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 May 31, 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 July 26, 1999, the number of shares outstanding of the Registrant's
common stock was 6,390,389 shares, $.10 par value.
<PAGE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited):
Condensed Comparative Balance Sheets
May 31, 1999 and August 31, 1998 1 - 2
Condensed Comparative Statements of Operations -
Three and Nine Months Ended May 31, 1999
and May 31, 1998 3
Condensed Comparative Statements of Cash Flows -
Nine Months Ended May 31, 1999 and
May 31, 1998 4
Notes to Condensed Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
Index to Exhibits 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
<TABLE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
CONDENSED COMPARATIVE BALANCE SHEETS
May 31, 1999 and August 31, 1998
(Unaudited)
<CAPTION>
May 31, August 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 178,531 $ 168,762
Accounts receivable, less allowance for
doubtful accounts 427,698 723,753
Inventories 755,012 1,253,456
Prepaid expenses and other current assets 34,716 68,538
------ ------
Total current assets 1,395,957 2,214,509
Property, plant and equipment, net 566,112 653,452
Deferred merger costs - 234,253
Other assets, net 112,568 80,733
------- ------
Total assets 2,074,637 3,182,947
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Post-petition liabilities:
Accounts payable - trade 5,542 774,200
Accrued merger costs - 181,319
Accrued interest due to The T Partnership,
a related party 13,502 293,764
Accrued litigation expenses - 265,134
Accrued expenses 31,076 341,646
Current installments of capitalized lease obligations - 73,279
------ ------
Total post-petition liabilities 50,120 1,929,342
Pre-petition liabilities:
Accounts payable - trade 755,639 -
Accrued merger costs 308,140 -
Accrued interest due to The T Partnership,
a related party 486,183 -
Accrued litigation expenses 175,134 -
Accrued expenses 381,509 -
Subordinated debentures and promissory notes due to
The T Partnership, a related party 2,458,125 -
Capitalized lease obligations, excluding current
installments 220,742 -
------- -------
Total pre-petition liabilities 4,785,472 -
</TABLE>
1
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
CONDENSED COMPARATIVE BALANCE SHEETS
(Continued)
<CAPTION>
May 31, August 31,
1999 1998
<S> <C> <C>
Subordinated debentures and promissory notes due to
The T Partnership, a related party - 2,247,125
Capitalized lease obligation, excluding
current installments - 196,614
---------- -------
Total liabilities 4,835,592 4,373,081
Stockholders' deficiency:
Common stock, $.10 par value. Authorized
20,000,000 shares 639,039 639,039
Additional paid-in capital 10,704,803 10,704,803
Accumulated deficit (14,104,797) (12,533,976)
----------- -----------
Total stockholders' deficiency (2,760,955) (1,190,134)
---------- ----------
Total liabilities and stockholders' deficiency $ 2,074,637 $ 3,182,947
See accompanying notes to condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
CONDENSED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenues $ 872,604 $ 1,502,537 $ 2,740,865 $ 4,152,546
Cost of goods sold 783,806 1,119,482 2,287,307 2,836,541
------- --------- --------- ---------
Gross profit 88,798 383,055 453,558 1,316,005
Operating expenses:
Selling, general and administrative 314,922 409,404 1,042,918 1,525,871
Research and development 111,858 118,734 350,379 416,224
------- ------- ------- -------
Operating loss (337,982) (145,083) (939,739) (626,090)
Other expenses:
Interest expense (89,433) (77,607) (261,935) (225,019)
Merger costs (16,322) - (369,147) -
------- -------- -------- --------
Net loss $ (443,737) $ (222,690) $ (1,570,821) $ (851,109)
======== ========== =========== =========
Basic and diluted loss per share $ (0.07) $ (0.03) $ (0.25) $ (0.13)
====== ======= ======= =======
Dividends per share None None None None
Weighted average shares outstanding 6,390,389 6,390,389 6,390,389 6,387,000
See accompanying notes to condensed financial statements.
</TABLE>
3
<PAGE>
<TABLE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
CONDENSED COMPARATIVE STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
May 31,
<CAPTION>
1999 1998
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net loss $ (1,570,821) $ (851,109)
Adjustments:
Depreciation 87,340 95,746
Amortization of deferred charges 6,250 6,250
Changes in assets and liabilities:
Decrease in accounts receivable, net 296,055 229,726
Decrease (increase) in inventories 498,444 (90,719)
Decrease in prepaid expenses and
other current assets 27,572 103,896
Increase in other assets (31,835) (185,213)
Decrease in deferred merger costs 234,253 -
Increase in accounts payable and accrued expenses 300,662 230,467
------- -------
Net cash used in operating activities (152,080) (460,956)
Cash flows from investing activities:
Cash purchases of property, plant and equipment - (2,085)
------ ------
Net cash used in investing activities - (2,085)
Cash flows from financing activities:
Proceeds from Stock Purchase Plan - 2,161
Proceeds from loan from The T Partnership,
a related party 211,000 400,000
Reductions of debt and capitalized lease
obligations (49,151) (37,247)
------- -------
Net cash provided by financing activities 161,849 364,914
Net decrease (increase) in cash 9,769 (98,127)
Cash at beginning of period 168,762 98,127
------- ------
Cash at end of period $ 178,531 $ -0-
Interest paid $ 37,379 $ 221,420
Property, plant and equipment acquired under
capitalized lease obligations $ - $ 49,150
See accompanying notes to condensed financial statements.
</TABLE>
4
<PAGE>
ELECTRO-CATHETER CORPORATION
DEBTOR-IN-POSSESSION AS OF MAY 14, 1999
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
- ------ ---------------------
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 (the "Company") as
of May 31, 1999, the results of operations for the three and nine months ended
May 31, 1999 and May 31, 1998 and statements of cash flows for the nine months
ended May 31, 1999 and May 31, 1998, but are not necessarily indicative of
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, 1998.
The unaudited condensed financial statements have been prepared using accounting
principles applicable to a going concern, which assumes continuity of
operations, realization of assets and settlement of liabilities in the normal
course of business. The appropriateness of using the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization by
the Company, the ability to achieve profitable operations, and the ability to
generate sufficient cash flow from operations to meet its obligations.
The accompanying unaudited condensed financial statements as of May 31, 1999
segregates liabilities into pre- bankruptcy petition and post-petition. A plan
of reorganization could materially change the amounts currently recorded in the
financial statements. The statements that might result from the outcome of this
uncertainty may be materially different from those presented herein.
Note 2 Bankruptcy
- ------ ----------
On May 14, 1999, as a result of the continued deterioration in the Company's
results of operations reflecting, among other factors, the lack of sufficient
financing, the continuing decline in demand for the Company's products and the
inability of the Company to achieve profitable operations, the Company filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. While the Company has suspended manufacturing operations, the
Company is in possession of its properties and assets and continues to operate
as a debtor-in-possession. As a debtor-in-possession, the Company is authorized
to operate its business, but may not engage in transactions outside of the
normal course of business without approval of the Bankruptcy Court. The Company
is currently in the process of seeking a corporate partner and/or private
investment to reactivate its manufacturing operations.
Pursuant to the provisions of the Bankruptcy Code, as of the petition date,
actions to collect pre-petition indebtedness by the Company are stayed and other
pre-petition contractual obligations may not be enforced against the Company. In
addition, as a debtor-in-possession, the Company has the right, subject to the
Bankruptcy Court's approval and certain other conditions, to assume or reject
any pre-petition unexpired leases. Parties affected by these rejections may file
claims with the Bankruptcy Court in accordance with the reorganization process.
The Company cannot presently determine or reasonably estimate the ultimate
liability that may result from rejecting leases, and no provisions have been
made for these items.
5
<PAGE>
Schedules have been filed by the Company with the Bankruptcy Court setting forth
the assets and liabilities of the debtor-in-possession as of the filing date as
reflected in the accounting records. Differences between amounts reflected in
such schedules and claims filed by creditors will be investigated and resolved
or adjudicated before the Bankruptcy Court. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization and,
accordingly, are not presently determinable.
The Company intends to present a plan of reorganization to the Bankruptcy Court
to reorganize the Company's business and to restructure the Company's
obligations. Under the provisions of the Bankruptcy Code, the Company has the
exclusive right to file such a plan at any time during the 120-day period
following May 14, 1999. The Company has not yet finalized its plan. Upon
completion and confirmation of the plan, the Company, if necessary, will adopt
fresh-start accounting in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7"). The accompanying
financial statements do not include any adjustments that may result from the
adoption of SOP 90-7, or in the event that a plan is not confirmed.
Note 3 Accounts Receivable
- ------ -------------------
Accounts receivable comprise the following:
<TABLE>
May 31, August 31,
<CAPTION>
1999 1998
<S> <C> <C>
Accounts receivable - trade $ 646,897 $ 937,342
Allowance for doubtful accounts (219,199) (213,589)
-------- --------
$ 427,698 $ 723,753
</TABLE>
Note 4 Subordinated Debentures and Promissory Notes
- ---------------------------------------------------
In February 1999, the Company borrowed an additional $75,000 from The T
Partnership under a promissory note. In May 1999, the Company borrowed an
additional $136,000 from The T Partnership under two promissory notes. The total
indebtedness due to The T Partnership at May 31, 1999 was $2,458,125.
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 May 31,1999, Electro-Catheter
Corporation owed The T Partnership $499,685 for monthly interest payments dating
back to July 1997. The Company has sent the required interest payments to The T
Partnership. The T Partnership has chosen not to tender such checks for payment.
Therefore, the Company has considered the interest payments unpaid at May 31,
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 the Company's property,
building, accounts receivable, inventories, machinery and equipment and general
intangibles. The Company 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 the Company agree
otherwise. Under the provisions of the agreement with The T Partnership, the
Company is obligated to comply with certain covenants, to be tested on a monthly
basis. Non-compliance by the Company shall allow The T Partnership to declare an
Event of Default and accelerate repayment of indebtedness. As of May 31, 1999,
the Company was not in compliance with certain covenants. However, pursuant to
the provisions of the Bankruptcy Code, the payment or acceleration of these
liabilities has been stayed.
6
<PAGE>
Note 5 Commitments and Contingencies
- ------ -----------------------------
FDA Warning Letter
- ------------------
Electro-Catheter Corporation'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 The
Company's facilities and practices, as a result of which the FDA issued a
Warning Letter (the "FDA Warning Letter") regarding noncompliance by the Company
with certain regulations regarding current good manufacturing practices ("cGMP")
in the manufacture of its products. The areas of noncompliance include the
Company'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 the Company's catheters and other quality assurance and recordkeeping
requirements. The Company 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. The Company's
actions have included the establishment of certain validation protocols,
revisions of the Company'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-Catheter Corporation'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 the Company 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 the Company 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 the Company 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. The Company 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, the Company submitted its corrective action plan to the FDA
delineating the corrective actions formulated and that the Company intends to
complete.
While the Company is currently under no restrictions by the FDA regarding the
manufacture or sale of its products, the Company 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, The Company'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.
7
<PAGE>
The Company has informed the FDA of its Chapter 11 filing. The FDA indicated
that as a result of the filing, the Company's corrective action plan would be
stayed at present.
Termination of The Proposed Merger
- ----------------------------------
The Company 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 CCS and the Company upon terms acceptable to their
respective Boards of Directors. The stockholders of each of the Company and CCS
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 had
not been satisfied. On April 16, 1999, the Company 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 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. Several months
ago, the Company and CCS submitted an application requesting CE Mark
certification for CCS to sell the Company's steerable line of catheters, as
manufacturer, with the Company 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, the Company 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. As a result of the
Company being in Chapter 11, efforts to obtain the CE Mark certification have
been halted.
Note 6 Reclassifications
- ------------------------
Certain reclassifications have been made to conform to the fiscal year 1999
presentation.
Note 7 Loss 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 8 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
8
<PAGE>
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.
The Company adopted SFAS No. 130 for the quarter ended November 30, 1998.
Adoption of SFAS No. 130 did not have any material impact on the Company's
financial statements.
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
factors which have affected the financial condition and results of operations of
Electro-Catheter Corporation ("the "Company") 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 ability to access funds necessary to
fund the Company's operations, the confirmation and consummation of the
Company's plan of reorganization under Chapter 11 of the Bankruptcy Code, the
ability to find a partner and/or a private investment in order to reactivate its
manufacturing operations, adverse economic conditions, and other factors set
forth in reports and other documents filed by the Company with the Securities
and Exchange Commission from time to time.
Termination of the Proposed Merger. The Company 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 CCS and the Company upon terms acceptable to their
respective Boards of Directors. The stockholders of each of the Company and CCS
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 had
not been satisfied. On April 16, 1999, the Company terminated the merger with
CCS. As such, all deferred merger costs have been expensed and are included in
the accompanying statement of operations.
9
<PAGE>
Overview. The Company'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 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. Domestic sales were also affected as sales
representatives that left the Company were not replaced as a result of the
financial condition of the Company. This decline in sales was partially offset
by certain cost reduction measures. Operations were additionally impacted by the
Company's decision on May 14, 1999 to seek protection pursuant to the provisions
of Chapter 11 of the Federal Bankruptcy Code. On May 13, 1999, the Company
suspended production until further notice. The Company continues to ship product
from inventory while it seeks additional financing or a corporate partner.
The Company's stockholders' deficiency, continued losses and lack of financing
create serious risk of loss for the holders of the Company's debt and equity
securities. No assurances can be given that the Company will be successful in
its attempts to find a partner or obtain adequate financing in order to
reactivate its manufacturing operations or, that as a result of such efforts,
the value of the Company's debt and equity securities will not be materially
impaired.
Revenues. Net revenues declined $629,933 (41.9%) and $1,411,681 (34.0%),
respectively, for the three and nine months ended May 31, 1999 as compared to
the same periods in the prior fiscal year.
The decline in sales was primarily attributed to lower electrophysiology sales
as the Company has not introduced any new products and also as a result of the
Company not having an approved electrophysiology ablation catheter to allow it
to compete in the domestic market. Sales of the Company's Pacewedge catheter
also declined as a result of lower demand. A 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 have also affected
sales. International revenues were also impacted by the Company not obtaining
the CE Mark on its products on a timely basis.
Unless the Company is able to reactivate its manufacturing operations, sales
will be very adversely affected. Without manufacturing, the Company will not be
able to satisfy its current backorders nor future orders unless such product is
in inventory.
Gross Profit. Gross profit dollars decreased $294,257 (76.8%) and $862,447
(65.5%) for the three and nine months ended May 31, 1999 as compared to the
three and nine months ended May 31, 1998. This decrease is primarily attributed
to decreased production levels related to the lower sales volume and the
unavailability of certain components and lower selling prices. The suspension of
operations negatively impacts gross profit.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $94,482 (23.1%) and $482.953 (31.7%) for the three and nine
months ended May 31, 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 of the loss of field sales personnel that
have not been replaced and cutbacks in international activities and lower legal
expenses.
Research and Development. Research and development expenses decreased $6,876
(5.8%) and $65,845 (15.8%), respectively, for the three and nine months ended
May 31, 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.
10
<PAGE>
Merger Costs. Merger costs represent the write-off of expenses associated with
the merger that was terminated.
Other Expense. Interest expense increased as a result of the increased
borrowings from The T Partnership.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended May 31, 1999 operating activities used $152,080 in
cash as compared to $460,956 for the nine months ended May 31, 1998, which
primarily reflects decreases in accounts receivable and inventories and an
increase in accounts payable and accrued expenses.
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
from external sources. The Company has had difficulty in paying its obligations
and, as a result, has delayed payments to vendors and certain others providing
services to the Company, such as attorneys. The Company continues to evaluate
its plans and adopt certain cost-saving measures, where appropriate.
On May 14, 1999, as a result of the continued deterioration in the Company's
results of operations reflecting, among other factors, the lack of sufficient
financing, the continuing decline in demand for the Company's products and the
inability of the Company to achieve profitable operations, the Company filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. While the Company has suspended manufacturing operations, the
Company is in possession of its properties and assets and continues to operate
as a debtor-in-possession. As a debtor-in-possession, the Company is authorized
to operate its business, but may not engage in transactions outside of the
normal course of business without approval of the Bankruptcy Court. The Company
is currently in the process of seeking a corporate partner and/or private
investment to reactivate its manufacturing operations.
Pursuant to the provisions of the Bankruptcy Code, as of the petition date,
actions to collect pre-petition indebtedness from the Company are stayed and
other pre-petition contractual obligations may not be enforced against the
Company. In addition, as a debtor-in-possession, the Company has the right,
subject to the Bankruptcy Court's approval and certain other conditions, to
assume or reject any pre-petition unexpired leases. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting leases, and no
provisions have been made for these items.
Schedules have been filed by the Company with the Bankruptcy Court setting forth
the assets and liabilities of the debtor-in-possession as of the filing date as
reflected in the accounting records. Differences between amounts reflected in
such schedules and claims filed by creditors will be investigated and resolved
or adjudicated before the Bankruptcy Court. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization and,
accordingly, are not presently determinable.
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 May 31,1999, Electro-Catheter
Corporation owed The T Partnership $499,685 for monthly interest payments dating
back to July 1997. The Company has sent the required interest payments to The T
Partnership. The T Partnership has chosen not to tender such checks for payment.
Therefore, the Company has considered the interest payments unpaid at May 31,
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
11
<PAGE>
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 the Company's property,
building, accounts receivable, inventories, machinery and equipment and general
intangibles. The Company 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 the Company agree
otherwise. Under the provisions of the agreement with The T Partnership, the
Company is obligated to comply with certain covenants, to be tested on a monthly
basis. Non-compliance by the Company shall allow The T Partnership to declare an
Event of Default and accelerate repayment of indebtedness. As of May 31, 1999,
the Company was not in compliance with certain covenants. However, pursuant to
the provisions of the Bankruptcy Code, the payment or acceleration of these
liabilities has been stayed.
Inflation did not have a material impact on the results of the Company's
operations for the nine months ended May 31, 1999.
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 filed a Current Report on Form 8-K dated
June 1, 1999, which reported under "Item 3. Bankruptcy
or Receivership that the Company has sought protection
pursuant to the provisions of Chapter 11 of the
Federal Bankruptcy Code.
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 August 5, 1999 Ervin Schoenblum
- ------------------ Acting President and
Chief Operating Officer
/s/Joseph P. Macaluso
---------------------
Date August 5, 1999 Joseph P. Macaluso
- ------------------- Chief Financial Officer
12
<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.
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 647
<ALLOWANCES> (219)
<INVENTORY> 755
<CURRENT-ASSETS> 1,396
<PP&E> 5,262
<DEPRECIATION> (4,676)
<TOTAL-ASSETS> 2,075
<CURRENT-LIABILITIES> 50
<BONDS> 0
0
0
<COMMON> 639
<OTHER-SE> (3,400)
<TOTAL-LIABILITY-AND-EQUITY> 2,075
<SALES> 2,741
<TOTAL-REVENUES> 2,741
<CGS> 2,287
<TOTAL-COSTS> 3,681
<OTHER-EXPENSES> (369)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (262)
<INCOME-PRETAX> (1,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,571)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
