-----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, AIW5X+FAYl6n0WuK8AtSJcup5qkhblhP1H7WLdMfBvP4DUht+nbnc8EegK2yH3b3 ToUMax0gdUVF3y6KWqk+4g== 0000893220-99-000158.txt : 19990215 0000893220-99-000158.hdr.sgml : 19990215 ACCESSION NUMBER: 0000893220-99-000158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: 99534498 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q FOR 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 December 31, 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: February 8, 1999 3,242,185 Shares of Common Stock, no par value 2 ESCALON MEDICAL CORP. INDEX Part I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 1997 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1997 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13
3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDARY CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1998 ------------ ------------ ASSETS (UNAUDITED) Current Assets: Cash and cash equivalents $ 2,263,967 $ 2,406,665 Investments 330,016 259,000 Note receivable -- 15,000 Accounts receivable, net 940,378 873,975 Other receivables 75,000 75,000 Inventory, net 462,042 688,079 Other current assets 79,088 264,954 ------------ ------------ Total current assets 4,150,491 4,582,673 Furniture and equipment, at cost, net 134,734 130,522 Long-term note receivable 112,500 137,500 License and distribution rights, net 878,838 809,657 Patents, net 475,175 468,649 Goodwill, net 968,295 904,451 Other assets 14,095 14,930 ------------ ------------ $ 6,734,128 $ 7,048,382 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 287,192 $ 505,922 Accrued and other liabilities 398,284 356,019 ------------ ------------ Total current liabilities 685,476 861,941 ------------ ------------ Shareholders' Equity: Preferred stock, no par value; 2,000,000 shares authorized; 900 and 818 shares issued and outstanding at June 30, 1998 and December 31, 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 December 31, 1998 45,253,597 45,321,687 Treasury stock -- (118,108) Accumulated deficit (39,952,266) (39,696,369) ------------ ------------ Total shareholders' equity 6,048,652 6,186,441 ------------ ------------ $ 6,734,128 $ 7,048,382 ============ ============
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 SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------------------------------------------------------- 1997 1998 1997 1998 ----------- ----------- ----------- ----------- Product revenues $ 1,509,476 $ 1,774,675 $ 2,880,640 $ 3,460,097 Costs and expenses: Cost of goods sold 671,561 792,148 1,277,576 1,509,004 Research and development 120,089 185,813 216,478 341,250 Marketing, general and administrative 795,444 715,010 1,459,763 1,397,973 ----------- ----------- ----------- ----------- Total costs and expenses 1,587,094 1,692,971 2,953,817 3,248,227 ----------- ----------- ----------- ----------- Income (loss) from operations (77,618) 81,704 (73,177) 211,870 ----------- ----------- ----------- ----------- Other income and expenses: Other income 75,000 -- 75,000 -- Interest income 23,164 33,090 49,767 70,018 Interest expense (46) (1,426) (149) (1,451) ----------- ----------- ----------- ----------- Total other income and expense 98,118 31,664 124,618 68,567 ----------- ----------- ----------- ----------- Net income $ 20,500 $ 113,368 $ 51,441 $ 280,437 =========== =========== =========== =========== Basic net income per share $ 0.008 $ 0.034 $ 0.020 $ 0.084 =========== =========== =========== =========== Diluted net income per share $ 0.008 $ 0.027 $ 0.019 $ 0.068 =========== =========== =========== =========== Weighted average shares - basic 2,629,375 3,017,184 2,629,375 3,028,668 =========== =========== =========== =========== Weighted average shares - diluted 2,682,847 4,181,743 2,656,111 4,103,394 =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 5 ESCALON MEDICAL CORP. AND SUBSIDARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, ------------------------------ 1997 1998 ----------- ----------- Cash Flows From Operating Activities: Net income $ 51,441 $ 280,437 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 164,613 174,722 Net loss on retirement of fixed assets 3,860 -- Write off of patents -- 24,805 Change in operating assets and liabilities: Accounts receivable (126,597) 66,403 Inventories (106,741) (226,037) Other current assets 13,550 (185,866) Accounts payable, accrued and other liabilities (179,456) 189,965 ----------- ----------- Net cash provided from (used in) operating activities (179,330) 324,429 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments -- (259,000) Proceeds from maturities of short-term investments 235,000 330,016 Short term note receivable -- (15,000) Purchase of furniture and equipment (3,650) (24,643) Proceeds from sale of furniture and equipment 1,000 -- Long term note receivable (25,000) (25,000) Long term receivable (75,000) -- License and distribution rights cost (99,109) (2,924) Patent costs (30,295) (28,197) Other assets (3,586) (835) ----------- ----------- Net cash used in investing activities (640) (25,583) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Preferred stock offering costs (36,750) -- Principal payments under capital lease obligations (1,690) -- Purchase of treasury stock -- (118,108) Payment of preferred stock dividends -- (38,040) ----------- ----------- Net cash used in financing activities (38,440) (156,148) ----------- ----------- Net increase (decrease) in cash and cash equivalents (218,410) 142,698 Cash and cash equivalents, beginning of period 1,752,648 2,263,967 ----------- ----------- Cash and cash equivalents, end of period $ 1,534,238 $ 2,406,665 =========== ===========
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 necessarily 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 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 warrants have not been included in computing basic and diluted net income per share for the three or six-month periods ended December 31, 1997 and 1998 because their exercise prices exceed market price and the effect of any conversion would be antidilutive. Employee stock options are included in these computations when the average market price exceeds their exercise price. This situation is reflected for the periods ending December 31, 1997. 6 7 3. PER SHARE INFORMATION (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------- ----------------------------- 1997 1998 1997 1998 ----------- ----------- ----------- ----------- Numerator: Numerator for basic earnings per share: Net income $ 20,500 $ 113,368 $ 51,441 $ 280,437 Preferred stock dividends -- (12,270) -- (24,540) ----------- ----------- ----------- ----------- Numerator for basic earnings per share-income available to Common shareholders 20,500 101,098 51,441 255,897 Effect of dilutive securities: Preferred stock dividends -- 12,270 -- 24,540 ----------- ----------- ----------- ----------- Numerator for diluted earnings per share-income available to Common shareholders after assumed conversions $ 20,500 $ 113,368 $ 51,441 $ 280,437 Denominator: Denominator for basic earnings per share - weighted average shares 2,629,375 3,017,184 2,629,375 3,028,668 Effect of dilutive securities: Convertible preferred stock -- 1,164,559 -- 1,074,726 Employee stock options 53,472 -- 26,736 -- ----------- ----------- ----------- ----------- Denominator for diluted earnings per share - weighted average and assumed conversion 2,682,847 4,181,743 2,656,111 4,103,394 =========== =========== =========== =========== Basic earnings per share $ 0.008 $ 0.034 $ 0.020 $ 0.084 =========== =========== =========== =========== Diluted earnings per share $ 0.008 $ 0.027 $ 0.019 $ 0.068 =========== =========== =========== ===========
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 DECEMBER 31, 1998 Raw materials/work in process $ 170,370 $ 145,143 Finished goods 472,672 728,936 ---------- ----------- 643,042 874,079 Valuation allowance (181,000) (186,000) ---------- ----------- $ 462,042 $ 688,079 ========== ===========
7 8 5. SHAREHOLDERS' EQUITY The following table summarizes the changes in the Company's shareholders' equity accounts for the six-months ended December 31, 1998.
Preferred Stock Common Stock Treasury Accumulated ------------------------------ ----------------------------- Shares Amount Shares Amount Stock Deficit ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1998 900 $ 747,321 3,021,027 $ 45,253,597 $ -- $(39,952,266) Preferred stock conversion (82) (68,090) 131,137 68,090 -- -- Purchase of treasury stock -- -- -- -- (118,108) -- Preferred stock dividends -- -- -- -- -- (24,540) Net income -- -- -- -- -- 280,437 ============ ============ ============ ============ ============ ============ Balance at December 31,1998 818 $ 679,231 3,152,164 $ 45,321,687 $ (118,108) $(39,696,369) ============ ============ ============ ============ ============ ============
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 Kozloski 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 pursuit of future acquisitions and 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. 9 10 RESULTS OF OPERATIONS Three and Six-month Periods Ended December 31, 1997 and 1998 Product revenues increased $265,199, or 18%, to $1,774,675 for the three-month period ended December 31, 1998 as compared to $1,509,476 for the quarter ended December 31, 1997. For the six-month period ended December 31, 1998, product revenues increased $579,457, or 20%, to $3,460,097 as compared to $2,880,640 for the same interim period in 1997. The revenue growth for the quarter reflects continued growth in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile Ophthalmic Prep Solution, disposable products and accessories. These gains were partially offset by decreased unit sales of ISPAN(TM)Intraocular Gases, OEM products and the Company's capital equipment products. For the six-month period ended December 31, 1998, the Company experienced unit sales increases for all of its product lines when compared to 1997. Contract manufacturing revenues vary from period to period depending on when orders are received and the lead times to produce the product. Cost of goods sold totaled $792,148, or 45% of revenues, for the three-month period ended December 31, 1998 as compared to $671,561, or 44% of revenues, for the same period last year. For the six-month period ended December 31, 1998, cost of good sold totaled $1,509,004, or 44% of revenues, as compared to $1,277,576, or 44% of revenues for the same period last year. Escalon has experienced unfavorable cost increases for both the quarter and year-to-date due to a weakening U.S. dollar against the German mark. This increases the cost associated with the purchasing Adatosil(R)5000 Silicone Oil, the Company's primary product. The on-going emphasis on cost control in our manufacturing operations has allowed the Company to maintain these margins. Research and development expenses increased $65,724, or 55%, for the three-month period ended December 31, 1998 when compared to the same period in 1997. When compared to the six-month period ended December 31, 1998 expenses increased $124,772, or 58%, from 1997. On a quarterly basis this increase resulted from expenses relating to pre-clinical trails, prototype development and ISO/CE certification costs. The increase on a six-month basis when compared to 1997, resulted from the write-off of patent costs, increased staff salaries, consulting fees, prototype and ISO/CE expenditures, and pre-clinical trial expenditures. On December 28th, an Investigational New Drug (IND) application for Ocufit SR(R) (sustained release) drug delivery system was filed with the U.S. Food and Drug Administration (FDA). Initial human clinical trials are expected to begin in early 1999, upon FDA clearance. Marketing, general and administrative expenses decreased $80,434, or 10%, for the three-month period ended December 31, 1998 when compared to the same period in 1997; and decreased $61,790, or 4%, for the six-month periods ending December 31, 1998 and 1997. The quarterly savings resulted from consolidation of corporate functions (instituted in January 1998), reduced litigation expenses, changes to the commission structure and reduction of advertising expenses. In the second quarter of fiscal 1998, the Company experienced a $101,000 favorable accrual reversal as a result of licensing its laser technology to IntraLase Corp. When the six-month periods are compared, the aforementioned savings were mitigated by foreign currency losses and spending related to stock listing issues. In the second quarter of fiscal 1998, the Company reported $75,000 of one-time income related to licensing its laser technology. For both the quarter and six-months ended December 31, 1998, there was no comparable event. 10 11 Interest income increased to $33,090 and $70,018 for the three and six-month periods ended December 31, 1998 from $23,164 and $49,767 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 and positive earnings provided these additional resources. There is no provision for income taxes for the three and six-month periods ended December 31, 1998 due to the utilization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash and cash equivalents of $2,406,665 as compared to $2,263,967 at June 30, 1998. The Company's short-term investments at December 31, 1998 and June 30, 1998 were $259,000 and $330,016, respectively. The net increase in cash and cash equivalents of $142,698 arises from increased profitability. While increasing inventory levels, acquiring treasury stock and making a deposit to be applied to the retirement of the preferred stock, the Company increased its cash position. The Company anticipates that the cash and cash equivalents and the interest earned thereon, together with funds generated from future product sales and external financing, should be adequate to satisfy its capital requirements, based on current levels of operations, through December 31, 1999. In the longer term, however, the Company will continue to pursue corporate partnering, licensing and other fund raising opportunities to satisfy the significant expenditures anticipated with development of its pharmaceutical products and drug delivery programs. In September, 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 are at the discretion of management. No stock has been repurchased pursuant to this authority. On January 21, 1999, Escalon completed acquisition of the Vascular Access Business Unit of Radiance Medical Systems, Inc. (formerly CardioVascular Dynamics Inc.) The initial payment of $1.1 million was made using the Company's cash reserves. An additional $1.0 million is payable when operations relocate to Wisconsin, a move anticipated within the next six to nine months. Escalon obtained a $2.0 million credit facility with PNC Bank on January 25, 1999. This includes a $1.0 million working line of credit and a $1.0 million five-year term loan. Portions of these funds were used to repurchase the outstanding Series A 6% Convertible Preferred Stock. The remainder will be used to complete funding of the Vascular Access acquisition. In November, the Company acquired an option to repurchase all outstanding Series A 6% Convertible Preferred Stock. On February 1, 1999 the Company exercised that option and repurchased its Preferred Stock for $818,000, plus accrued dividends. As part of that agreement, the Company also issued 225,000 shares of its Common Stock. 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." 11 12 YEAR 2000 ISSUES As previously reported on in Form 10-K, that the Company is addressing the potential millennium problem. A Year 2000 software upgrade for the financial module is on-site and being evaluated. None of the manufacturing equipment or products use date sensitive software, thereby minimizing our risk. The Company also believes that the products and equipment acquired for the Vascular Access business similarly provide minimal exposure for the same reason. The cost of further remediation will not have a material adverse impact on the Company's financial position. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In November, the Company acquired an option to repurchase all outstanding Series A 6% Convertible Preferred Stock. On February 1, 1999 the Company exercised that option and repurchased its Preferred Stock for $818,000, plus accrued dividends. As part of that agreement, the Company also issued 225,000 shares of its Common Stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 21, 1999, the Company held its Annual Meeting of Shareholders. The results of that meeting will be provided in Form 10-Q for the quarter ending March 31, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K was filed on January 21, 1999 and is incorporated herein by reference. The content of that report is summarized below: The Company reported that on January 21, 1999, Escalon Vascular Access, Inc. (a wholly owned subsidiary) and Radiance Medical Systems, Inc. entered into an Asset Sale and Purchase Agreement. Pursuant to this agreement, the Company acquired the assets of Radiance's Vascular Access Business for an aggregate purchase price of $2,104,442.19 in cash. The Company also agreed to pay royalties based on future sales of products of the Vascular Access Business for a period of five years following the closing of this sale. A $1,104.442.19 payment was made at closing and the remaining $1 million will be payable upon completion of transfer of Vascular Access Business to the Company's New Berlin, Wisconsin production facility. During the interim period, Radiance will continue manufacturing vascular access products on a subcontract basis. 12 13 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 12, 1999 By: /s/ Richard J. DePiano ----------------------------------------- Richard J. DePiano Chairman and Chief Executive Officer DATE: February 12, 1999 By: /s/ Douglas R. McGonegal ----------------------------------------- Douglas R. McGonegal Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 6-MOS JUN-30-1999 OCT-01-1998 DEC-31-1998 1 2,406,665 259,000 899,494 25,519 688,079 4,582,673 248,754 118,232 7,048,382 861,941 0 0 679,231 45,321,687 (39,814,477) 7,048,382 1,774,675 1,774,675 792,148 792,148 900,823 12,000 1,426 113,368 0 113,368 0 0 0 113,368 0.034 0.027
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