<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
-----------------------------
DELAWARE 74-2119162
(State or other jurisdiction of (IRS 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 January 31, 1998, 2,648,739 shares of the Registrant's common stock, $.10
par value, were outstanding.
1
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CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
DECEMBER 31, 1998
INDEX
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Page No.
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Part I. Financial Information
Balance Sheet at December 31, 1998 (Unaudited) ....................... 3
Statements of Operations and Accumulated Deficit for
the Three Months and Nine Months Ended
December 31, 1998 and 1997 (Unaudited)............................ 4
Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and 1997 (Unaudited)............................ 5
Notes to Financial Statements......................................... 6
Management's Discussion and Analysis of Financial Position
and Results of Operations......................................... 12
Part II. Other Information.............................................. 21
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
<S> <C>
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December 31,
1998
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ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 225,707
Accounts and notes receivable 712,368
Inventories 1,044,049
Prepaid expenses 228,789
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Total current assets 2,210,914
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Property, plant and equipment (net) 1,817,914
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Other assets:
Deferred financing costs, less accumulated
amortization of $344,553 383,460
Deferred license fees, less accumulated
amortization of $73,333 126,667
Deferred merger costs 749,964
Other 77,716
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Total other assets 1,337,807
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Total assets $ 5,366,635
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,139,786
Due to related party 101,400
Accrued compensation 550,501
Accrued royalties 172,612
Other accrued expenses 319,898
Deposits payable 342,570
Notes and debt obligations payable within one year 1,870,420
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Total current liabilities 4,497,187
8% Convertible debentures 300,000
12% Convertible debentures 200,000
Notes and debt obligations payable after one year 1,503,411
Other liabilities 82,731
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Total liabilities 6,583,329
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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 22,501,576
Accumulated deficit (23,983,144)
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Total stockholders' equity (1,216,694)
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Total liabilities and stockholders' equity $ 5,366,635
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</TABLE>
See accompanying notes to financial statements
3
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<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENT OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
<S> <C> <C> <C> <C>
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Three Months Ended December 31 Nine Months Ended December 31
1998 1997 1998 1997
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Revenue
Net sales $ 795,108 $ 1,011,110 $ 2,180,848 $ 2,904,888
Royalty income 0 604,500 0 1,900,125
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Total revenue 795,108 1,615,610 2,180,848 4,805,013
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Costs and expenses
Cost of products sold 451,992 590,896 1,229,811 1,742,956
Selling, general and administrative expenses 434,781 582,913 1,358,293 1,939,038
Engineering, research and development expenses 274,992 427,784 927,409 1,306,475
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Total cost and expenses 1,161,764 1,601,592 3,515,513 4,988,469
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Operating income (loss) (366,656) 14,017 (1,334,665) (183,456)
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Other income (expenses)
Interest income 436 1,018 1,228 8,969
Interest expense (449,074) (128,851) (747,780) (339,857)
Other income 0 0 0 941
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Total other income (expenses) (448,638) (127,833) (746,552) (329,947)
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Net income (loss) (815,294) (113,816) (2,081,217) (513,403)
Accumulated deficit - beginning of period (23,167,850) (21,061,804) (21,901,927) (20,662,217)
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Accumulated deficit - end of period $(23,983,144) $(21,175,620) $(23,983,144) $(21,175,620)
==================================================================
Net income (loss) per common share ($0.31) ($0.04) ($0.79) ($0.20)
Average number of shares outstanding 2,648,739 2,646,866 2,648,739 2,630,405
</TABLE>
See accompanying notes to financial statements
4
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<TABLE>
<CAPTION>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
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Nine months ended December 31, 1998 1997
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Cash flows from operating activities
Net loss $(2,081,216) (513,403)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 310,719 314,921
Securities received in lieu of insurance rebate 0 (799)
Stock issued for payment of directors' fees 0 34,000
Cash provided by (used for):
Accounts receivable (38,695) (346,884)
Inventories 379,648 (121,555)
Prepaid expenses (21,226) (4,696)
Other assets (337) --
Accounts payable 112,367 (2,516)
Due to related parties (5,622) --
Accrued interest 198,802 12,477
Accrued compensation 301,278 (12,564)
Accrued compensated absences (8,689) 13,972
Deposits payable (9,912) 42,180
Other accrued expenses 6,407 (56,760)
Other liabilities 12,034 14,811
----------- ----------
Net cash provided by (used for) operating activities (844,442) (626,816)
----------- ----------
Cash flows from investing activities;
Purchase of property, plant and equipment (3,355) (436,033)
Deferred merger costs (429,515) --
Increase in other assets 0 (7,870)
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Net cash provided by (used for) investing activities (432,870) (443,903)
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Cash flows from financing activities:
Proceeds from issuance of common stock and stock warrants, net of issuance costs 159,833 8,928
Currency translation adjustment 3,945 0
Proceeds from notes and debt obligations payable 617,443 109,293
Repayment of notes and debt obligations payable (46,324) (193,983)
Proceeds from issuance of 8% convertible debenture 300,000 --
Proceeds from issuance of 12% convertible debenture 200,000 --
Net borrowings on line of credit 278,410 1,318,054
Repayments of long term debt (2,133) (2,885)
Deferred financing costs (29,566) (310,449)
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Net cash provided by (used for) financing activities 1,481,608 928,958
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Net increase (decrease) in cash and cash equivalents 204,295 (141,761)
Cash and cash equivalents, beginning of year 21,412 185,463
----------- ----------
Cash and cash equivalents, end of period $ 225,707 43,702
----------- ----------
Supplemental cash flow information:
Interest paid during the period $ 268,038 239,723
Supplemental schedule of noncash investing and financing activities:
Reduction in accrued compensation in exchange for common stock -- 34,000
Reduction in accounts payable in exchange for common stock -- 8,928
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - General
These financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business, however without substantial
additional finance and/or the completion of the proposed merger with
Electro-Catheter Corporation, Inc. to support operational and working capital
requirements, there is no assurance that the Company will survive as a going
concern.
The accompanying balance sheet of Cardiac Control Systems, Inc. (the
"Company") as of December 31, 1998, the related statements of operations and
accumulated deficit for the three months and nine months ended December 31, 1998
and 1997, and the statements of cash flows for the nine months ended December
31, 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 December
31, 1998, and the results of operations for the three months and nine months
ended December 31, 1998 and 1997 and the cash flows for the nine months ended
December 31, 1998 and 1997.
Certain reclassifications have been made to the unaudited financial
statements previously reported for the three months and nine months ended
December 31, 1997 to conform with classifications used in the unaudited
financial statements for the three months and nine months ended December 31,
1998.
The accompanying unaudited financial statements as of December 31, 1998 and for
the three months and nine months ended December 31, 1998 and 1997 should be read
in conjunction with the Company's audited financial statements for the year
ended March 31, 1998 contained in the Company's annual report on Form 10-KSB.
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 nine months ended December 31, 1998 of
$2,081,217. The Company's ability to continue as a going concern is dependent
upon obtaining additional finance to support operational and working capital
requirements and/or the completion of the proposed merger with Electro-Catheter
Corporation, Inc. 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.
6
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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 and nine months ended December 31, 1998 and
1997, as their effect on the loss per share is anti-dilutive.
The FASB has issued SFAS No. 128, "Earnings per Share," which provides
guidance for computing and presenting earnings per share (EPS). This statement
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings per Share." This statement, when adopted, is not expected to have
a material impact on the Company.
NOTE 3 - Inventories
Inventories at December 31, 1998 are summarized as follows:
---------------------------------------------------------------
December 31, 1998
-----------
Raw materials and supplies $ 666,298
Work-in-process 210,575
Finished goods 204,123
-----------
1,080,997
Reserve for obsolescence (36,948)
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$ 1,044,049
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Finished goods inventories include approximately $96,093 of products consigned
to customers and independent sales representatives at December 31, 1998.
NOTE 4 - Notes And Debt Obligations Payable
Notes and debt obligations consist of the following at December 31,
1998:
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December 31, 1998
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Sirrom mortgage note, net of discount (A) $1,493,483
Coast Business Credit (B) 1,291,708
Minrad, Inc. Promissory note (C) 200,000
International Holdings, Inc. (D) 165,000
Greenberg Traurig Promissory Note (E) 184,000
Bart C. Gutekunst Promissory Note (F) 6,000
Alan J. Rabin Promissory Note (G) 4,000
Other 29,640
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$3,373,831
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Amount payable within one year 1,870,420
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Amount payable after one year $1,503,411
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7
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(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 subordinated 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 year 1995, $71,376 (50,000 shares) in
fiscal year 1997 and $19,550 (50,000 shares) in fiscal year
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 $6,517 at December 31, 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.
8
<PAGE>
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.
The Bridge Loan was repayable on November 30, 1998, but has
been extended to date. 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.
(C) On July 30, 1998, and August 13, 1998, the Company executed
promissory notes in favor of Minrad, Inc. ("Minrad") in the
amount of $75,000 and $125,000, respectively (collectively,
the "Minrad Note"). The Minrad Note bears interest at the
rate of 15% annually, and the principal amount and all
interest due thereunder is due and payable, after September
29, 1998, within ten (10) days after written demand from
Minrad.
(D) On August 26, 1998, the Company received $134,000 from
International Holdings, Inc. ("IHI") and executed a
promissory note in the amount of $165,000 (the "IHI Note")
in favor of IHI. Concurrently with execution of the IHI
Note, the Company paid Goodbody International, Inc., a
related company of IHI ("Goodbody"), a $34,000 consulting
fee for services relating to the obtaining of additional
debt financing. Pursuant to the terms of the IHI Note, the
Company has agreed to repay the IHI Note on or before
October 25, 1998. If the Company does not repay the IHI Note
on or before October 25, 1998, but does so on or before
November 12, 1998, in addition to repayment of the IHI Note,
the Company has agreed to pay Goodbody a $25,000 fee (the
"Goodbody Fee"). If repayment of the IHI Note and the
Goodbody Fee have not been received by IHI on or before
November 12, 1998, an immediate penalty fee of $2,500 shall
be incurred at 12:01 a.m. on November 13, 1998, and an
additional $2,500 fee will accrue and be imposed at 12:01
a.m. every 24 hours, until the IHI Note, the Goodbody Fee
and all penalty fees have been paid in full.
In connection with the IHI Note, the Company has agreed to
issue up to four warrants to IHI under certain conditions,
each giving IHI the right to purchase 50,000 shares of the
Company's common stock at an exercise price of $.01 per
share. If repayment of the IHI Note and the Goodbody Fee
have not been received by IHI on or before November 12,
1998, at 12:01 a.m. on November 13, 1998, the first of the
four warrants will be deemed issued to and earned by IHI. At
12:01 a.m. on the 13th of each month thereafter for up to
three months, one additional warrant shall be issued and
deemed earned, if the IHI Note, the Goodbody Fee and all
penalty fees have not been paid in full. Furthermore, if the
IHI Note, the Goodbody Fee and all penalty fees have not
been paid in full by January 1, 1999, IHI will have the
option to convert any or all of the amounts due into common
stock of the Company at an exercise price of $.01 per share.
As additional consideration for the IHI Note, IHI received a
warrant to purchase 330,000 shares of the Company's common
stock at an exercise price of $0.128 per share, exercisable
at any time on or before 5:00 p.m. Eastern Standard Time on
August 26, 2003.
(E) On August 27, 1998, the Company executed a Promissory Note
in favor of Greenberg Traurig, P.A. in the sum of $199,000,
due and payable, together with interest at a rate of 9% per
annum, at any time on or after the earlier of the effective
time of the merger with
9
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Electro-Catheter Corporation, a New Jersey corporation
("Electro"), or November 10, 1998. The Company granted to
Greenberg Traurig, P.A. a warrant to purchase 35,000 shares
of the Company's common stock at an exercise price of $0.375
per share, exercisable immediately and expiring on July 31,
2003 and, in the event that any amount owed under the
Promissory Note shall remain outstanding on August 31, 1998,
or on the last day of any month thereafter, the grant of a
right to purchase an additional 35,000 shares of the
Company's common stock expiring five years from the date of
grant at an exercise price per share equal to the average of
the bid and asked price on the date of grant. As of December
31, 1998, $184,000 remained outstanding against this note,
which has been transferred in the attached financial
statements from accounts payable to notes and debt
obligations payable within one year.
(F) On December 15, 1998, the Company received $6,000 from Mr.
Bart C. Gutekunst and issued a Promissory Note in his favor
due and payable with interest at an annual rate of 15% on
completion of the proposed merger with Electro-Catheter
Corporation, Inc. If the merger closing date shall not have
occurred by December 31, 1998, the Note is payable within
ten (10) days after written demand from the lender.
(G) On December 15, 1998, the Company received $4,000 from Mr.
Alan J. Rabin and issued a Promissory Note in his favor due
and payable with interest at an annual rate of 15% on
completion of the proposed merger with Electro-Catheter
Corporation, Inc. If the merger closing date shall not have
occurred by December 31, 1998, the Note is payable within
ten (10) days after written demand from the lender.
Aggregate notes and debt obligations outstanding at December 31, 1998 mature as
follows: 1999 - $1,870,420; 2000 - $5,029; 2001 - $1,498,382.
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 8%
convertible debentures, 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 common 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
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
the Company common stock at $5.00 a share was reduced to $0.40 a share.
NOTE 6 - 12% Convertible Debenture
On December 29, 1998, the Company obtained $200,000 in interim
financing from The Von Bulow Corporation through the issuance of a 12%
convertible debenture, convertible to shares of stock at $0.1875 per share.
10
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NOTE 7 - Probable Merger
On October 27, 1997, the Company entered into a letter of intent with
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 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"). 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, 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; which was effected on November 16, 1998, 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.
11
<PAGE>
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.
Financial Position and Liquidity
The Company's liquidity benefited from a loan from Coast Business
Credit, a division of Southern Pacific Bank ("Coast") under a loan agreement
dated June 13, 1997 (the "Coast Loan") whereby Coast agreed to lend the Company
an amount not to exceed $3,500,000, subject to limitations relating to the value
of receivables and inventories and including a capital expenditure sub-line up
to $500,000 and a term loan in the sum of $300,000, of which the latter two are
repayable over a forty-eight month period. On June 6, 1997, as consideration for
Sirrom Capital Corporation ("Sirrom") subordinating its interests to Coast, the
Company issued to Sirrom a warrant to purchase 50,000 shares of common stock,
$.10 par value per share, of the Company ("Company Common stock") exercisable
commencing immediately and expiring June 6, 2002 at an exercise price of $5.00
per share. In connection with the Coast Loan, on June 13, 1997, the Company
issued to Coast a warrant to purchase 37,500 shares of Company Common Stock
exercisable commencing immediately and expiring June 30, 2002 at an exercise
price of $4.00 per share. On June 11, 1998, the Company and Coast amended the
terms of the Coast Loan, pursuant to which the Company received an additional
$250,000 (the "Bridge Loan"). In connection with the Bridge Loan, the Company
issued to Coast a warrant to purchase 25,000 shares of Company Common Stock
exercisable commencing immediately and expiring June 30, 2002 at an exercise
price of $.40 per share and the exercise price per share of the warrant issued
to Coast in connection with the Coast Loan was reduced from $4.00 per share to
$.40 per share. As of December 31, 1998, the Company had outstanding
indebtedness of approximately $1,291,708 under the Coast Loan.
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 at the then current market price of $0.40 per
share. In consideration for this investment the Company lowered the exercise
price of previously issued options to purchase 3,571 shares of Company Common
Stock from $3.50 per share to $0.40 per share and lowered the exercise price of
certain warrants to purchase 16,811 shares of Company Common Stock from $5.00
per share, to $.40 per share.
12
<PAGE>
On July 30, 1998, and August 13, 1998, the Company executed promissory
notes in favor of Minrad, Inc. ("Minrad") in the amount of $75,000 and $125,000,
respectively (collectively, the "Minrad Note"). The Minrad Note bears interest
at the rate of 15% annually, and the principal amount and all interest due
thereunder is due and payable, after September 29, 1998, within ten (10) days
after written demand from Minrad.
On August 26, 1998, the Company received $134,000 from International
Holdings, Inc. ("IHI") and executed a promissory note in the amount of $165,000
(the "IHI Note") in favor of IHI. Concurrently with execution of the IHI Note,
the Company paid Goodbody International, Inc., a related company of IHI
("Goodbody"), a $34,000 consulting fee for services relating to the obtaining of
additional debt financing. Pursuant to the terms of the IHI Note, the Company
has agreed to repay the IHI Note on or before October 25, 1998. If the Company
does not repay the IHI Note on or before October 25, 1998, but does so on or
before November 12, 1998, in addition to repayment of the IHI Note, the Company
has agreed to pay Goodbody a $25,000 fee (the "Goodbody Fee"). If repayment of
the IHI Note and the Goodbody Fee have not been received by IHI on or before
November 12, 1998, an immediate penalty fee of $2,500 shall be incurred at 12:01
a.m. on November 13, 1998, and an additional $2,500 fee will accrue and be
imposed at 12:01 a.m. every 24 hours, until the IHI Note, the Goodbody Fee and
all penalty fees have been paid in full.
In connection with the IHI Note, the Company has agreed to issue up to
four warrants to IHI under certain conditions, each giving IHI the right to
purchase 50,000 shares of Company Common Stock at an exercise price of $.01 per
share. If repayment of the IHI Note and the Goodbody Fee have not been received
by IHI on or before November 12, 1998, at 12:01 a.m. on November 13, 1998, the
first of the four warrants will be deemed issued to and earned by IHI. At 12:01
a.m. on the 13th of each month thereafter for up to three months, one additional
warrant shall be issued and deemed earned, if the IHI Note, the Goodbody Fee and
all penalty fees have not been paid in full. Furthermore, if the IHI Note, the
Goodbody Fee and all penalty fees have not been paid in full by January 1, 1999,
IHI will have the option to convert any or all of the amounts due into Company
Common Stock at an exercise price of $.01 per share. As additional consideration
for the IHI Note, IHI received a warrant to purchase 330,000 shares of Company
Common Stock at an exercise price of $0.128 per share, exercisable at any time
on or before 5:00 p.m. Eastern Standard Time on August 26, 2003.
On December 15, 1998, the Company received $6,000 from Mr. Bart C.
Gutekunst and issued a Promissory Note in his favor due and payable with
interest at an annual rate of 15% on completion of the proposed merger with
Electro-Catheter Corporation, Inc. If the merger closing date shall not have
occurred by December 31, 1998, the Note is payable within ten (10) days after
written demand from the lender.
On December 15, 1998, the Company received $4,000 from Mr. Alan J.
Rabin and issued a Promissory Note in his favor due and payable with interest at
an annual rate of 15% on completion of the proposed merger with Electro-Catheter
Corporation, Inc. If the merger closing date shall not have occurred by December
31, 1998, the Note is payable within ten (10) days after written demand from the
lender.
On December 29, 1998, the Company obtained $200,000 in interim
financing from The Von Bulow Corporation through the issuance of a 12%
convertible debenture, convertible to shares of stock at $0.1875 per share.
13
<PAGE>
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 a
merger involving Electro-Catheter Corporation, a New Jersey corporation
("Electro") and an indirect, wholly-owned subsidiary of the Company ("Sub"),
whereby the Sub will merge with and into Electro (the "Merger"), is extremely
difficult to obtain. If the Company is unable to obtain substantial additional
finance to support operational and working capital requirements, there is no
assurance that the Company will survive as a going concern.
Cash used by operations during the first nine months of fiscal year
1999 approximated $844,442. Deferred merger costs utilized approximately
$429,515. Proceeds of the 8% and 12% convertible debenture approximated
$500,000; proceeds less repayments of notes and debt obligations were $571,119,
of which $184,000 represented a net transfer from accounts payable in respect of
the promissory note executed in favor of Greenberg, Traurig in the sum of
$199,000. Overall, positive cash flow for the first nine months of fiscal year
1999 approximated $204,295.
The Company has no commitments for the acquisition of capital assets.
It has material commitments pursuant to certain inventory procurement contracts
that aggregated $859,397 at December 31, 1998.
Results of Operations
Fiscal Quarter Ended December 31, 1998 Compared To Fiscal Quarter Ended December
31, 1997
Overview. The Company's total revenues for the second quarter of
fiscal year 1999 decreased by 51% to $795,108 as compared to $1,615,610 for the
third quarter of fiscal year 1998. Sales decreased from $1,011,110 in the third
quarter of fiscal year 1998 by 21% to $795,108 in the third quarter of fiscal
year 1999. Royalty income, which was $604,500 in the third quarter of fiscal
year 1998, was zero in the third quarter of fiscal year 1999. Royalty income
represents 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. Total operating costs in the third quarter of fiscal year 1999
were $439,828 lower than those incurred during the third quarter of fiscal year
1998, which, combined with the decrease in total revenues, resulted in an
operating loss of $366,656 in the third quarter of fiscal year 1999 as compared
to operating income of $14,017 in the third quarter of fiscal year 1998.
Sales. Total sales decreased from $1,011,110 in the third quarter of
fiscal year 1998 by 21% to $795,108 in the third quarter of fiscal year 1999.
Pacemaker unit sales decreased by 20% but pacemaker dollar sales decreased only
by 15% due to an increased proportion of pacemaker sales in the higher priced
Japanese market than in the comparative period. The unit 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 leads decreased in the domestic market by $258,318, but this was
partially offset by an increase of $149,649 in sales of defibrillator leads. The
decline in pacing lead sales was the result of a 94% decline in units reflecting
a major 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
through its customers. Sales of pacing leads in the international market
declined by 77%.
14
<PAGE>
Sales by geographic area for the third quarter of fiscal year 1999 and
1998 are as follows:
Geographic Area 1999 1998
--------------- ---- ----
United States $ 618,663 $ 800,609
International 176,445 210,501
========== ==========
$ 795,108 $1,011,110
========== ==========
Sales by product line for the third quarter of fiscal year 1999 and
1998 are as follows:
Product Line 1999 1998
------------ ---- ----
Pacemakers $ 296,832 $ 422,230
Electrode Leads 461,482 588,649
Other 36,794 231
========== ==========
795,108 $1,011,110
========== ==========
Royalty Income. Royalty income represents 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.
Costs of Products Sold. The cost of products sold in the third quarter
of fiscal year 1999 was $451,992, compared to $590,896 in the third quarter of
fiscal year 1998, representing a decrease of 24% as compared with a decrease of
21% in sales, which increased the rate of gross margin from 42% to 44%. This
improvement was due to the substitution in the product mix of defibrillator
leads for pacing leads.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $434,781 in the third quarter of fiscal year 1999,
representing a decrease of 25% from $582,913 in the third quarter of fiscal year
1998. Selling expenses were $168,686 in the third quarter of fiscal year 1999
compared to $230,077 in the third quarter of fiscal year 1998 as a result of
reduced costs in respect of payroll, commissions and royalties. General and
administrative expenses were $266,095 in the third quarter of fiscal year 1999
compared to $352,836 in the third quarter of fiscal year 1998 representing a
decrease of 25% as a result of reduced costs in respect of salaries, external
services and professional fees.
Engineering, Research and Development Expenses. Engineering, research
and development costs were $274,992 in the third quarter of fiscal year 1999,
which was a decrease of 36% from $427,784 in the third quarter of fiscal year
1998 due to reduced activity.
Other Income and Expenses. Interest income was $436 during the third
quarter of fiscal year 1999 compared to $1,018 during the third quarter of
fiscal year 1998. Total interest expense increased from $128,851 in the third
quarter of fiscal year 1998 to $449,074 in the third quarter of fiscal year 1999
due to increased borrowings to meet working capital requirements and to the
discounts below market value allowed in respect of the pricing of issues of
share warrants and debenture conversions required to obtain those borrowings.
15
<PAGE>
Nine Months Ended December 31, 1998 Compared To Nine Months Ended December 31,
1997.
Overview. The Company's total revenues for the first three quarters of
fiscal year 1999 decreased by 55% to $2,180,848 as compared to $4,805,013 for
the first three quarters of fiscal year 1998. Sales decreased from $2,904,888 in
the first three quarters of fiscal year 1998 to $2,180,848 in the first three
quarters of 1999. Royalty income decreased from $1,295,625 in the first three
quarters of fiscal year 1998 to zero in the first three quarters of fiscal year
1999. Royalty income represents 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. Total operating costs in the first three quarters of fiscal
year 1999 were $1,472,956 lower than those incurred during the first three
quarters of fiscal year 1998, which, combined with the decrease in total
revenue, resulted in an operating loss of $1,334,665 in the first three quarters
of fiscal year 1999 compared to an operating loss of $183,456 in the first three
quarters of fiscal year 1998.
Sales. Total sales during the first three quarters of fiscal year 1999
decreased from $2,904,888 in the first three quarters of fiscal year 1998 by
$724,040 or 25% to $2,180,848. Pacemaker unit sales decreased by 43% and
pacemaker dollar sales decreased by 41%. 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 leads decreased in the domestic market by $793,437, but this was largely
offset by an increase of $569,399 in sales of defibrillator leads. The decline
in pacing lead sales in the domestic market was the result of a 77% decline in
units reflecting a reduction both in complete systems sold (pacemaker 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 through its customers. Unit sales of pacing leads in the
international market fell by 41%.
Sales by geographic area for the first three quarters of fiscal year
1999 and 1998 were:
Geographic Area 1999 1998
--------------- ---- ----
United States $1,733,801 $2,312,253
International 447,047 592,635
========== ==========
$2,180,848 $2,904,888
========== ==========
Sales by product line area for the first three quarters of fiscal year
1999 and 1998 were:
Product Line 1999 1998
------------ ---- ----
Pacemakers $ 841,318 $1,472,764
Electrode Leads 1,220,729 1,411,248
Other 118,801 20,876
---------- ----------
$2,180,848 2,904,888
========== ==========
Royalty Income. Royalty income represents 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.
16
<PAGE>
Costs of Products Sold. The cost of products sold during the first
three quarters of fiscal year 1999 was $1,229,811 compared to $1,742,956 in the
first three quarters of fiscal year 1998, representing a decrease of 29% as
compared to a decrease of 25% in sales, which increased the rate of gross margin
from 40% in the first three quarters of fiscal year 1998 to 44% in the first
three quarters of fiscal year 1999. This improvement was due to the substitution
in the product mix of defibrillator leads for pacing leads.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,358,293 in the first three quarters of fiscal
year 1999, representing a decrease of $580,745 or 30% from $1,939,038 incurred
in the first three quarters of fiscal year 1998. Selling expenses decreased from
$831,380 in the first three quarters of fiscal year 1998 by $351,146 or 42% to
$480,234 in the first three quarters of fiscal year 1999 as a result of reduced
costs in respect of payroll, commissions and royalties. General and
administrative expenses decreased from $1,107,658 in the first three quarters of
fiscal year 1998 by $229,599 or 21% to $878,059 in the first three quarters of
fiscal year 1999 as a result of reduced costs in respect of salaries, outside
services and professional fees.
Engineering, Research and Development Expenses. Engineering, research
and development costs were $927,409 during the first three quarters of fiscal
year 1999 compared to $1,306,475 during the first three quarters of fiscal year
1998 due to reduced activity.
Other Income and Expenses. Interest income was $1,228 during the first
three quarters of fiscal year 1999 compared to $8,969 during the first three
quarters of fiscal year 1998. Total interest expense increased from $339,857 in
the first three quarters of fiscal year 1998 to $747,780 in the first three
quarters of fiscal year 1999 due to increased borrowings to meet working capital
requirements and to the discounts below market value allowed in respect of the
pricing of issues of share warrants and debenture conversions required to obtain
those borrowings.
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 Standardization
("ISO") in order to provide simplified trade among the member nations and to
assure free access to trade while maintaining quality standards for products
sold. All companies doing business in these nations must be certified to these
standards set forth by the 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 year 1996 for the Company's
products intended for sale in Europe. The Company was audited in July 1997 by
TUV Product Services as part of the annual review of the certified Quality
System. As a result of the TUV Product Services audit, the Quality System
certificate was renewed. In September, 1998, the Company was subject to an audit
of its design control processes by TUV and received certification to ISO 9001
standards. The ISO 9001 certification means that the Company meets the highest
and most stringent international product quality standards.
17
<PAGE>
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 sales
resources 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 other pacemaker
manufacturers will depend on the Company's ability to supply product and recruit
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 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 and sale of leads to Intermedics
produced income for the Company. However, the supply agreement under which the
Company sold electrode leads to Intermedics for its new systems expired on
August 1, 1998. Thus the Company cannot guarantee that it will continue to
supply Intermedics with products
Source of Supply. Suppliers of custom Application Specific Integrated
Circuits ("ASICs") have advised the Company that the technology used to produce
these ASICs will no longer be supported. As such, the Company placed one last
bulk order to ensure the availability of sufficient ASICs to satisfy projected
demands for 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 to effectuate 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
18
<PAGE>
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 a two digit
suffix to identify a year in the date field with an assumed prefix of "19."
Consequently, this limits those systems to dates between 1900 and 1999. If not
corrected, many computer systems and applications could fail or create erroneous
results by or at the year 2000.
The Company has undertaken to review the potential impact of the Year
2000 issue to its internal operations. 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
19
<PAGE>
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 calendar 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 year 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 Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130") and No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 130 establishes standards
for reporting and displaying comprehensive income, its components and
accumulated balances. FAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. Both FAS 130 and
FAS 131 are effective for periods beginning after December 15, 1997. Because of
the recent issuance of the standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial statement
disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 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 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. FAS 133 is effective for all fiscal year quarters of
fiscal year 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.
20
<PAGE>
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders
The Company held a special meeting of stockholders on November 16, 1998 for the
purposes of: obtaining (1) approval of a one for five reverse stock split (the
"Reverse Split"), (2) ratification, approval and adoption of a merger agreement
among the Company, Electro-Catheter Corporation, a New Jersey corporation
("Electro"), and CCS Subsidiary, Inc., a New Jersey Corporation and wholly owned
subsidiary of the Company (Sub), providing for the merger of Sub into and with
Electro, as a result of which Electro will become a wholly owned subsidiary of
the Company, (the "Merger"), (3) approval and adoption of an agreement of merger
and plan of reorganization among the Company, Catheter Technology Group, Inc.
("CTG") and CTG Merger Sub, Inc., a direct wholly owned subsidiary of CTG
("Merger Sub"), as a result of which the Company will become a direct, wholly
owned subsidiary of CTG, ( the "Restructuring Merger Agreement"), (4) authority
for the Board of Directors to adjourn the special meeting of stockholders to
permit further solicitation of proxies, if necessary ("Adjournment") and (5) to
transact any other business as may properly come before the special meeting
("Other Business"). Proxies were solicited by the Company under Regulation 14A
of the Securities and Exchange Commission's proxy rules. Approval was given to
all matters set before the special meeting of stockholders; a summary of the
votes cast for and against each of the matters set forth in the Proxy Statement
is set forth below.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------
Votes For Votes Against
-------------------------
(1) Reverse Split ....................... 1,439,725 83,633
(2) Merger .............................. 1,467,979 55,734
(3) Restructuring Merger Agreement ...... 1,468,061 55,691
(4) Adjournment ......................... 1,465,042 57,296
(5) Other Business ...................... 1,451,902 52,866
-----------------------------------------------------------------------
</TABLE>
Item 6. Exhibits
Exhibits filed as part of this report are as follows:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10.0 Promissory Note in favor of Bart C. Gutekunst dated December 15, 1998.
10.1 Promissory Note in favor of Alan J. Rabin dated December 15, 1998
10.2 12% Convertible Debenture in favor of Von Bulow Corporation dated December 29, 1998.
27.0 Financial Data Schedule.
</TABLE>
21
<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: February 12, 1999 By: /s/ Alan J. Rabin
-------------------------------------
Alan J. Rabin, President and
Chief Executive Officer
22
<PAGE>
INDEX TO EXHIBITS
Exhibits filed as part of this report are as follows:
Exhibit Sequential page Number or
Number Description Incorporation by Reference to
- ------- ----------- -----------------------------
10.0 Promissory Note in favor of Filed herewith.
Bart C. Gutekunst dated
December 15, 1998
10.1 Promissory Note in favor of Filed herewith.
Alan J. Rabin dated
December 15, 1998
10.2 12% Convertible Debenture Filed herewith.
in favor of Von Bulow Corporation
dated December 29, 1998
27.0 Financial Data Schedule. Filed herewith.
23
<PAGE>
Promissory Note
---------------
December 15, 1998
$6,000.00
For value received, the undersigned, Cardiac Control Systems, a
Delaware corporation having its principal office at 3 Commerce Boulevard, Palm
Coast, Florida 32164 (the "Borrower"), promises to pay to the order of Bart C.
Gutekunst, ("the Lender") located at 10 Timothy Road, Weston, Connecticut 06883,
(or at any other address notice of which is given by the Lender to the
Borrower), in a lawful money of the United States and in immediately available
funds, the principal amount of Six Thousand and 00/100 Dollars ($6,000) and
interest as provided in the next two paragraphs of this Note. The Borrower shall
pay the outstanding principal amount of this Note to the Lender in one
installment on or before the Merger Closing Date (as hereinafter defined). If
the Merger Closing Date shall not have occurred by December 31, 1998, then the
Borrower shall pay the outstanding principal amount of this Note to the Lender
within ten (10) days after written demand from the Lender. For purposes hereof,
"Merger Closing Date" shall mean the date as of which the Borrower and Elecath
(Electro-Catheter Corporation) shall have merged with (Catheter Technology
Group, Inc.), a Delaware corporation ("Surviving Corporation"), (the "Merger"),
and the Surviving Corporation shall have completed its financing in accordance
with the summary financing plan a copy of which has been delivered to the Leader
by Borrower.
The Borrower shall pay to the Lender interest, calculated on the basis
of a 360 day year, on the outstanding principal amount of this Note from and
including December 11, 1998 to but not including the date such outstanding
principal amount is paid in full at a rate of fifteen percent (15%) per year
provided, however, that (a) in no event shall such interest by payable at a rate
in excess of the maximum rate permitted by applicable law and (b) solely to the
extent necessary to result in such interest not being payable at a rate in
excess of such maximum rate, any amount that would be reacted as part of such
interest under a final judicial interpretation of applicable law shall be deemed
to have been a mistake and automatically canceled, and if received by Lender,
shall be refunded to the Borrower, it being the intention of the Lender and the
Borrower that such interest not be payable at a rate in excess of such maximum
on December 10, 1998 and continuing through the date the outstanding principal
amount of this Note is paid in full.
The Borrower shall have the option of paying the principal amount of
the Note to Lender in advance in full or in part at any time and from time to
time; provided, however, that upon making any such payment in full the Borrower
shall pay to the Lender all interest owing pursuant to this Note and remaining
unpaid and all other amounts owing by the Borrower to the Lender pursuant to
this Note and remaining unpaid.
<PAGE>
Borrower represents and warrants to Lender that:
(a) This Note has been authorized and approved by all necessary
corporate action of the Borrower; and
(b) This Note does not conflict with or violate (i) the articles
of incorporation of bylaws of Borrower or (ii) the terms or
conditions of any note, mortgage, lease, loan agreement or
other material agreement to which the Borrower is a party or
by which its assets are subject.
Borrower agrees that, for so long as any amount under this Note shall
be outstanding, it shall not sell or otherwise transfer any product line or any
material part of its assets to any third party. In addition, for so long as this
note remains outstanding, Borrower will provide Lender with copies of: (A) its
monthly financial statements (internally prepared) as soon as they are
available, (B) all filings that Borrower makes with the SEC within two (2)
business days after each such filing and (C) all filings that any party to the
Merger shall make with the SEC as soon as they are available
If Borrower fails to pay any amount pursuant to this Note, or upon or
at any time or from time to time after the Borrower fails to perform any
obligations pursuant to this Note and the continuation of such failure for more
than thirty (30) days after notice of such failure is given by Lender to the
Borrower, the outstanding principal amount of this Note, all interest owing
pursuant to this Note and remaining unpaid and all other amounts owing by the
Borrower to the Lender pursuant to this Note remaining unpaid shall, at the sole
option of the Lender and without any notice, presentment or protest of any kind
(each of which is waived by the Borrower), become immediately due. In addition,
upon (1) the Borrower's filing or having filed against it a petition in
bankruptcy and, in the case of such a petition filed against it, such petition
not being dismissed or stayed within thirty (30) days after such filing, (2) a
trustee or receiver being appointed by a court for any of the assets of the
Borrower and such appointment not being dismissed or stayed within thirty (30)
days after appointment, (3) the Borrower's suspending business operations or
becoming insolvent or (4) the Borrower's making a voluntary assignment of any of
its assets for the benefit of creditors, such outstanding principal amount, all
such interest and all such other amounts shall, without any notice, demand,
presentment or protest of any kind (each of which is waived by the Borrower),
automatically become immediately due.
The Borrower shall pay to the Lender on demand each cost and expense
(including, but not limited to, the reasonable fees and disbursements of counsel
to the Lender whether retained for advice, for litigation or for any other
purpose related to this Note) incurred by the Lender endeavoring to (1) collect
any of the outstanding principal amount of this Note, any interest owing
pursuant to this Note and remaining unpaid or any other amount of this Note, any
interest owing pursuant to this Note and remaining unpaid, (2) preserve or
exercise any right or remedy of the Lender relating to, enforce or realize upon
any guaranty, endorsement, collateral or other security now or hereafter
directly or indirectly securing the payment of, or otherwise now or hereafter
directly or indirectly applicable to, any of such outstanding principal amount,
any such interest or any such other amount or (3) preserve or exercise any right
or remedy of the Lender pursuant to this Note.
<PAGE>
This Note shall be governed by and interpreted under the laws of the
State of Florida (without reference to Florida's principles of conflicts of
laws). No provision, term, or condition of this Note may be waived or amended
except in writing.
By: /s/ W. A. Walton
------------------------------
Executive Vice President
STATE OF FLORIDA)
:ss.:
COUNTRY OF UNITED STATES)
On the 15 day of Dec. in the year 1998, before me personally came
---- ------
________________, to me known, who, being by my duly sworn, did depose and say
that he resides at _____________________; that he is the
_________________________ of Cardiac Control Systems, Inc., the corporation
described in and which executed the above instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Roberta Trueman
------------------------
[ SEAL ] ROBERTA TRUEMAN
[ STATE OF ] My Comm Exp 12/28/98
[ FLORIDA ] Bonded by Service Ins
[ NOTARY ] No. CC429959
[ PUBLIC ] [x] Personally Known [ ] Other I.D.
<PAGE>
Promissory Note
---------------
December 15, 1998
$4,000.00
For value received, the undersigned, Cardiac Control Systems, a
Delaware corporation having its principal office at 3 Commerce Boulevard, Palm
Coast, Florida 32164 (the "Borrower"), promises to pay to the order of Alan J.
Rabin, ("the Lender") located at 19 Choctaw Trail, Ormond Beach, Florida 32174,
(or at any other address notice of which is given by the Lender to the
Borrower), in a lawful money of the United States and in immediately available
funds, the principal amount of Four Thousand and 00/100 Dollars ($4,000) and
interest as provided in the next two paragraphs of this Note. The Borrower shall
pay the outstanding principal amount of this Note to the Lender in one
installment on or before the Merger Closing Date (as hereinafter defined). If
the Merger Closing Date shall not have occurred by December 31, 1998, then the
Borrower shall pay the outstanding principal amount of this Note to the Lender
within ten (10) days after written demand from the Lender. For purposes hereof,
"Merger Closing Date" shall mean the date as of which the Borrower and Elecath
(Electro-Catheter Corporation) shall have merged with (Catheter Technology
Group, Inc.), a Delaware corporation ("Surviving Corporation"), (the "Merger"),
and the Surviving Corporation shall have completed its financing in accordance
with the summary financing plan a copy of which has been delivered to the Leader
by Borrower.
The Borrower shall pay to the Lender interest, calculated on the basis
of a 360 day year, on the outstanding principal amount of this Note from and
including December 11, 1998 to but not including the date such outstanding
principal amount is paid in full at a rate of fifteen percent (15%) per year
provided, however, that (a) in no event shall such interest by payable at a rate
in excess of the maximum rate permitted by applicable law and (b) solely to the
extent necessary to result in such interest not being payable at a rate in
excess of such maximum rate, any amount that would be reacted as part of such
interest under a final judicial interpretation of applicable law shall be deemed
to have been a mistake and automatically canceled, and if received by Lender,
shall be refunded to the Borrower, it being the intention of the Lender and the
Borrower that such interest not be payable at a rate in excess of such maximum
on December 11, 1998 and continuing through the date the outstanding principal
amount of this Note is paid in full.
The Borrower shall have the option of paying the principal amount of
the Note to Lender in advance in full or in part at any time and from time to
time; provided, however, that upon making any such payment in full the Borrower
shall pay to the Lender all interest owing pursuant to this Note and remaining
unpaid and all other amounts owing by the Borrower to the Lender pursuant to
this Note and remaining unpaid.
<PAGE>
Borrower represents and warrants to Lender that:
(a) This Note has been authorized and approved by all necessary
corporate action of the Borrower; and
(b) This Note does not conflict with or violate (i) the articles
of incorporation of bylaws of Borrower or (ii) the terms or
conditions of any note, mortgage, lease, loan agreement or
other material agreement to which the Borrower is a party or
by which its assets are subject.
Borrower agrees that, for so long as any amount under this Note shall
be outstanding, it shall not sell or otherwise transfer any product line or any
material part of its assets to any third party. In addition, for so long as this
note remains outstanding, Borrower will provide Lender with copies of: (A) its
monthly financial statements (internally prepared) as soon as they are
available, (B) all filings that Borrower makes with the SEC within two (2)
business days after each such filing and (C) all filings that any party to the
Merger shall make with the SEC as soon as they are available
If Borrower fails to pay any amount pursuant to this Note, or upon or
at any time or from time to time after the Borrower fails to perform any
obligations pursuant to this Note and the continuation of such failure for more
than thirty (30) days after notice of such failure is given by Lender to the
Borrower, the outstanding principal amount of this Note, all interest owing
pursuant to this Note and remaining unpaid and all other amounts owing by the
Borrower to the Lender pursuant to this Note remaining unpaid shall, at the sole
option of the Lender and without any notice, presentment or protest of any kind
(each of which is waived by the Borrower), become immediately due. In addition,
upon (1) the Borrower's filing or having filed against it a petition in
bankruptcy and, in the case of such a petition filed against it, such petition
not being dismissed or stayed within thirty (30) days after such filing, (2) a
trustee or receiver being appointed by a court for any of the assets of the
Borrower and such appointment not being dismissed or stayed within thirty (30)
days after appointment, (3) the Borrower's suspending business operations or
becoming insolvent or (4) the Borrower's making a voluntary assignment of any of
its assets for the benefit of creditors, such outstanding principal amount, all
such interest and all such other amounts shall, without any notice, demand,
presentment or protest of any kind (each of which is waived by the Borrower),
automatically become immediately due.
The Borrower shall pay to the Lender on demand each cost and expense
(including, but not limited to, the reasonable fees and disbursements of counsel
to the Lender whether retained for advice, for litigation or for any other
purpose related to this Note) incurred by the Lender endeavoring to (1) collect
any of the outstanding principal amount of this Note, any interest owing
pursuant to this note and remaining unpaid or any other amount of this Note, any
interest owing pursuant to this Note and remaining unpaid, (2) preserve or
exercise any right or remedy of the Lender relating to, enforce or realize upon
any guaranty, endorsement, collateral or other security now or hereafter
directly or indirectly securing the payment of, or otherwise now or hereafter
directly or indirectly applicable to, any of such outstanding principal amount,
any such interest or any such other amount or (3) preserve or exercise any right
or remedy of the Lender pursuant to this Note.
<PAGE>
This Note shall be governed by and interpreted under the laws of the
State of Florida (without reference to Florida's principles of conflicts of
laws). No provision, term, or condition of this Note may be waived or amended
except in writing.
By: /s/ W. A. Walton
------------------------------
Executive Vice President
STATE OF FLORIDA)
:ss.:
COUNTRY OF UNITED STATES)
On the 15 day of Dec. in the year 1998, before me personally came
---- ------
________________, to me known, who, being by my duly sworn, did depose and say
that he resides at _____________________; that he is the
_________________________ of Cardiac Control Systems, Inc., the corporation
described in and which executed the above instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Roberta Trueman
------------------------
[ SEAL ] ROBERTA TRUEMAN
[ STATE OF ] My Comm Exp 12/28/98
[ FLORIDA ] Bonded by Service Ins
[ NOTARY ] No. CC429959
[ PUBLIC ] [x] Personally Known [ ] Other I.D.
December 29, 1998 $200,000
CARDIAC CONTROL SYSTEMS, INC.
12% CONVERTIBLE DEBENTURE
DUE DECEMBER 29,2003
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
1 . Payment. Cardiac Control Systems, Inc., a corporation duly organized
-------
and existing under the laws of the State of Delaware (herein referred to as the
"Company'), for value received, hereby promises to pay to The Von Bulow
---------------
Corporation, or registered assigns ("Holder"), the principal sum of TWO HUNDRED
- -----------
THOUSAND DOLLARS, ($200,000) together with accrued interest, on December 29,
2003 (the "Maturity Date"), in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts.
This Debenture shall bear simple, non-cumulative interest from the date
hereof through the Maturity Date at an interest rate of twelve percent (12%) per
annum; provided, however, that whenever the payment of principal is overdue on
------------------
the Debenture, interest shall accrue, if and to the extent permitted by
applicable law at fourteen percent (14%) per annum on the entire unpaid
principal balance of the Debenture so long as any such payment is overdue.
Interest shall be payable in cash or, at the Company's discretion, common
stock ($. 10 par value) of the Company ("Company Common Stock"), or a
combination thereof, on each June 30 and December 31 commencing June 30, 1998
and ending December 29, 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 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.
<PAGE>
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 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
----------
(a) Conversion Right. In the period beginning with the date hereof
-----------------
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 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 $0.1875 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 S25,000.00) 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, 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
--------- -------
(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
2
<PAGE>
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 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 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 to pay any
--------
tax which may be payable in respect of any transfer invoked 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 date on
---------------------------------
which the Debenture is first issued. the following adjustments shall apply.
(i) Stock Dividends, Distributions or Subdivisions. 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 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, and the shares into which this is convertible will
be proportionately decreased.
(iii) Merger or Reorganization, etc. In case of any 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
reasonably 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 Articles
-------------
of Incorporation or by-laws or through any reorganization, transfer of assets,
consolidation, merge, 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
3
<PAGE>
the taking of all such action as may be necessary or appropriate in order to
protect conversion rights of the Holder of this Debenture against impairment.
(g) Common Stock Reserved. The Company shall reserve and keep
-----------------------
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.
-------------------
(a) Notice of Registration. If at any time after the first date 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
------------------------------------------------
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
------------------------------------------
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 (provide 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.
4
<PAGE>
(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
------------------------------
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 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
-----------------
"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) herein
above, 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
5
<PAGE>
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 with and
-------------
governed by the laws of the State of Florida.
7. Assignment. This Debenture shall bind and inure to the benefit of the
----------
respective successors and assigns of the parties hereto.
8. Securities Restrictions.
-----------------------
THE SECLTRITIES 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
------
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: /s/ Alan J. Rabin
-----------------------------
Alan J. Rabin President and Chief
Executive Officer
6
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> OCT-01-1998 APR-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
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<INCOME-PRETAX> (815,294) (2,081,217)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (815,294) (2,081,217)
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<NET-INCOME> (815,294) (2,081,217)
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