-----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, N9juJfdM6wew5a644+/SvzL+/iPTYqQ37LVsq9vrYnY42tJR7Rhl24oU8tgq9Rby dybBTZmNwqi3KvCQ3ou79Q== 0000893220-99-000618.txt : 19990518 0000893220-99-000618.hdr.sgml : 19990518 ACCESSION NUMBER: 0000893220-99-000618 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99627118 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q ESCALON MEDICAL CORP. 1 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 March 31, 1999 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: May 5, 1999 3,242,184 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 March 31, 1999 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 1998 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 1. Legal Proceedings 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 13 SIGNATURES 15
3 PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements ESCALON MEDICAL CORP. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31, 1998 1999 ------------ ------------ ASSETS (UNAUDITED) Current Assets: Cash and cash equivalents $ 2,263,967 $ 2,623,232 Investments 330,016 1,003,781 Note receivable -- 15,000 Accounts receivable, net 940,378 1,227,351 Other receivables 75,000 75,000 Inventory, net 462,042 1,061,915 Other current assets 79,088 141,932 ------------ ------------ Total current assets 4,150,491 6,148,211 Furniture and equipment, at cost, net 134,734 446,740 Long-term note receivable 112,500 150,000 License and distribution rights, net 878,838 527,057 Patents, net 475,175 480,419 Acquisition costs, net -- 41,243 Goodwill, net 968,295 1,479,871 Other assets 14,095 14,930 ------------ ------------ $ 6,734,128 $ 9,288,471 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ -- $ 200,000 Accounts payable 287,192 445,506 Accrued and other liabilities 398,284 1,653,481 ------------ ------------ Total current liabilities 685,476 2,298,987 ------------ ------------ Long-term debt -- 783,333 Shareholders' Equity: Preferred stock, no par value; 2,000,000 shares authorized; 900 and 0 shares issued and outstanding at June 30, 1998 and March 31, 1999, respectively 747,321 -- Common stock, no par value; 35,000,000 shares authorized; 3,021,027 issued at June 30, 1998 and 3,377,164 shares issued less 134,980 Treasury shares at March 31, 1999 45,253,597 46,024,812 Treasury stock -- (118,108) Accumulated deficit (39,952,266) (39,700,553) ------------ ------------ Total shareholders' equity 6,048,652 6,206,151 ------------ ------------ $ 6,734,128 $ 9,288,471 ============ ============
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 SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------------- --------------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- Product revenues $ 1,496,301 $ 2,066,009 $ 4,376,941 $ 5,526,106 Costs and expenses: Cost of goods sold 648,169 922,168 1,925,744 2,431,172 Research and development 127,719 242,251 344,197 583,502 Marketing, general and administrative 727,094 951,845 2,186,855 2,349,818 ----------- ----------- ----------- ----------- Total costs and expenses 1,502,982 2,116,264 4,456,796 5,364,492 ----------- ----------- ----------- ----------- Income (loss) from operations (6,681) (50,255) (79,855) 161,614 ----------- ----------- ----------- ----------- Other income and expenses: Sale of Betadine product line -- 879,159 -- 879,159 Other income -- -- 75,000 -- Interest income 34,383 31,246 84,150 101,264 Interest expense -- (18,350) (149) (19,802) ----------- ----------- ----------- ----------- Total other income and expense 34,383 892,055 159,001 960,621 ----------- ----------- ----------- ----------- Net income $ 27,702 $ 841,800 $ 79,146 $ 1,122,235 =========== =========== =========== =========== Basic net income (loss) per share $ (0.090) $ (0.001) $ (0.070) $ 0.082 =========== =========== =========== =========== Diluted net income per share $ (0.090) $ (0.001) $ (0.070) $ 0.081 =========== =========== =========== =========== Weighted average shares - basic 2,629,375 3,162,184 2,629,375 3,072,524 =========== =========== =========== =========== Weighted average shares - diluted 2,629,375 3,162,184 2,629,375 3,116,671 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. 4 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, --------------------------------- 1998 1999 ----------- ----------- Cash Flows From Operating Activities: Net income $ 79,146 $ 1,122,235 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 246,952 283,433 Net loss on retirement of fixed assets 9,601 -- Write off of patents -- 24,805 Gain on sale of Betadine product line -- (879,159) Change in operating assets and liabilities: Accounts receivable (351,404) (286,973) Inventories (1,269) (1,059,625) Other current assets 13,766 (62,844) Accounts payable, accrued and other liabilities (92,746) 1,427,011 ----------- ----------- Net cash provided from (used in) operating activities (95,954) 568,883 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (470,130) (2,262,780) Proceeds from maturities of short-term investments 235,000 1,589,016 Proceeds from sale of Betadine product line -- 2,059,835 Purchase of vascular access business -- (1,400,000) Short term note receivable -- (15,000) Purchase of furniture and equipment (50,132) (48,312) Proceeds from sale of furniture and equipment 1,000 -- Long term note receivable (37,500) (37,500) Long term receivable (75,000) -- License and distribution rights cost (99,752) (11,381) Acquisition costs -- (42,941) Patent costs (28,140) (44,815) Other assets 233 (835) ----------- ----------- Net cash used in investing activities (524,421) (214,713) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from term loan -- 1,000,000 Preferred stock offering costs 1,126,658 -- Retirement of preferred stock -- (818,000) Principal payments under capital lease obligations (2,910) -- Principal payments on term loan -- (16,667) Purchase of treasury stock -- (118,108) Payment of preferred stock dividends (20,250) (42,130) ----------- ----------- Net cash used in financing activities 1,103,498 5,095 ----------- ----------- Net increase in cash and cash equivalents 483,123 359,265 Cash and cash equivalents, beginning of period 1,752,648 2,263,967 ----------- ----------- Cash and cash equivalents, end of period $ 2,235,771 $ 2,623,232 =========== ===========
See notes to condensed consolidated financial statements. 5 6 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access, 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 Outstanding warrants were excluded from computation of basic and diluted net income per share for the three and nine-month periods ended March 31, 1998 and 1999 because their exercise prices exceed market price, rendering the effect of any conversion to be antidilutive. Employee stock options are included in these computations when the average market price exceeds their exercise price. 6 7 3. PER SHARE INFORMATION (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------- --------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- Numerator: Numerator for basic and diluted earnings per share: Net income $ 27,702 $ 841,800 $ 79,146 $ 1,122,235 Preferred stock dividends and accretion (263,250) (845,983) (263,250) (870,523) ----------- ----------- ----------- ----------- Numerator for basic and diluted earnings per share-income available to Common shareholders $ (235,548) $ (4,183) $ (184,104) $ 251,712 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share-weighted average shares 2,629,375 3,162,184 2,629,375 3,072,524 Effect of dilutive securities: Employee stock options -- -- -- 44,147 ----------- ----------- ----------- ----------- Denominator for diluted earnings per Share-weighted average shares and assumed conversion 2,629,375 3,162,184 2,629,375 3,116,671 =========== =========== =========== =========== Basic earnings per share $ (0.090) $ (0.001) $ (0.070) $ 0.082 =========== =========== =========== =========== Diluted earnings per share $ (0.090) $ (0.001) $ (0.070) $ 0.081 =========== =========== =========== ===========
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 MARCH 31, 1999 ------------- -------------- Raw materials/work in process $ 170,370 $ 492,062 Finished goods 472,672 735,753 ----------- ----------- 643,042 1,227,815 Valuation allowance (181,000) (165,900) ----------- ----------- $ 462,042 $ 1,061,915 =========== ===========
7 8 5. SHAREHOLDERS' EQUITY The following table summarizes the changes in the Company's shareholders' equity accounts for the nine-months ended March 31, 1999.
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 -- -- Preferred stock retirement (818) (679,231) -- -- -- (138,767) Issue common stock -- -- 225,000 703,125 -- (703,125) Purchase of treasury stock -- -- -- -- (118,108) -- Preferred stock dividends -- -- -- -- -- (28,630) Net income -- -- -- -- -- 1,122,235 ---- ----------- --------- ------------ ------------ ------------ Balance at March 31, 1999 -- $ -- 3,377,164 $46,024,812 $ (118,108) $(39,700,553) ==== =========== ========= ============ ============ ============
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. The final pre-trial conference is presently scheduled for May 20, 1999. Class certification motions have been dismissed for failure to prosecute, with leave to renew. On May 12, 1999, the court granted the plaintiff's motion in the Blech action for class certification. ----- 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 -- including, 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 medical devices and pharmaceuticals. The Company is also developing its ophthalmic drug delivery system to complement its other businesses. To further diversify its product portfolio, in January the Company acquired the vascular access product line from Radiance Medical Systems, Inc. This is the first step in Escalon's new market strategy of acquiring niche medical products, outside the ophthalmic market. 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 Nine-Month Periods Ended March 31, 1998 and 1999 Product revenues increased $569,708, or 38%, to $2,066,009 for the three-month period ended March 31, 1999 as compared to $1,496,301 for the quarter ended March 31, 1998. For the nine-month period ended March 31, 1999, product revenues increased $1,149,165, or 26%, to $5,526,106 as compared to $4,376,941 for the same interim period in 1998. Revenue growth for the quarter reflects a continued increase in unit sales of Adatosil(R)5000 Silicone Oil, ISPAN(TM) Intraocular Gases, disposable products and accessories, and its new vascular access product line (which was acquired in late January 1999). Betadine(R)5% Sterile Ophthalmic Prep Solution sales decreased 38% for the quarter reflecting the sale of this product line in early March 1999. The Company also experienced a quarterly decline in sales of its capital equipment and OEM products. For the nine-month period ended March 31, 1999, the Company experienced unit sales increases for all of its products, except OEM products, when compared to 1998. Contract manufacturing revenues continue to vary from period to period depending on when orders are received and the lead times to produce the product. Cost of goods sold totaled $922,168, or 45% of revenues, for the three-month period ended March 31, 1999 as compared to $648,168, or 43% of revenues, for the same period last year. For the nine-month period ended March 31, 1999, cost of good sold totaled $2,431,172, or 44% of revenues, as compared to $1,925,744, or 44% of revenues for the same period last year. Escalon experienced unfavorable cost increases for both the quarter and year-to-date due to a weakening U.S. dollar against the German mark. The increase in cost associated with purchasing Adatosil(R)5000 Silicone Oil and the corresponding rise in sales volume of that product increased the quarterly cost of sales $98,000 over the third quarter of 1998. Manufacturing costs associated with the new vascular access products line contributed $198,600 during the quarter with no corresponding expense in 1998. For the nine-month period ended March 31, 1999, silicone oil and vascular access product costs increased $284,100 and $198,600 over the respective period in 1998. Research and development expenses increased $114,532, or 90%, for the three-month period ended March 31, 1999 when compared to the same period in 1998. When compared to the nine-month period ended March 31, 1999 expenses increased $239,305, or 70% above 1998. On a quarterly basis this increase resulted from expenses relating to pre-clinical and clinical trails, prototype development, ISO/CE certification costs and increased staffing. The increase on a nine-month basis when compared to 1998 resulted from the write-off of patent costs, increased staff salaries, consulting fees, prototype, ISO/CE and pre-clinical trial expenditures. On December 28, 1997, 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 began in the third quarter of fiscal 1999. Marketing, general and administrative expenses increased $224,751, or 31%, for the three-month period ended March 31, 1999 when compared to the same period in 1998; and increased $162,963, or 7%, for the nine-month periods ending March 31, 1999 and 1998. The addition of the vascular access division increased quarterly sales and administrative expenses by $224,500. When comparing the nine-month periods, cumulative savings reduced the additional cost incurred by the vascular access division over last year. These savings primarily originated from reduction of legal expenses over last year, and were further reduced by elimination of the gain generated in fiscal 1998 from the discontinuation of laser operations. Escalon realized an $879,159 gain in the current quarter, resulting from of the sale our Betadine product line to Alcon Labs, Inc. When reviewing comparable nine-month periods, the Betadine gain compares with the $75,000 reported in 1998 related to one-time income from licensing its laser technology. 10 11 Interest income decreased $3,137 to $31,246 for the quarter ended March 31, 1999. The decrease was caused by interest rate declines and slightly less cash available for investment for the entire quarter. On a nine-month to-date basis, interest income rose $17,114 to $101,264. This increase resulted from having greater cash deposits over the course of the year than were available in fiscal 1998. Interest expense rose $18,350 during the quarter, and $19,653 for the nine-month period ended March 31, 1999. On February 1, 1999, the Company made the first draw on its new credit facility with PNC Bank, N.A. This new borrowing capability allows Escalon the opportunity to begin acquisition of new products and technologies. There is no provision for income taxes for the three- and nine-month periods ended March 31, 1999 due to the utilization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had cash and cash equivalents of $2,623,232 as compared to $2,263,967 at June 30, 1998. The Company's short-term investments at March 31, 1999 and June 30, 1998 were $1,003,781 and $330,016, respectively. The net increase in cash and cash equivalents of $359,265 arises from increased profitability, which included sale of the Betadine product line. While increasing inventory and receivable levels, acquiring treasury stock, retiring preferred stock and purchasing a new business unit, 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 March 31, 2000. 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 1998, 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 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. 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-Q, the Company is addressing the potential millennium problem. A Year 2000 software upgrade for the Company's financial module is on-site and being evaluated. None of the Company's 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 On February 1, 1999, the Company exercised the option it had obtained from the holder of its Series A 6% Convertible Preferred Stock to simultaneously cause such holder to convert a portion of the Series A Preferred Stock into 225,000 shares of Common Stock and redeem the remaining outstanding shares of Series A Preferred Stock for $818,000 plus accrued and unpaid dividends. The 225,000 shares of Common Stock were issued upon conversion of the Series A Preferred Stock in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933. The Company received no cash proceeds from the issuance of such Common Stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on January 21, 1999. The following matters were acted upon: 1. The following persons were elected as directors of the Company for the next year until their successors are elected and qualified.
Nominees for Director For Against Withheld --------------------- --- ------- -------- Richard J. DePiano 2,339,112 58,671 0 Dr. Jay Federman 2,339,112 58,671 0 Dr. Jack Dodick 2,339,112 58,671 0 Fred G. Choate 2,339,112 58,671 0
There were no broker held non-voted shares represented at the meeting with respect to this matter. 2. The shareholders approved an amendment to the Company's 1993 Stock Option Plan. This increased the number of common shares authorized for issuance under the plan by 200,000 shares, to a total of 375,000 shares of stock.
For Against Abstain --- ------- ------- 1,117,506 95,475 25,359
12 13 There were 1,159,443 broker held non-voted shares represented at the meeting with respect to this matter. 3. The shareholders approval the sale and issuance of the Series A preferred stock and issuance of common stock upon conversion of Series A preferred stock pursuant to NASDAQ Stock Market Rule 4460(i).
For Against Abstain --- ------- ------- 1,108,192 126,601 3,547
There were 1,159,443 broker held non-voted shares represented at the meeting with respect to this matter. 4. The shareholders ratified the appointment of Parente Randolph Orlando Carey & Associates, LLP as the Company's independent auditors for fiscal year 1999.
For Against Abstain --- ------- ------- 2,330,806 56,344 10,633
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: 27 Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K was filed on January 21, 1999 (amended on April 7, 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 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 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. 13 14 A report on Form 8-K was filed on March 5, 1999 and is incorporated herein by reference. The content of that report is summarized below: Escalon reported the consummation of transactions under Bill of Sale and Acceptance Agreements between the Registrant, Alcon Laboratories, Inc. and Alcon Universal, Ltd. The Company sold its inventory and exclusive distribution rights for Betadine(R) 5% Sterile Ophthalmic Prep Solution to Alcon. Escalon received $2,059,835 in cash for these sales, $959,835 for inventory and $1,100,000 for distribution rights. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) DATE: May 14, 1999 By: /s/ Richard J. DePiano ------------------------------------------- Richard J. DePiano Chairman and Chief Executive Officer DATE: May 14, 1999 By: /s/ Douglas R. McGonegal ------------------------------------------- Douglas R. McGonegal Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 9-MOS JUN-30-1999 JAN-01-1999 MAR-31-1999 1 2,623,232 1,003,781 1,255,801 (28,450) 1,061,915 6,148,211 585,948 (139,208) 9,288,471 2,298,987 0 0 0 46,024,812 (39,818,661) 9,288,471 2,066,009 2,066,009 922,168 922,168 1,194,096 12,000 18,350 841,800 0 841,800 0 0 0 841,800 (0.001) (0.001)
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