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 quarterly period ended May 31, 1998
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 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 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
May 31, 1998 and August 31, 1997 1
Condensed Comparative Statements of Operations -
Three and Nine Months Ended May 31, 1998
and May 31, 1997 2
Condensed Comparative Statements of Cash Flows -
Nine Months Ended May 31, 1998 and
May 31, 1997 3
Notes to Condensed Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
INDEX TO EXHIBITS 14
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
May 31, August 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ - $ 98,127
Accounts receivable, net 759,133 988,859
Inventories
Finished goods 447,388 481,660
Work-in-process 575,201 490,621
Materials and supplies 310,497 270,086
------- ---------
Total inventories 1,333,086 1,242,367
Prepaid expenses and
other current assets 64,885 168,781
---------- ----------
Total current assets 2,157,104 2,498,134
Property, plant and equipment, net 684,002 777,663
Other assets, net 276,238 97,275
------- ---------
Total assets 3,117,344 3,373,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership 225,000 -
Current installments of capitalized
lease obligations 65,629 50,734
Accounts payable and accrued expenses 1,382,143 1,045,406
Accrued litigation expenses 288,400 443,820
------- -------
Total current liabilities 1,961,172 1,539,960
Subordinated debentures due to T Partnership,
excluding current installments 1,922,125 1,747,125
Capitalized lease obligation, excluding
current installments 219,285 222,277
------- ---------
Total liabilities 4,102,582 3,509,362
--------- ---------
Stockholders' deficiency:
Common stock 639,039 638,361
Additional paid-in capital 10,683,491 10,682,008
Accumulated deficit (12,307,768) (11,456,659)
----------- ----------
Total stockholders' deficiency ( 985,238) (136,290)
------------- ---------
Total liabilities and stockholders' deficiency $ 3,117,344 $ 3,373,072
========= =========
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,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 1,502,537 $ 1,718,954 $ 4,152,546 $ 5,138,259
Cost of goods sold 1,119,482 1,082,277 2,836,541 2,858,408
--------- --------- --------- ---------
Gross profit 383,055 636,677 1,316,005 2,279,851
Operating expenses:
Selling, general and administrative 409,404 561,074 1,525,871 1,759,889
Research and development 118,734 225,198 416,224 672,979
------- ------- ------- -------
Operating loss (145,083) (149,595) (626,090) (153,017)
Other income (expense):
Interest expense (77,607) (70,073) (225,019) (185,562)
------ ------- -------- --------
Net loss $ (222,690) $ (219,668) $ (851,109) $ (338,579)
======== ========= ======== ========
Basic and diluted loss per share $ (0.03) $(0.03) $ (0.13) $ (0.05)
===== ==== ===== ====
Dividends per share None None None None
Weighted average shares outstanding 6,390,389 6,383,611 6,387,000 6,378,661
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31,
1998 1997
---- ----
Increase (decrease) in cash:
Cash flows from operating activities:
Net loss $ (851,109) $ (338,579)
Adjustments:
Depreciation 95,746 107,658
Amortization of deferred charges 6,250 6,250
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 229,726 (131,067)
(Increase) decrease in inventories (90,719) 393,392
Decrease (increase) in prepaid expenses and
other current assets 103,896 (174,642)
(Increase) decrease in other assets (185,213) 14,105
Decrease in deferred revenues - (144,293)
Increase in accounts payable and accrued expenses 230,467 163,563
------- -------
Net cash used in operating activities (460,956) (103,613)
------- -------
Cash flows from investing activities:
Cash purchases of property, plant and equipment (2,085) (66,756)
------- --------
Net cash used in investing activities (2,085) (66,756)
----- --------
Cash flows from financing activities:
Proceeds from Stock Purchase Plan 2,161 3,682
Proceeds from loan from T Partnership 400,000 100,000
Reductions of debt and capitalized lease
obligations (37,247) (119,384)
------ -------
Net cash (used in) provided by financing activities 364,914 (15,702)
------- --------
Net decrease in cash (98,127) (186,071)
Cash at beginning of period 98,127 275,283
------ -------
Cash at end of period $ -0- $ 89,212
=== ======
Interest paid $ 221,420 $ 185,5610
======= ==========
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 May 31, 1998, the results of operations for
the three and nine months ended May 31, 1998 and May 31, 1997 and statements of
cash flows for the nine months ended May 31, 1998 and May 31, 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 Other Assets
- ------ ------------
In connection with the proposed merger (see Note 4 to Notes to Condensed
Financial Statements), the Company has incurred $174,290 of expenses through May
31, 1998. These expenses are included in Other Assets in the accompanying
balance sheet at May 31, 1998. Consummation of the merger is subject to, among
other things, raising capital. Upon consummation of the merger, these costs will
either be charged to additional paid-in capital with equity financing, amortized
over the term of any debt or charged to operations if the merger does not occur.
Note 3 Subordinated Debentures
- ------ -----------------------
In September 1997, in December 1997, in January 1998, and in May 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 May 31, 1998 was
$2,147,125.
Note 4 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.
4
In February 1997, the FDA conducted an inspection and audit of the
Company's facilities and practices as a result of which the FDA issued a Warning
Letter regarding non-compliance by the Company with certain cGMPs in the
manufacture of its products. Electro-Catheter Corporation communicated with the
FDA its intentions to remedy the non-compliance, established a plan and
timetable to effectuate such remediation and has diligently worked to take the
necessary corrective actions. A subsequent FDA inspection in September 1997,
indicated that while substantial progress had been made, not all corrective
actions have been completed. The Company is continuing in its efforts to
complete such actions and it is Electro-Catheter Corporation's intention to
inform the FDA by late September 1998 that it has completed such actions and is
ready for reinspection. There can be no assurance, however, that the Company
will be ready for such reinspection in September 1998 nor that it will pass any
such reinspection when it occurs. While the Company is currently under no
restrictions by the FDA regarding the manufacture or sale of its products, the
Company is unable to precisely determine the short-term economic impact of
instituting the required corrective actions, and there can be no assurance that
the FDA will not take further action including seizure of products, injunction
and/or civil penalties, if the necessary corrective actions are not completed on
a timely basis. At this time, the Company is unable to precisely determine the
short-term adverse economic impact which will result from instituting the
corrective actions, but the voluntary discontinuation of manufacturing of
certain products and the delay in the sale of other products has adversely
affected sales by an estimated 10%.
Litigation
- ----------
In September 1997, a Superior Court jury in Middlesex County, New Jersey
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. The Company filed an appeal of
the judgment.
Pending the Company's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied on certain of 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
terms of the Settlement Agreement, the matter has been settled for the sum of
$305,000 payable as follows: (i) by a lump sum payment of $65,000 within five
business days of the date of the Settlement Agreement and (ii) the balance,
bearing interest at the rate of 6% per annum, payable in monthly installments of
$10,000, plus interest, commencing July 1, 1998. The Settlement Agreement
provides that 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 has made the
payments due to date on a timely basis.
Merger
- ------
On January 20, 1998, the Company entered into an Agreement and Plan of
Reorganization 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 and the stockholders of the Company will become
5
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware
corporation and parent holding company of CCS, to be formed as part of a
restructuring in connection with the merger. By virtue of the merger, each
outstanding share of common stock, $.10 par value, of the Company will be
converted into the right to receive one-fifth of a share of common stock $.10
par value of CTG. Pursuant to the restructuring, CTG will succeed to all rights
and obligations of CCS and will become the successor issuer of CCS such that
stockholders of CCS will become stockholders of CTG. Subsequent to the
restructuring, it is intended that CTG will undergo a 1 for 5 reverse stock
split reducing the number of shares of common stock, $.10 par value, of CTG (the
"CTG Common Stock") outstanding to approximately 529,748 shares. By virtue of
the merger, subsequent to the reverse stock split, each outstanding share of
common stock, $.10 par value, of the Company will be converted into the right to
receive one-fifth of a share of CTG Common Stock, effectively equal to an even
exchange of shares prior to such reverse stock split.
Upon closing of the transaction, $1,000,000 of the Company's senior debt is
intended to be redeemed by: (a) the issuance by the surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to the T Partnership of a CTG 9% conditional promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock, or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that CCS shall not be obligated to make aggregate payments
with respect to both the Series A Preferred Stock and conditional note, in
excess of $1.0 million plus interest); and (c) the delivery to the T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of The Company's secured
indebtedness to the T Partnership exclusive of the amount redeemed under (a)
above), bearing interest at the rate of 12% per annum payable quarterly, the
principal amount of which shall be due and payable three years from the date of
execution of such note (the terms of the security for the note have yet to be
agreed upon).
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 merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (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.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
International sales should be adversely affected in Europe (approximately
17% of total revenues) for about the next six months as the Company was not able
to obtain the "CE" Mark on its products on a timely basis, in order to continue
to sell into this market. The effort to obtain the "CE" Mark is continuing and
the Company is hopeful of obtaining this designation before the end of the
calendar year on its major products in order to continue selling into this
market. However, there can be no assurance that the Company will obtain the "CE"
Mark or maintain the same level of revenue upon receiving the "CE" Mark as it
did previously.
6
Note 5 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1998
presentation.
Note 6 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.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------------
General
- -------
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial condition and
results of operations during the periods included in the accompanying financial
statements.
Statements contained in and preceding management's discussion and analysis
include various forward-looking information that is based on data currently
available to management and management's beliefs and assumptions. When used in
this report, the words "anticipates," estimates," believes," "plans," and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Such statements are
subject to risks and uncertainties, and the Company's actual results may vary
materially from those anticipated, estimated or projected due to a number of
factors, including, without limitation, the competitive environment for the
Company's products and services, and other factors set forth in reports and
other documents filed by the Company with the Securities and Exchange Commission
from time to time.
Results of Operations
- ---------------------
On January 20, 1998, the Company entered into an Agreement and Plan of
Reorganization 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 and the stockholders of the Company will become
stockholders of Catheter Technology Group, Inc. ("CTG"), a Delaware corporation
and parent holding company of CCS, to be formed as part of a restructuring in
connection with the merger. By virtue of the merger, each outstanding share of
common stock, $.10 par value, of the Company will be converted into the right to
receive one-fifth of a share of common stock $.10 par value of CTG. Pursuant to
the restructuring, CTG will succeed to all rights and obligations of CCS and
will become the successor issuer of CCS such that stockholders of CCS will
become stockholders of CTG. Subsequent to the restructuring, it is intended that
CTG will undergo a 1 for 5 reverse stock split reducing the number of shares of
common stock, $.10 par value, of CTG (the "CTG Common Stock") outstanding to
approximately 529,748 shares. By virtue of the merger, subsequent to the reverse
stock split, each outstanding share of common stock, $.10 par value, of the
Company will be converted into the right to receive one-fifth of a share of CTG
Common Stock, effectively equal to an even exchange of shares prior to such
reverse stock split.
Upon closing of the transaction, $1,000,000 of the Company's senior debt is
intended to be redeemed by: (a) the issuance by the surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to the T Partnership of a CTG 9% conditional promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
8
a default in the herein below mentioned secured promissory note (any
payment or conversion of the Series A Preferred Stock shall be deemed a payment
on the conditional note, and any principal or interest payments on the
conditional note shall be deemed redemptions and payments under the Series A
Preferred Stock, with the result being that CCS shall not be obligated to make
aggregate payments with respect to both the Series A Preferred Stock and
conditional note, in excess of $1.0 million plus interest); and (c) the delivery
to the T Partnership of a secured promissory note made by CTG in an amount not
to exceed $1.3 million (which amount shall be the remaining amount of The
Company's secured indebtedness to the T Partnership exclusive of the amount
redeemed under (a) above), bearing interest at the rate of 12% per annum payable
quarterly, the principal amount of which shall be due and payable three years
from the date of execution of such note (the terms of the security for the note
have yet to be agreed upon).
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 merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (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.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
Net revenues declined $216,417 (12.6%) and $985,713 (19.2%), respectively,
for the three and nine months ended May 31, 1998 as compared to the three and
nine months ended May 31, 1997. Product revenues increased $31,210 (2.1%) for
the three months ended May 31, 1998 as compared to the same three month period
in the prior fiscal year. However, product revenues decreased $471,238 (10.7%)
for the nine months ended May 31, 1998 as compared to the same period in the
prior fiscal year. Contract research and development declined $240,529 (100%)
and $544,293 (100%), respectively, for the three and nine months ended May 31,
1998 as compared to the three and nine months ended May 31, 1997. Licensing fees
and royalty income increased $11,902 for the three months ended May 31, 1998 and
declined $33,309 for the nine month period. For the nine months ended May 31,
1998 sales to an original equipment manufacturing ("OEM") customer increased
$63,727, however, revenues from this customer declined $19,000 for the three
month period ended May 31, 1998.
Domestic sales decreased $74,266 (7.4%) and $353,934 (11.6%) for the three
and nine months ended May 31, 1998, respectively, as compared to the same
periods in the prior year. These decreases are primarily due 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
9
representatives who have left the Company. International revenues decreased
$117,304 (8.6%) for the first nine months of fiscal year 1998 as compared to the
first nine months of fiscal year 1997. The decline in international revenues for
the nine month period is attributed to the lack of new products, lower demand
for the Company's electrophysiology products, product redesign problems, lower
prices due to competition and backorders. For the three months ended May 31,
1998, international revenues increased $105,476 (23.5%) as compared to the three
months ended May 31, 1997. This increase is attributed to new business in
countries where the Company has had representation and the timing of orders from
distributors. This increasing trend is not expected to continue in the near
term. International sales should be adversely affected in Europe (approximately
17% of total revenues) for about the next six months as the Company was not able
to obtain the "CE" Mark on its products on a timely basis, in order to continue
to sell into this market. The effort to obtain the "CE" Mark is continuing and
the Company is hopeful of obtaining this designation before the end of the
calendar year on its major products in order to continue selling into this
market. However, there can be no assurance that the Company will obtain the "CE"
Mark or maintain the same level of revenue upon receiving the "CE" Mark as it
did previously.
The Company's insufficient financing has hampered its ability to introduce
new products to market and to correct the redesign issues, in order to maintain
sales at its prior levels.
Gross profit dollars decreased $253,622 (39.8%) and $963,846 (42.3%),
respectively, for the three and nine months ended May 31, 1998 as compared to
the three and nine months ended May 31, 1997. This decrease is primarily
attributed to decreased production levels related to the lower sales volume, in
addition to writeoffs of certain inventories which were scrapped for
sterilization samples, evaluation and testing failures and the increased cost
associated with regulatory compliance. The lower volume continues to negatively
impact gross profit.
Selling, general and administrative expenses decreased $151,670 (27.0%) and
$234,018 (13.3%), respectively, for the three and nine months ended May 31, 1998
as compared to the same periods last year. The three months ended May 31, 1998
includes an adjustment of $144,068 to reclassify expenses associated with the
merger to other assets (see Note 2 to Notes to the Condensed Financial
Statements). Excluding this adjustment, selling, general and administrative
expenses decreased only $35,602 (6.3%) for the three months ended May 31, 1998
as compared to the three months ended May 31, 1997. The decreases primarily
reflects lower domestic and international selling expenses substantially
attributable to the loss of field sales personnel that have not yet been
replaced and cutbacks in international activities.
Research and development expenses decreased $106,464 (47.3%) and $256,755
(38.2%), respectively, for the three and nine months ended May 31, 1998 as
compared to the same periods in the prior fiscal year. This decrease reflects
the lower level of R&D efforts. The decrease is primarily attributed to
decreased personnel and lower material, supply, consulting and recruiting
expenses. In the prior fiscal year, costs associated with billable research and
development activities were charged to cost of revenues. There were no contract
research and development activities during the nine months ended May 31, 1998.
Interest expense increased as a result of the increased borrowings from the
T Partnership and interest on capitalized lease obligations.
10
The Company is reviewing its computer programs and systems to ensure that
the programs and systems will function properly and be Year 2000 compliant. The
Company presently believes that the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. The estimated cost of
these efforts are not expected to be material to the Company's financial
position or any year's result of operations, although there can be no assurance
to this effect. In addition, the Year 2000 problem may impact other entities
with which the Company transacts business, and the Company cannot predict the
effect of the Year 2000 problem on such entities. The Company is contacting its
major vendors to ascertain if any potential problems exist.
Liquidity and Capital Resources
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At May 31, 1998, working capital decreased $762,242 to $195,932 from August
31, 1997. The current ratio was 1.1 to 1 at May 31, 1998 as compared to 1.6 to 1
at August 31, 1997. Net cash used in operating activities was $460,956 for the
nine months ended May 31, 1998 as compared to $103,613 used in operating
activities for the nine months ended May 31, 1997. This increase in cash
required for operations is primarily attributed to the increase in the Company's
losses for the nine month period, increase in other assets which is primarily
associated with the expenses in connection with the proposed merger, higher
inventories and increase in accounts payable offset by a decrease in accounts
receivable and other current assets. The Company was able to satisfy its cash
requirements with borrowings from the T Partnership, cost saving measures,
especially in the sales and marketing area, where sales personnel have not been
replaced, cash on hand and extending its accounts payable.
In September 1997, a Superior Court jury in Middlesex County, New Jersey,
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. The Company filed an appeal of
the judgement.
Pending the Company's appeal, the plaintiff, in an effort to execute upon
the judgment rendered in his favor, levied on certain of 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
terms of the Settlement Agreement, the matter has been settled for the sum of
$305,000 payable as follows: (i) by a lump sum payment of $65,000 within five
business days of the date of the Settlement Agreement and (ii) the balance,
bearing interest at the rate of 6% per annum, payable in monthly installments of
$10,000, plus interest, commencing July 1, 1998. The Settlement Agreement
provides that 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 has made the
payments due to date on a timely basis.
11
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 merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (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 nine months ended May 31, 1998.
12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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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, 1998 /S/Ervin Schoenblum
-------------------
Ervin Schoenblum
Acting President
Date: July 15, 1998 /S/Joseph P. Macaluso
---------------------
Joseph P. Macaluso
Chief Financial Officer
13
INDEX TO EXHIBITS
27 Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
14