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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
____________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998 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 (904) 445-5450
(Address of Principal Executive Offices) (Zip Code) (Telephone Number)
_____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.10 par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X
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NO_____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its fiscal year ended March 31, 1998 were
$5,886,309.
The aggregate market value of voting stock of the Registrant held by non-
affiliates of the Registrant on May 29, 1998 was $405,233 (based on the average
of the closing bid and ask prices of the Registrant's common stock on May 29,
1998 of $0.38 and $0.43 respectively).
As of May 29, 1998, 2,648,739 shares of the Registrant's common stock were
issued and outstanding.
Transmittal Small Disclosure format. YES ___ NO X
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DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
GENERAL. Cardiac Control Systems, Inc. (the"Company") was incorporated as
Supramedics, Inc. on June 20, 1980 under the laws of the State of Delaware and
on August 28, 1980 changed its name to Cardiac Control Systems, Inc. to more
accurately reflect the business of the Company. The Company is engaged in the
design, development, manufacture, marketing, and sale of implantable cardiac
pacing systems. These systems consist of single-chamber, dual-chamber and
single-lead, atrial-controlled ventricular cardiac pacemakers together with
connecting electrode leads and equipment for the external programming and
monitoring of the pacemakers. The Company has received clearance from the Food
and Drug Administration of the United States Department of Health and Human
Service ("FDA") to distribute commercially a line of single-chamber and dual-
chamber pacemaker systems and a single-lead atrial-controlled ventricular
cardiac pacing system. The equipment used for the external programming and
monitoring of the Company's pacemaker products is usually loaned without charge
to physicians and other purchasers of the Company's products. The Company's
products are "medical devices" as defined by the FDA and thus are subject to
Federal regulations enforced by the FDA, including restrictions on the
commercial introduction of products and clinical testing requirements.
The Company's Common Stock, $.10 par value per share ("Company Common Stock"),
which historically was listed on the National Association of Securities Dealers
Automation Quotation Systems ("NASDAQ") SmallCap(SM) Market, was delisted
effective August 30, 1991 as a result of non-compliance with the NASDAQ
SmallCap(SM) Market's capital and surplus requirement then in effect of
$375,000. However, shares of the Company's Common Stock are currently traded
over-the-counter under the symbol "CDCS" and are quoted on the OTC Bulletin
Board(TM). This service allows market makers to enter quotes and trade
securities that do not need the NASDAQ SmallCap(SM) Market qualification
requirements.
The Company has had a prior history of net losses and had experienced cash
flow deficiencies and had been unable to pay many of its obligations as they
became due. The Company is continuing its efforts to increase its sales volume
and attain a profitable level of operations. However, there is no assurance
that the Company's efforts will be successful. There are many events and
factors in connection with the development, manufacture and sale of the
Company's products over which the Company has little or no control, including,
without limitation, production delays, marketing difficulties, lack of market
acceptance, and superior competitive products based on future technological
innovation. There can be no assurance that future operations will be profitable
or will satisfy future cash-flow requirements. See "Item 6. Management's
Discussion and Analysis of Financial Position and Result of Operations."
PRODUCTS. The Company currently manufactures and commercially distributes a
line of single- and dual-chamber implantable pacemakers and a single-lead, dual-
chamber atrial-controlled ventricular ("VDD") pacing system, as well as
electrode leads and programming equipment developed by the Company. Pacemaker
systems are prescribed by physicians for patients who suffer arrhythmias or
impairments of the natural electrical conduction system of the heart that render
the heart incapable of pumping blood throughout the body at a rate and rhythm
suitable for the body's needs. The pacemaker system treats the condition by
electrically stimulating the heart to restore proper rhythmic contractions of
the heart muscle.
The Company's pacemakers and electrode leads encompass 8 pacemaker models
(under the trade names MAESTRO(R) II or MAESTRO(R) II SAVVI) and 7 electrode
lead models (under the trade names PolySafe, Unipass(R) or A-Track). The
Company's first single- and dual-chamber pacemaker products were sold under the
MAESTRO trade name. This generation of products, however, is no longer
manufactured and marketed by the Company. Instead, a second generation of more
streamlined single- and dual-chamber models are being sold under the MAESTRO(R)
II trade name. The Company received FDA market clearance to market its most
recent dual-chamber pacemaker, the MAESTRO(R) Series 500 Model 534 dual-
chamber, bipolar DDD pacing system in October 1997. The Company received FDA
market clearance for a new design of a temporary cardiac pacing lead, the
INTERIM AV, in December 1997. The INTERIM AV is designed to allow atrial
sensing and ventricular pacing through the same lead.
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The Company further developed its VDD pacing system and received FDA clearance
in 1993 for two new VDD models which the Company sells under the trade name
MAESTRO(R) II SAVVI. These pacing systems were unique in the industry until
Sulzer Intermedics Inc. ("Intermedics"), a competitor of the Company at that
time, received FDA approval of its single-pass, atrial-controlled ventricular
pacing system. Intermedics commenced marketing its new product in March 1995.
One additional competitor (Medtronic, Inc.) has also recently entered the United
States market with a competitive single-lead product.
In addition, the Company markets certain electrode leads and pacing
accessories manufactured by other medical companies. Further, a significant
portion of the Company's business is the sale of implantable leads for
implantable pacemakers and defibrillators on an original equipment manufacturing
("OEM") basis to implantable cardiac device manufacturers and hybrid circuit
components to an Italian manufacturer and to an Indian manufacturer. See
"Sales, Marketing and Distribution Methods."
The Company's products are classified as "medical devices" within the meaning
of the Federal Food, Drug and Cosmetics Act, as amended (the "FDA Act") and, as
such, are subject to extensive domestic regulation by the FDA and European
regulation by the International Organization for Standardization ("ISO"). All
of the pacemaker systems marketed in the United States by the Company (including
related electrode leads) are in commercial distribution under the FDA's 510(k)
Premarket Notification regulations or Premarket Approval ("PMA") regulations.
European regulations now include the ISO 9000 series of standards developed by
the ISO as adopted by the member Nations of the European Economic Community
("EEC"). The Company is certified to ISO 9002 by the Notified Body, TUV Product
Services, of Munich, Germany and is developing design control processes in
preparation for a compliance audit to ISO 9001. See "Government Regulation."
The Company's MAESTRO(R) II anti-bradycardia cardiac pacemakers are
electronically based with an integrated circuit design, and include multi-
programmable single-chamber, dual-chamber and atrial-controlled ventricular
pacemakers. They are non-invasively programmable to multiple operating modes
and functions for prescriptive flexibility, provide a wide range of sensitivity
values and incorporate programmable high- and low-frequency bandpass filters.
This extensive programmability permits the physician the flexibility required to
provide truly prescriptive, individualized pacing therapy for a wide range of
patients.
The Company's pacemakers are generally sold together with electrode leads,
most of which are manufactured by the Company. The Company's PolySafe electrode
leads include various models of its specialized single-pass A-Track leads. The
A-Track leads, developed and patented by the Company, are triaxial pacing leads
in which the inner coil connects to a ventricular tip electrode for pacing and
sensing in the ventricle, and the two other coils connect to two diagonal atrial
bipolar ("DAB") electrodes positioned so as to provide sensing data from the
atrium. The DAB electrodes transmit sensed atrial signals to the pacemaker,
which then stimulates the ventricle at an appropriate rate, providing atrial-
synchronous ventricular pacing, mimicking the normal action of the heart. The
MAESTRO(R) II SAVVI system incorporating the A-Track lead represents an
important advance in technology, combining atrial-controlled ventricular pacing
with the convenience and reliability of a single-lead implant procedure. This
system is appropriate for the many patients with conduction disorders and a
physiologically responsive sino-atrial node.
The Company's electrode leads are insulated with Surethane, and are
manufactured using a patented coating process, rights to which are held
exclusively by the Company (see "Certain Patents, Trademarks and Licenses"). The
Surethane is applied in solution to the pacing coil using a non-thermosetting
coating process that results in non-stratified bonding of each layer of the
Surethane upon curing and a "unitized" construction of coil and insulation. This
process results in extremely slender and durable leads.
Both of the Company's portable programmer models enable bi-directional
communication between the clinician and the implanted pacemaker. Programming
and telemetry messages are transmitted to the pacemaker via a lightweight wand.
Prior to transmitting a new program to the pacemaker, the programmer
automatically provides validation of the selected mode/parameter value
combination as a safety step. One model incorporates an integral printer, and
the other provides for connection of a printer, for generating hard copy
records. Both provide for connection of a strip chart recorder, for generating
hard copy records of pacemaker performance. A
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programmer carrying the CE Mark label, as required in Europe, has been developed
and commercialized. In addition, the Company is nearing completion on a new
computer-based programming system.
SALES, MARKETING AND DISTRIBUTION METHODS. The primary markets for the
Company's products are hospitals, other medical institutions, and physicians
both in the United States and abroad. The Company currently markets its
products primarily through independent sales representatives in the United
States and independent distributors in the international markets. Also, the
Company sells selected components and products on an OEM basis to various U.S.
and non-U.S. companies. Independent representatives are paid by commission;
independent distributors generally purchase the Company's products at discounted
prices. The Company advertises in scientific publications and also uses trade
shows and convention demonstrations, direct mail advertising, telephone
solicitations and direct sales to selected customers as part of its marketing
efforts.
Pricing of the Company's products is generally similar to that for competing
products. The Company focuses its marketing attention on the technological
advantages of its pacemakers rather than on price considerations. The Company
bases its appeal to physicians on the Company's belief in the relative
simplicity with which its reliable and therapeutically effective pacemaker
systems can be implanted, programmed and monitored. The Company focuses its
marketing attention on the issue of price sensitivity only when necessary. For
example, under Medicare legislation, the amount of reimbursement that a hospital
and a physician receive from Medicare for a pacemaker implant does not vary with
the cost of the implanted pacemaker, and the Company must consider this in its
pricing decisions. See "Government Regulation."
The Company maintains inventories of pacing systems at many hospitals to
facilitate the immediate availability of these products when required. In
addition, the Company's independent sales representatives hold a supply of
pacemaker systems on consignment. A portion of the Company's sales in the
United States are filled by withdrawing products from consigned inventories,
whereupon the hospital is billed for the product.
Independent sales representatives, organizations and distributors selling the
Company's products are free to sell products not produced by the Company that do
not compete with the Company's products. As of March 31, 1998, 12 independent
sales representatives (or organizations) are actively selling the Company's
products in the United States. The Company has executed long-term contracts
with most of its sales representatives in the United States. Generally, the
contractual agreements executed between the Company and its independent sales
representatives provide each representative the exclusive right to sell the
Company's products in a specified area of the United States for a three- or
five-year period, are renewable for a second three- or five-year period, and
provide the Company with certain termination rights.
The Company's operations, sales and ability to attain a profitable level of
operations are dependent upon expansion of its OEM business and maintaining the
contractual relationships with its principal sales representatives and upon on-
going expansion of their business volume. Termination of any of these
contractual agreements between the Company and its key independent sales
representatives could have a material adverse effect on the Company's sales
volume and operations. Furthermore, the Company's ability to achieve a
profitable level of operations would be adversely affected if the Company's
sales representatives were unable to expand the volume of their business.
On December 20, 1995, the Company signed a distribution agreement with Grupo
Taper, S.A. of Madrid, Spain under which, subject to certain pre-existing
distribution agreements, Grupo Taper became the sole agent for the purchase,
import and distribution and sales of the Company's product in Europe and certain
specified non-European countries. The agreement is for an initial period of ten
(10) years and will automatically renew for a five (5) year period unless
terminated by either party upon six month's prior notice.
In August 1996, the Company opened a Japanese sales office and received
Japanese approvals and a license to import and sell the Company's single-lead
VDD product. A major Japanese distributor, The Herz Co., has begun distributing
the product throughout Japan. The Company expects that these efforts will enable
the Company to expand sales in the Japanese market, where the average unit price
is significantly higher than in the rest of the world.
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During the year ended March 31, 1998, two of the Company's independent sales
representatives each accounted for in excess of 10% of the Company's sales,
accounting for $897,492 (23%) of the total. With the exception of Intermedics
and a manufacturer of implantable cardiac difibrillators, as disclosed below,
during the year ended March 31, 1998, no single domestic or international
customer accounted for in excess of 10% of the Company's sales. Accordingly,
the Company believes that the loss of any single customer in the United States,
excluding its OEM customers, would not have a material adverse effect on its
business. However, the Company's ability to maintain a profitable level of
operations is dependent upon its ability to increase its sales volume.
Therefore, the loss of any important customer in the United States could
unfavorably impact the Company's sales volume and its ability to achieve a
profitable level of operations.
On August 1, 1990, the Company executed both a license agreement and a supply
agreement with Intermedics. Pursuant to the license agreement, the Company
received initial license fees aggregating $1.5 million. The license agreement
also provided for the payment of royalties to the Company based upon net sales
of Intermedics products incorporating the licensed (single-pass lead)
technology. On April 2, 1993, the Company amended and restated both its license
agreement and supply agreement with Intermedics. Pursuant to the amended and
restated license agreement, the Company received prepayment of royalties in the
amount of $850,000. The prepayment was applied against royalties at a rate of
2/1 per pacing system sold, reducing the potential aggregate royalties to be
received over the life of the Agreement from $7,031,250 to $6,181,250. Further,
pursuant to a subsequent amendment, a $100,000 prepayment of future royalties
was received in February 1994, which was applied against the next 1,000 pacing
systems sold at a rate of $100 per unit. The entire prepaid royalties of
$950,000 were earned by the Company as of March 31, 1997. Intermedic's
requirement to pay royalties under the license agreement expired on January 22,
1998, however, Intermedics is entitled to have a license to manufacture and sell
the technology until the expiration of its patent in February 2002. The supply
agreement, which was to expire on July 31, 1993, was extended until August 1,
1998 and provides for the Company to supply its specialized single-pass leads to
Intermedics at specified prices. Sales to Intermedics accounted for 29% of
sales for the year ended March 31, 1998.
On January 1, 1997, the Company executed a supply agreement and a joint
development agreement for defibrillation leads with a major implantable
defibrillator manufacturer. The supply agreement allows for the OEM sale of
defibrillation leads to this manufacturer, while the development agreement
contemplates the development and eventual supply of a second proprietary lead.
Sales and shipments of the first lead commenced in October 1997, and accounted
for 13% of the Company's sales for the year ended March 31, 1998. In addition,
a third lead is being developed for this manufacturer and a supply agreement for
this product was signed on December 23, 1997, with the first shipment of this
product expected to occur in the second quarter of fiscal 1999. The Company
expects total volume for this customer to grow in fiscal 1999. Pursuant to the
terms of the joint development agreement, during fiscal 1997, the Company
received $200,000 from the manufacturer, $60,000 of which was recorded as equity
financing for the purchase of 40,000 shares of the Company's Common Stock, and
$140,000 was recorded as other income for the purchase of the defibrillation
leads technology.
Historically, the Company encountered many difficulties in connection with its
efforts to develop a distribution network of independent sales representatives
in the United States large enough to attain enough sales to generate
profitability. The Company believes that these difficulties are attributable to
the Company's lack of a complete product line as well as the competitive
environment, and the Company's financial position. With the proposed merger with
Electro-Catheter Corporation ("Electro") (see below) and the combined product
line, the new products being developed and released to the market and the
financing associated with the merger, the Company expects to expand its
distribution. Further, the Company estimates its market share of pacing products
to be about 0.25% of an estimated worldwide pacing systems market of $2.0
billion. The Company considers the market large enough to accommodate the
Company's products.
PRODUCT WARRANTIES. The Company's pacemakers and electrode leads are both
covered by a limited warranty. Specific terms and conditions of the warranties
vary according to the pacemaker model and electrode lead. Generally, however,
the warranty on a pacemaker extends from 5 to 6 years, and the warranty on an
electrode lead continues for the patient's lifetime. All warranties provide for
replacement with a comparable Company product and for partial reimbursement of
medical expenses not covered by third parties.
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CERTAIN PATENTS, TRADEMARKS AND LICENSES. The Company's policy is to obtain
patents on its inventions whenever practical and to obtain licenses from others
with regard to technology that it deems necessary to its business. Technological
advance has been characteristically rapid in the industry in which the Company
competes, and the Company believes its business is not materially dependent upon
any individual patent or license. However, should certain of the Company's
licenses be terminated for any reason, the Company's operations and competitive
ability could be adversely affected.
On June 12, 1984, Mr. Robert R. Brownlee, a former director and former officer
of the Company, assigned all rights, title and interest in United States Patent
No. 4,585,004, titled "Heart Pacing and Intracardiac Electrogram Monitoring
System and Associated Method," to the Company. The patent, issued on April 29,
1986, applies to the specialized A-V Data ventricular leads developed by the
Company.
On November 14, 1985, all rights, title and interest in United States Patent
No. 4,726,379, titled "Cardiac Pacer with Switching Circuit for Isolation," were
assigned to the Company by two of its employees. The patent, issued on February
23, 1988, applies to bipolar dual-chamber pacing methods.
On June 28, 1988, Mr. Robert R. Brownlee, assigned all rights, title and
interest in United States Patent No. 4,962,767, titled "Pacemaker Catheter," to
the Company. The patent, issued on October 16, 1990, applies to the A-Track
electrode leads used with the Company's SAVVI VDD pacing system.
On December 12, 1988, all rights, title and interest in United States Patent
No. 4,907,592, titled "Self-Sealing Connector for Electrical Leads for Use in
Wet Environments," were assigned to the Company by one of its employees. The
patent was issued on March 13, 1990.
On August 15, 1990, Mr. Robert R. Brownlee, assigned all rights, title and
interest in United States Patent No. 5,127,403, titled "Pacemaker Catheter
Utilizing Bipolar Electrodes Spaced in Accordance to the Length of a Heart
Depolarization Signal," to the Company. The patent, issued on July 7, 1992,
applies to the A-Track electrode leads used with the Company's SAVVI VDD pacing
system.
On July 11, 1995, Mr. Robert R. Brownlee assigned all rights, title and
interest in United States Patent No. 5,630,835, titled "Method and Apparatus for
the Suppression of Far Field Interference Signals for Implantable Device Data
Transmission Systems," to the Company. The patent, issued on May 20, 1997,
applies to the SAVVI VDD pacing system.
The Company obtained from Howard C. Hughes and Roy D. Bertolet, the latter an
employee of the Company, an exclusive license to an extrusion technique for
coating pacemaker leads and other wires with polyurethane, for which a patent
was granted on February 5, 1985. The term of the license expires on February
17, 2002. The license provides for payment of royalties for each contract year
based on a percentage of net sales of products produced using the licensed
technology. On March 29, 1993 the licensor executed a sublicense agreement with
the Company, pursuant to which the Company granted a limited sublicense allowing
Intermedics to use the extrusion technique to manufacture leads pursuant to the
terms of the amended and restated license agreement between the Company and
Intermedics.
On March 5, 1997, an objection to the Company European Patent No. 0350282
relating to single-pass diagonal atrial bipolar pacemaker catheter technology
was heard in Munich, Germany. On March 24, 1997, the Company was advised that
the objection was rejected by the Patent Court. An appeal has been filed.
The Company uses various trademarks in association with marketing and sale of
its product lines. The MAESTRO(R) trademark, used with the Company's
pacemakers and programmers, has been registered with the U.S. Patent and
Trademark Office. The Company's trademarks PolySafe, A-Track, A-V Data, TriFix,
Trabeculok, SAVVI, DAB, PacePro, INTERIM and Surethane are unregistered
trademarks of the Company.
RESEARCH AND DEVELOPMENT. The Company expended approximately $975,100 and
$1,087,000 on research and development activities during the years ended March
31, 1998 and 1997, respectfully. Research and development activity previously
reported as culminating in FDA submission was rewarded with FDA approval in
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October 1997 of the MAESTRO(R) Series 500 Model 534 dual-chamber, bipolar DDD
pacing system and in December 1997 of the INTERIM single-lead temporary pacing
system.
Continued development of the Company's single-lead technology included the
development of a preshaped single-pass lead for VDD and DDD pacing. These leads
are believed to expand capability and use, as well as offer further enhancement
of performance relative to the Company's current single-lead products. The
Company is currently performing animal and human studies and plans to initiate
chronic human clinical studies in fiscal 1998. This lead is believed to offer
further enhancement of performance with completion of limited acute and chronic
animal studies. In November 1996, a development relationship was formally
established with a manufacturer of implantable defibrillators for the
application of the Company's unique lead technology to the special challenges of
implantable defibrillation leads. This relationship provides for the
development and manufacture of an existing lead design and a separate joint
development for a combined, single-pass, pace/defibrillation lead.
The fiscal year ended March 31, 1998 included on-going activity in the area of
implementing design controls in compliance with Section 4.4, ISO 9001 Quality
Standard and similar requirements of current good manufacturing practices
("CGMP") regulations.
RAW MATERIALS AND PRODUCTION. Although the Company endeavors to have
alternative supply sources for parts and materials used in manufacturing its
products, single sources are used for certain critical materials, including
medical adhesives, integrated circuits, hybrid microelectronic circuitry,
lithium batteries, various other components, and a material used to produce
Surethane. The loss of any one of these single sources or significant delivery
delays could cause a costly delay in production. Although the Company believes
that various design or material alternatives could be used, qualification of
these could prove time-consuming and could require notification to and clearance
by the FDA.
SOURCES OF SUPPLY. Two of the Company's principal suppliers of materials used
primarily in electrode lead production, Dow Corning Enterprises, Inc. ("Dow")
and E.I. DuPont de Nemours & Co. ("DuPont"), 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 to discontinue
supplying its materials to medical device manufacturers. The Company filed the
"Special Silicone Notification" for its products effected by the Dow 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 materials. No further FDA approvals of the alternate
materials of such suppliers were required.
With respect to other material changes resulting from decisions by material
suppliers to discontinue supplying the medical device industry, e.g. DuPont, 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. The Polymer Technology Group produces a product
that meets manufacturing requirements and has been identified as a tentative
replacement for the DuPont supplied material. Biocompatibility studies have
been completed. 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 supply of the DuPont material to meet the Company's anticipated
demand for the next several years.
Suppliers of custom Application Specific Integrated Circuits ("ASICs") have
advised the Company that the technology used to produce these ASICs will no
longer be supported. As such, the Company placed one last bulk order to ensure
the availability of sufficient ASICs to satisfy projected demands for current
products. The new
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pacing system under development will utilize appropriate new ASICs obviating the
need for perpetual supply of the currently used ASICs.
INSURANCE. The Company maintains what it believes to be an adequate amount
of comprehensive general liability insurance in an amount of $2,000,000 and what
it believes to be a reasonable amount of products liability coverage in an
amount of $1,000,000. No assurance can be given that the products liability
coverage will be sufficient to protect the Company's assets against claims by
users of its products or that the Company will be able to maintain such coverage
(or obtain additional coverage) in the future at reasonable premium rates or at
all, in which case its assets will be at risk in the event of successful claims
by users of its products. Furthermore, the Company's liability coverage may not
cover costs incurred by the Company under its product warranties (see "Product
Warranties") or costs incurred by the Company in the event of a product recall.
The Company has no pending, threatened or actual claims as of this date, nor
is the Company aware of any current circumstances that might give rise to such
claims. However, the Company could be exposed to possible claims for personal
injury or death resulting from the sale or subsequent malfunction of allegedly
defective products.
EMPLOYEES. As of May 29, 1998, the Company employed 46 persons full-time and
5 persons part time. Of the total employees, 23 were engaged in manufacturing
and quality control, 13 in general administration and executive activities, 12
in engineering and research and development, and 3 in sales and marketing. The
Company is not a party to any collective bargaining agreement and considers its
relations with its employees to be good.
GOVERNMENT REGULATION.
Federal Regulations. In the United States, the FDA, among other government
--------------------
agencies, is charged with regulating the introduction to the marketplace of new
medical devices, related manufacturing and laboratory practices, and labeling
and record keeping for such devices. The FDA has the authority to ban, detain
or seize "adulterated or misbranded" medical devices, and may also order repair,
replacement or refund and require notification of health professionals and
others with regard to medical devices that present unreasonable risks or
substantial harm to the public health. The FDA may also proceed through court
action to enjoin and restrain or initiate action for criminal prosecution of
certain violations of the FDA Act pertaining to medical devices.
Most implantable cardiac pacemakers fall within a category for which the FDA
has stringent clinical investigation and premarket clearance requirements. Such
regulation tends to lengthen the time for introducing new products in the United
States, and to increase the expense of developing and marketing such products.
Moreover, the FDA administers certain controls over approvals for exporting such
devices from the United States.
FDA regulations require a company to file a 510(k) Premarket Notification for
certain products demonstrating that the products are substantially equivalent
to products that were introduced into interstate commerce for commercial
distribution before May 28, 1976 (pre-enactment devices) or to products which
the FDA has already found to be substantially equivalent to pre-enactment
devices. The FDA has also issued regulations for the PMA of medical devices
that are not substantially equivalent to pre-enactment devices (such as the
Company's dual-chamber and single-lead atrial-controlled ventricular devices).
These must be cleared for commercial distribution through a PMA submission or a
PMA supplement. The regulations will eventually require a PMA submission for
all products (such as the Company's single-chamber devices) previously cleared
for commercial distribution through premarket notifications. Prior to seeking
PMA clearance for a medical device, a company is generally required to complete
a clinical evaluation in accordance with Investigational Device Exemption
("IDE") regulations. The time and expense associated with the clinical
investigation and premarket clearance requirements of the FDA are substantial.
Many of the new products developed by the Company in the future most likely
will be subject to the IDE and/or PMA regulations of the FDA. Accordingly, the
Company will continue to devote significant time to the FDA regulatory process
leading to FDA market clearance of new products developed by the Company.
8
<PAGE>
FDA regulations require the Company to register its manufacturing
establishment with the FDA, list all medical devices that are manufactured and
distributed by the Company, observe certain production and labeling standards
and submit to unscheduled inspections by the FDA. Other FDA regulations relate
to repair and replacement of devices, refund of purchase price and notification
of risks, record keeping and reporting, and restrictions on the sale,
distribution or use of certain devices.
In recent years the FDA has implemented product tracking and electrode lead
post-market surveillance regulations. These regulations require the Company to
track and maintain information regarding the location of product not in its
direct possession. The post-market surveillance regulations require the Company
to collect and analyze clinical data to complete product longevity analysis.
The expense to the Company to meet these regulations has been minimal to date.
The potential for a material expense due to these regulations remains a
possibility.
The average pacemaker recipient in the United States is of advanced age. Most
pacemaker recipients thus are eligible for Medicare. Therefore, in addition to
FDA and similar foreign regulations, the Company may also be affected by changes
in the laws and regulations relating to Medicare.
The Company's products are manufactured by the Company under closely
controlled environmental conditions with processes developed by engineering
personnel and monitored by quality assurance personnel. These processes are
designed to be consistent with CGMP regulations audited by the FDA. FDA
conducted an audit of the Company operations in December 1996 citing only minor
deficiencies which have since been corrected.
State Regulation. In addition to Federal law, the Company is subject to the
-----------------
Florida Drug and Cosmetic Act. In particular, the Company is required to
maintain a permit to operate a medical device manufacturing facility and must
register its medical devices with the appropriate Florida authority. All such
required permits have been received, and registrations made, by the Company.
European Regulation. The EEC nations have adopted universal standards as
--------------------
developed by the 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 EEC 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 Services, of Munich, Germany, during the second quarter of fiscal 1996
for the Company's products intended for sale in Europe. The Company was audited
in July 1997 by TUV Product Services as part of the annual review of the
certified Quality System. As a result of the TUV Product Services audit the
Quality System certificate was renewed. The Company is developing design
control processes in preparation for a compliance audit to ISO 9001.
INVENTORY. The Company is required to carry significant amounts of inventory
in order to meet rapid delivery requirements of customers and assure itself a
continuous supply of key components and parts from its suppliers. There is also
a several month lead time between the time that the Company acquires parts until
such time that a product is completed and available for sale. In addition, a
portion of the Company's business is consignment in nature where the Company
provides customers with the right to return products that are not implanted or
sold. Accordingly, inventory management is an important business concern both
with respect to the Company's liquidity and due to the potential for rapidly
changing business conditions and technological advances within the industry.
COMPETITION IN THE INDUSTRY. The Company competes with many other domestic
and foreign companies, many of which have significantly greater financial and
other resources than the Company. The industry is currently dominated by
Medtronic, Inc., Intermedics, Cardiac Pacemakers, Inc. (a division of Guidant
Corporation), and Pacesetter Systems, Inc. (a division of St. Jude Medical,
Inc.). Although many of the larger
9
<PAGE>
companies have a group of loyal physicians who use their products exclusively,
most physicians use more than one pacemaker supplier.
Technological innovation and sales ability are important with respect to
market entry and penetration. The Company believes that the primary competitive
factors determining the buying decision in the marketplace today include the
ability to reduce procedural cost, increase patient safety and improve product
effectiveness. Other factors include product reliability, product capability,
technical support provided by the manufacturer, price, and credibility of the
manufacturer. Nevertheless, the Company's products are subject to the risk of
being rendered obsolete by the introduction of new products or techniques by
others.
Some of the conditions and diseases that the Company's pacemakers are designed
to treat may, in certain cases, also be treated by drug therapy. The Company
does not deem itself to be in substantial direct competition with pharmaceutical
companies because, at present, drug therapy is only infrequently a viable
alternative to use of a pacemaker. However, new drugs and methods of therapy
that might compete with the Company's pacemaker products may be developed by
pharmaceutical or other health care companies. Many such companies are larger
than the Company and possess more substantial research facilities and other
resources.
Companies that are already well established can be expected to protect their
existing market shares. This is coupled with increasing marketing costs under
heavier competition, and escalating regulatory burdens. In addition, there is
an overriding necessity to increase research and development expenditures in
order to remain competitive.
ITEM 2. PROPERTY OF THE COMPANY
The Company owns and occupies a 50,000 square foot building on 4.11 acres of
land in Palm Coast, Florida. The facility houses the Company's headquarters and
its research and development, manufacturing, administrative and marketing
divisions. The facility includes a 3,000 square-foot controlled environment
area for the manufacture of the Company's medical products, and 18,000 square
feet of unimproved space that is not in use. The production capacity of the
Company's existing facility is greater than current production levels and should
be sufficient to meet the Company's needs for at least the next several years.
In the opinion of management, the property is adequately covered by insurance.
Sirrom Capital Corporation ("Sirrom") holds a first mortgage and assignment of
rents and leases on the property as security for a $1.5 million promissory note.
However, Sirrom's mortgage is subject to subordination up to a maximum of
$500,000 under an Intercreditor and Subordination Agreement entered into with
Coast Business Credit, a division of Southern Pacific Thrift and Loan
Association ("Coast"). The Sirrom note bears interest at a rate of 13.5%
annually, matures on March 31, 2000 and is payable monthly, interest only, with
a balloon payment of principal and accrued and unpaid interest due on the
maturity date.
Coast also holds a mortgage on the Property as part of its security for a $3.5
million credit facility (the "Coast Loan"). Coast's security interest in the
Property consists of a first priority lien up to $500,000 (plus Coast's costs
and expenses of collection and enforcement of such mortgage on the
Property) and a second priority lien on the remainder of Cardiac's indebtedness
to it. The Coast Loan is subject to a minimum interest rate of 9% per annum and
a maximum interest rate of prime rate plus 2.25%. The maturity date for payment
of any outstanding principal balance is June 30, 2000, subject to automatic
renewal for successive one-year terms, continuing until one party gives advance
written notice to the other that such party wishes to terminate the Coast Loan.
The Coast Loan is subject to an early termination fee of $70,000 if terminated
from June 14, 1998 to June 12, 1999, and $35,000 if terminated on or after June
14, 1999.
ITEM 3. LEGAL PROCEEDINGS
On January 4, 1994, Strategica Group, Inc., a Miami-based financial brokering
firm ("SGI"), filed suit against the Company in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida (the "Court"), alleging that
the Company had breached certain contractual duties and obligations arising
under an agreement (the "Agreement"), dated October 16, 1992. The suit seeks a
judgment requiring the Company to deliver
10
<PAGE>
warrants to purchase shares of the Company's Common Stock representing 15% of
the total outstanding shares of the Company, and damages in excess of $15,000.
The Company has denied liability and filed a counterclaim alleging that SGI
fraudulently induced the Company into the Agreement then breached the Agreement
and certain fiduciary duties. Management has vigorously defended the lawsuit and
filed counterclaims, and believes the ultimate outcome would not be expected to
materially affect the Company's financial position. Management has had
settlement discussions with SGI and believes that it has reached an agreement-
in-principle regarding settlement with SGI which has not yet been reduced to
writing. The settlement, as proposed, contemplates the reciprocal dismissal of
all claims asserted by each party and the grants by the Company to SGI of a
warrant exercisable within five (5) years for 125,000 shares at an exercise
price of $.20 per share.
In December, 1997, Japan Crescent, Inc. and Shinji Hara filed a civil action
against the Company in the Circuit Court of the 9th Judicial Circuit in and for
Orange County, Florida. The suit, which seeks damages in excess of $15,000,
alleges that the Company is indebted to the plaintiffs for services rendered in
connection with the acquisition of import approvals for certain of the Company's
products. The Company believes the matter can ultimately be resolved short of
trial. The Company further believes the outcome of the litigation is not
expected to materially affect its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock, which historically was listed
on the NASDAQ SmallCap(SM) Market, was delisted effective August 30, 1991 as a
result of non-compliance with the NASDAQ SmallCap(SM) Market's capital and
surplus requirement then in effect of $375,000. However, shares of the Company's
Common Stock are currently traded over-the-counter under the symbol "CDCS" and
are quoted on the OTC Bulletin Board(TM). This service allows market makers to
enter quotes and trade securities that do not meet NASDAQ SmallCap(SM) Market
qualification requirements.
The high and low closing bid prices for the Company's Common Stock for each of
the quarters during the years ended March 31, 1998 and 1997 as reported in the
OTC Bulletin Board:
<TABLE>
<CAPTION>
-------------------------------------------------------
High Low
-------------------------------------------------------
<S> <C> <C>
YEAR ENDED MARCH 31, 1998
Fourth Quarter................. 9/16 1 3/32
Third Quarter.................. 1 1/8 9/16
Second Quarter................. 15/16 15/32
First Quarter.................. 1 7/32 3/4
YEAR ENDED MARCH 31, 1997
Fourth Quarter................. 1 7/16 1 3/16
Third Quarter.................. 1 3/4 1 3/8
Second Quarter................. 2 3/4 1 1/2
First Quarter.................. 3 1/4 2
</TABLE>
These quotations represent prices between dealers in securities; they do not
include retail mark-up, mark-down or commission, and may not represent actual
transactions.
HOLDERS. As of May 29, 1998, there were approximately 586 holders of record of
the Company's Common Stock.
DIVIDENDS. The Company has not declared or paid any cash dividends on its
common stock and has no present plans to pay cash dividends in the foreseeable
future and intends to retain earnings for the future operation and expansion of
the business. Any determination to declare or pay dividends in the future will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's results of operations, financial condition, any contractual
restrictions, considerations imposed by applicable law and other factors deemed
relevant by the Board of Directors. Currently there are no contractual
restrictions on the Company's ability to pay or declare dividends; however, the
Company must give advance notice of such event to Sirrom
12
<PAGE>
Capital Corporation ("Sirrom") under the terms of Sirrom's warrant. (See Note
6 - "Notes and Debt Obligations" of the Notes to Financial Statements.)
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity benefited from the Coast Loan whereby Coast agreed to
lend the Company an amount not to exceed $3,500,000, subject to limitations
relating to the value of receivables and inventories and including a capital
expenditure sub-line up to $500,000 and a term loan in the sum of $300,000, of
which the latter two are repayable over a forty-eight month period. On June 6,
1997, as consideration for Sirrom subordinating its interests to Coast, the
Company issued to Sirrom warrants to purchase 50,000 shares of the Company's
Common Stock exercisable commencing immediately and expiring June 6, 2002 at an
exercise price of $5.00 per share. Pursuant to its loan agreement with Coast,
on June 13, 1997 the Company issued to Coast warrants to purchase 37,500 shares
of the Company's Common Stock exercisable commencing immediately and expiring
June 30, 2002 at an exercise price of $4.00 per share. As of March 31, 1998,
the Company had outstanding indebtedness of approximately $1,013,298 under the
loan.
As of March 31, 1998, the Company had no commitments for the acquisition of
capital assets. As of that date, it did have material commitments pursuant to
certain inventory procurement contracts of approximately $864,000 of which
$165,000 had been prepaid by the Company. The Company does not anticipate any
significant capital expenditures during the next twelve months.
Cash used by operations during fiscal 1998 approximated $49,000. Capital
expenditures and repayment of long-term debt additionally utilized approximately
$472,000 and $330,000, respectively. Proceeds under the line of credit and
long-term borrowings approximated $1,239,000. Deferred financing and Merger
costs absorbed $575,000. Overall, negative cash flow for fiscal 1998 was
$164,000.
Cash generated by operations during fiscal 1997 approximated $57,000. Capital
expenditures and repayment of debt obligations during fiscal 1997 approximated
$545,000 and $875,000 respectively. Net proceeds from the issue of common stock
and stock warrants during fiscal 1997 approximated $301,000. Proceeds from
notes and debt obligations approximated $163,000. Overall, negative cash flow
for fiscal 1997 approximated $982,000.
As indicated by the independent public accountants in their report and as
shown in the financial statements, the Company has experienced significant
operating losses which have resulted in an accumulated deficit of $21,901,927 as
of March 31, 1998. In addition, as discussed below, royalty payments from
Intermedics ceased in January 1998. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
On January 22, 1998, the Company's royalty agreement with Intermedics expired
whereupon Intermedics' obligation to make royalty payments to the Company
ceased. During the fiscal years ended March 31, 1998 and 1997, the Company
recorded $2,063,250 and $2,394,250 in royalty income, respectively, from
Intermedics. The expiration of those royalty obligations will have a material
effect on the Company's working capital.
The financing proposed to facilitate the consummation of the Merger is
intended to enable the combined companies to meet their obligations for at least
the first 24 months post closing of the Merger (see "Probable Merger"). It is
anticipated in the business plan that the combined companies will become cash
positive from basic operations within 15 months from completion of the Merger.
Relative to its current operations and the loss of royalty income from
Intermedics, the Company has taken the following actions to increase cash
availability:
a. The Company reduced its staff and operating expenses; and
b. The Company expanded its revenue base by adding additional OEM customers,
providing leads to a new implantable defibrillator customer and to a new
manufacturer of otologic implants; and obtained $300,000 in additional
cash through the issuance of 8% convertible debentures, and is attempting
to issue more 8% convertible debentures for an additional $250,000.
14
<PAGE>
These steps should be adequate to address liquidity needs until closing of the
Merger. If, however, the Merger is not consummated, then additional cash will
have to be raised and significant additional staff and operating expense cuts
will have to be made to conserve cash. The Company would attempt to acquire
another entity or to be acquired itself by another entity. If another merger did
not occur, then without an additional infusion of cash, a significant increase
in revenue and a substantial reduction in operating expenses, the Company could
not survive.
EVENT SUBSEQUENT TO MARCH 31, 1998
In addition, from April 22 through May 4, 1998, the Company obtained $300,000
in interim financing from selected current investors through issuance of an 8%
convertible debenture, convertible at current market price of $0.40 per share.
The Company is also attempting to obtain an additional $250,000 on similar
terms. Management believes that this additional resource will assist the Company
in the achievement of its planned product and market development programs
through the fiscal year 1999.
RESULTS OF OPERATIONS
Fiscal Year ended March 31, 1998 compared to Fiscal year ended March 31, 1997.
OVERVIEW. The Company's total revenues for fiscal 1998 decreased 11% to $5.9
million from $6.6 million for fiscal 1997. Sales decreased from $4.2 million to
$3.8 million and royalties decreased from $2.4 million to $2.1 million. Royalty
income represented royalties from Intermedics pursuant to a license agreement
between the Company and Intermedics; royalty income under this agreement ceased
on January 22, 1998. Operating costs for fiscal 1998 decreased 8% to $6.6
million from $7.2 million in fiscal 1997, which, with the decrease in total
revenues, resulted in an Operating Loss of $726,399 in fiscal 1998 as compared
to an Operating Loss of $575,464 in fiscal 1997. Interest expense in fiscal 1998
increased to $523,949 from $490,508 in fiscal 1997. Other Income decreased to
$941 in fiscal 1998 from $167,300 in fiscal 1997. The pretax loss in fiscal 1998
increased to $1,239,710 from $881,240 in fiscal 1997.
SALES. Total Sales in the year ended March 31, 1998 decreased by $377,988 or
9.0% to $3,823,059 from the level of $4,201,047 achieved in the prior year.
Pacemaker unit sales decreased by 1.6% and pacemaker dollar sales decreased by
3.8%, as pacemaker average selling prices declined by 2.2% due to competitive
pressures. The average selling prices of pacing electrode leads improved by 6%,
but their unit sales declined by 40%, due to reduced demand from an established
OEM customer, resulting in a net revenue reduction of $808,421, which was
largely offset by initial sales to the value of $503,500 for the Company's newly
introduced defibrillation electrode leads to a new OEM customer. Penetration of
the Japanese market has, so far, been below expectations, but management
believes that the long term potential of the Japanese and Asian markets and the
more effective marketing and distribution process intended to result from the
Merger warrant continued perseverance in this area.
Sales by geographic area for fiscal 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Geographic Area 1998 1997
--------------- ---- ----
<S> <C> <C>
United States $3,047,963 $3,486,511
International $ 775,096 $ 714,536
--------------------------------------
$3,823,059 $4,201,047
======================================
</TABLE>
Sales by product line, including product assemblies, for fiscal 1998 and
1997 are as follows:
15
<PAGE>
<TABLE>
<CAPTION>
Product Line 1998 1997
------------ ---- ----
<S> <C> <C>
Pacemakers $1,678,905 $1,744,528
Hybrid Circuits $ 258,250 $ 222,303
Electrode Leads $1,866,721 $2,171,641
Other $ 19,183 $ 62,575
--------------------------------------
$3,823,059 $4,201,047
======================================
</TABLE>
ROYALTY INCOME. Royalty Income represented royalty fees from Intermedics
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. Royalty receipts under this agreement terminated on
January 22, 1998.
COST OF PRODUCTS SOLD. Cost of products sold in fiscal 1998 was $2,339,973,
compared to $2,378,743 in fiscal 1997, representing a decrease of 1.6% as
compared with a sales decrease of 9%, which reduced the rate of gross margin
from 43% to 39%. This reduction was largely due to lower selling prices for
pacers and pacer assemblies in the European market due to competitive pressures
and increased rates of manufacturing overhead cost arising from reduced
production volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,496,817 in fiscal 1998, representing a decrease
of 17% from $3,013,724 in fiscal 1996. Selling expenses were $1,052,038 in
fiscal 1998 compared to $1,591,807 in fiscal 1997, representing a decrease of
34%, largely due to a decrease of $312,327 in volume dependent sales commission
and royalty expenses, employment cost reductions of $141,944 and additional cost
controls. General and administrative expenses were $1,444,780 in fiscal 1998
compared to $1,421,917 in fiscal 1997 representing an increase of 1.6% despite
increases totalling $74,000 in bank and finance charges, insurance costs and
overseas taxes.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development expenses were $1,775,918 in fiscal 1998, representing no significant
change from $1,778,294 in fiscal 1997 due to the continued development
activities in the areas of single pass electrode leads, bipolar dual-chamber
operation, light weight pulse generator, rate responsive pacing and the PacePro
programmer.
OTHER INCOME AND EXPENSES. Interest income was $9,697 during fiscal 1998,
compared to $17,431 during fiscal 1997. Total interest expense during fiscal
1998 increased to $523,949 from the level of $490,508 incurred during fiscal
1997, due largely to additional interest arising in fiscal 1998 since June 13,
1997 on the loan from Coast Business Credit.
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, its world-wide
market expansion, and the addition of new OEM corporate customers, it will have
the potential to increase sales.
EEC nations have adopted universal standards as developed by the 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 EEC which is evidenced by being granted the CE Mark. Standards for
active implantable medical products were
16
<PAGE>
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
Services, of Munich, Germany, 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, Intermedics, a
competitor of the Company, received FDA clearance commercially to 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. 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.
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 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 resources and products available with the proposed merger, and
the associated funding to be obtained in connection with the proposed merger,
will position the combined companies to be able to develop effective sales and
marketing, and research and development programs.
As discussed above, the manufacture for 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 expires on August 1, 1998. However, the Company anticipates supplying
components to Intermedics for the next year. Although the Company cannot
guarantee that it will continue to supply Intermedics with products, the Company
anticipates providing Intermedics with existing or new leads for the next few
years. However, in the event Intermedics receives FDA approval for its own
products or other events occur which causes a decrease in Intermedics' orders,
the Company's business and operating results would be adversely affected.
On January 1, 1997, the Company executed a supply agreement and a joint
development agreement for defibrillation leads with a major implantable
defibrillator manufacturer. The supply agreement allows for the OEM sale of
defibrillation leads to this manufacturer, while the development agreement
contemplates the development and eventual supply of a second proprietary lead.
Sales and shipments of the first lead commenced in October 1997, and accounted
for 13% of the Company's sales for the year ended March 31, 1998. In addition,
a third lead is being developed for this manufacturer and a supply agreement for
this product was signed on
17
<PAGE>
December 23, 1997, with the first shipment of this product expected to occur in
the second quarter of fiscal 1999. The Company expects total volume for this
customer to grow in fiscal 1999. Pursuant to the terms of the joint development
agreement, during fiscal 1997, the Company received $200,000 from the
manufacturer, $60,000 of which was recorded as equity financing for the purchase
of 40,000 shares of the Company's Common Stock, and $140,000 was recorded as
other income for the purchase of the defibrillation leads technology.
SOURCES OF SUPPLY. Two of the Company's principal suppliers of materials used
primarily in electrode lead production, Dow and DuPont, 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 to
discontinue supplying its materials to medical device manufacturers. The
Company filed the "Special Silicone Notification" for its products effected by
the Dow 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 materials. No further FDA approvals of
the alternate materials of such suppliers were required.
With respect to other material changes resulting from decisions by material
suppliers to discontinue supplying the medical device industry, i.e., DuPont,
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. The Polymer Technology Group produces a product
that meets manufacturing requirements and has been identified as a tentative
replacement for the DuPont supplied material. Biocompatibility studies have
been completed. 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 supply of the DuPont material to meet the Company's anticipated
demand for the next several years.
Suppliers of custom ASICs have advised the Company that the technology used to
produce these ASICs will no longer be supported. As such, the Company placed
one last bulk order to ensure the availability of sufficient ASICs to satisfy
projected demands for current products. The new pacing system under development
will utilize appropriate new ASICs obviating the need for perpetual supply of
the currently used ASICs.
PROBABLE MERGER. On October 27, 1997, the Company entered into a letter of
intent with Electro, a New Jersey corporation, to effect a merger of a wholly-
owned subsidiary of the Company ("Sub"), into and with Electro (the "Merger") as
a result of which Electro will become a wholly-owned subsidiary of the Company.
The Company has filed a Form S-4 Registration Statement with the Securities and
Exchange Commission ("SEC"), which will need to be declared effective by the SEC
before the merger can become effective.
To effectuate the Merger, the Company, Electro and Sub executed an Agreement
and Plan of Reorganization dated January 20, 1998, as amended by a First
Amendment to the Agreement and Plan of Reorganization, dated May 5, 1998
(collectively, the "Merger Agreement"). Prior to consummation of the Merger,
the Company will reorganize into a holding company structure, implemented in
accordance with Section 251 (g) of the General Corporation Law of the State of
Delaware, whereby the Company will become a direct wholly-owned subsidiary of
Catheter Technology Group, Inc., a Delaware corporation and a holding company
("CTG"). CTG will succeed to all rights and obligations of the Company and the
stockholders of the Company will become stockholders of CTG and will continue to
hold their shares of common stock without any change in number, designation,
terms or rights. The structure of the transaction contemplates that upon
effectiveness of the Merger,
18
<PAGE>
holders of Electro's common stock, $.10 par value per share ("Electro Common
Stock"), will receive one share of Company Common Stock for each share of
Electro Common Stock held. No fractional shares will be issued in the Merger.
Consummation of the Merger and transactions contemplated thereby are subject
to the satisfaction of certain conditions, including, among other things: (i)
The approval and adoption of the Merger Agreement and the Merger by the
stockholders of Eletro; and (ii) the registration under the Securities Act of
1933, as amended, and all applicable state securities laws, of the shares of
Cardiac Common Stock to be issued pursuant to the Merger. The material
conditions to the obligations of the Company, Sub or Electro to consummate the
Merger may not be waived or modified by the party that is, or whose stockholders
are, entitled to the benefits thereof.
Electro is based in Rahway, New Jersey and is engaged in the business of the
design, development, manufacture, marketing and sale of catheters and related
devices utilized in connection with illnesses of the heart and circulatory
system. The Company believes the Merger may allow certain efficiencies to
improve operating performance and that the broader product line may provide for
a more effective marketing and distribution process. There can be no assurance,
however, that consummation of the Merger will occur, or that if it does, it will
yield positive operating results in the future.
YEAR 2000 ISSUE. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the year 2000. Some
older computer systems stored dates with only a two-digit year with an assumed
prefix of "19". Consequently, this limits those systems to dates between 1900
and 1999. If not corrected, many computer systems and applications could fail
or create erroneous results by or at the year 2000 (the "Year 2000 issue").
The Company has undertaken a review of the potential impact of the Year 2000
issue. Such assessment has included a review of the impact of the issue
primarily in four areas: products, manufacturing systems, business systems and
miscellaneous/ other areas. Based on the results of its initial review, the
Company does not anticipate that the Year 2000 issue will impact operations or
operating results. The Company is in the process of testing its systems which
may be affected by the Year 2000 issue and estimates that all affected systems
can be tested, upgraded and/or replaced before they cause any operational
problems. This upgrading is estimated to take less than four man-months of
effort. In order to ensure Year 2000 compliance, the Company has created a task
force periodically to review areas of concern. This task force is to meet on a
quarterly basis through the middle of year 2000. Management believes that the
incremental costs associated with achieving Year 2000 compliance will not be
material to the Company's operating results.
The Company relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
operations. At this time, it is impossible to assess the impact of the Year
2000 issue on each of these organizations. There can be no guarantee that the
systems of other unrelated entities on which the Company relies will be
corrected on a timely basis and will not have a material adverse effect on the
Company. The Company is in the preliminary stages of assessing the impact on
its operations should these other entities fail properly to remedy their
computer systems.
INFLATION AND CHANGING PRICES
In the opinion of the Company's 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.
19
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("FAS 130") and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Because of the recent issuance of the
standards, management has been unable to fully evaluate the impact, if any, they
may have on future financial statement disclosures.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
page
<S> <C>
Report of Independent Certified Public Accountants F1
Financial statements
Balance sheet F2 - F3
Statements of operations F4
Statements of stockholders' equity F5
Statements of cash flows F6 - F7
Summary of significant accounting policies F8 - F11
Notes to financial statements F12- F26
</TABLE>
ITEM 8. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
21
<PAGE>
CARDIAC CONTROL
SYSTEMS, INC.
================================================================================
FINANCIAL STATEMENTS
As of March 31, 1998
and for the Two Years Then Ended
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance sheet F-2 - F-3
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6 - F-7
Summary of significant accounting policies F-8 - F-11
Notes to financial statements F-12 - F-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Cardiac Control Systems, Inc.
We have audited the accompanying balance sheet of Cardiac Control Systems, Inc.
as of March 31, 1998 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiac Control Systems, Inc.
as of March 31, 1998 and the results of its operations and its cash flows for
each of the two years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note to the financial
statements, the Company has experienced significant operating losses and has an
accumulated deficit at March 31, 1998. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note . The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Orlando, Florida
June 15, 1998
F-1
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
================================================================================
March 31, 1998
- - --------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash $ 21,412
Accounts receivable, net (Note 3) 673,673
Inventories (Note 4) 1,423,697
Prepaid expenses 207,563
- - --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,326,345
- - --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET (Notes 5 and 7) 1,974,096
- - --------------------------------------------------------------------------------
OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $238,248 (Note 8) 460,200
Deferred license fees, less accumulated
amortization of $43,333 156,667
Deferred merger costs (Note 13) 320,450
Other 79,220
- - --------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,016,537
- - --------------------------------------------------------------------------------
$5,316,978
================================================================================
</TABLE>
F-2
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
==================================================================================================
March 31, 1998
- - --------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,028,440
Due to related party (Note 6) 106,000
Accrued compensation 257,912
Accrued royalties (Note 11) 226,906
Other accrued expenses 48,372
Deposits payable 352,482
Current portion of long-term debt (Note 7) 1,021,682
- - --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,041,794
LONG-TERM DEBT, less current portion (Note 7) 1,491,720
OTHER LIABILITIES 82,720
- - --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,616,234
- - --------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (NOTES 7 AND 8):
Common stock, $.10 par value, 30,000,000 shares authorized,
2,648,739 shares issued 264,874
Additional paid-in capital 22,350,756
Accumulated deficit (21,901,927)
Cumulative translation adjustment (12,959)
- - --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 700,744
- - --------------------------------------------------------------------------------------------------
$ 5,316,978
==================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements
F-3
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Year ended March 31, 1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C>
REVENUE:
Sales (Note 10) $ 3,823,059 $ 4,201,047
Royalty income 2,063,250 2,394,250
- - --------------------------------------------------------------------------------
Total revenue 5,886,309 6,595,297
- - --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 2,339,973 2,378,743
Selling, general and administrative expenses 2,496,818 3,013,724
Engineering, research and development expenses 1,775,917 1,778,294
- - --------------------------------------------------------------------------------
Total costs and expenses 6,612,708 7,170,761
- - --------------------------------------------------------------------------------
Loss from operations (726,399) (575,464)
- - --------------------------------------------------------------------------------
OTHER INCOME (EXPENSES):
Interest income 9,697 17,432
Interest expense (523,949) (490,508)
Other income 941 167,300
- - --------------------------------------------------------------------------------
Total other expenses (513,311) (305,776)
- - --------------------------------------------------------------------------------
NET LOSS $(1,239,710) $ (881,240)
================================================================================
LOSS PER COMMON SHARE $ (.47) $ (.34)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,636,954 2,585,212
================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-4
<PAGE>
CARDLAC CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
-----------------------
Number Par Paid-in Treasury Accumulated Translation
of Shares Value Capital Stock Deficit Adjustment
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 2,532,942 $253,294 $21,857,388 $(10,938) $(19,780,977) $ -
Common shares issued, net of
costs of $8,968 91,428 9,143 296,889 - - -
Stock warrants issued - - 152,376 - - -
Acquisition of treasury stock - - - (5,000) - -
Retirement of treasury stock (4,999) (500) (15,438) 15,938 - -
Translation adjustment - - - - - (7,055)
Net loss - - - - (881,240) -
- - -------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 2,619,371 261,937 22,291,215 - (20,662,217) (7,055)
Common shares issued 29,368 2,937 39,991 - - -
Stock warrants issued - - 19,550 - - -
Translation adjustment - - - - - (5,904)
Net loss - - - - (1,239,710) -
- - -------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 2,648,739 $264,874 $22,350,756 $ - $(21,901,927) $ (12,959)
=========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===========================================================================================================
Year ended March 31, 1998 1997
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,239,710) $ (881,240)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 506,675 551,225
Gain on fixed asset disposals (12,935) (12,957)
Stock issued for payment of directors' fees 34,000 -
Stock issued for payment of consulting fees 8,928 -
Cash provided by (used for):
Accounts receivable 279,169 382,515
Inventories 95,941 514,807
Prepaid expenses 48,549 (192,039)
Other assets (10,811) (50,588)
Accounts payable 200,197 327,535
Due to related parties 106,000 -
Accrued expenses (36,648) (13,957)
Deposits payable (40,150) (126,962)
Other liabilities 12,046 (112,717)
Deferred royalties - (328,250)
- - -----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (48,749) 57,372
- - -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (471,992) (544,628)
Deferred merger costs (320,450) -
Proceeds from sale of equipment 29,458 22,633
- - -----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (762,984) (521,995)
- - -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and stock warrants,
net of issuance costs - 301,032
Deferred financing costs (254,878) (99,149)
Net borrowings on line of credit 775,798 -
Proceeds from long-term debt 463,149 163,253
Repayments of long-term debt (330,483) (875,174)
- - -----------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Financing Activities 653,586 (510,038)
- - -----------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH (5,904) (7,055)
- - -----------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (164,051) (981,716)
CASH, beginning of year 185,463 1,167,179
- - -----------------------------------------------------------------------------------------------------------
CASH, end of year $ 21,412 $ 185,463
===========================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-6
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
================================================================================
Year ended March 31, 1998 1997
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the year $ 317,356 $ 283,676
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred financing costs incurred by issuance of stock warrants $ - $ 81,000
Treasury stock acquired for reinstatement of accounts payable - 5,000
Reduction in accounts payable in exchange for common stock - 5,000
Accounts payable incurred for costs of license fees - 200,000
Debt discount incurred by issuance of stock warrants 19,550 71,376
Debt incurred for purchase of property and equipment - 15,345
===================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-7
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
INVENTORIES Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method for
raw material and supply inventories. Cost of work-in-process
and finished goods inventories is determined based upon
standard cost, which approximates cost on a FIFO basis.
PROPERTY, PLANT Property, plant and equipment are stated at cost. Additions,
AND EQUIPMENT improvements and expenditures that significantly extend the
useful life of an asset are capitalized. Expenditures for
repairs and maintenance are charged to operations as
incurred. Depreciation and amortization are provided on the
straight-line method for financial reporting purposes and
accelerated methods for tax purposes over the estimated
useful lives of the assets as follows:
Building and building improvements 10 - 30 years
Land improvements 20 years
Machinery and equipment 5 - 6 years
Office equipment and furniture and fixtures 5 - 10 years
Vehicles 3 - 5 years
Ancillary equipment 2 years
DEFERRED Deferred financing costs related to a mortgage note payable
COSTS and other loan agreements are capitalized and amortized over
AND FEES the term of the loans (see Note 7). Deferred license fees
related to a license to distribute products in Japan are
capitalized and amortized over five years, the life of the
license. Deferred merger costs relate to the proposed merger
with Electro and will be a cost of the transaction when the
merger occurs or charged to operations if the merger does
not occur (see Note 13).
IMPAIRMENT OF The Company evaluates impairment of long-lived assets in
LONG-LIVED ASSETS accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," (SFAS 121).
SFAS 121 requires impairment losses to be recorded on long-
lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets' carrying amount.
F-8
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
TRANSLATION OF The financial statements of the non-U.S. division are
FOREIGN CURRENCY translated into U.S. dollars as follows: all assets and
liabilities at the year-end exchange rate and revenue and
expenses at the average exchange rate. Adjustments resulting
from the translation of financial statements are reflected
as a separate component of stockholders' equity. Gains and
losses resulting from foreign currency transactions are
included in income currently and were not significant for
the years ended March 31, 1998 and 1997.
REVENUE Sales revenue and cost of sales are recognized as products
RECOGNITION are shipped and title passes, unless the buyer has a right
to return the products. Sales revenue and cost of sales
attributable to shipments that the buyer has the right to
return are recognized when the return privilege has expired,
usually upon resale (implant) of the products.
Pursuant to a license agreement with a third-party
distributor, the Company recognizes royalty income as leads
are sold by the distributor.
ENGINEERING, The Company capitalizes the cost of materials and equipment
RESEARCH AND acquired or constructed for research and development
DEVELOPMENT COSTS activities that have alternative future uses. All other
costs incurred for the purpose of product research, design,
and development are charged to operations as incurred.
Research and development costs included in engineering,
research and development expenses on the statements of
operations for the years ended March 31, 1998 and 1997
approximate $975,100 and $1,086,800, respectively.
INCOME TAXES The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). FAS 109 is an
asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized
in the Company's financial statements or tax returns.
Measurement of deferred income tax is based on enacted tax
laws including tax rates, with the measurement of deferred
income tax assets being reduced by available tax benefits
not expected to be realized.
F-9
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
LOSS PER Loss per share is based upon the weighted average number of
COMMON SHARE common shares outstanding during each period. Potential
common shares have not been included since their effect
would be antidilutive. Potential common shares include
397,475 stock options and 465,965 warrants.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share," (FAS 128), which is effective for
financial statements issued for periods ending after
December 15, 1997. FAS 128 simplifies the standards for
computing earnings per share and makes them comparable to
international earnings per share standards. This statement
replaces the presentation of primary EPS and fully diluted
EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the
period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the
earnings. Adoption of this statement did not have a material
effect on the Company's reported loss per share amounts.
FAIR VALUE OF Statement of Financial Accounting Standards No. 107,
FINANCIAL "Disclosures about Fair Value of Financial Instruments,"
INSTRUMENTS requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein
are based upon certain market assumptions and pertinent
information available to management as of March 31, 1998.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values. These
financial instruments include cash, accounts receivable,
accounts payable, accrued expenses and deposits payable.
Fair values were assumed to approximate carrying values for
these financial instruments since they are short term in
nature and their carrying amounts approximate fair values or
they are receivable or payable on demand. The fair value of
the Company's long-term debt is estimated based upon the
quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the
same remaining maturities.
F-10
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
RECENT ACCOUNTING In June 1997, the Financial Accounting Standards Board
PRONOUNCEMENT issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130), and No. 131,
"Disclosure about Segments of an Enterprise and Related
Information" (FAS 131). FAS 130 establishes standards for
reporting and displaying comprehensive income, its
components and accumulated balances. FAS 131 establishes
standards for the way that public companies report
information about operating segments in annual financial
statements and requires reporting of selected information
about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective
for periods beginning after December 15, 1997. The Company
has not determined the impact that the adoption of these new
accounting standards will have on its future financial
statements and disclosures.
RECLASSIFICATIONS Certain reclassifications have been made to the financial
statements previously reported for the year ended March 31,
1997 to conform with classifications used in the financial
statements for the year ended March 31, 1998.
F-11
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. NATURE OF Cardiac Control Systems, Inc. (the "Company") was
OPERATIONS incorporated in June 1980 as a Delaware Corporation. The
Company is engaged in the design, development, manufacture
and marketing of implantable cardiac pacemaker systems,
consisting of implantable pacemakers, connecting electrode
leads and devices used for programming and monitoring the
pacemaker systems. The Company commenced its principal
business operations during the year ended March 31, 1986
after the commercial release of its initial single-chamber
pacemaker system. The Company has received clearance from
the United States Food and Drug Administration (the "FDA")
to commercially distribute and market a line of the
Company's pacemaker systems.
In August 1996, the Company formed a division in Tokyo,
Japan to distribute and market the Company's products in
Japan. The Company has obtained the appropriate licensing
for the sale of several of its products in Japan.
2. GOING CONCERN As shown in the accompanying financial statements, the
AND Company has experienced significant losses which have
MANAGEMENT'S resulted in an accumulated deficit of $21,901,927. The
PLANS Company has also experienced severe cash flow shortages
which have resulted in a decrease in operating activity and
have caused the Company to significantly reduce its labor
force. In addition, royalties of $2,063,250 and $2,394,250
during fiscal 1998 and 1997, respectively, received under a
license agreement ceased in January 1998. These conditions
raise substantial doubt about the Company's ability to
continue as a going concern.
The Company has executed a letter of intent to merge with
Electro-Catheter Corporation (see Note 13). It is believed
that as a result of this merger, the combined entity will be
able to generate significant volume and cost savings,
allowing the realization of profitable operations and
positive cash flow within a 12- to 18-month period post
completion of the merger. It is also believed that this
merger will also provide the vehicle and opportunity for
additional acquisitions of like companies, further building
critical mass and enhancing growth potential.
F-12
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
As a condition of this merger, the Company is planning
to raise a minimum of $4 million in a combination of
debt and equity. This capital will be utilized to fund
the ongoing operations of the two companies, as well as
the research and development of new technologies.
Management believes that such financing will occur and
that sufficient funds will be provided to overcome its
financial difficulties. However, no assurances can be
given that the Company will be successful in obtaining
financing and completing the merger, and if the Company
is unable to obtain adequate financing, there remains
substantial doubt concerning the Company's ability to
continue as a going concern.
3. ACCOUNTS Accounts receivable at March 31, 1998 are summarized as
RECEIVABLE follows:
-------------------------------------------------------
<TABLE>
<S> <C>
Trade accounts receivable $677,281
Other accounts receivable 2,265
-------------------------------------------------------
679,546
Allowance for doubtful accounts (5,873)
-------------------------------------------------------
$673,673
=======================================================
</TABLE>
4 INVENTORIES Inventories at March 31, 1998 consist of the
following:
-------------------------------------------------------
<TABLE>
<S> <C>
Raw materials and supplies $ 859,836
Work-in-process 315,643
Finished goods 285,166
-------------------------------------------------------
1,460,645
Reserve for obsolescence (36,948)
-------------------------------------------------------
$1,423,697
=======================================================
</TABLE>
Finished goods inventories include approximately
$192,000 of products consigned to customers and
independent sales representatives.
F-13
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. PROPERTY, PLANT Components of property, plant and equipment at March
AND EQUIPMENT 31, 1998 are as follows:
------------------------------------------------------
<TABLE>
<S> <C>
Land $ 123,300
Building and building improvements 1,788,251
Land improvements 29,450
Machinery and equipment 1,147,277
Office equipment 559,593
furniture and fixtures 149,620
Ancillary equipment 1,250,743
Construction in progress (estimated costs
to complete $300,000) 577,620
------------------------------------------------------
5,625,854
Accumulated depreciation (3,651,758)
------------------------------------------------------
$ 1,974,096
======================================================
</TABLE>
Depreciation expense for the years ended March 31, 1998
and 1997 was $268,697 and $310,797, respectively.
6. RELATED PARTY As of March 31, 1998, $106,000 was due to an affiliate
TRANSACTIONS owned by a director of the Company for consulting
services provided to the Company during fiscal 1998.
During the year ended March 31, 1998, the Company repaid
in full $200,983 of advances from the Chairman of the
Board and President of the Company under certain
promissory notes.
F-14
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. LONG-TERM Long-term debt consists of the following at March 31, 1998:
DEBT
<TABLE>
---------------------------------------------------------------------------
<S> <C>
Sirrom mortgage note, net of discount (see note below) $ 1,480,450
CBC line of credit (see note below) 775,798
CBC term note (see note below) 237,500
Other 19,654
---------------------------------------------------------------------------
2,513,402
Less current portion (1,021,682)
---------------------------------------------------------------------------
Total $ 1,491,720
===========================================================================
</TABLE>
Aggregate maturities of long-term debt over future years are
as follows:
<TABLE>
---------------------------------------------------------------------------
<S> <C>
1999 $ 1,021,682
2000 1,485,642
2001 3,539
2002 2,539
---------------------------------------------------------------------------
$ 2,513,402
===========================================================================
</TABLE>
Sirrom
------
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.
F-15
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In connection with the Loan Agreement, the Company
originally granted the lender warrants to purchase 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 and 1998, the Company granted
Sirrom 50,000 additional warrants pursuant to this
agreement. The Company recorded $279,000 (100,000 shares) in
fiscal 1995, $71,376 (50,000 shares) in fiscal 1997 and
$19,550 (50,000 shares) in fiscal 1998 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
(see Note ). This has resulted in an effective interest rate
of approximately 24% on the Sirrom debt. The Sirrom note
includes an unamortized debt discount of $19,550 at March
31, 1998.
CBC
---
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"), which was unused at March 31, 1998,
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% (10.5% at March 31, 1998), and the
interest rate for the Term Loan and the CAPEX Subline is
equal to the prime rate plus 2.25% (10.75% at March 31,
1998). 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, of which the Company was in
violation as of March 31, 1998. Accordingly, the amounts due
under the CBC agreement as of March 31, 1998 amounting to
$1,013,298 have been classified as current. In addition, CBC
was granted a warrant to purchase 37,500 shares of stock at
$4 per share, expiring June 30, 2002.
F-16
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In conjunction with the Agreement, Company obtained an
Intercreditor and Subordination Agreement between CBC and
Sirrom. This agreement provided that Sirrom subordinate its
first security interest in the Company's real estate to CBC
limited however to $500,000 secured by the Sirrom mortgage.
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 and expiring five years from the
date of the Warrant Agreement.
On June 11, 1998, the CBC Loan Agreement was amended to
include an additional $250,000 bridge loan bearing interest
at prime plus 5% and due on August 31, 1998. The warrant
originally granted to CBC to purchase 37,500 shares of stock
was also amended. The exercise price was reduced from $4 per
share to $.40 per share. In addition, CBC was granted a
second warrant to purchase 25,000 shares of stock at $.40
per share. The warrant expires June 30, 2002.
8. STOCKHOLDERS' Issuance of Common Shares
-------------------------
EQUITY
In May 1996, Sirrom purchased 50,000 shares of common stock
for $5.00 per share. In June 1996, the Company issued 1,428
shares of common stock as payment for accounts payable of
$5,000 to a third party. The accounts payable balance was
then reinstated in March 1997, in conjunction with the
Company's purchase of 1,428 shares of treasury stock.
In January 1997, the Company entered into a supply agreement
with a major defibrillator manufacturer whereby the Company
will be the exclusive outside supplier of a defibrillation
lead. The agreement expires in December 1999. In connection
with this agreement, the manufacturer paid the Company
$200,000 and received 40,000 shares of common stock valued
at $60,000, representing the quoted market price of the
common shares. The difference between the purchase price and
the value assigned to the common stock of $140,000 was
recorded as a gain on sale of the technology underlying the
supply agreement included in other income.
During the year ended March 31, 1998, the Company issued
23,654 shares of common stock as payment of directors' fees,
which were valued at
F-17
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
$34,000 and 5,714 shares of common stock as payment for
consulting services which were valued at $8,928.
Stock Option Plan
-----------------
On September 9, 1987, the Company's Board of Directors
adopted the 1987 Non-Qualified Stock Option Plan (the "1987
Plan"). On February 7, 1992, the Company's Board of
Directors adopted the 1992 Non-Qualified Stock Option Plan
(the "1992 Plan"). In fiscal 1995, the Company combined the
1987 Plan and the 1992 Plan. This Plan provides the Board of
Directors with the authority to grant officers, directors,
and employees of the Company non-qualified options to
purchase up to a maximum of 400,000 shares of the Company's
common stock. Options granted under the Plan expire five
years after the date the options are granted or upon
termination of employment.
The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in
accounting for options issued to employees. Accordingly, no
compensation cost has been recognized for options granted to
employees at exercise prices which equal or exceed the
market price of the Company's common stock at the date of
grant. Options granted at exercise prices below market
prices are recognized as compensation cost measured as the
difference between market price and exercise price at the
date of grant.
Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net
income and earnings per share as if compensation cost for
the Company's employee stock options had been determined in
accordance with the fair value based method prescribed in
FAS 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-
pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively:
no dividend yield for both years, an expected life of five
years for both years, expected volatility of 60% and 44% and
risk-free interest rates of 6.6% and 6.4%.
F-18
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Under the accounting provisions of FAS 123, the Company's
net loss and loss per share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
<S> <C> <C>
NET LOSS
As reported $ (1,239,710) $ (881,240)
Pro forma (1,264,723) (952,300)
LOSS PER SHARE
As reported $ (.47) $ (.34)
Pro forma (.48) (.37)
============================================================
</TABLE>
F-19
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
A summary of the status of options under this plan as of March 31, 1998 and 1997
and changes during the years ending on those dates are presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 309,969 $ 3.72 $ 305,186 $ 4.02
Granted 88,500 1.O4 84,429 3.50
Forfeited or expired (24,542) 5.25 (79,646) 4.55
------- -------- ----------- --------
Balance at end of year 373,927 $ 2.83 309,969 $ 3.72
-------- -------- ----------- --------
Options exercisable at year end 350,617 $ 2.89 244,658 $ 3.69
Options granted during the year
at exercise prices which exceed
market price of stock at date of
grant:
Weighted average exercise price 88,500 $ 1.04 74,429 $ 3.50
Weighted average fair value 88,500 $ .47 74,429 .73
Options granted during the year
at exercise prices which equal
market price of stock at date of
grant:
Weighted average exercise price - $ - 10,000 $ 3.50
Weighted average fair value - - 10,000 1.66
</TABLE>
The following table summarizes information about fixed stock options at March
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices March 31, 1998 Contractual Life Exercise Price March 31, 1998 Exercise Price
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 87,000 4.1 years $ 1.00 87,000 $ 1.00
$ 3.50 to 3.63 286,927 2.1 years 3.52 263,617 3.52
------- -------
373,927 350,617
======== =======
</TABLE>
F-20
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Non-Plan Stock Options
----------------------
The Company has granted options to independent sales
representatives, Board of Directors and others. The
total number of non-plan stock options outstanding at
March 31, 1998 and 1997 were 23,548 and 31,406,
respectively. The total number of exercisable non-plan
stock options at March 31, 1998 and 1997 were 21,548
and 24,073, respectively. The exercise price for these
options range from $.40 to $10.50 per share. These
options are exercisable over five-year periods and
expire five years from the date of grant. The value of
these options was not material, and accordingly, no
compensation cost has been recognized by the Company.
Common Stock Purchase Warrants
------------------------------
Common stock purchase warrants outstanding at March 31,
1998 are as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Underlying Per Expiration
Shares Share Date
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Converted debenture holders 100,000 $ 5.00 3/31/99
Sirrom (see Note 7) 200,000 $ .01 3/31/00
Sirrom (see note below) 50,000 .01 10/18/00
Sirrom (see Note 7) 50,000 $ 5.00 6/6/02
Coast Business Credit (see Note 7) 37,500 $ 4.00 6/30/02
Employees 3,465 .18 8/21/02
Grupo Taper (see note below) 25,000 $ .80 8/5/07
==============================================================================
</TABLE>
All of the above warrants were exercisable at March 31,
1998, except for Grupo Taper, of which 25,000 are
unexercisable. The warrants issued to Grupo Taper
become exercisable according to the following schedule:
(i) 50,000 shares shall be exercisable one year after
the Company achieves ISO and CE approval if the
Distribution Agreement is still in force and if Grupo
has achieved at least 60% of its forecasted sales
commitment; (ii) 25,000 shares shall be exercisable
after December 20, 1997 if the Distribution Agreement
is in force and Grupo has achieved 60% of its
forecasted sales commitment for the year ended December
20, 1997; and (iii) 25,000 shares
F-21
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
shall be exercisable after December 20, 1998 if the
Distribution Agreement is in force and if Grupo has
achieved its forecasted sales commitment over the two-
year period ending December 20, 1998. Certain of the
above warrants contain "piggy-back" registration rights
and anti-dilution provisions.
The Company granted Sirrom 25,000 warrants in October
1995 and 25,000 in May 1996 at an exercise price of
$.01 per share. These warrants were issued under an
agreement whereby Sirrom gave up a first security
interest as a result of the issuance of a note payable.
The Company recorded $81,000 during the year ended
March 31, 1997 as deferred financing costs and
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.
Common Stock Reserved
---------------------
The aggregate number of shares of the Company's common
stock reserved for future issuance at March 31, 1998 is
summarized as follows:
-------------------------------------------------------
<TABLE>
<S> <C>
Common stock options:
1987/1992 Stock Option Plan 396,407
Non-plan 31,318
Common stock purchase warrants:
Sirrom Capital Corporation 300,000
Grupo Taper 25,000
Converted debenture holders 100,000
Coast Business Credit 37,500
Employees 3,465
Directors' compensation 69,765
-------------------------------------------------------
963,455
=======================================================
</TABLE>
F-22
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
9. INCOME TAXES Significant components of the Company's deferred income tax
assets and liabilities at March 31, 1998 are as follows:
<TABLE>
--------------------------------------------------------------
<S> <C>
Deferred tax assets:
Accrued liabilities $ 99,000
Net operating loss carryforwards 6,785,000
Inventory 148,000
Amortization 42,000
Other 3,000
--------------------------------------------------------------
Gross deferred tax assets 7,077,000
Deferred tax liability - depreciation (409,000)
Valuation allowance (6,668,000)
--------------------------------------------------------------
Net deferred taxes $ -
==============================================================
</TABLE>
The net change in the valuation allowance for deferred tax
assets was a decrease of $178,000 in fiscal 1998. As of March
31, 1998, the Company has approximately $18,900,000 of tax net
operating loss carryforwards (NOLs) available that expire from
1998 through 2011. The tax benefit of these losses of
approximately $6,426,000 has been offset by a valuation
allowance sufficient to reduce the deferred tax asset to an
amount management believes is more likely than not to be
realized.
The provision for income taxes differs from the amounts
computed by applying the Federal statutory rates to loss
before taxes due to the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
<S> <C> <C>
Provisions for Federal income taxes
at the statutory rate (34.0%) (34.0%)
Loss producing no current tax benefit 34.0% 34.0%
--------------------------------------------------------------
Taxes on income - -
==============================================================
</TABLE>
F-23
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. SEGMENT DATA The Company operates in a single industry segment, that
AND of providing implantable medical products to the health
SIGNIFICANT care industry. During the years ended March 31, 1998
CUSTOMERS and 1997, the Company exported its products to
European, Japanese and Asian distributors and exported
components and assemblies to certain European
manufacturers. Sales by geographic area for the years
ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Geographic Area 1998 1997
-------------------------------------------------------
<S> <C> <C>
United States $3,047,963 $3,486,511
Europe 605,440 626,508
Japan/Asia 169,656 88,028
-------------------------------------------------------
$3,823,059 $4,201,047
=======================================================
</TABLE>
The Company's products are primarily distributed
through independent sales representatives in the United
States. During the year ended March 31, 1998, two of
the Company's independent sales representatives each
accounted for in excess of 10% of the Company's sales
and in the aggregate accounted for $897,492 (23%) of
the Company's sales. During the year ended March 31,
1997, two of the Company's independent sales
representatives each accounted for in excess of 10% of
the Company's sales and in the aggregate accounted for
$892,279 (21%) of the Company's sales.
Further, pursuant to an electrode lead Supply Agreement
with Intermedics Inc., the Company sold $1,095,076 and
$1,954,408 of product to Intermedics Inc. for the years
ended March 31, 1998 and 1997, respectively, which
accounted for 29% and 47% of the Company's sales.
F-24
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
11. COMMITMENTS Patent Licensing Agreements
---------------------------
AND
CONTINGENCIES Effective July 1, 1986, the Company renegotiated its
exclusive license to a patented electrode-wire coating
system that was originally acquired by the Company on July
1, 1981. The modified license agreement requires the
payment of royalties equal to a percentage of sales of
products manufactured using the patented technology. The
license became non-exclusive on July 1, 1994. The term of
the license agreement expires upon the expiration date of
the patent, February 4, 2002, unless terminated earlier by
the Company. Royalty expense under the terms of the
agreement for the years ended March 31, 1998 and 1997 was
$39,564 and $62,655 respectively. Further, on March 29,
1993, the licensor executed a sublicense agreement with
the Company, enabling an unrelated company to manufacture
the licensed product.
Purchase Obligations
--------------------
During the year ended March 31, 1989, the Company entered
into an agreement for the procurement of hybrid
microelectronic circuits. The development of circuits for
the Company's atrial-controlled ventricular and single-
chamber pacing products was completed in fiscal 1992.
Development of the circuits for the Company's dual-chamber
devices was completed in fiscal 1993. As of March 31,
1998, the Company's future maximum purchase obligation
approximated $629,000.
During the year ended March 31, 1990, the Company entered
into an agreement for the procurement of integrated
circuits. The development of these circuits was completed
in fiscal 1992. As of March 31, 1998, the Company's future
maximum purchase obligation approximated $235,000, of
which approximately $165,000 has been prepaid by the
Company.
Legal Proceedings
-----------------
The Company is party to various legal proceedings arising
in the normal conduct of business. Management believes
that the final outcome of these proceedings will not have
a material adverse effect upon the Company's financial
position or results of operations.
F-25
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
12. SUBSEQUENT During April 1998, the Company issued $300,000 of 8%
EVENT convertible debentures. Interest is payable in cash or
stock, or a combination thereof, on each April 30 and
October 31 commencing October 31, 1998 and ending April 24,
2003, at which time all outstanding principal and interest
is due. The debentures are convertible from April 24, 1998
through the day immediately prior to the maturity date at a
rate of one share of common stock for each $.40 of
outstanding principal. The conversion price is adjustable
upon the occurrence of certain events.
13. PROPOSED In October 1997, the Company executed a letter of intent to
MERGER merge with Electro-Catheter Corporation ("Electro"), wherein
CCS Subsidiary, Inc. ("Sub") a newly-formed New Jersey
corporation and wholly-owned subsidiary of the Company will
merge into Electro pursuant to an Agreement and Plan of
Reorganization among the Company, Electro and Sub. If the
merger is consummated, of which there can be no assurance,
the separate corporate existence of Sub will cease and
Electro will become a wholly-owned subsidiary of the
Company. Prior to consummation of the merger, the Company
will reorganize into a holding company structure, whereby
the Company will become a direct, wholly-owned subsidiary of
Catheter Technology Group, a Delaware corporation and a
holding company ("CTG"). CTG will succeed to all rights and
obligations of Cardiac, and the stockholders of the Company
will become stockholders of CTG and will continue to hold
their shares of capital stock without any change in number,
designation, terms or rights. Pursuant to the merger, each
outstanding share of Electro common stock will be converted
into the right to receive one share of common stock, $.10
par value, of CTG. The proposed merger will result in the
reverse acquisition by Electro stockholders of CTG due to
the fact that the number of shares of CTG common stock to be
issued to Electro's current stockholders will represent
approximately 71% of the outstanding CTG common stock.
F-26
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the names and ages of the Directors and Executive
Officers of the Company as of March 31, 1998, in addition to information
respecting their positions and offices with the Company, their periods of
service in such capacities, and their business experience for at least the past
five years. There are no family relationships among the Directors and Executive
Officers of the Company.
William H. Burns Jr., age 48, has been a member of the Board of Directors
since September 1995. Mr. Burns is a health care entrepreneur and is a director
and president of six health care businesses (Biosight, Inc., BioVector, Inc.,
BioVision, Inc., Minrad, Inc., Medical Infusion, Inc., and Fertility Acoustics,
Inc. From July 1988 through March 1994, he was Founder, President and CEO of
Matrx Medical, Inc., a medical product design and distribution company. His
efforts in building Matrx Medical, Inc. earned him an award as Entrepreneur of
the Year in New York State in 1993. From 1975 through 1988, Mr. Burns held
various positions with the BOC group, including Vice President and General
Manager of Ohmeda, DVE.
Bart C. Gutekunst, age 47, has been a member of the Board of Directors
since July 1994 and became Chairman of the Board in October 1994. Mr. Gutekunst
focuses on growing businesses with a view toward enhancing value through
strategic, managerial and financial advisory involvement, with a particular
emphasis on the medical sector. In July 1995 he became Chairman and CEO of
NovaVison, Inc., an eye care technology company. In May 1997, NovaVision, Inc.
was merged with American Consolidated Laboratories, Inc., a specialty vision
products company, and Mr. Gutekunst was Chairman of the Board from May 1997
until January 1998. Also, since August 1997, Mr. Gutekunst has been a director
of Platform Technologies, LLC, a pool of venture capital investments. From
September 1992 to September 1994, he was Vice Chairman and Chief Financial
Officer of R-2 Medical Systems, Inc., a cardiac care device company, with
responsibility for strategic and corporate development as well as overseeing the
financial functions of the company. From February 1994 to March 1996, Mr.
Gutekunst served as Chairman of the Board of Directors of United Education and
Software, Inc., a multi-state operator of nursing and vocational schools
operating under Chapter 11 of the United States Bankruptcy Code where he oversaw
the voluntary liquidation of the company's assets. From 1988 to 1990, he was a
senior member of an investment firm, Entrecanales, Inc., funded by a major
European family, making equity investments and leveraged buyouts. From 1981 to
1987, he was Executive Vice President and a member of the Board of Directors, as
well as the Management and Investment Committees of Laidlaw, Adams & Peck Inc.,
where he supervised the investment banking department and completed over 50
public and private transactions. From 1976 to 1981, he was a member of Chemical
Bank's Merchant Banking Group. Mr. Gutekunst has been a member of the Board of
Directors or advisor to the Board for many companies.
Larry Haimovitch, age 51, has been a member of the Board of Directors since
November 1994. He is President of Haimovitch Medical Technology Consultants, a
San Francisco, California based healthcare consulting firm which specializes in
the medical device and technology industry with a particular emphasis on
cardiology-related areas and whose clients have included a major hospital chain,
numerous medical device companies, venture capital firms, investment groups, and
investment bankers. Prior to forming his firm in 1991, Mr. Haimovitch spent
over 20 years as a healthcare industry analyst for a number of leading research
firms and financial institutions such as Furman Selz, Sutro & Co., and Wells
Fargo Investment Advisors. He serves as a director to Electro- Pharmacology,
Inc., ORBTEC, Inc. and Milestone Scientific, Inc.
Augusto Ocana, age 54, was appointed to the Board of Directors in April
1996. He has over 20 years experience in building, turning around and managing
international health care businesses. Until December 31, 1997, he was Executive
Vice President of Grupo Taper International., S.A., a Spanish based holding
group of
22
<PAGE>
companies engaging in distribution of state-of-the-art medical products. Prior
to Grupo Taper, Dr. Ocana had been President and Chairman of Rempak
International and Managing Director of Abbott Laboratories. Dr. Ocana has also
been trained as a physician and has a degree in international law.
Alan J. Rabin, age 47, joined the Company in October 1994 as President,
Chief Executive Officer and a member of the Board of Directors. Mr. Rabin has 26
years experience in the management and growth of medical companies, with
emphasis on internal business development through marketing, sales, new product
development and building strategic relationships. Prior to joining the Company,
Mr. Rabin held an array of management positions, including:
. From 1992 to September 1994, President and Chief Executive
Officer of R-2 Medical Systems, Inc., a manufacturer of cardiac
care devices, including disposables used in cardiac pacing. In
partnership with Bart Gutekunst, this underperforming company was
successfully turned around and sold to an industry participant.
. Vice President of Marketing and Sales for Stereo Optical Company,
a manufacturer of disposable and capital ophthalmic diagnostic
devices from 1987 to 1992.
. Director of Marketing and Sales of Tycos Life Sciences, Inc., a
manufacturer of cardiovascular diagnostic and monitoring devices
from 1985 to 1986 and was instrumental in the turnaround and
ultimate sale of the company.
. From 1980 to 1985, various marketing, new business development
and product management positions with Davol, Inc., a division of
C.R. Bard in the surgical and cardiovascular equipment area.
Mr. Rabin currently serves as a director of BioVector, Inc., a medical
distribution company. He received a Bachelor of Science degree in biology and a
Master in Business Administration degree from the University of Illinois and
Northwestern University, respectively.
Robert T. Rylee, age 67, has been a member of the Board of Directors since
November 1988. He practiced law from 1958 to 1969 and was a partner in the firm
of Wood, Boykin, Rylee, and Walter from 1965 to 1969. In 1969, Mr. Rylee became
the President and CEO of Wright Manufacturing Company, a manufacturer of
orthopedic implants and instruments, a position he held until 1981 when he
became a Dow Corning Incorporated U.S. Area Vice President and the General
Manager of Health Care Business. On May 31, 1993, he retired as Vice President
and Chairman of Health Care Business, a position he had held with Dow Corning
Incorporated since 1986. He is currently a director of Clarus Medical Systems,
which position he has held since September 1993.
Tracey E. Young, age 43, has been a member of the Board of Directors since
September 1995. She is the Founder and President of Elliot Young & Associates,
Inc., a proprietary health care consulting concern, formed in 1987 to assist
companies and investors in identifying, evaluating, capturing and managing
strategic growth and financing opportunities in high technology health care
markets. Ms. Young also held key consulting positions with The Wilkerson Group,
both as the founding Associate Director of its Cardiovascular Market
Intelligence Service and as an independent consultant to the firm. She also
spent seven years in the pacemaker industry in senior marketing and strategic
planning positions with Telectronics Pacing Systems and Intermedics.
Terry McMahon, age 48, became the Company's Vice President of Regulatory
Affairs and Quality Assurance in November 1994. Prior to joining the Company,
Mr. McMahon was employed as the Manager of
23
<PAGE>
Regulatory and Technical Affairs with Xomed-Treace, Inc. from 1991 to December
1994. He joined Xomed in 1990 as Manager of Clinical Affairs where he managed
clinical and preclinical (animal) studies to demonstrate the safety and efficacy
of devices for head and neck surgery. Subsequent responsibilities included the
preparation of all regulatory filings for establishing and maintaining market
clearance for the company's product line. Prior to his employment with Xomed-
Treace, he served in a variety of managerial positions in Regulatory and
Technical Affairs for companies involved in medical device implants.
William Wharton, age 50, was appointed Vice President of Manufacturing and
Facilities in March 1996. Mr. Wharton had previously served the Company as Vice
President of Operations since February 1994 and as Vice President of Quality
Assurance since 1985. Mr. Wharton joined the Company in 1982 as Director of
Quality Assurance. Before joining the Company, he was employed as a Quality
Assurance Supervisor for at least five years by Medtronic, Inc., a major
competitor in the cardiac pacing industry.
W. Alan Walton, age 64, joined the Company Control Systems, Inc. in March,
1996 as Executive Vice President and Chief Operating Officer. Mr. Walton is a
fellow of the Institute of Chartered Accountants in England and from March, 1995
to February, 1996 was engaged as a financial and operations consultant with
Biosight, Inc. of Orchard Park, New York, a firm specializing in helping health
care businesses enhance their performance. Prior to his experience with
Biosight, he spent 19 years in senior financial and systems management positions
with Dunlop Holdings PLC in the United Kingdom and the United States, including
a position as General Manager, Group Information System with responsibility for
Dunlop's global computing and communications.
Jonathan S. Lee, age 46, a biomedical engineer, joined the management team
at the Company, Inc. in May, 1996 and serves as Vice President - Research and
Development. Prior to joining the Company, Mr. Lee spent 18 years in Research
and Development, Regulatory Affairs and Marketing with Telectronics Pacing
Systems, a leading pacemaker manufacturer. He established and managed
Telectronics' worldwide service facilities and established Telectronic's US
research and development presence in Denver, Colorado. Mr. Lee was also involved
in International Marketing Management with Telectronics. Mr. Lee received a
Bachelor of Engineering degree in Biomedical Engineering from the University NSW
in Sidney, Australia. He also completed two years post graduate work in computer
studies at the University NSW. He has been a member of the North American
Society of Pacing and Electrophysiology since 1984.
Kirk Kamsler, age 47, joined the Company in April 1996 as Director of
Marketing and Sales. He has over 20 years of sales, sales management and
marketing management experience with a variety of medical device companies,
including Davis & Geck, Inc., Matrix Medical, Inc. and Marquette Electronics,
Inc. Mr. Kamsler received a Bachelor of Arts degree from St. Lawrence University
in Canton, New York.
The Board of Directors is elected at each annual meeting of the
stockholders. Each Director holds office until his successor is duly elected and
qualified or until his earlier resignation or removal, with or without cause, at
any duly noticed special meeting of the stockholders of the Company by the
affirmative vote of a majority of the shares then entitled to vote at an
election of directors.
Under the bylaws of the Company, officers are elected annually by the Board
of Directors at the meeting of the Board of Directors following the annual
meeting of the stockholders. Each officer holds office until his or her
successor has been chosen and qualified, or until his or her death, resignation
or removal, with or without cause, by the Board of Directors.
None of the Directors or Executive Officers of the Company is a director of
any company, other than the Company, with a class of equity securities
registered pursuant to Section 12 of the Securities and Exchange Act
24
<PAGE>
of 1934, as amended, or subject to the requirements of Section 15(d) of such Act
or any company registered as an investment company under the Investment Company
Act of 1940, as amended, except for Bart C. Gutekunst who is Chairman of the
Board of American Consolidated Laboratories, Inc., Larry Haimovitch who is a
director of Electro-Pharmacology, Inc. and Alan J. Rabin and William H. Burns
who are directors of American Consolidated Laboratories, Inc.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each Director and Executive Officer, and each person owning beneficially
more than ten (10%) percent of a registered class of the Company's equity
securities, is required to file reports of ownership and changes in ownership
with the SEC, and furnish the Company with copies of all such reports. A late
report was filed for Phillip R. Beutel, director, with respect to a reinstated
stock option grant .
25
<PAGE>
ITEM 10. DIRECTORS' AND EXECUTIVE OFFICERS' COMPENSATION
EXECUTIVE REMUNERATION. The following table sets forth information about
the compensation paid or accrued by the Company during the fiscal years ended
March 31, 1998, 1997, and 1996 to the Company's Chief Executive Officers and any
other Executive Officer whose aggregate compensation exceeded $100,000 in fiscal
1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- - ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
Fiscal Year Other Securities
Name and Principal Ended Annual Underlying All Other
Position March 31 Salary Bonus Compensation Options Compensation
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Rabin 1998 $150,624 - 12,559/(1)/ $ 559/(2)/
(President, CEO, 1997 $146,000 - 12,000/(3)/ $ 521/(4)/
Director) 1996 $110,000 $ 10,000/(5)/ 20,000/(6)/ $ 26,349/(7)/
- - -------------------------------------------------------------------------------------------------------------------------------
Bart C. Gutekunst 1998 $ 48,624 - 10,906/(8)/ $ 15,934/(9)/
(Chairman of the Board) 1997 $ 48,000 - 10,000/(3)/ $11,313/(10)/
1996 $ 48,000 - 15,000/(6)/ $ 8,700/(11)/
- - -------------------------------------------------------------------------------------------------------------------------------
Kirk D. Kamsler 1998 $ 93,928 $ 10,200/(12)/ 8,000/(13)/ -
(Vice President Sales) 1997 $ 81,104 - 10,000/(14)/ $45,000/(15)/
1996 - - -
- - -------------------------------------------------------------------------------------------------------------------------------
Jonathan S. Lee 1998 $100,514 $ 10,920/(16)/ 8,000/(13)/ -
(Vice President 1997 $ 80,596 - 10,000/(17)/ $33,460/(15)/
Engineering) 1996 - - - -
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This includes options to purchase 12,000 shares of common stock in the
Company at $1.00 exercisable immediately and a warrant to purchase 559
shares of common stock in the Company at $.0.18.
(2) This represents interest on a Security Agreement and Promissory Note
between Alan J. Rabin and the Company dated April 15, 1997.
(3) On August 22, 1996, the Board of Directors awarded these options to
purchase shares of common stock in the Company at $3.50 per share,
exercisable on March 31, 1997.
(4) This represents interest received prior to conversion of the Debentures to
stock.
(5) In addition to his salary, Mr. Rabin is entitled to a performance bonus.
This represents the performance bonus paid in respect of Mr. Rabin's
services during the year ended March 31, 1996.
(6) On May 5, 1995, the Board of Directors awarded these options to purchase
shares of common stock of the Company at $3.63 per share. The options are
now exercisable.
(7) This represents reimbursement of relocation expenses, $21,549, paid to Mr.
Rabin pursuant to his employment agreement and consulting fees in
connection with debenture financing, $4,800.
26
<PAGE>
(8) These include options to purchase 8,000 shares of common stock in the
Company at $1.00 exercisable immediately and a warrant to purchase 2,906
shares of common stick in the Company at $0.18.
(9) This represents interest of $2,906 on two security agreements and
promissory notes between Bart C. Gutekunst and the Company dated March 24,
1997 and April 21, 1997, and consulting fees related to the Coast
financing in the amount of $13,028.
(10) This includes $7,500 in connection with his facilitating the Grupo Taper
Distributor and Sirrom mortgage agreements. It also includes $3,292 of
interest paid on a $100,000 secured promissory note, and $521 of interest
paid on debentures held prior to the conversion of the debentures to
stock.
(11) This represents consulting fees in connection with the Debenture
financing.
(12) In addition to his salary, Mr. Kamsler received a performance bonus. This
represents the performance bonus paid in respect of Mr. Kamsler's services
during the year ended March 31, 1997.
(13) This represents options to purchase 8,000 shares of common stock in the
Company at $1.00 exercisable immediately.
(14) Upon execution of his employment agreement with the Company, Mr. Kamsler
was granted options to purchase 10,000 shares of common stock of the
Company at $3.50 per share, exercisable one third on April 21, 1997, one
third on April 21, 1998 and one third on April 21, 1999.
(15) This represents reimbursement of relocation expenses paid pursuant to an
employment agreement.
(16) In addition to his salary, Mr. Lee received a performance bonus. This
represents the performance bonus paid in respect of Mr. Lee's services
during the year ended March 31, 1997.
(17) Upon execution of his employment agreement with the Company, Mr. Lee was
granted options to purchase 10,000 shares of common stock of the Company
at $3.50 per share, exercisable one third on May 5, 1997, one third on May
5, 1998 and one third on May 5, 1999.
The following table sets forth information concerning options granted
during the fiscal year ended March 31, 1998 to those persons named in the
preceding Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/share) Date
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bart C. Gutekunst 8,000/(1)/ 9% $1.00 5/08/2002
Alan J. Rabin 12,000/(1)/ 14% $1.00 5/08/2002
Kirk D. Kamsler 8,000/(1)/ 9% $1.00 5/08/2002
Jonathan S. Lee 8,000/(1)/ 9% $1.00 5/08/2002
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) These options are subject to immediate exercise.
27
<PAGE>
The following table sets forth information concerning the value of unexercised
stock options at March 31, 1997 for those persons named in the Summary
Compensation Table.
AGGREGATED OPTIONS IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised The-Money Options at
Acquired on Value Options at Fiscal Year End Fiscal Year End
Name Exercise Realized Exercisable/Unexercisable(1) Exercisable/Unexercisable
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bart C. Gutekunst - - 54,429/0 $0/$0
Alan J. Rabin - - 72,571/0 $0/$0
Jonathan S. Lee - - 11,333/6,667 $0/$0
Kirk D. Kamsler - - 11,333/6,667 $0/$0
</TABLE>
(1) These options have been adjusted to give effect to the Company's one for
seven reverse stock split effected December 13, 1994.
COMPENSATION OF DIRECTORS
For their service on the Board, each outside director is entitled to receive
annually the sum of $3,000 and such number of shares of the Company's Common
Stock that have a total value of $6,000 based on the average of the bid and ask
prices of the Company's Common Stock on the OTC Bulletin Board Service as quoted
on March 31, 1998. The Company accrued in respect of each of William Burns,
Larry Haimovitch, Augusto Ocana, Robert Rylee and Tracey Young the sum of $3,000
and 13,953 shares of the Company's Common Stock for their services through
fiscal year 1998.
EMPLOYMENT AGREEMENTS
Mr. Alan J. Rabin is employed as the President and Chief Executive Officer of
the Company pursuant to a three-year employment agreement dated as of October
13, 1994 amended by the Board of Directors at its meeting of May 15, 1996. As
compensation thereunder, Mr. Rabin receives an annual salary of $150,000;
reimbursement for business travel and other business expenses; and a bonus of up
to 50% of his annual salary based on the performance of the Company. The
employment agreement also provided reimbursement for Mr. Rabin's relocation and
temporary living expenses, not to exceed $38,000 plus the cost associated with
the moving of personal possessions and his family. His employment agreement
provides a severance package under certain defined circumstances equal to the
balance of the salary due under the employment agreement (payable in accordance
with the Company's payroll practices) and a lump sum payment equal to nine
months of his annual base salary then in effect, plus maintenance by the Company
(to the extent permitted under plan documents) for nine months from the date of
termination all benefit plans in which he was entitled to participate while an
employee, or the equivalent. The nine-month lump sum severance payment is also
payable to Mr. Rabin in the event his employment agreement is not renewed by the
Company at the end of its term. Pursuant to his employment agreement, the
Company awarded to Mr. Rabin a stock option for 28,571 shares of the Company's
Common Stock at an exercise price of $3.50 per share, all of which are now
exercisable immediately. Mr. Rabin's stock option agreement contains a change of
control provision whereby in the event of a change in control of the Company,
all outstanding options become immediately exercisable.
Mr. Bart C. Gutekunst is employed as the Chairman of the Board of the Company
pursuant to a three-year employment agreement dated as of October 13, 1994. As
compensation thereunder, Mr. Gutekunst receives an annual salary of $48,000;
reimbursement for business travel and other business expenses; and a bonus
related to the Company's financial, capital raising and corporate development
and acquisition activities in the form of the
28
<PAGE>
following transactional fees: 1% for debt and equity source, and 1% of the gross
consideration for asset acquisitions or sales, which fees are payable to Mr.
Gutekunst upon closing by the Company or its successor-in-interest of the
applicable transaction. Pursuant to the employment agreement, Mr. Gutekunst
received an option for 21,429 shares of the common stock of the Company at an
exercise price of $3.50 per share, all of which are now exercisable. His
employment agreement contains the same severance provisions as Mr. Rabin's
employment agreement and his stock option contains the same change of control
provision as Mr. Rabin's stock option agreement.
STOCK OPTION PLANS
On September 9, 1987, the Board of Directors of the Company adopted the 1987
Non-Qualified Stock Option Plan (the "1987 Plan"). The 1987 Plan provided the
Board of Directors with the authority to grant to employees, officers and
directors, and employees of the Company non-qualified options to purchase up to
a maximum of 142,857 shares of the Company's Common Stock.
On February 7, 1992, the Company's Board of Directors adopted the 1992 Non-
Qualified Stock Option Plan (the "1992 Plan"). The 1992 Plan provided the Board
of Directors with the authority to grant officers, directors, and employees of
the Company non-qualified options to purchase up to a maximum of 42,857 shares
of the Company's Common Stock. On March 17, 1994, the Board of Directors
amended and restated the 1992 Plan and provided therein authorization to issue
options for up to a maximum of 157,143 shares of the Company's Common Stock.
On January 19, 1995, the Board of Directors of the Company authorized the
combination of the 1987 Plan and the 1992 Plan into one plan now known as the
Combined 1987-1992 Non-Qualified Stock Option Plan ("Combined Option Plan").
The Combined Option Plan provides that all issued and outstanding stock option
agreements under the previous plans shall be governed by the Combined Option
Plan. Under the Combined Option Plan, the Company is authorized to issue
options to employees, officers and directors to purchase up to a maximum of
400,000 shares of the Company's Common Stock. As of March 31, 1998, there were
outstanding options for 373,927 shares under the Combined Plan, of which 309,857
shares were subject to options held by officers and directors at exercise prices
ranging from $1.00 to $3.75 per share.
29
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS. As of May 29, 1998, eighteen (18) stockholders were
known by the Company beneficially to own five percent (5%) or more of the
outstanding voting securities of the Company. The following table sets forth the
indicated information as of May 29, 1998 with respect to each person known by
the Company own beneficially to more than five percent (5%) (calculated in
accordance with the guidelines promulgated by the Securities and Exchange
Commission) of the 2,648,739 issued and outstanding shares of the Company Common
Stock on that date.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership (1) of Class (2)(3)
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Phillip R. Beutel /(4)/ 277,351 10.38%
3 Chase Lane
Colorado Springs, CO 80906
Penfield Partners, L.P. /(5)/ 159,856 6.00%
c/o William D. Witter, Inc.
150 E. 53rd Street
New York, New York 10022
Jeffrey Schuss 159,856 6.00%
c/o William D. Witter, Inc.
150 E. 53rd Street
New York, New York 10022
William D. Witter 159,856 6.00%
c/o William D. Witter, Inc.
150 E. 53rd Street
New York, New York 10022
Bradley Resources Company /(6)/ 452,280 15.49%
107 John Street
Southport, CT 06490
George Holbrook, Jr. 452,280 15.49%
107 John Street
Southport, CT 06490
James R. McGoogan 452,280 15.49%
107 John Street
Southport, CT 06490
Richard V. Traister 452,280 15.49%
107 John Street
Southport, CT 06490
ROI Partners /(7)/ 143,399 5.39%
353 Sacramento Street
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
San Francisco, CA 94111
Mitchell J. Soboleski 175,399 6.59%
353 Sacramento Street
San Francisco, CA 94111
Mark T. Boyer 175,399 6.59%
353 Sacramento Street
San Francisco, CA 94111
Austin W. Marxe /(8)/ 541,194 20.28%
153 East 53rd Street, Room 5101
New York, New York 10022
David Greenhouse /(9)/ 520,725 19.51%
153rd East 53rd Street, Room 5101
New York, New York 10022
Special Situations Fund III, L.P. /(10)/ 327,770 12.25%
153 East 53rd St. Rm 5101
New York, New York 10022
Special Situations Cayman Fund, L.P. /(11)/ 182,713 6.87%
153 East 53rd St. Rm 5101
New York, New York 10022
Irwin Gruverman /(12)/ 187,500 6.61%
16 Tanglewood Road
Needham, MA 02194
Paul F. Glenn /(13)/ 250,000 8.62%
P.O. Box 50310
Santa Barbara, CA 93150-0310
Sirrom Capital /(14)/ 350,000 11.87%
St. Cloud Corner
500 Church Street, Suite 200
Nashville, TN 37219 ---------------------------------------------------
5,420,138 194.92%
===================================================
</TABLE>
(1) Except as otherwise indicated, each person is the record owner of the shares
indicated and possesses the sole voting and investment power with respect to
such shares of common stock.
(2) Computations of percentage ownership of each individual treat warrants and
options to purchase common stock exercisable within the next sixty days as
though the shares subject thereto were issued and outstanding.
(3)The same shares may be beneficially held by more than one owner, resulting
in the total percentage of shares being greater than 100%.
31
<PAGE>
(4) Includes options to purchase 14,286 shares and warrants to purchase 8,665
shares.
(5) Includes warrants to purchase 17,332 shares. Penfield Parnters,L.P. is a
Delaware limited partnership. Pine Creek Advisors, L.P., a Delaware limited
partnership, having its address c/o William D. Witter, Inc., 153 East 53rd
Street, New York, New York 10022 is the general partner of Penfield
Partners, L.P. The general partners of Pine Creek Advisors, L.P. are Mr.
Schuss and William D. Witter, Inc., 153 East 53rd Street, New York, New
York 10022. Mr. William D. Witter is the President of William D. Witter,
Inc. and controls all shares controlled by William D. Witter, Inc. Through
their control of Pine Creek Advisors, L.P., each of Mr. Schuss and Mr.
Witter, acting individually, may vote and/or dispose of the shares held by
Penfield Partners, L.P.
(6) Bradley Resources Company ("Bradley") is a partnership. Mr. Holbrook, Mr.
McGoogan, and Mr. Traister are the general partners of Bradley. Each
general partner, acting individually, may vote and/or dispose of all the
shares held by Bradley. Bradley's shares include 181,898 shares held by
Bradley directly, warrants to purchase 16,811 shares held by Bradley,
options to purchase 3,571 shares held by Mr. Holbrook but beneficially
owned by Bradley, and 250,000 convertible debentures held by Bradley.
(7) Mr. Soboleski and Mr. Boyer are the general partners in the partnerships
holding the Company Common Stock as follows: 143,399 shares, including
warrants to purchase 12,132 shares are held by ROI Parnters, 12,000 shares
are held by ROI Offshore Fund, 6,000 shares are held by NAV LLC, 7,000
shares are held by Pleiades Investment Partners, and 7,000 shares are held
by ROI & Lane, L.P. The address of each of the foregoing partnerships is
353 Sacramento Street, San Francisco, CA 94111. Each general partner,
acting individually, may vote and/or dispose of all of the shares held by
any of the foregoing partnerships.
(8) Mr. Marxe owns 28,111 shares directly. Special Situations Fund III, L.P.
("Special"), 153 East 53rd Street, Room 5101, New York, New York, 10022
owns 327,770 shares, including warrants to purchase 27,731 shares. Special
Situations Cayman Fund ("Cayman"), 153 East 53rd Street, Room 5101, New
York, New York 10022 owns 182,713 shares including warrants to purchase
10,399 shares. Mr. Marxe is President and Chief Executive Officer of AWM
Investment Company, Inc. ("AWM"), 153 East 53rd Street, Room 5101, New
York, New York 10022. MGP Advisors Limited Partnership ("MGP"), 153 East
53rd Street, Room 5101, New York, New York 10022 is the general partner of
Special and AWM, in turn, is the general partner of MGP. Mr. Marxe, through
AWM and MGP, has control over all shares held by Special. AWM is also the
general partner of Cayman. Through AWM, Mr. Marxe has control over all
shares held by Cayman. Control of shares held by Special and Cayman is
shared with Mr. Greenhouse, the Executive Vice President of AWM. Each of
Mr. Marxe and Mr. Greenhouse may, individually, vote and/or dispose of all
shares held by Special and/or Cayman (see Footnote 9, below).
(9) Mr. Greenhouse owns 10,242 shares directly, including warrants to purchase
866 shares. Mr. Greenhouse is the Executive Vice President of AWM. Through
MGP and AWM, Mr. Greenhouse has control over all shares held by Special.
Through AWM, Mr. Greenhouse has control over all shares held by Cayman.
Control is shared with Mr. Marxe. (see Footnote 8, above).
(10) For shares held of record by Special Situations Fund III, L.P., see
Footnote 8, above. All shares owned by Special are controlled by Mr. Marxe
and Mr. Greenhouse.
(11) For shares held of record by Special Situations Cayman Fund, see Footnote
8, above. All shares owned by Cayman are controlled by Mr. Marxe and Mr.
Greenhouse.
(12) Includes convertible debentures convertible into 187,500 shares, of which
62,500 shares are held by Mr. Gruverman directly and 125,000 shares are
held by G&G Diagnostics, L.P. II, a limited partnership ("G&G"). Mr.
Gruverman is the general partner of G&G and has control of all shares held
by G&G.
(13) Includes convertible debentures convertible into 250,000 shares.
32
<PAGE>
(14) Includes warrants to purchase 300,000 shares.
MANAGEMENT. The following table sets forth the number of shares of common
stock beneficially owned by each Director of the Company as of May 29, 1998, and
the percentage of the outstanding shares such ownership represented at the close
of business on May 29, 1998 (according to information received by the Company),
together with information as to stock ownership of all Directors and Executive
Officers of the Company as a group as of May 29, 1998.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Name of Individual or Amount and Nature of Percent
Number of Persons in Group Beneficial Ownership(1)(3) of Class (2)
------------------------------------------------------------------------------------------------
<S> <C> <C>
William H. Burns............................ 24,274 0.91%
Bart C. Gutekunst........................... 67,577 2.50%
Larry G. Haimovitch......................... 33,841 1.27%
Augusto Ocana............................... 11,174 0.42%
Alan J. Rabin............................... 85,572 3.14%
Robert T. Rylee............................. 43,699 1.63%
Tracey E. Young............................. 23,491 0.88%
Jonathan S. Lee............................. 19,667 0.74%
Kirk D. Kamsler............................. 15,667 0.59%
All Directors and Executive Officers
as a group (14 persons)................... 384,920 13.03%
------------------------------------------------------------------------------------------------
</TABLE>
(1) Except as otherwise indicated, each person is the record owner of the
shares indicated and possesses the sole voting and investment power.
(2) Computations of percentage ownership of each individual and of the group
treat warrants and options to purchase common stock exercisable within the
next 60 days as though the shares subject thereto were issued and
outstanding.
(3) Includes warrants and options exercisable within the next 60 days to
purchase shares of common stock granted pursuant to the Company's Combined
Option Plan (see "Item 10. Directors' and Executive Officers' Compensation-
Stock Option Plans") as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Name of Individual or Number
Number of Persons in Group of shares
-------------------------------------------------------------------------------------
<S> <C>
William H. Burns...................................................... 13,000
Bart C. Gutekunst..................................................... 58,201
Larry G. Haimovitch................................................... 15,000
Augusto Ocana......................................................... 7,000
Alan J. Rabin......................................................... 73,996
Robert T. Rylee....................................................... 36,429
Tracey E. Young....................................................... 18,000
Jonathan S. Lee....................................................... 14,667
Kirk D. Kamsler....................................................... 14,667
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
All Directors and Executive Officers as a group (14 persons).......... 304,579
-------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND TRANSACTIONS
See "Employment Agreements" for a description of certain compensation
arrangements.
During the last calendar quarter of 1994, the Company raised $2,885,000
through a private placement of 5% Convertible Debentures (the "Debentures").
Interest payments have been made on March 31 and October 31 of each year,
commencing March 31, 1995. The Debentures were to mature October 31, 1999.
Effective March 31, 1996, the holders of the Debentures converted their
Debentures into the Company's Common Stock at a conversion rate of $2.80 per
share. Alan Rabin and Bart Gutekunst, President/Chief Executive Officer and
Chairman of the Board, respectively, of the Company, each received 8,928 shares
of the Company's Common Stock as a result of the conversion of the Debentures
owned by them. Those beneficial owners holding 5% or more of the Company issued
and outstanding Common Stock and the Common Stock they received upon conversion
of their Debentures is as follows: Phillip R. Beutel, 89,285 shares; Special
Situation Fund III, L.P., 285,714 shares; Penfield Partners, 178,571 shares;
Bradley Resources Company, 173,214 shares; and ROI Partners, 125,000 shares.
Pursuant to the terms of the Debentures, the Company filed with the SEC a
registration statement on Form S-1 registering the the Company's Common Stock
underlying the Debentures, which registration statement was declared effective
by the SEC on April 27, 1995.
In respect of their conversion of the Debentures, the Company issued warrants
to the Debenture holders for an aggregate of 100,000 warrants (to be divided
among the Debenture holders pro rata in accordance with their percentage
interests in the Debentures). The warrants have a term of three years and are
exercisable commencing March 31, 1996 at $5.00 per share.
Upon the closing of the minimum offering of the Debentures, Alan J. Rabin and
Bart C. Gutekunst entered into employment agreements with the Company on October
13, 1994. Previously, Mr. Gutekunst and Mr. Rabin had been consulting with and
assisting the Company in preparing its business plan and in obtaining additional
financing. On July 31, 1994, Mr. Gutekunst was appointed to the Board of
Directors to fill a vacancy. On October 13, 1994, Mr. Gutekunst was appointed
Chairman of the Board and Mr. Rabin was appointed the Company's President and
Chief Executive Officer pursuant to their respective employment agreements. For
consulting services rendered to the Company in connection with the development
of the Company's new business plan and the Company's financing, Mr. Rabin and
Mr. Gutekunst were paid consulting fees in the aggregate amount of $130,750.
Mr. Gutekunst and Mr. Rabin also participated in the Debenture financing
discussed above, and each acquired Debentures in the amount of $25,000.
In November 1995, the Company entered into an agreement with Biosight Inc., of
which William H. Burns, Jr., a director of the Company, is President and
principal stockholder. Under the agreement, Biosight Inc. provided consulting
services regarding the Company's manufacturing processes and inventory planning.
The agreement provided for payment of $30,000 in fees during the year ended
March 31, 1996 plus reimbursement of approved out-of-pocket expenses, and future
performance-related payments to be paid in stock and cash, provided certain
goals are met. Upon earning $30,000 in performance-related payments (in
combined cash and stock), the agreement provides for subsequent performance-
based payments to be made in the Company Common Stock. On September 12, 1997,
the Company issued 5,714 shares of the Company's Common Stock at $3.50 per share
to William H. Burns, Jr., for performance-based payments of $20,000.
During fiscal 1996, Tracey E. Young, a director of the Company, provided
consulting services to the Company regarding development of international
markets for the Company's products. In March 1996, the Board of Directors
approved payment of $5,000 in consulting fees to Ms. Young together with a grant
of a stock option for 5,000 shares, exercisable at $3.75 per share. In respect
of consulting services, the Board approved royalty payments to Ms. Young of $100
per unit (each unit comprised of a pacemaker and lead) sold in Japan for
35
<PAGE>
the three year period following approval of the product by regulatory
authorities in that country. As of May 29, 1998, Ms. Young has accrued
approximately $1,500 in royalty fees, however, the Company has not made any
royalty payments to her. Ms. Young has also provided the Company with consulting
services on clinical studies and other matters which included assisting the
Company in implementing its clinical studies for its single-lead DDD system, as
well as performing due diligence on the Company's merger with Electro. As of
December 26, 1997, Ms. Young has invoiced the Company approximately $100,000 for
consulting services performed by her through such date.
During fiscal 1996, the Company entered into a distribution agreement for the
European market with Grupo Taper, S.A., Madrid, Spain ("Grupo Taper"). As part
of the Distribution Agreement, Grupo Taper was permitted to designate a member
of the Board of Directors of The Company. Through December 31, 1997, that
member of the Board of Directors of the Company designated by Grupo Taper was
Dr. Augusto Ocana, an executive officer of Grupo Taper. On January 1, 1998, Dr.
Augusto Ocana left Grupo Taper's employ, and is therefore no longer Grupo
Taper's designate on the Board of Directors of the Company. Dr. Augusto Ocano
will, however, remain on the Board of Directors as an independent director. As
of that time, Grupo Taper will then designate another individual as a non-voting
member of the Board of Directors.
On October 28, 1996, the Company executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced the Company $108,247 at an annual
interest rate of ten per cent (10%). This advance, plus accrued interest, was
repaid to Mr. Gutekunst on February 14, 1997.
On March 24, 1997, the Company executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced the Company $100,000 at an annual
interest rate of ten per cent (10%) plus the right to purchase one (1) share of
restricted the Company Common Stock of the Company at an exercise price of
eighteen cents ($0.18) per share for each one dollar ($1.00) of interest earned
under the note. The note, plus accrued interest, was repaid to Mr. Gutekunst on
June 16, 1997.
On April 21, 1997, the Company executed a Security Agreement and Promissory
Note with Bart C. Gutekunst, director and Chairman of the Board. Under the
agreement and note, Mr. Gutekunst advanced the Company $68,553.65 at an annual
interest rate of ten percent (10%) plus the right to purchase one (1) share of
restricted common stock of the Company at an exercise price of eighteen cents
($0.18) per share for each one dollar ($1.00) of interest earned under the note.
The note, plus accrued interest, was repaid to Mr. Gutekunst on June 16, 1997.
On April 21, 1997, the Company executed a Security Agreement and Promissory
Note with Alan J. Rabin, a director and President. Under the agreement and
note, Mr. Rabin advanced the Company $32,429.18 at an annual interest rate of
ten percent (10%) plus the right to purchase one (1) share of restricted common
stock of the Company at an exercise price of eighteen cents ($0.18) per share
for each one dollar ($1.00) of interest earned under the note. The note, plus
accrued interest, was repaid to Mr. Rabin on June 16, 1997.
The foregoing transactions between the Company and its affiliates were
negotiated on behalf of the Company by its management. The Company believes
that such transactions are in compliance with the Company's policy that
transactions with affiliates be on terms at least as favorable as could have
been reasonably obtained from an unaffiliated third party.
36
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following Exhibits are filed as part of this Form 10-KSB:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<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 Certificate Exhibit 4.0 to Form S-1 Registration Statement filed on
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. 5% Exhibit 4.15 to Form 8-K Current Report dated October
Convertible Debenture due 11, 1994, File No. 0-14653
October 31, 1999
4.3 Combined 1987-1992 Non-Qualified Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
Stock Option Plan Statement filed on April 17, 1995, Registration No.
33-89938
4.4 Stock Purchase Warrant dated Exhibit 4.1 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of 1995, File No. 0-14653
Sirrom Capital Corporation
4.5 Stock Purchase Warrant, dated Exhibit 4.2 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of Dow 1995, File No. 0-14653
Corning Enterprises, Inc.
4.6 Stock Purchase Warrant, dated Exhibit 4.6 to Form 10-KSB for the year ended March 31,
October 15, 1995 in favor or 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.
</TABLE>
37
<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 Company September 30, 1986, File No. 0-14653
10.1 Settlement Agreement and Release Exhibit 10.2 to Form 10-K for the Year Ended March 31,
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 Sulzer 1993, File No. 0.14653
Intermedics 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 Sulzer 1992, File No. 0-14653
Intermedics 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 Biomedica, Exhibit 10.13 to Form 10-Q for the Quarter Ended
s.r.l. and the Company, dated December 31, 1994, File 0-14653
October 1, 1994
10.8 Agreement between the Company Exhibit 10.12 to Form S-1 Registration Statement filed
and Alan J. Rabin and Bart C. on March 2, 1995, Registration No. 33-89938
Gutekunst dated July 1, 1994
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Statement filed
Agreement between the Company on March 2, 1995, Registration No. 33-89938
and each Director, executed
December 1994
10.10 Employment Agreement between Exhibit 10.14 to Form S-1 Registration Statement filed
Robert R. Brownlee and the on March 2, 1995, Registration No. 33-89938
Company dated as of October 1,
1994
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.11 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated March 31,
between the Company and Sirrom 1995, File No. 0-14653
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 Dow 1995, File No. 0-14653
Corning Enterprises, Inc., dated
March 31, 1995
10.15 Subordination Agreement between Exhibit 10.5 to Form 8-K Current Report, dated March 31,
the Company Sirrom Capital 1995, File No. 0-14653
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 Sulzer September 30, 1995, File No. 0-14653
Intermedics Inc. and the Company
dated October 20, 1995
10.17 Amendment 2 to Supply Contract Exhibit 10.17 to Form 10-QSB for the Quarter ended
between Sulzer Intermedics September 30, 1995, File No. 0-14653
Inc.and the Company, October 20,
1995 dated
10.18 Amendment 2 to License Agreement Exhibit 10.18 to Form 10-QSB for the Quarter ended
between Sulzer Intermedics Inc. September 30, 1995, File No. 0-14653
and the Company, dated October
20, 1995
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>
39
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.20 Distribution Agreement between Exhibit 10.20 to Form 10-QSB for the Quarter ended
LEM Biomedica s.r.l. and the September 30, 1996, File No. 0-14653
Company,dated October 1,1996.
10.21 Security Agreement and Secured Exhibit 10.21 to Form 10-QSB for the Quarter ended
Promissory Note between Bart C. December 31, 1996, File No. 0-14653
Gutekunst and the Company, dated
October 28, 1996.
10.22 Security Agreement and Secured Exhibit 10.22 to Form 10-QSB for the Quarter ended
Promissory Note between Bart C. December 31, 1997, File No. 0-14653
Gutekunst and the Company, dated
March 24, 1997.
Security Agreement and Secured
10.23 Promissory Note between Alan J. Exhibit 10.23 to Form 10-QSB for the Quarter ended June
Rabin and the Company, dated 30, 1997, File No. 0-14653
April 15, 1997.
10.24 Security Agreement and Secured Exhibit 10.24 to Form 10-QSB for the Quarter ended June
Promissory Note Between Bart C. 30, 1997, File No. 0-14653
Gutekunst and the Company, dated
April 21, 1997.
10.25 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated June 13,
Coast Business Credit and the 1997, File No. 0-14653
Company, dated June 13, 1997.
10.26 $300,000 Secured Promissory Note Exhibit 10.2 to Form 8-K Current Report, dated June 13,
of the Company to Coast Business 1997, File No. 0-14653
Credit, dated June 13, 1997.
10.27 $500,000 CAPEX Promissory Note Exhibit 10.3 to Form 8-K Current Report, dated June 13,
of the Company to Coast Business 1997, File No. 0-14653
Credit, dated June 13, 1997.
10.28 Intercreditor and Subordination Exhibit 10.4 to Form 8-K Current Report, dated June 13,
Agreement between Coast Business 1997, File No. 0-14653
Credit and Sirrom Capital
Corporation
10.29 Mortgage and security Agreement Exhibit 10.5 to Form 8-K Current Report, dated June 13,
between the Company and Coast 1997, File No. 0-14653
Business Credit
10.30 Security Agreement (Intellectual Exhibit 10.6 to Form 8-K Current Report, dated June 13,
Property) between the Company 1997, File No. 0-14653
and Coast Business Credit
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.31 Grant of Security Interest Exhibit 10.7 to Form 8-K Current Report, dated June 13,
Patents in favor of Coast 1997, File No. 0-14653
Business Credit
21.0 Subsidiaries of the Registrant Included herewith
27.0 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.
(B) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
last quarter of the year ended March 31, 1998.
The execution of an Agreement and Plan of Reorganization by and between
the Company, Electro, and Sub was reported on Form 8-K on February 2,
1998. A First Amendment to the Agreement and Plan of Reorganization was
executed on May 5th, 1998, and such event was reported on Form 8-K on May
21, 1998.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By /s/ Alan J Rabin
----------------------------------------
Alan J. Rabin
President and CEO, and a Director
Dated: June 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated and on the date indicated. This reporting may be
executed in multiple counterparts, each of which shall be deemed an original and
all of which together shall constitute one and the same instrument.
/s/ Bart C. Gutekunst Chairman of the Board
-----------------------------------------
Bart C. Gutekunst
Dated: June 25, 1998
/s/ Alan J. Rabin President and CEO, and a Director
-----------------------------------------
Alan J. Rabin
Dated: June 25, 1998
/s/ Tracey E. Young Director
-----------------------------------------
Tracey E. Young
Dated: June 25, 1998
/s/ William H. Burns Director
-----------------------------------------
William H. Burns
Dated: June 25, 1998
/s/ Larry G. Haimovitch Director
-----------------------------------------
Larry G. Haimovitch
Dated: June 25, 1998
/s/ Robert T. Rylee Director
-----------------------------------------
Robert T. Rylee
Dated: June 25, 1998
/s/ Augusto Ocana Director
-----------------------------------------
Augusto Ocana
Dated: June 25, 1998
/s/ W. Alan Walton Executive Vice President, Chief
----------------------------------------- Operating Officer
W. Alan Walton (Principal Accounting Officer)
Dated: June 25, 1998
42
<PAGE>
INDEX TO EXHIBITS
<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 Certificate Exhibit 4.0 to Form S-1 Registration Statement filed on
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. 5% Exhibit 4.15 to Form 8-K Current Report dated October
Convertible Debenture due 11, 1994, File No. 0-14653
October 31, 1999
4.3 Combined 1987-1992 Non-Qualified Exhibit 4.8 to Amendment No. 1 to Form S-1 Registration
Stock Option Plan Statement filed on April 17, 1995, Registration No.
33-89938
4.4 Stock Purchase Warrant dated Exhibit 4.1 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of 1995, File No. 0-14653
Sirrom Capital Corporation
4.5 Stock Purchase Warrant, dated Exhibit 4.2 to Form 8-K Current Report, dated March 31,
March 31, 1995 in favor of Dow 1995, File No. 0-14653
Corning Enterprises, Inc.
4.6 Stock Purchase Warrant, dated Exhibit 4.6 to Form 10-KSB for the year ended March 31,
October 15, 1995 in favor or 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.
10.0 License Agreement between Exhibit 10.1 to Form 10-Q for the Quarter Ended
Hughes/Bertolet and the Company September 30, 1986, File No. 0-14653
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.1 Settlement Agreement and Release Exhibit 10.2 to Form 10-K for the Year Ended March 31,
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 Sulzer 1993, File No. 0.14653
Intermedics 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 Sulzer 1992, File No. 0-14653
Intermedics 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 Biomedica, Exhibit 10.13 to Form 10-Q for the Quarter Ended
s.r.l. and the Company, dated December 31, 1994, File 0-14653
October 1, 1994
10.8 Agreement between the Company Exhibit 10.12 to Form S-1 Registration Statement filed
and Alan J. Rabin and Bart C. on March 2, 1995, Registration No. 33-89938
Gutekunst dated July 1, 1994
10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Statement filed
Agreement between the Company on March 2, 1995, Registration No. 33-89938
and each Director, executed
December 1994
10.10 Employment Agreement between Exhibit 10.14 to Form S-1 Registration Statement filed
Robert R. Brownlee and the on March 2, 1995, Registration No. 33-89938
Company dated as of October 1,
1994
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.11 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated March 31,
between the Company and Sirrom 1995, File No. 0-14653
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 Dow 1995, File No. 0-14653
Corning Enterprises, Inc., dated
March 31, 1995
10.15 Subordination Agreement between Exhibit 10.5 to Form 8-K Current Report, dated March 31,
the Company Sirrom Capital 1995, File No. 0-14653
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 Sulzer September 30, 1995, File No. 0-14653
Intermedics Inc. and the Company
dated October 20, 1995
10.17 Amendment 2 to Supply Contract Exhibit 10.17 to Form 10-QSB for the Quarter ended
between Sulzer Intermedics September 30, 1995, File No. 0-14653
Inc.and the Company, October 20,
1995 dated
10.18 Amendment 2 to License Agreement Exhibit 10.18 to Form 10-QSB for the Quarter ended
between Sulzer Intermedics Inc. September 30, 1995, File No. 0-14653
and the Company, dated October
20, 1995
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>
45
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.20 Distribution Agreement between Exhibit 10.20 to Form 10-QSB for the Quarter ended
LEM Biomedica s.r.l. and the September 30, 1996, File No. 0-14653
Company,dated October 1,1996.
10.21 Security Agreement and Secured Exhibit 10.21 to Form 10-QSB for the Quarter ended
Promissory Note between Bart C. December 31, 1996, File No. 0-14653
Gutekunst and the Company, dated
October 28, 1996.
10.22 Security Agreement and Secured Exhibit 10.22 to Form 10-QSB for the Quarter ended
Promissory Note between Bart C. December 31, 1997, File No. 0-14653
Gutekunst and the Company, dated
March 24, 1997.
Security Agreement and Secured Exhibit 10.23 to Form 10-QSB for the Quarter ended June
10.23 Promissory Note between Alan J. 30, 1997, File No. 0-14653
Rabin and the Company, dated
April 15, 1997.
10.24 Security Agreement and Secured Exhibit 10.24 to Form 10-QSB for the Quarter ended June
Promissory Note Between Bart C. 30, 1997, File No. 0-14653
Gutekunst and the Company, dated
April 21, 1997.
10.25 Loan and Security Agreement Exhibit 10.1 to Form 8-K Current Report, dated June 13,
Coast Business Credit and the 1997, File No. 0-14653
Company, dated June 13, 1997.
10.26 $300,000 Secured Promissory Note
of the Company to Coast Business Exhibit 10.2 to Form 8-K Current Report, dated June 13,
Credit, dated June 13, 1997. 1997, File No. 0-14653
10.27 $500,000 CAPEX Promissory Note Exhibit 10.3 to Form 8-K Current Report, dated June 13,
of the Company to Coast Business 1997, File No. 0-14653
Credit, dated June 13, 1997.
10.28 Intercreditor and Subordination Exhibit 10.4 to Form 8-K Current Report, dated June 13,
Agreement between Coast Business 1997, File No. 0-14653
Credit and Sirrom Capital
Corporation
10.29 Mortgage and security Agreement Exhibit 10.5 to Form 8-K Current Report, dated June 13,
between the Company and Coast 1997, File No. 0-14653
Business Credit
10.30 Security Agreement (Intellectual Exhibit 10.6 to Form 8-K Current Report, dated June 13,
Property) between the Company 1997, File No. 0-14653
and Coast Business Credit
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.31 Grant of Security Interest Exhibit 10.7 to Form 8-K Current Report, dated June 13,
Patents in favor of Coast 1997, File No. 0-14653
Business Credit
21.0 Subsidiaries of the Registrant
27.0 Financial Data Schedule
</TABLE>
47
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF THE REGISTRANT
CARDIAC CONTROL SYSTEMS FAR EAST, LTD.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 674
<ALLOWANCES> 6
<INVENTORY> 1,424
<CURRENT-ASSETS> 2,326
<PP&E> 5,626
<DEPRECIATION> 3,652
<TOTAL-ASSETS> 5,317
<CURRENT-LIABILITIES> 3,042
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 22,351
<TOTAL-LIABILITY-AND-EQUITY> 5,317
<SALES> 3,823
<TOTAL-REVENUES> 5,886
<CGS> 2,340
<TOTAL-COSTS> 6,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> (1,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,240)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> 0
</TABLE>
