<PAGE>
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
_____________________________
DELAWARE 74-2119162
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3 COMMERCE BOULEVARD, PALM COAST, FLORIDA 32164
(Address of Principal Executive Offices) (Zip Code)
_____________________________
Registrant's telephone number, including area code: (904) 445-5450
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ----
As of July 31, 1996, 2,580,799 shares of the Registrant's common stock, $.10 par
value, were issued and outstanding.
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<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
JUNE 30, 1996
INDEX
- ---------------------------------------------------------------------------
Page No.
- ---------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Balance Sheets at June 30, 1996 (Unaudited)....................... 3
Statements of Operations and Accumulated Deficit for the
Three Months Ended June 30, 1996 and 1995 (Unaudited)......... 4
Statements of Cash Flows for the Three Months Ended
June 30, 1996 and 1995 (Unaudited)............................ 5
Notes to Financial Statements..................................... 6
Management's Discussion and Analysis of Financial Position
and Results of Operations..................................... 9
PART II. OTHER INFORMATION......................................... 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
JUNE 30, 1996
- -----------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
<S> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................... $ 835,504
Accounts and notes receivable ....................................... 1,355,470
Inventories ......................................................... 1,817,286
Prepaid expenses .................................................... 243,475
-----------
Total current assets ................................... 4,251,735
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation of $3,211,741 .......................................... 1,619,925
OTHER ASSETS .......................................................... 335,792
-----------
Total assets .......................................... $ 6,207,452
===========
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Notes and debt obligations payable within one year .............. $ 604,303
Accounts payable .................................................. 240,822
Accrued interest .................................................. 4,452
Accrued compensation .............................................. 128,155
Accrued compensated absences ...................................... 144,252
Deposits payable .................................................. 491,069
Other accrued expenses ............................................ 295,804
-----------
Total current liabilities ............................. 1,908,857
-----------
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR ...................... 1,404,185
-----------
OTHER LIABILITIES ...................................................... 188,281
-----------
DEFERRED ROYALTIES ..................................................... 221,400
-----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.10 par value, 30,000,000 shares authorized,
2,580,799 shares issued and outstanding ...................... 258,080
Capital in excess of par value ..................................... 22,179,635
Accumulated deficit ................................................ (19,942,048)
Treasury stock at cost 3,571 shares ................................ (10,938)
-----------
Total stockholders' equity (deficit) .................. 2,484,729
COMMITMENTS AND CONTINGENT LIABILITIES ................................. -
-----------
Total liabilities and stockholders' equity (deficit) .. $ 6,207,452
===========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended June 30, 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Net sales ........................................ $ 1,202,493 $ 1,272,003
Royalty income ................................... 694,525 501,800
---------------------------
Total revenue ................................ 1,897,018 1,773,803
---------------------------
COSTS AND EXPENSES
Cost of products sold ........................... 692,631 633,390
Selling, general and administrative expenses .... 821,340 907,563
Engineering, research and development expenses .. 444,877 259,876
---------------------------
Total cost and expenses ..................... 1,958,848 1,800,829
---------------------------
OPERATING LOSS ...................................... (61,830) (27,026)
---------------------------
OTHER INCOME (EXPENSES)
Interest income ................................. 10,548 6,527
Interest expense ................................ (134,789) (136,927)
Other income .................................... 25,000 48
---------------------------
Total other income (expenses) ............... (99,241) (130,352)
---------------------------
NET LOSS ............................................ (161,071) (157,378)
ACCUMULATED DEFICIT - BEGINNING OF PERIOD ........... (19,780,977) (19,519,472)
---------------------------
ACCUMULATED DEFICIT - END OF PERIOD ................. $(19,942,048) $(19,676,850)
===========================
NET LOSS PER COMMON SHARE ........................... $(.06) $(.12)
===========================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ......... 2,561,427 1,342,819
===========================
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss ..............................................................................$ (161,071) $(157,378)
Adjustment to reconcile net loss to net cash used for operating activities:
Depreciation and amortization .................................................... 126,381 114,215
Gain on fixed assets disposals ................................................... (491) (878)
Cash provided by (used for):
Accounts and notes receivable ............................................... (20,113) 151,437
Inventories ................................................................. 217,158 (125,608)
Prepaid expenses ............................................................ (179,402) (77,013)
Other assets ................................................................ (10,755) (2,775)
Accounts payable ............................................................ (59,886) (34,998)
Accrued interest ............................................................ (4,760) 35,409
Accrued compensation ........................................................ (54,297) (67,642)
Accrued compensation absences ............................................... 7,482 10,883
Deposits payable ............................................................ (28,525) (80,560)
Other accrued expenses ...................................................... 40,443 69,640
Other liabilities ........................................................... 4,890 11,600
Deferred royalties .......................................................... (106,850) (77,200)
-------------------------
Net cash provided (used) by operating activities ......................................... (229,816) (253,502)
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment ............................................. (140,432) (123,111)
Proceeds from sale of equipment ....................................................... 491 3,966
-------------------------
Net cash used by investing activities .................................................... 139,941 (119,145)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock and stock warrants, net of issuance expenses ... 246,033
Proceeds from notes and debt obligations payable ...................................... 47,545 68,490
Repayment of notes and debt obligations payable ....................................... (254,568) (20,083)
Principal payments under capital lease obligations .................................... (929) (813)
Principal payments under installment purchase obligations ............................. (843)
Debt issuance costs ................................................................... (22,634)
-------------------------
Net cash provided by financing activities ................................................ 38,081 24,117
-------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................................. (331,677) (325,896)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR ............................................. 1,167,181 667,490
-------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD .................................................$ 835,504 $ 341,594
=========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period ...................................................... $ 82,228 $ 89,577
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Reduction in accounts payable in exchange for common stock ........................... $ 5,000
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of June 30, 1996, the related statements of operations and accumulated
deficit for the three months ended June 30, 1996 and 1995, and the statements of
cash flows for the three months ended June 30, 1996 and 1995 are unaudited. In
the opinion of management, such financial statements reflect all adjustments,
consisting only of normal recurring items, necessary to present fairly the
financial position of the Company at June 30, 1996 and the results of operations
and cash flows for the three months ended June 30, 1996 and 1995.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1995 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1996.
The accompanying unaudited financial statements as of June 30, 1996 and for the
three months ended June 30, 1996 and 1995 should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 1996.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company has a history of net losses
and incurred a net loss for the three months ended June 30, 1996 of $161,071.
The Company's ability to continue as a going concern is dependent upon the
attainment of a profitable level of operations. The Company believes that sales
growth is critical to attaining a profitable level of operations. Therefore, the
Company is continuing its efforts to expand its sales volume, both domestically
and internationally. Management believes that the Company has the potential to
increase sales and ultimately achieve a profitable level of operations. Also,
the Company is pursuing additional working capital to expand its market position
and pursue development of new technologies. However, there is no assurance that
the Company will be able to attain profitable operations and continue operations
as a going concern.
NOTE 2 - INVENTORIES
Inventories at June 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------
June 30, 1996
-------------
<S> <C>
Raw materials and supplies ........$ 360,930
Work-in-process ................... 963,919
Finished goods .................... 536,754
-------------
1,861,603
Reserve for obsolescence .......... (44,317)
-------------
$1,817,286
------------------------------------------------
</TABLE>
Finished goods inventories include approximately $313,844 of products consigned
to customers and independent sales representatives at June 30, 1996.
6
<PAGE>
NOTE 3 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------
June 30, 1996
--------------
<S> <C>
Sirrom mortgage note, net of discount (A) .. $1,395,375
Intermedics loan (B) ....................... 552,714
Other....................................... 60,399
------------
2,008,488
Amount payable within one year............. (604,303)
------------
Amount payable after one year............... $1,404,185
----------------------------------------------------------
</TABLE>
(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. 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.
(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. Sirrom consented to subordinate its security interest in a portion of
these sales proceeds on royalties to facilitate this transaction.
Aggregate notes and debt obligations outstanding at March 31, 1996 mature as
follows: 1997 - $604,303; 1998 - $4,603; 1999 - $4,180; 2000 - $1,395,375.
7
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
During the three months ended June 30, 1996, the Company issued 1,428 shares of
common stock in payment of an accounts payable balance of $5,000 and 50,000
shares of common stock to Sirrom Capital Corporation at a price of $5.00 per
share plus right to exercise a warrant to purchase 25,000 shares of common stock
at $0.01 per share.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
FINANCIAL POSITION AND LIQUIDITY
The Company's continuing efforts towards expanding its engineering, research and
development activities, building sales and marketing organizations and its
capital expenditure and debt service requirements contributed to negative cash
flow during the first quarter of fiscal 1997.
Cash used by operations during the first quarter of fiscal 1997 approximated
$230,000. Capital expenditures and repayment of debt and capital lease
obligations additionally utilized approximately $140,000 and $255,000
respectively. Proceeds from the issuance of common stock and warrants, net of
issuance expenses, approximated $246,000. Overall, negative cash flow for the
first quarter of fiscal 1997 approximated $332,000.
Cash used by operations during the first quarter of fiscal 1996 approximated
$253,000. Capital expenditures and repayment of debt obligations during the
first quarter of fiscal 1996 approximated $123,000 and $22,000, respectively.
Short term borrowings during the first quarter of fiscal 1996 aggregated
$68,000. Overall, negative cash flow for the first quarter of fiscal 1996
approximated $326,000.
The Company has no significant commitment for the acquisition of capital assets.
It has, however, material commitments pursuant to certain inventory procurement
contracts that aggregate approximately $1,317,000 at June 30, 1996.
The Company is currently pursuing addtional working capital in order to support
operations, continue its efforts in building a domestic sales force and continue
its development of new technologies. The ability of the Company to generate
adequate amounts of cash either through external financing sources or operations
to meet its working capital, capital expenditure and debt service requirements
on a long-term basis is dependent upon the attainment of a profitable level of
operations. The Company believes that sales growth is critical to the attainment
of a profitable level of operations. Accordingly, the Company is continuing its
efforts to expand the volume of its business, both domestically and
internationally. The Company believes that it has the potential to increase its
sales and ultimately achieve a profitable level of operations. However, there is
no assurance that the Company's operations will improve and/or generate the cash
flow required to meet the Company's liquidity needs, or that the Company will be
able to continue its operations as a going concern.
RESULTS OF OPERATIONS
OVERVIEW. Overall, the Company's total revenues for the first quarter of
fiscal 1997 increased 7% to $1.9 million as compared to $1.8 million for the
first quarter of fiscal 1996. Sales decreased from $1.3 million to $1.2 million
but royalties increased from $0.5 million to $0.7 million for the first quarter
of fiscal 1997 as compared to the quarter of fiscal 1996. Royalty income
represents royalties from Intermedics Inc. pursuant to a License Agreement
between the Company and Intermedics. The increase in revenue was slightly more
than offset by an increase in costs and expenses which resulted in a 2% increase
in the net loss to $161,000 for the first quarter of fiscal 1997, as compared to
a net loss of $157,000 for the first quarter of fiscal 1996.
SALES. Although overall sales values declined by 5%, unit sales of pacemakers
and electrode leads increased by 6% and 8% respectively; unit sales of hybrid
circuits declined by 37%. The decrease in sales values was largely due to the
increasing proportionate volume of pacer unit sales to Europe, where the selling
prices are lower than those in the domestic market.
9
<PAGE>
Sales by geographic area for the first quarter of fiscal 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Geographic Area 1997 1996
-----------------------------------------
<S> <C> <C>
United States .....$1,069,518 $1,148,615
Europe ............ 132,975 123,388
----------------------
$1,202,493 $1,272,003
-----------------------------------------
</TABLE>
The Company's domestic sales for the first quarter of fiscal 1997 decreased 7%
as compared to the first quarter of fiscal 1996. The decrease in domestic sales
was a result of a reduction in the sale of pacer units together with a reduction
in average prices for pacers; these were partially offset by an increase in the
sale of electrode lead units. Sales to Europe for the first quarter of fiscal
1997 increased as compared to the first quarter of fiscal 1996. Increases in
the values of pacer and electrode lead sales were partially offset by a decrease
in the value of sales of hybrid circuits. Shipments to the Company's European
partner, Grupo Taper S.A. of Madrid, Spain, were held pending confirmation of
the Company's right to use the European Union CE Mark, which was received after
the end of the quarter.
Sales by product line for the first quarter of fiscal 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Product Line 1997 1996
------------------------------------------------------------------
<S> <C> <C>
Single-chamber pacemakers ................. $ 187,019 $ 130,873
Dual-chamber pacemakers ................... 57,960 -
Atrial-controlled ventricular pacemakers .. 271,064 454,764
Hybrid circuits ........................... 60,500 100,125
Electrode leads ........................... 598,967 581,665
Other ..................................... 26,983 4,576
----------------------
$1,202,493 $1,272,003
------------------------------------------------------------------
</TABLE>
ROYALTY INCOME. Royalty income represents royalty fees from Intermedics Inc.
pursuant to a License Agreement between the Company and Intermedics, whereby the
Company licensed the technology relating to its single-pass atrial-controlled
ventricular pacing system. Intermedics began marketing this pacing system in
March 1995. The future potential royalties to be recorded over the life of the
License Agreement are estimated at $2.0 million.
COSTS OF PRODUCTS SOLD. The cost of products sold in the first quarter of
fiscal 1997 was $692,631, compared to $633,390 in the first quarter of fiscal
1996, representing an increase of 9% as compared with the decrease of 7% in
sales values, which decreased the gross margin from 50% to 42%. This reduction
was due to customer mix, with a higher volume of unit sales to Intermedics and
the international market, where selling prices are lower than in the domestic
market, and to a reduction in production volumes better to manage inventory
levels, thus having a negative effect on overhead absorption.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $821,340 in the first quarter of fiscal 1997,
representing a decrease of 9% from $907,563 in the first quarter of fiscal 1996.
Selling expenses reduced from $531,175 in the first quarter of fiscal 1996 to
$481,740 in the first quarter of fiscal 1997. General and administrative
expenses reduced from $376,388 in the first quarter of fiscal 1996 to $339,600
in the first quarter of fiscal 1997 due mainly to reduced salary costs.
10
<PAGE>
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development costs were $444,877 in the first quarter of fiscal 1997,
representing an increase of 71% from $259,876 in the first quarter of fiscal
1996 due to the planned intensified development activities in the areas of
single pass electrode leads, bipolar dual chamber operation, rate responsive
pacing and a replacement programmer.
OTHER INCOME AND EXPENSES. Interest income was $10,548 during the first quarter
of fiscal 1997, representing an increase of 62% from $6,527 in the first quarter
of fiscal 1996. Total interest expense decreased from $136,927 in the first
quarter of fiscal 1996 to $134,789 in the first quarter of fiscal 1997.
Interest paid to Sirrom Capital Corporation in respect of a secured loan of
$1,500,000 granted on March 31, 1995 was $50,486 in each of the first quarters
of fiscal years 1997 and 1996. Interest in the sum of $35,964 on $2,885,000 5%
Convertible Debentures was paid in the first quarter of fiscal 1996, but as
these Debentures were converted to common stock on March 31, 1996, no Debenture
interest was payable during the first quarter of fiscal 1997. Interest in the
sum of $30,485 was paid to Intermedics Inc. during the first quarter of fiscal
1997 in respect of the outstanding proceeds of a promissory note in the sum of
$1,000,000 executed on October 20, 1995. The balances of principal and accrued
interest outstanding pursuant to the Intermedics' promissory note at June 30,
1996 were $552,714 and $4,452. Debt amortization costs increased from $47,349
in the first quarter of fiscal 1996 to $52,561 in the first quarter of fiscal
1997. Other income during the first quarter of fiscal 1997 was $25,000 in
respect of a prior year deposit now taken into income.
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 the Company believes is 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 represented the completion of a critical step in
securing the CE Mark. The final steps of product testing and review of
technical documentation were subsequently completed, and the CE Mark was issued
by the Notified Body following the end of the quarter.
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
11
<PAGE>
acceptance of the product. Further, management believes that there is a
sufficient market to accommodate both the Company's and Intermedics pacemakers.
The Company estimates that its market share of pacemakers generally is less than
1% of an estimated total worldwide market of $2 billion per year.
Various factors impact on a firm's ability to increase market share including,
but not limited to the financial strength of the firm, the ability of the firm
and its competitors, and the time involved in obtaining FDA clearance for new or
improved products. Therefore, although management believes that the Company is
well poised for viable growth, management cannot predict the degree of market
share the Company can obtain. Factors beyond the Company's control may impede
its progress and in such event, its business and operations would be adversely
impacted.
The Company's ability to successfully compete with Intermedics and other
pacemaker manufacturers will depend on the Company's ability to supply product
and recruit and increase a quality sales force 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, expand 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.
12
<PAGE>
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 integrated circuits will no
longer be supported. As such, the Company placed one last bulk order to ensure
the availability of sufficient integrated circuits 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.
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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 4, 1994, a financial brokering and consulting firm filed suit
against the Company in the Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida (the "Court"), alleging that the Company had breached
certain contractual duties and obligations. The suit requests a judgment
requiring the Company to deliver warrants to purchase 15% of the Company's
common stock, and damages in excess of $15,000. The Company denied liability
and filed a counterclaim alleging that the brokering firm fraudulently induced
the Company into the Agreement then breached the Agreement and certain fiduciary
duties. Management plans to vigorously defend the lawsuit and pursue its
counterclaims. In the opinion of management, this action has no merit and the
ultimate outcome is not expected to materially affect the financial position of
the Company.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(A). EXHIBITS
Exhibits filed in Part II of this Report are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.0 Certificate of Incorporation of Exhibit 3.0 to Amendment No. 1 to Form S-1 Registration
the Company, as amended Statement filed on February 1, 1988, Registration No. 33-
16490 and Form 10-K for the year ended March 31, 1990,
File No. 0-14653
3.1 Amendment to Certificate of Exhibit 3.1 to Form S-1 Registration Statement filed on
Incorporation March 2, 1995, Registration No. 33-89938
3.2 By-Laws of the Company Exhibit 3.1 to Form S-18 Registration Statement filed on
October 16, 1985, Registration No. 33-9208
3.3 Amendment to Bylaws Exhibit 3.3 to Form S-1 Registration Statement filed on
March 2, 1995, Registration No. 33-89938
4.0 Form of Common Stock Exhibit 4.0 to Form S-1 Registration Statement filed on
Certificate March 2, 1995, Registration No. 33-89938
4.1 Form of Sales Representative Exhibit 4.13 to Form 10-Q for the Quarter Ended
Stock Option Agreement September 30, 1988, File No. 0-14653
4.2 Cardiac Control Systems, Inc. Exhibit 4.15 to Form 8-K Current Report dated October 11,
5% Convertible Debenture due 1994, File No. 0-14653
October 31, 1999
4.3 Combined 1987-1992 Non- Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
Qualified Stock Option Plan Statement filed on April 17, 1995, Registration No. 33-
89938
4.4 Stock Purchase Warrant dated Exhibit 4.1 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of 1995, File No. 0-14653
Sirrom Capital Corporation
4.5 Stock Purchase Warrant, dated Exhibit 4.2 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of Dow 1995, File No. 0-14653
Corning Enterprises, Inc.
4.6 Stock Puchase Warrant, dated Exhibit 4.6 to Form 10-KSB for the year ended March 31,
October 15, 1995 in favor of 1996, File No. 0-14653
Sirrom Capital Corporation
4.7 Stock Purchase Warrant, dated Exhibit 4.7 to Form 10-KSB for the year ended March 31,
March 29, 1996 in favor of 1996, File No. 0-14653
Grupo Taper, S.A.Exhibit
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------------------------
<S> <C> <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 Cardiac 1990, File No. 0-14653
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 between Exhibit 10.24 to Form 8-K Current Report, dated October
Bart C. Gutekunst and the 11, 1994, File No. 0-14653
Company, dated October 13,
1994
10.5 Employment Agreement between Exhibit 10.25 to Form 8-K Current Report, dated October
Alan J. Rabin and the Company, 11, 1994, File No. 0-14653
dated October 13, 1994
10.6 Employment Agreement between Exhibit 10.12 to Form 10-Q for the Quarter Ended
Robert S. Miller and the December 31, 1994, File No. 0-14653
Company, dated December 12,
1994
10.7 Agreement between LEM Exhibit 10.13 to Form 10-Q for the Quarter Ended
Biomedica, s.r.l. and the December 31, 1994, File 0-14653
Company, dated October 1, 1994
10.8 Agreement between the Exhibit 10.12 to Form S-1 Registration Statement filed on
Company and Alan J. Rabin and March 2, 1995, Registration No. 33-89938
Bart C. Gutekunst, dated July 1,
1994
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Statement filed on
Agreement between the March 2, 1995, Registration No. 33-89938
Company and each Director,
executed December 1994
</TABLE>
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a). Exhibits
Exhibits filed in Part II of this Report are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.10 Employment Agreement between Exhibit 10.14 to Form S-1 Registration Statement filed on
Robert R. Brownlee and the March 2, 1995, Registration No. 33-89938
Company dated as of October 1,
1994
10.11 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated March 31,
between the Company and 1995, File No. 0-14653
Sirrom Capital Corporation,
dated March 31, 1995
10.12 $1,500,000 Secured Promissory Exhibit 10.2 to Form 8-K Current Report, dated March 31,
Note in favor of Sirrom Capital 1995, File No. 0-14653
Corporation, dated March 31,
1995
10.13 Mortgage, Assignment of Rents Exhibit 10.3 to Form 8-K Current Report, dated March 31,
and Leases, and Security 1995, File No. 0-14653
Agreement in favor of Sirrom
Capital Corporation, dated
March 31, 1995
10.14 Second Mortgage and Security Exhibit 10.4 to Form 8-K Current Report, dated March 31,
Agreement in favor of Bart 1995, File No. 0-14653
Gutekunst, as trustee, dated
March 31, 1995
10.15 Subordination Agreement Exhibit 10.5 to Form 8-K Current Report, dated March 31,
between the Company Sirrom 1995, File No. 0-14653
Capital Corporation, and the
Debentureholders, dated March
31, 1995
10.16 Promissory Note and Security 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, dated
October 20, 1995
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
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<S> <C> <C>
10.19 Distribution Agreement between Exhibit 10.19 to Form 10-QSB for the Quarter ended
Grupo Taper S.A. and the December 31, 1995, File No. 0-14653
Company, dated December 20,
1995
------------------------------
</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.
6(B). REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the
three months ended June 30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDIAC CONTROL SYSTEMS, INC.
(Registrant)
Date: August 8,1996 By: /s/ Alan J. Rabin
------------------- ----------------------------------------
Alan J. Rabin
President and Chief Executive Officer
Date: August 8, 1996 By: /s/ W. Alan Walton
------------------- ----------------------------------------
W. Alan Walton
Executive Vice President and Chief
Operating Officer
19
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