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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended JUNE 30, 1997
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-20127
ESCALON MEDICAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
California 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
182 Tamarack Circle
Skillman, New Jersey 08558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 609-497-9141
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of each class: Name of each exchange on which registered:
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None None
____________________ __________________________________________
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, without par value
Class A Redeemable Common Stock Purchase Warrants, exercisable for
the purchase of one share of Common Stock, without par value
Class B Redeemable Common Stock Purchase Warrants, exercisable for
the purchase of one share of Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: YES X NO__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $2,657,434. Such aggregate market value was computed
by reference to the bid and asked price of the Common Stock in the when-issued
trading market on September 11, 1997. For purposes of making this calculation
only, the registrant has defined affiliates as including all directors and
beneficial owners of more than ten percent of the Common Stock of the Company.
The number of shares of the registrant's Common Stock outstanding as of
September 11, 1997 was 10,517,519.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
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ESCALON MEDICAL CORP.
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended June 30, 1997
TABLE OF CONTENTS
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PART I
Page
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Item 1. Business ............................................................................. 1
Item 2. Properties ........................................................................... 5
Item 3. Legal proceedings .................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders .................................. 6
PART II
Item 5. Market for registrant's common equity and related stockholder matters ................ 6
Item 6. Selected financial data .............................................................. 7
Item 7. Management's discussion and analysis of financial condition and results of operations 8
Item 8. Financial statements and supplementary data .......................................... 10
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure . 10
PART III
Item 10. Directors and executive officers of the registrant ................................... 10
Item 11. Executive compensation ............................................................... 10
Item 12. Security ownership of certain beneficial owners and management........................ 11
Item 13. Certain relationships and related transactions ....................................... 11
PART IV
Item 14. Exhibits, financial statement schedules, and reports on form 8-K ..................... 11
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This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to general business strategy, the introduction of new products, the
potential market and uses for the Company's products, expansion plans, the
Company's plans to file applications with the Food and Drug Administration (the
"FDA"), the development of joint venture opportunities, the effects of
competition on the structure of the markets in which the Company competes,
defending itself in litigation matters, operating performance and liquidity, 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
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 of the Company 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 incorporated herein by reference,
the following: (i) The competitive nature of the industries in which the Company
competes and the ability of the Company to (a) successfully maintain existing
strategic relationships and (b) negotiate and enter into new strategic
relationships and otherwise distinguish its products from those of other
companies on the basis of quality, value and reliability; (ii) Economic and
regulatory conditions which could adversely affect sales of the Company's
products, including the uncertainty of FDA approval for any new applications;
(iii) The ability of the Company to successfully develop and market new
products; (iv) Future capital needs and the uncertainty of additional funding
(whether through the financial markets, collaborative or other arrangements with
strategic partners, or from other sources); (v) Uncertain protection of
important proprietary technology; (vi) The outcome of litigation matters; (vii)
Limitation on third-party reimbursement and the possible adverse impact of
health care reform on the payment of health care services; (viii) Dependence on
key personnel; and (ix) The ability of the Company to maintain its listing on
NASDAQ.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) ("Escalon" or the "Company") operates in the healthcare market
specializing in the development, marketing and distribution of ophthalmic
medical devices and pharmaceutical products. In addition, it is currently
developing its proprietary ophthalmic drug delivery system. In February 1996,
the Company acquired substantially all of the assets and certain liabilities of
Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic
surgical products. Prior to the acquisition, the Company devoted substantially
all of its resources to the research and development of its ultrafast laser
systems designed for the treatment of ophthalmic disorders. As a result of the
acquisition of EOI, Escalon changed its market focus to its surgical products
and pharmaceutical business and while it is no longer manufacturing laser
systems, it is continuing its efforts to find a strategic partner to develop and
commercialize its proprietary laser technology. During the fourth quarter of
fiscal year 1996, the Company moved its corporate headquarters from San Diego,
California to Skillman, New Jersey.
SURGICAL PRODUCTS BUSINESS
The Company develops, manufactures and distributes over 40 ophthalmic
surgical products which are utilized primarily by the vitreoretinal ophthalmic
surgeon. In addition, the Company contract manufactures certain of its products
for other third-party companies. The following is a summary of the Company's key
surgical product lines:
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AdatoSil(R) 5000 Silicone Oil ("AdatoSil 5000")
AdatoSil 5000, which the Company distributes under a license and
distribution agreement with Adatomed/Chiron Vision, is a specialty product used
in "worst case" detached retina surgery as a mechanical aid in the reattachment
procedure. The use of highly purified silicone oil, like AdatoSil 5000, as a
tamponade has become a standard of care in AIDS patients suffering from retinal
detachment secondary to CMV retinitis infection. During fiscal 1997, sales of
AdatoSil 5000 accounted for approximately 56% of the Company's revenues.
ISPAN Intraocular Gases
The Company distributes two intraocular gas products, C(3)F(8) and SF(6),
which are used by vitreoretinal surgeons as a temporary tamponade in detached
retina surgery. Under a distribution agreement from Scott Medical Products
("Scott"), Escalon distributes packages of Scott gases in canisters containing
25 grams or less of gas. Along with the intraocular gases, the Company
manufactures and distributes a patented disposable universal gas kit which
delivers the gas from the canister to the patient.
Viscous Fluid Transfer Systems
To complement the use of AdatoSil 5000, Escalon markets several viscous
fluid transfer systems and related disposable syringe products which aids the
surgeon in the process of injecting and extracting the oil. Adjustable pressures
and vacuums provided by the equipment allow the surgeon to manipulate the flow
of oil during surgery.
Fiber Optic Light Source Products
Light source and fiber optic products are widely used by the vitreoretinal
surgeon during surgery. The Company offers the surgeon a complete line of light
sources along with a variety of fiber optic probes and illuminated tissue
manipulators.
PHARMACEUTICAL PRODUCTS BUSINESS
Betadine(R) 5% Sterile Ophthalmic Prep Solution ("Betadine 5%")
Currently, Escalon distributes one pharmaceutical product, Betadine 5%,
a prescription pre-operative povidone-iodine preparation used to sterilize the
cornea, conjunctiva, and periocular (surfaces around the eye) regions of the eye
prior to ophthalmic surgery. Betadine 5% is distributed by Escalon under a
license and distribution agreement with The Purdue Frederick Company. Escalon's
objective is to have this product used in most of the two million ophthalmic
surgeries which take place in the United States each year. Sales of this product
accounted for approximately 15% of the Company's revenues in fiscal 1997.
Povidone-Iodine 2.5% Solution -- Ophthalmia Neonatorum
In an effort to prevent ophthalmia neonatorum, newborns in the United
States are treated with erythromycin or silver nitrate. However, bacterial
resistance to erythromycin can occur and chemical toxicity is common with the
use of silver nitrate. Povidone-iodine, a broad spectrum antimicrobial, active
against bacteria, viruses and fungi, has often been suggested as a viable
alternative for the prevention of this disease. Recently, a clinical study
completed outside the United States by Drs. Isenberg, Apt and Wood of UCLA has
provided support for this hypothesis. A patent claiming this use was issued to
UCLA and Escalon has acquired an exclusive license from UCLA to develop and
market the 2.5% solution. The Company's intent is to seek joint venture or
strategic partnership arrangements to fund the development and potential
commercialization of this product.
Ocufit SR(R)
One of the Company's major development projects relates to its Ocufit SR
(sustained release) drug delivery system. Ocufit SR is designed to make the
treatment of eye disease easier and more effective for people requiring topical
eye drop therapy.
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The patented Ocufit SR ocular insert, a flexible rod-shaped formulation
made of medical grade silicone rubber, can be loaded with a variety of drugs.
This insert, which can be retained comfortably in the upper or lower fornix, is
not affected by eye or lid movement. Drug release can be controlled so that
targeted amounts of drug are delivered for defined time periods, lasting weeks
to months.
The first Ocufit SR product, which is being developed jointly by Escalon
and The West Company ("West"), which has expertise in injection molded
elastomers and drug delivery systems development, is Ocufit diclofenac.
Diclofenac, a non-steroidal anti-inflammatory drug ("NSAID"), is prescribed
post-operatively to reduce inflammation of the ocular tissue. Current U.S. sales
of diclofenac in a topical drop form approximates $30 million per year. It is
anticipated that this market will grow as NSAID compounds are becoming more
widely prescribed.
Escalon anticipates filing an Investigational New Drug application with
the Food and Drug Administration by the end of calendar year 1997 and begin the
Phase I clinical trial by June 1998. The Company's overall strategy is to seek
strategic partnership arrangements for the further development and
commercialization of Ocufit diclofenac and other Ocufit applications.
ULTRAFAST LASER PRODUCTS BUSINESS
The Company for the past several years has devoted substantially all of
its resources to the development of its proprietary ultrafast laser systems for
the treatment of a broad range of eye disorders. Escalon's solid-state
picosecond (one trillionth of a second) Nd: YLF (Neodymium: Yitrium-Lithium-
Fluoride) laser systems are designed to be more precise than lasers systems
utilizing currently available technologies.
With the acquisition of EOI, the Company has chosen to change its focus to
its surgical products and pharmaceutical business and as such, is no longer
manufacturing its laser systems. In order to further develop and commercialize
it laser technology, Escalon is currently negotiating a joint venture
arrangement in which the Company, along with an academic institution partner,
will license their intellectual laser properties to a newly formed company in
return for an equity interest in the new company and future royalties on product
sales. If created, this joint venture company would have the responsibility of
funding and developing the laser technology through to commercialization. No
assurances can be given, however, that the above noted negotiations will be
successful. If such negotiations are not successful, the Company's intends to
continue its search for a strategic partner to fund and develop the ultrafast
laser technology.
RESEARCH AND DEVELOPMENT
The Company conducts its medical device product development at its
Mukwonago, Wisconsin facility. The Ocufit SR research and development is being
conducted at The West Company laboratories pursuant to a collaborative
arrangement. Given the change in market focus, research and development
activities at its laser laboratory in Irvine, California has been limited during
fiscal 1997. Research and development expenditures for fiscal years 1997, 1996
and 1995 amounted to $1.6 million, $1.7 million and $2.8 million, respectively.
MANUFACTURING AND DISTRIBUTION
Escalon leases 7,500 square feet of space in Mukwonago, Wisconsin for its
Surgical Products operations. The facility is currently used for engineering,
product design and development and manufacturing and product assembly. Various
vendors are used for subcontract component manufacture, assembly and
sterilization. Manufacturing facilities include a class 10,000 clean room. All
of the Company's Surgical Products are distributed from its Wisconsin facility.
Livingston Healthcare Services Inc., New Castle, Delaware, currently serves as a
warehousing and distribution facility for Betadine 5%. For each new product
Escalon develops, the manufacture, testing and marketing of such product entails
risk of product liability. Product liability insurance is carried by Escalon to
cover the primary risk.
Although the Company no longer manufactures laser systems, it is seeking
to establish a joint venture arrangement for the further development and
commercialization of its laser technology.
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MARKETING AND SALES
Escalon's independent sales force carries out direct promotion and sales
of its products. Currently, Escalon sells most of its ophthalmic device and
instrument products directly to the end user. However, Betadine 5% is primarily
sold through traditional drug wholesale channels.
The Company's five independent sales representatives are based in New
Jersey, Wisconsin, Missouri, Florida and California. These independent sales
representatives market to teaching institutions, key hospitals and eye surgery
centers, focusing primarily on physicians and operating room personnel
performing vitreoretinal surgery. Notwithstanding Escalon's vitreoretinal
interest, these sales representatives pursue leads for Betadine 5% in all
institutions and promote other products as required.
The Company does not anticipate additional sales of its current laser
systems given its change in market focus.
SERVICE AND SUPPORT
Escalon maintains a full service program for all products sold. Warranties
exist on all products against defects and performance. Surgical Product repairs
are made at the Wisconsin facility and returns are handled by customer service
personnel.
The Company maintains its laser systems through Company-trained
independent technicians. Service for the laser products is coordinated from the
Company's Wisconsin facility. Service and maintenance are available on a time
and materials basis.
THIRD PARTY REIMBURSEMENT
It is expected that the Company's products will be purchased primarily by
ophthalmologists and hospitals, which will then bill various third-party-payers
for the health care services provided to their patients. These payers include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. In addition, third party
payers may deny reimbursement if they determine that any procedure performed
using any one of the Company's products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication.
PATENTS AND ROYALTIES
The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Escalon's policy is to protect its technology by
aggressively obtaining patent protection for all of its developments and
products, both in the United States and in selected countries outside the United
States. The Company's Surgical Products and pharmaceutical technology are
covered by thirteen issued United States patents and one issued Taiwanese
patent. In addition, one United States patent is currently pending. With respect
to the Company's ultrafast laser systems, fourteen patents have been issued or
allowed and two additional patent applications have been filed by the Company in
the United States. It is the Company's policy to file for patent protection in
those foreign countries in which the Company believes that protection is
necessary to protect its economic interests. The Company intends to vigorously
defend its patents if the need arises.
The Company licenses a laser patent from Patlex Corporation. Under the
patent license agreement, the Company has agreed to pay royalties on a
royalty-bearing component of the laser systems with respect to laser system
sales until the expiration of the licensed patent in May 2005.
COMPETITION
There are numerous direct and indirect competitors of Escalon in the
United States and abroad. These companies include: ophthalmic-oriented companies
that market a broad portfolio of products, including prescription
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ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as
contact lens cleaning solution) and other eye care products; large integrated
pharmaceutical companies that market a limited number of ophthalmic
pharmaceuticals in addition to many other pharmaceuticals; and smaller specialty
pharmaceutical and biotechnology companies that are engaged in the development
and commercialization of prescription ophthalmic pharmaceuticals and products,
and possibly drug delivery systems.
The ophthalmic market is highly fragmented with several large companies
dominating the industry. The Company believes that these large companies capture
approximately 50% of the overall ophthalmic market. The balance of the market is
composed of smaller companies ranging from start-up entities to established
niche market players. The ophthalmic market in general is intensely competitive
with each company eager to expand its market share. As a result of the intense
competition, the Company believes that many of the industry's smaller companies
will either consolidate or fail. Escalon's strategy is to compete primarily on
the basis of technological innovation to which it has proprietary rights.
Escalon believes, therefore, that its success will depend in large part upon
obtaining and maintaining exclusive marketing rights covering its current and
future products through licenses, the issuance of patents and certain other
government actions. At the same time, Escalon recognizes that there are other
young and innovative companies which may develop competitive technologies.
Although the Company has numerous competitors in the vitreoretinal market,
Escalon believes that it is in a niche market with regards to its Ocufit SR
business. Specifically, the Company is unaware of any competitors which have
sustained drug release technology similar to Ocufit SR. There is, however, at
least one company that Escalon is aware of that has developed technology based
on "once-a-day" drug release. The Company can make no assurance that additional
competition will not develop in the vitreoretinal market.
HUMAN RESOURCES
As of June 30, 1997, Escalon employed 18 full-time employees and two
part-time employees. Eight of Escalon's full-time employees are in general
administrative and marketing positions, six are in Surgical Products
manufacturing, three are in Surgical Products engineering and one is in quality
assurance. In addition, the Company utilizes one consultant to handle the
Company's regulatory and clinical affairs. Escalon also has five independent
sales representatives who market primarily Escalon products. Escalon's employees
are not covered by a collective bargaining agreement and Escalon considers its
relations with employees to be good.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 12,500 square feet of
space for its (a) executive offices in Skillman, New Jersey, (b)
manufacturing/warehouse facility in Mukwonago, Wisconsin and (c) laser research
and development facility in Irvine, California. The Company is looking to
sublease its 3,000 square feet of space in California. The Wisconsin facility
lease covering approximately 7,500 square feet of space expires in June 1998.
The New Jersey office lease covering 2,000 square feet expires in June 1999. The
California facility lease for 3,000 square feet expires in September 1999.
Ocufit drug delivery research and development is conducted principally at The
West Company in Lionville, Pennsylvania. Annual rent under all of the Company's
lease arrangements approximates $120,000.
ITEM 3. LEGAL PROCEEDINGS
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 and which was reported in the
Company's Form 10-Q for the quarter ended September 30, 1996). 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
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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 August 15, 1996, the Company, together with
three other companies against whom similar claims have been asserted in separate
actions filed as "related" to In Re Blech Securities Litigation, filed a motion
for permission to take an immediate appeal. On January 16, 1997, the motion was
denied. On March 31, 1997, the Court issued Pretrial Order No. 2, which sets
January 31, 1998 as the cutoff date for discovery and directs that the case be
ready for trial by March 31, 1998. The Pretrial Order No. 2 also provides for
certain coordination of discovery in the Kozloski case, related cases making
similar allegations arising from other issuers' offerings and In Re Blech
Securities Litigation. Discovery has commenced in all related actions but is in
its preliminary stages.
While continuing to deny any wrongdoing and in an effort to curtail its
legal expenses related to this litigation, the Company has reached an agreement
in principle to settle this action for $500,000 on its behalf and on behalf of
its former and present officers and directors. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the National Market segment of the
Nasdaq Stock Market under the symbol "ESMC." The following table sets forth, for
the periods indicated, the high and low sales prices as quoted on the Nasdaq
Stock Market.
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Period High Low
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Fiscal 1996:
First Quarter $ 3.38 $ 2.50
Second Quarter 2.63 1.50
Third Quarter 4.38 1.63
Fourth Quarter 3.00 2.19
Fiscal 1997:
First Quarter $ 2.38 $ 0.88
Second Quarter 1.63 0.84
Third Quarter 1.13 0.50
Fourth Quarter 0.78 0.38
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As of September 11, 1997, there were 55 holders of record of the Company's
Common Stock. On September 11, 1997, the closing sale price of the Common Stock
as reported by the Nasdaq Stock Market was $0.4375.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings to finance future
growth and working capital needs and therefore does not anticipate paying any
cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein in Item 8.
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FOR THE YEARS ENDED JUNE 30,
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1993 1994 1995 1996 1997
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 1,894 $ 100 $ 170 $ 2,341 $ 5,431
Costs and expenses:
Cost of sales .......................... 1,017 64 99 1,229 2,650
Research and development ............... 3,578 3,419 2,776 1,723 1,571
Marketing, general and administrative .. 2,746 2,916 1,905 2,723 3,716
Write down of goodwill and license and
distribution rights ................ -- -- -- -- 3,319
Acquired research and development ...... -- -- -- 1,000 --
------- ------- ------- ------- --------
Total costs and expenses ............. 7,341 6,399 4,780 6,675 11,256
------- ------- ------- ------- --------
Loss from operations ..................... (5,447) (6,299) (4,610) (4,334) (5,825)
Interest income .......................... 38 232 342 257 141
Interest expense ......................... (22) (30) -- (5) (1)
------- ------- ------- ------- --------
Net loss ................................. $(5,431) $(6,097) $(4,268) $(4,082) $ (5,685)
======= ======= ======= ======= ========
Net loss per share ....................... $ (2.73) $ (1.41) $ (0.74) $ (0.54) $ (0.54)
======= ======= ======= ======= ========
Shares used in the computation of net loss
per share ............................. 1,987 4,327 5,746 7,571 10,518
======= ======= ======= ======= ========
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AS OF JUNE 30,
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1993 1994 1995 1996 1997
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents $ 441 $ 2,933 $ 3,518 $ 2,585 $ 1,753
Working capital .......... 1,167 7,937 6,764 3,754 2,170
Total assets ............. 2,917 12,461 7,847 11,600 5,834
Accumulated deficit ...... (19,713) (25,811) (30,079) (34,162) (39,847)
Total shareholders' equity 1,903 11,650 7,470 10,483 4,798
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto which are set forth elsewhere herein.
OVERVIEW
On February 12, 1996, the Company acquired all of the assets and certain
liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the acquisition, the
Company was in the development stage and devoting substantially all of its
resources to the research and development of laser systems designed for the
treatment of ophthalmic disorders. Upon completion of the acquisition, the
Company changed its market focus and is now engaged in developing, marketing and
distributing ophthalmic medical devices and pharmaceuticals. The Company is also
developing its ophthalmic drug delivery system to complement its other
businesses. Although the Company is no longer manufacturing laser systems, the
Company is attempting to find a strategic partner to further develop and
commercialize its ophthalmic laser technology. The results of operations for the
year ended June 30, 1996 include the results of operations of EOI subsequent to
the acquisition. Sales of products acquired from EOI are made primarily to
hospitals and physicians throughout the United States. As a result of the
acquisition, the Company is no longer in the development stage for financial
reporting purposes.
The Company has recorded losses from inception and expects that operating
losses will continue as the Company continues research and development relating
to the application of its drug delivery technology and until product sales
generate sufficient revenues to fund its continuing operations.
The Company expects that results of operations may fluctuate from quarter
to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; and (ii) general competitive and
economic conditions of the health care market.
RESULTS OF OPERATIONS
Years Ended June 30, 1996 and 1997
Product revenues increased to $5,431,282 in fiscal year 1997 from
$2,341,073 in fiscal year 1996. This increase of $3,090,209, or 132%, relates
primarily to having twelve months of sales in fiscal 1997 from product lines
acquired from EOI as compared to only five months of like-kind sales during
fiscal year 1996.
Cost of goods sold totaled $2,650,360, or 49% of revenues, for the year
ended June 30, 1997 as compared to $1,228,907, or 52% of revenues, for fiscal
year 1996. The overall dollar increase in cost of goods sold for fiscal 1997 is
due to the increase in sales noted above. The decrease in cost of goods sold as
a percentage of product revenues has resulted primarily from a 3% increase in
the selling price of AdatoSil 5000 Silicone Oil, the Company's primary product,
coupled with the strengthening of the U.S. dollar against the German mark which
has lowered the costs associated with AdatoSil 5000 Silicone Oil purchases.
Research and development expenses decreased from $1,722,998 in fiscal year
1996 to $1,570,674 in fiscal year 1997, a decrease of $152,324 or 9%. The
decrease in research and development expenses relates to a decrease in the
expenditures associated with the Company's laser development program offset by
expenditures associated with the Company's surgical products and ophthalmic drug
delivery programs acquired from EOI. The reduction in the laser development
program is a direct result of a reduction is workforce and other cost reduction
programs implemented during the fiscal year 1996 in connection with the change
in the Company's market focus. The Company's research and development expenses
consist primarily of direct expenses associated with compensation and benefits,
consulting and research and development arrangements with third parties and
indirect expenses such as materials, equipment and supplies.
-8-
<PAGE> 11
Marketing and general and administrative expenses increased $992,121 or
36% to $3,715,727 for the year ended June 30, 1997 as compared to $2,723,606 in
fiscal year 1996. This increase relates primarily to (i) the inclusion of the
marketing and general and administrative operations acquired from EOI for twelve
months in fiscal 1997 as compared to only five months in fiscal year 1996; (ii)
legal fees associated with the Company's ongoing litigation; and (iii) offset by
a decrease in marketing and general and administrative expenses associated with
the Company's laser development projects resulting from the aforementioned cost
reduction programs.
Included in the results of operations for the year ended June 30, 1996 is
a $1.0 million non-cash charge for the in-process technology acquired from EOI.
At June 30, 1997, the Company took a non-cash charge to operations of $3,318,888
in connection with the write down of goodwill and license and distribution
rights acquired from EOI. This write down is due to the impairment of value
resulting from changes in the estimates of future sales associated with the
license and distribution agreements.
Interest income decreased to $140,705 in fiscal year 1997 from $257,093 in
fiscal year 1996. The decrease is due to a reduction in the levels of cash and
cash equivalents available for investment.
Years Ended June 30, 1995 and 1996
Product revenues increased to $2,341,073 in fiscal year 1996 from $170,000
in fiscal year 1995. This increase of $2,171,073 is attributable to the February
12, 1996 EOI acquisition, offset by a decrease in laser system sales of
approximately $33,000. The Company's ability to sell its laser systems in the
United States is subject to certain FDA limitations based on the status of the
Company's various clinical trials. International sales of its laser systems,
while not directly limited by the FDA, are also indirectly impacted by the
status of these clinical trials in the United States. In addition, the Company
has reduced the size of its laser operations workforce in order to preserve
working capital. Given these factors, it is not likely that laser sales volumes
will increase significantly beyond the current levels, until such time as the
viability of these various applications are further demonstrated through FDA
approvals to advance into later phases of the clinical trials.
Cost of sales totaled $1,228,907, or 52% of revenues, for the year ended
June 30, 1996 as compared to $98,803, or 58% of revenues, for fiscal year 1995.
The increase in cost of sales is attributable to the EOI acquisition. As such, a
gross margin analysis comparing fiscal years would not be meaningful.
Research and development expenses decreased from $2,776,474 in fiscal year
1995 to $1,722,998 in fiscal year 1996, a decrease of $1,053,476 or 38%. The
decrease in research and development expenses is a direct result of a reduction
in workforce and other cost reduction programs implemented in connection with
the Company's change in focus of its operations. The decrease in research and
development expenses during fiscal year 1996 were offset by increases in certain
non-cash expenses, including the write-down of inventories to anticipated net
realizable value, the ongoing depreciation of test and applications research
systems, the write-down of certain patents pending and the research and
development operations acquired from EOI. The Company's research and development
expenses consist primarily of direct expenses associated with compensation and
benefits and indirect expenses such as materials, equipment and supplies.
Marketing and general and administrative expenses increased $818,663 or
43% to $2,723,606 for the year ended June 30, 1996 as compared to $1,904,943 in
fiscal year 1995. This increase relates primarily to (i) the inclusion of the
results of operations from EOI; (ii) severance costs associated with the
acquisition of EOI; and (iii) legal fees associated with the Company's ongoing
litigation. The increase was offset by decreases in personnel, travel and
marketing costs related to the workforce and other cost reduction programs
involving the Company's laser operations.
Included in the results of operations for the year ended June 30, 1996 is
a $1.0 million non-cash charge for the in-process technology acquired from EOI.
-9-
<PAGE> 12
Interest income decreased to $257,093 in fiscal year 1996 from $341,685 in
fiscal year 1995. The decrease is due to a reduction in the levels of cash and
cash equivalents available for investment.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and cash equivalents of $1,752,648
as compared to $2,584,503 at June 30, 1996. The Company's short-term investments
at June 30, 1997 and 1996 were $235,000 and $795,970, respectively. The net
decrease in short-term investments is attributable to the maturing of short-term
investments since June 30, 1996. The net decrease in cash and cash equivalents
and short-term investments of $1,392,825 relates primarily to the loss from
operations, excluding non-cash expenses.
The Company anticipates that the cash and cash equivalents and the
interest earned thereon, together with funds generated from future product
sales, should be adequate to satisfy its capital requirements, based on current
levels of operations, through the end of fiscal year 1998. In the longer term,
however, the Company will seek corporate partnering, licensing and other fund
raising opportunities necessary to satisfy the significant expenditures
anticipated in connection with the development of its surgical products and
ophthalmic drug delivery operations.
Pursuant to various collaborative research and development, technology
license, and consulting arrangements relating to the Company's drug delivery
technology, the Company has financial commitments of $190,000 and $75,000 to be
paid during fiscal years 1998 and 1999, respectively. Other significant
expenditures may be incurred in connection with the legal proceedings discussed
in "Item 3. Legal Proceedings."
As of June 30, 1997, the Company had federal income tax and state income
tax net operating loss carryforwards of approximately $40.8 million and $16.6
million, respectively. Under the provision of Section 382 of the Internal
Revenue Code, use of the Company's net operating loss carryforwards is subject
to an annual limitation since a change in ownership of more than 50% occurred
within a three year specified testing period. Such annual limitation could range
from approximately $150,000 to $2.2 million. Federal and state net operating
loss carryforwards will begin to expire in 2001. The Company also had federal
and state research credit carryforwards of $562,000 and $174,000, respectively,
as of June 30, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are filed under this Item 8,
beginning on page F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders (the
"Proxy Statement"), which is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
-10-
<PAGE> 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See Index to Financial Statements at page F-1.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the financial statements or notes
thereto.
Reports on Form 8-K
A report on Form 8-K was filed on April 29, 1997 announcing that Sterling
C. Johnson, former President and Chief Operating Officer, stepped down to pursue
other opportunities.
Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically,
followed by the footnote reference to the previous filing.
2.1 Assets Sale and Purchase Agreement between Registrant and Escalon
Ophthalmics, Inc., dated October 9, 1995. (7)
3.1 (a) Restated Articles of Incorporation of Registrant. (8)
(b) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated November 8, 1993.(8)
(c) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated February 12, 1996.(8)
3.2 Amended and Restated Bylaws of Registrant. (1)
4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (3)
4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (3)
4.3 Form of Class C Common Stock Purchase Warrants. (3)
4.4 Form of Underwriters Class A Common Stock Purchase Warrants. (3)
-11-
<PAGE> 14
4.5 Form of Underwriters Class B Common Stock Purchase Warrants. (3)
4.6 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer
Corporation. (3)
(b) Amendment to Warrant Agreement between Registrant and U.S. Stock
Transfer Corporation. (5)
(c) Amendment to Warrant Agreement between Registrant and American Stock
Transfer Company. (6)
10.1(a) 1993 Stock Option Plan of Registrant. (4)
(b) Form of Nonqualified Stock Option Agreement of Registrant under the
1993 Stock Option Plan. (4)
(c) Form of Incentive Stock Option Agreement of Registrant under the 1993
Stock Option Plan. (4)
10.2 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers. (2)
10.3 Underwriting Agreement between the Registrant and the Underwriter. (3)
10.4 Unit Purchase Option between the Registrant and the Underwriter. (3)
10.5 Registration Rights Agreement between Registrant and EOI Corp. dated as
of February 12, 1996.(8)
10.6 Employment Agreement between Registrant and John T. Rich dated January
15, 1990, as amended as of January 15, 1995 and as further amended on
September 12, 1995. (8)
10.7 Employment Agreement between Registrant and Ronald Hueneke dated
October 4, 1991. (8)
10.8 Employment Agreement between Registrant and Richard J. DePiano dated
March 1, 1997.*
10.9 Distribution and License Agreement between Registrant and The Purdue
Frederick Company dated August 31, 1995. (8)
10.10 Distribution and Development Agreement between Registrant and Adatomed
Pharmazeutische Und Medizintechnische Gesellschaft Mbh dated January 1,
1990, as amended January 26, 1993 and as further amended May 17, 1993.
(8)
10.11 Distributorship Agreement between Registrant and Scott Medical Products
dated as of September 8, 1992, as amended September 8, 1995. (8)
10.12 Research and Development Agreement between Registrant and The West
Company, Incorporated dated April 3, 1995. (8)
10.13 Supply and Distribution Agreement between Registrant and Storz
Instrument Company dated as of July 7, 1995. (8)
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Data Schedule.*
- ---------------
* Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1 dated April 24, 1992 (Registration No. 33-47439).
(2) Filed as an exhibit to Pre-Effective Amendment No. 7 to the
Company's Registration Statement on Form S-1 dated August 20, 1992
(Registration No. 33-47439).
(3) Filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 dated November 9, 1993
(Registration No. 33-69360).
(4) Filed as an exhibit to the Company's Registration Statement on Form
S-8 dated June 13, 1994 (Registration Number 33-80162).
(5) Filed as an exhibit to the Company's Form 10-K for year ended June
30, 1994.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended
June 30, 1995.
(7) Filed as an appendix to the Registration Statement on Form S-4 dated
December 5, 1995 (Registration Statement No. 33-80037).
(8) Filed as an exhibit to the Company's Form 10-K for the year ended
June 30, 1996.
-12-
<PAGE> 15
ESCALON MEDICAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors .................................................... F-2
Balance Sheets at June 30, 1996 and 1997 .......................................... F-3
Statements of Operations for the years ended June 30, 1995, 1996 and 1997 ......... F-4
Statements of Shareholders' Equity for the years ended June 30, 1995, 1996 and 1997 F-5
Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997 ......... F-6
Notes to Financial Statements ..................................................... F-7
</TABLE>
F-1
<PAGE> 16
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Escalon Medical Corp.
We have audited the accompanying balance sheets of Escalon Medical Corp.
as of June 30, 1996 and 1997 and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Escalon Medical Corp. at
June 30, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Princeton, New Jersey
August 14, 1997
F-2
<PAGE> 17
ESCALON MEDICAL CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
ASSETS 1996 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,584,503 $ 1,752,648
Investments 795,970 235,000
Accounts receivable, net of allowance for doubtful accounts
of $6,677 and $4,519 at June 30, 1996 and 1997, respectively 735,910 587,265
Inventory, net 669,996 577,782
Other current assets 80,891 52,850
------------ ------------
Total current assets 4,867,270 3,205,545
Furniture and equipment, at cost, net 172,092 97,977
Long-term note receivable -- 62,500
License and distribution rights, net 2,074,990 892,528
Patents, net 446,995 465,046
Goodwill, net 3,959,055 1,095,982
Other assets 79,494 14,156
------------ ------------
$ 11,599,896 $ 5,833,734
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 7,510 $ 2,910
Accounts payable 653,871 553,197
Accrued compensation 246,250 259,378
Accrued professional expenses 41,108 44,649
Accrued customer expenses 75,000 --
Other accrued expenses 46,020 131,668
Customer deposits 43,480 43,480
------------ ------------
Total current liabilities 1,113,239 1,035,282
------------ ------------
Long term capital lease obligations 3,235 --
------------ ------------
Commitments
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares authorized;
10,518,814 and 10,517,519 shares issued and outstanding
at June 30, 1996 and 1997, respectively 44,645,440 44,645,440
Accumulated deficit (34,162,018) (39,846,988)
------------ ------------
Total shareholders' equity 10,483,422 4,798,452
------------ ------------
$ 11,599,896 $ 5,833,734
============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE> 18
ESCALON MEDICAL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Sales revenues $ 170,000 $ 2,341,073 $ 5,431,282
----------- ----------- ------------
Costs and Expenses:
Cost of goods sold 98,803 1,228,907 2,650,360
Research and development 2,776,474 1,722,998 1,570,674
Marketing, general and administrative 1,904,943 2,723,606 3,715,727
Write down of goodwill and license and distribution rights -- -- 3,318,888
Acquired research and development -- 1,000,000 --
----------- ----------- ------------
Total costs and expenses 4,780,220 6,675,511 11,255,649
----------- ----------- ------------
Loss from operations (4,610,220) (4,334,438) (5,824,367)
----------- ----------- ------------
Other Income and Expenses:
Interest income 341,685 257,093 140,705
Interest expense -- (4,950) (1,308)
----------- ----------- ------------
Total other income and expense 341,685 252,143 139,397
----------- ----------- ------------
Net loss $(4,268,535) $(4,082,295) $ (5,684,970)
=========== =========== ============
Net loss per share $ (0.74) $ (0.54) $ (0.54)
=========== =========== ============
Shares used in computation of net
loss per share 5,745,572 7,570,913 10,518,495
=========== =========== ============
</TABLE>
See notes to financial statements
F-4
<PAGE> 19
ESCALON MEDICAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
WARRANTS TO
COMMON STOCK PURCHASE TOTAL
-------------------------- COMMON ACCUMULATED DEFERRED SHAREHOLDERS'
SHARES AMOUNT STOCK DEFICIT COMPENSATION EQUITY
----------- ----------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 5,741,418 $37,503,435 $ 56,505 $(25,811,188) $(98,280) $ 11,650,472
Amortization of deferred compensation -- -- -- -- 81,936 81,936
Exercise of warrants to purchase stock and
common stock options 4,655 11,046 (4,548) -- -- 6,498
Net loss -- -- -- (4,268,535) -- (4,268,535)
----------- ----------- -------- ------------ -------- ------------
Balance at June 30, 1995 5,746,073 37,514,481 51,957 (30,079,723) (16,344) 7,470,371
Amortization of deferred compensation -- -- -- -- 16,344 16,344
Issuance of common stock pursuant to
acquisition agreement 4,720,772 6,996,184 -- -- -- 6,996,184
Exercise of stock options 51,460 82,463 -- -- -- 82,463
Exercise/expiration of warrants to purchase
common stock 509 52,312 (51,957) -- -- 355
Net loss -- -- -- (4,082,295) -- (4,082,295)
----------- ----------- -------- ------------ -------- ------------
Balance at June 30, 1996 10,518,814 44,645,440 -- (34,162,018) -- 10,483,422
Cancellation of previously issued shares (1,295) -- -- -- -- --
Net loss -- -- -- (5,684,970) -- (5,684,970)
----------- ----------- -------- ------------ -------- ------------
Balance at June 30, 1997 10,517,519 $44,645,440 $ -- $(39,846,988) $ -- $ 4,798,452
=========== =========== ======== ============ ======== ============
</TABLE>
See notes to financial statements
F-5
<PAGE> 20
ESCALON MEDICAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,268,535) $(4,082,295) $(5,684,970)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 376,400 757,951 854,402
Amortization of deferred compensation 81,936 16,344 --
Write off of goodwill and license and distribution rights -- -- 3,318,888
Write off of patents 75,716 61,044 10,980
Acquired research and development -- 1,000,000 --
Net loss (gain) on disposition of assets -- 58,769 (2,450)
Change in operating assets and liabilities:
Accounts receivable -- (33,326) 148,645
Inventory 672,115 165,122 92,214
Other current assets (15,707) (17,119) 28,041
Accounts payable, accrued compensation,
professional and customer expenses, and
other accrued expenses (406,795) (1,201,530) (73,357)
Customer deposits (27,500) -- --
----------- ----------- -----------
Net cash used in operating activities (3,512,370) (3,275,040) (1,307,607)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (719,524) (890,970) (235,000)
Proceeds from maturities of short-term investments 5,073,000 3,208,396 795,970
Purchase of furniture and equipment (352,424) (52,963) (37,022)
Proceeds from sale of furniture and equipment -- -- 5,900
Other assets 124,319 61,146 65,338
Patent costs (34,111) (66,050) (49,099)
Long term note receivable -- -- (62,500)
Cash acquired in acquisition -- 1,756 --
----------- ----------- -----------
Net cash provided from investing activities 4,091,260 2,261,315 483,587
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 6,498 82,818 --
Principal payments under capital lease obligations -- (3,000) (7,835)
----------- ----------- -----------
Net cash provided from (used in) financing activities 6,498 79,818 (7,835)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 585,388 (933,907) (831,855)
Cash and cash equivalents, beginning of year 2,933,022 3,518,410 2,584,503
----------- ----------- -----------
Cash and cash equivalents, end of year $ 3,518,410 $ 2,584,503 $ 1,752,648
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the year $ -- $ 4,950 $ 1,308
=========== =========== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE> 21
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) (the "Company"), was incorporated on December 24, 1987 in the State of
California. The Company develops, markets and distributes ophthalmic medical
devices and pharmaceutical products and is developing its ophthalmic drug
delivery system. Activities from inception have included development and testing
of laser technology and the sales of a minimal number of laser systems. Such
laser sales have been to physicians, clinics and university hospitals in
connection with their participation in the Company's clinical trials and for
investigation of additional applications for the Company's laser systems. As
described more fully in Note 4, the Company acquired substantially all of the
assets and certain of the liabilities of Escalon Ophthalmics, Inc. ("EOI"), a
Pennsylvania corporation, on February 12, 1996 pursuant to the Assets Sale and
Purchase Agreement dated October 9, 1995 and as amended December 19, 1995. The
results of operations for the year ended June 30, 1996 include the results of
operations of EOI subsequent to the acquisition. Sales of the products acquired
from EOI are made primarily to hospitals and physicians throughout the United
States. As a result of this acquisition, the Company is no longer in the
development stage for financial reporting purposes. Included in the accumulated
deficit is approximately $31.9 million which was accumulated during the
development stage.
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three
months or less at the time of purchase to be cash equivalents.
The Company invests its excess cash in money market accounts with
financial institutions having strong credit ratings. Investments with maturities
of one year or less are considered current assets.
The Company has established practices relative to diversification and
maturities for safety and liquidity purposes. These practices are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any losses on its cash equivalents and
investments.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to follow
Accounting Principal Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related interpretations in accounting for its
employee stock option plans. Under APB 25, no compensation expense is recognized
at the time of option grant because the exercise price of the Company's employee
stock option equals the fair market value of the underlying common stock on the
date of grant.
Revenue Recognition
The Company recognizes revenue from the sales of its products at the time
of shipment.
F-7
<PAGE> 22
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Inventories
Raw materials, work in process and finished goods inventories are recorded
at lower of cost (first-in, first-out) or market. The composition of inventories
is as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Raw materials/work in process $ 623,460 $ 628,687
Finished goods 643,915 610,093
----------- -----------
1,267,375 1,238,780
Valuation allowance (597,379) (660,998)
----------- -----------
$ 669,996 $ 577,782
=========== ===========
</TABLE>
During fiscal 1995, there were no changes in the Company's inventory
valuation allowance which totaled $500,000. In fiscal 1996, there was a net
increase in the inventory valuation allowance of $97,379 which consisted of (i)
a $146,640 increase resulting from the EOI acquisition, (ii) a $26,187 charged
to expenses, and (iii) a $75,448 deduction in such inventory allowance. The
increase in the valuation allowance during fiscal 1997 resulted from a $63,619
charge to expenses.
Furniture and Equipment
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets which are estimated to be eighteen months to seven years. Depreciation
expense for the years ended June 30, 1995, 1996 and 1997 was $376,400, $459,553
and $107,687 respectively.
Assets under capital leases, consisting of office equipment, are amortized
over the lesser of the useful life or the applicable lease terms, whichever is
shorter, which range from 3 to 5 years.
Furniture and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Equipment $ 630,681 $ 660,192
Furniture and fixtures 36,211 36,211
Leasehold improvements 14,475 6,404
Assets under capital leases 11,840 9,847
Testing and applications research systems 1,061,409 1,061,409
----------- -----------
1,754,616 1,774,063
Less accumulated depreciation and amortization (1,582,524) (1,676,086)
----------- -----------
$ 172,092 $ 97,977
=========== ===========
</TABLE>
Acquired License and Distribution Rights
In connection with the acquisition described in Note 4, a portion of the
purchase price was allocated to certain product license and distribution
agreements. Such cost allocation was based on an independent valuation, with
such costs being amortized over an eight-year period using the straight-line
method. At June 30, 1997, the Company evaluated the ongoing value assigned to
these license and distribution agreements. Based on such evaluation, the Company
determined that an asset, with a carrying value of $2,199,000, was impaired due
to changes in estimates
F-8
<PAGE> 23
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
relating to the future sales associated with such agreements. The change in the
sales estimates resulted from (i) anticipated competition related to one of the
Company's major products and (ii) delays in the development of the international
distribution for another of the Company's products which could result in the
loss of the exclusive distributorship for such product. As a result, the Company
wrote down its license and distribution rights by $918,253 to its estimated fair
value. Fair value was based on estimated future cash flows to be generated from
the license and distribution agreements, discounted at a market rate of
interest. Accumulated amortization of license and distribution rights was
$114,010 and $192,063 at June 30, 1996 and 1997, respectively.
Patents
It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 17 years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. Accumulated patent
amortization was $40,474 and $60,542 at June 30, 1996 and 1997, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired (see Note 4). These costs are being amortized over a
ten-year period using the straight-line method. The Company periodically reviews
the value of its goodwill to determine if an impairment has occurred. As noted
in the above paragraph, "Acquired License and Distribution Rights," the Company
wrote down the value of its license and distribution rights due to an
impairment. As required by the Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," ("FASB 121") goodwill associated with the acquired
license and distribution rights was likewise written down by $2,400,635 at June
30, 1997. Accumulated amortization of goodwill for the years ended June 30, 1996
and 1997 was $172,133 and $180,889, respectively.
Research and Development
All research and development costs are charged to operations as incurred.
Net Loss Per Share
Net loss per share is computed based upon the weighted average number of
common shares outstanding. Common stock equivalents have not been included in
computing net loss per share since their effect would have been antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The impact of Statement 128 on the calculation of primary and fully
diluted earnings per share is not expected to be material.
Income Taxes
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-9
<PAGE> 24
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(3) INVESTMENTS - HELD-TO-MATURITY
As of June 30, 1996 and 1997, the Company held investments consisting of
fixed-rate certificates of deposits of $2,890,970 and $1,585,000, respectively.
These certificates of deposits have been classified as investments held to
maturities. Such investments are recorded at cost which approximates fair value
at June 30, 1996 and 1997. Included in cash and cash equivalents at June 30,
1996 and 1997 were held-to-maturity securities totaling $2,095,000 and
$1,350,000 with original maturities of 90 days or less. All held-to-maturity
securities are due in one year or less.
(4) ACQUISITION OF ESCALON OPHTHALMICS, INC.
On February 12, 1996, the Company acquired substantially all of the assets
and certain of the liabilities of EOI, a developer, marketer and distributor of
ophthalmic medical devices, pharmaceuticals and drug delivery systems, in
exchange for 4,770,772 shares of the Company's Common Stock. Total estimated
cost of the acquisition was $8.9 million, including liabilities assumed of
$1,016,340 and estimated transaction costs of approximately $928,000. The
acquisition was accounted for using the purchase method of accounting as
prescribed by Accounting Principal Board Opinion No. 16 and includes the
acquisition of accounts receivable, inventories, equipment and various other
tangible and intangible assets. The total purchase price over the fair value of
net assets acquired approximates $4.1 million at the date of acquisition.
Another $1.0 million of the purchase price was assigned to in-process technology
and was charged to operations immediately following the acquisition. As
described in Note 2, goodwill related to the impaired license and distribution
agreements was written down to $0 in accordance with FASB 121.
The following pro forma results of operations information has been
prepared to give effect to the purchase as if such transaction had occurred at
the beginning of the respective periods presented. The historical results of
operations, included in the pro forma results, reflect additional amortization
expense base on the independent valuation of assets acquired as well as the $1.0
million charge to operations related to the acquired in-process technology. The
information presented is not necessarily indicative of results of future
operations of the combined companies.
PRO FORMA RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revenues $ 3,571,305 $ 5,031,862
Net loss $ (6,488,656) $ (4,864,327)
Net loss per share $ (0.62) $ (0.46)
Weighted average shares outstanding 10,466,344 10,498,824
</TABLE>
(5) OPERATING LEASES
The Company leases its research, manufacturing and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future minimum rentals to be paid under these leasing
arrangements as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- ------
<S> <C>
1998 $140,474
1999 82,660
2000 8,094
--------
$231,228
========
</TABLE>
Rent expense charged to operations during the years ended June 30, 1995,
1996 and 1997 was $250,000, $239,732 and $190,153, respectively.
F-10
<PAGE> 25
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(6) CAPITAL STOCK TRANSACTIONS
Redeemable Common Stock Purchase Warrants
During November 1993, the Company successfully completed an underwritten
public offering of 3,450,000 Units (the "Units"), each Unit consisting of one
share of Common Stock, one Class A Redeemable Common Stock Purchase Warrant and
one Class B Redeemable Common Stock Purchase Warrant (the "Public Offering").
Each Class A and Class B Warrant entitles the holder thereof to purchase one
share of Common Stock at a price of $6.25 and $7.50, respectively. The warrants
are currently exercisable and expire in November 2000. The underwriter of the
Public Offering was granted an option to purchase 300,000 Units at $8.00 per
unit. The option is exercisable commencing November 1994 and expires in November
1998. The Public Offering price for the Units was $5.00 per Unit. The net
proceeds to the Company from the Public Offering, after deducting underwriting
discounts and commissions and related expenses payable by the Company was
approximately $14,800,000.
In October 1993, in connection with the certain loan arrangements, the
Company issued an aggregate of 167,500 Class C Common Stock warrants. Each Class
C warrant entitles the holder to purchase one share of Common Stock at $5.00 per
share. The warrants are currently exercisable and expire in November 1998.
Stock Option Plans
The Company has adopted seven employee stock option plans which provide
for incentive stock options and non-qualified stock options to purchase 812,455
shares of the Company's common stock. Under the terms of the plans, options may
be granted at not less than fair market value of the Common Stock at the date of
grant. Vesting generally occurs ratably over four years and are exercisable over
a period no longer than ten years after the grant date. At June 30, 1997,
options to purchase 450,000 shares of the Company's Common Stock were
exercisable and 232,484 shares are reserved for future grants.
Financial Accounting Standards Board Statement No. 123 ("FASB 123")
requires pro forma information regarding net income and earnings per share as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of FASB 123. The fair value of
these equity awards was estimated at the date of grant using the Black-Scholes
option pricing method with the following weighted average assumptions for fiscal
1997: risk-free interest rate of 5.6%; expected volatility of 0.865; expected
option life of one year from vesting and an expected dividend rate of 0.0%.
For purposes of the pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options' vesting period. The
Company had no option grants during fiscal year ended June 30, 1996. For the
fiscal year ended June 30, 1997, the pro forma net loss was $(5,774,970). The
pro forma net loss per share of Common Stock was $0.55.
F-11
<PAGE> 26
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(6) CAPITAL STOCK TRANSACTIONS - (CONTINUED)
The following is a summary of the Company's stock option activity and
related information for the fiscal years ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------------------------- -------------------------
COMMON WEIGHTED COMMON WEIGHTED
STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 427,840 $4.286 289,688 $4.141
Granted -- -- 450,000 $0.563
Exercised (51,460) $1.642 -- --
Forfeited (86,692) $6.337 (289,688) $4.141
-------- --------
Outstanding at end of year 289,688 $4.141 450,000 $0.563
======== ========
Exercisable at end of year 269,587 450,000
======== ========
Weighted average fair value of
options granted during the year -- $0.200
</TABLE>
All options outstanding at June 30, 1997 have an exercise price of $0.563
and a remaining contractual life of 9.9 Years.
Non-plan options to purchase 5,470 and 5,470 shares of Common Stock, at
prices of $0.365 and $1.827, respectively, were outstanding and exercisable at
June 30, 1997. These options generally have vesting and exercise provisions
consistent with options granted under the plans.
(7) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liability, which are considered to be
noncurrent, consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 220,000 $ 268,000
NOL carryforward 14,421,000 14,873,000
Tax credit carryforwards 663,000 736,000
------------ ------------
Total deferred tax assets 15,304,000 15,877,000
Deferred tax liability:
License and distribution rights (830,000) (353,000)
------------ ------------
Net deferred tax assets 14,474,000 15,524,000
Valuation allowance (14,474,000) (15,524,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
F-12
<PAGE> 27
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(7) INCOME TAXES - (CONTINUED)
At June 30, 1997, the Company has federal income tax and state income tax
net operating loss carryforwards of approximately $40.8 million and $16.6
million, respectively. The difference between the federal and state carryforward
amounts is primarily attributable to differences in research and development
expenses and to California's statutory 50% annual reduction rule. In addition,
the Company has federal and California research credit carryforwards of $562,000
and $174,000, respectively, at June 30, 1997. Federal and state operating losses
and tax credits will expire at various dates between 2001 and 2012.
For the years ended June 30, 1995, 1996 and 1997, the Company recorded
valuation allowances of $11,563,000, $14,474,000 and $15,524,000, respectively.
Under the provisions of Section 382 of the Internal Revenue Code, use of
net operating loss (NOL) and credit carryforwards is subject to an annual
limitation if there is a change in ownership during a specified testing period.
As a result of such ownership changes in fiscal 1990 and in fiscal 1994,
approximately $14,268,000 of federal NOL carryforward is subject to limitation.
No formal study has been performed to test for additional ownership
changes which may have occurred at the time of the acquisition of EOI (see Note
4) or afterward. If an additional ownership change did occur, an additional
limitation would apply to all of the NOL carryforwards attributable to periods
before that change. Depending on the existence and time of such change,
potentially all of the federal NOL carryforwards at June 30, 1997 could be
subject to a limitation which would be based on the value of the Company
immediately before the change multiplied by a published interest rate. Based on
the value of the Company's stock and the published interest rates since the EOI
acquisition occurred, the potential annual limitation could range from
approximately $150,000 to $2.2 million. The limitation could also restrict the
use of the tax credit carryforwards, and approximately $16 million of the NOL
carryforwards for state tax purposes.
Approximately $8.2 million of the federal NOL carryforward at June 30,
1997 represents amounts that were transferred to the Company as a result of the
acquisition of EOI. Use of this transferred NOL is also limited under Section
382. Any tax benefit realized from such use would first reduce acquired
goodwill. Although the Company believes that the acquisition of EOI qualified as
a tax free reorganization, there is no certainty that the Internal Revenue
Service will agree. If the acquisition were not to qualify as a tax free
reorganization, the NOL carryforward of EOI would be treated as a purchase of
assets, and the tax basis of the acquired assets would be increased.
(8) COMMITMENTS
Pursuant to various collaborative research and development, technology
license, and consulting arrangements relating to the Company's drug delivery
technology, the Company has financial commitments of $190,000 and $75,000 to be
paid during fiscal years 1998 and 1999, respectively.
(9) 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 and which was most recently reported
in the Company's Form 10-Q for the quarter ended September 30, 1996). 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
F-13
<PAGE> 28
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(9) CONTINGENCIES - (CONTINUED)
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 August 15, 1996, the Company,
together with three other companies against whom similar claims have been
asserted in separate actions filed as "related" to In Re Blech Securities
Litigation, filed a motion for permission to take an immediate appeal. On
January 16, 1997, the motion was denied. On March 31, 1997, the Court issued
Pretrial Order No. 2, which sets January 31, 1998 as the cutoff date for
discovery and directs that the case be ready for trial by March 31, 1998. The
Pretrial Order No. 2 also provides for certain coordination of discovery in the
Kozloski case, related cases making similar allegations arising from other
issuers' offerings and In Re Blech Securities Litigation. Discovery has
commenced in all related actions but is in its preliminary stages.
While continuing to deny any wrongdoing and in an effort to curtail its
legal expenses related to this litigation, the Company has reached an agreement
in principle to settle this action for $500,000 on its behalf and on behalf of
its former and present officers and directors. 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.
F-14
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
Dated: September 26, 1997
By:/s/Richard J. DePiano
----------------------------------------
Richard J. DePiano
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By:/s/ Richard J. DePiano Chairman and Chief Executive Officer September 26, 1997
--------------------------------- (Principal Executive Officer) and Director
Richard J. DePiano
By:/s/ John T. Rich Vice President of Finance (Principal September 26, 1997
--------------------------------- Financial Officer and Principal Accounting
John T. Rich Officer) and Secretary
By:/s/ Robert J. Kunze Director September 26, 1997
-------------------------------
Robert J. Kunze
By:/s/ Jay L. Federman, M.D. Director September 26, 1997
-------------------------------
Jay L. Federman, M.D.
By:/s/ Sterling C. Johnson Director September 26, 1997
-----------------------------
Sterling C. Johnson
By:/s/ Jack M. Dodick, M.D. Director September 26, 1997
-------------------------
Jack M. Dodick, M.D.
</TABLE>
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Assets Sale and Purchase Agreement between Registrant and Escalon
Ophthalmics, Inc., dated October 9, 1995. (7)
3.1 (a) Restated Articles of Incorporation of Registrant. (8)
(b) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated November 8, 1993.(8)
(c) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated February 12, 1996.(8)
3.2 Amended and Restated Bylaws of Registrant. (1)
4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (3)
4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (3)
4.3 Form of Class C Common Stock Purchase Warrants. (3)
4.4 Form of Underwriters Class A Common Stock Purchase Warrants. (3)
4.5 Form of Underwriters Class B Common Stock Purchase Warrants. (3)
4.6 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer
Corporation. (3)
(b) Amendment to Warrant Agreement between Registrant and U.S. Stock
Transfer Corporation. (5)
(c) Amendment to Warrant Agreement between Registrant and American Stock
Transfer Company. (6)
10.1(a) 1993 Stock Option Plan of Registrant. (4)
(b) Form of Nonqualified Stock Option Agreement of Registrant under the
1993 Stock Option Plan. (4)
(c) Form of Incentive Stock Option Agreement of Registrant under the 1993
Stock Option Plan. (4)
10.2 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers. (2)
10.3 Underwriting Agreement between the Registrant and the Underwriter. (3)
10.4 Unit Purchase Option between the Registrant and the Underwriter. (3)
10.5 Registration Rights Agreement between Registrant and EOI Corp. dated as
of February 12, 1996.(8)
10.6 Employment Agreement between Registrant and John T. Rich dated January
15, 1990, as amended as of January 15, 1995 and as further amended on
September 12, 1995. (8)
10.7 Employment Agreement between Registrant and Ronald Hueneke dated
October 4, 1991. (8)
10.8 Employment Agreement between Registrant and Richard J. DePiano dated
March 1, 1997.*
10.9 Distribution and License Agreement between Registrant and The Purdue
Frederick Company dated August 31, 1995. (8)
10.10 Distribution and Development Agreement between Registrant and Adatomed
Pharmazeutische Und Medizintechnische Gesellschaft Mbh dated January 1,
1990, as amended January 26, 1993 and as further amended May 17, 1993.
(8)
10.11 Distributorship Agreement between Registrant and Scott Medical Products
dated as of September 8, 1992, as amended September 8, 1995. (8)
10.12 Research and Development Agreement between Registrant and The West
Company, Incorporated dated April 3, 1995. (8)
10.13 Supply and Distribution Agreement between Registrant and Storz
Instrument Company dated as of July 7, 1995. (8)
</TABLE>
-1-
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1 dated April 24, 1992 (Registration No. 33-47439).
(2) Filed as an exhibit to Pre-Effective Amendment No. 7 to the
Company's Registration Statement on Form S-1 dated August 20, 1992
(Registration No. 33-47439).
(3) Filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 dated November 9, 1993
(Registration No. 33-69360).
(4) Filed as an exhibit to the Company's Registration Statement on Form
S-8 dated June 13, 1994 (Registration Number 33-80162).
(5) Filed as an exhibit to the Company's Form 10-K for year ended June
30, 1994.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended
June 30, 1995.
(7) Filed as an appendix to the Registration Statement on Form S-4 dated
December 5, 1995 (Registration Statement No. 33-80037).
(8) Filed as an exhibit to the Company's Form 10-K for the year ended
June 30, 1996.
- 2 -
<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement dated June 4, 1997 is made by and between
Escalon Medical Corp. (the "Company"), a California corporation with its
principal offices located at 182 Tamarack Circle, Skillman, New Jersey 08558,
and Richard J. DePiano (the "Executive"), an individual residing at 44 Righters
Mill Road, Gladwyne, Pennsylvania 19035.
RECITALS:
The parties hereto desire to enter into this Agreement to set forth the
terms and conditions pursuant to which the Executive will be employed as
Chairman and Chief Executive Officer of the Company and to address certain other
matters in connection with such employment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. EMPLOYMENT.
1.1 POSITION AND DUTIES. The Company hereby employs the
Executive as Chairman and Chief Executive Officer of the Company upon the terms
and conditions set forth in this Agreement, and the Executive hereby accepts
such employment. Subject to the direction and control of the Board of Directors
(the "Board"), the Executive, as Chairman and Chief Executive Officer, shall
perform such executive, managerial and administrative duties as are from time to
time assigned to him by the Board and are consistent with his position as
Chairman and Chief Executive Officer.
1.2 OBLIGATIONS OF THE EXECUTIVE. The Executive shall devote
sufficient business time, attention and energies to the business of the Company
to perform his duties hereunder. The Company understands that the Executive has
been engaged and will continue to engage in certain other business and
investment activities and agrees that the Executive may continue to engage in
such other activities provided that the Executive shall continue to fulfill the
obligations of his position with the Company as provided in the preceding
sentence.
2. TERM OF AGREEMENT. The initial term of this Agreement commenced on
March 1, 1997 and shall continue through February 28, 1998. This Agreement may
be extended by the parties for such additional period and upon such terms and
conditions as the parties shall agree in writing. Each reference herein to "the
term of this Agreement" shall include the initial term and any extension term.
<PAGE> 2
3. BASE SALARY. The Executive shall be paid, as base compensation for
all services to be rendered by the Executive hereunder, a salary at the rate of
$240,000 per year, payable on a current basis in accordance with the Company's
standard payroll practices for executives. Such annual rate of base compensation
in effect at any time during the term of this Agreement shall hereinafter be
referred to as the "Base Salary."
4. INCENTIVE CASH BONUS. If, during the term of the Executive's
employment hereunder, the Company shall have entered into a Transaction (as
hereinafter defined), the Executive shall be entitled to receive an incentive
cash bonus in an amount equal to 10% of the increase in the Company's Market
Capitalization (as hereinafter defined) from and after March 1, 1997 to the
close of business on the date on which the Executive's employment under this
Agreement shall terminate pursuant to Section 2 hereof (the "Termination Date");
provided, however, that the minimum bonus payable to the Executive hereunder
upon the occurrence of a Transaction shall be $250,000; and further provided,
however, that the bonus payable hereunder shall be reduced by an amount equal to
the appreciation value of the stock options granted to the Executive by the
Company pursuant to Section 6 hereof that have theretofore been exercised or
that are exercisable as of the Termination Date and have not been forfeited by
the Executive. As used in this Agreement, the term "Transaction" shall mean the
occurrence of one or more events that shall result in the following: (i) a sale,
license or other transfer of all or a substantial portion of the assets of the
Company, (ii) a merger or consolidation of the Company, or (iii) a sale of all
or a substantial portion of the Company's capital stock. As used in this
Agreement, the term "Market Capitalization" shall mean the aggregate dollar
value determined by multiplying the number of shares of the Company's capital
stock then outstanding by the Fair Market Value (as hereinafter defined) of such
shares on the date in question; provided, however, that if, on or prior to the
Termination Date, the Company shall have been wholly or partially liquidated or
acquired, in whole or in part, whether by merger, consolidation, sale of all or
a substantial portion of its assets, sale of all or a substantial portion of its
capital stock or otherwise, the Market Capitalization on the Termination Date
shall be increased to include the aggregate value of all cash, notes, securities
and other forms of consideration distributed to the stockholders of the Company
upon such liquidation or by reason of such acquisition, as determined in good
faith by the Board of Directors of the Company. As used in this Agreement, the
term "Fair Market Value" shall mean the average of the highest and lowest sale
prices of the Company's capital stock on the Nasdaq Stock Market on the date in
question or, if no sales were effected on such day, on the immediately preceding
trading day; provided, however, that if the Company's capital stock, or any
class or series thereof, is not traded on the Nasdaq Stock Market at such time,
the Fair Market Value thereof shall be determined in good faith by the Board of
Directors of the Company.
5. ADDITIONAL BENEFITS. While this Agreement is in effect, the Company
shall provide the following additional benefits:
-2-
<PAGE> 3
5.1 VACATION. The Executive shall receive six weeks paid
vacation each calendar year.
5.2 AUTOMOBILE OR AUTOMOBILE ALLOWANCE. The Company shall
provide the Executive with an automobile allowance of $800 per month.
5.3 EXPENSE REIMBURSEMENT. Upon submission of proper vouchers,
the Company shall pay or reimburse the Executive for all necessary business and
entertainment expenses reasonably incurred by the Executive in connection with
the business of the Company.
5.4 INSURANCE BENEFITS. The Company shall reimburse the
Executive medical, hospital, disability and other insurance benefits having a
total cost comparable to the cost of such benefits provided to the other senior
executive officers of the Company.
5.5 RETIREMENT PLAN. The Executive shall be entitled to
participate in any profit sharing or pension plan made available to full-time
employees of the Company in accordance with the terms of such plans.
5.6 OTHER BENEFITS. Without limiting any of the foregoing
benefits, the Executive shall receive all benefits and participate in all
benefit programs generally made available to other senior executive officers of
the Company.
6. STOCK OPTIONS. The Company shall cause to be granted to the
Executive incentive stock options exercisable for a total of 450,000 shares of
the Company's Common Stock at a per share exercise price equal to the fair
market value per share of the Company's Common Stock on the date of grant. Such
stock options shall be vested in full on the date of grant but shall terminate
in all events upon the payment of the incentive bonus payable pursuant to
Section 4 hereof.
7. TERMINATION UPON DEATH. The Executive's employment hereunder and any
and all rights under this Agreement or otherwise as an employee of the Company
shall terminate upon the death of the Executive, and thereafter the Company
shall have no liability or obligation to the Executive's estate or legal
representatives hereunder, provided that the Executive shall be entitled to the
Base Salary and other compensation earned by the Executive, but not paid, prior
to his death, except that the Executive shall not be entitled to receive an
incentive cash bonus pursuant to Section 4 hereof unless the Company shall have
entered into a Transaction prior to the date of the Executive's death.
8. CONFIDENTIALITY; PUBLIC STATEMENTS. The Company may, pursuant to the
Executive's employment hereunder, provide to him and confide in him business
methods and systems, techniques and methods of operation developed at great
expense
-3-
<PAGE> 4
by the Company ("Trade Secrets") and which the Executive recognizes to be unique
assets of the Company hereunder, directly or indirectly, in any manner utilize
or disclose to any person, firm, corporation, association or other entity,
except to directors, consultants or employees of the Company in the course of
his duties and where required by law: (a) any such Trade Secrets, (b) any sales
prospects, customers lists, products, research or data of any kind, or (c) any
information relating to strategic plans, sales costs, profits or the financial
condition of the Company or any of its customers or prospective customers, which
are not generally known to the public or recognized as standard practice in the
industries in which the Company shall be engaged. The Executive further
covenants and agrees that he will promptly deliver to the Company all tangible
evidence of the knowledge and information described in (a), (b) and (c), above,
prior to or at the termination of the Executive's employment.
9. ENTIRE AGREEMENT. Except for any agreement evidencing the stock
options granted pursuant to Section 6 hereof, this Agreement constitutes the
full and complete understanding and agreement of the Executive and the Company
respecting the subject matter hereof, and supersedes all prior understandings
and agreements, oral or written, express or implied. This Agreement may not be
modified or amended orally, but only by an agreement in writing, signed by the
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
10. HEADINGS. The section headings of this Agreement are for
convenience of reference only and are not to be considered in the interpretation
of the terms and conditions of this Agreement.
11. DEFINITION OF COMPANY. The Company is governed by its Board and,
accordingly, all references in this Agreement to the actions and discretion of
the Company are meant and deemed to refer to the actions and discretion of the
Board.
12. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when sent
by certified mail, postage prepaid, addressed as follows:
If to the Company:
Escalon Medical Corp.
182 Tamarack Circle
Skillman, NJ 08558
Attn: Compensation Committee Chairman
If to the Executive, at his personal residence as set forth
above.
-4-
<PAGE> 5
Any party may change the persons and address to which notices or other
communications are to be sent by giving written notice of such change to the
other party in the manner provided herein for giving notice.
13. WAIVER OF BREACH. No waiver by either party of any condition or of
the breach by the other of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances shall be deemed or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition, or of the breach of any other term or covenant
set forth in this Agreement. Moreover, the failure of either party to exercise
any right hereunder shall not bar the later exercise thereof.
14. INURE AND BIND; NONALIENATION. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors in
interest. The Executive shall not pledge, hypothecate, anticipate or in any way
create a lien upon any amounts provided under this Agreement. This Agreement and
the benefits payable hereunder shall not be assignable by either party without
the prior written consent of the other; provided, however, that nothing in this
Section shall preclude the Executive from designating a beneficiary to receive
any benefit payable hereunder upon his death, or the executors, administrators
or other legal representatives of the Executive or his estate from assigning any
rights hereunder to which they become entitled to the person or persons entitled
thereto.
15. GOVERNING LAW. This Agreement is entered into and shall be
construed in accordance with the laws of the Commonwealth of Pennsylvania.
16. INVALIDITY OR UNENFORCEABILITY. If any term of provision of this
Agreement is held to be invalid or unenforceable, for any reason, such
invalidity or unenforceability shall not affect any other term or provision
hereof and this Agreement shall continue in full force and effect as if such
invalid or unenforceable term or provision (to the extent of the invalidity or
unenforceability) had not been contained herein.
17. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or the breach hereof, shall be settled by arbitration in
Philadelphia, Pennsylvania, in accordance with the laws of the Commonwealth of
Pennsylvania by three arbitrators, one of whom shall be appointed by the
Company, one by the Executive and third of whom shall be appointed by the first
two arbitrators. If either party fails to select an arbitrator within 30 days
after written notice of demand for arbitration from the other, the other party
may have such arbitrator appointed by the American Arbitration Association. If
the first two arbitrators cannot agree on the appointment of a third arbitrator
within 30 days after their selection, then the third arbitrator shall be
appointed by the American Arbitration Association. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association.
Judgment upon
-5-
<PAGE> 6
the award rendered by the arbitrators may be entered in any court
having jurisdiction hereof. In the event that it shall be necessary or desirable
from the Company and/or the Executive to retain legal counsel and/or incur other
costs and expenses in connection with the enforcement of any or all of either
party's rights under this Agreement, each party shall bear its own costs and
expenses in connection with the enforcement of its rights (including the
enforcement of any arbitration award in court), regardless of the final outcome.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written.
ESCALON MEDICAL CORP.
By: /s/ John T. Rich
--------------------------------
Title: Vice President of Finance
-------------------------
/s/ Richard J. DePiano
------------------------------------
Richard J. DePiano
Approved:
/s/ Robert J. Kunze
------------------------------------
Robert J. Kunze
/s/ Jay L. Federman, M.D.
------------------------------------
Jay L. Federman, M.D.
-6-
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-54994) pertaining to the 1988, 1989, 1990, 1991 and 1992 Stock Option
Plans of Escalon Medical Corp., the Registration Statement (Form S-8 No.
33-80162) pertaining to the 1993 Stock Option Plan of Escalon Medical Corp. and
the Registration Statement (Form S-3 No. 333-4382) of Escalon Medical Corp. and
the related Prospectus of our report dated August 14, 1997, with respect to the
financial statements of Escalon Medical Corp. included in its Annual Report
(Form 10-K) for the year ended June 30, 1997.
Ernst & Young LLP
Princeton, New Jersey
September 26, 1997
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