UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----------
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7578
ELECTRO-CATHETER CORPORATION
(Exact name of the Registrant as specified in Charter)
New Jersey 22-1733406
(State of Incorporation) (I.R.S. Employer ID Number)
2100 Felver Court, Rahway, New Jersey 07065
(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 12, 1999, the number of shares outstanding of the Registrant's
common stock was 6,390,389 shares, $.10 par value.
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
February 28, 1999 and August 31, 1998 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended February 28, 1999
and February 28, 1998 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended February 28, 1999 and
February 28, 1998 3
Notes to Condensed Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
February 28, 1999 and August 31, 1998
(Unaudited)
February 28, August 31,
1999 1998
------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 70,520 $ 168,762
Accounts receivable, net 434,098 723,753
Inventories 971,326 1,253,456
Prepaid expenses and other current assets 58,507 68,538
-------- -----------
Total current assets 1,534,451 2,214,509
Property, plant and equipment, net 594,225 653,452
Deferred merger costs - 234,253
Other assets, net 116,108 80,733
---------- -----------
Total assets 2,244,784 3,182,947
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current installments of capitalized lease obligations 80,000 73,279
Accounts payable - trade 671,699 774,200
Accrued expenses 398,241 341,646
Accrued merger costs 297,418 181,319
Accrued interest due to The T Partnership,
a related party 428,887 293,764
Accrued litigation expenses 205,134 265,134
--------- ---------
Total current liabilities 2,081,379 1,929,342
Subordinated debentures and promissory notes due to
The T Partnership, a related party 2,322,125 2,247,125
Capitalized lease obligation, excluding
current installments 158,498 196,614
------- -------
Total liabilities 4,562,002 4,373,081
--------- ---------
Stockholders' deficiency:
Common stock 639,039 639,039
Additional paid-in capital 10,704,803 10,704,803
Accumulated deficit (13,661,060) (12,533,976)
---------- -----------
Total stockholders' deficiency (2,317,218) (1,190,134)
Total liabilities and stockholders' deficiency $ 2,244,784 $ 3,182,947
========= =========
See accompanying notes to condensed financial statements.
1
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
------------- ------------- ------------- --------------
Net revenues including product
sales, royalty revenue and
licensing fees $ 900,975 $ 1,314,696 $ 1,868,261 $ 2,650,009
Cost of goods sold 801,520 852,213 1,503,501 1,717,059
------- ---------- --------- ---------
Gross profit 99,455 462,483 364,760 932,950
Operating expenses:
Selling, general and
administrative 365,927 590,417 727,996 1,116,467
Research and development 118,854 134,472 238,521 297,490
------- ------- ------- -------
Operating loss (385,326) (262,406) (601,757) (481,007)
Other expenses:
Interest expense (84,212) (74,556) (172,502) (147,412)
Merger costs (352,825) - (352,825) -
--------- ----------- --------- ------------
Net loss $(822,363) $ (336,962) $(1,127,084) $ (628,419)
======= ======== ========= ========
Basic and diluted net loss
per common share $(0.13) $ (0.05) $ (0.18) $ (0.10)
====== ======== ======= =======
Dividends per share None None None None
Weighted average shares
outstanding 6,390,389 6,387,000 6,390,389 6,385,548
See accompanying notes to condensed financial statements.
2
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
February 28, February 28,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (1,127,084) $ (628,419)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 59,227 64,497
Amortization 4,167 4,167
Changes in assets and liabilities:
Decrease in accounts receivable, net 289,655 133,957
Decrease (increase) in inventories 282,130 (215,044)
Decrease in prepaid expenses and
other current assets 10,031 108,585
Increase in other assets (39,542) (728)
Decrease in deferred merger costs 234,253 -
Increase in accounts payable and
other accrued expenses 145,316 156,668
------- -------
Net cash used in operating activities $ (141,847) (376,317)
------- -------
Cash flows from investing activities:
Cash purchases of property, plant and
equipment - (2,085)
------- ------
Cash flows from financing activities:
Stock purchase plan - 2,161
Proceeds from subordinated debentures and
promissory notes due to The T Partnership,
a related party 75,000 300,000
Repayment of capitalized lease obligations (31,395) (21,886)
-------- -------
Net cash provided by financing activities 43,605 280,275
------ -------
Net decrease in cash (98,242) (98,127)
Cash at beginning of period 168,762 98,127
------- ------
Cash at end of period $ 70,520 $ -0-
======= =========
Interest paid $ 37,379 $ 144,413
Property, plant and equipment acquired under
capitalized lease obligations $ - $ 49,150
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 ("Electro") as of February 28, 1999, the results of operations for
the three and six months ended February 28, 1999 and February 28, 1998 and
statements of cash flows for the six months ended February 28, 1999 and February
28, 1998, 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 Electro's Annual Report on Form 10-K for the fiscal year
ended August 31, 1998.
Note 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. Electro
incurred net losses of $1,077,317, $1,354,942 and $892,940 for the years ended
August 31, 1998, 1997 and 1996, respectively, and a loss of $1,127,084 for the
six months ended February 28, 1999. At February 28, 1999, Electro had an
accumulated deficit of $13,661,060. The net losses incurred by Electro have
consumed working capital and weakened its financial position. Electro's ability
to continue in business is dependent upon its success in generating sufficient
cash flow from operations or obtaining additional financing from external
sources. Electro continues to re-evaluate its plans and adopt certain cost
reduction measures. Electro continues to explore alternative financing from
external sources. However, there can be no assurance that Electro will be able
to generate the funding required to sustain operations. The accompanying
Financial Statements do not include any adjustment that might result from the
outcome of this uncertainty.
Note 3 Accounts Receivable
- ------ -------------------
Accounts receivable comprise the following:
February 28, August 31,
1999 1998
---------- --------
Accounts receivable - trade $ 653,297 $ 937,342
Allowance for doubtful accounts (219,199) (213,589)
-------- --------
$ 434,098 $ 723,753
======== =======
4
Note 4 Inventories
- ------ -----------
Inventories consist of the following: February 28, August 31,
1999 1998
----------- ----------
Finished goods $ 362,431 $ 398,503
Work-in-process 403,862 611,300
Materials and supplies 205,033 243,653
------- -------
$ 971,326 $ 1,253,456
======= ==========
Note 5 Subordinated Debentures and Promissory Notes
- ---------------------------------------------------
In February 1999, the Company borrowed an additional $75,000 from The T
Partnership under a promissory note. The total indebtedness due to The T
Partnership at February 28, 1999 was $2,322,125.
The rate of interest on the debt to The T Partnership is 12% per annum on any
outstanding balance and is payable monthly. As of February 28, 1999, Electro
owed The T Partnership $428,887 for monthly interest payments dating back to
July 1997. Electro has sent the required interest payments to The T Partnership.
The T Partnership has chosen not to tender such checks for payment. Therefore,
Electro has considered the interest payments unpaid at February 28, 1999 and has
reflected the amount as a liability in the accompanying balance sheet. Interest
payments under this agreement continue to be required to be made monthly;
however, The T Partnership has agreed that the failure to make such monthly
payments will not constitute an event of default, as defined in the agreement,
and has agreed not to request acceleration of payment for the prior interest
payments or, further, for any interest payments through March 1, 2000. Monthly
principal payments of $25,000 scheduled to begin on September 1, 1996 have,
pursuant to several waivers, with the latest received in April 1999, been
deferred to March 1, 2000. The loan is secured by Electro's property, building,
accounts receivable, inventories and machinery and equipment. Electro is to
prepay the outstanding balance in the event it is merged into or consolidated
with another corporation or it sells all or substantially all of its assets,
unless The T Partnership and Electro agree otherwise. Under the provisions of
the agreement with The T Partnership, Electro is obligated to comply with
certain covenants, to be tested on a monthly basis. Non-compliance by Electro
shall allow The T Partnership to declare an Event of Default and accelerate
repayment of indebtedness. As of February 28, 1999, Electro was not in
compliance with certain covenants. However, in April 1999, The T Partnership
agreed not to exercise its right to accelerate the repayment of indebtedness as
a result of any non-compliance with the aforementioned covenants through March
1, 2000 and agreed to defer the principal and interest payments due through
February 28, 1999 until March 1, 2000.
Note 6 Commitments and Contingencies
- ------ -----------------------------
FDA Warning Letter
- ------------------
Electro's products are classified as medical devices under the FDA Act and, as
such, are subject to extensive regulatory compliance requirements. In February
1997, the FDA conducted an inspection and audit of Electro's facilities and
practices, as a result of which the FDA issued a Warning Letter (the "FDA
Warning Letter") regarding noncompliance by Electro with certain regulations
regarding current good manufacturing practices ("cGMP") in the manufacture of
its products. 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 recordkeeping requirements. Electro
5
has communicated with the FDA its intentions to remedy the noncompliance, has
established a plan 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 of 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 recordkeeping protocols. A subsequent
FDA inspection in September 1997 indicated that while substantial progress had
been made, not all corrective actions had been completed.
In January and February 1999, the FDA conducted another general inspection of
Electro's facilities. As a result of the inspection, the FDA issued Form FDA 483
citing Inspectional Observations. Three of the observations were repeated from
the FDA's February 1997 inspection. It was acknowledged by the FDA inspectors
that Electro had made progress on all three of these observations, but had not
yet completed them. A major reason for the delay in completing the corrective
steps was that Electro had been involved in merger discussions with Cardiac
Control Systems, Inc. ("CCS") since May 1997 with the understanding that certain
functions that were being currently performed at Electro would be transferred to
CCS's facility. The merger had been delayed and, as such, the corrective actions
on these three observations had not been completed. Electro is now giving these
three observations top priority. The other observations included validation,
sterilization, environmental monitoring, complaint handling and documentation
control issues. In February 1999, Electro submitted its corrective action plan
to the FDA delineating the corrective actions formulated and that Electro
intends to complete.
While Electro is currently under no restrictions by the FDA regarding the
manufacture or sale of its products, Electro is unable to determine precisely
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. Until all
corrective actions required under the FDA Warning Letter have been taken, the
FDA will not consider new products for approval. However, Electro's insufficient
financing for research and development efforts over the last few years have
limited its ability to produce new products and, consequently, no FDA approvals
are currently sought.
Termination of The Proposed Merger
- ----------------------------------
Electro entered into an Agreement and Plan of Reorganization dated as of January
20, 1998, with CCS to effect a merger of the two companies targeted toward the
development and marketing of advanced specialty electrophysiology products.
Consummation of the merger was subject to a number of conditions, including the
securing of a minimum of $4.0 million in financing in addition to any existing
debt obligations of both Cardiac and Electro upon terms acceptable to their
respective Boards of Directors. The stockholders of each of Electro and Cardiac
approved the merger at the respective Special Meetings of such Stockholders held
on November 16, 1998.
Despite the efforts of management of both companies, the financing condition has
not been satisfied. On April 16, 1999, Electro terminated the merger with CCS.
As such, all deferred merger costs have been expensed and are included in the
accompanying statement of operations.
International Sales
- --------------------
Beginning in June 1998, international sales were adversely affected in Europe
(approximately 21% and 17% of total revenues for the fiscal years 1996 and 1997,
respectively) as Electro was not able to obtain the CE Mark on its products on
6
a timely basis in order to continue to sell into this market. Several months
ago, Electro and CCS submitted an application requesting CE Mark certification
for CCS to sell Electro's steerable line of catheters, as manufacturer, with
Electro acting as vendor to CCS in such regard. The CE Mark certification was
granted on October 26, 1998, issued in the name of CCS. Since the merger has
been terminated, Electro will attempt to pursue alternative means to obtain CE
Mark certification. However, there can be no assurance that the CE Mark
certification can be obtained.
Note 7 Reclassifications
- ------ -----------------
Certain reclassifications have been made to conform to the fiscal year 1999
presentation.
Note 8 Earnings Per Share
- ------ -------------------
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.
Note 9 Comprehensive Income
- ---------------------------
On June 7, 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Electro adopted SFAS No. 130 for the quarter ended November 30, 1998.
Comprehensive income for the three month periods ended February 28, 1999 and
1998 were the same as the net losses of $822,363 and $336,962, respectively.
Comprehensive income for the six months ended February 28, 1999 and 1998 were
the same as the net losses of $1,127,084 and $628,419, respectively.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------
Results of Operations
- ---------------------
General. The following is management's discussion and analysis of certain
significant factors which have affected the financial condition and results of
operations of Electro-Catheter Corporation ("Electro") 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 Electro'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
Electro's products and services, and other factors set forth in reports and
other documents filed by Electro with the Securities and Exchange Commission
from time to time.
Proposed Merger. Electro entered into an Agreement and Plan of Reorganization
dated as of January 20, 1998, with Cardiac Control Systems ("CCS") to effect a
merger of the two companies targeted toward the development and marketing of
advanced specialty electrophysiology products.
Consummation of the merger was subject to a number of conditions, including the
securing of a minimum of $4.0 million in financing in addition to any existing
debt obligations of both Cardiac and Electro upon terms acceptable to their
respective Boards of Directors. The stockholders of each of Electro and Cardiac
approved the merger at the respective Special Meetings of such Stockholders held
on November 16, 1998.
Despite the efforts of management of both companies, the financing condition has
not been satisfied. On April 16, 1999, Electro terminated the merger with CCS.
As such, all deferred merger costs have been expensed and are included in the
accompanying statement of operations.
Overview. Electro's insufficient financing for research and development efforts
over the last few years has limited its ability to produce new products and,
consequently, has adversely affected product sales. Additionally, international
sales were adversely affected in Europe as Electro was not able to obtain the CE
Mark on its products on a timely basis, in order to continue to sell into this
market. Domestic sales were also affected as sales representatives that left
Electro were not replaced as a result of the financial condition of Electro.
This decline in sales was partially offset by certain cost reduction measures.
Electro's current cash flow problems has delayed payment to certain vendors,
thereby delaying the purchase of certain key components. This has caused Electro
to delay delivery of certain products to customers, thereby adding to the cash
flow problems as Electro is not able to ship certain products for which it has
orders and subsequently invoice its customers.
8
Revenues. Net revenues declined $413,721 (31.5%) and $781,748 (29.5%),
respectively, for the three and six months ended February 28, 1999 as compared
to the same periods in the prior fiscal year. Product sales declined $358,330
(29.2%) and $631,648 (25.7%),respectively, for the three and six months ended
February 28, 1999 as compared to the three and six months ended February 28,
1998. Sales to an OEM customer declined $86,740 and $137,925, respectively, for
the same periods while other revenues increased $31,349 for the three months
ended February 28, 1999 and decreased $12,175 for the six months ended February
28, 1999 as compared to the same periods last year.
Direct domestic sales decreased $248,123 (27.6%) and $386,541 (21.8%),
respectively, for the three and six months ended February 28, 1999 as compared
to the same periods in the prior year. The decline was primarily attributed to
lower electrophysiology sales as Electro has not introduced any new products and
also to Electro not having an approved electrophysiology ablation catheter.
Sales of Electro's Pacewedge catheter also declined as a result of lower demand.
A decline in demand for Electro's older products in pacing and monitoring,
backorders, as well as the impact of not replacing sales representatives who
have left Electro have also affected sales. International revenues decreased
$110,207 (33.5%) and $245,107 (35.6%) respectively for the same periods. The
decline in international revenues is attributed to Electro not obtaining the CE
Mark on its products on a timely basis, in order to continue to sell into Europe
and the lack of new products for the electrophysiology market that Electro has
targeted. Certain of Electro's European distributors have terminated their
relationship with Electro in order to represent competitors. Several months ago,
Electro and CCS submitted applications requesting CE Mark certification for CCS
to sell Electro's steerable line of catheters and Electro's multi- electrode
non-balloon catheters, as manufacturer, with Electro acting as vendor to CCS in
such regard. The CE Mark certifications were granted and issued in the name of
CCS. Since the merger has been terminated, Electro will attempt to pursue
alternative means to obtain CE Mark certification. However, there can be no
assurance that the CE Mark certification can be obtained.
Gross Profit. Gross profit dollars decreased $363,028 (78.5%) and $568,190
(60.9%) for the three and six months ended February 28, 1999 as compared to the
three and six months ended February 28, 1998. This decrease is primarily
attributed to decreased production levels, for the most part related to the
lower sales volume and the unavailability of certain components, as well as
lower selling prices. The gross profit percentage for the three months ended
February 28, 1999 was 11.0% as compared to 35.2% for the three months ended
February 28, 1998. The gross profit percentage for the six months ended February
28, 1999 was 19.5% as compared to 35.2% for the six months ended February 28,
1998. The lower volume continues to negatively impact gross profit.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $224,490 (38.0%) and $388,471 (34.8%) for the three and six
months ended February 28, 1999 as compared to the same periods in the last
fiscal year. This decrease primarily reflects lower domestic and international
selling expenses primarily attributed to the loss of field sales personnel that
have not yet been replaced and cutbacks in international activities and lower
legal expenses.
Research and Development. Research and development expenses decreased $15,618
(11.6%) and $58,969 (19.8%), respectively, for the three and six months ended
February 28, 1999 as compared to the same periods in the prior year. This
decrease reflects the lower level of R&D efforts. The decrease is primarily
attributed to a decrease in personnel.
9
Merger Costs. Merger costs represent the write-off of expenses associated with
the merger that has been terminated (see Note 6 to the Financial Statements).
Interest Expense. 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 February 28, 1999 Electro had negative working capital of $546,928 as
compared to positive working capital of $285,167 at August 31, 1998. Net cash
used in operating activities was $141,847 for the six months ended February 28,
1999 as compared to $376,317 used in operating activities for the same period in
the prior fiscal year. This decrease in cash required for operations is
primarily attributed to the decease in accounts receivable, inventories and
deferred merger costs, an increase in accounts payable and accrued expenses.
Electro was able to satisfy its cash requirements with cost saving measures,
especially in the sales and marketing area where sales personnel have not been
replaced, cash on hand, collection of accounts receivable, a reduction in
inventories and extension of its accounts payable in addition to a loan from The
T Partnership.
Electro's ability to continue with its plans is contingent upon its ability to
obtain sufficient cash flow from operations or to obtain additional financing
from external sources. Electro has had difficulty in paying its obligations and,
as a result, has delayed payments to vendors and certain others providing
services to Electro, such as attorneys. Electro continues to evaluate its plans
and adopt certain cost- saving measures, where appropriate. Electro continues to
explore alternative financing from external sources. However, there can be no
assurance that Electro will be able to generate the funding required.
The rate of interest on the debt to The T Partnership is 12% per annum on any
outstanding balance and is payable monthly. As of February 28, 1999, Electro
owed The T Partnership $428,887 for monthly interest payments dating back to
July 1997. Electro has sent the required interest payments to The T Partnership.
The T Partnership has chosen not to tender such checks for payment. Therefore,
Electro has considered the interest payments unpaid at February 28, 1999 and has
reflected the amount as a liability in the accompanying balance sheet. Interest
payments under this agreement continue to be required to be made monthly;
however, The T Partnership has agreed that the failure to make such monthly
payments will not constitute an event of default, as defined in the agreement,
and has agreed not to request acceleration of payment for the prior interest
payments or, further, for any interest payments through March 1, 2000. Monthly
principal payments of $25,000 scheduled to begin on September 1, 1996 have,
pursuant to several waivers, with the latest received in April 1999, been
deferred to March 1, 2000. The loan is secured by Electro's property, building,
accounts receivable, inventories and machinery and equipment. Electro is to
prepay the outstanding balance in the event it is merged into or consolidated
with another corporation or it sells all or substantially all of its assets,
unless The T Partnership and Electro agree otherwise. Under the provisions of
the agreement with The T Partnership, Electro is obligated to comply with
certain covenants, to be tested on a monthly basis. Non-compliance by Electro
shall allow The T Partnership to declare an Event of Default and accelerate
repayment of indebtedness. As of February 28, 1999, Electro was not in
compliance with certain covenants. However, in April 1999, The T Partnership
agreed not to exercise its right to accelerate the repayment of indebtedness as
a result of any non-compliance with the aforementioned covenants through
10
March 1, 2000 and agreed to defer the principal and interest payments due
through February 28, 1999 until March 1, 2000.
Operating Trends and Uncertainties
- ----------------------------------
Sales. The ability of Electro to attain profitable 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
process and approval process is normally accomplished in coordination with its
international distributors. In order for Electro to continue to sell its
products in the nations of the EEC, it was required to obtain the CE Mark
certification from the International Organization of Standardization ("ISO").
Since Electro has not yet obtained the CE Mark certification and is now unable
to sell certain of its products in the nations of the EEC (which accounted for
approximately 14%, 17% and 21% of total revenues for fiscal years 1998, 1997 and
1996, respectively), international sales have been adversely affected in Europe.
Several months ago, Electro and Cardiac submitted an application requesting CE
Mark certification for Cardiac to sell Electro's steerable line of catheters and
its multi-electrode non-balloon catheters, as manufacturer, with Electro acting
as vendor to Cardiac in such regard. The CE Mark certifications were granted.
Since the merger has been terminated, Electro will attempt to pursue alternative
means to obtain CE Mark certification. However, there can be no assurance that
the CE Mark certification can be obtained.
FDA Warning Letter. Electro's products are classified as medical devices under
the FDA Act and, as such, are subject to extensive regulatory compliance
requirements. In February 1997, the FDA conducted an inspection and audit of
Electro's facilities and practices, as a result of which the FDA issued a
Warning Letter (the "FDA Warning Letter") regarding noncompliance by Electro
with certain regulations regarding current good manufacturing practices ("cGMP")
in the manufacture of its products. 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 recordkeeping requirements. Electro
has communicated with the FDA its intentions to remedy the noncompliance, has
established a plan 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 of 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 recordkeeping protocols. A subsequent
FDA inspection in September 1997 indicated that while substantial progress had
been made, not all corrective actions had been completed.
In January and February 1999, the FDA conducted another general inspection of
Electro's facilities. As a result of the inspection, the FDA issued Form FDA 483
citing Inspectional Observations. Three of the observations were repeated from
the FDA's February 1997 inspection. It was acknowledged by the FDA inspectors
that Electro had made progress on all three of these observations, but had not
yet completed them. A major reason for the delay in completing the corrective
steps was that Electro had been involved in merger discussions with Cardiac
Control Systems, Inc. ("CCS") since May 1997 with the understanding that certain
11
functions that were being currently performed at Electro would be transferred to
CCS's facility. The merger had been delayed and, as such, the corrective actions
on these three observations had not been completed. Electro is now giving these
three observations top priority. The other observations included validation,
sterilization, environmental monitoring, complaint handling and documentation
control issues. In February 1999, Electro submitted its corrective action plan
to the FDA delineating the corrective actions formulated and that Electro
intends to complete.
While Electro is currently under no restrictions by the FDA regarding the
manufacture or sale of its products, Electro is unable to determine precisely
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. Until all
corrective actions required under the FDA Warning Letter have been taken, the
FDA will not consider new products for approval. However, Electro's insufficient
financing for research and development efforts over the last few years have
limited its ability to produce new products and, consequently, no FDA approvals
are currently sought.
Year 2000 Issue. Many currently installed computer systems use a two-digit
suffix to identify year references with an assumed prefix of "19". This limits
those systems to recognizing dates between 1900 and 1999. As a result, in less
than a year, computer systems and/or software used by many companies in a very
wide variety of applications will experience operating difficulties unless they
are modified or upgraded to adequately process information involving, related to
or dependent upon the century change. If not corrected, systems and/or
applications could fail or create erroneous results at or in connection with
applications after December 31, 1999. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the century change.
Electro has established a project team to address Year 2000 risks. Electro is
currently assessing the impact of Year 2000 on its computer systems and
financial applications although a plan has not been implemented. Electro is also
assessing the potential overall impact of the impending century change on its
business, results of operations and financial position.
Electro has reviewed its information and operational systems and manufacturing
processes in order to identify those products, services or systems that are not
Year 2000 compliant. As a result of its initial assessment, Electro has
determined that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with
Electro's overall systems initiatives. The total cost of these Year 2000
compliance activities is not anticipated to be material to Electro's financial
position or its results of operations. Electro expects to complete its Year 2000
project during the fourth quarter of calendar 1999. Based on available
information, Electro does not believe any material exposure to significant
business interruption exist as a result of Year 2000 compliance issues.
Accordingly, Electro has not adopted any formal contingency plan in the event
its Year 2000 project is not completed in a timely manner. The costs and the
timing in which Electro plans to complete its Year 2000 modification and testing
processes are based on management's best estimates. However, there can be no
assurance that Electro will timely identify and remediate all significant Year
2000 problems, that remedial efforts will not involve significant time and
expense, or that such problems will not have a material adverse effect on
Electro's business, results of operations or financial position.
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Electro also faces risk to the extent that suppliers of products, services and
systems purchased by it and others with whom Electro transacts business on a
worldwide basis do not comply with Year 2000 requirements. Electro will initiate
written communications with significant suppliers and customers to determine the
extent to which it is vulnerable to these third parties' failure to remediate
their own Year 2000 issues. In the event any such third parties cannot provide
Electro with products, services or systems that meet the Year 2000 requirements
on a timely basis, or in the event Year 2000 issues prevent such third parties
from timely delivery of products or services required by Electro, its results of
operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase
Electro's products or services, its business, results of operations and
financial position could be materially adversely affected. Due to the general
uncertainty, both internally and externally, inherent in the Year 2000 problem
resulting, in part, from the uncertainty of its Year 2000 readiness of third
parties, suppliers and customers, Electro is unable to accurately predict at
this time whether the consequences of Year 2000 failures will have a material
impact on Electro's results of operations, liquidity or financial condition.
The discussion of Electro's efforts, and management's expectations, relating to
Year 2000 compliance are forward-looking statements. Electro's ability to
achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
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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) Electro did not file any Current Reports on Form 8-K
during the period reviewed by this Quarterly Report on
Form 10-Q.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRO-CATHETER CORPORATION
/s/Ervin Schoenblum
-------------------
Date April 19, 1999 Ervin Schoenblum
Acting President and
Chief Operating Officer
/s/Joseph P. Macaluso
---------------------
Date April 19, 1999 Joseph P. Macaluso
Chief Financial Officer
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INDEX TO EXHIBITS
- -----------------
27 - Financial data schedule which is submitted electronically to the
Securities and Exchange Commission for information only and is not
filed.
15