United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: March 31,1996 Commission File Number: 0-26656
CARDIOTRONICS SYSTEMS, INC.
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(Exact Name of Registrant as specified in its charter)
Colorado 33-0327520
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(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
5966 La Place Court, Carlsbad, California 92008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 431-9446
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 2, 1996
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Common Stock ($.012 Par Value) 475,811 shares
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
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INDEX
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed consolidated balance sheets at
March 31, 1996 and December 31, 1995 3
Condensed consolidated statements of operations for the
three months ended March 31, 1996 and 1995 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 1996 and 1995 5
Notes to condensed consolidated financial statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities Not applicable
Item 3 - Defaults Upon Senior Securities Not applicable
Item 4 - Submission of Matters to a Vote of Security - Holders Not applicable
Item 5 - Other Information Not applicable
Item 6 - Exhibits and Reports on Form 8-K 11
2
Form 10-QSB
Part I - Item 1
Financial Information
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
March 31, 1996 December 31, 1995
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(unaudited)
Current assets:
Cash and cash equivalents $ 642,037 $ 619,020
Accounts receivable, net 1,253,393 931,585
Inventories, net 706,023 644,151
Other current assets 89,343 123,665
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Total current assets 2,690,796 2,318,421
Equipment and furnishings, net 593,459 550,997
Goodwill, net 3,927,272 4,000,000
Patents and trademarks, net 4,288,098 4,373,642
Other assets 246,305 259,986
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Total assets $ 11,745,930 $ 11,503,046
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,052,566 $ 852,011
Accrued liabilities 484,089 698,750
Notes payable to shareholder 2,500,000 2,000,000
Note payable to bank 5,800,000 5,800,000
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Total current liabilities 9,836,655 9,350,761
Commitments and Contingencies
Stockholders' equity:
Convertible preferred stock, $.03 par
value; 40,000,000 shares authorized:
Series C,D and E preferred stock,
11,568,122 (1996) and (1995)
shares issued and outstanding 347,043 347,043
Common stock, $.012 par value; 100,000,000
shares authorized; 475,811 (1996)
and 471,802 (1995) issued and
outstanding 5,710 5,662
Additional paid in capital 16,516,037 16,500,085
Accumulated deficit (14,959,515) (14,700,505)
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Total stockholders' equity 1,909,275 2,152,285
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Total liabilities and
stockholders' equity $ 11,745,930 $ 11,503,046
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Three Months
Ended Ended
March 31, 1996 March 31, 1995
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Net sales $2,299,142 $ 1,889,932
Cost of sales 1,133,792 853,569
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Gross margin 1,165,350 1,036,363
Selling and marketing expenses 519,751 650,647
General and administrative expenses 487,535 604,531
Research and development expenses 115,131 93,301
Patent litigation expenses 23,969 356,979
Amortization of intangible assets 172,008 234,872
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Total operating expenses 1,318,394 1,940,330
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Loss from operations (153,044) (903,967)
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Other income (expense)
Interest income 7,329 11,336
Interest expense (138,719) (109,027)
Other, net 25,424 -
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(105,966) (97,691)
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Net loss $ (259,010) $(1,001,658)
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Net loss per common share $ (0.55) $ (2.12)
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Weighted average number of
common shares outstanding(a) 474,448 471,802
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(a) Excludes preferred stock convertible into
2,892,031 shares of common stock in
1996 and 1995
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
4
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Three Months
Ended Ended
3/31/96 3/31/95
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Cash flows from operating activities:
Net loss $(259,010) $(1,001,658)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 210,781 261,065
Amortization of premium on securities 6,470
Changes in operating assets and liabilities:
Accounts receivable, net (321,808) (152,328)
Inventories, net (61,872) (198,734)
Other assets 36,970 (2,275)
Accounts payable 200,555 630,567
Accrued liabilities (214,661) (334,366)
Deferred liabilities (25,628)
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Net cash used in operating activities (409,045) (816,887)
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Cash flows from investing activities:
Proceeds from sale of short term investments 300,000
Capitalized patent costs (2,704)
Purchases of equipment and furnishings (81,234) (78,728)
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Net cash (used in) provided by investing activities (83,938) 221,272
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Cash flows from financing activities:
Proceeds from notes payable and short-term borrowings 500,000
Proceeds from issuance of common stock 16,000
Proceeds from notes payable and short-term borrowings 621,778
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Net cash provided by financing activities 516,000 621,778
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Net increase (decrease) in cash and cash equivalents 23,017 26,163
Cash and cash equivalents at beginning of year 619,020 128,655
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Cash and cash equivalents at end of period $ 642,037 $ 154,818
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
5
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - BUSINESS AND STATEMENT OF ACCOUNTING POLICY
BUSINESS:
Cardiotronics Systems, Inc. ("Cardiotronics") and its wholly-owned subsidiary,
R2 Medical Systems, Inc. ("R2") develops, manufactures and markets disposable
medical devices for the acute treatment of heart rate disorders (Cardiotronics
and R2 are collectively referred to herein as the "Company").
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information not misleading. All
material intercompany profits, transactions and balances are eliminated upon
consolidation.
In the opinion of management, the unaudited financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary for a
fair statement of the Company's financial position as of March 31, 1996, and
the results of its operations and its cash flow. These results are not
necessarily indicative of the results to be expected for the full fiscal year.
The financial information presented herein should be read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE:
Losses per common share are calculated using the weighted average number of
common shares outstanding during the period. This computation excludes
convertible preferred stock and options outstanding, since their effect would
be anti-dilutive. All per share amounts have been restated to reflect the one
for four reverse split on common stock effective June 21, 1995.
6
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - BUSINESS AND STATEMENT OF ACCOUNTING POLICY (CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1995 financial statements to
conform them to the 1996 presentation.
NOTE 2 - NOTES PAYABLE TO SHAREHOLDERS
On March 19, 1996, the Company issued demand notes (the "Notes") and borrowed
$500,000 from two of its major shareholders. The Notes are unsecured,
subordinated to the Company's bank loan and have an interest rate of 7% per
annum. The proceeds were used to fund cash used in operations. As of March
31, 1996, the Company has demand notes outstanding of $2,183,500 from Warburg,
Pincus Investors, L. P. ("Warburg") and $316,500 from the Vertical Fund
Associates, L. P. ("Vertical") which carry an average interest rate of 6.6%.
The Company is not currently making interest payments on the outstanding
balance. Accrued interest payable at March 31, 1996, was approximately $42,500
and $6,200 to Warburg and Vertical, respectively.
7
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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OVERVIEW
The Company's business is the successor to the operations of Cardiotronics,
Inc., a company incorporated in Colorado in April 1987. As a result of a
stock transfer and exchange in August 1989, Cardiotronics, Inc. became a
majority owned subsidiary of Encore Ventures, Ltd., a public company
incorporated in Colorado in April 1988. In November 1989, Encore Ventures,
Ltd. changed its name to Cardiotronics Systems, Inc. A merger between the
Company and its majority owned subsidiary, Cardiotronics, Inc. was completed
in December 1992. In September 1994, the Company acquired all of the
outstanding common stock of R2 Medical Systems, Inc., a manufacturer of
stimulation electrodes and cabling systems.
For purposes of this discussion and analysis, the three months ended March 31,
1995 and 1996 are referred to as 1995 and 1996, respectively.
FINANCIAL CONDITION
For the three months ended March 31, 1996, net cash used in operations was
$409,045 compared to $816,887 in 1995. The decrease in net cash used in
operations was due primarily to the decrease in the net loss from 1996
compared to 1995 and an increase in accounts payable due to raw material
inventory purchases. This was partially offset by an increase in accounts
receivable due to the large volume of sales during the last month of the
quarter and a decrease in accrued expenses related to the cost containment
programs implemented during the fourth quarter of 1995.
On March 19, 1996,the Company issued a demand note and borrowed $500,000 from
two shareholders at 7% interest per annum. The proceeds were used to fund the
cash used in operations (see Note 2 to the Condensed Consolidated Financial
Statements).
The Company will continue to use net cash in operating activities as long as
net losses continue to be significant, resulting in a need for external
sources of financing. The Company's bank line of credit expires on May 28,
1996. Management is currently seeking to extend this credit line prior to its
maturity. As of March 31, 1996, the Company had borrowing availability under
the bank credit line of $200,000. Although there can be no assurance the
Company will be successful in renewing this bank credit line, the Company has
a commitment from Warburg, a significant preferred shareholder, to provide
sufficient funds to continue operations through December 31, 1996.
The Company currently plans to spend approximately $175,000 for capital
expenditures during the remainder of 1996.
8
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
SALES
Sales increased in 1996 by $409,210, or 22%, over 1995. This growth is due
primarily to increased volumes of stimulation electrodes to both retail and
OEM customers. There was a slight decline in retail selling prices and a
slight increase in OEM selling prices in 1996 when compared to 1995.
Management believes that the Company's continued sales growth will depend on
unit volume growth resulting from market acceptance of the clinical advantages
of stimulation slectrodes and the ability to maintain current selling price
levels despite pressure from both its retail and OEM customers.
GROSS MARGIN
Gross margin in 1996 increased by $128,987 from 1995 due primarily to the
Company's increase in sales volume. The gross margin percentage declined to
50.7% in 1996 from 54.8% in 1995 due primarily to the shift in sales mix
toward lower margin OEM products in 1996.
SELLING AND MARKETING EXPENSES
Selling expenses in 1996 declined by $130,896 compared to 1995 as a result of
a decrease in personnel and certain promotional costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in 1996 declined by $116,996 compared to
1995 due primarily to the consolidation of the operations of R2 which was
completed during the second quarter of 1995.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses in 1996 increased by $21,830, or 23%, due to
costs related to the completion of the development of a new product line in
1996 and increases in research costs related to conductive gel and interface
cable technology. An increase in personnel expenses in 1996 at the Company's
headquarters in Carlsbad was offset by a reduction in personnel expenses at
R2's former facility in Chicago.
9
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS (CONTINUED)
PATENT LITIGATION EXPENSES
Patent litigation expenses in 1996 declined to $23,969 from $356,979 in 1995.
This decline is due primarily to the high level of discovery expense in 1995
related to litigation with Katecho, Inc., ("Katecho") which asserts that the
Company's patents are being violated by Katecho. Management believes that the
trial with Katecho, which has not been scheduled at this time, will cost
approximately $500,000.
AMORTIZATION OF INTANGIBLE ASSETS
The decrease in amortization of intangible assets is due to the $3.4 million
write-down of goodwill during the fourth quarter of 1995.
OTHER INCOME (EXPENSE)
Interest expense increased from 1995 to 1996 due primarily to the $3,600,000
increase in notes payable at March 31, 1996 compared to March 31, 1995.
Other, net is due primarily to the net proceeds from a litigation settlement.
See Part II - Item 1. Legal Proceedings
10
PART II
OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
On February 28, 1996, the Company settled a lawsuit with Zoll wherein the
Company contended Zoll had engaged in a pattern of unfair trade practices and
unfair competition by marketing its products using false and misleading
statements regarding the safety of Cardiotronics stimulation electrodes. The
terms of the settlement include a payment by Zoll of an undisclosed amount and
an agreement that Zoll would not make certain specified statements. Zoll also
agreed to revise a number of warnings and warranty language that appear in its
future product packaging and user manuals and to provide written confirmation
of its policies to certain customers and Zoll employees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Employment Agreement, dated May 10, 1996, by and among the Company
and Ronald R. Bromfield
10.2 Employment Agreement, dated May 10, 1996, by and among the Company
and Bruno T. Bisceglia, Jr.
10.3 Employment Agreement, dated May 10, 1996, by and among the Company
and Dennis W. Gladney
10.4 Employment Agreement, dated May 10, 1996, by and among the Company
and Scott P. Youngstrom
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is being filed.
11
SIGNATURES
Pursuant to the requirements 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.
Cardiotronics Systems, Inc.
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(REGISTRANT)
Date: May 13, 1996 By: /s/ Ronald R. Bromfield
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Ronald R. Bromfield
PRESIDENT AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
Date: May 13, 1996 By: /s/ Scott P. Youngstrom
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Scott P. Youngstrom
VICE PRESIDENT, FINANCE &
ADMINISTRATION (PRINCIPAL
FINANCIAL OFFICER)
12
EXHIBIT INDEX
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Exhibit Page
No. No.
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10.1 Employment Agreement, dated May 10, 1996, by and among the
Company and Ronald R. Bromfield
10.2 Employment Agreement, dated May 10, 1996, by and among the
Company and Bruno T. Bisceglia, Jr.
10.3 Employment Agreement, dated May 10, 1996, by and among the
Company and Dennis W. Gladney
10.4 Employment Agreement, dated May 10, 1996, by and among the
Company and Scott P. Youngstrom
13