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 May 31, 1998
[ ] 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
incorporation or organization) Identification 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 April 6, 1998, the number of shares outstanding of the Registrant's common
stock was 6,390,389 shares, $.10 par value.
AMENDMENT NO. 1
The undersigned hereby amends the following items, financial statements,
exhibits or other positions of its Quarterly Report on Form 10-Q for the
quarterly period ended May 31, 1998, as set forth in the pages attached hereto:
PART I
Item 1. Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Results
of Questions.
PART II
Item 6. Exhibits and Reports on Form 8-K
ELECTRO-CATHETER CORPORATION
----------------------------
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed Comparative Balance Sheets
May 31, 1998 and August 31, 1997 1
Condensed Comparative Statements of Operations -
Three and Nine Months Ended May 31, 1998
and May 31, 1997 2
Condensed Comparative Statements of Cash Flows -
Nine Months Ended May 31, 1998 and May 31, 1997 3
Notes to Condensed Financial Statements 4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
PART I - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
ASSETS May 31, August 31,
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ - $ 98,127
Accounts receivable, net 759,133 988,859
Inventories
Finished goods 447,388 481,660
Work-in-process 575,201 490,621
Materials and supplies 310,497 270,086
------- -------
Total inventories 1,333,086 1,242,367
Prepaid expenses and
other current assets 64,885 168,781
--------- ---------
Total current assets 2,157,104 2,498,134
Property, plant and equipment, net 684,002 777,663
Other assets, net 276,238 97,275
--------- ---------
Total assets 3,117,344 3,373,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T Partnership,
a related party 225,000 -0-
Current installments of capitalized
lease obligations 65,629 50,734
Accounts payable and accrued expenses 1,382,143 1,045,406
Accrued litigation expenses 288,400 443,820
--------- ---------
Total current liabilities 1,961,172 1,539,960
Subordinated debentures due to
T Partnership, a related party,
excluding current installments 1,922,125 1,747,125
Capitalized lease obligation,
excluding current installments 219,285 222,277
Total liabilities 4,102,582 3,509,362
Stockholders' deficiency:
Common stock 639,039 638,361
Additional paid-in capital 10,683,491 10,682,008
Accumulated deficit (12,307,768) (11,456,659)
---------- ----------
Total stockholders' deficiency ( 985,238) ( 136,290)
---------- ----------
Total liabilities and
stockholders' deficiency $ 3,117,344 $ 3,373,072
========= =========
See accompanying notes to condensed financial statements.
1
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
May 31, May 31,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 1,502,537 $ 1,718,954 $ 4,152,546 $ 5,138,259
Cost of goods sold 1,119,482 1,082,277 2,836,541 2,858,408
--------- --------- --------- ---------
Gross profit 383,055 636,677 1,316,005 2,279,851
Operating
expenses:
Selling, general
and administrative 409,404 561,074 1,525,871 1,759,889
Research and development 118,734 225,198 416,224 672,979
------- ------- ------- -------
Operating loss (145,083) (149,595) (626,090) (153,017)
Other expenses:
Interest expense (77,607) (70,073) (225,019) (185,562)
------- ------- -------- --------
Net loss $ (222,690) $ (219,668) $ (851,109) $ (338,579)
========= ========= ========= =========
Basic and diluted
loss per share $ (0.03) $ (0.03) $ (0.13) $ (0.05)
====== ====== ====== ======
Dividends per share None None None None
Weighted
average shares
outstanding 6,390,389 6,383,611 6,387,000 6,378,661
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31,
1998 1997
---- ----
Increase (decrease) in cash: Cash flows from operating activities:
Net loss $ (851,109) $ (338,579)
Adjustments:
Depreciation 95,746 107,658
Amortization of deferred charge 6,250 6,250
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 229,726 (131,067)
(Increase) decrease in inventories (90,719) 393,392
Decrease (increase) in prepaid expenses and
other current assets 103,896 (174,642)
(Increase) decrease in other assets (185,213) 14,105
Decrease in deferred revenues -0- (144,293)
Increase in accounts payable and accrued
expenses 230,467 163,563
------- -------
Net cash used in operating activities (460,956) (103,613)
------- -------
Cash flows from investing activities:
Cash purchases of property,
plant and equipment ( 2,085) (66,756)
------ ------
Net cash used in investing activities ( 2,085) (66,756)
Cash flows from financing activities:
Proceeds from Stock Purchase Plan 2,161 3,682
Proceeds from loan from T Partnership,
a related party 400,000 100,000
Reductions of debt and capitalized
lease obligations (37,247) (119,384)
------ -------
Net cash (used in) provided by
financing activities 364,914 (15,702)
------- ------
Net decrease in cash (98,127) (186,071)
Cash at beginning of period 98,127 275,283
------ -------
Cash at end of period -0- 185,561
Interest paid $ 221,420 $ 185,561
======= =======
Property, plant and equipment acquired under
capitalized lease obligations $ 49,150 $ 196,125
====== =======
See accompanying notes to condensed financial statements.
3
ELECTRO-CATHETER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
- ------ ---------------------
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Electro-Catheter
Corporation as of May 31, 1998, the results of operations for the three and nine
months ended May 31, 1998 and May 31, 1997 and statements of cash flows for the
nine months ended May 31, 1998 and May 31, 1997, but are not necessarily
indicative of the results to be expected for the full year.
The financial statements have been prepared in accordance with the requirements
of Form 10-Q and consequently do not include disclosures normally made in an
Annual Report on Form 10-K. Accordingly, the financial statements included
herein should be reviewed in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 1997.
Note 2 Other Assets
- ------ ------------
In connection with the proposed merger (see Note 4 to Notes to Condensed
Financial Statements), the Company has incurred $174,290 of expenses through May
31, 1998. These expenses are included in Other Assets in the accompanying
balance sheet at May 31, 1998. Consummation of the merger is subject to, among
other things, raising capital. Upon consummation of the merger, these costs will
either be charged to additional paid-in capital with equity financing, amortized
over the term of any debt or charged to operations if the merger does not occur.
Note 3 Subordinated Debentures
- ------ -----------------------
In September 1997, in December 1997, and in January 1998, 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 May 31, 1998 was
$2,147,125.
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 the Company's
facilities and practices as a result of which the FDA issued a Warning Letter
regarding non-compliance by the Company with certain cGMP in the manufacture of
its products. Electro communicated with the FDA its intentions to remedy the
non-compliance, established a plan and timetable to effectuate remediation and
has diligently worked to take the necessary corrective actions. A subsequent FDA
- -
4
inspection in September 1997 indicated that while substantial progress has been
made, not all corrective actions have been completed. The Company is continuing
in its efforts to complete such actions and it is Electro's intention to inform
the FDA by late September 1998 that it is has completed such actions and is
ready for reinspection. There can be no assurance, however, that the Company
will be ready for any reinspection in September 1998 nor that it will pass any
such reinspection when it occurs. While the Company is currently under no
restrictions by the FDA regarding the manufacture or sale of its products, the
Company is unable to precisely determine the short-term economic impact of
instituting the required corrective actions and there can be no assurance that
the FDA will not take further action, including seizure of products, injunction
and/or civil penalties, if the necessary corrective actions are not completed on
a timely basis. At this time, the Company is unable to precisely determine the
short-term adverse economic impact which will result from instituting the
corrective actions, but the voluntary discontinuation of manufacturing of
certain products and the delay in the sale of other products has adversely
affected sales by an estimated 10%.
Litigation
- ----------
In September 1997, a Superior Court jury in Middlesex County found the Company
liable for age discrimination in connection with its termination of an employee
in April 1994. The jury awarded the terminated employee $283,000 plus attorney's
fees and expenses and prejudgment interest in the combined amount of
approximately $47,990. The Company also incurred legal costs from September 1996
through September 1997 in the amount of approximately $115,665. All of the
aforementioned costs were recorded in the financial statements for the year
ended August 31, 1997.
Pending the Company's appeal, the plaintiff, in an effort to execute upon the
judgment rendered in his favor, levied the Company's bank accounts, thereby
freezing the available funds. Notwithstanding management's belief that the
Company had arguments supporting its appeal, management weighed the considerable
cash requirements of an appeal bond, the costs of continued efforts relative to
the appeal, and the need to vacate the levies to satisfy the Company's immediate
cash requirements against the likelihood of prevailing on its appeal and the
terms of a possible settlement, and on April 8, 1998, the Company entered into a
Settlement Agreement with the plaintiff. Under the key terms of the Settlement
Agreement, the matter is deemed settled for the sum of $305,000 payable by a
lump sum payment of $65,000 within five business days of the date of the
Settlement Agreement with the balance, bearing interest at the rate of 6% per
annum, payable in monthly installments of $10,000, plus interest, commencing
July 1, 1998. A default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest.
Merger
- ------
The Company entered into an Agreement and Plan of Reorganization, dated as of
January 20, 1998 (the "Merger Agreement"), 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. A subsequent amendment of the
Merger Agreement was entered into on May 5, 1998. Currently, the structure of
the transaction contemplates the merger of a newly-created, wholly-owned
subsidiary of CCS into and with the Company as a result of which the Company
shall become a wholly-owned subsidiary of CCS and the stockholders of the
Company will become stockholders of Catheter Technology Group, Inc. ("CTG"), a
Delaware corporation and parent holding company of CCS, to be formed as a part
of a restructuring in connection with the merger. By virtue of the merger, each
outstanding share of common stock, $.10 par value, of the Company will be
converted into the right to receive one-fifth of a share of common stock $.10
par value of CTG. Pursuant to the restructuring, CTG will succeed to all rights
and obligations of CCS and will become the successor issuer of CCS such that
stockholders of CCS will become stockholders of CTG. Subsequent to the
restructuring, it is intended that CTG will undergo a 1 for 5 reverse stock
5
split reducing the number of shares of common stock, $.10 par value, of CTG (the
"CTG Common Stock") outstanding to approximately 529,748 shares. By virtue of
the merger, subsequent to the reverse stock split to receive one-fifth of a
share of CTG Common Stock, effectively equal to an even exchange of shares prior
to such reverse stock split.
Upon closing of the transaction, $1 million of the Company's senior debt is
intended to be redeemed by: (a) the issuance by the surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger ;
(b) the delivery to the T Partnership of a CTG 9% conditional promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock, or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that CCS shall not be obligated to make aggregate payments
with respect to both the Series A Preferred Stock and conditional note, in
excess of $1.0 million plus interest); and (c) the delivery to the T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of The Company's secured
indebtedness to the T Partnership exclusive of the amount redeemed under (a)
above), bearing interest at the rate of 12% per annum payable quarterly, the
principal amount of which shall be due and payable three years from the date of
execution of such note (the terms of the security for the note have yet to be
agreed upon).
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (iv) the receipt of all
required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
International sales should be adversely affected in Europe (approximately 17% of
total revenues) for about the next six months as the Company was not able to
obtain the "CE" Mark on its products on a timely basis, in order to continue to
sell into this market. The effort to obtain the "CE" Mark is continuing and the
Company is hopeful of obtaining this designation before the end of the calendar
year on itsmajor products in order to continue selling into this market.
However, there can be no assurance that the Company will obtain the "CE" Mark or
maintain the same level of revenue upon receiving the "CE" Mark as it did
previously.
6
Note 5 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1998
presentation.
Note 6 Earnings Per Share
- ------ ------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share and
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. SFAS 128 is effective
for financial statements relating to both interim and annual periods ending
after December 15, 1997.
Basic loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Diluted loss per share is based on net loss for the relevant period, divided by
the weighted average number of common shares outstanding during the period.
Common share equivalents, such as outstanding stock options, are not included in
the calculation since the effect would be antidilutive.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULT 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. The Company entered into an Agreement and Plan of Reorganization dated
- ------- as of January 20, 1998 (the "Merger Agreement") 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. A subsequent
amendment of the Merger Agreement was entered into on May 5, 1998. Currently,
the structure of the transaction contemplates the merger of a newly-created,
wholly-owned subsidiary of CCS into and with the Company as a result of which
the Company shall become a wholly-owned subsidiary of CCS and the stockholders
of the Company will become stockholders of Catheter Technology Group, Inc.
("CTG"), a Delaware corporation and parent holding company of CCS, to be formed
as part of a restructuring in connection with the merger. By virtue of the
merger, each outstanding share of common stock, $.10 par value, of the Company
will be converted into the right to receive one-fifth of a share of common stock
$.10 par value of CTG. Pursuant to the restructuring, CTG will succeed to all
rights and obligations of CCS and will become the successor issuer of CCS such
that stockholders of CCS will become stockholders of CTG. Subsequent to the
restructuring, it is intended that CTG will undergo a 1 for 5 reverse stock
split reducing the number of shares of common stock, $.10 par value, of CTG (the
"CTG Common Stock") outstanding to approximately 529,748 shares. By virtue of
the merger, subsequent to the reverse stock split, each outstanding share of
common stock, $.10 par value, of the Company will be converted into the right to
receive one-fifth of a share of CTG Common Stock, effectively equal to an even
exchange of shares prior to such reverse stock split.
Upon closing of the transaction, $1 million of the Company's senior debt is
intended to be redeemed by: (a) the issuance by the surviving subsidiary
corporation in the merger (the "Surviving Subsidiary") to the T Partnership of
an aggregate of 1,000 shares of Series A 9% preferred stock, no par value (the
"Series A Preferred Stock") of the Surviving Subsidiary, which shares shall have
a liquidation value equal to, and shall be issued in redemption of, $1.0 million
of the indebtedness and shall be convertible into shares of CTG Common Stock at
a conversion price equal to 120% of the price per share of the CTG Common Stock
used as the basis for the consideration given (whether in the form of issued
stock, if any, or warrants, provided the exercise price of the warrant reflects
the current market value of the CTG Common Stock, or otherwise) in exchange for
any capital raised in satisfaction of the financing contingency to the merger;
(b) the delivery to the T Partnership of a CTG 9% conditional promissory note
pursuant to which CTG is obligated to pay only those amounts which are due but
not paid to the holders of the Series A Preferred Stock or in the event of
certain other non-monetary defaults such as bankruptcy, liquidation, a sale of
substantially all assets, a change of ownership of the surviving subsidiary, or
8
a default in the herein below mentioned secured promissory note (any payment or
conversion of the Series A Preferred Stock shall be deemed a payment on the
conditional note, and any principal or interest payments on the conditional note
shall be deemed redemptions and payments under the Series A Preferred Stock,
with the result being that CCS shall not be obligated to make aggregate payments
with respect to both the Series A Preferred Stock and conditional note, in
excess of $1.0 million plus interest); and (c) the delivery to the T Partnership
of a secured promissory note made by CTG in an amount not to exceed $1.3 million
(which amount shall be the remaining amount of The Company's secured
indebtedness to the T Partnership exclusive of the amount redeemed under (a)
above), bearing interest at the rate of 12% per annum payable quarterly, the
principal amount of which shall be due and payable three years from the date of
execution of such note (the terms of the security for the note have yet to be
agreed upon).
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (iv) the receipt of all
required regulatory approvals by the two companies.
CCS develops, manufactures and sells a broad line of implantable cardiac
pacemakers, pacemaker leads and related products which Company management
believes are complementary to its own product lines. The Company believes the
merger may allow certain efficiencies to improve operating performance and that
the broader product line may provide for a more effective marketing and
distribution process. There can be no assurance, however, that consummation of
the merger will yield positive operating results in the future.
From December 1997 through March 1998, the Company also had discussions
regarding acquisition by another firm based outside the United States. In early
April 1998, the Company's Board of Directors terminated these discussions,
believing that the terms proposed were not in the best interest of the
stockholders.
Overview. Net revenues declined $216,417 (12.6%) and $985,713 (19.2%),
- -------- respectively, for the three and nine months ended May 31, 1998 as
compared to the three and nine months ended May 31, 1997. Product revenues
increased $31,210 (2.1%) for the three months ended May 31, 1998 as compared to
the same three month period in the prior fiscal year. However, product revenues
decreased $471,238 (10.7%) for the nine months ended May 31, 1998 as compared to
the same period in the prior fiscal year. Contract research and development
declined $240,529 (100%) and $544,293 (100%), respectively, for the three and
nine months ended May 31, 1998 as compared to the three and nine months ended
May 31, 1997. Licensing fees and royalty income increased $11,902 for the three
months ended May 31, 1998 and declined $33,309 for the nine month period. For
the nine months ended May 31, 1998 sales to an original equipment manufacturing
("OEM") customer increased $63,727, however, revenues from this customer
declined $19,000 for the three month period ended May 31, 1998.
Sales. Domestic sales decreased $74,266 (7.4%) and $353,934 (11.6%) for the
- ------ three and nine months ended May 31, 1998, respectively, as compared to
the same periods in the prior year. These decreases are primarily due to the
Company not having an approved electrophysiology ablation catheter, lack of new
products, a continued decline in demand for the Company's older products in
pacing and monitoring, backorders, as well as the impact of not replacing sales
representatives who have left the Company. International revenues decreased
$117,304 (8.6%) for the first nine months of fiscal year 1998 as compared to the
first nine months of fiscal year 1997. The decline in international revenues for
the nine month period is attributed to the lack of new products, lower demand
for the Company's electrophysiology products, product redesign problems, lower
prices due to competition and backorders. For the three months ended May 31,
1998, international revenues increased $105,476 (23.5%) as compared to the three
months ended May 31, 1997. This increase is attributed to new business in
countries where the Company has had representation and the timing
9
of orders from distributors. This increasing trend is not expected to continue
in the near term. International sales should be adversely affected in Europe
(approximately 17% of total revenues) for about the next six months as the
Company was not able to obtain the "CE" Mark on its products on a timely basis,
in order to continue to sell into this market.
The Company's insufficient financing has hampered its ability to introduce new
products to market and to correct the redesign issues, in order to maintain
sales at its prior levels.
Gross Profits. Gross profit dollars decreased $253,622 (39.8%) and $963,846
- ------------- (42.3%), respectively, for the three and nine months ended May 31,
1998 as compared to the three and nine months ended May 31, 1997. This decrease
is primarily attributed to decreased production levels related to the lower
sales volume. 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 negatively impact gross profit.
Selling, General and Administrative Expenses. Selling, general and
- ----------------------------------------------------- administrative expenses
decreased $151,670 (27.0%) and $234,018 (13.3%), respectively, for the three and
nine months ended May 31, 1998 as compared to the same periods last year. The
three months ended May 31, 1998 includes an adjustment of $144,068 to reclassify
expenses associated with the merger to other assets (see Note 2 to Notes to the
Condensed Financial Statements). Excluding this adjustment, selling, general and
administrative expenses decreased only $35,602 (6.3%) for the three months ended
May 31, 1998 as compared to the three months ended May 31, 1997. The decreases
primarily reflects lower domestic and international selling expenses
substantially attributable to the loss of field sales personnel that have not
yet been replaced and cutbacks in international activities.
Engineering, Research and Development Expenses. Research and development
- ---------------------------------------------------- expenses decreased $106,464
(47.3%) and $256,755 (38.2%), respectively, for the three and nine months ended
May 31, 1998 as compared to the same periods in the prior fiscal year. This
decrease reflects the lower level of R&D efforts. The decrease is primarily
attributed to decreased personnel and lower material, supply, consulting and
recruiting expenses. In the prior fiscal year, costs associated with billable
research and development activities were charged to cost of revenues. There were
no contract research and development activities during the nine months ended May
31, 1998.
Other Income and Expenses. Interest expense increased as a result of the
- ---------------------------- increased borrowings from the T Partnership and
interest on capitalized lease obligations.
Liquidity and Capital Resources
- -------------------------------
At May 31, 1998, working capital decreased $762,242 to $195,932 from August 31,
1997. The current ratio was 1.1 to 1 at May 31, 1998 as compared to 1.6 to 1 at
August 31, 1997. Net cash used in operating activities was $460,956 for the nine
months ended May 31, 1998 as compared to $103,613 used in operating activities
for the nine months ended May 31, 1997. This increase in cash required for
operations is primarily attributed to the increase in the Company's losses for
the nine month period, increase in other assets which is primarily associated
with the expenses in connection with the proposed merger, higher inventories and
increase in accounts payable offset by a decrease in accounts receivable and
other current assets. The Company was able to satisfy its cash requirements with
borrowings from the T Partnership, cost saving measures, especially in the sales
and marketing area, where sales personnel have not been replaced, cash on hand
and extending its accounts payable.
10
In September 1997, a Superior Court jury in Middlesex County, New Jersey, found
the Company liable for age discrimination in connection with its termination of
an employee in April 1994. The jury awarded the terminated employee $283,000
plus attorney's fees and expenses and prejudgment interest in the combined
amount of approximately $47,990. The Company also incurred legal costs from
September 1996 through September 1997 in the amount of approximately $115,665.
All of the aforementioned costs were recorded in the financial statements for
the year ended August 31, 1997. The Company filed an appeal of the judgement.
Pending the Company's appeal, the plaintiff, in an effort to execute upon the
judgment rendered in his favor, levied on certain of the Company's bank
accounts, thereby freezing the available funds. Notwithstanding management's
belief that the Company had arguments supporting its appeal, management weighed
the considerable cash requirements of an appeal bond, the costs of continued
efforts relative to the appeal, and the need to vacate the levies to satisfy the
Company's immediate cash requirements against the likelihood of prevailing on
its appeal and the terms of a possible settlement, and on April 8, 1998, the
Company entered into a Settlement Agreement with the plaintiff. Under the key
terms of the Settlement Agreement, the matter has been settled for the sum of
$305,000 payable as follows: (i) by a lump sum payment of $65,000 within five
business days of the date of the Settlement Agreement and (ii) the balance,
bearing interest at the rate of 6% per annum, payable in monthly installments of
$10,000, plus interest, commencing July 1, 1998. The Settlement Agreement
provides that a default in any monthly payment which remains unpaid for a period
of ten days allows the plaintiff to declare a default and accelerate the payment
of the entire outstanding balance with interest. The Company has made the
payments due to date on a timely basis.
The Company's ability to continue with its plans is contingent upon its ability
to either obtain sufficient cash flow from operations, obtain additional
financing, or consummate a combination with another company. The Company has had
difficulty in paying its obligations and, as a result, has delayed payments to
some vendors. The Company continues to evaluate its plans to obtain funds.
Consummation of the merger is subject, among other things, to: (i) raising
sufficient capital to support the product development efforts of both companies;
(ii) declaration of the effectiveness of the registration statement filed with
the Securities and Exchange Commission in connection with the merger; (iii) the
approval of the merger and the transactions contemplated thereby by the
stockholders of Electro-Catheter Corporation and CCS; (iv) the receipt of all
required regulatory approvals by the two companies.
Management believes that this merger can offer benefits to both companies by
taking advantage of economies of scale and elimination of redundant efforts.
However, there can be no assurance that the merger will be consummated or that
the Company will be able to generate the funding required.
Inflation did not have a material impact on the results of the Company's
operations for the nine months ended May 31, 1998.
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 is it 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
11
designation before June 14, 1998. However, 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.
Year 2000 Issue. Electro is reviewing its computer programs and systems to
- ---------------- ensure that the programs and systems will function properly and
be in compliance with Year 2000 capability requirements. Management of Electro
presently believes that the Year 2000 issue will not pose significant
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.
12
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The exhibits filed or incorporated by reference as part of this
Quarterly Report on Form 10-Q are listed in the attached Index of
Exhibits.
(b) The Company did not file any Current Reports on Form 8-K during
the period reviewed by this Quarterly Report on Form 10-Q.
13
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 9, 1998 Ervin Schoenblum
Acting President & Chief Operating Officer
/s/Joseph P. Macaluso
Date: October 9, 1998 Joseph P. Macaluso
Chief Financial Officer
14
INDEX TO EXHIBITS
10.1 First Amendment to the Agreement and Plan of Reorganization dated
May 5, 1998 among the Company, Cardiac Control Systems, Inc. and CCS Subsidiary,
Inc.
15