<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarter ended September 30, 1996
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to
Commission file number 0-24540
INCONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1501619
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6675 - 185TH AVENUE N.E.
REDMOND, WA 98052-6734
(206) 861-9800
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- ------------------------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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 shorter periods that the registrant has been
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes ( X ) No ( )
----- -----
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 31, 1996
(Common stock, $0.01 par value) 16,952,827
Page 1 of 11 sequentially numbered pages
<PAGE> 2
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations -
three and nine months ended September 30, 1996 and 1995
and period from November 13, 1990 to September 30, 1996 . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
nine months ended September 30, 1996 and 1995
and period from November 13, 1990 to September 30, 1996 . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 7
PART II
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
Page 2 of 11 sequentially numbered pages
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 DECEMBER 31,
(UNAUDITED) 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,098,816 $ 2,048,600
Securities available for sale 42,281,848 17,165,307
Inventories 2,161,926 1,365,849
Current portion of notes receivable from employees 761,042 66,417
Prepaid expenses and other current assets 748,188 1,122,931
------------ ------------
Total current assets 48,051,820 21,769,104
Property and equipment, net 4,937,239 4,856,352
Notes receivable from employees 5,000 728,542
Other assets 304,317 115,579
------------ ------------
Total assets $ 53,298,376 $ 27,469,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 498,591 $ 1,005,071
Accrued expenses 1,520,766 1,018,264
Current portion of long-term obligations 1,023,889 990,773
------------ ------------
Total current liabilities 3,043,246 3,014,108
Long-term obligations, less current portion 1,818,473 2,263,767
Commitments -- --
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares--10,000,000;
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--40,000,000;
Issued and outstanding shares--
16,950,640 at September 30,1996 and 13,808,432 at
December 31, 1995 129,237,891 82,934,507
Deficit accumulated during development stage (80,206,362) (59,440,456)
Notes receivable from stockholders (660,000) (1,238,516)
Cumulative translation adjustment 65,128 (63,833)
------------ ------------
Total stockholders' equity 48,436,657 22,191,702
------------ ------------
Total liabilities and stockholders' equity $ 53,298,376 $ 27,469,577
============ ============
</TABLE>
See accompanying notes.
Page 3 of 11 sequentially numbered pages
<PAGE> 4
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS, NINE MONTHS NOV. 13, 1990 (DATE
------------- ----------- OF INCORPORATION)
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, THROUGH
------------------------------ ----------------------------- SEPTEMBER 30,
1996 1995 1996 1995 1996
------------- ------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues from clinical trials $ 90,374 $ -- $ 198,722 $ -- $ 224,210
Expenses:
Research and development 5,794,138 5,348,155 17,122,675 14,703,417 68,216,326
Marketing and general and
administrative 1,578,699 1,339,736 5,312,436 3,376,021 15,566,030
------------- ------------- ------------- ------------- --------------
7,372,837 6,687,891 22,435,111 18,079,438 83,782,356
Interest expense 104,471 131,684 339,633 390,229 1,845,846
Interest income (694,158) (400,653) (1,587,730) (1,152,405) (5,009,460)
-------------- -------------- -------------- -------------- --------------
Net loss $ 6,692,776 $ 6,418,922 $ 20,988,292 $ 17,317,262 $ 80,394,532
============= ============= ============= ============= ==============
Net loss per share $ 0.40 $ 0.47 $ 1.34 $ 1.37
============= ============= ============= =============
Shares used in computation of
net loss per share: 16,938,883 13,588,340 15,636,841 12,650,348
</TABLE>
See accompanying notes.
Page 4 of 11 sequentially numbered pages
<PAGE> 5
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM NOV. 13, 1990
NINE MONTHS ENDED SEPTEMBER 30, (DATE OF INCORPORATION)
------------------------------ THROUGH SEPTEMBER 30,
1996 1995 1996
---- ---- -------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (20,988,292) $ (17,317,262) $ (80,394,531)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,815,103 1,436,760 6,484,461
Compensation related to retirement of
stockholders' loans 552,516 -- 552,516
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses
and other current assets (450,286) 43,072 (1,059,842)
(Increase) in inventories (794,391) (104,180) (2,160,240)
Increase in accounts payable,
accrued expenses, and sales tax payable 30,783 218,116 2,138,701
--------------- ----------------- ----------------
Net cash used in operating activities (19,834,567) (15,723,494) (74,438,935)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,635,126) (1,848,042) (10,925,244)
Loans to employees (45,000) (33,251) (1,117,323)
Proceeds from collection of employee loans 12,000 -- 24,000
Purchases of securities (39,064,242) (13,759,572) (110,667,090)
Proceeds from maturity of securities 13,080,000 18,275,000 57,910,933
Proceeds from sale of securities 1,618,182 912,033 10,527,301
Other -- -- (83,653)
--------------- ----------------- ----------------
Net cash provided by (used in) investing
activities (26,034,186) 3,546,168 (54,331,076)
FINANCING ACTIVITIES:
Net proceeds from sales of convertible
preferred stock -- -- 38,134,502
Proceeds from note payable -- -- 589,774
Repayment of note payable -- (20,498) (589,774)
Proceeds from lease financing 270,654 868,554 5,869,705
Payments on lease financing (665,027) (779,471) (3,015,281)
Loans to stockholders -- (686,000) (686,000)
Proceeds from collection of stockholders' loans 26,000 -- 26,000
Proceeds from exercise of stock options 136,154 32,901 716,477
Net proceeds from sale of common stock 46,167,230 13,938,102 89,839,466
--------------- ----------------- ----------------
Net cash provided by financing activities 45,935,011 13,353,588 130,884,869
Effect of exchange rate changes on cash (16,042) -- (16,042)
--------------- ----------------- ----------------
Net increase (decrease) in cash and cash
equivalents 50,216 1,176,262 2,098,816
Cash and cash equivalents at beginning of
period 2,048,600 2,746,460 --
--------------- ----------------- ----------------
Cash and cash equivalents at end of period $ 2,098,816 $ 3,922,722 $ 2,098,816
=============== ================= ================
SUPPLEMENTAL DISCLOSURE OF CASH PAID:
Interest $ 308,038 $ 385,322 $ 1,831,325
=============== ================= ================
SUPPLEMENTAL DISCLOSURES OF NON-CASH
ACTIVITIES:
Deferred sales tax $ 10,503 $ 10,503 $ 122,901
=============== ================= ================
Notes receivable related to exercise of stock
options $ (552,516) $ (22,884) $ --
=============== ================= ================
Conversion of preferred to common stock $ -- $ -- $ 38,134,502
=============== ================= ================
</TABLE>
See accompanying notes.
Page 5 of 11 sequentially numbered pages
<PAGE> 6
INCONTROL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INTERIM FINANCIAL INFORMATION
The consolidated financial statements included herein have been prepared by
InControl, Inc. (the "Company") without audit, according to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position and results of operations as of and for the periods indicated.
Certain reclassification of previously reported amounts have been made to
conform with the current year presentation.
The results of operations for the nine-month period ended September 30, 1996,
are not necessarily indicative of results to be expected for the entire year
ending December 31, 1996 or for any other fiscal period.
INVENTORIES
Inventories are valued at the lower of cost (first in, first out method) or
management's estimate of fair value. Allowances are made for obsolete,
unsalable, or unusable inventories. The components of inventories are as
follows:
<TABLE>
<CAPTION>
September 30, 1996
(unaudited) December 31, 1995
------------------ -----------------
<S> <C> <C>
Raw materials $ 1,344,574 $ 739,226
Work in process 123,506 419,074
Finished products 693,846 207,549
------------------ -----------------
$ 2,161,926 $ 1,365,849
================== =================
</TABLE>
Page 6 of 11 sequentially numbered pages
<PAGE> 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since the commencement of operations in November 1990, InControl, a development
stage company, has been engaged in designing and developing the METRIX System.
The METRIX System, a proprietary system designed to treat atrial fibrillation,
is comprised of an active implantable defibrillator, transvenous leads to
connect the defibrillator to the heart, a system analyzer, and a system
programmer. Since inception, the majority of the Company's resources have been
devoted to research and development activities. Through September 30, 1996 the
Company had accumulated a deficit of $80.2 million. The Company expects to
incur substantial additional losses in the future due primarily to the
Company's clinical trial activities, the expansion of marketing and sales
capabilities, the expansion of manufacturing capabilities in the United States,
and research and development of the next generation of atrial defibrillation
devices. The amount and timing of the Company's future revenues and losses
will be affected by, among other things, the recruitment of suitable patients,
the progress of clinical trials, the timing of regulatory approvals, the rate
of market acceptance of the METRIX System, and the availability of third-party
reimbursement for the Company's products. The Company believes that it will
incur losses at least until the METRIX System is approved for marketing in the
United States.
This document contains forward-looking statements, which are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Factors which could affect the Company's financial
results are described in the preceding paragraph and in the Company's latest
Annual Report on Form 10-K filed with the SEC. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only of
the date of this report. InControl undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report
or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three and nine months ended September 30, 1996 were $90,000
and $199,000 from the sale of seven and fifteen devices respectively. Five of
the devices sold were part of the United States clinical trials and the
remaining ten devices were part of the European clinical trials.
During the first nine months of 1996 a total of eighteen METRIX defibrillators
have been implanted, bringing the total devices implanted to date to
twenty-one. The Company recognizes revenue from clinical investigations and
trials following the implant of a METRIX device and acknowledgment by the
clinic or hospital of its financial obligation to the Company. During 1996,
the Company has not recognized revenue on three of the eighteen implants.
During the first nine months of 1995, InControl had no implants and recorded no
revenues.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three and nine months ended September
30, 1996 were $5.8 million and $17.1 million, up from $5.3 million and $14.7
million in the comparable periods in 1995. The increases are primarily
attributable to increases in personnel (130 at September 30, 1996 from 104 at
September 30, 1995) and personnel-related costs, funding of preclinical and
clinical research studies, depreciation of equipment, and expansion of United
States manufacturing capabilities. Included in the year to date personnel
related costs is a $340,000 one-time compensation expense, taken in the second
quarter, resulting from bonus payments to individuals who participated in an
employee stock ownership plan. The participating employees elected to receive
payment of the bonus by offsetting principal and accrued interest of certain
loans owed to the Company.
Page 7 of 11 sequentially numbered pages
<PAGE> 8
MARKETING AND GENERAL AND ADMINISTRATIVE EXPENSES
Marketing and general and administrative expenses for the three and nine months
ended September 30, 1996 were $1.6 million and $5.3 million, up from $1.3
million and $3.4 million in the comparable periods in 1995. The increases are
primarily attributable to the increase in personnel (33 at September 30, 1996
from 25 at September, 1995), and personnel-related costs and supplies and
facilities costs. Included in the year to date personnel related costs is a
$240,000 one-time compensation expense, taken in the second quarter, resulting
from bonus payments to individuals who participated in an employee stock
ownership plan. The participating employees elected to receive payment of the
bonus by offsetting principal and accrued interest of certain loans owed to the
Company.
INTEREST INCOME AND INTEREST EXPENSE
For the three and nine month periods ended September 30, 1996 the Company
generated $694,000 and $1.6 million of interest income as compared to $401,000
and $1.2 million for similar periods ended September 30, 1995. Increases in
interest income from prior year periods resulted from increased average
balances of cash, cash equivalents and securities available for sale. The
increase in average investment balances resulted from a public offering of
common stock completed April 23, 1996.
For the three and nine month periods ended September 30, 1996, the Company
incurred $104,000 and $340,000 of interest expense as compared to $132,000 and
$390,000 for similar periods ended September 30, 1995. Changes in interest
expense, which were not material, relate to the extent of the Company's
reliance on capital lease financing.
PRODUCT DEVELOPMENT AND DISTRIBUTION AGREEMENTS WITH THIRD PARTIES
The Company has entered into a product development and supply agreement with
Procath Corporation, a wholly owned subsidiary of EPMedSystems, Inc.
EPMedSystems is a manufacturer and supplier of a range of cardiac
electrophysiology products, including catheters designed for internal
cardioversion. Under the terms of the agreement, Procath will manufacture a
new InControl temporary atrial defibrillation catheter.
Under separate, non-exclusive distribution agreements, InControl has agreed to
distribute EPMedSystems' ALERT atrial defibrillation system in certain
specified international markets and the ALERT Companion, an external
defibrillation energy source, on a worldwide basis. The product development
and supply agreement along with the distribution agreements require no
material financial commitments of InControl.
LIQUIDITY AND CAPITAL RESOURCES
InControl has financed its operations since inception through the sale of
common and preferred stock, interest income on the invested proceeds of such
sales, and the use of equipment lease financing. In April 1996, the Company
completed a public offering of three million shares of common stock at a price
of $16.50 a share. After issuance costs of approximately $3.3 million, the
Company realized net proceeds of $46.2 million. Through September 1996, the
Company has raised net proceeds totaling $128.0 million through the sale of
common and preferred stock, and has generated $5.0 million of interest income
on the invested proceeds of such offerings. Since its inception, the Company
has invested $10.9 million in equipment and leasehold improvements and has
financed $5.9 million of these investments through capital leases.
At September 30, 1996, the Company had cash, cash equivalents, and securities
available for sale totaling $44.4 million, compared to a balance of $19.2
million at December 31, 1995. The increase was primarily due to the net
proceeds of $46.2 million from the sale of common stock offset by: $19.8
million in operating expenditures, $1.4 million in purchases of property and
equipment not financed through capital leases, and $665,000 on payments of
capital leases.
Page 8 of 11 sequentially numbered pages
<PAGE> 9
The Company anticipates that its existing capital and the interest thereon will
enable it to sustain operations into the second quarter of 1998. The Company
will require substantial capital resources to support clinical trial
activities, the expansion of marketing and sales capabilities, the expansion of
manufacturing capabilities in the United States, and research and development
of the next generation of atrial defibrillation devices and other products.
The Company's future capital requirements will depend on many factors,
including the recruitment of suitable patients, the progress of clinical
trials, the timing of regulatory approvals, the rate of market acceptance of
the METRIX System, and the availability of third-party reimbursement for the
Company's products. The Company may need to seek additional funding, through
either public or private sources, to meet its future operational requirements.
There can be no assurance such funds will be available as needed or on terms
that are acceptable to the Company. Insufficient funding may require the
Company to delay, reduce, or eliminate certain of its research and development
activities, planned clinical trials, and manufacturing and administrative
programs.
Page 9 of 11 sequentially numbered pages
<PAGE> 10
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K
No reports on form 8-K were filed during the quarter ended September 30, 1996.
Page 10 of 11 sequentially numbered pages
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCONTROL, INC.
(Registrant)
Dated:________________________ By:_____________________________________
Donald F. Seaton III
Vice President, Finance,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
Page 11 of 11 sequentially numbered pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INCONTROL
INC.'S 3RD QUARTER 10-Q BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INCONTROL INC.'S 3RD QUARTER 10-Q
AND 1995 10-K FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000871629
<NAME> INCONTROL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,099
<SECURITIES> 42,282
<RECEIVABLES> 761
<ALLOWANCES> 0
<INVENTORY> 2,162
<CURRENT-ASSETS> 48,052
<PP&E> 10,834
<DEPRECIATION> 5,897
<TOTAL-ASSETS> 53,298
<CURRENT-LIABILITIES> 3,043
<BONDS> 1,818
0
0
<COMMON> 129,238
<OTHER-SE> (80,801)
<TOTAL-LIABILITY-AND-EQUITY> 53,298
<SALES> 199
<TOTAL-REVENUES> 199
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> (20,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,988)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
