<PAGE>
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: June 30,1996 Commission File Number: 0-26656
Cardiotronics Systems, Inc.
---------------------------------
(Exact Name of Registrant as specified in its charter)
Colorado 33-03275
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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
---------------
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
---
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 July 31, 1996
- ------- ----------------------------
Common Stock ($.012 Par Value) 475,811 shares
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CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
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INDEX
PART I. FINANCIAL INFORMATION
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Item 1 - Financial Statements:
Condensed consolidated balance sheets at
June 30, 1996 and December 31, 1995 3
Condensed consolidated statements of operations for the
three and six months ended June 30, 1996 and 1995 4
Condensed consolidated statements of cash flows for the
three and six months ended June 30, 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 Not applicable
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
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Form 10-QSB
Part I - Item 1
Financial Information
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
June 30, 1996 December 31, 1995
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(unaudited)
Current assets:
Cash and cash equivalents $ 279,771 $ 619,020
Accounts receivable,net 1,074,044 931,585
Inventories, net 1,067,452 644,151
Other current assets 102,870 123,665
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Total current assets 2,524,137 2,318,421
Equipment and furnishings, net 660,163 550,997
Goodwill, net 3,854,545 4,000,000
Patents and trademarks, net 4,206,603 4,373,642
Other assets 246,662 259,986
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Total assets $ 11,492,110 $ 11,503,046
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,403,559 $ 852,011
Accrued liabilities 492,652 698,750
Notes payable to shareholder 2,500,000 2,000,000
Note payable to bank 5,500,000 5,800,000
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Total current liabilities 9,896,211 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 (15,272,891) (14,700,505)
------------ ------------
Total stockholders' equity 1,595,899 2,152,285
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Total liabilities and stockholders'
equity $ 11,492,110 $ 11,503,046
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------------ ------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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<CAPTION>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net sales $ 2,637,776 $ 1,932,563 $ 4,936,918 $ 3,822,495
Cost of sales 1,447,265 1,145,875 2,581,057 1,999,444
---------- ---------- ---------- ----------
Gross margin 1,190,511 786,688 2,355,861 1,823,051
Selling and marketing expenses 514,275 796,488 1,034,026 1,447,135
General and administrative expenses 434,860 781,887 922,395 1,386,418
Research and development expenses 135,264 81,401 250,395 174,702
Patent litigation expenses 96,604 491,525 120,573 848,504
Amortization of intangible assets 171,302 234,873 343,310 469,745
---------- ---------- ---------- ----------
Total operating expenses 1,352,305 2,386,174 2,670,699 4,326,504
---------- ---------- ---------- ----------
Loss from operations (161,794) (1,599,486) (314,838) (2,503,453)
---------- ---------- ---------- ----------
Other income (expense)
Interest income 8,593 13,320 15,922 24,656
Interest expense (141,464) (108,028) (280,183) (217,055)
Other, net (18,711) - 6,713 -
---------- ---------- ---------- ----------
(151,582) (94,708) (257,548) (192,399)
---------- ---------- ---------- ----------
Net loss $ (313,376) $(1,694,194) $ (572,386) $(2,695,852)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share $ (0.66) $ (3.59) $ (1.20) $ (5.71)
---------- ---------- ---------- ----------
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Weighted average number of
common shares outstanding (a) 475,811 471,802 475,147 471,802
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(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
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<TABLE>
<CAPTION>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities 67,107 (1,078,373) (341,938) (1,895,260)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of short-term investments 196,610 496,610
Capitalized patent costs (17,844) (20,548)
Purchases of equipment and furnishings (111,529) (8,216) (192,763) (86,944)
---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities (129,373) 188,394 (213,311) 409,666
---------- ---------- ---------- ----------
Cash flows from financing activities:
Principal payment on notes payable (300,000) (300,000)
Proceeds from notes payable and short-term borrowings 900,000 500,000 1,521,778
Proceeds from issuance of common stock 16,000
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Net cash provided by financing activities (300,000) 900,000 216,000 1,521,778
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (362,266) 10,021 (339,249) 36,184
Cash and cash equivalents at beginning of year 642,037 154,818 619,020 128,655
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $279,771 $ 164,839 $279,771 $164,839
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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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 June 30, 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
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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 June 30,
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 June 30, 1996, was approximately $78,400
and $11,400 to Warburg and Vertical, respectively.
NOTE 3 - LITIGATION AND CONTINGENCIES
The Company is a defendant in various actions, claims and legal proceedings
arising from normal business operations. Management believes they have
meritorious defenses and intends to vigorously defend against all allegations
and claims. As the ultimate outcome of the matters is uncertain, no contingent
liabilities or provisions have been recorded in the accompanying financial
statements for such matters. However, in management's opinion, based upon
discussion with legal counsel, liabilities arising from these matters, if any,
will not have a material adverse affect on the consolidated financial position
or results of operations.
7
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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 June 30,
1995 and 1996 are referred to as the 1995 Second Quarter and 1996 Second
Quarter, respectively, and the six months ended June 30 ,1995 and 1996 are
referred to as the 1995 First Half and 1996 First Half, respectively.
FINANCIAL CONDITION
For the 1996 Second Quarter, net cash provided by operations was $67,107 as
compared to net cash used in operations of $(1,078,373) for the 1995 Second
Quarter. For the 1996 First Half, net cash used in operations was $(341,938)
compared to $(1,895,260) in the 1995 First Half. The decrease in net cash
used in operations was due primarily to the decrease in the net loss from the
1996 Second Quarter compared to the 1995 Second Quarter and from the 1996
First Half compared to the 1995 First Half. This was partially offset by 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 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. Management is currently in the process of extending
the bank line of credit. As of June 30, 1996, the Company had borrowing
availability under the bank credit line of $500,000. The Company has a
written commitment from Warburg, a significant preferred shareholder, to
provide sufficient funds to continue operations through December 31, 1996, if
necessary.
The Company currently plans to spend approximately $50,000 for capital
expenditures during the remainder of 1996.
8
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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 from the 1995 Second Quarter to the 1996 Second Quarter by
$705,213, or 36%, and increased from the 1995 First Half to the 1996 First
Half by $1,114,423, or 29%. This increase 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 the 1996 First Half when compared to the 1995 First Half.
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 electrodes and the ability to maintain current
selling price levels despite pressure from both its retail and OEM customers.
GROSS MARGIN
The gross margin percentage increased from 40.7% in the 1995 Second
Quarter to 45.1% in the 1996 Second Quarter due primarily to significant
start-up costs associated with the transfer of the manufacturing of R2
products to California during the second quarter of 1995. The gross margin
percentage was 47.7% for both the 1995 First Half and the 1996 First Half. A
shift in the sales mix toward a higher percentage of lower margin OEM
products sold in the 1996 First Half offset the reductions in costs
associated with the start-up costs incurred in the 1995 First Half and not in
the 1996 First Half.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses in the 1996 Second Quarter decreased $282,213
compared to the 1995 Second Quarter. Selling and marketing expenses in the
1996 First Half decreased $413,109 compared to the 1995 First Half. This is
primarily due to decreases in field sales personnel costs, the elimination of
certain promotional costs and reductions in interface systems expense.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the 1996 Second Quarter declined by
$347,027 compared to the 1995 Second Quarter. General and administrative
expenses in the 1996 First Half declined $464,023 compared to the 1995 First
Half. This is due primarily to decreases in personnel costs and the
consolidation of the operations of R2 which was completed during the second
quarter of 1995.
9
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $53,863 from the 1995 Second
Quarter to the 1996 Second Quarter and increased $75,693 from the 1995 First
Half to the 1996 First Half primarily due to personnel and related costs
associated with the development of new product lines in 1996. An increase in
personnel expenses at the Company's headquarters in Carlsbad was partially
offset by a reduction in personnel expenses at R2's former facility in Chicago.
PATENT LITIGATION EXPENSES
Patent litigation expenses decreased $394,921 from the 1995 Second Quarter to
the 1996 Second Quarter and decreased $727,931 from the 1995 First Half to
the 1996 First Half due primarily to the high level of discovery expense in
the 1995 First Half 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 been scheduled
for the fourth quarter of 1996, could cost approximately $500,000.
AMORTIZATION OF INTANGIBLE ASSETS
The decrease in amortization of intangible assets of $63,571 from the 1995
Second Quarter to the 1996 Second Quarter and $126,435 from the 1995 First
Half to the 1996 First Half is due to the $3.4 million write-down of goodwill
during the fourth quarter of 1995.
OTHER INCOME (EXPENSE)
Interest expense increased $33,436 from the 1995 Second Quarter to the 1996
Second Quarter and $63,128 from the 1995 First Half to the 1996 First Half
due primarily to the $2,400,000 increase in notes payable at June 30, 1996
compared to June 30, 1995.
10
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Part II
OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
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
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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.
--------------------------------
(REGISTRANT)
Date: August 1, 1996 By: /s/ Ronald R. Bromfield
--------------------------------
Ronald R. Bromfield
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 1, 1996 By: /s/ Scott P. Youngstrom
--------------------------------
Scott P. Youngstrom
VICE PRESIDENT, FINANCE & ADMINISTRATION
(PRINCIPAL FINANCIAL OFFICER)
12
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of Cariotronics Systems, Inc. and Subsidiary as of
June 30, 1996 and the related statement of operation for the year then ended
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 279,771
<SECURITIES> 0
<RECEIVABLES> 1,084,464
<ALLOWANCES> (10,420)
<INVENTORY> 1,067,452
<CURRENT-ASSETS> 2,524,137
<PP&E> 964,214
<DEPRECIATION> (304,051)
<TOTAL-ASSETS> 11,492,110
<CURRENT-LIABILITIES> 9,896,211
<BONDS> 0
0
347,043
<COMMON> 5,710
<OTHER-SE> 1,590,169
<TOTAL-LIABILITY-AND-EQUITY> 11,492,110
<SALES> 4,936,918
<TOTAL-REVENUES> 4,936,918
<CGS> 2,581,057
<TOTAL-COSTS> 2,581,057
<OTHER-EXPENSES> 2,670,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,183
<INCOME-PRETAX> (572,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (572,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (572,386)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> 0
</TABLE>
