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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-
14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
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DELAWARE 74-2119162
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
3 COMMERCE BOULEVARD, PALM COAST, FLORIDA 32164 (904) 445-5450
(Address of Principal Executive Offices) (Zip Code) (Telephone Number)
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_____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.10 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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
-- --
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its fiscal year ended March 31, 1996 were
$7,673,523.
The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on May 31, 1996 was $4,393,400 (based on the
average of the closing bid and ask prices of the Registrant's common stock on
May 31, 1996 of 2 7/8 and 3 3/8 respectively).
As of May 31, 1996, 2,579,371 shares of the Registrant's common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL. The Company was incorporated as Supramedics on June 20, 1980 under
the laws of the State of Delaware and on August 28, 1980 changed its name to
Cardiac Control Systems, Inc. to more accurately reflect the business of the
Company. The Company is engaged in the design, development, manufacture,
marketing, and sale of implantable cardiac pacing systems. These systems consist
of single-chamber, dual-chamber and single lead atrial-controlled ventricular
cardiac pacemakers together with connecting ventricular electrode leads and
equipment for the external programming and monitoring of the pacemakers. The
Company has received classification (clearance) from the United States Food and
Drug Administration ("FDA") to distribute commercially a line of single-chamber
and dual-chamber pacemaker systems and a single-lead atrial-controlled
ventricular cardiac pacing system. The equipment used for the external
programming and monitoring of the Company's pacemaker products is usually loaned
without charge to physicians and other purchasers of the Company's products. The
Company's products are "medical devices" as defined by the FDA and thus are
subject to Federal regulations enforced by the FDA, including restrictions on
the commercial introduction of products and clinical testing requirements.
The Company's common stock has historically been listed in the National
Association of Securities Dealers Automatic Quotation System ("NASDAQ").
However, on August 29, 1991, the Company was advised by The NASDAQ Stock Market
that the Company's common stock listing would be deleted effective August 30,
1991. The Company was not in compliance with the NASDAQ's capital and surplus
requirement then in effect of $375,000. However, the Company is currently listed
on the NASD OTC Bulletin Board Service. This service allows market makers to
enter quotes and trade securities that do not meet NASDAQ qualification
requirements.
The Company has had a prior history of net losses and had experienced cash
flow deficiencies and been unable to pay many of its obligations as they became
due. The Company is continuing its efforts to increase its sales volume and
maintain a profitable level of operations. However, there is no assurance that
the Company's efforts will be successful. There are many events and factors in
connection with the development, manufacture and sale of the Company's products
over which the Company has little or no control, including, without limitation,
production delays, marketing difficulties, lack of market acceptance, and
superior competitive products based on future technological innovation. There
can be no assurance that future operations will continue to be profitable or
will satisfy future cash-flow requirements. See "Item 6. Management's
Discussion and Analysis of Financial Position and Results of Operations."
PRODUCTS. The Company currently manufactures and commercially distributes
a line of single and dual-chamber implantable pacemakers and a single-lead dual-
chamber atrial-controlled ventricular (VDD) pacing system, as well as electrode
leads and programming equipment, developed by the Company. Pacemaker systems
are prescribed by physicians for patients who suffer arrhythmias or impairments
of the natural electrical conduction system of the heart that render the heart
incapable of pumping blood throughout the body at a rate and rhythm suitable for
the body's needs. The pacemaker system treats the condition by electrically
stimulating the heart to restore proper rhythmic contractions of the heart
muscle.
The Company's pacemakers and electrode leads are of different dimensions
encompassing 7 pacemaker models (under the tradenames MAESTRO(R) II or MAESTRO
II SAVVI) and approximately 7 electrode lead models (under the tradenames
Polysafe, Unipass(R) or A-Track). The Company's first single- and dual-chamber
pacemaker products were sold under the MAESTRO trade name. This generation of
products, however, is no longer manufactured and marketed by the Company.
Instead, a second generation of more streamlined single-chamber models received
FDA clearance in 1993 and is being sold under the MAESTRO II tradename. The
Company also received FDA clearance to market its streamlined dual-chamber
pacemaker, the MAESTRO(R) Series 500 Model 533 (dual chamber DDD, unipolar) in
September 1995. The Company developed and completed qualification testing of a
new hybrid (the S-7) which is to be the main building block of two other 500
Series products currently under development.
The Company further developed a single-pass atrial-controlled ventricular
(VDD) pacing system and received FDA clearance in 1993 for two VDD models which
the Company sells under the trade name MAESTRO II
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SAVVI. These pacing systems were unique in the industry until a competitor of
the Company (Intermedics) recently received FDA approval for its single-pass
atrial-controlled ventricular pacing system. Intermedics Inc. commenced
marketing its new product in March 1995. The Company licenses technology to
Intermedics for the manufacture of electrode leads used with Intermedics' new
system and further supplies Intermedics with those leads pursuant to license and
supply agreements entered into with the Company. The Company receives income in
the form of royalties and direct payment for leads under those agreements.
Single lead technology research continues via cooperation with top universities
investigating new functions and designs using a pig model. The review boards of
the institutions which conducted the clinical studies granted approval for the
acute use of these leads in the third quarter of fiscal 1996. Clinical data
from such approved studies is to be used in obtaining FDA approval for
expansion of these studies and ultimately market release. In conjunction with
these animal studies a ventricular screw-in lead was developed and FDA
submission is being prepared.
In addition, the Company markets certain electrode leads and pacing
accessories manufactured by other medical companies. Further, the Company sells
hybrid circuit components pursuant to a supply agreement between the Company
and an Italian manufacturer. See "Sales, Markets and Distribution Methods,"
below.
The Company's products are classified as medical devices and as such are
subject to extensive regulation by the FDA. All of the pacemaker systems
marketed in the United States by the Company (including related electrode leads)
are in commercial distribution under the FDA's 510(k) Premarket Notification
regulations or Premarket Approval ("PMA") regulations. See "Government
Regulations," below. Such regulations now include the ISO 9000 series of
standards developed by the International Organization for Standardization (ISO)
as adopted by the European Union Nations. The Company has undergone audit to
ISO 9002 by the notified body TUV,. of Munich, Germany and is developing design
control processes in preparation for compliance audit to ISO 9001.
The Company's MAESTRO II anti-bradycardia cardiac pacemakers are
electronically based with an integrated circuit design, and include multi-
programmable single-chamber (either atrial or ventricular), and atrial-
controlled ventricular pacemakers. They are non-invasively programmable to
multiple operating modes and functions for prescriptive flexibility, provide a
wide range of sensitivity values and incorporate programmable high- and low-
frequency bandpass filters. This extensive programmability permits the
physician the flexibility required to provide truly prescriptive, individualized
pacing therapy for a wide range of patients. In fiscal 1996, the Company
introduced state-of-the-art Computer Aided Design (CAD) capability,
Pro/Engineering, affording increased efficiencies and reducing costs through
virtual prototyping of mechanical assemblies. The Company expects that this
tool will be key to the timely development of a new pacing system project
initiated by the Company's research and development group which has been
planned to utilize the best of outside design forces, the Company's marketing
personnel and R&D department.
The Company's pacemakers are generally sold together with electrode leads
manufactured by the Company. The Company's PolySafe electrode leads include
various models of its specialized single-pass A-Track leads. The A-Track leads,
developed and patented by the Company, are triaxial pacing leads in which the
inner coil connects to a ventricular tip electrode for pacing and sensing in the
ventricle, and the two other coils connect to two diagonal atrial bipolar
("DAB") electrodes positioned so as to provide sensing data from the atrium. The
DAB electrodes transmit sensed atrial signals to the pacemaker, which then
stimulates the ventricle at an appropriate rate, providing atrial-synchronous
ventricular pacing, mimicking the normal action of the heart. The MAESTRO II
SAVVI system incorporating the A-Track lead represents an important advance in
technology, combining atrial-controlled ventricular pacing with the convenience
and reliability of a single-lead implant procedure. This system is appropriate
for the many patients with conduction disorders and a physiologically responsive
sino-atrial node.
The Company's electrode leads are insulated with Surethane/r/, and are
manufactured using a patented coating process, rights to which are held by the
Company (see "Certain Patents, Trademarks and Licenses," below). The Surethane
is applied in solution to the pacing coil using a non-thermosetting coating
process that results in non-stratified bonding of each layer of the Surethane
upon curing and a "unitized" construction of coil and insulation. This process
results in extremely slender and durable leads.
Both of the Company's portable programmer models enable bi-directional
communication between the clinician and the implanted pacemaker. Programming and
telemetry messages are transmitted to the pacemaker
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via a lightweight wand. Prior to transmitting a new program to the pacemaker,
the programmer automatically provides validation of the selected mode/parameter
value combination as a safety step. One model incorporates an integral printer,
and the other provides for connection of a printer, for generating hardcopy
records. Both provide for connection of a stripchart recorder, for generating
hardcopy records of EGM telemetry data. A programmer carrying the CE mark
label, as required in Europe, has been developed. In parallel, the Company has,
under development, a new programmer incorporating computer technology with the
ever present need for ease-of-use.
SALES, MARKETS AND DISTRIBUTION METHODS. The primary markets for the
Company's products are hospitals, other medical institutions, and physicians
both in the United States and abroad. The Company currently markets its products
primarily through independent sales representatives in the United States and
independent distributors in the international markets. Also, the Company sells
hybrid circuit components to an Italian manufacturer. Independent
representatives are paid by commission; independent distributors generally
purchase the Company's products at discounted prices. The Company advertises in
scientific publications and also uses trade shows and convention demonstrations,
direct mail advertising, telephone solicitations and direct sales to selected
customers as part of its marketing efforts.
Pricing of the Company's products is generally similar to that for
competing products. The Company focuses its marketing attention on the
technological advantages of its pacemakers rather than on price considerations.
The Company bases its appeal to physicians on the Company's belief in the
relative simplicity with which its reliable and therapeutically effective
pacemaker systems can be implanted, programmed and monitored. The Company
focuses its marketing attention on the issue of price sensitivity only when
necessary. For example, under Medicare legislation, the amount of reimbursement
that a hospital and a physician receive from Medicare for a pacemaker implant
does not vary with the cost of the implanted pacemaker, and the Company must
consider this in its pricing decisions. See "Government Regulations," below.
The Company maintains inventories of pacing systems at many hospitals to
facilitate the immediate availability of these products when required. In
addition, the Company's independent sales representatives hold a supply of
pacemaker systems on consignment. The majority of the Company's sales in the
United States are filled by withdrawing products from consigned inventories,
whereupon the hospital is billed for the product.
Independent sales representatives, organizations and distributors selling
the Company's products are free to sell products not produced by the Company
that do not compete with the Company's products. As of March 31, 1996, 20
independent sales representatives (or organizations) are actively selling the
Company's products in the United States. The Company has executed long-term
contracts with most of its sales representatives in the United States.
Generally, the contractual agreements executed between the Company and its
independent sales representatives provide each representative the exclusive
right to sell the Company's products in a specified area of the United States
for a three- or five-year period, are renewable for a second three- or five-year
term, and provide the Company with certain termination rights.
The Company's operations, sales and ability to attain a profitable level of
operations are dependent upon maintaining the contractual relationships with its
principal sales representatives and upon on-going expansion of their business
volume. Termination of any of these contractual agreements between the Company
and its key independent sales representatives would have a material adverse
effect on the Company's sales volume and operations. Furthermore, the Company's
ability to maintain a profitable level of operations would be adversely affected
if the Company's sales representatives are unable to expand the volume of their
business.
The Company also currently exports its hybrid circuit components to Italy.
In the past, the Company exported assembled products to distributors in Greece,
the Netherlands, Spain, Germany, Japan and Hong Kong; however, as of January 1,
1995, the Company is currently not selling its assembled products in those
countries that are members of the European Union ("EU"), pending the Company's
completion of Certification under the Active Implantable Medical Device
directive ("AIMD") by the European Union. The lack of AIMD Certification,
however, does not prevent the Company from selling components to the EU nations.
The Company is currently selling components to a manufacturer in Italy and
anticipates pursuing other European markets for distribution of its components.
See "Government Regulations" below. The Company is not currently exporting
products to the Far East. The Far East distributor has not yet received approval
to distribute the Company's MAESTRO II products in the Far East.
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On December 20, 1995, the Company signed a distribution agreement with
Grupo Taper, S.A. of Madrid, Spain under which, subject to certain pre-existing
distribution agreements, Grupo Taper is the sole agent for the purchase, import
and distribution and sales of the Company's product in Europe and certain
specified non-European countries. The agreement is for an initial term of ten
(10) years and will automatically renew for a five (5) year period unless
terminated by either party upon six month's prior notice.
During the year ended March 31, 1996, two of the Company's independent
sales representatives each accounted for in excess of 10% of the Company's sales
and, in aggregate, accounted for $1,787,118 (34%) of the total. With the
exception of Intermedics Inc., as disclosed below, during the years ended March
31, 1996 no single domestic or international customer accounted for in excess of
10% of the Company's sales. Accordingly, the Company does not believe that the
loss of any single customer in the United States, excluding Intermedics Inc.,
would have a material adverse effect on its business. However, the Company's
ability to maintain a profitable level of operations is dependent upon its
ability to increase its sales volume. Therefore, the loss of any important
customer in the United States could unfavorably impact the Company's sales
volume and its ability to maintain a profitable level of operations. See "Item
6. Management's Discussion and Analysis of Financial Position and Results of
Operations."
On October 1, 1994, the Company executed an agreement with LEM Biomedica
s.r.l. (LEM), an Italian manufacturer, to supply LEM with the Company's
proprietary hybrid circuits for a period of two years. LEM is using these
circuits to manufacture implantable pacemakers under the LEM trade name. This
agreement covers the Company's hybrid circuits for single-chamber, dual-chamber
and single-lead atrial controlled ventricular (VDD) pulse generators. The
Company had been selling pacemaker sub-assemblies to LEM for three years
pursuant to a previous supply agreement that expired in November 1994. Pursuant
to the terms of the original Agreement, LEM provided equity financing of
$500,000 with the purchase of 71,428 shares of the Company's Common Stock. This
represents approximately 2.8% of the total outstanding shares of the Company.
On August 1, 1990, the Company executed a License Agreement and a Supply
Agreement with Intermedics Inc., a subsidiary of Sulzer Brothers Limited. The
License Agreement provided initial fees to the Company aggregating $1.5 million.
The License Agreement also provided for the payment of royalties to the Company
based upon net sales of Intermedics products incorporating the licensed (single-
pass lead) technology. On April 2, 1993, the Company amended and restated its
License Agreement and Supply Contract with Intermedics Inc. The Amended and
Restated License Agreement provided for the prepayment of $850,000 in royalties
to the Company. The prepayment will be applied against future royalties at a
rate of 2/1 per pacing system sold, reducing the potential aggregate royalties
to be received over the life of the Agreement from $7,031,250 to $6,181,250.
Further, pursuant to a subsequent amendment, a $100,000 prepayment of future
royalties was received in February 1994, to be applied against the next 1,000
pacing systems sold at a rate of $100 per unit. The Supply Contract which was
to expire on July 31, 1993, has been extended until August 1, 1998, and provides
for the Company to supply its specialized single-pass leads to Intermedics Inc.
for three years at specified prices. Sales to Intermedics Inc. accounted for 37%
of sales for the year ended March 31, 1996. (See Note 8 "Segment Data and
Significant Customers" of the Notes to Financial Statements).
Historically, the Company encountered many difficulties in connection with
its efforts to develop a distribution network of independent sales
representative in the United States large enough to attain enough sales to
generate profitability. The Company believes that these difficulties are
attributable to the Company's lack of visibility and the competitive
environment, and, most important the Company's financial position. However, the
Company believes that the capital infusion received from its private placement
of Debentures, the satisfaction of the DCE mortgage, and with new management in
place providing expertise in corporate finance, sales and marketing, and
research and development, the Company will be able to expand its distribution.
Further, the Company estimates its market share of pacing products to be less
than 1%. Because the estimated pacing systems market is $1.8 billion, the
Company considers the market large enough to accommodate the Company's products.
The Company believes that, with its new-generation single-chamber MAESTRO
II and single-lead dual-chamber MAESTRO II SAVVI pacing systems and with the
additional financing, it has the potential to increase its sales volume in the
United States and expand into other international markets.
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PRODUCT WARRANTIES. The Company's pacemakers and electrode leads are
covered by a limited warranty. Specific terms and conditions of the warranty
vary according to the model. Generally, however, pacemaker warranties extend
from 5 to 6 years, and pacing lead warranties continue for the patient's
lifetime. All warranties provide for replacement with a comparable Company
product and for partial reimbursement of medical expenses not covered by third
parties.
CERTAIN PATENTS, TRADEMARKS, AND LICENSES. The Company obtains licenses
from others that it deems necessary to its business, and its policy is to obtain
patents on its inventions whenever practical. Technological advance has been
characteristically rapid in the industry in which the Company competes, and the
Company does not believe its business is materially dependent upon any
individual patent or license. However, should certain of the Company's licenses
be terminated for any reason, the Company's operations and competitive ability
could be adversely affected.
On June 12, 1984, Mr. Robert R. Brownlee, a Director and Senior Executive
Vice President of the Company, assigned all rights, title and interest in United
States Patent No. 4,585,004, titled "Heart Pacing and Intracardiac Electrogram
Monitoring System and Associated Method," to the Company. The patent, issued on
April 29, 1986, applies to the specialized A-V Data/r/ ventricular leads
developed by the Company.
On November 14, 1985, all rights, title and interest in United States
Patent No. 4,726,379, titled "Cardiac Pacer with Switching Circuit for
Isolation," were assigned to the Company by two of its employees. The patent,
issued on February 23, 1988, applies to bipolar dual-chamber pacing methods.
On June 28, 1988, Mr. Robert R. Brownlee, a Director and Senior Executive
Vice President of the Company, assigned all rights, title and interest in United
States Patent No. 4,962,767, titled "Pacemaker Catheter" to the Company. The
patent, issued on October 16, 1990, applies to the A-Track electrode leads used
with the Company's SAVVI pacing system.
On December 12, 1988, all rights, title and interest in United States
Patent No. 4,907,592, titled "Self-Sealing Connector for Electrical Leads for
Use in Wet Environments," were assigned to the Company by one of its employees.
The patent was issued on March 13, 1990.
On August 15, 1990, Mr. Robert R. Brownlee, a Director and Senior Executive
Vice President of the Company, assigned all rights, title and interest in United
States Patent No. 5,127,403, titled "Pacemaker Catheter Utilizing Bipolar
Electrodes Spaced in Accordance to the Length of a Heart Depolarization Signal"
to the Company. The patent, issued on July 7, 1992, applies to the A-Track
electrode leads used with the Company's SAVVI pacing system.
The Company has obtained from Howard C. Hughes and Roy D. Bertolet, the
latter an employee of the Company, an exclusive license to an extrusion
technique for coating pacemaker leads and other wires with polyurethane, for
which a patent was granted on February 5, 1985. The term of the license
corresponds to the life of the patent, which expires on February 4, 2002. The
license provides for payment of royalties for each contract year based on a
percentage of net sales of products produced using the licensed technology. On
June 30, 1994, the license became non-exclusive. Further, on March 29, 1993, the
licensor executed a sublicense agreement with the Company, pursuant to which
the Company granted a limited sublicense allowing Intermedics Inc. to use the
extrusion technique to manufacture leads pursuant to the terms of the Amended
and Restated License Agreement between the Company and Intermedics Inc. On
April 1, 1996 the Company again became the exclusive licensee of this
technology.
The Company uses various trademarks with its product lines. The MAESTRO
trademark, used with the Company's pacemakers and programmers, has been
registered with the U.S. Patent and Trademark Office. The Company's trademarks
PolySafe, A-Track, A-V Data, TriFix, Trabeculok, SAVVI, DAB, and Surethane are
unregistered trademarks of the Company.
RESEARCH AND DEVELOPMENT. The Company expended $698,000 and $390,000 on
research and development activities during the years ended March 31, 1996 and
1995 respectively. Research and Development activity has resulted in FDA
approval in September 1995 of the MAESTRO/(R)/ Series 500 Model 533 (dual
chamber DDD, unipolar) pulse generator. The R&D group successfully developed and
completed qualification testing of a new hybrid (the S-7) which is to be the
main building block of two other 500
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Series products currently under development (the model 534 and 535). In
addition to finalizing the two new models, the Company has undertaken the design
and development of a new pacing system. This development will utilize state-of-
the-art CAD capabilities, will capitalize upon outside design forces and exploit
appropriate aspects of computer technology. Such exploitation is evidenced by
the development of a Graphical User Interface (GUI) programmer (currently in
prototype) yielding a state-of-the-art programmer addressing the need for ease-
of-use in pacing system programming. The new system is aimed at competing in
the dual chamber, rate responsive market while capitalizing on the parallel
developments of the single lead technology of the Company.
RAW MATERIALS AND PRODUCTION. Although the Company endeavors to have
alternative supply sources for parts and materials used in manufacturing its
products, single sources are used for certain critical materials, including
medical adhesives, integrated circuits, hybrid microelectronic circuitry,
lithium batteries, various other components, and a material used to produce
Surethane. The loss of any one of these single sources or significant delivery
delays could cause a costly delay in production. Although the Company believes
that various design or material alternatives could be used, that could prove
time-consuming and could require notification to and clearance by the FDA.
Two of the Company's principal suppliers of materials used in electrode
lead production, Dow Corning Corp. and E.I. Du Pont De Nemoirs & Company, have
indicated that they will no longer supply their materials to the medical device
industry for implantable devices. The Company has identified alternate sources
for the Dow Corning materials and has qualified and submitted a notification to
the FDA. The FDA acknowledged receiving the Company's notification and indicated
that, unless otherwise notified by the FDA, the alternate materials identified
in the notification may be used in the Company's products in place of the
comparable Dow Corning materials. The Company has pursued alternate sources for
the E.I. Du Pont De Nemoirs material and has been successful in developing a
material currently undergoing final qualification testing. This qualification
testing includes both biocompatibility and compatibility with current
manufacturing methodologies.
Suppliers of custom Application Specific Integrated Circuits (ASIC's) have
advised the Company that the technology used to produce these IC's will no
longer be supported. As such, the Company placed one last bulk order to ensure
the availability of sufficient IC's to satisfy projected demands for product.
The new pacing system under development will realize appropriate ASIC's for the
new system obviating the need for perpetual supply of the currently used ASIC's.
The Company's products are manufactured by the Company under closely
controlled environmental conditions with processes developed by engineering
personnel and monitored by quality assurance personnel. These processes are
designed to be consistent with the Good Manufacturing Practices ("GMP")
regulations audited by the FDA. In addition, the Company has undergone audit to
ISO 9002 by the notified body TUV of Munich, Germany, and is developing design
control processes in preparation for compliance audit to ISO 9001.
INSURANCE. The Company maintains what it believes to be an adequate amount
of comprehensive general liability insurance and what it believes to be a
reasonable amount of products liability coverage. No assurance can be given
that the products liability coverage will be sufficient to protect the Company's
assets against claims by users of its products or that the Company will be able
to maintain such coverage (or obtain additional coverage) in the future at
reasonable premium rates or at all, in which case its assets will be at risk in
the event of successful claims by users of its products. Furthermore, the
Company's liability coverage may not cover costs incurred by the Company under
its product warranties (see "Product Warranties," above) or costs incurred by
the Company in the event of a product recall.
The Company has no pending, threatened or actual claims as of this date,
nor is the Company aware of any current circumstances that might give rise to
such claims. However, the Company could be exposed to possible claims for
personal injury or death resulting from the sale or subsequent malfunction of
allegedly defective products.
EMPLOYEES. As of May 31, 1996, the Company employs 78 persons full-time,
including management.
GOVERNMENT REGULATIONS. The activities of the Company in developing,
producing and marketing medical devices are subject to regulation by the FDA
and, in some instances, by state and foreign governmental authorities.
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Federal Regulations. In the United States, the FDA, among other
-------------------
government agencies, is charged with regulating the introduction to the
marketplace of new medical devices, related manufacturing and laboratory
practices, and labeling and record keeping for such devices. The FDA has the
authority to ban, detain or seize "adulterated or misbranded" medical devices,
and may also order repair, replacement or refund and require notification of
health professionals and others with regard to medical devices that present
unreasonable risks or substantial harm to the public health. The FDA may also
proceed through court action to enjoin and restrain or initiate action for
criminal prosecution of certain violations of the Federal Food, Drug and
Cosmetic Act, as amended, pertaining to medical devices.
Most implantable cardiac pacemakers fall within a category for which the
FDA has stringent clinical investigation and premarket clearance requirements.
Such regulation tends to lengthen the time for introducing new products in the
United States, and to increase the expense of developing and marketing such
products. Moreover, the FDA administers certain controls over approvals for
exporting such devices from the United States.
FDA regulations require a company to file a 510(k) Premarket Notification
for certain products demonstrating that the products are substantially
equivalent to products that were introduced into interstate commerce for
commercial distribution before May 28, 1976 (pre-enactment devices) or to
products which the FDA has already found to be substantially equivalent to pre-
enactment devices. The FDA has also issued regulations for the premarket
approval ("PMA") of medical devices that are not substantially equivalent to
pre-enactment devices (such as the Company's dual-chamber and single-lead
atrial-controlled ventricular devices). These must be cleared for commercial
distribution through a PMA submission or a PMA supplement. The regulations will
eventually require a PMA submission for all products (such as the Company's
single-chamber devices) previously cleared for commercial distribution through
premarket notifications. Prior to seeking PMA clearance for a medical device, a
company is generally required to complete a clinical evaluation in accordance
with Investigational Device Exemption ("IDE") regulations. The time and expense
associated with the clinical investigation and premarket clearance requirements
of the FDA are substantial.
Many of the new products developed by the Company in the future will most
likely be subject to the IDE and/or PMA regulations of the FDA. Accordingly, the
Company will continue to devote significant time to the FDA regulatory process
leading to FDA market clearance of products developed by the Company in the
future.
FDA regulations require the Company to register its manufacturing
establishment with the FDA, list all medical devices that are manufactured and
distributed by the Company, observe certain production and labeling standards
and submit to unscheduled inspections by the FDA. Other FDA regulations relate
to repair and replacement of devices; refund of purchase price and notification
of risks; record keeping and reporting; and restrictions on the sale,
distribution or use of certain devices.
The FDA has recently implemented product tracking and electrode lead
post-market surveillance regulations. These regulations require the Company to
track and maintain information regarding the location of product not in its
direct possession. The post-market surveillance regulations require the Company
to collect and analyze clinical data to complete product longevity analysis. The
expense to the Company to meet these regulations is yet undetermined as the
protocols to implement these regulations are still under review. This expense
could be material.
The average pacemaker recipient in the United States is of advanced age.
Most pacemaker recipients thus are eligible for Medicare. Therefore, in addition
to FDA and similar foreign regulations, the Company may also be affected by
changes in the laws and regulations relating to Medicare.
State Regulation. In addition to federal law, the Company is subject to
------------------
the Florida Drug and Cosmetic Act. In particular, the Company is required to
maintain a permit to operate a medical device manufacturing facility and
must register its medical devices with the appropriate Florida authority. All
such required permits have been received, and registrations made, by the
Company.
8
<PAGE>
European Regulation. In addition to federal and state law, the European
--------------------
Union ("EU") 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
EU which is evidenced by being granted the CE Mark. Standards for implantable
medical products were implemented January 1, 1993, with a transition period
ending December 31, 1994, however, the Company did not obtain certification, the
CE Mark, by the deadline.
The EU has adopted voluntary quality system standards developed by the
International Organization for Standardization ("ISO") as one means of securing
the CE Mark. 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. Since the Company was unable to obtain
certification by January 1, 1995, its sales of assembled products to the EU
market have been suspended. The Company is not required to have the CE Mark in
order to sell components in Europe and is selling pacemaker components to a
manufacturer in Italy under a three-year agreement with that company. The
Company successfully passed an audit of its Quality System to the ISO 9002 in
April/May 1996. The audit was conducted by a registered Notified Body of the
European Union and represents the completion of one critical step in securing
the CE Mark. The final steps of product testing and review of technical
documentation are in the final phase by the Notified Body at this writing.
Certification of the Quality System and of product test results and technical
documentation is imminent; however, until certification is issued by the
Notified Body the Company's products may not be sold in the European Union
countries.
WORKING CAPITAL. The Company is required to carry significant amounts of
inventory in order to meet rapid delivery requirements of customers and assure
itself a continuous supply of key components and parts from its suppliers. There
is also a several-month lead time between the time that the Company acquires
parts until such time that a product is completed and available for sale. In
addition, a portion of the Company's business is related to consignment business
where the Company provides customers with the right to return products that are
not implanted or sold. Accordingly, inventory management is an important
business concern both with respect to the Company's liquidity and due to the
potential for rapidly changing business conditions and technological advances
within the industry.
COMPETITION IN THE INDUSTRY. The Company competes with many other domestic
and foreign companies, many of which have significantly greater financial and
other resources than the Company. The industry is currently dominated by
Medtronic, Inc.; Intermedics Inc. (which has been acquired by Sulzer Brothers
Limited); Telectronics Pacing Systems, Inc. (a division of Pacific Dunlop);
Cardiac Pacemakers, Inc. (a division of Guidant Corporation); and Pacesetter
Systems, Inc. (a division of St. Jude Medical, Inc.). Although many of the
larger companies have a group of loyal physicians who use their products
exclusively, most physicians use more than one pacemaker supplier.
Technological innovation and sales ability are important with respect to
market entry and penetration. The Company believes that the primary competitive
factors in the marketplace today, given competing products with similar
capabilities, are product reliability, product capability, design
characteristics, longevity, service, technical support provided by the
manufacturer, product warranty and price, and credibility of the Company.
Nevertheless, the Company's products are subject to the risk of being rendered
obsolete by the introduction of new products or techniques by others.
Some of the conditions and diseases that the Company's pacemakers are
designed to treat may, in certain cases, also be treated by drug therapy. The
Company does not deem itself to be in substantial direct competition with
pharmaceutical companies because, at present, drug therapy is only infrequently
a viable alternative to use of a pacemaker. However, new drugs and methods of
therapy that might compete with the Company's pacemaker products may be
developed by pharmaceutical or other health care companies. Many such companies
are larger than the Company and possess more substantial research facilities and
other resources.
Companies that are already well established can be expected to protect
their existing market shares. This is coupled with increasing marketing costs
under heavier competition, and escalating regulatory burdens. In addition, there
is an overriding necessity to increase research and development expenditures in
order to remain competitive.
9
<PAGE>
ITEM 2. PROPERTY OF THE COMPANY
The Company owns and occupies a 50,000 square-foot building on 4.11 acres
of land in Palm Coast, Florida. The facility houses the Company's headquarters
and its research and development, manufacturing, administrative and marketing
divisions. The facility includes a 3,000 square-foot controlled environment area
for the manufacture of the Company's medical products, and 18,000 square feet of
unimproved space that is not in use. The production capacity of the Company's
existing facility is greater than current production levels and should be
sufficient to meet the Company's needs for at least the next several years.
As of March 31,1995, the Company retired its obligation to Dow Corning
Enterprises, Inc. ("DCE"), a wholly owned subsidiary of Dow Corning Corporation,
pursuant to which DCE released the Company from its Investment Agreement with
DCE, the secured promissory note, and the DCE mortgage encumbering the Company's
premises. The Company had been in default of its $1.75 million mortgage note
payable to DCE and owed DCE approximately $2.65 million in principal and accrued
interest as of March 31, 1995. The Company accomplished the debt reduction
through a $1.5 million Loan and Security Agreement dated March 31, 1995 from
Sirrom Capital Corporation, a Tennessee corporation ("Sirrom") from which the
Company paid DCE $1 million and gave DCE a warrant for the Company's common
stock. In return, DCE forgave approximately $1.65 million of debt and accrued
interest.
In respect of the new financing, Sirrom holds a first mortgage on the
Company's premises and a first lien against all of the Company's real and
personal property (including patents and royalties) but, excluding inventory and
accounts receivable. (See Note 5 - "Notes and Debt Obligations" of the Notes to
Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS
On January 4, 1994, a financial brokering 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 arising from an agreement (the "Agreement"),
dated October 16, 1992. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 21, 1996, the holders of the $2,885,000 5% Convertible Debentures
were requested to state whether they elected to convert 100% of their debentures
to shares of Common Stock in the Company at a conversion price of one share of
Common Stock for each $2.80 of outstanding principal. As of March 31, 1996, the
holders of over 75% of the principal outstanding of the Company's 5% Convertible
Debentures elected to convert their Debentures into Common Stock of the Company.
Section 2 (b) (iii) of the Debenture Instrument provided for automatic
conversion of all Debentures in the event holders of 66 % in principal amount of
the Debentures outstanding have converted their Debentures into the Company's
Common Stock. Thus all the 5% Convertible Debentures outstanding were
automatically converted into the Company's Common Stock effective March 31, 1996
at the conversion price of one share of Common Stock for each $2.80 in
outstanding principal.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION. The Company's common stock has historically been listed
in the National Association of Securities Dealers Automated Quotation System
("NASDAQ"). However, on August 29, 1991, the Company was advised by The NASDAQ
Stock Market that the Company's common stock listing would be deleted effective
August 30, 1991. The Company was not in compliance with the NASDAQ's capital and
surplus requirement then in effect of $375,000. However, the Company is
currently listed on the NASD OTC Bulletin Board Service under the symbol "CDCS".
This service allows market makers to enter quotes and trade securities that do
not meet NASDAQ qualification requirements.
The high and low closing bid prices for the Company's common stock for each
of the quarters during the years ended March 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
High Low
---------------------------------------------------
<S> <C> <C>
YEAR ENDED MARCH 31, 1996
Fourth Quarter................... 3 7/8 2 5/8
Third Quarter 3 3/8 2
Second Quarter................... 4 5/8 3 3/8
First Quarter.................... 4 1/8 3 3/8
YEAR ENDED MARCH 31, 1995
Fourth Quarter................... 3 1/2 2
December 13 - December 31, 1994 2 1/2 1
October 1 - December 12, 1994 15/32 1/8
Second Quarter................... 3/8 1/8
First Quarter.................... 17/32 1/8
</TABLE>
These quotations represent prices between dealers in securities; they do not
include retail mark-up, mark-downs or commission, and do not necessarily
represent actual transactions. The quotations for the first and second quarters
in the year ended March 31, 1995 have not been adjusted for the one for seven
reverse stock split effectuated on December 13, 1994.
HOLDERS. As of May 31, 1996, there were approximately 623 holders of
record of the Company's common stock.
DIVIDENDS. The Company has not declared or paid any cash dividends on
its common stock and has no present plans to pay cash dividends in the
foreseeable future and intends to retain earnings for the future operation and
expansion of the business. Any determination to declare or pay dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend upon the Company's results of operations, financial condition, any
contractual restrictions, considerations imposed by applicable law and other
factors deemed relevant by the Board of Directors. Currently there are no
contractual restrictions on the Company's ability to pay or declare dividends;
however, the Company must give advance notice of such event to Sirrom Capital
Corporation ("Sirrom") under the terms of Sirrom's warrant. See Note 6 -
Stockholders' Equity (Deficit) -Common Stock Purchase Warrants, of the Notes to
Financial Statements.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
FINANCIAL POSITION AND LIQUIDITY
The Company's financial position was reinforced by the proceeds of the
$1,000,000 promissory note, executed on October 20, 1995 with Intermedics Inc.,
and a distribution agreement entered into in March 1996 with Grupo Taper, S.A.
of Madrid, Spain. The Intermedics loan is repaid at a given ratio of electrode
lead sales to Intermedics. The balance of principal and the accrued interest
outstanding pursuant to the Intermedics promissory note at March 31, 1996 were
$807,283 and $9,212. Under the terms of the distribution agreement, Grupo Taper
made an advance payment of $500,000 on initial inventory to be purchased. As
consideration for the distribution agreement, Grupo Taper made an additional
payment of $500,000 in respect of the purchase of 100,000 shares of common stock
in CCS and warrants for the purchase of 100,000 further shares of common stock
in CCS. The Company's liquidity was strengthened on March 31, 1996 by the
conversion of $2,885,0000 5% Convertible Debentures into 1,030,352 shares of
common stock in CCS; the Debenture interest expense through the date of the
conversion was satisfied by the issuance of 51,660 shares of common stock in
CCS.
Cash used by operations during fiscal 1996 approximated $253,000. Capital
expenditures and repayment of debt obligations during fiscal 1996 approximated
$403,000 and $308,000 respectively. Net proceeds from the issuance of stock
approximated $329,000. Proceeds from notes and debt obligations payable
approximated $1,068,000. Overall, positive cash flow for fiscal 1996
approximated $500,000.
Cash used by operations during fiscal 1995 approximated $1,598,000. Capital
expenditures and repayment of debt obligations during fiscal 1995 approximated
$309,000 and $1,227,,000, respectively. Proceeds from the issuance of stock
aggregated $9,000; short-term borrowings during fiscal 1995 aggregated $40,000;
and long-term borrowings aggregated $4,135,000. Overall, positive cash flow for
fiscal 1995 approximated $561,000.
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 that aggregate approximately $988,000 at March
31, 1996. (See "Note 9 - Commitments and Contingencies" of the "Notes to
Financial Statements").
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
OVERVIEW. The Company's total revenues for fiscal 1996 increased 34% to
$7.7 million compared to $5.7 million for fiscal 1995. Sales increased from
$4.8 million to $5.3 million, and Royalties increased from $0.9 million to $2.4
million for 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, partially offset by a 31%
increase in total costs to $7.5 million as compared to $5.7 million in fiscal
1995, resulted in an increase in operating income for fiscal 1996 to $159,486 as
compared to $13,564 for fiscal 1995. Interest expense in fiscal 1996 increased
116% to $672,303 as compared to $311,313 in fiscal 1995, due to the full year
effect of the 5% interest on the debenture financing raised during the third
quarter of fiscal 1995, the interest on the Intermedics, Inc. promissory note
executed on October 20, 1995, (see the next following paragraph), and the
amortization of debt costs, which increased to $219,775 in fiscal 1996 from
$30,142 in fiscal 1995. Other Income increased in fiscal 1996 to $234,600 as
compared to $928 in fiscal 1995 due principally to taking a prior year deposit
of $75,000 into income and $159,500 arising from a gain on the sale of a
European distribution agreement to Grupo Taper. The pretax loss before
extraordinary gain of $261,505 in fiscal 1996, is comparable to pretax loss of
$281,817 before extraordinary items in fiscal 1995.
On October 20, 1995, the Company executed a promissory note for the
principal amount of $1,000,000 with Intermedics Inc. to assist the Company in
meeting the demand of Intermedic's future electrode lead orders pursuant to the
Supply Contract between Intermedics and the Company. The loan is being repaid
at a given ratio of 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 Licence Agreement with
Intermedics. Any unpaid principal and accrued interest will be due and payable
September 1, 1998. The balance of principal and the accrued interest
outstanding pursuant to the Intermedics promissory note at March 31, 1996 were
respectively $807,283 and $9,212.
12
<PAGE>
SALES. Total sales in the year ended March 31, 1996 increased by 10%, but
pacer unit sales decreased 33%. The decrease was directly attributable to the
Company's inability to sell in Europe because of lack of ISO and CE approval in
1996 and an agreement with LEM Biomedica to purchase hybrids instead of
completed pacemakers. The decrease in pacer unit sales was partially offset by
an increase of 25% in pacer average selling prices due to the preponderance of
pacer sales in the year having occurred within the USA domestic market, where
selling prices are higher than in the European market. The decrease in pacer
unit sales was also offset by an increase of 44% in unit sales of electrode
leads and an increase of 294% in unit sales of hybrid circuits to an Italian
manufacturer, LEM Biomedica.
Sales by geographic area for fiscal 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
-----------------------------------------
Geographic Area 1996 1995
-----------------------------------------
<S> <C> <C>
United States..... $4,720,457 $3,931,299
Europe............ 601,366 886,563
----------------------
$5,321,823 $4,817,862
-----------------------------------------
</TABLE>
The Company's domestic sales for fiscal 1996 increased by 22% over those
achieved in fiscal 1995. An increase of 3% in pacer unit sales was partially
offset by a decline of 1% in average selling prices; unit sales of electrode
leads increased by 46% and values were enhanced by an increase of 7% in average
selling prices, resulting in an increase of 56% in the sales values of this
product line.
Sales by product line (including product assemblies) for fiscal 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Product Line 1996 1995
------------------------------------------------------------------
<S> <C> <C>
Single-chamber pacemakers................. $ 757,048 $ 968,842
Dual-chamber pacemakers 135,206 83,386
Atrial-controlled ventricular pacemakers.. 1,671,439 2,013,820
Hybrid circuits........................... 363,625 95,750
Electrode leads........................... 2,359,879 1,532,106
Other..................................... 34,626 123,958
-----------------------
$5,321,823 $4,817,862
------------------------------------------------------------------
</TABLE>
The Company has executed a Distribution Agreement in respect of Europe with
Grupo Taper S.A. of Madrid, Spain and has completed an EN ISO 9002/EN 46002
quality systems audit, conducted at CCS by TUV Product Service of Munich,
Germany, and expects to be granted the right to use the CE Mark during the first
quarter of fiscal 1997. The Company expects that these activities will enable
the Company to re-enter the European market with finished product.
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. The future potential royalties to be
recorded over the life of the Agreement are estimated at $2.7 million.
COSTS OF PRODUCTS SOLD. Cost of products sold in fiscal 1996 was
$2,551,413, compared to $2,495,673 in fiscal 1995, representing an increase of
2% as compared with the increase of 10% in sales, which improved the gross
margin from 48% to 52%. Increased production levels continue to have a
favorable impact on the Company's manufacturing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3,968,000 in fiscal 1996, representing a 46%
increase from $2,711,923 for fiscal 1995. Selling expenses were $2,071,109 for
fiscal 1996 compared to $1,185,786 for fiscal 1995, representing an increase of
75%, in order to support the full year costs of the new selling organization
required to promote the recognition of the Company and the acceptance of its
products in the market. Management considers that the continuing viability of
the Company is largely dependent upon achieving sufficient volume of sales at
margins adequate to support the ongoing costs of administration and the
Company's Engineering, Research and Development program. General and
administrative expenses increased from $1,526,137 in fiscal 1995 by 24% to
$1,896,891 in fiscal 1996 due
13
<PAGE>
to the full year effect of the higher level of salary expense first reported in
respect of fiscal 1995.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development expenses increased from $506,377 in fiscal 1995 by 96% to $994,624
in fiscal 1996 due to expansion of resources and expansion of continued
development in single pass leads, dual chamber operation, rate responsive pacing
and a replacement programmer.
OTHER INCOME AND EXPENSES. Interest expense increased from $311,313 in
fiscal 1995 to $672,303 in fiscal 1996 as a result of the full year effect of 5%
interest on $2,885,000 Convertible Debentures, interest on the Intermedics'
promissory note dated October 20, 1995 in the sum of $1,000,000 and amortization
of debt costs which increased to $219,775 in fiscal 1996 compared to $30,142 in
fiscal 1995, largely as a result of an amortization charge in the sum of
$139,500 in respect of warrants issued to Sirrom Capital Corporation in
consideration of the secured loan of $1,500,000 granted on March 31, 1995 and
the amortization during fiscal 1996 of $66,684 related to the cost of raising
$2,885,000 in 5% Convertible Debentures. Other income in the sum of $234,600
during fiscal 1996 largely comprised taking a prior year deposit of $75,000 into
income and $159,500 in respect of the gain on the sale of a European
distribution agreement to Grupo Taper, S.A.
OPERATING TRENDS AND UNCERTAINTIES
SALES. The ability of the Company to maintain a profitable level of
operations is dependent upon expansion of sales volume, both domestically and
internationally and continued development of new, advanced products. 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 European Union (EU) 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 EU 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 EU, it must obtain certification, the CE
Mark. The Company successfully passed an audit of its Quality System to the
ISO 9002 in April/May 1996. The audit was conducted by a registered Notified
Body of the European Union and represents the completion of one critical step in
securing the CE Mark. The final steps of product testing and review of
technical documentation are currently in the final phase by the Notified Body.
Certification of the Quality System and of product test results and technical
documentation is imminent; however, until certification is issued by the
Notified Body, the Company's products may not be sold in the European Union
countries.
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.
14
<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 and continue to develop and
release new advanced products. 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 and subsequent conversion of the
Debentures and the cash flow generated from Intermedics' orders and royalties
have positioned the Company to increase its research and development
capabilities, 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. 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 will 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. Two of the Company's principal suppliers of materials used
primarily in electrode lead production, Dow Corning Corp. and E.I. DuPont de
Nemours & Company, have indicated that they will no longer supply their
materials to the medical device industry for use in implantable devices. In
July 1993, the FDA published in the Federal Register a one-time-only requirement
for medical device manufacturers to file a special notification of material
supplier changes resulting from the decision of Dow Corning to discontinue
supplying its materials to medical device manufacturers. The Company filed the
"Special Silicone Notification" for its products effected by the Dow Corning
decision in September 1993. In this notification alternate suppliers and
materials were identified and supporting technical biological test data were
provided for the alternate materials. The FDA acknowledged receiving the
Company's notification and indicated that, unless otherwise notified by FDA, the
alternate materials identified in the notification may be used in the Company's
products in place of the comparable Dow Corning materials. No further FDA
approvals of the alternate materials of such suppliers were required.
With respect to other materials changes resulting from decisions by the
material suppliers to discontinue supplying the medical device industry, e.g.
E.I. DuPont de Nemours, the FDA has indicated that such changes shall be handled
on a case-by-case basis through the established product approval processes
within the FDA. The availability of materials suitable for use in implantable
medical devices is an industry-wide problem and is not unique to 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.
Suppliers of custom Application Specific Integrated Circuits (ASIC's) have
advised that the technology used to produce these IC's will no longer be
supported. As such, the Company placed one last bulk order to ensure the
availability of sufficient IC's to satisfy projected demands for product. The
new pacing system under
15
<PAGE>
development will realize appropriate ASIC's for the new system obviating the
need for perpetual supply of the currently used ASIC's.
INFLATION AND CHANGING PRICES
In the opinion of Company management, the rate of inflation during the past
two fiscal years has not had any material impact on the Company's operations.
Because of the implementation of cost containment and new Medicare regulations,
any increase in sales revenues is expected to result from an increase in the
volume of business rather than from an increase in selling prices. The Company's
pricing structure may not reflect inflation rates, due to constraints of
Medicare regulations, market conditions and competition.
CHANGE IN ACCOUNTING METHOD
Effective December 15, 1995, the Company adopted Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which establishes fair value as the measurement basis for
transactions in which an entity acquires goods or services from nonemployees in
exchange for equity instruments. Under the provisions of SFAS 123, the Company
has elected not to adopt the fair value method for stock issued to employees,
but will instead account for all employee stock transactions under APB Opinion
No. 25, "Accounting for Stock Issued to Employees.
RECENT ACCOUNTING PRONOUNCEMENT
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets Being Disposed of," which provides guidance on how
and when impairment losses are recognized on long-lived assets. This statement,
when adopted, is not expected to have a material impact on the Company.
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS
<S> <C>
page
Report of Independent Certified Public Accountants 17
Balance Sheet at March 31, 1996 18-19
Statements of Operations for the Years Ended
March 31, 1996 and 1995 20
Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended March 31, 1996 and 1995 21
Statements of Cash Flows for the Years Ended
March 31, 1996 and 1995 22-23
Summary of Significant Accounting Policies and Notes to Financial Statements 24-40
</TABLE>
ITEM 8. DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Cardiac Control Systems, Inc.
We have audited the accompanying balance sheet of Cardiac Control Systems, Inc.
as of March 31, 1996 and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the two years in the period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiac Control Systems, Inc.
as of March 31, 1996 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in the summary of accounting policies, effective December 15, 1995,
the Company changed its method of accounting for stock-based compensation by
adopting Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation."
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Orlando, Florida
June 7, 1996
17
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Balance Sheet
- --------------------------------------------------------------------------------
March 31, 1996
- ----------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $1,167,179
Accounts and notes receivable (Note 2) 1,335,357
Inventories (Note 3) 2,034,445
Prepaid expenses 64,073
- ----------------------------------------------------------------
Total current assets 4,601,054
Property, plant and equipment (Notes 4 and 5) 1,547,823
Other assets 267,193
- ----------------------------------------------------------------
$6,416,070
- ----------------------------------------------------------------
18
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Balance Sheet
- --------------------------------------------------------------------------------
March 31, 1996
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes and debt obligations payable within one year (Note 5) $ 811,192
Accounts payable 300,708
Accrued interest 9,212
Accrued compensation 182,452
Accrued compensated absences 136,770
Deposits payable 519,594
Other accrued expenses 255,361
- ------------------------------------------------------------------------------
Total current liabilities 2,215,289
Notes and debt obligations payable after one year (Note 5) 1,370,373
Other liabilities 183,391
Deferred royalties 328,250
- ------------------------------------------------------------------------------
Total liabilities 4,097,303
- ------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 6):
Common stock, $.10 par value, 30,000,000 shares authorized,
2,532,942 shares issued 253,294
Capital in excess of par value 21,857,388
Accumulated deficit (19,780,977)
Treasury stock at cost, 3,571 shares (10,938)
- ------------------------------------------------------------------------------
Total stockholders' equity 2,318,767
- ------------------------------------------------------------------------------
$ 6,416,070
- ------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to
financial statements.
19
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year ended March 31, 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE:
Sales (Note 8) $5,321,823 $4,817,862
Royalty income 2,351,700 909,675
- ----------------------------------------------------------------------------------------------
Total revenue 7,673,523 5,727,537
- ----------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 2,551,413 2,495,673
Selling, general and administrative expenses 3,968,000 2,711,923
Engineering, research and development expenses 994,624 506,377
- ----------------------------------------------------------------------------------------------
Total costs and expenses 7,514,037 5,713,973
- ----------------------------------------------------------------------------------------------
Income from operations 159,486 13,564
- ----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
Interest income 16,712 15,004
Interest expense (672,303) (311,313)
Other income 234,600) 928
- ----------------------------------------------------------------------------------------------
Total other expenses (420,991) (295,381)
- ----------------------------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY GAIN (261,505) (281,817)
EXTRAORDINARY GAIN (Note 5) - 1,656,788
- ----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (261,505) $1,374,971
- ----------------------------------------------------------------------------------------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary:
Loss before extraordinary gain $ (.19) $ (.21)
Extraordinary gain - 1.21
- ----------------------------------------------------------------------------------------------
Net income (loss) (.19) $ 1.00
- ----------------------------------------------------------------------------------------------
Fully diluted:
Loss before extraordinary gain (.19) $ (.11)
Extraordinary gain - .90
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (.19) $ .79
- ----------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON SHARE AND EQUIVALENTS OUTSTANDING
Primary 1,356,607 1,372,099
Fully diluted 1,356,607 1,834,121
- ----------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to financial statements.
</TABLE>
20
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Statements of Stockholders' Equity (Deficit)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
----------------------- Capital in
Number Par Excess of Treasury Accumulated
of Shares Value Par Value Stock Deficit
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 1,206,991 $ 120,699 $ 18,083,536 $ - $ (20,894,443)
Conversion of notes payable
to stockholder 130,582 13,059 352,572 - -
Common shares issued 703 70 2,272 - -
Stock options exercised 4,543 454 8,050 - -
Stock warrants issued - - 279,000 - -
Net income - - - - 1,374,971
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 1,342,819 134,282 18,725,430 - (19,519,472)
Conversion of debentures and
related interest, net of
costs of $225,175 1,082,012 108,201 2,696,269 - -
Common shares issued 108,111 10,811 280,939 - -
Stock warrants issued - - 154,750 - -
Acquisition of treasury stock - - - (10,938) -
Net loss - - - - (261,505)
- ---------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 2,532,942 $ 253,294 $ 21,857,388 $ (10,938) $ (19,780,977)
- ----------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to financial statements.
</TABLE>
21
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year ended March 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (261,505) $1,374,971
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Extraordinary gain - (1,656,788)
Depreciation and amortization 486,942 205,232
Gain on fixed asset disposals (7,136) -
Stock issued for payment of directors' fees 21,750 -
Stock issued for payment of interest 144,645 -
Cash provided by (used for):
Accounts and notes receivable 56,981 (808,025)
Inventories (279,013) (458,947)
Prepaid expenses (6,414) 56,466
Other assets (33,397) (37,471)
Accounts payable (174,169) (252,224)
Stockholder advances - (95,493)
Accrued interest 8,657 203,750
Accrued compensation (96,914) (124,383)
Accrued compensated absences 24,293 34,812
Deposits payable 168,447 124,193
Other accrued expenses 41,767 59,351
Other liabilities 14,079 4,461
Deferred royalties (361,800) (227,450)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (252,787) (1,597,545)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (402,701) (309,303)
Proceeds from sale of equipment 25,482 1,121
(Purchase) redemption of certificate of deposit 40,000 (40,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (337,219) (348,182)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock and stock warrants, net of issuance expenses 328,950 8,503
Proceeds from notes and debt obligations payable 1,068,490 4,175,141
Repayment of notes and debt obligations payable (307,745) (1,221,219)
Principal payments under capital lease obligations - (2,996)
Principal payments under installment purchase obligations - (2,991)
Debt issuance costs - (449,452)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,089,695 2,506,986
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 499,689 561,259
Cash and cash equivalents, beginning of year 667,490 106,231
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,167,179 $ 667,490
- ----------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to financial statements.
</TABLE>
22
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year ended March 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental cash flow information:
Interest paid during the year $ 299,225 $ 77,421
Supplemental schedule of noncash investing and financing activities:
Transfer of deferred registration costs from other assets to capital in excess of par $ 51,844 $ -
Conversion of debentures to common stock, net of unamortized debt issue costs 2,723,219 -
Acquisition of other assets in exchange for stock warrants 84,250 -
Treasury stock acquired in settlement of note receivable 10,938 -
Reduction in accounts payable in exchange for common stock - 2,344
Accrued interest converted to common stock - 80,996
Warrants issued with note payable - 279,000
Debenture issued in exchange for note payable to stockholder - 250,000
Notes payable to stockholder converted to common stock - 284,634
Accounts payable converted to notes payable - 44,000
Debt incurred for purchase of property and equipment - 14,995
- ---------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to financial statements.
</TABLE>
23
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Cash Equivalents Only investments with original maturities of three months or
less are considered cash equivalents. Cash equivalents are
recorded at cost, which approximates market value. Interest
income is recognized as earned.
Inventories Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method for
raw material and supply inventories. Cost of work-in-process
and finished goods inventories is determined based upon
standard cost, which approximates cost on a FIFO basis.
Property, Plant Property, plant and equipment are stated at cost. Additions,
and Equipment improvements and expenditures that significantly extend the
useful life of an asset are capitalized. Expenditures for
repairs and maintenance are charged to operations as
incurred. When assets are retired or disposed of, the cost
and accumulated depreciation thereon are removed from the
accounts, and any gains or losses are included in operations.
Depreciation and amortization are provided on the straight-
line method for financial reporting purposes and accelerated
methods for tax purposes over the estimated useful lives of
the assets as follows:
Building and building improvements 30 years
Land improvements 20 years
Machinery, equipment, furniture and fixtures 2 - 8 years
Vehicles 3 - 5 years
Deferred In the ordinary course of business, the Company has entered
Royalties into various license and supply agreements with various
distributors of the Company's products. Under the terms of
certain license and supply agreements, the Company has
received advance payment of royalties pursuant to the
agreements. These advance payments are recorded as deferred
royalties and recognized as income when earned.
Revenue Sales revenue and cost of sales are recognized as products
Recognition are shipped and title passes, unless the buyer has a right to
return the products. Sales revenue and cost of sales
attributable to shipments that the buyer has the right to
return are recognized when the return privilege has expired,
usually upon resale (implant) of the products.
24
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Engineering, The Company capitalizes the cost of materials and equipment
Research and acquired or constructed for research and development
Development Costs activities that have alternative future uses. All other costs
incurred for the purpose of product research, design, and
development are charged to operations as incurred. Research
and development costs included in engineering, research and
development expenses on the statements of operations for the
years ended March 31, 1996 and 1995 approximate $698,000 and
$390,000, respectively.
Income Taxes The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). FAS, 109 is an
asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Measurement of
deferred income tax is based on enacted tax laws including
tax rates, with the measurement of deferred income tax assets
being reduced by available tax benefits not expected to be
realized.
Net Income (Loss) Primary net income (loss) per share of common stock is based
per Common Share on the weighted average of common shares and common share
equivalents principally in the form of options and warrants
outstanding during the period. Common stock equivalents have
not been included for the year ended March 31, 1996 as their
effect on the loss per share is anti-dilutive. For 1995, on a
fully-diluted basis, both net income and shares outstanding
are adjusted to assume the conversion of 5% convertible
debentures from the date of issue. All shares were restated
for the one-for- seven reverse stock split effective December
13, 1994 (see Note 6).
Concentration Financial instruments which potentially expose the Company to
of Credit Risk concentration of credit risk consist primarily of accounts
receivable. Such risk is limited due to the large number of
customers, generally short payment terms, and their
dispersion across geographic areas.
25
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Fair Value of Statement of Financial Accounting Standards No. 107,
Financial "Disclosures about Fair Value of Financial Instruments,"
Instruments requires disclosure of fair value information about financial
instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information
available to management as of March 31, 1996.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash and equivalents, trade
receivables, accounts payable and accrued expenses. Fair
values were assumed to approximate carrying values for these
financial instruments since they are short term in nature and
their carrying amounts approximate fair values or they are
receivable or payable on demand. The fair value of the
Company's long-term debt is estimated based upon the quoted
market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same
remaining maturities.
Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Change in Effective December 15, 1995, the Company adopted Statement of
Method of Financial Accounting Standard No. 123 ("SFAS 123"),
Accounting for "Accounting for Stock-Based Compensation," which establishes
Stock-Based fair value as the measurement basis for transactions in which
Compensation an entity acquires goods or services from nonemployees in
exchange for equity instruments. Under the provisions of SFAS
123, the Company has elected not to adopt the fair value
method for stock issued to employees, but will instead
account for all employee stock transactions under APB Opinion
No. 25, "Accounting for Stock Issued to Employees."
26
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Summary of Significant Accounting Policies
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
<S> <C>
RECENT The FASB has issued SFAS No. 121, "Accounting for the Impairment of
ACCOUNTING Long-Lived Assets and Long-Lived Assets Being Disposed of," which
PRONOUNCEMENT provides guidance on how and when impairment losses are recognized on
long-lived assets. This statement, when adopted, is not expected to have a
material impact on the Company.
</TABLE>
27
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<C> <S>
1. THE COMPANY Cardiac Control Systems, Inc. (the "Company") was incorporated in June
1980 as a Delaware Corporation. The Company is engaged in the design,
development, manufacture and marketing of implantable cardiac pacemaker
systems, consisting of implantable pacemakers, connecting electrode leads
and devices used for programming and monitoring the pacemaker systems.
The Company commenced its principal business operations during the year
ended March 31, 1986 after the commercial release of its initial
single-chamber pacemaker system. The Company has received clearance from
the United States Food and Drug Administration (the "FDA") to commercial-
ly distribute and market a line of cardiac pacemaker systems.
2. ACCOUNTS Accounts and notes receivable at March 31, 1996 are summarized as follows:
AND NOTES
RECEIVABLE ---------------------------------------------------------------------------
<S> <C>
Accounts receivable - trade $ 883,609
Royalties receivable 484,000
Other accounts receivable 1,065
----------------------------------------------------------------------------
1,368,674
Allowance for doubtful accounts (33,317)
---------------------------------------------------------------------------
$1,335,357
---------------------------------------------------------------------------
</TABLE>
28
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Inventories Inventories at March 31, 1996 consist of the following:
-----------------------------------------------------------
Raw materials and supplies $ 1,146,164
Work-in-process 314,934
Finished goods 629,347
-----------------------------------------------------------
2,090,445
Reserve for obsolescence (56,000)
-----------------------------------------------------------
$ 2,034,445
-----------------------------------------------------------
Finished goods inventories include approximately $382,400 of
products consigned to customers and independent sales
representatives at March 31, 1996.
4. Property, Plant Components of property, plant and equipment at March 31,
and Equipment 1996 are as follows:
------------------------------------------------------------
Building and building improvements $ 1,716,482
Land improvements 29,450
Machinery, equipment, furniture and fixtures 2,905,644
Vehicles 11,666
------------------------------------------------------------
4,663,242
Accumulated depreciation (3,238,719)
-----------------------------------------------------------
1,424,523
Land 123,300
----------------------------------------------------------
$ 1,547,823
----------------------------------------------------------
29
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. Notes and Debt Note and debt obligations consist of the following at
Obligations March 31, 1996:
-----------------------------------------------------------
<TABLE>
<S> <C>
Sirrom mortgage note, net of discount (A) $ 1,360,500
Intermedics loan (B) 807,283
Other 13,782
----------------------------------------------------------
2,181,565
Less amounts payable within one year 811,192
----------------------------------------------------------
Total notes and debt obligations payable
after one year $ 1,370,373
----------------------------------------------------------
(A) 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. The Loan Agreement restricts
the Company from incurring additional indebtedness in
excess of $200,000 annually without the lender's
consent. In addition, the Company must give the lender
advance notice of certain events, such as dividend
payments, certain new stock issues, reorganizations, and
merger or sale of substantially all assets.
In connection with the Loan Agreement, the Company
granted the lender a warrant to purchase, initially,
100,000 shares of the Company's common stock at $.01 per
share (see Note 6). 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.
From the loan proceeds, the Company paid a former
creditor $1 million and gave the former creditor a
warrant to purchase 200,000 shares of the Company's
common stock at $2.80 per share. The warrant expires on
March 31, 1998 and also has certain piggy-back
registration rights
</TABLE>
30
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
regarding the underlying shares. In exchange for the proceeds
and the warrant, the former creditor forgave approximately
$1.65 million in principal and accrued interest owed by the
Company. The $1.65 million forgiveness resulted in an
extraordinary gain being recorded in March 1995.
(B) On October 20, 1995, the Company entered into a Promissory
Note and Security Agreement (the "Security Agreement") with
Intermedics, Inc., a Delaware Corporation, ("Intermedics")
and executed a $1,000,000 secured promissory note. Interest
on the note is payable at 24.5% and all principal and
interest is due September 1, 1998. Payments of principal and
interest are made as sales of electrode leads are made from
the Company to Intermedics. As such sales are made, the
amount paid by Intermedics to the Company to purchase the
leads is reduced by $250 for the first 4,000 leads and $90
for additional leads. This reduction in payments is offset
against the note payable and accrued interest balance due to
Intermedics. Based upon projected sales of leads to
Intermedics, the Company anticipates that the entire loan
balance will be paid by March 31, 1997 and, accordingly, the
entire balance has been classified as a current liability.
The security agreement provides for alternative payment
methods in the event the Company ceases sales of leads to
Intermedics. The note is secured by a first security interest
in the proceeds of all sales of leads from the Company to
Intermedics after October 15, 1995 as well as a first
security interest in any royalties received by the Company
from Intermedics after October 15, 1995.
Aggregate notes and debt obligations outstanding at March 31, 1996
mature as follows: 1997 - $811,192; 1998 - $4,476; 1999 - $5,132;
2000 -$1,360,765.
31
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Stockholders' Issuance of Common Shares
Equity
During the year ended March 31, 1996, the Company issued
8,111 shares of common stock as payment of directors' fees.
In March 1996, the Company entered into a distribution
agreement with Grupo Taper ("Grupo") whereby Grupo will
receive exclusive distribution rights for most of Europe. In
connection with this agreement, Grupo paid the Company
$500,000 and received 100,000 shares of common stock valued
at $270,000 and 100,000 common stock purchase warrants valued
at $70,500. The difference between the purchase price and the
value assigned to the common stock and warrants of $159,500
was recorded as a gain on sale of the distribution agreement
included in other income.
Reverse Stock Split
At the annual meeting of shareholders held in March 1994, the
Company received approval to effect a reverse stock split of
the common stock. The Board of Directors ratified the
shareholders' approval of the reverse stock split and
effected a reverse stock split of one share for every seven
shares of common stock outstanding, effective December 13,
1994. The net income (loss) per common share calculations and
all share information contained in these financial statements
have been retroactively adjusted to give effect to the
reverse stock split.
Convertible Debentures
During fiscal 1995, the Company issued $2,885,000 in 5%
Convertible Debentures ("the Debentures") which were due
October 31, 1999. The Debentures were convertible into common
stock at the option of the Debenture holder at a conversion
price of $2.80. On March 31, 1996, the Debenture holders
elected to convert the $2,885,000 Debentures into 1,030,352
shares of common stock. The shares underlying these
Debentures were registered with the SEC effective April 27,
1995. Interest related to the Debentures for fiscal 1996 of
$144,645 was paid in the form of 51,660 shares of common
stock at a conversion price of $2.80. Costs incurred to
register the shares underlying the Debentures of $63,394, as
required by the Debenture agreement, and unamortized costs
incurred to issue the Debentures of $161,781 were recorded as
a reduction of capital in excess of par value upon
conversion.
32
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In conjunction with the conversion of the debentures, the
Company issued 100,000 warrants to the Debenture holders at
an exercise price of $5 per share expiring March 31, 1999.
During the year ended March 31, 1995, concurrently with the
issuance of the 5% Convertible Debentures, discussed above,
stockholder notes and accrued interest thereon aggregating
$615,630 were converted to a $250,000 Debenture and 130,582
shares of common stock of the Company (at $2.80 per share).
Stock Option Plan
-----------------
On September 9, 1987, the Company's Board of Directors
adopted the 1987 Non-Qualified Stock Option Plan (the "1987
Plan"). On February 7, 1992, the Company's Board of
Directors adopted the 1992 Non-Qualified Stock Option Plan
(the "1992 Plan"). In fiscal 1995, the Company combined the
1987 Plan and the 1992 Plan. This Plan provides the Board
of Directors with the authority to grant officers,
directors, and employees of the Company non-qualified
options to purchase up to a maximum of 400,000 shares of
the Company's common stock. Options granted under the Plan
expire five years after the date the options are granted or
upon termination of employment.
33
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Changes in options outstanding under these plans are summarized as follows:
Option Price
Shares per Share
------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, March 31, 1994 213,914 $2.63 - $5.25
Granted 128,754 $3.50 - $5.25
Exercised (2,401) $2.63
Canceled (97,557) $3.50 - $5.25
------------------------------------------------------------------------------
BALANCE, March 31, 1995 242,710 $3.50 - $5.25
Granted 72,000 $3.50 - $3.75
Canceled (9,524) $3.50
------------------------------------------------------------------------------
BALANCE, March 31, 1996 305,186 $3.50 - $5.25
------------------------------------------------------------------------------
Options available for grant at March 31, 1996 91,221
Options exercisable at March 31, 1996 200,521
-------------------------------------------------------------
Non-Plan Stock Options
----------------------
The Company has granted options to independent sales representative, Board
of Directors and others which are summarized as follows:
Option Price
Shares per Share
------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, March 31, 1994 38,658 $ .70 - $10.50
Exercised (2,142) $ .70
Canceled (5,000) $7.00 - $ 8.75
------------------------------------------------------------------------------
BALANCE, March 31, 1995 31,516 $ .70 - $10.50
Granted 6,000 $ 4.00
Canceled (3,571) $ 5.25
------------------------------------------------------------------------------
BALANCE, March 31, 1996 33,945 $ .70 - $10.50
------------------------------------------------------------------------------
Options available for grant at March 31, 1996 8,008
Options exercisable at March 31, 1996 33,945
-------------------------------------------------------------
The above options are exercisable over five-year periods and expire five
years from the date of grant.
</TABLE>
34
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Common Stock Purchase Warrants
------------------------------
As of March 31, 1995, the Company issued warrants to Sirrom Capital
Corporation ("Sirrom") and to Dow Corning Enterprises, Inc. ("DCE")
in connection with a loan obtained from Sirrom and the satisfaction
of the Company's obligations to DCE (see Note 5).
The Sirrom warrant permits Sirrom to initially purchase 100,000
shares of the Company's common stock at an exercise price of $.01
per share, with an expiration date of March 31, 2000 (the "Sirrom
Warrant"). Upon issuance of the Warrant in March 1995, the Company
recorded $279,000 as an addition to capital in excess of par value,
representing the difference between the estimated fair market value
of the underlying stock and $.01 per share. The Sirrom Warrant also
provides that in the event the loan to the Company is not paid off
by March 31, 1997, or any anniversary thereof thereafter, Sirrom has
the right to purchase an additional 50,000 shares of Common Stock
(at $.01 per share) upon such date and upon each such anniversary
thereof that any amount owed to Sirrom (or any extension, amendment
or modification thereof) shall be outstanding. Under the warrant,
Sirrom also has certain"piggy-back" registration rights regarding
the shares underlying the warrant in the event the Company files a
registration statement on a form suitable for a secondary offering.
The Sirrom Warrant also contains anti-dilution provisions allowing
for an adjustment in shares subject to the warrant in the event of a
new stock issuance by the Company, stock dividends, stock-splits and
the like.
The Company issued Sirrom 25,000 additional warrants in October 1995
at an exercise price of $.01 per share expiring October 2000. These
warrants were issued pursuant to Sirrom giving up a first security
interest as a result of the issuance of a note payable to
Intermedics (see Note 5). The Company recorded $84,250 as debt costs
upon issuance of these warrants as an addition to capital in excess
of par value, representing the difference between the estimated fair
market value of the underlying stock and $.01 per share.
The DCE warrant permits DCE to purchase 200,000 shares of the
Company's common stock at $2.80 per share, and expires on March 31,
1998 (the "DCE Warrant"). The DCE Warrant contains certain "piggy-
back"
35
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
registration rights pursuant to which the shares underlying
the DCE warrant are registered. The DCE Warrant contains
anti-dilution provisions allowing for an adjustment in shares
subject to the warrant in respect of a new stock issuance by
the Company, stock dividends, stock splits, and the like.
Common Stock Reserved
The aggregate number of shares of the Company's common stock
reserved for issuance pursuant to common stock options,
common stock purchase warrants, and future director
compensation at March 31, 1996 is summarized as follows:
-------------------------------------------------------------
Common stock options:
1987/1992 Stock Option Plan 396,407
Non-plan 41,953
Common stock purchase warrants:
Dow Corning Enterprises, Inc. 200,000
Sirrom Capital Corporation 125,000
Grupo Taper 100,000
Debenture holders 100,000
Directors' compensation 1,667
-------------------------------------------------------------
965,027
-------------------------------------------------------------
36
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes As of March 31, 1996, the Company has approximately
$18,400,000 of tax net operating loss carryforwards available
that expire from 1997 through 2010.
Significant components of the Company's deferred income tax
assets and liabilities at March 31, 1996 are as follows:
-------------------------------------------------------------
Deferred tax assets:
Accrued liabilities $ 131,000
Deferred royalties 124,000
Net operating loss carryforwards 6,535,000
Inventory 187,000
Other 13,000
-------------------------------------------------------------
6,990,000
Deferred tax liabilities:
Depreciation and amortization (144,000)
Valuation allowance (6,846,000)
-------------------------------------------------------------
Net deferred taxes $ -
-------------------------------------------------------------
The net change in the valuation allowance for deferred tax
assets was a decrease of $339,000 in fiscal 1996.
The provision for income taxes differs from the amounts
computed by applying the Federal statutory rates to income
before taxes for the years ended March 31, 1996 and 1995 due
to the following:
1996 1995
-------------------------------------------------------------
Provisions for Federal income taxes
at the statutory rate (34.0%) 34.0%
Loss producing no current tax benefit 34.0% -
Utilization of net operating loss
carryforward - (34.0%)
-------------------------------------------------------------
Taxes on income - -
-------------------------------------------------------------
37
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. Segment Data The Company operates in a single industry segment, that of
and providing implantable medical products to the health care
Significant industry. The Company has no foreign operations. However,
Customers during the years ended March 31, 1996 and 1995, the Company
exported its products to European distributors and exported
components and assemblies to certain European manufacturers.
Sales by geographic area for the years ended March 31, 1996
and 1995 are as follows:
Geographic Area 1996 1995
------------------------------------------------------------
United States $4,720,457 $ 3,931,299
Europe 601,366 886,563
------------------------------------------------------------
$5,321,823 $ 4,817,862
------------------------------------------------------------
Export sales of components and assemblies to one manufacturer
in Italy accounted for $537,492 (11%) of the Company's sales
during the year March 31, 1995.
The Company's products are primarily distributed through
independent sales representatives in the United States.
During the year ended March 31, 1996, two of the Company's
independent sales representatives each accounted for in
excess of 10% of the Company's sales and in the aggregate
accounted for $1,787,118 (34%) of the Company's sales. During
the year ended March 31, 1995, four of the Company's
independent sales representatives each accounted for in
excess of 10% of the Company's sales and in the aggregate
accounted for $2,213,830 (46%) of the Company's sales.
Further, pursuant to an electrode lead Supply Agreement with
Intermedics Inc., the Company sold $1,989,089 and $1,326,577
of product to Intermedics Inc. for the years ended March 31,
1996 and 1995, respectively, which accounted for 37% and 28%
of the Company's sales.
38
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Commitments Patent Licensing Agreements
and
Contingencies Effective July 1, 1986, the Company renegotiated its
exclusive license to a patented electrode-wire coating
system that was originally acquired by the Company on July
1, 1981. The modified license agreement requires the payment
of royalties equal to a percentage of sales of products
manufactured using the patented technology. The license
became non-exclusive on July 1, 1994. The term of the
license agreement expires upon the expiration date of the
patent, February 4, 2002, unless terminated earlier by the
Company. Royalty expense under the terms of the agreement
for the years ended March 31, 1996 and 1995 was $45,567 and
$32,656, respectively. Further, on March 29, 1993, the
licensor executed a sublicense agreement with the Company,
enabling Intermedics to manufacture the licensed product.
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 March 31, 1996,
the Company's future maximum purchase obligation
approximated $966,000.
During the year ended March 31, 1990, the Company entered
into an agreement for the procurement of integrated
circuits. The development of these circuits was completed in
fiscal 1992. As of March 31, 1996, the Company's future
maximum purchase obligation approximated $22,000.
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
39
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 effect the
financial position of the Company.
Employment Agreements
The Company has entered into various employment agreements
expiring during fiscal year 1998. Minimum future obligations
under all employment agreements amount to $347,600 in 1997
and $213,000 in 1998.
10. Reclassifi-
cations
Certain reclassifications have been made to the financial
statements previously reported for the year ended March 31,
1995 to conform with classifications used in the financial
statements for the year ended March 31, 1996.
40
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the names and ages of the Directors and Executive
Officers of the Company as of March 31, 1996, in addition to information
respecting their positions and offices with the Company, their periods of
service in such capacities, and their business experience for at least the past
five years. There are no family relationships among the Directors and Executive
Officers of the Company.
Robert R. Brownlee, age 64, is one of the founders of the Company and presently
serves the Company as Senior Executive Vice President of Research and Technical
Matters and as a Director and Secretary to the Board of Directors. From June
1982 to May 1988, he served the Company as Senior Executive Vice President and
Chairman of the Board of Directors. He has been a member of the Board of
Directors since 1980. During 1980 and 1981, Mr. Brownlee served the Company as
Vice President of Product Research and Executive Vice President of Engineering,
respectively. He was a faculty member of The Pennsylvania State University (the
"University") from 1960 to 1980 and served as Adjunct Associate Professor of
Comparative Medicine, Milton S. Hershey Medical Center of the University from
1981 to 1985. Prior to 1980, Mr. Brownlee served as a consultant to Intermedics
Inc., a major competitor in the cardiac pacing industry.
William H. Burns Jr., age 46 was appointed to the Board of Directors in
September, 1995. He has been President and CEO of Biosight, Inc., a health care
consulting company, and Vector Inc., a medical product design and distribution
company since May, 1994. From July, 1988 through March, 1994 he was Founder,
President and CEO of Matrx Medical Inc., also a medical product design and
distribution company. His efforts in building Matrx Medical, Inc. earned him an
award as Entrepreneur of the Year in New York State in 1993. From 1975 through
1998, Mr. Burns held various positions with the BOC group, including Vice
President and General Manager of Ohmeda Dental, Veterinary and Emergency Care
Products. Mr. Burns is also a director of NovaVision, a contact lens
manufacturer of the Ophthalmic and Optometry Industry.
Bart C. Gutekunst, age 45, was appointed to the Board of Directors in July 1994
and became Chairman of the Board in October 1994. In 1995 he became Chairman
and CEO of NovaVision. Since 1990 he has been an independent financial
advisor. From 1988 to 1990, he was a senior member of an investment firm,
Entrecanales, Inc., funded by a major European family, making equity investments
and leveraged buyouts. From 1981 to 1987, he was Executive Vice President and a
member of the Board of Directors, as well as the Management and Investment
Committees of Laidlaw, Adams & Peck Inc., where he supervised the investment
banking department and completed over 50 public and private transactions. From
1976 to 1981, he was a member of Chemical Bank's Merchant Banking Group. Mr.
Gutekunst has been a member of the Board of Directors or advisor to the Board
for many companies. From September 1992 to September 1994, he was Vice Chairman
and Chief Financial Officer of R-2 Medical Systems, Inc., a cardiac care device
company, with responsibility for corporate development as well as overseeing the
financial functions of the company. Since 1994, Mr. Gutekunst has served as
Chairman of the Board of Directors of United Education and Software, Inc., a
multi-state operator of nursing and vocational schools operating under Chapter
11 of the United States Bankruptcy Code where he is overseeing the voluntary
liquidation of the company's assets. Previously he had been a director of that
company for approximately ten years.
Larry Haimovitch, age 49, was appointed to the Board of Directors in November
1994. He is President of Haimovitch Medical Technology Consultants, a San
Francisco, California based healthcare consulting firm which specializes in the
medical device and technology industry with a particular emphasis on cardiology
related areas and whose clients have included a major hospital chain, numerous
medical device companies, venture capital firms, investment groups, and
investment bankers. Prior to forming his firm in 1991, Mr. Haimovitch spent
over 20 years as a healthcare industry analyst for a number of leading research
firms and financial institutions such as Furman Selz, Sutro & Co., and Wells
Fargo Investment Advisors. He also currently serves as a director to Electro-
Pharmacology, Inc.
Augusto Ocana, age 50, was appointed to the Board of Directors in April, 1996.
He is currently Executive Vice President of Grupo Taper International, S.A.,
which is a Madrid, Spain, based holding group of companies engaging in state-of-
the-art medical products. Prior to Grupo Taper, Dr. Ocana had been President
and Chairman
41
<PAGE>
of Rempak International and Marketing Director of Abbott Laboratories. Dr.
Ocana has also been trained as a Physician and has a degree in International
Law.
Alan J. Rabin, age 46, joined the Company in October 1994, in connection with
the Debenture financing. At that time, he was appointed to the Board and
appointed the Company's President and Chief Executive Officer. Until September
1994, Mr. Rabin was President and Chief Executive Officer of R-2 Medical
Systems, Inc, a manufacturer of cardiac care devices, including disposables used
in cardiac pacing. R-2 Medical Systems, Inc. was sold to Cardiotronics, Inc. in
1994. From 1987 to 1992, Mr. Rabin was Vice President of Marketing and Sales
for Stereo Optical Company, a manufacturer and distributor of disposable and
ophthalmic diagnostic devices. From 1985 to 1986, he was Director of Marketing
and Sales at Tycos Life Services, Inc., a manufacturer of cardiovascular
diagnostic and monitoring devices. From 1980 to 1985, Mr. Rabin held various
marketing, new business development, and product management positions with
surgical and cardiovascular equipment divisions of C.R. Bard. Prior to assuming
those positions, Mr. Rabin was employed in marketing and sales in the critical
care and anesthesia market. He also currently serves as a director of
NovaVision.
Robert T. Rylee, age 65, was appointed to the Board of Directors in November
1988 pursuant to the terms of an Investment Agreement between the Company and
Dow Corning Enterprises, Inc. He practiced law from 1958 to 1969 and was a
partner in the firm of Wood, Boykin, Rylee, and Walter from 1965 to 1969. In
1969, Mr. Rylee became the President and CEO of Wright Manufacturing Company, a
manufacturer of orthopedic implants and instruments, a position he held until
1981 when he became a Dow Corning U.S. Area Vice President and the General
Manager of Health Care Business. On May 31, 1993, he retired as Vice President
and Chairman of Health Care Business, a position he had held since 1986. Mr.
Rylee therefore also retired as Director of the Company representing Dow Corning
Enterprises, Inc. effective May 31, 1993. However, on June 11, 1993, the Company
re-appointed Mr. Rylee to the Company's Board of Directors as an independent
Director, in which capacity he does not represent Dow Corning Enterprises, Inc.
He is currently the Chief Executive Officer and a director of Clarus Medical
Systems, which position he has held since September 1993.
Tracey E. Young, age 41 was appointed to the Board of Directors in September,
1995. She is the Founder and President of Elliot Young Associates, Inc., a
proprietary health care consulting concern, formed in 1987 to assist companies
and investors in identifying, evaluating, capturing and managing strategic
growth and financing opportunities in high technology health care markets. Ms.
Young has also held key consulting positions with The Wilkerson Group, both as
the founding Associate Director of their Cardiovascular Market Intelligence
Service and as an independent consultant to the firm. She has also spent seven
years in the pacemaker industry in senior marketing and strategic planning
positions with Telectronics Pacing Systems and Intermedics, Inc.
Terry McMahon, age 47, joined the Company in November 1994 as its Vice President
of Regulatory Affairs and Quality Assurance in December 1994. Prior to joining
the Company, Mr. McMahon was employed as the Manager for Clinical Affairs with
Xomed-Treace, Inc. from 1990 to December 1994, where he managed clinical and
pre-clinical (animal) studies to demonstrate the safety and efficacy of devices
for head and neck injury. Additional responsibilities included the preparation
of all regulatory filings for establishing and maintaining market clearance for
the company's product line. Prior to his employment with Xomed-Treace, he served
in a variety of managerial positions in Regulatory and Technical Affairs for
companies involved in medical device implants.
Robert S. Miller, age 47, joined the Company in December 1994 as the Company's
Vice President of Sales and Marketing. Form 1992 to December 1994, he was the
Manager of Field Sales Education with Telectronics Pacing Systems, Inc., one of
the leading pacemaker manufacturers in the industry, concentrating on sales,
sales management and training. Prior to joining Telectronics in 1992, he was
the managing partner of an organization that represented Telectronics Pacing
Systems, Inc. as an independent sales distributor. Prior to his association
with Telectronics, Mr. Miller also spent several years as a representative of
Cardiac Pacemakers, Inc., another leader in the pacemaker industry.
Paul H. Neff, age 59 has served the Company as Vice President of Research and
Development since 1985. He has served the Company in various capacities since
1981, including Vice President of Operations and Manager of Linear Systems. From
1978 to 1980, he served as an Electronics Designer for The Pennsylvania State
University, and he served as a consultant to Intermedics Inc., a major
competitor in the cardiac pacing industry, from 1977 to 1979.
William Wharton, age 48, was appointed Vice President of Operations in February
1994. He had served the Company as Vice President of Quality Assurance since
1985. Mr. Wharton joined the Company in 1982 as Director
42
<PAGE>
of Quality Assurance. Before joining the Company, he was employed as a Quality
Assurance Supervisor for at least five years by Medtronic, Inc., a major
competitor in the cardiac pacing industry.
W. Alan Walton, age 62, joined the Company as Executive Vice President and Chief
Operating Officer in March, 1996. Mr. Walton is a fellow of the Institute of
Chartered Accountants in England, and was most recently engaged as a financial
and operations consultant with Biosight Inc., of Orchard Park, NY, a firm
specializing in helping health care businesses enhance their performance. Prior
to his experience with Biosight, he spent nineteen years in senior Financial and
Systems Management positions with Dunlop Holdings plc in the United Kingdom,
including a position as general manager, Group Information Systems, with
responsibility for Dunlop's global computing an communications.
Jonathan S. Lee, age 44, joined the Company in May, 1996 as Vice President of
Research and Development. Mr. Lee is a biomedical engineer and has 18 years
experience in Research & Development, Regulatory Affairs and Marketing with
Telectronics, a leading pacemaker manufacturer. He established and managed
Telectronic's world wide service facilities, and established Telectronics'
research and development presence in Denver, Colorado. He has been a member of
the North American Society of Pacing and Electrophysiology since 1984.
The Board of Directors is elected at each annual meeting of the shareholders.
Each Director holds office until his successor is duly elected and qualified or
until his earlier resignation or removal, with or without cause, at any duly
noticed special meeting of the shareholders of the Company by the affirmative
vote of a majority of the shares then entitled to vote at an election of
directors.
Under the by-laws of the Company, officers are elected annually by the Board of
Directors at the meeting of the Board of Directors following the annual meeting
of the shareholders. Each officer holds office until his or her successor has
been chosen and qualified, or until his or her death, resignation or removal,
with or without cause, by the Board of Directors.
None of the Directors or Executive Officers of the Company is a director in any
company, other than the Company, with a class of equity securities registered
pursuant to Section 12 of the Securities and Exchange Act of 1934, as amended,
or subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended except for Phillip R. Beutel who is a director of MedPlus Corporation,
Bart C. Gutekunst who is Chairman of the Board of United Education Software,
Inc., and Larry Haimovitch who is a director of Electro-Pharmacology, Inc.
Each director and executive officer, and each person owning beneficially more
than 10% of a registered class of the Company's equity securities, is required
to report to the Securities and Exchange Commission, by a specified date, his or
her transactions related to the Company's Common Stock and to provide a copy of
any such report to the Company. A late report was filed for each of Messrs.
Brownlee and McMahon, officers, and Ms. Mitchell, former controller, and each of
Messrs. Rabin and Gutekunst, officers and directors, and Messrs. Haimovich and
Rylee, directors, with respect to one stock option grant to each of them, a late
report was filed by Messrs. Rabin and Gutekunst with respect to conversion of
their debentures into Common Stock, which report also included reports of de
minimus amounts of stock issued to them twice during the fiscal year in respect
of interest payments on their debentures; two late reports were filed by Phillip
R. Beutel, an owner of over 10% of the Company's Common Stock, for six
transactions (which transactions include a conversion of his debenture into
Common Stock and the interest payment on the debentures in de minimus amounts of
Common Stock).
ITEM 10. DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION
EXECUTIVE REMUNERATION. The following table sets forth information about the
compensation paid or accrued by the Company during the fiscal years ended March
31, 1996, 1995, and 1994 to the Company's Chief Executive Officers and any other
Executive Officer whose aggregate compensation exceeded $100,000 in fiscal 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
Fiscal Year Securities
Name and Principal Ended Other Annual Underlying All Other
Position March 31, Salary Compensation Options Compensation
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alan J. Rabin 1996 $110,000 $ 9,094/(1)/ 20,000/(2)/ $26,349/(3)/
(President, CEO, 1995 $ 55,000 $ 1,250/(4)/ 28,571/(5)/ $64,451/(6)/
Director) 1994 - - - -
- ---------------------------------------------------------------------------------------------
Bart C. Gutekunst 1996 $ 48,000 - 15,000/(2)/ $ 8,700
(Chairman of the 1995 $ 24,000 $ 1,250/(7)/ 21,429/(5)/ $95,050/(8)/
Board) 1994 - - - -
- ---------------------------------------------------------------------------------------------
Robert R. Brownlee 1996 $ 96,800 $ 8,000/(9)/ 2,000/(2)/ -
(Senior Executive 1995 $ 84,015 $ 5,625/(10)/ 25,714/(11)/ -
Vice President) 1994 $ 82,100 $11,100/(12)/ - -
- ---------------------------------------------------------------------------------------------
Robert S. Miller 1996 $100,000 $32,951/(13)/ - -
(Vice President, Sales 1995 $ 29,293 $ 6,333/(14)/ 14,286/(15)/ -
and Marketing) 1994 - - - -
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) In addition to his salary, Mr. Rabin is entitled to a performance bonus.
This represents the performance bonus accrued in respect of Mr. Rabin's
services during the year ended March 31, 1996.
(2) On May 5, 1995, the Board of Directors awarded these options to purchase
shares in common stock of the Company at $3.63 per share. The options are
exercisable one third on August 5, 1995, one third on May 5, 1996, and one
third on May 5, 1997.
(3) This represents reimbursement of relocation expenses, $21,549, paid to Mr.
Rabin pursuant to his employment agreement and consulting fees for debenture
financing, $4,800.
(4) This represents a monthly fee of $625 paid to Mr. Rabin in October and
November 1994 for his services to the Company as a Director.
(5) Upon execution of their employment agreements with the Company, Mr. Rabin
was granted stock options for 28,571 shares of the Company's common stock
and Mr. Gutekunst was granted stock options for 21,429 shares of the
Company's common stock, exercisable at $3.50 per share.
(6) This includes $12,751 for reimbursement of relocation expenses paid to Mr.
Rabin pursuant to his employment agreement. It also includes $51,700 for
consulting services rendered the Company in connection with the development
of its new business plan and its financing efforts prior to his employment
with the Company.
(7) This represents a monthly fee of $625 paid to Mr. Gutekunst in August and
September 1994 for his services to the Company as a Director prior to his
employment as Chairman.
(8) This includes $79,050 for consulting services rendered the Company in
connection with the development of its new business plan and its financing
efforts prior to his employment with the Company. It also includes $16,000
in connection with his facilitating the refinancing of the mortgage on the
Company's property.
(9) This represents the performance bonus accrued in respect of Mr.
Brownlee's services during the year ended March, 1996.
43
<PAGE>
(10) This represents a monthly fee of $625 paid to Mr. Brownlee for nine
months for his services to the Company as a Director.
(11) This represents options to purchase 11,428 shares of common stock in the
Company at $3.50 per share, exercisable one third on August 18, 1994, one third
on May 11, 1995 and one third on May 11, 1996 and 14,286 shares of common stock
in the Company at $3.50 per share, fully exercisable October 10, 1994.
(12) This represents a monthly fee of $625 paid to Mr. Brownlee for the year
ended March 31, 1994 for his services to the Company as a Director and a car
allowance of $300 a month for the year.
(13) In addition to his salary, Mr. Miller is entitled to a performance
bonus. This represents $23,951 performance bonus and $9,000 car allowance for
the year ended March 31, 1996.
(14) This represents $3,333 performance bonus and $3,000 car allowance for
the period December 12, 1994 to March 31, 1995.
(15) Upon execution of his employment agreement with the Company, Mr. Miller
was granted options to purchase 14,286 shares of common stock in the Company at
$3.50 a share, exercisable one third on December 12, 1995, one third on December
12, 1996 and one third on December 12, 1997.
The following table sets forth information concerning options granted during
the fiscal year ended March 31, 1996 to those persons named in the preceding
Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/share) Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan J. Rabin 20,000/(1)/ 28% $3.625 5/5/2000
Bart C. Gutekunst 15,000/(1)/ 21% $3.625 5/5/2000
Robert R. Brownlee 2,000/(1)/ 3% $3.625 5/5/2000
- --------------------------------------------------------------------------------
</TABLE>
(1) Two thirds of the options are subject to immediate exercise and the final
third become exercisable on May 5, 1997.
The following table sets forth information concerning the value of unexercised
stock options at March 31, 1996 for those persons named in the Summary
Compensation Table.
44
<PAGE>
AGGREGATED OPTIONS IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised The-Money Options at
Acquired on Value Options at Fiscal Year End Fiscal Year End
Name Exercise Realized Exercisable/Unexercisable/(1)/ Exercisable/Unexercisable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan J. Rabin - - 25,714/22,857 $0/$0
Bart C. Gutekunst - - 19,286/17,143 $0/$0
Robert R. Brownlee - - 32,531/10,183 $0/$0
Robert Miller - - 4,762/9,524 $0/$0
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) These options have been adjusted to give effect to the Company's one for
seven reverse stock split effected December 13, 1994.
COMPENSATION OF DIRECTORS
For their service on the Board, each outside director is entitled to receive
annually the sum of $3,000 and such number of shares of the Company's common
stock that have a total value of $6,000 based on the average of the bid and ask
prices of the Company's common stock on the NASD OTC Bulletin Board Service as
quoted on January 19, 1996. In fiscal 1996 the following individuals received
compensation as outside director: For his service on the Board from August,
1995 through March, 1996, William Burns was paid $1,250 in cash and 690 shares
of the Company's common stock. For her service on the Board from September,
1995 through March 1996, Tracey Young received $1,125 in cash and 621 shares of
the Company's common stock. Larry Haimovitch and Robert Rylee each received
$3,000 in cash and 2,400 shares of the Company's Common Stock for their service
on the Board for the 1996 fiscal year.
EMPLOYMENT AGREEMENTS
Mr. Alan J. Rabin is employed as the President and Chief Executive Officer of
the Company pursuant to a three year employment agreement dated as of October
13, 1994. As compensation thereunder, Mr. Rabin receives an annual salary of
$110,000; reimbursement for business travel and other business expenses; and a
bonus of 25% of his annual salary based on the performance of the Company. The
employment agreement also provides reimbursement for Mr. Rabin's relocation and
temporary living expenses, not to exceed $38,000 plus the cost associated with
the moving of personal possessions and his family. His employment agreement
provides a severance package under certain defined circumstances equal to the
balance of the salary due under the employment agreement (payable in accordance
with the Company's payroll practices) and a lump sum payment equal to nine
months of his annual base salary then in effect, plus maintenance by the Company
(to the extent permitted under plan documents) for nine months from the date of
termination all benefit plans in which he was entitled to participate while an
employee, or the equivalent. The nine month lump sum severance payment is also
payable to Mr. Rabin in the event his employment agreement is not renewed by the
Company at the end of its term. Pursuant to his employment agreement, the
Company awarded to Mr. Rabin a stock option for 28,571 shares of the Company's
common stock at an exercise price of $3.50 per share, 14,286 of which vested
immediately and the remaining 14,285 shares will be subject to exercise
incrementally over the term of his employment agreement. Mr. Rabin's stock
option agreement contains a change of control provision whereby in the event of
a change in control of the Company, all outstanding options become immediately
exercisable.
45
<PAGE>
Mr. Bart C. Gutekunst is employed as the Chairman of the Board of the Company
pursuant to a three year employment agreement dated as of October 13, 1994. As
compensation thereunder, Mr. Gutekunst receives an annual salary of $48,000;
reimbursement for business travel and other business expenses; and a bonus
related to the Company's financial, capital raising and corporate development
and acquisition activities in the form of the following transactional fees: 1%
for debt and equity source, and 1% of the gross consideration for asset
acquisitions or sales, which fees are payable to Mr. Gutekunst upon closing by
the Company or its successor-in-interest of the applicable transaction.
Pursuant to the employment agreement, Mr. Gutekunst received an option for
21,429 shares of the common stock of the Company at an exercise price of $3.50
per share, 10,715 of which became immediately exercisable and the remaining
10,714 will become exercisable incrementally over the term of the agreement.
His employment agreement contains the same severance provisions as Mr. Rabin's
employment agreement and his stock option contains the same change of control
provision as Mr. Rabin's stock option agreement.
Mr. Robert S. Miller is employed as the Company's Vice President of Sales and
Marketing pursuant to a three year employment agreement dated December 10, 1994.
As compensation thereunder, Mr. Miller receives an annual salary of $100,000;
reimbursement for business travel and other business related expenses; and a
bonus of up to 50% of his annual salary, depending upon achievement of sales and
profit goals and performance by the employee; however, $10,000 of the bonus is
guaranteed to be paid annually. Mr. Miller, pursuant to his employment
agreement, was granted options for 14,285 shares of the Company's Common Stock
at an exercise price of $3.50 per share, exercisable incrementally over a three
year period commencing December 10, 1995. Mr. Miller's employment agreement
provides for reimbursement for relocation and temporary living expenses if he is
required to relocate by the Company. His employment agreement provides a
severance package under certain circumstances equal to the balance of the salary
due under the employment agreement and a payment equal to six months of his
annual base salary then in effect (payable in accordance with the Company's
payroll practices), plus continued participation for six months from the
termination date in all benefit plans in which he was entitled to participate as
an employee (to the extent permitted under the plans), or their equivalent.
STOCK OPTIONS
On September 9, 1987, the Board of Directors of the Company adopted the 1987
Non-Qualified Stock Option Plan (the "1987 Plan"). The 1987 Plan provided the
Board of Directors with the authority to grant to employees, officers and
directors, and employees of the Company non-qualified options to purchase up to
a maximum of 142,857 shares of the Company's common stock.
On February 7, 1992, the Company's Board of Directors adopted the 1992 Non-
Qualified Stock Option Plan (the "1992 Plan"). The 1992 Plan provided the Board
of Directors with the authority to grant officers, directors, and employees of
the Company non-qualified options to purchase up to a maximum of 42,857 shares
of the Company's common stock. On March 17, 1994, the Board of Directors
amended and restated the 1992 Plan and provided therein authorization to issue
options for up to a maximum of 157,143 shares of the Company's common stock.
On January 19, 1995, the Board of Directors of the Company authorized the
combination of the 1987 Plan and the 1992 Plan into one plan now known as the
Combined 1987-1992 Non-Qualified Stock Option Plan ("Combined Plan"). The
Combined Plan provides that all issued and outstanding stock option agreements
under the previous plans shall be governed by the Combined Plan. Under the
Combined Plan, the Company is authorized to issue options to employees, officers
and directors to purchase up to a maximum of 400,000 shares of the Company's
common stock. As of March 31, 1996, there were outstanding options for 305,186
shares under the Combined Plan, of which 237,569 shares were subject to options
held by officers and directors at exercise prices ranging from $3.50 to $5.25
per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS. As of May 31, 1996, six (6) stockholders were known
by the Company to beneficially own five percent (5%) or more of the outstanding
voting securities of the Company. The following table sets forth the indicated
information as of May 31, 1996 with respect to each person known by the Company
to own beneficially more than five percent (5%) (calculated in accordance with
the guidelines promulgated by the Securities and Exchange Commission) of the
2,579,371 issued and outstanding shares of common stock of the Company on that
date.
In accordance with Rule 13d-3, promulgated under the Exchange Act, shares
that are not outstanding but that are issuable upon exercise of outstanding
options, warrants, rights or conversion privileges have been deemed to be
outstanding for the purpose of computing the percentage of outstanding shares
owned by the person owning such right, but have not been deemed outstanding for
the purpose of computing the percentage for any other person.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)
- ------------------------------------------------------------------------------
Phillip R. Beutel 302,065 11.56%
3 Chase Lane
Colorado Springs, CO 80906
Special Situations Fund III, L.P. 327,770 12.57%
153 East 53rd St. Rm 5101
New York, New York 10022
Penfield Partners 204,856 7.89%
c/o William D. Witter, Inc.
150 E. 53rd Street
New York, NY 10022
Bradley Resources Company 198,709 7.65%
107 John Street
Southport, CT 06490
ROI Partners 143,399 5.53%
353 Sacramento Street
San Francisco, CA 94111
Dow Corning Enterprises, Inc. 235,714(3) 8.48%
2200 West Salzburg Road
Auburn, MI 48611
-----------------------------------
1,412,513 48.93%
===================================
</TABLE>
(1) Except as otherwise indicated, each person is the record owner of the
shares indicated and possesses the sole voting and investment power with
respect to such shares of common stock.
(2) Computations of percentage ownership of each individual treat warrants and
options to purchases common stock exercisable within the next sixty days as
though the shares subject thereto were issued and outstanding.
(3) This amount represents (a) redeemable warrants covering the purchase of
200,000 shares of common stock issued pursuant to the retirement of the
Company's mortgage with Dow Corning Enterprises, Inc. and (b) 35,714 shares
of common stock of which Dow Corning Enterprises, Inc. is the record owner.
MANAGEMENT. The following table sets forth the number of shares of common
stock beneficially owned by each Director of the Company as of May 31, 1996, and
the percentage of the outstanding shares such ownership represented at the close
of business on May 31, 1996 (according to information received by the
46
<PAGE>
Company), together with information as to stock ownership of all Directors and
Executive Officers of the Company as a group as of May 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name of Individual or Amount and Nature of Percent
Number of Persons in Group Beneficial Ownership(1)(3)(4) of Class (2)
- -----------------------------------------------------------------------------------
<S> <C> <C>
William H. Burns....................... 690 0.03%
Bart C. Gutekunst...................... 34,528 1.33%
Larry G. Haimovitch.................... 15,304 0.59%
Alan J. Rabin.......................... 42,623 1.63%
Robert T. Rylee........................ 28,019 1.08%
Tracey E. Young........................ 5,621 0.22%
Augusto Ocana..........................
All Directors and Executive Officers
as a group (14 persons).............. 248,896 (4) 9.03%
- -----------------------------------------------------------------------------------
</TABLE>
(1) Except as otherwise indicated, each person is the record owner of the
shares indicated and possesses the sole voting and investment power with respect
to such shares of common stock.
(2) Computations of percentage ownership of each individual and of the group
treat options to purchase common stock exercisable within the next 60 days as
though the shares subject thereto were issued and outstanding.
(3) Includes options exercisable within the next 60 days to purchase shares of
common stock granted pursuant to the Company's Non-Qualified Stock Option Plans
(see "Item 11. Directors' and Executive Officers' Compensation - Stock Options")
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Name of Individual or Number
Number of Persons in Group of Shares
- -------------------------------------------------------------------------
<S> <C>
William H. Burns.................................................
Bart C. Gutekunst................................................ 24,286
Larry G. Haimovitch.............................................. 1,333
Alan J. Rabin.................................................... 32,381
Robert T. Rylee.................................................. 25,619
Tracey E. Young.................................................. 5,000
Augusto Ocana....................................................
All Directors and Executive Officers as a group (14 persons)..... 176,523
- -------------------------------------------------------------------------
</TABLE>
(4) Includes shares owned by family members and shares subject to debentures,
options and warrants as described in notes (3) and (4), above. Includes 513
shares owned by a spouse of an officer as to which the officer disclaims
beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND TRANSACTIONS
47
<PAGE>
See "Employment Agreements" for a description of certain compensation
arrangements.
During the last calendar quarter of 1994, the Company raised $2,885,000
through a private placement of 5% Convertible Debentures. Interest payments
were made on March 31 and October 31 of each year, commencing March 31, 1995.
The Debentures' maturity date is October 31, 1999. Effective March 31, 1996,
the holders of Debentures converted their Debentures into common stock of the
Company at a conversion rate of $2.80 per shares. Alan Rabin and Bart Gutekunst,
President/Chief Executive Officer and Chairman of the Board, respectively, of
the Company, each received 8,928 shares of the Company's Common Stock in respect
of the conversion. Those beneficial owners holding 5% or more of the Company's
issued and outstanding common stock and the common stock they received upon
conversion of their debentures is as follows: Phillip R. Beutel, 89,285 shares;
Special Situation Fund III, L.P., 285,714 shares; Penfield Partners, 178,571
shares; Bradley Resources Company, 173,214 shares; and ROI Partners, 125,000
shares. Pursuant to the terms of the 5% Convertible Debentures, the Company
filed with the SEC a registration statement on Form S-1 registering the common
stock underlying the Debentures, which registration statement was declared
effective by the SEC on April 27, 1995.
In respect of their conversion of the debentures, the Company agreed to issue
warrants to the debenture holders for an aggregate of 100,000 warrants (to be
divided among the debenture holders pro rata in accordance with their percentage
interests in the Debentures). The warrants will have a term of three years and
will be exercisable commencing March 31, 1996 at $5.00 per share.
Upon the closing of the minimum offering of the convertible debentures, Alan
J. Rabin and Bart C. Gutekunst entered into employment agreements with the
Company on October 13, 1994. Previously, Mr. Gutekunst and Mr. Rabin had been
consulting with and assisting the Company in preparing its business plan and
obtaining additional financing. On July 31, 1994, Mr. Gutekunst was appointed
to the Board of Directors to fill a vacancy. On October 13, 1994, Mr. Gutekunst
was appointed Chairman of the Board and Mr. Rabin was appointed the Company's
President and Chief Executive Officer pursuant to their respective employment
agreements. For consulting services rendered the Company in connection with the
development of the Company's new business plan and the Company's financing, Mr.
Rabin and Mr. Gutekunst were paid consulting fees in the aggregate amount of
$130,750. Mr. Gutekunst and Mr. Rabin also participated in the debenture
financing discussed above, and each acquired a debenture in the amount of
$25,000.
On October 1, 1994, the Company issued to Robert R. Brownlee, Senior
Executive Vice President of the Company, an option to purchase 14,286 shares for
the Company's common stock at an exercise price of $3.50 per share. The option
agreement contains certain piggyback registration rights.
On October 7, 1994, the Company executed an employment agreement with Robert
R. Brownlee, who serves the Company as Executive Vice President of Technical
Affairs. The agreement is a three year agreement whereby Mr. Brownlee will
receive an annual salary of $96,800; reimbursement for business travel and other
business expenses; and may receive from time to time such bonus compensation as
the Board of Directors of the Company in its sole discretion shall authorize.
The employment agreement provides that should Mr. Brownlee decide to commit less
time to the Company subsequent to October 1, 1995, his base salary shall be
reduced proportionately. Further, any options exercisable at the termination of
Mr. Brownlee's employment shall be retained by him. His employment agreement
provides a severance package under certain defined circumstances equal to the
balance of the salary due under the employment agreement (payable in accordance
with the Company's payroll practices) and a lump sum payment equal to nine
months of his annual base salary then in effect, plus maintenance by the Company
(to the extent permitted under plan documents) for nine months from the date of
termination all benefit plans in which he was entitled to participate while an
employee, or the equivalent.
In November, 1995, the Company entered into an agreement with Biosight Inc.,
of which William H. Burns, Jr., a director of the Company, is President and
principal shareholder. Under the agreement, Biosight Inc. provides consulting
services regarding the Company's manufacturing processes and inventory planning.
The agreement provides for payment of $30,000 in fees during the year ended
March 31, 1996, plus reimbursement of approved out-of-pocket expenses, and
future performance related payments to be paid in stock and cash, provided
certain goals are met. Upon earning $30,000 in performance related payments
(in combined cash and stock), the agreement provides for subsequent performance
based payments to be made in the Company's common stock.
48
<PAGE>
During fiscal 1996, Tracey E. Young, a director of the Company, provided
consulting services to the Company regarding development of international
markets for the Company's products. In March, 1996, the Board of Directors
approved payment of $5,000 in consulting fees to Ms. Young together with a grant
of a stock option for 5,000 shares, exercisable at $3.75 per share. In respect
of consulting services, the Board approved royalty payments to Ms. Young of $100
per unit (each unit comprised of a pacemaker and lead) sold in Japan for the
three year period following approval of the product by regulatory authorities in
that country.
During fiscal 1996, the Company entered into a distribution agreement for the
European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). Dr.
Augusto Ocana, who became a director of the Company in April 1996, is an
executive officer of Grupo Taper.
The foregoing transactions between the Company and its affiliates have been
negotiated on behalf of the Company by its management. The Company believes that
such transactions are in compliance with the Company's policy that transactions
with affiliates were on terms at least as favorable as could have been
reasonably obtained from an unaffiliated third party.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
49
<PAGE>
EXHIBITS
The following Exhibits are filed as part of this Form 10-KSB:
<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
5% Convertible Debenture due 11, 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.
4.6 Stock Purchase Warrant, dated Page 55
October 15, 1995 in favor or
Sirrom Capital Corporation
4.7 Stock Purchase Warrant, dated Page 60
March 29, 1996 in favor of
Grupo Taper, S.A.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit
Number
- --------------------------------------------------------------------------------------------------------
<S> <C>
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 1990, File No. 0-14653
Cardiac Electro-physiology and
the Company
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 Exhibit 10.24 to Form 8-K Current Report dated October
between Bart C. Gutekunst and 11, 1994, File No. 0-14653
the Company, dated October 13,
1994
10.5 Employment Agreement Exhibit 10.25 to Form 8-K Current Report dated October
between Alan J. Rabin and the 11, 1994, File No. 0-14653
Company, dated October 13,
1994
10.6 Employment Agreement Exhibit 10.12 to Form 10-Q for the Quarter Ended
between Robert S. Miller and December 31, 1994, File No. 0-14653
the 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 Exhibit 10.14 to Form S-1 Registration Statement filed on
between Robert R. Brownlee March 2, 1995, Registration No. 33-89938
and the Company dated as of
October 1, 1994
10.11 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated March
between the Company and 31, 1995, File No. 0-14653
Sirrom Capital Corporation,
dated March 31, 1995
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential Page Number or
Number Description Incorporation by ference to
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.12 $1,500,000 Secured Promissory Exhibit 10.2 to Form 8-K Current Report, dated March
Note in favor of Sirrom Capital 31, 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
and Leases, and Security 31, 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
Agreement in favor of Dow 31, 1995, File No. 0-14653
Corning Enterprises, Inc., dated
March 31, 1995
10.15 Subordination Agreement Exhibit 10.5 to Form 8-K Current Report, dated March
between the Company Sirrom 31, 1995, File No. 0-14653
Capital Corporation, and the
Debentureholders, dated March
31, 1995
10.16 Promissory Note and Security Exhibit 10.16 to Form 10-QSB for the Quarter ended
Agreement between Intermedics September 30, 1995, File No. 0-14653
Inc. and the Company dated
October 20, 1995
10.17 Amendment 2 to Supply Exhibit 10.17 to Form 10-QSB for the Quarter ended
Contract between Intermedics September 30, 1995, File No. 0-14653
Inc.and the Company, October
20, 1995 dated
10.18 Amendment 2 to License Exhibit 10.18 to Form 10-QSB for the Quarter ended
Agreement between Intermedics September 30, 1995, File No. 0-14653
Inc. and the Company, dated
October 20, 1995
10.19 Distribution Agreement Exhibit 10.19 to Form 10-QSB for the Quarter ended
between Grupo Taper S.A. and December 31, 1995, File No. 0-14653
the Company, dated December
20, 1995
11.0 Statement re Computation of Page 66
Per Share Income (Loss)
</TABLE>
Copies of the above-described exhibits will be furnished to the stockholders
upon written request, addressed to President and Chief Executive Officer,
Cardiac Control Systems, Inc., 3 Commerce Boulevard, Palm Coast, Florida 32164.
REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the year ended
March 31, 1996.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
By /s/ Alan J. Rabin
---------------------------------------
Alan J. Rabin
President and CEO, and a Director
Dated: June 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated and on the date indicated. This reporting may
be executed in multiple counterparts, each of which shall be deemed an original
and all of which together shall constitute one and the same instrument.
/s/ Bart C. Gutekunst Chairman of the Board
- ----------------------------
Bart C. Gutekunst
Dated: June 25, 1996
/s/ Alan J. Rabin President and CEO, and a Director
- ----------------------------
Alan J. Rabin
Dated: June 25, 1996
/s/ Tracey E. Young Director
- ----------------------------
Tracey E. Young
Dated: June 25, 1996
/s/ William H. Burns Director
- ----------------------------
William H. Burns
Dated: June 25, 1996
/s/ Larry G. Haimovitch Director
- -----------------------------
Larry G. Haimovitch
Dated: June 25, 1996
/s/ Robert T. Rylee Director
- -----------------------------
Robert T. Rylee
Dated: June 25, 1996
/s/ Augusto Ocana Director
- -----------------------------
Augusto Ocana
Dated: June 25, 1996
/s/ W. Alan Walton Executive Vice President, Chief Operating Officer
- ---------------------------- (Principal Accounting Officer)
W. Alan Walton
Dated: June 25, 1996
53
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER DESCRIPTION NUMBER
<S> <C> <C>
4.6 Stock Purchase Warrant, dated October 15, 55
1995 in favor of Sirrom Capital Corporation
4.7 Stock Purchase Warrant dated March 29, 1996 60
In favor of Grupo Taper, S.A.
11.0 Statement of Computation of Per Share Income 66
(Loss).
27 Financial Data Schedule
</TABLE>
54
<PAGE>
EXHIBIT 4.6
STOCK PURCHASE WARRANT
IN FAVOR OF SIRROM CAPITAL CORPORATION
DATED OCTOBER 15, 1995
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY REGISTRATION UNDER SUCH SECURITIES ACTS OR
SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
WARRANT NO. C-1
STOCK PURCHASE WARRANT
THIS WARRANT is issued this 18th day of October, 1995, by Cardiac
Control Systems, Inc., a Delaware corporation (the "Company"), to SIRROM CAPITAL
CORPORATION, a Tennessee corporation ("Sirrom")(Sirrom and any subsequent
assignee or transferee, are hereinafter referred to collectively as "Holder" or
"Holders").
1. ISSUANCE OF WARRANT. For and in consideration of Sirrom
-------------------
granting its consent under Section 4.5 of that certain Loan and Security
Agreement and related the Secured Promissory Note, each dated as of March 31,
1995, pursuant to which the Company borrowed $1,500,000 from Sirrom
(respectively, the "Note" and the "Loan Agreement"), to the Company incurring
indebtedness of $1,000,000 from Intermedics Inc. ("Intermedics"), pursuant to a
Promissory Note and Security Agreement of even date herewith (the "Intermedics
Loan"), and in that correction agreeing to subordinate its security interest in
certain collateral under the Loan Agreement in order that the Company might
grant to Intermedics a first priority security interest in certain assets of the
Company as set forth in the Consent of Sirrom of even date herewith, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company hereby grants to Holder the right to purchase
Twenty Five Thousand (25,000) shares of the Company's Common stock, $. 10 par
value (the "Common Stock"); provided, however, that in the event Sirrom
purchases from the Company at least 50,000 shares of Common Stock at a per share
purchase price of $5.00 simultaneously, or reasonably contemporaneously, with
the purchase by Grupo Taper s.a., of Madrid, Spain, of at least 100,000 shares
of the Company's Common Stock at a per share purchase price of $5.00, the
Company hereby grants to Holder the right to purchase an additional 25,000
shares of Common Stock (for a total of 50,000 shares).
2. TERM. The shares of Common Stock issuable upon exercise
----
of this Warrant are hereinafter referred to as the "Shares." This Warrant shall
be exercisable at any time and from time to time from the date hereof until
October 18, 2000 (the "Expiration Date").
3. PRICE. The exercise price per share for which all or
-----
any of the Shares may be purchased pursuant to the terms of this Warrant shall
be one cent ($0.01), in further consideration of Sirrom granting its consent to
the incurrence of additional indebtedness pursuant to the Intermedics Loan and
subordinating its security interest in certain of its collateral under the Loan
Agreement, as described in Section 1 above, and such other good and valuable
consideration as has been received by the Company.
4. EXERCISE. This Warrant may be exercised by the Holder
--------
hereof (but only on the conditions hereinafter set forth) as to all or any
increment or increments of the Shares then subject to exercise under Section 1
above upon delivery of written notice of intent to exercise in substantially the
form of the "Notice of Exercise" attached hereto as Annex A, to the Company at
the following address: 3 Commerce Boulevard, Palm Coast, Florida 32137, or at
such other address as the Company shall designate in a written notice to the
Holder hereof, together with this Warrant and either (I) a certified or
cashier's check payable to the Company for the aggregate purchase price of the
Shares so purchased or (ii) the surrender, as noted on the Notice of Exercise,
of Shares having a value on the date of exercise equal to the aggregate purchase
price of the Shares so purchased. Upon exercise of this Warrant as aforesaid,
the Company shall, as promptly as
55
<PAGE>
practicable, and in any event within fifteen (15) business days thereafter,
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Shares for which this Warrant is being exercised
in such names and denominations as are requested by such Holder. If this
Warrant shall be exercised with respect to less than all of the Shares, the
Holder shall be entitled to receive a new Warrant covering the number of Shares
in respect of which this Warrant shall not have been exercised, which new
Warrant shall in all other respects be identical to this Warrant. The Company
covenants and agrees that it will pay when due any and all state and federal
issue taxes which may be payable in respect of the issuance of this Warrant or
the issuance of any Shares upon exercise of this Warrant; provided, however,
that the Company shall have no liability for any state or federal income taxes
which may be payable by Holder upon income recognized by Holder as a result of
the exercise of this Warrant.
5. COVENANTS AND CONDITIONS. The above provisions are subject to
------------------------
the following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933 (the "Securities Act") or any state securities laws
("Blue Sky Laws"). This Warrant has been acquired for investment purposes and
not with a view to distribution or resale and may not be pledged, hypothecated,
sold, made subject to a security interest, or otherwise transferred without (I)
an effective registration statement for such Warrant under the Securities Act
and such applicable Blue Sky Laws, or (ii) an opinion of counsel reasonably
satisfactory to the Company that registration is not required under the
Securities Act or under any applicable Blue Sky Laws. Transfer of the Shares
issued upon the exercise of this Warrant shall be restricted in the same manner
and to the same extent as the Warrant and, if required by applicable securities
laws, the certificates representing such Shares shall bear substantially the
following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY REGISTRATION UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment therefor,
be legally and validly issued and outstanding, fully paid and nonassessable.
The Company shall at all times reserve and keep available for issuance upon the
exercise of this Warrant such number of authorized but unissued shares of Common
Stock as will be sufficient to permit the exercise in full of this Warrant.
6. TRANSFER OF WARRANT. Subject to the provisions of Section 5, this
-------------------
Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer and by the execution by such transferee of an investment
letter in a form reasonably satisfactory to the Company. Upon such presentation
for transfer and receipt of such investment letter, the Company shall promptly
execute and deliver a new Warrant or Warrants in the form hereof in the name of
the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses in connection with the
preparation, issuance and delivery of Warrants under this Section 6; provided,
however, that the Holder shall reimburse the Company for any out-of-pocket
expenses incurred by the Company in connection with such issuance.
7. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING. This Warrant
-----------------------------------------------
does not confer upon the Holder hereof, as such, any right whatsoever as a
shareholder of the Company. Notwithstanding the foregoing, in the event the
Company should offer to all of the Company's shareholders the right to purchase
any securities of the company, then all shares of Common Stock that are subject
to this Warrant shall be deemed to be outstanding and owned by the Holder as of
the subscription date and the Holder shall be entitled to participate in such
rights offering as if it were a shareholder.
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<PAGE>
8. ADJUSTMENT UPON CHANGES IN COMPANY COMMON STOCK. The number of
-----------------------------------------------
shares of Common Stock subject to this Warrant and the price per share of such
shares shall be adjusted by the Company proportionately to reflect changes in
the capitalization of the Company as a result of any recapitalization,
reclassification, stock dividend, stock split, combination of shares, exchange
of shares or any other similar change in the Company's capital structure which
affects holders of Common Stock generally. All adjustments described herein
shall be reflected on the Company's stock warrant ledger and the Holder shall
receive written notice thereof.
9. CHANGE OF CONTROL. In the event of a merger, consolidation,
-----------------
recapitalization, combination or exchange of shares occurring after the date
hereof pursuant to which the Company is not the surviving entity, the Company
covenants that it will use its best efforts to obtain from the acquiring entity,
as a condition to the closing of such transaction or event., the right for the
Holder to exchange this Warrant, at its sole option and in lieu of exercise
hereof, for a warrant to purchase shares of the acquiring entity. The period of
exercise of such new warrant shall be equal to the remaining duration of the
exercise period of this Warrant and shall permit the Holder to purchase that
number of shares or other consideration of the acquiring entity which the Holder
would be entitled to receive as a result of such merger, consolidation,
recapitalization, combination or exchange of shares if this Warrant had been
exercised immediately prior to such merger, consolidation, recapitalization,
combination or exchange of shares (or the record date, if any, for such
transaction or event) for the same aggregate exercise price as provided for in
this Warrant.
10. REGISTRATION.
-------------
(a) The Company agrees that, in the event that the Company's
registration statement on Form S-1, File No. 33-89938 (the "Debentures'
Shelf"), pursuant to which the Company has registered under the Securities Act
the Common Stock into which its 5% convertible debentures due October 31, 1999
(the "Debentures") are convertible, is effective on the date of exercise of this
Warrant, the Company shall promptly amend the Debentures' Shelf so as to permit
the offer for sale by the Holder(s) of the Shares, from time to time pursuant to
Rule 415 under the Securities Act. The Company shall keep the Debentures' Shelf
effective for the Selling Period (as defined below) until the earlier of: (I)
the date that all of the Shares are sold; or (ii) the date that the Holder(s) of
the Shares receives an opinion of counsel that such sale is in compliance with
Rule 144, including paragraph (k) thereof, or any successor rule or regulation
under the Securities Act (the "Selling Period"). The Company shall maintain the
effectiveness of the Debentures' Shelf during the Selling Period, and shall
amend and supplement such registration statement to the extent necessary to
permit offers for resale thereunder of all or any of the Shares without further
registration under the Securities Act. The Company shall bear the entire
expense of the registration, provided, however, that the Holder(s) of the Shares
shall be responsible for the fees of any counsel or other professionals retained
by the Holder, and any transfer taxes or underwriting discounts or commissions
applicable to the sale of the Shares.
(b) Notwithstanding the foregoing, the Company and the holders of the
Shares agree that if at any time after the date hereof the Company shall propose
to file a registration statement with respect to any of its Common Stock on a
form suitable for a secondary offering, it will give notice in writing to such
effect to the registered holders of the Warrant and the Shares at least 30 days
prior to such filing, and, at the written request of any such registered holder,
made within 10 days after the receipt of such notice, will include therein at
the Company's cost and expense (except for the fees and expenses of counsel to
such holders and underwriting discounts, commissions, and filing fees,
attributable to the Shares included therein) such of the Shares as such holders
shall request; provided, however, that if the offering being registered by the
Company is underwritten and if no other outstanding Common Stock is offered
thereby by a person or entity other than the Company and if the representative
of the underwriters certifies in writing that the inclusion therein of the
Shares would materially and adversely affect the sale of the securities to be
sold by the Company thereunder, the Shares shall not be included in such
registration statement or such registration statement shall include only so many
shares as will not have such an effect.
The Company, at its own expense, will cause the prospectus included in
such registration statement to meet the requirements of the Securities Act for a
period of at least nine months after the effective date of such registration
statement.
57
<PAGE>
(c) At the time any registration statement filed in accordance with
the provisions of Section 10(b) above becomes effective, and at the effective
date of any post effective amendment thereto, the Company will. at its own
expense, furnish to the holders of the shares included in such registration
statement pursuant to this Section 10, an opinion of the Company's counsel to
the effect that the registration statement and the prospectus contained therein,
and each amendment or supplement thereto, as of their respective effective or
issue dates, comply as to form in all material respects with the requirements of
the Securities Act and the rules and regulations promulgated thereunder.
Such counsel shall also state that no facts have come to the attention
of such counsel which cause them to believe that such registration statement,
the prospectus contained therein, or any amendment or supplement thereto, as of
their respective effective or issue dates, contains any untrue statement of any
material fact or omits to state any material fact necessary to make the
statements therein not misleading (except that no statement need be made with
respect to any financial statements, notes thereto or other financial data or
other expertized material contained therein, or any information provided for
inclusion therein by the holder of the Shares).
If for any reason the Company's counsel is unable to make such a
statement and unless the representative of the underwriters directs otherwise,
the Company shall so notify the holders of the Shares and shall use its best
efforts to remove expeditiously all impediments to the rendering of such
opinion.
(d) The Company shall promptly notify the participating holders of
Shares of the occurrence of any event as a result of which any current
prospectus included in a registration statement filed pursuant to this Section
10 includes any misstatement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing.
(e) The Company's obligations under Section 10(b) with respect to each
holder of Shares are expressly conditioned upon such holder's furnishing to the
Company in writing such information concerning such holder and the terms of such
holder's proposed offering as the Company or the representative of the
underwriters shall reasonably request for inclusion in the registration
statement. If any registration statement including any of the Shares is filed,
the Company shall indemnify each holder thereof (and each underwriter for such
holder and each person, if any, who controls such underwriter within the meaning
of the Securities Act) from any loss, claim, damage or liability arising out of
or based upon any untrue statement of a material fact contained in such
registration statement or any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except for any such statement or omission based on information furnished in
writing by such holder of the shares expressly for use in connection with such
registration statement; and such holder shall indemnify the Company (and each of
its officers and directors who has signed such registration statement, each
director, each person, if any, who controls the Company within the meaning of
the Securities Act, each underwriter for the Company and each person, if any,
who controls such underwriter within the meaning of the Securities Act) and each
other such holder against any loss, claim, damage or liability arising from any
such statement or omission which was made in reliance upon information furnished
in writing to the Company by such holder of the shares expressly for use in
connection with such registration statement.
(f) The rights of the holder of this Warrant or the Shares pursuant to
this Section 10 shall terminate on the date the Holder receives an opinion of
counsel that each Share may be transferred by the holder thereof pursuant to
Rule 144(k) under the Securities Act, or any successor rule or regulation.
11. CERTAIN NOTICES. In case at any time the Company shall propose
---------------
to (I) declare any cash dividend upon its Common Stock; (ii) declare any
dividend upon its Common Stock payable in stock or make any special dividend or
other distribution to the holders of its Common Stock; (iii) offer for
58
<PAGE>
subscription to the holders of any shares of its Common Stock or otherwise
issue, or enter into an agreement providing for the issuance of, any additional
shares of stock of any class or other rights (other than with respect to options
to purchase Common Stock granted pursuant to stock option plans approved by
stockholders of the Company); (iv) reorganize, or reclassify the capital stock
of the Company, or consolidate, merge or otherwise combine with, or sell all or
substantially all of its assets to, another corporation; or (v) voluntarily or
involuntarily dissolve, liquidate or wind up of the affairs of the Company;
then, in each such case, the Company shall give, by certified or registered
mail: (a) at least 20 days' prior written notice of the date on which the books
of the Company shall close or a record shall be taken for such dividend
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, and (b) in the case of such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date
when the same shall take place. Any notice required by clause (a) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and any
notice required by clause (b) shall specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization. reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer as of the date first above written.
CARDIAC CONTROL SYSTEMS, INC.
BY:
---------------------------------
Alan J. Rabin
President
59
<PAGE>
EXHIBIT 4.7
STOCK PURCHASE WARRANT
IN FAVOR OF GRUPO TAPER, S.A.
DATED MARCH 29, 1996
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS
SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY REGISTRATION UNDER SUCH SECURITIES ACTS OR
SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
STOCK PURCHASE WARRANT
THIS WARRANT is issued as of and effective the 29th day of March,
1996, by CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation. (the "Company"),
to (GRUPO TAPER S.A., a Spanish corporation Grupo Taper S.A., and any subsequent
assignee or transferee, hereinafter referred to collectively as "Holder" or
"Holders") .
1. ISSUANCE OF WARRANT. For and in consideration of (I) Grupo Taper
-------------------
S.A., entering into a certain Distribution Agreement dated as of December 20,
1995 (the "Distribution Agreement") which provides for Grupo Taper S.A. to make
a $500,000 initial inventory payment; and (ii) Grupo Taper S.A. purchasing
100,000 shares of common stock, par value $.10 (the "Common Stock") of the
Company pursuant to a Stock Purchase Agreement between Grupo Taper S.A. and the
Company dated the date hereof (the "Stock Purchase Agreement"), and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company hereby grants to Holder the right to purchase an
additional 100,000 shares of the Company's Common Stock, the number of which
shares shall be subject to adjustment as provided in this Warrant. The number
of shares of Common Stock issuable upon exercise of this Warrant as may be
adjusted are hereinafter referred to as the "Shares".
2. PRICE. The exercise price per share for which all or any of the
-----
Shares may be purchased pursuant to the terms of this Warrant shall be U.S.
$.80, subject to adjustment as provided in this warrant (the "Exercise Price").
3. EXERCISE OF WARRANT; TERM. This Warrant shall be exercisable in
-------------------------
accordance with the following schedule (I) 50,000 Shares shall be exercisable
one (1) year after the Company achieves ISO and CE approval if the Distribution
Agreement is still in force and if Grupo Taper S.A. has achieved at least 60% of
its forecasted sales commitment of 500 units of pacemaker products (the "First
Exercise Date"); (ii) 25,000 Shares shall be exercisable after December 20, 1997
if the Distribution Agreement is in force on December 20, 1997 and Grupo Taper
S.A. has achieved at least 60% of its forecasted sales commitment of 500 units
of pacemaker products for the year ended December 20, 1997; and (iii) 25,000
Shares shall be exercisable after December 20, 1998 if the Distribution
Agreement is in force on December 20, 1998 and if Grupo Taper S.A. has achieved
its forecasted sales commitment of 5,500 pacemaker products. over the two-year
period ending December 20, 1998. The forecasted sales commitment in the case of
each of clauses (I), (ii) and (iii) in the preceding sentence shall be subject
to adjustment as provided in the Distribution Agreement. To the extent
exercisable as provided in this Section, the Shares may be exercised at any time
and from time to time from the First Exercise Date until ten (10) years from the
date hereof (the "Expiration Date").
4. EXERCISE. This Warrant may be exercised by the Holder hereof (but
--------
only on the conditions hereinafter set forth) as to all or any increment or
increments of the Shares then subject to exercise under Section 3 above upon
delivery of written notice of intent to exercise in substantially the form of
the "Notice of Exercise" attached hereto as Annex A, to the Company at the
-------
following address: 3 Commerce Boulevard, Palm Coast, Florida 32137 U.S.A.; or at
such other address as the Company shall designate in a written notice to the
Holder hereof, together with this Warrant and either (I) a certified or
cashier's check payable to the Company for the aggregate Exercise Price of the
Shares so purchased or (ii) the surrender, as noted on the Notice of Exercise,
of shares having a value on the date of exercise equal to the aggregate Exercise
Price of the Shares so purchased. Upon exercise of this Warrant as aforesaid,
the Company shall, as promptly as practicable, and in any event within fifteen
(15)
60
<PAGE>
business days thereafter, execute and deliver to the Holder of this warrant a
certificate or certificates for the total number of whole Shares for which this
Warrant is being exercised in such names and denominations as are requested by
such Holder. If this Warrant shall be exercised with respect to less than all
of the Shares, the Holder shall be entitled to receive a new warrant covering
the number of Shares in respect of which this Warrant shall not have been
exercised, which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it will pay when due any and all
state and federal issue taxes which may be payable in respect of the issuance of
this Warrant or the issuance of any Shares upon exercise of this Warrant,
provided, however, that the Company shall have no liability for any state or
federal income taxes which may be payable by Holder upon income recognized by
Holder as a result of the exercise of this Warrant. As used in this Warrant,
the term "affiliate" shall mean an entity that directly, or indirectly through
one or more intermediaries controls or is controlled by, or is under common
control with Grupo Taper S.A.
5. COVENANTS AND CONDITIONS. The above provisions are subject to
------------------------
the following:
(a) Neither this Warrant nor the Shares have been registered under the
securities Act of 1933 (the "Securities Act") or any state securities laws
("Blue Sky Laws". This warrant has been acquired for investment purposes and
not with a view to distribution or resale and may not be pledged, hypothecated,
sold, made subject to a security interest, or otherwise transferred without (I)
an effective registration statement for such Warrant under the Securities Act
and such applicable Blue Sky Laws, or (ii) an opinion of counsel reasonably
satisfactory to the Company that registration is not required under the
Securities Act or under any applicable Blue Sky laws provided that this Warrant
may be transferred to any affiliate of such Holder, subject to subsection 5(b),
below, without any such registration or opinion, subject to the foregoing
restriction on any further sale, transfer, pledge or hypothecation thereof in
substantially the form set forth on the first page of this Warrant. Transfer of
the Shares issued upon the exercise of this Warrant shall be restricted in the
same manner and to the same extent as the Warrant and, if required by applicable
securities laws, the certificates representing such Shares shall bear
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNTIL
(I) A REGISTRATION STATEMENT, UNDER THE ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN
THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE ACT
OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
(b) Holder represents and warrants that this Warrant in being acquired by
Holder for its own account and not for the account or benefit of any U.S. Person
(as defined in Regulation 5 as promulgated under the Securities Act, a copy of
which definition in attached hereto as Annex B). Holder agrees that during the
-------
forty (40) days after its acquisition of this Warrant and any Shares issued upon
exercise of this Warrant, that such Warrant and Shares may be sold or otherwise
transferred only outside of the jurisdiction of the United States and not to any
U.S. person or for the account of any U.S. person; and, after forty (40) days
the Shares my be sold and otherwise transferred within the jurisdiction of the
United States and to or for the account of a U.S. Person, subject to the
restrictions referenced in subsection 5(a), above.
(c) The Company covenants and agrees that all Shares which may be issued
upon exercise of this Warrant will, upon issuance and payment therefor, be
legally and validly issued and outstanding, fully paid and nonassessable. The
Company shall at all times reserve and keep available for issuance upon the
exercise of this Warrant such number of authorized but unissued shares of Common
Stock will be sufficient to permit the exercise in full of this Warrant.
6. TRANSFER OF WARRANT. Subject to the provisions of Section 5 hereof,
-------------------
this Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the warrant to the Company
61
<PAGE>
with written instructions for such transfer in substantially the form of the
"Form of Assignment" to attached hereto as Annex C, and by the execution of such
-------
transferee of an investment letter reasonably satisfactory to the Company. Upon
such presentation for transfer and receipt as aforesaid, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses in connection with the
preparation, issuance and delivery of Warrants under this Section 6; provided,
however, that the Holder shall pay its own legal fees, if any, in connection
therewith and shall reimburse the Company for any out-of-pocket expenses
incurred by the Company in connection with such issuance.
7. WARRANT HOLDER NOT STOCKHOLDER; RIGHTS OFFERING. This warrant does not
-----------------------------------------------
confer upon the Holder hereof, as such, any right whatsoever as a stockholder
of the Company. Notwithstanding the foregoing, in the event the Company should
offer to all of the Company's stockholders the right to purchase any securities
of the Company, then all shares of Common Stock that are subject to this Warrant
shall be deemed to be outstanding and owned by the Holder as of the subscription
date and the Holder shall be entitled to participate in such rights offering as
if it were a stockholder.
8. ADJUSTMENT UPON CHANGES IN COMPANY COMMON STOCK. The number of Shares
-----------------------------------------------
subject to this Warrant and the Exercise Price thereof shall be adjusted by the
Company proportionately to reflect changes in the capitalization of the Company
as a result of any recapitalization, reclassification, stock dividend, stock
split, combination of shares, exchange of shares or any other similar change in
the Company's capital structure which affects holders of Common Stock generally
and pursuant to which the Company is the surviving entity.
9. CHANGE OF CONTROL; ANTI-DILUTION PROVISIONS. (a) In the event of a
-------------------------------------------
merger, consolidation, recapitalization, combination or exchange of shares
occurring after the date hereof pursuant to which the Company is not the
surviving entity, the Company covenants that it will use its best efforts to
obtain from as acquiring entity, as a condition to the closing of such
transaction or event, the right for the Holder to exchange this Warrant, at its
sole option and in lieu of exercise hereof. for a warrant to purchase shares of
the acquiring entity (a "Substitute Warrant"); provided, however, if the
-----------------
acquiring entity does not agree to a Substitute Warrant, this warrant shall
thereupon become immediately exercisable by Holder as to all Shares. The period
of exercise of a Substitute Warrant shall be equal to the remaining duration of
the exercise period of this Warrant and shall permit the Holder to purchase that
number of shares or other consideration of the acquiring entity which the Holder
would be entitled to receive as a result of such merger, consolidation,
recapitalization, combination or exchange of shares if this Warrant had been
exercised immediately prior to such merger, consolidation, recapitalization,
combination or exchange of shares (or the record date, if any, for such
transaction or event) for the same aggregate Exercise Price as provided for in
this Warrant.
(b) In the event the Company after the date hereof shall issue to all
holders of Common Stock or grant to all holders of common Stock any rights to
subscribe for, to purchase, or any options for the purchase of, Company Common
Stock (including, without limitation, any stock or securities convertible into
or exchangeable for Company Common Stock ("Convertible Securities"), whether or
not such rights or options (or the right to convert any Convertible Securities)
are immediately exercisable at a price of less than $2.90 per share (such
issuance, sale or grant is sometimes hereinafter called a "Dilutive Issuance",
then, in such case, the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect on the record date of such issuance by a fraction, of
which the numerator shall be the number of shares of Common Stock outstanding
and subject to Convertible Securities on record date for such issuance plus the
number of Share of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so to be issued (or the aggregate initial
conversion price of the Convertible Securities) would purchase at $2.90 per
share and of which the denominator shall be the number of shares of Common Stock
outstanding and subject to Convertible Securities on the record date for such
issuance plus the number of additional shares of Common Stock to be issued (or
into which the Convertible Securities are initially convertible). Such
adjustment shall become effective at the close of business on the record date.
As an example for illustrative purposes only assuming the Company had 1,443,619
shares of Common Stock outstanding and 1,495,404 shares subject to Convertible
Securities (including this Warrant) and the Company were to subsequently issue
to a third party 300,000 shares of Common Stock at $1.00 per Share, the
adjustment number of Shares exercisable under this Warrant would increase by
6,066 Shares to an aggregate of 106,666 and the Exercise Price would decrease by
approximately $.05 per Share to approximately $.75 per share. For purposes of
adjustment under this Section, this Warrant and the shares exercisable under
this Warrant shall not be demand to be Convertible Securities or otherwise
activate this subsection
62
<PAGE>
(b) Notwithstanding the foregoing, no adjustment in the Exercise Price or
the number of Common stock issuable upon exercise of this warrant shall be made
upon (I) the issuance of options (or upon exercise thereof) by the Company
pursuant to its stock option plans, (ii) the issuance of any Common Stock in
respect of exercise or conversion of any of the Company's options, warrants,
debentures, or other convertible securities outstanding as of the date hereof.
(c) To the extent that the Dilutive Issuance consists of options, rights or
warrants issued after the date hereof and prior to the exercise of this Warrant,
shares of Common Stock are not delivered (or Convertible Securities are not
delivered) after the expiration of such options, rights or warrants, the
Exercise Price shall be readjusted to the Exercise Price and quantity of Shares
which would then be in effect had the adjustments made upon the issuance of such
options, rights or warrants been made upon the basis of delivery of only the
number of shares of Common Stock (or Convertible Securities) actually delivered.
Shares of Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the purpose of any
such computation.
(d) No adjustment in the Exercise Price and quantity of Shares shall be
required unless such adjustment would require an increase or decrease of at
least one percent (1%) of such price or quantity; provided, however, that any
adjustments which by reason of this subsection (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment
required to be made hereunder. All calculations under this section 9 shall be
made to the nearest cent or to the nearest one-hundredth of a share, as the case
may be; however, no fractional Shares shall be issued.
(e) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of this Warrant to be
mailed to the Holder. Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant, warrants
theretofore or thereafter issued may continue to express the same Exercise Price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant.
(f) If any event occurs as to which in the reasonable opinion of the
Company or the registered Holder hereof, in good faith, the other Provisions of
this Warrant are not strictly applicable but the lack of any adjustment would
not in the opinion of the Company or the Holder hereto fairly protect the
purchase rights of the Holder of this Warrant in accordance with the basic
intent and principles of such provisions, or if strictly applicable would not
fairly protect the purchase rights of the Holder of this Warrant in accordance
with the basic intent and principles of such provisions, then, unless the
Company and such Holder shall agree as to the appropriate adjustment to be made
hereunder, the Holder shall appoint a firm of independent certified public
accountants acceptable to the Company and such Holder which shall give their
opinion upon the adjustment, if any, on a basis consistent with the basic intent
and principles established in the other provisions of this warrant, necessary to
preserve, without dilution, the exercise rights of the registered Holder of this
Warrant. All fees and related costs of such firm shall be borne equally by the
Company and such Holder. Upon receipt of such opinion, the Company shall
forthwith make the adjustments described herein.
10. REGISTRATION
------------
(a) The Company agrees that, in the event that the Company's
registration statement on Form S-1, File No. 33-89938 (the "Registration
Statement"), pursuant to which the Company has registered under the Securities
Act the Stock in to which its 5% convertible debentures due October 31, 1999
(the "Debentures") are convertible is effective on the date of exercise of this
Warrant (the "Debentures' Shelf"), the Company shall include the Shares in its
next amendment to the Debentures' Shelf so as to permit the offer for sale by
the Holder(s) of the Shares, from time to time pursuant to Rule 415 under the
Securities Act. The Company shall keep the Registration Statement effective in
accordance with the terms of the Debentures (the "Selling Period"). The Company
shall maintain the effectiveness of the Debentures' Shelf during the Selling
Period, and shall amend and
63
<PAGE>
supplement such registration statement to the extent necessary to permit offers
for resale thereunder of all or any of the Shares without further registration
under the Securities Act. The Company shall bear the entire expense of the
registration, provided, however, that the Holder(s) of the Shares shall be
-------- -------
responsible for the fees of any counsel or other professionals retained by the
Holder, and any transfer taxes or underwriting discounts or commissions
applicable to the sale of the Shares.
(b) Notwithstanding the foregoing, the Company and the Holder(s) of
the Shares agree that if at any time after the date hereof the Company shall
propose to file a registration statement with respect to any of its Common Stock
or any similar security of the Company on a form suitable for a secondary
offering, it will give notice in writing to such effect to the registered
Holder(s) of the Warrant and the Shares at least 30 days prior to such filing,
and, at the written request of any such registered Holder, made within 10 days
after the receipt of such notice, will include therein at the Company's cost and
expense (except for the fees and expenses of counsel to such Holders and
underwriting discounts, commissions, and filing fees, attributable to the shares
included therein) such of the Shares as such Holders shall request; provided,
however, that if the offering being registered by the Company is underwritten
and if no other outstanding Common Stock is offered thereby a person or entity
other than the Company and if the representative of the underwriters certifies
in writing that the inclusion therein of the Shares would materially and
adversely affect the sale of the securities to be sold by the Company
thereunder, the Shares shall not be included in such registration statement or
such registration statement shall include only so many shares as will not have
such an effect.
(c) The Company, at is own expense, will cause the prospectus included
in the registration statement(s) provided for in this section 10 to meet the
requirements of the Securities Act for a period of at least nine (9) months
after the effective date of such registration statement.
(d) The Company shall promptly notify the participating Holders of
Shares of the occurrence of any event as a result of which any current
prospectus included in a registration statement filed pursuant to this Section
10 includes any misstatement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing.
(e) The Company's obligations under this Section 10 with respect to
each Holder of Shares or Warrants are expressly conditioned upon such Holder's
furnishing to the Company in writing such information concerning such Holder and
the terms of such Holder's proposed offering as the Company or the
representative of the underwriters shall reasonably request for inclusion in the
registration statement. If any registration statement including any of the
Shares is filed, the Company shall indemnify each Holder thereof (and each
underwriter for such Holder and each person, if any, who controls such
underwriter within the meaning of the Securities Act) from any loss, claim,
damage or liability arising out of or based upon any untrue statement of a
material fact contained in such registration statement or any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except for any such statement or omission
based on information furnished in writing by such Holder of the Shares or
Warrants expressly for use in connection with such registration statement; and
such Holder shall indemnify the Company (and each of its officers and directors
who has signed such registration statement, each director, each person, if any,
who controls the Company within the meaning of the Securities Act, each
underwriter for the company and each person, if any, who controls such
underwriter within the meaning of the Securities Act) and each other such Holder
against any loss, claim, damage or liability arising from any such statement or
omission which was made in reliance upon information furnished in writing to the
Company by such Holder of the Shares or Warrants expressly for use in connection
with such registration statement. Notwithstanding the foregoing, the amount
recoverable from a Holder under this Section 10 shall be limited to the net
proceeds received by such Holder from the sale of its Shares registered under
the Registration statement.
(f) The rights of the Holder of this Warrant or the Shares pursuant to
this Section 10 shall terminate on the date the Holder receives an opinion of
counsel that each Share may be transferred by the holder thereof pursuant to
Rule 144(k) under the Securities Act, or any successor rule or regulation.
11. CERTAIN NOTICES. In case, at any time, the Company shall propose
---------------
to (I) declare any cash dividend upon its Common Stock; (ii) declare any
dividend upon its Common Stock payable in Stock or make any special
64
<PAGE>
dividend or other distribution to the holders of its Common Stock; (iii) offer
for subscription to the holders of any shares of its Common Stock; (iv)
reorganize, or reclassify the capital stock of the Company, or consolidate,
merge or otherwise combine with. or sell all or substantially all of its assets
to, another corporation; (v) make a Dilutive Issuance, or (vi) voluntarily or
Involuntarily dissolve, liquidate or wind up of the affairs of the Company;
then, in each such case, the Company shall give, by certified or registered
mail: (a) at least 20 days prior written notice of the date on which the books
of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger, sale,
issuance, dissolution, liquidation or winding up, and (b) in the case of such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date
when the same shall take place. Any notice required by clause (a) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and any
notice required by clause (b) shall specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and delivered by its duly authorized officer as of the date first above written.
CARDIAC CONTROL SYSTEMS, INC.
BY:______________________________ NAME: Alan J. Rabin
TITLE: President and Chief
Executive Officer
ACKNOWLEDGED AND AGREED:
GRUPO TAPER S.A.
By: ______________________________
65
<PAGE>
EXHIBIT 11
CARDIAC CONTROL SYSTEMS, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended March 31, 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Net loss before extraordinary gain....................... $ (261,505) $ (281,817)
Extraordinary gain....................................... - 1,656,788
---------------------------
Net income (loss)........................................ $ (261,505) $1,374,971
===========================
Weighted average number
of common shares outstanding........................... 1,356,607 1,270,051
Net common shares issuable on exercise of certain stock
options and warrants (a)............................... - 102,048
--------------------------
Weighted average number of common shares outstanding,
as adjusted............................................ 1,356,607 1,372,099
===========================
Loss per common share before extraordinary gain.......... $ (.19) $ (.21)
Extraordinary gain per common share...................... - 1.21
--------------------------
Net income (loss) per common share....................... $ (.19) $ 1.00
===========================
FULLY DILUTED INCOME (LOSS) PER SHARE:
Net loss before extraordinary gain....................... $ (261,505) $ (281,817)
Adjustment for interest assuming conversion of 5%
convertible debentures................................. - 65,031
--------------------------
Net loss before extraordinary gain as adjusted........... (261,505) (216,786)
Extraordinary gain....................................... - 1,656,788
Net income (loss), as adjusted........................... $ (261,505) $1,440,002
===========================
Weighted average number of common shares outstanding,
as adjusted per primary computation above.............. 1,356,607 1,372,099
Net common shares issuable on exercise of certain stock
options and warrants (a)............................... - 339
Net common shares issuable on conversion of 5% convertible
debentures............................................. - 461,683
--------------------------
Weighted average number of common shares outstanding,
as adjusted............................................ 1,356,607 1,834,121
===========================
Fully diluted loss per common share before extraordinary
gain................................................... $ (.19) $ (.11)
Extraordinary gain per common share...................... - .90
--------------------------
Fully diluted income (loss) per common share............. $ (.19) $ .79
===========================
</TABLE>
(a) Net Common Shares issuable on exercise of outstanding stock options and
warrants have not been included in the computation for the year ended March
31, 1996 since inclusion thereof would have an anti-dilutive effect on the
loss per Common Share.
66
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 1,167
<SECURITIES> 0
<RECEIVABLES> 1,335
<ALLOWANCES> 33
<INVENTORY> 2,034
<CURRENT-ASSETS> 4,601
<PP&E> 4,787
<DEPRECIATION> 3,239
<TOTAL-ASSETS> 6,416
<CURRENT-LIABILITIES> 2,215
<BONDS> 1,370
0
0
<COMMON> 253
<OTHER-SE> 2,065
<TOTAL-LIABILITY-AND-EQUITY> 6,416
<SALES> 5,322
<TOTAL-REVENUES> 7,674
<CGS> 2,551
<TOTAL-COSTS> 2,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11
<INTEREST-EXPENSE> 672
<INCOME-PRETAX> (262)
<INCOME-TAX> 0
<INCOME-CONTINUING> (262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (262)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
