-----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, GJt50Gwr85kog3XWTO9chsgMj4nfiL/z7j+KBCv4/WJFkYrjA9cklsq1LJpXqkOG 7nMF8QA+db+7vuF6EeJVZw== 0000893220-01-000142.txt : 20010212 0000893220-01-000142.hdr.sgml : 20010212 ACCESSION NUMBER: 0000893220-01-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010209 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: 1530061 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 w45208e10-q.txt 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 December 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 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 of outstanding stock of each of the issuer's classes of common stock, as of the latest practicable date. Date: February 2, 2001 3,242,184 Shares of Common Stock, $0.001 par value ----------------- --------- 2 ESCALON MEDICAL CORP. INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three And Six Months Ended December 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 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 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 4. Submission of Matters to Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
2 3 PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements ESCALON MEDICAL CORP. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 2000 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 177,106 $ 292,681 Accounts receivable, net 1,331,783 1,966,878 Inventory, net 1,574,678 1,617,810 Prepaid insurance 166,667 77,800 Other current assets 69,063 53,556 ------------ ------------ Total current assets 3,319,297 4,008,725 Long-term note receivable 150,000 150,000 Furniture and equipment, net 479,018 619,432 Customer lists, net 7,464,722 7,208,056 Goodwill, net 2,278,576 2,226,042 Trademarks and trade names, net 2,229,722 2,153,106 License and distribution rights, net 266,843 249,495 Patents, net 215,006 209,640 Other assets 442,106 534,435 ------------ ------------ Total assets $ 16,845,290 $ 17,358,931 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ 4,032,105 $ 4,351,005 Current portion of long-term debt 1,400,000 1,400,000 Accounts payable 462,086 352,414 Accrued compensation 355,074 475,842 Other current liabilities 280,976 508,320 ------------ ------------ Total current liabilities 6,530,241 7,087,581 Long-term debt, net of current portion 4,900,000 4,550,000 ------------ ------------ Total liabilities 11,430,241 11,637,581 Shareholders' Equity: Preferred stock, no par value; 2,000,000 shares authorized; no shares issued -- -- Common stock, $0.001 par value; 35,000,000 shares authorized, 3,242,184 shares issued 3,242 3,242 Additional paid-in capital 46,021,569 46,021,569 Accumulated deficit (40,609,762) (40,303,461) ------------ ------------ Total shareholders' equity 5,415,049 5,721,350 Total liabilities and shareholders' equity $ 16,845,290 $ 17,358,931 ============ ============
Note: The consolidated balance sheet at June 30, 2000 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
Three Months Ended Six Months Ended December 31, December 31, 1999 2000 1999 2000 ----------- ---------- ----------- ---------- Revenues, net $ 886,534 $2,937,395 $ 2,310,212 $5,897,360 ----------- ---------- ----------- ---------- Costs and expenses: Cost of goods sold 421,358 983,384 1,154,198 2,028,055 Research and development 231,950 87,577 467,383 198,641 Marketing, general and administrative 1,039,468 1,386,999 1,976,195 2,721,279 ----------- ---------- ----------- ---------- Total costs and expenses 1,692,776 2,457,960 3,597,776 4,947,975 ----------- ---------- ----------- ---------- Income (loss) from operations (806,242) 479,435 (1,287,564) 949,385 ----------- ---------- ----------- ---------- Other income and expenses: Gain on Sale of Silicone Oil product line -- -- 1,848,215 -- Write-off of Ocufit (455,112) -- (455,112) -- Equity in income (loss) of unconsolidated joint venture -- 24,854 -- (29,968) Interest income 44,903 10 93,787 2,929 Interest expense (14,791) (270,389) (29,772) (559,020) ----------- ---------- ----------- ---------- Total other income and expenses (425,000) (245,525) 1,457,118 (586,059) ----------- ---------- ----------- ---------- Earnings before income taxes (1,231,242) 233,910 169,554 363,326 Income taxes -- 35,000 1,875 57,025 ----------- ---------- ----------- ---------- Net income (loss) $(1,231,242) $ 198,910 $ 167,679 $ 306,301 =========== ========== =========== ========== Basic net income (loss) per share $ (0.380) $ 0.061 $ 0.052 $ 0.094 =========== ========== =========== ========== Diluted net income (loss) per share $ (0.380) $ 0.060 $ 0.052 $ 0.094 =========== ========== =========== ========== Weighted average shares - basic 3,242,184 3,242,184 3,242,184 3,242,184 =========== ========== =========== ========== Weighted average shares - diluted 3,242,184 3,302,017 3,254,250 3,268,384 =========== ========== =========== ==========
See notes to condensed consolidated financial statements 4 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31, 1999 2000 ----------- --------- Cash Flows From Operating Activities: Net income $ 167,679 $ 306,301 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 155,099 516,239 Gain on sale of Silicone Oil (1,848,215) -- Write-off of Ocufit 455,112 -- Loss of unconsolidated joint venture -- 29,968 Change in operating assets and liabilities: Accounts receivable 657,829 (635,094) Inventories 99,727 (43,131) Other operating assets, current and long-term 1,148 (122,971) Accounts payable, accrued and other liabilities (224,514) 238,439 ----------- --------- Net cash provided from (used in) operating activities (536,135) 289,751 ----------- --------- Cash Flows From Investing Activities: Purchase of short-term investments (6,043,060) -- Proceeds from maturities of short-term investments 6,043,060 -- Proceeds from sale of Silicone Oil product line 1,058,590 -- Final payment for Vascular Access Business (1,000,000) -- Purchase of furniture and equipment (67,341) (95,181) Other assets (142,498) -- License and distribution rights and goodwill (11,107) (47,896) Patent costs (15,834) -- ----------- --------- Net cash used in investing activities (178,190) (143,077) ----------- --------- Cash Flows From Financing Activities: Line of credit borrowing, net -- 318,901 Principal payments on term loan (100,002) (350,000) ----------- --------- Net cash used in financing activities (100,002) (31,099) ----------- --------- Net increase (decrease) in cash and cash equivalents (814,327) 115,575 Cash and cash equivalents, beginning of period 3,854,240 177,106 ----------- --------- Cash and cash equivalents, end of period $ 3,039,913 $ 292,681 =========== ========= Supplemental Schedule of Cash Flow Information: Interest paid $ 14,791 $ 520,817 =========== ========= Supplemental Schedule of Noncash Activity Deposit on furniture and equipment reclassed from other assets $ -- $ 105,044 =========== =========
See notes to condensed consolidated financial statements 5 6 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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., Sonomed, Inc. and Escalon Digital Vision, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). 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, 2001. 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, 2000 included in the Company's annual report on Form 10-K. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management does not expect to adoption of SAB 101 to have a material effect on the Company's operations or financial position. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2001. 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 Six Months Ended December 31, December 31, 1999 2000 1999 2000 ----------- ---------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share: Net income $(1,231,242) $ 198,910 $ 167,679 $ 306,301 ----------- ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 3,242,184 3,242,184 3,242,184 3,242,184 Effect of dilutive securities: Employee stock options -- 59,833 12,066 26,200 ----------- ---------- ---------- ---------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,242,184 3,302,017 3,254,250 3,268,384 =========== ========== ========== ========== Basic earnings per share $ (0.380) $ 0.061 $ 0.052 $ 0.094 =========== ========== ========== ========== Diluted earnings per share $ (0.380) $ 0.060 $ 0.052 $ 0.094 =========== ========== ========== ==========
6 7 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, December 31, 2000 2000 ----------- ------------ Raw materials / work in process $ 1,336,754 $ 1,354,443 Finished goods 365,092 365,535 ----------- ----------- 1,701,846 1,719,978 Valuation allowance (127,168) (102,168) ----------- ----------- $ 1,574,678 $ 1,617,810 =========== ===========
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 $12,290,227, of which $11,188,513 was allocated to proprietary rights and intangible assets, including: $7,700,000 to customer lists, $2,300,000 to trademarks and trade names and $1,188,513 to goodwill. The intangible assets are being amortized on a straight-line basis over a fifteen-year period. 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 at least three percent of Sonomed's net quarterly sales for a period of three years. 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 being presented. The information presented is not necessarily indicative of results of future operations of the combined companies. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended December 31, December 31, 1999 2000 1999 2000 ---------- ---------- ---------- ---------- Revenues $2,487,000 $2,937,000 $5,510,000 $5,897,000 Net income $ (691,000) $ 199,000 $1,145,000 $ 306,000 Basic net income per share $ (0.213) $ 0.061 $ 0.353 $ 0.094 Diluted net income per share $ (0.213) $ 0.060 $ 0.352 $ 0.094 Weighted average shares - basic 3,242,184 3,242,184 3,242,184 3,242,184 Weighted average shares - diluted 3,242,184 3,302,017 3,254,250 3,268,384
7 8 5. BANK LOANS In connection with the acquisition of Sonomed on January 14, 2000, PNC Bank, N.A. refinanced the Company's $2,000,000 credit facility. In doing so, it released $1,000,000 of restricted cash held as collateral for the Company's prior 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 provide financing for 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 though January 2002. The maximum interest rate that may be charged on the term loan and on the protected portion of the line of credit for calendar year 2000 was 9%. 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 collateralize these agreements. At December 31, 2000, the interest rates applicable to the term loan and the line of credit were 9.0% and 9.0% (10.25% on the unprotected portion), respectively. The term loan and the line of credit agreements contain various covenants related to required levels of earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, and the maintenance of net worth levels, among others. The Company did not achieve the EBITDA and net worth covenants and also violated another covenant regarding investments and advances, which are breaches of the loan agreements. The Bank has waived these requirements of the agreements as of December 31, 2000, and for the period ending January 1, 2002. 6. CONTINGENCY Litigation As previously reported in reports filed with the SEC, 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 lawsuit 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, 1983, 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 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. 7. REVENUES, NET Revenues, net include quarterly payments earned in connection with the sale of the AdatoSil(R) 5000 Silicone Oil ("Silicone Oil") product line. This revenue totaled $905,000 for the period beginning on the commencement date of August 11, 2000 through December 31, 2000. The Company is entitled to receive additional consideration, in varying amounts, through fiscal 2005. Included in accounts receivable as of December 31, 2000 is $559,000. 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, the following: (i) the competitive nature of the industries in which the Company competes and the ability of the Company to (a) successfully maintain existing strategic relationships and (b) negotiate and enter into new strategic relationships and otherwise distinguish its products from those of other companies on the basis of quality, value and reliability; (ii) economic and regulatory conditions which could adversely affect sales of the Company's products, including the uncertainty of FDA approval for any new applications; (iii) the ability of the Company to successfully develop and market new products; (iv) 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); (v) uncertain protection of important proprietary technology; (vi) the outcome of litigation matters; (vii) limitation on third-party reimbursement and the possible adverse impact of health care reform on the payment of health care services; (viii) dependence on key personnel; (ix) an uninterrupted supply of materials vital to the Company's revenue streams; and (x) the ability of the Company to maintain its listing on the NASDAQ SmallCap Market. OVERVIEW The following discussion should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. and its subsidiaries, Sonomed, Inc., Escalon Pharmaceutical Inc., Escalon Vascular Access, Inc. and Escalon Digital Vision, Inc., (jointly referred to as "Escalon" or the "Company") operate in the healthcare market specializing in the development, manufacture, 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 the completion of the acquisition, the Company changed its market focus and is now engaged in developing, manufacturing, marketing and distributing ophthalmic diagnostic, surgical and pharmaceutical products as well as niche medical products. Sales of the products acquired from EOI are made primarily to hospitals and physicians throughout the United States. 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. Escalon's present and expected future market strategy is to locate and acquire profitable niche medical products that it will own and control 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, in March and August 1999, respectively. 9 10 Escalon purchased the vascular access business unit of Radiance Medical Systems, Inc. in January 1999. This was significant as the Company's first step in diversification. The vascular access product line was the first niche product acquired outside the ophthalmic medical field. Vascular products are marketed to cardiac catheterization laboratories through a series of 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. The Company entered into a joint venture with MegaVision, Inc. in April 2000. The joint venture has been named Escalon Medical Imaging, LLC ("Imaging"). The purpose of Imaging is to develop, manufacture and market hardware and software to retro-fit existing ophthalmic photographic equipment to digital technology. The Company (through its subsidiary Escalon Digital Vision, Inc.) and MegaVision, Inc. each own 50% of Imaging. 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; (iii) general competitive and economic conditions of the healthcare market; and (iv) availability from suppliers of component parts and supplies. RESULTS OF OPERATIONS The Company currently operates in three business units: Medical, which includes the original ophthalmic surgical products; Sonomed, which includes ophthalmic diagnostic devices; and Vascular, which includes vascular access devices. Three and Six-Month Periods Ended December 31, 1999 and 2000 Product revenues increased $2,051,000 or 231.23%, to $2,937,000 for the three-month period ended December 31, 2000 as compared to $887,000 for the same period ended December 31, 1999. Revenue from the Sonomed business unit, which was acquired in January 2000, was $1,547,000 for the three-month period ended December 31, 2000. In the Company's Medical business unit, revenue earned in connection with Silicone Oil was $559,000 for the three-month period ended December 31, 2000. Revenues from the balance of the Medical product line increased by a nominal $18,000. The Vascular business unit experienced a $73,000 decrease compared to the same period last year. This decrease occurred as distributors experienced a short-term surplus of inventory and reduced orders from the Company. Product revenues increased $3,587,000 or 155.28%, to $5,897,000 for the six-month period ended December 31, 2000 as compared to $2,310,000 for the same period ended December 31, 1999. Revenue from the Sonomed business unit, which was acquired in January 2000, was $3,083,000 for the six months ended December 31, 2000. In the Company's Medical business unit, revenue earned in connection with Silicone Oil was $574,000 from July 1, 1999 through August 13, 1999. The Company sold its rights to the product to Bausch & Lomb on August 13, 1999, and did not recognize any revenue from Silicone Oil for a period of one year from the date of sale. Beginning on August 13, 2000, the Company is entitled to receive from Bausch & Lomb, a percentage of Bausch & Lomb's gross profit from sales of the oil product through fiscal 2005. From August 13, 2000 through December 31, 2000 revenue earned in connection with Silicone Oil was $905,000, $331,000 more than the Silicone Oil revenue recognized during the period ended December 31, 2000. Revenues from the balance of the Medical product line increased by $258,000. This increase was due mainly to the fulfillment of customers' backorders for the Company's ISPAN(TM) gas product during the first quarter of fiscal 2001. The Vascular business unit experienced an $85,000 decrease compared to the same period last year. This decrease occurred as distributors experienced a short-term surplus of inventory and reduced orders from the Company. Cost of goods sold totaled $983,000, or 33.47% of revenue, for the three-month period ended December 31, 2000, as compared to $421,000, or 47.46% of revenue for the same period last year. 10 11 The reduction in cost of goods sold as a percentage of revenue is due to a favorable product mix resulting from the acquisition of Sonomed and revenues received from Bausch & Lomb related to Silicone Oil. Cost of goods sold in the Sonomed unit totaled $626,000, or 40.47% of revenue. Cost of goods sold in the Medical unit decreased $36,000 to $136,000, or 15.06% of revenue. Cost of goods sold as a percentage of revenue was 53.09% during the same period last fiscal year. This decrease is due to the fact that the Silicone Oil revenue recognized during fiscal 2001 does not have any costs associated with the revenue. Cost of goods sold for the Medical business unit was 39.88% of sales for the three-month period ended December 31, 2000, when Silicone Oil revenue is excluded. This decrease is due to the reclassification of certain personnel out of the Medical business unit's manufacturing costs into other departments and business units. Cost of goods sold in the Vascular unit decreased $28,000 to $221,000, or 45.10% of revenue, as compared to 44.29% of revenue during the same period last year. Cost of goods sold totaled $2,028,000, or 34.39% of revenue, for the six-month period ended December 31, 2000, as compared to $1,154,000, or 49.96% of revenue for the same period last year. The reduction in cost of goods sold as a percentage of revenue is due to a favorable product mix resulting from the acquisition of Sonomed and revenues received from Bausch & Lomb related to Silicone Oil. Cost of goods sold in the Sonomed unit totaled $1,121,000, or 36.36% of revenue. Cost of goods sold in the Medical unit decreased $201,000 to $451,000, or 24.66% of revenue. Cost of goods sold as a percentage of revenue was 52.62% during the same period last fiscal year. This decrease is due to the fact that the Silicone Oil revenue recognized during fiscal 2001 does not have any costs associated with the revenue. Cost of goods sold for the Medical business unit was 48.81% of sales for the six-month period ended December 31, 2000, when Silicone Oil revenue is excluded. This decrease is due to the reclassification of certain personnel out of the Medical business unit's manufacturing costs into other departments and business units. Cost of goods sold in the Vascular unit decreased $46,000 to $456,000, or 46.29% of revenue, as compared to 46.87% of revenue during the same period last year. Research and development expenses decreased $144,000, or 62.07%, to $88,000 for the three-month period ended December 31, 2000 when compared to the same period last fiscal year. Research and development in the Sonomed unit totaled $63,000 for the three-month period ended December 31, 2000. Research and development in the Medical and Vascular business units decreased $207,000 when compared to the same period last year. The Company has suspended development of Povidone-Iodine 2.5% and is seeking a partner for further development of this product line; development of Ocufit SR(R) has been terminated. The Company's present strategy for research and development, as well as what it expects to implement in the future, entails undertaking shorter-term projects with quicker anticipated returns. Research and development expenses decreased $268,000, or 57.39%, to $199,000 for the six-month period ended December 31, 2000 when compared to the same period last fiscal year. Research and development expense in the Sonomed unit totaled $136,000 for the six-month period ended December 31, 2000. Research and development in the Medical and Vascular business units decreased $404,000 when compared to the same period last year. The Company has suspended development of Povidone-Iodine 2.5% and is seeking a partner for further development of this product line; development of Ocufit SR(R) has been terminated. The Company's present strategy for research and development, as well as what it expects to implement in the future, entails undertaking shorter-term projects with quicker anticipated returns. Marketing, general and administrative expenses increased $348,000, or 33.49%, to $1,387,000 for the three-month period ended December 31, 2000 when compared to the same period last fiscal year. Marketing, general and administrative expenses in the Sonomed unit totaled $554,000 for the three-month period ended December 31, 2000. Salaries and other employee-related expenses represent $209,000, while amortization of acquisition-related intangible assets amounted to $190,000 for the three-month period ended December 31, 2000. Marketing, general and administrative expenses in the Medical business unit decreased $145,000, or 21.33%, to $556,000 for the three-month period ended December 31, 2000 when compared to the same period last year. Legal expenses decreased by $77,000, being atypically high during the three-month period ended December 31, 1999 as a result of pre-acquisition related costs for the Sonomed deal. Travel-related expenses decreased by $47,000, the direct result of a concerted effort in this regard. Marketing, general and administrative expenses in the Vascular business unit decreased $61,000, or 18.37%, to $271,000. This decrease was due to reduced salaries and employee-related expenses due to reduced headcount. 11 12 Marketing, general and administrative expenses increased $745,000, or 37.70%, to $2,721,000 for the six-month period ended December 31, 2000 when compared to the same period last fiscal year. Marketing, general and administrative expenses in the Sonomed unit totaled $976,000 for the six-month period ended December 31, 2000. Amortization of intangible assets was $376,000, while salaries and other employee-related expenses was $344,000 for the six-month period ended December 31, 2000. Marketing, general and administrative expenses in the Medical business unit decreased $155,000, or 11.51%. Legal expenses decreased by $72,000, being atypically high during the six-month period ended December 31, 1999 as a result of pre-acquisition related costs for the Sonomed deal. Royalties decreased by $51,000 as a result of the Company's decision to discontinue clinical trials of Ocufit SR(R) in December 1999. Travel-related expenses decreased $44,000, the direct result of a concerted effort in this area. Medical experienced an increase of $41,000 in salaries and employee-related costs, the result of annual cost of living increases. Marketing, general and administrative expenses in the Vascular business unit decreased $86,000, or 13.56%. The main factors contributing to this decrease were decreased salaries and employee-related costs, which reduced by $88,000, the result of reduced headcount; and a decrease in travel-related expenses, which reduced by $52,000, the direct result of a concerted effort in this area. These decreases were partially offset by an increase in consulting expense of $43,000, mostly due to the retention of a sales and marketing consultant. 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 $1,848,000 gain after writing off the remaining net book value of license and distribution rights associated with that product line. 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 one-time non-cash charge of $455,000 in the second quarter of fiscal 2000, which included write-off of the net book value for remaining goodwill and patent costs associated with this project. On December 18, 2000, the Company announced that it was granted FDA approval for its high-end digital camera system for ophthalmologists known as the CFA Digital Imaging System. The system will be marketed through the Company's joint venture with MegaVision, Inc. As a result of the approval, the joint venture was able to begin selling the product in December 2000, resulting in Escalon recognizing $25,000 of income for the three months ended December 31, 2000. For the six months ended December 31, 2000, the Company has recorded a $30,000 loss from the joint venture. Interest income decreased $45,000 and $91,000 for the three- and six-month periods ended December 31, 2000 as compared to the same periods last year. On a quarterly basis, the Company's cash balance has been substantially lower than during the same period last fiscal year. This decrease resulted from the decrease in cash and cash equivalents available for investment due to significant changes in the Company, namely, the Sonomed acquisition. Interest expense increased $256,000 and $529,000 for the three- and six-month periods ended December 31, 2000 as compared to the same periods last year. This is a result of corporate borrowing arrangements that did not exist until the third quarter of fiscal 2000. In connection with the Sonomed acquisition, PNC Bank refinanced its existing debt, providing $12,000,000 of financing to the Company. There is no provision for federal income taxes for the periods presented as a result of utilization of net operating loss carryforwards. The Company has recognized a $57,000 expense related to state income taxes for the six-month period ended December 31, 2000. 12 13 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had cash and cash equivalents of $293,000 as compared to $177,000 at June 30, 2000, an increase of $116,000. This increase consists of $290,000 provided by operating activities, and $319,000 additional borrowing against the line of credit, offset by $350,000 used to pay down the term loan, $95,000 used to purchase assets, the large portion of which includes a new accounting software package and related hardware and $48,000 which has been classified as goodwill related to the Sonomed acquisition. The additions to goodwill were the result of an agreement between the Company and the former owner of Sonomed, whereby the Company agreed to indemnify the former owner for certain taxes incurred as a result of the acquisition. On January 14, 2000, the Company replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan and a $5,000,000 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 term loan is based on prime plus 1.0% and the line of credit is based on prime plus 0.75%. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on the floating-rate term loan and line of credit. At December 31, 2000, the Company was party to interest rate cap agreements covering the $7,000,000 term loan through January 1, 2003 and $3,000,000 of the reducing line of credit through January 1, 2002. The agreements entitle the Company to receive from the Bank, the counter-party to both agreements, on a monthly basis the amounts, if any, by which the Company's interest payments on the $3,000,000 protected portion of the line of credit exceed 9%. Payments are also due monthly from the Bank if the interest rate on the $7,000,000 term loan exceeds 9% through January 1, 2001, 9.5% for the period January 1, 2001 through January 1, 2002 and 10% for the period January 1, 2002 through January 1, 2003. At December 31, 2000, the interest rates applicable to the term loan and the line of credit were 9.0% and 9.0% (10.25% on the unprotected portion), respectively. Escalon also paid $100,000 in finance fees that are recorded in other assets. These fees are being 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 Bank's prime rate as of December 31, 2000 was 9.5%. The term loan and the line of credit agreements contain various covenants related to required levels of EBITDA, as defined, and the maintenance of net worth levels, among others. The Company did not achieve the EBITDA and net worth covenants and also violated another covenant regarding investments and advances, which are breaches of the loan agreements. The Bank has waived these requirements of the agreements as of December 31, 2000, and for the period ending January 1, 2002. 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 anticipates that the cash generated from future product sales, together with cash received from the Silicone Oil divestment and funds available from the line of credit, should be adequate to satisfy its capital requirements, based on current levels of operations. In the longer term, the Company will seek corporate partnering, licensing and other financing opportunities to satisfy the significant expenditures needed to fund its' growth-through-acquisition strategy. The Common Stock is currently listed on the Nasdaq SmallCap Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain listing requirements must be met. If the Company's securities were delisted, an investor could find it more difficult to dispose of them, or to obtain accurate quotations as to the market value of the Company's securities. 13 14 Reportable Segments Six Months Ended December 31, 2000
Medical Vascular Sonomed Other Total ---------- ---------- ----------- -------- ----------- Revenue, net $1,829,000 $ 985,000 $ 3,083,000 $ -- $ 5,897,000 Interest income 3,000 -- -- -- 3,000 Interest expense -- -- (559,000) -- (559,000) Equity in loss of unconsolidated joint venture -- -- -- (30,000) (30,000) Net profit (loss) 357,000 (25,000) -- (26,000) 306,000 ---------- ---------- ----------- -------- ----------- Depreciation and amortization 68,000 63,000 377,000 8,000 516,000 Assets 2,574,000 2,240,000 12,127,000 409,000 17,350,000 Expenditures for long lived assets 67,000 21,000 7,000 -- 95,000 ---------- ---------- ----------- -------- -----------
During the six-month period ended December 31, 2000, Medical derived the majority of its revenues from the sales of ISPAN(TM) gas products and disposable products and from additional consideration in connection with the sale of the Silicone Oil product line. Vascular derived the majority of its revenues from the sales of Smartneedles and PD Access needles, both of which are used by personnel in the medical field to aid in locating difficult arteries and veins. Sonomed derived the majority of its revenues from the sales of A-Scans, B-Scans and pachymeters, which are ultrasound systems used for diagnostic or biometric applications in ophthalmology. During the six-month period ended December 31, 2000, the Company had one customer, Bausch & Lomb, from which greater than 10% of consolidated net revenues were derived. Revenues from Bausch & Lomb were $1,199,000, or 20.33% of consolidated net revenues, during the period. This revenue is recorded in the Medical business segment. Included in accounts receivable is $559,000 owed to the Company from Bausch & Lomb. Of the external revenues reported above, $1,000, $-0- and $1,048,000 were derived internationally in Medical, Vascular and Sonomed, respectively. Refer to the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10Q for analysis between the fiscal 2001 information disclosed here and the comparative results from fiscal 2000. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about the Company's financial instruments consisting primarily of debt obligations that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related interest rates by expected maturity dates. Interest rates are based upon the federal prime rate at December 31, 2000 plus 1.0% on the term loan and 0.75% on the line of credit. Interest rate cap agreements are used to reduce the potential impact of increases on the floating-rate term loan and line of credit. At December 31, 2000, the Company was party to interest rate cap agreements covering the entire term loan through January 1, 2003 and $3,000,000 of the line of credit through January 1, 2002.
Expected maturity date ----------------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Total --------- --------- --------- --------- ------- --------- Term loan 1,400,000 1,400,000 1,400,000 1,400,000 350,000 5,950,000 Interest rate - capped 9.50% 10.50% -- -- -- Interest rate - no cap -- -- 10.50% 10.50% 10.50% Line of credit - capped 3,000,000 -- -- -- -- 3,000,000 Interest rate 9.50% -- -- -- -- Line of credit - no cap 1,351,000 -- -- -- -- 1,351,000 Interest rate 10.25% -- -- -- --
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 2. CHANGES IN SECURITIES The Company previously had outstanding Class A and Class B Redeemable Common Stock Purchase Warrants, with respect to which four Warrants plus $25 and $30, respectively, were exercisable for one share of Common Stock. These Warrants expired on November 17, 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on November 2, 2000. The following matters were acted upon: 1. The following persons were elected as directors of the Company for the next three fiscal years until their successors are elected and qualified. Nominees for Director For Against Withheld William L.G. Kwan 2,741,638 104,375 0 Anthony J. Coppola 2,741,638 104,375 0 There were no broker held non-voted shares represented at the meeting with respect to this matter. 15 16 Other directors and the year in which their terms as directors will expire: Director Year -------- ---- Richard J. DePiano 2002 Fred G. Choate 2001 Jay L. Federman, M.D. 2002 Jeffrey F. O'Donnell 2001 2. The shareholders approved an amendment to the Company's 1999 Equity Incentive Plan to increase the number of shares available for award under the Plan from 235,000 to 435,000 shares of Common Stock. For Against Withheld --------- ------- -------- 2,640,917 193,342 11,754 There were 1,657,682 broker held non-voted shares represented at the meeting with respect to this matter. 3. The shareholders approved the Company's Equity Incentive Plan for Employees of Sonomed, Inc. For Against Withheld --------- ------- -------- 2,657,244 174,122 14,647 There were 1,657,682 broker held non-voted shares represented at the meeting with respect to this matter. 4. The shareholders ratified the appointment of Parente Randolph, LLC as the Company's independent auditors for fiscal year 2001. For Against Withheld --------- ------- -------- 2,759,226 74,250 12,537 There were no broker held non-voted shares represented at the meeting with respect to this matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.14 Registrant's Amended and Restated 1999 Equity Incentive Plan, filed as an exhibit to the Company's Registration Statement on Form S-8 dated February 5, 2001 (b) Reports on Form 8-K: None. 16 17 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: February 9, 2001 By: /s/ Richard J. DePiano ---------------- ------------------------------------------- Richard J. DePiano Chairman and Chief Executive Officer DATE: February 9, 2001 By: /s/ Harry M. Rimmer ---------------- ------------------------------------------- Harry M. Rimmer Vice President - Corporate Development and Finance, Secretary 17 -----END PRIVACY-ENHANCED MESSAGE-----