UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q/A
(mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2100 Felver Court, Rahway, New Jersey 07065
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone No. including Area Code: 732-382-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of the issuer's common stock, as of
the latest practical date:
As of January 14, 1998, the number of shares outstanding of the Registrant's
common stock was 6,383,611 shares, $.10 par value.
AMENDMENT NO. 1
The undersigned amends the following items, financial statements, exhibits or
other portions of its Quarterly Report on Form 10-Q for the quarterly period
ended November 30, 1997, as set forth in the pages attached hereto:
PART I.
Item 1. Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
November 30, 1997 and August 31, 1997 1
Condensed Comparative Statements of Operations -
Three Months Ended November 30, 1997
and November 30, 1996 2
Condensed Comparative Statements of Cash Flows -
Three Months Ended November 30, 1997
and November 30, 1996 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. - FINANCIAL STATEMENTS
- ------------------------------
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
November 30, 1997 and August 31, 1997
(Unaudited)
November 30, August 31,
1997 1997
ASSETS
Current assets:
Cash and cash equivalents $ 15,883 $ 98,127
Accounts receivable, net 973,809 988,859
Inventories
Finished goods 412,824 481,660
Work-in-process 646,127 490,621
Materials and supplies 286,957 270,086
------- -------
Total inventories 1,345,908 1,242,367
Prepaid expenses and
other current assets 83,370 168,781
--------- ---------
Total current assets 2,418,970 2,498,134
Property, plant and equipment, net 746,804 777,663
Other assets, net 91,838 97,275
--------- ---------
Total assets 3,257,612 3,373,072
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership,
a related party 75,000 -0-
Current installments of capitalized
lease obligations 55,000 50,734
Accounts payable and accrued expenses 1,135,723 1,045,406
Accrued litigation expenses 443,820 443,820
--------- -----------
Total current liabilities 1,709,543 1,539,960
Subordinated debentures due to
T Partnership, a related party
excluding current installments 1,772,125 1,747,125
Capitalized lease obligation, excluding
current installments 203,691 222,277
--------- ---------
Total liabilities 3,685,359 3,509,362
--------- ---------
Stockholders' deficiency:
Common stock 638,361 638,361
Additional paid-in capital 10,682,008 10,682,008
Accumulated deficit (11,748,116) (11,456,659)
Total stockholders' deficiency (427,747) (136,290)
Total liabilities and stockholders'
deficiency $ 3,257,612 $ 3,373,072
========= =========
See accompanying notes to condensed financial statements.
1
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
November 30,
1997 1996
---- ----
Net revenues, including product
sales, research and development
revenues and license fees $ 1,335,313 $ 1,677,750
Cost of revenues 864,846 814,995
------------ ------------
Gross profit 470,467 862,755
Operating expenses:
Selling, general and 526,050 593,833
administrative 163,018 212,567
------------ -----------
Research and development
(218,601) 56,355
Operating income (loss)
Other expense:
Interest expense (72,856) (54,700)
------ ------
Net profit (loss) $ (291,457) 1,655
======= =====
Net loss per common share $ (0.05) 0.00
==== ====
Dividends per share None None
Weighted average shares outstanding 6,383,611 6,373,711
========= =========
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
November 30,
1997 1996
---- ----
Cash flows from operating activities:
Net profit (loss) $ (291,457) $ 1,655
Reconciliation of net profit (loss) to
net cash (used in) provided by
operating activities:
Depreciation 32,508 31,313
Amortization 2,083 2,083
Changes in assets and liabilities:
Decrease in accounts receivable, net 15,050 105,643
Increase in inventories (103,541) (82,243)
Decrease (increase) in prepaid expenses
and other current assets 85,411 (19,623)
Decrease in other assets 3,354 172
Decrease in deferred revenues - (144,293)
Increase in accounts payable
and accrued expenses 90,317 108,430
-------- --------
Net cash (used in) provided by
operating activities $(166,275) 3,137
========= =====
Cash flows used in investing activities:
Purchases of property, plant
and equipment (1,649) (40,447)
------- --------
Cash flows from financing activities:
Proceeds from loan and warrants
from T Partnership, a related party 100,000 -0-
Repayment of debentures and
capitalized lease obligations (14,320) (76,836)
-------- --------
Net cash provided by (used in)
financing activities 85,680 (76,836)
------ --------
Net decrease in cash (82,244) (114,146)
Cash at beginning of period 98,127 275,283
------ -------
Cash at end of period $ 15,883 $ 161,137
====== =======
See accompanying notes to condensed financial statements.
3
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
- ------ ---------------------
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Electro-Catheter
Corporation as of November 30, 1997, the results of operations for the three
months ended November 30, 1997 and November 30, 1996 and statements of cash
flows for the three months ended November 30, 1997 and November 30, 1996, but
are not necessarily indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. Accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1997.
Note 2 Subordinated Debentures
- ------ -----------------------
In September 1997 and again in December 1997, the Company borrowed additional
amounts from the T Partnership, a related party, in each case in the amount of
$100,000, under substantially the same terms and conditions as its previous
borrowings, without issuing any additional warrants. Under the current
arrangement, the Company is obligated to comply with a financial covenant to be
tested on a monthly basis. Non-compliance by the Company with such covenant
would allow the T Partnership to declare an event of default and accelerate
repayment of indebtedness. The Company is currently in compliance with the
covenant. The total indebtedness due to the T Partnership at November 30, 1997
was $1,847,125.
Note 3 Commitments and Contingencies
- ------ -----------------------------
FDA Warning Letter
- ------------------
The products developed and manufactured by the Company come under the
jurisdiction of the Food and Drug Administration ("FDA") of the United States
Department of Health and Human Services. Since the devices manufactured by the
Company are intended for "human use", as defined by the FDA, the Company and
said devices are subject to FDA regulations, which, among other things, allow
for the conduct of routine detailed inspections of device manufacturing
establishments and confirmation of adherence to "current good manufacturing
practices" ("cGMP") in the manufacture of medical devices which include testing,
quality control, design and documentation requirements.
In February 1997, the FDA conducted an inspection and audit of Electro. At the
conclusion of the audit, the FDA issued a number of observations regarding
noncompliance by Electro with certain cGMP in the manufacture of its products.
On March 11, 1997, the FDA issued a Warning Letter to Electro requesting that
prompt action be taken to correct the violations. The areas of noncompliance
include Electro's methods of investigation of device complaints, 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
4
noncompliance, has established a plan and timetable to effectuate such
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 there can be no
assurance that Electro will be ready for any reinspection nor that Electro will
pass any 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. At this time, Electro is unable to precisely determine the
short-term adverse economic impact which will result from instituting the
corrective actions, but the voluntary discontinuation of manufacturing of
certain products and the delay in the sale of other products has adversely
affected sales by an estimated 10%.
Litigation
- ----------
In September 1997, a 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 planning on taking an appeal, but all
related costs already incurred and awarded were recorded in the financial
statements for the year ended August 31, 1997.
Merger
- ------
On October 23, 1997, the Company entered into a letter of intent with Cardiac
Control Systems, Inc. ("CCS") a Delaware corporation, located in Palm Coast,
Florida, to effect a merger of the two companies targeted toward the development
and marketing of advanced specialty electrophysiology products. Currently, the
structure of the transaction contemplates the merger of a newly-created,
wholly-owned subsidiary of CCS into and with the Company as a result of which
the Company shall become a wholly-owned subsidiary of CCS. The transaction
further contemplates an exchange of common stock of the two companies, with two
shares of CCS common stock, $.10 par value per share, to be exchanged for every
three shares of the Company's common stock, $.10 par value per share. Upon
closing of the transaction, $1 million of the Company's senior debt is intended
to be converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) 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 the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
5
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.
Note 3 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1997
presentation.
Note 4 Earnings Per Share
- ------ ------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997. As the Company's stock options are antidilutive,
assuming the treasury stock method, the calculation presented is the "basic"
calculation.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
General
- -------
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial statements.
Statements contained in and preceding management's discussion and analysis
include various forward-looking information that is based on data currently
available to management and management's beliefs and assumptions. When used in
this report, the words "anticipates," "estimates, "believes," "plans," and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Such statements are
subject to risks and uncertainties, and the Company's actual results may vary
materially from those anticipated, estimated or projected due to a number of
factors, including, without limitation, the competitive environment for the
Company's products and services, and other factors set forth in reports and
other documents filed by the Company with the Securities and Exchange Commission
from time to time.
Results of Operations
- ---------------------
General. On October 23, 1997, the Company entered into a letter of intent with
- ------- Cardiac Control Systems, Inc.,("CCS") a Delaware corporation located in
Palm Coast, Florida, to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Currently, the structure of the transaction contemplates the merger of a
newly-created, wholly-owned subsidiary of CCS into and with the Company as a
result of which the Company shall become a wholly-owned subsidiary of CCS. The
transaction further contemplates an exchange of common stock of the two
companies, with two shares of CCS common stock, $.10 par value per share, to be
exchanged for every three shares of the Company's common stock, $.10 par value
per share. Upon closing of the transaction, $1 million of the Company's senior
debt is intended to be converted into convertible preferred stock.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) 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 the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
Overview. Net revenues declined $342,437 (20.4%) for the three months ended
- -------- November 30, 1997 as compared to the three months ended November 30,
1996. Product revenues declined $232,040 (15.9%) and contract research and
development revenues declined $144,293 (100.0%) for the three months ended
November 30, 1997 as compared to the same period last year. This decline was
partially offset by an increase in sales to an original equipment manufacturing
7
("OEM") customer ($12,042) and revenues from licensing certain of the Company's
technology to a third party ($21,854). Sales. Direct domestic sales decreased
$147,270 (14.5%) for the three months ended November 30, 1997 as compared to the
same three months of the prior year. This decrease is attributed to the Company
not having an approved electrophysiology ablation catheter, lack of new products
(as the Company has focused its engineering efforts on 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 $84,770 (19.1%) for the first three months of fiscal year
1998 as compared to the first three months of fiscal year 1997. The decline in
international revenues is attributed to the lack of new products (as the Company
has focused its engineering efforts on the contract research and development and
OEM business), lower demand for the Company's electrophysiology products,
product redesign problems, pricing pressure due to competition and backorders.
Gross Profits. Gross profit dollars decreased $392,288 (45.5%) for the three
- ------------- months ended November 30, 1997 as compared to the three months
ended November 30, 1996. This decrease is primarily attributed to decreased
production levels related to the lower sales volume. The gross profit percentage
for the three months ended November 30, 1997 was 35.2% as compared to 51.4% for
the three months ended November 30, 1996. 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 increased cost of goods sold is also attributable to write-offs of
certain inventories which were scrapped for sterilization samples, evaluation
and testing failures and the increased cost associated with regulatory
compliance. The lower volume continues to adversely impact gross profit.
Selling, General and Administrative Expenses. Selling, general and
- ----------------------------------------------------- administrative expenses
decreased $67,783 (11.4%) for the three months of the current year as compared
to the same period in the prior year. This decrease primarily reflects lower
domestic and international selling expenses, substantially attributable to the
loss of field sales personnel that have not yet been replaced, and to cutbacks
in international sales and marketing activities. This decrease was partially
offset by increased expenses associated with efforts toward the merger with
Cardiac Control Systems, Inc.
Engineering, Research and Development Expenses. Research and development
- ---------------------------------------------------- expenses decreased $49,549
(23.3%) for the three months ended November 30, 1997 as compared to the same
three month period in the prior year. The decrease is primarily the result of
decreased engineering efforts and lower material, supply, consulting and
recruiting expenses. In the prior fiscal year, costs associated with contract
research and development activities were charged to cost of revenues.
Other Income and Expenses. Interest expense increased as a result of the
- ---------------------------- increased borrowings from the T Partnership as well
as interest paid on capitalized lease obligations.
The net loss for the three months ended November 30, 1997 was $291,457 or $0.05
per share as compared to a net profit of $1,655 or $0.00 per share for the three
months ended November 30, 1996.
8
Liquidity and Capital Resources
- -------------------------------
At November 30, 1997, working capital decreased $248,747 to $709,427 from August
31, 1997. The current ratio was at 1.4 to 1 at November 30, 1997 as compared to
1.6 to 1 at August 31, 1997. Net cash used in operating activities was $166,275
for the three months ended November 30, 1997 as compared to $3,137 net cash
provided by operating activities for the three months ended November 30, 1996.
This increase in cash required for operations is a result of the increase in the
Company's losses and a higher inventory level offset partially by an increase in
accounts payable and accrued expenses and a decline in other assets. The Company
has been able to satisfy its obligations with borrowings from the T Partnership,
cash on hand and extending its accounts payable.
In September 1997, a 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 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 is planning on taking an appeal and determining the costs attendant
thereto, but all related costs already incurred and awarded were recorded in the
financial statements for the year ended August 31, 1997.
The Company's ability to continue with its plans is contingent upon its ability
to either obtain sufficient cash flow from operations, obtain additional
financing, or consummate a combination with another company. The Company has had
difficulty in paying its obligations and, as a result, has delayed payments to
some vendors. The Company continues to evaluate its plans to obtain funds. 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 benefits to both companies by taking
advantage of economies of scale and elimination of redundant efforts. However,
there can be no assurance that the merger will be consummated or that the
Company will be able to generate the funding required.
Inflation did not have a material impact on the results of the Company's
operations for the three months ended November 30, 1997.
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 of its 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. Electro is reviewing its computer programs and systems to
- --------------- ensure that the programs and systems will function properly and
in compliance with Year 2000 capability requirements. Management of Electro
presently believes that the Year 2000 issue will not pose significant
9
operational problems for Electro's computer systems. The estimated cost of
Electro's review and assessment efforts is not expected to be material to
Electro's financial position or any year's result of operations, although there
can be no assurance of this result. In addition, the Year 2000 issue may impact
other entities with which Electro transacts business, and Electro cannot predict
the effect of the Year 2000 issue on such entities.
10
SIGNATURES
Pursuant to the requirements 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
/s/Ervin Schoenblum
-------------------
Date: October 8, 1998 Ervin Schoenblum
Acting President and
Chief Operating Officer
/s/Joseph P. Macaluso
---------------------
Date: October 8, 1998 Joseph P. Macaluso
Chief Financial Officer
11