<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, 1999
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 July 22, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES _____ NO __X__
1
<PAGE>
ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. UNAUDITED FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements...................... 3
- Condensed Balance Sheets as of June 30,
1999 and March 31, 1999.................................. 3
- Condensed Statements of Operations for
the Three Months Ended June 30, 1999 and 1998............ 4
- Condensed Statements of Cash Flows for
the Three Months Ended June 30, 1999 and 1998............ 5
- Notes to Condensed Interim Financial
Statements............................................... 6
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations......... 10
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K............................ 14
SIGNATURE .................................................................. 15
EXHIBIT INDEX ............................................................. 16
</TABLE>
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 1999 1999
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 349,773 $ 1,188,867
Short-term investments 3,286,436 3,172,792
Accounts receivable, net of allowance for doubtful
accounts of $23,200 and $7,500, respectively 396,921 278,533
Inventory, net of reserve for obsolescence of $140,000
and $125,000, respectively 510,792 439,218
Prepaid expenses 88,421 69,112
-------------- -------------
Total current assets 4,632,343 5,148,522
-------------- -------------
EQUIPMENT, at cost:
Furniture, fixtures and equipment 633,245 600,495
Less- Accumulated depreciation (477,455) (455,426)
-------------- -------------
Equipment, net 155,790 145,069
-------------- -------------
PATENTS, net of accumulated amortization of $18,616 and $17,204, 120,264 121,676
respectively
OTHER ASSETS 13,472 13,472
-------------- -------------
Total assets $ 4,921,869 $ 5,428,739
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 94,840 $ 144,212
Accrued compensation 85,016 135,996
Other accrued liabilities 184,242 207,854
Other current liabilities 4,224 9,960
-------------- -------------
Total current liabilities 368,322 498,022
-------------- -------------
LONG-TERM LIABILITIES:
Other long-term liabilities 1,279 2,335
-------------- -------------
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 (12,679,449) (12,303,335)
-------------- -------------
Total shareholders' equity 4,552,268 4,928,382
-------------- -------------
Total liabilities and shareholders' equity $ 4,921,869 $ 5,428,739
-------------- -------------
-------------- -------------
</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,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE, net $ 459,922 $ 313,878
COST OF SALES 281,047 265,118
----------- -----------
Gross profit 178,875 48,760
----------- -----------
OPERATING EXPENSES:
Sales and marketing 289,781 315,968
General and administrative 186,283 260,232
Research and development 127,360 127,043
----------- -----------
Total operating expenses 603,424 703,243
----------- -----------
INCOME (LOSS) FROM OPERATIONS (424,549) (654,483)
OTHER INCOME:
Interest income 50,986 78,980
Other income (expense) (2,551) (366)
----------- -----------
NET INCOME (LOSS) $(376,114) $(575,869)
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $(0.07) $(0.11)
----------- -----------
----------- -----------
Basic and diluted weighted average shares used in computing
net income (loss) per common share 5,383,507 5,383,507
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (376,114) $ (575,869)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 23,441 49,877
Amortization of discount (19,321) (39,678)
Inventory reserves 15,000 (69,682)
Changes in operating assets and liabilities-
Accounts receivable (118,388) 132,707
Inventory (86,574) 116,271
Other assets (19,309) (39,100)
Accounts payable (49,372) (1,195)
Accrued compensation and other accrued
liabilities (81,384) (31,217)
-------------- --------------
Net cash used in operating activities (712,021) (457,886)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (32,750) (3,743)
Patent costs - (5,305)
Purchases of short-term investments, net (1,058,815) (2,877,671)
Sale of short-term investments 964,492 2,312,000
-------------- --------------
Net cash used in investing activities (127,073) (574,719)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (839,094) (1,032,605)
CASH AND CASH EQUIVALENTS, beginning of period 1,188,867 2,525,026
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 349,773 $ 1,492,421
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
(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 that incorporate the Company's
proprietary technology. Sales to date have been primarily in the United
States.
The Company has incurred losses since its inception and has an accumulated
deficit of $12,679,449 at June 30, 1999. 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; dependence on single source suppliers and
sub-contractors; 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; 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, 1999, the Company's
short-term investments consist primarily of government securities that 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,
1999 1999
---------- ----------
<S> <C> <C>
Raw materials $431,528 $393,606
Finished goods 219,264 170,612
---------- ----------
650,792 564,218
Less- Reserve for obsolescence (140,000) (125,000)
---------- ----------
$510,792 $439,218
---------- ----------
---------- ----------
</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 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.
7
<PAGE>
REVENUE RECOGNITION
Revenue from product sales is recorded when the Company ships the product and
when the earnings process is complete. The Company recognizes revenue from
sales to stocking distributors if there is no right of product return other
than for normal warranty related matters.
COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") 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. For each period presented there are no differences
between Net Income and Comprehensive Income.
SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") in the Quarter ended December 31, 1998. SFAS 131
established standards for reporting information about the segments of
enterprises' business. The adoption of this statement had no impact on the
Company's financial statements as there are no material differences between
information reported to management and that contained in the financial
statements of the Company.
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per basic and diluted common share for each period presented is computed
using the sum of the weighted average number of shares of common stock
outstanding. Fully diluted shares that 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, 1999 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 and
Results of Operations, the results of operations for the quarter ended June
30, 1999 should not be taken as an indication of the results of operations
for all or any part of the balance of the year.
The accounts receivable balance at June 30, 1999 of $420,121 included
$134,382 (32%) and $57,795 (14%) from two customers. The Company's accounts
receivable balances are primarily domestic.
8
<PAGE>
(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 for the fiscal year ended March 31, 1999, filed on Form
10-KSB on June 4, 1999.
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 the
most recent interim period are not necessarily indicative of the results to
be expected for the full year.
9
<PAGE>
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 is continuing to develop its sales
force in the US, consisting of both independent sales representative
organizations and stocking distributors. 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 is continuing to develop its sales distribution network in the
US, and to expand its effective sales coverage across the entire country.
This ongoing process requires continual investments in training sales
representatives to effectively present the Company's product line as well as
understanding the nature of the risks inherent in laparoscopic surgery. 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 4, 1999. 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.
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
10
<PAGE>
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 and stocking distributors 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.
The Company believes that the measures taken to develop the sales force and
expand market coverage in the US, 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
2000, 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 $12,679,449 as of June 30, 1999. 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. The Company also expects that quarterly results
may fluctuate significantly due to placement of stocking orders from newly
contracted distributors, which are typically sizeable and may not occur
evenly over successive quarterly periods. 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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1998.
NET REVENUES. Revenues for the quarter ended June 30, 1999, were $459,922,
compared to $313,878 for the quarter ended June 30, 1998, an increase of 47%.
The increase is attributable to the Company continuing to develop its own
sales and marketing efforts, including the signing of new stocking
distributors in the US (new stocking distributors placed initial stocking
orders of approximately $93,000 compared to $0 in the comparable quarter of
the prior year). While there can be no assurance that the arrangement with
the stocking distributors will result in recurring business, the Company
believes that the distributors will be effective marketing partners in their
territories. The contracts with the stocking distributors do not provide a
right of return for the products sold to the distributors. The Company
anticipates revenue growth for the fiscal year ended March 31, 2000 ("FY
2000") compared to fiscal year 1999 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 FY 2000 that 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.
11
<PAGE>
GROSS PROFIT. The gross profit for the quarter ended June 30, 1999 of
$178,875 increased by 267% from the quarter ended June 30, 1998 gross profit
of $48,760. Gross profit as a percentage of revenue (gross margin) increased
from 16% for the quarter ended June 30, 1998 to 39% in the quarter ended June
30, 1999. The increase in gross profit is primarily the result of improved
utilization of manufacturing facilities and resources, combined with
headcount and cost reduction programs implemented over the past year. 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, while
improved, 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 $289,781 for
the quarter ended June 30, 1999 decreased by 8% compared to $315,968 for the
quarter ended June 30, 1998. The decrease is primarily the result of the
shift from independent sales representatives (who were paid commissions on
their sales) to stocking distributors (who buy products from the Company at a
discount, but who are not paid commissions by the Company).
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$186,283 for the quarter ended June 30, 1999 decreased by 28% compared to
$260,232 for the quarter ended June 30, 1998. This decrease is the result of
lower headcount, lower legal fees and the elimination of directors' fees.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses of
$127,360 for the quarter ended June 30, 1999 were basically unchanged
compared to $127,043 for the quarter ended June 30, 1998.
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, 1999, 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 the
remaining 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 believes 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 anticipates
that its cash on hand will be sufficient to fund its operations, working
capital and capital requirements until it reaches break-even cash flow, but
no assurances can be made that this will be the case, or that break-even cash
flow will be achieved.
The Company's common stock is traded on the Over The Counter Bulletin Board
(OTC:BB).
12
<PAGE>
INCOME TAXES
Net operating loss carryforwards totaling approximately $12.4 million are
available to reduce taxable income as of June 30, 1999. 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.
YEAR 2000
Computer programs that rely on two-digit date codes to perform computations
and decision-making functions may cause computer systems to malfunction due
to an inability of such programs to interpret the date code "00" as the year
2000. The Company has conducted an assessment of its internal exposure to the
Year 2000 problem. Products manufactured by the Company do not incorporate
any computer programs that rely on two-digit date codes. The cost to replace
hardware and computer software used by the Company does not exceed $10,000.
The Company has formally communicated with its significant vendors of goods
and services with respect to their compliance with Year 2000 programs. Most
of these vendors have responded either with assurances that they are or will
be Year 2000 compliant before the year 2000. However, the Company recognizes
that the nature of its business and those of many of its service providers
and vendors, featuring interconnected systems of businesses, utilities,
government agencies and even individuals, could affect the Company's ability
to provide products to its customers, and by extension, could adversely
affect the Company's financial position, results of operations and cash
flows. The Company continues to make concerted efforts to evaluate the Year
2000 issue as it may affect the Company, but because of the
interrelationships with its vendors, and their relationships with their
vendors, it will not be possible to certify with 100% assurance that the
Company will not be subject to some problems resulting from the Year 2000
issue. The Company does not believe at this time that these potential
problems will materially impact the ability of the Company to continue its
operations, however, no assurance can be given that this will be the case.
The expectations of the Company contained in this section on Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve substantial risks and uncertainties
that may cause actual results to differ materially from those indicated by
the forward looking statements. All forward looking statements in this
section 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 Not Applicable
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.
14
<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.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------- -------------------------------------------- -------------
<S> <C> <C>
/s/ Karl D. Hawkins Chief Financial Officer July 23, 1999
- ---------------------------- (Principal Accounting Officer)
Karl D. Hawkins
</TABLE>
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ----------------- ------------------------------------ -------------------
<S> <C> <C>
27 Financial Data Schedule 17
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ELECTROSCOPE, INC. BALANCE SHEET AS OF JUNE 30,1999 AND STATEMENTS OF OPERATIONS
AND CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 349,773
<SECURITIES> 3,286,436
<RECEIVABLES> 420,121
<ALLOWANCES> 23,200
<INVENTORY> 650,792
<CURRENT-ASSETS> 4,632,343
<PP&E> 633,245
<DEPRECIATION> (477,455)
<TOTAL-ASSETS> 4,921,869
<CURRENT-LIABILITIES> 368,322
<BONDS> 0
0
0
<COMMON> 16,941,317
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 4,921,869
<SALES> 459,922
<TOTAL-REVENUES> 459,922
<CGS> 281,047
<TOTAL-COSTS> 603,424
<OTHER-EXPENSES> (48,435)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (376,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (376,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (376,114)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
