U.S. Securities and Exchange Commission
Washington, D.C. 2054
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, 1998
[ ] 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.
-------------------------
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, 1998
----- -----------------
Common Stock, $ .01 par value 4,132,493
Transitional Small Business Disclosure Format:
Yes____ No X
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ELECTROPHARMACOLOGY, INC.
INDEX TO 10-QSB
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Balance Sheets as of March 31, 1998 and December 31, 1997 2
Statements of Operations for the three months ended March 31,
1998 and 1997 3
Statements of Cash Flows for the three months ended March 31,
1998 and 1997 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,
1998 and 1997 6
PART II OTHER INFORMATION 11
ITEM 1. Legal Proceedings 11
Signatures 14
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ELECTROPHARMACOLOGY, INC.
Balance Sheets
(Unaudited with respect to March 31, 1998)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
- ------ 1998 1997
-----------------------------------
<S> <C> <C>
Current assets :
Cash $ 21,698 $ 111,496
Trade accounts receivable, net of allowance for doubtful accounts
of $23,997 at 3/31/98 and $26,000 at 12/31/97 187,030 169,404
Inventory 156,081 152,233
Trade notes and other receivables 18,917 32,748
Prepaid expenses 120,465 157,065
-----------------------------------
Total current assets 504,191 622,946
Rental and other equipment, net 641,532 713,466
Patents, net of accumulated amortization of $15,746 at 3/31/98
and $14,226 at 12/31/97 87,609 89,129
Deposits 14,105 18,001
-----------------------------------
Total assets $ 1,247,437 $ 1,443,542
===================================
LIABILITIES AND NET CAPITAL DEFICIENCY
- --------------------------------------
Current liabilities:
Notes payable $ 763,727 $ 804,179
Accounts payable 461,592 380,313
Accrued expenses 195,800 187,933
Accrued commissions 35,734 46,181
Accrued payroll 2,935 18,385
Customer deposits - 7,561
Notes payable to related parties 65,926 73,926
-----------------------------------
Total current liabilities 1,525,714 1,518,478
Commitments and contingencies
Net capital deficiency:
Convertible preferred stock, $0.01 par value - 10,000,000 shares authorized;
issued and outstanding 242,950 (entitled to $2,000,043 in liquidation) 2,430 2,430
Common stock, $0.01 par value - 30,000,000 shares authorized; 4,132,493
shares issued and 4,071,194 shares outstanding at
3/31/98 and 12/31/97, respectively 41,325 40,711
Additional paid-in capital 15,277,249 15,254,912
Deferred Compensation (67,678) (67,678)
Deficit (15,531,603) (15,305,311)
-----------------------------------
Net capital deficiency (278,277) (74,936)
-----------------------------------
Total liabilities and net capital deficiency $ 1,247,437 $ 1,443,542
===================================
</TABLE>
See accompanying notes to financial statements
2
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Electropharmacology, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------------
1998 1997
----- ----
<S> <C> <C>
Revenue:
Rentals $ 215,698 $ 660,828
Sales 33,860 144,000
-------------------------------------
Total revenue 249,558 804,828
Operating expenses:
Cost of revenue 71,534 88,374
Selling, general and administrative 363,664 868,766
Research and development 24,112 109,416
-------------------------------------
Total operating expenses 459,310 1,066,556
-------------------------------------
Loss from operations (209,752) (261,728)
Other income (expense)
Interest expense (15,709) (641)
Interest and other income 35 3,824
Loss on disposal of equipment (865)
-------------------------------------
Total other income (expense) (16,539) 3,183
-------------------------------------
Net loss $ (226,291) $ (258,545)
=====================================
Net loss per share - basic and diluted $ (0.05) $ (0.07)
=====================================
Weighted average number of common shares outstanding -
basic and diluted 4,115,466 3,529,672
=====================================
</TABLE>
See accompanying notes to financial statements.
3
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Electropharmacology, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities
Net loss $ (226,291) (258,545)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 66,569 70,553
Issuance of common stock for services 22,950 -
Changes in operating assets and liabilities :
Trade notes and other receivables 13,831 248,190
Accounts receivable (17,626) (11,170)
Inventory (3,848) (100,372)
Prepaid expenses 36,600 33,404
Deposits 3,896 -
Rental equipment (SofPulse units) 6,884 (263,140)
Accounts payable 81,278 384,250
Accrued Expenses, commissions and customer deposits (25,591) (168,701)
--------------------------------
Net cash provided by (used in) operating activities (41,348) (65,531)
--------------------------------
Investing activities
Patents, deposits and other assets - (13,940)
--------------------------------
Net cash used in investing activities - (13,940)
--------------------------------
Financing activities
Repayment of long-term notes payable and capitalized lease
obligations (40,450) (7,806)
Repayment of notes payable to related parties (8,000) -
--------------------------------
Net cash used in financing activities (48,450) (7,806)
--------------------------------
Net increase (decrease) in cash (89,798) (87,277)
Cash at beginning of period 111,496 223,523
--------------------------------
Cash at end of period $ 21,698 $ 136,246
================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net $ 2,424 $ 641
================================
Supplemental disclosure of noncash
investing and financing activities:
Issuance of comnmon stock for services $ 22,950 $ -
================================
</TABLE>
See accompanying notes to financial statements.
4
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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, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997.
Certain 1997 balances have been reclassified to conform with the
presentation used in 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Electropharmacology, Inc. (the "Company") is engaged in the business of
developing medical applications for pulsed electromagnetic signals (PEMS) and in
manufacturing and marketing a PEMS device called SofPulse. The Company intends
to pursue the application of PEMS in enhancing the delivery of drugs and
biologics to selected tissues and promoting the regeneration of cells in tissues
damaged by trauma or chronic diseases. The Company's strategy also includes the
acquisition of other biotechnologies with potential applications in cancer and
autoimmune diseases. Incorporated under the laws of the State of California in
August 1990 under the name Magnetic Resonance Therapeutics, Inc., the Company
reorganized in February 1995 through a merger with and into Electropharmacology,
Inc. a Delaware Corporation. 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 first embodiment of the Company's PEMS technology is the SofPulse
device ("SofPulse") that was cleared for commercial marketing in January 1991 by
the United States Food and Drug Administration pursuant to a Section 510(k)
premarket notification. SofPulse broadcasts PEMS in the radio frequency range at
27.1 MHZ ("PEMSRF") and is marketed as an adjunct in the palliative treatment of
pain and edema associated with various medical conditions that involve
superficial soft tissue injury. SofPulse is an easy to operate, non-invasive
device that broadcasts PEMSRF which can be administered through clothing, casts
and dressings. As a result, SofPulse can be conveniently used immediately
following trauma or surgery. To date, SofPulse has been used by clinicians on
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 Company's management believes that SofPulse can be marketed
to cosmetic surgeons, sports team trainers and physicians, pain clinics,
physical rehabilitation centers and distributors or medical equipment rental
companies who serve the home care market for the recovery of post-operative
ambulatory patients.
The Company commenced commercially marketing the SofPulse device in
early 1992. The Company's principal sources of revenue from SofPulse devices
have been rental fees charged to nursing homes and hospitals and sales to
certain distributors and cosmetic surgeons. To date, the Company has generated
only modest revenue from sales and rentals of the Sofpulse, which has achieved
only limited market acceptance. As of March 31, 1998, the Company had 96
SofPulse devices under rental agreements at nursing homes. Since inception, the
Company's expenses have exceeded revenue, resulting in losses of $2,927,990 and
$1,647,917 respectively, for the years ended December 31, 1996 and 1997. As of
March 31, 1998, the Company had an accumulated deficit of $15,531,603. 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, manufacturing, marketing literature and
advertisement for the Sofpulse, and the hiring of personnel necessary to support
the Company's operations. The Company continues to have high levels of
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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 devices. Once manufactured, it may take
several months for a SofPulse 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's management 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
clinical utility through controlled clinical studies; build an effective sales
and marketing infrastructure to increase significantly the sale and rental of
the Sofpulse devices in the existing and the target markets; continue to obtain
reimbursement for the Sofpulse treatment by third party payers; 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.
The Company's management does not believe that it can create
shareholder value by pursuing on its own both the growth of the SofPulse device
business and the PEMS technology business. Accordingly, the Company is currently
implementing a strategy to create value from each of the two lines of businesses
under separate business structures. The Company, subject to necessary approvals
and a satisfactory outcome of mutual due diligence, has negotiated the principal
terms of an asset purchase agreement pursuant to which a company (the
"Purchaser") that is engaged in the development and manufacturing of medical
electronic devices and topical dermatological products, will acquire most of the
Company's SofPulse device units and certain other assets specifically related to
the business of SofPulse device manufacturing and marketing. In exchange
therefor, the Purchaser will agree to assume certain specified liabilities and
issue a number of shares of Purchaser's stock and grant the Company a warrant to
purchase additional shares of Purchaser's stock tied to the revenues generated
from the SofPulse marketing by the Purchaser. In the event that the Purchaser is
successful in increasing the revenues from SofPulse marketing, the Company's
management believes that the value of the Company's equity position in Purchaser
will increase, although there can be no assurance that this increase in value
will occur. The Company also is in advanced stages of negotiations to combine
with two development stage, privately held biotechnology companies which will
result in the Company as the surviving entity. The proposed transactions with
the biotechnology companies are contingent upon several conditions, including
the closing of the SofPulse device transaction with the Purchaser, obtaining
necessary stockholder approvals and a satisfactory outcome of mutual due
diligence. The consummation of the biotechnology company transactions will
provide the Company with a broad portfolio of biotechnologies, collaborative
affiliations with major medical institutions and relationships with
internationally recognized scientists. Upon consummation of the foregoing
contemplated transactions, the Company intends to conclude a financing in order
to provide it with the capital necessary to pursue the development of the
portfolio of proposed technologies to be acquired, including technologies in
large therapeutic markets such as cancer and infectious diseases, and uses by
the Company's existing technologies in tissue repair/regeneration through
corporate partnerships.
7
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However, there can be no assurance that the Company will be able to close any of
the contemplated transactions or conclude the contemplated financing.
Results of Operations
Three Months Ended March 31, 1998 Compared to the Three Months Ended
March 31, 1997
Revenue for the three months ended March 31, 1998 was $249,558,
compared to $804,828 for the three months ended March 31, 1997, or a decrease of
$555,270.This 69.0% decrease was primarily attributable to a $445,130, or 67.4%,
decrease in rental revenues in the three months ended March 31, 1998, as
compared to the same period in 1997. The Company's rental revenues were
materially adversely affected as a consequence of the issuance on July 18, 1997
by the Health Care Financing Administration ("HCFA") of a national policy of
non-reimbursement by Medicare for all forms of electrotherapy for wound healing.
HCFA was enjoined from implementing this national policy under a ruling by a
U.S. District Court in Massachusetts on November 18, 1997. As a result of the
HCFA announcement, monthly rental revenues declined substantially. Rental
revenues in March 1998 were $59,400, as compared to $258,260 in March 1997. At
March 31, 1998, there were 96 units under rental contracts or monthly fixed fee
arrangements, as compared to 364 units at March 31, 1997. Revenue from the sales
of units also decreased from $144,000 in the quarter ended March 31, 1997 to
$33,860 in the comparable period in 1998. During the three months ended March
31, 1998, the Company sold five used SofPulse devices as compared to 12 new
devices in the first quarter of 1997.
Cost of revenue for the three months ended March 31, 1998 was $71,534, compared
to $88,374 for the three months ended March 31, 1997, an decrease of $16,840.
This 19.1% decrease reflects the decreased number of SofPulse devices sold
during the quarter ended March 31, 1998, as compared to the same period in the
prior year.
Selling, general and administrative expenses were $363,664 for the
three months ended March 31, 1998, compared to $868,766 for the three months
ended March 31, 1997, a decrease of $505,102, or 58.1%. This cost decrease
reflects a reduction in consulting expenses as well as salaries and related
benefits associated with personnel reductions in the sales and marketing,
clinical support services and manufacturing departments.
Research and development expenses decreased to $24,112 for the three
months ended March 31, 1998, compared to $109,416 for the three months ended
March 31, 1997, a decrease of $85,304, or 75.9%. This decrease in expense is
primarily attributable to the reduction in basic scientific research involving
PEMS technologies.
Interest and other income (expense) for the three months ended March
31, 1998, decreased to $(16,540), compared to $3,183 for the three months ended
March 31, 1997, primarily due to a $15,068 increase in interest expense. With
the exception of obligations under capital equipment leases, the Company had no
debt outstanding at March 31, 1997; whereas on March 31, 1998, the Company had
8
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debt outstanding to directors of the Company in the aggregate amount of $73,926,
a note payable to the Company's outside law firm secured by 55 SofPulse devices
in the amount of $672,751 for legal services rendered during 1997, and notes
payable in the amount of $90,976 to finance the Company's directors and
officers' and liability insurance policies.
Interest income for the three months ended March 31, 1998 decreased by
$3,789 from the three months ended March 31, 1997 due to the decrease in funds
of the Company available for short term investment in the first quarter of 1998.
The above resulted in a net loss of $(226,291) for the three months
ended March 31, 1998, compared to a net loss of $(258,545) for the three months
ended March 31, 1997.
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, 1998, the Company had a working capital deficit
of $1,021,523 and a deficiency in capital of $278,277.
Net cash used in operating activities for the three months ended March
31, 1998 was $41,348, as compared to $65,531 for the three months ended March
31, 1997. Net cash was used primarily to fund the losses from operations. No net
cash was used in investing activities at March 31, 1998, as compared to $13,940
at March 31, 1997. The decrease is attributable to fewer purchases of property
and equipment. Net cash used in financing activities was $48,450 for the quarter
ended March 31, 1998, as compared to $7,806 used in financing activities for the
quarter ended March 31, 1997. In 1998, the Company made payments on insurance
premium finance agreements which were not outstanding in the same period in
1997. At March 31, 1998, the Company had cash of $21,698.
At December 31, 1997, the Company had a net operating loss
("NOL") carry forward of $10,719,000 available to offset future taxable income,
if any, through the year 2012. During 1993 and 1995, changes in ownership of
greater than 50% occurred as a result of the Company issuing equity securities.
Accordingly, a substantial limitation will be imposed upon the future
utilization of approximately $2,450,000 of its net operating loss carry
forwards.
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, the deferral of product development and
clinical studies, and reductions in sales and marketing expenses until after
additional financing is obtained. 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 deferral of new products and clinical
studies may adversely affect the continued acceptance or use of the SofPulse
device and negatively affect the Company in the longer term. The Company's
management believes that it is unlikely that the Company's revenues will
increase without incurring additional sales and marketing expenses.
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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 also exploring alternative sources 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 on favorable terms. On September 23, 1997, Nasdaq notified the Company
that the Company's stock would be delisted from the Nasdaq SmallCap Market as of
the close of business on September 23, 1997 due to noncompliance with the
minimum capital, surplus and public float requirements. The Company is now
quoted on the Nasdaq OTC Bulletin Board. There can be no assurance, however,
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.
As a consequence of the Company's deteriorating cash position and its
unsuccessful efforts to consummate a financing in late 1996 and early 1997, the
Company underwent a reduction in personnel from 27 to 18 employees, or 33%, in
March 1997. In a further attempt to contain costs after revenues declined
subsequent to the HCFA announcement, the Company underwent a second reduction in
personnel to 10 full-time employees in October 1997. In September 1997, as part
of its efforts to enter into a strategic alliance with another biotechnology
company, the Company signed a merger agreement with Eurobiotech Group, Inc., a
development stage biotechnology company, which agreement was terminated on
December 31, 1997 due to the inability of Eurobiotech Group, Inc. to meet
certain conditions precedent to closing, including the production of audited
financial statements.
Impact of the Year 2000
The Securities and Exchange Commission, in Staff Legal Bulletin No. 5
(CF/IM), has stated that public operating companies should consider whether they
will be affected by any material expenditures, problems or uncertainties
associated with the Year 2000 issue, which affects many existing computer
systems that use only two digits to identify a year in the date field. The
Company believes that the matters raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its own computer systems and the Company
intends to confirm that any computer systems that the Company may purchase or
lease in the future will have addressed the Year 2000 issue.
The Company is currently determining the extent to which it may be
impacted by third parties' failure to remedy their own Year 2000 issues. The
Company is having, and will continue to have, formal communications with all of
its significant customers, payers, suppliers, and other third parties to
determine the extent, if any, to which the Company's systems could be impacted
by any third party Year 2000 issues and related remedies. The Company presently
believes that the Year 2000 issue will not pose significant operational problems
for the Company. However, Year 2000 issues could adversely impact the Company if
systems operated by its customers or vendors are not Year 2000 compliant.
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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 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 Diapulse's 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 aforementioned
petition.
In August 1994, Diapulse filed a lawsuit in the Supreme Court of the
State of New York, Nassau County ("The Court"), 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 Winter
("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. 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
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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 ("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 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' customers. On April 23, 1997, the Court
denied the APS motion for preliminary injunction, without prejudice, on the
grounds that "[t]he court is unable to conclude that plaintiff is likely to
prevail in the lawsuit." 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 contractual relations with its customers and solicit such
customers to do business with Hirsch. 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 customers.
This lawsuit is in the preliminary stage and, therefore, the outcome of this
litigation is uncertain. The Company believes that it has meritorious defenses
that 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, on April 3, 1997, an arbitration
proceeding before the American Arbitration Association ("AAA") 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. APS initially informed
AAA that it declined to participate in the arbitration. On May 12, 1997, the
Company filed in the Superior Court a petition to compel APS to arbitrate the
parties' dispute. Under California procedure, the Company's petition constitutes
a response to APS' complaint, and the Company is not required to answer the
complaint. On July 24, 1997, the Court granted the Company's petition to compel
arbitration, and the Court also stayed all proceedings in the case pending
12
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the arbitration. On August 1, 1997, APS selected an arbitrator and stated its
intention to proceed with the arbitration. The date for the arbitration hearing
has not yet been set by the AAA.
On March 19, 1998, the Company and APS entered into an agreement to
settle APS' claims against the Company, as well as to settle the AAA arbitration
proceeding. The settlement agreement provides that it does not constitute an
admission of liability. The settlement is conditional upon the Court's finding
that the settlement was entered into in good faith. Pursuant to the settlement
agreement, ten days after the final determination by the Court that the
settlement is in good faith (i) APS will dismiss the pending litigation against
the Company; (ii) the Company will terminate the AAA arbitration proceeding; and
(iii) the Company and APS will enter into a new distributorship agreement. The
distributor agreement provides, inter alia, that APS will receive a maximum
aggregate discount up to $100,000 towards the future purchase of a certain
minimum additional number of SofPulse devices. Defendants Hirsch and Bowman have
stated that they will oppose the Company's request that the settlement with APS
be approved as a good faith settlement. Defendants Hirsh and Bowman assert that
in connection with entering into the Company's prior distribution agreement with
Hirsch, the Company made certain misrepresentations concerning whether APS had
trade secrets. They also assert that the Company induced Mr. Bowman to breach
certain fiduciary duties and have threatened to sue the Company. As of May 15,
1998, Hirsch and Bowman have not filed any claim against the Company, and their
threat to do so appears to be conditioned upon the consummation of the Company's
settlement with APS, which settlement is subject to Court approval.
On August 28, 1997, Michelle O'Connell, formerly employed by Kinetech
Medical, Inc. ("Kinetech") as the Company's representative, filed a complaint
entitled O'Connell v. Kinetech Medical, Inc. and Electropharmacology, Inc. in
the County Court in Dallas County, Texas. The complaint alleges that Kinetech
and the Company are jointly and severally liable for an unspecified amount of
commissions earned by O'Connell from Kinetech, but unpaid, and asserts a cause
of action quantum meruit against the Company. A motion to transfer venue to
Houston, Texas by Kinetech was denied. The Company answered the complaint and
asserted several affirmative defenses. The case has not yet been set for trial
and no discovery between the Company and O'Connell has taken place.
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) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
ELECTROPHARMACOLOGY, INC.
Registrant
Dated: May 20, 1998 ______________________
Dr. Arup Sen
Chief Executive Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB AT MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,698
<SECURITIES> 0
<RECEIVABLES> 211,027
<ALLOWANCES> 23,997
<INVENTORY> 156,081
<CURRENT-ASSETS> 120,465
<PP&E> 641,532
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,247,437
<CURRENT-LIABILITIES> 1,525,714
<BONDS> 0
<COMMON> 41,325
0
2,430
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,247,437
<SALES> 33,860
<TOTAL-REVENUES> 249,558
<CGS> 71,534
<TOTAL-COSTS> 71,534
<OTHER-EXPENSES> 387,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,709
<INCOME-PRETAX> (226,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> (226,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (226,291)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
