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,
1997
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: 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:
As of April 7, 1997, the number of shares outstanding of the Registrant's
common stock was 6,383,611 shares, $.10 par value per share.
<PAGE>
ELECTRO-CATHETER CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
February 28, 1997 and August 31, 1996 1
Condensed Comparative Statements of Operations -
Three and Six Months Ended February 28, 1997
and February 29, 1996 2
Condensed Comparative Statements of Cash Flows -
Six Months Ended February 28, 1997 and
February 29, 1996 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 6. Exhibits and Reports on Form 8-K 7
SIGNATURES 8
Index to Exhibits 9
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE BALANCE SHEETS
(Unaudited)
February 28, 1997 and August 31, 1996
<CAPTION>
February 28, August 31,
1997 1996
----------- -------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 98,783 275,283
Accounts receivable, net 923,367 1,016,201
Inventories
Finished goods 833,650 954,997
Work-in-process 406,185 490,396
Materials and supplies 433,857 416,786
--------- ---------
Total inventories 1,673,692 1,862,179
Prepaid expenses and
other current assets 269,729 64,344
---------- ----------
Total current assets 2,965,571 3,218,007
Property, plant and equipment, net 737,621 551,698
Other assets, net 109,133 123,407
---------- ---------
Total assets 3,812,325 3,893,112
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of subordinated
debentures due to T-Partnership 300,000 300,000
Current installments of capitalized
lease obligations 37,954 7,489
Deferred revenues - 144,293
Accounts payable and accrued expenses 834,866 741,479
-------- ---------
Total current liabilities 1,172,820 1,193,261
Subordinated debentures due to
T-Partnership, excluding current
installments 1,347,125 1,447,125
Capitalized lease obligation, excluding
current installments 192,639 37,756
------- ------
Total liabilities 2,712,584 2,678,142
--------- ---------
Stockholders' equity:
Common stock 638,361 637,371
Additional paid-in capital 10,682,008 10,679,316
Accumulated deficit (10,220,628) (10,101,717)
------------ ------------
Total stockholders' equity 1,099,741 1,214,970
--------- ---------
Total liabilities and stockholders'
equity $ 3,812,325 3,893,112
========= =========
See accompanying notes to condensed financial statements.
</TABLE>
1
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
<CAPTION>
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,741,555 $ 1,953,692 $ 3,419,305 $ 3,779,685
Cost of goods sold 961,136 994,388 1,776,131 1,889,285
--------- ----------- ----------- -----------
Gross profit 780,419 959,304 1,643,174 1,890,400
Operating expenses:
Selling, general and administrative 604,982 746,456 1,198,815 1,534,492
Research and development 235,214 252,013 447,781 529,349
----------- ----------- ----------- -----------
Operating loss (59,777) (39,165) (3,422) (173,441)
Other income (expenses):
Interest income -- -- -- 86
Interest expense (60,789) (51,670) (115,489) (95,214)
----------- ----------- ----------- -----------
Net loss $ (120,566) $ (90,835) $ (118,911) $ (268,569)
=========== =========== =========== ===========
Net loss per common share $ (0.02) $ (0.01) $ (0.02) $ (0.04)
=========== =========== =========== ===========
Dividends per share None None None None
Weighted average shares outstanding 6,378,661 6,348,778 6,377,247 6,346,586
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
<CAPTION>
February 28, February 29,
1997 1996
---- ----
<S> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Cash received from customers $ 3,494,639 3,595,130
Cash paid to vendors and employees (3,391,899) (4,198,973)
Interest received - -
Interest paid (112,321) (59,545)
-------- ---------
Net cash used in operating activities (9,581) (663,388)
------- ---------
Cash flows from investing activities:
Cash purchases of property, plant and
equipment (59,824) (11,298)
------- -------
Net cash used in investing activities (59,824) (11,298)
------- -------
Cash flows from financing activities:
Stock purchase plan 3,682 1,066
Proceeds from loan from and issuance
of warrants from T-Partnership - 400,000
Reductions of debt and capitalized lease
obligations (110,777) (13,934)
-------- --------
Net cash (used in) provided by financing
activities (107,095) 387,132
-------- -------
Net decrease in cash (176,500) (287,554)
Cash at beginning of period 275,283 304,385
------- -------
Cash at end of period $ 98,783 16,831
====== ======
Net loss $ (118,911) (268,569)
Adjustments:
Depreciation 70,026 62,792
Amortization 4,167 4,167
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 92,834 (174,555)
Decrease (increase) in inventories 188,487 (84,310)
Increase in prepaid expenses and
other current assets (205,385) (40,643)
Decrease in other assets 10,107 8,830
Decrease in deferred revenues (144,293) -
Increase (decrease) in accounts
payable and accrued expenses 93,387 (171,100)
------ --------
Net cash used in operating activities $ (9,581) (663,388)
====== ========
Noncash investing and financial activities:
During the six months ended February 28, 1997, capitalized lease
obligations of $196,125 were recognized when the Company entered
into leases for equipment.
See accompanying notes to condensed financial statements.
</TABLE>
3
<PAGE>
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 28, 1997, the results of operations
for the three and six months ended February 28, 1997 and February 29, 1996 and
statements of cash flows for the six months ended February 28, 1997 and February
29, 1996, but are not necessarily indicative of the results to be expected for
the full year.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include disclosures normally
made in an Annual Report on Form 10-K. Accordingly, the financial statements
included herein should be reviewed in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1996.
Note 2
Toward the end of the second quarter, certain products were damaged during
the sterilization process as a result of a processing error by the company that
sterilizes the Company's product. The extent of the damage and the amount
recoverable under any claims against the outside sterilization company are being
investigated. The cost of these products is approximately $165,000 and such cost
is included in "other current assets" in the accompanying balance sheet.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net revenues, which includes research and development revenue of $159,471
and $64,000 from licensing certain of the Company's technology to third parties,
decreased $212,137 (10.9%) for the three months ended February 28, 1997 as
compared to the three months ended February 29, 1996. For the six months ended
February 28, 1997 net revenues, which includes research and development revenue
of $303,764 and $96,000 from licensing certain of the Company's technology,
decreased $360,380 (9.5%) as compared to the same six-month period in the prior
fiscal year. Direct domestic sales decreased $218,700 (17.6%) and $375,360
(15.7%), respectively, for the three and six months ended February 28, 1997 as
compared to the same periods last year. These decreases are primarily due to a
decline in sales of the Company's electrophysiology products and lower demand
for some of the Company's older products. International sales decreased $232,385
(33.2%) and $388,768 (29.9%), respectively, for the same periods which, for the
most part, is attributed to a decline in sales of the Company's
electrophysiology products.
During recent months, the Company has devoted most of its engineering
efforts to its research and development customer, original equipment
manufacturers (OEM) customers and other long-term projects. This strategy has
affected sales in the short-term, but management hopes that such strategy will
yield more positive results in the long-term as the Company emphasizes and
continues to investigate opportunities to capitalize on its catheter technology
and manufacturing capabilities.
Gross profit dollars decreased $178,884 (18.6%) and $247,226 (13.1%)
respectively, for the three and six months ended February 28, 1997 as compared
to the same periods last year. This decrease is primarily attributed to the
lower volume manufactured. The gross profit percentage for the six months ended
February 28, 1997 was 48.1% as compared to 50.0% for the same period last year.
In October 1996, the Company reduced its manufacturing force as a result of the
decreased demand. This decrease in production will continue to negatively impact
gross profit.
Selling, general and administrative expenses decreased $141,564 (19.0%) and
$335,677 (21.9%), respectively, for the three and six months ended February 28,
1997 as compared to the three and six months ended February 29, 1996. These
decreases primarily reflect lower domestic marketing and selling expenses as a
result of the loss of field sales personnel that have not yet been replaced.
Research and development expenses decreased $16,799 (6.7%) and $81,568
(15.4%) for the three and six months ended February 28, 1997 as compared to the
same period last year. The decrease is primarily attributed to the transfer of
expenses to costs of revenues associated with billable research and development
activities performed for a third party and lower material purchases. These
decreases were partially offset by higher expenses for new personnel.
Interest expense increased primarily as a result of the higher loan balance
to the T-Partnership and interest costs associated with the financing of new
capital equipment.
5
<PAGE>
The net loss for the three months ended February 28, 1997 was $120,566 or
$.02 per share as compared to a loss of $90,835 or $0.01 per share for the three
months ended February 29, 1996.
The net loss for the six months ended February 28, 1997 was $118,911 or
$.02 per share as compared to a net loss of $268,569 or $0.04 per share for the
six months ended February 29, 1996.
Liquidity and Capital Resources
At February 28, 1997, working capital decreased $231,995 to $1,792,751 from
August 31, 1996. The current ratio was 2.5 to 1 at February 28, 1997 as compared
to 2.7 to 1 at August 31, 1996. Net cash used in operating activities was $9,581
for the six months ended February 28, 1997 as compared to $663,388 used in
operating activities for the six months ended February 29, 1996. This
improvement is primarily attributed to the reduction in the Company's losses for
the six-month period and the decrease in accounts receivable and the increase in
accounts payable. The Company was able to satisfy its cash requirements from
funds received for research and development work performed for third parties,
cost-saving measures, especially in the sales and marketing area where some
sales personnel have not been replaced, and cash on hand.
The Company's ability to continue with its plans is contingent upon its
ability to obtain sufficient cash flow from operations or to obtain additional
financing. The Company continues to evaluate its plans and adopt certain
cost-saving measures, when and where appropriate. However, there can be no
assurance that the Company will be able to generate the funding required.
On August 31, 1995, the Company entered into an agreement with the
T-Partnership to borrow an additional $500,000 ("Lending Agreement"). In January
1996, the Company and the T-Partnership agreed to a restructuring of its
financing agreement. The T-Partnership advanced an additional $200,000 to the
Company and agreed to defer interest payments for a period of three months
(interest payments were added to the outstanding principal on the T-Partnership
indebtedness). The total indebtedness due to the T-Partnership at February 28,
1997 was $1,647,125. On April 10, 1997, the T-Partnership advanced an additional
$100,000 to the Company on the same terms and conditions as the Lending
Agreement, except that no additional warrants were issued.
The rate of interest on the debt is 12% per annum and is payable monthly on
any outstanding balance. Principal payments of $25,000 began on September 1,
1996. 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 is to prepay the outstanding balance in the event the
Company is merged into or consolidated with another corporation or the Company
sells all or substantially all of its assets.
In exchange for the additional advances, the Company 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 the indebtedness. As of August 31, 1996, the Company was not in
compliance with this financial covenant. However, on December 16, 1996, the
T-Partnership agreed not to exercise its right to accelerate the repayment of
indebtedness through September 1, 1997 as a result of non-compliance with the
aforementioned financial covenant and the nonpayment of the December principal
payment or any future principal payments due in the 1997 fiscal year.
6
<PAGE>
In June 1996, the Company received an advance of $300,000 from an unrelated
company to perform research and development projects and pre-production work. In
September 1996, the Company reached a verbal agreement-in-principle with this
company to perform research and development and production for a period of one
year for a monthly fee of $150,000. This arrangement has been reduced to a
mutually agreed upon Term Sheet from which a formal agreement is intended to be
reached. In December 1996 and March 1997, the Company received additional
advances of $150,000 from this company.
In October 1996, the Company reached an agreement to license certain of its
technology to another medical device company that is in a market segment in
which the Company does not participate. This agreement has been finalized. For
the six months ended February 28, 1997, the Company received all of the $96,000
in license fees from this company as per the terms of this arrangement.
The aforementioned agreements include the opportunity to manufacture third
party products which could increase plant utilization. However, there can be no
assurance that the Company will receive the manufacturing rights to these
products or be able to manufacture these products. If manufacturing rights are
not received for one of these agreements, then royalty payments are to be
received based upon the customer's sales volume.
Inflation did not have a material impact on the results of the Company's
operations for the six months ended February 28, 1997.
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 to Exhibits.
(b) During the quarter ended February 28, 1997, the Company did
not file any Current Reports on Form 8-K.
7
<PAGE>
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 14, 1997 Ervin Schoenblum
Acting President & Chief Operating Officer
/s/Joseph P. Macaluso
---------------------
Date April 14, 1997 Joseph P. Macaluso
Chief Financial Officer
8
<PAGE>
INDEX TO EXHIBITS
-----------------
27 - Financial Data Schedule, which is submitted
electronically to the Securities and
Exchange Commission for information only and
is not filed.
9
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000032120
<NAME> Electro-Catheter Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> FEB-28-1997
<CASH> 99
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<ALLOWANCES> (33)
<INVENTORY> 1,674
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0
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<COMMON> 638
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