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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB A
----------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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
(Address of Principal Executive Offices) (Zip Code)
----------------------------
Registrant's telephone number, including area code: (904) 445-5450
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
As of July 31, 1998, 2,648,739 shares of the Registrant's common stock, $.10 par
value, were outstanding.
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CARDIAC CONTROL SYSTEMS, INC.
INDEX TO FORM 10-QSB
JUNE 30, 1998
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet at June 30, 1998 (Unaudited) 3
Statements of Operations and Accumulated Deficit for the
Three Months ended June 30, 1998 (Unaudited) 4
Statements of Cash Flows for the
Three Months ended June 30, 1998 (Unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position
and Results of Operations 10
PART II. OTHER INFORMATION 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
- ------------------------------------------------------------------------------
June 30,
1998
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ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 33,527
Accounts and notes receivable 560,529.45
Inventories 1,396,572.34
Prepaid expenses 254,710.04
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,245,338.88
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PROPERTY, PLANT AND EQUIPMENT (NET) 1,918,679.60
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OTHER ASSETS:
Deferred financing costs, less accumulated
amortization of $272,177 426,270.45
Deferred license fees, less accumulated
amortization of $53,333 146,666.69
Deferred merger costs 427,371.57
Other 80,010.14
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TOTAL OTHER ASSETS 1,080,318.85
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TOTAL ASSETS $ 5,244,337
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,160,095
Due to related party 102,521.80
Accrued compensation 308,874.26
Accrued royalties 210,111.01
Other accrued expenses 74,284.73
Deposits payable 352,481.62
Notes and debt obligations payable within one year 1,112,861.51
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TOTAL CURRENT LIABILITIES 3,321,230.04
8% CONVERTIBLE DEBENTURES 300,000.00
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR 1,503,037.92
OTHER LIABILITIES 84,622.39
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TOTAL LIABILITIES 5,208,890.35
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STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 30,000,000 shares
authorized, 2,648,739 shares issued 264,874
Additional paid in capital 22,337,797
Accumulated deficit (22,567,224)
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TOTAL STOCKHOLDERS' EQUITY 35,447
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,244,337
==============================================================================
See accompanying notes to financial statements
3
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CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(Unaudited)
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Three Months Ended June 30
1998 1997
- ------------------------------------------------------------------------------
REVENUE
Net sales $ 620,777 $ 852,288
Royalty income 0 697,125
---------------------------
Total revenue 620,777 1,549,413
---------------------------
COSTS AND EXPENSES
Cost of products sold 326,090 503,815
Selling, general and administrative expenses 469,091 743,072
Engineering, research and development expenses 334,915 458,272
---------------------------
Total cost and expenses 1,130,096 1,705,159
---------------------------
OPERATING INCOME (LOSS) (509,319) (155,746)
---------------------------
OTHER INCOME (EXPENSES)
Interest income 317 5,983
Interest expense (156,295) (82,586)
Other income
---------------------------
Total other income (expenses) (155,978) (76,602)
---------------------------
NET INCOME (LOSS) (665,297) (232,348)
ACCUMULATED DEFICIT - BEGINNING OF PERIOD (21,901,927) (20,662,217)
---------------------------
ACCUMULATED DEFICIT - END OF PERIOD $(22,567,224) $(20,894,565)
===========================
NET INCOME (LOSS) PER COMMON SHARE $ (0.25) $ (0.09)
AVERAGE NUMBER OF SHARES OUTSTANDING 2,648,739 2,619,371
See accompanying notes to financial statements
4
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CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended June 30, 1998 1997
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(665,297) $(232,348)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 114,263 104,579
Gain (loss) on fixed asset disposals - (671)
Cash provided by (used for):
Accounts receivable 113,143 (273,180)
Inventories 27,124 (118,157)
Prepaid expenses (47,147) (158,281)
Other assets (2,026) -
Accounts payable 132,677 (199,755)
Due to related parties (4,500) -
Accrued interest 3,054 -
Accrued compensation 50,356 36,253
Accrued compensated absences 606 22,694
Deposits payable - 184,011
Other accrued expenses 6,736 (7,359)
Other liabilities 1,230 15,455
------------------------
Net cash provided by (used for) operating activities (269,781) (626,758)
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,180) (186,640)
Deferred merger costs (106,922) -
Proceeds from sale of equipment - 4,260
Increase in other assets - (2,600)
------------------------
Net cash provided by (used for) investing activities (108,102) (184,980)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and debt obligations payable - 93,893
Repayment of notes and debt obligations payable - (193,983)
Proceeds from issuance of 8% convertible debenture 300,000 -
Net borrowings on line of credit 56,225 (93,893)
Proceeds from short term debt 35,745 -
Repayments of long term debt (1,973) (1,534)
Debt issuance costs - (165,288)
------------------------
Net cash provided by (used for) financing activities 389,998 (360,804)
------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,115 (34,184)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,412 185,463
------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,527 $ 151,279
========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 109,344 $ 57,071
See accompanying notes to financial statements
5
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CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of June 30, 1998, the related statements of operations and accumulated
deficit for the three months ended June 30, 1998 and 1997, and the statements of
cash flows for the three months ended June 30, 1998 and 1997 are unaudited. In
the opinion of management, such financial statements reflect all adjustments,
consisting only of normal recurring items, necessary to present fairly the
financial position of the Company at June 30, 1998, and the results of
operations and the cash flows for the three months ended June 30, 1998.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months ended June 30, 1997 to conform with
classifications used in the unaudited financial statements for the three months
ended June 30, 1998.
The accompanying unaudited financial statements as of June 30, 1998 and for the
three months ended June 30, 1998 and 1997 should be read in conjunction with the
Company's audited financial statements for the year ended March 31, 1998.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company has a history of net losses
and incurred a net loss for the three months ended June 30, 1998 of $665,297.
The Company's ability to continue as a going concern is dependent upon the
consummation of the proposed merger with Electro-Catheter Corporation (see Note
6 below) and the attainment of a profitable level of operations. The Company
believes that continual development of new product and resultant sales growth is
critical to attaining a profitable level of operations. Therefore, the Company
is continuing its efforts to invest in development of its single lead technology
and expand its sales volume, both domestically and internationally. Management
believes that the Company has the potential to increase sales and ultimately
achieve a profitable level of operations. Also, the Company is pursuing
additional working capital to expand its market position and pursue development
of new technologies. However, there is no assurance that the Company will be
able to attain profitable operations and continue operations as a going concern.
NOTE 2 - LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included for the three months ended June 30, 1998 and 1997, as their effect on
the loss per share is anti-dilutive.
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NOTE 3 - INVENTORIES
Inventories at June 30, 1998 are summarized as follows:
----------------------------------------------------------------------
June 30, 1998
-------------
(unaudited)
Raw materials and supplies........................... $ 812,251
Work-in-process...................................... 341,668
Finished goods....................................... 279,601
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1,433,520
Reserve for obsolescence............................. 36,948
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$ 1,396,572
----------------------------------------------------------------------
Finished goods inventories include approximately $135,427 of products consigned
to customers and independent sales representatives at June 30, 1998.
NOTE 4 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at June 30, 1998:
----------------------------------------------------------------------
June 30, 1998
-------------
Sirrom mortgage note, net of discount (A).......... $ 1,492,950
Coast Business Credit (B).......................... 1,069,523
Other.............................................. 53,427
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2,615,900
Amount payable within one year.................... 1,112,862
-------------
Amount payable after one year...................... $ 1,503,038
----------------------------------------------------------------------
(A) On March 31, 1995, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Sirrom Capital Corporation ("Sirrom") and
executed a $1,500,000 secured promissory note. Interest on the note is
payable monthly at 13.5% per annum and principal is due on March 31, 2000.
The note is secured by a first mortgage lien on all the Company's real and
personal property, excluding inventory and accounts receivable, but
including general intangibles such as its patents and royalties. The Loan
Agreement restricts the Company from incurring additional indebtedness in
excess of $200,000 annually without the lender's consent. In addition, the
Company must give the lender advance notice of certain events, such as
dividend payments, certain new stock issues, reorganizations, and merger or
sale of substantially all assets.
In connection with the Loan Agreement, the Company granted Sirrom warrants
to purchase, initially, 100,000 shares of the Company's common stock at $.01
per share. An additional 50,000 warrants to purchase shares of common stock
at $.01 per share will be granted to the lender upon each anniversary date,
beginning March 31, 1997 through March 31, 1999, that any amount owed to
Sirrom shall be outstanding. On March 31, 1997 and, again, on March 31,
1998, the Company granted Sirrom 50,000 additional warrants pursuant to the
Loan 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
7
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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. This has
resulted in an effective interest rate of approximately 30% per annum on the
Sirrom debt. The Sirrom note includes an unamortized debt discount of $7,050
at June 30, 1998.
(B) On June 13, 1997, the Company entered into a Loan Agreement ("Agreement")
with Coast Business Credit ("CBC") for a maximum borrowing of $3.5 million
which includes a line of credit up to $2.7 million, a $500,000 sub line for
capital expenditures ("CAPEX"), and a $300,000 term loan ("Term Loan"). The
maximum borrowing base available under the line of credit is based upon
eligible receivables and inventory as defined in the Agreement. The maturity
date for the Agreement is June 30, 2000. The CAPEX and the Term Loan are
based upon a 48 month amortization period. The interest rate on the line of
credit is equal to the prime rate plus 2%, and the interest rate for the
Term Loan and the CAPEX Subline is equal to prime rate plus 2.25%.
Borrowings under the Agreement are collateralized by a first security
interest in substantially all of the assets of the Company. The Agreement
also contains a minimum tangible net worth requirement. In addition, CBC was
granted warrants to purchase 37,500 shares of stock at $4 per share,
expiring June 30, 2002.
In conjunction with the Agreement, the Company obtained an Intercreditor and
Subordination Agreement between CBC and Sirrom. This agreement provides that
Sirrom subordinate its first security interest in the assets of the Company
to CBC, however, the priority interest of CBC in the Company's real estate
is limited to $500,000. As consideration for its waiver of its first
security interest in the assets of the Company, Sirrom was granted warrants
to purchase 50,000 shares of stock at $5 per share, exercisable at any time
from June 6, 1997 and expiring on June 6, 2002.
On June 11, 1998, the Company and CBC executed an amendment to the original
Loan Agreement whereby CBC agreed to advance the Company a further Bridge
Loan in the sum of $250,000 repayable on August 31, 1998. The interest rate
on the Bridge Loan is equal to prime rate plus 5% per annum , calculated on
the basis of a 360-day year for the actual number of days elapsed. The
exercise price of the warrants to purchase 37,500 shares of stock granted
under the Agreement dated June 13, 1997 was reduced from $4.00 to $0.40 and,
in addition, CBC was granted warrants to purchase 25,000 shares of stock at
$0.40, expiring June 30, 2002.
Aggregate notes and debt obligations outstanding at June 30, 1998 mature as
follows: 1999 - $1,112,862; 2000 - $4,153; 2001 - $1,497,251; 2002 - $1,634.
NOTE 5 - 8% CONVERTIBLE DEBENTURES
From April 22 through May 4, 1998, the Company obtained $300,000 in interim
financing from selected current investors through the issuance of an 8%
convertible debenture, convertible to shares of stock at $0.40 per share. The
debenture holders include two stockholders of Cardiac Control Systems, Inc., Mr.
George Holbrook and Mr. A. Bruce Brackenridge. In return for their efforts, the
exercise price of the option controlled by Mr. Holbrook to purchase 3,571 shares
of the Company stock at $3.50 a share and the exercise price of the warrant
controlled by Mr. Holbrook to purchase 16,811 shares of the Company stock at
$5.00 a share were each reduced to $0.40 a share and the exercise price of the
8
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warrant held by Mr. Brackenridge to purchase 866 shares of the Company stock at
$5.00 was reduced to $0.40. The Company is attempting to obtain an additional
$250,000 on similar terms.
NOTE 6 - PROBABLE MERGER
On October 27, 1997, the Company entered into a letter of intent with Electro
Catheter Corporation, Inc (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.
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 Agreement and Plan of Reorganization, dated May 5, 1998 and a Second
Amendment to Agreement and Plan of Reorganization, dated August 7, 1998
(collectively, the "Merger Agreement"). Simultaneously with the 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, Inc., a Delaware corporation and a holding company ("CTG").
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, holders of Electro's common stock, $.10 par
value per share ("Electro Common Stock"), will receive one-fifth of a share of
common stock, $.10 par value, of CTG 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 Electro; and (ii) the registration under the Securities Act of 1933, as
amended, and all applicable state securities laws, of the shares of CTG to be
issued pursuant to the Merger.
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.
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Item 2. Management's Discussion and Analysis of Financial Position and Results
of Operations
The statements contained in this Form 10-QSB that are not historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Additional written or oral forward looking statements
may be made by Cardiac Control systems, Inc. (the "Company") from time to time
in filings with the Securities and Exchange Commission or otherwise. Such
statements may include, but not be limited to, projections of revenues, income,
or loss, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate, " project," and similar expressions identify forward
looking statements, which speak only as of the date such statement is made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified and certain of which are beyond
the Company's control and actual results may differ materially depending on a
variety of important factors including the sources for sufficient capital to
meet the Company's growth and operation, the ability of the Company to
continually develop new, advanced products, the length of the regulatory review
process for new or advanced products, the availability of raw materials,
expansion of sales volume, changes in economic conditions, demand for the
Company's products, and changes in the regulatory and competitive environment.
Statements in this Form 10-QSB, including the Notes to the Financial Statements
and "Management's Discussion and Analysis of Financial Position and Results of
Operations", describe factors, among others, that could contribute to or cause
such differences.
LIQUIDITY AND CAPITAL RESOURCES
From April 22 through May 4, 1998, the Company obtained $300,000 in
interim financing from selected current investors through the issuance of an 8%
convertible debenture (the "Debenture"), convertible into shares of Company
Common Stock at $0.40 per share. Two of the Debenture holders, Mr. George
Holbrook and Mr. A. Bruce Brackenridge, are also holders of an option and
warrants. In addition to receiving the Debenture, these two individuals also
received a reduction in the exercise prices of their warrants and options. The
exercise price of the option controlled by Mr. Holbrook to purchase 3,571 shares
of Company Common Stock at $3.50 a share and the exercise price of the warrant
controlled by Mr. Holbrook to purchase 16,811 shares of Company Common Stock at
$5.00 a share were each reduced to $0.40 a share and the exercise price of the
warrant held by Mr. Brackenridge to purchase 866 shares of Company Common Stock
at $5.00 was reduced to $0.40. The Company is attempting to obtain an additional
$250,000 on similar terms.
On June 11, 1998, the Company and Coast executed an amendment to the
original Coast Loan Agreement whereby Coast agreed to advance the Company a
further bridge loan in the sum of $250,000 (the "Bridge Loan") due and payable
on August 31, 1998. The interest rate on the Bridge Loan is equal to the prime
rate plus 5% per annum, calculated on the basis of a 360-day year for the actual
number of days elapsed. The exercise price of the warrant to purchase 37,500
shares of Company Common Stock granted under the Coast Loan Agreement dated June
13, 1997 was reduced from $4.00 to $0.40 and, in addition, Coast was granted a
warrant to purchase 25,000 shares of Company Common Stock at an exercise price
of $0.40, expiring June 30, 2002.
The interest and warrant provisions and other inducements which the
Company is required to offer to obtain capital are becoming increasingly more
burdensome. Interim financing of the Company pending the consummation of the
Merger is extremely difficult to obtain. If the Company is unable to obtain
additional interim financing it might not be able to survive until November, the
expected time of consummation of the Merger.
10
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Cash used by operations during the first quarter of fiscal 1998 was
$269,781. Capital expenditures, repayment of long term debt and deferred merger
costs additionally utilized $1,180, $1,972 and $106,922, respectively. Proceeds
of debenture financing and short term borrowings were $300,000 and $35,745,
respectively, and net borrowings on the Line of Credit with Coast were $56,225.
Overall, positive cash flow for the first quarter of fiscal 1998 was $12,115.
As of June 30, 1998, the Company had no commitments for the acquisition
of capital assets. It had material commitments pursuant to certain inventory
procurement contracts of $859,397 at June 30, 1998.
RESULTS OF OPERATIONS
Fiscal Quarter Ended June 30, 1998 Compared To Fiscal Quarter Ended June 30,
1997.
Overview. The Company's total revenues for the first quarter of fiscal
1999 decreased 60% to approximately $621,000 from approximately $1.5 million for
the first quarter of fiscal 1998. Sales decreased from approximately $852,000 to
approximately $621,00 and royalties decreased from approximately $697,000 to
zero. Royalty income represented royalty fees from Sulzer Intermedics Inc.
("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 fees under this
agreement terminated on January 22, 1998.
Costs and expenses in the first quarter of fiscal 1999 decreased 32% to
approximately $1.13 million from approximately $1.71 million in the first
quarter of fiscal 1998, which, with the decrease in total revenues, resulted in
an Operating Loss of $509,319 in the first quarter of fiscal 1999 as compared to
an Operating Loss of $155,746 in the first quarter of fiscal 1998. Interest
expense in the first quarter of fiscal 1999 increased to $156,295 from $82,585
in the first quarter of fiscal 1998. The pretax loss in the first quarter of
fiscal 1999 increased to $665,297 from $232,348 in the first quarter of fiscal
1998.
Sales. Total Sales in the first quarter of fiscal 1999 decreased by
$257,340 or 27% to $620,777 from the level of $852,288 achieved in the first
quarter of fiscal 1998. Pacemaker unit sales decreased by 49% and pacemaker
dollar sales decreased by 46%. This decline reflects sales worldwide, and is due
to loss of sales to competition because of the Company's lack of a pacemaker
generator with rate response and other diagnostic features. Sales of pacing
electrode leads decreased by $208,230, which was largely offset by sales of
$166,625 for the Company's newly introduced defibrillation electrode leads to a
new original equipment manufacturer ("OEM") customer. The decline in pacing lead
sales was the result of a 59% decline in units reflecting a reduction both in
complete systems sold (pacemakers with leads), as well as in leads sold to
Intermedics. The reduction in sales to Intermedics is perceived to be due to the
reduction of internal inventories maintained by Intermedics, as well as a
reduction of sales of this product by Intermedics to its customers. 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
proposed Merger warrant further perseverance in this area.
Sales by geographic area for the first quarters of fiscal years 1999
and 1998 are as follows:
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GEOGRAPHIC AREA 1999 1998
--------------- -------- --------
United States $565,321 $781,009
International $ 55,456 $ 71,279
-------- --------
$620,777 $852,288
======== ========
Sales by product line for the first quarters of fiscal years 1999 and
1998 are as follows:
PRODUCT LINE 1999 1998
------------ -------- --------
Pacemakers $244,062 $449,512
Electrode Leads $344,024 $385,629
Other $ 32,691 $ 17,147
-------- --------
$620,777 $852,288
======== ========
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 fees under this agreement
terminated on January 22, 1998.
Cost of Products Sold. Cost of products sold in the first quarter of
fiscal 1999 was $326,090, compared to $503,815 in the first quarter of fiscal
1998, representing a decrease of 35% as compared with a sales decrease of 27%,
which improved the rate of gross margin from 41% to 47%. This improvement was
largely due to improved overall selling prices in both the domestic and the
international markets and manufacturing efficiencies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $469,091 in the first quarter of fiscal 1999,
representing a decrease of 37% from $743,072 in the first quarter of fiscal
1998. Selling expenses were $158,770 in the first quarter of fiscal 1999
compared to $346,377 in the first quarter of fiscal 1998, representing a
decrease of 54%, largely due to a decrease of $137,764 in volume dependent sales
commissions and royalty expenses. General and administrative expenses were
$310,321 in the first quarter of fiscal 1999 compared to $396,695 in the first
quarter of fiscal 1998 representing an decrease of 22% due largely to reduced
employment costs.
Engineering, Research and Development Expenses. Engineering, research
and development expenses were $334,915 in the first quarter of fiscal 1999,
representing a reduction of 27% from the level of $458,272 in the first quarter
of fiscal 1998 due to reduced activity and employment costs.
Other Income and Expenses. Interest income was $317 in the first
quarter of fiscal 1999, compared to $5,983 in the first quarter of fiscal 1998.
Total interest expense in the first quarter of fiscal 1999 increased to $156,295
from the level of $82,585 incurred during the first quarter of fiscal 1998, due
largely to additional interest arising the first quarter of fiscal 1999 on the
Coast Loan.
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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.
European Economic Community ("EEC") nations have adopted universal
standards as developed by the International Organization for Standordigation
("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 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.
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 United States Food and Drug
Administration ("FDA") clearance to commercially market a single-lead atrial-
controlled ventricular pacemaker that it developed utilizing the Company's
technology pursuant to license and supply agreements with the Company.
Intermedics commenced marketing its new pacemakers in March 1995. In addition,
other competitors have also commenced marketing competitive single-lead
products.
Although the introduction of the new single-lead pacemakers poses
competition for the Company, management believes that the Company will benefit
from such competition since the new competition will increase the visibility of
single-lead, atrial-controlled ventricular pacemakers in the marketplace and
thereby increase market acceptance of the product. Further, management believes
that there is a sufficient market to accommodate both the Company's and other
competitive pacemakers. The Company estimates its market share of pacing
products to be about 0.25% of an estimated worldwide pacing systems market of
$2.0 billion.
Various factors impact on a firm's ability to increase market share
including, but not limited to, the financial strength of the firm, the ability
of the firm and its competitors, and the time involved in obtaining FDA
clearance for new or improved products. Therefore, although management believes
that the Company is well poised for viable growth, management cannot predict the
degree of market share the Company can obtain. Factors beyond the Company's
control may impede its progress and in such event, its business and operations
would be adversely impacted.
The Company's ability to successfully compete with Intermedics and
other pacemaker manufacturers will depend on the Company's ability to supply
product and recruit and increase a quality sales force and continue to develop
and release new advanced products. The Company historically has been restricted
in its marketing capabilities due to financial constraints impeding its ability
to supply products and recruit and train a sales force. However, the Company
believes that the resources and products available with the Merger, and the
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associated funding to be obtained in connection with the 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 produces income for the Company. The Company sells electrode leads
to Intermedics for its new systems under an amended and restated supply
agreement that expires on August 1, 1998.
It is anticipated that Intermedics will eventually develop its own
manufacturing capability for electrode leads necessary for its new pacemakers.
However, any such development will take time. Although the Company does not know
how long it will take Intermedics to develop its own manufacturing capability,
added to any such development period would be the time necessary to obtain FDA
clearance of its manufacturing process. Thus, although the Company cannot
guarantee that it will continue to supply Intermedics with products, the Company
anticipates providing Intermedics with existing or new leads for the next few
years without a supply agreement on the same or similar terms and conditions
that the Company sells to other similar customers. However, in the event
Intermedics receives FDA approval in a shorter time-frame than anticipated, or
other events occur which causes a decrease in Intermedics' orders, the Company's
business and operating results would be adversely affected.
Sources of Supply. Two of the Company's principal suppliers of
materials used primarily in electrode lead production, Dow Corning 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 the
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 performed. 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
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projected demands for product. The new pacing system under development will
utilize appropriate new ASICs for the new system 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-Catheter Corporation, a New Jersey corporation
("Electro"), 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.
To effectuate the Merger, the Company, Electro and Sub executed an
Agreement and Plan of Reorganization dated as of January 20, 1998, as amended by
a First Amendment to Agreement and Plan of Reorganization, dated as of May 5,
1998 and a Second Amendment to Agreement and Plan of Reorganization, dated as of
August 7, 1998 (collectively, the "Merger Agreement"). Prior to consummation of
the Merger, the Company will effectuate a 1 for 5 reverse stock split (the
"Reverse Split") whereby the number of outstanding shares of Company Common
Stock will be reduced to approximately 530,000 shares. Simultaneously with the
consummation of the Merger, the Company will reorganize into a holding company
structure (the "Restructuring") whereby the Company will become a direct,
wholly-owned subsidiary of Catheter Technology Group, Inc., a Delaware
corporation ("CTG"). 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.
Pursuant to the Merger Agreement, each outstanding share of common
stock, $.10 par value, of Electro ("Electro Common Stock") will be converted
into the right to receive one-fifth of a share of common stock, $.10 par value,
of CTG ("CTG Common Stock"). No fractional shares of CTG Common Stock will be
issued in the Merger, but cash will be paid in lieu of such fractional shares.
Approximately 1,278,000 shares of CTG Common Stock will be issued to
Electro stock holders in connection with the merger (the "Merger Shares"). The
Merger will result in: (i) the reverse acquisition by Electro stock holders of
CTG (as the successor issuer and parent holding company of the Company as a
result of the Restructuring) due to the fact that immediately after the
consummation of the Merger, the Merger Shares will represent an aggregate of
approximately 55% of the outstanding shares of CTG Common Stock (after giving
effect to the approximately 22% interest in CTG to be issued in connection with
the contemplated public offering to occur simultaneous with and as a condition
to the consummation of the Merger), based on the number of shares of CTG Common
Stock outstanding at the completion of the Reverse Split and the Restructuring;
and (ii) the combination of the current business operations and management of
the Company and Electro.
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
15
<PAGE>
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 to review the potential impact of the Year
2000 Issue. Such assessment has included a review of the impact of the issue in
primarily 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 replaced before they cause any operational problems.
This upgrading is estimated to take less than four man-months of effort. In
order to insure Year 2000 compliance, the Company has created a task force to
periodically review their 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's task force has identified the other organizations which
are critical to the Company's continued operations. The Company intends to
survey these organizations to determine the impact of the Year 2000 on their
operations and their plans for addressing any potential concerns. The Company
expects that this assessment will be completed in the fourth quarter of 1998 and
expects that any issues will be resolved by the end of the second calendar
quarter of 1999.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and No. 131, "Disclosure about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 130 establishes standards for
reporting and displaying comprehensive income, its components and accumulated
balances. SFAS 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 SFAS 130 and SFAS 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.
In June 1998, the Financial Accounting Standards Board issued SFAS 133
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may specifically be designated as a hedge, the
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<PAGE>
objective of which is to match the timing of gain or loss recognition of (I) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii)) the earnings effect of the hedged transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized as income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into any derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
17
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
In order to amend certain provisions of the Agreement and Plan of
Reorganization dated as of January 20, 1998, as amended by a First Amendment to
Agreement and Plan of Reorganization dated as of May 5, 1998, the Company,
Electro and Sub executed a Second Amendment to Agreement and Plan of
Reorganization dated August 7, 1998 (the "Amendment"). The Amendment provides,
among other things, that: (i) the Company will effectuate the Reverse Split
prior to consummation of the Merger and as a consequence, the holders of Electro
Common Stock will receive one-fifth of a share of CTG Common Stock; (ii) an
additional condition to the consummation of the Merger is that the affirmative
vote of the holders of a majority of the outstanding shares of the Company
Common Stock entitled to vote at a special meeting of the stockholders of the
Company shall have approved the Reversed Split and the Restructuring, and
ratified, approved and adopted the Merger Agreement; (iii) the condition that
the ratio of the closing bid price of a share of Company Common Stock to a share
of Electro Common Stock shall not be greater than 2.00 nor less than .50 was
deleted; and (iv) the date by which the Merger Agreement may be terminated by
any party if the conditions to the consummation of the Merger are not met was
extended to October 31, 1998. The Company still plans to consummate the Merger
after the occurrence of all conditions precedent.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed in Part II of this report are as follows:
2.0 First Amendment to Agreement and Plan of Reorganization
dated May 5, 1998.
4.0 8% Convertible Debenture due April 24, 2003.
10.0 $250,000 Bridge Loan Agreement between the Company and
Coast.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
A First Amendment to Agreement and Plan of Reorganization between the
Company, Electro, and Sub was executed on May 5th, 1998, and such event was
reported on Form 8-K on May 21, 1998.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CARDIAC CONTROL SYSTEMS, INC.
Date: October 7, 1998 By: /s/ Alan J. Rabin
----------------------------
Alan J. Rabin, President and
Chief Executive Officer
19
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INDEX TO EXHIBITS
Exhibits
- --------
2.0 First Amendment to Agreement and Plan of Reorganization dated
May 5, 1998.
4.0 8% Convertible Debenture due April 24, 2003.
10.0 $250,000 Bridge Loan Agreement between the Company and Coast.
27.0 Financial Data Schedule.
<PAGE>
EXHIBIT 2.0
FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into as of this 5th day of May 1998, by and among
CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation ("Parent"), CCS
SUBSIDIARY, INC., a New Jersey corporation and wholly-owned subsidiary of Parent
("Acquisition Sub"), and ELECTRO-CATHETER CORPORATION, a New Jersey corporation
("Company").
R E C I T A L S:
WHEREAS, Parent, Acquisition Sub and the Company entered into that
certain Agreement and Plan of Reorganization dated as of January 20, 1998 (the
"Reorganization Agreement"; terms used herein and as otherwise defined shall
have the meanings given to them in the Reorganization Agreement); and
WHEREAS, the parties desire to remove the ability to waive certain
conditions to the Closing and the consummation of the Merger; and
WHEREAS, due to changes in market conditions the parties desire to
change the Exchange Ratio; and
WHEREAS, Parent desires to reorganize through a holding company
structure pursuant to Section 251(g) of the General Corporation Law of the State
of Delaware, whereby Parent would form a direct, wholly-owned subsidiary
("Holdings"), which will form a direct, wholly-owned subsidiary ("Holdings
Merger Sub"), whereby Merger Sub will merge with and into Parent so that Parent
will become a direct, wholly-owned subsidiary of Holdings; and
WHEREAS, in order to obtain the required financing for the Merger, the
Company shall issue approximately 2,500,000 shares of Common Stock to
prospective investors immediately prior to the Effective Time of the Merger and
such shares of the Company Common Stock will be exchanged for shares of Holdings
common stock at the same ratio as all other shares of the Company Common Stock
are exchanged for shares of Holdings common stock (the "Financing Shares"); and
WHEREAS, the Company shareholders shall no longer exchange their issued
and outstanding shares of Common Stock for shares of Parent Common Stock, but
instead shall exchange such shares for shares of Holdings common stock at an
applicable ratio which shall result in the Company shareholders holding
approximately 71% of the issued and outstanding shares of Holdings common stock
other than the Financing Shares (the "Non-Financing Shares"), and the
shareholders of Parent will hold the remaining approximately 29% of the issued
and outstanding shares of Holdings Common Stock other than the Financing Shares;
and
WHEREAS, subsequent to the Effective Time of the Merger, Holdings will
effectuate a reverse stock split at a 1 for 5 ratio whereby the number of Non-
Financing Shares will be reduced to approximately 1.8 million, and the number of
Financing Shares will be reduced to approximately 500,000; and
WHEREAS, all Company Options, Company Warrants and conversion rights:
(1) shall be converted into options, warrants and conversion rights for shares
of Holdings common stock and will be added to the capital structure of Holdings;
(2) shall be adjusted in regards to the number and exercise price in accordance
to the same exchange ratio as the Company's Common Stock; (3) shall be subject
to the same reverse stock split ratio as the Holdings common stock; and (4) are
not included in the Company shareholders' 71% interest in shares of Holdings
outstanding common stock; and
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WHEREAS, the parties hereby agree to amend the Reorganization Agreement
to effectuate the foregoing in accordance with the terms set forth herein below.
NOW, THEREFORE, for the reasons set forth hereinbelow, and in
consideration of the mutual promises contained herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. The first paragraph on the first page shall be deleted in its
entirety and replaced with the following:
The Boards of Directors of Parent, Acquisition Sub
and the Company have each duly approved and adopted this
Agreement and Plan of Reorganization (this "Agreement"), the
plan of merger (the "Plan of Merger") and the proposed merger
of Acquisition Sub with and into the Company in accordance
with this Agreement, the Plan of Merger and the New Jersey
Business Corporation Act (the "New Jersey Statute"), whereby,
among other things, the issued and outstanding shares of
common stock, $.10 par value, of the Company (the "Company
Common Stock"), will be exchanged and converted into shares of
common stock, $.10 par value, of a to be organized parent
holding company of Parent ("Holdings") (the "Holdings Common
Stock") in the manner set forth in Article II hereof and in
the Plan of Merger, upon the terms and subject to the
conditions set forth in this Agreement and the Plan of Merger.
2. Subsection 2.1(b)(iii) shall be deleted in its entirety and
replaced with the following:
owned by Holdings or any subsidiary of Holdings,
shall be cancelled and no Holdings Common Stock or other
consideration shall be delivered in exchange therefore.
3. Subsection 2.1(c) shall be deleted in its entirety and
replaced with the following:
Subject to Section 2.2, each share of Company Common
Stock issued and outstanding immediately prior to the
Effective Time (other than shares cancelled pursuant to
Section 2.1(b)) shall be deemed cancelled and converted into
and shall represent the right to receive one share of Holdings
Common Stock in accordance with Section 2.2. For convenience
of reference, the shares of Holdings Common Stock to be issued
upon the exchange and conversion of Company Common Stock in
accordance with this Section 2.1(c) are sometimes hereinafter
collectively referred to as the "Merger Shares".
4. Subsection 2.1(d) shall be deleted in its entirety.
5. For purposes of Sections 2.2(a) - (g), 3.4(ii), 4.4(ii), 5.2,
6.5 and 6.16, all references to the defined phrase Parent Common Stock shall be
deleted in their entirety and replaced with the phrase Holdings Common Stock.
6. For purposes of Sections 2.2(a) - (g), 3.4(ii), 4.4(ii), 5.2
and 6.16, all references to the defined word Parent shall be deleted in their
entirety and replaced with the word Holdings.
7. The first sentence of Section 2.3 shall be deleted in its
entirety and replaced with the following:
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At the Effective Time, each of the Company's then
outstanding Company Warrants, Company Options and conversion
rights (whether or not exercisable at the Effective Time) by
virtue of the Merger and without any further action on the
part of the holder thereof, shall be assumed by Holdings and
automatically converted, on the same terms, into a warrant,
option or conversion right to purchase a number of shares of
Holdings Common Stock (to be registered shares to the extent
the option, warrant or conversion right holder is, by the
terms of the Company option plan, warrant or conversion right
in effect, entitled upon exercise of the option, warrant or
conversion right, to receive registered stock) equal to the
number of shares of Company Common Stock covered by such
Company Warrants, Company Options and conversion rights
immediately prior to the Effective Time, at an exercise price
per share of Holdings Common Stock equal to the exercise price
in effect under such Company Warrants, Company Options or
conversion rights immediately prior to the Effective Time.
8. The reference to Section 7.8 in the second sentence of Section
6.2 shall be deleted.
9. Section 6.16 shall be deleted in its entirety and replaced with
the following:
PREFERRED STOCK; SECURED PROMISSORY NOTE. Holdings
and The T Partnership agree that: (a) the designation of
Series A Preferred Stock of the Surviving Corporation, which
shall be convertible into the shares of Holdings Common Stock
at a conversion price equal to the product of 120% multiplied
by the price per share of the common stock of Holdings used as
the basis for the consideration given (either in the form of
issued stock, if any, or warrants, provided the exercise price
of the warrant reflects the current market value of common
stock, or otherwise) in exchange for any capital raised
pursuant to Section 7.7 of this Agreement, shall be as set
forth in Exhibit 1.4 attached hereto, and such number of
shares of Preferred Stock having a liquidation value equal to
$1,000,000 of the Company's indebtedness outstanding and due
to The T Partnership at the time of the Closing shall be
issued in redemption of $1,000,000 of such indebtedness; (b)
Holdings shall execute a conditional note for the benefit of
The T Partnership in the form set forth in Exhibit 6.16(b)
attached hereto; and (c) Holdings shall execute a secured
promissory note in an amount not to exceed $1,300,000, which
amount shall include interest up through Closing on the
Company's current indebtedness to The T Partnership, but such
amount shall not include any amount described under Section
9.13(b) which shall be payable at Closing, substantially in
the form set forth in Exhibit 6.16(c) attached hereto.
10. The introductory phrase under ARTICLE VII shall be deleted in
its entirety and replaced with the following:
The obligations of each Party to perform this
Agreement and the Plan of Merger and to consummate the
transactions contemplated hereby and thereby will be subject
to the satisfaction of the following conditions:
11. Section 7.1 shall be deleted in its entirety and replaced with
the following:
STOCKHOLDER APPROVAL. This Agreement, the Plan of
Merger and the Merger shall have been approved and adopted by
at least two-thirds (2/3) of the outstanding shares voting of
the Company Common Stock.
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<PAGE>
12. Section 7.6 shall be deleted in its entirety and replaced with
the following:
BID PRICE RATIO. The ratio of the closing bid price
of a share of Parent Common Stock to a share of Company Common
Stock shall not be greater than 2.00 nor less than .50 based
on the average of closing bid prices for any ten (10) day
period ending on and including the second NASDAQ trading day
immediately preceding the Closing Date and rounding the result
of such average to the nearest 1/100ths.
13. Section 7.8 shall be inserted and read as follows:
HOLDING COMPANY REORGANIZATION. Immediately prior to
the Effective Time, Parent shall reorganize through a holding
company structure pursuant to Section 251(g) of the General
Corporation Law of the State of Delaware and an Agreement of
Merger substantially in the form of Exhibit 7.8 attached
hereto, whereby Parent would form a direct, wholly-owned
Delaware subsidiary, which will also form a direct, wholly-
owned Delaware subsidiary ("Holdings Merger Sub") whereby
Holdings Merger Sub will merge with and into Parent so that
Parent will become a direct, wholly-owned subsidiary of
Holdings.
14. Introductory phrase to ARTICLE VIII shall be deleted in its
entirety and replaced with the following:
The obligations of Parent to perform this Agreement
and to consummate the transactions contemplated hereby and of
Acquisition Sub to perform this Agreement and the Plan of
Merger and to consummate the transactions contemplated hereby
and thereby will be subject to the satisfaction of the
following conditions, unless waived by Parent and Acquisition
Sub; provided, however, only non-material approvals may be
waived under Section 8.8 by Parent and Acquisition Sub:
15. The introductory phrase to ARTICLE IX shall be deleted in its
entirety and replaced with the following:
The obligations of the Company to perform this
Agreement and the Plan of Merger and to consummate the
transactions contemplated hereby and thereby will be subject
to the satisfaction of the following conditions, unless waived
by the Company; provided, however, Sections 9.6, and 9.9
through 9.13 may not be waived by the Company, except any non-
material approvals under Section 9.9 may be waived by the
Company:
16. Section 9.10 shall be deleted in its entirety and replaced
with the following:
APPOINTMENT OF DIRECTORS The Board of Directors of
Holdings shall have taken such action as shall be necessary to
expand the size of Holdings' Board of Directors and to appoint
Ervin Schoenblum and Abraham Nechemie as directors of Holdings
to serve on Holdings' Board of Directors until the next annual
meeting of the stockholders of Holdings. Holdings shall
continue to nominate such individuals at the next three (3)
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<PAGE>
successive annual meetings of the stockholders immediately
following the next annual meeting of the stockholders in the
same manner and on equal standing as other director nominees
comprising management's slate.
17. Section 9.13 shall be deleted in its entirety and replaced
with the following:
COMPANY INDEBTEDNESS. Provisions shall have been made
for payment at Closing of indebtedness of the Company: (a)
which is due at Closing to SSSG for reasonable attorneys' fees
and expenses; and (b) which may be incurred subsequent to May
1, 1998 in an amount of $100,000, or any greater amount as
agreed to by the Company and Parent in writing, for the
purpose of operating capital pending completion of the Merger,
and owed to The T Partnership.
18. The date set forth in Sections 11.1(b)(i) and 11.1(c) shall be
changed from May 1, 1998 to August 14, 1998.
19. The Section reference set forth in the proviso of the second
sentence in Section 11.2 shall be changed from 10.1(d) to 10.1(b).
20. The following shall be inserted after the first sentence of
Section 12.6:
Without limiting the foregoing, the rights and
obligations of Parent under this Agreement shall be binding
upon and inure to the benefit of Holdings.
21. Notwithstanding any provision in the Reorganization Agreement
to the contrary, each of Parent and the Company may take such actions as shall
allow each of them to secure interim financing in an amount not to exceed
$600,000 to be used for operating capital pending completion of the transactions
contemplated under the Reorganization Agreement; provided, however, that, prior
to consummating such financing arrangement, the material terms thereof are
disclosed to the other party and such terms are reasonably acceptable to the
other party, except that the issuance of convertible debt securities by Parent
in the amount of $580,000 with an effective conversion price per share of not
less than $.30, or on terms more favorable than those specified, are hereby
acceptable to the Company and such a financing arrangement may be consummated by
Parent without further disclosure or consent. No action on the part of either
party in securing financing contemplated by this Agreement and in accordance
herewith shall result in a breach of the Reorganization Agreement or constitute
default under such Reorganization Agreement and each party hereby consents to
such actions by the other party. Parent and the Company shall cause each of
their respective Disclosure Schedules to be amended to reflect any such interim
financing that they may obtain in accordance with this Agreement.
22. Sections 3.8 and 3.14 of the Company Disclosure Schedule shall
be amended to reflect the settlement of the Ternyila Judgment.
23. All Exhibits and the Glossary to the Reorganization Agreement
shall be amended to reflect the amendments to the Reorganization Agreement set
forth herein.
24. Except to the extent amended hereby, all terms, provisions and
conditions of the Reorganization Agreement shall continue in full force and
effect and shall remain enforceable and binding in accordance with their
respective terms.
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IN WITNESS WHEREOF, each of the parties hereto has caused this First
Amendment to Agreement and Plan of Reorganization to be executed on its behalf
as of the day and year first above written.
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ Alan J. Rabin
------------------
Alan J. Rabin
President
CCS SUBSIDIARY, INC.
By:/s/ Alan J. Rabin
-----------------
Alan J. Rabin
President
ELECTRO-CATHETER CORPORATION
By: /s/ Ervin Schoenblum
--------------------
Ervin Schoenblum
Acting President
The T Partnership hereby executes this Agreement for the limited and
sole purpose amending its obligations under Section 6.16 of the Reorganization
Agreement as set forth in Section 9 above.
THE T PARTNERSHIP, LLP
By:
--------------------------------
Name:
------------------------------
Its
--------------------------------
6
<PAGE>
EXHIBIT 4.0
8% Convertible Debenture, Due
April 13, 2003
<PAGE>
April __, 1998 $_________
CARDIAC CONTROL SYSTEMS, INC.
8% CONVERTIBLE DEBENTURE
DUE APRIL 24, 2003
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No holder of this Debenture shall have any preemptive right to acquire any
shares or securities of any kind, whether now or hereafter authorized which may
at any time be Issued, sold or offered for sale by the Company, except that the
Debenture may be converted into Common Stock as provided herein.
This Debenture and the Common Stock of the Company issuable upon conversion
hereof (until such time as such Common Stock is registered with the Securities
and Exchange Commission pursuant to an effective registration statement) have
not been registered under the Securities Act of 1933, as amended, or any other
securities statute, and no sale, transfer or other disposition of any interest
herein may be made unless, in the written opinion of counsel to the Company,
such transfer would not violate or require registration under any such statute.
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1. Payment. Cardiac Control Systems, Inc., a corporation duly organized and
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existing under the laws of the State of Delaware (herein referred to as the
"Company"), for value received, hereby promises to pay to
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, or registered assigns ("Holder"), the principal sum of
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,($ ) together with accrued interest, on April 24, 2003
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(the "Maturity Date"), in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts.
This Debenture shall bear simple, non-cumulative interest from the date
hereof through the Maturity Date at an interest rate of eight percent (8%) per
annum; provided, however, that whenever the payment of principal is overdue on
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the Debenture, interest shall accrue, if and to the extent permitted by
applicable law at ten percent (10%) per annum on the entire unpaid principal
balance of the Debenture so long as any such payment is overdue.
Interest shall be payable in cash or, at the Company's discretion, common
stock ($.10 par value) of the Company ("Company Common 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 accrued and unpaid
interest shall be due and payable. The cash value of any payments made in Common
Stock of the Company shall be the Conversion Price as hereinafter defined.
This Debenture may be prepaid in whole or in part at anytime prior to the
Issuance Date.
This Debenture is convertible into Common Stock, at the option of Holder,
pursuant to Section 2(a) below.
Upon conversion pursuant to Section 2 below, the Company shall not be
obligated or required to reduce or pay principal outstanding on this Debenture.
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By acceptance of this Debenture, the Holder agrees that it will promptly
deliver and surrender this Debenture to the Company upon full payment thereof,
and that it will promptly notify the Company of any disposition of the Debenture
and of the name and of the name and address of the transferee of such Debenture.
For purposes of this Debenture, the Company may assume that Holder is the holder
hereunder unless notified to the contrary in the manner provided in Section 5.
2. Conversion.
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(a) Conversion Right. In the period beginning with the date hereof
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through the business day immediately prior to the Maturity Date (the "Election
Period"), the Holder hereof shall have the right to elect to convert the
Debenture into Common Stock of the Company as set forth in Section 2(b) below,
in lieu of having the Company repay the Debenture pursuant to Section 1 above.
Such election shall be made in writing and delivered to the Company in
accordance with Section 5.
(b) Mechanics of Conversion. At any time, and, as applicable, from time
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to time, the Holder may convert into Common Stock at the Conversion Price the
entire principal amount outstanding on the Debenture or the Holder may convert
incrementally, and if incrementally, then the minimum amount so converted at
such time shall be twenty-five thousand dollars ($25,000.00) of outstanding
principal. Upon conversion, the principal amount of the Debenture then being
converted shall be converted into Common Stock of the Company on the Conversion
Date (defined below) at the price of one share of Common Stock for each $.40 of
outstanding principal (the "Conversion Price"). The Conversion Price and number
of shares of Common Stock issuable upon conversion are subject to adjustment as
provided this Section 2. No fractional shares of Common Stock shall be issued
upon conversion of the Debenture. In lieu of any fractional shares to which the
Holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the Conversion Price. Further, any accrued but unpaid
interest outstanding on the Conversion Date shall be paid to the Holder in cash,
or in company Common Stock, or any combination thereof as provided in Section 1
above. To exercise his conversion rights, the Holder shall give written notice
to the Company at the Company's office as indicated under Section 5 below, that
he elects to convert the Debenture or portion thereof (in the minimum amount of
$25,000.00) and shall state therein the amount of the outstanding principal that
he elects to convert into Common Stock in his name or the name or names of his
nominees in which he wishes the certificate of certificates for shares of Common
Stock to be issued.
(c) Issuance of Common Stock Upon Conversion. Within a reasonable time,
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not exceeding ten (10) business days after the Conversion Date (the "Issuance
Date"), the Company shall deliver or cause to be delivered to or upon the
written order of the Holder of the Debenture so converted, certificates
representing the number of fully paid and nonassessable shares of Common Stock
of the Company into which such Debenture, or increment thereof, may be converted
in accordance with the provisions of this Section 2. Within a reasonable time,
not exceeding ten (10) business days after receipt by the Holder of the
certificates, the Holder of the Debenture so converted shall surrender the
Debenture to the Company for cancellation. In the case of an incremental
conversion, the Company shall thereupon issue a new Debenture in an amount equal
to the outstanding principal balance prior to such conversion, less the amount
of outstanding principal so converted. Subject to the following provisions of
this Section 2 such conversion shall be deemed to have occurred on the
Conversion Date, so that the rights of the Holder of such Debenture shall be
treated for all purposes as having become the record holder or holders of such
shares of Common Stock at such time; provided, however, that no such conversion
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(when the stock transfer books of the Company shall be closed) shall be
effective to constitute the person or persons entitled to receive the shares of
Common Stock upon such conversion on such date, but such conversion shall be
effective to constitute the person or persons entitled to receive such shares of
Common Stock as the record holder or holders thereof for all purposes at the
close of business on the next succeeding day on which such
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stock transfer books are open. The "Conversion Date" shall be the date the
Company receives a notice of election from the Holder as provided in Section
2(b).
(d) Taxes on Conversion. The issuance of certificates of shares
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of Common Stock upon the conversion of the Debenture shall be made without
charge by the Company to the converting holder for any tax in respect of the
issuance of such certificates and such certificates shall be issued in the
respective names of, or in such names as may be directed by, the Holder of the
Debenture converted; provided, however, that the Company shall not be required
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to pay any tax which may be payable in respect of any transfer involved in the
issuance or delivery of any such certificate in a name other than that of the
Holder of the Debenture converted, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
(e) Adjustment to Conversion Price. At any time after the
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date on which the Debenture is first issued, the following adjustments shall
apply.
(i) Stock Dividends, Distributions or Subdivisions.
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In the event the Company shall issue additional shares of Common Stock (or
securities convertible into Common Stock) in a stock dividend, stock
distribution or subdivision paid with respect to Common Stock, or declare any
dividend or other distribution payable with additional shares of Common Stock
(or securities convertible into Common Stock) with respect to Common Stock or
effect a split or subdivision of the outstanding shares of the Company's Common
Stock, the Conversion Price shall, concurrently with the effectiveness of such
stock dividend, stock distribution or subdivision, or the earlier declaration
thereof, be proportionately decreased.
(ii) Combinations or Consolidations. In the event the
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outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(iii) Merger or Reorganization, etc. In case of any
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consolidation or merger of the Company with or into another corporation or the
conveyance of all or substantially all of the assets of the Company to another
corporation, each Debenture shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Company deliverable upon conversion of such
Debenture would have been entitled upon such consolidation, merger or
conveyance; and, in any such case, appropriate adjustment shall be made in the
application of the provisions herein set forth with respect to the rights and
interest thereafter of the Holders of Debentures, to the end that the provisions
set forth herein (including provisions with respect to adjustments in the
Conversion Price with respect to the Debenture) shall thereafter be applicable,
as nearly as reasonable may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of such Debenture.
(f) No Impairment. The Company will not, by amendment of its
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Articles of Incorporation or by-laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 2 and in the taking of all
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such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder of this Debenture against impairment.
(g) Common Stock Reserved. The Company shall reserve and keep
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available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect conversion of
the Debenture.
3. Registration Rights.
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(a) Notice of Registration. If at any time after the first date
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set forth above, the Company proposes to file a registration statement to
register any of its Common Stock under the Securities Act of 1933, as amended
(other than in connection with a merger or pursuant to Form S-4 or Form S-8 or
other comparable form not available for registering the shares of Common Stock
issuable upon the conversion of this Debenture (the "Registrable Stock") for
sale to the public), whether such registration is for the Company's own account
or the account of others, and provided the managing underwriter for the proposed
offering, if any, advises the Company that the inclusion of the Registrable
Stock in such registration statement would not jeopardize the successful
marketing of the Company Common Stock, in the managing underwriter's exercise of
reasonable judgment, then the Company shall at such time give prompt written
notice to Holder of its intention to effect such registration setting forth a
description of intended method of distribution and indicating Holder's right
under such proposed registration, and upon the request of Holder, delivered to
the Company within twenty (20) days after giving such notice (which request
shall specify the Registrable Stock intended to be disposed of by Holder), the
Company shall include such Registrable Stock held by Holder and requested to be
included in such registration subject to any underwriter's cutback or lock-up.
(i) Company's Withdrawal of Registration Statement. If, at any
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time after giving such written notice of the Company's intention to register any
of the Registrable Stock and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to file the registration statement wherein the
Registrable Stock would be registered, to withdraw a registration statement and
abandon the proposed offering in which Holder had requested to include his
Registrable Stock or to delay the registration of such Registrable Stock, at its
sole election, the Company may give written notice of such determination to
Holder and thereupon shall be relieved of its obligation to register any
Registrable Stock issued or issuable in connection with such registration (but
not from its obligation to pay registration expenses in connection therewith or
to register the Registrable Stock in a subsequent registration); and in the case
of a determination to delay a registration, the Company shall thereupon be
permitted to delay registering any Registrable Stock for the same period as the
delay in respect of securities being registered for the Company's own account.
(ii) Holder's Withdrawal of Registrable Stock. Holder shall be
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permitted to withdraw all or any part of the Registrable Stock at any time prior
to the effective date of such registration.
(iii) Holder's Acceptance of Underwriting Terms. The Company
-----------------------------------------
shall not be required to include any of the Registrable Stock in the
registration statement relating to an underwritten offering of the Company's
securities unless Holder accepts the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (provided such terms are
usual and customary for selling stockholders) and Holder agrees to execute
and/or deliver such documents in connection with such registration as the
Company or the managing underwriter may reasonably request.
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(b) Expiration of Registration Rights. The obligations of the
---------------------------------
Company to register shares of the Registrable Stock under this Section 3 shall
terminate ten (10) years after the Conversion Date, unless such obligations
terminate earlier in accordance with the terms of this Debenture.
(c) Cooperation with the Company. Holder will cooperate with the
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Company in all respects, including, without limitation, timely supplying all
information reasonably requested by the Company and executing and returning all
documents reasonably requested in connection with the registration and sale of
the Registrable Stock.
(d) Expenses. All expenses incurred by the Company in complying
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with the provisions of this Agreement, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of any
counsel and independent public accountants for the Company, fees and expenses
(including counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., fees of transfer agents and registrars and costs of insurance
("Registration Expenses") shall be borne by the Company. However, Registration
Expenses shall not include expenses of counsel for Holder, any transfer taxes or
any underwriting discounts, selling commissions or underwriter expense
reimbursement allowances applicable to the sale of the Registrable Stock
("Selling Expenses"). The Company will pay all Registration Expenses in
connection with each registration of the Registrable Stock pursuant to the
provisions of this Section 3. All Selling Expenses in connection with each such
registration statement shall be borne by the participating Holders in proportion
to the number of shares sold by each.
4. Events of Default. If any of the following events (herein defined as
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"Events of Default") shall occur and be continuing: (a) if the Company defaults
in the payment of the principal or interest under this Debenture or any part
thereof when the same shall become due and payable, either by the terms hereof
or otherwise as herein provided; (b) upon the breach of the covenants of the
Company contained in this Debenture; (c) if any proceedings involving the
Company are commenced by or against the Company under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law or statute of the federal government or any state government
and, if such proceedings are instituted against the Company, the Company by any
action or failure to act indicates its approval of, consent to or acquiescence
therein, or an order shall be entered approving the petition in such proceeding
and, within fifty (50) days after the entry thereof, such order is not vacated,
or stayed on appeal or otherwise, or shall not otherwise have ceased to continue
in effect; then, as to the Events of Default under clauses (a) and (b)
hereinabove, the Holder of this Debenture may at its option after thirty (30)
days" advance written notice to the Company (during which time the Company shall
have the right to cure such Event of Default) declare such Debenture to be and,
all the Debentures shall thereon become, forthwith due and payable in cash. If
an Event of Default exists after the thirty day notice and a failure of the
Company to cure as provided above, the Holder may pursue all remedies available
to him at law or equity. As to an Event of Default under clause (c) hereinabove,
then the Debenture shall be, and all the Debentures shall thereupon become
immediately due and payable in cash and the Holder may pursue all remedies
available to him at law or equity.
5. Communications and Notices. Except as otherwise specifically provided
--------------------------
herein, all communications and notices provided for in this Debenture shall be
sent by express mail, facsimile or telegram to the Holder at his address as
provided to the Secretary of the Company from time to time and, if to the
Company, at 3 Commerce Boulevard, Palm Coast, Florida 32037-7961, for the
attention of the President, or such other address as may be furnished in writing
from time to time. Any notice provided pursuant to this Section 5 shall be
deemed received upon delivery. The Company and the holder of any Debenture may
from time to time change their respective addresses, for purposes of this
Section 5, by
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written notice to the other parties; provided, however, that notice of such
change shall be effective only upon receipt.
6. Governing Law. This Debenture shall be construed in accordance
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with and governed by the laws of the State of Florida.
7. Assignment. This Debenture shall bind and inure to the benefit of
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the respective successors and assigns of the parties hereto.
8. Securities Restrictions.
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACTS. NEITHER SAID
SECURITIES NOR ANY SECURITIES WHICH MAY BE ISSUED IN EXCHANGE FOR, UPON THE
CONVERSION OF, OR OTHERWISE IN RESPECT OF, SAID SECURITIES MAY BE SOLD, OFFERED
FOR SALE, OR ENCUMBERED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO SUCH SHARES OR SECURITIES UNDER SAID SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES ACTS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
9. Waiver. No waiver of a right in any instance shall constitute a
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continuing waiver of successive rights, and any one shall govern only the
particular matters waived.
Appropriate stop transfers will be noted on the Debentures and other
corporate records.
IN WITNESS WHEREOF, CARDIAC CONTROL SYSTEMS, INC., has caused this Debenture
to be executed in its corporate name by its President and Chief Executive
Officer on the date and year first above written.
CARDIAC CONTROL SYSTEMS, INC.
BY:
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Alan J. Rabin, President and Chief
Executive Officer
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EXHIBIT 10.0
Amendment to Loan Document between
the Company and Coast Business Credit
and
Secured Promissory Note between the
Company and Coast Business Credit
<PAGE>
AMENDMENT TO LOAN DOCUMENTS
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This AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment")
dated as of this 11 day of June 1998, between Coast Business Credit(R), a
--
division of Southern Pacific Bank ("Coast"), and Cardiac Control Systems, Inc.,
a Delaware corporation ("Borrower"), is made in reference to the following
facts:
A. Borrower previously entered into a Loan and Security Agreement
with Coast dated June 13, 1997 (as it may be amended, supplemented or modified
from time to time, the "Loan Agreement"). In addition, Borrower previously
executed certain related documents, instruments and agreements in connection
with the Loan Agreement (the "Loan Documents"), each dated as of even date
therewith, including but not limited to a Warrant ("Warrant One") to purchase
Thirty-seven Thousand Five Hundred (37,500) shares of common stock of Borrower.
B. Borrower has requested and received Loans from Coast in excess
of the amount to which Borrower is eligible under the Loan Agreement (the
"Overadvance").
C. Borrower has requested that Coast provide it with a term loan
in the amount of Two Hundred Fifty Thousand Dollars ($250,000) to satisfy the
Obligations resulting from the Overadvance and for ongoing working capital
needs.
D. Coast is willing to amend the Loan Agreement on the terms and
subject to the conditions set forth in this Amendment.
NOW THEREFORE, in consideration of the foregoing and the terms and
conditions hereof, the parties do hereby agree as follows, effective as of the
date set forth above:
1. Definitions. Terms used herein, unless otherwise defined herein, shall have
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the meanings set forth in the Loan Agreement.
2. Credit Line. Section 1 of the Schedule is hereby amended by deleting the
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text after the first colon up to subsection (1) and replacing it with the
following:
"Loans in an amount not to exceed the lesser of a total of
$3,500,000 at any one time outstanding (the "Maximum Dollar
Amount"), or the sum of (1), (2), (3), (4) and (5) below."
3. Bridge Loan. Section 1 of the Schedule is hereby amended by adding a
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subsection (5) as follows:
"Bridge Loan. Coast will advance a term loan ("Bridge Loan") to
Borrower in the aggregate amount of Two Hundred and Fifty Thousand
Dollars ($250,000) that shall be repayable on August 31, 1998 and
evidenced by a secured promissory note in form and substance
satisfactory to Coast, provided that the proceeds of the Bridge
Loan shall be applied to satisfy the Overadvance, as defined in the
Amendment dated June 11, 1998."
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4. Interest Rate. Section 2 of the Schedule is hereby amended by deleting the
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first sentence of the text thereof and substituting the following therefor:
"A rate equal to the "Prime Rate" plus 2% per annum, other
than the Term Loan and CAPEX Subline which will accrue
interest at the Prime Rate plus 2.25% per annum and the
Bridge Loan which will accrue interest at the Prime Rate
plus 5% per annum, calculated on the basis of a 360-day year
for the actual number of days elapsed."
5. Warrant One. Concurrently herewith and as a condition to Coast's
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performance of its obligations under this Amendment, Borrower and Coast
hereby agree and acknowledge that Warrant One is hereby amended so that the
"Current Warrant Price" (as defined in Warrant One) shall be equal to Forty
Cents ($0.40) per share.
6. Warrant Two. As a condition to Coast's performance of its obligations
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under this Amendment, Borrower shall deliver a second warrant to Coast in
form and substance satisfactory to Coast granting Coast the option to
purchase Twenty-five Thousand (25,000) shares of common stock of Borrower
at a price of Forty Cents ($0.40) per share.
7. Accommodation Fee. In consideration of this Amendment and the financial
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accommodations made available to Borrower from Coast, and in addition to
all other fees and charges, Borrower shall pay to Coast on the date hereof
an accommodation fee of $10,000, which fee shall be fully earned as of the
date hereof.
8. No Waiver. Nothing herein shall be construed as a waiver of any Event of
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Default.
9. Reaffirmation. Except as modified by the terms herein, the Loan Agreement
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and the Loan Documents remain in full force and effect. If there is any
conflict between the terms and provisions of this Amendment and the terms
and provisions of the Loan Agreement the Loan Documents, the terms and
provisions of the is Amendment shall govern.
10. Counterparts. This Amendment may be executed in one or more counterparts,
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each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
11. Governing Law. This Amendment shall be governed by and construed according
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to the laws of the State of California.
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12. Attorneys' Fees; Costs; Jury Trial Waiver. Borrower agrees to pay, on
-----------------------------------------
demand, all attorneys' fees and costs incurred in connection with the
negotiation, documentation and execution of this Amendment. If any legal
action or proceeding shall be commenced at any time by any party to this
Amendment in connection with its interpretation or enforcement, the
prevailing party or parties in such action or proceeding shall be entitled
to reimbursement of its reasonable attorneys' fees and costs in connection
therewith, in addition to all other relief to which the prevailing party or
parties may be entitled. Each of Coast and Borrower hereby waives its right
to a jury trial in any such action or proceeding.
"Borrower"
CARDIAC CONTROL SYSTEMS, INC.
By: /s/ Alan J. Rabin
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Title: President & CEO
"Coast"
COAST BUSINESS CREDIT, a division of
Southern Pacific Bank, formerly known as COAST
BUSINESS CREDIT, a division of Southern Pacific
Thrift & Loan Association
By:
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Title:
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COAST
SECURED PROMISSORY NOTE
$250,000 Los Angeles, California
June 11, 1998
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the order of
COAST BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), at 12121
Wilshire Boulevard, Suite 1111, Los Angeles, California, or at such other
address as the holder of this Note shall direct, the entire principal balance of
this Note, plus any and all accrued and unpaid interest, on the earlier of: (i)
August 31, 1998, or (ii) the date that the Loan and Security Agreement between
the Borrower and Coast dated June 13, 1997 as amended, replaced, supplemented or
modified from time to time (collectively, the "Loan Agreement") terminates by
its terms or is terminated by either party in accordance with its terms, plus
interest as hereinafter provided.
This Note shall bear interest on the unpaid principal balance hereof from time
to time outstanding at a rate equal to the "Prime Rate" (as hereinafter defined)
plus 5% per annum. Interest shall be calculated on the basis of a 360-day year
for the actual number of days elapsed. As used herein, the term "Prime Rate"
shall mean the actual "Reference Rate" or the substitute therefor of the Bank of
America NT & SA whether or not that rate is the lowest interest rate charged by
said bank. The interest rate applicable to this Note shall be adjusted monthly,
as of the first day of each month, and the interest rate charged during each
month shall be based on the highest Prime Rate in effect during said month. If
the Prime Rate is unavailable, "Prime Rate" shall mean the highest of the prime
rates published in the Wall Street Journal on the first business day of the
month, as the base rate of corporate loans at large U.S. money center banks.
Accrued interest shall be payable monthly, in addition to the principal payment
provided above, commencing on June 30, 1998, and continuing on the last day of
each succeeding month.
Principal of, and interest on, this Note shall be payable in lawful money of the
United States of America. If a payment hereunder becomes due and payable on a
Saturday, Sunday or legal holiday, the due date thereof shall be extended to the
next succeeding business day, and interest shall be payable thereon during such
extension.
In the event any payment of principal or interest on this Note is not paid in
full when due, or if any other default or event of default occurs under the Loan
Agreement or any other present or future instrument, document, or agreement
between Borrower and Coast, Coast may, as its option, at any time thereafter,
declare the entire unpaid principal balance of this Note plus all accrued
interest to be immediately due and payable, without notice or demand. Without
limiting the foregoing, and without limiting Coast's other rights and remedies,
in the event any installment of principal or interest is not paid in full on or
before the date due, Borrower agrees that it would be impracticable or extremely
difficult to fix the actual damages resulting therefrom to Coast, and therefore
the Borrower agrees immediately to pay to Coast an amount equal to 5% of the
installment (or portion thereof) not paid, as liquidated damages, to compensate
Coast for the internal administrative expenses in administering the default.
Without limiting the foregoing, and without limiting Coast's other rights and
remedies, in the event any installment of interest is not paid on or before the
date due, it shall thereafter bear like interest as the principal of this Note.
The acceptance of any installment of principal or interest by Coast after the
time when it becomes due, as herein specified, shall not be held to establish a
custom,
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or to waive any rights of Coast to enforce payment when due of any further
installments or any other rights, nor shall any failure or delay to exercise any
rights be held to waive the same.
All payments hereunder are to be applied first to costs and fees referred to
hereunder, second to the payment of accrued interest and the remaining balance
to the payment of principal. Any principal prepayment hereunder shall be applied
against principal payments in the inverse order of maturity. Coast shall have
the continuing and exclusive right to apply or reverse and reapply any and all
payments hereunder in its sole discretion.
Borrower agrees to pay all costs and expenses (including without limitation
attorney's fees) incurred by Coast in connection with or related to this Note,
or its enforcement, whether or not suit be brought. Borrower hereby further
waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and Borrower hereby waives the benefits of any statute
of limitations with respect to any action to enforce, or otherwise related to
this Note.
This Note is secured by the Loan Agreement and all other present and future
security agreements and mortgages between Borrower and Coast. Nothing herein
shall be deemed to limit any of the terms or provisions of the Loan Agreement or
any other present or future document, instrument or agreement, between Borrower
and Coast, and all of Coast's rights and remedies hereunder and thereunder are
cumulative.
In the event any one or more of the provisions of this Note shall for any reason
be held to be invalid, illegal or unenforceable, the same shall not affect any
other provision of this Note and the remaining provisions of this Note shall
remain in full force and effect.
No waiver or modification of any of the terms or provisions of this Note shall
be valid or binding unless set forth in a writing signed by a duly authorized
officer of Coast, and then only to the extent therein specifically set forth. If
more than one person executes this Note, their obligations hereunder shall be
joint and several.
COAST AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS NOTE;
OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND
BORROWER; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY
OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH COAST OR BORROWER.
This Note is payable in, and shall be governed by the internal laws of, the
State of California.
CARDIAC CONTROL SYSTEMS, INC.
By /s/ Alan J. Rabin
----------------------------
President or Vice President
By /s/ W. A. Walton
----------------------------
Secretary or Ass't Secretary
6
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0
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