<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 JUNE 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)
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 July 31, 1995, 1,342,819 shares of the Registrant's common stock, $.10 par
value, were issued and outstanding.
================================================================================
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
JUNE 30, 1995
INDEX
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Page No.
- ---------------------------------------------------------------------------
<S> <C>
PART I. FINANCIAL INFORMATION
Balance Sheets at June 30, 1995 (Unaudited)
and March 31, 1995 ........................................ 3
Statements of Operations and Accumulated Deficit for the
Three Months Ended June 30, 1995 and 1994 (Unaudited) ..... 4
Statements of Cash Flows for the Three Months Ended
June 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 ..................................... 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
June 30, March 31,
1995 1995
- --------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 341,594 $ 667,490
Certificate of deposit ........................................... 40,000 40,000
Accounts and notes receivable .................................... 1,251,839 1,403,276
Inventories ...................................................... 1,881,040 1,755,432
Prepaid expenses ................................................. 134,672 57,659
------------ ------------
Total current assets 3,649,145 3,923,857
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation of $3,060,154 and $3,039,211 ........................ 1,468,604 1,410,259
OTHER ASSETS ........................................................ 408,231 463,822
------------ ------------
Total assets ........................................ $ 5,525,980 $ 5,797,938
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes and debt obligations payable within one year ............ $ 94,217 $ 46,538
Accounts payable ................................................ 439,879 474,877
Accrued interest ................................................ 35,964 555
Accrued compensation ............................................ 211,725 279,367
Accrued compensated absences .................................... 123,360 112,477
Deposits payable ................................................ 270,587 351,147
Other accrued expenses .......................................... 283,234 213,594
------------ ------------
Total current liabilities ............................. 1,458,966 1,478,555
------------ ------------
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR .................... 4,153,729 4,119,782
------------ ------------
OTHER LIABILITIES .................................................... 180,911 169,311
------------ ------------
DEFERRED ROYALTIES ................................................... 612,850 690,050
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.10 par value, 30,000,000 shares authorized,
1,342,819 and 1,342,819 shares issued and outstanding ..... 134,282 134,282
Capital in excess of par value ................................... 18,662,092 18,725,430
Accumulated deficit .............................................. (19,676,850) (19,519,472)
------------ ------------
Total stockholders' equity (deficit) .................. (880,476) (659,760)
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES ............................... - -
Total liabilities and stockholders' equity (deficit) .. $ 5,525,980 $ 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 June 30, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Net sales....................................... $ 1,272,003 $ 1,066,773
Royalty income.................................. 501,800 26,975
------------ ------------
Total revenue............................... 1,773,803 1,093,748
------------ ------------
COSTS AND EXPENSES
Cost of products sold.......................... 633,390 632,651
Selling, general and administrative expenses... 969,830 511,098
Engineering, research and development expenses. 197,609 115,471
------------ ------------
Total cost and expenses.................... 1,800,829 1,259,220
------------ ------------
OPERATING LOSS..................................... (27,026) (165,472)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income................................ 6,527 477
Interest expense............................... (136,927) (57,842)
Other income................................... 48 108
------------ ------------
Total other income (expenses).............. (130,352) (57,257)
------------ ------------
NET LOSS........................................... (157,378) (222,729)
ACCUMULATED DEFICIT - BEGINNING OF PERIOD.......... (19,519,472) (20,894,443)
------------ ------------
ACCUMULATED DEFICIT - END OF PERIOD................ $(19,676,850) $(21,117,172)
============= =============
NET LOSS PER COMMON SHARE.......................... $(.12) $(.18)
============= =============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 1,342,819 1,207,493
============= =============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended June 30, 1995 1994
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss...........................................................$(157,378) $(222,729)
Adjustment to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation.................................................. 61,678 42,596
Amortization.................................................. 52,537 -
Gain on sale of equipment..................................... (878) -
Decrease in accounts receivable............................... 151,437 165,923
(Increase) decrease in inventories............................ (125,608) 4,012
(Increase) decrease in prepaid expenses....................... (77,013) 19,303
Increase in other assets...................................... (2,775) -
Decrease in accounts payable.................................. (34,998) (49,551)
Increase in stockholder advances.............................. - 84,531
Increase in accrued interest.................................. 35,409 52,486
Increase (decrease) in accrued compensation................... (67,642) 26,714
Increase in accrued compensated absences...................... 10,883 6,135
Decrease in deposits payable................................. (80,560) (12,392)
Increase in other accrued expenses............................ 69,640 13,409
Increase in other liabilities................................. 11,600 8,573
Decrease in deferred royalties................................ (77,200) (12,450)
Debt issuance costs........................................... (22,634) -
-------- ---------
Net cash provided (used) by operating activities.......... (253,502) 126,560
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment.......................... (123,111) (23,488)
Proceeds from sale of equipment.................................... 3,966 -
-------- ---------
Net cash used by investing activities......................... (119,145) (23,488)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes and debt obligations payable................... 68,490 58,995
Repayment of notes and debt obligations payable.................... (20,083) (67,516)
Principal payments under capital lease obligations................. (813) (712)
Principal payments under installment purchase obligations.......... (843) (694)
-------- ---------
Net cash provided (used) by financing activities.............. 46,751 (9,927)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (325,896) 93,145
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD........................ 667,490 106,231
-------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD..............................$ 341,594 $ 199,376
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period....................................$ 54,168 $ 5,356
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Reduction in accounts payable in exchange for common stock.........$ - $ 2,344
</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 June 30, 1995, the related statements of operations and accumulated
deficit for the three months ended June 30, 1995 and 1994, and the statements of
cash flows for the three months ended June 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 June 30, 1995 and the results of operations
and cash flows for the three months ended June 30, 1995 and 1994.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1994 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1995. Also, all share information for the three months ended
June 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 June 30, 1995 and for the
three months ended June 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 three months ended June 30, 1995 of $157,378.
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. Also,
the Company is pursuing additional working capital to expand its market position
and pursue development of new technologies. However, there is no assurance that
the Company will be able to attain profitable operations and continue operations
as a going concern.
NOTE 2 - INVENTORIES
Inventories at June 30, 1995 and March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
June 30, 1995 March 31, 1995
------------- --------------
<S> <C> <C>
Raw materials and supplies.... $ 905,815 $ 867,492
Work-in-process............... 539,539 436,647
Finished goods................ 555,686 571,293
---------- ----------
2,001,040 1,875,432
Reserve for obsolescence...... (120,000) (120,000)
---------- ----------
$1,881,040 $1,755,432
- ------------------------------------------------------------
</TABLE>
Finished goods inventories include approximately $379,000 and $306,000 of
products consigned to customers and independent sales representatives at June
30, 1995 and March 31, 1995, respectively.
6
<PAGE>
NOTE 3 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations payable at June 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 June 30, 1995 and
March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
June 30, 1995 March 31, 1995
------------- --------------
<S> <C> <C>
Sirrom mortgage note, net of discount.. $1,255,875 $1,221,000
5% Convertible Debentures.............. 2,885,000 2,885,000
Other.................................. 107,071 60,320
---------- ----------
4,247,946 4,166,320
Amount payable within one year........ (94,217) (46,538)
---------- ----------
Amount payable after one year.......... $4,153,729 $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 June 30, 1995, accrued interest outstanding
pursuant to the Debentures approximated $36,000 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
is 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 nominate and 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, such as dividend payments,
certain new stock issues, reorganization, and merger or sale of substantially
all assets.
7
<PAGE>
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 June 30,
1995, the Company's future maximum purchase obligation approximated $684,000.
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 June 30, 1995, the Company's future maximum
purchase obligation approximated $154,000.
8
<PAGE>
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 and 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 quarter 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 quarter of fiscal 1996.
Accordingly, the Company experienced negative cash flow.
Cash used by operations during the first quarter of fiscal 1996 approximated
$254,000. Capital expenditures and repayment of debt obligations during the
first quarter of fiscal 1996 approximated $119,000 and $22,000, respectively.
Short-term borrowings during the first quarter of fiscal 1996 aggregated
$68,000. Overall, negative cash flow for the first quarter fiscal 1996
approximated $326,000.
Cash provided by operations during the first quarter of fiscal 1995 approximated
$127,000. Capital expenditures and repayment of debt obligations during the
first quarter of fiscal 1995 approximated $23,000 and $69,000, respectively.
Short-term borrowings during the first quarter of fiscal 1995 aggregated
$59,000. Overall, positive cash flow for the first quarter of fiscal 1995
approximated $93,000.
The Company has no significant commitments for the acquisition of capital
assets. It has, however, entered into material commitments pursuant to certain
inventory procurement contracts with a remaining obligation aggregating
approximately $838,000 at June 30, 1995. As of June 30, 1995, the Company's
incurred and unpaid obligations pursuant to these contracts approximates
$149,000 (see "Note 4 - Commitments and Contingent Liabilities" of the "Notes to
Financial Statements").
The Company is currently pursuing addtional working capital in order to support
operations, continue its efforts in building a domestic sales force and continue
its development of new technologies. 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.
RESULTS OF OPERATIONS
OVERVIEW. Overall, the Company's total revenues for the first quarter of
fiscal 1996 increased 62% to $1.8 million as compared to $1.1 million for the
first quarter of fiscal 1995. Sales increased 19% from $1.1 million to $1.3
million and royalties increased from $26,975 to $501,800 for the first quarter
of fiscal 1996 as compared to fiscal 1995. Royalty income represents royalties
from Intermedics Inc. pursuant to a License Agreement between the Company and
Intermedics. The increase in revenue, slightly offset by increases in costs and
expenses, resulted in a 29% decline in the net loss to $157,000 for the first
quarter of fiscal 1996, as compared to a net loss of $223,000 for the first
quarter of fiscal 1995.
10
<PAGE>
SALES. Although overall sales have increased 19%, pacer unit sales declined
43%. However, this decline in pacer unit sales was offset by a 46% increase in
lead unit sales, the sale of hybrid circuits to an Italian manufacturer, and a
6% increase in the average selling price for pacers. The decline in overall
pacer unit sales for the first quarter of fiscal 1996 as compared to the first
quarter of fiscal 1995 is a 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. The increase in average selling
price is a result of an increase in the percentage of sales of higher-priced
atrial-controlled ventricular pacers over the lower-priced single-chamber
pacers.
Sales by geographic area for the first quarter of fiscal 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Geographic Area 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
United States.............................. $1,148,615 $ 869,023
Europe..................................... 123,388 197,750
---------- ----------
$1,272,003 $1,066,773
- ---------------------------------------------------------------------
</TABLE>
The Company's domestic sales for the first quarter of fiscal 1996 increased 32%
as compared to the first quarter of fiscal 1995. The increase in domestic sales
is a result of a 10% increase in pacer unit sales and a 47% increase in lead
unit sales. The increased pacer sales are a result of increased demand for the
Company's downsized pacers. The increased lead sales are due to the increased
sales to Intermedics Inc. and the increased pacer sales. European sales
declined 38% for the first quarter of fiscal 1996 as compared to the first
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 calendar 1995. 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 quarter of
fiscal 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Product Line 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Single-chamber pacemakers.................. $ 130,873 $ 230,448
Dual-chamber pacemakers.................... - 66,300
Atrial-controlled ventricular pacemakers... 454,764 380,162
Hybrid circuits............................ 100,125 -
Electrode leads............................ 581,665 339,123
Other...................................... 4,576 50,740
---------- ----------
$1,272,003 $1,066,773
- ---------------------------------------------------------------------
</TABLE>
The Company will continue to incur lost dual-chamber sales until such time that
it receives approval for its downsized dual-chamber device submitted to the
Food and Drug Administration ("FDA") under a PMA Supplement in February 1995.
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
11
<PAGE>
ventricular pacing system should provide the Company a very competitive position
in the market.
ROYALTY INCOME. 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 $4.6 million.
COSTS OF PRODUCTS SOLD. As compared to the 19% increase in sales, cost of
product sold remained constant at $633,000 the first quarter of fiscal 1996 as
compared to the same for last year, resulting in an increase in the gross margin
to 50% for the first quarter of fiscal 1996 as compared to 41% for the same
period last year. Increased production levels are having a favorable impact on
the Company's manufacturing costs, further, the Company is incurring an increase
in average selling prices and 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 46% of sales for the first quarter of fiscal 1996 as compared to 32%
for the first 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 90% for the first quarter of fiscal 1996 as
compared to the first quarter of fiscal 1995 primarily as a result of increased
commission expense as a result of increased pacer sales and the support of new
sales representatives; increased salary expense for new senior management and
sales and marketing personnel; 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; and
increased royalty expense as a result of increased lead sales.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. The 71% increase in
engineering, research and development expenses for the first quarter of fiscal
1996 as compared to the first 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.
OTHER INCOME AND EXPENSES. Interest expense for first quarter of fiscal 1996
increased 137% as compared to the first quarter of fiscal 1995 as a result of
higher debt balances, 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 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.
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 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.
12
<PAGE>
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
continue to sell its product in the EC, it must obtain certification, the CE
Mark. These standards have been developed by the International Organization for
Standardization ("ISO"). To gain the CE Mark the Company must demonstrate
conformance with the applicable ISO standard for quality systems or conduct
third party testing of its products. Alternatively, the Company may elect to
combine a demonstration of ISO conformity with selective product testing to
secure the CE Mark. The Company is presently operating under Good Manufacturing
Practices ("GMP") as set forth by the FDA. These practices are similar to the
ISO standards but not quite as extensive. The Company is preparing for
certification during calendar 1995. 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.
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
April 1, 1996, 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
13
<PAGE>
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.
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. The Company exhausted its supply of integrated circuits
required to manufacture its MAESTRO dual-chamber devices currently approved for
distribution in the United States by the FDA. Accordingly, the Company
experienced a decline in dual-chamber device sales. The PMA Supplement for the
Company's new MAESTRO II dual-chamber device, developed with new electronic
circuitry, was submitted to the FDA in February 1995. The new dual-chamber
device is presently being sold as a hybrid circuit to a distributor in Italy.
Further, 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 tenantive
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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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
15
<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>
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<S> <C> <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 0-14563
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>
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<S> <C> <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
11.0 Statement re Computation of Page 20
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
June 30, 1995.
18
<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: August 11, 1995 By: /s/ Alan J. Rabin
--------------- ---------------------------------------
Alan J. Rabin
President and Chief Executive Officer
Date: August 11, 1995 By: /s/ Lauri Mitchell
--------------- ----------------------------------------
Lauri Mitchell
Controller
19
<PAGE>
EXHIBIT 11.0
CARDIAC CONTROL SYSTEMS, INC.
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Three Months Ended June 30, 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
PRIMARY LOSS PER SHARE:
Net loss............................ $ (157,378) $ (222,729)
========== ==========
Weighted average number
of common shares outstanding...... 1,342,819 1,207,493
Net common shares issuable
on exercise of certain stock
options and warrants (a).......... - -
---------- ----------
Weighted average number
of common shares outstanding,
as adjusted....................... 1,342,819 1,207,493
========== ==========
Loss per common share............... $ (.12) $ (.18)
========== ==========
FULLY DILUTED LOSS PER SHARE:
Net loss............................ $ (157,378) $ (222,729)
========== ==========
Weighted average number
of common shares outstanding,
as adjusted per primary
computation above................. 1,342,819 1,207,493
Net common shares issuable
on exercise of certain stock
options and warrants (a).......... - -
---------- ----------
Weighted average number
of common shares outstanding,
as adjusted....................... 1,342,819 1,207,493
========== ==========
Fully diluted loss per
common share...................... $ (.12) $ (.18)
========== ==========
</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 effect on the loss per Common
Share.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 381,594
<SECURITIES> 0
<RECEIVABLES> 1,332,348
<ALLOWANCES> 80,509
<INVENTORY> 1,881,040
<CURRENT-ASSETS> 3,649,145
<PP&E> 4,528,758
<DEPRECIATION> 3,060,154
<TOTAL-ASSETS> 5,525,980
<CURRENT-LIABILITIES> 1,458,966
<BONDS> 4,153,729
<COMMON> 134,282
0
0
<OTHER-SE> (1,014,758)
<TOTAL-LIABILITY-AND-EQUITY> 5,525,980
<SALES> 1,272,003
<TOTAL-REVENUES> 1,773,803
<CGS> 633,390
<TOTAL-COSTS> 1,800,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,927
<INCOME-PRETAX> (157,378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (157,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (157,378)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
