-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wre9w289ftus/XW0W3Nb0iEvFvfBSFQiQODRoUaU7M/uOWrhL0UepuAeZ4pcawdT 2hRzTKKH4AAWzrMlyC1YPg== 0001047469-97-004900.txt : 19971117 0001047469-97-004900.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004900 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONGARD SYSTEMS INC CENTRAL INDEX KEY: 0000888428 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, FOIL & COATED PAPER BAGS [2673] IRS NUMBER: 841149380 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20432 FILM NUMBER: 97720379 BUSINESS ADDRESS: STREET 1: 40 COMMERCE DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 3032932090 MAIL ADDRESS: STREET 1: 40 COMMERCE DRIVE STREET 2: 40 COMMERCE DRIVE CITY: HAUPPAUGE STATE: NY ZIP: 11788 10QSB 1 FORM 10-QSB 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 September 30, 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 September 30, 1997: 6,613,722 Transitional Small Business Disclosure Format: Yes _____ No __X__ PART I. ITEM 1. FINANCIAL STATEMENTS ONGARD SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 ASSETS (Unaudited) (Audited) - ------ ----------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 73,812 $ 885,552 Restricted cash 50,000 50,000 Trade accounts receivable, net of allowance of $20,000 and $40,000, respectively 420,142 744,856 Receivables, other 56,808 --- Inventory, net 3,046,169 2,102,380 Prepaid expenses and other 112,781 203,712 ---------- ---------- Total current assets 3,759,712 3,986,500 ---------- ---------- PROPERTY AND EQUIPMENT, net 1,503,123 1,836,056 ---------- ---------- EQUIPMENT UNDER OPERATING LEASES, net --- 237,594 ---------- ---------- OTHER ASSETS: Excess cost over net tangible assets acquired, net 2,172,920 2,268,788 Intangible and other assets, net 214,174 303,359 Debt guarantee fee and issuance costs, net 132,903 --- Deposits 66,068 95,241 ---------- ---------- Total other assets 2,586,065 2,667,388 ---------- ---------- TOTAL ASSETS $7,848,900 $8,727,538 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these financial statement 2 ONGARD SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS September 30 December 31 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------ ------------ (Unaudited) (Audited) CURRENT LIABILITIES: Notes payable to bank $ 1,000,000 --- Trade accounts payable 1,481,301 $ 541,604 Accrued liabilities 1,175,462 1,242,257 Capital leases payable 192,479 186,741 Customer deposits 209,339 221,359 Current portion of notes payable 106,512 98,847 Notes payable, related parties 40,000 --- ------------ ------------ Total current liabilities 4,205,093 2,290,808 ------------ ------------ CAPITAL LEASES PAYABLE, NET OF CURRENT PORTION 134,309 198,051 NONCURRENT PORTION OF NOTES PAYABLE 28,716 109,520 ------------ ------------ Total liabilities $ 4,368,118 $ 2,598,379 ------------ ------------ STOCKHOLDERS' EQUITY: Convertible Series A Preferred stock; $.001 par value, 3,000,000 shares authorized, 253,292 issued and outstanding at September 30, 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 September 30, 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 September 30, 1997 and December 31, 1996 6,614 6,614 Additional paid-in capital 30,445,661 30,212,161 Deferred compensation (147,375) (589,500) Accumulated deficit (27,602,295) (24,278,293) ------------ ------------ Total stockholders' equity $ 3,480,782 $ 6,129,159 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,848,900 $ 8,727,538 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 3 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended September 30 September 30 ------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- REVENUES $ 817,425 $ 729,444 $ 3,363,564 $ 2,544,660 COST OF SALES 1,168,704 1,157,773 3,847,038 3,638,700 ----------- ----------- ----------- ----------- Operating margin (deficit) (351,279) (428,329) (483,474) (1,094,040) ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Sales and marketing 297,247 446,254 1,260,807 1,283,818 General and administrative 362,750 430,105 1,091,456 1,735,699 Research and development 5,201 15,705 40,030 151,823 Deferred compensation 147,375 145,314 442,125 435,937 Depreciation and amortization 104,608 54,726 324,108 304,601 ----------- ----------- ----------- ----------- Total expenses 917,181 1,092,104 3,158,526 3,911,878 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (1,268,460) (1,520,433) (3,642,000) (5,005,918) INTEREST INCOME 2,149 38,692 9,307 123,346 OTHER INCOME (Note 2) 89,990 7,920 496,777 39,349 INTEREST EXPENSE (84,465) (35,046) (175,111) (284,386) OTHER EXPENSES (7,773) (147) (12,977) (54,128) ----------- ----------- ----------- ----------- NET LOSS $(1,268,559) $(1,509,014) $(3,324,004) $(5,181,737) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (.19) $ (.23) $ (.50) $ (.84) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,613,722 6,488,722 6,613,722 6,145,789 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. 4 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30 ------------------------- 1997 1996 ----------- ----------- (Unaudited) (Unaudited) CASH FLOWS USED IN OPERATING ACTIVITIES: Net Loss (3,324,004) $(5,181,737) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization and non-cash interest 311,563 530,171 Compensation expense related to stock options 442,125 435,937 Gain on sale of Mailback assets (400,153) --- Allowance for doubtful accounts (19,736) (30,683) Changes in assets and liabilities: Decrease in restricted cash --- 43,823 Decrease in accounts receivable, trade and other 287,642 188,384 (Increase) in inventory (713,421) (544,697) Decrease (Increase) in prepaid expenses 90,931 (85,803) Decrease (increase) in deposits 29,173 (47,587) Decrease in customer deposits (12,020) (38,788) Increase (decrease) in accounts payable and accrued liabilities 1,031,656 (405,757) ----------- ----------- Net cash used in operating activities (2,276,244) (5,136,737) ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of property and equipment (32,987) (166,691) Increase in patent, patents pending and trademark (42,021) (55,532) Proceeds from sale of Mailback assets 676,000 --- Increase in debt issuance costs (45,355) --- ----------- ----------- Net cash (used in) investing activities $ 555,637 $ (222,223) ----------- -----------
The accompanying notes are an integral part of these financial statements. 5 ONGARD SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30 ------------------------- 1997 1996 ---------- ----------- (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in notes payable related party $ 40,000 $ (7,500) Increase (decrease) in notes payable Bank 1,000,000 (1,764,270) Payment of capital lease obligations (58,004) (165,275) Payment of leasehold improvements financed by owner (73,125) (69,798) Net proceeds from issuance of common stock --- 5,701,608 ---------- ----------- Net cash provided by financing activities $ 908,867 $ 3,694,765 ---------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH (811,740) (1,664,195) CASH and cash equivalents, beginning of year 885,552 3,693,303 ---------- ----------- CASH and cash equivalents, end of the period $ 73,812 $ 2,029,108 ---------- ----------- ---------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 88,601 $ 142,204 ---------- ----------- ---------- ----------- SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: Leasehold improvements financed by owner $ 22,902 $ 350,000 Acquisition of equipment through capital leases $ 91,120 $ 517,657 Reclassification of equipment under lease to finished goods inventory $ 230,368 Reclassification of finished goods inventory to equipment under lease $ 116,584 Value of warrants provided for debt guarantee $ 176,000 Reversal of certain accruals and accounts payable $ 158,754
6 ONGARD SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The information in this Form 10-QSB includes the results of operations of the Company and its wholly-owned subsidiary, OnGard Sterilization Technology ("OST"), for the periods ended September 30, 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 nine months ended September 30, 1997 may not necessarily be indicative of the full year results. When used in this form or other filings or press releases made by the Company regarding forward-looking comments, important factors could arise which could cause actual results to differ from those contained in any forward looking statement. Undue reliance should not be placed on such statements which speak only as of the date made. 2. WORKING CAPITAL DEFICIENCY The Company's cash position at September 30,1997 was approximately $74,000; its working capital had declined to a deficit of $445,000 from positive working capital of $1,696,000 at December 31, 1996. While the Company has a significant backlog of customer orders for its equipment products, which approximated $3.1 million, it has been unable to meet the delivery dates requested by these customers; the Company continues to believe that its Autopak product offerings have market potential but it lacked the marketing structure to create the sales revenues the Company anticipated. Both of these matters have caused considerable amounts to be invested in inventory and resulted in recurring losses. Further, in September 1997, new senior management voluntarily suspended production operations due to safety concerns (see Note 3). Upon their resignation in October 1997, remedial actions began and key departments within the plant were reopened. However, the month-long shutdown exacerbated the financial condition. As a result, the Company has exhausted substantially all of its internal funds and is unable to meet its current trade obligations. The Company is addressing its funding requirements with its major investors for additional financing and is also currently evaluating a plan to divest selected assets of its equipment business and apply those proceeds to pay its creditors or, as an alternative, sell the equipment business in total. Thereafter, it may seek to recapitalize its disposable packaging business. Discussions are being held with entities which have expressed interest in acquiring the equipment business or selected assets. The Company cannot determine, at this time, whether these entities will provide an offer or, if an offer is received, if it will be sufficient to meet the Company's requirements, or, whether funds received from investors, if any, will be sufficient to meet its future obligations. 3. PLANT SHUTDOWN In September 1997 the Company's new senior management voluntarily suspended production operations based on an inspection of the facility and related safety concerns. The production operations were suspended for approximately one month. During October, subsequent to the resignation of these individuals, remedial activities commenced based on the advice of safety experts. At this date, most of the production departments are operational; one department is not fully functional, but those activities are outsourced when necessary and not precluding production. All employees were paid in full during the supsension. 7 4. SALE OF SELECTED ASSETS OF MAILBACK CONTAINER LINE On June 30, 1997 the Company completed the sale of selected assets of its Mailback and Container product line to Sage Products, Inc. of Crystal Lake, Illinois. The sale included all customer account data, patents and related intellectual property, inventory and minor office equipment. Accounts receivables were retained by the Company. The sale price was approximately $726,000. At September 30, 1997 approximately $51,000 of the sale price was included in Other Receivables in the accompanying balance sheet, of which $41,000 was paid in October, 1997. The Company reported a gain on the sale of approximately $400,000. Revenues for this product line were $438,000 for the six month period ending June 30, 1997 and $895,000 for the twelve months ended December 31, 1996. 5. CONVERTIBLE DEBENTURE TRANSACTION TERMINATED The Company had previously indicated in its first quarter 10-QSB that it had completed the documentation for the sale of $1.5 million from the sale of Convertible Debentures, and that it anticipated funding to occur in May 1997. The Debentures were to be 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. As previously indicated in the Company's second quarter 10-QSB, in May 1997 the Company elected not to proceed with this offering of Debentures. No Debentures were sold pursuant to the offering and all transactions relating to this arrangement were terminated. 6. INVENTORY Inventory consists of the following: SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- Raw materials $1,915,425 $1,356,476 Work in process 888,497 629,280 Finished goods 105,814 116,624 ---------- ---------- $2,909,737 $2,102,380 ---------- ---------- ---------- ---------- 7. PROPERTY AND EQUIPMENT AND INTANGIBLE AND OTHER ASSETS Property and equipment, at cost, consist of the following: SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- Furniture and fixtures $ 86,558 $ 86,080 Leasehold improvements 815,204 784,140 Machinery and equipment 1,633,112 2,079,400 ----------- ----------- 2,534,874 2,949,620 Less accumulated depreciation and amortization (1,031,751) (1,113,564) ----------- ----------- $ 1,503,123 $ 1,836,056 ----------- ----------- ----------- ----------- 8 Intangible and other assets, at cost, consist of the following: SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- Patents and trademarks $230,766 $338,150 Other intangible assets --- 20,000 -------- -------- 230,766 358,150 Less accumulated amortization (16,592) (54,791) -------- -------- $214,174 $303,359 -------- -------- -------- -------- 8. 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 of the Company's former bank line. 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. 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 has also recorded $176,000 in 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 occurring in June 1997. (Note 9). These warrants were valued pursuant to SFAS No. 123 according to the Black Scholes valuation method. 9. DEBT 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 interest 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. At September 30, 1997 $1.0 million was outstanding on the credit line. In exchange for their guarantees the Company granted the guarantors 375,000 warrants to purchase OnGard common stock at a price of $1.25 per share or the price per share at the closing date. The Warrant contains an antidilution provision which adjusts the price per share and number of shares issueable to the price of any subsequent financing where the price per share is lower than the granted price. The funding occurred on May 30, 1997. The Company has recorded the fair value of the warrants granted as a non-cash fee with an offsetting increase to additional paid in capital (Note 8). The amount will be included as interest expense and amortized over the one-year life of the loan. 10. 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. 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. Other warrants, which have expired, are excluded from the following data. Warrant prices and expiration periods of remaining warrants vary but key terms, shown below, are included in each transaction. A summary of the key warrant terms, Company calculation of dilution adjusted prices and shares at September 30, 1997 and potential maximum gross proceeds to the Company are as follows: 9 Guarantor's Class B Guarantor's Warrants Warrants Warrants Total ---------- --------- ----------- ----- (1994-1995) (1997) ------ Number of shares 600,000 375,000 375,000 1,350,000 Original price $4.00 $6.00 $1.25 - Dilution adjusted shares 712,377 443,073 375,000 1,530,450 Dilution adjusted price $3.32- $3.47 $5.06-$5.14 $1.25 - Maximum potential gross proceeds ($ millions) (a) $2.4 $2.3 $ .5 $5.2 Expiration date 10-24-99, 2-28-98 5-29-02 5-31-00 Redemption provision No Yes No (a) There is no assurance that the full amount, if any, of these proceeds will be received by the Company in the future. 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 Nine Months Ended September 30 Ended September 30 ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues ......................... 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales..................... 143.0 158.7 114.4 143.0 ------ ------ ----- ----- Operating Margin (deficit)........ (43.0) (58.7) (14.4) (43.0) ------ ------ ----- ----- Operating Expenses: Sales and marketing............. 36.4 61.2 37.5 50.5 General and administrative ..... 44.4 58.9 32.5 68.2 Research and development........ .6 2.2 1.2 6.0 Deferred compensation........... 18.0 19.9 13.1 17.1 Depreciation and amortization... 12.8 7.5 9.6 12.0 ------ ------ ----- ----- Total ........................... 112.2 149.7 93.9 153.8 ------ ------ ----- ----- Loss from operations.............. (155.2) (208.4) (108.3) (196.8) Interest and other expenses....... (11.3) (4.8) (5.6) (13.3) Interest and other income ........ 11.3 6.3 15.1 6.5 ------ ------ ----- ----- Net loss.......................... (155.2)% (206.9)% (98.8)% (203.6)% ------ ------ ----- ----- ------ ------ ----- -----
10 THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenues for the three months ended September 30, 1997 increased 12% or $88,000 from $729,000 to $817,000 in the same period in 1996. Excluding sales in the quarter for 1996, of the Company's Mailback business of $207,000 (which was sold on June 30,1997), the increase for comparable business was $295,000. The increase is primarily attributable to sales in the Company's equipment business line. The increase was achieved despite the third quarter revenue being the lowest in the current year due to the voluntary suspension of production for a safety standdown. The suspension of production took place for most of September and into October 1997. In October 1997 the Company began remedial action which was completed for all departments but one in late October 1997. Operating margin improved to a deficit of $351,000 (a deficit of 43% of revenues) for the three months ended September 30, 1997 compared to a deficit of $428,000 (59% of revenues) for the same period in 1996. The improvement in margin resulted in part from an increase in revenues of $88,000 described above, lower direct material costs and lower overhead costs as a result of containment measures. Revenues, which were insufficient to offset factory overhead, resulted in an operating margin deficiency. General and administrative expenses decreased $20,000, or 5%, from $398,000 (59.5% of revenues) to $378,000 (46% of revenues) for the respective three month periods ended September 30, 1997 and 1996. 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 September 30, 1997, and 1996. Sales and marketing expenses decreased 33%, or $149,000 to $297,000 (36% of revenues) in the three months ended September 30, 1997 versus $446,000 (61% of revenues) in the comparable period in 1996. The Company has decreased its direct selling efforts, including manpower and collateral materials, in its Autopak packaging line. Research and development expenses decreased $11,000 to $5,000 from $16,000, a 69% decrease, for the quarter ended September 30, 1997 to the comparable quarter in 1996. The decrease relates to the completion of Autopak-Registered Trademark-development, and of the Company's compact sterilizer product line. Interest expense increased from $35,000 to $84,000 for the comparable quarters ended September 30, 1997 and 1996, or 140%. This results from the payment in full of the Company's prior bank line, on April 15, 1996 offset by increases for interest related to assets financed by capital leases, interest on the new bank line and short term loans. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues for the nine months ended September 30, 1997 increased 32% or $819,000 from $2,545,000 to $3,364,000 in the same period in 1996. Excluding the revenues from the Company's Mailback business (which was sold on June 30, 1997) during the nine months ended September 30, 1996 and for which there were only six comparable months in 1997, sales were $1,056,000 higher for comparable business lines. The increase is predominantly attributable to sales in the Company's equipment business line. Operating margin improved to a deficit of $483,000 (a deficit of 14% of revenues) for the nine months ended September 30, 1997 compared to a deficit of $1,094,000 (43% of revenues) for the same period in 1996. The improvement in margin resulted in part from an increase in revenues of $819,000 described above, lower overhead costs as a result of cost containment measures and certain start-up production costs incurred in 1996, which were not recurring. Revenues, which were insufficient to offset fixed factory overhead, resulted in an operating margin deficiency. General and administrative expenses decreased $645,000, or 37% from $1,736,000 to $1,091,000 for the respective nine month periods ended September 30, 1996 and 1997. The decrease is the result of cost containment measures in a broad 11 category of expenses including, legal, professional fees, travel, personnel and office supplies, as well as expenditures incurred for relocation during 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 $6,000 from $436,000 to $442,000 in the respective nine months ended September 30, 1997, and 1996. Sales and marketing expenses decreased $23,000 to $1,261,000 in the nine months ended September 30, 1997 versus $1,284,000 in the comparable period in 1996, or 2%. The Company has decreased its direct selling efforts, including manpower and collateral materials, in its Autopak packaging line while increasing its direct selling efforts in the equipment line. Research and development expenses decreased $112,000 to $40,000 from $152,000, a 74% decrease, for the nine months ended September 30, 1997 to the comparable quarter in 1996. The decrease relates to the completion of Autopak-Registered Trademark- development, and of the Company's compact sterilizer product line. Interest expense decreased from $284,000 to $175,000 for the comparable nine month ended September 30, 1997 and 1996, a decrease of 109,000 or 38%. 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 decreased to a deficit of $445,000 from positive working capital of $1,696,000 at December 31, 1996. Cash and cash equivalents were $74,000 at September 30, 1997 versus $886,000 at December 31, 1996. Accounts receivable decreased $325,000 to $420,000 at September 30, 1997, from $745,000 at December 31, 1996. Inventory increased, net, $944,000 to $3,046,000 at September 30, 1997 from $2,102,000 at December 31, 1996. Since its inception the Company has funded its operating deficiencies and capital requirements with funds provided either from the sale of stock or various forms of debt or lease finacing. 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 a number of private transactions after that date. When working capital at December 31, 1994 amounted to a deficit of $1,032,000, 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 9). 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. 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 12 months from inception. The Company provided the guarantors with warrants to purchase 375,000 shares of common stock at a price of $1.25 or the price at the closing date. Funds were drawn in full on May 30, 1997. The Company also raised funds from the sale of its Mailback/Container business assets on June 30,1997. The gross sales price was $726,000; excluding contingent funds retained by the acquiror, the Company has received $712,000 to date. At September 30, 1997 the Company had exhausted substantially all of its cash and was unable to meet its current trade obligations. The Company is addressing its nearterm funding requirements with its major investors for additional financing. It has also established a plan to divest selected assets of its equipment business with the intention of paying its credit obligations from the proceeds, or, selling the business in total. Thereafter it could seek to recapitalize its packaging line, Autopak-Registered Trademark-. The Company is holding discussions with companies which have expressed an interest in acquiring a position in the steam sterilizer equipment business. There is no assurance that the Company will be successful in completing this transaction or that it can negotiate terms which will enable it to satisfy its obligations or subsequently recapitalize its business. 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. 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 13 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. 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 which are 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. OnGard submitted all of the 510(k) notices during 1994 and 1996. The Company received notification that all of its 510(k) submittals for sharps containers had been approved and cleared for marketing. The Company sold all of its containers and Mailback business as described in Note 2. The Company has also received a 510(k) notice for its submission of AutoPak-Registered Trademark-. 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. On August 28, 1997, Item 5 - Other Events, reflecting the resignation of certain directors of OnGard's Board including the Chairman and CEO, Mark Weiss and the hiring of both a CEO and COO and their appointment as directors. On September 17, 1997 Item 5 - Other Events, reflecting a voluntary suspension of production due to safety concerns. On October 1, 1997 Item 5 - Other Events, reflecting the resignation of the two newly appointed directors who were the CEO and COO. On October 8, 1997 Item 5 - Other Events, reflecting the reopening of the production facility, and that the Company was evaluating a plan to divest the assets of its equipment business to meet its working capital demands. 15 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: November 13, 1997 PHIL B. KART ---------------------------------------------- Phil B. Kart Vice President and Principal Financial Officer 16 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIRD QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 73,812 50,000 440,142 20,000 3,046,169 3,759,712 2,534,874 1,031,751 7,848,900 4,205,093 0 0 778,177 6,614 (147,375) 7,848,900 3,363,564 3,363,564 3,847,038 3,158,526 0 0 175,111 (3,324,004) 0 (3,324,004) 0 0 0 (3,324,004) (.50) (.50)
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