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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 0-28604
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ELECTROSCOPE, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1162056
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4828 STERLING DRIVE, BOULDER, COLORADO 80301
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(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 444-2600
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(Issuer's telephone number)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OF 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 NO X
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STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK, NO PAR VALUE 5,290,386 SHARES
- ---------------------------- ------------------------------
Class (outstanding at August 12, 1996)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements. . . . . . . . 3
- Condensed Balance Sheets as of June 30,
1996 and March 31, 1996 . . . . . . . . . . . . . . 3
- Condensed Statements of Operations for
the Three Months Ended June 30, 1996 and 1995 . . . 4
- Condensed Statements of Cash Flows for
the Three Months Ended June 30, 1996 and 1995 . . . 5
- Notes to Condensed Interim Financial
Statements. . . . . . . . . . . . . . . . . . . . . 6
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations. . 11
PART II. OTHER INFORMATION
ITEM 2 - Changes in Securities . . . . . . . . . . . . . . . . 15
ITEM 4 - Submission of Matters to a Vote of Security Holders . 15
ITEM 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . 17
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PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, March 31,
1996 1996
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,121,117 $ 538,708
Short-term investments 10,000,000 -
Accounts receivable, net of allowance for doubtful
accounts of $33,428 and $33,428, respectively 41,335 110,465
Inventory, net of reserve for obsolescence of $65,771
and $65,000, respectively 771,758 803,417
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Total current assets 12,934,210 1,452,590
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EQUIPMENT, at cost:
Furniture, fixtures and equipment 309,864 304,735
Less- Accumulated depreciation (131,268) (111,265)
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Equipment, net 178,596 193,470
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PATENTS, net 102,423 99,161
OTHER ASSETS 92,256 80,739
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Total assets $13,307,485 $ 1,825,960
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 203,064 $ 130,368
Accrued compensation 37,516 94,448
Other accrued liabilities 37,430 93,109
Customer deposits 54,971 116,521
Other current liabilities 6,639 6,639
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Total current liabilities 339,620 441,085
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LONG-TERM LIABILITIES:
Deferred revenue (Note 2) 127,941 135,703
Other long-term liabilities 18,087 19,746
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Total long-term liabilities 146,028 155,449
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COMMITMENTS AND CONTINGENCIES (Notes 1 and 4)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 10,000,000 shares authorized,
no shares outstanding - -
Common stock, no par value, 100,000,000 shares authorized,
5,290,386 and 3,893,402 shares outstanding, respectively 16,902,367 5,255,039
Warrants to purchase common stock 290,400 -
Accumulated deficit (4,370,930) (4,025,613)
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Total shareholders' equity 12,821,837 1,229,426
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Total liabilities and shareholders' equity $13,307,485 $ 1,825,960
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended June 30,
------------------------
1996 1995
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REVENUE, net $ 413,642 $ 528,366
COST OF SALES 309,516 444,933
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Gross profit 104,126 83,433
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OPERATING EXPENSES:
Sales and marketing 183,227 194,242
General and administrative 155,568 123,592
Research and development 126,702 122,785
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Total operating expenses 465,497 440,619
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INCOME (LOSS) FROM OPERATIONS (361,371) (357,186)
OTHER INCOME:
Interest income 8,796 5,033
Other income 7,258 (32)
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NET INCOME (LOSS) $(345,317) $(352,185)
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NET INCOME (LOSS) PER SHARE (NOTE 2):
Net income (loss) per common share
and common equivalent share $(0.08) $(0.09)
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Shares used in computing net income
(loss) per common share and common
equivalent share 4,210,817 3,717,535
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The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
----------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (345,317) $ (352,185)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 20,392 11,732
Changes in operating assets and liabilities-
Accounts receivable 69,130 (103,872)
Inventory 31,659 (35,950)
Other assets (11,517) (23,447)
Accounts payable 72,696 (23,176)
Accrued compensation and other accrued
liabilities (112,611) (32,918)
Customer deposits (61,550) (41,190)
Deferred revenue (7,762) -
Other liabilities (1,659) -
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Net cash used in operating activities (346,539) (601,006)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (18,686) (33,939)
Patent costs (5,094) -
Purchases of Short-term investments (10,000,000) -
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Net cash used in investing activities (10,023,780) (33,939)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 13,185,952 592,488
Proceeds from issuance of warrants 50 -
Stock issuance costs (1,233,274) (3,132)
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Net cash provided by financing activities 11,952,728 589,356
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,582,409 (45,589)
CASH AND CASH EQUIVALENTS, beginning of period 538,708 955,728
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CASH AND CASH EQUIVALENTS, end of period $ 2,121,117 $ 910,139
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</TABLE>
The accompanying notes are an integral part of these statements.
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ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
(1) ORGANIZATION AND NATURE OF BUSINESS
Electroscope, Inc. (the "Company") was incorporated as a Colorado corporation on
February 1, 1991. The Company designs, develops, manufactures and markets an
innovative, patented monopolar electrosurgical shielding system and integrated
surgical instruments, which are designed to provide greater safety to patients
who undergo laparoscopic surgery. The Company has developed and is selling a
monitoring system which can be used with most electrosurgical instruments
available today. It has also developed and is selling its own line of
integrated shielded five millimeter electrosurgical instruments. These products
monitor for stray electrical energy during laparoscopy and signals the
electrosurgical generator to deactivate when this energy is detected. The
Company's sales to date have been made principally in the United States. Prior
to fiscal year 1994, the Company was in the development stage.
The Company has incurred losses since its inception and has an accumulated
deficit of $4,370,930 at June 30, 1996. The Company's operations are subject to
certain risks and uncertainties, which include the following. Commercial
acceptance of the Company's products will have to occur in the marketplace
before the Company can attain successful operations. Other risks and
uncertainties include the possibility of substantial operating losses,
dependence on the Company's exclusive distributor, current and potential
competitors with greater financial, technical and marketing resources,
management's plan for growth and expansion, and the Company's limited
manufacturing experience for large-scale production.
The condensed interim financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
The condensed interim financial statements should be read in conjunction with
the financial statements and the notes thereto, included in the Company's
Registration Statement on Form SB-2 as filed with the Securities and Exchange
Commission on June 25, 1996, for the fiscal year ended March 31, 1996.
The accompanying condensed interim financial statements have been prepared, in
all material respects, in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and
reflect, in the opinion of management, all adjustments, which
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are of a normal recurring nature, necessary to summarize fairly the financial
position and results of operations for such periods. The results of operations
for such interim periods are not necessarily indicative of the results to be
expected for the full year.
DISTRIBUTION AGREEMENT
On September 8, 1995, the Company signed a distribution agreement (the
"Distribution Agreement") with Valleylab Inc., a part of the Hospital Products
Group of Pfizer Inc. ("Valleylab"), pursuant to which Valleylab paid a non-
refundable fee of $150,000, placed a non-cancelable purchase order for $400,000
of integrated electrosurgical instruments, and agreed to other terms and
conditions, some of which are discussed below. In exchange, the Company granted
to Valleylab the exclusive right to promote, sell and distribute its products
worldwide, subject to certain conditions.
The Distribution Agreement is exclusive until May 31, 1996, and, if Valleylab
meets its minimum purchase requirements outlined below, continues to be
exclusive during its term, ending June 30, 1999. Valleylab met the purchase
requirement for the period ended May 31, 1996, and accordingly, the Distribution
Agreement retains its exclusivity through December 31, 1996.
Valleylab's past and future minimum purchase requirements to retain its
exclusivity are as follows:
June 30, 1995 through May 31, 1996...........$1,000,000
1996 calendar year...........................$1,750,000
1997 calendar year...........................$3,750,000
1998 calendar year...........................$6,250,000
If, in any calendar year, Valleylab's actual purchases exceed the minimum
purchase requirements for that year, the increment will be added to the above
requirements for all subsequent calendar years. In the event that Valleylab
fails to meet the minimum requirements set forth, and as adjusted, the
Distribution Agreement becomes non-exclusive. As of June 30, 1996, Valleylab
had purchased $1,953,700 of system monitors and electrosurgical instruments
under the Distribution Agreement, of which $749,100 related to purchases in
calendar year 1996.
Valleylab is responsible for direct sales of the Company's electrosurgical
products and accessories. The Company maintains its own marketing and sales
specialists, and is entitled to expand its own sales force as needed to support
the Valleylab sales effort.
During the exclusive phase of the Distribution Agreement, Valleylab has the
right to terminate on 60 days notice only if the Company has breached any term
or condition of the Distribution Agreement and fails to cure such breach within
such 60-day period. During the non-exclusive phase of the Distribution
Agreement, Valleylab has the right to terminate (with or without a breach of the
Company) on 60 days written notice.
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(2) INITIAL PUBLIC OFFERING
In June 1996, the Company completed an initial public offering of 1,200,000
shares of its common stock at a price per share of $10.50, of which all shares
were sold by the Company. After underwriting discounts, commissions and other
expenses, net proceeds to the Company from the offering were approximately
$11.4 million.
In connection with the initial public offering, the Company sold, for a nominal
purchase price, a five-year warrant to purchase up to 120,000 shares of common
stock, exercisable at 120% of the initial offering price, or $12.60 per share.
In accordance with Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," the fair value of the warrant
sold is estimated using an option-pricing model. In accordance with SFAS No.
123, the option-pricing model takes into account as of the date the warrant is
issued the exercise price, life of the warrant, current price of the common
stock, expected common stock volatility and the risk-free interest rate for the
expected term of the warrant. Based on this valuation methodology, the Company
has recorded the fair value of the warrant sold at $290,400. The difference
between the fair value of the warrant and the nominal purchase price has been
recorded as a deduction from the net proceeds to the Company from the offering.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all cash and
highly liquid investments with an original maturity of three months or less to
be cash equivalents. As of June 30, 1996, the Company's cash and cash
equivalents consisted of demand deposits and money market accounts in banks and
other financial institutions, which approximated market value.
LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Loss per common share and common equivalent share for all periods presented is
computed using the sum of the weighted average number of shares of common stock
and common stock equivalent shares from common stock options and warrants.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock and common stock equivalent shares issued by the Company at prices
significantly below the assumed public offering price during the twelve month
period prior to the proposed offering date (using the treasury stock method and
an initial offering price of $10.50 per share), have been included in the
calculation as if they were outstanding for all periods presented regardless of
whether they are antidilutive. Options and warrants for the Company's common
stock issued prior to this one-year period have been excluded as they are
antidilutive. During the second quarter of Fiscal 1997, the Company will
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report earnings per share in accordance with Accounting Principles Board Opinion
No. 15, "Earnings per Share."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, short-term investments and
short-term trade receivables and payables. The carrying values of cash, short-
term investments and short-term trade receivables and payables approximate their
fair value. The short-term investments, as of June 30, 1996, consist of
government securities which the Company classifies as hold-to-maturity.
INVENTORY
Inventory consists primarily of component parts and raw materials, and is valued
at the lower of cost (first-in, first-out basis) or market. Inventory consists
of the following:
June 30, March 31
1996 1996
---------- ----------
Raw materials $274,295 $286,331
Work in process 471,084 437,856
Finished goods 92,150 144,230
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837,529 868,417
Less- Reserve for obsolescence (65,771) (65,000)
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$771,758 $803,417
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(4) COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation by the United States Food and Drug
Administration ("FDA"). The FDA provides regulations governing the manufacture
and sale of the Company's products and regularly inspects the Company and other
manufacturers to determine their compliance with these regulations.
As a result of one such inspection, the FDA issued a Warning Letter on March 4,
1994 to the Company, noting certain deficiencies of its Good Manufacturing
Practices ("GMP"). The Company believes it has adequately addressed such
deficiencies. The Company has hired an experienced manager to supervise its
compliance with FDA requirements and address such deficiencies. The Company was
last inspected in April 1995, and has not, at June 30, 1996, been notified of
any deficiencies from that inspection. FDA inspections are conducted
approximately every two years after approval is obtained or on a more frequent
basis, at the discretion of the FDA.
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Under the terms of the Distribution Agreement, after termination, Valleylab may
sell for a period of six months, any inventory of products held by it at the
date of termination. In the event of termination, the Company has the
obligation to purchase from Valleylab products held in Valleylab's inventory, if
any, to the extent such products are salable and non-obsolete and have been
received by Valleylab within nine months of the latter of the date of
termination or the post-termination sales period.
Because of seasonal and other factors, the results of operations for the three-
month period ended June 30, 1996, should not be taken as an indication of
operations for all or any part of the balance of the year.
(5) MANAGEMENT'S REPRESENTATIONS
In the opinion of the Company, the accompanying unaudited condensed interim
financial statements include all adjustments necessary for the fair presentation
of the financial position of the Company at June 30, 1996 and March 31, 1996,
and the results of operations and cash flows for the three months ended June 30,
1996 and 1995. The condensed interim financial information and notes thereto
should be read in conjunction with the financial statements and notes for the
fiscal years ended March 31, 1996 and 1995 included in the Company's
Registration Statement, as amended, dated June 25, 1996, filed with the
Securities and Exchange Commission on Form SB-2.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company manufactures and markets a line of proprietary electrosurgical
products that are designed to provide greater safety to patients who undergo
minimally invasive electrosurgery. The Company believes that its patented
Electroshield Monitoring System offers surgeons significant advantages compared
to other electrosurgical systems in use because of its ability to monitor
dynamically for stray electrical energy out of the view of the surgeon during
MIS procedures. The Company has received three FDA Form 510(k) notifications
for its products and obtained patent protection for its products' basic
shielding and monitoring features. In September 1995, the Company entered into
an exclusive worldwide Distribution Agreement with Valleylab, part of the
Hospital Products Group of Pfizer, Inc., pursuant to which Valleylab must make
certain minimum purchases through calendar year 1998 in order to retain its
exclusive rights. The Company also employs its own clinical sales specialists
to assist Valleylab in educating the market about the existence of a safe
approach to MIS procedures employing electrosurgery.
HISTORICAL PERSPECTIVE AND OUTLOOK
The Company was organized in February 1991. During its first two years, the
Company developed the EM-2 Electronic Monitor and adaptive sheaths to work with
traditional electrosurgical instruments. During this period, the Company
applied for patents with the United States Patent Office and conducted clinical
trials. In 1993, the Company hired a vice president of sales and marketing and
recruited clinical sales specialists. The Company also continued work on its
patent applications and formulated development plans for shielded hinged tip and
fixed tip electrosurgical instruments. As this development program proceeded it
became apparent that the merging of electrical and mechanical engineering skills
in the instrument development process for the Company's patented, integrated
electrosurgical instruments was more difficult than was expected at first. As a
result, the development of the instruments with the Electroshield AEM technology
was not completed until 1995. The Company introduced integrated instruments for
the Electroshield Monitoring System in November 1995.
The installed base of the Company's EM-2 Electronic Monitor has continued to
increase since the introduction of the product in 1994. The Company believes
such installed base has the potential for increasing rapidly as the Valleylab
sales representatives become familiar with the Electroshield Monitoring System
and sell the system to their customers. The approximate number of EM-2
Electronic Monitors sold were 138, 321 and 567 in each of the fiscal years ended
March 31, 1994, 1995 and 1996, respectively. The Company expects that the sales
of electrosurgical instruments and accessories should increase as additional
EM-2 Electronic Monitors are installed.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $4,370,930 as of June 30, 1996. Due to the early stage
of marketing efforts by Electroscope's sole worldwide distributor, Valleylab,
the Company believes that it may continue to operate at a net loss for several
quarters. The Company believes its results of operations may fluctuate on a
quarterly basis as a result of the size and frequency of sales to Valleylab, the
timing of which are solely at the discretion of Valleylab. Such fluctuations
may be significant, and may result in the Company operating at a loss in any one
period even after a period of profitability.
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RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1995
NET REVENUES. Revenues for the three months ended June 30, 1996, were $413,642,
compared to $528,366 for the three months ended June 30, 1995, a decrease of
22%. The decrease is attributable to reduced sales to Valleylab for the three
months ended June 30, 1996 resulting from Valleylab making significant stocking
purchases prior to March 31, 1996, to develop an inventory of finished goods.
The Company anticipates continued revenue growth for the fiscal year ended March
31, 1997 ("Fiscal Year 1997") as the Company's arrangement with Valleylab
continues to expand its installed base of Electroshield Monitoring Systems with
resulting increases in sales of electrosurgical instruments and adaptive sheaths
used by this installed equipment. In order to maintain the exclusivity of the
Valleylab distribution agreement, Valleylab must purchase approximately
$1,000,000 of products from the Company during the remainder of calendar year
1996. As a result of increased market acceptance, an increasing installed base
of equipment, and purchases by Valleylab which have exceeded its first minimum
purchase requirement, the Company expects that purchases by Valleylab in Fiscal
Year 1997 will exceed this amount. However, there can be no assurance that such
purchases will be made.
GROSS PROFIT. The gross profit for the three months ended June 30, 1996, of
$104,126 increased by $20,693 (a 25% increase) from the three month ended June
30, 1995 gross profit of $83,433. Gross profit as a percentage of revenue
increased from 16% for the three months ended June 30, 1995 to 25% in the three
months ended June 30, 1996. Gross profit and gross profit as a percentage of
revenue can be expected to fluctuate from quarter to quarter, as a result of
product sales mix and sales volume. Gross margins are expected to be
approximately 50% at higher levels of production and sales. These gross margins
are currently not being achieved because of the costs incurred and expenses
related to the enlarged manufacturing capacity, which resulted from expansions
in facilities and manufacturing staff in anticipation of higher future
production requirements in support of Valleylab's sales efforts, as well as
higher manufacturing costs associated with early stage production of hinged tip
instruments.
SALES AND MARKETING EXPENSES. Sales and marketing expenses of $183,227 for the
three months ended June 30, 1996 decreased by $11,015 (a 6% decrease) compared
to the three months ended June 30, 1995 of $194,242. The decrease is the
results of a reduction of one Company sales representative for the three months
ended June 30, 1996 as compared to the same period the previous year. In
addition, the exclusive distribution agreement with Valleylab has reduced the
Company's requirements for direct sales activities, for which it was responsible
in the June 30, 1995 quarter. The Company believes that sales and marketing
expenses will continue to decrease as a percentage of net revenue with
increasing sales volume. There can be no assurance, however, that such decrease
will occur.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 26% from $123,592 for the three months ended June 30, 1995 to $155,568
for the three months ended June 30, 1996. This increase was primarily due to
overall increase in the number of personnel and the expansion of the Company's
quality assurance department, which is responsible for maintaining the Company's
compliance with the FDA's manufacturing requirements.
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RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$122,785 for the three months ended June 30, 1995 to $126,702, an 3% increase,
reflecting the Company's ongoing product development efforts, which are expected
to increase modestly in Fiscal Year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements principally through
sales of Common Stock which totaled $5,304,051 through March 31, 1996, and, to a
lesser degree, funds provided by sales of the Company's products. In the first
quarter of Fiscal Year 1997, the Company completed its initial public offering,
raising net proceeds of $11.4 million, and raised an additional $585,000 in cash
from the exercise of warrants issued in connection with previous sales of Common
Stock. Historically, these funds have been used for working capital and general
corporate purposes. The Company may use working capital to build inventories,
to ensure that orders can be filled in a timely manner, to support the sales
efforts of the Company's exclusive distributor and to accommodate anticipated
growth. While net proceeds from the Company's initial public offering are
currently invested in government securities, the Company may also use a
substantial portion of the net proceeds for the acquisition or development of
complementary products or businesses, if such acquisition or development
opportunities arise. The Company currently has no understanding, commitment or
agreement with respect to any such acquisition or development program.
Capital expenditures historically have been relatively minor, and have consisted
of specialized equipment, manufacturing equipment, office equipment and
leasehold improvements. The Company anticipates that its cash on hand, the
proceeds from the warrant exercise discussed in the foregoing paragraph, net
cash provided by its sales, and the proceeds from the offering will be
sufficient to fund its operations, working capital and capital requirements for
at least twelve months following the offering.
The Company believes that to be successful in rapidly penetrating the market for
electrosurgical products, it must be able to deliver quickly all its products to
its sole distributor, Valleylab, when orders are received. The Distribution
Agreement provides that Valleylab will submit non-binding forecasts of sales to
the Company by product to facilitate manufacturing operations. Given the
relatively short time the Distribution Agreement has been in force, however, it
is not yet clear what the customer ordering patterns are likely to be. For this
reason, the Company has chosen to build an inventory of its products, based on
its own experience to date, somewhat ahead of the orders placed thus far, and in
anticipation of increasing end user orders. This decision accounts for the
higher level of finished goods, work in progress and raw materials than might be
expected at this stage of the Company's development.
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INCOME TAXES
Net operating loss carryforwards totaling approximately $4.0 million are
available to reduce taxable income as of June 30, 1996. The net operating loss
carryforwards expire, if not previously utilized, at various dates beginning in
the year 2006. The Company has not paid income taxes since its inception. The
Tax Reform Act of 1986 and other income tax regulations contain provisions which
may limit the net operating loss carryforwards available to be used in any given
year, if certain events occur, including changes in ownership interests. The
Company has established a valuation allowance for the entire amount of its
deferred tax asset since inception due to its history of operating losses.
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PART II. OTHER INFORMATION
ITEM 1 - Not Applicable
ITEM 2 - CHANGES IN SECURITIES
(a) On June 25, 1996, the Company completed an initial public
offering of 1,200,000 shares of common stock. After the public
offering, there were 5,290,386 shares issued and outstanding.
ITEM 3 - Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On April 17, 1996, a special meeting of the shareholders of the
Company was held. The purpose of the meeting was to vote on a
proposal to increase the number of options authorized for
issuance pursuant to the Company's Stock Option Plan from
1,050,000 to 1,150,000 shares. The proposal was approved with
2,414,474 votes cast in favor and no votes opposed.
ITEM 5 - Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Computation of Net Income (Loss) per Common Share and
Common Equivalent Share.
27 - Financial Data Schedule.
(b) The Registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Electroscope has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Name Title Date
- ----------------------- ------------------------------ ---------------------
Chief Financial Officer August 13, 1996
- ----------------------- (Principal Accounting Officer)
Vern D. Kornelsen Secretary/Treasurer and Director
-16-
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ------------------------------------------------ ---------------
11 Computation of Net Income (Loss) per
Common Share and Common Equivalent Share 18
27 Financial Data Schedule 19
-17-
<PAGE>
EXHIBIT 11
ELECTROSCOPE, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(UNAUDITED)
For the Three Months Ended
----------------------------
June 30, 1996 June 30, 1995
------------- -------------
NET INCOME (LOSS) $ (345,317) $ (352,185)
------------- -------------
------------- -------------
SHARES USED IN SHARE COMPUTATION-
Common stock shares
outstanding (weighted average) 3,965,082 3,428,364
Treasury stock effect of common stock and
equivalents issued within one year of
the public offering at prices less than
the public offering price 245,735 289,171
------------- -------------
Shares used in computation 4,210,817 3,717,535
------------- -------------
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $(0.08) $(0.09)
------------- -------------
------------- -------------
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ELECTROSCOPE, INC. BALANCE SHEET AS OF JUNE 30, 1996 AND STATEMENTS OF OPERATION
AND CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,121,117
<SECURITIES> 10,000,000
<RECEIVABLES> 74,763
<ALLOWANCES> 33,428
<INVENTORY> 771,758
<CURRENT-ASSETS> 12,934,210
<PP&E> 178,596
<DEPRECIATION> (131,268)
<TOTAL-ASSETS> 13,307,485
<CURRENT-LIABILITIES> 339,620
<BONDS> 0
0
0
<COMMON> 16,902,367
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 13,307,485
<SALES> 413,642
<TOTAL-REVENUES> 413,642
<CGS> 309,516
<TOTAL-COSTS> 465,497
<OTHER-EXPENSES> (16,054)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (345,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (345,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,317)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
