<PAGE>
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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 QUARTERLY PERIOD ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 0-14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Small Business Issurer 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)
(904) 445-5450
(Issuer's Telephone Number)
Check whether the Issuer (1)has 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
-----
As of July 31, 1997, 2,619,371 shares of the Issuer's common stock, $.10 par
value, were issued and outstanding.
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<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Page No.
- --------------------------------------------------------------------------------
<S> <C>
Part I. Financial Information
Balance Sheet at June 30, 1997 (Unaudited).............................. 3
Statements of Operations and Accumulated Deficit for the Three Months
Ended June 30, 1997 and 1996 (Unaudited)............................ 4
Statements of Cash Flows for the Three Months Ended
June 30, 1997 and 1996 (Unaudited).................................. 5
Notes to Financial Statements........................................... 6
Management's Discussion and Analysis of Financial Position
and Results of Operations........................................... 9
Part II. Other Information................................................ 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30,
1997
- --------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 151,279
Accounts and notes receivable............................. 1,226,022
Inventories............................................... 1,637,794
Prepaid expenses.......................................... 414,894
-------------
Total current assets......................... 3,429,989
-------------
Property, plant and equipment (net).......................... 1,893,102
-------------
Other assets
Deferred financing costs, less accumulated amortization
of $135,752............................................. 473,106
Deferred license fees, less accumulated amortization of
$10,000................................................. 190,000
Other.................................................... 79,925
-------------
Total other assets........................... 743,031
-------------
Total assets................................. $ 6,066,122
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable......................................... $ 628,488
Accrued compensation..................................... 289,399
Accrued royalties........................................ 276,048
Other accrued expenses................................... 68,609
Deposits payable......................................... 576,643
Notes and debt obligations payable within one year..... 126,959
-------------
Total current liabilities.................... 1,966,146
-------------
Notes and debt obligations payable after one year...... 2,374,944
Other liabilities........................................ 73,501
-------------
Total liabilities........................... 4,414,591
-------------
Stockholders' equity
Common stock, $.10 par value, 30,000,000 shares
authorized,
2,619,371 shares issued............................. 261,937
Additional paid in capital................................ 22,291,215
Accumulated deficit....................................... (20,894,566)
Cumulative translation adjustment......................... (7,055)
-------------
Total stockholders' equity................... 1,651,531
-------------
Total liabilities and stockholders' equity................... $ 6,066,122
=============
</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, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenue
Net sales..................................... $ 852,288 $ 1,202,493
Royalty income................................ 697,125 694,525
----------------------------
Total revenue............................. 1,549,413 1,897,018
----------------------------
Costs and expenses
Cost of products sold........................ 503,815 679,944
Selling, general and administrative expenses. 743,072 821,340
Engineering, research and development
expenses.................................... 458,272 457,564
----------------------------
Total cost and expenses.................. 1,705,159 1,958,848
----------------------------
Operating income (loss).......................... (155,746) (61,830)
----------------------------
Other income (expenses)
Interest income.............................. 5,983 10,548
Interest expense............................. (82,586) (134,789)
Other income................................. 25,000
----------------------------
Total other income (expenses)............ (76,603) (99,241)
----------------------------
Net income (loss)................................ (232,349) (161,071)
Accumulated deficit - beginning of period........ (20,662,217) (19,780,977)
----------------------------
Accumulated deficit - end of period.............. $(20,894,566) $(19,942,048)
============================
Net income (loss) per common share............... $(0.09) $(0.06)
============================
Average number of common shares outstanding...... 2,619,371 2,561,427
============================
</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, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................... $ (232,349) $ (161,071)
Adjustment to reconcile net income (loss) to net
cash used for operating activities:
Depreciation and amortization..................... 104,579 126,381
Gain on fixed assets disposals.................... (671) (491)
Cash provided by (used for):
Accounts and notes receivable................... (273,180) (20,113)
Inventories..................................... (118,157) 217,158
Prepaid expenses................................ (158,281) (179,402)
Other assets.................................... (10,775)
Accounts payable................................ (199,755) (59,886)
Accrued interest................................ (4,760)
Accrued compensation............................ 36,253 (54,297)
Accrued compensation absences................... 22,694 7,482
Deposits payable................................ 184,011 (28,525)
Other accrued expenses.......................... (7,359) 40,443
Other liabilities............................... 15,457 4,890
Deferred royalties.............................. (106,850)
--------------------------
Net cash provided by (used for) by operating
activities............................................ (626,758) (229,816)
--------------------------
Cash flows from investing activities
Purchase of property, plant and equipment............ (186,640) (140,432)
Proceeds from sale of equipment...................... 4,260 491
Increase in other assets............................. (2,600)
--------------------------
Net cash provided by (used for) used by investing
activities............................................ (184,980) (139,941)
--------------------------
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..... 1,138,359 47,545
Repayment of notes and debt obligations payable...... (193,983) (254,568)
Principal payments under capital lease obligations... (1,534) (929)
Debt issuance costs.................................. (165,288)
--------------------------
Net cash provided by financing activities.............. 777,554 38,081
--------------------------
Net increase (decrease) in cash and cash equivalents... (34,184) (331,676)
Cash and cash equivalents - beginning of year.......... 185,463 1,167,181
--------------------------
Cash and cash equivalents - end of period.............. $ 151,279 $ 835,505
==========================
Supplemental Cash Flow Information:
Interest paid during the period...................... $ 57,071 $ 82,228
</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, 1997, the related statements of operations and accumulated
deficit for the three months ended June 30, 1997 and 1996, and the statements of
cash flows for the three months ended June 30, 1997 and 1996 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, 1997 and the results of operations
and cash flows for the three months ended June 30, 1997 and 1996.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1996 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1997.
The accompanying unaudited financial statements as of June 30, 1997 and for the
three months ended June 30, 1997 and 1996 should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 1997.
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, 1997 of $232,349.
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
continual development of new product and resultant sales growth is critical to
attaining a profitable level of operations. Therefore, the Company is continuing
its efforts to invest in development of its single lead technology and 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 - LOSS PER COMMON SHARE
Primary loss per share of common stock is based on the weighted average number
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 three months ended June 30, 1997 and 1996 as
their effect on the loss per share is anti-dilutive.
The FASB has issued SFAS No. 128, "Earnings per Share," which provides guidance
for computing and presenting earnings per share (EPS). This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings per Share." This statement, when adopted, is not expected to have
a material impact on the Company.
6
<PAGE>
NOTE 3 - INVENTORIES
Inventories at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------
June 30, 1997
--------------
<S> <C>
Raw materials and supplies.. $ 858,253
Work-in-process............. 464,731
Finished goods.............. 333,595
--------------
1,656,579
Reserve for obsolescence.... (18,785)
--------------
$ 1,637,794
- --------------------------------------------
</TABLE>
Finished goods inventories include approximately $166,886 of products consigned
to customers and independent sales representatives at June 30, 1997.
NOTE 4 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at June 30, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
June 30, 1997
---------------
<S> <C>
Sirrom mortgage note, net of discount (A).. $ 1,434,573
Coast Business Credit (B).................. 999,219
Other...................................... 68,111
---------------
2,501,903
Amount payable within one year............. (126,959)
---------------
Amount payable after one year.............. $ 2,374,944
- -----------------------------------------------------------
</TABLE>
(A) On March 31, 1995, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Sirrom Capital 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
warrants to purchase, initially, 100,000 shares of the Company's common
stock at $.01 per share. An additional 50,000 warrants to purchase shares
of common stock at $.01 per share will be granted to the lender upon each
anniversary date, beginning March 31, 1997 through March 31, 1999, that any
amount owed to Sirrom shall be outstanding. On March 31, 1997, the Company
granted Sirrom 50,000 additional warrants pursuant to this agreement. The
Company recorded $279,000 (100,000 shares) in fiscal 1995 and $71,376
(50,000 shares) in fiscal 1997 as a debt discount with the offset to
additional paid-in capital, representing the difference between the
estimated fair market value of the underlying stock at the date of grant
and $.01 per share. This has resulted in an effective interest rate of
approximately 30% on the
7
<PAGE>
Sirrom debt. The Sirrom note includes an unamortized debt discount of
$65,427 at June 30, 1997
(B) On June 13, 1997, the Company entered into a Loan Agreement ("Agreement")
with Coast Business Credit ("CBC") for a maximum borrowing of $3.5 million
which includes a line of credit up to $2.7 million, a $500,000 Subline for
capital expenditures ("CAPEX"), and a $300,000 Term Loan. The maximum
borrowing base available under the line of credit is based upon eligible
receivables and inventory as defined in the Agreement. The maturity date
for the Agreement is June 30, 2000. The CAPEX and the Term Loan are based
upon a 48 month amortization period. The interest rate on the line of
credit is equal to the prime rate plus 2%, and the interest rate for the
Term Loan and the CAPEX Subline is equal to prime rate plus 2.25%.
Borrowings under the Agreement are collateralized by a first security
interest in substantially all of the assets of the Company. The Agreement
also contains a minimum tangible net worth requirement. In addition, CBC
was granted warrants to purchase 37,500 shares of stock at $4 per share,
expiring June 30, 2002.
In conjunction with the Agreement, the Company obtained an Intercreditor
and Subordination Agreement between CBC and Sirrom. This agreement provides
that Sirrom subordinate its first security interest in the assets of the
Company to CBC, however, the priority interest of CBC in the Company's real
estate is limited to $500,000. As consideration for its waiver of its first
security interest in the assets of the Company, Sirrom was granted warrants
to purchase 50,000 shares of stock at $5 per share, exercisable at any time
from June 6, 1997 and expiring on June 6, 2002.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Position and Results
of Operations
This Quarterly Report on Form 10-QSB contains forward looking statements within
the meaning of section 21E of the Securities Exchange Act of 1934, as amended.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. Such statements may include, but not be limited to, projections of
revenues, income, or loss, capital expenditures, plans for future operations,
financing needs or plans, and plans relating to product or services of the
Company, as well as assumptions relating to the foregoing. The words "believe,"
"expect," "anticipate," "estimate, " project," and similar expressions identify
forward looking statements. Forward looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified.
Future events and actual results could differ materially from those set forth
in, contemplated by, or underlying the forward looking statements. Statements
in this Quarterly Report, including the Notes to the Financial Statements and
"Management's Discussion and Analysis of Financial Position and Results of
Operation, describe factors, among others, that could contribute to or cause
such differences.
Financial Position and Liquidity
The Company's liquidity benefited from the loan agreement dated June 13, 1997
with Coast Business Credit (CBC) for a maximum borrowing of $3.5 million, of
which approximately $1.0 million was drawn at June 30, 1997.
Cash used by operations during the first three months of fiscal 1998
approximated $627,000. Capital expenditures and repayment of debt and capital
lease obligations additionally utilized approximately $187,000 and $194,000
respectively. Proceeds of notes and debt obligations payable approximated
$1,138,000. Overall, negative cash flow for the first three months of fiscal
1998 approximated $34,000.
The Company has commitments of approximately $217,000 for the acquisition of
capital assets. It also has material commitments pursuant to certain inventory
procurement contracts that aggregate approximately $1,075,000 at June 30, 1997.
Results of Operations
Overview. Overall, the Company's total revenues for the first quarter of
fiscal 1998 decreased 18% to $1.55 million as compared to $1.9 million for the
first quarter of fiscal 1997. Sales decreased from $1.2 million to $0.85
million but royalties remained at $0.7 million for the first quarter of fiscal
1998 as in the first quarter of fiscal 1997. Royalty income represents royalties
from Sulzer Intermedics Inc. pursuant to a License Agreement between the Company
and Sulzer Intermedics. Costs and expenses in the first quarter of fiscal 1998
decreased by 13% to $1.7 million compared to $1.96 million in the first quarter
of fiscal 1997, which resulted in an operating loss of $155,746 in the first
quarter of fiscal 1998 compared to an operating loss of $61,830 in the first
quarter of fiscal 1997. Other expenses, net of other income, for the first
quarter of fiscal 1998 decreased by 23% to $76,603 compared to $99,241 in the
first quarter of fiscal 1997, which resulted in a net loss of $232,349 in the
first quarter of fiscal 1998 compared to a net loss of $161,071 in the first
quarter of fiscal 1997.
Sales. Product sales decreased by 29% from the comparative period in fiscal
1997. Sales of pacers and electrode leads decreased by 13% and 35%
respectively. The decline in sales is due to the Company having focused its
resources into the research and development of advanced single lead systems in
preparation for intended long term growth and increased competition from other
companies that have entered the market with single lead products.
9
<PAGE>
Sales by geographic area for the first quarter of fiscal 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Geographic Area 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
United States.................... $ 781,009 $ 1,069,518
Europe........................... 71,279 132,975
----------------------------------
$ 852,288 $ 1,202,493
- ----------------------------------------------------------------------
</TABLE>
Royalty Income. Royalty income represents royalty fees from Sulzer Intermedics
Inc. pursuant to a License Agreement between the Company and Sulzer Intermedics,
whereby the Company licensed the technology relating to its single-pass atrial-
controlled ventricular pacing system.
Costs of Products Sold. The cost of products sold in the first quarter of
fiscal 1998 was $503,815, compared to $679,944 in the first quarter of fiscal
1997, representing a decrease of 26% as compared to the decrease of 29% in sales
values, which decreased the gross margin from 43% to 41%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $743,072 in the first quarter of fiscal 1998,
representing a decrease of 10% from $821,340 in the first quarter of fiscal
1997. Selling expenses decreased 28% from $481,740 in the first quarter of
fiscal 1997 to $346,377 in the first quarter of fiscal 1998 due to reduced sales
commissions, as well as a refocus of resources into research and development.
General and administrative expenses increased from $339,600 in the first quarter
of fiscal 1997 to $396,695 in the first quarter of fiscal 1998 due largely to
external professional services.
Engineering, Research and Development Expenses. Engineering, research and
development costs were $458,272 in the first quarter of fiscal 1998, compared to
$457,564 in the first quarter of fiscal 1997 due to the sustained activity in
the development of advanced products. In addition, $149,206 of research costs
were capitalized in the first quarter of fiscal 1998, compared to nil in the
first quarter of fiscal 1997.
Other Income and Expenses. Interest income was $5,983 during the first quarter
of fiscal 1998, representing a decrease of 43% from $10,548 in the first quarter
of fiscal 1997. Interest expense decreased from $134,789 in the first quarter
of fiscal 1997 to $82,586 in the first quarter of fiscal 1998 due to the Company
having completed, in the fourth quarter of fiscal 1997, both the repayment to
Sulzer Intermedics of the balance of the loan of $1.0 million obtained in
October, 1995 and the amortization of the discount in the sum of $279,000,
recorded in March 1995, relating to the warrant issued to Sirrom Capital
Corporation in respect of 100,000 shares of the Company's common stock at $0.01
a share.
Operating Trends and Uncertainties
Sales. The ability of the Company to attain a profitable level of operations is
dependent upon expansion of sales volume, both domestically and internationally
and continued development of new, advanced products. The Company believes that
with the continued release of new products and its world-wide market expansion,
it will have the potential to increase sales.
The European Union ("EU") nations have adopted universal standards as developed
by the International Organization for Standardization ("ISO") 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. The Company Quality System received
certification to the ISO 9002 on November 19, 1996. The CE Mark certification
was issued by the Notified Body, TUV Product Service, of Munich, Germany,
10
<PAGE>
during the second quarter of fiscal 1996 for the Company's products intended for
sale in Europe. The Company is developing design control processes in
preparation for a compliance audit to ISO 9001.
Until March 1995, the Company was the only manufacturer commercially marketing
single-lead atrial-controlled ventricular pacemakers. However, Sulzer
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. Sulzer Intermedics commenced marketing its new
pacemakers in March 1995. In addition, other competitors have also commenced
marketing competitive single lead products.
Although the introduction of the new single lead pacemakers poses competition
for the Company, management believes that the Company will benefit from such
competition since the new competition 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 other
competitive 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 successfully to compete with Sulzer 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 Company
believes that the credit facility from Coast Business Credit and the cash flow
generated from Sulzer Intermedics' orders and royalties have positioned the
Company to increase its research and development capabilities and its sales
force, and to provide an uninterrupted supply of products. However, actual
results may differ materially from the Company expectations, depending on a
variety of important factors, some of which may be out of the Company's control,
including, among others, the availability of raw materials from suppliers, the
timing of FDA clearance of new products, the ability of the Company to keep pace
with market demand for new products, the ability of the Company's sales force,
and the ability of the Company to successfully compete with competitors who have
greater financial resources.
As discussed above, the manufacture and sale of leads to Sulzer Intermedics
produce income for the Company. The Company sells electrode leads to Sulzer
Intermedics for its new systems under an Amended and Restated Supply Contract
that terminates on August 1, 1998. The Company also receives royalties from
Sulzer Intermedics sales of its products incorporating the licensed technology
under an Amended and Restated License Agreement. The Company anticipates
supplying components to Sulzer Intermedics under the supply agreement for the
next several years. An increase in demand for components by Sulzer 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 Sulzer 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 Sulzer 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 Sulzer Intermedics with
products, the Company anticipates providing Sulzer Intermedics with components
for the next few years. However, in the event Sulzer Intermedics receives FDA
approval in a shorter time-frame than anticipated, or other events occur which
11
<PAGE>
causes a decrease in Sulzer 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, 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 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. 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 ASIC's will no longer be supported.
As such, the Company placed one last bulk order to ensure the availability of
sufficient ASIC's to satisfy projected demands for product. State of the art
ASIC's will be developed for the new pacing 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.
Recent Accounting Pronouncement
The FASB has issued SFAS No. 128, "Earnings per Share," which provides guidance
for computing and presenting earnings per share (EPS). This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings per Share." This statement , when adopted, is not expected to
have a material impact on the Company.
12
<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 Securities
(a) Not applicable.
(b) Not applicable.
(c) Effective March 31, 1997, the number of shares of the Company's
common stock, $0.10 par value, which Sirrom Capital Corporation
("Sirrom"), an accredited investor, has the right to purchase at
one cent ($0.01) per share, increased by 50,000. This increase was
pursuant to the terms of a warrant issued to Sirrom, pursuant to
the Loan and Security Agreement between the Company and Sirrom
dated March 31, 1995, under the terms of which the Company is
required to grant Sirrom the right to purchase an additional
50,000 shares of common stock upon each anniversary date,
commencing March 31, 1997 that any amount owed Sirrom shall be
outstanding.
On June 6, 1997, the Company issued to Sirrom Capital Corporation
("Sirrom"), an accredited investor, 50,000 common stock purchase
warrants exercisable at $5.00 per share at any time from June 6,
1997 and expiring June 6, 2002. The warrants were issued in
connection with a loan from Coast Business Credit which closed on
June 13, 1997.
On June 13, 1997, the Company issued to Coast Business Credit
("CBC"), an accredited investor, 37,500 common stock purchase
warrants exercisable at $4.00 per share commencing immediately and
expiring June 30, 2002. The warrants were issued in connection
with a loan from CBC which closed on June 13, 1997.
All of the foregoing transactions were entered into by the Company
in reliance on Section 4(2) of the Securities Act of 1933. The
foregoing warrant holders indicated their investment intent and
the warrant instruments bear a legend accordingly.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
6(a). Exhibits
Exhibits filed in Part II of this Report are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<C> <S> <C>
3.0 Certificate of Exhibit 3.0 to Amendment No. 1 to Form
Incorporation of the S-1 Registration Statement filed on
Company, as amended 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 Exhibit 3.1 to Form S-1 Registration
of Incorporation Statement filed on 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
Certificate Statement filed on March 2, 1995,
Registration No. 33-89938
4.1 Form of Sales Exhibit 4.13 to Form 10-Q for the Quarter
Representative Stock Ended September 30, 1988, File No. 0-14653
Option Agreement
4.2 Cardiac Control Systems, Exhibit 4.15 to Form 8-K Current Report
Inc. 5% Convertible dated October 11, 1994, File No. 0-14653
Debenture due October 31,
1999
4.3 Combined 1987-1992 Exhibit 4.8 to Amendment No. 1 to Form
Non-Qualified Stock Option S-1 Registration Statement filed on April
Plan 17, 1995, Registration No. 33-89938
4.4 Stock Purchase Warrant Exhibit 4.1 to Form 8-K Current Report,
dated March 31, 1995 in dated March 31, 1995, File No. 0-14653
favor of Sirrom Capital
Corporation
4.5 Stock Purchase Warrant, Exhibit 4.2 to Form 8-K Current Report,
dated March 31, 1995 in dated March 31, 1995, File No. 0-14653
favor of Dow Corning
Enterprises, Inc.
4.6 Stock Purchase Warrant, Exhibit 4.6 to Form 10-KSB for the year
dated October 15, 1995 in ended March 31, 1996, File No. 0-14653
favor of Sirrom Capital
Corporation
4.7 Stock Purchase Warrant, Exhibit 4.7 to Form 10-KSB for the year
dated March 29, 1996 in ended March 31, 1996, File No. 0-14653
favor of Grupo Taper,
S.A.Exhibit
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<S> <C> <C>
4.8 Stock Purchase Warrant, Exhibit 4.1 to Form 8-K Current Report
dated June, 1997 in favor dated June 13, 1997, File No. 0-14653.
of Coast Business Credit,
a Division of Southern
Pacific Thrift and Loan
Association
4.9 Stock Purchase Warrant Exhibit 4.2 to Form 8-K Current Report
dated June 6, 1997 in dated June 13, 1997, File No. 0-14653
favor of Sirrom Capital $481,740
Corporation
10.0 License Agreement between Exhibit 10.1 to Form 10-Q for the Quarter
Hughes/Bertolet and the Ended September 30, 1986, File No. 0-14653
Company
10.1 Settlement Agreement and Exhibit 10.2 to Form 10-K for the Year
Release between Applied Ended March 31, 1990, File No. 0-14653
Cardiac Electro-physiology
and the Company
10.2 Amended and Restated Exhibit 10.19 to Form 8-K Current Report,
License Agreement between dated April 2, 1993, File No. 0-14653
Sulzer Intermedics Inc.
and the Company, dated
April 2, 1993
10.3 Amended and Restated Exhibit 10.20 to From 8-K Current Report,
Supply Contract between dated April 2, 1992, File No. 0-14653
Sulzer Intermedics Inc.
and the Company, dated
April 2, 1993
10.4 Employment Agreement Exhibit 10.24 to Form 8-K Current Report,
between Bart C. Gutekunst dated October 11, 1994, File No. 0-14653
and the Company, dated
October 13, 1994
10.5 Employment Agreement Exhibit 10.25 to Form 8-K Current Report,
between Alan J. Rabin and dated October 11, 1994, File No. 0-14653
the Company, dated October
13, 1994
10.6 Employment Agreement Exhibit 10.12 to Form 10-Q for the
between Robert S. Miller Quarter Ended December 31, 1994, File No.
and the Company, dated 0-14653
December 12, 1994
10.7 Agreement between LEM Exhibit 10.13 to Form 10-Q for the
Biomedica, s.r.l. and the Quarter Ended December 31, 1994, File
Company, dated October 1, 0-14653
1994
10.8 Agreement between the Exhibit 10.12 to Form S-1 Registration
Company and Alan J. Rabin Statement filed on March 2, 1995,
and Bart C. Gutekunst, Registration No. 33-89938
dated July 1, 1994
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<S> <C> <C>
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration
Agreement between the Statement filed on March 2, 1995,
Company and each Director, Registration No. 33-89938
executed December 1994
10.10 Employment Agreement Exhibit 10.14 to Form S-1 Registration
between Robert R. Brownlee Statement filed on March 2, 1995,
and the Company dated as Registration No. 33-89938
of October 1, 1994
10.11 Loan and Security Exhibit 10.1 to Form 8-K Current Report,
Agreement between the dated March 31, 1995, File No. 0-14653
Company and Sirrom Capital
Corporation, dated March
31, 1995
10.12 $1,500,000 Secured Exhibit 10.2 to Form 8-K Current Report,
Promissory Note in favor dated March 31, 1995, File No. 0-14653
of Sirrom Capital
Corporation, dated March
31, 1995
10.13 Mortgage, Assignment of Exhibit 10.3 to Form 8-K Current Report,
Rents and Leases, and dated March 31, 1995, File No. 0-14653
Security Agreement in
favor of Sirrom Capital
Corporation, dated March
31, 1995
10.14 Second Mortgage and Exhibit 10.4 to Form 8-K Current Report,
Security Agreement in dated March 31, 1995, File No. 0-14653
favor of Bart Gutekunst,
as trustee, dated March
31, 1995
10.15 Subordination Agreement Exhibit 10.5 to Form 8-K Current Report,
between the Company Sirrom dated March 31, 1995, File No. 0-14653
Capital Corporation, and
the Debentureholders,
dated March 31, 1995
10.16 Promissory Note and Exhibit 10.16 to Form 10-QSB for the
Security Agreement between Quarter ended September 30, 1995, File
Sulzer Intermedics Inc., No. 0-14653
and the Company dated
October 20, 1995
10.17 Amendment 2 to Supply Exhibit 10.17 to Form 10-QSB for the
Contract between Sulzer Quarter ended September 30, 1995, File
Intermedics Inc., and the No. 0-14653
Company, dated October 20,
1995
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<S> <C> <C>
10.18 Amendment 2 to License Exhibit 10.18 to Form 10-QSB for the
Agreement between Sulzer Quarter ended September 30, 1995, File
Intermedics Inc., and the No. 0-14653
Company, dated October 20,
1995
10.19 Distribution Agreement Exhibit 10.19 to Form 10-QSB for the
between Grupo Taper S.A. Quarter ended December 31, 1995, File No.
and the Company, dated 0-14653
December 20, 1995
10.20 Distribution Agreement Exhibit 10.20 to Form 10-QSB for the
between LEM Biomedica Quarter ended September 30, 1996, File
s.r.l. and the Company, No. 0-14653
dated October 1, 1996
10.21 Security Agreement and Exhibit 10.21 to Form 10-QSB for the
Secured Promissory Note Quarter ended December 31, 1996, File No.
between Bart C. Gutekunst 0-14653
and the Company, dated
October 28, 1996.
10.22 Security Agreement and Exhibit 4.1 to Form 10-KSB for the year
Secured Promissory Note ended March 31, 1997, File No. 0-14653
between Bart C. Gutekunst
and the Company, dated
March 24, 1997.
10.23 Security Agreement and Included herewith.
Secured Promissory Note
between Alan J. Rabin and
the Company, dated April
15, 1997.
10.24 Security Agreement and Included herewith
Secured Promissory Note
between Bart C. Gutekunst
and the Company, dated
April 21, 1997.
10.25 Loan and Security Exhibit 10.1 to Form 8-K Current Report
Agreement Coast Business dated June 13, 1997, File No. 0-14653
Credit and the Company,
dated June 13, 1997
10.26 $300,000 Secured Exhibit 10.2 to Form 8-K Current Report
Promissory Note of the dated June 13, 1997, File No. 0-14653
Company to Coast Business
Credit, dated June 13, 1997
10.27 $500,000 CAPEX Promissory Exhibit 10.3 to Form 8-K Current Report
Note of the Company to dated June 13, 1997, File No. 0-14653
Coast Business Credit,
dated June 13, 1997
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- --------------------------------------------------------------------------------
<S> <C> <C>
10.28 Intercreditor and Exhibit 10.4 to Form 8-K Current Report
Subordination Agreement dated June 13, 1997, File No. 0-14653
between Coast Business
Credit and Sirrom Capital
Corporation
10.29 Mortgage and Security Exhibit 10.5 to Form 8-K Current Report
Agreement between the dated June 13, 1997, File No. 0-14653
Company and Coast Business
Credit
10.30 Security Agreement Exhibit 10.6 to Form 8-K Current Report
(Intellectual Property) dated June 13, 1997, File No. 0-14653
between the Company and
Coast Business Credit
10.31 Grant of Security Interest Exhibit 10.7 to Form 8-K Current Report
- Patents in favor of Coast dated June 13, 1997, File No. 0-14653
Business Credit
27 Financial Data Schedule Included herewith
- --------------------------------------------------------------------------------
</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
The Company filed Form 8-K dated June 13, 1997 to report the closing
on a maximum $3.5 million credit facility with Coast Business Credit, a division
of Southern Pacific Thrift and Loan Association (Coast), pursuant to a Loan and
Security Agreement.
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: 8/11/1997 By:/s/ Alan J. Rabin
----------------- ----------------------------------
Alan J. Rabin
President and Chief Executive
Officer
Date: 8/11/1997 By:/s/ W. Alan Walton
----------------- ----------------------------------
W. Alan Walton
Executive Vice President and Chief
Operating Officer
19
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
Number
10.23 Security Agreement and Secured Promissory Note
between Alan J. Rabin and the Company,
dated April 15, 1997
10.24 Security Agreement and Secured Promissory Note
between Bart C. Gutekunst and the Company,
dated April 21, 1997
27 Financial Data Schedule
20
<PAGE>
Exhibit 10.23
Security Agreement and Promissory Note
between Alan J. Rabin and the Company
dated April 15, 1997
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as
of the fifteenth day of April, 1997 by and between CARDIAC CONTROL SYSTEMS,
INC., a Delaware corporation ("Debtor" or "Company") and ALAN J. RABIN, an
individual ("Secured Party").
WHEREAS, Debtor is obligated to pay Secured Party the sum of Thirty-
two thousand four hundred and twenty-nine and 18/100 Dollars ($32,429.18) (the
"Obligation") pursuant to a secured promissory note dated of even date herewith
(the "Note"), which Obligation represents $32,000.00 advanced to the Debtor by
Secured Party and $429.18 in expenses incurred by Secured Party in connection
with making such advance, which expenses have been itemized in a writing and
delivered to the Company.
NOW, THEREFORE, in consideration of the mutual promises made herein
between the parties hereto, and other valuable consideration, the receipt of
which is hereby acknowledged, the parties mutually agree as follows:
1. Recitals. The above recitals are true and correct and are
--------
incorporated herein by this reference.
2. Grant of Security Interest. To secure the payment of the Note to
--------------------------
the Secured Party, the Debtor does hereby grant to the Secured Party a security
interest in and to all inventory now owned or hereafter acquired by Debtor,
including without limitation all parts and accessories, and proceeds therefrom
(the "Collateral").
3. Rights Upon Default. Upon the occurrence of an Event of Default,
-------------------
as defined in the Note, the Secured Party shall have the rights and remedies of
a secured party under the Florida Uniform Commercial Code and any and all rights
and remedies available to Secured Party under any other applicable laws.
4. Perfection. In order to perfect Secured Party's security interest
----------
in the Collateral, Debtor shall execute and deliver to Secured Party a UCC-1
Financing Statement which shall be filed with the Florida Secretary of State.
The Debtor shall pay all costs of filing such financing statement.
5. Prior Security Interest. Secured Party acknowledged that the
-----------------------
security interest of Secured Party is subject to the prior and senior security
interest of Sirrom Capital Corporation.
6. Notice. All notices under this Agreement shall be in writing and
------
shall be deemed to have been given (I) in the case of delivery, when delivered
to the address set forth on the signature page to this Agreement, (ii) in the
case of mailing, on the third business day after deposit in the U.S. Mail,
postage prepaid, certified or registered mail and addressed to the other party
at the address set forth on the signature page to this Agreement; and (iii) in
all other cases when the
<PAGE>
same has been actually received by the other party. Either party may change its
address to which said notices are to be sent by the giving of notice of such
change as set forth herein.
7. Term. This Agreement and the rights and privileges granted
----
hereunder to the Secured Party shall continue and remain in full force and
effect until the Obligation has been paid in full to the Secured Party. At such
time, this Agreement, marked "canceled" and the Note, marked "Paid in Full",
shall be returned to Debtor, and the Secured Party shall further execute a
termination statement in regard to any financing statement that is solely
related to the Collateral.
8. Security Agreement. This Agreement has been delivered in the
------------------
State of Florida and shall be construed in accordance and governed by the laws
of Florida.
9. Complete Agreement. This Agreement constitutes the complete
------------------
agreement between the parties in regard to the matters set forth herein and this
Agreement may not be altered, amended or otherwise modified except by a writing
signed by both parties hereto.
IN WITNESS WHEREOF, the Debtor and Secured Party have executed this
Agreement as of the date and year first above written.
"Debtor"
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ W. A. Walton
--------------------------
W. Alan Walton, Executive Vice-President
"Secured Party"
/s/ Alan J. Rabin
---------------------------
Alan J. Rabin
-2-
<PAGE>
SECURED PROMISSORY NOTE
$32,429.18 April 15, 1997
Palm Coast, Florida
FOR VALUE RECEIVED, the undersigned, Cardiac Control Systems, Inc., a
Delaware corporation (the "Maker"), hereby promises to pay to Alan J. Rabin, an
individual (the "Payee"), at Payee's principal place of business or such other
place as Payee may from time to time designate in writing, the principal amount
of Thirty-two thousand four hundred and twenty-nine and 18/100 Dollars
($32,429.18), together with interest on unpaid principal from time to time
outstanding computed from the date of this Note, at the rate provided herein.
The Maker may prepay, at any time and from time to time, without penalty, all or
a portion of said amount.
1. Commencing on the date of this Note, the unpaid principal balance
from time to time outstanding hereunder shall bear interest at the rate of ten
percent (10%) per annum, which interest shall accrue to May 15, 1997 (the
"Maturity Date"), at which time the entire amount of unpaid principal and any
accrued but unpaid interest shall be paid in full.
a. For a term of five (5) years from the Maturity Date, Payee shall
have a right to purchase, in whole or in part and at his option, one (1) share
of restricted common stock of Maker ("Share(s)") at an exercise price of
eighteen cents ($0.18) per Share for every one ($1.00) dollar of interest due
under this Note. Upon receipt by Maker of (i) written notice from Payee of
Payee's exercise of his right to purchase such Shares, delivered to Maker at its
principal place of business, (ii) a representation letter from Payee
satisfactory to Maker containing representations from Payee regarding his
investment intent, acknowledgment that the Shares are restricted and his
accredited investor status, and (iii) clear funds in an amount equal to the
number of Shares to be purchased multiplied by eighteen cents ($0.18), Maker
shall issue the Shares purchased. Payee shall have no other rights to purchase
Shares except as expressly set forth herein, including, without limitation, no
preemptive rights, and no rights to adjustment due to a distribution,
subdivision, reclassification or any other issuance of Shares by Maker or
derivative securities convertible into or exerciseable for Shares. Payee shall
have no right to receive fractional shares. Any amount of interest shall be
rounded down to the nearest whole dollar. Any certificates evidencing Shares
issued pursuant to this Note shall bear a restrictive legend providing
substantially that the Shares may not be transferred by Payee unless registered
under applicable federal and state securities laws or unless an exemption from
such registration is available.
2. Notwithstanding the provisions of Section 1 of this Note, from and
after the date of an Event of Default (defined below), the outstanding principal
and accrued and unpaid interest shall together be deemed outstanding principal
and the interest on such principal shall be computed at the rate of three
percent (3%) per month, which interest
<PAGE>
shall be payable monthly commencing on the first day of the calendar month
following the date of an Event of Default, and continuing thereafter until the
outstanding principal balance and any accrued and unpaid interest is paid in
full.
3. The entire unpaid amount of this Note, inclusive of principal and
interest, shall become immediately due and payable upon the occurrence of an
Event of Default, as defined below. The term "Event of Default", as used herein,
shall mean the occurrence and continuation of any one or more of the following
events: (a) the failure of Maker to pay in full this Note on the Maturity Date;
(b) the adjudication of Maker as a bankrupt or insolvent, or an assignment by
Maker for the benefit of creditors; (c) the voluntary, or involuntary,
appointment of a receiver, trustee or similar officer for Maker or for any
substantial part of its property or business, and which appointment, if
involuntary, shall have continued for a period of ninety (90) days; (d) the
voluntary, or involuntary, institution of bankruptcy, insolvency,
reorganization, arrangement, dissolution, liquidation or similar proceeding
relating to the Company, and which, if involuntary, shall have continued for as
period of ninety (90) days.
This Note shall be governed by and construed in accordance with the laws
of the State of Florida.
This payment of this Note is secured by a security agreement and UCC-1
financing statement, of even date herewith, on certain personal property of
Maker and being used in the business of Maker.
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ W. A. Walton
----------------------------------------
W. Alan Walton, Executive Vice President
<PAGE>
Exhibit 10.24
Security Agreement and Promissory Note
between Bart C. Gutekunst and the Company
dated April 21, 1997
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as
of the twenty-first day of April, 1997 by and between CARDIAC CONTROL SYSTEMS,
INC., a Delaware corporation ("Debtor" or "Company") and BART C. GUTEKUNST, an
individual ("Secured Party").
WHEREAS, Debtor is obligated to pay Secured Party the sum of Sixty-one
thousand, five hundred and fifty-three and 65/100 Dollars ($65,553.65) (the
"Obligation") pursuant to a secured promissory note dated of even date herewith
(the "Note"), which Obligation represents $60,000 advanced to the Debtor by
Secured Party and $1,553.65 in expenses incurred in making such advance, which
expenses have been itemized in writing and delivered to the Company.
NOW, THEREFORE, in consideration of the mutual promises made herein
between the parties hereto, and other valuable consideration, the receipt of
which is hereby acknowledged, the parties mutually agree as follows:
1. Recitals. The above recitals are true and correct and are
incorporated herein by this reference.
2. Grant of Security Interest. To secure the payment of the Note to
--------------------------
the Secured Party, the Debtor does hereby grant to the Secured Party a security
interest in and to all inventory now owned or hereafter acquired by Debtor,
including without limitation all parts and accessories, and proceeds therefrom
(the "Collateral").
3. Rights Upon Default. Upon the occurrence of an Event of Default,
-------------------
as defined in the Note, the Secured Party shall have the rights and remedies of
a secured party under the Florida Uniform Commercial Code and any and all rights
and remedies available to Secured Party under any other applicable laws.
4. Perfection. In order to perfect Secured Party's security interest
----------
in the Collateral, Debtor shall execute and deliver to Secured Party a UCC-1
Financing Statement which shall be filed with the Florida Secretary of State.
The Debtor shall pay all costs of filing such financing statement.
5. Prior Security Interest. Secured Party acknowledged that the
-----------------------
security interest of Secured Party is subject to the prior and senior security
interest of Sirrom Capital Corporation.
6. Notice. All notices under this Agreement shall be in writing and
------
shall be deemed to have been given (I) in the case of delivery, when delivered
to the address set forth on the signature page to this Agreement, (ii) in the
case of mailing, on the third business day after deposit in the U.S. Mail,
postage prepaid, certified or registered mail and addressed to the other party
at the address set forth on the signature page to this Agreement; and (iii) in
all other cases when the
<PAGE>
same has been actually received by the other party. Either party may change its
address to which said notices are to be sent by the giving of notice of such
change as set forth herein.
7. Term. This Agreement and the rights and privileges granted
----
hereunder to the Secured Party shall continue and remain in full force and
effect until the Obligation has been paid in full to the Secured Party. At such
time, this Agreement, marked "canceled" and the Note, marked "Paid in Full",
shall be returned to Debtor, and the Secured Party shall further execute a
termination statement in regard to any financing statement that is solely
related to the Collateral.
8. Security Agreement. This Agreement has been delivered in the
------------------
State of Florida and shall be construed in accordance and governed by the laws
of Florida.
9. Complete Agreement. This Agreement constitutes the complete
------------------
agreement between the parties in regard to the matters set forth herein and this
Agreement may not be altered, amended or otherwise modified except by a writing
signed by both parties hereto.
IN WITNESS WHEREOF, the Debtor and Secured Party have executed this
Agreement as of the date and year first above written.
"Debtor"
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ Alan J. Rabin
-----------------
Alan Rabin, President
"Secured Party"
/s/ Bart C. Gutekunst
---------------------
Bart C. Gutekunst
-2-
<PAGE>
SECURED PROMISSORY NOTE
$61,553.65 April 21, 1997
Palm Coast, Florida
FOR VALUE RECEIVED, the undersigned, Cardiac Control Systems, Inc., a
Delaware corporation (the "Maker"), hereby promises to pay to Bart C. Gutekunst,
an individual (the "Payee"), at Payee's principal place of business or such
other place as Payee may from time to time designate in writing, the principal
amount of Sixty-one thousand five hundred and fifty-three and 65/100 dollars
($61,553.65), together with interest on unpaid principal from time to time
outstanding computed from the date of this Note, at the rate provided herein.
The Maker may prepay, at any time and from time to time, without penalty, all or
a portion of said amount.
1. Commencing on the date of this Note, the unpaid principal balance
from time to time outstanding hereunder shall bear interest at the rate of ten
percent (10%) per annum, which interest shall accrue to May 15, 1997 (the
"Maturity Date"), at which time the entire amount of unpaid principal and any
accrued but unpaid interest shall be paid in full.
a. For a term of five (5) years from the Maturity Date, Payee
shall have a right to purchase, in whole or in part and at his option, one (1)
share of restricted common stock of Maker ("Share(s)") at an exercise price of
eighteen cents ($0.18) per Share for every one ($1.00) dollar of interest due
under this Note. Upon receipt by Maker of (i) written notice from Payee of
Payee's exercise of his right to purchase such Shares, delivered to Maker at its
principal place of business, (ii) a representation letter from Payee
satisfactory to Maker containing representations from Payee regarding his
investment intent, acknowledgment that the Shares are restricted and his
accredited investor status, and (iii) clear funds in an amount equal to the
number of Shares to be purchased multiplied by eighteen cents ($0.18), Maker
shall issue the Shares purchased. Payee shall have no other rights to purchase
Shares except as expressly set forth herein, including, without limitation, no
preemptive rights, and no rights to adjustment due to a distribution,
subdivision, reclassification or any other issuance of Shares by Maker or
derivative securities convertible into or exerciseable for Shares. Payee shall
have no right to receive fractional shares. Any amount of interest shall be
rounded down to the nearest whole dollar. Any certificates evidencing Shares
issued pursuant to this Note shall bear a restrictive legend providing
substantially that the Shares may not be transferred by Payee unless registered
under applicable federal and state securities laws or unless an exemption from
such registration is available.
2. Notwithstanding the provisions of Section 1 of this Note, from and
after the date of an Event of Default (defined below), the outstanding principal
and accrued and unpaid interest shall together be deemed outstanding principal
and the interest on such principal shall be computed at the rate of three
percent (3%) per month, which interest
<PAGE>
shall be payable monthly commencing on the first day of the calendar month
following the date of an Event of Default, and continuing thereafter until the
outstanding principal balance and any accrued and unpaid interest is paid in
full.
3. The entire unpaid amount of this Note, inclusive of principal and
interest, shall become immediately due and payable upon the occurrence of an
Event of Default, as defined below. The term "Event of Default", as used
herein, shall mean the occurrence and continuation of any one or more of the
following events: (a) the failure of Maker to pay in full this Note on the
Maturity Date; (b) the adjudication of Maker as a bankrupt or insolvent, or an
assignment by Maker for the benefit of creditors; (c) the voluntary, or
involuntary, appointment of a receiver, trustee or similar officer for Maker or
for any substantial part of its property or business, and which appointment, if
involuntary, shall have continued for a period of ninety (90) days; (d) the
voluntary, or involuntary, institution of bankruptcy, insolvency,
reorganization, arrangement, dissolution, liquidation or similar proceeding
relating to the Company, and which, if involuntary, shall have continued for as
period of ninety (90) days.
This Note shall be governed by and construed in accordance with the
laws of the State of Florida.
This payment of this Note is secured by a security agreement and UCC-1
financing statement, of even date herewith, on certain personal property of
Maker and being used in the business of Maker.
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ Alan J. Rabin
-----------------------------
Alan Rabin, President
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<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
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