-----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, IGR55ppkenr8h4KbItmmW1EEM5ZsSvwehRT+q9bE0EbPzUS6F+3soh/+Y31QBv/z 0MHb3B7vZDUE2KOieDx5lg== 0000893220-98-001738.txt : 19981118 0000893220-98-001738.hdr.sgml : 19981118 ACCESSION NUMBER: 0000893220-98-001738 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 98751364 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 10Q ESCALON MEDICAL CORP. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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) California 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: November 6, 1998 2,760,568 Shares of Common Stock, no par value ---------------- --------- 2 ESCALON MEDICAL CORP. INDEX Part I. FINANCIAL INFORMATION PAGE Item 1. Condensed Financial Statements Condensed Balance Sheets as of June 30, 1998 and September 30, 1998 3 Condensed Statements of Operations for the Three Months Ended September 30, 1997 and 1998 4 Condensed Statements of Cash Flows for the Three Months Ended September 30, 1997 and 1998 5 Notes to Condensed 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 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDARY CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 1998 1998 ------------ ------------ ASSETS (UNAUDITED) ------ Current Assets: Cash and cash equivalents $ 2,263,967 $ 2,189,497 Investments 330,016 334,000 Accounts receivable, net 940,378 869,564 Other receivables 75,000 75,000 Inventory, net 462,042 705,432 Other current assets 79,088 198,915 ------------ ------------ Total current assets 4,150,491 4,372,408 Furniture and equipment, at cost, net 134,734 131,365 Long-term note receivable 112,500 125,000 License and distribution rights, net 878,838 842,812 Patents, net 475,175 452,685 Goodwill, net 968,295 936,373 Other assets 14,095 16,495 ------------ ------------ $ 6,734,128 $ 6,877,138 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable $ 287,192 $ 359,519 Accrued and other liabilities 398,284 432,276 ------------ ------------ Total current liabilities 685,476 791,795 ------------ ------------ Shareholders' Equity: Preferred stock, no par value; 2,000,000 shares authorized; 900 and 818 shares issued and outstanding at June 30, 1998 and September 30, 1998, respectively 747,321 679,231 Common stock, no par value; 35,000,000 shares authorized; 3,021,027 issued at June 30, 1998 and 3,152,164 shares issued less 134,980 Treasury shares at September 30, 1998 45,253,597 45,321,687 Treasury stock - (118,108) Accumulated deficit (39,952,266) (39,797,467) ------------ ------------ Total shareholders' equity 6,048,652 6,085,343 ------------ ------------ $ 6,734,128 $ 6,877,138 ============ ============
Note: The consolidated balance sheet at June 30, 1998 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 SUBSIDARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------ 1997 1998 ------------- ------------- Product revenues $1,371,164 $1,685,422 Costs and expenses: Cost of goods sold 606,015 716,856 Research and development 96,389 155,437 Marketing, general and administrative 664,319 682,963 ---------- ---------- Total costs and expenses 1,366,723 1,555,256 ---------- ---------- Income from operations 4,441 130,166 ---------- ---------- Other income and expenses: Interest income 26,603 36,928 Interest expense (102) (25) ---------- ---------- Total other income and expense 26,501 36,903 ---------- ---------- Net income $ 30,942 $ 167,069 ========== ========== Basic net income per share $ 0.012 $ 0.051 ========== ========== Diluted net income per share $ 0.012 $ 0.041 ========== ========== Weighted average shares - basic 2,629,375 3,040,152 ========== ========== Weighted average shares - diluted 2,629,375 4,114,879 ========== ==========
See notes to condensed consolidated financial statements. 4 5 ESCALON MEDICAL CORP. AND SUBSIDARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- 1997 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,942 $ 167,069 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 81,754 86,140 Write off of patents - - 24,805 Change in operating assets and liabilities: Accounts receivable (35,110) 70,814 Inventories 113,539 (243,390) Other current assets (4,418) (119,827) Accounts payable, accrued and other liabilities (112,130) 119,819 ---------- ---------- Net cash provided from operating activities 74,577 105,430 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments - - (259,000) Proceeds from maturities of short-term investments - - 255,016 Long term note receivable (12,500) (12,500) Purchase of furniture and equipment (1,200) (10,457) License and distribution rights cost (97,668) - - Other assets 740 (2,400) Patent costs (7,445) (6,681) ---------- ---------- Net cash used in investing activities (118,073) (36,022) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital lease obligations (1,001) - - Purchase of treasury stock - - (118,108) Payment of preferred stock dividends - - (25,770) ---------- ---------- Net cash used in financing activities (1,001) (143,878) ---------- ---------- Net decrease in cash and cash equivalents (44,497) (74,470) Cash and cash equivalents, beginning of period 1,752,648 2,263,967 ---------- ---------- Cash and cash equivalents, end of period $1,708,151 $2,189,497 ========== ==========
See notes to condensed consolidated financial statements. 5 6 ESCALON MEDICAL CORP. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiary Escalon Pharmaceutical 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, 1999. 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, 1998 included in the Company's annual report on Form 10-K. 2. REVERSE STOCK SPLIT On November 20, 1997, the Company held its annual meeting of shareholders at which time the shareholders approved a one-for-four reverse stock split (the "Reverse Split") of the Company's Common Stock (the "Common Stock"). As a result of the Reverse Split, each shareholder now has one share of Common Stock for every four shares owned before the Reverse Split. The Reverse Split caused certain adjustments to be made to the Company's Class A, B and C Redeemable Common Stock Purchase Warrants. The exercise price and number of warrants necessary for purchase of a Common Stock share has been increased by a factor of four. All references in the condensed financial statements with regard to shares, per share amounts and share prices have been adjusted for the Reverse Split. 3. PER SHARE INFORMATION In December 1997, the Company adopted the Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" ("SFAS No.128"). Earnings per share information has been restated for all prior periods presented as prescribed by SFAS No. 128. Outstanding stock options and warrants have not been included in computing basic and diluted net income per share for the three-month periods ended September 30, 1997 and 1998 because their exercise prices exceed market price and their effect would be antidilutive. 6 7 3. PER SHARE INFORMATION (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------- 1997 1998 --------------- ---------------- Numerator: Numerator for basic earnings per share: Net income $ 30,942 $ 167,069 Preferred stock dividends - - (12,270) ---------- ---------- Numerator for basic earnings per share-income available to Common shareholders 30,942 154,799 Effect of dilutive securities: Preferred stock dividends - - 12,270 ---------- ---------- Numerator for diluted earnings per share-income available to Common shareholders after assumed conversions 30,942 167,069 Denominator: Denominator for basic earnings per share - weighted average shares 2,629,375 3,040,152 Effect of dilutive securities: Convertible preferred stock - - 1,074,727 ========== ========== Denominator for diluted earnings per share - weighted average and assumed conversion 2,629,375 4,114,879 ========== ========== Basic earnings per share $ 0.012 $ 0.051 ========== ========== Diluted earnings per share $ 0.012 $ 0.041 ========== ==========
4. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------ Raw materials/work in process $ 170,370 $ 142,526 Finished goods 472,672 743,906 --------- --------- 643,042 886,432 Valuation allowance (181,000) (181,000) --------- --------- $ 462,042 $ 705,432 ========= =========
5. SHAREHOLDERS' EQUITY In July 1998, the preferred shareholder converted 82 shares into 131,137 shares of Common Stock at a conversion price of $0.6253 per share. The Company purchased 134,980 shares of its Common Stock as treasury stock from EOI Corp in August. These treasury shares cost $118,108. The Board of Directors has authorized the repurchase 7 8 5. SHAREHOLDERS' EQUITY (CONTINUED) of up to 500,000 additional shares of the Company's stock. The price paid, timing and manner of these purchases will be at management's discretion. The following table summarizes the changes in the Company's shareholders' equity accounts for the three months ended September 30, 1998. There were no changes in the Company's shareholders' equity accounts for the three months ended September 30, 1997 except for the decrease in the accumulated deficit relating to the net income of $ 30,942.
Preferred Stock Common Stock ------------------------------- -------------------------------------------- Shares Amount Shares Amount ----------- ------------------- -------------------- ----------------------- Balance at June 30, 1998 900 $747,321 3,021,027 $45,253,597 Preferred stock conversion (82) (68,090) 131,137 68,090 Purchase of treasury stock - - - - - - - - Preferred stock dividend - - - - - - - - Net income - - - - - - - - --- -------- --------- ----------- Balance at September 30,1998 818 $679,231 3,152,164 $45,321,687 === ======== ========= ===========
Treasury Accumulated Stock Deficit -------------------- ---------------------- Balance at June 30, 1998 $ - - $(39,952,266) Preferred stock conversion - - - - Purchase of treasury stock (118,108) - - Preferred stock dividend - - (12,270) Net income - - 167,069 --------- ------------ Balance at September 30,1998 $(118,108) $(39,797,467) ========= ============
7. 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 which the Company is no longer a party to). 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. On March 31, 1997, the court issued Pretrial Order No. 2, which set discovery cut off and ready trial dates, as well as providing for certain coordination of discovery in the Kozloski case, and certain related cases involving other issuers and D. Blech & Co. Discovery in the related actions is ongoing. It currently is scheduled to be completed by March 15, 1999 and the cases ready for trial by May 20, 1999. Class certification motions have been dismissed for failure to prosecute, with leave to renew. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement in principle to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. This settlement is subject to agreement upon final documentation and court approval. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. In view of the anticipated settlement, no discovery or motion practice is proceeding in the Kozlowki case. 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 joint venture opportunities, expenses associated with defending itself in litigation matters and the effect of such matters on the Company's operations, liquidity and capital resources, 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 (including Amendment No. 3 to a Registration Statement on Form S-3 filed by the Company with the Securities and Exchange Commission on April 30, 1998 (Registration No. 333-44513)), the following: (i) 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); and (ii) The outcome of, and costs associated with, litigation matters. 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. 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. In order to further develop and commercialize its laser technology, the Company, in October 1997, licensed its intellectual laser properties to a newly formed company, IntraLase Corporation, in return for an equity interest and future royalties on product sales. IntraLase will have the responsibility of funding and developing the laser technology through to commercialization. Sales of products acquired from EOI are made primarily to hospitals and physicians throughout the United States. 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-Month Periods Ended September 30, 1997 and 1998 9 10 Product revenues increased $314,257, or 23%, to $1,685,422 for the three-month period ended September 30, 1998 as compared to $1,371,164 for the same period ended September 30, 1997. This revenue increase reflects continued growth in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile Ophthalmic Prep Solution, ISPAN(TM)Intraocular Gases. The Company experienced sales growth for all of its product lines. Cost of goods sold totaled $716,856, or 42% of revenues, for the three-month period ended September 30, 1998 as compared to $606,015, or 44% of revenues, for the same period last year. The 2% decrease in cost of goods sold as a percentage of revenues is due primarily to: (i) a strong U.S. dollar against the German mark which has lowered the cost associated with the purchasing Adatosil(R)5000 Silicone Oil, the Company's primary product; and (ii) an on-going emphasis on cost control in its manufacturing operations. Research and development expenses increased $59,048, or 61%, for the three-month period ended September 30, 1998 when compared to the same period in 1997. To better focus on profitable product lines, management elected to discontinue pursuit of one disposable product line due to its failure to generate acceptable revenues. This decision resulted in $24,800 of patent costs associated with this product line being written-off in the first fiscal quarter of 1998. Successful pursuit of ISO9001 and CE certification caused the Company to incur an additional $10,000 in expense over those of the first quarter 1997. The remainder of the overage resulted from increased spending for consulting, prototype development and increased staff salaries. Marketing, general and administrative expenses increased $18,644, or 3%, for the three-month period ended September 30, 1998 compared to the same period ended September 30, 1997. Interest income increased to $36,928 for the three-month period ended September 30, 1998 from $26,603 for the same period in 1997. The increase is the result of increased cash and cash equivalents available for investment. The January 1998 convertible preferred stock offering provided these resources. There is no provision for income taxes for the three-month periods ended September 30, 1998 and 1997 due to the utilization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had cash and cash equivalents of $2,189,497 as compared to $2,263,967 at June 30, 1998. The Company's short-term investments at September 30, 1998 and June 30, 1997 were $334,000 and $330,016, respectively. The net decrease in cash and cash equivalents of $74,470 relates primarily to the acquisition of additional Betadine inventory, $270,727, and purchase of treasury stock, $118,108, significantly offset by cash provided from operations. 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 September 30, 1999. In the longer term, however, the Company will seek corporate partnering, licensing and other fund raising opportunities to satisfy the significant expenditures anticipated with development of its surgical products, pharmaceutical and drug delivery programs. The Company's ability to raise additional funds, however, may be affected by the Company's listing status. 10 11 Due to a change in supplier process for Betadine 5% and the protracted lead-time necessary to validate processing on new equipment, the Company committed an additional $420,000 to purchase adequate inventory to cover anticipated sales needs for approximately 20 months. This inventory expenditure should occur in the second quarter of fiscal 1999. The Board of Directors 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. The Company is also negotiating the repurchase of all outstanding Preferred Stock. On October 22, 1998, Escalon announced it had signed a letter of intent to acquire the Vascular Access Business Unit of CardioVascular Dynamics Inc. The Company intends to finance this purchase through use of its cash reserves, cashflow generated from operations and commercial borrowing, which still needs to be arranged. The Company anticipates additional expenditures may be incurred in connection with the legal proceedings as discussed in Part II. See "Part II. Item 1. Legal Proceedings." PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 7 of the Notes to Condensed Financial Statements in Part I is incorporated herein by reference thereto. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: None 11 12 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: November 16, 1998 By: /s/ Douglas R. McGonegal ------------------------ Douglas R. McGonegal Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary 12 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 2,189,497 334,000 886,083 16,519 705,432 4,372,408 234,569 103,204 6,877,138 791,795 0 0 679,231 45,321,687 (39,915,575) 6,877,138 1,685,422 1,685,422 716,856 716,856 826,400 12,000 25 167,069 0 167,069 0 0 0 167,069 0.051 0.041
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