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
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
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
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 April 6, 1998, the number of shares outstanding of the Registrant's
common stock was 6,390,389 shares, $.10 par value.
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
February 28, 1998 and August 31, 1997 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended February 28, 1998
and February 28, 1997 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended February 28, 1998 and
February 28, 1997 3
Notes to Condensed Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 7 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
Index to Exhibits 11
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
February 28, August 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ - $ 98,127
Accounts receivable, net 854,902 988,859
Inventories
Finished goods 329,770 481,660
Work-in-process 845,105 490,621
Materials and supplies 282,536 270,086
-------- ---------
Total inventories 1,457,411 1,242,367
Prepaid expenses and
other current assets 60,196 168,781
----------- ----------
Total current assets 2,372,509 2,498,134
Property, plant and equipment, net 715,251 777,663
Other assets, net 93,836 97,275
----------- ---------
Total assets 3,181,596 3,373,072
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership 150,000 -
Current installments of capitalized lease
obligations 63,672 50,734
Accounts payable and accrued expenses 1,207,390 1,045,406
Accrued litigation expenses 389,354 443,820
--------- -------
Total current liabilities 1,810,416 1,539,960
Subordinated debentures due to
T Partnership, excluding current installments 1,897,125 1,747,125
Capitalized lease obligation, excluding
current installments 236,603 222,277
--------- ---------
Total liabilities 3,944,144 3,509,362
--------- ---------
Stockholders' deficiency:
Common stock 639,039 638,361
Additional paid-in capital 10,683,491 10,682,008
Accumulated deficit (12,085,078) (11,456,659)
---------- ----------
Total stockholders' deficiency (762,548) (136,290)
------------- --------
Total liabilities and stockholders' deficiency $ 3,181,596 $ 3,373,072
========= =========
See accompanying notes to condensed financial statements.
1
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
------------- --------------- ------------- ---------------
Net revenues $ 1,314,696 $ 1,741,555 $ 2,650,009 $ 3,419,305
Cost of goods sold 852,213 961,136 1,717,059 1,776,131
---------- ------- --------- ---------
Gross profit 462,483 780,419 932,950 1,643,174
Operating expenses:
Selling, general and administrative 590,417 604,982 1,116,467 1,198,815
Research and development 134,472 235,214 297,490 447,781
------- ------- ------- -------
Operating loss (262,406) (59,777) (481,007) (3,422)
Other expenses:
Interest expense (74,556) (60,789) (147,412) (115,489)
------ -------- --------- ---------
Net loss $ (336,962) $ (120,566) $ (628,419) $ (118,911)
======== ======== ======== ========
Basic and diluted
net loss per share $(0.05) $ (0.02) $ (0.10) $ (0.02)
====== ======== ======== =======
Dividends per share None None None None
Weighted average shares outstanding 6,387,000 6,378,661 6,385,548 6,377,247
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
February 28, February 28,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (628,419) $ (118,911)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 64,497 70,026
Amortization 4,167 4,167
Changes in assets and liabilities:
Decrease in accounts receivable, net 133,957 92,834
(Increase) decrease in inventories (215,044) 188,487
Decrease (increase) in prepaid expenses and
other current assets 108,585 (205,385)
(Increase) decrease in other assets (728) 10,107
Decrease in deferred revenues - (144,293)
Increase (decrease) in accounts
payable and accrued expenses 156,668 93,387
------- ------
Net cash used in operating activities $ (376,317) (9,581)
------- -------
Cash flows from investing activities:
Cash purchases of property, plant and
equipment (2,085) (59,824)
------ -------
Cash flows from financing activities:
Stock purchase plan 2,161 3,682
Proceeds from loan from T Partnership 300,000 -
Reductions of debt and capitalized lease
obligations (21,886) (110,777)
------- --------
Net cash provided (used in) by financing activities 280,275 (107,095)
------- --------
Net decrease in cash (98,127) (176,500)
Cash at beginning of period 98,127 275,283
------ -------
Cash at end of period $ -0- $ 98,783
========= ======
Interest paid $ 144,413 $ 112,321
Property, plant and equipment acquired under
capitalized lease obligations $ 49,150 $ 196,125
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 February 28, 1998, the results of operations
for the three and six months ended February 28, 1998 and February 28, 1997 and
statements of cash flows for the six months ended February 28, 1998 and February
28, 1997, 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, 1997.
Note 2 Subordinated Debentures
- ------ -----------------------
In September 1997, in December 1997, and in January 1998, the Company
borrowed additional amounts from the T Partnership, in each case in the amount
of $100,000, under substantially the same terms and conditions as its previous
borrowings, without issuing any additional warrants. Under the current
arrangement, the Company is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by the Company with such covenant
would allow the T Partnership to declare an event of default and accelerate
repayment of indebtedness. The Company is currently in compliance with the
covenant. The total indebtedness due to the T Partnership at February 28, 1998
was $2,047,125.
Note 3 Commitments and Contingencies
- ------ -----------------------------
FDA Warning Letter
- ------------------
The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration ("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 1997, 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, 1997 the FDA
issued a Warning Letter to the Company requesting that prompt action be taken to
correct these violations.
In response to the observations and the Warning Letter, Electro-Catheter
Corporation provided the FDA with a plan and timetable for instituting
corrective actions. The Company continues to work diligently to correct these
violations. A subsequent FDA inspection in September indicated that while
substantial
4
progress had been made towards correcting the violations, not all corrective
actions had been completed. The FDA then issued a report noting that no
additional violations of cGMP were discovered and listing those previous
violations in the process of being corrected. At this time, the Company is
unable to precisely determine the short-term economic impact of its continuing
corrective actions.
Litigation
- ----------
In September 1997, a Superior Court jury in Middlesex County found the
Company liable for age discrimination in connection with its termination of an
employee in April 1994. The jury awarded the terminated employee $283,000 plus
attorney's fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997.
Pending the Company's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied the Company's bank accounts, thereby
freezing the available funds. Notwithstanding management's belief that the
Company had arguments supporting its appeal, management weighed the considerable
cash requirements of an appeal bond, the costs of continued efforts relative to
the appeal, and the need to vacate the levies to satisfy the Company's immediate
cash requirements against the likelihood of prevailing on its appeal and the
terms of a possible settlement, and on April 8, 1998, the Company entered into a
Settlement Agreement with the plaintiff. Under the key term of the Settlement
Agreement, the matter is deemed settled for the sum of $305,000 payable by a
lump sum payment of $65,000 within five business days of the date of the
Settlement Agreement with the balance, bearing interest at the rate of 6% per
annum, payable in monthly installments of $10,000, plus interest, commencing
July 1, 1998. A default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest.
Merger
- ------
On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., ("CCS") a Delaware corporation located in Palm
Coast, Florida, to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Currently, the structure of the transaction contemplates the merger of a
newly-created, wholly-owned subsidiary of CCS into and with the Company as a
result of which the Company shall become a wholly-owned subsidiary of CCS. The
transaction further contemplates an exchange of common stock of the two
companies, with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10 par value
per share. This exchange ratio is currently being reassessed. Upon closing of
the transaction, $1 million of the Company's senior debt is intended to be
converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the transaction by the shareholders of Electro-Catheter Corporation;
(iv) the receipt of all required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
5
During the past few months, the Company has also had discussions regarding
acquisition by another firm based outside the United States. The Company's Board
of Directors recently terminated these discussions, believing that the terms
proposed were not in the best interest of the shareholders.
Note 4 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1998
presentation.
Note 5 Earnings Per Share
- ------ ------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS
128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share
and specifies the computation, presentation and disclosure requirements for
earnings per share for entities with publicly held common stock. SFAS 128 is
effective for financial statements relating to both interim and annual periods
ending after December 15, 1997.
Basic loss per share is based on net loss for the relevant period, divided
by the weighted average number of common shares outstanding during the period.
Diluted loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Common share equivalents, such as outstanding stock options, are not included in
the calculation since the effect would be antidilutive.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- -----------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
Results of Operations
- ---------------------
On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., ("CCS") a Delaware corporation located in Palm
Coast, Florida, to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Currently, the structure of the transaction contemplates the merger of a
newly-created, wholly-owned subsidiary of CCS into and with the Company as a
result of which the Company shall become a wholly-owned subsidiary of CCS. The
transaction further contemplates an exchange of common stock of the two
companies, with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10 par value
per share. This exchange ratio is currently being reassessed. Upon closing of
the transaction, $1 million of the Company's senior debt is intended to be
converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the transaction by the shareholders of Electro-Catheter Corporation;
(iv) the receipt of all required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
During the past few months, the Company has also had discussions regarding
acquisition by another firm based outside the United States. The Company's Board
of Directors recently terminated these discussions, believing that the terms
proposed were not in the best interest of the shareholders.
Net revenues declined $426,859 (24.5%) and $769,296 (22.5%), respectively,
for the three and six months ended February 28, 1998 as compared to the same
three and six months ended February 28, 1997. Product sales declined $270,408
(18.0%) and $502,448 (17.0%), respectively, for the three and six months ended
February 28, 1998. Contract research and development revenues declined $159,471
(100%) and $303,764 (100%), respectively, for the three and six months ended
February 28, 1998. Licensing fees declined $67,665 (100%) and $45,811 (46.0%),
respectively, for the three and six months ended February 28, 1998. These
decreases were partially offset by an increase in sales to an original equipment
manufacturing ("OEM") customer in the amounts of $70,685 (440.3%) and $82,727
(149.9%), respectively, for the three and six months ended February 28, 1998.
Domestic sales decreased $132,398 (12.8%) and $279,668 (13.6%),
respectively, for the three and six months ended February 28, 1998 as compared
to the same periods in the prior fiscal year. This decrease is attributed to the
Company not having an approved electrophysiology ablation catheter, lack of new
products, a continued decline in demand for the Company's older products in
pacing and monitoring, backorders, as well as the impact of not replacing sales
representatives who have left the Company. International sales decreased
$138,010 (29.6%) and $222,780 (24.5%), respectively, for the three and six
months ended February 28, 1998 as compared to the same periods last year. The
decline in international revenues is attributed to the lack of new products,
lower demand for the Company's electrophysiology products, product redesign
problems, pricing pressure due to competition and backorders.
7
Gross profit dollars decreased $317,936 (40.7%) and $710,224 (43.2%),
respectively, for the three and six months ended February 28, 1998 as compared
to the three and six months ended February 28, 1997. This decrease is primarily
attributed to lower volume in addition to write-off of certain inventories which
were scrapped for sterilization samples, evaluation and testing failures and
increased costs associated with regulatory compliance.
Selling, general and administrative expenses decreased $14,565 (2.4%) and
$82,348 (6.9%), respectively, for the three and six month periods ended February
28, 1998 as compared to the same periods last year. These decreases primarily
reflect lower domestic and international selling expenses, substantially
attributable to the loss of sales personnel that have not been replaced, and to
cutbacks in international sales and marketing activities. This decrease was
partially offset by expenses associated with the contemplated merger with
Cardiac Control Systems, Inc.
Research and development expenses decreased $100,742 (42.8%) and $150,291
(33.6%), respectively, for the three and six months ended February 28, 1998 as
compared to the same periods last year. This decrease reflects the cutback in
engineering activities. In the prior fiscal year, costs associated with contract
research and development activities were charged to cost of revenues. There were
no contract research and development activities during the six month period
ended February 28, 1998.
Interest expense increased as a result of increased borrowings from the T
Parnership as well as interest paid on capitalized lease obligations.
By June 14, 1998, the Company is required to have the CE mark on its
products to continue to ship into the member nations in the European Economic
Community. The CE mark is a certification designation issued by the
International Organization for Standardization (ISO). Sales to these countries
were approximately 17% of total revenues for the six months ended February 28,
1998. Inventories of products without the CE mark within the European Economic
Community as of June 14, 1998, can continue to be sold for several years. The
Company currently does not have the CE mark on any of its products. The Company
continues to explore measures available to it in order to be able to continue
selling its key products in these countries. However, there can be no assurance
that the Company will succeed in doing so without a lapse in sales of some or
all of its products.
Liquidity and Capital Resources
- -------------------------------
At February 28, 1998, working capital decreased $396,081 to $562,093 from
August 31, 1997. The current ratio was at 1.3 to 1 at February 28, 1998 as
compared to 1.6 to 1 at August 31, 1997. Net cash used in operating activities
was $376,317 for the six months ended February 28, 1998 as compared to $9,581
for the six months ended February 28, 1997. This increase in cash required for
operations is a result of the increase in the Company's losses and a higher
inventory level offset partially by an increase in accounts payable and accrued
expenses and a decline in accounts receivable and other current assets. The
Company has been able to satisfy its obligations with borrowings from the T
Partnership, cash on hand and extending its accounts payable.
In September 1997, a Superior Court jury in Middlesex County found the
Company liable for age discrimination in connection with its termination of an
employee in April 1994. The jury awarded the terminated employee $283,000 plus
attorney's fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997.
Pending the Company's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied on the Company's bank accounts,
thereby freezing the funds. Notwithstanding management's belief that the Company
had arguments supporting its appeal, management weighed the considerable cash
8
requirements of an appeal bond, the costs of continued efforts relative to
the appeal, and the need to vacate the levies to satisfy the Company's immediate
cash requirements against the likelihood of prevailing on its appeal and the
terms of a possible settlement, and on April 8, 1998, the Company entered into a
Settlement Agreement with the plaintiff. Under the key term of the Settlement
Agreement, the matter is deemed settled for the sum of $305,000 payable by a
lump sum payment of $65,000 within five business days of the date of the
Settlement Agreement with the balance, bearing interest at the rate of 6% per
annum, payable in monthly installments of $10,000, plus interest, commencing
July 1, 1998. A default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest.
The Company's ability to continue with its plans is contingent upon its
ability to either obtain sufficient cash flow from operations, obtain additional
financing, or consummate a combination with another company. The Company has had
difficulty in paying its obligations and, as a result, has delayed payments to
some vendors. The Company continues to evaluate its plans to obtain funds.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the transaction by the shareholders of Electro-Catheter Corporation;
(iv) the receipt of all required regulatory approvals by the two companies.
Management believes that this merger can offer benefits to both companies
by taking advantage of economies of scale and elimination of redundant efforts.
However, there can be no assurance that the merger will be consummated or that
the Company will be able to generate the funding required.
Inflation did not have a material impact on the results of the Company's
operations for the six months ended February 28, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
In September 1997, a Superior Court jury in Middlesex County found the
Company liable for age discrimination in connection with its termination of an
employee in April 1994. The jury awarded the terminated employee $283,000 plus
attorney's fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997.
Pending the Company's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied on the Company's bank accounts,
thereby freezing the funds. Notwithstanding management's belief that the Company
had arguments supporting its appeal, management weighed the considerable cash
requirements of an appeal bond, the costs of continued efforts relative to the
appeal, and the need to vacate the levies to satisfy the Company's immediate
cash requirements against the likelihood of prevailing on its appeal and the
terms of a possible settlement, and on April 8, 1998, the Company entered into a
Settlement Agreement with the plaintiff. Under the key term of the Settlement
Agreement, the matter is deemed settled for the sum of $305,000 payable by a
lump sum payment of $65,000 within five business days of the date of the
Settlement Agreement with the balance, bearing interest at the rate of 6% per
annum, payable in monthly installments of $10,000, plus interest, commencing
July 1, 1998. A default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest.
9
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(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) The Company filed a Current Report on Form 8-K dated
January 20, 1998, which reported under "Item 5. Other
Events" that the Company had entered into a definitive
merger agreement with Cardiac Control Systems, Inc.
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
/s/Ervin Schoenblum
Date April 14, 1998 Ervin Schoenblum
----------------
Acting President & Chief Operating Officer
/s/Joseph P. Macaluso
Date April 14, 1998 Joseph P. Macaluso
------------------
Chief Financial Officer
10
INDEX TO EXHIBITS
27 - Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
11