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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 1997
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-25828
Electropharmacology, Inc.
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Exact name of small business issuer as specified in its charter
Delaware 95-4315412
- --------------------------------- ----------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2301 N.W. 33rd Court, Suite 102, Pompano Beach, FL 33069
--------------------------------------------------------
(Address of principal executive offices)
(954) 975-9818
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 the latest practicable date:
Number of Shares Outstanding
Class On March 31, 1997
----- -----------------
Common Stock, $.01 par value 3,529,672
---------
Transitional Small Business Disclosure Format:
Yes No X
--- ---
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ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Balance Sheets as of March 31, 1997 and December 31, 1996 2
Statements of Operations for the three months ended March 31,
1997 and 1996 3
Statements of Cash Flows for the three months ended March 31,
1997 and 1996 4
Notes to Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three months ended March 31,
1997 and 1996 9
PART II OTHER INFORMATION 13
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures 16
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ELECTROPHARMACOLOGY, INC.
BALANCE SHEETS
(UNAUDITED WITH RESPECT TO MARCH 31, 1997)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1997 1996
------------------------------
<S> <C> <C>
Current assets:
Cash $ 136,246 $ 223,523
Trade accounts receivable, net of allowance for doubtful accounts 583,372 572,202
of $159,466 at March 31, 1997 and $134,000 at December 31, 1996
Inventory 194,536 94,164
Trade notes receivable - 248,190
Prepaid expenses 16,723 50,127
------------------------------
Total current assets 930,877 1,188,206
Rental and other equipment, net 1,138,691 945,058
Deposits and other assets 92,709 79,816
------------------------------
Total assets $ 2,162,277 $ 2,213,080
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 687,944 $ 316,746
Accrued expenses 268,930 513,130
Accrued commissions 93,823 30,845
Accrued payroll 130,274 104,701
Customer deposits 7,561 7,561
Current maturities of obligations under capital leases 15,905 22,386
------------------------------
Total current liabilities 1,204,437 995,369
Obligations under capital leases, less current maturities 2,011 3,336
------------------------------
Total liabilities 1,206,447 998,705
Shareholders' equity:
Preferred stock, $0.01 par value - 10,000,000 shares authorized; issued and
outstanding 421,950 4,220 4,220
Common stock, $0.01 par value - 30,000,000 shares authorized; 3,540,165 shares
issued and 3,529,672 shares outstanding 35,402 35,402
Additional paid-in capital 11,352,922 11,352,922
Treasury stock, at cost, 10,493 common shares (60,000) (60,000)
Deficit (10,376,714) (10,118,169)
------------------------------
Total shareholders' equity 955,830 1,214,375
------------------------------
Total liabilities and shareholders' equity $ 2,162,277 $ 2,213,080
==============================
</TABLE>
See accompanying notes to financial statements
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ELECTROPHARMACOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
---- ----
Revenue:
Rentals $ 660,828 $ 351,863
Sales 144,000 18,560
------------------------
Total revenue 804,828 370,423
Operating expenses:
Cost of revenue 88,374 41,861
Selling, general and administrative 868,766 768,908
Research and development 109,416 324,693
------------------------
Total operating expenses 1,066,556 1,135,462
------------------------
Loss from operations (261,728) (765,039)
Other income (expense)
Interest expense (641) (1,140)
Interest and other income 3,824 39,179
------------------------
Total other income (expense) 3,183 38,039
------------------------
Net loss $ (258,545) $ (727,000)
========================
Net loss per common share $ (0.07) $ (0.24)
========================
Weighted average number of common shares outstanding 3,529,672 3,063,981
========================
See accompanying notes to financial statements.
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ELECTROPHARMACOLOGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net loss $ (258,545) $ (727,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 70,553 56,169
Changes in operating assets and liabilities:
Accounts receivable (11,170) (44,235)
Trade notes receivable 248,190 91,018
Inventory (100,372)
Prepaid expenses 33,404 14,880
Deposits and other assets - (7,731)
Rental equipment (SofPulse-TM- units) (263,140) -
Accounts payable and accrued expenses 215,549 51,580
-------------------------
Net cash used in operating activities (65,531) (565,319)
-------------------------
INVESTING ACTIVITIES
Purchases of property and equipment - (152,881)
Deposits and other assets (13,940) -
-------------------------
Net cash used in investing activities (13,940) (152,881)
-------------------------
FINANCING ACTIVITIES
Repayment of long-term notes payable and
capital lease obligations (7,806) (8,000)
Repayment of notes payable to related parties - (120,000)
-------------------------
Net cash used in financing activities (7,806) (128,000)
-------------------------
Net decrease in cash (87,277) (846,200)
Cash at beginning of period 223,523 3,069,748
-------------------------
Cash at end of period $ 136,246 $ 2,223,548
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net $ 641 $ 1,140
Income taxes $ - $ -
=========================
See accompanying notes to financial statements.
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ELECTROPHARMACOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete audited financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996.
Electropharmacology, Inc. (the "Company") is engaged in developing,
manufacturing, and marketing medical devices that deliver pulsed
electromagnetic signals ("PEMS-TM-") in the radio frequency range. The
Company was incorporated under the laws of the State of California in August
1990 under the name Magnetic Resonance Therapeutics, Inc., and was
reorganized through a merger with and into Electropharmacology, Inc., a
Delaware corporation, in February 1995. The Company's executive offices are
located at 2301 NW 33rd Court, Suite 102, Pompano Beach, Florida 33069, and
its telephone number is (954) 975-9818.
The Company's product, which is marketed under the name SofPulse-TM-, is
an easy to operate, noninvasive device that delivers pulsed radiofrequency
("PRF") energy. The Company has focused on PEMS-TM- that combine selected
pulse forms and amplitudes to produce certain radio frequency energy fields
that are believed to affect superficial soft tissues. In January 1991, the
FDA advised the Company of its determination, pursuant to the premarket
notification provisions under Section 510(k) of the FDC Act, to treat the
MRT100, the first model of the SofPulse-TM-, as a class III device. To date,
the Company's focus has been the application of PEMS-TM- as an adjunct in the
palliative treatment of pain and edema associated with various medical
conditions that involve superficial soft tissue injury. Edema is localized
tissue swelling resulting from an abnormal accumulation of fluid in the
tissue and frequently represents an obstacle to the achievement of effective
healing of soft tissue damages from conventional medical treatment. Edema can
also result in a permanent loss of range of motion. Since PRF can be
administered through
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clothing, casts or dressings, the SofPulse-TM- is a cost effective adjunct for
the palliative treatment of pain and edema without any known adverse effects.
PEMS-TM- treatment is based on broadcasting pulsed electromagnetic fields
to achieve therapeutic benefits when applied to superficial soft tissue. To
date, the SofPulse-TM- has been used as an adjunct for palliative treatment of
postoperative pain and edema in various superficial soft tissues that suffer
damage in medical conditions such as acute or chronic (non-healing or
recalcitrant) skin ulcers, edema and pain resulting from trauma of hand and
ankle, pain associated with sprains of the lower back, and pain and edema
following reconstructive and plastic surgery. The traditional treatment of pain
and edema generally involves a combination of analgesic and anti-inflammatory
drugs and superficial approaches such as the application of ice packs. PEMS-TM-
has been used by clinicians as an adjunct to these other approaches.
The Company's principle marketing efforts are directed toward health care
professionals and providers engaged in medical and health care practices. The
Company's strategy has been to market the SofPulse-TM- to nursing homes and
hospitals with access to substantial numbers of patients and, to a lesser
extent, to plastic, reconstructive and orthopedic surgeons. The Company has
focused on promoting rentals as part of its pricing and marketing strategies
whereby the user is billed by the Company, on a monthly basis, for the actual
length of time that the SofPulse-TM- is used by the clinicians to treat
patients. As part of its education, marketing and promotional strategy, the
Company disseminates information it receives from the clinicians to the medical
community through summary case reports, Continuing Educational Unit courses and
advertisements in professional journals.
The Company's objective is to establish PEMS-TM- delivery by the
SofPulse-TM- as a recognized modality used by physicians and other health care
practitioners, including physical therapists, occupational therapists, and other
professionals, to treat postoperative pain and edema. Since its introduction in
commercial marketing, the SofPulse-TM- has been used to administer more than
250,000 treatments to thousands of patients. In order to further expand the use
of this non-invasive treatment modality, the Company has continued to expand its
technology base that may enable it to design proprietary devices suitable for
the delivery of various signals to (i) different anatomical locations of the
body, and (ii) aid in the healing or regeneration of damaged tissues. The
Company intends to conduct clinical evaluations of specific PEMS-TM- in medical
conditions where the reduction of pain and edema is desirable for improved
patient outcomes as well as in additional markets that may be addressed by
broader use of its proprietary signals in tissue regeneration. In order to
improve its competitive advantage in the expanded market segments in the future,
the Company intends to expand its patent portfolio, which
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currently consists of two issued U.S. patents and several pending patent
applications in the U.S. and in certain foreign countries.
The Company's principle sources of revenue have been rental fees charged to
nursing homes and hospitals for the use of the SofPulse-TM- and revenue
generated from sales of the SofPulse-TM- to certain distributors and surgeons.
As of March 31, 1997, the Company had 364 of the SofPulse-TM- devices under
rental agreements, and has sold an additional 104 SofPulse-TM- devices. To date,
the Company has generated limited revenue from sales and rentals of the
SofPulse-TM-, which has achieved only limited market acceptance. Expanding
market penetration for the SofPulse-TM- is expected to require substantial
marketing efforts and the expenditure of significant funds in order to
demonstrate the technological advantage and clinical benefit of the PEMS-TM-
modality to the clinicians. There can be no assurance that the therapeutic use
of PRF energy underlying the PEMS-TM- modality will become a generally accepted
medical practice for which reimbursement by third party payors is available.
Further, there can be no assurance that the Company's efforts will result in
successful market penetration and increased revenue from sales and rental of its
products, or that the Company will be successful in expanding its technology
base.
(2) SUBSEQUENT EVENTS
The Company announced on April 2, 1997 the resignation of Joseph Mooibroek,
the Company's Chairman of the Board, President and Chief Executive Officer,
effective immediately, and the appointment of Dr. Arup Sen as the Company's
Chairman of the Board, President and Chief Executive Officer. Dr. Sen
previously was the Company's Executive Vice President of Research, Development,
Regulatory and Clinical Studies.
The Company announced on May 7, 1997 the execution of a multi-year
distribution agreement for the sale and rental of SofPulse-TM- devices for
selected applications in the United States with National Patient Care Systems,
Inc. ("NPCS"), a privately held company specializing in distribution, lease and
rental of specialty medical devices to hospitals, nursing homes, physicians'
offices and home care. Under the agreement, NCPS will purchase from the
Company specified minimum quotas of SofPulse-TM- devices in exchange for
exclusive distribution rights to three selected market applications of
SofPulse-TM-. The parties may agree to renegotiate the minimum purchase quotas
and the exclusivity of distributorship in each market application based on
prospective market demand for SofPulse-TM- to be evaluated and developed during
the first eight months of the agreement. NPCS also will assume responsibility
for the growth and operation of the Company's current fleet of rental devices
including the Company's sales and marketing group, make monthly payments to the
Company for five years and pay
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royalties to the Company on NPCS's rental revenues. The cumulative revenue to
the Company through the term of the agreement could exceed $25 million, provided
that NPCS meets substantially the minimum purchase quotas for all of the market
applications, for which there can be no assurance.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in August 1990 and commenced commercially
marketing the SofPulse-TM- device in early 1992. To date, the Company has
generated only modest revenue from sales and rentals of the SofPulse-TM-, which
has achieved only limited market acceptance. Since inception, the Company's
expenses have exceeded revenue, resulting in losses of $3,069,586 and $2,927,990
respectively, for the years ended December 31, 1995 and 1996. As of December
31, 1996, the Company had an accumulated deficit of $10,118,169. Losses
incurred since inception have been primarily attributable to costs incurred in
connection with the design and development of the Company's products, research
and clinical studies on the SofPulse-TM-, manufacturing, marketing literature
and advertisement for the SofPulse-TM-, and the hiring of personnel necessary
to support the Company's operations. The Company continues to have high levels
of operating expenses (including salaries of management, research and
development, manufacturing and marketing personnel) and will be required to
incur significant expenses in connection with research and clinical studies and
the purchase of materials to manufacture the SofPulse-TM- devices. Once
manufactured, it may take several months for a SofPulse-TM- device to produce
any rental revenue for the Company. Accordingly, the Company anticipates that
it will continue to incur significant losses until, at the earliest, the Company
generates sufficient revenue to support its operations. The Company believes
that generation of a level of revenue sufficient to support operations is
dependent upon, among other things, the Company's ability to successfully and
objectively demonstrate SofPulse's-TM- clinical utility through controlled
clinical studies; build an effective sales and marketing infrastructure to
increase significantly the sale and rental of the SofPulse-TM- devices in the
existing and the target markets; continue to obtain reimbursement for the
SofPulse-TM- treatment by third party payors; and develop and introduce new
products and enhance existing products. There can be no assurance that the
Company will be able to achieve any of the foregoing, which could have a
material adverse effect on the Company's business, financial condition, cash
flows, results of operations and prospects.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Revenue for the three months ended March 31, 1997 was $804,828, compared to
$370,423 for the three months ended March 31, 1996, or an increase of $434,405.
This
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117.3% increase was primarily attributable to increased SofPulse-TM- rental
revenue. Revenue growth during the first half of 1996 was adversely affected by
the reorganization of the Company's sales organization. That reorganization has
been completed and the Company began to experience improvement from those
changes beginning in October 1996. The Company then expanded its domestic
geographic coverage and contracted with four additional independent
representative organizations. As a result, rentals for the three months ended
March 31, 1997 were $660,828, compared with $351,863 for the three months ended
March 31, 1996, an increase of $308,965, or 87.8%. As of March 31, 1997, there
were 364 units under rental contracts, compared to 199 as of March 31, 1996, an
increase of 165, or 82.9%. See Note 2 of Notes to Financial Statements
regarding a recent agreement by the Company to transfer control of its rental
units to a third party.
Cost of revenue for the three months ended March 31, 1997 was $88,374,
compared to $41,861 for the three months ended March 31, 1996, an increase of
$46,513. This 111.1% increase reflects additional depreciation associated with
the expanded SofPulse-TM- rental base.
Selling, general and administrative expenses were $868,766 for the three
months ended March 31, 1997, compared to $768,908 for the three months ended
March 31, 1996, an increase of $99,858, or 13.0%. This cost increase reflects
the salaries and related benefits for additional personnel to support the
Company's operations. In the first half of 1996, the Company redirected its
focus from research and development to sales and marketing. Three full-time
physical therapists, a product manager, a national sales director and two
regional sales directors joined the Company adding to the Company's payroll
expense.
Research and development expenses decreased to $109,416 for the three
months ended March 31, 1997, compared to $324,693 for the three months ended
March 31, 1996, a decrease of $215,277, or 66.3%. This decrease is primarily
attributable to the completion in early 1996 of the Company's PMA application,
as well as the reduction of basic scientific research involving PRF and PEMS-TM-
technologies.
Interest and other income (expense) for the three months ended March 31,
1997, decreased to $3,183, compared to $38,039 for the three months ended March
31, 1996. This decrease is primarily due to a decrease in interest income
attributable to a lack of funds of the Company available for short term
investment.
The above resulted in a net loss of $(258,545) for the three months ended
March 31, 1997, compared to a net loss of $(727,000) for the three months ended
March 31, 1996.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements have been and will continue to be
significant. Since its inception, the Company has satisfied its operating
requirements primarily through issuance of equity and debt securities and loans
from stockholders. At March 31, 1997 the Company had working capital of
$(273,560).
Net Cash used in operating activities for the three months ended March 31,
1997 was $65,531 compared to $565,319 for the three months ended March 31, 1996.
Net cash was used primarily to fund the losses from operations. Net cash used
in investing activities at March 31, 1997 was $13,940 compared to $152,881 at
March 31, 1996. The decrease is attributable to fewer purchases of property and
equipment. Net cash used in financing activities was $7,806 for the quarter
ended March 31, 1997, as compared to $128,000 used in financing activities for
the quarter ended March 31, 1996. In 1997 the Company made payments on capital
lease obligations for $7,806 whereas in 1996, the Company repaid notes to
related parties for $120,000 and repaid capital lease obligations for $8,000.
At December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of $9,013,000 available to offset future taxable income, if any,
through the year 2011. In the event a 50% or greater change in ownership
occurs, a substantial annual limitation would be imposed upon the future
utilization of these loss carryforwards. At this point in time, the Company has
not completed a change in ownership study and any limitations are not known.
Under the present circumstances, the Company's ability to continue as a going
concern depends on its ability to restructure, improve its operations, and
ultimately, to obtain additional financing. The Company has taken steps that
include reductions in operating costs, including stringent cost controls,
personnel reductions and redeployments, and the deferral of the majority of
research and development activities until after 1997. There can be no assurance
that these measures will be successful. Moreover, deferring research and
development activities will delay the development of new products. The Company
will also defer, until after 1997, conducting definitive clinical studies that
document the effectiveness of the SofPulse-TM- treatment for its intended use.
This deferral of clinical studies may adversely affect the continued acceptance
or use of the SofPulse-TM- device and negatively affect the Company in the
longer term. However, at the present time, the Company believes these actions
are necessary to reduce near term cash requirements and to fund other operating
activities. The Company is continuing to expand the number of SofPulse-TM-
devices that are under rental agreements generating revenue and will continue to
allocate more devices to those geographic areas where it believes it can produce
higher monthly revenue, although there can be no assurance whether sufficient
revenue growth can be achieved over the long-term. The Company is also
exploring alternative sources
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of additional financing. No definitive sources of additional financing have
been identified at this time, nor can there be any assurance that additional
financing will be obtained or obtained on favorable terms. There are certain
capital and other requirements that the Company must exceed or maintain in order
for the Company's Common Stock to continue to be listed on Nasdaq. If the
Company is unable to obtain additional financing or otherwise find ways to meet
its cash requirements, the Company will soon be in violation of the Nasdaq
listing requirements and Nasdaq may de-list the Common Stock of the Company.
Accordingly, there can be no assurance that a public trading market for the
Company's Common Stock will continue to exist.
The Company cannot predict whether the operating and financing strategies
described above will be successful. If the Company is unable to restructure and
improve its operations and is unable to ultimately obtain additional financing,
it may not be able to continue as a going concern.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1993, Diapulse Corporation of America, Inc. ("Diapulse") filed
a citizen's petition requesting that the FDA revoke the substantial equivalence
finding for the SofPulse-TM- and prevent the Company from making certain
labeling claims. The Company believes, based upon the advice of regulatory
counsel, that Diapulse's petition is without merit. The Company has responded
to the petition. The Company, however, in response to comments received by the
Company from the FDA, has made revisions in its promotional materials to obviate
any claim that such material is inconsistent with FDA regulations. The Company
has received an opinion of regulatory counsel stating that the petition is
lacking in merit and that it is highly unlikely that the FDA will grant the
petition. Nevertheless, in the event that the FDA were to grant the petition,
the Company's business and prospects would be materially adversely affected. In
October 1993, Diapulse submitted additional information to the FDA in support of
its petition and the Company responded. As of the date hereof, the FDA has not
notified the Company as to any action with respect to the petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the State
of New York, Nassau County, captioned DIAPULSE CORPORATION OF AMERICA V.
MAGNETIC RESONANCE THERAPEUTICS, INC. ET AL., alleging that the defendants
Magnetic Resonance Therapeutics, Inc., a legal predecessor to the Company, Bio-
Sales, Inc., the Company, and certain of the Company's present and former
directors and officers, including Joshua Barnum ("Barnum"), David Mills
("Mills"), Arthur Pilla ("Pilla"), David Saloff ("Saloff"), and David Winer
("Winer"), engaged in deceptive acts and practices, false advertising and unfair
competition in the marketing of a medical device. The complaint also alleges
that Barnum and Mills breached confidentiality and noncompetition agreements
with Diapulse and that the Company, Barnum and Pilla aided in the alleged
tortious breach of the agreements. Diapulse seeks unspecified compensatory
damages, disgorgement of profits realized by the defendants as a result of their
alleged acts, treble damages, punitive damages and reasonable attorneys' fees.
Diapulse also seeks unspecified injunctive relief prohibiting the defendants
from engaging in the alleged acts and ordering the defendants to take remedial
action to rectify the effects on consumers and Diapulse caused by the
defendants' alleged acts. The defendants jointly moved to dismiss the complaint
on jurisdictional and substantive grounds. The Court dismissed Winer from the
case based on lack of personal jurisdiction. The Court also dismissed certain
claims, as to the remaining individual defendants, including deceptive acts and
practices, false advertising and unfair competition. As to the claims remaining
against the individual defendants, certain of such claims may be indemnified by
the Company.
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As to the Company, the Court denied the motion to dismiss. The Company answered
the complaint, denied all material allegations, asserted various affirmative
defenses and counterclaimed against Diapulse and Jesse Ross, individually. The
counterclaims allege causes of action against Diapulse and Jesse Ross for
federal unfair competition and tortious interference of existing and contractual
business relations. In addition, the Company has asserted claims against
Diapulse for deceptive acts and unfair trade practices, and trade disparagement.
In its counterclaims, the Company seeks compensatory and punitive damages in an
amount to be proved at trial. This lawsuit is in a preliminary stage and its
outcome is uncertain. Although the Company believes that it has meritorious
defenses that it will vigorously pursue, there can be no assurance that the
outcome of such action will be resolved favorably to the Company or that such
litigation will not have an adverse effect on the Company's liquidity, financial
condition and results of operations.
On March 27, 1997, Ancillary Provider Services, Inc. ("APS") filed a
complaint entitled ANCILLARY PROVIDER SERVICES, INC. V. CHRISTIAN BOWMAN, HIRSCH
MEDICAL SERVICES, INC., ELECTROPHARMACOLOGY, INC. AND DOES 1 THROUGH 100 in the
Superior Court in Los Angeles, California against Christian Bowman, a former APS
employee, Hirsch Medical Services, Inc. ("Hirsch") and the Company. The
complaint alleges causes of action for misappropriation of trade secrets, breach
of fiduciary duty, unfair business practices, tortious inducement to breach
contracts, tortious interference with prospective economic advantage, breach of
contract and breach of contract and covenant of good faith and fair dealing and
seeks unspecified actual, consequential, incidental and punitive damages, an
accounting, restitution, and an injunction prohibiting the defendants from
contacting or doing business with APS's customers. Simultaneous with filing the
complaint, APS moved by order to show cause for a preliminary injunction against
the defendants to prevent them from contacting or doing business with APS's
customers. The hearing on the motion for preliminary injunction was on April
23, 1997. The complaint alleges that beginning in October 1995, APS was the
exclusive distributor in Southern California of the Company's MRT device. The
complaint further alleges that in June 1996, APS hired defendant Bowman,
formerly of the Company, to assist APS in its efforts to distribute the MRT
device. According to the complaint Bowman entered into an employment agreement
with APS that included a confidentiality provision and a non-compete clause.
APS asserts that the Company improperly terminated the APS distributorship
agreement and replaced APS with defendant Hirsch as the MRT distributor in
California. Thereafter, APS alleges that Bowman resigned from APS on March 14,
1997, joined Hirsch and that defendants misappropriated confidential trade
secrets from APS including, among other things, its proprietary customer lists.
The complaint alleges that the defendants continue to interfere with APS's
contractual relations with its customers and solicit such customers to do
business with Hirsch. This lawsuit is in the preliminary stage and, therefore,
the outcome of this litigation is uncertain. The Company believes
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that it has meritorious defenses which it will pursue vigorously. Pursuant to a
provision in the 1996 distributorship agreement between APS and the Company
requiring all disputes between APS and the Company be resolved by arbitration,
the Company initiated an arbitration proceeding before the American Arbitration
Association in Miami, Florida seeking a declaration that the 1996
distributorship agreement governs APS and the Company, that the Company has no
continuing obligations to APS pursuant to such agreement, and that any claims
arising out of or relating to the 1996 agreement or the alleged breach thereof,
are meritless.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Quarterly Report on
form 10-Q:
(27) -- Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 1997:
* Form 8-K dated February 12, 1997 - Item 5 -
regarding clinical trials
* Form 8-K dated March 26, 1997 - Item 5 -
regarding resignation of Chief Financial Officer
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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 authorized.
ELECTROPHARMACOLOGY, INC.
Registrant
Dated: May 20, 1997 /s/ Dr. Arup Sen
---------------------------------------
Dr. Arup Sen
Chief Executive Officer
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT
- -------------- --------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-QSB
at March 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 136,246
<SECURITIES> 0
<RECEIVABLES> 742,838
<ALLOWANCES> 159,466
<INVENTORY> 194,536
<CURRENT-ASSETS> 930,877
<PP&E> 1,138,691
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,162,277
<CURRENT-LIABILITIES> 1,204,437
<BONDS> 0
0
4,220
<COMMON> 35,402
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,162,277
<SALES> 144,000
<TOTAL-REVENUES> 804,828
<CGS> 88,374
<TOTAL-COSTS> 88,374
<OTHER-EXPENSES> 978,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641
<INCOME-PRETAX> (258,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (258,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (258,545)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
