UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 1997.
or
( ) Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ___________to_____________.
Commission File Number: 0-20432.
ONGARD SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1149380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Commerce Drive, Hauppauge, NY 11788
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (516) 231-8989
2323 Delgany Street, Denver, Colorado 80216
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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_____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 31, 1997: 6,613,722
Transitional Small Business Disclosure Format:
Yes_____ No__X__
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1997 1996
ASSETS (Unaudited) (Audited)
- ------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 50,539 $ 885,552
Restricted cash 50,000 50,000
Trade accounts receivable, net of
allowance of $40,000, respectively 797,949 744,856
Inventory, net 2,326,453 2,102,380
Prepaid expenses and other 278,751 203,712
---------- ----------
Total current assets 3,503,692 3,986,500
---------- ----------
PROPERTY AND EQUIPMENT, net 1,752,538 1,836,056
---------- ----------
EQUIPMENT UNDER OPERATING LEASES, net 233,333 237,594
---------- ----------
OTHER ASSETS:
Excess cost over net tangible assets
acquired, net 2,236,833 2,268,788
Intangible and other assets, net 307,593 303,359
Deposits 92,048 95,241
---------- ----------
Total other assets 2,636,474 2,667,388
---------- ----------
TOTAL ASSETS $8,126,037 $8,727,538
========== ==========
The accompanying notes are an integral part of these financial statement
2
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ ---- ----
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 963,772 $ 541,604
Accrued liabilities 1,298,341 1,242,257
Capital leases payable 186,992 186,741
Customer deposits 251,113 221,359
Current portion of notes payable 101,139 98,847
------------ ------------
Total current liabilities 2,801,357 2,290,808
------------ ------------
CAPITAL LEASES PAYABLE, NET OF CURRENT PORTION 152,643 198,051
NONCURRENT TRADE ACCOUNTS PAYABLE 83,498 109,520
Total liabilities $ 3,037,498 $ 2,598,379
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible Series A Preferred stock; $.001 par value, 3,000,000 shares
authorized, 253,292 issued and outstanding at March 31, 1997 and December
31, 1996, aggregate liquidation preference of $ 1,013,168 $ 778,167 $ 778,167
Series B Redeemable Preferred Stock, no par value;
100 shares issued and outstanding at March 31, 1997
and December 31, 1996 10 10
Common stock; $.001 par value,
25,000,000 shares authorized, 6,613,722
shares issued and outstanding at March 31, 1997
and December 31, 1996 6,614 6,614
Additional paid-in capital 30,212,161 30,212,161
Deferred compensation (442,125) (589,500)
Accumulated deficit (25,466,288) (24,278,293)
------------ ------------
Total stockholders' equity $ 5,088,539 $ 6,129,159
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,126,037 $ 8,727,538
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
-----------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
REVENUES $ 1,288,324 $ 727,750
COST OF SALES 1,307,750 887,289
----------- -----------
Operating margin (deficit) (19,246) (159,539)
----------- -----------
COSTS AND EXPENSES:
Sales & marketing 495,404 425,756
General and administrative 376,125 734,166
Research and development 26,067 68,396
Deferred compensation 147,375 145,314
Depreciation and amortization 109,428 73,946
----------- -----------
Total expenses 1,154,399 1,447,578
----------- -----------
LOSS FROM OPERATIONS (1,173,645) (1,607,117)
INTEREST INCOME 6,148 41,628
OTHER INCOME 351 1,292
INTEREST EXPENSE (18,777) (186,448)
OTHER EXPENSES (2,072) (10,794)
----------- -----------
NET LOSS $(1,187,995) $(1,761,439)
=========== ===========
NET LOSS PER SHARE $ (.18) $ (.32)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 6,613,722 5,515,190
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net Loss $(1,187,995) $(1,761,439)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization and non-cash interest 174,484 260,268
Compensation expense related to stock options 147,375 145,312
Allowance for doubtful accounts -- (5,118)
Changes in assets and liabilities:
(Increase) in restricted cash -- (1,770)
(Increase) in accounts receivable (53,093) (11,649)
(Increase) in inventory (224,073) (441,624)
(Increase ) in prepaid expenses (75,039) (177,985)
Decrease (increase) in deposits 3,193 (60,746)
Increase (decrease) in customer deposits 29,754 (11,237)
Increase (decrease) in accounts payable
and accrued liabilities 467,62 (32,882)
----------- -----------
Net cash used in operating activities (717,768) (2,098,870)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (16,441) (139,265)
Increase in patent, patents pending and trademark (10,240) (17,568)
----------- -----------
Net cash used in investing activities $ (26,681) $ (156,833)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ONGARD SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1997 1996
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable Bank $ -- $ (141,948)
Payment of capital lease obligations (54,558) (41,072)
Payment of leasehold improvements financed by owner (36,006) --
Net proceeds from issuance of common stock -- 4,548,802
----------- -----------
Net cash provided by (used in) financing activities (90,564) 4,365,782
----------- -----------
NET INCREASE (DECREASE) IN CASH (835,013) 2,110,079
CASH and cash equivalents, beginning of year 885,552 3,693,303
----------- -----------
CASH and cash equivalents, end of the period $ 50,539 $ 5,803,382
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 17,555 $ 30,583
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES:
Stock Subscription Receivable -- $ 513,719
Leasehold improvements financed by owner $ 22,902 $ 350,000
Acquisition of equipment through capital leases $ 9,401 $ 431,112
Reclassification of finished goods inventory to
equipment, currently under lease $ -- $ 116,584
</TABLE>
6
<PAGE>
ONGARD SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The information in this Form 10-QSB includes the results of the Company and
its wholly-owned subsidiary, OnGard Sterilization Technology ("OST"), for
the periods ended March 31, 1997 and 1996. The data is unaudited, but
includes all adjustments including the elimination of intercompany accounts
and transactions which are, in the opinion of management, necessary for a
fair presentation of the interim periods presented. The accounting policies
utilized in the preparation of financial information are the same as set
forth in the Company's annual financial statements and should be read in
conjunction with the Company's Form 10-KSB. Certain prior period balances
have been reclassified to conform to the current period classification.
Results of operations for the three months ended March 31, 1997 may not
necessarily be indicative of the full year results.
2. CONVERTIBLE DEBENTURE TRANSACTION
In April 1997, the Company completed the documentation for $1.5 million
(gross proceeds) from the sale of convertible debentures (the
"Debentures"), and anticipates the funding will occur in May 1997. The
Debentures are convertible into common stock of the Company in $50,000
denominations at any time after a 45-day restriction period at a price
equal to the then fair market value of the common stock less 22-1/2%, or
the common stock price at the funding date, whichever is lower. The
Debentures bear interest at the rate of 6% per annum until conversion; such
interest is payable quarterly in cash or common stock of the Company, at
the Company's option.
The Debentures mature five years from issuance, at which time any remaining
amounts convert to common stock. The Company granted warrants to the
placement agrent equal to 10% of the funds raised at the exercise price
described above and paid placement fees of approximately 10% of the funds
raised. The Company will record the value of the guaranteed discount from
market price provided to the Debenture holders as non-cash interest expense
over the period from issuance to the earlist conversion date.
3. INVENTORY
Inventory consists of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials $1,424,260 $1,356,476
Work in process 697,936 629,280
Finished goods 164,257 116,624
----------- ----------
$ 2,326,453 $2,102,380
=========== ==========
7
<PAGE>
4. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS
Property and equipment, at cost, consist of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Furniture and fixtures $ 87,545 $ 86,080
Leasehold improvements 812,475 784,140
Machinery and equipment 2,098,343 2,079,400
--------- ---------
2,998,363 2,949,620
Less accumulated depreciation (1,245,825) (1,113,564)
and amortization ---------- ----------
$1,752,538 $1,836,056
========== ==========
Intangible and other assets, at cost, consist of the:
March 31, 1997 December 31, 1996
-------------- -----------------
Patents and trademarks $ 348,393 $338,150
Other intangible assets 20,000 20,000
---------- --------
368,393 358,150
Less accumulated amortization (60,800) (54,791)
---------- --------
$ 307,593 $303,359
========== ========
5. DEBT GUARANTEE FEE
Debt guarantee fees reflected the estimated fair value of 600,000 warrants
issued to the guarantor of the Company's $2.5 million bank indebtedness in
exchange for the guarantee. The amount was amortized over the term of the
note, the period from October 1995 through maturity in April 1996, as a
non-cash charge against earnings which was included in interest expense
(Note 6). The Company obtained an investment banking opinion for the fair
value assigned to the first 400,000 warrants granted, and applied the same
value for the subsequent 200,000 warrants which were granted under the same
terms and conditions. The guarantee fee was fully amortized upon the
repayment of the debt in April 1996.
The Company will also record similar charges for the value of the 375,000
warrants granted to the guarantors in conjunction with a new credit
facility committed in April 1997 with funding anticipated in May 1997.
(Note 6).
8
<PAGE>
6. DEBT
In October 1994, the Company entered into a $1.5 million term loan with a
bank which was facilitated by a third party guarantor. The interest on the
loan was at the prime rate plus 2% and provided for a 36 month amortization
schedule with a balloon payment at the end of one and a half years from
inception. In April and May 1995, the guarantor of the $1.5 million note
and another guarantor ("the guarantors") facilitated an additional $1.0
million in indebtedness with the same bank. Two notes of $500,000 each were
executed with the principal amount due in April 1996; interest was payable
monthly. In exchange for their guarantees, the Company granted the
guarantors options to acquire a total of 200,000 shares at an exercise
price of $4.00 per share (Note 5). These two notes bear interest at 11%.
The three notes were paid in full in April, 1996, in accordance with the
maturity payment terms described above.
In April 1997 the Company obtained a commitment for a new credit facility
with a bank, which was facilitated by the same two guarantors of the
previous bank borrowing. The credit line of $1.0 million bears intrest at
the LIBOR rate plus 2%, and matures twelve months from inception. The
Company secured the credit facility with all of its tangible and intangible
assets. In exchange for their guarantees the Company granted the guarantors
375,000 warrants to purchase OnGard common stock at a price of $2 per share
or the price per share at the closing date, whichever is lower. The Company
expects the documentation will be completed and funding available in May
1997.
The Company will record the fair value of the warrants granted as a
non-cash fee, included as interest expense, and amortized over the life of
the loan.
7. WARRANTS
The Company has issued warrants in connection with the securities
transactions which have financed its operations since its initial public
offering, other than its September 1995 private placement described in Note
2. Warrants included with the Company's initial public offering expired on
April 30, 1996 and generated $6.0 million in gross proceeds from their
exercise.
Warrant prices and expiration periods of remaining warrants vary but key
terms, shown below, are included in each transaction. The Company has
excluded the dilution impact of both the convertible debenture and related
warrants, and guarantors 1997 warrants (both will be completed during May
1997) until the actual exercise price, which is subject to certain events,
can be determined (Note 2 and Note 6). A summary of the key warrant terms,
Company calculation of dilution adjusted prices and shares at March 31,
1997 and potential maximum gross proceeds to the Company are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Class A Guarantor's Underwriter's Class B
Warrants Warrants Warrants Warrants Total
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Number of shares 228,571 (b) 600,000 250,000 375,000 1,453,571
Original price $6.00 $4.00 $3.50-$9.45 $6.00 --
Dilution adjusted shares 268,341 692,780 345,260 428,531 1,734,912
Dilution adjusted price $5.20 $3.41- $3.57 $3.01-$6.25 $5.23-$5.31 --
Maximum potential gross $1.4 $2.4 $1.6 $2.3 $7.7
proceeds ($ millions)(a)
Expiration date 4-20-97, 10-24-99, 08-11-97, 2-28-98
7-18-97 5-31-00 07-20-97
Redemption provision Yes No No Yes
</TABLE>
(a) There is no assurance that the full amount, if any, of these proceeds
will be received by the Company in the future.
(b) Number of shares have been adjusted to reflect 71,429 exercised
warrants.
PART I. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of
revenues.
Three Months
Ended March 31
--------------
1997 1996
---- ----
Revenues 100.0% 100.0%
Cost of sales 101.5 121.9
----- -----
Operating Margin (deficit) (1.5) (21.9)
----- -----
Operating Expenses:
General and administrative 29.2 100.8
Sales and marketing 38.5 58.5
Depreciation and amortization 8.5 10.2
Deferred compensation 11.4 20.0
Research and development 2.0 9 .4
----- -----
Total 89.6 198.9
----- -----
Loss from operations (91.1) (220.8)
Interest and other expenses (1.7) (27.3)
Interest and other income .5 5.9
----- -----
Net loss (92.3)% (242.2)%
----- -----
10
<PAGE>
Three months ended March 31, 1997 compared to three months ended March 31, 1996
Revenues for the three months ended March 31, 1997 increased 77% or
$560,000 from $728,000 to $1,288,000 in the same period in 1996. Excluding
revenues of $21,000 in 1996 from a divested product line, revenues increased
82%. The increase is primarily attributable to the Company's equipment business
line which doubled from the prior year.
Operating margin improved to a deficit of $19,000 (a deficit of 2% of
revenues) for the three months ended March 31, 1997 compared to a deficit of
$160,000 (22% of revenues) for the same period in 1996. The improvement in
margin resulted in part from a increase in revenues of $560,000 described above,
offset partially by an increase in the level of overhead costs associated with
engineering and quality control which were required to upgrade the performance
and quality of the equipment product line. Revenues, which were insufficient to
offset fixed factory overhead, resulted in a slight operating margin deficiency.
General and administrative expenses decreased $358,000, or 49% from
$734,000 to $376,000 for the respective three month periods ended March 31, 1997
and 1996. The decrease is the result of cost containment measures in a broad
category of expenses including, legal, professional fees, travel and office
supplies, as well as expenditures incurred for relocation in the quarter ended
March 1996 which were not recurring.
Deferred compensation, the non-cash charges which reflect the difference
between market and exercise prices of stock options granted, increased $2,000
from $145,000 to $147,000 in the respective quarters ended March 31, 1997, and
1996
Sales and marketing expenses increased $69,000 to $495,000 in the three
months ended March 31, 1997 versus $426,000 in the comparable period in 1995, or
16% . The Company has increased its direct selling efforts, including manpower
and collateral materials, in its equipment product line.
Research and development expenses decreased $42,000 to $26,000 from
$68,000, a 62% decrease, for the first quarter ended March 31, 1997 to the
comparable quarter in 1996. The decrease relates to the completion of Autopak(R)
development, and of the Company's compact sterilizer product line.
Interest expense decreased from $186,000 to $19,000 for the comparable
quarters ended March 31, 1997 and 1996, a decrease of 167,000 or 90%. This
results from the payment in full of the Company's bank line, on April 15, 1996
offset by increases for interest related to assets financed by capital leases.
Liquidity and Capital Resources
The Company's working capital at March 31, 1997 decreased to $702,000 from
$1,696,000 at December 31, 1996. Cash and cash equivalents were $51,000 at March
31, 1997 versus $886,000 at December 31, 1996. Accounts receivable increased
$53,000 to $798,000 at March 31, 1997, from $745,000 at December 31, 1996.
Inventory increased, net, $224,000 to $2,326,000 at March 31, 1997 from
$2,102,000 at December 31, 1996.
11
<PAGE>
Successful completion of the Company's initial public offering in 1992
provided funds to expand development efforts for the Company's existing product
line and continue product enhancement and expansion. The Company had raised
additional funds through various private transactions since that date, however,
as working capital at December 31, 1994 amounted to a deficit of $1,032,000, it
became necessary for the Company to obtain additional funds. In order to align
its capital structure and working capital deficiency, on September 29, 1995, the
Company completed a private placement (the "September 1995 Private Placement")
of the sale of 2,204,021 shares of the Company's common stock at a price of
$3.50 per share aggregating gross proceeds of $7,714,000. Pursuant to the
September 1995 Private Placement the Company registered such Common Shares
issued in this placement. The Company also sold 100 shares of its Series B
Redeemable Preferred Limited Voting Stock (the "Series B preferred stock") in
the September 1995 Private Placement. Provided that the holders of the Series B
preferred stock own in the aggregate at least 5% of the Company's Common Stock,
the holders of the Series B preferred stock were granted the right to elect one
member to the Company's Board of Directors, which they exercised effective
December 24, 1995.
The Company had also previously generated funds through $2.5 million in
notes payable to a bank which had been facilitated by third party guarantors
(Note 6). The notes called for a 36 month amortization schedule and a balloon
payment at the end of one-and-a-half years in April, 1996. The balloon payment
($1,622,000) was paid in full from the Company's cash position in April, 1996.
In addition, the Company obtained funds through the exercise of outstanding
Common Stock Purchase Warrants. These warrants were to expire on August 15,
1995, but were initially extended until December 31, 1995 and thereafter until
March 29, 1996 and April 30, 1996. Through the exercise of Common Stock Purchase
Warrants, the Company generated $6.0 million in gross proceeds through the
expiration date of the Common Stock Purchase Warrants, April 30, 1996.
Most recently, in April 1997, the Company obtained a commitment for a $1.0
bank line of credit facilitated by the guarantors who had facilitated the
Company's previous bank line. The line bears interest at the LIBOR rate plus 2%
and matures twelve months from inception. The Company provided the guarantors
with warrants to purchase 375,000 shares of common stock at a price of $2 or the
price at the closing date, whichever is lower. The Company expects the closing
date and funds to become available in May 1997. The Company also obtained a
commitment for the sale of $1.5 million in convertible debentures. The
Debentures are convertible into common stock at a price equal to the lower of
(i) the fair market value at the closing date less 22 1/2 percent or (ii) the
price at the funding date. The debentures are convertible after a 45 day
restriction period. Interest on the debentures of 6% per annum is payable in
cash or common stock at the Company's option. The Company anticipates funding
during May 1997.
Although the Company has been successful to date in obtaining sources of
financing sufficient to meet current trade obligations and other expenses and to
enable it to pursue its business plans generally, there is no assurance it will
be successful in this regard in the future. Furthermore, there can be no
assurance that the Company will be successful in securing other funds or, that
if successful, such funds will be adequate to fund the Company's operations
until it is able to generate cash from operations sufficient to sustain its
ongoing operations without additional external sources of capital.
12
<PAGE>
Government Regulation
The Company's existing and planned products are or may be subject to
regulation by the FDA pursuant to the provisions of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, several, if not all, of the
Company's infection control products, sterilization medical packaging and
sterilization supplies are subject to regulation as medical devices.
Medical devices are classified into either Class I, II or III. Class I and
II devices are not expressly approved by the FDA. However, pursuant to section
510(k) of the FDC Act, the manufacturer or distributor of a Class I or II device
that is initially introduced commercially on or after May 28, 1976 must notify
the FDA of its intent commercially to introduce the device through the
submission of a premarket notification (a "510(k) notice"). Before commercial
distribution can commence, the FDA must review the 510(k) notice and clear the
device for commercial distribution. The FDA normally has 90 days to review the
510(k) notice and grant or deny clearance to market on the basis that it is
substantially equivalent to a device marketed before May 28, 1976.
Alternatively, the FDA may postpone a final decision and require the submission
of additional information, which may include clinical data. If additional
information is required, review and clearance of a 510(k) notice may be
significantly delayed. In order to clear a Class I or II device for marketing,
the FDA must determine, from the information contained in the 510(k) notice,
that the device is "substantially equivalent" to one or more Class I or II
devices that are legally marketed in the United States.
If a device is not considered "substantially equivalent," it is regulated
as a Class III medical device. In general, a Class III medical device must be
expressly approved by the FDA for commercial distribution pursuant to the
submission of a Premarket Approval Application ("PMA"). A PMA must contain,
among other information, substantial information about the manufacture of the
device and data from adequate and well controlled clinical trials that
demonstrate that the device is both safe and effective. The PMA approval process
is substantially more complex and lengthy than the 510(k) premarket notification
process. Once a PMA is submitted, it may take 16-24 months, or longer, for the
FDA review and approval, if such approval is granted at all.
A medical device, whether cleared for marketing under the 510(k) pathway or
pursuant to a PMA approval, is subject to ongoing regulatory oversight by the
FDA to ensure compliance with regulatory requirements, including, but not
limited to, product labeling requirements and limitations, including those
related to promotion and marketing efforts, Current Good Manufacturing Practice
requirements, record keeping and medical device (adverse reaction) reporting.
FDA regulatory oversight also applies to the Company's sterile medical
packaging products, which are used by other companies in packaging their own
medical devices. Generally, FDA acceptance of the suitability of such packaging
products is made in the context of regulatory submissions of other companies
concerning the device to be packaged. Thus, the Company requires no separate FDA
clearance or approval of these packaging products. Within this framework, the
principal regulatory responsibilities of the Company for its sterile medical
packaging products are to ensure that the packaging products are manufactured in
conformity with Current Good Manufacturing Practice requirements. Although the
Company believes that all of its manufacturing activities are in conformity with
Current Good Manufacturing Practice requirements, there can be no guarantee of
compliance.
13
<PAGE>
Historically, the FDA has not exercised device regulatory authority over
some types of infection control products, such as sharps containers or mailer
packages, including those used in the Company's mail-back system, and has
allowed companies to begin commercial introduction (on or after May 28, 1976) of
these types of products without a 510(k) clearance. On February 3, 1994, the FDA
issued a written policy statement which allowed manufacturers of sharps
containers a "discretionary period" of 180 days (until August 2, 1994) to
continue marketing their products already in distribution (introduced on or
after May 28, 1976) without the benefit of 510(k) clearance provided that
required 501(k) notices are submitted to FDA prior to the conclusion of the
discretionary period. Manufacturers of sharps containers also must comply with
FDA device listing and establishment registration requirements. The FDA has
indicated that there is no change in its regulatory posture toward the mailer
packages used in the mail-back system and that it does not intend to regulate
this product as a medical device. There can, however, be no assurance that the
FDA will maintain its current regulatory posture toward the mailing package.
OnGard submitted all but one of the 510(k) notices during 1994. In June
1994, the Company received notification that all of its 510(k) submittals for
sharps containers had been approved and cleared for marketing. The Company has
an additional submittal for one of its sharps containers which the FDA had
advised it to withhold until the others had cleared, which it is now preparing
for submission. The Company has also received a 510(k) notice for its submission
of AutoPak(R).
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
One on May 6, 1997, Item 5 - Other Events, reflecting the resignation
of certain directorss of OnGard's Board.
15
<PAGE>
SIGNATURE
In accordance with to the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
ON-GARD SYSTEMS, INC.
Dated: May 14, 1997 PHIL B. KART
----------------------------------------------
Phil B. Kart
Vice President and Principal Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 100,539
<SECURITIES> 0
<RECEIVABLES> 837,949
<ALLOWANCES> 40,000
<INVENTORY> 2,326,453
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0
778,177
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</TABLE>
