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 April 30, 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 May 15, 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
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EQUIDYNE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT - FORM 10-QSB
THREE AND NINE MONTHS ENDED APRIL 30, 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 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
EQUIDYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 30, July 31,
2002 2001
---------------- ---------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 13,512 $ 15,405
Held-to-maturity investments -- 7,207
Accounts receivable, net 59 96
Inventories, net 394 349
Deferred costs 61 232
Deferred income taxes 4,589 936
Prepaid and other current assets 227 272
----------------- --------------
Total current assets 18,842 24,497
Property and equipment, net 149 428
Deposits on tooling, machinery and other 149 3,889
Patents, net 1,693 1,814
----------------- --------------
$ 20,833 $ 30,628
================= ==============
Liabilities & Stockholders' Equity
Current Liabilities:
Accounts payable $ 444 $ 1,081
Accrued liabilities 1,430 1,577
Accrued income taxes 1,364 1,664
Deferred revenue 374 562
----------------- --------------
Total current liabilities 3,612 4,884
Stockholders' Equity:
Common stock, $.10 par value; authorized - 35,000,000 shares; issued -
16,481,903 shares at April 30, 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) (5,707) 2,816
----------------- --------------
22,534 31,057
Treasury stock, at cost (1,497,100 shares) (5,313) (5,313)
----------------- --------------
Total stockholders' equity 17,221 25,744
----------------- --------------
$ 20,833 $ 30,628
================= ==============
See accompanying notes.
3
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------------------------- --------------------------------
Net sales $ 289 $ 166 $ 694 $ 219
Cost of goods sold 94 1,108 660 1,356
-------------------------------- --------------------------------
Gross profit (loss) 195 (942) 34 (1,137)
Selling, general and administrative expenses 1,135 2,768 6,385 9,487
Research and development 102 146 397 512
Inventory write-down -- -- 295 656
Asset impairment and other restructure charges -- -- 5,511 --
-------------------------------- --------------------------------
Total operating expenses 1,237 2,914 12,588 10,655
-------------------------------- --------------------------------
Operating loss (1,042) (3,856) (12,554) (11,792)
Other income:
Gain on sale of affiliate capital stock -- -- -- 40,263
Interest and other 34 505 379 1,294
-------------------------------- --------------------------------
34 505 379 41,557
-------------------------------- --------------------------------
Income (loss) before provision (benefit) for income (1,008) (3,351) (12,175) 29,765
taxes
Provision (benefit) for income taxes (377) (1,100) (3,652) 11,745
-------------------------------- --------------------------------
Net income (loss) $ (631) $ (2,251) $ (8,523) $ 18,020
================================ ================================
Net income (loss) per common share, basic $ (0.04) $ (0.15) $ (0.57) $ 1.16
================================ ================================
Net income (loss) per common share, diluted $ (0.04) $ (0.15) $ (0.57) $ 1.08
================================ ================================
See accompanying notes.
4
EQUIDYNE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
April 30
---------------------------------
2002 2001
---------------------------------
Operating activities:
Net income (loss) $ (8,523) $ 18,020
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 422 409
Deferred compensation amortization -- 463
Deferred income taxes (3,653) 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 37 (35)
Inventories, prepaid and other assets 170 (630)
Accounts payable and other current liabilities (1,272) 2,579
---------------------------------
Net cash used in operating activities (7,541) (17,058)
Investing activities:
Proceeds from sale of affiliate stock -- 49,245
Proceeds from sale of held-to-maturity securities 7,207 --
Purchase of held-to-maturity securities -- (15,050)
Purchase of property and equipment (1,559) (1,021)
---------------------------------
Net cash provided by investing activities 5,648 33,174
Financing activities:
Purchase of treasury stock -- (5,313)
Proceeds from exercise of common stock options -- 88
---------------------------------
Net cash used in financing activities -- (5,225)
---------------------------------
Increase (decrease) in cash and cash equivalents (1,893) 10,891
Cash and cash equivalents, beginning of period 15,405 2,010
---------------------------------
Cash and cash equivalents, end of period $ 13,512 $ 12,901
=================================
Supplemental Cash Flow Information:
Income taxes paid $ 301 $ 7,533
Noncash transactions - stock options issued for services -- 328
Noncash transactions - exercise of stock options 3 20
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 INJEXTM 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". The Company's
products are sold subject to rights of return
6
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 April 30, 2002 and July 31,
2001, deferred revenue was approximately $374,000 and $562,000, respectively.
The related cost of the inventory shipped of approximately $61,000 and $232,000
at April 30, 2002 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 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 April 30, 2002 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):
April 30, July 31,
2002 2001
----------------- ---------------
Raw materials $ 221 $ 396
Finished goods 459 761
----------------- ---------------
680 1,157
Inventory reserves (286) (808)
----------------- ---------------
$ 394 $ 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 affiliate based in Germany. 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 nine months ended April 30, 2002 and
the three months ended April 30, 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 Nine Months Ended
April 30, April 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
---------------------------------- --------------------------------
Basic:
Net income (loss) $ (631) $ (2,251) $ (8,523) $ 18,020
================================== ================================
Weighted-average shares 14,985 15,024 14,985 15,572
================================== ================================
Basic earnings (loss) per share $ (0.04) $ (0.15) $ (0.57) $ 1.16
================================== ================================
Diluted:
Net income (loss) $ (631) $ (2,251) $ (8,523) $ 18,020
================================== ================================
Weighted-average shares 14,985 15,024 14,985 15,572
Effect of dilutive securities:
Stock options -- -- -- 830
Warrants -- -- -- 258
---------------------------------- --------------------------------
Dilutive potential common shares -- -- -- 1,088
Weighted-average shares, as adjusted 14,985 15,024 14,985 16,660
================================== ================================
Diluted earnings (loss) per share $ (0.04) $ (0.15) $ (0.57) $ 1.08
================================== ================================
Options to purchase 1,087,858 shares of common stock at prices ranging from
$3.00 to $7.00 per share were outstanding at April 30, 2001, but were not
included in the computation of diluted earnings per share for the nine months
ended April 30, 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 paid $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 was charged as a separate component of
operating expenses in the caption "inventory write-down" in the Statement of
Operations for the three months ended January 31, 2002.
In February 2002, a former non-executive officer of the Company filed a
complaint in the United States District Court, Northern District of Georgia,
against the Company, asserting claims of breach of contract, and retaliation and
violation of 29 U.S.C. Section 621 of the 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
filed an answer on April 5, 2002 denying the allegations of the complaint.
Additionally, the Company asserted counterclaims of unjust enrichment and
violations of 15 U.S.C. Section 78 p(b). The Company seeks recovery of certain
bonus payments and stock transaction profits realized by the plaintiff.
In the ordinary course of conducting its business, the Company has become
subject to litigation and claims regarding 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
In December 2001, 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 restructuring 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 the Company's sales, management concluded that it had more than enough
inventory on hand to meet its foreseeable demands. Therefore, the Company no
longer had a current use 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 as described in this paragraph.
Management further concluded that given the highly specialized and customized
nature of this equipment, it likely had no significant resale or scrap value.
Therefore, the entire carrying value of such assets has been written-off.
Additionally, the Company recorded a charge of approximately $0.1 million for
employee severance and excess facility costs.
9
Detail of the pre-tax asset impairment and other restructuring charges (in
thousands) is shown in the following table:
Charges for
nine months
Balance as of ended April Charges Balance as of
July 31, 2001 30, 2002 Cash Paid against assets April 30, 2002
------------------------------------------------------------------------------------
Asset impairment $ -- $ 5,278 $ -- $ (5,278) $ --
Employee severance -- 193 (87) -- 106
Excess facility costs -- 40 (12) -- 28
------------------------------------------------------------------------------------
Total asset impairment
and restructure costs $ -- $ 5,511 $ (99) $ (5,278) $ 134
====================================================================================
The accrued restructure charges of $134,000 are included in accrued
liabilities in the accompanying balance sheet as of April 30, 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 fiscal 2001 of certain of the Company's inventory to its net
realizable value. This prior year write-down resulted in a charge to operations
of $656,000 in the second quarter of fiscal 2001.
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; that the Company will require but
be unable to obtain additional financing; the 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 will not meet the current and future
regulatory compliance rules of the U.S. Food and Drug Administration (the "FDA")
and other agencies overseeing the Company's operations and products, gain
marketplace acceptance; and changes in health care or reimbursement regulation
or foreign economic conditions or currency translation will adversely affect the
Company.
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
From January 1999 to December 2001, the Company's focus was 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 FDA in March 2001. The Company launched its INJEX 30 System to the U.S.
diabetes market in July 2000, utilizing a direct sales force of more than 50
persons. 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.
In December 2001, 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 evaluated 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 devices) that
could potentially serve as the basis for licensing agreements and/or strategic
partnerships with pharmaceutical and biotech companies.
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
11
charges, $5.3 million relates to a loss due to the impairment of value of
certain non-operating assets as described in this paragraph. Based on the
present level of the Company's sales, management concluded that it had more than
enough inventory on hand to meet foreseeable demands. Therefore, the Company no
longer had a current use 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. Therefore, the entire carrying value of such
assets has been written-off. Additionally, the Company recorded a charge of
approximately $0.1 million for employee severance and excess facility costs.
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, biotech
and medical device 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. In the third quarter of fiscal 2002, the Company received
$254,000 from such licensing arrangement. 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, licensing opportunities and evaluation of
other business opportunities for the Company. 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 $289,000 for the three months ended
April 30, 2002 compared to $166,000 for the three months ended April 30, 2001.
Sales were $694,000 and $219,000 for the nine months ended April 30, 2002 and
2001, respectively. The sales increase in the current quarter reflects the
aforementioned licensing revenues, offset, in part, by lower product sales. The
year-to-date increase reflects the impact of the licensing revenues as well as
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. Revenues for the three months ended April 30, 2002 also reflect
fewer product sales than in the comparable three month period of the prior year
resulting from the effects of the reduction in advertising and marketing
expenditures.
Cost of sales for the three and nine months ended April 30, 2002 were
$94,000 and $1,108,000, respectively as compared to $660,000 and $1,356,000,
respectively, in the three and nine month periods in the prior fiscal year. The
production cost of ampules and adapters is currently in excess of the respective
selling prices. Gross margins continue to be impacted by manufacturing
inefficiencies resulting primarily from start-up costs and low production
volumes, although to a much lesser extent in the three months ended April 30,
2002, as the Company's production requirements were negligible. The three and
nine months ended April 30, 2001 were also impacted by the write-off of certain
excess and obsolete inventory. However, the high cost structure for production
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 and a $966,000 third quarter write-down of inventory to reduce the
carrying value of inventory to the lower of cost or selling price.
Selling, general and administrative ("SG&A") expenses for the three months
ended April 30, 2002 were $1,135,000, a decrease of $1,633,000, or 59%, from the
$2,768,000 in the third quarter of the prior fiscal year. SG&A expenses for the
nine months ended April 30, 2002 were $6,385,000, a decrease of $3,102,000,
12
or 33%, from the $9,487,000 in the prior year. The decrease in both the three
and nine month periods principally reflects lower total salary expense,
recruiting and travel related costs resulting from the reductions of the
Company's sales force in April and October 2001 as well as fewer administrative
and executive staff compared to the same periods in the prior year. Total
employees were reduced from 70 in April 2001 to 15 at the end of April 2002. The
reduced costs were offset, in part, by the appointments of Mr. Rowan and Mr.
Myers as CEO and President, respectively in December 2001. The current fiscal
year also included payments to Dr. Gavin for his services in conjunction with
his arrangement as Non-Executive Chairman and a $120,000 bonus paid to Mr. Rowan
for his services to the Board during the first five months of fiscal 2002. SG&A
expenses during the nine months ended April 30, 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, though
the current quarter included no such payments. The above reductions in SG&A were
offset, in part, by a year-to-date increase in legal and accounting costs of
approximately $175,000, as the Company has engaged counsel to help resolve
certain legal and contractual disputes. In the first nine months of the prior
fiscal year, SG&A expenses included bonus and severance payments totaling
$975,000 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
was charged to operations in the second quarter of fiscal 2002.
Research and development expenses decreased slightly to $102,000 in the
three months ended April 30, 2002 from $146,000 in the comparable prior year
period. Nine month expenditures on research and development decreased to
$397,000 from $512,000 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. 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 has 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. (See Part II, Item 1 - Legal
Proceedings).
The decrease in other income (expense) in the nine 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
13
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 nine
months ended April 30, 2002 is ($377,000) and ($1,100,000), respectively, as
compared to ($3,652,000) and $11,745,000 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.
Liquidity and Capital Resources
At April 30, 2002, the Company had working capital of $15.2 million,
compared to working capital of $19.6 million at July 31, 2001. Cash used by
operating activities in the nine months ended April 30, 2002 was $7.5 million as
compared to $17.1 million in the nine months ended April 30, 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
a net of $5.6 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 nine months ended April 30, 2002 and
2001 were $1.6 million and $1.0 million, respectively. This increase is
attributable to additional expenditures 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's 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 through 2002. In addition, the Company may consider enhancing
future growth through investments in or acquisitions of companies, technologies
or products in related or other 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
investments or acquisitions or 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 paid $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 was charged as a
separate component of operating expenses in the caption "inventory write-down"
in the Statement of Operations for the three months ended January 31, 2002.
In February 2002, a former non-executive officer of the Company filed a
complaint in the United States District Court, Northern District of Georgia,
against the Company, asserting claims of breach of contract, and retaliation and
violation of 29 U.S.C. Section 621 of the 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
filed an answer on April 5, 2002 denying the allegations of the complaint.
Additionally, the Company asserted counterclaims of unjust enrichment and
violations of 15 U.S.C. Section 78 p(b). The Company seeks recovery of certain
bonus payments and stock transaction profits realized by the plaintiff.
In the ordinary course of conducting its business, the Company has become
subject to litigation and claims regarding 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
10.1 - Termination Agreement, dated as of July 26, 2001, between the
Company and Mr. Joseph Randall Nelson filed as an exhibit herein.
(b) Reports on Form 8-K:
On March 6, 2002, the Company filed a report on Form 8-K with the
Securities and Exchange Commission in reference to a March 5, 2002 press
release announcing the date of its 2002 Annual Meeting of Stockholders.
On April 25, 2002, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing the resignation of Coburn
Pharr as the Company's Chief Operating Officer effective April 18, 2002.
On May 17, 2002, the Company filed a report on Form 8-K in reference
to a May 17, 2002 press release, which announced that Company's Board of
Directors had approved amendments to the Company's By-Laws to provide
certain procedures for stockholders taking action by written consent
without a meeting.
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: May 24, 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