<PAGE>
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 29,
1996
______ 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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone No. including Area Code: 908-382-5600
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 each of the issuer's classes
of common stock, as of the latest practical date:
6,350,211 shares of common stock, $.10 par value as of April 4, 1996.
<PAGE>
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
February 29, 1996 and August 31, 1995 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended February 29, 1996
and February 28, 1995 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended February 29, 1996 and
February 28, 1995 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 7
PART II. OTHER INFORMATION
Item 5. Other Information 7
SIGNATURES 8
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<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
February 29, 1996 and August 31, 1995
<CAPTION>
February 29, August 31,
1996 1995
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,831 304,385
Accounts receivable, net 1,380,843 1,206,288
Inventories
Finished goods 1,062,556 938,224
Work-in-process 605,801 644,957
Materials and supplies 509,032 509,898
--------- ---------
Total inventories 2,177,389 2,093,079
Prepaid expenses and
other current assets 83,673 43,030
---------- ----------
Total current assets 3,658,736 3,646,782
Property, plant and equipment, net 596,561 598,787
Other assets, net 122,950 135,947
---------- ---------
Total assets 4,378,247 4,381,516
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T-Partnership 150,000 -
Current installments of capitalized
lease obligations 7,212 -
Current installments of long-term debt - 13,055
Accounts payable and accrued expenses 945,475 1,128,310
-------- -----------
Total current liabilities 1,102,687 1,141,365
Subordinated debentures due to
T-Partnership, excluding current installments 1,450,000 1,200,000
Long-term capital lease obligations 41,177 -
---------- ---------
Total liabilities 2,593,864 2,341,365
--------- ---------
Stockholders' equity:
Common stock 635,021 633,630
Additional paid-in capital 10,626,708 10,615,298
Accumulated deficit (9,477,346) (9,208,777)
----------- -----------
Total stockholders' equity 1,784,383 2,040,151
--------- ---------
Total liabilities and stockholders'
equity $ 4,378,247 4,381,516
========= =========
See accompanying notes to condensed financial statements.
</TABLE>
1
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,953,692 $ 1,873,415 $ 3,779,685 $ 3,500,136
Cost of goods sold 994,388 1,046,917 1,889,285 1,923,602
------- --------- --------- ---------
Gross profit 959,304 826,498 1,890,400 1,576,534
Operating expenses:
Selling, general and administrative 746,456 788,519 1,534,492 1,497,703
Research and development 252,013 191,753 529,349 423,187
------- ------- ------- --------
Operating loss (39,165) (153,774) (173,441) (344,356)
Other income (expenses):
Interest income - 2,295 86 2,600
Interest expense (51,670) (28,904) (95,214) (57,198)
------- -------- -------- -------
Net loss $ (90,835) (180,383) (268,569) (398,954)
======= ========= ========= =========
Net loss per common share $(0.01) $ (0.03) $ (0.04) $ (0.07)
====== ======== ========= ========
Dividends per share None None None None
Weighted average shares outstanding 6,348,778 5,762,324 6,346,586 5,762,324
See accompanying notes to condensed financial statements.
</TABLE>
2
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<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
<CAPTION>
February 29, February 28,
1996 1995
---- ----
<S> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Cash received from customers $ 3,595,130 3,350,785
Cash paid to vendors and employees (4,198,973) (3,899,791)
Interest received - 2,600
Interest paid (59,545) (57,364)
--------- ----------
Net cash used in operating activities (663,388) (603,770)
Cash flows from investing activities:
Cash purchases of property, plant and
equipment (11,298) (7,048)
------- ------
Net cash used in investing activities (11,298) (7,048)
------- ------
Cash flows from financing activities:
Stock purchase plan 1,066 -
Proceeds from loan from and issuance
of warrants from T-Partnership 400,000 250,000
Reductions of debt and capitalized lease
obligations (13,934) (8,899)
-------- -------
Net cash provided by financing
activities 387,132 241,101
Net decrease in cash (287,554) (369,717)
Cash at beginning of period 304,385 376,388
------- -------
Cash at end of period $ 16,831 6,671
====== =====
Net loss $ (268,569) (398,954)
Adjustments:
Depreciation 62,792 70,074
Amortization 4,167 9,298
Changes in assets and liabilities:
Increase in accounts receivable, net (174,555) (149,351)
Increase in inventories (84,310) (8,428)
(Increase) decrease in prepaid expenses
and other current assets (40,643) 33,602
Decrease in other assets 8,830 7,299
Decrease in accounts payable
and accrued expenses (171,100) (167,310)
-------- --------
Net cash used in operating activities $ (663,388) (603,770)
======== =======
Noncash investing and financial activities:
During the six months ended February 29, 1996, capitalized lease
obligations of $49,268 were recognized when the Company entered into
leases for equipment.
See accompanying notes to condensed financial statements.
</TABLE>
3
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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 February 29, 1996, the results of operations
for the three and six months ended February 29, 1996 and February 28, 1995 and
statements of cash flows for the six months ended February 29, 1996 and February
28, 1995, but are not necessarily indicative of the results to be expected for
the full year.
These statements should be read in conjunction with the Company's Annual
Report to the Securities and Exchange Commission on Form 10-K for the fiscal
year ended August 31, 1995.
Note 2 Subordinated Debentures
The Company and the T-Partnership, to whom the Company has had an
indebtedness of $1,500,000, agreed in January 1996 to a restructuring of their
financing agreement. The T-Partnership advanced additional amounts of $100,000
to the Company on January 11, 1996 and March 5, 1996 and deferred all interest
payments due from the Company for a period of three months (interest payments
were added to outstanding principal on the T-Partnership indebtedness). The
assets of the Company will secure these new advances and will continue to secure
preexisting indebtedness due from the Company to the T-Partnership. In exchange
for these advances, the Company has agreed that if it is not in compliance with
certain financial covenants, to be tested on a monthly basis, the T-Partnership
may declare an Event of Default and accelerate repayment of indebtedness. The
Company is currently in compliance with this covenant. The T-Partnership
indebtedness otherwise is to be repaid in equal monthly payments from September
1, 1996 through August 1, 2001.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales for the three months ended February 29, 1996 increased $80,277
(4.3%) as compared to the three months ended February 28, 1995. International
sales increased $219,734 (45.8%) as a result of higher sales of steerable
catheters with temperature control that are sold based upon specific approval
from certain countries under Section 801(e) of the FDA regulations. Sales also
increased as a result of further penetration of the worldwide market and the
timing of orders from distributors that maintain inventory. This increase was
partially offset by a decrease in domestic sales of $139,457 (10.0%). This
decrease is a result of a decline in sales in certain regions of the U.S. as
well as a decline in shipments to an OEM customer for a special-design catheter
which is used by this customer in clinical trials for its own product.
For the six months ended February 29, 1996 international sales increased as
a result of higher sales of steerable catheters with temperature control that
are sold based upon specific approval from certain countries under Section
801(e) of the FDA regulations. Sales also increased due to further penetration
of the worldwide market and the timing of orders from distributors that maintain
inventory. This increase was offset by a decline in domestic sales of $97,711
(38%) for the six months ended February 29, 1996. This decrease is attributed to
a decline in sales in certain regions of the U.S.
Gross profit dollars increased $132,895 (16.1%) and $313,866 (19.9%) for
the three and six months ended February 29, 1996 as compared to the three and
six months ended February 28, 1995. This increase is primarily attributed to the
increase in operating yields and manufacturing output. The gross profit
percentages for the three and six months ended February 29, 1996 were 49.1% and
50.0%, respectively, as compared to 44.1% and 45.0%, respectively, for the same
periods last year. Gross profit for the current fiscal year also included the
positive impact of selling directly to hospitals in the northeast region rather
than through a distributor, which required discounts, as the Company did the
prior fiscal year. In December 1995, the Company reduced its manufacturing staff
as a result of lower than anticipated product demand. Gross profit will be
negatively affected for a period of time as a result of this labor reduction
since overhead expenses will be allocated over a smaller direct labor pool.
Selling, general and administrative expenses decreased $42,063 (5.3%) for
the three month period ended February 29, 1996 as compared to the same period
last year. This decrease primarily reflects lower domestic selling expenses
associated with the departure of four of the Company's sales representatives who
have not been replaced. This decrease was partially offset by expenses
attributed to the addition of an International Marketing Manager. Selling,
general and administrative expenses increased $36,789 (2.5%) for the six month
period ended February 29, 1996 as compared to the same period last year. This
increase is attributed mostly to an increase in selling expenses during the
first quarter of the current fiscal year associated with the addition of new
sales representatives to cover the territory previously represented by a
distributor and the addition of an International Marketing Manager. As noted
above, during the second quarter of fiscal year 1996, four of the Company's
sales representatives departed and were not replaced, which resulted in the
lower second quarter expenditures.
5
<PAGE>
Research and development expenditures increased $60,260 (31.4%) and
$106,162 (25.1%) for the three and six months ended February 29, 1996 as
compared to the three and six months ended February 28, 1995. The increase for
the three months ended February 29, 1996 is attributed to an increase in
personnel and support from manufacturing for new product development. The
increase for the six months ended February 29, 1996 is attributed to an increase
in personnel and purchases of materials used for new product development.
Interest expense increased as a result of additional borrowings from the T-
Partnership, including the amortization of warrants issued in conjunction with
these borrowings.
The net loss for the three months ended February 29, 1996 was $90,385 or
$.01 per share as compared to a loss of $180,383 or $.03 per share for the three
months ended February 28, 1995.
The net loss for the six months ended February 29, 1996 was $268,569 or
$.04 per share as compared to a loss of $398,954 or $.07 per share for the six
months ended February 29, 1996.
Liquidity and Capital Resources
Working capital increased $50,632 to $2,556,049 from August 31, 1995. The
current ratio was 3.3 to 1 at February 29, 1996 as compared to 3.2 to 1 at
August 31, 1995. Net cash used in operating activities was $663,388 for the
first six months of fiscal year 1996 as compared to $603,770 for the first six
months of 1995 as a result of the loss from operations, increases in accounts
receivable and inventories and the reduction in accounts payable and accrued
expenses. During the first six months of 1996 the Company was able to satisfy
its cash shortfall from operating activities with the borrowings from the
T-Partnership and cash on hand.
On August 31, 1995, the Company entered into an agreement with the
T-Partnership to borrow an additional $500,000 and combine such loan with the
original $1,000,000 for a total loan due to the T-Partnership of $1,500,000. The
T-Partnership agreed to lend the Company $200,000 on the execution of the
agreement and, at the Company's request, an additional sum of $300,000. As of
November 30, 1995, the Company had borrowed all of the $500,000. The rate of
interest is 12% per annum and is payable monthly on any outstanding balance.
Principal payments of $20,000 were scheduled to commence on September 1, 1995
for the original $1,000,000. However, the new agreement provides for repayment
to begin on September 1, 1996 with installments of $25,000 each month. Any
remaining balance is due on August 1, 2001. The loan is secured by the Company's
property, building, accounts receivable, inventories and machinery and
equipment. The Company must prepay the outstanding balance in the event the
Company is merged into or consolidated with another corporation or the Company
sells all or substantially all of its assets. Ervin Schoenblum, the Company's
Acting President and director and another member of the Company's Board of
Directors are members of the T-Partnership.
6
<PAGE>
Under the provisions of the original agreement, the T-Partnership was
granted purchase warrants which permitted the T-Partnership to purchase 166,667
shares of the Company's common stock at a price of $3.25 per share. The new
agreement states that the T-Partnership will surrender its original purchase
warrant to purchase 166,667 shares of common stock and be granted a new purchase
warrant to purchase 500,000 shares of the Company's common stock at a price of
$0.9875 per share. The warrants are immediately exercisable.
The Company and the T-Partnership, to whom the Company has had an
indebtedness of $1,500,000, agreed in January 1996 to a restructuring of their
financing agreement. The T-Partnership has advanced an additional $200,000 to
the Company and has agreed to defer all interest payments due from the Company
for a period of three months (interest payments to be added to outstanding
principal on the T-Partnership indebtedness). The assets of the Company will
secure these new advances and will continue to secure preexisting indebtedness
due from the Company to the T- Partnership. In exchange for these advances, the
Company has agreed that if it is not in compliance with certain financial
covenants, to be tested on a monthly basis, the T-Partnership may declare an
Event of Default and accelerate repayment of indebtedness. The Company is
currently in compliance with this covenant. The T- Partnership indebtedness
otherwise is to be repaid in equal monthly payments from September 1, 1996
through August 1, 2001.
The Company's ability to continue in business is dependent upon its ability
to generate sufficient cash flow from operations or to obtain additional
financing. The Company continues to re-evaluate its plans and adopt certain
revenue enhancement and cost reduction measures. In December, 1995, the Company
reduced its manufacturing staff as a result of lower than anticipated product
demand. The Company is also attempting to increase sales by examining and, where
appropriate, modifying its distribution network, utilizing aggressive pricing
and introducing new products to market.
Inflation did not have a material impact on the results of the Company's
operations for the six months ended February 29, 1996.
Part II. Other Information
Item 5. Other Information
Dr. Robert I. Bernstein and Michael Bernstein, M.D. have recently resigned
from the Board of Directors for health reasons. The Company will consider
adding, on a timely basis, one or more members to the Board of Directors.
Exhibits and Reports on Form 8-K
Exhibits
None.
Reports on Form 8-K
None.
7
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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 15, 1996 Ervin Schoenblum
Acting President & Chief Operating Officer
/s/Joseph P. Macaluso
Date April 15, 1996 Joseph P. Macaluso
Chief Financial Officer
8
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<NAME>* Arlene Bell
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