UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended August 31, 1997
[ ] 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 its charter)
New Jersey 22-1733406
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2100 Felver Court, Rahway, New Jersey 07065
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number including Area Code: 732-382-5600
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act
common stock, $.10 par value
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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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K/A or any amendment to this Form 10-K/A. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and ask prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value as of November 18, 1997............$2,661,185
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date
common stock, $.10 par value
as of November 18, 1997............... 6,383,611
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with respect to its
1998 Annual Meeting of Stockholders are incorporated into Part III.
AMENDMENT NO. 1
The undersigned hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the fiscal year
ended August 31, 1997, as set forth in the pages attached hereto:
PART I
Item 1. Business
PART II
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART III
Item 12. Security Ownership of Certain Beneficial Owners
and Management
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
PART I
FORWARD LOOKING INFORMATION
Electro-Catheter Corporation ("Electro" or the "Company") desires to
provide investors with meaningful and useful information. As a result, this
Report contains certain statements which describe the Company's belief
concerning future business conditions and the outlook for the Company based on
currently available information. Many of the statements other than statements of
historical facts included in this report are forward-looking statements,
including, without limitation, those regarding the Company's future financial
position, business strategy, budgets, projected costs and plans and objectives
of management for future operations. Wherever possible, the Company has
identified these "forward-looking" statements (as defined in Section 21E of the
Securities Exchange Act of 1934) by words such as "anticipates," "believes,"
"estimates," "expects," and similar expressions. These forward-looking
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance and achievements to differ materially from
those expressed in, or implied by, these statements. These risks and
uncertainties include, but are not limited to, the following: the financial
strength of the industry, demand for the Company's products, the competitive
pricing environment within the industry and the Company's ability to develop,
market and sell new products. The Company assumes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 1. BUSINESS
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General
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Electro-Catheter Corporation is engaged in the business of design, development,
manufacture, marketing and sale of products utilized in connection with
illnesses of the heart and circulatory system and make use of catheters and
related products. The Company was incorporated in New Jersey in 1961. The
Company has targeted electrophysiology as its focal area for future growth, but
intends to maintain and develop products for the emergency care, invasive and
non-invasive cardiology and invasive radiology markets. The Company also
continues to explore opportunities to expand its Original Equipment
Manufacturing ("OEM") business and contract research and development business to
capitalize on its catheter technology expertise and its manufacturing
capabilities. Electro produces a wide range of catheter products intended to be
utilized by doctors and other trained hospital personnel for diagnostic as well
as therapeutic purposes.
The Company markets its cardiovascular catheters and other catheters worldwide.
Export sales were approximately $1,828,000 in fiscal year 1997, $2,324,000 in
fiscal year 1996 and $1,964,000 in 1995, representing approximately 27%, 32% and
27% of net sales in such fiscal years, respectively.
On October 23, 1997, the Company entered into a letter of intent with Cardiac
Control Systems, Inc., a Delaware corporation ("CCS"), to effect a merger (the
"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. It is intended that upon the closing of
the Merger, 50% of the Company's senior debt would be redeemed and the remaining
50% of such debt would be converted into convertible preferred stock of the
surviving subsidiary in the Merger.
1
Consummation of the Merger is subject, among other things, to: (i) the execution
of a definitive agreement reflecting the intentions of the parties; (ii) raising
sufficient capital to support the product development efforts of both companies;
(iii) the approval of the transaction by the Board of Directors of each company;
(iv) the approval of the transaction by the stockholders of the Company; and (v)
the receipt of all required regulatory approvals by each company.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which the management of the
Company believes are complementary to its own product lines. Management of
Electro believes that 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.
Products
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The Company produces a wide range of catheter products intended to be utilized
by doctors and other trained hospital personnel for diagnostic and therapeutic
purposes. Catheters are hollow tubes that can be passed through veins, arteries
and other anatomical passageways. The Company considers the market within which
it sells its present and proposed products as a single industry segment.
In over thirty-six years of business, Electro has sold well over two million
catheters. The current selling prices for the products marketed by the Company
typically range from thirty-five to five hundred dollars.
Electrophysiology Catheters. The field of cardiac electrophysiology ("EP") is
one of the most rapidly growing areas of medical technology. Cardiac
electrophysiology is the study of the electrical system of the heart. Cardiac
electrophysiologists are concerned with electrical disorders in the heart, their
etiology, diagnosis and treatment. The medical problems on which cardiac
electrophysiologists focus are conduction problems of the heart, which include
tachyarrhythmic episodes which can lead to sudden cardiac death. The development
of transcatheter diagnosis of the heart's conduction system and transcatheter
correction of certain conduction dysfunctions have increasingly attracted the
attention of cardiologists.
The Company's line of diagnostic EP catheters is comprised of three categories:
the Detector, the Investigator and the Cloverleaf, and each category has its
unique characteristics requested by physicians that desire different handling
features. In addition, Electro has a Genesis line of steerable EP catheters that
provides the physicians with a more sophisticated mapping tool for difficult
diagnostic procedures. These catheters are available in many curve and electrode
configurations.
The Company markets its Circuit Breaker steerable catheters with temperature
control for catheter ablation for international distribution only. These
catheters are compatible with most radiofrequency generators. Due to certain
development issues, clinical trials scheduled for 1997 were delayed. The Company
plans to begin clinical trials in the U.S. in 1998 in order to seek approval to
market these catheters domestically.
Monitoring and Pacing Catheters. The Company's line of monitoring catheters are
made of flexible radiopaque materials which are visible in use through
fluoroscopy. The catheters have a variety of tips, shapes and internal
configurations and can be manipulated by an experienced physician through the
anatomy to the desired location. Through the use of these catheters,
electrophysiological data, pressure and flow readings and blood samples may be
obtained. In addition, the Company's catheters may be utilized as conduits for
the injection of radiopaque materials into the bloodstream to permit
fluoroscopic observation of abnormalities in the vasculature.
Monitoring catheters are marketed under the following names: Baltherm(R) Flow
Directed Balloon Catheters, Pacewedge(R) Balloon Guided Catheters and
Balwedge(R) Catheters.
The Company's pacing catheters are fabricated from a number of materials and
frequently consist of an electrode-bearing tube. The tube is guided into the
body and the electrode is delivered through the venous system to the heart where
it is then used for pacing. This procedure involves the delivery to the heart
muscle, from a source outside the body, of an electrical stimulus causing
contractions like the natural heartbeat. Such pacing is necessary where there is
a conduction blockage in the heart causing the heart to beat at a slow or
irregular rate.
One of the pacing catheters manufactured by the Company is the Balectrode(R)
Bipolar Pacing Probe. With this product, both the amount of manipulation of the
catheter required to cause the stimulating electrode to be positioned in the
proper location within the heart and the time required from the commencement of
the procedure until it is completed, are substantially reduced over what would
result if a non-balloon catheter were used as the delivery system.
The pacing products usually are sold in kits containing the catheter, a
placement needle, connectors and various other devices. These kits are sold
under various names, including the following: Balectrode(R) Flow-Directed
Temporary Pacing Kit, Silicore(R) Semi-Floating Pacing Kit and Multipace.
Multi-Purpose Catheters. Multi-Purpose catheters have features or uses which,
under certain circumstances, result in the combination of pacing and monitoring
functions. Further, the Company manufactures certain electrode-bearing catheters
used to make electrical measurements within the heart and provide electrical
stimulation for both therapeutic and diagnostic purposes.
Drainage Catheters. Although the Company's principal activities have been in the
cardiovascular area, it currently is manufacturing and marketing the Elecath(R)
One Step(TM) Fluid Drainage System which is used for draining fluid collections
from various locations in the body. This system consists of a catheter, composed
of a unique formulation developed by the Company, mounted on a simple
penetration apparatus. In the opinion of the Company's management, the product
may be useful to a broad range of physicians, in addition to radiologists, and
the use thereof may result in more complete and safer drainage.
Sales, Marketing and Distribution Methods
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The Company markets, sells and distributes its products domestically through its
own sales force. At November 18, 1997 the Company employed 4 salespersons in the
field and a home office staff of marketing and sales support of 6 people. The
Company also employs an International Marketing Manager based in Europe on an
independent contractor basis. In previous years, the Company had one significant
distributor in the United States which was responsible for sales in all or part
of thirteen Eastern states plus the District of Columbia. This distributor
accounted for approximately 11% of net sales in fiscal year 1995. The Company
terminated its arrangement with this distributor on May 31, 1995 and the Company
now markets its products directly in this territory. As such, there were no
sales to this distributor in fiscal years 1997 and 1996. The principal customers
for the Company's products are hospitals whose purchasing decisions are
determined on the basis of assessment of the products by the physicians. No one
customer accounted for more than ten percent of the Company's net revenues for
fiscal years 1997 and 1996. International markets are serviced by a network of
independent distributors. Electro also sells its products to OEM customers,
performs contract research and development work for third parties and engages in
licensing of its technology to third parties.
While export sales have contributed significantly to Electro's net sales in
fiscal years 1997, 1996 and 1995, Electro has not effected substantial
penetration of the domestic electrophysiology market which is attributable, in
part, to its lack of an FDA-approved ablation catheter. Electro's focus on
engineering efforts in contract research and development and its OEM business
has also contributed to lower domestic sales together with lower demand for
older products in pacing and monitoring.
Advertising of the Company's products consists primarily of displays at medical
conventions and meetings, advertisements in medical journals and direct mail.
The Company also cooperates in the publication of technical papers written by
medical authorities in areas relating to the Company's products.
Product Warranties
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Electro's catheters are covered by a limited warranty, the duration of
which is tied to product expiration dates. Generally, however, the warranties
extend for five years. All warranties provide for replacement with a comparable
Electro product or issuance of a credit at Electro's discretion. Product returns
are not material to Electro's results of operations.
Certain Patents, Trademarks and Licenses
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Electro's policy is to protect its proprietary position by, among other
methods, filing United States and select foreign patent applications to protect
the technology that is important to the development of the business. Pursuant to
provisions adopted under the General Agreement on Tariffs and Trade, patents in
force on June 8, 1995, are entitled to a patent term of the longer of 17 years
from issuance or 20 years from the earliest filing date of the patent. Electro
currently holds six patents in the U.S. (one of which is owned jointly with
another party) and has one application pending. The last to expire of Electro's
patents will remain in effect until 2015. Electro has also obtained certain
patents in its principal overseas markets. The following are Electro's current
material patents:
United States Patents Description Date of Issue
- --------------------- ----------- -------------
4,699,157 Pacing Catheter and 10/13/87
Method for Making
Same
4,790,825 Closed Chest Cannulation 12/13/88
Method and Device for
Atrial Major Artery
5,190,050 Tip Deflectable 3/2/93
Steerable Catheter
5,358,479 Multiform Twistable Tip 10/25/94
Deflectable Catheter
5,571,085 Steerable Open Lumen 11/5/96
Catheter
5,718,701* Ablation Electrode 2/17/98
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*owned jointly with another party
Although Electro holds such patents, it believes that its business as a whole is
not or will not be materially dependent upon patent protection. However, Electro
will continue to seek such patents as it deems advisable to protect its research
and development efforts and to market its products. Electro believes that it is
not infringing on any other party's patent. However, there can be no assurance
that current and potential competitors will not file applications or apply for
patents or additional proprietary rights relating to materials or processes used
by Electro.
Electro develops new products as a result of its own analysis of the needs of
the market which it serves and as a result of needs perceived by physicians and
researchers who work with Electro on the design and development of the devices
and systems needed by them. In certain instances, Electro pays the cooperating
physician or researches a royalty based upon the revenues derived from the sales
of the product to others.
Electro also relies upon technical know-how and continuing technological
innovation to develop and maintain its position in the market and believes that
the success of its operations will depend largely upon such know-how and
innovation. Electro requires employees and consultants to execute appropriate
confidentiality agreements and assignments of inventions in connection with
their employment or consulting arrangement with Electro.
There can be no assurance that trade secrets will be established, that secrecy
obligations will be honored or that competition will not independently develop
superior or similar technology.
Research and Development
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The Company's research and development activities are devoted primarily to the
design and development of new products and enhancements to existing products.
For the three years ended August 31, 1997, the Company incurred aggregate direct
expenses of approximately $2,824,000 for research and development activities,
including new product development, of which approximately $882,000 was
attributable to fiscal year 1997, $1,010,000 to fiscal year 1996 and $932,000 to
fiscal year 1995. All of such activities were sponsored by the Company. The
major portion of such expenses was related to salaries and other expenses of
personnel employed on a regular basis in research and development efforts.
During fiscal year 1997 and 1996, the Company performed research and development
and pre-production planning for an unrelated medical device company for which
services the Company recognized $544,293 and $155,707 in revenues in such years,
respectively. The costs associated with these revenues are shown in cost of
sales and, as such, are not included in research and development expenses. In
May 1997, the agreement-in-principle to perform contract research and
development work for the 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 a monthly fee
of $150,000 for a period of one year. A definitive agreement was never executed.
Electro received $600,000 for the work it had performed prior to termination and
an additional $100,000 termination fee. As a result of the termination, the
Company's revenues were adversely affected.
Production and Sources of Supply
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The Company manufactures its products in a 25,000 square foot facility which it
owns and another 10,000 square foot facility which it leases. The Company
believes that these facilities have sufficient capacity to meet the Company's
anticipated catheter needs for several years. The manufacturing of catheters is
a complex process and each catheter is assembled and tested. The Company designs
its catheters and manufactures a portion of the tubing, balloons, and many
components with tooling and formulations developed by it or especially for it.
The Company maintains facilities to manufacture tubing and balloons and for the
production of catheters in the unique configurations required for their use. In
addition, where more convenient or when the level of sophistication warrants it,
the Company uses outside suppliers for certain components. The Company utilizes
the services of outside contractors for the performance of sterilization.
Although most of the components and processes necessary for Electro's production
activities are available from more than one vendor, certain components and
processes are manufactured or provided by single vendors, some involving molds
owned by the Company. Significant components for which Electro has only one
source include tubing for catheters, connector pins used in pacing catheters,
latex used in balloons, needles and certain packaging. The Company attempts to
maintain an adequate supply of the components on hand in order to minimize any
supply interruption from single source vendors to allow sufficient time to
locate and qualify a new vendor or to find a substitute for a single source. As
such, there can be no assurance that the Company's ability to manufacture
certain products will not be materially affected by single source vendors.
Insurance
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Electro maintains comprehensive general liability insurance coverage in the
amount of $5,000,000 and products liability coverage in the amount of
$2,000,000. Electro believes that such coverages are adequate and reasonable,
however, no assurance can be given that the products liability coverage will be
sufficient to protect Electro's assets against claims by users of its products
or that Electro will be able to maintain such coverage (or obtain additional
coverage) in the future at reasonable premium rates or at all, in which case its
assets will be at risk in the event of successful claims by users of its
products. Furthermore, Electro's liability coverage may not cover costs incurred
by Electro under its product warranties (see "Product Warranties") or costs
incurred by Electro in the event of a product recall.
Electro has no pending, threatened or actual claims as of this date, nor is
Electro aware of a ny current circumstances that might give rise to such claims.
However, Electro could be exposed to possible claims for personal injury or
death resulting from the sale or subsequent malfunction of allegedly defective
products.
Employees
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At November 18, 1997, the Company had approximately 104 full-time employees. Of
the total employees, 74 were engaged in manufacturing and quality control, 10 in
general administration and executive activities, 10 in engineering and research
and development, and 10 in sales and marketing. The Company is not a party to
any collective bargaining agreement and considers its relations with its
employees to be good.
Government Regulation
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Federal Regulations. The products developed 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, as well as other Federal, state
and local agencies and similar health authorities in foreign countries. The
regulations promulgated by such agencies govern the introduction of new medical
devices and modifications to approved devices, the observances of certain
standards with respect to the manufacture and labeling of such devices, the
maintenance of certain records and the reporting of potential product defects.
The Federal Food, Drug and Cosmetics Act, as amended (the "FDA Act"), regulates
manufacturers of "medical devices". The Company's products are medical devices
within the meaning of such Act. An amendment to the FDA providing for the
classification of medical devices and the establishment of standards relating to
their safety and effectiveness, scientific review of certain devices and the
registration of manufacturers and others has been in effect since 1976 and has
been supplemented by the Safe Medical Devices Act of 1991. Under these
provisions, a manufacturer must obtain approval from the FDA of a new medical
device before it can be marketed, which approval process requires, in the case
of certain classes of medical devices, that the safety and efficacy of such
devices be demonstrated by the manufacturer to the FDA through the conduct of an
FDA-approved clinical evaluation program. Under certain circumstances, the cost
of obtaining such approval may be high and the process lengthy and no assurance
can be given that approval will be obtained. Although the Company has received
FDA approval to market its principal existing products, or is exempt from formal
approval requirements as provided by law for those devices already in
distribution before May 28, 1976, there can be no assurance that the Company
will receive the requisite approvals to market additional products. Furthermore,
any substitution by the Company of its current sources for certain raw materials
utilized in its production processes will, if such substitution results in a
change in the composition of the material, be subject to FDA approval, and there
can be no assurance that such approvals will be obtained.
Since the devices developed by the Company are intended for "human use", as
defined by the FDA, the Company and such devices are subject to FDA regulations
which, among other things, allow for the conduct of routine detailed inspections
of device manufacturing establishments and require adherence to "current good
manufacturing practices" ("cGMP") in the manufacture of medical devices which
include testing, quality control, design and documentation requirements.
In addition, certain other classes of medical devices must comply with
industry-wide performance standards with respect to safety and efficacy
promulgated by the FDA. The FDA has not yet developed industry-wide performance
standards with respect to the safety and efficacy of those products manufactured
by the Company which will be subject to such standards. When and if such
standards are adopted, the Company will be required to submit data demonstrating
compliance with the standards (during which period the Company may be permitted
to continue to market products which have been previously approved by the FDA).
In recent years, the FDA has pursued a more rigorous enforcement program to
ensure that regulated businesses, like the Company, comply with applicable laws
and regulations. Noncompliance with applicable requirements can result in fines,
penalties, recall of products, suspension of production or the inability to
obtain premarket clearance or approval for new products. The Company cannot
predict the extent or impact of future Federal, State or local legislation or
regulation.
In February 1997, the FDA conducted an inspection and audit of the Company. 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 the violations.
The areas of noncompliance include Electro's methods of investigation of device
complains, methods of validation of device sterilization, environmental
monitoring procedures, methods of validation of extrusion processes which are
used in the manufacture of certain of Electro's catheters and other quality
assurance and record keeping requirements. Electro has communicated with the FDA
its intentions to remedy the noncompliance, has established a plan and timetable
to effectuate such remediation and has diligently worked to take the necessary
corrective actions; Electro's actions have included the establishment of certain
validation protocols, revisions to Electro's Quality System and Quality System
Manual, the implementation of a program for environmental testing, the purchase
of equipment for extrusion process validation and the institution of file and
record keeping protocols. A subsequent FDA inspection in September 1997
indicated that, while substantial progress has been made, not all corrective
actions have been completed. Electro is continuing in its efforts to complete
such actions but the Company is unable to precisely determine when such actions
will be completed. There can be no assurance that Electro will be ready for any
reinspection by the FDA nor that Electro will pass any such reinspection when it
occurs. While Electro is currently under no restrictions by the FDA regarding
the manufacture or sale of its products, Electro 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. While Electro
is unable to precisely estimate whether and to what extent adverse economic
impact may result from instituting the corrective actions, 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%.
Foreign Regulations. Many countries in which Electro markets its products
regulate the manufacture, marketing and use of medical devices. Electro intends
to pursue product approval or registration procedures for its new products in
countries where it is marketing existing products as well as for new and
existing products in additional countries where it believes there is a market
for its products. The international registration and approval process is
normally accomplished in coordination with its international distributors. In
order for Electro to continue to sell certain of its products in the nations of
the EEC after June 14, 1998, it must obtain certification, the CE Mark, from
ISO. Since Electro has not yet obtained the CE Mark and is now unable to sell
certain of its products in the Nations of the EEC (which account for
approximately 17% of total revenues), international sales should be adversely
affected in Europe for about the next six months or more. The effort to obtain
the CE Mark (which account for approximately 17% of total revenues) is
continuing and management of Electro is hopeful of obtaining this designation
before the end of the calendar year on its major products in order to allow
sales into this market. Even if Electro does obtain the CE mark, there can be no
assurance that Electro will obtain the CE Mark or maintain the same level of
revenue upon receiving the CE Mark as it did previously.
Export sales of devices that have not received FDA marketing clearance generally
are subject to export permit requirements. In order to obtain such a permit,
Electro must provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located, stating
that the sale of the device is not in violation of the country's medical device
laws. In April 1996, new legislation was enacted to permit the export of devices
not approved in the U.S., if the product complies with the laws of the country
and as long as the products are approved by any of the industrialized countries
specified in the export reform legislation. Electro has received such clearance
for its Circuit Breaker steerable catheter with temperature control for ablation
and is currently distributing it outside the U.S.; sales of Electro's Circuit
Breaker steerable catheter for the fiscal years ended August 31, 1997 and August
31, 1996 were approximately $87,000 and $180,000, respectively.
The Company is also subject to various Federal, state and local laws pertaining
to such matters as safe working conditions, environmental protection, fire
hazard control and other regulations. The Company is not aware of any
regulations with which it is not in compliance.
Backlog
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Electro does not operate with significant backlog. The majority of product
shipments in a quarter relate to orders received in that quarter. The Company's
actual product shipments depend on its production capacity, manufacturing yields
and component availability, among other factors. At October 31, 1997, the
Company had a backlog of orders for its products which aggregated to
approximately $716,000, as compared to approximately $389,000 at October 31,
1996.
Competition in the Industry
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The medical technology industry is a highly competitive field, characterized by
rapid technological advances, and the Company competes with many other companies
on current products and products in the development stages. Many of these
competitors have significantly greater financial, marketing, sales, distribution
and technical resources than the Company. Rapid technological advances by the
Company's competitors could at any time require that the Company redesign a
portion of its product line. Accordingly, there can be no assurance as to the
success of the Company's products in competition with such companies.
The Company's older products compete primarily with those of larger companies
that have greater resources and better distribution capabilities. The current
principal basis of competition in these markets is price. The Company's limited
resources make it less capable than larger competitors to offer aggressive
pricing to meet competition. In addition, certain customers purchase catheters
in blanket contracts which include products offered by the Company's larger
competitors but not by the Company. For these reasons, the Company has not been
able to compete effectively during recent years in the market for non-EP
products.
The electrophysiology market is also highly competitive and competition is
expected to increase. These competitors currently include USCI, a division of
C.R. Bard, Inc.; Mansfield and EP Technologies, divisions of Boston Scientific
Corporation; CardioRhythm, Inc., a division of Medtronic, Inc.; Cordis-Webster
Laboratories, a division of Johnson & Johnson, Inc. and Daig Corporation, a
division of St. Jude Medical, Inc. These companies are more capable of offering
a broader range of products to the cardiologist. The Company's ability to
compete effectively in the future could be dependent upon broadening its range
of products and/or forging an alliance with another company which would effect
greater product diversity. The Company's electrophysiology products compete with
other treatments, including prescription drugs, implantable cardiac
defibrillators and open heart surgery.
The Company's catheter ablation product is not yet approved for marketing in the
U.S., but some competitors have developed products, specifically for use in
catheter ablation, which are approved in the U.S. Due to certain development
issues, clinical trials scheduled for 1997 were delayed. The Company plans to
begin its clinical trials for ablation in 1998 in order to seek approval to
market these catheters domestically. The costs to perform such clinical trials
are estimated at $150,000 which Electro anticipates would be funded from
financing obtained in connection with the Merger. The primary competitive
factors relative to other catheter ablation products are technical superiority,
financial resources, the timing of regulatory approval, commercial introduction
and quality. The Company's competitive position also depends on its ability to
attract and retain qualified personnel, develop effective proprietary products
and implement production and marketing plans. The Company hopes that it can
effectively compete in this market.
2
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Results of Operations
- ---------------------
General
- -------
On October 23, 1997, the Company entered into a letter of intent with Cardiac
Control Systems, Inc., a Delaware corporation ("CCS"), 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. It is intended that upon the closing of
the transaction, 50% of the Company's senior debt would be redeemed and the
remaining 50% of such debt would be converted to convertible preferred stock of
the surviving subsidiary in the Merger.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) the execution of a definitive agreement reflecting the intentions of the
parties; (iii) the approval of the transaction by the Board of Directors of each
company; (iv) the approval of the transaction by the stockholders of Electro;
and (v) the receipt of all required regulatory approvals by each company.
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 eighteen months, the Company has devoted much of its engineering
efforts to its contract research and development customer and original equipment
manufacturing ("OEM") business. This strategy has adversely affected product
sales, but the Company hopes that this strategy will yield more positive results
in the long-term as the Company continues to investigate opportunities to
capitalize on its catheter technology and manufacturing capabilities. In May
1997, the agreement-in- principle to perform contract 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 a monthly fee
of $150,000 for a period of one year. A definitive agreement was never executed.
Electro received $600,000 for the work it had performed and also received a
$100,000 termination fee. As a result of the termination, the Company's revenues
were adversely affected in the short-term. The Company's OEM business may
partially offset the lost revenues from the termination.
Fiscal Year Ended August 31, 1997 Compared to Fiscal Year Ended August 31, 1996
- -------------------------------------------------------------------------------
Overview. Net revenues declined $713,998 (9.7%) for the fiscal year ended August
- -------- 31, 1997 as compared to the fiscal year ended August 31, 1996. Product
revenues declined $1,148,149 (16.4%) for the year in addition to a decline in
revenues from an OEM customer of $64,133. These declines were partially offset
by an increase in contract research and development revenues of $388,586, which
included the $100,000 termination fee described above and $109,698 received from
licensing certain of the Company's technology.
Sales. Direct domestic sales decreased $678,405 (14.4%) for the fiscal year
- ----- ended August 31, 1997 as compared to the prior fiscal year. This decrease
is primarily due to the Company not having an approved electrophysiology
ablation catheter, lack of new products as the Company had focused its attention
on the contract research and development and OEM business, 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 revenues decreased $496,254 (21.4%) for 1997 as compared
to 1996. The decline in international revenues is attributed to the
insufficiency of new products as the Company had focused its attention on the
contract research and development and OEM business, lower demand for the
Company's electrophysiology products, product redesign requirements, lower
prices due to competition and backorders.
Gross Profits. Gross profit dollars decreased $675,982 (20.6%) for the fiscal
- ------------- year ended August 31, 1997 as compared to the prior year. This
decrease is primarily attributed to decreased production levels related to the
lower sales volume as well as the write-off of certain inventories. The
decreased production levels caused the cost of goods sold of the catheters to
increase due to less efficient labor utilization and a greater amount of fixed
overhead allocated to each catheter produced. The gross profit percentage for
the year ended August 31, 1997 was 39.2% as compared to 44.6% for the year ended
August 31, 1996. The lower volume continues to adversely impact gross profit.
Selling, General and Administrative Expenses. Selling, general and
- ---------------------------------------------------- administrative expenses
decreased $570,864 (19.3%) for the current year as compared to the prior year.
This decrease primarily reflects lower domestic marketing and selling expenses
of $641,690 (32.5%) primarily attributed to the departure of field sales
personnel that have not yet been replaced. This decrease was partially offset by
an increase in the provision for bad debt which resulted from non-payments by an
international distributor experiencing cash flow problems.
Engineering, Research and Development Expenses. Research and development
- --------------------------------------------------- expenses decreased $128,345
(12.7%) for the year ended August 31, 1997 as compared to the prior year. The
decrease is primarily attributed to the transfer of expenses to costs of
revenues associated with billable research and development activities in
addition to lower material purchases and consulting fees. These decreases were
partially offset by higher expenses for new personnel.
Other Income and Expenses. Interest expense increased primarily as a result of
- ------------------------- the increased borrowings from the T Partnership (see
Note 7 of the Financial Statements included in response to Item 14) and interest
associated with capitalized leases for equipment.
Litigation expense for fiscal year 1997 represents the jury award to a
terminated employee as a result of an age discrimination suit and the Company's
legal costs from September 1996 to defend this action (see Note 15 of the
Financial Statements included in response to Item 14).
The net loss for the fiscal year ended August 31, 1997 was $1,354,942 or $0.21
per share as compared to a net loss of $892,940 or $0.14 per share for the year
ended August 31, 1996.
Fiscal Year Ended August 31, 1996 Compared to Fiscal Year Ended August 31, 1995
- -------------------------------------------------------------------------------
Overview. During 1996, the Company entered into a joint venture arrangement with
- -------- one of the leading centers for electrophysiology in the U.S. to develop
products for the diagnosis of ventricular tachycardia. The Company also began to
develop products in the therapeutic area of atrial fibrillation. In June 1996,
the Company received an advance of $300,000 from an unrelated party to perform
research and development and pre-production planning. In September 1996, the
Company reached a verbal agreement-in-principle to perform further research and
development and production for this company pursuant to which the Company was to
receive a monthly fee of $150,000 for a period of one year for this effort. As
noted above, this arrangement was never formalized and has now been terminated.
In October 1996, the Company reached a formal agreement to license certain of
its technology to another medical device company that is in a market segment in
which the Company does not participate.
Sales. Net revenues increased $99,012 (1.4%) for the fiscal year ended August
- ------ 31, 1996 to $7,362,436 as compared to the fiscal year ended August 31,
1995. Total domestic sales decreased $416,351 (7.9%) while international sales
increased $359,656 (18.3%) for fiscal 1996 as compared to fiscal 1995. In
addition, the Company had revenues of $155,707 in 1996 related to the
performance of research and development activities for a third party. The
decline in domestic sales is attributed to a decline in sales in several of the
Company's product lines, especially the Company's steerable catheters, and the
loss of field sales personnel that have not yet been replaced. The increase in
international sales is attributed to an increase in sales of the Company's
traditional and electrophysiology products, including sales to distributors in
countries where the Company had not previously been represented.
Gross Profits. Gross profit dollars decreased $118,899 (3.5%) in fiscal year
- -------------- 1996 as compared to the prior year. This decrease in gross profit
is attributed primarily to the increased fourth quarter production costs and
write-offs of certain inventories. The gross profit percentage for 1996 was
44.6% as compared to 46.8% for 1995. Gross profit for fiscal year 1996 also
included the positive impact of selling directly to hospitals in the northeast
region rather than through a distributor, as previously accomplished, which
required discounts. In December 1995, the Company reduced its manufacturing
staff as a result of lower than anticipated demand. Gross profit was also
negatively affected as a result of this labor reduction, since overhead expenses
were allocated over a smaller direct labor pool. In October 1996, the Company
again reduced its workforce.
Selling, General and Administrative Expenses. Selling, general and
- ---------------------------------------------------- administrative expenses
decreased by $483,820 (14.1%) for fiscal year 1996 as compared to fiscal year
1995. This decrease primarily reflects lower domestic marketing and selling
expenses. This decrease is attributed to the departure of some of the Company's
sales representatives and the Director of Clinical Development who have not been
replaced. This decrease was offset partially by hiring an International
Marketing Manager.
Engineering, Research and Development Expenses. Research and development expense
- ---------------------------------------------- increased by $78,117 (8.4%) for
fiscal year 1996 as compared to the prior fiscal year. The increase is
attributed to an increase in personnel, consulting fees and purchases of
materials and supplies for new product development.
Other Income and Expenses. Interest expense increased in fiscal year 1996 as a
- ------------------------- result of increased borrowings from the T Partnership
(see Note 7 of the Notes to the Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K").
The net loss for fiscal year 1996 was $892,940 or $.14 per share as compared to
a loss of $1,135,890 or $.18 per share for fiscal year 1995.
Liquidity and Capital Resources
- -------------------------------
At August 31, 1997, working capital decreased $1,066,572 to $958,174 from August
31, 1996. The current ratio was 1.6 to 1 at August 31, 1997 as compared to 2.7
to 1 at August 31, 1996. Net cash used in operating activities was $37,025 for
the fiscal year ended August 31, 1997 as compared to $546,610 used in operating
activities for the prior fiscal year. This decrease in cash used in operating
activities is primarily a result of the decline in inventories and the increase
in accounts payable and accrued expenses and accrued litigation costs which have
yet to be paid. Electro 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 New Jersey found
Electro liable for age discrimination in connection with its termination of an
employee in April 1994. The jury awarded the employee $283,000 plus attorneys'
fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
in the amount of approximately $115,665 which is also included in the litigation
expense in the accompanying 1997 Statements of Operations. The Company is
contemplating the filing of an appeal.
On October 11, 1993, the Company entered into an agreement with the T
Partnership, a related party, to borrow up to $1,000,000. Ervin Schoenblum, the
Company's Acting President and Director and Abraham Nechemie, also a Director of
the Company, are members of the T Partnership. On August 31, 1995, after the
Company had drawn down all of the $1,000,000, 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) and in
April 1997, the Company borrowed an additional $100,000 from the T Partnership
under the same terms and conditions as its previous borrowing.
The rate of interest on the debt is 12% per annum on any outstanding balance and
is payable monthly. Principal payments of $25,000 scheduled to begin on
September 1, 1996, have been deferred to September 1, 1998. Any remaining
balance is due on August 1, 2003. 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, unless the T Partnership and Company agree
otherwise.
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. Non-compliance by the Company shall allow the T Partnership to declare an
Event of Default and accelerate repayment of indebtedness. As of August 31,
1997, the Company was not in compliance with this financial covenant. However,
in November 1997, the T Partnership agreed not to exercise its right to
accelerate the repayment of indebtedness through September 1, 1998 as a result
of non-compliance with the aforementioned financial covenant and the nonpayment
of principal payments in the 1998 fiscal year. The T Partnership has also agreed
to a modification to the financial covenant. The Company is currently in
compliance with such covenant. The total indebtedness due to the T Partnership
at August 31, 1997 was $1,747,125.
Under the provisions of the original agreement, the T Partnership was granted
warrants which permit the T Partnership to purchase 166,667 shares of the
Company's common stock at a price of $3.25 per share. The August 1995 agreement
provides that the T Partnership surrender its warrants and be granted a new
warrant to purchase 500,000 shares of the Company's common stock at a price of
$0.9875 per share in exchange for the surrendered warrant. No additional
warrants were issued as a result of subsequent borrowings. A value has been
allocated to the warrants based upon their estimated fair market value at the
date of the agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is shown in
other assets in the accompanying 1997 and 1996 balance sheets. The warrants are
immediately exercisable and expire on August 1, 2001. As of August 31, 1997
these warrants remain outstanding.
In September 1997, the Company borrowed an additional $100,000 from the T
Partnership.
The report of the Company's independent auditors on the Company's financial
statements, included elsewhere herein, includes an explanatory paragraph which
states that the Company's recurring losses and limited working capital raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. During fiscal year 1997, the Company was able
to satisfy its cash shortfall from operating activities with the borrowings from
the T Partnership, and advances from an unrelated company to perform contract
research and development, as well as 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. The Company has had
difficulty in paying its obligations and, as a result, has delayed payments to
vendors. The Company continues to re-evaluate its plans to obtain funds. The
contemplated merger is contingent upon the Company and CCS raising sufficient
capital to support each company's product development efforts. Management
believes that this merger can offer advantages to both companies by, among other
benefits, providing economies of scale and elimination of redundancies. However,
there can be no assurance that the merger will occur or that the Company will be
able to generate the funding required.
The Company does not plan to pay dividends in the near future.
Operating Trends and Uncertainties
- ----------------------------------
Sales. The ability of Electro to attain a profitable level of operations is
- ------ dependent upon expansion of sales volume, both domestically and
internationally, and continued development of new and advanced products. Many
countries in which Electro markets its products regulate the manufacture,
marketing and use of medical devices. Electro intends to pursue product approval
or registration procedures in countries where it is marketing its products. The
international registration and approval process is normally accomplished in
coordination with its international distributors. In order for Electro to
continue to sell certain of its products in the nations of the European Economic
Community (the "EEC") after June 14, 1998, Electro must obtain certification,
the CE Mark, from the International Organization for Standardization. In the
event that Electro is unable to obtain the CE Mark by such date, it will be
unable to sell certain products in the nations of the EEC and international
sales (which account for approximately 17% of total revenues) should be
adversely affected in Europe for some period of time. The effort to obtain the
CE Mark is continuing and Electro is hopeful of obtaining this designation
before June 14, 1998.
Year 2000 Issue. Many existing computer programs use only two digits to identify
- ---------------- a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the year
2000. Some older computer systems stored dates with only a two-digit year
reference with an assumed prefix of "19". Consequently, this limits those
systems to dates between 1900 and 1999. If not corrected, many computer systems
and applications could fail or create erroneous results by or at the year 2000
(the "Year 2000 Issue").
The Company has undertaken to review the potential impact of the Year 2000
Issue. The Company believes that such assessment will need to include a review
of the impact of the issue in primarily four areas: products, manufacturing
systems, business systems and miscellaneous/other areas. Additionally, testing
of the various potentially affected systems will be required to determine
whether upgrading or replacement will be required. Management does not currently
anticipate that it will encounter serious Year 2000 Issues with its systems and
does not believe that any incremental costs associated with achieving Year 2000
compliance, to the extent necessary, will be material to the Company's
operations.
The Company relies on its customers, suppliers, utility service providers,
financial institutions and other partners in order to continue normal business
operations. At this time, it is impossible to assess the impact of the Year 2000
Issue on each of these organizations. There can be no assurance that the systems
of other unrelated entities on which the Company relies will be corrected on a
timely basis and will not have a material adverse effect on the Company.
Recently Issued Accounting Standard
- -----------------------------------
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. The Company does not expect the adoption of SFAS 128 to
have a material impact on the Company.
Inflation and Changing Prices
- -----------------------------
Inflation did not have a material impact on the results of the Company's
operations during the last three fiscal years.
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
- ------- ----------------------------------------
OWNERS AND MANAGEMENT
---------------------
Certain Beneficial Owners
- -------------------------
A. Set forth below is information concerning persons (including any "group" as
that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934)
known to the Company to own more than 5% of the common stock of Electro, of the
Company as of November 18, 1997.
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class(1)
- ---------------- -------------------- -----------
The T Partnership, L.L.P. 2,464,844(3) 35.3%
c/o Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039(2)
Fred S. Lafer 2,464,844 35.3%
c/o The Taub Foundation
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
Abraham H. Nechemie 2,469,844(4) 35.4%
Wiss & Co.
354 Eisenhower Pkwy.
Livingston, NJ 07039
Ervin Schoenblum 2,512,844(5) 35.8%
c/o Electro Catheter Corp.
2100 Felver Court
Rahway, NJ 07065
Stephen D. Shapiro 2,464,844 35.4%
20 Old Post Road
E. Setauket, NY 11733
Henry Taub 2,464,844 35.4%
c/o The Taub Foundation
300 Frank W. Burr Blvd.
Teaneck, NJ 07666
Bruce Paul 658,400 10.3%
1 Hampton Road
Purchase, NY 10577
- ----------------------------
<FN>
(1) The common stock deemed to be owned which is not outstanding but
subject to warrants and currently exercisable options is deemed to be
outstanding for the purpose of determining the percentage of all
outstanding common stock owned. The same shares may be held
beneficially by more than one owner resulting in the total percentage
being greater than 100%.
(2) The T Partnership, L.L.P. is a New Jersey limited liability partnership
(formerly The T Partnership, a New Jersey general partnership)
consisting of Fred Lafer (10% equity interest), Abraham H. Nechemie (5%
equity interest), Ervin Schoenblum (5% equity interest), Stephen D.
Shapiro (10% equity interest) and Henry Taub (70% equity interest). The
T Partnership disclaims any beneficial ownership of shares issuable
upon currently exercisable stock options held by each of Messrs.
Nechemie and Schoenblum.
(3) Includes 83,344 and 500,000 shares which the T Partnership has the
right to acquire pursuant to outstanding warrants, which warrants are
immediately exercisable at prices of $1.425 and $.9875 per share,
respectively.
(4) Includes 5,000 shares issuable upon the exercise of currently
exercisable stock options.
(5) Includes 48,000 shares issuable upon the exercise of currently
exercisable stock options.
</FN>
Management
- ----------
B. The following table sets forth the number of shares of common stock of
Electro beneficially owned by each Director of Electro, each of the named
executive officers named in the Summary Compensation Table set forth above as of
November 18, 1977, and the percentage of the outstanding shares of such
ownership represented at the close of business on November 18, 1977, together
with information as to stock ownership of all Directors and Executive Officers
of Electro as a group as of November 18, 1977.
Amount and Nature of Percentage
Name of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------------ -------------------- -----------
Abraham H. Nechemie 2,469,844(2) 35.4%
Ervin Schoenblum 2,512,844(2) 35.8%
Lee W. Affonso 35,300(3) 0.6%
Joseph P. Macaluso 29,400(3) 0.5%
All executive officers and 2,577,544(2)(4) 36.9%
directors as group
(8 persons)
- ----------------------------
<FN>
(1) The common stock subject to currently exercisable options is deemed to
be outstanding for the purpose of determining the percentage of all
outstanding common stock owned.
(2) Messers. Nechemie and Schoenblum are partners in the T Partnership,
which owns 2,464,844 shares of common stock of Electro and has the
right to acquire 583,344 share pursuant to immediately exercisable
warrants. Also included in the table above are currently exercisable
options for the purchase of 5,000 and 48,000 shares held by Messrs.
Nechemie and Schoenblum, respectively.
(3) All 21,900 shares are subject to currently exercisable options.
(4) Includes 140,400 shares subject to currently exercisable options held
by all executive officers and directors of Electro (including those
individually named in the table above).
</FN>
BOARD COMPENSATION REPORT ON EXECUTIVE COMPENSATION
The Company has no compensation committee or other committee of the Board
of Directors performing similar functions. All members of the Board of Directors
review and determine executive compensation for all executive officers on an
annual basis. Ervin Schoenblum, the Company's Acting President, is the only
executive officer of the Company also serving on the Board. Mr. Schoenblum's
compensation as Acting President was negotiated between the parties and was
based in part on the amount of compensation paid to him while he was a
consultant to the Company and the level of compensation historically paid by the
Company for this position.
The Board of Directors has implemented an executive compensation philosophy
that seeks to relate executive compensation to corporate performance, individual
performance and creation of stockholder value. Historically, this has been
achieved through compensation programs which focus on both short- and long-term
results.
In accordance with the Board of Directors' executive compensation
philosophy, the major component of executive compensation has been base salary.
Salaries for executive officers are based on current individual and
organizational performance, affordability and competitive market trends.
Additional incentives are provided through issuance of incentive stock options.
Board of Directors: Abraham H. Nechemie
Ervin Schoenblum
PERFORMANCE GRAPH
The following performance graph compares the five-year cumulative total return
on the Company's Common Stock to the S & P 500 Index and the S & P Medical
Products and Supplies Index assuming $100 was invested on August 31, 1992 and
all dividends were reinvested.
[Graphic presentation omitted in EDGAR filed document]
INDEXED RETURNS
Years Ending
Base
Period
Company/Index Aug92 Aug93 Aug94 Aug95 Aug96 Aug95
ELECTRO-CATHETER CORP. 100 125.00 62.50 40.60 81.25 34.00
S&P 500 INDEX 100 115.21 121.52 147.58 175.22 246.44
HLTH CARE (MED PDS&SUPP)-500 100 76.73 89.69 138.08 157.11 224.95
Notwithstanding anything set forth in any of the Company's previous filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934 which
might incorporate future filings, the preceding performance graph and the Report
of the Compensation Committee herein above provided shall not be deemed
incorporated by reference into any such filings.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) 1. Financial Statements: The financial statements
filed in this Annual Report on Form 10-K are listed
in the attached Index to Financial Statements.
2. Financial Statement Schedules: The financial
statement schedules filed in this Annual Report on
Form 10-K are listed in the attached Index to
Financial Statements.
3. Exhibits: The exhibits required to be filed as part
of this Annual Report on Form 10-K are listed in the
attached Index to Exhibits.
(b) Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
October 7, 1997, which, under "Item 5. Other Events"
thereunder reported a verdict in certain litigation
in which the Company has been involved. Also, the
Company has filed a Current Report on Form 8-K dated
November 7, 1997, which, under "Item 5. Other
Events" thereunder, reported the execution of a
letter of intent with Cardiac Control Systems, Inc.
contemplating the merger of the two companies.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
Dated: October 8, 1998 By: s/Ervin Schoenblum
---------------- ------------------
Ervin Schoenblum
Acting President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and the
capacities and on the dates indicated:
Dated: October 8, 1998 /s/Ervin Schoenblum
---------------- -------------------
Ervin Schoenblum, Acting President
& Director
Dated: October 8, 1998 /s/Joseph P. Macaluso
------------- ---------------------
Joseph P. Macaluso
Principal Accounting Officer
Dated: October 8, 1998 /s/Abraham H. Nechemie
---------------- ----------------------
Abraham H. Nechemie, Director
ELECTRO-CATHETER CORPORATION
Index to Financial Statements
Page
Independent Auditors' Report F-1
Financial Statements:
Balance Sheets - August 31, 1997 and 1996 F-2
Statements of Operations - Years ended August 31, 1997,
1996 and 1995 F-3
Statements of Stockholders' Deficiency/Equity -
Years ended August 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows - Years ended August 31, 1997,
1996 and 1995 F-5
Notes to Financial Statements F-6
Financial Statement Schedule:
II - Valuation and Qualifying Accounts F-20
All other schedules are omitted for the reason that they are not required or are
not applicable or the required information is shown in the financial statements
or notes thereto.
7
Independent Auditors' Report
----------------------------
The Board of Directors
Electro-Catheter Corporation:
We have audited the financial statements of Electro-Catheter Corporation as
listed in the accompanying index. In connection with our audits of the financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electro-Catheter Corporation at
August 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended August 31, 1997 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has limited working capital resources which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Short Hills, New Jersey
November 12, 1997
F-1
ELECTRO-CATHETER CORPORATION
Balance Sheets
August 31, 1997 and 1996
1997 1996
-------- -------
Assets
Current assets:
Cash and cash equivalents $ 98,127 275,283
Accounts receivable, less
allowance for doubtful
accounts of $152,070 in 1997
and $15,000 in 1996 988,859 1,016,201
Inventories 1,242,367 1,862,179
Prepaid expenses and other
current assets 168,781 64,344
--------- ---------
Total current assets 2,498,134 3,218,007
Property, plant and equipment, net 777,663 551,698
Other assets, net 97,275 123,407
--------- ---------
Total assets 3,373,072 3,893,112
========= =========
Liabilities and Stockholders' Deficiency/Equity
- -----------------------------------------------
Current liabilities:
Current installments of long-term debt - 300,000
Current installments of capitalized
lease obligations 50,734 7,489
Accounts payable - trade 566,816 345,888
Deferred revenues - 144,293
Accrued expenses 478,590 395,591
Accrued litigation expenses 443,820 -
---------
Total current liabilities 1,539,960 1,193,261
Subordinated debentures due to
T Partnership, a related party,
excluding current portion 1,747,125 1,447,125
Capitalized lease obligation,
excluding current installments 222,277 37,756
---------
Total liabilities 3,509,362 2,678,142
--------- ---------
Stockholders' deficiency/equity:
Common stock, $.10 par value,
Authorized 20,000,000 shares;
issued 6,383,611 in 1997 and
6,373,711 in 1996 638,361 637,371
Additional paid-in capital 10,682,008 10,679,316
Accumulated deficit (11,456,659) (10,101,717)
Commitments and contingencies (136,290) (1,214,970)
Total stockholders' deficiency/
equity - -
----------- -----------
Total liabilities and
stockholders' deficiency/
equity $ 3,373,072 3,893,112
========= =========
See accompanying notes to financial statements
F-2
ELECTRO-CATHETER CORPORATION
Statements of Operations
Years ended August 31, 1997, 1996 and 1995
1995 1996 1997
---- ---- ----
Net revenues, including research
and development revenue of
$544,293 in 1997 and $155,707
in 1996 $ 6,648,438 7,362,436 7,263,424
Cost of goods sold 4,041,486 4,079,502 3,861,591
---------- --------- ---------
Gross profit 2,606,952 3,282,934 3,401,833
Operating expenses:
Selling, general and
administrative 2,384,127 2,954,991 3,438,811
Research and development 881,728 1,010,073 931,956
--------- --------- ---------
Operating loss (658,903) (682,130) (968,934)
Other income (expense):
Interest income 86 1,102
Interest expense (249,384) (210,896) (168,058)
Litigation expenses (446,655) - -
------- ------- -------
Net loss $(1,354,942) (892,940) (1,135,890)
=========== ======== ==========
Net loss per common share $ (0.21) (0.14) (0.18)
==== ===== =====
See accompanying notes to financial statements
F-3
ELECTRO-CATHETER CORPORATION
Statements of Stockholders' Deficiency/Equity
Years ended August 31, 1997, 1996 and 1995
Additional Accumulated Total stockholders
Common paid-in deficit deficiency/equity
------ ------- ------- -----------------
Balances at August 31, 1994 $ 576,232 10,106,647 (8,072,887) 2,609,992
Employee stock plan 248 1,988 - 2,236
Common stock issued under private
placement 57,150 442,913 - 500,063
Proceeds from issuance of stock
warrants - 63,750 - 63,750
Net loss - - (1,135,890) (1,135,890)
--------- ---------- --------- ---------
Balances at August 31, 1995 633,630 10,615,298 (9,208,777) 2,040,151
Stock options exercised 2,350 18,213 - 20,563
Employee stock plan 287 779 - 1,066
Common stock issued for services
rendered 1,104 10,631 - 11,735
Amortization of deferred compensation
expense on stock options - 34,395 - 34,395
Net loss - - (892,940) (892,940)
--------- ---------- -------
Balances at August 31, 1996 637,371 10,679,316 (10,101,717) 1,214,970
Employee stock plan 990 2,692 - 3,682
Net loss - - (1,354,942) (1,354,942)
--------- ---------- --------- ---------
Balances at August 31, 1997 $ 638,361 10,682,008 (11,456,659) (136,290)
========== ========== =========== ========
See accompanying notes to financial statements
F-4
ELECTRO-CATHETER CORPORATION
Statements of Cash Flows
Years ended August 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $(1,354,942) (892,940) (1,135,890)
Reconciliation of net loss to net cash
used in operating activities:
Depreciation and amortization 145,614 130,524 137,106
Amortization of deferred charges 8,333 8,333 61,708
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 27,342 190,087 (141,514)
Decrease (increase) in
inventories 619,812 230,900 (289,789)
(Increase) decrease in prepaid
expenses and other current
assets (104,437) (21,314) 96,749
Decrease in other assets, net 17,799 4,207 3,527
Decrease (increase) in deferred
revenues (144,293) 144,293 -
Increase (decrease) in accounts
payable and accrued expenses 747,747 (340,700) 124,128
------- ------- -------
Net cash used in operating activities $ (37,025) (546,610) (1,143,975)
------ ------- ---------
Cash flows used in investing
activities:
Purchases of property, plant
and equipment (115,292) (34,167) (12,143)
------- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of stock - - 500,063
Net proceeds from issuance of
subordinated debentures and
warrants 100,000 547,125 575,000
Proceeds from exercise of stock options - 20,563 -
Proceeds from employee stock
purchase plan 3,682 1,066 2,236
Proceeds from loan on officer's
life insurance policy - - 25,000
Repayment of debt (128,521) (17,079) (18,184)
------- ------ -------
Net cash (used in) provided by
financing activities (24,839) 551,675 1,084,115
------ ------- ---------
Net decrease in cash (177,156) (29,102) (72,003)
Cash and cash equivalents
at beginning of year 275,283 304,385 376,388
------- ------- -------
Cash and cash equivalents
at end of year $ 98,127 275,283 304,385
====== ======= =======
Interest paid $ 241,049 199,724 101,967
Property, plant & equipment
acquired under capitalized
lease obligations $ 256,287 49,268 -
See accompanying notes to financial statements.
F-5
ELECTRO-CATHETER CORPORATION
Notes to Financial Statements
August 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Nature of Business
------------------
Electro-Catheter Corporation ("Company") has been in business
for over 36 years. The Company develops, manufactures,
markets, and sells products for hospitals and physicians.
These products are diagnostic and therapeutic catheters which
are utilized in connection with illnesses of the heart and
circulatory system. The Company has targeted
electrophysiology as its focal area for future growth, but
intends to maintain and develop products for emergency care,
cardiac surgery, invasive and non-invasive cardiology and
invasive radiology.
(b) Revenue Recognition
-------------------
Revenues are recognized at the time of shipment and
provisions, when appropriate, are made where the right to
return exists in accordance with SFAS No. 48. Revenue under
service contracts are accounted for as the services are
performed in accordance with the terms of the contract and
are not refundable if the research effort is unsuccessful.
(c) Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are carried at cost which
approximates market value.
(d) Concentrations of Credit Risk
-----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
accounts receivable. The Company's customer base is primarily
comprised of hospitals in the U.S. and distributors outside
the U.S. As of August 31, 1997, the Company believes it has
no significant concentration of credit risk with its accounts
receivable.
(e) Inventory Valuation
-------------------
Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(f) Patents and Trademarks
----------------------
Patents and trademarks are recorded at cost and are amortized
on a straight-line basis over their useful lives. Such costs,
net of accumulated amortization, are included in other
assets, net in the accompanying balance sheets.
(g) Property, Plant and Equipment
-----------------------------
Property, plant and equipment is carried at cost. Plant and
equipment is depreciated using the straight-line method over
the estimated useful lives of the assets.
Repairs and maintenance costs are charged to operations as
incurred.
F-6
(1) Summary of Significant Accounting Policies, continued
---------------------------------------------------------
Betterments are capitalized. Leasehold improvements are
amortized over the term of the lease or the useful life of
the asset, whichever is shorter.
When assets are retired or otherwise disposed, the cost and
related accumulated depreciation are removed from the related
accounts, and any resulting gain or loss is recognized in
operations for the period.
(h) Research and Development
------------------------
Research and development costs are charged to expense when
incurred.
(i) Accounting for Income Taxes
---------------------------
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences
are expected to reverse. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for
any tax benefits which are not expected to be realized. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period in which such tax rate
changes are enacted.
(j) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(k) Stock-Based Compensation
------------------------
Prior to September 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. On
September 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future
years as if the fair- value based method defined in SFAS No.
123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(l) Loss Per Share
--------------
Loss per share is computed using the weighted average number
of shares outstanding during each year. Shares issuable upon
exercise of outstanding stock options, warrants and
conversion of debentures are not included in the computation
of loss per share because the result of their inclusion would
be anti-dilutive.
The weighted average number of shares of common stock used in
the computation of loss per share was approximately 6,380,000
in 1997, 6,354,000 in 1996 and 6,027,000 in 1995.
F-7
(1) Summary of Significant Accounting Policies, continued
-----------------------------------------------------
(m) Long-Lived Assets To Be Disposed Of
-----------------------------------
In accordance with SFAS No. 121, the Company reviews
long-lived assets for impairment whenever events or changes
in business circumstances occur that indicate that the
carrying amount of the assets may be recoverable. The Company
assesses the recoverability of long-lived assets held and to
be used based on undiscounted cash flows, and measures the
impairment, if any, using discounted cash flows. Adoption of
SFAS No. 121 in fiscal 1997 did not have any impact on the
Company's financial position, operating results or cash
flows.
(n) Financial Instruments
---------------------
The carrying amounts of cash and cash equivalents and other
current assets and current liabilities approximate fair value
due to the short-term maturity of these instruments.
(2) Liquidity
---------
The accompanying financial statements have been prepared on a going
concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary
course of business. The Company incurred net losses of $1,354,942,
$892,940 and $1,135,890 for the years ended August 31, 1997, 1996 and
1995 respectively, and at August 31, 1997 had an accumulated deficit of
$11,456,659. The net losses incurred by the Company have consumed
working capital and weakened the Company's financial position. The
Company's ability to continue in business is dependent upon its success
in generating sufficient cash flow from operations or obtaining
additional financing. The Company continues to re-evaluate its plans
and adopt certain cost reduction measures. The Company is attempting to
increase sales by examining and, where appropriate, modifying its
distribution network, utilizing aggressive pricing and introducing new
products to market. The Company's ability to continue as a going
concern is dependent upon the successful implementation of the
aforementioned programs. There can be no assurances that these programs
can be successfully implemented. The financial statements do not
include any adjustments relating to the recoverability and
classifications of reported asset amounts or the amounts of liabilities
that might result from the outcome of this uncertainty.
(3) Inventories
-----------
Inventories consisted of the following:
1997 1996
---- ----
Finished goods $ 481,660 954,997
Work-in-process 490,621 490,396
Materials and supplies 270,086 416,786
------- -------
$1,242,367 $1,862,179
========= ========
F-8
(4) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consisted of the following:
1997 1996
---- ----
Land $ 38,400 38,400
Building 153,597 153,597
Building improvements 993,168 952,837
Office Equipment 2,307,607 2,244,694
Furniture and equipment 534,232 519,319
Leasehold improvements 340,382 340,382
Sales equipment and
diagnostic computers 587,348 589,348
Capitalized leases 305,555 49,268
--------- ---------
5,260,289 4,887,845
Less accumulated deprecia-
tion and amortization 4,482,626 4,336,147
--------- ---------
Net property, plant
and equipment $ 777,663 551,698
========= =========
(5) Accrued Expenses
----------------
The components of accrued expenses consisted of the following:
1997 1996
---- ----
Accrued salaries, wages and
payroll taxes $ 287,933 278,263
Accrued audit fees 52,500 60,000
Other expenses 138,157 57,328
------- -------
$ 478,590 395,591
======= =======
(6) Deferred Revenues
-----------------
In June 1996, the Company received an advance of $300,000 from an
unrelated company to perform research and development and
pre-production planning for it. For services performed, the Company
recognized $155,707 in revenues in 1996 and such amount was reported in
net revenues in the statement of operations. The remaining $144,293 was
recorded as deferred revenues in the accompanying 1996 balance sheet
and was recognized as revenue in fiscal year 1997.
(7) Subordinated Debentures Due to T Partnership
--------------------------------------------
On October 11, 1993, the Company entered into an agreement with the T
Partnership to borrow up to $1,000,000. Ervin Schoenblum, the Company's
Acting President and Director, and Abraham Nechemie, also a Director of
the Company, are members of the T Partnership. On August 31, 1995,
after the Company had drawn down all of the $1,000,000, 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) and in April 1997, the Company borrowed
an additional $100,000 from the T Partnership under the same terms and
conditions as its previous borrowing.
F-9
(7) Subordinated Debentures Due to T Partnership, continued
--------------------------------------------------------
The rate of interest on the debt is 12% per annum on any outstanding
balance and is payable monthly. Principal payments of $25,000 scheduled
to begin on September 1, 1996 have been deferred to September 1, 1998.
Any remaining balance is due on August 1, 2003. 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, unless the T Partnership and Company agree otherwise.
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. Non-compliance by the Company shall allow
the T Partnership to declare an Event of Default and accelerate
repayment of indebtedness. As of August 31, 1997, the Company was not
in compliance with this financial covenant. However, in November 1997,
the T Partnership agreed not to exercise its right to accelerate the
repayment of indebtedness through September 1, 1998 as a result of
non-compliance with the aforementioned financial covenant and the
nonpayment of principal payments in the 1998 fiscal year. The T
Partnership has also agreed to a modification to the financial
covenant. The Company is currently in compliance with such covenant.
The total indebtedness due to the T Partnership at August 31, 1997 was
$1,747,125.
Under the provisions of the original agreement, the T Partnership was
granted warrants which permit the T Partnership to purchase 166,667
shares of the Company's common stock at a price of $3.25 per share. The
August 1995 agreement provides that the T Partnership surrender its
warrants and be granted a new warrant to purchase 500,000 shares of the
Company's common stock at a price of $0.9875 per share in exchange for
the surrendered warrant. No additional warrants were issued as a result
of subsequent borrowings. A value has been allocated to the warrants
based upon their estimated fair market value at the date of the
agreement. Such amount ($50,000) is amortized as additional interest
expense over the term of the indebtedness. The unamortized balance is
shown in other assets in the accompanying 1997 and 1996 balance sheets.
The warrants are immediately exercisable and expire on August 1, 2001.
As of August 31, 1997 these warrants remain outstanding.
In September 1997, the Company borrowed an additional $100,000 from the
T Partnership.
(8) Capitalized Lease Obligations
-----------------------------
The Company has entered into lease commitments for equipment that meet
the requirements for capitalization. The equipment has been capitalized
and shown in property, plant and equipment in the accompanying 1997
balance sheet (see Note 3). The related obligations are also recorded
in the accompanying balance sheet and are based upon the present value
of the future minimum lease payments with interest rates of 13.7% to
17.1%. The net book value of equipment acquired under capitalized lease
obligations was $264,867 and $43,520, respectively for the years ended
August 31, 1997 and 1996.
F-10
(8) Capitalized Lease Obligations, continued
----------------------------------------
The annual maturities for capitalized lease obligations as well as
subordinated debentures due to the T Partnership for the five years
subsequent to August 31, 1997, are as follows:
1998 $ 51,010
1999 359,186
2000 367,778
2001 367,187
2002 and thereafter 874,975
(9) Other Debt
----------
The Company has borrowed $125,000 against the cash surrender value of a
life insurance policy of the former Chairman of the Board of the
Company. Interest on the loan is 6%. The loan plus accrued interest is
recorded as a reduction in the policy's cash surrender value, which is
included in other assets in the accompanying balance sheets.
(10) Stock Options
-------------
On May 20, 1987, the Company's stockholders approved the 1987 Incentive
Stock Option Plan (the "1987 Plan"). Under the 1987 Plan, 225,000
shares of authorized but unissued shares of common stock, $.10 par
value, of the Company were set aside to provide an incentive for
officers and other key employees to render services and make
contributions to the Company. Options may be granted at not less than
their fair market value at the date of grant and are exercisable at
such time provided by the grants during the five-year period beginning
on the date of grant.
On May 23, 1990, the Company's stockholders approved the 1990 Incentive
Stock Option Plan (the "1990 Plan"). The terms of the 1990 Plan are
substantially the same as the terms of the 1987 Plan. The 1990 Plan
provides for the reservation of 225,000 shares of common stock for
issuance thereunder.
On July 15, 1992, the Company's stockholders approved the 1992
Incentive Stock Option Plan (the "1992 Plan"). The terms of the 1992
Plan are substantially the same as the terms of the 1987 and 1990
Plans. The 1992 Plan likewise provides for the reservation of 225,000
shares of common stock for issuance thereunder.
On April 1, 1992, the Board of Directors adopted the 1992 Non-
Qualified Stock Option Plan pursuant to which options to purchase
200,000 shares of common stock may be granted to directors, officers
and key employees. Options may be granted at a price determined by the
Board of Directors, but not less than 80% of the fair market value at
the date of grant. Options are exercisable at such time provided by the
grants, but each option granted shall terminate no longer than five
years after the date of grant.
In July 1994, the Company extended the expiration date of certain
outstanding options held by two members of its Board of Directors. The
extension, relating to a total of 44,500 shares of the Company's common
stock, effected options having an exercise price per share of $.875 at
the date of grant and a fair market value of $1.25 per share at the
date of extension. The difference between the price at the date of
grant and the fair market value at the date of the extension has been
recorded as compensation expense and is being amortized over the
extension period.
F-11
(10) Stock Options, continued
------------------------
In October 1994, the Board of Directors voted in favor of offering all
employees, officers and directors holding options at a price greater
than $1.00 per share the opportunity to have those options replaced by
stock options at a price of $1.00 per share, representing the fair
market value at that time. Accordingly, options to purchase 384,300
shares were terminated and an equal number of new options were issued,
which is reflected in the table below. In addition, the Company also
granted 25,000 stock options to the Company's Acting President at $1.00
per share.
A summary of all stock option activity follows:
Number
of Option Price
Shares Per Share Total
Year ended August 31, 1995:
Granted 405,300 $ .81 - 1.14 407,025
Cancelled or expired 395,800 1.19 - 2.75 791,338
Outstanding at August 31,
1995 490,300 .81 - 5.00 698,761
======= ============ =======
Year ended August 31, 1996:
Granted 12,900 $ .81 - .88 10,794
Exercised 23,500 .88 20,563
Cancelled or expired 129,700 .81 - 5.00 330,231
Outstanding at August 31,
1996 350,000 .81 - 2.75 358,761
======= ========== =======
Year ended August 31, 1997:
Granted 23,500 $ .81 - 1.13 21,643
Cancelled or expired 22,300 .81 - 1.50 20,113
Outstanding at August 31,
1997 351,200 .81 - 2.75 353,791
======= ============= =======
Options to acquire 216,260 shares of common stock were exercisable at
August 31, 1997.
The per share weighted-average fair value of stock options granted
during 1997 and 1996 was $.59 and $.55, respectively on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 5%, volatility factor of 73% and an expected
life of 5 years. The Company applies APB Opinion No. 25 in accounting
for its stock options and, accordingly, no compensation expense has
been recognized for its stock options in the financial statements. Had
the Company determined compensation cost based on the fair market value
at the grant date for its stock options under SFAS No. 123, the
Company's net income would not have been materially affected. The pro
forma amounts are indicated below:
F-12
1997 1996
--------- -------
Net loss - as reported $ (1,354,942) $ (892,940)
Net loss - pro forma (1,357,590) (893,624)
Loss per share - as reported $ (0.21) $ (0.14)
Loss per share - pro forma (0.21) (0.14)
In accordance with SFAS No. 123, pro forma net income and earnings per
share data reflect only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma amounts
presented above since compensation expense for options granted prior to
September 1, 1995 was not considered.
(11) Employee Stock Purchase Plan
----------------------------
The Company has an Employee Stock Purchase Plan (the "Plan") which
provides for the issuance of a maximum of 75,000 shares of the
Company's common stock which were made available for sale under the
Plan's first offering.
After the first offering, subsequent offerings were made upon the
recommendation of the committee administering the Plan. Common stock
can be purchased through employee- authorized payroll deductions at the
lower of 85% of the fair market value of the common stock on either the
first or last day of trading of the stock during the calendar year. It
is the intention of the Company that the Plan qualify under Section 423
of the Internal Revenue Code. The Company's Board of Directors
authorized extension of the Plan to January 1, 1998. During 1997, 1996
and 1995, 9,900, 2,866 and 2,476 shares, respectively, were purchased
under the Plan.
(12) Preferred Stock, Common Stock and Paid-in Capital
-------------------------------------------------
The Company is authorized to issue up to 1,000,000 shares of preferred
stock. As of August 31, 1997, no preferred shares have been issued.
In March 1995, the T Partnership purchased 571,500 shares of the
Company's restricted common stock, $.10 par value, in a private
placement at $.875 per share for gross proceeds of approximately
$500,000. In connection with this private placement, the Company also
issued to the T Partnership a purchase warrant to purchase 83,344
shares of the Company's common stock at an exercise price of $1.425 per
share. This warrant will expire five years from the date of the
agreement. Ervin Schoenblum, the Company's Acting President and
director, and Abraham H. Nechemie, the other member of the Company's
Board of Directors, are members of the T Partnership.
(13) Income Taxes
------------
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will be realized. The
valuation allowance for deferred tax assets as of September 1, 1997 was
$3,197,000 as compared to $2,983,000 at September 1, 1996. The net
change in the total valuation allowance for the year ended August 31,
1997 was an increase of $142,000 as compared to a decrease of $536,000
at August 31, 1996.
At August 31, 1997 and 1996, the tax effects of temporary differences
that give rise to the deferred tax assets and deferred tax liabilities
are as follows:
F-13
(13) Income Taxes, continued
-----------------------
Deferred tax assets:
1997 1996
---- ----
Inventories $ 93,000 155,000
Accounts receivable, due to
allowance for doubtful accounts 23,000 3,000
Contribution carryover 25,000 23,000
Compensated absences 31,000 30,000
Federal and state net operating
loss carryforwards 2,390,000 2,209,000
Research and development and
investment tax credit
carryforwards 635,000 635,000
--------- ---------
Total gross deferred tax assets 3,197,000 3,055,000
Less valuation allowance 3,137,000 2,983,000
--------- ---------
Net deferred tax assets 60,000 72,000
Deferred tax liabilities:
Excess of tax over financial
statement depreciation (60,000) (72,000)
------ ------
Net deferred tax $ -0- -0-
========= ==========
At August 31, 1997, the Company had available federal net operating
loss carryforwards, research and development and investment tax credit
carryforwards that expire as follows:
Net operating Research and
Expiration loss carry- development Investment tax
Date forwards credits credits
1999 $ - 25,000 _
2000 - 275,000 35,000
2001 4,417,000 246,000 43,000
2002 2,063,000 - -
2003 690,000 - -
2004 268,000 - -
2005 46,000 - -
2006 223,000 - -
2007 454,000 - -
2008 854,000 11,000 -
2009 1,368,000 - -
2010 1,178,000 - -
2011 589,000 - -
2012 1,435,000 - -
---------- --------- ------
Total 13,585,000 557,000 78,000
F-10
(14) Segment Data
------------
The Company operates in one business segment. Export sales were
approximately $1,828,000 in 1997, $2,324,000 in 1996 and $1,964,000 in
1995. The major areas of export sales are as follows:
Region 1997 1996 1995
- ------ ---- ---- ----
Asia $ 448,507 $ 459,947 $ 419,601
Europe 1,201,036 1,592,469 1,301,582
South America 76,744 127,151 149,621
Other 101,750 144,724 93,831
Sales to the only domestic distributor of the Company's products
totalled approximately $765,000 in 1995, representing approximately 11%
of net sales. The agreement with this distributor was terminated on May
31, 1995 and, as such, there were no sales to this distributor in 1996
and 1997.
(15) Commitments and Contingencies
-----------------------------
(a) The Company has agreements to lease equipment for use in the operations
of the business under operating leases. The Company incurred rental
expenses of approximately $105,000 in 1997, $116,000 in 1996 and
$148,000 in 1995.
The following is a schedule of future minimum rental payments for operating
leases which expire through 2000:
1998 8,294
1999 4,150
2000 4,150
------
16,594
(b) The Company is involved in certain claims and litigation arising in the
normal course of business. Management believes, based on the opinion of
counsel representing the Company in such matters, that, except for one
claim, the outcome of such claims and litigation will not have a
material effect on the Company's financial position and results of
operations. The one exception is that in September 1997, a jury in
Middlesex County of the Superior Court of New Jersey found the Company
liable for age discrimination when it terminated an employee in April
1994. The jury awarded the terminated employee $283,000. In addition to
the $283,000, the court awarded the plaintiff 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 in the amount of approximately $115,665. The Company is
considering taking an appeal, but has accrued all related costs to date
in the accompanying financial statements.
(c) In February 1997, the FDA conducted an inspection and audit of the
Company. 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 the violations.
F-15
(15) Commitments and Contingencies, continued
----------------------------------------
In response to the observations and the Warning Letter, the Company has
provided the FDA with a plan and timetable for instituting corrective
actions. The Company has been working diligently in its efforts to
correct these violations.
In September 1997, the FDA conducted another audit of the Company's
facilities. While the Company has made progress towards correcting the
violations, at the conclusion of this audit, the FDA issued a report
which included no additional violations of cGMP but listed violations
which are in the process of correction by the Company. At this time,
the Company is unable to precisely determine the short-term adverse
economic impact which will result from instituting the corrective
actions.
(d) On October 23, 1997, the Company entered into a letter of intent with
Cardiac Control Systems, Inc., a Delaware corporation ("CCS"), 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. It is intended that
upon the closing of the transaction, 50% of the Company's senior debt
would be redeemed and the remaining 50% of such debt would be converted
to 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) the execution of a definitive agreement
reflecting the intentions of the parties; (iii) the approval of the
transaction by the Board of Directors of each company; (iv) the
approval of the transaction by the shareholders of Electro-Catheter
Corporation; and (v) the receipt of all required regulatory approvals
by each company.
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.
F-16
Schedule II
ELECTRO-CATHETER CORPORATION
Valuation and Qualifying Accounts
Addition
Balance at charged to
beginning cost and Balance at
of year expenses Write-offs end of year
------- -------- ---------- -----------
1997 Allowance for
doubtful accounts $15,000 $142,848 $ 5,778 $152,070
1996 Allowance for
doubtful accounts $76,976 39,383 101,179 15,000
1995 Allowance for
doubtful accounts $21,776 55,020 - 76,796
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F-17