<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from _____ to ______
Commission File Number 0-26656
CARDIOTRONICS SYSTEMS, INC.
(Name of Small Business Issuer as Specified in its Charter)
COLORADO 33-0327520
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive Offices) (Zip Code)
(619) 431-9446
(Issuer's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Exchange Act
NONE
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Exchange Act
Common Stock, $.012 par value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. / /
The Issuer's total revenues for the year ended December 31, 1995 were $8,424,001
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing sale price on February 23, 1996 as
reported on the NASDAQ stock market, was $1,096,734.
The number of shares outstanding of the Issuer's $.012 par value common stock
at March 15, 1996 was 475,811.
The number of shares outstanding of the Issuer's $.03 par value preferred
stock at March 15, 1996 was 11,568,122.
Documents incorporated by reference: None.
<PAGE>
PART I
ITEM 1. BUSINESS
Cardiotronics Systems, Inc. and its wholly-owned subsidiary, R2 Medical
Systems, Inc. (the "Company" or "Cardiotronics") develops, manufactures, and
markets disposable medical devices for the acute treatment of heart rate
disorders. Applied to a patient's chest, the Company's stimulation electrodes
facilitate external defibrillation and pacing of heart attack victims as well
as patients undergoing interventional cardiac procedures such as coronary
angioplasty, open heart surgery, and catheter arrhythmia ablation. The
Company also develops and manufactures cabling systems and other interfaces
that connect its stimulation electrodes with external defibrillator/pacemaker
systems. These cable interface systems enable hospitals to standardize on one
electrode system, regardless of defibrillator manufacturer.
The Company's business is the successor to the operations of Cardiotronics,
Inc., a company incorporated in Colorado on April 27, 1987. As a result of a
stock transfer and exchange on August 25, 1989, Cardiotronics, Inc. became a
majority owned subsidiary of Encore Ventures, Ltd. a public company
incorporated in Colorado on April 15, 1988. On November 1, 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 on December 21, 1992. The Company's name was changed from
Cardiotronics Systems, Incorporated to Cardiotronics Systems, Inc. in June,
1995. On December 11, 1995, the Company's common stock was approved for
listing on The Nasdaq Smallcap Market under the symbol CDIO.
Effective September 30, 1994, the Company acquired all of the outstanding
common stock of R2 Medical Systems, Inc., a manufacturer of stimulation
electrodes and cabling systems.
Heart disease remains the major cause of death in the U.S. today despite the
advent and increased availability of clot lysing pharmaceuticals, open heart
surgery, and coronary angioplasty. One of the impediments to reducing the
mortality rate associated with heart disease is the rapid onset of heart rate
disorders which often occur during a heart attack or an interventional
cardiac procedure.
The first line of defense for medical personnel treating a patient
experiencing a heart rate disorder is the defibrillator. By applying the
paddles of the defibrillator to the patient's chest, a high energy shock can
be delivered to terminate certain heart rate disorders characterized by rapid
or chaotic rhythms.
However, traditional paddle-based defibrillation systems suffer from several
disadvantages which limit their clinical utility. For a patient who
experiences a life threatening heart rate disorder while undergoing a
diagnostic or therapeutic heart procedure, intervention with a paddle-based
defibrillator is time consuming, disruptive, and subject to such
paddle-related problems as patient burns, operator shocks, and failed
conversion due to inadequate pressure or gel coverage. In addition, patients
who have undergone emergency external defibrillation may require subsequent
pacemaker support in order to maintain a life-sustaining heart rate. This
support is not possible with traditional paddle-based defibrillator systems.
Stimulation electrodes address many of the weaknesses of traditional
paddle-based defibrillators. Cardiotronics' line of disposable electrodes
avoid or minimize such adverse effects of paddle-based defibrillation as:
patient burns; operator shocks; and failed conversion due to an inadequate
paddle-to-patient interface. In addition, the placement of disposable
electrodes on high risk patients permits more rapid intervention and can free
the hands of medical professionals for other patient care needs. The American
Heart Association's Advanced Cardiac Life Support guidelines include
transcutaneous pacing as the second step in the bradycardia protocol after
administration of the drug atropine.
The potential market for disposable stimulation electrodes is substantial
with approximately 1.5 million heart attacks ("acute myocardial infarctions")
per year. In addition, over 3 million patients each year undergo various
invasive heart procedures such as coronary angiography, coronary angioplasty,
open heart surgery, catheter ablation, electrophysiology studies, and
pacemaker implantations.
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Cost containment and health care reform efforts initiated by the federal and
state governments and by third-part payers have created an environment which
is focused on reducing health care costs. This has resulted in increased
pressure on hospitals to reduce costs as well as increased competition among
hospital suppliers to reduce costs or demonstrate the cost effectiveness of
their products. In this environment it will be difficult to raise prices.
PRODUCTS
The Company's products consist primarily of disposable stimulation electrodes
marketed under the Cardiotronics and R2 brand names. They are utilized in a
variety of in-hospital and emergency outpatient environments to facilitate
external defibrillation and pacing.
Cardiotronics' disposable electrode product line is one of the broadest in
the industry and enables the Company to respond to the diverse clinical and
departmental needs of its hospital customers. The Company pioneered the
development of radiolucent electrodes which are preferred in the
catheterization and electrophysiology laboratories. Cardiotronics is the only
provider of sterile electrodes which are often required for use in the
operating room. Cardiotronics is also the only provider of electrodes which
permit the simultaneous pacing and ECG monitoring of patients. The price of
Cardiotronics' electrodes generally range from $15 to $55 per set.
Cardiotronics also manufactures a variety of electronic and cabling interface
devices which facilitate utilization of the Company's disposable electrode
pads with virtually any commercially available defibrillator or
defibrillator/pacer.
MARKETING AND SALES
There are approximately 900 hospitals in the United States that have open
heart programs, and that are the primary market for the Company's products.
The Company markets its products under its own name to hospitals in the
United States through a direct sales force of 11 people and several
independent distributors. Cardiotronics ships and bills its hospital
customers directly. Cardiotronics generally places its cabling and interface
devices with the hospital at no charge in return for an initial minimum order
for its disposable stimulation pad electrodes.
The Company also manufactures products for several OEM customers. In 1995,
OEM sales were approximately 35% of total sales. The Company accesses the
international markets in Canada, Japan, and certain parts of Europe by
utilizing a combination of OEM's and independent distributors.
Since the Company generates a substantial portion of its revenue from the
sales of disposable electrodes, it does not carry large amounts of inventory
and typically turns its raw materials inventory over within 45-65 days. The
Company typically ships its products within several days of order and has no
significant backlog. The Company bills its customers on a net 30 basis with
exceptions only to its international distributors.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts include all aspects of the
stimulation electrodes system including interfaces with defibrillator and
defibrillator/pacer products. In 1995 the Company initiated R&D programs
covering advanced conductive gels and "smart" cabling systems. The objective
of these programs is to develop stimulation electrode systems which can be
applied faster and utilized more safely than existing products. The Company
is developing electrode and cabling technology with the objective of
improving conversion reliability and reducing the possibility of patient
burns.
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MANUFACTURING
The Company maintains close supervision and control of its manufacturing and
seeks to achieve as much vertical integration of the manufacturing processes
as possible. The staff includes individuals with mechanical and electronic
engineering experience and support personnel who design and manufacture all
of the Company's disposable electrode products and electronic devices
in-house. The Company's policy is to qualify multiple vendors for materials;
however, a key component is available from only one source. Since this
component is widely used in the medical electrode business, supply problems
are not anticipated.
PRODUCT LIABILITY
In the event that complications develop from the use of the Company's
products, liability of the Company for personal injury and related medical
problems may result. The Company has obtained limited product liability
insurance; however, any product liability awards in excess of the limits of
coverage could have a material adverse impact on the financial condition of
the Company. The Company's subsidiary, R2 Medical Systems, Inc. is a
defendant in a product liability lawsuit seeking damages of $20 million (see
Item 3 -- Legal Proceedings in this report).
COMPETITION
The market for disposable electrodes is extremely competitive. The Company
competes with several independent marketers of disposable electrodes as well
as manufacturers of defibrillator equipment including Physio Control
Corporation ("Physio Control") and Zoll Medical Corporation ("Zoll"). Most
of these companies are substantially larger than the Company with large sales
forces and greater financial resources. The Company believes that its
continued success will depend upon its ability to develop innovative or
superior products.
PATENTS AND TRADEMARKS
The Company and its subsidiary own or have exclusive licenses to several
patents. The Company may apply for trademarks and additional patents on
existing or future products. No assurance can be given that any patents or
trademarks will be granted or that, if granted, any such patents or
trademarks will afford any meaningful protection.
The medical device industry generally seeks to enforce patents aggressively.
Patents have been issued, or may be issued, to other companies for products
similar to those sold by the Company. There can be no assurance that other
companies will not assert claims against Cardiotronics.
GOVERNMENT REGULATION
The Company's manufacturing activities and products sold in the United States
are subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration ("FDA"). The FDA regulates the manufacture and sale of medical
devices, including labeling, advertising, and record keeping.
MEDICAL ADVISORY BOARD
The Company has established a Medical Advisory Board comprised of individuals
with professional expertise, knowledge and contacts encompassing various
aspects of the medical industry. The Medical Advisory Board assists in
evaluating or providing sources of ideas for research projects. Members of
the Medical Advisory Board have no legal responsibilities or powers and are
not subject to any type of conflict of interest policy. Members of the
Advisory Board or firms with which they are affiliated might be paid for
their services in connection with a Company project on a case-by-case basis,
although there are no standing compensation arrangements.
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EMPLOYEES
At December 31, 1995 the Company had 104 full-time employees, of whom 74
were engaged in manufacturing and quality assurance. In addition, at December
31, 1995, the Company utilized 16 full-time contract employees, primarily in
manufacturing. None of the Company's employees is covered by collective
bargaining agreements, and management considers relations with its employees
to be good.
ITEM 2. PROPERTIES
The Company leases a 22,492 square foot facility in Carlsbad, California and
houses all of the Company's office and manufacturing activities. The lease
expires in March, 2000. The property is in good condition and is suitable for
its intended use.
ITEM 3. LEGAL PROCEEDINGS
In May, 1994 the Company's subsidiary, R2 Medical Systems, Inc. filed a
patent infringement lawsuit against Katecho, Inc., Cardiovascular Group of
Oregon, Inc., and Padeco, Inc. in U.S. District Court, Northern District of
Illinois, Eastern Division. The lawsuit is in discovery, and no trial date
has been scheduled.
In July, 1994 the Company's subsidiary, R2 Medical Systems, Inc., was named
as a defendant in a product liability action in the Supreme Court of the
State of New York, County of Suffolk, entitled J. Michael Kramer vs County of
Suffolk, et. al. (the "action"). The action alleges, among other things,
that defibrillation pads manufactured by R2 Medical Systems were defective
and seeks damages of $20 million. While this litigation has proceeded slowly
and is still in an early stage, the Company believes, after consultation with
its counsel, that it has valid defenses based on the fact that, to the
Company's best knowledge, the electrodes alleged to be defective were never
used on the plaintiff, nor were such electrodes ever recovered or documented
to be manufactured by R2. However, in view of the inherent uncertainties
surrounding this type of litigation, no assurance can be given that R2 will
prevail in this case. The Company is unable to assess the likelihood of an
adverse outcome or estimate the amount or range, if any, of any possible
loss. An adverse judgment could have a material adverse effect on the
financial condition of the Company.
In June, 1994 Cardiotronics Systems, Inc. filed a lawsuit against Zoll
Medical Corporation ("Zoll") in the Superior Court of the State of California
for the County of Los Angeles contending that 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. In July, 1994 Cardiotronics obtained a preliminary
injunction against Zoll that enjoined Zoll from stating to customers or
potential customers that Cardiotronics' products were unsafe when used with
Zoll defibrillators. In February, 1996 this lawsuit was settled. 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
clarification of its policies to certain customers and Zoll employees.
On December 30, 1994 the Company's subsidiary, R2 Medical Systems, Inc.
("R2") was sued in the U.S. District Court, Northern District of Illinois,
Eastern Division, in an action entitled Roger Lee Heath vs Baxter, Walters,
Townsen, et. al. Heath's complaint has been dismissed as being legally
insufficient, and he has been given until April 30, 1996 to file an amended
complaint should he choose to do so.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
5
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has traded on the NASDAQ SmallCap Market tier of the
NASDAQ Stock Market under the symbol CDIO since December 11, 1995. Previously it
traded over-the-counter. The following table sets forth the range of high and
low bid quotations (adjusted to reflect the one-for-four reverse stock split in
June, 1995) for each quarter in the last two fiscal years as reported by the
National Quotation Bureau, Inc. for the period up to December 11, 1995 and
subsequent to that date high and low sales prices as reported by NASDAQ.
1995 1994
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter 6 1/2 4 4 2
Second Quarter 7 4 8 2
Third Quarter 6 1/4 4 8 4
Fourth Quarter 7 4 1/2 7 1/2 4
HOLDERS
As of February 27, 1996 there were approximately 360 shareholders of record of
the Company's Common Stock.
DIVIDENDS
The Company has not paid cash dividends in the past on either its common or
preferred stock and does not expect to do so in the foreseeable future. The
Company is restricted from paying dividends on its common stock by the terms of
its preferred stock and on both its common and preferred stock by the terms of
its bank credit agreement.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION & LIQUIDITY
As of December 31, 1995 the Company had a working capital deficit of $7,032,342.
This deficit is due to borrowings under a bank credit line of $5,800,000 and
$2,000,000 from shareholders at December 31, 1995. Working capital includes cash
and cash equivalents of $619,020 at December 31, 1995.
The principal sources of cash to fund operations are the Company's cash
resources and the bank credit line, which matures on May 31, 1996. Management
believes that it can renew this credit line. In addition, the Company has a
commitment from E.M. Warburg, Pincus & Co., Inc. to provide sufficient funds to
continue operations through December 31, 1996.
Accounts receivable at December 31, 1995 averaged 38 days compared to 43 days at
December 31, 1994. The Company plans to spend approximately $250,000 in capital
expenditures in 1996 compared to $346,000 in 1995.
RESULTS OF OPERATIONS
Net sales increased 188% to $8.4 million from $2.9 million in 1994, an increase
of $5.5 million. The increase in net sales was principally driven by the
inclusion of sales of R2 Medical Systems for the entire year during 1995, as
opposed to only the fourth quarter for 1994. The increase in sales was also
aided by a 38% growth in the Cardiotronics brand of electrodes, and by price
increases of both Cardiotronics and R2 products, ranging from 5% to 10%.
Gross profit increased to $3.9 million in 1995 from $1.7 million in 1994. Gross
profit as a percentage of net sales decreased to 46% in 1995 from 57% in 1994.
The decrease was due to a shift in product mix toward lower margin OEM products,
costs associated with consolidating all manufacturing operations in Carlsbad,
California, the closing of the R2 facility in Chicago, the hiring of additional
personnel in California, and the write-off of obsolete inventory.
Operating expenses increased to $11.6 million in 1995 from $4.3 million in 1994.
Operating expenses increased in all areas.
Selling, general and administrative expenses increased to $5.7 million from
$3.7 million in 1994 primarily as a result of higher commissions on a higher
level of sales along with increased sales, marketing, and administrative
staffing levels, and to a lesser extent, the installation of a new accounting
system. The Company is taking steps to reduce these expenses in 1996,
primarily in the sales area.
Research and development expenses increased to $423,000 in 1995 from $128,000
in 1994 due to an increase in staffing levels and the initiation of several
new R&D projects. R&D spending in 1995 represented approximately 5% of sales,
and the Company expects this rate of spending to be maintained in the future.
Patent litigation expense increased to $1,031,000 in 1995 from $247,000 in
1994 due to a significant amount of discovery during 1995 related to the
Company's pursuit of a patent infringement suit. Management expects these
costs to decrease for 1996. Although no trial date has been scheduled, the
cost of a trial could approximate $500,000.
Amortization of intangible assets increased to $4.4 million from $235,000 in
1994, an increase of approximately $4.2 million. Such increase is due to the
write-down of goodwill in the amount of approximately $3.5 million and a full
year of amortization of intangible assets acquired in the R2 Medical
acquisition (see Note 12 in the Notes to Consolidated Financial Statements).
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Interest income decreased 44% to $34,000 in 1995 from $61,000 in 1994, which
is attributable to lower cash invested in interest-bearing instruments as
well as a decline in interest rates.
Interest expense increased to $459,000 in 1995 from $118,000 in 1994, due to
an increase in the amounts borrowed under the Company's bank credit line and
from shareholders.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements and schedules that constitute Item 7 are attached at
the end of this annual report on Form 10-KSB.
EXPLANATIONS:
The net loss per share as shown in the accompanying financial statements is
based on the net loss for the period divided by the weighted average number of
shares outstanding. Common stock equivalents have not been included as the
effect is anti-dilutive. The weighted average number of shares outstanding is
calculated by multiplying the number of shares issued by the fraction of the
period for which they have been outstanding. The loss per share in 1994 has been
re-stated for the one-for-four reverse stock split in June 1995, and both per
share losses for 1995 and 1994 exclude the effects of the Company's preferred
stock outstanding.
No ratios indicating the financial condition of the registrant have been
included in this report or the accompanying financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the directors
and executive officers of the Company, including, with respect to each
individual, his or her age and his or her position with the Company, and the
year in which he or she first became a director of the Company. Additional
information concerning each of the individuals follows the table.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ------------------ ---- -------- ------
<S> <C> <C> <C>
Robert S. Grimes 62 Chairman of the Board 1992
Ronald R. Bromfield 43 President, Chief Executive Officer 1993
and Director
Tim J. Way 33 Vice President, Quality Assurance 1989
& Regulatory, Secretary and Director
Richard B. Emmitt 51 Director 1991
Elizabeth H. Weatherman 36 Director 1993
Bruno T. Bisceglia, Jr. 46 Vice President, National Accounts 1989
and Director
Dennis W. Gladney 43 Vice President, Sales & Marketing
David L Schlotterbeck 48 Director 1995
Scott P. Youngstrom 36 Vice President, Finance & Administration
Treasurer
</TABLE>
All Directors are elected at the annual meeting of shareholders and hold
office until the next annual meeting. The officers serve at the discretion
of the Board of Directors.
The Board of Directors held six meetings in 1995. All directors attended at
least 75% of the total number of meetings of the Board and the committees on
which they served. The Company has an Audit Committee which consists of
Robert Grimes, Richard Emmitt, and Elizabeth Weatherman. No meetings of this
committee were held in 1995. The Company has a Compensation Committee which
consists of Robert Grimes, Richard Emmitt, and Elizabeth Weatherman. This
committee held one meeting in 1995.
ROBERT S. GRIMES; Retired. Mr. Grimes has served as Chairman of the Board
since January, 1992. From 1988 to 1994 Mr. Grimes was Vice President of
business development for Puritan-Bennett, Inc., a medical device manufacturer.
RONALD R. BROMFIELD; Mr. Bromfield has served as the Company's President and
Chief Executive Officer since October 1993. Mr. Bromfield has served as a
director since September, 1993. From August 1991 to October 1993 Mr.
Bromfield was the Vice President, Marketing, Sales & Technical Services at
Physio Control Corporation, a medical device manufacturer. From 1982 to
August 1991 Mr. Bromfield held a number of other positions at Physio Control,
including Director of International Sales & Marketing, Director of
Production, and Product Manager.
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TIM J. WAY; Mr. Way has served as Vice President, Quality Assurance &
Regulatory since December, 1995. Mr. Way has served on the board since
August, 1989. From July, 1995 to December, 1995 he served as Vice President,
Corporate Development. From 1989 to 1995 he was the Vice President, Finance
and Treasurer of the Company.
RICHARD B. EMMITT; Mr. Emmitt is a Managing Director of The Vertical Group,
Inc., an investment management firm and a general partner of Vertical Fund
Associates, L.P. Mr. Emmitt has served on the board since February, 1991. He
is a director of several privately held healthcare companies.
ELIZABETH H. WEATHERMAN; Ms. Weatherman is a Managing Director of E.M.
Warburg Pincus & Co., Inc., a venture banking firm. Ms. Weatherman has served
on the board since November, 1993. Ms. Weatherman is a director of VitalCom
Inc. and several privately held healthcare companies.
BRUNO T. BISCEGLIA, JR. Mr. Bisceglia has served as Vice President, National
Accounts since December, 1995. Mr. Bisceglia has served on the board since
August, 1989. From September, 1994 to December, 1995 he served as Vice
President, Sales. From October 1993 to September 1994 he served as Vice
President Sales and Marketing. From August 1989 to October 1993, Mr.
Bisceglia served as the President of the Company.
DENNIS W. GLADNEY; Mr. Gladney has been Vice President, Sales & Marketing of
the Company since December, 1995. From September 1994 to December, 1995 he
was Vice President, Marketing of the Company. From June 1993 to July 1994,
he was the President of Arzco Medical Systems, a medical device company.
From February 1991 to June 1993, he was the Vice President, Sales and
Marketing for Endomedix Corp. From September 1989 to February 1991, he was
the domestic director of marketing for Karl Storz Endoscopy.
DAVID L. SCHLOTTERBECK; Mr. Schlotterbeck has served as President and CEO of
VitalCom Inc., since August 1995. Mr. Schlotterbeck has served on the board
since November, 1995. From August 1994 to August 1995 he served as a
consultant to E. M. Warburg, Pincus & Co., Inc. From 1991 to July 1994 Mr.
Schlotterbeck was the Executive Vice President and Chief Operating Officer of
Nellcor, Incorporated, a medical device company. Mr. Schlotterbeck is a
director of VitalCom as well as two private companies in the medical device
industry.
SCOTT P. YOUNGSTROM; Mr. Youngstrom joined the Company as Vice President,
Finance & Administration and Treasurer in March, 1996. For more than five
years previously Mr. Youngstrom was the Controller of IMED Corporation, a
medical device subsidiary of Advanced Medical, Inc.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Chief Executive Officer of the Company and by each other
executive officer of the Company whose total salary and bonus exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($)
- --------------------------- ---- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Ronald R. Bromfield 1995 $158,654 $38,563 0 $76,307
President and CEO 1994 $154,375 $30,000 37,500 $34,141
1993 $ 31,250 $30,000 37,500 -0-
Bruno Bisceglia, Jr. 1995 $110,787 $15,550 0 -0-
VP National Accounts 1994 $ 83,229 0 18,750 -0-
1993 $ 75,472 0 15,000 -0-
Dennis W. Gladney 1995 $115,385 $15,700 0 -0-
VP Sales & Marketing 1994 $ 35,000 $20,000 18,750 -0-
</TABLE>
Other compensation paid to Mr. Bromfield in 1995 and 1994 was for relocation
and housing expenses.
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AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE. The
following table sets forth information concerning each exercise of stock options
during the fiscal year ended December 31, 1995 by the Company's Chief Executive
Officer and each other executive officer of the Company whose total salary and
bonus exceeded $100,000, and the fiscal year-end value of unexercised options
held by these persons.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES FOR THE LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTION AT
SHARES ACQUIRED VALUE YEAR-END (#) FISCAL YEAR-END ($)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald R. Bromfield -0- $0 62,500/12,500 $53,125/$3,125
Bruno Bisceglia, Jr. -0- $0 27,500/6,250 $21,875/$1,562
Dennis W. Gladney -0- $0 12,500/6,250 $625/$312
</TABLE>
COMPENSATION OF DIRECTORS
The Company has no standard or other arrangements pursuant to which directors
of the Company are compensated for any services as a director or for
committee participation or special assignments. Mr. Grimes received $4,000
for consulting with the Company in 1995. Mr. Schlotterbeck received a
nonqualified stock option grant on 10,000 shares in 1995 at an exercise price
of $6.76 per share. The option vests over three years and expire ten years
from date of grant or earlier if Mr. Schlotterbeck ceases to be a director.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
On October 18, 1993, the Company entered into a three year employment
agreement with Ronald R. Bromfield which provides for an annual base salary of
$150,000 and a minimum bonus of $60,000 per year based upon achieving
performance criteria. On December 13, 1994, this agreement was amended to
provide for a minimum base salary of $165,000 in the second and third years
of the agreement.
During 1994, the Company loaned Mr. Bromfield $200,000 for the purpose of
purchasing a residence. The loan is unsecured, carries no interest, and is
repayable in five equal annual installments commencing on the third
anniversary.
The Company is currently negotiating employment agreements with all of the
Company's officers and six other key employees with provisions that provide
for salary continuation, accelerated vesting of options, and lump sum
payments in the event of termination as a result of a change-in-control of
the Company.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information as of March 15, 1996 concerning the
beneficial ownership of the Company's voting securities by each person known
to the Company to beneficially own more than 5% of each class of securities,
by each director, by each executive officer named in the Summary Compensation
Table, and by all directors and officers as a group. Shares reported as
beneficially owned include those for which the named persons may exercise
voting power or investment power, and all shares are owned by persons having
sole voting and investment power over such shares unless otherwise noted.
The number of shares reported as beneficially owned by each person as of
March 15, 1996 includes the number of shares that such person has the right
to acquire within 60 days of that date, such as through the exercise of stock
options or conversion of preferred stock into common stock.
<TABLE>
<CAPTION>
TITLE OF NUMBER OF SHARES PERCENT OF
CLASS NAME AND ADDRESS BENEFICIALLY OWNED CLASS
- -------- ---------------- ------------------ ----------
<S> <C> <C> <C>
Common Stock Holstein Family Trust 123,928 26.0%
$.012 par value 2259 Warmouth Street
San Pedro, CA 90732
Elizabeth H. Weatherman 2,500,000(1) 84.0%
Warburg, Pincus Investors, L.P.
466 Lexington Ave.
New York, NY 10017
Vertical Fund Associates, L.P. 362,250(2) 45.7%
18 Bank Street
Summit, NJ 07901
Richard B. Emmitt 369,750(2)(3) 46.2%
Robert S. Grimes 11,250(4) 2.3%
Ronald R. Bromfield 62,500(5) 11.6%
Bruno Bisceglia, Jr. 48,000(6) 9.5%
Tim J. Way 50,000(7) 9.9%
Dennis W. Gladney 12,500(8) 2.6%
David L. Schlotterbeck 0 0%
Scott P. Youngstrom 0 0%
All directors and executive officers 3,054,000(9) 88.8%
as a group (9 persons)
Series C Elizabeth H. Weatherman 2,000,000 72.2%
Convertible Warburg, Pincus Investors, L.P.
Preferred Stock 466 Lexington Ave.
$.03 par value New York, NY 10017
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
Series C Vertical Fund Associates, L.P. 466,689 16.8%
Convertible 18 Bank Street
Preferred Stock Summit, NJ 07901
$.03 par value
Series D Elizabeth H. Weatherman 1,319,828 62.3%
Convertible Warburg, Pincus Investors, L.P.
Preferred Stock 466 Lexington Ave.
$.03 par value New York, NY 10017
Vertical Fund Associates, L.P. 800,000 37.7%
18 Bank Street
Summit, NJ 07901
Series E Elizabeth H. Weatherman 6,680,172 100%
Convertible Warburg, Pincus Investors, L.P.
Preferred Stock 466 Lexington Ave.
$.03 par value New York, NY 10017
</TABLE>
(1) Includes 2,000,000 shares series C convertible preferred stock, 1,319,828
shares series D convertible preferred stock, and 6,680,172 shares series E
convertible preferred stock owned by Warburg, Pincus Investors, L.P. ("WP
Investors") and in total is convertible into 2,500,000 common shares. The
sole general partner of WP Investors is Warburg, Pincus & Co., a New York
general partnership ("WP"). Lionel I. Pincus is the managing partner of WP
and may be deemed to control it. E.M. Warburg, Pincus & Company ("EM
Warburg"), a New York general partnership, manages WP Investors. WP has a
20% interest in the profits of WP Investors and, through its wholly-owned
subsidiary, E.M. Warburg, Pincus & Co., Inc. ("EMW"), owns 1.13% of the
limited partnership interests in WP Investors. Ms. Weatherman is a partner
of WP and EM Warburg and a managing director of EMW.
(2) Includes 45,578 shares of common stock, 466,689 shares of series C
convertible preferred stock, and 800,000 shares of series D convertible
preferred stock. Mr. Emmitt is the general partner of Vertical Fund
Associates, L.P., and may be deemed to be the beneficial owner of these
shares.
(3) Includes 7,500 shares of common stock that could be acquired within 60
days through the exercise of stock options.
(4) Includes 1,250 shares of common stock owned directly and 10,000 shares of
common stock that could be acquired within 60 days through the exercise of
stock options.
(5) Includes 62,500 shares of common stock that could be acquired within 60
days through the exercise of stock options.
(6) Includes 20,500 shares of common stock owned directly and 27,500 shares
of common stock that could be acquired within 60 days through the exercise of
stock options.
(7) Includes 22,500 shares of common stock owned directly and 27,500 shares
of common stock that could be acquired within 60 days through the exercise of
stock options.
(8) Includes 12,500 shares of common stock that could be acquired within 60
days through the exercise of stock options.
(9) Includes 89,828 shares of common stock, 11,266,689 shares of convertible
preferred stock, and 147,500 shares of common stock that could be acquired
within 60 days through the exercise of stock options.
13
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September, 1994 the Company borrowed $4,000,000 from WP Investors, Inc.,
an affiliate of Warburg, Pincus Investors, L.P. to finance the acquisition of
R2 Medical Systems, Inc. This note bore an interest rate of 8% per annum.
In December, 1994 this note was repaid in full from the proceeds of a bank
credit line, which is guaranteed by WP Investors, Inc.
In September 1994, the Company sold 2,119,828 shares of Series D Convertible
Preferred Stock and 6,680,172 shares of Series E Convertible Preferred Stock
at $1.25 per share for proceeds of $10,980,000, net of expenses of $20,000.
800,000 shares of Series D Preferred were purchased by Vertical Fund
Associates, L.P. 1,319,828 shares of Series D Preferred and 6,680,172 shares
of Series E Preferred were purchased by Warburg, Pincus Investors, L.P.
Shares of Preferred Stock are convertible into common stock on a one for four
exchange ratio. On December 31, 1995, the total outstanding Preferred Shares
were convertible into 2,892,031 of the Company's common stock, assuming full
conversion.
During 1995, the Company borrowed $1,746,000 from Warburg, Pincus Investors,
L.P. and $253,200 from Vertical Fund Associates, L.P. The notes are
unsecured, subordinated to the Company's bank loans, carry an average
interest rate of 6.5%, and are payable on demand. No payments are currently
being made.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
(3.1) Articles of Incorporation and amendments thereto dated October 26,
1989 and September 29, 1994, incorporated by reference to exhibit
3.1 on Form 10-KSB dated March 31, 1995.
(3.2) Bylaws incorporated by reference to exhibit 3.2 on Form 10-KSB dated
March 31, 1995.
(10.1) 1993 Stock Option Plan incorporated by reference to exhibit 4.1 Form
S-8 dated November 2, 1995.
(10.2) 1994 Stock Option Plan incorporated by reference to exhibit 4.2 Form
S-8 dated November 2, 1995.
(10.3) 1995 Stock Option Plan incorporated by reference to exhibit 4.3 Form
S-8 dated November 2, 1995.
(10.4) Employment Agreement dated October 18, 1993 and amendment to
Employment Agreement dated December 13, 1994 with Ronald R.
Bromfield incorporated by reference to exhibit 10.2 on
Form 10-KSB dated March 31, 1995.
(10.6) Loan Agreement dated February 8, 1995 with Ronald R. Bromfield
incorporated by reference to exhibit 10.3 on Form 10-KSB dated
March 31, 1995.
(10.7) Lease dated December 1, 1994 with The Campus, LLC incorporated by
reference to exhibit 10.4 on Form 10-KSB dated March 31, 1995.
(21.1) Subsidiaries of the Registrant.
(23.1) Consent of Deloitte & Touche LLP
(b) Reports on Form 8-K
None.
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Cash Flows 20
Consolidated Statements of Changes in Stockholders' Equity 21
Notes to Consolidated Financial Statements 22-27
15
<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.
CARDIOTRONICS SYSTEMS, INC. (Registrant)
By /S/ RONALD R. BROMFIELD Date March 28, 1996
------------------------------------
Ronald R. Bromfield
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURES DATE
---------- ----
/s/ RONALD R. BROMFIELD 3/28/96
- --------------------------------------
Ronald R. Bromfield
President, Director, and
Chief Executive Officer
(Principal Executive Officer)
/s/ SCOTT P. YOUNGSTROM 3/28/96
- --------------------------------------
Scott P. Youngstrom
Vice President Finance & Administration
(Principal Financial Officer)
/s/ TIM J. WAY 3/28/96
- --------------------------------------
Tim J. Way
Director
/s/ ROBERT S. GRIMES 3/28/96
- --------------------------------------
Robert S. Grimes
Chairman of the Board of Directors
/s/ BRUNO T. BISCEGLIA, JR. 3/28/96
- --------------------------------------
Bruno T. Bisceglia, Jr.
Director
/s/ RICHARD B. EMMITT 3/28/96
- --------------------------------------
Richard B. Emmitt
Director
/s/ ELIZABETH H. WEATHERMAN 3/28/96
- --------------------------------------
Elizabeth H. Weatherman
Director
/s/ DAVID L. SCHLOTTERBECK 3/28/96
- --------------------------------------
Director
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cardiotronics Systems, Inc.
Carlsbad, California
We have audited the accompanying consolidated balance sheets of Cardiotronics
Systems, Inc. and Subsidiary (the Company) as of December 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 11, the Company is involved in certain legal actions
which could have a significant impact on the consolidated financial
statements. The ultimate outcome of these lawsuits cannot presently be
determined. Accordingly, no provision for any liability that may result has
been made in the consolidated financial statements.
/S/ Deloitte & Touche, L.L.P.
- ------------------------------------
Costa Mesa, California
March 1, 1996 except for Note 8, for which the date is March 21, 1996
17
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
ASSETS DECEMBER 31, 1995 DECEMBER 31, 1994
- ------ ----------------- -----------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 619,020 $ 128,655
Short-Term Investments 499,742
Accounts Receivable, net of
allowance for doubtful accounts
of $25,970 for 1995 and $110,619
for 1994 931,585 806,422
Inventories, net 644,151 754,270
Other Current Assets 123,665 400,414
----------- -----------
Total Current Assets 2,318,421 2,589,503
EQUIPMENT AND FURNISHINGS, net 550,997 353,576
GOODWILL, net 4,000,000 8,032,122
PATENTS AND TRADEMARKS, net 4,373,642 4,745,372
OTHER ASSETS 259,986 281,492
----------- -----------
Total Assets $11,503,046 $16,002,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 852,011 $ 826,444
Accrued Liabilities 698,750 715,232
Deferred Rent 123,013
Note Payable to Bank 5,800,000
Notes Payable to Shareholders 2,000,000
----------- -----------
Total Current Liabilities 9,350,761 1,664,689
NOTE PAYABLE TO BANK 4,078,222
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible Preferred Stock,
$.03 par value 40,000,000 shares
authorized:
Series B Preferred Stock, 0 (1995)
and 2,250 (1994) shares issued
and outstanding 67
Series C Preferred Stock, 2,768,122
(1995) and 2,765,872(1994)
shares issued and outstanding 83,043 82,976
Series D Preferred Stock, 2,119,828
(1995) and 2,119,828(1994)
shares issued and outstanding 63,595 63,595
Series E Preferred Stock, 6,680,172
(1995) and 6,680,172(1994)
shares issued and outstanding 200,405 200,405
Common Stock, $.012 par value;
400,000,000 shares authorized;
471,811(1995) and 471,811 (1994)
shares issued and outstanding 5,662 5,662
Additional Paid in Capital 16,500,085 16,500,085
Accumulated Deficit (14,700,505) (6,593,636)
----------- -----------
Total Stockholders' Equity 2,152,285 10,259,154
----------- -----------
Total Liabilities and
Stockholders' Equity $11,503,046 $16,002,065
=========== ===========
See independent auditors' report and notes to consolidated financial statements.
18
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
Net Sales $ 8,424,001 $ 2,923,909
Cost of Sales 4,498,485 1,256,220
----------- -----------
Gross Profit 3,925,516 1,667,689
Operating Expenses:
Selling, General and Administrative 5,722,977 3,682,134
Research and Development 423,132 128,389
Patent Litigation 1,031,491 246,568
Amortization of Intangible Assets 4,429,331 234,874
----------- -----------
11,606,931 4,291,965
Operating Loss (7,681,415) (2,624,276)
Interest Income 33,791 60,504
Interest Expense 459,245 118,260
----------- -----------
Net Loss ($8,106,869) ($2,682,032)
=========== ===========
Net Loss per Common Share ($17.18) ($5.68)
=========== ===========
Weighted Average Number of
Common Shares Outstanding (a) 471,811 471,811
=========== ===========
(a) Does not include preferred shares convertible into 2,892,031 shares of
common stock (1995) and 2,892,031 (1994)
See independent auditors' report and notes to consolidated financial statements.
19
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
1995 1994
----------- ------------
OPERATING ACTIVITIES:
Net Loss ($8,106,869) ($2,682,032)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,071,753 282,497
Write-down of goodwill 3,487,571
Loss on disposal of equipment 26,350 6,326
Gain on sale of short-term investments (4,429)
Changes in operating assets and
liabilities net of effects from
purchase of R2 Medical Systems,
Incorporated:
Accounts receivable, net (125,163) (226,329)
Inventories, net 110,119 186
Other current assets 283,087 1,930
Accounts payable and accrued
liabilities (3,531) 218,878
Deferred liabilities (110,394) 83,505
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,371,506) (2,315,039)
INVESTING ACTIVITIES:
Proceeds from sale of short term investments 496,610 500,064
Capitalized patent costs (10,314)
Purchases of equipment and furnishings (346,203) (88,038)
Increase in note receivable from officer (120,000)
Purchase of R2 Medical Systems, Incorporated,
net of cash acquired (14,615,646)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 140,093 (14,323,620)
FINANCING ACTIVITIES:
Proceeds from notes payable and short-term
borrowings 3,721,778 9,078,222
Principal payments on short-term borrowings (5,230,000)
Proceeds from sale of preferred stock, net 10,979,999
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,721,778 14,828,221
----------- -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 490,365 (1,810,438)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 128,655 1,939,093
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 619,020 $ 128,655
=========== ===========
SUPPLEMENTARY DISCLOSURES:
Interest paid $ 435,752 $ 78,222
Income taxes paid $ 2,400 $ 1,600
During 1994, the Company acquired R2 Medical
Systems, Incorporated, a transaction
summarized as follows:
Fair value of assets acquired $15,778,149
Cash paid, net of cash acquired (14,615,646)
-----------
Liabilities assumed $ 1,162,503
===========
See independent auditors' report and notes to consolidated financial statements.
20
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------ --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES(a) AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 471,811 $5,662 2,768,122 $ 83,043 $ 5,784,086 $ (3,911,604) $ 1,961,187
Issuance of Series D preferred stock 2,119,828 63,595 2,586,190 2,649,785
Issuance of Series E preferred stock 6,680,172 200,405 8,129,809 8,330,214
Net loss (2,682,032) (2,682,032)
------------------------------------------------------------------------------------------
Balances at December 31, 1994 471,811 5,662 11,568,122 347,043 16,500,085 (6,593,636) 10,259,154
Net loss (8,106,869) (8,106,869)
------------------------------------------------------------------------------------------
Balances at December 31, 1995 471,811 $5,662 11,568,122 $347,043 $16,500,085 $(14,700,505) $ 2,152,285
==========================================================================================
</TABLE>
(a) Convertible into 2,892,031 shares of common stock at December 31, 1995
and 1994, respectively.
21
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Two Years Ended December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: Cardiotronics Systems, Inc. and Subsidiary (the "Company") is
engaged in the design, manufacture and sale of disposable medical products
used for emergency resuscitation and support.
CONSOLIDATION: The consolidated financial statements include the accounts of
Cardiotronics Systems, Inc. and its wholly-owned subsidiary, R2 Medical
Systems, Inc. (R2) (Note 2). All material intercompany profits, transactions
and balances have been eliminated in consolidation.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's balance sheet includes the
following financial instruments: cash and cash equivalents, trade accounts
receivable, accounts payable, and notes payable. The Company considers the
carrying amounts in the financial statements to approximate fair value for
these financial instruments due to the relatively short period of time
between origination of the instruments and their expected realization. The
carrying amount of the note receivable from officer is considered to
approximate fair value given the discounting of the note at its inception.
REVENUE RECOGNITION: The Company recognizes revenue at the time product is
shipped.
CREDIT RISK: The Company sells its products primarily to hospitals and other
healthcare providers worldwide. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses have
historically been within management's expectations.
CASH EQUIVALENTS: The Company considers all highly liquid instruments with
an original maturity of three months or less to be cash equivalents.
INVESTMENTS: Effective January 1, 1994 the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." At December 31, 1994, marketable equity and
debt securities have been categorized as available for sale and are stated at
fair value. Marketable equity and debt securities available for current
operations are classified in the balance sheet as current assets. Unrealized
holding gains and losses, if any, are included as a component of
stockholders' equity until realized.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
EQUIPMENT AND FURNISHINGS: Equipment and furnishings are stated at cost, net
of accumulated depreciation. Depreciation is computed using the straight-line
method over 5 years. Leasehold improvements are amortized over the lesser of
the useful life or the related lease term.
22
<PAGE>
INTANGIBLE ASSETS: Goodwill represents the excess of cost over net assets
acquired from the acquisition of R2 Medical, which is being amortized over 15
years, and is net of accumulated amortization of $4,168,258 and $136,138 as
of December 31, 1995 and 1994 respectively (see Note 12). Patents and
trademarks, including patents acquired in the purchase of R2, are being
amortized over their remaining lives of approximately twelve years, and are
net of accumulated amortization of $497,825 and $100,615 as of December 31,
1995 and 1994 respectively. The Company assesses the recoverability of
goodwill at each balance sheet date by determining whether the amortization
of the balance over its remaining useful life can be recovered through
projected undiscounted future cash flows from operations.
PER SHARE INFORMATION: Loss per common share is computed using the weighted
average number of common shares outstanding for the period. The computation
of net loss per common share excludes convertible preferred stock and options
outstanding, since their effect would be anti-dilutive.
All per share information has been adjusted to reflect the one-for-four
reverse stock split in June, 1995.
RECENT ACCOUNTING PRONOUNCEMENTS: In the fourth quarter of fiscal year 1995,
the Company elected to adopt early the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
statement also requires that assets to be disposed of should be written down
to fair value less selling costs. The adoption of SFAS 121 resulted in the
Company recording an impairment loss of $3.4 million (Note 12).
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED COMPENSATION, which became
effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under SFAS 123 or APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro-forma
disclosures of net income and earnings per share as if the provisions of SFAS
123 had been applied. The Company is in the process of evaluating the impact
of SFAS 123 and the potential impact on the Company adopting the new standard
has not been quantified at this time. The Company must adopt SFAS 123 no
later than December 1, 1996.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1994
financial statements to conform them to the 1995 presentation.
2. ACQUISITION OF R2 MEDICAL SYSTEMS, INC.
Effective September 30, 1994, the Company acquired all of the outstanding
common stock of R2 for $14,615,646, net of cash acquired. R2 manufactures
disposable medical products used for emergency resuscitation and support.
This transaction was accounted for as a purchase with R2's operating results
included in the Consolidated Statement of Operations from the date of
acquisition. As a result of the acquisition, the Company recorded goodwill
and Patent acquisition costs of $8,168,259 and $4,838,000, respectively.
The unaudited consolidated results of operations through December 31, 1994 on
a pro forma basis as though the acquisition had been consummated on January
1, 1994 is as follows:
Year ended December 31, 1994
----------------------------
Sales $ 6,234,448
Net Loss $(3,495,136)
Net Loss per common share $(1.85)
The pro forma financial information presented is not necessarily indicative
either of results of operations that would have occurred had the acquisition
been effected on January 1, 1994 or of future results of operations.
23
<PAGE>
3. OPERATIONS AND MANAGEMENT'S PLANS
The Company has incurred significant recurring operating losses. The
Company's attainment of profitable operations is dependent upon achieving a
level of sales adequate to support the Company's cost structure. Until this
level of sales is achieved, the Company will continue to require funds to
support its ongoing operations. Management's intent is to obtain such funds
through equity financing and borrowings from stockholders. Management has
received a commitment from its majority shareholder to provide sufficient
funds to continue operations through December 31, 1996.
The Company does not have the funds to repay the bank loan (Note 8) which
matures on May 31, 1996. Management believes that it can renew this line of
credit. Additionally, WP Investors, Inc. has agreed to provide the Company
with sufficient funds to carry on operations through December 31, 1996,
either in the form of a guarantee of a bank loan or as a direct equity or
debt placement.
Management is concentrating on reducing operating expenses and manufacturing
costs. Management is also exploring possible distribution arrangements with
other medical device manufacturers in order to distribute additional products
through the Company's existing sales force.
4. INVENTORIES
DECEMBER 31,
----------------------
1995 1994
-------- --------
Raw material $715,707 $504,007
Work in process -- 134,486
Finished goods 73,386 134,804
Reserve (144,942) (19,027)
-------- --------
$644,151 $754,270
======== ========
5. INVESTMENTS
During 1995, the Company sold investments with an aggregate book value of
$492,181 for total cash proceeds of $496,610, resulting in a net realized gain
of $4,429.
6. EQUIPMENT AND FURNISHINGS
DECEMBER 31,
----------------------
1995 1994
-------- --------
Machinery and equipment $545,669 $354,818
Furniture and fixtures 76,769 76,769
Leasehold improvements 149,013 36,198
-------- --------
771,451 467,785
Accumulated depreciation and amortization (220,454) (114,209)
-------- --------
Net equipment and furnishings $550,997 $353,576
======== ========
7. NOTE RECEIVABLE FROM OFFICER
During 1994, the Company loaned an officer $200,000 for the purpose of
purchasing a residence. The loan is unsecured, carries no interest and is
repayable in five equal annual installments commencing in February 1998. The
Company has imputed a discount on the note of $80,000, utilizing a 9%
interest rate, which is being amortized to interest income over the term of
the note. The outstanding balance of the note, net of discount, is included
in other assets in the accompanying consolidated balance sheets.
8. NOTE PAYABLE TO BANK
The Company has a $6,000,000 revolving credit facility with a bank which matures
on May 31, 1996. The credit facility, guaranteed by WP Investors, Inc., a
shareholder of the Company, is collateralized by substantially all of
24
<PAGE>
the Company's assets. At December 31, 1995, $5,800,000 was outstanding under
this facility at an interest rate of 7 3/8%, payable monthly. The credit
agreement contains certain restrictive covenants including minimum net worth
and working capital requirements and prohibits the payment of dividends. The
Company was in compliance with or had received waivers on all covenants of
this facility at December 31, 1995.
9. NOTES PAYABLE TO SHAREHOLDERS
During 1995 the Company borrowed a total of $2,000,000 through a series of
demand notes from two of its major shareholders. The Company borrowed
$1,746,000 from Warburg, Pincus Investors, L.P. and $254,000 from Vertical
Fund Associates, L.P. The notes are unsecured, subordinated to the Company's
bank loans and carry an average interest rate of 6.5%. The Company is
currently not making interest payments on the notes. Interest payable on
these loans as of December 31, 1995 was $13,040 and $1,878 to Warburg and
Vertical, respectively, and is included within accrued liabilities in the
accompanying consolidated balance sheet.
10. STOCKHOLDERS' EQUITY
At December 31, 1995, there were 3,601,928 shares of common stock reserved
for issuance under stock option plans, for exercise of warrants, and for
conversion of preferred stock. The total liquidation preference of
outstanding preferred stock is $13,768,122 as of December 31, 1995.
In September 1994, the Company sold 2,119,828 shares of Series D Convertible
Preferred Stock and 6,680,172 shares of Series E Convertible Preferred Stock
at $1.25 per share for proceeds of $10,980,000, net of expenses of
approximately $20,000.
As of December 31, 1995, the 2,768,122 shares of Series C Convertible
Preferred Stock, the 2,119,828 shares of Series D Convertible Preferred Stock
and the 6,680,172 shares of Series E Convertible Preferred Stock were
convertible into 692,031, 529,957 and 1,670,043 shares, respectively, of the
Company's common stock. Assuming full conversion of all Series of
Convertible Preferred Stock, the total number of common shares outstanding at
December 31, 1995 would have been 3,363,842.
The Company has three stock option plans under which options may be granted
to employees, directors, and advisors. Options may be designated as incentive
stock options or nonstatutory stock options; however, incentive stock options
may be granted only to employees of the Company. Incentive stock options must
be granted at not less than fair market value of the related shares on the
date of grant. Nonstatutory stock options must be granted at not less than
85% of fair market value on the date of grant. A maximum of 700,000 options
may be granted under these plans. Options expire at various dates through
November 2005. At December 31, 1995, there were 398,850 options outstanding,
of which 195,200 were exercisable. The balance of 203,650 options
outstanding becomes exercisable at various dates through November 1998.
Changes in options outstanding are as follows:
Price
Shares Per Share
------- ---------
Outstanding at December 31, 1993 106,500 $4.00
Granted 130,500 $4.00 to $6.00
-------
Outstanding at December 31, 1994 237,000 $4.00 to $6.00
Granted 162,150 $6.52 to $8.00
Canceled (300) $7.00
-------
Outstanding at December 31, 1995 398,850 $4.00 to $8.00
=======
The Company has warrants outstanding to purchase 9,897 shares of common
stock, which are exercisable at $24.00 per share and expire on February 10,
1997.
25
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into noncancelable operating leases for manufacturing
and office space and equipment. Rental expense for the years ended December
31, 1995 and 1994 was $167,147 and $112,198, respectively. At December 31,
1995, aggregate minimum future lease payments were as follows:
Year ended December 31:
1996 $174,008
1997 180,323
1998 190,282
1999 201,078
2000 50,944
-------
$796,635
========
LITIGATION
In May 1994, R2 filed a patent infringement lawsuit against Katecho, Inc.,
Cardiovascular Group of Oregon, Inc., and Padeco, Inc. in U.S. District
Court, Northern District of Illinois, Eastern Division. The lawsuit is in
discovery, and no trial date has been scheduled. If the Company does not
prevail in this lawsuit, it will have to write down a significant amount of
the value assigned to these patents.
In July 1994, R2 was named as a defendant in a product liability action in
the Supreme Court of the State of New York, County of Suffolk, entitled J.
Michael Kramer vs. County of Suffolk, et. al. (the "action"). The action
alleges, among other things, that defibrillation pads manufactured by R2
Medical Systems were defective and seeks damages of $20 million. While this
litigation has proceeded slowly and is still in an early stage, the Company
believes, after consultation with its counsel, that it has valid defenses
based on the fact that, to the Company's best knowledge, the electrodes
alleged to be defective were never used on the plaintiff, nor were such
electrodes ever recovered or documented to be manufactured by R2. However, in
view of the inherent uncertainties surrounding this type of litigation, no
assurance can be given that R2 will prevail in this case. The Company is
unable to assess the likelihood of an adverse outcome or estimate the amount
or range, if any, of any possible loss. An adverse judgment could have a
material adverse effect on the financial condition and operations of the
Company.
On December 30, 1994, R2 was sued in the U.S. District Court, Northern
District of Illinois, Eastern Division, in an action entitled Roger Lee Heath
vs. Baxter, Walters, Townsen, et. al. R2 has filed a motion to dismiss this
lawsuit on the basis that no wrongdoing is alleged against R2. The Company
believes that this lawsuit is baseless.
12. IMPAIRMENT OF ASSETS
In the fourth quarter of fiscal year 1995, the Company elected to adopt early
the provisions of SFAS 121. This statement requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets' carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The statement
also requires that assets to be disposed of should be written down to fair
value less selling costs. Based upon the comparison of the recorded values of
long-lived assets (defined as fixed assets and goodwill) against the expected
future cash flows to be generated by the assets and after applying the
principles of measurement contained in the Statement, the Company determined
that the long-lived assets were impaired, and accordingly, recorded a charge
to goodwill of approximately $3.4 million. Such charge has been included in
the accompanying consolidated statements of operations within the line item
Amortization of Intangible Assets.
26
<PAGE>
13. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This statement
requires the recognition of deferred tax assets and liabilities for the
future consequences of events that have been recognized in the Company's
financial statements or tax returns. In the event the future consequences of
differences between financial reporting bases and the tax bases of the
Company's assets and liabilities result in a deferred tax asset, SFAS 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
At December 31, 1995 and 1994, the Company had deferred tax assets of
approximately $8,800,000 and $2,300,000, respectively which were fully
reserved. The deferred tax assets relate primarily to operating loss
carryforwards which expire beginning in 2002. The annual usage of such
operating losses to reduce future income taxes is subject to significant
limitations.
14. MAJOR DISTRIBUTORS AND FOREIGN SALES
The Company's two largest customers accounted for 18% and 16% of sales,
respectively, in 1995. No one customer accounted for more than 10% of sales
for the year ended December 31, 1994. The Company has no foreign operations.
Export sales (payable in U.S. dollars) were $1,326,542 in 1995 and $239,308
in 1994.
15. EMPLOYEE BENEFIT PLAN
During the year ended December 31, 1994, the Company established a defined
contribution employee profit sharing plan (the 401(k) Plan or the Plan).
Employees who attain the age of 18 and are employed by the Company for 3
months are eligible to participate in the 401(k) Plan. The 401(k) Plan allows
the participating employees to defer specified percentages of their
compensation (as defined), with the Company matching certain amounts. There
were no Company contributions; and administrative costs associated with the
Plan were $1,305 and $350 for the years ended December 31, 1995 and 1994,
respectively.
27
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NO: NO:
- ------ ----
21.1 -- List of Subsidiaries of the Company..............................
23.1 -- Consent of Deloitte & Touche LLP.................................
- ------------
28
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant State of incorporation
R2 Medical Systems, Inc. California
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
22668 of Cardiotronics Systems, Inc. on Form S-8 of our report, dated March 1,
1996, except for Note 8, for which the date is March 21, 1996 (which report
contains an explanatory paragraph regarding certain legal actions), appearing in
the Annual Report on Form 10-KSB of Cardiotronics Systems, Inc. for the year
ended December 31, 1995.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Costa Mesa, California
March 28, 1996
<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
December 31, 1995 and the related statement of operations for the year then
ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 619,020
<SECURITIES> 0
<RECEIVABLES> 957,555
<ALLOWANCES> (25,970)
<INVENTORY> 644,151
<CURRENT-ASSETS> 2,318,421
<PP&E> 771,451
<DEPRECIATION> (220,454)
<TOTAL-ASSETS> 11,503,046
<CURRENT-LIABILITIES> 9,350,761
<BONDS> 0
0
347,043
<COMMON> 5,662
<OTHER-SE> 1,799,580
<TOTAL-LIABILITY-AND-EQUITY> 11,503,046
<SALES> 8,424,001
<TOTAL-REVENUES> 8,424,001
<CGS> 4,498,485
<TOTAL-COSTS> 4,498,485
<OTHER-EXPENSES> 11,513,618
<LOSS-PROVISION> 93,313
<INTEREST-EXPENSE> 459,245
<INCOME-PRETAX> (8,106,869)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,106,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,106,869)
<EPS-PRIMARY> (17.18)
<EPS-DILUTED> 0
</TABLE>
