<PAGE> 1
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 September 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 SHARES 5,383,507
-------------------------- ---------------------------------
Class (outstanding at October 26, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES NO X
----- -----
<PAGE> 2
ELECTROSCOPE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements
- Condensed Balance Sheets as of September 30,
1999 and March 31, 1999......................................................... 3
- Condensed Statements of Operations for
the Three Months Ended September 30, 1999 and 1998.............................. 4
- Condensed Statements of Operations for
the Six Months Ended September 30, 1999 and 1998................................ 5
- Condensed Statements of Cash Flows for
the Six Months Ended September 30, 1999 and 1998................................ 6
- Notes to Condensed Interim Financial
Statements...................................................................... 7
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations................................ 10
PART II. OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders................................ 15
ITEM 6 - Exhibits and Reports on Form 8-K................................................... 15
SIGNATURE ........................................................................................ 16
EXHIBIT INDEX .................................................................................... 17
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
ELECTROSCOPE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1999 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,284,066 $ 1,188,867
Short-term investments 1,994,020 3,172,792
Accounts receivable, net of allowance for doubtful
accounts of $9,955 and $7,500 respectively 337,458 278,533
Inventory, net of reserve for obsolescence of $160,000
and $125,000 respectively 508,329 439,218
Prepaid expenses 56,479 69,112
------------ ------------
Total current assets 4,180,352 5,148,522
------------ ------------
EQUIPMENT, at cost:
Furniture, fixtures and equipment 684,930 600,495
Less- Accumulated depreciation (498,561) (455,426)
------------ ------------
Equipment, net 186,369 145,069
------------ ------------
PATENTS, net of accumulated amortization of $20,028 and
$17,204 respectively 122,833 121,676
OTHER ASSETS 13,472 13,472
------------ ------------
Total assets $ 4,503,026 $ 5,428,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 94,074 $ 144,212
Accrued compensation 121,097 135,996
Other accrued liabilities 183,462 207,854
Other current liabilities 4,224 9,960
------------ ------------
Total current liabilities 402,857 498,022
------------ ------------
LONG-TERM LIABILITIES:
Other long-term liabilities 223 2,335
------------ ------------
Total long-term liabilities 223 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 (13,131,771) (12,303,335)
------------ ------------
Total shareholders' equity 4,099,946 4,928,382
------------ ------------
Total liabilities and shareholders' equity $ 4,503,026 $ 5,428,739
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE, net $ 458,532 $ 368,428
COST OF SALES 272,405 244,787
----------- -----------
Gross profit 186,127 123,641
----------- -----------
OPERATING EXPENSES:
Sales and marketing 289,469 330,524
General and administrative 230,722 253,605
Research and development 131,331 138,964
----------- -----------
Total operating expenses 651,522 723,093
----------- -----------
INCOME (LOSS) FROM OPERATIONS (465,395) (599,452)
OTHER INCOME:
Interest income 15,459 77,339
Other income (expense) (2,386) (4,111)
----------- -----------
NET INCOME (LOSS) $ (452,322) $ (526,224)
=========== ===========
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $ (0.08) $ (0.10)
=========== ===========
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 statements.
<PAGE> 5
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE, net $ 918,454 $ 682,306
COST OF SALES 553,452 509,905
----------- -----------
Gross profit 365,002 172,401
----------- -----------
OPERATING EXPENSES:
Sales and marketing 579,250 646,492
General and administrative 417,006 513,837
Research and development 258,691 266,007
----------- -----------
Total operating expenses 1,254,947 1,426,336
----------- -----------
INCOME (LOSS) FROM OPERATIONS (889,945) (1,253,935)
OTHER INCOME:
Interest income 66,445 156,319
Other income (expense) (4,936) (4,477)
----------- -----------
NET INCOME (LOSS) $ (828,436) $(1,102,093)
=========== ===========
NET INCOME (LOSS) PER SHARE (Note 2):
Basic and diluted net income (loss) per common share $ (0.15) $ (0.21)
=========== ===========
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 statements.
<PAGE> 6
ELECTROSCOPE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (828,436) $(1,102,093)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 45,959 89,743
Amortization of discount (36,106) (90,452)
Inventory Reserves 35,000 --
Loss on retirement of assets -- 22,633
Changes in operating assets and liabilities-
Accounts receivable (58,925) 166,478
Inventory (104,111) 47,554
Accrued Interest and other current assets 12,633 (13,644)
Other assets -- (2,627)
Accounts payable (50,138) 31,872
Accrued compensation, accrued and other
current liabilities (45,027) (18,580)
Customer deposits -- (4,376)
Other non-current liabilities (2,112) (884)
----------- -----------
Net cash used in operating activities (1,031,263) (874,376)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,435) (29,818)
Patent costs (3,981) (11,694)
Purchases of short-term investments-net (1,058,814) (4,540,240)
Sale of short-term investments 2,273,692 4,247,000
----------- -----------
Net cash provided by (used in) investing activities 1,126,462 (334,752)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95,199 (1,209,128)
CASH AND CASH EQUIVALENTS, beginning of period 1,188,867 2,525,026
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,284,066 $ 1,315,898
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
ELECTROSCOPE, INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 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. The product monitors for
stray electrical energy during laparoscopic surgical procedures and deactivates
the electrosurgical unit when this energy creates potentially dangerous
conditions, thus enhancing patient safety for patients who undergo laparoscopic
surgery. The product can be used with most electrosurgical instruments available
today in the USA. The Company has also developed and is marketing its own line
of integrated, shielded, five millimeter diameter electrosurgical instruments
that incorporate the Company's proprietary technology. The Company's sales to
date have been made principally in the United States.
The Company has incurred losses since its inception and has an accumulated
deficit of approximately $13.1 million at September 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; 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.
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.
<PAGE> 8
Cash and Cash Equivalents
For purposes of presentation in the financial statements, the Company considers
all cash and highly liquid investments with an original maturity of three months
or less to be cash equivalents.
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 September 30, 1999, the Company's short-term
investments consist primarily of government and corporate 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>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
Raw materials $441,372 $393,606
Finished goods 226,957 170,612
-------- --------
668,329 564,218
Less- Reserve for obsolescence (160,000) (125,000)
-------- --------
$508,329 $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. 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.
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.
<PAGE> 9
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 common share and common equivalent 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
September 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 and the six
months ended September 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 Company is moving away from selling directly to hospitals through
independent sales representative organizations and towards selling through
stocking distributors. This has increased the concentration of accounts
receivable in a smaller number of customers since the beginning of this fiscal
year.
The accounts receivable balance of $347,413 at September 30, 1999 included the
following balances due from five major customers: $60,812 (17.5% of total
receivables), $45,188 (13%), $40,249 (11.6%), $23,769 (6.8%) and $23,033 (6.6%).
These distributors are located in various parts of the United States, in
exclusive territories. The distributors have been granted extended payment terms
for their initial orders and normal payment terms for subsequent orders. The
Company believes that amounts outstanding for these five distributors will be
collected. The Company's accounts receivable balances are primarily domestic.
(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 Exchange Commission, for the fiscal year ended
March 31, 1999, filed on Form 10-KSB.
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.
<PAGE> 10
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 enhance patient safety for patients who undergo
minimally invasive electrosurgery (MIS). The Company believes that its patented
Electroshield(R) Monitoring System offers surgeons significant advantages
compared to other electrosurgical systems in use because of its ability to
dynamically monitor 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
electronic monitoring product and its accessories. The Company is developing a
line of disposable products and intends to explore additional product
development and acquisition opportunities from 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 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.
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(R) AEM(R) technology was
not completed until 1995. The Company introduced integrated instruments for the
Electroshield(R) Monitoring System (EMS) in November 1995.
<PAGE> 11
The installed base of the Company's Electronic Monitors has continued to
increase since the introduction of the product in 1994. The Company expects that
the sales of electrosurgical instruments and accessories should increase as
additional 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 continues to develop the sales force and expand market coverage in
the US, along with increased marketing efforts and the introduction of new
products with the expectation that these measures 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 $13,131,771 as of September 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 sales
network and the development of its internal sales force, resulting 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.
RESULTS OF OPERATIONS
For the three months ended September 30, 1999 compared to the three months ended
September 30, 1998.
NET REVENUES. Revenues for the three months ended September 30, 1999 were
$458,532, compared to $368,428 for the three months ended September 30, 1998, an
increase of 25%. The increase is attributable to the Company continuing to
develop its sales and marketing efforts, including the signing of new stocking
distributors in the US (new stocking distributors placed initial stocking orders
of approximately $70,000 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
products sold to the distributors other than for normal warranty related
matters. The Company anticipates revenue growth for the fiscal year ended March
31, 2000 ("Fiscal Year 2000"), compared to fiscal year 1999 as the Company's
continuing development of 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 2000, 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. Gross profit for the three months ended September 30, 1999 was
$186,127, compared to the three months ended September 30, 1998 gross profit of
$123,641, an increase of 51%. Gross profit as a percentage of revenue (Gross
Margin) increased to 41% for the three months ended September 30, 1999 from 34%
in the three months ended September 30, 1998. The increase in gross profit
resulted from the increased volume of sales, which resulted in increased
utilization of manufacturing capacity. 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 and other, generally fixed, manufacturing
costs.
<PAGE> 12
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the three months
ended September 30, 1999 were $289,469 compared to $330,524 for the three months
ended September 30, 1998, a decrease of 12%. 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 for the
three months ended September 30, 1999 were $230,722, compared to $253,605 for
the three months ended September 30, 1998, a decrease of 9%. The reduction is
due to reduced headcount and the transfer of certain personnel to marketing and
customer support functions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
three months ended September 30, 1999 were $131,331 compared to $138,964 for the
three months ended September 30, 1998, a decrease of 6%. The primary
contributors to the lower level of spending were reductions in headcount due to
completion of some engineering projects, lower levels of inventory consumption
required to test and modify products and lower levels of outside services.
RESULTS OF OPERATIONS
For the six months ended September 30, 1999 compared to the six months ended
September 30, 1998.
NET REVENUES. Revenues for the six months ended September 30, 1999 were
$918,454, compared to $682,306 for the six months ended September 30, 1998, an
increase of 35%. 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 $150,000 compared to $0 in the comparable six
months of the prior year). The Company anticipates revenue growth for fiscal
year 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 fiscal year 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.
GROSS PROFIT. Gross profit for the six months ended September 30, 1999 was
$365,002, compared to the gross profit of $172,401 for the six months ended
September 30, 1998, an increase of 112%. Gross profit as a percentage of revenue
(Gross Margin) increased to 40% for the six months ended September 30, 1999
compared to 25% for the six months ended September 30, 1998. The increase in
gross profit is the result of increased sales volumes, which more fully utilized
manufacturing capacity plus reductions in manufacturing headcount and spending
reduction programs. 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 and other, generally fixed, manufacturing costs.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the six months
ended September 30, 1999 were $579,250 compared to $646,492 for the six months
ended September 30, 1998 a decrease of 10%. The decrease is the result of the
Company's change from a sales force consisting of direct employees and
independent sales representatives (paid only on a commission basis) to one
primarily made up of stocking distributors who purchase the Company's products
at a discount but who are not paid commissions. Some of the reduced levels of
spending were offset by the reassignment of certain personnel from
Administration and Operations to marketing and customer support roles. 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.
<PAGE> 13
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the
six months ended September 30, 1999 were $ 417,006 compared to $513,837 for the
six months ended September 30, 1998, a decrease of 19%. The reductions resulted
from lower headcount, the reassignment of certain personnel to Marketing and
Sales functions, lower costs for Directors fees and lower costs for outside
services.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the six
months ended September 30, 1999 were $258,691 compared to $266,007 for the six
months ended September 30, 1998, a decrease of 3%. The decrease is the result of
a decrease in headcount, reflecting the completion of certain engineering
projects, a reduction in the utilization of outside consulting services and
reduced consumption of inventories and supplies used in testing and modifying
products.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements principally through
sales of Common Stock which approximated $17.3 million through September 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, government and corporate securities, the Company may also
use a substantial portion of those 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 also 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 trades on the Over the Counter Bulletin Board.
INCOME TAXES
Net operating loss carryforwards totaling approximately $12.4 million are
available to reduce taxable income as of September 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.
<PAGE> 14
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.
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the shareholders of the
Company was held on August 11, 1999. The purpose of
the meeting was to elect Directors for the coming
year and to ratify the appointment of Arthur
Andersen LLP as independent public accountants for
the Company. Results of the voting were:
(1) To Elect Directors:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Vernon D. Kornelsen 4,548,014 296,972
David W. Newton 4,548,014 296,972
Roger C. Odell 4,547,014 297,972
</TABLE>
(2) To ratify the appointment of Arthur Andersen
LLP as independent pubic accountants for the
Company:
Votes For: 4,842,586
Votes Against: 200
Abstain: 2,200
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule.
<PAGE> 16
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 October 27, 1999
- ---------------------------- (Principal Accounting Officer)
Karl D. Hawkins
</TABLE>
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Electroscope, Inc. balance sheet as of September 30, 1999 and statements of
operation and cash flows for the six months ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,284,066
<SECURITIES> 1,994,020
<RECEIVABLES> 347,413
<ALLOWANCES> (9,955)
<INVENTORY> 668,329
<CURRENT-ASSETS> 4,180,352
<PP&E> 684,930
<DEPRECIATION> (498,561)
<TOTAL-ASSETS> 4,503,026
<CURRENT-LIABILITIES> 402,857
<BONDS> 0
0
0
<COMMON> 16,941,317
<OTHER-SE> 290,400
<TOTAL-LIABILITY-AND-EQUITY> 4,503,026
<SALES> 918,454
<TOTAL-REVENUES> 918,454
<CGS> 553,452
<TOTAL-COSTS> 1,254,947
<OTHER-EXPENSES> (61,509)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (828,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> (828,436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (828,436)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
