UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the Quarterly Period Ended October 31, 2001
__ TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the Transition Period From ____ to _____
Commission File Number 0-9922
EQUIDYNE CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 04-2608713
- ------------------------------------- -------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11770 Bernardo Plaza Court, Suite 351, San Diego, California 92128
------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (858) 451-7001
--------------
238 Littleton Road, Westford Massachusetts 01886
(Former Address of principal executive offices)
Issuer's Former telephone number: (978) 692-6680
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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.
[X] YES [ ] NO
As of November 30, 2001, the Issuer had only one class of Common Stock, of which
there were 14,984,803 shares outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
EQUIDYNE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT - FORM 10-QSB/A
THREE MONTHS ENDED OCTOBER 31, 2001
TABLE OF CONTENTS
PART I Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis or
Plan of Operation 10
PART II
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Explanatory Note:
This Form 10-QSB/A amends and restates Items 1 and 2 of Part I of the Form
10-QSB of Equidyne Corporation (the "Company") for the three months ended
October 31, 2001, as filed by the Company with the Securities and Exchange
Commission on December 17, 2001, to reclassify certain revenues for sales made
during the three months ended October 31, 2001 as deferred revenues and to
correct inadvertent arithmetic errors related to accrued interest on the
Company's held-to-maturity investments. The restatement results in net a loss of
$0.14 per share instead of a net loss of $0.13 per share as originally reported.
In February 2002, the Company received notification from one of its customers of
its intention to return certain of the Company's products due to the products'
approaching shelf-life expiration. The Company determined that based on the
special return provisions given by the Company to this customer, the Company had
previously recognized approximately $250,000 of revenues in the three months
ended October 31, 2001 which should have been classified as deferred revenues.
The related cost of inventory shipped of $114,000 has also been reclassified as
deferred costs. In addition, the Company inadvertently overstated accrued
interest income on its held-to-maturity investments in the three months ended
October 31, 2001, due to an arithmetic error, by the amount of $106,000.
Accordingly, the Company has restated its unaudited interim consolidated
financial statements for the three months ended October 31, 2001 to correct
these errors. Conforming changes reflecting these corrections have been made to
Management's Discussion and Analysis or Plan of Operation. The principal effect
of these corrections on the accompanying unaudited interim consolidated
financial statements is presented in Note 2 to the Company's Consolidated
Financial Statements.
For purposes of this Form 10-QSB/A, and in accordance with Rule 12b-15 of
the Securities Exchange Act of 1934, as amended, the Company has amended and
restated in its entirety each of Items 1 and 2 of Part I of its Form 10-QSB for
the three months ended October 31, 2001. This Form 10-QSB does not reflect
events
2
occurring after the filing of the original Form 10-QSB, or modify or update
those disclosures in any way, except as required to reflect the effects of this
restatement.
3
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
EQUIDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, July 31,
2001 2001
---------------- ---------------
(Unaudited)
(Restated)
Assets
Current Assets:
Cash and cash equivalents $ 11,411 $ 15,405
Held-to-maturity investments 7,113 7,207
Accounts receivable, net 117 96
Inventories 588 349
Deferred costs 172 232
Deferred income taxes 1,756 936
Prepaid and other current assets 374 272
----------------- --------------
Total current assets 21,531 24,497
Property and equipment, net 1,757 428
Deposits on tooling, machinery and other 3,201 3,889
Patents 1,773 1,814
----------------- --------------
$ 28,262 $ 30,628
================= ==============
Liabilities & Stockholders' Equity
Current Liabilities:
Accounts payable $ 695 $ 1,081
Accrued liabilities 2,225 1,577
Accrued income taxes 1,364 1,664
Deferred revenue 387 562
----------------- --------------
Total current liabilities 4,671 4,884
Stockholders' Equity:
Common stock, $.10 par value; Authorized - 35,000,000 shares; issued -
16,481,903 shares at October 31, 2001 and 16,450,759 shares at
July 31, 2001 1,648 1,645
Additional paid-in capital 26,593 26,596
Retained earnings 663 2,816
----------------- --------------
28,904 31,057
Treasury stock, at cost (1,497,100 shares) (5,313) (5,313)
----------------- --------------
Total stockholders' equity 23,591 25,744
----------------- --------------
$ 28,262 $ 30,628
================= ==============
See accompanying notes.
4
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended October 31,
---------------------------------
2001 2000
---------------------------------
(Restated)
Net sales $ 281 $ 4
Cost of goods sold 290 2
---------------------------------
Gross profit (9) 2
Selling, general and administrative expenses 3,074 3,414
Research and development 124 242
---------------------------------
Total operating expenses 3,198 3,656
---------------------------------
Operating loss (3,207) (3,654)
Other income:
Gain on sale of affiliate capital stock -- 40,263
Interest and other 234 94
---------------------------------
234 40,357
---------------------------------
Income (loss) before provision (benefit) for income taxes (2,973) 36,703
Provision (benefit) for income taxes (820) 14,100
---------------------------------
Net income (loss) $ (2,153) $ 22,603
=================================
Net income (loss) per common share, basic $ (0.14) $ 1.39
=================================
Net income (loss) per common share, diluted $ (0.14) $ 1.27
=================================
See accompanying notes.
5
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended October 31
---------------------------------
2001 2000
---------------------------------
(Restated)
Operating activities:
Net income (loss) $ (2,153) $ 22,603
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 121 148
Deferred compensation amortization -- 204
Deferred income taxes (820) 2,045
Gain on sale of affiliate stock -- (40,263)
Changes in operating assets and liabilities:
Decrease in cash restricted for purchase of inventory -- 354
Accounts receivable (21) (109)
Inventories, prepaid and other assets (281) (536)
Accounts payable and other current liabilities (213) 11,688
Other -- 12
---------------------------------
Net cash used in operating activities (3,367) (3,854)
Investing activities:
Proceeds from sale of affiliate stock -- 49,245
Proceeds from held to maturity securities 94 --
Purchase of held to maturity securities -- (7,864)
Purchase of property and equipment (721) (170)
---------------------------------
Net cash provided by (used in) investing activities (627) 41,211
Financing activities:
Purchase of treasury stock -- (925)
Proceeds from exercise of common stock options -- 8
---------------------------------
Net cash used in financing activities -- (917)
---------------------------------
Increase (decrease) in cash and cash equivalents (3,994) 36,440
Cash and cash equivalents, beginning of period 15,405 2,010
---------------------------------
Cash and cash equivalents, end of period $ 11,411 $ 38,450
=================================
Supplemental Cash Flow Information:
Income taxes paid $ 300 $ --
Noncash transactions - exercise of stock options 3 14
See accompanying notes.
6
EQUIDYNE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Equidyne Corporation (the "Company") is engaged in developing,
manufacturing and selling the INJEX(TM) System, a patented, needle-free drug
delivery system. In May 1998, the Company acquired Equidyne Systems, Inc.
("ESI") which has been in the business of developing the INJEX System. Since
January 1999, the Company has focused on the INJEX System and disposed of or
discontinued its other product lines.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements
contain all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair and accurate presentation of the
Company's financial position at October 31, 2001 and the results of its
operations for the three month periods ended October 31, 2001 and October 31,
2000. These interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in its Annual Report on Form 10-KSB for the year ended July 31, 2001. Interim
results are not necessarily indicative of those to be expected for the full
year.
The consolidated financial statements include the accounts of Equidyne
Corporation and its subsidiaries. All significant intercompany transactions and
account balances are eliminated in consolidation.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
all highly liquid debt instruments with original maturities of three months or
less. The carrying amount reported in the balance sheets for cash and cash
equivalents approximates its fair value.
Held-To-Maturity Investments
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. At October 31, 2001
and July 31, 2001, all of the Company's investments are classified as
held-to-maturity. (See Note 3).
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 is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other than temporary, are included in
net securities gains (losses), if any. The cost of securities sold is based on
the specific identification method.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
7
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements". As the Company's
products are sold subject to rights of return of generally up to 90 days, and,
as the Company does not have a sufficient sales history on which to base an
estimated rate of returns, revenue is not recognized until the expiration of the
return period. As of October 31, 2001 and July 31, 2001, deferred revenue was
approximately $387,000 and $562,000, respectively. The related cost of the
inventory shipped of approximately $172,000 and $232,000 at October 31, 2001 and
July 31, 2001, respectively, has also been deferred, to be recognized concurrent
with the recognition of the related revenue.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under the new
rules, goodwill and intangible assets that are deemed to have indefinite lives
are no longer amortized but are reviewed annually for impairment. The provisions
of FAS 142 are required for fiscal years beginning after December 15, 2001,
although earlier adoption is permitted for companies with fiscal years beginning
after March 31, 2001, provided that no interim financial statements have been
issued. The Company adopted the new standard effective August 1, 2001, however,
FAS 142 had no effect on the Company's financial statements, since the Company's
only intangible assets at October 31, 2001 consist of patents on its INJEX
technology, for which the provisions of FAS 142 do not apply.
2. Restatement of Previously Reported Results
The Company is amending and restating its Form 10-QSB for the three months
ended October 31, 2001 to reclassify certain revenues for sales made during the
three months ended October 31, 2001 as deferred revenues and to correct
inadvertent arithmetic errors related to accrued interest on the Company's
held-to-maturity investments. The restatement results in net a loss of $0.14 per
share instead of a net loss of $0.13 per share as originally reported. In
February 2002, the Company received notification from one of its customers of
its intention to return certain of the Company's products due to the products'
approaching shelf-life expiration. The Company determined that based on the
special return provisions given by the Company to this customer, the Company had
previously recognized approximately $250,000 of revenues in the three months
ended October 31, 2001 which should have been classified as deferred revenues.
The related cost of inventory shipped of $114,000 has also been reclassified as
deferred costs. In addition, the Company inadvertently overstated accrued
interest income on its held-to-maturity investments in the three months ended
October 31, 2001, due to an arithmetic error, by the amount of $106,000.
3. Investments
At October 31, 2001, the Company's investments are comprised of U.S.
corporate debt securities with a total amortized cost of $7,113,000 and
scheduled maturities in January 2002. The estimated fair market value of these
securities at October 31, 2001 was $7,121,000, based on quoted market values,
resulting in an unrealized gain of $8,000. At October 31, 2001, all of the
Company's investments are classified as held-to-maturity.
8
4. Inventories
Inventories consist of the following:
October 31, July 31,
2001 2001
----------------- ---------------
Raw materials $ 166,000 $ 108,000
Finished goods 422,000 241,000
----------------- ---------------
$ 588,000 $ 349,000
================= ===============
5. Investment in Affiliate
In August and October 2000, the Company sold all of its remaining ownership
in Rosch AG, a former German affiliate. In August 2000, the Company sold 332,000
shares of common stock of Rosch AG, and in October 2000, the Company sold all
936,750 of its then remaining shares for aggregate net proceeds of $49,245,000,
and recognized a net gain on the sales of $40,263,000.
6. Earnings (Loss) per Share
Basic earnings (loss) is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share reflects
the effect of dilutive securities, principally stock options and warrants.
Dilutive securities were not included in the calculation of diluted weighted
average shares for the three months ended October 31, 2001, due to their
anti-dilutive effect. The following table sets forth the computation of basic
and diluted earnings (loss) per share (in thousands, except per share amounts):
Three Months Ended
October 31
---------------------------------
2001 2000
----------------- ---------------
(Restated)
Basic:
Net income (loss) $ (2,153) $ 22,603
================= ===============
Weighted-average shares 14,985 16,244
================= ===============
Basic earnings (loss) per share $ (0.14) $ 1.39
================= ===============
Diluted:
Net income (loss) $ (2,153) $ 22,603
================= ===============
Weighted-average shares 14,985 16,244
Effect of dilutive securities:
Stock options -- 1,174
Warrants -- 318
----------------- ---------------
Dilutive potential common shares -- 1,492
----------------- ---------------
Weighted average shares, as adjusted 14,985 17,736
================= ===============
Diluted earnings (loss) per share $ (0.14) $ 1.27
================= ===============
9
Options to purchase 1,126,000 shares of common stock at prices ranging from
$3.81 to $7.00 per share were outstanding at October 31, 2000, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be anti-dilutive.
7. Contingencies
In September 2001, Olpe Jena filed a Complaint in United States District
Court, Southern District of California, against Equidyne Systems, Inc., a
wholly-owned subsidiary ("ESI"), seeking damages in excess of $1,880,000 for
termination of its contract to manufacture injectors and reset boxes. On October
18, 2001, ESI filed an Answer denying the material allegations of the Complaint
and asserting various counter-claims against Olpe Jena. No discovery has been
conducted in the lawsuit, no pre-trial motions have been filed and no trial date
has been established by the Court. The Company believes the claims of Olpe Jena
are without merit and plans to vigorously defend itself against such claims.
In the ordinary course of conducting its business, the Company has become
subject to litigation and claims on various matters. There exists a reasonable
possibility that the Company will not prevail in all cases. Although sufficient
uncertainty exists in these cases to prevent the Company from determining the
amount of its liability, if any, the ultimate exposure is not expected to
substantially affect the Company's Statement of Operations or its Balance Sheet
as of October 31, 2001. However, in the event of an unanticipated adverse final
determination in respect of certain matters, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
8. Reduction in Force
In October 2001, the Company reduced its sales force by 18 employees. The
Company believes that consumer education for its needle-free products can be
effectively accomplished with direct-to-consumer advertising, an informative web
site and sales support for its retail distribution partners including sales
training and point-of sale materials. A field sales organization for detailing
doctors and hosting consumer seminars has not proven cost-effective. Severance
packages were offered to separated employees. This resulted in a charge to
operations in the three months ended October 31, 2001 of approximately $150,000.
9. Subsequent Events
In November 2001, the Company commenced a voluntary exchange program with
certain of its earlier existing customers, offering to provide free of charge a
new INJEX 30 injector and an updated instruction manual, training video and
carrying case. This upgrade will increase the durability and life of the product
as well as assist in its proper use and storage.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto. This Report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements concerning prospects for
future sales of the Company's products in the domestic diabetes market, sales
into new domestic and international markets, strategic corporate relationships,
and generally heightened prospects for the adoption and use of needle-free
technology. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward looking statements. Such risks, uncertainties and other factors
include, without limitation, the risk that the Company will not have sufficient
cash to sustain itself to the time, if ever, that it is profitable from
operations, the Company's possible need for additional financing and
uncertainties related to the time required to gain marketplace acceptance of its
products or complete research and development, the Company meeting the current
and future regulatory compliance rules of the FDA and other agencies overseeing
the Company's operations and products, the Company will not successfully attract
strategic corporate partners, the Company will not obtain necessary clinical
data and government clearances, the Company will not be able to complete the
development of new products, changes in health care or reimbursement regulation,
the risk that research and development efforts of the Company will not produce
desired results at all or on a timely basis, technological innovations of
competitors, and changes in foreign economic conditions or currency translation.
Forward-looking statements are based on the estimates and opinions of
management on the date the statements are made. The Company assumes no
obligation to update forward-looking statements if conditions or management's
estimates or opinions should change, even if new information becomes available
or other events occur in the future.
Overview
Since fiscal year 2000, the Company's focus has been centered on the sales,
marketing and production of its current INJEX 30 System and planning the
introduction of the INJEX 50 System, which received marketing clearance from the
U.S. Food and Drug Administration in March 2001. The Company launched its INJEX
30 System to the U.S. diabetes market in July 2000, utilizing a 50-person direct
sales force. Since this original launch, the Company has entered into
distribution agreements with Rite Aid Corporation ("Rite Aid") in October 2000
and CVS Corporation ("CVS") in May 2001. These companies provide the retail
distribution necessary to facilitate sales growth through large retail pharmacy
chains across the United States. In addition, in the prior fiscal year, the
Company obtained Generic Product Indicator ("GPI") codes for the purpose of
obtaining reimbursement through health insurance plans and pharmacy benefit
managers.
The Company's initial marketing strategy, which targeted physicians,
diabetes educators and pharmacists in the United States diabetes market, did not
include a direct-to-consumer marketing campaign and did not adequately address
other markets outside of diabetes. In April 2001, the Company announced a new
marketing strategy focused on direct-to-consumer marketing in the domestic
diabetes market and new business development in the clinical and pharmaceutical
drug delivery markets. Implementation of the new strategy included the
reduction, restructuring and refocusing of the Company's sales force, and
reallocation of the Company's marketing resources and objectives towards
increased clinical distribution, pharmaceutical partnerships and
direct-to-consumer advertising and sales support. In addition, in May 2001, the
Company entered into a joint marketing agreement with CVS for a comprehensive
program designed to take advantage of CVS' diabetes customer base. The program
includes INJEX product features in CVS customer publications and CVS' online
pharmacy, "CVS.com", as well as various customer and pharmacist mailings and
local pharmacy events. In November 2001, the Company amended its agreement with
CVS to reduce the monthly advertising and marketing expenditures paid to CVS.
The Company believes this will allow it to better allocate its sales and
marketing resources among other marketing programs. In August 2001, the Company
entered into a distribution agreement with Henry Schein, Inc., the largest
provider of healthcare products and
11
services to office-based practitioners in the North American and European
markets, to facilitate distribution and marketing to the clinical sector.
Finally, the Company reduced its sales force by 25 and 18 employees in
April and October 2001, respectively. The Company believes that consumer
education for its needle-free products can be effectively accomplished with
direct-to-consumer advertising, an informative web site and sales support for
its retail distribution partners including sales training and point-of sale
materials. A field sales organization for detailing doctors and hosting consumer
seminars has not proven cost-effective.
The Company is now attempting to develop partnerships with pharmaceutical
and biotechnology companies to enhance the delivery of their injected
medications, vaccines and other therapies, such as Human Growth Hormone
treatment. The Company also anticipates increased revenues from clinical
applications following the planned introduction of the INJEX 50 System into the
market during the second half of fiscal 2002.
The Company has continued its efforts to improve its manufacturing
capabilities of the component parts of its INJEX ampules and vial adapters. The
Company continues to work with its manufacturing partners on building the
automated, high-volume, low-cost production systems to supply these components.
The Company has invested over $4.5 million into the development of such tooling
and automation machinery. The Company expects completion of the tooling during
the first half of fiscal 2002, to be followed by the completion of the
automation machinery in the third quarter of fiscal 2002. The new tooling and
machinery is expected to reduce the Company's production costs, and generate a
corresponding improvement to its gross margins.
Restatement of Previously Reported Results
The Company is amending and restating its Form 10-QSB for the three months
ended October 31, 2001 to reclassify certain revenues for sales made during the
three months ended October 31, 2001 as deferred revenues and to correct
inadvertent arithmetic errors related to accrued interest on the Company's
held-to-maturity investments. The restatement results in net a loss of $0.14 per
share instead of a net loss of $0.13 per share as originally reported. In
February 2002, the Company received notification from one of its customers of
its intention to return certain of the Company's products due to the products'
approaching shelf-life expiration. The Company determined that based on the
special return provisions given by the Company to this customer, the Company had
previously recognized approximately $250,000 of revenues in the three months
ended October 31, 2001 which should have been classified as deferred revenues.
The related cost of inventory shipped of $114,000 has also been reclassified as
deferred costs. In addition, the Company inadvertently overstated accrued
interest income on its held-to-maturity investments in the three months ended
October 31, 2001, due to an arithmetic error, by the amount of $106,000.
Results of Operations (as Restated)
Consolidated net sales ("sales") were $281,000 for the three months ended
October 31, 2001 compared to $4,000 for the three months ended October 31, 2000.
The sales increase in the current quarter reflects the impact of sales through
the Company's distribution partners (Rite-Aid and CVS). Although full-scale
market introduction of the INJEX System occurred in July 2000, the majority of
the sales occurred in the second half of the prior fiscal year, as the Company
increased its retail distribution network and established managed care coverage.
Cost of sales for the three months ended October 31, 2001 and 2000 were
$290,000 and $2,000, respectively. Although cost of sales as a percentage of
sales increased in the current quarter to 76.1% from 50.0% in the prior year
first quarter, gross margins continue to be impacted by manufacturing
inefficiencies resulting primarily from start-up costs and low production
volumes. The Company continues to make
12
investments in its production infrastructure which negatively impact cost of
sales and related gross margins at the current sales volumes. The Company also
expects the introduction of improved production equipment and tooling in the
current fiscal year will improve certain manufacturing inefficiencies and better
enable it to satisfy larger production volumes. However, its high cost structure
will continue until demand for the Company's products enables it to achieve
greater production volumes.
Selling, general and administrative ("SG&A") expenses for the three months
ended October 31, 2001 were $3,074,000, a decrease of $340,000, or 10%, from the
$3,414,000 in the first three months of the prior fiscal year. The decrease
principally reflects the impact of the reduction in Company staffing from
decreasing the Company's sales force by 25 sales representatives in April 2001
and fewer administrative and executive staff compared to the same period in the
prior year. The three months ended October 31, 2000 also included bonus payments
totaling $500,000 to two former directors and executive officers of the Company,
in accordance with their respective employment agreements, and $204,000 of
deferred consulting expense. These decreases were offset, in part, by increases
in sales and marketing expenses paid under the Company's joint marketing
programs with Rite-Aid and CVS totaling approximately $525,000, and the effect
of the $150,000 of severance costs related to the October 2001 sales force
reduction mentioned above.
Research and development expenses decreased to $124,000 in the three months
ended October 31, 2001 from $242,000 in the comparable prior year period. During
the prior year first quarter, the Company's research and development activities
included improvements to the INJEX 30 and INJEX 50 System components, and
continuing work on the single-use disposable INJEX System design, which was
completed in fiscal year 2001 and resulted in obtaining a new patent. Current
year projects include continuing work on variations to the INJEX System that
would allow the Company to have product offerings in additional markets, such as
vaccinations, short-term injection therapies, dental and other clinical
applications.
During fiscal 2001, the Company made certain improvements to the INJEX 30
injector and reset box. As a result of these improvements, management made a
decision to sell only the improved versions of the products, thus rendering any
previous versions obsolete. In the second quarter of fiscal 2002, the Company
commenced a voluntary exchange program with certain of its earlier existing
customers, offering to provide free of charge a new INJEX 30 injector and an
updated instruction manual, training video and carrying case. This upgrade will
increase the durability and life of the product as well as assist in its proper
use and storage.
Net loss for three months ended October 31, 2001 was $2,153,000, or $0.14
per share, compared to net income of $22,603,000, or $1.39 per share, for the
three months ended October 31, 2000. Net income (loss) per share is based on the
weighted average number of common shares outstanding during the respective
periods. The decrease is primarily attributable to net gains on the prior year
sales of Rosch AG capital stock of approximately $40.3 million. Investment
income provided a partial offset to the net operating losses of approximately
$234,000 in the three months ended October 31, 2001.
The Company's provision (benefit) for income taxes for the three months
ended October 31, 2001 and 2000 is ($820,000) and $14,100,000, respectively. The
current year tax benefit is based on the Company's ability to carryback the
operating losses incurred in the current year to recapture a portion of the
taxes paid in fiscal year 2001.
Liquidity and Capital Resources
At October 31, 2001, the Company had working capital of $16.9 million,
compared to working capital of $19.6 million at July 31, 2001. The decrease of
approximately $2.7 million resulted primarily from the net effect of Company's
first quarter operating losses, combined with the additional expenditure on its
tooling and automation manufacturing equipment. The Company continues to fund
the manufacture of the production tools and automation machinery necessary for
high-volume, fully-automated production of the INJEX 30 and 50 Systems
components.
13
The Company believes that funds on hand, combined with cash generated from
investment income, will be sufficient to finance operations and capital
expenditures for fiscal 2002. In addition, the Company may consider enhancing
future growth through acquisitions of companies, technologies or products in
related lines of business, as well as through expansion of the existing line of
business. There is no assurance that management will find suitable candidates or
effect the necessary financial arrangements for such acquisitions and obtain
necessary working capital for the acquired entities.
New Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Under the new
rules, goodwill and certain intangible assets deemed to have indefinite lives
are no longer amortized but are reviewed annually for impairment. The Company's
intangible assets at October 31, 2001 consist of patents on its INJEX
technology, for which the accounting changes required by FAS 142 do not apply.
As a result, FAS 142 is not expected to have any effect on the Company's
financial statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In September 2001, Olpe Jena filed a Complaint in United States District
Court, Southern District of California, against Equidyne Systems, Inc., a
wholly-owned subsidiary ("ESI"), seeking damages in excess of $1,880,000 for
termination of its contract to manufacture injectors and reset boxes. On October
18, 2001, ESI filed an Answer denying the material allegations of the Complaint
and asserting various counter-claims against Olpe Jena. No discovery has been
conducted in the lawsuit, no pre-trial motions have been filed and no trial date
has been established by the Court. The Company believes the claims of Olpe Jena
are without merit and plans to vigorously defend itself against such claims.
In the ordinary course of conducting its business, the Company has become
subject to litigation and claims on various matters. There exists a reasonable
possibility that the Company will not prevail in all cases. Although sufficient
uncertainty exists in these cases to prevent the Company from determining the
amount of its liability, if any, the ultimate exposure is not expected to
substantially affect the Company's Statement of Operations or its Balance Sheet
as of October 31, 2001. However, in the event of an unanticipated adverse final
determination in respect of certain matters, the Company's consolidated net
income for the period in which such determination occurs could be materially
affected.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holder
None.
Item 5. Other Information
On December 7, 2001, the Board of Directors and the Audit Committee of the
Company unanimously appointed King Griffin & Adamson P.C., Dallas, Texas, as the
Company's independent certifying accountants
14
for the fiscal year ending July 31, 2002 replacing Ernst & Young. The Company
filed a Form 8-K regarding this change in accountants on December 14, 2001.
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EQUIDYNE CORPORATION
(Registrant)
Dated: March 13, 2002 By: /s/ Marcus R. Rowan
---------------------------------
Marcus R. Rowan
Chief Executive Officer
By: /s/ Jeffery B. Weinress
---------------------------------
Jeffery B. Weinress
Chief Financial Officer
(principal financial and accounting officer)
15