-----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, LAlRt8XLfPasDEeTo6jIfmWBNdKbmHHeMwtVwfVTN8/iQuylEhu405ydIuLZpIv1 grIPlDU1HTAvLzSPP3RFYQ== 0000893220-98-000665.txt : 19980406 0000893220-98-000665.hdr.sgml : 19980406 ACCESSION NUMBER: 0000893220-98-000665 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980403 SROS: NONE 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: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 98587119 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-K/A 1 AMENDMENT NO.2 10-K ESCALON MEDICAL CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A-2 (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 1997 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 NUMBER 0-20127 ESCALON MEDICAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.) California 33-0272839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 182 Tamarack Circle Skillman, New Jersey 08558 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 609-497-9141 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class: Name of each exchange on which registered: -------------------- ------------------------------------------ None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, without par value ------------------------------- Class A Redeemable Common Stock Purchase Warrants, exercisable for the purchase of one share of Common Stock, without par value - -------------------------------------------------------------------------------- Class B Redeemable Common Stock Purchase Warrants, exercisable for the purchase of one share of Common Stock, without par value - -------------------------------------------------------------------------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $2,657,434. Such aggregate market value was computed by reference to the bid and asked price of the Common Stock in the when-issued trading market on September 11, 1997. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and beneficial owners of more than ten percent of the Common Stock of the Company. The number of shares of the registrant's Common Stock outstanding as of September 11, 1997 was 10,517,519. DOCUMENTS INCORPORATED BY REFERENCE None 2 PRELIMINARY NOTE: This Form 10-K/A-2 is being filed to replace Item 1, Business, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in their entirety. PART I ITEM 1. BUSINESS COMPANY OVERVIEW Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) ("Escalon" or the "Company") operates in the healthcare market specializing in the development, marketing and distribution of ophthalmic medical devices and pharmaceutical products. In addition, it is currently developing its proprietary ophthalmic drug delivery system. In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to the acquisition, the Company devoted substantially all of its resources to the research and development of its ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the acquisition of EOI, Escalon changed its market focus to its surgical products and pharmaceutical business and while it is no longer manufacturing laser systems, it is continuing its efforts to find a strategic partner to develop and commercialize its proprietary laser technology. During the fourth quarter of fiscal year 1996, the Company moved its corporate headquarters from San Diego, California to Skillman, New Jersey. SURGICAL PRODUCTS BUSINESS The Company develops, manufactures and distributes over 40 ophthalmic surgical products which are utilized primarily by the vitreoretinal ophthalmic surgeon. In addition, the Company contract manufactures certain of its products for other third-party companies. The following is a summary of the Company's key surgical product lines: AdatoSil(R) 5000 Silicone Oil ("AdatoSil 5000") AdatoSil 5000, which the Company distributes under a license and distribution agreement with Adatomed/Chiron Vision, is a specialty product used in "worst case" detached retina surgery as a mechanical aid in the reattachment procedure. The use of highly purified silicone oil, like AdatoSil 5000, as a tamponade has become a standard of care in AIDS patients suffering from retinal detachment secondary to CMV retinitis infection. During fiscal 1997, sales of AdataSil 5000 accounted for approximately 56% of the Company's revenues. ISPAN Intraocular Gases The Company distributes two intraocular gas products, C3F8 and SF6, which are used by vitreoretinal surgeons as a temporary tamponade in detached retina surgery. Under a non-exclusive distribution agreement from Scott Medical Products ("Scott"), Escalon distributes packages of Scott gases in canisters containing 25 grams or less of gas. Along with the intraocular gases, the Company manufactures and distributes a patented disposable universal gas kit which delivers the gas from the canister to the patient. Viscous Fluid Transfer Systems To complement the use of AdatoSil 5000, Escalon markets several viscous fluid transfer systems and related disposable syringe products which aids the surgeon in the process of injecting and extracting the oil. Adjustable pressures and vacuums provided by the equipment allow the surgeon to manipulate the flow of oil during surgery. 2 3 Fiber Optic Light Source Products Light source and fiber optic products are widely used by the vitreoretinal surgeon during surgery. The Company offers the surgeon a complete line of light sources along with a variety of fiber optic probes and illuminated tissue manipulators. PHARMACEUTICAL PRODUCTS BUSINESS Betadine(R) 5% Sterile Ophthalmic Prep Solution ("Betadine 5%") Currently, Escalon distributes one pharmaceutical product, Betadine 5%, a prescription pre-operative povidone-iodine preparation used to sterilize the cornea, conjunctiva, and periocular (surfaces around the eye) regions of the eye prior to ophthalmic surgery. Betadine 5% is distributed by Escalon under a license and distribution agreement with The Purdue Frederick Company. Escalon's objective is to have this product used in most of the two million ophthalmic surgeries which take place in the United States each year. Sales of this product accounted for approximately 15% of the Company's revenues in fiscal 1997. Povidone-Iodine 2.5% Solution -- Ophthalmia Neonatorum In an effort to prevent ophthalmia neonatorum, newborns in the United States are treated with erythromycin or silver nitrate. However, bacterial resistance to erythromycin can occur and chemical toxicity is common with the use of silver nitrate. Povidone-iodine, a broad spectrum antimicrobial, active against bacteria, viruses and fungi, has often been suggested as a viable alternative for the prevention of this disease. Recently, a clinical study completed outside the United States by Drs. Isenberg, Apt and Wood of UCLA has provided support for this hypothesis. A patent claiming this use was issued to UCLA and Escalon has acquired an exclusive license from UCLA to develop and market the 2.5% solution. The Company's intent is to seek joint venture or strategic partnership arrangements to fund the development and potential commercialization of this product. Ocufit SR(R) One of the Company's major development projects relates to its Ocufit SR (sustained release) drug delivery system. Ocufit SR is designed to make the treatment of eye disease easier and more effective for people requiring topical eye drop therapy. The patented Ocufit SR ocular insert, a flexible rod-shaped formulation made of medical grade silicone rubber, can be loaded with a variety of drugs. This insert, which can be retained comfortably in the upper or lower fornix, is not affected by eye or lid movement. Drug release can be controlled so that targeted amounts of drug are delivered for defined time periods, lasting weeks to months. The first Ocufit SR product, which is being developed jointly by Escalon and The West Company ("West"), which has expertise in injection molded elastomers and drug delivery systems development, is Ocufit diclofenac. Diclofenac, a non-steroidal anti-inflammatory drug ("NSAID"), is prescribed post-operatively to reduce inflammation of the ocular tissue. Current U.S. sales of diclofenac in a topical drop form approximates $30 million per year. It is anticipated that this market will grow as NSAID compounds are becoming more widely prescribed. Escalon anticipates filing an Investigational New Drug application with the Food and Drug Administration by the end of calendar year 1997 and begin the Phase I clinical trial by June 1998. The Company's overall strategy is to seek strategic partnership arrangements for the further development and commercialization of Ocufit diclofenac and other Ocufit applications. 3 4 ULTRAFAST LASER PRODUCTS BUSINESS The Company for the past several years has devoted substantially all of its resources to the development of its proprietary ultrafast laser systems for the treatment of a broad range of eye disorders. Escalon's solid-state picosecond (one trillionth of a second) Nd: YLF (Neodymium:Yitrium-Lithium-Fluoride) laser systems are designed to be more precise than lasers systems utilizing currently available technologies. With the acquisition of EOI, the Company has chosen to change its focus to its surgical products and pharmaceutical business and as such, is no longer manufacturing its laser systems. In order to further develop and commercialize it laser technology, Escalon is currently negotiating a joint venture arrangement in which the Company, along with an academic institution partner, will license their intellectual laser properties to a newly formed company in return for an equity interest in the new company and future royalties on product sales. If created, this joint venture company would have the responsibility of funding and developing the laser technology through to commercialization. No assurances can be given, however, that the above noted negotiations will be successful. If such negotiations are not successful, the Company's intends to continue its search for a strategic partner to fund and develop the ultrafast laser technology. RESEARCH AND DEVELOPMENT The Company conducts its medical device product development at its Mukwonago, Wisconsin facility. The Ocufit SR research and development is being conducted at The West Company laboratories pursuant to a collaborative arrangement. Given the change in market focus, research and development activities at its laser laboratory in Irvine, California has been limited during fiscal 1997. Research and development expenditures for fiscal years 1997, 1996 and 1995 amounted to $1.6 million, $1.7 million and $2.8 million, respectively. MANUFACTURING AND DISTRIBUTION Escalon leases 7,500 square feet of space in Mukwonago, Wisconsin for its Surgical Products operations. The facility is currently used for engineering, product design and development and manufacturing and product assembly. Various vendors are used for subcontract component manufacture, assembly and sterilization. Manufacturing facilities include a class 10,000 clean room. All of the Company's Surgical Products are distributed from its Wisconsin facility. Livingston Healthcare Services Inc., New Castle, Delaware, currently serves as a warehousing and distribution facility for Betadine 5%. For each new product Escalon develops, the manufacture, testing and marketing of such product entails risk of product liability. Product liability insurance is carried by Escalon to cover the primary risk. Although the Company no longer manufactures laser systems, it is seeking to establish a joint venture arrangement for the further development and commercialization of its laser technology. MARKETING AND SALES Escalon's independent sales force carries out direct promotion and sales of its products. Currently, Escalon sells most of its ophthalmic device and instrument products directly to the end user. However, Betadine 5% is primarily sold through traditional drug wholesale channels. The Company's five independent sales representatives are based in New Jersey, Wisconsin, Missouri, Florida and California. These independent sales representatives market to teaching institutions, key hospitals and eye surgery centers, focusing primarily on physicians and operating room personnel performing vitreoretinal surgery. Notwithstanding Escalon's vitreoretinal interest, these sales representatives pursue leads for Betadine 5% in all institutions and promote other products as required. The Company does not anticipate additional sales of its current laser systems given its change in market focus. 4 5 SERVICE AND SUPPORT Escalon maintains a full service program for all products sold. Warranties exist on all products against defects and performance. Surgical Product repairs are made at the Wisconsin facility and returns are handled by customer service personnel. The Company maintains its laser systems through Company-trained independent technicians. Service for the laser products is coordinated from the Company's Wisconsin facility. Service and maintenance are available on a time and materials basis. THIRD PARTY REIMBURSEMENT It is expected that the Company's products will be purchased primarily by ophthalmologists and hospitals, which will then bill various third-party-payers for the health care services provided to their patients. These payers include Medicare, Medicaid and private insurers. Government agencies generally reimburse at a fixed rate based on the procedure performed. In addition, third-party-payers may deny reimbursement if they determine that any procedure performed using any one of the Company's products was unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. PATENTS AND ROYALTIES The pharmaceutical and medical device communities place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Escalon's policy is to protect its technology by aggressively obtaining patent protection for all of its developments and products, both in the United States and in selected countries outside the United States. The Company's Surgical Products and pharmaceutical technology are covered by thirteen issued United States patents and one issued Taiwanese patent which expire at varying dates between 2005 and 2012. In addition, one United States patent is currently pending. With respect to the Company's ultrafast laser systems, fourteen patents have been issued or allowed and two additional patent applications have been filed by the Company in the United States. The patents related to the Company's ultrafast laser systems expire at varying dates between 2006 and 2013. It is the Company's policy to file for patent protection in those foreign countries in which the Company believes that protection is necessary to protect its economic interests. The Company intends to vigorously defend its patents if the need arises. The Company licenses a laser patent from Patlex Corporation. Under the patent license agreement, the Company has agreed to pay royalties on a royalty-bearing component of the laser systems with respect to laser system sales until the expiration of the licensed patent in May 2005. COMPETITION There are numerous direct and indirect competitors of Escalon in the United States and abroad. These companies include: ophthalmic-oriented companies that market a broad portfolio of products, including prescription ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as contact lens cleaning solution) and other eye care products; large integrated pharmaceutical companies that market a limited number of ophthalmic pharmaceuticals in addition to many other pharmaceuticals; and smaller specialty pharmaceutical and biotechnology companies that are engaged in the development and commercialization of prescription ophthalmic pharmaceuticals and products, and possibly drug delivery systems. 5 6 The ophthalmic market is highly fragmented with several large companies dominating the industry. The Company believes that these large companies capture approximately 50% of the overall ophthalmic market. The balance of the market is composed of smaller companies ranging from start-up entities to established niche market players. The ophthalmic market in general is intensely competitive with each company eager to expand its market share. As a result of the intense competition, the Company believes that many of the industry's smaller companies will either consolidate or fail. Escalon's strategy is to compete primarily on the basis of technological innovation to which it has proprietary rights. Escalon believes, therefore, that its success will depend in large part upon obtaining and maintaining exclusive marketing rights covering its current and future products through licenses, the issuance of patents and certain other government actions. At the same time, Escalon recognizes that there are other young and innovative companies which may develop competitive technologies. Although the Company has numerous competitors in the vitreoretinal market, Escalon believes that it is in a niche market with regards to its Ocufit SR business. Specifically, the Company is unaware of any competitors which have sustained drug release technology similar to Ocufit SR. There is, however, at least one company that Escalon is aware of that has developed technology based on "once-a-day" drug release. The Company can make no assurance that additional competition will not develop in the vitreoretinal market. HUMAN RESOURCES As of June 30, 1997, Escalon employed 18 full-time employees and two part-time employees. Eight of Escalon's full-time employees are in general administrative and marketing positions, six are in Surgical Products manufacturing, three are in Surgical Products engineering and one is in quality assurance. In addition, the Company utilizes one consultant to handle the Company's regulatory and clinical affairs. Escalon also has five independent sales representatives who market primarily Escalon products. Escalon's employees are not covered by a collective bargaining agreement and Escalon considers its relations with employees to be good. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the notes thereto which are set forth elsewhere herein. OVERVIEW 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 and pharmaceuticals. The Company is also developing its ophthalmic drug delivery system to complement its other businesses. Although the Company is no longer manufacturing laser systems, the Company is attempting to find a strategic partner to further develop and commercialize its ophthalmic laser technology. The results of operations for the year ended June 30, 1996 include the results of operations of EOI subsequent to the acquisition. Sales of products acquired from EOI are made primarily to hospitals and physicians throughout the United States. As a result of the acquisition, the Company is no longer in the development stage for financial reporting purposes. The Company has recorded losses from inception and expects that operating losses will continue as the Company continues research and development relating to the application of its drug delivery technology and until product sales generate sufficient revenues to fund its continuing operations. 6 7 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; and (ii) general competitive and economic conditions of the health care market. RESULTS OF OPERATIONS Years Ended June 30, 1996 and 1997 Product revenues increased to $5,431,282 in fiscal year 1997 from $2,341,073 in fiscal year 1996. This increase of $3,090,209, or 132%, relates primarily to having twelve months of sales in fiscal 1997 from product lines acquired from EOI as compared to only five months of like-kind sales during fiscal year 1996. However, trends in the Company's product lines are showing increases in unit sales of AdatoSil 5000 Silicone Oil, Betadine 5% Sterile Ophthalmic Prep Solution and ISPAN intraocular gases coupled with decreases in unit sales of the Company's capital equipment and related disposable product lines. With regards to product revenues from AdatoSil 5000, the Company anticipates that a competitor's product will be introduced during fiscal 1998 which may result in a decrease in future unit sales and related revenues. Additionally, subsequent to the year ended June 30, 1997, the Company's distributorship relating to the ISPAN intraocular gases was modified from an exclusive to a non-exclusive basis as a result of not meeting the minimum unit purchase requirement. The Company believes that this contractual change will not have a material impact on the Company's current or future operations. Cost of goods sold totaled $2,650,360, or 49% of revenues, for the year ended June 30, 1997 as compared to $1,228,907, or 52% of revenues, for fiscal year 1996. The overall dollar increase in cost of goods sold for fiscal 1997 is due to the increase in sales noted above. The decrease in cost of goods sold as a percentage of product revenues has resulted primarily from a 3% increase in the selling price of AdatoSil 5000 Silicone Oil, the Company's primary product, coupled with the strengthening of the U.S. dollar against the German mark which has lowered the costs associated with AdatoSil 5000 Silicone Oil purchases. Research and development expenses decreased from $1,722,998 in fiscal year 1996 to $1,570,674 in fiscal year 1997, a decrease of $152,324 or 9%. The decrease in research and development expenses relates to a decrease of $847,161 in the expenditures associated with the Company's laser development program offset by an increase of $694,837 in expenditures associated with the Company's surgical products and ophthalmic drug delivery programs acquired from EOI. The reduction in the laser development program is a direct result of a reduction is workforce and other cost reduction programs implemented during the fiscal year 1996 in connection with the change in the Company's market focus. The Company's research and development expenses consist primarily of direct expenses associated with compensation and benefits, consulting and research and development arrangements with third parties and indirect expenses such as materials, equipment and supplies. Marketing and general and administrative expenses increased $992,121 or 36% to $3,715,727 for the year ended June 30, 1997 as compared to $2,723,606 in fiscal year 1996. Of this increase, (i) $2,439,255 relates to the inclusion of the marketing and general and administrative operations acquired from EOI for twelve months in fiscal 1997 as compared to only five months in fiscal year 1996; (ii) $107,079 is related to legal fees associated with the Company's ongoing litigation; and (iii) offset by a decrease of $1,554,213 in marketing and general and administrative expenses associated with the Company's laser development projects resulting from the aforementioned cost reduction programs. Included in the results of operations for the year ended June 30, 1996 is a $1.0 million non-cash charge for the in-process technology acquired from EOI. At June 30, 1997, the Company took a non-cash charge to operations of $3,318,888 in connection with the write down of goodwill and license and distribution rights acquired from EOI. This write down is due to the impairment of value resulting from changes in the estimates of future sales associated with the license and distribution agreements. 7 8 Interest income decreased to $140,705 in fiscal year 1997 from $257,093 in fiscal year 1996. The decrease is due to a reduction in the levels of cash and cash equivalents available for investment. Years Ended June 30, 1995 and 1996 Product revenues increased to $2,341,073 in fiscal year 1996 from $170,000 in fiscal year 1995. This increase of $2,171,073 is attributable to the February 12, 1996 EOI acquisition, offset by a decrease in laser system sales of approximately $33,000. The Company's ability to sell its laser systems in the United States is subject to certain FDA limitations based on the status of the Company's various clinical trials. International sales of its laser systems, while not directly limited by the FDA, are also indirectly impacted by the status of these clinical trials in the United States. In addition, the Company has reduced the size of its laser operations workforce in order to preserve working capital. Given these factors, it is not likely that laser sales volumes will increase significantly beyond the current levels, until such time as the viability of these various applications are further demonstrated through FDA approvals to advance into later phases of the clinical trials. Cost of sales totaled $1,228,907, or 52% of revenues, for the year ended June 30, 1996 as compared to $98,803, or 58% of revenues, for fiscal year 1995. The increase in cost of sales is attributable to the EOI acquisition. As such, a gross margin analysis comparing fiscal years would not be meaningful. Research and development expenses decreased from $2,776,474 in fiscal year 1995 to $1,722,998 in fiscal year 1996, a decrease of $1,053,476 or 38%. Research and development expenses decreased $1,502,434 as a direct result of a reduction in workforce and other cost reduction programs implemented in connection with the Company's change in focus of its operations. This decrease was partially offset by (i) an increase in certain non-cash expenses of $308,696 relating to the write-down of inventories to anticipated net realizable value, the ongoing depreciation of test and applications research systems, the write-down of certain patents pending; and (ii) an increase of $140,262 relating to the research and development operations acquired from EOI. The Company's research and development expenses consist primarily of direct expenses associated with compensation and benefits and indirect expenses such as materials, equipment and supplies. Marketing and general and administrative expenses increased $818,663 or 43% to $2,723,606 for the year ended June 30, 1996 as compared to $1,904,943 in fiscal year 1995. This increase consisted of (i) $1,162,937 related to the operations acquired from EOI; (ii) approximately $260,000 of severance costs associated with the acquisition of EOI; and (iii) approximately $130,000 of legal fees associated with the Company's ongoing litigation. The increase was offset by a decrease in marketing, general and administrative expenses of $734,274 resulting from decreases in personnel, travel and marketing costs related to the workforce and other cost reduction programs involving the Company's laser operations. Included in the results of operations for the year ended June 30, 1996 is a $1.0 million non-cash charge for the in-process technology acquired from EOI. Interest income decreased to $257,093 in fiscal year 1996 from $341,685 in fiscal year 1995. The decrease is due to a reduction in the levels of cash and cash equivalents available for investment. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had cash and cash equivalents of $1,752,648 as compared to $2,584,503 at June 30, 1996. The Company's short-term investments at June 30, 1997 and 1996 were $235,000 and $795,970, respectively. The net decrease in short-term investments is attributable to the maturing of short-term investments since June 30, 1996. The net decrease in cash and cash equivalents and short-term investments of $1,392,825 relates primarily to the loss from operations, excluding non-cash expenses. 8 9 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 the end of fiscal year 1998. In the longer term, however, the Company will seek corporate partnering, licensing and other fund raising opportunities necessary to satisfy the significant expenditures anticipated in connection with the development of its surgical products and ophthalmic drug delivery operations. Pursuant to various collaborative research and development, technology license, and consulting arrangements relating to the Company's drug delivery technology, the Company has financial commitments of $190,000 and $75,000 to be paid during fiscal years 1998 and 1999, respectively. Other significant expenditures may be incurred in connection with the legal proceedings discussed in "Item 3. Legal Proceedings." As of June 30, 1997, the Company had federal income tax and state income tax net operating loss carryforwards of approximately $40.8 million and $16.6 million, respectively. Under the provision of Section 382 of the Internal Revenue Code, use of the Company's net operating loss carryforwards is subject to an annual limitation since a change in ownership of more than 50% occurred within a three year specified testing period. Such annual limitation could range from approximately $150,000 to $2.2 million. Federal and state net operating loss carryforwards will begin to expire in 2001. The Company also had federal and state research credit carryforwards of $562,000 and $174,000, respectively, as of June 30, 1997. 9 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Dated: April 3, 1998 By: /s/JOHN T. RICH ------------------------------------------- John T. Rich Vice President, Finance and Administration 10 -----END PRIVACY-ENHANCED MESSAGE-----