 2,237.82 24,762.18 84,845.44
18 300 84,845.44 27,000.00 1,732.26 25,267.74 59,577.70
19 300 59,577.70 27,000.00 1,216.38 25,783.62 33,794.08
20 300 33,794.08 27,000.00 689.96 26,310.04 7,484.04
21 85 7,484.04 7,636.84 152.80 7,484.04 0.00
22
23
24
25
26
27
28
29
30
----- ------------ ---------- ---------- ------------
Totals 6,085 1,000,000.00 187,636.84 187,636.84 1,000,000.00
</TABLE>
<PAGE>
Schedule 2
CARDIAC CONTROL SYSTEMS $1,000,000 LOAN
(Loan Calculations For Illustrative Purposes Only)
<TABLE>
<CAPTION>
Revenue
-----------------------------
Quantity Beginning 400 leads/mth 400 leads/mth Ending
Leads Loan 4000 leads 4000 leads 24.50% Principal Loan
Month Purchased Balance @$250/lead @$90/lead Interest Reduction Balance
- ----- --------- ------------ ------------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 400 1,000,000.00 100,000.00 20,416.67 79,583.33 920,416.67
2 400 920,416.67 100,000.00 18,791.84 81,208.16 839,208.51
3 400 839,208.51 100,000.00 17,133.84 82,866.16 756,342.35
4 400 756,342.35 100,000.00 15,441.99 84,558.01 671,784.34
5 400 671,784.34 100,000.00 13,715.60 86,284.40 585,499.93
6 400 585,499.93 100,000.00 11,953.96 88,046.04 497,453.89
7 400 497,453.89 100,000.00 10,156.35 89,843.65 407,610.24
8 400 407,610.24 100,000.00 8,322.04 91,677.96 315,932.28
9 400 315,932.28 100,000.00 6,450.28 93,549.72 222,382.57
10 400 222,382.57 100,000.00 4,540.31 95,459.69 126,922.88
----- ------------ ---------- ------------
Sub Total 4,000 1,000,000.00 126,922.88 873,077.12
11 400 126,922.88 36,000.00 2,591.34 33,408.66 93,514.22
12 400 93,514.22 36,000.00 1,909.25 34,090.75 59,423.47
13 400 59,423.47 36,000.00 1,213.23 34,786.77 24,636.70
14 280 24,636.70 25,139.70 503.00 24,636.70 0.00
15
16
17
18
19
20
----- ---------- ---------- ------------
1,480 133,139.70 6,216.82 126,922.88
21
22
23
24
25
26
27
28
29
30
----- ------------ ---------- ---------- ------------
Totals 5,480 1,000,000.00 133,139.70 133,139.70 1,000,000.00
</TABLE>
<PAGE>
Schedule 3
CARDIAC CONTROL SYSTEMS $1,000,000 LOAN
(Loan Calculations For Illustrative Purposes Only)
<TABLE>
<CAPTION>
Revenue Variable
-----------------------------
Quantity Beginning # Leads/mth # Leads/mth Ending
Leads Loan 4000 leads 4000 leads 24.50% Principal Loan
Month Purchased Balance @$250/lead @$90/lead Interest Reduction Balance
- ----- --------- ------------ ------------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 320 1,000,000.00 80,000.00 20,416.67 59,583.33 940,416.67
2 410 940,416.67 102,500.00 19,200.17 83,299.83 857,116.84
3 460 857,116.84 115,000.00 17,499.47 97,500.53 759,616.31
4 300 759,616.31 75,000.00 15,508.83 59,491.17 700,125.14
5 430 700,125.14 107,500.00 14,294.22 93,205.78 606,919.36
6 490 606,919.36 122,500.00 12,391.27 110,108.73 496,810.63
7 380 496,810.63 95,000.00 10,143.22 84,856.78 411,953.85
8 360 411,953.85 90,000.00 8,410.72 81,589.28 330,364.58
9 450 330,364.58 112,500.00 6,744.94 105,755.06 224,609.52
10 400 224,609.52 100,000.00 4,585.78 95,414.22 129,195.30
----- ------------ ---------- ------------
Sub Total 4,000 1,000,000.00 129,195.30 870,804.70
11 490 129,195.30 44,100.00 2,637.74 41,462.26 87,733.03
12 570 87,733.03 51,300.00 1,791.22 49,508.78 38,224.25
13 434 38,224.25 39,004.66 780.41 38,224.25 0.00
14
15
16
17
18
----- ---------- ---------- ------------
Sub Total 1,494 134,404.66 5,209.37 129,195.29
19
20
21
22
23
24
25
26
27
28
29
30
----- ------------ ---------- ---------- ------------
Totals 5,494 1,000,000.00 134,404.66 134,404.66 1,000,000.00
</TABLE>
<PAGE>
EXHIBIT 10.17
AMENDEMENT 2 TO SUPPLY CONTRACT BETWEEN
INTERMEDICS INC. AND THE COMPANY
DATED OCTOBER 20, 1995
29
<PAGE>
AMENDMENT 2 TO SUPPLY CONTRACT
This Amendment is entered into as of October 20, 1995, by and between
Intermedics Inc. ("ITM"), a Delaware corporation, and Cardiac Control Systems,
Inc. ("CCS"), having a principal place of business at 3 Commerce Boulevard, Palm
Coast, Florida 32164.
WHEREAS ITM and CCS are parties to an amended and restated supply
contract dated April 2, 1993 (the "Supply Contract") and
WHEREAS ITM and CCS are also parties to an amended and restated license
agreement also dated April 2, 1993 (the "License Agreement") and
WHEREAS, under the terms of a promissory note and security agreement of
even date herewith (the "Note"), ITM has agreed to loan CCS $1.0 million to
assist CCS in its refinancing efforts and
WHEREAS the parties now desire to amend the terms of the Supply Contract
to conform it to certain provisions of the Note,
THEREFORE, in consideration of the mutual promises set forth in this
Amendment and other good and valuable consideration, the parties agree:
1. A new paragraph is added to the end of section 2.1 of the Supply
Contract which reads:
Notwithstanding the foregoing, until the obligation under the
promissory note and security agreement dated October 20, 1995, is
satisfied, ITM may withhold $250 per packaged Lead from the applicable,
above-quoted prices for the first 4,000 packaged Leads ordered after
October 15, 1995. Thereafter, ITM may withhold $90 per packaged Lead
until CCS satisfies its obligations under the promissory note and
security agreement. Upon full satisfaction of the obligation under the
promissory note and security agreement, the two sentences immediately
preceding this sentence will be of no further effect.
2. The last two sentences of section 4.1 are deleted in their entirety.
<PAGE>
Unless expressly modified by this Amendment, all other provisions in the
Supply Agreement will remain unchanged and in full force and effect.
Cardiac Control Systems, Inc. Intermedics Inc.
by: /s/ Alan J. Rabin by: /s/ John E. Garcia
---------------------------- --------------------------
Alan J. Rabin, President John E. Garcia, President
<PAGE>
EXHIBIT 10.18
AMENDMENT 2 TO LICENSE AGREEMENT BETWEEN
INTERMEDICS INC. AND THE COMPANY
DATED OCTOBER 20, 1995
32
<PAGE>
AMENDMENT 2 TO LICENSE AGREEMENT
This Amendment is entered into as of October 20, 1995, by and between
Intermedics Inc. ("ITM"), a Delaware corporation, and Cardiac Control Systems,
Inc. ("CCS"), having a principal place of business at 3 Commerce Boulevard, Palm
Coast, Florida 32164.
WHEREAS ITM and CCS are parties to an amended and restated license
agreement dated April 2, 1993 (the "License Agreement") and
WHEREAS ITM and CCS are also parties to an amended and restated supply
contract also dated April 2, 1993 (the "Supply Contract") and
WHEREAS, under the terms of a promissory note and security agreement of
even date herewith (the "Note"), ITM has agreed to loan CCS $1.0 million to
assist CCS in its refinancing efforts and
WHEREAS CCS will repay the loan by way of certain withholdings from the
price Intermedics pays for packaged leads under the Supply Contract or, under
certain circumstances specified in the Note, by a reduction of Intermedics'
royalty payments under the License Agreement and
WHEREAS the parties now desire to amend the License Agreement to conform
it to certain provisions of the Note and to clarify the intention of the
parties,
THEREFORE, in consideration of the mutual promises set forth in this
Amendment and other good and valuable consideration, the parties agree:
1. A new paragraph is added to the end of section 4.1 of the License
Agreement which reads:
Notwithstanding the foregoing, if for any reason CCS cannot or will
not supply leads to ITM under the Supply Contract to satisfy CCS's
obligations under the promissory note and security agreement dated
October 20, 1995, then ITM will reduce the royalty payments it owes
under the License Agreement by $250 per lead for the first 4,000 leads
sold after such failure or refusal to supply and by $90 per lead
thereafter. Such withholding will continue only until CCS satisfies its
obligations under the promissory note and security agreement.
-1-
<PAGE>
2. By way of clarification, a new clause is added to the end of the
first sentence of section 2.5 which reads:
. . . ; provided further that the right reserved to CCS in the preceding
clause does not include the right to sublicense the Licensed Technology
or the Licensed Patents or to supply Licensed Products (including
without limitation packaged Leads, partially assembled Leads or Lead
components) to a current competitor of ITM as that term is defined in
section 4.3 hereof.
Unless expressly modified by this Amendment, all other provisions in the
License Agreement will remain unchanged and in full force and effect.
Cardiac Control Systems, Inc. Intermedics Inc.
by: /s/ Alan J. Rabin by: /s/ John E. Garcia
------------------------ -------------------------
Alan J. Rabin, President John E. Garcia, President
-2-
<PAGE>
EXHIBIT 11.1
COMPUTATION OF INCOME (LOSS) PER SHARE
35
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
COMPUTATION OF INCOME (LOSS )PER SHARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Net income (loss)..................... $ (5,908) $ 330,715 $ (163,286) $ 107,986
========== ========== ========== ==========
Weighted average number
of common shares outstanding........ 1,343,280 1,207,705 1,343,051 1,207,596
Net common shares issuable
on exercise of certain stock
options and warrants (a)............ - - - -
---------- ---------- ---------- ----------
Weighted average number
of common shares outstanding,
as adjusted......................... 1,343,280 1,207,705 1,343,051 1,207,596
========== ========== ========== ==========
Income (loss) per common share........ $ .00 $ .27 $ (.12) $ .09
========== ========== ========== ==========
FULLY DILUTED INCOME (LOSS) PER SHARE:
Net income (loss)..................... $ (5,908) $ 330,715 $ (163,286) $ 107,986
========== ========== ========== ==========
Weighted average number
of common shares outstanding,
as adjusted per primary
computation above.................. 1,343,280 1,207,705 1,343,051 1,207,596
Net common shares issuable
on exercise of certain stock
options and warrants (a)............ - - - -
---------- ---------- ---------- ----------
Weighted average number
of common shares outstanding,
as adjusted......................... 1,343,280 1,207,705 1,343,051 1,207,596
========== ========== ========== ==========
Fully diluted income (loss) per
common share........................ $ .00 $ .27 $ (.12) $ .09
========== ========== ========== ==========
</TABLE>
(a) Net common shares issuable on exercise of outstanding stock options and
warrants have not been included in the computation, since inclusion thereof
would have an anti-dilutive or immaterial effect on the income(loss) per common
share.
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 117,064
<SECURITIES> 0
<RECEIVABLES> 1,289,297
<ALLOWANCES> 80,509
<INVENTORY> 2,110,815
<CURRENT-ASSETS> 3,539,404
<PP&E> 4,642,245
<DEPRECIATION> 3,115,460
<TOTAL-ASSETS> 5,449,097
<CURRENT-LIABILITIES> 1,428,278
<BONDS> 4,187,643
<COMMON> 134,362
0
0
<OTHER-SE> (1,018,747)
<TOTAL-LIABILITY-AND-EQUITY> 5,449,097
<SALES> 1,314,899
<TOTAL-REVENUES> 1,801,749
<CGS> 591,325
<TOTAL-COSTS> 1,739,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,083
<INCOME-PRETAX> (5,908)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,908)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
