UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
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: 732-382-5600
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 the issuer's common stock, as
of the latest practical date:
As of July 7, 1997, the number of shares outstanding of the Registrant's
common stock was 6,383,611 shares, $.10 par value
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
May 31, 1997 and August 31, 1996 1
Condensed Comparative Statements of Operations -
Three and Nine Months Ended May 31, 1997
and May 31, 1996 2
Condensed Comparative Statements of Cash Flows -
Nine Months Ended May 31, 1997 and
May 31, 1996 3
Notes to Condensed Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 9
INDEX TO EXHIBITS 10
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (unaudited)
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ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
May 31, 1997 and August 31, 1996
(Unaudited) (Audited)
May 31, August 31,
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 89,212 275,283
Accounts receivable, net 1,147,268 1,016,201
Inventories
Finished goods 708,618 954,997
Work-in-process 415,181 490,396
Materials and supplies 344,988 416,786
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Total inventories 1,468,787 1,862,179
Prepaid expenses and
other current assets 238,986 64,344
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Total current assets 2,944,253 3,218,007
Property, plant and equipment, net 706,921 551,698
Other assets, net 103,052 123,407
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Total assets 3,754,226 3,893,112
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership 300,000 300,000
Current installments of capitalized
lease obligations 39,389 7,489
Deferred revenues - 144,293
Accounts payable and accrued expenses 905,042 741,479
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Total current liabilities 1,244,431 1,193,261
Subordinated debentures due to T Partnership,
excluding current installments 1,447,125 1,447,125
Capitalized lease obligation, excluding
current installments 182,597 37,756
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Total liabilities 2,874,153 2,678,142
Stockholders' equity:
Common stock 638,361 637,371
Additional paid-in capital 10,682,008 10,679,316
Accumulated deficit (10,440,296) (10,101,717)
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Total stockholders' equity 880,073 1,214,970
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Total liabilities and stockholders' equity $ 3,754,226 $ 3,893,112
========= =========
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,
1997 1996 1997 1996
Net revenues $ 1,718,954 $ 1,702,137 $ 5,138,259 $ 5,481,822
Cost of goods sold 1,082,277 928,468 2,858,408 2,817,753
--------- ----------- --------- ---------
Gross profit 636,677 773,669 2,279,851 2,664,069
Operating expenses:
Selling, general and administrative 561,074 769,943 1,759,889 2,304,435
Research and development 225,198 261,419 672,979 790,768
------- ------- ------- ----------
Operating loss (149,595) (257,693) (153,017) (431,134)
Other income (expenses):
Interest income - - - 86
Interest expense (70,073) (55,533) (185,562) (150,747)
------- ------- -------- --------
Net loss $ (219,668) $ (313,226) $ (338,579) $ (581,795)
========= ======== ======== =======
Net loss per common share $ (0.03) $ (0.05) $ (0.05) $ (0.09)
===== ==== ===== ====
Dividends per share None None None None
Weighted average shares outstanding 6,383,611 6,350,211 6,378,661 6,347,624
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31,
1997 1996
---- ----
Increase (decrease) in cash: Cash flows from operating activities:
Net loss $ (338,579) (581,795)
Adjustments:
Depreciation 107,658 95,121
Amortization of deferred charges 6,250 6,250
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (131,067) 155,687
Decrease (increase) in inventories 393,392 (102,135)
Increase in prepaid expenses and
other current assets (174,642) (20,571)
Decrease in other assets 14,105 6,910
Decrease in deferred revenues (144,293) -
(Decrease) increase in accounts payable
and accrued expenses 163,563 (213,711)
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Net cash used in operating activities (103,613) (654,244)
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Cash flows from investing activities:
Cash purchases of property, plant and equipment (66,756) (18,155)
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Net cash used in investing activities (66,756) (18,155)
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Cash flows from financing activities:
Proceeds from Stock Purchase Plan 3,682 1,066
Proceeds from loan and issuance
of warrants to T Partnership 100,000 500,000
Reductions of debt and capitalized lease
obligations (119,384) (14,508)
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Net cash (used in) provided by financing activities (15,702) 486,558
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Net decrease in cash (186,071) (185,841)
Cash at beginning of period 275,283 304,385
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Cash at end of period $ 89,212 118,544
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Non-cash investing and financial activities:
During the nine months ended May 31, 1997, capitalized lease obligations of
$196,125 were recognized when the Company entered into leases for equipment
See accompanying notes to condensed financial statements.
3
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
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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, 1997, the results of operations for
the three and nine months ended May 31, 1997 and May 31, 1996 and statements of
cash flows for the nine months ended May 31, 1997 and May 31, 1996, but are not
necessarily indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include disclosures normally
made in an Annual Report on Form 10-K. Accordingly, the financial statements
included herein should be reviewed in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1996.
Note 2 Other Current Assets
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Toward the end of the second quarter, certain of the Company's products
were damaged during the sterilization process as a result of a processing error
by the company that sterilizes the Company's product. The extent of the damage
and the amount recoverable under any claims against the outside sterilization
company are being investigated. The cost of these products is approximately
$165,000 and such cost is included in "other current assets" in the accompanying
balance sheet.
Note 3 Subordinated Debentures
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During April 1997, the Company borrowed an additional $100,000 from the T
Partnership under the same terms and conditions as its previous borrowing,
without issuing any additional warrants. Under the provisions of the agreement
with the T Partnership, the Company is obligated to comply with certain
financial covenants, to be tested on a monthly basis, the non-compliance with
which shall allow the T Partnership to declare an Event of Default and
accelerate repayment of indebtedness. As of May 31, 1997, the Company was not in
compliance with this financial covenant. However, on December 16, 1996, the T
Partnership agreed not to exercise its right to accelerate the repayment of
indebtedness through September 1, 1997 as a result of non-compliance with the
aforementioned financial covenant and the nonpayment of principal payments in
the 1997 fiscal year. The Company is in discussion with the T Partnership
regarding this non-compliance and the September 1, 1997 date.
4
Note 4 FDA Warning Letter
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The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration (the "FDA") of the United
States Department of Health and Human Services. Since the devices manufactured
by the Company are intended for "human use", as defined by the FDA, the Company
and said devices are subject to FDA regulations, which, among other things,
allow for the conduct of routine detailed inspections of device manufacturing
establishments and confirmation of adherence to "current good manufacturing
practices" ("CGMP") in the manufacture of medical devices.
In February, the FDA conducted an inspection and audit of Electro-Catheter
Corporation. At the conclusion of the audit, the FDA issued a number of
observations regarding violations of CGMP. On March 11, the FDA issued a Warning
Letter to the Company requesting that prompt action be taken to correct the
violations.
In response to the observations and the Warning Letter, Electro-Catheter
Corporation has provided the FDA with a plan and timetable for instituting
corrective actions. The Company is currently working diligently in its efforts
to correct these violations. At this time, the Company is unable to determine
the economic impact which will result from instituting the corrective actions.
Note 5 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1997
presentation.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
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AND FINANCIAL CONDITION
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Results of Operations
- ---------------------
During the past year, the Company has devoted most of its engineering
efforts to its contracted research and development customer and original
equipment manufacturing (OEM) business. This strategy has adversely affected
product sales, but the Company hopes that such strategy will yield more positive
results in the long-term as the Company emphasizes and continues to investigate
opportunities to capitalize on its catheter technology and manufacturing
capabilities. In May 1997, the agreement-in-principle to perform contracted
research and development work for a medical device company, which work commenced
in June 1996, was terminated at the request of the other company. The terms of
the agreement-in-principle called for the other company to pay Electro- Catheter
Corporation a monthly fee of $150,000 for a period of one year. A definitive
agreement was never executed. Electro-Catheter Corporation received $600,000 for
the work it had performed prior to termination and is scheduled to receive a
$100,000 termination fee as a result of this termination. For the three and nine
months ended May 31, 1997 revenues from this agreement were $240,529 (14.0% of
sales) and $544,293 (10.6% of sales), respectively. As a result of the
termination, the Company's revenues will be adversely affected in the short
term. The Company's OEM business is expected to partially offset the lost
revenues resulting from the termination.
Net revenues declined $343,563 (6.3%) for the nine months ended May 31,
1997 as compared to the nine month period ended May 31, 1996. Product sales
decreased $949,604 (17.7%) for the nine month period in addition to a decline in
sales from an OEM customer of $40,400. These declines were partially offset by
contracted research and development revenues of $544,293, including the $100,000
termination fee, and $102,148 from licensing certain of the Company's
technology.
For the three months ended May 31, 1997 net revenues increased $16,817
(1.0%) as compared to the three months ended May 31, 1996. Contracted research
and development revenues of $240,529, including a $100,000 termination fee, were
mostly offset by a decline in product sales of $207,638 (12.5%) for the three
month period.
Direct domestic sales decreased $237,041 (19.2%) and $612,401 (16.8%),
respectively, for the three and nine months ended May 31, 1997 as compared to
the same periods last year. These decreases are primarily due to the Company's
not having an approved electrophysiology ablation catheter, dearth of new
products as the Company has focused its attention on the contracted research and
development and OEM business, a continued decline in demand for the Company's
older products as well as the impact of not replacing sales representatives who
have left the Company. International sales increased for the three months ended
May 31, 1997 $29,495 (7.0%), but declined for the nine month period $359,273
(20.9%). For the nine months ended May 31, 1997, the decline in international
sales is attributed to lower demand for the Company's electrophysiology
products, unavailability of certain products and the dearth of new products as
the Company has focused its attention on the contracted research and development
and OEM business. The increase in international sales for the third quarter is
due to low sales in the third quarter of the prior fiscal year as a result of
the timing of orders from distributors.
6
Gross profit dollars decreased $136,992 (17.7%) and $384,218 (14.4%),
respectively, for the three and nine months ended May 31, 1997 as compared to
the same periods last year. This decrease is primarily attributed to decreased
production levels as well as increased inventory write-offs. The gross profit
percentage for the three months ended May 31, 1997 was 37.0% as compared to
45.5% for the same period last year. The gross profit percentage for the nine
months ended May 31, 1997 was 44.4% as compared to 48.6% for the same period
last year. In October 1996, the Company reduced its manufacturing force as a
result of the decreased demand. This decrease in production continues to
negatively impact gross profit.
Selling, general and administrative expenses decreased $208,869 (27.1%) and
$544,546 (23.6%), respectively, for the three and nine months ended May 31, 1997
as compared to the three and nine months ended May 31, 1996. These decreases
primarily reflect lower domestic marketing and selling expenses as a result of
the loss of field sales personnel that have not yet been replaced.
Research and development expenses decreased $36,221 (13.9%) and $117,789
(14.9%) for the three and nine months ended May 31, 1997 as compared to the same
period last year. The decrease is primarily attributed to the transfer of
expenses to cost of goods sold associated with contracted research and
development activities as well as lower material purchases. These decreases were
partially offset by higher expenses for new personnel.
Interest expense increased primarily as a result of the increased
borrowings from the T Partnership and interest costs associated with the
financing of new capital equipment.
The net loss for the three months ended May 31, 1997 was $219,668 or $0.03
per share as compared to a net loss of $313,226 or $0.05 per share for the three
months ended May 31, 1996.
The net loss for the nine months ended May 31, 1997 was $338,579 or $0.05
per share as compared to a net loss of $581,795 or $0.09 per share for the nine
months ended May 31, 1996.
Liquidity and Capital Resources
- -------------------------------
At May 31, 1997 working capital decreased $324,924 to $1,699,822 from
August 31, 1996. The current ratio was 2.4 to 1 at May 31, 1997 as compared to
2.7 to 1 at August 31, 1996. Net cash used in operating activities was $103,613
for the nine months ended May 31, 1997 as compared to $654,244 used in operating
activities for the nine months ended May 31, 1996. This improvement is primarily
attributed to the reduction in the company's losses for the nine month period,
the decrease in inventories and increase in accounts payable offset by increases
in accounts receivable and prepaid expenses and other current assets and a
decrease in deferred revenues. The Company was able to satisfy its cash
requirements from funds received for contracted research and development work,
an additional loan of $100,000 from the T Partnership, cost saving measures,
especially in the sales and marketing area where sales personnel that left the
Company had not been replaced, and cash on hand.
The Company's ability to continue with its plans is contingent upon its
ability to obtain sufficient cash flow from operations or to obtain additional
financing from external sources. The Company continues to evaluate its plans and
adopt certain cost-saving measures, when appropriate. However, there can be no
assurance that the Company will be able to generate the funding required.
On August 31, 1995, the Company entered into an agreement with the T
Partnership to borrow an additional $500,000 ("Lending Agreement"). In January
1996, the Company and the T Partnership agreed to a restructuring of its
financing agreement. The T Partnership advanced an additional $200,000 to the
Company and agreed to defer interest payments for a period of three months
(interest payments were added to the outstanding principal on the T-Partnership
indebtedness). The total indebtedness due to the T Partnership at May 31, 1997
was $1,747,125.
The rate of interest on the debt is 12% per annum and is payable monthly on
any outstanding balance. Principal payments of $25,000 began on September 1,
1996. 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 is to 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.
7
During April 1997, the Company borrowed an additional $100,000 from the T
Partnership under the same terms and conditions as its previous borrowing,
without issuing any additional warrants. Under the provisions of the agreement
with the T Partnership, the Company is obligated to comply with certain
financial covenants, to be tested on a monthly basis, the non-compliance with
which shall allow the T Partnership to declare an Event of Default and
accelerate repayment of indebtedness. As of May 31, 1997, the Company was not in
compliance with this financial covenant. However, on December 16, 1996, the T
Partnership agreed not to exercise its right to accelerate the repayment of
indebtedness through September 1, 1997 as a result of non-compliance with the
aforementioned financial covenant and the nonpayment of principal payments in
the 1997 fiscal year. The Company is in discussion with the T Partnership
regarding this non-compliance and the September 1, 1997 date.
In June 1996, the Company received an advance of $300,000 from an unrelated
medical device company to perform contracted research and development and
pre-production. In September 1996, the Company reached a verbal
agreement-in-principle with this company to perform research and development and
production for a period of one year for a monthly fee of $150,000. In May 1997,
the agreement-in-principle to perform research and development work for this
medical device company was terminated at the request of the other company. The
Company received a total of $600,000 for the work it had performed prior to
termination for the period from June 1996 to May 1997 and is scheduled to
receive a $100,000 termination fee as a result of this termination. In October
1996, the Company reached an agreement to license certain of its technology to
another medical device company that is in a market segment in which the Company
does not currently participate. This agreement is finalized. During the nine
months ended May 31, 1997, the Company received all of the $96,000 license fee
charged to this company as per the terms of this arrangement. This agreement
includes the opportunity to manufacture third party products which could
increase plant utilization. However, there can be no assurance that the Company
will receive the manufacturing rights to these products or be able to
manufacture these products. If manufacturing rights are not received, then
royalty payments are to be received based upon the customer's sales volume.
Inflation did not have a material impact on the results of the Company's
operations for the nine months ended May 31, 1997.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on June 12, 1997 (the
"Annual Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934;
(ii) there was no solicitation in opposition to management's nominees as listed
in the Company's proxy statement; and (iii) all of such nominees were elected.
(c) At the Annual Meeting, the Company's shareholders voted in favor
of management's nominees for election as directors of the Company as follows:
For Against
Donald W. Muntz 5,352,690 52,112
George M. Pavia, Esq. 5,372,257 32,445
Abraham H. Nechemie 5,372,257 32,445
Ervin Schoenblum 5,372,257 32,445
Total number of broker non-votes: 35,454 Total votes withheld or for which
no response was received: 990,164
(d) Not applicable.
8
Item 5. Other Information
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On March 3, 1997, the Company received a letter from The NASDAQ Stock
Market, Inc. ("NASDAQ") informing the Company that it no longer appears to meet
the bid price or, as an alternate, the book value requirements for continued
listing on The NASDAQ SmallCap Market and that such non-compliance with NASDAQ
requirements could subject the Company to delisting unless the Company can
demonstrate reasonable efforts to effect compliance. On June 4, 1997, the
Company responded to the concerns by NASDAQ and indicated certain intended
actions and anticipated events which could resolve such concerns. On July 2,
1997, NASDAQ notified the Company that its staff had completed reviewing the
Company's intentions and request for continued listing and that based upon that
review, the staff had determined to deny the Company's request.
The Company is entitled to an oral hearing of the delisting determination
made by NASDAQ's staff and has requested and been granted such a hearing forum.
Based upon conversations with NASDAQ staff, the Company believes that a hearing
will be scheduled not before the end of August. Until a final determination has
been made by NASDAQ, the proposed delisting will be stayed and the Company's
common stock will continue to be listed on the NASDAQ SmallCap Market.
Item 6. Exhibits and Reports on Form 8-K
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(a) The exhibits filed or incorporated by reference as part
of this Quarterly Report on Form 10-Q are listed in the
attached Index to Exhibits.
(b) During the quarter ended May 31, 1997, the Company did
not file any current Reports on Form 8-K. 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 11, 1997 /S/Ervin Schoenblum
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Ervin Schoenblum
Acting President
Date: July 11, 1997 /S/Joseph P. Macaluso
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Joseph P. Macaluso
Chief Financial Officer
9
INDEX TO EXHIBITS
27 Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
10