<PAGE>
===============================================================================
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 QUARTER ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-14653
CARDIAC CONTROL SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
_____________________________
DELAWARE 74-2119162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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, 1997, 2,579,371 shares of the Registrant's common stock, $.10
par value, were outstanding.
===============================================================================
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
FORM 10-QSB
DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Page No.
- -------------------------------------------------------------------------------
<S> <C>
PART I. FINANCIAL INFORMATION
Balance Sheet at December 31, 1996 (Unaudited)..................... 3
Statements of Operations and Accumulated Deficit for the
Three Months and Nine Months Ended December 31, 1996 and
1995 (Unaudited).................................................. 4
Statements of Cash Flows for the Nine Months Ended
December 31, 1996 and 1995 (Unaudited)............................ 5
Notes to Financial Statements...................................... 6
Management's Discussion and Analysis of Financial Position
and Results of Operations......................................... 9
PART II. OTHER INFORMATION............................................. 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIAC CONTROL SYSTEMS, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31,
1996
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 168,834
Accounts and notes receivable........................... 960,830
Inventories............................................. 1,508,363
Prepaid expenses........................................ 349,282
------------
Total current assets......................... 2,987,309
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation of $3,353,120.............................. 1,789,623
OTHER ASSETS............................................... 367,127
------------
Total assets................................. $ 5,144,059
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and debt obligations payable within one year..... $ 165,806
Accounts payable....................................... 438,765
Accrued interest....................................... 407
Accrued compensation................................... 161,013
Accrued compensated absences........................... 107,001
Deposits payable....................................... 428,594
Other accrued expenses................................. 346,050
------------
Total current liabilities.................... 1,647,636
------------
NOTES AND DEBT OBLIGATIONS PAYABLE AFTER ONE YEAR........... 1,484,671
------------
OTHER LIABILITIES........................................... 72,968
------------
DEFERRED ROYALTIES.......................................... 42,900
------------
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 30,000,000 shares
authorized, 2,584,370 shares issued............... 258,437
Capital in excess of par value.......................... 22,179,278
Accumulated deficit..................................... (20,525,894)
Treasury stock at cost 4,999 shares..................... (15,937)
------------
Total stockholders' equity................... 1,895,884
------------
Total liabilities and stockholders' equity... $ 5,144,059
============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Net sales.................................. $ 1,109,405 $ 1,426,507 $ 3,280,579 $ 4,013,409
Royalty income............................. 640,900 722,800 1,854,775 1,711,450
--------------------------------------------------------------
Total revenue.......................... 1,750,305 2,149,307 5,135,354 5,724,859
--------------------------------------------------------------
COSTS AND EXPENSES
Cost of products sold...................... 721,727 643,447 1,911,769 1,868,163
Selling, general and administrative
expenses.................................. 752,070 951,921 2,301,605 2,690,157
Engineering, research and
development expenses...................... 421,195 286,810 1,328,342 863,759
--------------------------------------------------------------
Total cost and expenses................ 1,894,992 1,882,178 5,541,716 5,422,079
--------------------------------------------------------------
OPERATING INCOME (LOSS)........................ (144,687) 267,129 (406,362) 302,780
--------------------------------------------------------------
OTHER INCOME (EXPENSES)
Interest income............................ 995 3,128 17,269 11,147
Interest expense........................... (114,939) (195,153) (380,823) (465,028)
Other income............................... - - 25,000 62,919
--------------------------------------------------------------
Total other income (expenses).......... (113,944) (192,025) (338,554) (390,962)
--------------------------------------------------------------
NET INCOME (LOSS).............................. (258,631) 75,104 (744,916) (88,182)
ACCUMULATED DEFICIT - BEGINNING OF
PERIOD........................................ (20,267,263) (19,682,758) (19,780,978) (19,519,472)
--------------------------------------------------------------
ACCUMULATED DEFICIT - END OF PERIOD............ $(20,525,894) $(19,607,654) $(20,525,894) $(19,607,654)
==============================================================
NET INCOME (LOSS) PER COMMON SHARE............. $(0.10) $0.06 $(0.29) $(0.07)
==============================================================
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................... 2,580,240 1,363,142 2,574,202 1,349,769
==============================================================
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended, December 31, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $ (744,916) $ (88,182)
Adjustment to reconcile net loss to
net cash used for operating
activities:
Depreciation and amortization............... 389,021 354,693
Gain on fixed assets disposals.............. (4,701)
Cash provided by (used for):
Accounts and notes receivable.......... 374,526 (73,295)
Inventories............................ 526,082 (435,261)
Prepaid expenses....................... (285,209) (51,767)
Accounts payable....................... 138,057 (164,630)
Accrued interest....................... (8,805) 130,372
Accrued compensation................... (21,439) (87,344)
Accrued compensation absences.......... (29,769) 16,819
Deposits payable....................... (91,000) (326,147)
Other accrued expenses................. 90,689 54,793
Other liabilities...................... (110,423) 21,529
Deferred royalties..................... (285,350) (263,300)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities............................... (58,536) (916,421)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment........ (459,557) (316,138)
Proceeds from sale of equipment.................. - 20,891
Increase in other assets......................... (46,467) (13,884)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
investing activities............................... (506,024) (309,131)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock and stock warrants, net of
issuance expenses............................... 201,927 -
Proceeds from notes and debt
obligations payable............................. 131,534 1,068,490
Repayment of notes and debt
obligations payable............................. (763,936) (136,757)
Principal payments under capital
lease obligations............................... (3,312) (2,523)
Principal payments under
installment purchase obligations................ - (2,657)
Debt issuance costs.............................. - (22,690)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities............................... (433,787) 903,863
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................... (998,347) (321,689)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR........ 1,167,181 667,490
--------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD............ $ 168,834 $ 345,801
==========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period.................. $ 219,694 $ 177,036
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Reduction in accrued compensation
in exchange for common stock.................... - $ 2,000
Reduction in accrued interest in
exchange for common stock....................... - $ 84,574
Reduction in accounts receivable in
exchange for common stock....................... - $ 10,938
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
CARDIAC CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying balance sheet of Cardiac Control Systems, Inc. (the "Company")
as of December 31, 1996, the related statements of operations and accumulated
deficit for the three months and nine months ended December 31, 1996 and 1995,
and the statements of cash flows for the nine months ended December 31, 1996 and
1995 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, 1996, and
the results of operations for the three months and nine months ended
December 31, 1996 and 1995 and the cash flows for the nine months ended
December 31, 1996 and 1995.
Certain reclassifications have been made to the unaudited financial statements
previously reported for the three months and nine months ended December 31, 1995
to conform with classifications used in the unaudited financial statements for
the three months and nine months ended December 31, 1996.
The accompanying unaudited financial statements as of December 31, 1996 and for
the three months and nine months ended December 31, 1996 and 1995 should be read
in conjunction with the Company's audited financial statements for the year
ended March 31, 1996.
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 of $744,916 for the nine months ended December 31, 1996.
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 sales
growth is critical to attaining a profitable level of operations. Therefore, the
Company is continuing its efforts to 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. However,
there is no assurance that the Company will be able to attain profitable
operations and continue operations as a going concern.
NOTE 2 - INVENTORIES
Inventories at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------
December 31,
1996
------------
(unaudited)
<S> <C>
Raw materials and supplies $ 268,287
Work-in-process 891,033
Finished goods 402,412
------------
1,561,732
Reserve for obsolescence (53,369)
------------
$1,508,363
-----------------------------------------------
</TABLE>
Finished goods inventories include approximately $249,156 of products consigned
to customers and independent sales representatives at December 31, 1996.
6
<PAGE>
NOTE 3 - NOTES AND DEBT OBLIGATIONS PAYABLE
Notes and debt obligations consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------
December 31,
1996
------------
<S> <C>
Sirrom mortgage note, net of discount (A) $1,465,125
Intermedics loan (B) 43,347
Other 142,005
------------
1,650,477
Amount payable within one year 165,806
------------
Amount payable after one year $1,484,671
-----------------------------------------------------------
</TABLE>
(A) On March 31, 1995, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Sirrom Capital Corporation, a Tennessee
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 a
warrant to purchase, initially, 100,000 shares of the Company's common
stock at $.01 per share. Upon issuance of the warrant in March 1995, the
Company recorded $279,000 as a discount, representing the difference
between the estimated fair market value of the underlying stock and $.01
per share. This resulted in an effective interest rate of 28% on the Sirrom
debt.
(B) On October 20, 1995, the Company entered into a Promissory Note and
Security Agreement (the "Security Agreement") with Intermedics, Inc., a
Delaware Corporation, ("Intermedics") and executed a $1,000,000 secured
promissory note. Interest on the note is payable at 24.5% and all principal
and interest is due September 1, 1998. Payments of principal and interest
are made as sales of electrode leads are made from the Company to
Intermedics. As such sales are made, the amount paid by Intermedics to the
Company to purchase the leads is reduced by $250 per lead for the first
4,000 leads and $90 per lead for additional leads. This reduction in
payments is offset against the note payable and accrued interest balance
due to Intermedics. Based upon projected sales of leads to Intermedics, the
Company anticipates that the entire loan balance will be paid by March 31,
1997 and, accordingly, the entire balance has been classified as a current
liability. The security agreement provides for alternative payment methods
in the event the Company ceases sales of leads to Intermedics. The note is
secured by a first security interest in the proceeds of all sales of leads
from the Company to Intermedics after October 15, 1995 as well as a first
security interest in any royalties received by the Company from Intermedics
after October 15, 1995. Sirrom consented to subordinate its security
interest in a portion of these sales proceeds on royalties to facilitate
this transaction.
Aggregate notes and debt obligations outstanding at December 31, 1996 mature as
follows: 1997 -- $165,806; 1998 -- $6,549; 1999 -- $7,856; 2000 -- $1,470,266.
7
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
During the nine months ended December 31, 1996, the Company issued 50,000 shares
of common stock to Sirrom Capital Corporation at a price of $5.00 per share. In
connection with that transaction, a warrant held by Sirrom, exercisable for
25,000 shares of common stock, was increased to 50,000 shares at $0.01 per
share, which increase was valued at $81,000. The Company also issued and
repurchased 1,428 shares of common stock in payment and reinstatement of an
accounts payable balance of $5,000.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
FINANCIAL POSITION AND LIQUIDITY
The Company's continuing efforts towards expanding its engineering, research and
design activities, increased marketing efforts and its capital expenditure and
debt service requirements contributed to negative cash flow during the first
nine months of fiscal 1997.
Cash used by operations during the first nine months of fiscal 1997 was $58,536.
Capital expenditures and repayment of debt and capital lease obligations
additionally utilized $459,557 and $767,248 respectively. Proceeds from the
issuance of common stock and warrants, net of issuance expenses, was $201,927.
Proceeds of notes and debt obligations payable was $131,534. Overall, negative
cash flow for the first nine months of fiscal 1997 was $998,347.
The Company has no significant commitments for the acquisition of capital
assets. It has, however, material commitments pursuant to certain inventory
procurement contracts that aggregate approximately $1,153,000 at December 31,
1996.
The Company is currently pursuing additional working capital from external
financing sources in order to continue its development of new technologies,
continue its efforts in building a domestic sales force and support its
operations. The ability of the Company to generate adequate amounts of cash
through operations to meet its working capital, capital expenditure and debt
service requirements on a long-term basis is dependent upon the attainment of a
profitable level of operations. The Company believes that sales growth is
critical to the attainment of a profitable level of operations. Accordingly,
the Company is continuing its efforts to expand the volume of its business, both
domestically and internationally. The Company believes that it has the potential
to increase its sales and ultimately achieve a profitable level of operations.
However, there is no assurance that the Company's operations will improve and/or
generate the cash flow required to meet the Company's liquidity needs, or that
the Company will be able to continue its operations as a going concern.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 versus Three months Ended December 31,
1995.
OVERVIEW. The Company's total revenues for the third quarter of fiscal 1997
decreased by 19% to $1.75 million as compared to $2.15 million for the third
quarter of fiscal 1996. Sales decreased from $1.4 million to $1.1 million and
royalties decreased from $0.7 million to $0.6 million for the third quarter of
fiscal 1997 as compared to the third quarter of fiscal 1996. Royalty income
represents royalties from Intermedics Inc. pursuant to a License agreement
between the Company and Intermedics. The decrease in total revenue was not
matched by a reduction in costs and expenses, specifically in research and
development, resulting in an operating loss of $144,687 in the third quarter of
fiscal 1997 as compared to operating income of $267,129 in the third quarter of
fiscal 1996.
SALES. Product sales decreased by 22%. Sales of pacers and electrode leads
decreased by 50% and 10% respectively, but sales of hybrid circuits increased by
152%. The decline in sales of pacers and leads is due to additional companies
having entered the market with single lead products competitive to the Company's
current technology and because the Company has focused its resources into the
research and development of advanced single lead systems in preparation for
intended long term growth.
9
<PAGE>
Sales by geographic area for the third quarters of fiscal 1997 and fiscal 1996
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Geographic Area 1997 1996
----------------------------------------------
<S> <C> <C>
United States.......... $ 921,852 $1,314,882
Europe................. 187,553 111,625
----------------------
$1,109,405 $1,426,507
----------------------------------------------
</TABLE>
ROYALTY INCOME. Royalty income represents royalty fees from Intermedics Inc.
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. The future potential royalties to be recorded over
the remaining life of the agreement are estimated at $2.5 million.
COST OF PRODUCTS SOLD. The cost of products sold in the third quarter of fiscal
1997 was $721,727, compared to $643,447 in the third quarter of fiscal 1996,
representing an increase of 12% as compared with the decrease of 22% in net
sales, which decreased the gross margin from 55% to 35%. This reduction was
due to a change in customer mix, with a higher relative volume of sales to
Intermedics and the international market, where selling prices are lower than in
the domestic market, and , within the overall sales total, the increased
proportion of sales of hybrid circuits, which generate lower margins than pacers
and electrode leads.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $752,070 in the third quarter of fiscal 1997,
representing a decrease of 21% from $951,921 in the third quarter of fiscal
1996. Selling expenses reduced from $524,590 in the third quarter of fiscal
1996 to $391,623 in the third quarter of fiscal 1997 due to reduced sales
commissions and redirection of sales and marketing resources into research and
development. General and administrative expenses reduced from $427,331 in the
third quarter of fiscal 1996 to $360,447 in the third quarter of fiscal 1997 due
largely to reduced costs of salaries and external professional services.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development costs were $421,195 in the third quarter of fiscal 1997,
representing an increase of 47% from $286,810 in the third quarter of fiscal
1996, due to the planned intensified development activities in the areas of
single pass electrode leads, bipolar dual chamber operation, rate responsive
pacing and a replacement programmer.
OTHER INCOME AND EXPENSES. Interest income was $995 during the third quarter of
fiscal 1997, representing a decrease of 68% from $3,128 in the third quarter of
fiscal 1996. Total interest expense decreased from $195,153 in the third
quarter of fiscal 1996 to $114,939 in the third quarter of fiscal 1997.
Interest paid to Sirrom Capital Corporation in respect of a secured loan of
$1,500,000 granted on March 31, 1995 was $51,041 in each of the third quarters
of fiscal years 1997 and 1996. Interest on $2,885,000 5% Convertible Debentures
in the sum of $35,569 was accrued in the third quarter of fiscal 1996 but, as
these Debentures were converted to common stock on March 31, 1996, no Debenture
interest was payable during fiscal 1997. Interest in the sum of $9,557 was paid
to Intermedics Inc. during the third quarter of fiscal 1997 in respect of the
outstanding proceeds of a promissory note in the sum of $1,000,000 executed on
October 20, 1995. The balances of principal and accrued interest outstanding at
December 31, 1996 pursuant to the Intermedics' promissory note were $43,347 and
$407. Debt amortization costs decreased from $55,135 in the third quarter of
fiscal 1996 to $54,284 in the third quarter of fiscal 1997.
Nine Months Ended December 31, 1996 versus Nine months Ended December 31, 1995.
OVERVIEW. The Company's total revenues for the first nine months of fiscal 1997
decreased by 10% to $5.1 million as compared to $5.7 million for the first nine
months of fiscal 1996. Sales decreased from $4.0 million to $3.3 million but
royalties increased from $1.7 million to $1.8 million for the first nine months
of fiscal 1997 as compared to the first nine months of fiscal 1996. Royalty
10
<PAGE>
income represents royalties from Intermedics Inc. pursuant to a license
agreement between the Company and Intermedics. The decrease in total revenue
was not matched by a reduction in costs and expenses, resulting in an operating
loss of $406,362 in the first nine months of fiscal 1997 as compared to
operating income of $302,780 in the first nine months of fiscal 1996.
SALES. Product sales overall decreased by 18%. Sales of pacers and electrode
leads decreased by 32% and 5% respectively. The decline in sales of pacers and
leads is due to additional companies having entered the market with single lead
products competitive to the Company's current technology and because the Company
has focused its resources into the research and development of advanced single
lead systems in preparation for intended long term growth. Unit sales of hybrid
circuits increased by 6%, but selling prices declined by 29%, resulting in a
decrease of 24% in sales values.
Sales by geographic area for the first nine months of fiscal 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
----------------------------------------------
Geographic Area 1997 1996
----------------------------------------------
<S> <C> <C>
United States...........$2,784,326 $3,608,946
Europe.................. 496,253 404,463
----------------------
$3,280,579 $4,013,409
----------------------------------------------
</TABLE>
ROYALTY INCOME. Royalty income represents royalty fees from Intermedics Inc.
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. The future potential royalties to be recorded over
the remaining life of the agreement are estimated at $2.5 million.
COST OF PRODUCTS SOLD. The cost of products sold in the first nine months of
fiscal 1997 was $1,911,769 compared to $1,868,163 in the first nine months of
fiscal 1996, representing an increase of 2% as compared to a decrease of 18% in
net sales, which decreased the gross margin from 53% to 42%. This reduction was
due to customer mix, with a higher relative volume of sales to Intermedics and
the international market, where selling prices are lower than in the domestic
market, and to lower selling prices for hybrid circuits.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,301,605 in the first nine months of fiscal
1997, representing a decrease of 14% from $2,690,157 in the first nine months of
fiscal 1996. Selling expenses reduced from $1,535,272 in the first nine months
of fiscal 1996 to $1,242,995 in the first nine months of fiscal 1997 due to
reduced sales commissions and redirection of sales and marketing resources into
research and development. General and administrative expenses reduced from
$1,154,885 in the first nine months of fiscal 1996 to $1,058,610 in the first
nine months of fiscal 1997 due largely to reduced costs of salaries.
ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES. Engineering, research and
development costs were $1,328,342 in the first nine months of fiscal 1997,
representing an increase of 54% from $863,759 in the first nine months of fiscal
1996 due to the planned intensified development activities in the areas of
single pass electrode leads, bipolar dual chamber operation, rate responsive
pacing and a replacement programmer.
OTHER INCOME AND EXPENSES. Interest income was $17,269 during the first nine
months of fiscal 1997, representing an increase of 55% from $11,147 in the first
nine months of fiscal 1996. Total interest expense decreased from $465,028 in
the first nine months of fiscal 1996 to $380,822 in the first nine months of
fiscal 1997. Interest paid to Sirrom Capital Corporation in respect of a
secured loan of $1,500,000 granted on March 31, 1995 was $152,569 in each of the
first nine months of 1997 and of 1996. Interest on $2,885,000 5% Convertible
Debentures in the sum of $104,729 was accrued in the first nine months of fiscal
1996 but, as these Debentures were converted to common stock on March 31, 1996,
no Debenture interest was payable during fiscal 1997. Interest in the sum of
$71,597 was paid to Intermedics Inc. During the first nine months of fiscal 1997
11
<PAGE>
in respect of the outstanding proceeds of a promissory note in the sum of
$1,000,000 executed on October 20, 1995. The balances of principal and accrued
interest outstanding at December, 1996 pursuant to the Intermedics' promissory
note were $43,347 and $407. Debt amortization costs increased from $157,620 in
the first nine months of fiscal 1996 to $161,129 in the first nine months of
fiscal 1997. Other income of $25,000 in the first nine months of fiscal 1997
and $62,919 in the first nine months of fiscal 1996 represented prior year
deposits now taken into income.
OPERATING TRENDS AND UNCERTAINTIES
SALES. The ability of the Company to maintain a profitable level of operations
is dependent upon expansion of sales volume, both domestically and
internationally and continued development of advanced, new products. The
Company believes that with continued development and the commercial release of
its advanced, new atrial-controlled ventricular pacing systems and the
introduction of its new line of more competitive pacing products, it will have
the potential to improve its sales and the recruitment of additional sales
representatives.
The European Union (EU) nations have adopted universal standards 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. In order for the Company to continue to sell
its product in the EU, it must obtain certification, the CE Mark. The Company
successfully passed an audit of its Quality System to the ISO 9002 in April/May
1996. The audit was conducted by a registered Notified Body of the European
Union and represented the completion of a critical step in securing the CE Mark.
The final steps of product testing and review of technical documentation were
subsequently completed, and the CE Mark was issued by the Notified Body during
the second quarter of fiscal 1996. The Company is now shipping product to
Europe.
Until recently, the Company was the only manufacturer commercially marketing
single-lead atrial-controlled ventricular pacemakers. However, 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. Intermedics commenced marketing its new pacemakers in March
1995. Medtronic has also commenced marketing a new single-lead atrial-
controlled pacemaker in the United States.
Although the introduction of the new Intermedics and Medtronic pacemakers pose
competition for the Company, management believes that the Company can benefit
from such competition since they 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 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 to successfully compete with other pacemaker manufacturers
will depend on the Company's ability to supply a competitively featured product,
to recruit and increase a quality sales force, and to 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. As discussed above, the
12
<PAGE>
manufacture and sale of leads to Intermedics produce income for the Company.
The Company sells electrode leads to Intermedics for its new systems under an
Amended and Restated Supply Contract that terminates on August 1, 1998. The
Company also receives royalties from Intermedics sales of its products
incorporating the licensed technology under an Amended and Restated License
Agreement. The Company anticipates supplying components to Intermedics under
the supply agreement for the next several years. An increase in demand for
components by 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 Intermedics will eventually develop its own manufacturing
capability for electrode leads necessary for its new pacemakers. However, any
such development will take time. Although the Company does not know how long it
will take Intermedics to develop its own manufacturing capability, added to any
such development period would be the time necessary to obtain FDA clearance of
its manufacturing process. Thus, although the Company cannot guarantee that it
will continue to supply Intermedics with products, the Company anticipates
providing Intermedics with components for the next few years. However, in the
event Intermedics receives FDA approval in a shorter time-frame than
anticipated, or other events occur which causes a decrease in Intermedics'
orders, the Company's business and operating results would be adversely
affected.
SOURCES OF SUPPLY. Two of the Company's principal suppliers of materials used
primarily in electrode lead production, Dow Corning Corp. and E.I. DuPont de
Nemours & Company, have 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 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 material 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 these integrated circuits will no
longer be supported. As such, the Company placed one last bulk order to ensure
the availability of sufficient integrated circuits to satisfy projected demands
13
<PAGE>
for product. The new pacing system under development will realize appropriate
ASIC's for the new 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 4, 1994, a financial brokering and consulting firm filed suit
against the Company in the Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida (the "Court"), alleging that the Company had breached
certain contractual duties and obligations. The suit requests a judgment
requiring the Company to deliver warrants to purchase 15% of the Company's
common stock, and damages in excess of $15,000. The Company denied liability
and filed a counterclaim alleging that the brokering firm fraudulently induced
the Company into the Agreement then breached the Agreement and certain fiduciary
duties. Management plans to vigorously defend the lawsuit and pursue its
counterclaims. In the opinion of management, this action has no merit and the
ultimate outcome is not expected to materially affect the financial position of
the Company.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on November 13, 1996, for
the purposes of: (1) electing the Company's Board of Directors and
(2) ratifying the appointment of BDO Seidman LLP as the Company's independent
auditors for the year ended March 31, 1996. Proxies were solicited by the
Company under Regulation 14A of the Securities and Exchange Commission's proxy
rules, and there was no solicitation in opposition to management's nominees for
directors listed in the Proxy Statement. A summary of the votes cast for and
against each of the matters set forth in the Proxy Statement is set forth below:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Votes For Votes Against
----------------------------
<S> <C> <C>
Election of Directors:
William H. Burns.................... 1,646,646 9,133
Bart C. Gutekunst................... 1,646,732 9,046
Larry Haimovitch.................... 1,646,703 9,076
Augusto Ocana....................... 1,572,965 82,814
Alan J. Rabin....................... 1,646,874 8,904
Robert T. Rylee..................... 1,646,874 8,904
Tracey E. Young..................... 1,646,731 9,047
Ratification of Independent
Accountants........................ 1,647,448 5,177
------------------------------------------------------------------
</TABLE>
ITEM 5. OTHER INFORMATION
None
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(A). EXHIBITS
Exhibits filed in Part II of this Report are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- -------------------------------------------------------------------------------
<C> <S> <C>
3.0 Certificate of Exhibit 3.0 to Amendment No. 1 to Form
Incorporation of the S-1 Registration Statement filed on
Company, as amended February 1, 1988, Registration
No. 33-16490 and Form 10-K for the year
ended March 31, 1990, File No. 0-14653
3.1 Amendment to Certificate Exhibit 3.1 to Form S-1 Registration
of Incorporation Statement filed on March 2, 1995,
Registration No. 33-89938
3.2 By-Laws of the Company Exhibit 3.1 to Form S-18 Registration
Statement filed on October 16, 1985,
Registration No. 33-9208
3.3 Amendment to Bylaws Exhibit 3.3 to Form S-1 Registration
Statement filed on March 2, 1995,
Registration No. 33-89938
4.0 Form of Common Stock Exhibit 4.0 to Form S-1 Registration
Certificate Statement filed on March 2, 1995,
Registration No. 33-89938
4.1 Form of Sales Exhibit 4.13 to Form 10-Q for the Quarter
Representative Stock Ended September 30, 1988, File No. 0-14653
Option Agreement
4.2 Cardiac Control Systems, Exhibit 4.15 to Form 8-K Current Report
Inc. 5% Convertible dated October 11, 1994, File No. 0-14653
Debenture due October 31,
1999
4.3 Combined 1987-1992 Exhibit 4.8 to Amendment No. 1 to Form
Non-Qualified Stock Option S-1 Registration Statement filed on
Plan April 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 Puchase Warrant, Exhibit 4.6 to Form 10-KSB for the year
dated October 15, 1995 in ended March 31, 1996, File No. 0-14653
favor of Sirrom Capital
Corporation
4.7 Stock Purchase Warrant, Exhibit 4.7 to Form 10-KSB for the year
dated March 29, 1996 in ended March 31, 1996, File No. 0-14653
favor of Grupo Taper,
S.A.Exhibit
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- -------------------------------------------------------------------------------
<C> <S> <C>
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
Intermedics Inc. and the
Company, dated April 2,
1993
10.3 Amended and Restated Exhibit 10.20 to Form 8-K Current Report,
Supply Contract between dated April 2, 1992, File No. 0-14653
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
and the Company, dated No.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
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
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- -------------------------------------------------------------------------------
<C> <S> <C>
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
Intermedics Inc., and the No. 0-14653
Company dated October 20,
1995
10.17 Amendment 2 to Supply Exhibit 10.17 to Form 10-QSB for the
Contract between Quarter ended September 30, 1995, File
Intermedics Inc., and the No. 0-14653
Company, dated October 20,
1995
10.18 Amendment 2 to License Exhibit 10.18 to Form 10-QSB for the
Agreement between Quarter ended September 30, 1995, File
Intermedics Inc., and the No. 0-14653
Company, dated October 20,
1995
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit Sequential Page Number or
Number Description Incorporation by Reference to
- -------------------------------------------------------------------------------
<C> <S> <C>
10.19 Distribution Agreement Exhibit 10.19 to Form 10-QSB for the
between Grupo Taper S.A. Quarter ended December 31, 1995, File
and the Company, dated No. 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 Included herewith
Secured Promissory Note
between Bart C. Gutekunst
and the Company dated
October 28, 1996.
- -------------------------------------------------------------------------------
</TABLE>
Copies of the above described exhibits will be furnished to the stockholders
upon written request, addressed to President and Chief Executive Officer,
Cardiac Control Systems, Inc., 3 Commerce Boulevard, Palm Coast, Florida 32164.
6(B). REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the nine
months ended December 31, 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CARDIAC CONTROL SYSTEMS, INC.
(Registrant)
Date: 2/12/97 By: /s/ Alan J. Rabin
------- ---------------------------------------
Alan J. Rabin
President and Chief Executive Officer
Date: 2/12/97 By: /s/ W. Alan Walton
------- ---------------------------------------
W. Alan Walton
Executive Vice President and
Chief Operating Officer
20
<PAGE>
EXHIBIT 10.21
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as of
the 28th day of October, 1996 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 One Hundred
Eight Thousand Two Hundred Forty-Six Dollars and 64/100 ($108,246.64) (the
"Obligation") pursuant to a secured promissory note dated of even date herewith
(the "Note"), which Obligation represents $100,000.00 advanced to the Debtor by
Secured Party and $8,246.64 in expenses incurred by Secured Party in connection
with making such advance, which expenses shall be 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 law.
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. Senior Security Interest. Secured Party's security interest hereunder
------------------------
shall be a first lien on the Collateral, senior and prior to any other security
interests that Debtor may grant in the Collateral.
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
<PAGE>
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. Governing Law. This Agreement has been delivered in the State of
-------------
Florida and shall be construed in accordance and governed by the laws of
Florida.
9. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed an original and all of which together shall be
deemed on and the same instrument.
10. 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 Rabin
---------------------------
Alan Rabin, President
3 Commerce Blvd.
Palm Coast, FL 32164
"Secured Party"
/s/ Bart C. Gutekunst
-------------------------------
Bart C. Gutekunst
10 Timothy Road
Weston, CT 06883
<PAGE>
EXHIBIT 10.21
SECURED PROMISSORY NOTE
$108,246.64 October 28, 1996
Palm Coast, Florida
FOR VALUE RECEIVED, the undersigned, Cardiac Control Systems, Inc., a
Delaware corporation (the "Maker"), hereby promises to pay to Bart C. Gutekunst,
an individual (the "Payee"), at Payee's principal place of business or such
other place as Payee may from time to time designate in writing, the principal
amount of One Hundred Eight Thousand Two Hundred Forty-Six Dollars and 64/100
($US108,246.64), 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 February 15, 1996 (the
"Maturity Date"), at which time the entire amount of unpaid principal and any
accrued but unpaid interest shall be paid in full.
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.
<PAGE>
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 Rabin
---------------------------
Alan Rabin, President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997
<PERIOD-START> OCT-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 168,834 168,834
<SECURITIES> 0 0
<RECEIVABLES> 960,830 960,830
<ALLOWANCES> 19,218 19,218
<INVENTORY> 1,508,363 1,508,363
<CURRENT-ASSETS> 2,987,309 2,987,309
<PP&E> 5,142,743 5,142,743
<DEPRECIATION> 3,353,120 3,353,120
<TOTAL-ASSETS> 5,144,059 5,144,059
<CURRENT-LIABILITIES> 1,647,636 1,647,636
<BONDS> 1,484,671 1,484,671
0 0
0 0
<COMMON> 258,437 258,437
<OTHER-SE> 1,637,447 1,637,447
<TOTAL-LIABILITY-AND-EQUITY> 5,144,059 5,144,059
<SALES> 1,109,405 3,280,579
<TOTAL-REVENUES> 1,750,305 5,135,354
<CGS> 721,727 1,911,769
<TOTAL-COSTS> 1,894,992 5,541,716
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 114,939 380,823
<INCOME-PRETAX> (258,631) (744,916)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (258,631) (744,916)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (258,631) (714,916)
<EPS-PRIMARY> (0.10) (0.29)
<EPS-DILUTED> (0.10) (0.29)
</TABLE>
