<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File No. 0-20127
ESCALON MEDICAL CORP.
(Exact name of Registrant as specified in its charter)
California 33-0272839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
351 East Conestoga Road
Wayne, PA 19087
(610) 688-6830
(Address, including zip code, and
telephone number, including area code,
of Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Date: November 6, 1998 2,760,568 Shares of Common Stock, no par value
---------------- ---------
<PAGE> 2
ESCALON MEDICAL CORP.
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1998
and September 30, 1998 3
Condensed Statements of Operations for the
Three Months Ended September 30, 1997 and 1998 4
Condensed Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP. AND SUBSIDARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
------------ ------------
ASSETS (UNAUDITED)
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,263,967 $ 2,189,497
Investments 330,016 334,000
Accounts receivable, net 940,378 869,564
Other receivables 75,000 75,000
Inventory, net 462,042 705,432
Other current assets 79,088 198,915
------------ ------------
Total current assets 4,150,491 4,372,408
Furniture and equipment, at cost, net 134,734 131,365
Long-term note receivable 112,500 125,000
License and distribution rights, net 878,838 842,812
Patents, net 475,175 452,685
Goodwill, net 968,295 936,373
Other assets 14,095 16,495
------------ ------------
$ 6,734,128 $ 6,877,138
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 287,192 $ 359,519
Accrued and other liabilities 398,284 432,276
------------ ------------
Total current liabilities 685,476 791,795
------------ ------------
Shareholders' Equity:
Preferred stock, no par value; 2,000,000 shares authorized; 900 and 818
shares issued and outstanding at June 30, 1998
and September 30, 1998, respectively 747,321 679,231
Common stock, no par value; 35,000,000 shares authorized;
3,021,027 issued at June 30, 1998 and 3,152,164 shares issued
less 134,980 Treasury shares at September 30, 1998 45,253,597 45,321,687
Treasury stock - (118,108)
Accumulated deficit (39,952,266) (39,797,467)
------------ ------------
Total shareholders' equity 6,048,652 6,085,343
------------ ------------
$ 6,734,128 $ 6,877,138
============ ============
</TABLE>
Note: The consolidated balance sheet at June 30, 1998 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
ESCALON MEDICAL CORP. AND SUBSIDARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Product revenues $1,371,164 $1,685,422
Costs and expenses:
Cost of goods sold 606,015 716,856
Research and development 96,389 155,437
Marketing, general and administrative 664,319 682,963
---------- ----------
Total costs and expenses 1,366,723 1,555,256
---------- ----------
Income from operations 4,441 130,166
---------- ----------
Other income and expenses:
Interest income 26,603 36,928
Interest expense (102) (25)
---------- ----------
Total other income and expense 26,501 36,903
---------- ----------
Net income $ 30,942 $ 167,069
========== ==========
Basic net income per share $ 0.012 $ 0.051
========== ==========
Diluted net income per share $ 0.012 $ 0.041
========== ==========
Weighted average shares - basic 2,629,375 3,040,152
========== ==========
Weighted average shares - diluted 2,629,375 4,114,879
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
ESCALON MEDICAL CORP. AND SUBSIDARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,942 $ 167,069
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 81,754 86,140
Write off of patents - - 24,805
Change in operating assets and liabilities:
Accounts receivable (35,110) 70,814
Inventories 113,539 (243,390)
Other current assets (4,418) (119,827)
Accounts payable, accrued and other liabilities (112,130) 119,819
---------- ----------
Net cash provided from operating activities 74,577 105,430
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments - - (259,000)
Proceeds from maturities of short-term investments - - 255,016
Long term note receivable (12,500) (12,500)
Purchase of furniture and equipment (1,200) (10,457)
License and distribution rights cost (97,668) - -
Other assets 740 (2,400)
Patent costs (7,445) (6,681)
---------- ----------
Net cash used in investing activities (118,073) (36,022)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (1,001) - -
Purchase of treasury stock - - (118,108)
Payment of preferred stock dividends - - (25,770)
---------- ----------
Net cash used in financing activities (1,001) (143,878)
---------- ----------
Net decrease in cash and cash equivalents (44,497) (74,470)
Cash and cash equivalents, beginning of period 1,752,648 2,263,967
---------- ----------
Cash and cash equivalents, end of period $1,708,151 $2,189,497
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
ESCALON MEDICAL CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Escalon
Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its
subsidiary Escalon Pharmaceutical Inc. (jointly referred to as "Escalon" or the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. Operating results for interim periods are not indicative of the
results that may be expected for the fiscal year ending June 30, 1999.
For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1998 included in the Company's
annual report on Form 10-K.
2. REVERSE STOCK SPLIT
On November 20, 1997, the Company held its annual meeting of
shareholders at which time the shareholders approved a one-for-four reverse
stock split (the "Reverse Split") of the Company's Common Stock (the "Common
Stock"). As a result of the Reverse Split, each shareholder now has one share of
Common Stock for every four shares owned before the Reverse Split. The Reverse
Split caused certain adjustments to be made to the Company's Class A, B and C
Redeemable Common Stock Purchase Warrants. The exercise price and number of
warrants necessary for purchase of a Common Stock share has been increased by a
factor of four.
All references in the condensed financial statements with regard to
shares, per share amounts and share prices have been adjusted for the Reverse
Split.
3. PER SHARE INFORMATION
In December 1997, the Company adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("SFAS No.128").
Earnings per share information has been restated for all prior periods presented
as prescribed by SFAS No. 128. Outstanding stock options and warrants have not
been included in computing basic and diluted net income per share for the
three-month periods ended September 30, 1997 and 1998 because their exercise
prices exceed market price and their effect would be antidilutive.
6
<PAGE> 7
3. PER SHARE INFORMATION (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------
1997 1998
--------------- ----------------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share:
Net income $ 30,942 $ 167,069
Preferred stock dividends - - (12,270)
---------- ----------
Numerator for basic earnings per share-income available to
Common shareholders 30,942 154,799
Effect of dilutive securities:
Preferred stock dividends - - 12,270
---------- ----------
Numerator for diluted earnings per share-income available to
Common shareholders after assumed conversions 30,942 167,069
Denominator:
Denominator for basic earnings per share - weighted average shares 2,629,375 3,040,152
Effect of dilutive securities:
Convertible preferred stock - - 1,074,727
========== ==========
Denominator for diluted earnings per share - weighted average and
assumed conversion 2,629,375 4,114,879
========== ==========
Basic earnings per share $ 0.012 $ 0.051
========== ==========
Diluted earnings per share $ 0.012 $ 0.041
========== ==========
</TABLE>
4. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in,
first-out basis) or market, consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------------
<S> <C> <C>
Raw materials/work in process $ 170,370 $ 142,526
Finished goods 472,672 743,906
--------- ---------
643,042 886,432
Valuation allowance (181,000) (181,000)
--------- ---------
$ 462,042 $ 705,432
========= =========
</TABLE>
5. SHAREHOLDERS' EQUITY
In July 1998, the preferred shareholder converted 82 shares into
131,137 shares of Common Stock at a conversion price of $0.6253 per share.
The Company purchased 134,980 shares of its Common Stock as
treasury stock from EOI Corp in August. These treasury shares cost $118,108.
The Board of Directors has authorized the repurchase
7
<PAGE> 8
5. SHAREHOLDERS' EQUITY (CONTINUED)
of up to 500,000 additional shares of the Company's stock. The price paid,
timing and manner of these purchases will be at management's discretion.
The following table summarizes the changes in the Company's
shareholders' equity accounts for the three months ended September 30, 1998.
There were no changes in the Company's shareholders' equity accounts for the
three months ended September 30, 1997 except for the decrease in the accumulated
deficit relating to the net income of $ 30,942.
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------- --------------------------------------------
Shares Amount Shares Amount
----------- ------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 900 $747,321 3,021,027 $45,253,597
Preferred stock conversion (82) (68,090) 131,137 68,090
Purchase of treasury stock - - - - - - - -
Preferred stock dividend - - - - - - - -
Net income - - - - - - - -
--- -------- --------- -----------
Balance at September 30,1998 818 $679,231 3,152,164 $45,321,687
=== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Treasury Accumulated
Stock Deficit
-------------------- ----------------------
<S> <C> <C>
Balance at June 30, 1998 $ - - $(39,952,266)
Preferred stock conversion - - - -
Purchase of treasury stock (118,108) - -
Preferred stock dividend - - (12,270)
Net income - - 167,069
--------- ------------
Balance at September 30,1998 $(118,108) $(39,797,467)
========= ============
</TABLE>
7. CONTINGENCIES
Litigation
As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter which the Company is no longer a party to). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in
November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering. On June 6, 1996, the court
denied a motion by the Company and the named officers and directors to dismiss
the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an
answer to the complaint denying all allegations of wrongdoing and asserting
various affirmative defenses. On March 31, 1997, the court issued Pretrial Order
No. 2, which set discovery cut off and ready trial dates, as well as providing
for certain coordination of discovery in the Kozloski case, and certain related
cases involving other issuers and D. Blech & Co. Discovery in the related
actions is ongoing. It currently is scheduled to be completed by March 15, 1999
and the cases ready for trial by May 20, 1999. Class certification motions have
been dismissed for failure to prosecute, with leave to renew.
In an effort to curtail its legal expenses related to this
litigation, while continuing to deny any wrongdoing, the Company has reached an
agreement in principle to settle this action on its behalf and on behalf of its
former and present officers and directors, for $500,000. This settlement is
subject to agreement upon final documentation and court approval. The Company's
directors and officers insurance carrier has agreed to fund a significant
portion of the settlement amount. In view of the anticipated settlement, no
discovery or motion practice is proceeding in the Kozlowki case.
8
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This document contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include certain
information relating to the development of joint venture opportunities, expenses
associated with defending itself in litigation matters and the effect of such
matters on the Company's operations, liquidity and capital resources,
fluctuations in results of operations, as well as information contained
elsewhere in this Report where statements are preceded by, followed by or
include the words "believes," "expects," "anticipates," or similar expressions.
For such statements the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The forward-looking statements contained in this document are
subject to risks and uncertainties that could cause the assumptions underlying
such forward-looking statements and the actual results to differ materially from
those expressed in or implied by the statements. The most important factors that
could prevent the Company from achieving its goals -- and cause the assumptions
underlying the forward-looking statements and the actual results to differ
materially from those expressed in or implied by those forward-looking
statements -- include, without limitation and in addition to those discussed in
the documents filed by the Company with the Securities and Exchange Commission
(including Amendment No. 3 to a Registration Statement on Form S-3 filed by the
Company with the Securities and Exchange Commission on April 30, 1998
(Registration No. 333-44513)), the following: (i) Future capital needs and the
uncertainty of additional funding (whether through the financial markets,
collaborative or other arrangements with strategic partners, or from other
sources); and (ii) The outcome of, and costs associated with, litigation
matters.
OVERVIEW
The following discussion should be read in conjunction with the
interim financial statements and the notes thereto which are set forth elsewhere
in this report on Form 10-Q.
On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the
acquisition, the Company was in the development stage and devoting substantially
all of its resources to the research and development of laser systems designed
for the treatment of ophthalmic disorders. Upon completion of the acquisition,
the Company changed its market focus and is now engaged in developing, marketing
and distributing ophthalmic medical devices and pharmaceuticals. The Company is
also developing its ophthalmic drug delivery system to complement its other
businesses. In order to further develop and commercialize its laser technology,
the Company, in October 1997, licensed its intellectual laser properties to a
newly formed company, IntraLase Corporation, in return for an equity interest
and future royalties on product sales. IntraLase will have the responsibility of
funding and developing the laser technology through to commercialization. Sales
of products acquired from EOI are made primarily to hospitals and physicians
throughout the United States.
The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
health care market.
RESULTS OF OPERATIONS
Three-Month Periods Ended September 30, 1997 and 1998
9
<PAGE> 10
Product revenues increased $314,257, or 23%, to $1,685,422 for the
three-month period ended September 30, 1998 as compared to $1,371,164 for the
same period ended September 30, 1997. This revenue increase reflects continued
growth in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile
Ophthalmic Prep Solution, ISPAN(TM)Intraocular Gases. The Company experienced
sales growth for all of its product lines.
Cost of goods sold totaled $716,856, or 42% of revenues, for the
three-month period ended September 30, 1998 as compared to $606,015, or 44% of
revenues, for the same period last year. The 2% decrease in cost of goods sold
as a percentage of revenues is due primarily to: (i) a strong U.S. dollar
against the German mark which has lowered the cost associated with the
purchasing Adatosil(R)5000 Silicone Oil, the Company's primary product; and (ii)
an on-going emphasis on cost control in its manufacturing operations.
Research and development expenses increased $59,048, or 61%, for the
three-month period ended September 30, 1998 when compared to the same period in
1997. To better focus on profitable product lines, management elected to
discontinue pursuit of one disposable product line due to its failure to
generate acceptable revenues. This decision resulted in $24,800 of patent costs
associated with this product line being written-off in the first fiscal quarter
of 1998. Successful pursuit of ISO9001 and CE certification caused the Company
to incur an additional $10,000 in expense over those of the first quarter 1997.
The remainder of the overage resulted from increased spending for consulting,
prototype development and increased staff salaries.
Marketing, general and administrative expenses increased $18,644, or
3%, for the three-month period ended September 30, 1998 compared to the same
period ended September 30, 1997.
Interest income increased to $36,928 for the three-month period
ended September 30, 1998 from $26,603 for the same period in 1997. The increase
is the result of increased cash and cash equivalents available for investment.
The January 1998 convertible preferred stock offering provided these resources.
There is no provision for income taxes for the three-month periods
ended September 30, 1998 and 1997 due to the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
$2,189,497 as compared to $2,263,967 at June 30, 1998. The Company's short-term
investments at September 30, 1998 and June 30, 1997 were $334,000 and $330,016,
respectively. The net decrease in cash and cash equivalents of $74,470 relates
primarily to the acquisition of additional Betadine inventory, $270,727, and
purchase of treasury stock, $118,108, significantly offset by cash provided from
operations.
The Company anticipates that the cash and cash equivalents and the
interest earned thereon, together with funds generated from future product
sales, should be adequate to satisfy its capital requirements, based on current
levels of operations, through September 30, 1999. In the longer term, however,
the Company will seek corporate partnering, licensing and other fund raising
opportunities to satisfy the significant expenditures anticipated with
development of its surgical products, pharmaceutical and drug delivery programs.
The Company's ability to raise additional funds, however, may be
affected by the Company's listing status.
10
<PAGE> 11
Due to a change in supplier process for Betadine 5% and the
protracted lead-time necessary to validate processing on new equipment, the
Company committed an additional $420,000 to purchase adequate inventory to cover
anticipated sales needs for approximately 20 months. This inventory expenditure
should occur in the second quarter of fiscal 1999.
The Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock. The price, timing and manner of these
purchases will be at the discretion of management. The Company is also
negotiating the repurchase of all outstanding Preferred Stock.
On October 22, 1998, Escalon announced it had signed a letter of intent
to acquire the Vascular Access Business Unit of CardioVascular Dynamics Inc.
The Company intends to finance this purchase through use of its cash reserves,
cashflow generated from operations and commercial borrowing, which still needs
to be arranged.
The Company anticipates additional expenditures may be incurred in
connection with the legal proceedings as discussed in Part II. See "Part II.
Item 1. Legal Proceedings."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 7 of the Notes to Condensed
Financial Statements in Part I is incorporated herein by reference thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
DATE: November 16, 1998 By: /s/ Douglas R. McGonegal
------------------------
Douglas R. McGonegal
Vice President Finance
and Chief Financial
Officer (Principal
Financial and Accounting
Officer) and Secretary
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,189,497
<SECURITIES> 334,000
<RECEIVABLES> 886,083
<ALLOWANCES> 16,519
<INVENTORY> 705,432
<CURRENT-ASSETS> 4,372,408
<PP&E> 234,569
<DEPRECIATION> 103,204
<TOTAL-ASSETS> 6,877,138
<CURRENT-LIABILITIES> 791,795
<BONDS> 0
0
679,231
<COMMON> 45,321,687
<OTHER-SE> (39,915,575)
<TOTAL-LIABILITY-AND-EQUITY> 6,877,138
<SALES> 1,685,422
<TOTAL-REVENUES> 1,685,422
<CGS> 716,856
<TOTAL-COSTS> 716,856
<OTHER-EXPENSES> 826,400
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 167,069
<INCOME-TAX> 0
<INCOME-CONTINUING> 167,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,069
<EPS-PRIMARY> 0.051
<EPS-DILUTED> 0.041
</TABLE>
