UNITED STATES
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 January 31, 2002
__ 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
--------------
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 February 28, 2002, 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
THREE AND SIX MONTHS ENDED JANUARY 31, 2002
TABLE OF CONTENTS
PART I Page
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis or Plan of Operation 11
PART II
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EQUIDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, July 31,
2002 2001
---------------- ---------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 15,601 $ 15,405
Held-to-maturity investments -- 7,207
Accounts receivable, net 95 96
Inventories, net 461 349
Deferred costs 54 232
Deferred income taxes 4,212 936
Prepaid and other current assets 309 272
----------------- --------------
Total current assets 20,732 24,497
Property and equipment, net 184 428
Deposits on tooling, machinery and other 101 3,889
Patents, net 1,733 1,814
----------------- --------------
$ 22,750 $ 30,628
================= ==============
Liabilities & Stockholders' Equity
Current Liabilities:
Accounts payable $ 441 $ 1,081
Accrued liabilities 2,713 1,577
Accrued income taxes 1,364 1,664
Deferred revenue 380 562
----------------- --------------
Total current liabilities 4,898 4,884
Stockholders' Equity:
Common stock, $.10 par value; authorized - 35,000,000 shares; issued -
16,481,903 shares at January 31, 2002 and 16,450,759 shares at July
31, 2001 1,648 1,645
Additional paid-in capital 26,593 26,596
Retained earnings (deficit) (5,076) 2,816
----------------- --------------
23,165 31,057
Treasury stock, at cost (1,497,100 shares) (5,313) (5,313)
----------------- --------------
Total stockholders' equity 17,852 25,744
----------------- --------------
$ 22,750 $ 30,628
================= ==============
See accompanying notes.
3
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------------------------- --------------------------------
Net sales $ 124 $ 49 $ 405 $ 53
Cost of goods sold 276 246 566 248
-------------------------------- --------------------------------
Gross profit (loss) (152) (197) (161) (195)
Selling, general and administrative expenses 2,326 3,305 5,250 6,719
Research and development 171 124 295 366
Inventory write-down 295 656 295 656
Asset impairment and other restructure charges 5,361 -- 5,511 --
-------------------------------- --------------------------------
Total operating expenses 8,153 4,085 11,351 7,741
-------------------------------- --------------------------------
Operating loss (8,305) (4,282) (11,512) (7,936)
Other income:
Gain on sale of affiliate capital stock -- -- -- 40,263
Interest and other 111 695 345 789
-------------------------------- --------------------------------
111 695 345 41,052
-------------------------------- --------------------------------
Income (loss) before provision (benefit) for income (8,194) (3,587) (11,167) 33,116
taxes
Provision (benefit) for income taxes (2,455) (1,255) (3,275) 12,845
-------------------------------- --------------------------------
Net income (loss) $ (5,739) $ (2,332) $ (7,892) $ 20,271
================================ ================================
Net income (loss) per common share, basic $ (0.38) $ (0.15) $ (0.53) $ 1.28
================================ ================================
Net income (loss) per common share, diluted $ (0.38) $ (0.15) $ (0.53) $ 1.19
================================ ================================
See accompanying notes.
4
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
January 31
---------------------------------
2002 2001
---------------------------------
Operating activities:
Net income (loss) $ (7,892) $ 20,271
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 353 257
Deferred compensation amortization -- 327
Deferred income taxes (3,276) 2,045
Asset impairment and other restructure charges 5,278 --
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 1 (84)
Inventories, prepaid and other assets 29 (599)
Accounts payable and other current liabilities 14 5,019
---------------------------------
Net cash used in operating activities (5,493) (12,673)
Investing activities:
Proceeds from sale of affiliate stock -- 49,245
Proceeds from held to maturity securities 7,207 --
Purchase of held to maturity securities -- (22,527)
Purchase of property and equipment (1,518) (278)
---------------------------------
Net cash provided by investing activities 5,689 26,440
Financing activities:
Purchase of treasury stock -- (4,573)
Proceeds from exercise of common stock options -- 68
---------------------------------
Net cash used in financing activities -- (4,505)
---------------------------------
Increase in cash and cash equivalents 196 9,262
Cash and cash equivalents, beginning of period 15,405 2,010
---------------------------------
Cash and cash equivalents, end of period $ 15,601 $ 11,272
=================================
Supplemental Cash Flow Information:
Income taxes paid $ 301 $ --
Noncash transactions - stock options issued for services -- 328
Noncash transactions - exercise of stock options 3 14
See accompanying notes.
5
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 patented, needle-free drug delivery systems. In May
1998, the Company acquired Equidyne Systems, Inc. ("ESI") which was engaged in
the development of the INJEX(TM) System, a reusable needle-free drug delivery
system. Since January 1999, the Company has focused on the INJEX System and
disposed of or discontinued its earlier product lines.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-QSB and do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. 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.
Certain reclassifications have been made to prior periods results to
conform to current period classifications.
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 amounts reported in the balance sheets for cash and cash
equivalents approximates their 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. During January 2002,
the Company's held-to-maturity investments matured.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
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 between 90 days and
180 days, as defined by the sales agreement. In addition, the Company's INJEX
System has a limited shelf life, and certain retailers and wholesalers can
return these products to the Company up to six months beyond this expiration
date. As a result of these rights of return and the current availability of
historical trends in sales and product returns, the Company defers recognition
of revenues and the related cost of inventory shipped until expiration of such
rights of return. As of January 31, 2002 and July 31, 2001, deferred revenue was
approximately $380,000 and $562,000, respectively. The related cost of the
inventory shipped of approximately $54,000 and $232,000 at January 31, 2002 and
July 31, 2001, respectively, has also been deferred, to be recognized concurrent
with the recognition of the related revenue.
6
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 August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 supercedes FAS 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (FAS 121) and the accounting and reporting
provisions of the Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." FAS 144 establishes a single accounting model, based on the
framework established by FAS 121, for long-lived assets to be disposed of by
sale and resolved significant implementation issues related to FAS 121. FAS 144
retains the requirements of FAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. FAS 144 excludes goodwill from its
scope, describes a probability-weighted cash flow estimation approach, and
establishes a "primary-asset" approach to determine the cash flow estimation
period for groups of assets and liabilities. FAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. Equidyne believes the adoption of FAS
144 will not have a material impact on its financial position or results of
operations.
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. Inventories
Inventories consist of the following (in thousands):
January 31, July 31,
2002 2001
----------------- ---------------
Raw materials $ 264 $ 396
Finished goods 372 761
----------------- ---------------
636 1,157
Inventory reserves (175) (808)
----------------- ---------------
$ 461 $ 349
================= ===============
7
3. Investment in Affiliate
In the first quarter of fiscal 2001, the Company sold all of its remaining
ownership in Rosch AG, a former German affiliate. The Company sold 1,268,750
shares of common stock of Rosch AG for aggregate net proceeds of $49,245,000,
and recognized a net gain on the sale of $40,263,000.
4. Earnings (Loss) per Share
Basic earnings (loss) per share 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 and six months ended January 31, 2002 and
three months ended January 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 Six Months Ended
January 31, January 31,
---------------------------------- --------------------------------
2002 2001 2002 2001
---------------------------------- --------------------------------
Basic:
Net income (loss) $ (5,739) $ (2,332) $ (7,892) $ 20,271
================================== ================================
Weighted-average shares 14,985 15,577 14,985 15,846
================================== ================================
Basic earnings (loss) per share $ (0.38) $ (0.15) $ (0.53) $ 1.28
================================== ================================
Diluted:
Net income (loss) $ (5,739) $ (2,332) $ (7,892) $ 20,271
================================== ================================
Weighted-average shares 14,985 15,577 14,985 15,846
Effect of dilutive securities:
Stock options -- -- -- 917
Warrants -- -- -- 313
---------------------------------- --------------------------------
Dilutive potential common shares -- -- -- 1,230
Weighted average shares, as adjusted 14,985 15,577 14,985 17,076
================================== ================================
Diluted earnings (loss) per share $ (0.38) $ (0.15) $ (0.53) $ 1.19
================================== ================================
Options to purchase 748,858 shares of common stock at prices ranging from
$3.81 to $7.00 per share were outstanding at January 31, 2001, but were not
included in the computation of diluted earnings per share for the six months
ended January 31, 2001, because the options' exercise prices were greater than
the average market price of the common shares and, therefore, the effect would
be anti-dilutive.
5. Contingencies
In September 2001, Olpe Jena filed a Complaint in United States District
Court, Southern District of California, against 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. In
February 2002, the Company and Olpe
8
Jena reached a settlement under which the Company agreed to pay $695,000 to
complete the purchase of injectors and reset boxes that Olpe Jena had
manufactured, but not delivered prior to contract termination in December 2000.
Of the $695,000 settlement, $400,000 was charged to operations in the fourth
quarter of fiscal year 2001. The remaining $295,000 is shown as a separate
component of operating expenses in the caption "inventory write-down" in the
accompanying Statement of Operations. The $695,000 settlement is included in
accrued liabilities as of January 31, 2002 in the accompanying Balance Sheet.
In February 2002, a former non-executive officer of the Company filed a
complaint in United States District Court, Northern District of Georgia, against
the Company, asserting claims of breach of contract and age discrimination under
the federal Age Discrimination in Employment Act. The complaint seeks
unspecified amounts of back pay (including wages, benefits and stock options),
front pay, compensatory damages, fees and costs. The Company is currently
evaluating the claim and has until April 4, 2002 to respond.
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
materially adversely affect the Company's financial condition or results of
operations.
6. Asset Impairment and Other Restructure Charges
During the second quarter of fiscal 2002, the Company's Board of Directors
appointed Marcus R. Rowan, a director of the Company, as Chief Executive Officer
and appointed Mark C. Myers, a consultant to the Company, as President. The new
executive management began an evaluation of the Company's technologies, markets
and production capabilities. They concluded that a change in the strategic focus
of the Company was necessary as the Company's production capabilities were not
cost effective nor were its sales and marketing programs generating satisfactory
results. The evaluation also found that the Company's research program had made
progress in developing disposable systems (both pre-filled and variable dosage
products) that could potentially serve as the basis for licensing agreements
and/or strategic partnerships with pharmaceutical and biotech companies.
As a result of a Board decision to change the Company's strategic
direction, the Company recorded a $5.4 million pre-tax charge related to asset
impairment losses and other restructure costs in the second quarter of fiscal
2002. Of the second quarter charges, $5.3 million relates to a loss due to the
impairment of value of certain assets. Based on the present level of sales,
management concluded that it had more than enough inventory on hand to meet its
foreseeable demands. Thus, the Company no longer had a current need for its
high-volume, automated manufacturing equipment. In accordance with the
provisions of FAS 144, the Company determined that the expected undiscounted
cash flows from such fixed assets were substantially less than the carrying
values of the assets. Management further concluded that given the highly
specialized and customized nature of this equipment, it likely had no
significant resale or scrap value. Thus, the entire carrying value of such
assets have been written-off. Additionally, the Company recorded a charge of
approximately $0.1 million for employee severance and excess facility costs. The
Company believes this restructuring will be completed before the end of its next
fiscal quarter ending April 30, 2002.
In the first quarter of fiscal 2002, in connection with a change in the
Company's sales and marketing strategies, the Board of Directors approved a
reduction in the Company's sales force by 18 employees. Severance packages were
offered to terminated employees. This resulted in a pre-tax charge to operations
of approximately $150,000. Such charges have been reclassified to other
restructure costs in the Company's Statement of Operations for the six months
ended January 31, 2002 to conform to current period presentation.
9
Detail of the pre-tax asset impairment and other restructuring charges (in
thousands) is shown in the following table:
Charges for
six months
ended Balance as of
Balance as of January 31, Charges January 31,
July 31, 2001 2002 Cash Paid against assets 2002
------------------------------------------------------------------------------------
Asset impairment $ -- $ 5,278 $ -- $ (5,278) $ --
Employee severance -- 193 (55) -- 138
Excess facility costs -- 40 -- -- 40
------------------------------------------------------------------------------------
Total asset impairment
and restructure costs $ -- $ 5,511 $ (55) $ (5,278) $ 178
====================================================================================
The accrued restructure charges of $178,000 are included in accrued
liabilities in the accompanying balance sheet as of January 31, 2002.
7. Prior Year Inventory Write-down
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. This decision resulted in the write-down in the
second quarter of the prior year certain of its inventory to its net realizable
value. This prior year write-down resulted in a charge to operations of
$656,000.
8. Exchange Program
In November 2001, the Company commenced a voluntary exchange program with
certain of its 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. The program, which was completed in
January 2002, cost approximately $290,000 (including the cost of inventory and
outside service costs) and was included in selling, general and administrative
expenses for the three months ended January 31, 2002 in the accompanying
Statement of Operations.
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
research and development innovations, strategic corporate relationships, future
sales of the Company's products in the domestic diabetes market, sales into new
domestic and international markets, 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 complete
research and development, the risk that research and development efforts of the
Company will not produce desired results at all or on a timely basis, the
Company will not be able to obtain the necessary patents to protect its
intellectual property or that such patents will provide the anticipated legal
protection, the Company will not be able to successfully license it products or
attract strategic partners, the Company will not obtain necessary clinical data
and government clearances, the Company meeting the current and future regulatory
compliance rules of the FDA and other agencies overseeing the Company's
operations and products, and to gain marketplace acceptance of its products or,
changes in health care or reimbursement regulation, 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 reusable INJEX 30 System and planning the
introduction of the reusable 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 entered
into distribution agreements with several large distribution partners to expand
distribution channels and obtained Generic Product Indicator ("GPI") codes for
the purpose of facilitating reimbursement through health insurance plans and
pharmacy benefit managers. To meet the anticipated demand for its INJEX
products, the Company entered into supply arrangements with contract
manufacturers and began to build automated, high-volume machinery, equipment and
tools in fiscal 2000. Over the past two years, the Company has invested over $5
million into the development of machinery to manufacture and assemble the
plastic components of its INJEX ampules and vial adapters.
During the second quarter of fiscal 2002, the Company's Board of Directors
appointed Marcus R. Rowan, a director of the Company, as Chief Executive Officer
and appointed Mark C. Myers, a consultant to the Company, as President. The new
executive management began an evaluation of the Company's technologies, markets
and production capabilities. They concluded that a change in the strategic focus
of the Company was necessary as the Company's production systems were not cost
effective nor were its sales and marketing programs generating satisfactory
results. The evaluation also found that the Company's research program had made
progress in developing disposable systems (both pre-filled and variable dosage
products) that could potentially serve as the basis for licensing agreements
and/or strategic partnerships with pharmaceutical and biotech companies.
11
As a result of the decision to change in the Company's strategic direction,
the Company recorded a $5.4 million pre-tax charge related to asset impairment
losses and other restructure costs in the second quarter of fiscal 2002. Of the
second quarter charges, $5.3 million relates to a loss due to the impairment of
value of certain non-operating assets. Based on the present level of sales,
management concluded that it had more than enough inventory on hand to meet its
foreseeable demands. Thus, the Company no longer had a current need for its
high-volume, automated manufacturing equipment. In accordance with the
provisions of FAS 144, the Company determined that the expected undiscounted
cash flows from such fixed assets were substantially less than the carrying
values of the assets. Management further concluded that given the highly
specialized and customized nature of this equipment, it likely had no
significant resale or scrap value. Thus, the entire carrying value of such
assets have been written-off. Additionally, the Company recorded a charge of
approximately $0.1 million for employee severance and excess facility costs. The
Company believes the restructuring will be completed before the end of its next
fiscal quarter ending April 30, 2002.
While the Company will continue sales of the INJEX 30 System into the
diabetes market from its existing inventories, the Company has begun to expand
its research and development programs and increase its efforts to develop
strategic partnerships and licensing arrangements with pharmaceutical and
biotech companies. Through an agreement with the Company's former affiliate,
Rosch AG, the Company has participated in a licensing arrangement with Pharmacia
for the worldwide use of the INJEX System for human growth hormone treatment.
The Company believes more shareholder value can be derived from licensing its
intellectual property than from its retail sales activities, and the focus of
the Company will shift from an exclusive focus on its reusable INJEX devices to
one which places additional emphasis on technology development and licensing
opportunities. As part of this change in focus, the Company has postponed
ramping up manufacturing of the INJEX 50 System pending successful development
of a strategic partnership or licensing arrangement designed to facilitate the
introduction of the INJEX 50 System into the market.
Results of Operations
Consolidated net sales ("sales") were $124,000 for the three months ended
January 31, 2002 compared to $49,000 for the three months ended January 31,
2001. Sales were $405,000 and $53,000 for the six months ended January 31, 2002
and 2001. respectively. The sales increase in both the current quarter and
year-to-date 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 and six months ended January 31, 2002 were
$276,000 and $566,000, respectively as compared to $246,000 and $248,000,
respectively in the three and six month periods in the prior fiscal year. Gross
margins continue to be impacted by manufacturing inefficiencies resulting
primarily from start-up costs and low production volumes. The current quarter
was also impacted by the write-off of certain excess and obsolete inventory.
However, its high cost structure will continue until demand for the Company's
products enables it to achieve greater production volumes. The prior year cost
of sales was impacted by significant pre-production costs and negative margins
resulting from limited sales volumes.
Selling, general and administrative ("SG&A") expenses for the three months
ended January 31, 2002 were $2,326,000, a decrease of $979,000, or 30%, from the
$3,305,000 in the second quarter of the prior fiscal year. SG&A expenses in for
the six months ended January 31, 2002 were $5,250,000, a decrease of $1,469.000,
or 22%, from the $6,719,000 in the prior year. The decrease in both the three
and six month periods principally reflects the impact on compensation,
recruiting and travel related costs as the Company reduced its sales force in
April 2001 and again in October 2001 and fewer administrative and executive
staff compared to the same period in the prior year. Total employees were
reduced from 70 in April 2001 to 20 at the end of January 2002. These savings
were offset, in part, by increases in executive compensation from the
appointments of Mr. Rowan and Mr. Myers as CEO and President, respectively. The
second quarter of the current fiscal year also included payments to Dr. Gavin
for his services in conjunction with his arrangement as
12
Non-Executive Chairman and a $120,000 bonus paid to Mr. Rowan for his services
to the Board during the first six months of fiscal 2002. SG&A expenses during
the six months ended January 31, 2002, were also impacted by increases in sales
and marketing expenses paid under the Company's joint marketing programs with
Rite-Aid and CVS totaling approximately $525,000. In the first five months of
the prior fiscal year, SG&A expenses included bonus payments totaling $500,000
to two former directors and executive officers of the Company, in accordance
with their respective employment agreements, and $325,000 of deferred consulting
expense.
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. This decision resulted in the write-down in the
second quarter of the prior year certain of its inventory, which had originally
been purchased for resale, to its net realizable value. This prior year
write-down resulted in a charge to operations of $656,000. In the second quarter
of current fiscal year, 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. The cost of the exchange
program, including inventory and consulting costs was approximately $290,000 and
is included in SG&A expenses for the three months ended January 31, 2002.
Research and development expenses increased to $171,000 in the three months
ended January 31, 2002 from $124,000 in the comparable prior year period. Six
month expenditures on research and development decreased to $295,000 from
$366,000 in the prior year. The Company's continues its efforts to enhance its
needle-free systems, particularly its disposable, single-use model, that would
allow the Company to have product offerings that could serve as the basis for
licensing agreements and/or strategic partnerships with pharmaceutical and
biotech companies.
As a result of the aforementioned change in the Company's strategic
direction, the Company recorded a $5.4 million pre-tax charge related to asset
impairment losses and other restructure costs in the second quarter of fiscal
2002. Of the second quarter charges, $5.3 million relates to a loss due to the
impairment of value of certain non-operating assets (primarily its automated
manufacturing equipment and tools). In accordance with the provisions of FAS
144, the Company determined that the expected undiscounted cash flows from such
fixed assets were substantially less than the carrying values of the assets.
Management further concluded that given the highly specialized and customized
nature of this equipment, it likely had no significant resale or scrap value.
Thus, the entire carrying value of such assets have been written-off.
Additionally, the Company recorded a charge of approximately $0.1 million for
employee severance and excess facility costs. Also in the current year second
quarter, the Company recorded a charge of $295,000, shown as a separate
component of operating expenses in the caption "inventory write-down" in the
accompanying Statement of Operations, resulting from the settlement of
litigation with a former manufacturer of its injectors and reset boxes.
The decrease in other income (expense) in the six month period is primarily
attributable to net gains on the prior year first quarter sales of Rosch AG
capital stock of approximately $40.3 million. Investment income, primarily
interest income decreased from the prior year as a result of the decreased
average cash and investments on hand and the sharply declining interest rates
from the prior year.
The Company's provision (benefit) for income taxes for the three and six
months ended January 31, 2002 is ($2,455,000) and ($3,275,000), respectively, as
compared to ($1,255,000) and $12,845,000 in the same periods in the prior year.
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.
13
Liquidity and Capital Resources
At January 31, 2002, the Company had working capital of $15.8 million,
compared to working capital of $19.6 million at July 31, 2001. Cash used by
operating activities in the six months ended January 31, 2002 was $5.5 million
as compared to $12.7 million in the six months ended January 31, 2001. In the
current period, the use of cash was primarily attributable to operating losses,
net of non-cash asset impairment and restructuring charges. The Company received
$5.7 million from its investing activities, of which $7.2 million resulted from
the proceeds received upon the maturity of its non-cash investments. Capital
expenditures in the six months ended January 31, 2002 and 2001 were $1.5 million
and $0.3 million, respectively. This increase is attributable to the additional
expenditure on its tooling and automation manufacturing equipment. Such large
capital expenditures are not expected in the future resulting from both the
substantial completion of the manufacturing equipment during the second quarter
of fiscal year 2002 and the change in the Company strategic direction.
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 August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 supercedes FAS 121, "Accounting for Long-Lived Assets and for
Long-Lived Assets to be disposed of" (FAS 121) and the accounting and reporting
provisions of the Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." FAS 144 establishes a single accounting model, based on the
framework established by FAS 121, for long-lived assets to be disposed of by
sale and resolved significant implementation issues related to FAS 121. FAS 144
retains the requirements of FAS 121 to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. FAS 144 excludes goodwill from its
scope, describes a probability-weighted cash flow estimation approach, and
establishes a "primary-asset" approach to determine the cash flow estimation
period for groups of assets and liabilities. FAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. Equidyne believes the adoption of FAS
144 will not have a material impact on its financial position or results of
operations.
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.
14
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 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. In
February 2002, the Company and Olpe Jena reached a settlement under which the
Company agreed to pay $695,000 to complete the purchase of injectors and reset
boxes that Olpe Jena had manufactured, but not delivered prior to contract
termination in December 2000. Of the $695,000 settlement, $400,000 was charged
to operations in the fourth quarter of fiscal year 2001. The remaining $295,000
is shown as a separate component of operating expenses in the caption "inventory
write-down" in the accompanying Statement of Operations, and is included in
accrued liabilities as of January 31, 2002 in the accompany Balance Sheet.
In February 2002, a former non-executive officer of the Company filed a
complaint in United States District Court, Northern District of Georgia, against
the Company, asserting claims of breach of contract and age discrimination under
the federal Age Discrimination in Employment Act. The complaint seeks
unspecified amounts of back pay (including wages, benefits and stock options),
front pay, compensatory damages, fees and costs. The Company is currently
evaluating the claim and has until April 4, 2002 to respond.
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
materially adversely affect the Company's financial condition or results of
operations.
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 March 4, 2002, the Company announced that its 2002 Annual Meeting of
Stockholders will be held on May 28, 2002. The date after which notice of a
shareholder proposal submitted outside the processes of Rule 14a-8 will be
considered untimely under the advance notice provisions of the Company's By-Laws
will be March 29, 2002, not March 15, 2002, as previously reported on Form 8-K
submitted to the Securities and Exchange Commission on March 4, 2002.
15
Item 6. Exhibits and Reports on Forms 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
On December 14, 2001, the Company filed a report on Form 8-K with the
Securities and Exchange Commission reporting a change in the Company's
independent certifying accountants.
On January 23, 2002, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing the appointments of Marcus R.
Rowan as the Company's Chief Executive Officer and Mark C. Myers as the
Company's President.
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)
16