<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: September 30,1996 Commission File Number: 0-26656
CARDIOTRONICS SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
COLORADO 33-0327520
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(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 OCTOBER 16, 1996
Common Stock ($.012 Par Value) 476,686 shares
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed consolidated balance sheets at
September 30, 1996 and December 31, 1995 3
Condensed consolidated statements of operations for the
three and nine months ended September 30, 1996 and 1995 4
Condensed consolidated statements of cash flows for the
three and nine months ended September 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
<PAGE>
Form 10-QSB
Part I - Item 1
Financial Information
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 223,173 $ 619,020
Accounts receivable,net 901,481 931,585
Inventories, net 924,145 644,151
Other current assets 176,447 123,665
----------- -----------
Total current assets 2,225,246 2,318,421
Equipment and furnishings, net 659,529 550,997
Goodwill, net 3,781,818 4,000,000
Patents and trademarks, net 4,110,094 4,373,642
Other assets 248,549 259,986
----------- -----------
Total assets $11,025,236 $11,503,046
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 864,421 $ 763,866
Accrued liabilities 745,416 786,895
Notes payable to shareholder 2,500,000 2,000,000
Note payable to bank 5,500,000 5,800,000
----------- -----------
Total current liabilities 9,609,837 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, 11,564,622 (1996) and
11,568,122 (1995) shares issued and outstanding 346,939 347,043
Common stock, $.012 par value; 100,000,000 shares authorized;
476,686 (1996) and 471,802 (1995) issued and outstanding 5,720 5,662
Additional paid in capital 16,516,131 16,500,085
Accumulated deficit (15,453,391) (14,700,505)
----------- -----------
Total stockholders' equity 1,415,399 2,152,285
----------- -----------
Total liabilities and stockholders' equity $11,025,236 $11,503,046
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 2,340,776 $ 2,369,211 $ 7,277,694 $ 6,191,706
Cost of sales 1,157,379 1,283,899 3,738,436 3,283,343
------------ ------------ ------------ ------------
Gross margin 1,183,397 1,085,312 3,539,258 2,908,363
Selling and marketing expenses 518,930 754,711 1,552,956 2,201,846
General and administrative expenses 403,614 651,598 1,326,009 2,038,016
Research and development expenses 120,108 98,515 370,503 273,217
Patent litigation expenses 11,027 102,316 131,600 950,820
Amortization of intangible assets 172,948 234,981 516,258 704,726
------------ ------------ ------------ ------------
Total operating expenses 1,226,627 1,842,121 3,897,326 6,168,625
------------ ------------ ------------ ------------
Loss from operations (43,230) (756,809) (358,068) (3,260,262)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 3,779 10,747 19,701 35,403
Interest expense (139,052) (113,623) (419,235) (330,678)
Other, net (1,997) - 4,716 -
------------ ------------ ------------ ------------
(137,270) (102,876) (394,818) (295,275)
------------ ------------ ------------ ------------
Net loss $ (180,500) $ (859,685) $ (752,886) $ (3,555,537)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per common share $ (0.38) $ (1.82) $ (1.58) $ (7.54)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of
common shares outstanding (a) 475,878 471,802 475,393 471,802
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(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
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities (6,037) (623,275) (347,975) (2,518,535)
Cash flows from investing activities:
Proceeds from sale of short-term investments 496,610
Capitalized patent costs (2,947) (7,484) (23,495) (7,484)
Purchases of equipment and furnishings (47,615) (206,465) (240,378) (293,409)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (50,562) (213,949) (263,873) 195,717
------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payment on notes payable (300,000)
Proceeds from notes payable and short-term borrowings 900,000 500,000 2,421,778
Proceeds from issuance of common stock 16,000
------------ ------------ ------------ ------------
Net cash provided by financing activities - 900,000 216,000 2,421,778
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (56,599) 62,776 (395,848) 98,960
Cash and cash equivalents at beginning of year 279,771 164,839 619,020 128,655
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 223,172 $ 227,615 $ 223,172 $ 227,615
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
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 September 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
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
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
September 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 September 30, 1996, was approximately
$114,400 and $16,600 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
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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 September
30, 1995 and 1996 are referred to as the 1995 Third Quarter and 1996 Third
Quarter, respectively, and the nine months ended September 30 ,1995 and 1996
are referred to as the 1995 Nine Months and 1996 Nine Months, respectively.
FINANCIAL CONDITION
For the 1996 Third Quarter, net cash used in operations was $(6,037) as
compared to net cash used in operations of $(623,275) for the 1995 Third
Quarter. The decrease in net cash used in operations was due primarily to the
decrease in the net loss from the 1996 Third Quarter compared to the 1995 Third
Quarter. For the 1996 Nine Months, net cash used in operations was $(347,975)
compared to $(2,518,535) in the 1995 Nine Months. The decrease in net cash
used in operations was due primarily to the decrease in the net loss from the
1996 Nine Months compared to the 1995 Nine Months. This was partially offset
by an increase in finished goods inventory levels.
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 potential need for
external sources of financing. Management is currently in the process of
extending the bank line of credit. As of September 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 $25,000 for capital
expenditures during the remainder of 1996.
8
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES
Sales decreased from the 1995 Third Quarter to the 1996 Third Quarter by
$28,435, or 1%. This is due primarily to decreases in both unit volume and
revenues from retail customers partially offset by increases in both unit
volume and revenues from OEM customers. Sales increased from the 1995 Nine
Months to the 1996 Nine Months by $1,085,988, or 17%. 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 Nine Months when compared to the
1995 Nine Months.
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 45.8% in the 1995 Third Quarter to
50.6% in the 1996 Third Quarter and increased from 47.0% for the 1995 Nine
Months to 48.6% in the 1996 Nine Months due primarily to significant start-up
costs incurred in 1995 due to the transfer of production from R2's facility in
Illinois to California. This is partially offset by the shift in sales mix
toward a higher percentage of lower margin OEM products.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses in the 1996 Third Quarter decreased $235,781, or
31.2%, when compared to the 1995 Third Quarter. Selling and marketing expenses
as a percentage of sales were 22.1% and 31.9% for the 1996 Third Quarter and
1995 Third Quarter, respectively. Selling and marketing expenses for the 1996
Nine Months decreased $648,890, or 29.5%, when compared to the 1995 Nine
Months. Selling and marketing expenses as a percentage of sales was 21.3% for
the 1996 Nine Months and 35.6% for the 1995 Nine Months. This is primarily due
to decreases in field sales personnel costs, the elimination of certain
promotional costs and reductions in interface systems expense.
9
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the 1996 Third Quarter decreased
$247,984, or 38.0%, when compared to the 1995 Third Quarter. General and
administrative expenses as a percentage of sales were 17.2% and 27.5% for the
1996 Third Quarter and 1995 Third Quarter, respectively. General and
administrative expenses for the 1996 Nine Months decreased $712,007, or 34.9%,
when compared to the 1995 Nine Months. General and administrative expenses as
a percentage of sales was 18.2% for the 1996 Nine Months and 32.9% for the 1995
Nine Months. 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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $21,593, or 21.9%, from the 1995
Third Quarter to the 1996 Third Quarter and increased $97,286, or 35.6%, from
the 1995 Nine Months to the 1996 Nine Months. Research and development
expenses as a percentage of sales were 5.1% and 4.2% for the 1996 Third Quarter
and 1995 Third Quarter, respectively. Research and development expenses as a
percentage of sales was 5.1% for the 1996 Nine Months and 4.4% for the 1995
Nine Months. This is 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 $91,289 from the 1995 Third Quarter to the
1996 Third Quarter and decreased $819,220 from the 1995 Nine Months to the 1996
Nine Months 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 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 $62,033 from the 1995
Third Quarter to the 1996 Third Quarter and $188,468 from the 1995 Nine Months
to the 1996 Nine Months is due to the $3.4 million write-down of goodwill
during the fourth quarter of 1995.
OTHER INCOME (EXPENSE)
Interest expense increased $25,429 from the 1995 Third Quarter to the 1996
Third Quarter and $88,557 from the 1995 Nine Months to the 1996 Nine Months due
primarily to the increase in notes payable for the periods ending September 30,
1996 compared to September 30, 1995.
10
<PAGE>
Part II
OTHER INFORMATION
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
<PAGE>
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: November 7, 1996 By: /s/ Ronald R. Bromfield
---------------------------------
Ronald R. Bromfield
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 7, 1996 By: /s/ Scott P. Youngstrom
---------------------------------
Scott P. Youngstrom
VICE PRESIDENT, FINANCE & ADMINISTRATION
(PRINCIPAL FINANCIAL OFFICER)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY AS OF
SEPTEMBER 30, 1996, AND THE RELATED STATEMENT OF OPERATION FOR THE PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 223,173
<SECURITIES> 0
<RECEIVABLES> 921,481
<ALLOWANCES> (20,000)
<INVENTORY> 924,145
<CURRENT-ASSETS> 2,225,246
<PP&E> 1,011,829
<DEPRECIATION> 352,300
<TOTAL-ASSETS> 11,025,236
<CURRENT-LIABILITIES> 9,609,837
<BONDS> 0
0
346,939
<COMMON> 5,720
<OTHER-SE> 1,062,740
<TOTAL-LIABILITY-AND-EQUITY> 11,025,236
<SALES> 7,277,694
<TOTAL-REVENUES> 7,277,694
<CGS> 3,738,436
<TOTAL-COSTS> 3,738,436
<OTHER-EXPENSES> 3,903,991
<LOSS-PROVISION> (6,665)
<INTEREST-EXPENSE> 419,235
<INCOME-PRETAX> (752,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> (752,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (752,886)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
