-----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, Lch/ac0aU0snCnCXrLoraWeORRWM1ShouEBYyGOiqSW3EwP9I1KOpO4kcemBBu3q QoK+juA+ZEGV5+YyRunllw== 0000893220-00-000693.txt : 20000517 0000893220-00-000693.hdr.sgml : 20000517 ACCESSION NUMBER: 0000893220-00-000693 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 636602 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 10-Q 1 FORM 10-Q - ESCALON MEDICAL CORP. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File No. 0-20127 ESCALON MEDICAL CORP. (Exact name of Registrant as specified in its charter) Delaware 33-0272839 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 351 East Conestoga Road Wayne, PA 19087 (610) 688-6830 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Date: May 5, 2000 3,242,184 Shares of Common Stock, $0.001 par value ----------- --------- 2 ESCALON MEDICAL CORP. AND SUBSIDIARIES INDEX
PAGE Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and March 31, 2000 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 13
3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31, 1999 2000 ---- ---- (UNAUDITED) ASSETS ------ Current Assets: Cash and cash equivalents $ 3,854,240 $ 2,271,918 Cash and cash equivalents - restricted 1,000,000 - Note Receivable 15,000 15,000 Accounts receivable, net 1,063,829 1,942,921 Inventory, net 1,117,208 1,559,351 Other current assets 142,235 172,353 ------------ ------------ Total current assets 7,192,512 5,961,543 Furniture and equipment, at cost, net 449,555 485,660 Long-term note receivable 150,000 150,000 License and distribution rights, net 537,138 246,647 Patents, net 495,923 217,691 Trademarks and trade names, net - 2,268,056 Customer lists, net - 7,593,055 Goodwill, net 1,510,207 2,350,741 Other assets 67,438 259,064 ------------ ------------ $ 10,402,773 $ 19,532,457 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Line of Credit $ 1,000,000 $ 5,000,000 Notes payable, short-term - 505,147 Current portion of long-term debt 200,000 1,400,000 Accounts payable 434,308 429,774 Accrued and other liabilities 1,757,432 785,399 ------------ ------------ Total current liabilities 3,391,740 8,120,320 Long-term debt, net of current portion 733,332 5,600,000 ------------ ------------ Total liabilities 4,125,072 13,720,320 ------------ ------------ Shareholders' Equity: Common stock, $0.001 par value; 35,000,000 shares authorized; 3,377,164 and 3,242,184 shares issued, at June 30, 1999 and March 31, 2000, respectively 46,024,811 46,024,811 Treasury stock, at cost 134,980 shares in 1999 (118,108) - Accumulated deficit (39,629,002) (40,212,674) ------------ ------------ Total shareholders' equity 6,277,701 5,812,137 ------------ ------------ $ 10,402,773 $ 19,532,457 ============ ============
Note: The consolidated balance sheet at June 30, 1999 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------------- --------------------------------- 1999 2000 1999 2000 --------------- ---------------- ---------------- --------------- Product revenues $ 2,066,009 $ 2,109,521 $ 5,526,106 $ 4,419,733 Costs and expenses: Cost of goods sold 922,168 820,866 2,431,172 1,975,064 Research and development 242,251 296,930 583,502 764,313 Marketing, general and administrative 951,845 1,383,349 2,349,818 3,361,419 --------------- ---------------- ---------------- --------------- Total costs and expenses 2,116,264 2,501,145 5,364,492 6,100,796 --------------- ---------------- ---------------- --------------- Income (loss) from operations (50,255) (391,624) 161,614 (1,681,063) --------------- ---------------- ---------------- --------------- Other income and expenses: Sale of Betadine product line 879,159 - 879,159 - Gain on sale of Silicone Oil product line - - - 1,848,215 Write-off of Ocufit - 22,253 - (432,859) Interest income 31,246 32,561 101,264 126,348 Interest expense (18,350) (252,573) (19,802) (282,345) --------------- ---------------- ---------------- --------------- Total other income and expense 892,055 (197,759) 960,621 1,259,359 --------------- ---------------- ---------------- --------------- Income (loss) before income tax 841,800 (589,383) 1,122,235 (421,704) Income taxes - 43,860 - 43,860 --------------- ---------------- ---------------- --------------- Net income (loss) $ 841,800 $ (633,243) $ 1,122,235 $ (465,564) =============== ================ ================ =============== Basic net income (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14) =============== ================ ================ =============== Diluted net income (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14) =============== ================ ================ =============== Weighted average shares - basic 3,162,184 3,242,184 3,072,524 3,242,184 =============== ================ ================ =============== Weighted average shares - diluted 3,162,184 3,242,184 3,116,671 3,242,184 =============== ================ ================ ===============
See notes to condensed consolidated financial statements. 4 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED MARCH 31, -------------------------------- 1999 2000 ----------- ------------ Cash Flows From Operating Activities: Net income $ 1,122,235 $ (465,564) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 283,433 513,281 Net loss on retirement of fixed assets -- 4,257 Write off of patents 24,805 -- Gain on sale of Betadine product line (879,159) -- Gain on sale of Silicone Oil product line -- (1,848,215) Write off of Ocufit -- 432,859 Change in operating assets and liabilities: Accounts receivable (286,973) 687,283 Inventories (355,183) 153,551 Other current assets (62,844) 41,238 Accounts payable, accrued and other liabilities 427,011 (336,949) ----------- ------------ Net cash provided from (used in) operating activities 273,325 (818,259) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (2,262,780) (7,043,061) Proceeds from maturities of short-term investments 1,589,016 7,043,061 Release of restricted cash -- 1,000,000 Proceeds from sale of Betadine product line 2,059,835 -- Proceeds from sale of Silicone Oil product line -- 1,587,885 Purchase of vascular access business (1,104,442) (1,000,000) Purchase of Sonomed Inc. -- (12,050,000) Short term note receivable (15,000) -- Purchase of furniture and equipment (48,312) (86,648) Proceeds from sale of furniture and equipment -- 1,300 Long term note receivable (37,500) -- License and distribution rights cost (11,381) (30,801) Acquisition costs (42,941) -- Patent costs (44,815) (36,915) Other assets (835) (115,552) ----------- ------------ Net cash used in investing activities 80,845 (10,730,731) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from term loan 1,000,000 7,000,000 Proceeds from line of credit, net -- 4,000,000 Retirement of preferred stock (818,000) -- Principal payments on term loan (16,667) (933,332) Payment of deferred finance cost -- (100,000) Purchase of treasury stock (118,108) -- Payment of preferred stock dividends (42,130) -- ----------- ------------ Net cash used in financing activities 5,095 9,966,668 ----------- ------------ Net increase in cash and cash equivalents 359,265 (1,582,322) Cash and cash equivalents, beginning of period 2,263,967 3,854,240 ----------- ------------ Cash and cash equivalents, end of period $ 2,623,232 $ 2,271,918 =========== ============
See notes to condensed consolidated financial statements. 5 6 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries Escalon Pharmaceutical Inc., Escalon Vascular Access, Inc. and Sonomed, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2000. For more complete financial information, the accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 1999 included in the Company's annual report on Form 10-K. 2. PER SHARE INFORMATION The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", in presenting basic and diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------------- ------------------------------------ 1999 2000 1999 2000 ----------------- ---------------- ---------------- ----------------- Numerator: Numerator for basic earnings per share: Net income (loss) $ 841,800 $ (633,243) $ 1,122,235 $ (465,564) Preferred stock dividends and accretion (845,983) - (870,523) - ----------------- ---------------- ---------------- ----------------- Numerator for basic and diluted earnings per share-income (loss) available to common shareholders $ (4,183) $ (633,243) $ 251,712 $ (465,564) ================= ================ ================ =================
6 7 2. PER SHARE INFORMATION (CONTINUED) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------------- ------------------------------------ 1999 2000 1999 2000 ----------------- ---------------- ---------------- ----------------- Denominator: Denominator for basic earnings per share - weighted average shares 3,162,184 3,242,184 3,072,524 3,242,184 Effect of dilutive securities: Employee stock options - - 44,147 -------------- ---------------- --------------- ----------------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,162,184 3,242,184 3,116,671 3,242,184 ============== ================ =============== ================= Basic earnings (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14) ============== ================= =============== ================= Diluted earnings (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14) ============== ================= =============== =================
3. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
JUNE 30, 1999 MARCH 31, 2000 ------------- -------------- Raw materials/work in process $ 526,553 $ 1,160,369 Finished goods 623,655 464,150 ----------- ----------- 1,150,208 1,624,519 Valuation allowance (33,000) (65,168) =========== =========== $ 1,117,208 $ 1,559,351 =========== ===========
4. ACQUISITION OF SONOMED, INC. On January 14, 2000, the Company purchased all of the outstanding capital stock of Sonomed, Inc. ("Sonomed"), a privately held manufacturer and marketer of ophthalmic ultrasound diagnostic devices. This business combination was accounted for as a purchase. The total cost of the acquisition was $12,550,000, $11,050,000 was allocated to proprietary rights and intangible assets, including: $7,700,000 to customer lists, $2,300,000 to trademarks and trade names and $1,050,000 to goodwill. The excess costs are being amortized on a straight-line basis over a fifteen-year period. Of the $12,550,000 purchase price, $500,000 is included in notes payable at March 31, 2000. The Company is obligated to pay that amount May 15, 2000 upon resolution of issues related to final valuation of net assets acquired. In addition, the Company entered into a three-year employment agreement with the president of Sonomed, which provides for a $175,000 annual salary (plus cost of living adjustments). The Company also issued to key employees of Sonomed incentive stock options exercisable for the purchase of 330,000 shares of the Company's Common Stock and agreed to make available to key employees of Sonomed a bonus program of a least three per cent of Sonomed's net quarterly sales for a period of three years. 7 8 4. ACQUISITION OF SONOMED, INC. (CONTINUED) The following pro forma results of operations information has been prepared to give effect to the purchase as if such transaction had occurred at the beginning of the period presented. The information presented is not necessarily indicative of results of future operations of the combined companies. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED MARCH 31 ------------------------------------- 1999 2000 ------------- ----------- Revenues $ 10,508,536 $ 8,303,135 Net income $ 2,103,970 $ 499,668 Basic net income per share $0.40 $0.15 Diluted net income per share $0.40 $0.15 Weighted average shares - basic 3,072,524 3,242,184 Weighted average shares - diluted 3,116,671 3,327,309
5. BANK LOANS In connection with the Sonomed acquisition, PNC Bank, N.A. refinanced the Company's $2,000,000 credit facility. In so doing, it released the $1,000,000 restricted cash held as collateral for the term loan. The Company repaid the outstanding balances on its letter of credit ($1,000,000) and the term loan ($833,330). PNC Bank then granted a new $12,000,000 credit facility to assist with the acquisition. This included a $7,000,000 five-year term loan and a $5,000,000 reducing line of credit. The interest rate on the term loan is based on prime plus 1.0% and the line of credit is based on prime plus 0.75%. An interest rate cap agreement was entered into 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 calender year 2000 is 10% and 9.75% on the protected portion of the line of credit. Escalon also 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. All of the Company's assets, including those acquired from Sonomed, collateralize these agreements. 6. CONTINGENCIES Litigation As previously reported in reports filed with the Securities and Exchange Commission, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter to which the Company is no longer a party). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by the Company and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and its insurance carrier have deposited such funds in an escrow account. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to the development of acquisition and joint venture opportunities, fluctuations in results of operations, as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates," or similar expressions. For such statements the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. The most important factors that could prevent the Company from achieving its goals -- and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements -- include, without limitation and in addition to those discussed in the documents filed by the Company with the Securities and Exchange Commission, future capital needs and the uncertainty of additional funding (whether through the financial markets, collaborative or other arrangements with strategic partners, or from other sources). OVERVIEW The following discussion should be read in conjunction with the interim financial statements and the notes thereto which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. and its subsidiaries Escalon Pharmaceutical Inc., Escalon Vascular Access Inc. and Sonomed, Inc., (jointly referred to as "Escalon" or the "Company"), operate in the healthcare market specializing in the development, marketing and distribution of ophthalmic diagnostic, surgical and pharmaceutical products, as well as, vascular access devices. On February 12, 1996, the Company acquired all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the acquisition, the Company was in the development stage and devoting substantially all of its resources to the research and development of laser systems designed for the treatment of ophthalmic disorders. Upon completion of the acquisition, the Company changed its market focus and is now engaged in developing, marketing and distributing ophthalmic medical devices, pharmaceuticals and niche medical products. Sales of products acquired from EOI are made primarily to hospitals and physicians throughout the United States Escalon purchased the vascular access business unit of Radiance Medical Systems, Inc. in January 1999. The vascular access product line was the first niche product acquired outside the ophthalmic medical field. Vascular products are marketed to cardiac cathetarization laboratories through independent distributors. In January 2000, the company purchased Sonomed, Inc., a privately held manufacturer and marketer of ophthalmic ultrasound diagnostic devices. These products are sold domestically and internationally either directly to the customer or through a series of independent distributors. Escalon's market strategy is to locate and acquire profitable niche medical products that it owns and controls the rights to. To finance this program, the Company sold its license and distribution rights to Betadine(R)5% Sterile Ophthalmic Prep Solution ("Betadine") and Adatosil(R)5000 Silicone Oil ("Silicone Oil"), in third quarter of fiscal 1999 and the first quarter of fiscal 2000, respectively. 9 10 To further develop and commercialize its proprietary laser technology, in October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase, in return for an equity interest in IntraLase and future royalties on product sales. IntraLase has the responsibility of funding and developing the laser technology through to commercialization. The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; and (iii) general competitive and economic conditions of the health care market. RESULTS OF OPERATIONS Three and Nine-Month Periods Ended March 31, 2000 and 1999 Product revenues increased $43,512, or 2%, to $2,109,521 for the three-month period ended March 31, 2000 as compared to $2,066,009 for the same period ended March 31, 1999. Product revenue from Silicone Oil and Betadine declined $1,218,836 from the fiscal 1999 period as a result of the sale of the license and distribution rights to those product lines in August and March of 1999, respectively. The two and a half months of revenue acquired from Sonomed contributed $1,160,680 and substantially replaced the entire revenue decline from product line sales. Revenue from the vascular access business increased $126,348 over the like period last year. In the third quarter of fiscal 2000, Escalon also experienced a decline in unit sales of OEM, ISPAN(TM) gas products, capital equipment and disposable products of $24,680. Contract manufacturing revenues vary from quarter to quarter depending on when orders are received and the lead times to produce such products. For the nine-month period ended March 31, 2000, the Company experienced a $1,106,373, or 20%, decline in revenues from the same period in fiscal 1999. Loss of revenues from product lines sold amounted to $3,272,237 between the two periods. Addition of Sonomed and vascular products offset that amount by $1,160,680 and $1,197,548, respectively. The Company also experienced an overall decline of $192,364 in sales of OEM, capital and disposable products for this nine-month period, as compared to the comparable fiscal 1999 period. Cost of goods sold totaled $820,866, or 40% of revenue, for the three-month period ended March 31, 2000, as compared to $922,168, or 45% of revenue, for the same period last year. Product lines sold reduced comparative quarterly costs by $509,034. Sonomed's product line costs were $337,889 for the current quarter; there were no comparable costs for the same period last year. Vascular and ophthalmic product manufacturing costs increased $64,592 and $5,250, respectively, in the third quarter of fiscal 2000 when compared to the third fiscal quarter of 1999. For the nine-month period ended March 31, 2000, cost of goods sold totaled $1,975,064, or 45% of revenue, compared with $2,431,172, or 44% of revenue, for the first nine months of fiscal 1999. Costs associated with discontinued product lines decreased $1,327,509 in the fiscal 2000 period. Sonomed's and vascular product costs rose by $337,889 and $566,883, respectively. The Company began selling the Sonomed product line in mid-January, 2000. Vascular costs represent three full quarters of operation in fiscal 2000, compared to only two and a half months of fiscal 1999 operations. Ophthalmic device costs decreased $33,371 for the like period of fiscal 1999. Research and development expenses increased $54,679, or 23%, for the three-month period ended March 31, 2000 when compared to the same period in 1999. Expenses for clinical trials related to providone-iodine 2.5% increased $51,150 and Ocufit SR(R) costs decreased $78,300 (project abandoned in December 1999) over the same quarter of fiscal 1999. The quarterly increase includes $59,600 for Sonomed products; an additional $14,800 for vascular products; and a $7,400 increase in other medical device research costs. When comparing the nine-month periods ending March 31, 2000 and 1999, research and development costs increased $180,811, or 31%. Expenses for clinical trials (Ocufit and 2.5% providone-iodine) increased $70,500; Sonomed's and vascular research costs increased $59,600 and 10 11 $66,700, respectively, over the same period in fiscal 1999. The Company did experience favorable reductions in patent and various other developmental costs that reduced the fiscal 2000 increases by $16,000. Marketing, general and administrative expenses increased $431,504, or 45%, for the three-month period ended March 31, 2000 compared to the same period last year. The direct marketing, general and administrative expenses related to Sonomed increased expenses $252,500. Depreciation and amortization expense also increased $119,500 due to that acquisition. Expenses for the vascular access product line increased by $133,800 from fiscal 1999. This resulted from the Company's effort to promote these products by increasing the sales staff, related travel expense and additional royalties as sales volume increased. The sale of Silicone Oil and Betadine reduced quarterly royalty and commission expenses by $85,200. When comparing the nine-month periods ending March 31, 2000 and 1999, marketing, general and administrative costs increased $1,014,726, or 43%. Vascular products and Sonomed contributed $767,700 and $252,500, respectively. Increases also occurred in salaries and wages, $98,000; legal/investor relations costs, $62,600; travel, $41,000; and office expenses, $40,000. The Company realized a favorable $234,500 reduction in commissions and royalties related to product lines sold. In March 1999, the Company reported the sale of its inventory, license and distribution rights for Betadine(R)5% Sterile Ophthalmic Prep Solution. This sale resulted in a $879,159 gain, after adjusting for the cost of inventory sold, and the write-off of the remaining goodwill and license and distribution rights associated with that product line. In August 1999, the Company reported the sale of its license and distribution rights for the Adatosil(R) 5000 Silicone Oil product line. This sale resulted in a $1,848,215 gain after writing off of the remaining net book value of license and distribution rights associated with that product line. Beginning in the second quarter of fiscal 2001, the Company will also receive additional payments based on future sales of Silicone Oil through 2004. After completing the initial Phase I human clinical trials in late December 1999, management re-evaluated its Ocufit SR(R) ophthalmic drug delivery system project. It was decided that further expenditures on this project were not in the shareholders' best interest, and the project was discontinued. This decision resulted in the Company taking a charge of $455,112 in the second quarter of fiscal 2000, which included write-off of the net book value for remaining goodwill and patent cost associated with this project. That estimate cost was reduced slightly in the third quarter, but the Company anticipates that when all related closing expenses are incurred by year-end, the original estimate will be attained. Interest income increased to $32,561 and $126,348 for the three- and nine-month periods ended March 31, 2000 from $31,246 and $101,264 for the same periods in 1999. On a quarterly basis, the average daily cash balance in fiscal 2000 was slightly less; however, the Company was earning interest at higher rates. This increase on a nine-month basis is a result of increased cash and cash equivalents available for investment, due to proceeds received from sale of the Silicone Oil and Betadine product lines and higher interest rates. 11 12 Interest expense increased to $252,573 and $282,345 for the three- and nine-month periods ended March 31, 2000 from $18,350 and $19,802 for the same periods in 1999. This is the result of corporate borrowing arrangements that did not exist until the third quarter of fiscal 1999 and 2000. In connection with the Sonomed acquisition, PNC Bank ("PNC Bank" or "Bank") refinanced its existing debt, providing $12,000,000 of financing to the Company. There is no provision for federal income taxes for the three- or nine-month period ended March 31, 2000 and 1999 due to the utilization of net operating loss carryforwards. At March 31, 2000, the Company recorded a $43,900 provision for state tax income liabilities that are not covered by net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had cash and cash equivalents of $2,271,918 as compared to $3,854,240 at June 30, 1999, a decrease of $1,582,322. During the third quarter, the Company paid off $1,833,330 in outstanding debt to PNC Bank N.A. and incurred $100,000 in financing fees. Partially offsetting this reduction in cash was a receipt of the third $529,295 installment paid on the Silicone Oil product line sale. The $1,000,000 in restricted cash and cash equivalents resulted from the Bank's release of its collateral for the term loan. On January 14, 2000, the Company completed the acquisition of Sonomed, Inc. ("Sonomed"), a manufacturer of ophthalmic ultrasound diagnostic devices. 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 10% per annum and due in 125 days. On January 14, 2000, the Company replaced the $2,000,000 credit facility obtained in January 1999. The Bank granted a new $12,000,000 credit facility to assist in the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 reducing line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with the Bank. 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. Escalon also 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. All of the Company's assets, including those acquired from Sonomed, collateralize these agreements. The Board of Directors has authorized the repurchase of up to 500,000 shares of the Company's Common Stock. The price, timing and manner of these purchases will be at the discretion of management. No purchases have been made, nor are any currently expected to be made, under this authority. The Company's Common Stock is currently listed on the Nasdaq National Market. In order to maintain that listing, the Company must maintain $4,000,000 in net tangible assets, a $5,000,000 market value of the public float, two market-makers and a minimum bid price of $1.00 per share. As of March 31, 2000, the Company does not meet the net tangible asset test by $538,600. Escalon will seek to have it shares traded on an alternative trading market, should this listing be suspended. 12 13 The Company anticipates that the cash and cash equivalents and the interest earned thereon, together with funds generated from future product sales, should be adequate to satisfy its capital requirements, based on current levels of operations, through March 31, 2001. In the longer term, however, the Company will seek corporate partnering, licensing and other financing opportunities to satisfy the significant expenditures anticipated with development of its surgical products, pharmaceutical products and vascular access devices. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 4 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K was filed on January 14, 2000, reporting the purchase of all of the outstanding Common Stock of Sonomed, Inc. A report on Form 8-K/A was filed on March 30, 2000, amending the Form 8-K, as filed on January 14, 2000, and reporting the financial information related to the purchase of Sonomed, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) DATE: May 15, 2000 By: /s/ Douglas R. McGonegal ------------------------------------------- Douglas R. McGonegal Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS JUN-30-2000 JAN-01-2000 MAR-31-2000 2,271,918 0 1,991,711 (48,790) 1,559,351 5,961,543 978,741 (493,081) 19,532,457 8,120,320 0 0 0 46,024,811 (40,212,674) 19,532,457 2,109,521 2,109,521 820,866 820,866 1,680,279 3,000 252,573 (589,383) 43,860 (633,243) 0 0 0 (633,243) (0.20) (0.20)
-----END PRIVACY-ENHANCED MESSAGE-----