-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWdAiolXQf2LbTXkyW1uAFoG/+aCeBwC1J/RvamYm6Isz5hgWsFRbdIqmsWVCiYR N34N9FAPoyFzduuDoDZeUg== 0000893220-00-000399.txt : 20000403 0000893220-00-000399.hdr.sgml : 20000403 ACCESSION NUMBER: 0000893220-00-000399 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000114 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 591751 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 8-K/A 1 FORM 8-K AMENDMENT ESCALON MEDICAL CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 14, 2000 Escalon Medical Corp. (Exact name of registrant as specified in its charter) Delaware 0-20127 33-0272839 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 351 East Conestoga Road, Wayne, Pennsylvania 19087 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 688-6830 N/A (Former name or former address, if changed since last report.) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On January 14, 2000, Escalon Medical Corp. (the "Registrant") purchased all of the outstanding capital stock of Sonomed, Inc. ("Sonomed"), a privately held manufacturer and marketer of ophthalmic ultrasound diagnostics devices, pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of January 14, 2000, among the Registrant, Sonomed and the stockholders of Sonomed. The purchase price was $12,550,000, of which $12,050,000 was paid in cash and $500,000 was represented by a promissory note bearing interest at the rate of 10% per annum in the event of a default. The purchase price is subject to adjustment under certain circumstances. As a result of the transaction, Sonomed became a wholly owned subsidiary of the Registrant. In connection with the Stock Purchase Agreement, Sonomed entered into an Employment Agreement with Louis Katz, whereby Sonomed agreed to employ Mr. Katz as its president for a period of three years at a salary of $175,000 per year, which salary will be increased after one year for each subsequent one-year period by a percentage equal to not less than the sum of (i) the percentage increase in the cost of living in the County of Nassau, State of New York for the year then ended and (ii) 2%; provided, however, that in no event will any annual increase exceed 5%. After its three-year initial term, the Employment Agreement will renew automatically for successive terms of one year each unless either party notifies the other party in writing at least 90 days prior to the expiration of the existing term of such party's determination not to renew the Employment Agreement beyond the existing term. The Employment Agreement also provides for participation by Mr. Katz in a bonus program, health insurance and other fringe benefits, including an automobile allowance not to exceed $850 per month. In connection with the acquisition of Sonomed, the Registrant adopted the Escalon Medical Corp. Equity Incentive Plan for Employees of Sonomed, Inc., pursuant to which options for the purchase of 330,000 shares of the Company's Common Stock were issued to management employees of Sonomed at an exercise price of $2.625 per share. Mr. Katz was granted an option to purchase 90,000 of these shares. Also in connection with the acquisition of Sonomed, Sonomed established a management bonus program whereby Mr. Katz and other management employees of Sonomed designated by him will be paid quarterly bonuses in the aggregate amount of at least 3% of Sonomed's net sales with respect to each calendar quarter. Other than as set forth above, no material relationship exists between (i) the Registrant or any of its affiliates, other than Sonomed, and Sonomed or any of its stockholders, (ii) any director or officer of the Registrant and any director or officer of Sonomed or (iii) any associate of any director or officer of the Registrant and any associate of any director or officer of Sonomed. The consideration under the Stock Purchase Agreement was determined by arms' length negotiations between the Registrant and the stockholders of Sonomed. -2- 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired. The audited financial statements of the business acquired include the balance sheets of Sonomed, Inc. as of December 31, 1999 and 1998, and the related statements of income, shareholders' equity and cash flows for the three years in the period ended December 31, 1999. Exhibit 99.1 - Financial Statements of Sonomed, Inc. (b) Unaudited Pro Forma Financial Information. The following unaudited pro forma condensed consolidated financial information has been prepared to reflect the transaction under the Stock Purchase Agreement (the "Transaction") among Escalon Medical Corp. (the "Buyer"), Sonomed, Inc. and the stockholders of Sonomed, Inc. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the audited historical consolidated financial statements and related notes included in the Registrant's Annual Report on Form 10-K for the periods ended June 30, 1999, and the condensed consolidated financial statements for the six months ended December 31, 1999 in the Registrant's Quarterly Report on Form 10-Q for period ended December 31, 1999, which reports are incorporated herein by reference. The unaudited pro forma condensed consolidated statement of operations gives effect to the Transaction as if it had occurred at the beginning of the period presented. The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and does not purport to be indicative of the operating results or financial position that would have actually occurred if the Transaction had been in effect on the dates indicated, nor is it necessarily indicative of future operating results or financial position. -3- 4 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Sales revenues $ 7,559,011 $ 7,169,357 (1) $ 14,728,368 Costs and expenses: Cost of goods sold 3,282,177 1,989,436 (1) 5,271,613 Research and development 738,124 211,837 (1) 949,961 Marketing, general and administrative 3,331,562 2,216,015 (1)(2) 5,547,577 -------------- --------------- ------------- Total costs and expenses 7,351,863 4,417,288 11,769,151 -------------- --------------- ------------- Income from operations 207,148 2,752,069 2,959,217 Other income, net 986,639 (966,098) (1)(3) 20,541 -------------- --------------- ------------- Income before income taxes 1,193,787 1,785,971 2,979,758 Income taxes - 22,925 (1)(4) 22,925 -------------- --------------- ------------- Net income $ 1,193,787 $ 1,763,046 $ 2,956,833 ============== =============== ============= Basic net income per share (A) $ 0.10 $ 0.67 ====== ============ Diluted net income per share $ 0.10 $ 0.66 ====== ============ (1) Weighted average shares-basic 3,114,823 3,114,823 ========= ========= Weighted average shares-diluted 3,150,721 3,150,721 ========= =========
(A) Historical and pro forma net income available to common shareholders at June 30, 1999 was decreased by $870,523, for preferred stock dividends and accretion. (1) Net sales and expenses as per the Sonomed, Inc. audited Statement of Income for the year ended December 31, 1999 (Exhibit 99.1). (2) Sonomed historical selling and administrative expenses, $515,499 and $748,769, respectively, additional compensation (bonus plan enumerated in Item 2 above) $215,080 and goodwill arising from the acquisition of $736,667. (3) Sonomed historical interest and other income, $145,478, gain on sale of investments, $12,080, less interest expense associated with this acquisition (adjustable rate loans with interest rate cap) reported at the cap limit for presentation purposes, $1,123,656. The annual effect of a 1/8th % rate reduction would be $14,344. -4- 5 (4) Sonomed was a Subchapter S corporation. The income tax provision reflects only New York State and other local taxes. There is no provision for federal income tax for both Escalon and Sonomed due to utilization of net operating loss carryforwards. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- Sales revenues $ 2,310,212 $ 3,584,679 (1) $ 5,894,891 Costs and expenses: Cost of goods sold 1,154,198 994,718 (1) 2,148,916 Research and development 467,383 105,919 (1) 573,302 Marketing, general and Administrative 1,978,070 1,108,008 (1)(2) 3,086,078 -------------- -------------- ------------- Total costs and expenses 3,599,651 2,208,645 5,808,296 -------------- -------------- ------------- Income (loss) from operations (1,289,439) 1,376,034 86,595 Gain on sale of Silicone Oil product line 1,848,215 - 1,848,215 Write-off of Ocufit (455,112) - (455,112) Other income, net 64,015 (492,013) (1)(3) (427,998) -------------- -------------- ------------- Income (loss) before income taxes 167,679 884,021 1,051,700 Income taxes - 11,463 (1)(4) 11,463 ============== ============== ============= Net income (loss) $ 167,679 $ 872,558 $ 1,040,237 ============== ============== ============= Basic net loss per share $ 0.05 $ 0.32 ============== ============= Diluted net loss per share $ 0.05 $ 0.32 ============== ============= Weighted average shares-basic 3,242,184 3,242,184 =============== ============= Weighted average shares-diluted 3,254,250 3,254,250 =============== =============
(1) Net sales and expenses as per Sonomed, Inc. audited Statement of Income for the year ended December 31, 1999, reduced by 50%. (2) Sonomed historical selling and administrative expenses, $257,750 and $374,384, respectively, additional compensation (bonus plan enumerated in Item 2 above) $107,540 and goodwill arising from the acquisition of $368,334. -5- 6 (3) Sonomed historical interest and other income, $72,739, gain on sale of investments, $6,040, less interest expense associated with this acquisition (adjustable rate loans with interest rate cap) reported at the cap limit for presentation purposes, $570,792. The annual effect of a 1/8th % rate reduction would be $7,391. (4) Sonomed was a Subchapter S corporation. The income tax provision reflects only New York State and other local taxes. There is no provision for federal income tax for both Escalon and Sonomed due to utilization of net operating loss carryforwards. -6- 7 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- ASSETS Current Assets: $ (12,365,000) (a) Cash and cash equivalents $3,039,913 12,400,000 (b) $ 2,241,583 (833,330) (c) Cash and cash equivalents - restricted 1,000,000 (1,000,000) (c) - Accounts receivable, net 1,479,590 897,000 (a) 2,376,590 Inventory, net 1,017,481 600,000 (a) 1,617,481 Other current assets 195,143 19,000 (a) 214,143 ---------- ------------ ------------ TOTAL CURRENT ASSETS 6,732,127 (282,330) 6,449,797 Long-term receivables 150,000 - 150,000 License and distribution rights, net 251,585 - 251,585 Goodwill, net 1,187,385 11,050,000 (a) 12,237,385 29,000 (a) Other assets 808,840 30,000 (a) 967,840 100,000 (b) ---------- ------------ ------------ TOTAL ASSETS $9,129,937 $10,926,670 $20,056,607 ========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: $5,000,000 (b) Line of credit $1,000,000 (1,000,000) (c) $ 5,000,000 Current portion of long-term debt 1,050,000 (b) 200,000 (200,000) (c) 1,050,000 Note payable - 500,000 (b) 500,000 Accounts payable and accrued expenses 851,227 260,000 (a) 1,111,227 ---------- ------------ ------------ TOTAL CURRENT LIABILITIES 2,051,227 5,610,000 7,661,227 5,950,000 (b) Long-term debt 633,330 (633,330)(c) 5,950,000 ---------- ------------ ------------ TOTAL LIABILITIES 2,684,557 10,926,670 13,611,227 SHAREHOLDERS' EQUITY: Common stock 46,024,811 - 46,024,811 Accumulated deficit (39,579,431) - (39,579,431) ----------- ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 6,445,380 - 6,445,380 ----------- ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,129,937 $ 10,926,670 $ 20,056,607 ========== ==-========= ==-=========
-7- 8 (a) Sonomed was acquired January 14, 2000 in a business combination accounted for as a purchase. The total estimated cost of the acquisition was $12,550,000, which exceeded the fair value of the net assets acquired by $11,050,000. The excess will be amortized on the straight-line method over 15 years. The preliminary estimate of the purchase price was allocated as follows: Cash $ 185,000 Receivables 897,000 Inventories 600,000 Other current assets 19,000 Property and equipment 29,000 Other assets 30,000 Goodwill 11,050,000 Accounts payable and accrued expenses (260,000) ------------ Total cost of acquisition $ 12,550,000
These opening estimates are subject to change within 120 days, pending subsequent verification and review. (b) The acquisition was financed through a five-year line of credit of $ 5,000,000, a five-year term loan of $7,000,000 and a $500,000 note payable to the Sonomed shareholders. The interest rate on the line of credit is based on prime plus 0.75% and the term loan is based on prime plus 1.0%. Floating interest rate protection is in place to cover the $7,000,000 term loan through January 2003 and $3,000,000 of the line of credit through January 2002. The maximum interest rate that may be charged on the term loan for calendar year 2000 is 10% and 9.75% on the protected portion of the line of credit. The interest rate on the note payable is 10%. Escalon paid $100,000 in finance fees that are recorded in other assets. These fees will be amortized over the term of the loans using the effective interest method (c) In connection with the financing this acquisition, Escalon repaid all of its existing debt utilizing cash on hand and the restricted certificate of deposit that secured a portion of that debt. -8- 9 (c) Exhibits. Exhibit No. Document ----------- -------- 2.1 Stock Purchase Agreement dated as of January 14, 2000 among Escalon Medical Corp., Sonomed, Inc. and the Stockholders of Sonomed, Inc. (1) 2.2 Note dated January 14, 2000 in the principal amount of $500,000 from the Registrant to Louis Katz. (1) 2.3 Employment Agreement dated as of January 14, 2000 between Sonomed, Inc. and Louis Katz. (1) 2.4 Bonus Plan for Management Employees of Sonomed, Inc. (1) 2.5 Escalon Medical Corp. Equity Incentive Plan for Employees of Sonomed, Inc. (1) 2.6 News Release of the Registrant dated January 18,2000. (1) 99.1 Financial Statements of Sonomed, Inc. for the years ended December 31, 1999, 1998 and 1997 with Report of Independent Auditors. * ---------- * Filed herewith (1) Filed as an exhibit to the Company's Form 8-K, dated January 19, 2000. -9- 10 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. ESCALON MEDICAL CORP. Date: March 29, 2000 By: /s/ Douglas R. McGonegal -------------------------- Douglas R. McGonegal, Vice President - Finance Chief Financial Officer EX-99.1 2 SONOMED, INC. FINANCIAL STATEMENTS 1 Exhibit 99.1 Sonomed, Inc. Financial Statements CONTENTS Report of Independent Auditors....................................................................... 1 Financial Statements Balance Sheets as of December 31, 1999 and 1998...................................................... 2 Statements of Income for the years ended December 31, 1999, 1998 and 1997............................ 3 Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997............. 4 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................ 5 Notes to Financial Statements........................................................................ 6
2 Report of Independent Auditors The Board of Directors and Shareholders Sonomed, Inc. We have audited the accompanying balance sheets of Sonomed, Inc. as of December 31, 1999 and 1998, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sonomed, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Melville, New York March 27, 2000 1 3 Sonomed, Inc. Balance Sheets
DECEMBER 31 1999 1998 ------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,250,578 $ 1,708,656 Investments (Note 2) -- 2,434,369 Accounts receivable, net of allowance for doubtful accounts of $18,145 in 1999 and 1998 794,980 632,037 Inventories (Note 3) 549,007 422,463 Prepaid expenses and other current assets 6,951 5,720 ------------------------------ Total current assets 5,601,516 5,203,245 Fixed assets (Note 4) 29,324 22,200 Other assets 30,130 18,153 ------------------------------ Total assets $ 5,660,970 $ 5,243,598 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 125,481 $ 178,258 Accrued expenses and other liabilities 497,965 334,165 ------------------------------ Total current liabilities 623,446 512,423 Commitments and contingencies (Notes 6, 7 and 8) Shareholders' equity (Note 5): Common stock, $.01 par value: Authorized shares -- 10,000,000 Issued shares -- 2,944,495 in 1999 and 1998 29,445 29,445 Additional paid-in capital 746,582 746,582 Retained earnings 4,761,497 4,455,148 ------------------------------ 5,537,524 5,231,175 Less treasury stock, at cost (227,495 shares) (500,000) (500,000) ------------------------------ 5,037,524 4,731,175 ------------------------------ Total liabilities and shareholders' equity $ 5,660,970 $ 5,243,598 ==============================
See accompanying notes. 2 4 Sonomed, Inc. Statements of Income
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------------- Net sales $7,169,357 $6,380,181 $5,156,235 Cost of sales 1,989,436 2,077,727 1,715,346 -------------------------------------------- 5,179,921 4,302,454 3,440,889 Expenses: Selling 515,499 530,800 511,128 General and administrative 748,769 568,268 515,678 Research and development 211,837 252,447 287,677 ------------------------------------------- 1,476,105 1,351,515 1,314,483 ------------------------------------------- Income from operations 3,703,816 2,950,939 2,126,406 Gain on sale of investments 12,080 40,488 -- Interest and other income 145,478 160,795 100,073 ------------------------------------------- 157,558 201,283 100,073 ------------------------------------------- Income before income taxes 3,861,374 3,152,222 2,226,479 Income taxes (Note 2) 22,925 28,882 22,590 ------------------------------------------- Net income $3,838,449 $3,123,340 $2,203,889 -------------------------------------------
See accompanying notes. 3 5 Sonomed, Inc. Statements of Shareholders' Equity
ADDITIONAL TOTAL COMMON STOCK PAID-IN RETAINED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY -------------------------------------------------------------------------------------------- Balance at December 31, 1996 2,944,495 $ 29,445 $ 746,582 $ 2,523,669 $ (500,000) $ 2,799,696 Dividends paid -- -- -- (2,037,750) -- (2,037,750) Net income -- -- -- 2,203,889 -- 2,203,889 -------------------------------------------------------------------------------------------- Balance at December 31, 1997 2,944,495 29,445 746,582 2,689,808 (500,000) 2,965,835 Dividends paid -- -- -- (1,358,000) -- (1,358,000) Net income -- -- -- 3,123,340 -- 3,123,340 -------------------------------------------------------------------------------------------- Balance at December 31, 1998 2,944,495 29,445 746,582 4,455,148 (500,000) 4,731,175 Dividends paid -- -- -- (3,532,100) -- (3,532,100) Net income -- -- -- 3,838,449 -- 3,838,449 -------------------------------------------------------------------------------------------- Balance at December 31, 1999 2,944,495 $ 29,445 $ 746,582 $ 4,761,497 $ (500,000) $ 5,037,524 ============================================================================================
See accompanying notes. 4 6 Sonomed, Inc. Statements of Cash Flows
YEAR ENDED DECEMBER 31 1999 1998 1997 --------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 3,838,449 $ 3,123,340 $ 2,203,889 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investments (40,488) - (12,080) Depreciation and amortization 15,686 15,766 22,600 Provision for losses on accounts receivable - 3,505 6,297 Changes in operating assets and liabilities: Accounts receivable (162,943) (98,310) 10,230 Inventories (126,544) 6,666 (56,968) Prepaid expenses and other assets (13,208) (3,675) - Accounts payable, accrued expenses and other liabilities 111,023 116,017 (86,449) ------------------------------------------------------ Net cash provided by operating activities 3,657,297 3,122,741 2,092,765 INVESTING ACTIVITIES Purchases of property, plant, and equipment (29,724) (2,321) - Purchases of investments - (1,629,292) (1,998,638) Proceeds from sales of investments 2,446,449 1,234,049 499,660 ------------------------------------------------------ Net cash provided by (used in) investing activities 2,416,725 (397,564) (1,498,978) FINANCING ACTIVITIES Dividends paid (3,532,100) (1,358,000) (2,037,750) ------------------------------------------------------ Net cash used in financing activities (3,532,100) (1,358,000) (2,037,750) ------------------------------------------------------ Increase (decrease) in cash and cash equivalents 2,541,922 1,367,177 (1,443,963) Cash and cash equivalents at beginning of year 1,708,656 341,479 1,785,442 ------------------------------------------------------ Cash and cash equivalents at end of year $ 4,250,578 $ 1,708,656 $ 341,479 ====================================================== SUPPLEMENTAL INFORMATION Interest paid $ 724 $ 724 $ 664 ====================================================== Taxes paid $ 22,925 $ 28,882 $ 22,590 ====================================================== Purchase of property, plant and equipment with a note payable $ - $ - $ 21,875 ======================================================
See accompanying notes. 5 7 Sonomed, Inc. Notes to Financial Statements (continued) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Sonomed, Inc. (the "Company") was organized in 1983 to manufacture and service ultrasound diagnostic and surgical devices for the medical profession in both the United States and abroad. Approximately 90% of the Company's revenues are derived from the sale of manufactured goods. Sales to foreign customers accounted for approximately 36%, 41% and 50% of the Company's revenues for the years ended December 31, 1999, 1998 and 1997, respectively. A geographic breakdown of sales for the years ended December 31, 1999, 1998 and 1997 is impractical. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires 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. INVESTMENTS The Company accounts for its investments using Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Management determines the proper classifications of investments at the time of purchase and reevaluates such designations 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, which approximates the market. Marketable equity securities are classified as available-for-sale and are stated at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income. 6 8 Sonomed, Inc. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) At December 31, 1999, the Company did not hold any investments. At December 31, 1998, securities consisted of three U.S. Treasury Notes classified as held-to-maturity and a mutual fund, which is classified as available-for-sale. There was no unrealized gain or loss on available-for-sale securities at December 31, 1998. CONCENTRATION OF CREDIT RISK At December 31, 1999, accounts receivable from health care providers and foreign distributors totaled $425,684 and $387,441, respectively. At December 31, 1998, accounts receivable from health care providers and foreign distributors totaled $276,363 and $373,819, respectively. One customer accounted for 13% of sales in 1999. Credit is extended based on an evaluation of the customer's financial condition and collateral is generally not required. Credit losses are provided for in the financial statements and consistently have been within management's expectations. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. FIXED ASSETS Fixed assets are carried at cost, less depreciation and amortization computed by the straight-line method over the estimated useful lives of the assets. ADVERTISING EXPENSE The Company's policy is to expense all advertising costs when incurred. Advertising expense for the year ended December 31, 1999, 1998 and 1997 was approximately $50,000, $43,000 and $40,000, respectively. 7 9 Sonomed, Inc. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Effective October 1, 1987, the shareholders of the Company elected to be taxed under Subchapter S of the Internal Revenue Code. Under such provisions, income of the Company will be included in the income tax returns of its shareholders. Accordingly, no provision for federal income taxes has been recorded by the Company. The Company has recorded provisions for New York State Subchapter S and other local taxes of $22,925, $28,882 and $22,590 for 1999, 1998 and 1997, respectively. REVENUE RECOGNITION Revenue is recognized upon shipment of product. 3. INVENTORIES Inventories consist of the following at December 31:
1999 1998 ---------------------- Raw materials $373,280 $287,619 Work in process and finished goods 175,727 134,844 ---------------------- $549,007 $422,463 =======================
4. FIXED ASSETS Property and equipment consists of the following at December 31:
1999 1998 --------------------- Equipment $285,164 $255,440 Leasehold improvements 3,000 3,000 ----------------------- 288,164 258,440 Less accumulated depreciation and amortization 258,840 236,240 ----------------------- $ 29,324 $ 22,200 =======================
8 10 Sonomed, Inc. Notes to Financial Statements (continued) 5. STOCK PURCHASE PLAN On July 15, 1984, the shareholders of the Company approved an Incentive Stock Option Plan for Company employees and a Non-qualified Stock Option Plan for Company employees, directors and other individuals providing service to the Company. Pursuant to each plan, 150,000 shares of common stock have been reserved at prices to be determined by the Board of Directors. All options are exercisable at times as determined by the Board of Directors not to exceed five years after the grant date provided the optionee continues his/her relationship with the Company. There were no options granted or exercised in 1999, 1998 and 1997 and no options were outstanding under either plan at December 31, 1999. At December 31, 1999, 258,000 shares of common stock were reserved for future issuance under these plans. 6. OPERATING LEASE OBLIGATIONS The Company leases premises under operating leases expiring September 30, 2004. The leases provide for additional rental payments for increases in real estate taxes and certain operating expenses. The accompanying financial statements include rent expense of approximately $133,000, $132,000 and $130,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The minimum rental commitments, under noncancellable operating leases are as follows: Year ending December 31: 2000 $129,000 2001 129,000 2002 129,000 2003 129,000 2004 97,000 ======== Total minimum lease payments $613,000 ========
7. COMMITMENTS AND CONTINGENCIES The Company is a party to litigation which arises in the ordinary course of business. The Company believes that these actions will not have a material adverse effect on the Company's financial position or results of operations. 9 11 Sonomed, Inc. Notes to Financial Statements (continued) 8. PROFIT SHARING PLAN Effective January 1, 1993, the Company adopted a 401(k) profit sharing plan. Under the terms of the plan, which covers all employees who qualify under certain age and length of service requirements, the Company makes non-elective contributions on behalf of each participant eligible to share in matching contributions for the plan year. The Company's matching contribution is equal to 50% of such participant's voluntary employee contributions, up to a maximum of 10% of each employee's compensation. The Company's contribution for the years ended December 31, 1999, 1998 and 1997 was $48,468, $28,762 and $27,190, respectively. 9. SUBSEQUENT EVENTS On January 14, 2000, the Company was acquired by Escalon Medical Corp. ("Escalon"), a Delaware corporation, located in Wayne, Pennsylvania for $12,550,000, including cash of $12,050,000 and a promissory note of $500,000. The promissory note is due 125 days from the closing date. A portion ($1,000,000) of the purchase price was placed in escrow for a period of the later of twenty-four months or until claims, if any, are settled. In addition, Escalon entered into a renewable employment agreement with the former principal shareholder of the Company for a period of three years at an annual salary of $175,000. 10 -----END PRIVACY-ENHANCED MESSAGE-----