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 quarterly period ended May 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7578
ELECTRO-CATHETER CORPORATION
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1733406
(State of Incorporation) (I.R.S. Employer ID Number)
2100 Felver Court, Rahway, New Jersey 07065
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 908-382-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
6,350,211 shares of Common stock, $.10 par value as of July 8, 1996.
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
May 31, 1996 and August 31, 1995 1
Condensed Comparative Statements of Operations -
Three and Nine Months Ended May 31, 1996
and May 31, 1995 2
Condensed Comparative Statements of Cash Flows -
Nine Months Ended May 31, 1996 and
May 31, 1995 3
Notes to Condensed Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 7
PART II. OTHER INFORMATION
Not Applicable
Signatures 8
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
May 31, 1996 and August 31, 1995
May 31, August 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 118,544 $ 304,385
Accounts receivable, net 1,050,601 1,206,288
Inventories
Finished goods 1,137,889 938,224
Work-in-process 553,082 644,957
Materials and supplies 504,243 509,898
---------- ----------
Total inventories 2,195,214 2,093,079
Prepaid expenses and
other current assets 63,601 43,030
------ ------
Total current assets 3,427,960 3,646,782
Property, plant and equipment, net 524,743 598,787
Leased property under capitalized
leases, net 46,346 -
Other assets, net 122,787 135,947
------- -------
Total assets 4,121,836 4,381,516
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T-Partnership 225,000 -
Current installments of capitalized
lease obligations 7,489 -
Current installments of long-term debt - 13,055
Accounts payable and accrued expenses 902,864 1,128,310
------- ---------
Total current liabilities 1,135,353 1,141,365
Subordinated debentures due to
T-Partnership, excluding current
installments 1,475,000 1,200,000
Long-term capital lease obligations 40,326 -
--------- ---------
Total liabilities 2,650,679 2,341,365
--------- ---------
Stockholders' equity:
Common stock 635,021 633,630
Additional paid-in capital 10,626,708 10,615,298
Accumulated deficit (9,790,572) (9,208,777)
---------- ----------
Total stockholders' equity 1,471,157 2,040,151
--------- ---------
Total liabilities and stockholders'
equity $ 4,121,836 $ 4,381,516
============ ============
See accompanying notes to condensed financial statements.
1
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
1996 1995 1996 1995
Net sales $ 1,702,137 $ 1,774,495 $ 5,481,822 $ 5,274,631
Cost of goods sold 928,468 921,956 2,817,753 2,845,558
------- ------- --------- ---------
Gross profit 773,669 852,539 2,664,069 2,429,073
Operating expenses:
Selling, general and administrative 769,943 964,244 2,304,435 2,461,947
Research and development 261,419 230,996 790,768 654,183
------- ------- ------- -------
Operating loss (257,693) (342,701) (431,134) (687,057)
Other income (expenses):
Interest income - 1,244 86 3,844
Interest expense (55,533) (28,246) (150,747) (85,444)
------- ------- -------- -------
Net loss $ (313,226) $ (369,703) $ (581,795) $ (768,657)
=========== ============ ============ ============
Net loss per common share $ (0.05) $ (0.06) $ (0.09) $ (0.13)
======== ========= ========= =========
Dividends per share None None None None
Weighted average shares outstanding 6,350,211 6,078,011 6,347,624 5,934,517
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31,
1996 1995
Increase (decrease) in cash:
Cash flows from operating activities:
Cash received from customers $ 5,626,750 $ 5,211,115
Cash paid to vendors and employees (6,188,521) (6,017,760)
Interest received 86 3,844
Interest paid (92,559) (84,111)
------- -------
Net cash used in operating activities (654,244) (886,912)
-------- --------
Cash flows from investing activities:
Cash purchases of property, plant and
equipment (18,155) (10,681)
------- -------
Net cash used in investing activities (18,155) (10,681)
------- -------
Cash flows from financing activities:
Proceeds from the issuance of stock - 500,063
Proceeds from Stock Purchase Plan 1,066 2,236
Proceeds from loan and issuance
of warrants to T-Partnership 500,000 250,000
Reductions of debt and capitalized lease
obligations (14,508) (13,497)
------- -------
Net cash provided by (used in) financing activities 486,558 738,802
------- -------
Net decrease in cash (185,841) (158,791)
Cash at beginning of period 304,385 376,388
------- -------
Cash at end of period 118,544 217,597
======= =======
Net loss $ (581,795) $ (768,657)
Adjustments:
Depreciation 95,121 104,207
Amortization of deferred charges 6,250 9,298
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 155,687 (63,516)
Increase in inventories (102,135) (239,066)
Decrease (increase) in prepaid expenses and
other current assets (20,571) 88,658
Decrease (increase) in other assets 6,910 (32,861)
(Decrease) increase in accounts payable
and accrued expenses (213,711) 15,025
-------- ------
Net cash used in operating activities $ (654,244) $ (886,912)
=========== ===========
See accompanying notes to condensed financial statements.
3
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position of
Electro-Catheter Corporation as of May 31, 1996, the results of operations for
the three and nine months ended May 31, 1996 and May 31, 1995 and statements of
cash flows for the nine months ended May 31, 1996 and May 31, 1995, but are not
necessarily indicative of the results to be expected for the full year.
These statements should be read in conjunction with the Company's Annual
Report to the Securities and Exchange Commission on Form 10-K for the fiscal
year ended August 31, 1995.
Note 2 Subordinated Debentures
The Company and the T-Partnership, to whom the Company has had an
indebtedness of $1,500,000, agreed in January 1996 to a restructuring of their
financing agreement. The T-Partnership advanced additional amounts of $100,000
to the Company on January 11, 1996 and March 5, 1996 and deferred all interest
payments due from the Company for a period of three months (interest payments
were added to outstanding principal on the T- Partnership indebtedness). The
assets of the Company will secure these new advances and will continue to secure
preexisting indebtedness due from the Company to the T-Partnership. In exchange
for these advances, the Company has agreed that if it is not in compliance with
certain financial covenants, to be tested on a monthly basis, the T-Partnership
may declare an Event of Default and accelerate repayment of indebtedness. The
Company is currently in compliance with this covenant. The T-Partnership
indebtedness otherwise is to be repaid in equal monthly payments from September
1, 1996 through August 1, 2001.
Note 3 Subsequent Event
In June 1996 the Company received an advance of $300,000 from an unrelated
party to perform research and development and pre-production planning for them.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
Although the third quarter of fiscal year 1996 proved to be difficult, it
provided a foundation for the future. During the quarter the Company entered
into a joint venture arrangement with one of the leading centers for
electrophysiology in the U.S. The Company also began research in the area of
atrial fibrillation and continues to explore resolutions for the problems of the
electrophysiologist.
Third quarter sales declined $72,358 (4.1%) as compared to the same period
last year. International sales declined $93,587 (18.3%) and domestic sales
increased $21,229 (1.7%). The decrease in international sales is attributed to
the timing of orders from distributors, unfavorable economic conditions in
certain countries, unavailability of certain products and a decline in certain
markets. An increase in sales in the northeast region of the U.S., offset
partially by declines in other regions, attributed to the increase in domestic
sales.
For the nine months ended May 31, 1996 total sales increased $207,191
(3.9%). International sales increased $283,673 (19.8%) and domestic sales
decreased $76,482 (2.0%). International sales increased as a result of higher
sales of steerable catheters with temperature control that were sold based upon
specific approval from certain countries under Section 801(e) of the FDA
regulations, as well as improved penetration of the worldwide market. Domestic
sales declined in certain regions of the U.S.
Gross profit dollars decreased $78,870 (9.3%) for the three months ended
May 31, 1996 as compared to the same period last year. This decrease is
primarily attributed to the lower volume. For the nine months ended May 31, 1996
gross profit dollars increased $234,996 (9.7%) as compared to the same nine
months in the prior fiscal year. The increase is primarily attributed to the
additional volume and increase in operating yields and manufacturing output. The
gross profit percentages for the three and nine months ended May 31, 1996 were
45.5% and 48.6%, respectively, as compared to 48.0% and 46.1%, respectively, for
the same periods last year. Gross profit for the current fiscal year also
included the positive impact of selling directly to hospitals in the northeast
region rather than through a distributor, which required discounts, as the
Company did in the prior fiscal year. In December 1995, the Company reduced its
manufacturing staff as a result of lower than anticipated demand. Gross profit
is expected to be negatively affected for a period of time as a result of this
labor reduction, since overhead expenses will be allocated over a smaller direct
labor pool. Gross profit was partially affected in the third quarter as a result
of this reduction in the manufacturing staff.
5
Selling, general and administrative expenses decreased $194,301 (20.2%) and
$157,512 (6.4%), respectively, for the three and nine months ended May 31, 1996
as compared to the three and nine months ended May 31, 1995. This decrease
primarily reflects lower domestic marketing and selling expenses in the third
quarter of the current fiscal year. For the third quarter of fiscal year 1996,
this decrease is attributed to the departure of some of the Company's sales
representatives and the Director of Clinical Development who have not been
replaced and lower commissions, sample costs and other selling expenses. This
decrease in expenses was partially offset by the addition of an International
Marketing Manager. For the nine months the third quarter reduction was offset by
higher selling expenses resulting from the addition of new sales representatives
that were on staff during the first quarter of the current fiscal year.
Research and development expenses increased $30,423 (13.2%) and $136,585
(20.9%), respectively, for the three and nine months ended May 31, 1996 as
compared to the same periods last year. The increase is primarily attributed to
an increase in personnel and purchases of materials used for new product
development.
Interest expense increased primarily as a result of the increased
borrowings from the T-Partnership.
The net loss for the three months ended May 31, 1996 was $313,226 or $.05
per share as compared to a net loss of $369,703 or $.06 per share for the three
months ended May 31, 1995.
The net loss for the nine months ended May 31, 1996 was $581,795 or $.09
per share as compared to a net loss of $768,657 or $.13 per share for the nine
months ended May 31, 1995.
Liquidity and Capital Resources
Working capital decreased $212,810 to $2,292,607 from August 31, 1995 to
May 31, 1996. The current ratio was 3.0 to 1 at May 31, 1996 as compared to 3.2
to 1 at August 31, 1995. Net cash used in operating activities was $654,244 for
the nine months ended May 31, 1996 as compared to $886,912 for the same nine
months for fiscal year 1995. This decrease is primarily attributed to the
reduction in the company's losses. During the first nine months, the Company was
able to satisfy its cash shortfall from borrowings from the T-Partnership and
cash on hand and cash generated from operations. During the third quarter of
fiscal year 1996, the Company generated $9,144 from operating activities. This
is attributed primarily to the decrease in receivables of $330,242 during the
quarter, as a result of the higher second quarter sales which the Company
collected during the third quarter.
On August 31, 1995, the Company entered into an agreement with the T-
Partnership to borrow an additional $500,000 and combine such loan with the
original $1,000,000 for a total loan due to the T-Partnership of $1,500,000. As
of November 30, 1995, the Company had borrowed all of the $500,000. The rate of
interest is 12% per annum and is payable monthly on any outstanding balance.
Principal payments of $20,000 were scheduled to commence on September 1, 1995
for the original $1,000,000. However, the new agreement provides for repayment
to begin on September 1, 1996 with installments of $25,000 each month. Any
remaining balance is due on August 1, 2001. The loan is secured by the Company's
property, building, accounts receivable, inventories and machinery and
equipment. The Company must prepay the outstanding balance in the event the
Company is merged into or consolidated with another corporation or the Company
sells all or substantially all of its assets. Ervin Schoenblum, the Company's
Acting President and director and another member of the Company's Board of
Directors are members of the T-Partnership.
6
Under the provisions of the original agreement, the T-Partnership was
granted purchase warrants which permitted the T-Partnership to purchase 166,667
shares of the Company's common stock at a price of $3.25 per share. The new
agreement states that the T-Partnership will surrender its original purchase
warrant to purchase 166,667 shares of common stock and be granted a new purchase
warrant to purchase 500,000 shares of the Company's common stock at a price of
$0.9875 per share. The warrants are immediately exercisable.
The Company and the T-Partnership, to whom the Company has had an
indebtedness of $1,500,000, agreed in January 1996 to a restructuring of their
financing agreement. The T-Partnership has advanced an additional $200,000 to
the Company and has agreed to defer all interest payments due from the Company
for a period of three months (interest payments to be added to outstanding
principal on the T-Partnership indebtedness). The assets of the Company are to
secure these new advances and are to continue to secure preexisting indebtedness
due from the Company to the T- Partnership. In exchange for these advances, the
Company has agreed that if it is not in compliance with certain financial
covenants, to be tested on a monthly basis, the T-Partnership may declare an
Event of Default and accelerate repayment of the indebtedness. The Company is
currently in compliance with this covenant. The T-Partnership indebtedness
otherwise is to be repaid in equal monthly payments from September 1, 1996
through August 1, 2001.
In June 1996, the Company received an advance of $300,000 from an unrelated
party to perform research and development and pre-production planning for them.
The Company's ability to continue in business is dependent upon its ability
to generate sufficient cash flow from operations or to obtain additional
financing. The Company continues to re-evaluate its plans and adopt certain
revenue enhancement and cost reduction measures. In December 1995, the Company
reduced its manufacturing staff as a result of lower than anticipated product
demand. The Company is also attempting to increase sales by examining and, where
appropriate, modifying its distribution network, utilizing aggressive pricing
and introducing new products to market.
7
Inflation did not have a material impact on the results of the Company's
operations for the nine months ended May 31, 1996.
Exhibits and Reports on Form 8-K
Exhibits
None.
Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
Date: July 15, 1996 /S/Ervin Schoenblum
Ervin Schoenblum
Acting President
Date: July 15, 1996 /S/Joseph P. Macaluso
Joseph P. Macaluso
Chief Financial Officer
8