-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXKKDdQ4z9uPj2SExXEk0ASJ9XFt3twU4XHb6NnmVllEvv2gJfSxet+W/ErIyWSu G09XGDRTXFGG4xmjR4MHMA== 0000950109-97-005320.txt : 19970813 0000950109-97-005320.hdr.sgml : 19970813 ACCESSION NUMBER: 0000950109-97-005320 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDIAC CONTROL SYSTEMS INC CENTRAL INDEX KEY: 0000706507 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 742119162 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14653 FILM NUMBER: 97656577 BUSINESS ADDRESS: STREET 1: 3 COMMERCE BLVD CITY: PALM COAST STATE: FL ZIP: 32137 BUSINESS PHONE: 9044455450 MAIL ADDRESS: STREET 1: 3 COMMERCE BLVD CITY: PALM COAST STATE: FL ZIP: 32164 10QSB 1 FORM 10-QSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB ____________________________ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 0-14653 CARDIAC CONTROL SYSTEMS, INC. (Exact Name of Small Business Issurer as specified in its charter) _____________________________ DELAWARE 74-2119162 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 3 COMMERCE BOULEVARD, PALM COAST, FLORIDA 32164 (Address of Principal Executive Offices) (904) 445-5450 (Issuer's Telephone Number) Check whether the Issuer (1)has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X ----- NO ----- As of July 31, 1997, 2,619,371 shares of the Issuer's common stock, $.10 par value, were issued and outstanding. ================================================================================ CARDIAC CONTROL SYSTEMS, INC. FORM 10-QSB JUNE 30, 1997 INDEX
- -------------------------------------------------------------------------------- Page No. - -------------------------------------------------------------------------------- Part I. Financial Information Balance Sheet at June 30, 1997 (Unaudited).............................. 3 Statements of Operations and Accumulated Deficit for the Three Months Ended June 30, 1997 and 1996 (Unaudited)............................ 4 Statements of Cash Flows for the Three Months Ended June 30, 1997 and 1996 (Unaudited).................................. 5 Notes to Financial Statements........................................... 6 Management's Discussion and Analysis of Financial Position and Results of Operations........................................... 9 Part II. Other Information................................................ 13
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CARDIAC CONTROL SYSTEMS, INC. BALANCE SHEET (Unaudited)
- -------------------------------------------------------------------------------- June 30, 1997 - -------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents................................. $ 151,279 Accounts and notes receivable............................. 1,226,022 Inventories............................................... 1,637,794 Prepaid expenses.......................................... 414,894 ------------- Total current assets......................... 3,429,989 ------------- Property, plant and equipment (net).......................... 1,893,102 ------------- Other assets Deferred financing costs, less accumulated amortization of $135,752............................................. 473,106 Deferred license fees, less accumulated amortization of $10,000................................................. 190,000 Other.................................................... 79,925 ------------- Total other assets........................... 743,031 ------------- Total assets................................. $ 6,066,122 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable......................................... $ 628,488 Accrued compensation..................................... 289,399 Accrued royalties........................................ 276,048 Other accrued expenses................................... 68,609 Deposits payable......................................... 576,643 Notes and debt obligations payable within one year..... 126,959 ------------- Total current liabilities.................... 1,966,146 ------------- Notes and debt obligations payable after one year...... 2,374,944 Other liabilities........................................ 73,501 ------------- Total liabilities........................... 4,414,591 ------------- Stockholders' equity Common stock, $.10 par value, 30,000,000 shares authorized, 2,619,371 shares issued............................. 261,937 Additional paid in capital................................ 22,291,215 Accumulated deficit....................................... (20,894,566) Cumulative translation adjustment......................... (7,055) ------------- Total stockholders' equity................... 1,651,531 ------------- Total liabilities and stockholders' equity................... $ 6,066,122 =============
See accompanying notes to financial statements 3 CARDIAC CONTROL SYSTEMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (Unaudited)
- ------------------------------------------------------------------------------- Three Months Ended June 30, 1997 1996 - ------------------------------------------------------------------------------- Revenue Net sales..................................... $ 852,288 $ 1,202,493 Royalty income................................ 697,125 694,525 ---------------------------- Total revenue............................. 1,549,413 1,897,018 ---------------------------- Costs and expenses Cost of products sold........................ 503,815 679,944 Selling, general and administrative expenses. 743,072 821,340 Engineering, research and development expenses.................................... 458,272 457,564 ---------------------------- Total cost and expenses.................. 1,705,159 1,958,848 ---------------------------- Operating income (loss).......................... (155,746) (61,830) ---------------------------- Other income (expenses) Interest income.............................. 5,983 10,548 Interest expense............................. (82,586) (134,789) Other income................................. 25,000 ---------------------------- Total other income (expenses)............ (76,603) (99,241) ---------------------------- Net income (loss)................................ (232,349) (161,071) Accumulated deficit - beginning of period........ (20,662,217) (19,780,977) ---------------------------- Accumulated deficit - end of period.............. $(20,894,566) $(19,942,048) ============================ Net income (loss) per common share............... $(0.09) $(0.06) ============================ Average number of common shares outstanding...... 2,619,371 2,561,427 ============================
See accompanying notes to financial statements 4 CARDIAC CONTROL SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------- Three Months Ended June 30, 1997 1996 - -------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss).................................... $ (232,349) $ (161,071) Adjustment to reconcile net income (loss) to net cash used for operating activities: Depreciation and amortization..................... 104,579 126,381 Gain on fixed assets disposals.................... (671) (491) Cash provided by (used for): Accounts and notes receivable................... (273,180) (20,113) Inventories..................................... (118,157) 217,158 Prepaid expenses................................ (158,281) (179,402) Other assets.................................... (10,775) Accounts payable................................ (199,755) (59,886) Accrued interest................................ (4,760) Accrued compensation............................ 36,253 (54,297) Accrued compensation absences................... 22,694 7,482 Deposits payable................................ 184,011 (28,525) Other accrued expenses.......................... (7,359) 40,443 Other liabilities............................... 15,457 4,890 Deferred royalties.............................. (106,850) -------------------------- Net cash provided by (used for) by operating activities............................................ (626,758) (229,816) -------------------------- Cash flows from investing activities Purchase of property, plant and equipment............ (186,640) (140,432) Proceeds from sale of equipment...................... 4,260 491 Increase in other assets............................. (2,600) -------------------------- Net cash provided by (used for) used by investing activities............................................ (184,980) (139,941) -------------------------- Cash flows from financing activities Proceeds from issuance of common stock and stock warrants, net of issuance expenses.................. 246,033 Proceeds from notes and debt obligations payable..... 1,138,359 47,545 Repayment of notes and debt obligations payable...... (193,983) (254,568) Principal payments under capital lease obligations... (1,534) (929) Debt issuance costs.................................. (165,288) -------------------------- Net cash provided by financing activities.............. 777,554 38,081 -------------------------- Net increase (decrease) in cash and cash equivalents... (34,184) (331,676) Cash and cash equivalents - beginning of year.......... 185,463 1,167,181 -------------------------- Cash and cash equivalents - end of period.............. $ 151,279 $ 835,505 ========================== Supplemental Cash Flow Information: Interest paid during the period...................... $ 57,071 $ 82,228
See accompanying notes to financial statements 5 CARDIAC CONTROL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - GENERAL The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company") as of June 30, 1997, the related statements of operations and accumulated deficit for the three months ended June 30, 1997 and 1996, and the statements of cash flows for the three months ended June 30, 1997 and 1996 are unaudited. In the opinion of management, such financial statements reflect all adjustments, consisting only of normal recurring items, necessary to present fairly the financial position of the Company at June 30, 1997 and the results of operations and cash flows for the three months ended June 30, 1997 and 1996. Certain reclassifications have been made to the unaudited financial statements previously reported for the three months ended June 30, 1996 to conform with classifications used in the unaudited financial statements for the three months ended June 30, 1997. The accompanying unaudited financial statements as of June 30, 1997 and for the three months ended June 30, 1997 and 1996 should be read in conjunction with the Company's audited financial statements for the year ended March 31, 1997. The accompanying unaudited financial statements have been prepared assuming that the Company will continue operations on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company has a history of net losses and incurred a net loss for the three months ended June 30, 1997 of $232,349. The Company's ability to continue as a going concern is dependent upon the attainment of a profitable level of operations. The Company believes that continual development of new product and resultant sales growth is critical to attaining a profitable level of operations. Therefore, the Company is continuing its efforts to invest in development of its single lead technology and expand its sales volume, both domestically and internationally. Management believes that the Company has the potential to increase sales and ultimately achieve a profitable level of operations. Also, the Company is pursuing additional working capital to expand its market position and pursue development of new technologies. However, there is no assurance that the Company will be able to attain profitable operations and continue operations as a going concern. NOTE 2 - LOSS PER COMMON SHARE Primary loss per share of common stock is based on the weighted average number of common shares and common share equivalents, principally in the form of options and warrants, outstanding during the period. Common stock equivalents have not been included for the three months ended June 30, 1997 and 1996 as their effect on the loss per share is anti-dilutive. The FASB has issued SFAS No. 128, "Earnings per Share," which provides guidance for computing and presenting earnings per share (EPS). This statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings per Share." This statement, when adopted, is not expected to have a material impact on the Company. 6 NOTE 3 - INVENTORIES Inventories at June 30, 1997 are summarized as follows:
- -------------------------------------------- June 30, 1997 -------------- Raw materials and supplies.. $ 858,253 Work-in-process............. 464,731 Finished goods.............. 333,595 -------------- 1,656,579 Reserve for obsolescence.... (18,785) -------------- $ 1,637,794 - --------------------------------------------
Finished goods inventories include approximately $166,886 of products consigned to customers and independent sales representatives at June 30, 1997. NOTE 4 - NOTES AND DEBT OBLIGATIONS PAYABLE Notes and debt obligations consist of the following at June 30, 1997:
- ----------------------------------------------------------- June 30, 1997 --------------- Sirrom mortgage note, net of discount (A).. $ 1,434,573 Coast Business Credit (B).................. 999,219 Other...................................... 68,111 --------------- 2,501,903 Amount payable within one year............. (126,959) --------------- Amount payable after one year.............. $ 2,374,944 - -----------------------------------------------------------
(A) On March 31, 1995, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Sirrom Capital Corporation ("Sirrom") and executed a $1,500,000 secured promissory note. Interest on the note is payable monthly at 13.5% and principal is due on March 31, 2000. The note is secured by a first mortgage lien on all the Company's real and personal property, excluding inventory and accounts receivable, but including general intangibles such as its patents and royalties. The Loan Agreement restricts the Company from incurring additional indebtedness in excess of $200,000 annually without the lender's consent. In addition, the Company must give the lender advance notice of certain events, such as dividend payments, certain new stock issues, reorganizations, and merger or sale of substantially all assets. In connection with the Loan Agreement, the Company granted the lender warrants to purchase, initially, 100,000 shares of the Company's common stock at $.01 per share. An additional 50,000 warrants to purchase shares of common stock at $.01 per share will be granted to the lender upon each anniversary date, beginning March 31, 1997 through March 31, 1999, that any amount owed to Sirrom shall be outstanding. On March 31, 1997, the Company granted Sirrom 50,000 additional warrants pursuant to this agreement. The Company recorded $279,000 (100,000 shares) in fiscal 1995 and $71,376 (50,000 shares) in fiscal 1997 as a debt discount with the offset to additional paid-in capital, representing the difference between the estimated fair market value of the underlying stock at the date of grant and $.01 per share. This has resulted in an effective interest rate of approximately 30% on the 7 Sirrom debt. The Sirrom note includes an unamortized debt discount of $65,427 at June 30, 1997 (B) On June 13, 1997, the Company entered into a Loan Agreement ("Agreement") with Coast Business Credit ("CBC") for a maximum borrowing of $3.5 million which includes a line of credit up to $2.7 million, a $500,000 Subline for capital expenditures ("CAPEX"), and a $300,000 Term Loan. The maximum borrowing base available under the line of credit is based upon eligible receivables and inventory as defined in the Agreement. The maturity date for the Agreement is June 30, 2000. The CAPEX and the Term Loan are based upon a 48 month amortization period. The interest rate on the line of credit is equal to the prime rate plus 2%, and the interest rate for the Term Loan and the CAPEX Subline is equal to prime rate plus 2.25%. Borrowings under the Agreement are collateralized by a first security interest in substantially all of the assets of the Company. The Agreement also contains a minimum tangible net worth requirement. In addition, CBC was granted warrants to purchase 37,500 shares of stock at $4 per share, expiring June 30, 2002. In conjunction with the Agreement, the Company obtained an Intercreditor and Subordination Agreement between CBC and Sirrom. This agreement provides that Sirrom subordinate its first security interest in the assets of the Company to CBC, however, the priority interest of CBC in the Company's real estate is limited to $500,000. As consideration for its waiver of its first security interest in the assets of the Company, Sirrom was granted warrants to purchase 50,000 shares of stock at $5 per share, exercisable at any time from June 6, 1997 and expiring on June 6, 2002. 8 Item 2. Management's Discussion and Analysis of Financial Position and Results of Operations This Quarterly Report on Form 10-QSB contains forward looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to product or services of the Company, as well as assumptions relating to the foregoing. The words "believe," "expect," "anticipate," "estimate, " project," and similar expressions identify forward looking statements. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Quarterly Report, including the Notes to the Financial Statements and "Management's Discussion and Analysis of Financial Position and Results of Operation, describe factors, among others, that could contribute to or cause such differences. Financial Position and Liquidity The Company's liquidity benefited from the loan agreement dated June 13, 1997 with Coast Business Credit (CBC) for a maximum borrowing of $3.5 million, of which approximately $1.0 million was drawn at June 30, 1997. Cash used by operations during the first three months of fiscal 1998 approximated $627,000. Capital expenditures and repayment of debt and capital lease obligations additionally utilized approximately $187,000 and $194,000 respectively. Proceeds of notes and debt obligations payable approximated $1,138,000. Overall, negative cash flow for the first three months of fiscal 1998 approximated $34,000. The Company has commitments of approximately $217,000 for the acquisition of capital assets. It also has material commitments pursuant to certain inventory procurement contracts that aggregate approximately $1,075,000 at June 30, 1997. Results of Operations Overview. Overall, the Company's total revenues for the first quarter of fiscal 1998 decreased 18% to $1.55 million as compared to $1.9 million for the first quarter of fiscal 1997. Sales decreased from $1.2 million to $0.85 million but royalties remained at $0.7 million for the first quarter of fiscal 1998 as in the first quarter of fiscal 1997. Royalty income represents royalties from Sulzer Intermedics Inc. pursuant to a License Agreement between the Company and Sulzer Intermedics. Costs and expenses in the first quarter of fiscal 1998 decreased by 13% to $1.7 million compared to $1.96 million in the first quarter of fiscal 1997, which resulted in an operating loss of $155,746 in the first quarter of fiscal 1998 compared to an operating loss of $61,830 in the first quarter of fiscal 1997. Other expenses, net of other income, for the first quarter of fiscal 1998 decreased by 23% to $76,603 compared to $99,241 in the first quarter of fiscal 1997, which resulted in a net loss of $232,349 in the first quarter of fiscal 1998 compared to a net loss of $161,071 in the first quarter of fiscal 1997. Sales. Product sales decreased by 29% from the comparative period in fiscal 1997. Sales of pacers and electrode leads decreased by 13% and 35% respectively. The decline in sales is due to the Company having focused its resources into the research and development of advanced single lead systems in preparation for intended long term growth and increased competition from other companies that have entered the market with single lead products. 9 Sales by geographic area for the first quarter of fiscal 1998 and 1997 are as follows:
- ---------------------------------------------------------------------- Geographic Area 1998 1997 - ---------------------------------------------------------------------- United States.................... $ 781,009 $ 1,069,518 Europe........................... 71,279 132,975 ---------------------------------- $ 852,288 $ 1,202,493 - ----------------------------------------------------------------------
Royalty Income. Royalty income represents royalty fees from Sulzer Intermedics Inc. pursuant to a License Agreement between the Company and Sulzer Intermedics, whereby the Company licensed the technology relating to its single-pass atrial- controlled ventricular pacing system. Costs of Products Sold. The cost of products sold in the first quarter of fiscal 1998 was $503,815, compared to $679,944 in the first quarter of fiscal 1997, representing a decrease of 26% as compared to the decrease of 29% in sales values, which decreased the gross margin from 43% to 41%. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $743,072 in the first quarter of fiscal 1998, representing a decrease of 10% from $821,340 in the first quarter of fiscal 1997. Selling expenses decreased 28% from $481,740 in the first quarter of fiscal 1997 to $346,377 in the first quarter of fiscal 1998 due to reduced sales commissions, as well as a refocus of resources into research and development. General and administrative expenses increased from $339,600 in the first quarter of fiscal 1997 to $396,695 in the first quarter of fiscal 1998 due largely to external professional services. Engineering, Research and Development Expenses. Engineering, research and development costs were $458,272 in the first quarter of fiscal 1998, compared to $457,564 in the first quarter of fiscal 1997 due to the sustained activity in the development of advanced products. In addition, $149,206 of research costs were capitalized in the first quarter of fiscal 1998, compared to nil in the first quarter of fiscal 1997. Other Income and Expenses. Interest income was $5,983 during the first quarter of fiscal 1998, representing a decrease of 43% from $10,548 in the first quarter of fiscal 1997. Interest expense decreased from $134,789 in the first quarter of fiscal 1997 to $82,586 in the first quarter of fiscal 1998 due to the Company having completed, in the fourth quarter of fiscal 1997, both the repayment to Sulzer Intermedics of the balance of the loan of $1.0 million obtained in October, 1995 and the amortization of the discount in the sum of $279,000, recorded in March 1995, relating to the warrant issued to Sirrom Capital Corporation in respect of 100,000 shares of the Company's common stock at $0.01 a share. Operating Trends and Uncertainties Sales. The ability of the Company to attain a profitable level of operations is dependent upon expansion of sales volume, both domestically and internationally and continued development of new, advanced products. The Company believes that with the continued release of new products and its world-wide market expansion, it will have the potential to increase sales. The European Union ("EU") nations have adopted universal standards as developed by the International Organization for Standardization ("ISO") in order to provide simplified trade among the member nations and to assure free access to trade while maintaining quality standards for products sold. All companies doing business in these nations must be certified to these standards set forth by the EU which is evidenced by being granted the CE Mark. Standards for active implantable medical products were implemented January 1, 1993, with a transition period ending December 31, 1994. The Company Quality System received certification to the ISO 9002 on November 19, 1996. The CE Mark certification was issued by the Notified Body, TUV Product Service, of Munich, Germany, 10 during the second quarter of fiscal 1996 for the Company's products intended for sale in Europe. The Company is developing design control processes in preparation for a compliance audit to ISO 9001. Until March 1995, the Company was the only manufacturer commercially marketing single-lead atrial-controlled ventricular pacemakers. However, Sulzer Intermedics Inc., a competitor of the Company, received FDA clearance to commercially market a single-lead atrial-controlled ventricular pacemaker that it developed utilizing the Company's technology pursuant to license and supply agreements with the Company. Sulzer Intermedics commenced marketing its new pacemakers in March 1995. In addition, other competitors have also commenced marketing competitive single lead products. Although the introduction of the new single lead pacemakers poses competition for the Company, management believes that the Company will benefit from such competition since the new competition will increase the visibility of single- lead atrial-controlled ventricular pacemakers in the marketplace and thereby increase market acceptance of the product. Further, management believes that there is a sufficient market to accommodate both the Company's and other competitive pacemakers. The Company estimates that its market share of pacemakers generally is less than 1% of an estimated total worldwide market of $2 billion per year. Various factors impact on a firm's ability to increase market share including, but not limited to, the financial strength of the firm, the ability of the firm and its competitors, and the time involved in obtaining FDA clearance for new or improved products. Therefore, although management believes that the Company is well poised for viable growth, management cannot predict the degree of market share the Company can obtain. Factors beyond the Company's control may impede its progress and in such event, its business and operations would be adversely impacted. The Company's ability successfully to compete with Sulzer Intermedics and other pacemaker manufacturers will depend on the Company's ability to supply product and recruit and increase a quality sales force and continue to develop and release new advanced products. The Company historically has been restricted in its marketing capabilities due to financial constraints impeding its ability to supply products and recruit and train a sales force. However, the Company believes that the credit facility from Coast Business Credit and the cash flow generated from Sulzer Intermedics' orders and royalties have positioned the Company to increase its research and development capabilities and its sales force, and to provide an uninterrupted supply of products. However, actual results may differ materially from the Company expectations, depending on a variety of important factors, some of which may be out of the Company's control, including, among others, the availability of raw materials from suppliers, the timing of FDA clearance of new products, the ability of the Company to keep pace with market demand for new products, the ability of the Company's sales force, and the ability of the Company to successfully compete with competitors who have greater financial resources. As discussed above, the manufacture and sale of leads to Sulzer Intermedics produce income for the Company. The Company sells electrode leads to Sulzer Intermedics for its new systems under an Amended and Restated Supply Contract that terminates on August 1, 1998. The Company also receives royalties from Sulzer Intermedics sales of its products incorporating the licensed technology under an Amended and Restated License Agreement. The Company anticipates supplying components to Sulzer Intermedics under the supply agreement for the next several years. An increase in demand for components by Sulzer Intermedics will put further demands on the Company to supply the products; however, with the anticipated cash flow from such orders that would be generated under the license and supply agreements, plus anticipated positive cash flow from sales of other products by the Company, management believes that the Company will be in a position to accommodate an increase in orders. It is anticipated that Sulzer Intermedics will eventually develop its own manufacturing capability for electrode leads necessary for its new pacemakers. However, any such development will take time. Although the Company does not know how long it will take Sulzer Intermedics to develop its own manufacturing capability, added to any such development period would be the time necessary to obtain FDA clearance of its manufacturing process. Thus, although the Company cannot guarantee that it will continue to supply Sulzer Intermedics with products, the Company anticipates providing Sulzer Intermedics with components for the next few years. However, in the event Sulzer Intermedics receives FDA approval in a shorter time-frame than anticipated, or other events occur which 11 causes a decrease in Sulzer Intermedics' orders, the Company's business and operating results would be adversely affected. Sources of Supply. Two of the Company's principal suppliers of materials used primarily in electrode lead production, Dow Corning Corp. and E.I. DuPont de Nemours & Company, indicated that they will no longer supply their materials to the medical device industry for use in implantable devices. In July 1993, the FDA published in the Federal Register a one-time-only requirement for medical device manufacturers to file a special notification of material supplier changes resulting from the decision of Dow Corning to discontinue supplying its materials to medical device manufacturers. The Company filed the "Special Silicone Notification" for its products effected by the Dow Corning decision in September 1993. In this notification alternate suppliers and materials were identified and supporting technical biological test data were provided for the alternate materials. The FDA acknowledged receiving the Company's notification and indicated that, unless otherwise notified by the FDA, the alternate materials identified in the notification may be used in the Company's products in place of the comparable Dow Corning materials. No further FDA approvals of the alternate materials of such suppliers were required. With respect to other materials changes resulting from decisions by the material suppliers to discontinue supplying the medical device industry, e.g. E.I. DuPont de Nemours, the FDA has indicated that such changes shall be handled on a case- by-case basis through the established product approval processes within the FDA. The availability of materials suitable for use in implantable medical devices is an industry-wide problem and is not unique to the Company or to the cardiovascular device segment of the industry. A tentative replacement for the DuPont supplied material has been identified which meets manufacturing requirements. Biocompatibility studies have been initiated on the replacement candidate. Since the candidate replacement material is comprised of the same chemical composition as the DuPont material, it is expected that it will be comparable with respect to the performance characteristics and biocompatibility of the current material in use. Similarly, FDA approval of this replacement material is anticipated to be forthcoming based upon a satisfactory outcome of the testing in progress. The Company believes, however, that it has a sufficient quantity of the DuPont material on supply to meet the Company's anticipated demand for the next several years. Suppliers of custom Application Specific Integrated Circuits (ASIC's) have advised that the technology used to produce ASIC's will no longer be supported. As such, the Company placed one last bulk order to ensure the availability of sufficient ASIC's to satisfy projected demands for product. State of the art ASIC's will be developed for the new pacing system, obviating the need for perpetual supply of the currently used ASIC's. Inflation and Changing Prices In the opinion of Company management, the rate of inflation during the past two fiscal years has not had any material impact on the Company's operations. Because of the implementation of cost containment and new Medicare regulations, any increase in sales revenues is expected to result from an increase in the volume of business rather than from an increase in selling prices. The Company's pricing structure may not reflect inflation rates, due to constraints of Medicare regulations, market conditions and competition. Recent Accounting Pronouncement The FASB has issued SFAS No. 128, "Earnings per Share," which provides guidance for computing and presenting earnings per share (EPS). This statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings per Share." This statement , when adopted, is not expected to have a material impact on the Company. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings On January 4, 1994, a financial brokering and consulting firm filed suit against the Company in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida (the "Court"), alleging that the Company had breached certain contractual duties and obligations. The suit requests a judgment requiring the Company to deliver warrants to purchase 15% of the Company's common stock, and damages in excess of $15,000. The Company denied liability and filed a counterclaim alleging that the brokering firm fraudulently induced the Company into the Agreement then breached the Agreement and certain fiduciary duties. Management plans to vigorously defend the lawsuit and pursue its counterclaims. In the opinion of management, this action has no merit and the ultimate outcome is not expected to materially affect the financial position of the Company. Item 2. Changes in Securities (a) Not applicable. (b) Not applicable. (c) Effective March 31, 1997, the number of shares of the Company's common stock, $0.10 par value, which Sirrom Capital Corporation ("Sirrom"), an accredited investor, has the right to purchase at one cent ($0.01) per share, increased by 50,000. This increase was pursuant to the terms of a warrant issued to Sirrom, pursuant to the Loan and Security Agreement between the Company and Sirrom dated March 31, 1995, under the terms of which the Company is required to grant Sirrom the right to purchase an additional 50,000 shares of common stock upon each anniversary date, commencing March 31, 1997 that any amount owed Sirrom shall be outstanding. On June 6, 1997, the Company issued to Sirrom Capital Corporation ("Sirrom"), an accredited investor, 50,000 common stock purchase warrants exercisable at $5.00 per share at any time from June 6, 1997 and expiring June 6, 2002. The warrants were issued in connection with a loan from Coast Business Credit which closed on June 13, 1997. On June 13, 1997, the Company issued to Coast Business Credit ("CBC"), an accredited investor, 37,500 common stock purchase warrants exercisable at $4.00 per share commencing immediately and expiring June 30, 2002. The warrants were issued in connection with a loan from CBC which closed on June 13, 1997. All of the foregoing transactions were entered into by the Company in reliance on Section 4(2) of the Securities Act of 1933. The foregoing warrant holders indicated their investment intent and the warrant instruments bear a legend accordingly. 13 Item 6. Exhibits and Reports on Form 8-K 6(a). Exhibits Exhibits filed in Part II of this Report are as follows:
- -------------------------------------------------------------------------------- Exhibit Sequential Page Number or Number Description Incorporation by Reference to - -------------------------------------------------------------------------------- 3.0 Certificate of Exhibit 3.0 to Amendment No. 1 to Form Incorporation of the S-1 Registration Statement filed on Company, as amended February 1, 1988, Registration No. 33-16490 and Form 10-K for the year ended March 31, 1990, File No. 0-14653 3.1 Amendment to Certificate Exhibit 3.1 to Form S-1 Registration of Incorporation Statement filed on March 2, 1995, Registration No. 33-89938 3.2 By-Laws of the Company Exhibit 3.1 to Form S-18 Registration Statement filed on October 16, 1985, Registration No. 33-9208 3.3 Amendment to Bylaws Exhibit 3.3 to Form S-1 Registration Statement filed on March 2, 1995, Registration No. 33-89938 4.0 Form of Common Stock Exhibit 4.0 to Form S-1 Registration Certificate Statement filed on March 2, 1995, Registration No. 33-89938 4.1 Form of Sales Exhibit 4.13 to Form 10-Q for the Quarter Representative Stock Ended September 30, 1988, File No. 0-14653 Option Agreement 4.2 Cardiac Control Systems, Exhibit 4.15 to Form 8-K Current Report Inc. 5% Convertible dated October 11, 1994, File No. 0-14653 Debenture due October 31, 1999 4.3 Combined 1987-1992 Exhibit 4.8 to Amendment No. 1 to Form Non-Qualified Stock Option S-1 Registration Statement filed on April Plan 17, 1995, Registration No. 33-89938 4.4 Stock Purchase Warrant Exhibit 4.1 to Form 8-K Current Report, dated March 31, 1995 in dated March 31, 1995, File No. 0-14653 favor of Sirrom Capital Corporation 4.5 Stock Purchase Warrant, Exhibit 4.2 to Form 8-K Current Report, dated March 31, 1995 in dated March 31, 1995, File No. 0-14653 favor of Dow Corning Enterprises, Inc. 4.6 Stock Purchase Warrant, Exhibit 4.6 to Form 10-KSB for the year dated October 15, 1995 in ended March 31, 1996, File No. 0-14653 favor of Sirrom Capital Corporation 4.7 Stock Purchase Warrant, Exhibit 4.7 to Form 10-KSB for the year dated March 29, 1996 in ended March 31, 1996, File No. 0-14653 favor of Grupo Taper, S.A.Exhibit
14
- -------------------------------------------------------------------------------- Exhibit Sequential Page Number or Number Description Incorporation by Reference to - -------------------------------------------------------------------------------- 4.8 Stock Purchase Warrant, Exhibit 4.1 to Form 8-K Current Report dated June, 1997 in favor dated June 13, 1997, File No. 0-14653. of Coast Business Credit, a Division of Southern Pacific Thrift and Loan Association 4.9 Stock Purchase Warrant Exhibit 4.2 to Form 8-K Current Report dated June 6, 1997 in dated June 13, 1997, File No. 0-14653 favor of Sirrom Capital $481,740 Corporation 10.0 License Agreement between Exhibit 10.1 to Form 10-Q for the Quarter Hughes/Bertolet and the Ended September 30, 1986, File No. 0-14653 Company 10.1 Settlement Agreement and Exhibit 10.2 to Form 10-K for the Year Release between Applied Ended March 31, 1990, File No. 0-14653 Cardiac Electro-physiology and the Company 10.2 Amended and Restated Exhibit 10.19 to Form 8-K Current Report, License Agreement between dated April 2, 1993, File No. 0-14653 Sulzer Intermedics Inc. and the Company, dated April 2, 1993 10.3 Amended and Restated Exhibit 10.20 to From 8-K Current Report, Supply Contract between dated April 2, 1992, File No. 0-14653 Sulzer Intermedics Inc. and the Company, dated April 2, 1993 10.4 Employment Agreement Exhibit 10.24 to Form 8-K Current Report, between Bart C. Gutekunst dated October 11, 1994, File No. 0-14653 and the Company, dated October 13, 1994 10.5 Employment Agreement Exhibit 10.25 to Form 8-K Current Report, between Alan J. Rabin and dated October 11, 1994, File No. 0-14653 the Company, dated October 13, 1994 10.6 Employment Agreement Exhibit 10.12 to Form 10-Q for the between Robert S. Miller Quarter Ended December 31, 1994, File No. and the Company, dated 0-14653 December 12, 1994 10.7 Agreement between LEM Exhibit 10.13 to Form 10-Q for the Biomedica, s.r.l. and the Quarter Ended December 31, 1994, File Company, dated October 1, 0-14653 1994 10.8 Agreement between the Exhibit 10.12 to Form S-1 Registration Company and Alan J. Rabin Statement filed on March 2, 1995, and Bart C. Gutekunst, Registration No. 33-89938 dated July 1, 1994
15
- -------------------------------------------------------------------------------- Exhibit Sequential Page Number or Number Description Incorporation by Reference to - -------------------------------------------------------------------------------- 10.9 Form of Indemnification Exhibit 10.13 to Form S-1 Registration Agreement between the Statement filed on March 2, 1995, Company and each Director, Registration No. 33-89938 executed December 1994 10.10 Employment Agreement Exhibit 10.14 to Form S-1 Registration between Robert R. Brownlee Statement filed on March 2, 1995, and the Company dated as Registration No. 33-89938 of October 1, 1994 10.11 Loan and Security Exhibit 10.1 to Form 8-K Current Report, Agreement between the dated March 31, 1995, File No. 0-14653 Company and Sirrom Capital Corporation, dated March 31, 1995 10.12 $1,500,000 Secured Exhibit 10.2 to Form 8-K Current Report, Promissory Note in favor dated March 31, 1995, File No. 0-14653 of Sirrom Capital Corporation, dated March 31, 1995 10.13 Mortgage, Assignment of Exhibit 10.3 to Form 8-K Current Report, Rents and Leases, and dated March 31, 1995, File No. 0-14653 Security Agreement in favor of Sirrom Capital Corporation, dated March 31, 1995 10.14 Second Mortgage and Exhibit 10.4 to Form 8-K Current Report, Security Agreement in dated March 31, 1995, File No. 0-14653 favor of Bart Gutekunst, as trustee, dated March 31, 1995 10.15 Subordination Agreement Exhibit 10.5 to Form 8-K Current Report, between the Company Sirrom dated March 31, 1995, File No. 0-14653 Capital Corporation, and the Debentureholders, dated March 31, 1995 10.16 Promissory Note and Exhibit 10.16 to Form 10-QSB for the Security Agreement between Quarter ended September 30, 1995, File Sulzer Intermedics Inc., No. 0-14653 and the Company dated October 20, 1995 10.17 Amendment 2 to Supply Exhibit 10.17 to Form 10-QSB for the Contract between Sulzer Quarter ended September 30, 1995, File Intermedics Inc., and the No. 0-14653 Company, dated October 20, 1995
16
- -------------------------------------------------------------------------------- Exhibit Sequential Page Number or Number Description Incorporation by Reference to - -------------------------------------------------------------------------------- 10.18 Amendment 2 to License Exhibit 10.18 to Form 10-QSB for the Agreement between Sulzer Quarter ended September 30, 1995, File Intermedics Inc., and the No. 0-14653 Company, dated October 20, 1995 10.19 Distribution Agreement Exhibit 10.19 to Form 10-QSB for the between Grupo Taper S.A. Quarter ended December 31, 1995, File No. and the Company, dated 0-14653 December 20, 1995 10.20 Distribution Agreement Exhibit 10.20 to Form 10-QSB for the between LEM Biomedica Quarter ended September 30, 1996, File s.r.l. and the Company, No. 0-14653 dated October 1, 1996 10.21 Security Agreement and Exhibit 10.21 to Form 10-QSB for the Secured Promissory Note Quarter ended December 31, 1996, File No. between Bart C. Gutekunst 0-14653 and the Company, dated October 28, 1996. 10.22 Security Agreement and Exhibit 4.1 to Form 10-KSB for the year Secured Promissory Note ended March 31, 1997, File No. 0-14653 between Bart C. Gutekunst and the Company, dated March 24, 1997. 10.23 Security Agreement and Included herewith. Secured Promissory Note between Alan J. Rabin and the Company, dated April 15, 1997. 10.24 Security Agreement and Included herewith Secured Promissory Note between Bart C. Gutekunst and the Company, dated April 21, 1997. 10.25 Loan and Security Exhibit 10.1 to Form 8-K Current Report Agreement Coast Business dated June 13, 1997, File No. 0-14653 Credit and the Company, dated June 13, 1997 10.26 $300,000 Secured Exhibit 10.2 to Form 8-K Current Report Promissory Note of the dated June 13, 1997, File No. 0-14653 Company to Coast Business Credit, dated June 13, 1997 10.27 $500,000 CAPEX Promissory Exhibit 10.3 to Form 8-K Current Report Note of the Company to dated June 13, 1997, File No. 0-14653 Coast Business Credit, dated June 13, 1997
17
- -------------------------------------------------------------------------------- Exhibit Sequential Page Number or Number Description Incorporation by Reference to - -------------------------------------------------------------------------------- 10.28 Intercreditor and Exhibit 10.4 to Form 8-K Current Report Subordination Agreement dated June 13, 1997, File No. 0-14653 between Coast Business Credit and Sirrom Capital Corporation 10.29 Mortgage and Security Exhibit 10.5 to Form 8-K Current Report Agreement between the dated June 13, 1997, File No. 0-14653 Company and Coast Business Credit 10.30 Security Agreement Exhibit 10.6 to Form 8-K Current Report (Intellectual Property) dated June 13, 1997, File No. 0-14653 between the Company and Coast Business Credit 10.31 Grant of Security Interest Exhibit 10.7 to Form 8-K Current Report - Patents in favor of Coast dated June 13, 1997, File No. 0-14653 Business Credit 27 Financial Data Schedule Included herewith - --------------------------------------------------------------------------------
Copies of the above described exhibits will be furnished to the stockholders upon written request, addressed to President and Chief Executive Officer, Cardiac Control Systems, Inc., 3 Commerce Boulevard, Palm Coast, Florida 32164. 6(b). Reports on Form 8-K The Company filed Form 8-K dated June 13, 1997 to report the closing on a maximum $3.5 million credit facility with Coast Business Credit, a division of Southern Pacific Thrift and Loan Association (Coast), pursuant to a Loan and Security Agreement. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARDIAC CONTROL SYSTEMS, INC. (Registrant) Date: 8/11/1997 By:/s/ Alan J. Rabin ----------------- ---------------------------------- Alan J. Rabin President and Chief Executive Officer Date: 8/11/1997 By:/s/ W. Alan Walton ----------------- ---------------------------------- W. Alan Walton Executive Vice President and Chief Operating Officer 19 INDEX OF EXHIBITS Exhibit Description Number 10.23 Security Agreement and Secured Promissory Note between Alan J. Rabin and the Company, dated April 15, 1997 10.24 Security Agreement and Secured Promissory Note between Bart C. Gutekunst and the Company, dated April 21, 1997 27 Financial Data Schedule 20 EX-10.23 2 SECURITY AGREEMENT AND PROMISSORY NOTE 04/15/97 Exhibit 10.23 Security Agreement and Promissory Note between Alan J. Rabin and the Company dated April 15, 1997 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as of the fifteenth day of April, 1997 by and between CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation ("Debtor" or "Company") and ALAN J. RABIN, an individual ("Secured Party"). WHEREAS, Debtor is obligated to pay Secured Party the sum of Thirty- two thousand four hundred and twenty-nine and 18/100 Dollars ($32,429.18) (the "Obligation") pursuant to a secured promissory note dated of even date herewith (the "Note"), which Obligation represents $32,000.00 advanced to the Debtor by Secured Party and $429.18 in expenses incurred by Secured Party in connection with making such advance, which expenses have been itemized in a writing and delivered to the Company. NOW, THEREFORE, in consideration of the mutual promises made herein between the parties hereto, and other valuable consideration, the receipt of which is hereby acknowledged, the parties mutually agree as follows: 1. Recitals. The above recitals are true and correct and are -------- incorporated herein by this reference. 2. Grant of Security Interest. To secure the payment of the Note to -------------------------- the Secured Party, the Debtor does hereby grant to the Secured Party a security interest in and to all inventory now owned or hereafter acquired by Debtor, including without limitation all parts and accessories, and proceeds therefrom (the "Collateral"). 3. Rights Upon Default. Upon the occurrence of an Event of Default, ------------------- as defined in the Note, the Secured Party shall have the rights and remedies of a secured party under the Florida Uniform Commercial Code and any and all rights and remedies available to Secured Party under any other applicable laws. 4. Perfection. In order to perfect Secured Party's security interest ---------- in the Collateral, Debtor shall execute and deliver to Secured Party a UCC-1 Financing Statement which shall be filed with the Florida Secretary of State. The Debtor shall pay all costs of filing such financing statement. 5. Prior Security Interest. Secured Party acknowledged that the ----------------------- security interest of Secured Party is subject to the prior and senior security interest of Sirrom Capital Corporation. 6. Notice. All notices under this Agreement shall be in writing and ------ shall be deemed to have been given (I) in the case of delivery, when delivered to the address set forth on the signature page to this Agreement, (ii) in the case of mailing, on the third business day after deposit in the U.S. Mail, postage prepaid, certified or registered mail and addressed to the other party at the address set forth on the signature page to this Agreement; and (iii) in all other cases when the same has been actually received by the other party. Either party may change its address to which said notices are to be sent by the giving of notice of such change as set forth herein. 7. Term. This Agreement and the rights and privileges granted ---- hereunder to the Secured Party shall continue and remain in full force and effect until the Obligation has been paid in full to the Secured Party. At such time, this Agreement, marked "canceled" and the Note, marked "Paid in Full", shall be returned to Debtor, and the Secured Party shall further execute a termination statement in regard to any financing statement that is solely related to the Collateral. 8. Security Agreement. This Agreement has been delivered in the ------------------ State of Florida and shall be construed in accordance and governed by the laws of Florida. 9. Complete Agreement. This Agreement constitutes the complete ------------------ agreement between the parties in regard to the matters set forth herein and this Agreement may not be altered, amended or otherwise modified except by a writing signed by both parties hereto. IN WITNESS WHEREOF, the Debtor and Secured Party have executed this Agreement as of the date and year first above written. "Debtor" CARDIAC CONTROL SYSTEMS, INC. By: /s/ W. A. Walton -------------------------- W. Alan Walton, Executive Vice-President "Secured Party" /s/ Alan J. Rabin --------------------------- Alan J. Rabin -2- SECURED PROMISSORY NOTE $32,429.18 April 15, 1997 Palm Coast, Florida FOR VALUE RECEIVED, the undersigned, Cardiac Control Systems, Inc., a Delaware corporation (the "Maker"), hereby promises to pay to Alan J. Rabin, an individual (the "Payee"), at Payee's principal place of business or such other place as Payee may from time to time designate in writing, the principal amount of Thirty-two thousand four hundred and twenty-nine and 18/100 Dollars ($32,429.18), together with interest on unpaid principal from time to time outstanding computed from the date of this Note, at the rate provided herein. The Maker may prepay, at any time and from time to time, without penalty, all or a portion of said amount. 1. Commencing on the date of this Note, the unpaid principal balance from time to time outstanding hereunder shall bear interest at the rate of ten percent (10%) per annum, which interest shall accrue to May 15, 1997 (the "Maturity Date"), at which time the entire amount of unpaid principal and any accrued but unpaid interest shall be paid in full. a. For a term of five (5) years from the Maturity Date, Payee shall have a right to purchase, in whole or in part and at his option, one (1) share of restricted common stock of Maker ("Share(s)") at an exercise price of eighteen cents ($0.18) per Share for every one ($1.00) dollar of interest due under this Note. Upon receipt by Maker of (i) written notice from Payee of Payee's exercise of his right to purchase such Shares, delivered to Maker at its principal place of business, (ii) a representation letter from Payee satisfactory to Maker containing representations from Payee regarding his investment intent, acknowledgment that the Shares are restricted and his accredited investor status, and (iii) clear funds in an amount equal to the number of Shares to be purchased multiplied by eighteen cents ($0.18), Maker shall issue the Shares purchased. Payee shall have no other rights to purchase Shares except as expressly set forth herein, including, without limitation, no preemptive rights, and no rights to adjustment due to a distribution, subdivision, reclassification or any other issuance of Shares by Maker or derivative securities convertible into or exerciseable for Shares. Payee shall have no right to receive fractional shares. Any amount of interest shall be rounded down to the nearest whole dollar. Any certificates evidencing Shares issued pursuant to this Note shall bear a restrictive legend providing substantially that the Shares may not be transferred by Payee unless registered under applicable federal and state securities laws or unless an exemption from such registration is available. 2. Notwithstanding the provisions of Section 1 of this Note, from and after the date of an Event of Default (defined below), the outstanding principal and accrued and unpaid interest shall together be deemed outstanding principal and the interest on such principal shall be computed at the rate of three percent (3%) per month, which interest shall be payable monthly commencing on the first day of the calendar month following the date of an Event of Default, and continuing thereafter until the outstanding principal balance and any accrued and unpaid interest is paid in full. 3. The entire unpaid amount of this Note, inclusive of principal and interest, shall become immediately due and payable upon the occurrence of an Event of Default, as defined below. The term "Event of Default", as used herein, shall mean the occurrence and continuation of any one or more of the following events: (a) the failure of Maker to pay in full this Note on the Maturity Date; (b) the adjudication of Maker as a bankrupt or insolvent, or an assignment by Maker for the benefit of creditors; (c) the voluntary, or involuntary, appointment of a receiver, trustee or similar officer for Maker or for any substantial part of its property or business, and which appointment, if involuntary, shall have continued for a period of ninety (90) days; (d) the voluntary, or involuntary, institution of bankruptcy, insolvency, reorganization, arrangement, dissolution, liquidation or similar proceeding relating to the Company, and which, if involuntary, shall have continued for as period of ninety (90) days. This Note shall be governed by and construed in accordance with the laws of the State of Florida. This payment of this Note is secured by a security agreement and UCC-1 financing statement, of even date herewith, on certain personal property of Maker and being used in the business of Maker. CARDIAC CONTROL SYSTEMS, INC. By: /s/ W. A. Walton ---------------------------------------- W. Alan Walton, Executive Vice President EX-10.24 3 SECURITY AGREEMENT AND PROMISSORY NOTE 04/21/97 Exhibit 10.24 Security Agreement and Promissory Note between Bart C. Gutekunst and the Company dated April 21, 1997 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as of the twenty-first day of April, 1997 by and between CARDIAC CONTROL SYSTEMS, INC., a Delaware corporation ("Debtor" or "Company") and BART C. GUTEKUNST, an individual ("Secured Party"). WHEREAS, Debtor is obligated to pay Secured Party the sum of Sixty-one thousand, five hundred and fifty-three and 65/100 Dollars ($65,553.65) (the "Obligation") pursuant to a secured promissory note dated of even date herewith (the "Note"), which Obligation represents $60,000 advanced to the Debtor by Secured Party and $1,553.65 in expenses incurred in making such advance, which expenses have been itemized in writing and delivered to the Company. NOW, THEREFORE, in consideration of the mutual promises made herein between the parties hereto, and other valuable consideration, the receipt of which is hereby acknowledged, the parties mutually agree as follows: 1. Recitals. The above recitals are true and correct and are incorporated herein by this reference. 2. Grant of Security Interest. To secure the payment of the Note to -------------------------- the Secured Party, the Debtor does hereby grant to the Secured Party a security interest in and to all inventory now owned or hereafter acquired by Debtor, including without limitation all parts and accessories, and proceeds therefrom (the "Collateral"). 3. Rights Upon Default. Upon the occurrence of an Event of Default, ------------------- as defined in the Note, the Secured Party shall have the rights and remedies of a secured party under the Florida Uniform Commercial Code and any and all rights and remedies available to Secured Party under any other applicable laws. 4. Perfection. In order to perfect Secured Party's security interest ---------- in the Collateral, Debtor shall execute and deliver to Secured Party a UCC-1 Financing Statement which shall be filed with the Florida Secretary of State. The Debtor shall pay all costs of filing such financing statement. 5. Prior Security Interest. Secured Party acknowledged that the ----------------------- security interest of Secured Party is subject to the prior and senior security interest of Sirrom Capital Corporation. 6. Notice. All notices under this Agreement shall be in writing and ------ shall be deemed to have been given (I) in the case of delivery, when delivered to the address set forth on the signature page to this Agreement, (ii) in the case of mailing, on the third business day after deposit in the U.S. Mail, postage prepaid, certified or registered mail and addressed to the other party at the address set forth on the signature page to this Agreement; and (iii) in all other cases when the same has been actually received by the other party. Either party may change its address to which said notices are to be sent by the giving of notice of such change as set forth herein. 7. Term. This Agreement and the rights and privileges granted ---- hereunder to the Secured Party shall continue and remain in full force and effect until the Obligation has been paid in full to the Secured Party. At such time, this Agreement, marked "canceled" and the Note, marked "Paid in Full", shall be returned to Debtor, and the Secured Party shall further execute a termination statement in regard to any financing statement that is solely related to the Collateral. 8. Security Agreement. This Agreement has been delivered in the ------------------ State of Florida and shall be construed in accordance and governed by the laws of Florida. 9. Complete Agreement. This Agreement constitutes the complete ------------------ agreement between the parties in regard to the matters set forth herein and this Agreement may not be altered, amended or otherwise modified except by a writing signed by both parties hereto. IN WITNESS WHEREOF, the Debtor and Secured Party have executed this Agreement as of the date and year first above written. "Debtor" CARDIAC CONTROL SYSTEMS, INC. By: /s/ Alan J. Rabin ----------------- Alan Rabin, President "Secured Party" /s/ Bart C. Gutekunst --------------------- Bart C. Gutekunst -2- SECURED PROMISSORY NOTE $61,553.65 April 21, 1997 Palm Coast, Florida FOR VALUE RECEIVED, the undersigned, Cardiac Control Systems, Inc., a Delaware corporation (the "Maker"), hereby promises to pay to Bart C. Gutekunst, an individual (the "Payee"), at Payee's principal place of business or such other place as Payee may from time to time designate in writing, the principal amount of Sixty-one thousand five hundred and fifty-three and 65/100 dollars ($61,553.65), together with interest on unpaid principal from time to time outstanding computed from the date of this Note, at the rate provided herein. The Maker may prepay, at any time and from time to time, without penalty, all or a portion of said amount. 1. Commencing on the date of this Note, the unpaid principal balance from time to time outstanding hereunder shall bear interest at the rate of ten percent (10%) per annum, which interest shall accrue to May 15, 1997 (the "Maturity Date"), at which time the entire amount of unpaid principal and any accrued but unpaid interest shall be paid in full. a. For a term of five (5) years from the Maturity Date, Payee shall have a right to purchase, in whole or in part and at his option, one (1) share of restricted common stock of Maker ("Share(s)") at an exercise price of eighteen cents ($0.18) per Share for every one ($1.00) dollar of interest due under this Note. Upon receipt by Maker of (i) written notice from Payee of Payee's exercise of his right to purchase such Shares, delivered to Maker at its principal place of business, (ii) a representation letter from Payee satisfactory to Maker containing representations from Payee regarding his investment intent, acknowledgment that the Shares are restricted and his accredited investor status, and (iii) clear funds in an amount equal to the number of Shares to be purchased multiplied by eighteen cents ($0.18), Maker shall issue the Shares purchased. Payee shall have no other rights to purchase Shares except as expressly set forth herein, including, without limitation, no preemptive rights, and no rights to adjustment due to a distribution, subdivision, reclassification or any other issuance of Shares by Maker or derivative securities convertible into or exerciseable for Shares. Payee shall have no right to receive fractional shares. Any amount of interest shall be rounded down to the nearest whole dollar. Any certificates evidencing Shares issued pursuant to this Note shall bear a restrictive legend providing substantially that the Shares may not be transferred by Payee unless registered under applicable federal and state securities laws or unless an exemption from such registration is available. 2. Notwithstanding the provisions of Section 1 of this Note, from and after the date of an Event of Default (defined below), the outstanding principal and accrued and unpaid interest shall together be deemed outstanding principal and the interest on such principal shall be computed at the rate of three percent (3%) per month, which interest shall be payable monthly commencing on the first day of the calendar month following the date of an Event of Default, and continuing thereafter until the outstanding principal balance and any accrued and unpaid interest is paid in full. 3. The entire unpaid amount of this Note, inclusive of principal and interest, shall become immediately due and payable upon the occurrence of an Event of Default, as defined below. The term "Event of Default", as used herein, shall mean the occurrence and continuation of any one or more of the following events: (a) the failure of Maker to pay in full this Note on the Maturity Date; (b) the adjudication of Maker as a bankrupt or insolvent, or an assignment by Maker for the benefit of creditors; (c) the voluntary, or involuntary, appointment of a receiver, trustee or similar officer for Maker or for any substantial part of its property or business, and which appointment, if involuntary, shall have continued for a period of ninety (90) days; (d) the voluntary, or involuntary, institution of bankruptcy, insolvency, reorganization, arrangement, dissolution, liquidation or similar proceeding relating to the Company, and which, if involuntary, shall have continued for as period of ninety (90) days. This Note shall be governed by and construed in accordance with the laws of the State of Florida. This payment of this Note is secured by a security agreement and UCC-1 financing statement, of even date herewith, on certain personal property of Maker and being used in the business of Maker. CARDIAC CONTROL SYSTEMS, INC. By: /s/ Alan J. Rabin ----------------------------- Alan Rabin, President EX-27 4 FINANCIAL DATA SCHEDULE
5 1 3-MOS MAR-31-1998 APR-01-1997 JUN-30-1997 151,279 0 1,226,022 19,218 1,637,794 3,429,989 5,388,004 3,494,901 6,066,122 1,966,146 2,374,944 0 0 261,937 22,291,215 6,066,122 852,288 1,549,413 503,815 1,705,159 76,603 0 82,586 (232,349) 0 (232,349) 0 0 0 (232,349) (0.09) (0.09)
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