<PAGE>
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, 1998
For the transaction period from __________ to________
Commission file number 0-28604
--------------
ELECTROSCOPE, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1162056
- ---------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4828 STERLING DRIVE, BOULDER, COLORADO 80301
---------------------------------------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 444-2600
---------------------------------------------------------------------
(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 X NO
-------- --------
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 5,383,507 SHARES
- ----------------------------------- --------------------------------
Class (outstanding at August 11, 1998)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
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1
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ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
Number
------
PART I. UNAUDITED FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements . . . . . . 3
- Condensed Balance Sheets as of June 30,
1998 and March 31, 1998 . . . . .. . . . . . . . . 3
- Condensed Statements of Operations for
the Three Months Ended June 30, 1998 and 1997. . . 4
- Condensed Statements of Cash Flows for
the Three Months Ended June 30, 1998 and 1997. . . 5
- Notes to Condensed Interim Financial
Statements . . . . . . . . . . . . . . . . . . . . 6
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations . 9
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . . . . 13
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . 13
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1998 1998
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,492,421 $ 2,525,026
Short-term investments 4,280,078 3,674,729
Accounts receivable, net of allowance for doubtful
accounts of $7,040 and $7,500, respectively 188,903 321,150
Inventory, net of reserve for obsolescence of $70,318
and $140,000, respectively 496,417 543,006
Prepaid expenses 102,359 63,259
-------------- -------------
Total current assets 6,560,178 7,127,170
-------------- -------------
EQUIPMENT, at cost:
Furniture, fixtures and equipment 625,350 621,607
Less - Accumulated depreciation (413,796) (380,659)
-------------- -------------
Equipment, net 211,554 240,948
-------------- -------------
PATENTS, net of accumulated amortization of $13,036
and $11,830, respectively 174,562 186,454
OTHER ASSETS 11,450 11,450
-------------- -------------
Total assets $ 6,957,744 $ 7,566,022
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 98,235 $ 99,430
Accrued compensation 108,801 150,635
Other accrued liabilities 208,506 191,871
Customer deposits and other accrued liabilities 4,828 11,015
-------------- -------------
Total current liabilities 420,370 452,951
-------------- -------------
LONG-TERM LIABILITIES:
Other long-term liabilities 5,503 5,331
-------------- -------------
Total long-term liabilities 5,503 5,331
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
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, 5,383,507 and 5,383,507 shares
outstanding, respectively 16,941,317 16,941,317
Warrants to purchase common stock 290,400 290,400
Accumulated deficit (10,699,846) (10,123,977)
-------------- -------------
Total shareholders' equity 6,531,871 7,107,740
-------------- -------------
Total liabilities and shareholders' equity $ 6,957,744 $ 7,566,022
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE, net $ 313,878 $ 311,564
COST OF SALES 265,118 274,962
----------- -----------
Gross profit 48,760 36,602
----------- -----------
OPERATING EXPENSES:
Sales and marketing 315,968 561,741
General and administrative 260,232 408,579
Research and development 127,043 209,675
----------- -----------
Total operating expenses 703,243 1,179,995
----------- -----------
INCOME (LOSS) FROM OPERATIONS (654,483) (1,143,393)
OTHER INCOME:
Interest income 78,980 112,949
Other income (expense) (366) (15,433)
----------- -----------
NET INCOME (LOSS) $(575,869) $(1,045,877)
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per
common share $(0.11) $(0.19)
----------- -----------
----------- -----------
Basic and diluted weighted average shares
used in computing net income (loss)
per common share 5,383,507 5,374,950
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (575,869) $ (1,045,877)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 49,877 33,462
Amortization of discount (39,678) (109,005)
Common stock issued as stock bonus - 40,000
Inventory reserves (69,682) -
Changes in operating assets and liabilities-
Accounts receivable 132,707 (60,626)
Inventory 116,271 (85,004)
Other assets (39,100) 25,240
Accounts payable (1,195) (84,957)
Accrued compensation, Customer deposits and other
accrued liabilities (31,217) (208,738)
-------------- --------------
Net cash used in operating activities (457,886) (1,495,505)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (3,743) (98,696)
Patent costs (5,305) (4,484)
Purchases of short-term investments (2,877,671) --
Sale of short-term investments 2,312,000 8,099,999
-------------- --------------
Net cash used in investing activities (574,719) 7,996,819
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock -- (156,715)
-------------- --------------
Net cash provided by (used in) financing activities -- (156,715)
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,032,605) 6,344,599
CASH AND CASH EQUIVALENTS, beginning of period 2,525,026 527,015
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,492,421 $ 6,871,614
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1998
(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
a patented monopolar electrosurgical shielding system and integrated surgical
instruments, which are designed to provide greater safety to patients who
undergo laparoscopic surgery. The products can be used with most
electrosurgical instruments available today in the USA. It has also
developed and is marketing its own line of integrated, shielded, five
millimeter diameter electrosurgical instruments which incorporate the
Company's proprietary technology. These products monitor for stray
electrical energy during laparoscopy and deactivate the electrosurgical unit
when this energy creates potentially dangerous conditions.
The Company has incurred losses since its inception and has an accumulated
deficit of $10,699,846 at June 30, 1998. 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, in significant volumes, before the Company can attain profitable
operations; the possibility of continued substantial operating losses and
limitations on future capital availability; current and potential competitors
with greater financial, technical and marketing resources; the potential
impact of a failure to comply with or changes in government regulations;
manufacturing being subject to Governmental regulations; dependence on new
product development and intellectual property rights; dependence on single
source suppliers and sub-contractors; the Company's limited manufacturing
experience for large-scale production; potential fluctuations in future
quarterly results; uncertainty of future efforts at health care reform;
product liability risk and limited insurance coverage against such risk;
potential risks associated with the Year 2000 computer software issue, and
dependence on key personnel.
(2) 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.
6
<PAGE>
CASH AND 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.
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 receivables and payables approximate
their fair value.
SHORT-TERM INVESTMENTS
As required under Statement of Financial Accounts Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS
115) management determines the appropriate classification of its investments
in debt securities at the time of purchase. At June 30, 1998, the Company's
short-term investments consist primarily of government securities which the
Company classifies as held-to-maturity.
The amortized cost of debt securities classified as held-to-maturity is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion of discounts are included in interest income.
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:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Raw materials $395,724 $448,486
Finished goods 171,011 234,520
---------- ----------
566,735 683,006
Less - Reserve for obsolescence (70,318) (140,000)
---------- ----------
$496,417 $543,006
---------- ----------
---------- ----------
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred income tax assets
and liabilities for the expected future income tax consequences, based on
enacted tax laws, of temporary differences between the financial reporting
and tax bases of assets and liabilities. SFAS No. 109 requires recognition
of deferred tax assets for the expected future tax effects of all deductible
temporary differences, loss carryforwards and tax credit carryforwards. The
Company's deferred tax assets have been completely offset by a
7
<PAGE>
valuation allowance because the realization criteria set forth in SFAS 109
are not currently satisfied, primarily due to the Company's history of
operating losses.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
This statement establishes standards for computing and presenting earnings
per share. The Company adopted this standard in its fiscal quarter ended
December 31, 1997.
The Company adopted the provisions of SFAS 130, "Reporting Comprehensive
Income" as of April 1, 1998. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The adoption of this statement had no
impact on the Company's financial statements.
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per basic and diluted common share for all fiscal years presented is
computed using the sum of the weighted average number of shares of common
stock outstanding. Fully diluted shares which would result from the exercise
of common stock options and warrants would be anti-dilutive and thus are not
presented.
(3) 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 of June 30, 1998 the Company believes it was in substantial
compliance with all known regulations.
Because of seasonal and other factors including the continuing development of
the sales force discussed in Item 2, Historical Perspective and Outlook,
Results of Operations, the results of operations for the quarter ended June
30, 1998, should not be taken as an indication of the results of operations
for all or any part of the balance of the year.
(4) MANAGEMENT'S REPRESENTATIONS
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 and notes thereto
should be read in conjunction with the financial statements and the notes
thereto, included in the Company's Annual Report to the Securities and
Exchange Commission, filed on Form 10-KSB on June 15, 1998.
8
<PAGE>
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 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.
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 (MIS). The Company believes that its
patented Electroshield-Registered Trademark- 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 five FDA Form 510(k) notifications for its products and obtained
patent protection for its products' basic shielding and monitoring features.
The Company recognizes that market awareness and acceptance of the hazards
inherent in monopolar electrosurgery and acceptance of the Company's products
to address such hazards has been slower to occur than the Company had
believed would be the case. The Company has modified its marketing
strategies to address the issues of market acceptance of the technology. The
Company has also undertaken efforts to broaden the product line offerings
beyond the original EM2 product and its accessories. The Company is
developing a line of disposable products, and intends to explore product
development and acquisition opportunities with third parties.
The Company believes that it has sufficient cash resources on hand to
successfully complete the development of the sales force, and that it has
attracted and can continue to attract the additional human resources
necessary to manage the development of the sales force, the increased
marketing efforts, and the general growth of the business. There can be no
assurance however, that the Company's efforts in this area will result in
increased revenues or the achievement of profitability.
Statements herein that are not historical facts, including statements about
the Company's strategies and expectations about new and existing products and
market demand and acceptance of new and existing products, technologies and
opportunities, market and industry segment growth, and return on investments
in products and markets are forward looking statements within the meaning of
the Private Securities Litigation Reform. Act of 1995. These forward looking
statements involve substantial risks and uncertainties that may cause actual
results to differ materially from those indicated by the forward looking
statements. These forward looking statements should be read in conjunction
with the risk factors discussed in the Form 10-KSB filed by the Company on
June 15, 1998. All forward looking statements are based on information
available to the Company on the date of this document and the Company assumes
no obligation to update such forward looking statements.
9
<PAGE>
HISTORICAL PERSPECTIVE AND OUTLOOK
The Company was organized in February 1991. During its first two years, the
Company developed the EM2 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. 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-Registered Trademark- Active Electrode Monitoring
(AEM-Registered Trademark-) technology was not completed until 1995. The
Company introduced integrated instruments for the Electroshield-Registered
Trademark- Monitoring System (EMS) in November 1995.
The installed base of the Company's EM2 and EM2+ Electronic Monitors has
continued to increase since the introduction of the product in 1994. The
Company believes such installed base has the potential for increasing as the
independent sales representatives of the Company become familiar with the EMS
and sell the system to their customers. The Company expects that the sales
of electrosurgical instruments and accessories should increase as additional
EM2+ Electronic Monitors are installed. The Company continues to devote
resources to increasing market awareness of the inherent hazards of monopolar
electrosurgery. There can be no assurance, however, as to the rate of market
acceptance of the EMS. Given the system's short history of usage, the
Company cannot predict the rate of its electrosurgical instrument sales. As
a result of the lack of immediate market acceptance of the EM2+ EMS, the
Company has broadened its R&D efforts to reduce its dependence on products
involving AEM-Registered Trademark- technology.
The Company believed that the most cost effective way to educate the market
to the hazards of monopolar electrosurgery and to generate significant
revenues for the Company was to supplement a direct sales effort with an
exclusive distribution agreement with Valleylab, Inc., then a division of
Pfizer, Inc. This agreement did not meet its objectives and the Company has
developed its own direct sales force, made up of Company employees and
independent sales representative organizations, which together provide market
presence in many of the major market areas in the United States. In
addition, in Fiscal Year 1998 the Company began to sell through independent
distributors in Australia, Canada and Taiwan. The Company believes that such
measures, along with increased marketing efforts and the introduction of new
products, will provide the basis for increased revenues and will ultimately
lead to profitable operations. Management does not expect that profitable
revenue levels will be reached in fiscal year 1999, and there can be no
assurance that these measures, or any others that the company may adopt, will
result in either increased revenues or profitable operations.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $10,699,846 as of June 30, 1998. Due to the need to
continue the development and training of a sales and distribution network 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 through the
independent sales network, which could result in increased sales expenses.
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.
10
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997.
NET REVENUES. Revenues for the three months ended June 30, 1998, were
$313,878, compared to $311,564 for the three months ended June 30, 1997, an
increase of 1%. The Company anticipates revenue growth for the fiscal year
ended March 31, 1999 ("Fiscal Year 1999") compared to fiscal year 1998 as the
Company's efforts to develop an independent sales force and marketing program
mature and result in increased market coverage and increased sales. The
company also expects to introduce new products during Fiscal Year 1999 which
are expected to contribute to increased revenues. There can be no assurance,
however, that the Company's sales and marketing efforts will lead to
increased revenues, or that the new products will find adequate market
acceptance to generate significant revenues.
GROSS PROFIT. The gross profit for the three months ended June 30, 1998, of
$48,760 increased by 33% from the three months ended June 30, 1997 gross
profit of $36,602. Gross profit as a percentage of revenue (gross margin)
increased from 12% for the three months ended June 30, 1997 to 16% in the
three months ended June 30, 1998. The increase in gross profit is primarily
the result of lower manufacturing overhead spending. Gross profit and gross
margin 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 higher
at higher levels of production and sales. These higher gross margins are
currently not being achieved because of the expenses related to manufacturing
capacity, which is currently underutilized due to the reduced levels of
product revenues and other, generally fixed, manufacturing costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses of $315,968 for
the three months ended June 30, 1998 decreased by 44% compared to $561,741
for the three months ended June 30, 1997. The decrease is the result of the
Company's transition from a direct sales force to a network of independent
sales representatives who are paid on a commission only basis. In addition,
in the quarter ended June 30, 1997 the Company incurred significant
expenditures on a communications campaign to increase market awareness of the
hazards inherent in laparoscopic surgery. The Company believes that sales
and marketing expenses will 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 of
$260,232 for the three months ended June 30, 1998 decreased by 36% compared
to $408,579 for the three months ended June 30, 1997. This decrease was
primarily the result of the transfer of certain personnel to Marketing and
Sales, and also reflected the payment in stock of a bonus to the Chief
Executive Officer in the three months ended June 30, 1997, with no comparable
payment in the 1998 period.
RESEARCH AND DEVELOPMENT. Research and development expenses of $127,043 for
the three months ended June 30, 1998 decreased by 39% compared to $209,675
for the three months ended June 30, 1997. This decrease reflects the reduced
level of engineering support required for the Company's EM2+ product, offset
in part by spending on new product development efforts.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements principally
through sales of Common Stock which approximated $17.3 million through June
30, 1998, and, to a substantially lesser degree, funds provided by sales of
the Company's products. Historically, these funds have been used for working
capital and general corporate purposes including research and development.
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 sales force and to accommodate anticipated growth. While net
proceeds from the Company's initial public offering are currently invested
primarily in money market instruments and 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
will be sufficient to fund its operations, working capital and capital
requirements for at least the next twelve months.
The Company's common stock is traded on the Nasdaq National Market. The
Company must also maintain certain requirements in order to be listed on
Nasdaq. These requirements include maintaining a specified level of net
tangible assets, as defined, market capitalization or net income.
Additionally, the Company must maintain a specified level of publicly traded
shares, market value of the publicly traded shares, minimum bid price, number
of market makers and shareholders. On July 14, 1998 the Company was notified
by Nasdaq that it was not in compliance with the Nasdaq listing requirements.
The Company has 90 days to respond to Nasdaq with its plans to stay in
compliance. There can be no assurance that the Company will be able to
continue to be traded on the Nasdaq National Market exchange.
INCOME TAXES
Net operating loss carryforwards totaling approximately $10.2 million are
available to reduce taxable income as of June 30, 1998. 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
THE COMPANY IS EXPOSED TO VARIOUS ASSERTED AND UNASSERTED
CLAIMS ARISING IN THE NORMAL COURSE OF BUSINESS. THE COMPANY DOES NOT
BELIEVE THAT THESE CLAIMS WILL HAVE ANY MATERIAL IMPACT ON THE FINANCIAL
POSITION, RESULTS OF OPERATIONS OR CASH FLOWS OF THE COMPANY.
ITEM 2 Not Applicable
ITEM 3 - Not Applicable
ITEM 4 - Not Applicable
ITEM 5 - Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule.
(b) On April 6, 1998, the Registrant filed a report with the
SEC on Form 8-K, and under Item 5 reported that the Class Action Complaint
brought against the Registrant in June of 1997 had been dismissed with
prejudice on March 24, 1998 by the United States District Court in the
District of Minnesota.
On April 17, 1998, the Registrant filed a report with the
SEC on Form 8-K, and under Item 5 reported that a Schedule 13D had been filed
with the SEC by Vern D. Kornelsen and CMED Partners, LLLP indicating that Mr.
Kornelsen had obtained sole dispositive power over 36.1% of the Registrants
outstanding Common Stock.
On April 30, 1998, the Registrant filed a report with the
SEC on Form 8-K, and under Item 5 reported that Vern D. Kornelsen had been
elected to the Board of Directors of the Registrant, and that Roger C. Odell had
transferred 88% of his direct holdings of the Common Stock of the Registrant to
CMED Partners, LLLP.
13
<PAGE>
SIGNATURE
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
- ----------------------------------------------------------------------------
/s/ Karl D. Hawkins Chief Financial Officer August 11, 1998
- -------------------------- (Principal Accounting Officer)
Karl D. Hawkins
14
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- -----------------------------------------------------------------------------
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ELECTROSCOPE, INC. BALANCE SHEET AS OF JUNE 30, 1998 AND STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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0
0
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</TABLE>
