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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, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-20127
ESCALON MEDICAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
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California 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
351 East Conestoga Road 19087
Wayne, PA
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code 610-688-6830
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:
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. [__]
On September 10, 1999 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $7,649,933.
The number of shares of the registrant's Common Stock outstanding as of
September 10, 1999 was 3,242,184.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 1999 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, 1999
TABLE OF CONTENTS
PART I
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Item 1. Business ......................................................................................................... 1
Item 2. Properties ....................................................................................................... 6
Item 3. Legal proceedings ................................................................................................ 6
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 .......................................................................................... 8
Item 7. Management's discussion and analysis of financial condition and results of operations ............................ 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................... 12
Item 8. Financial statements and supplementary data ...................................................................... 12
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure ............................. 12
PART III
Item 10. Directors and executive officers of the registrant ............................................................... 13
Item 11. Executive compensation ........................................................................................... 13
Item 12. Security ownership of certain beneficial owners and management ................................................... 13
Item 13. Certain relationships and related transactions ................................................................... 13
PART IV
Item 14. Exhibits, financial statement schedules, and reports on form 8-K ................................................. 13
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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, 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.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular
Access, Inc. (jointly referred to as "Escalon" or the "Company"), operates in
the healthcare market specializing in the development, marketing and
distribution of ophthalmic medical devices, pharmaceutical and vascular access
products. The Company is also developing its ophthalmic drug delivery system to
complement its other businesses.
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 this acquisition, the
Company devoted substantially all of its resources into research and development
of ultrafast laser systems designed for treatment of ophthalmic disorders. As a
result of the EOI acquisition, Escalon changed its market focus and is no longer
developing laser technology. In October 1997, the Company licensed its
intellectual laser properties to a newly formed company, IntraLase Corporation
("IntraLase"), in return for an equity interest and future royalties on product
sales. IntraLase will have the responsibility of funding and developing laser
technology through to commercialization.
To further diversify its product portfolio, in January 1999, the
Company acquired the vascular access product line from Radiance Medical Systems,
Inc. These products use doppler technology to aid medical personnel in locating
difficult arteries and veins. Currently, this product line concentrates on the
pediatric and critical care market. This was the first step in a plan of
diversification to acquire profitable niche medical products.
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.
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Escalon now maintains its executive offices in Wayne, Pennsylvania.
Day-to-day finance functions operate out of its production facility in New
Berlin, Wisconsin. To accommodate the needs of vascular access production, the
Company will soon be adding 3,500 square feet to that facility.
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 manufactures, on a contract basis, certain of
its products for other third-party companies. The following is a summary of the
Company's key surgical product lines:
AdatoSil(R)5000 Silicone Oil ("AdatoSil 5000")
During fiscal year 1999, the Company distributed AdatoSil 5000 under a
license and distribution agreement with Adatomed/Chiron Vision, an affiliate of
Bausch & Lomb Surgical, Inc. This 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 1999, sales of AdatoSil(R)
5000 accounted for approximately 56% of the Company's sales revenues. On August
13, 1999, Escalon sold the license and distribution rights for this product to
Bausch & Lomb Surgical, Inc. for $2.1 million and additional cash consideration
payable over the next six years. See Form 8-K, as filed on August 26, 1999, for
additional details.
ISPAN Intraocular Gases
The Company distributes two intraocular gas products, C3F8 and SF6,
which are used by vitreoretinal surgeons as a temporary tamponade in detached
retina surgery. Under a non-exclusive 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 aid 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%")
Until March 1999, Escalon distributed 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. This product was distributed
under a license and distribution agreement with The Purdue Frederick Company. In
March, Escalon sold these license and distribution rights to Alcon Universal,
Ltd. for $1.1 million. Alcon Labs, Inc. purchased the Company's remaining
inventory of this product for $959,835. Sales for this product (excluding the
inventory purchased by Alcon Labs, Inc.) accounted for approximately 9.5% of
Company sales revenues in fiscal 1999.
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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.
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, 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 approximate $30 million per year. It is anticipated that
this market will grow as NSAID compounds are becoming more widely prescribed.
Escalon filed an Investigational New Drug (IND) application with the
Food and Drug Administration (FDA) in December 1998. Phase I clinical trials of
the drug delivery system began at Duke University in March 1999. These trials
will continue through the end of 1999.
The Company's overall strategy is to seek strategic partnership
arrangements for the further development and commercialization of Ocufit
diclofenac and other Ocufit applications.
Povidone-Iodine 2.5% Solution -- Ophthalmia Neonatorum
In an effort to prevent ophthalmia neonatorum, newborns in the United
States are treated with erythromycin. However, bacterial resistance to
erythromycin can occur. 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. 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.
An IND application for this product will be filed with the FDA by
December 1999. Once approved, the drug will proceed directly to Phase Three
trials. These are expected to last approximately one year. The Company expects
the testing and approval process to take about 2-1/2 years.
VASCULAR ACCESS PRODUCTS BUSINESS
In January 1999, the Company acquired the vascular access product line
from Radiance Medical Systems, Inc. This added the PD Access(TM) and
Smartneedle(TM) lines of monitors, needles and catheter products. These patented
devices utilize a miniature doppler ultrasound probe that is inserted in the
lumen of a vascular access needle. When the device is placed subcutaneously in a
patient, the probe and monitor can determine if the user is approaching an
artery or vein, guiding them to a successful access.
ULTRAFAST LASER PRODUCTS BUSINESS
From it inception through 1996, the Company devoted substantially all
of its resources toward the development of 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 system was designed to be more precise than
those utilizing currently available technology.
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With the acquisition of EOI, the Company chose to concentrate its focus
on surgical and pharmaceutical products, and ceased manufacturing its laser
systems. In order to continue development and commercialization of its
technology, the Company licensed its intellectual laser properties to IntraLase
in exchange for an initial 25% equity interest. This equity position has been
diluted to 11% during fiscal 1999. As IntraLase obtains additional equity
investors the percentage is expected to continue declining. The Company is also
entitled to a 2.5% royalty on future products sales, which are based on the
Company's patented technology, a 1.5% royalty on product sales not dependent on
the Company's technology and an annual license fee.
RESEARCH AND DEVELOPMENT
The Company conducts medical device product development at its New
Berlin, 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 the Company's former laser laboratory in Irvine, California were
discontinued in fiscal 1997. Research and development expenditures for fiscal
years 1999, 1998 and 1997 amounted to $.7 million, $.5 million and $1.6 million,
respectively.
MANUFACTURING AND DISTRIBUTION
Escalon leases 10,000 square feet of space in New Berlin, Wisconsin for
its surgical products operations. The facility is currently used for
engineering, product design and development, 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 ophthalmic surgical products are distributed from its Wisconsin
facility. Radiance Medical Systems, Inc., in Irvine, California currently
manufactures, warehouses and ships the vascular access products on a subcontract
basis. This will continue through the first quarter of fiscal 2000, until the
New Berlin facility is ready to commence production. 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.
The Company has aggressively pursued ISO9001 and CE certification to
demonstrate the high quality of its products and expand its marketing horizons.
In fiscal 1999, CE certification for its disposable delivery systems was
received. Escalon has also received ISO9001 certification for the design,
manufacture and distribution of its viscous fluid system.
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. Vascular access products are
marketed domestically through a series of ten specialty distributors.
The Company's nine independent sales representatives are based in
Pennsylvania, New York, Wisconsin, Massachusetts, Missouri, Michigan, Minnesota,
Florida and California. These independent representatives market to teaching
institutions, key hospitals and eye surgery centers, focusing primarily on
physicians and operating room personnel performing vitreoretinal surgery.
SERVICE AND SUPPORT
Escalon maintains a full service program for all products sold.
Warranties exist on all products against defects and performance. Product
repairs are made at the Wisconsin facility and customer service personnel handle
returns.
THIRD PARTY REIMBURSEMENT
It is expected that physicians and hospitals will purchase the
Company's ophthalmic products. They in turn will bill various third-party payors
for health care services provided to their patients. These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. In addition, third-party
payors may deny reimbursement if they determine that a procedure performed using
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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. Eleven United States issued patents, and one issued Taiwanese patent,
cover the Company's surgical products and pharmaceutical technology. In
addition, one United States patent is currently pending. With respect to the
Company's ultrafast laser systems (licensed to IntraLase), fourteen patents have
been issued or allowed and two additional patent applications have been filed in
the United States. Vascular access products are covered by five issued United
States patents, there are also four Japanese and European patents and two
Canadian patents that are issued and based on the United States patents. It is
the Company's policy to file for patent protection in those foreign countries in
which the Company believes such protection is necessary to protect its economic
interests. The Company intends to vigorously defend its patents if the need
arises.
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 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 85% 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 this
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
protecting its intellectual property through patents and other government
registrations. 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 will be in a niche market with regard to its
proposed 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.
There are a variety of other devices that directly compete with the
products acquired from Radiance.
HUMAN RESOURCES
As of June 30, 1999, Escalon employed 25 full-time employees and two
part-time employees. Ten of Escalon's full-time employees are in general
administrative and marketing positions, five are employed in vascular access
sales, five are in surgical products manufacturing, four 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 nine 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.
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ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 13,500 square feet of
space for its (a) executive offices in Wayne, Pennsylvania, (b)
manufacturing/warehouse facility in New Berlin, Wisconsin, (c) consultant's
office/storage facility in Turnersville, New Jersey and (d) laser research and
development facility in Irvine, California. The Wisconsin facility lease
covering approximately 10,000 square feet of space expires in April 2007. The
Company's 3,000 square feet of space in California is subleased to IntraLase,
with that lease expiring in September 1999. Both the executive office and
consultant's office space leases expire in December 1999; these amount to 500
square feet of space. The property leased in Wayne, Pennsylvania is subleased
from a company that is 100% owned by the Chief Executive Officer and Chairman of
the Board of the Company. 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 $84,200.
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). 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.
In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement,
subject to final court approval, to settle this action on its behalf and on
behalf of its former and present officers and directors, for $500,000. The
Company's directors and officers insurance carrier has agreed to fund a
significant portion of the settlement amount. Both the Company and their
insurance carrier have deposited such funds in an escrow account.
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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Fiscal 1998:
First Quarter $2.50 $1.38
Second Quarter 10.44 1.38
Third Quarter 10.25 1.56
Fourth Quarter 2.38 0.77
Fiscal 1999:
First Quarter $1.00 $0.56
Second Quarter 2.19 0.56
Third Quarter 3.38 2.31
Fourth Quarter 2.81 1.88
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As of September 10, 1999, there were 180 holders of record of the
Company's Common Stock. On September 10, 1999, the closing sale price of the
Common Stock as reported by the NASDAQ Stock Market was $2.313.
The Common stock is currently listed on the NASDAQ National Market. In
order to continue to be listed on the NASDAQ National Market, however, the
Company must maintain $4,000,000 in net tangible assets, a $5,000,000 market
value of the public float, two market makers and a minimum bid price of $1.00
per share. If the Company's securities were delisted, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of the Company's securities.
The Company has never declared or paid cash dividends on its common
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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1995 1996 1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $ 170 $ 2,341 $ 5,431 $ 5,942 $ 7,559
Costs and expenses:
Cost of sales ............................... 99 1,229 2,650 2,589 3,282
Research and development .................... 2,776 1,723 1,571 495 738
Marketing, general and administrative ....... 1,905 2,723 3,716 2,805 3,332
Write down of goodwill and license
and distribution rights ................. -- -- 3,319 -- --
Acquired research and development ........... -- 1,000 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses .................. 4,780 6,675 11,256 5,889 7,352
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Income (loss) from operations ................. (4,610) (4,334) (5,825) 53 207
Sale of Betadine product line ................. -- -- -- -- 879
Interest income ............................... 342 257 141 119 145
Interest expense .............................. -- (5) (1) (1) (37)
-------- -------- -------- -------- --------
Net income (loss) ............................. $ (4,268) $ (4,082) $ (5,685) $ 171 $ 1,194
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Basic net income (loss) per share ............. $ (2.97) $ (2.16) $ (2.16) $ (0.04) $ 0.10
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Diluted net income (loss) per share ........... $ (2.97) $ (2.16) $ (2.16) $ (0.04) $ 0.10
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Weighted average shares - basic
Used in per share computation .............. 1,436 1,893 2,630 2,673 3,115
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Weighted average shares - diluted
Used in per share computation .............. 1,436 1,893 2,630 2,673 3,151
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FOR THE YEARS ENDED JUNE 30,
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1995 1996 1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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BALANCE SHEET DATA:
Cash and cash equivalents ........... $ 3,518 $ 2,585 $ 1,753 $ 2,264 $ 3,854
Working capital ..................... 6,764 3,754 2,170 3,465 3,801
Total assets ........................ 7,847 11,600 5,834 6,734 10,403
Accumulated deficit ................. (30,079) (34,162) (39,847) (39,952) (39,629)
Total shareholders' equity .......... 7,470 10,483 4,798 6,049 6,278
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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. 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, pharmaceuticals and niche medical
products. The Company is continuing development of its ophthalmic drug delivery
system to complement its other businesses. Sales of products acquired from EOI
are made primarily to hospitals and physicians throughout the United States.
Escalon purchased the vascular access business unit of Radiance Medical
Systems, Inc. in January 1999. This was significant as the Company's first step
in diversification. The vascular access product line is the first niche product
acquired outside the ophthalmic medical field. Vascular products are marketed to
the pediatric and critical care providers through a series of independent
distributors.
Escalon's market strategy is to locate and acquire profitable niche
medical products that it owns and controls the rights to. To finance this
program, the Company in March sold its license and distribution rights to
Betadine(R)5% Sterile Ophthalmic Prep Solution to Alcon. Subsequent to year-end,
it also sold the license and distribution rights to Adatosil(R)5000 Silicone
Oil.
To further develop and commercialize its proprietary laser technology,
in October 1997, the Company licensed its intellectual laser properties to a
newly formed company, IntraLase, in return for an equity interest in IntraLase
and future royalties on product sales. IntraLase has the responsibility of
funding and developing the laser technology through to commercialization.
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
Years Ended June 30, 1998 and 1999
Product revenues increased to $7,559,010 in fiscal year 1999 from
$5,942,004 in fiscal year 1998. This increase of $1,617,006, or 27%, is due to
the increase in unit sales of Adatosil(R)5000 Silicone Oil, vascular access
products, contract manufactured equipment and ISPAN(TM)Intraocular Gases. These
increases were negatively impacted by a decrease in unit sales of the Company's
equipment, related disposable product lines and Betadine(R)5% Sterile Ophthalmic
Prep Solution (this product line was sold in March 1999). Contract manufacturing
revenues vary from quarter to quarter depending on when orders are received and
the lead times to produce such products.
Cost of goods sold totaled $3,282,177, or 43% of revenues, for fiscal
year 1999 as compared to $2,588,500, or 44% of revenues, for the year ended June
30, 1998. The slight decrease in cost of goods sold as a percentage of revenues
is due primarily to a change in the product sales mix during the respective
periods, with the addition of vascular access products and the disposal of the
Betadine product line.
-9-
<PAGE> 12
Research and development expenses increased from $494,895 in fiscal
year 1998 to $738,124 in fiscal year 1999, an increase of $243,229 or 49%. This
represents increased spending for Ocufit SR(R), which entered the clinical trial
stage; and preliminary spending for Providone-Iodine 2.5% Solution, which will
enter that stage of development by the second quarter of fiscal 2000, these
categories contributed $120,000 over fiscal 1998 spending. The addition of
vascular access manufacturing to the Wisconsin facility caused the Company to
incur $45,000 in additional costs, in preparation for the relocation. The
abandonment of two medical patents and additional ISO 9000 expenses contributed
$25,000 and $35,000, respectively. Staffing levels for Wisconsin also increased
to help prepare for future growth and maintain the required documentation for
the ISO/CE program.
Marketing and general and administrative expenses increased $526,108,
or 19%, to $3,331,562 for the year ended June 30, 1999 as compared to $2,805,454
in fiscal year 1998. Administrative, sales and marketing costs for five and a
half months to promote vascular access products accounted for $537,000.
IntraLase's fiscal 1998 contribution to intellectual property costs incurred by
Escalon also reduced 1998 expenses by $75,000. Marketing and administrative
expenses related to the ophthalmic business declined $86,000 from those reported
in fiscal 1998.
In March 1999, the Company reported the sale of its inventory, license
and distribution rights for Betadine(R)5% Sterile Ophthalmic Prep Solution. This
sale resulted in a $879,159 gain, after adjusting for the cost of inventory
sold, and the write-off of the remaining goodwill and license and distribution
rights associated with that product line.
Interest income increased to $144,877 in fiscal year 1999 from $118,471
in fiscal year 1998. This increase is due to greater levels of cash and cash
equivalents available for investment; the result of the product line sale,
aggressive collection efforts and corporate borrowing.
Interest expense increased $37,243 to $37,397 in fiscal 1999. In
February 1999, the Company obtained a $2 million credit facility from PNC Bank,
N.A. This marks the first time the Company gained access to traditional
mainstream financing sources. As a result of this financing, Escalon obtained a
$1 million five-year term loan and access to a $1 million line of credit. In
prior years, interest expense was virtually non-existent since the Company had
no borrowing capability.
Years Ended June 30, 1997 and 1998
Product revenues increased to $5,942,004 in fiscal year 1998 from
$5,431,282 in fiscal year 1997. This increase of $510,722, or 9%, is due to the
increase in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile
Ophthalmic Prep Solution and ISPAN(TM)Intraocular Gases. These increases were
partially offset by a decrease in unit sales of the Company's capital equipment,
related disposable product lines and contract manufacturing product lines.
Contract manufacturing revenues vary from quarter to quarter depending on when
orders are received and the lead times to produce such products.
Cost of goods sold totaled $2,588,500, or 44% of revenues, for fiscal
year 1998 as compared to $2,650,360, or 49% of revenues, for the year ended June
30, 1997. The 5% decrease in cost of goods sold as a percentage of revenues is
due primarily to (i) the strengthening of the U.S. dollar against the German
mark which has lowered the cost associated with the purchases of Adatosil(R)5000
Silicone Oil, the Company's primary product; and (ii) a change in the product
sales mix during the respective periods.
Research and development expenses decreased from $1,570,674 in fiscal
year 1997 to $494,895 in fiscal year 1998, a decrease of $1,075,779 or 68%. This
decrease relates to the elimination of expenditures associated with the
Company's laser development program, as a result of the Company's change in
market focus, and a decrease in expenditures associated with the Company's drug
delivery technology.
Marketing and general and administrative expenses decreased $910,273,
or 24%, to $2,805,454 for the year ended June 30, 1998 as compared to $3,715,727
in fiscal year 1997. This decrease is due principally to (i) the reduction in
the amortization expense of goodwill and license and distribution rights
resulting from the write down of such assets during the fourth quarter of fiscal
1997; and (ii) the decrease in commission expense as a result of a change in the
-10-
<PAGE> 13
Company's commission structure. These decreases were offset partially by costs
associated with the closing of the Company's New Jersey office and relocation of
the Company's Wisconsin production facility.
Included in the results of operations for the year ended June 30, 1997
was 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 was due to the impairment of value resulting from changes in the
estimates of future sales associated with the license and distribution
agreements. No similar charges were incurred in fiscal 1998.
During fiscal year 1998, the Company accrued $100,000 representing its
anticipated contribution to settle the claims related to outstanding litigation
(George Kozlowski v. Intelligent Surgical Lasers, Inc., et al.). See Note 16 of
the Notes to Consolidated Financial Statements for further details surrounding
this litigation.
Pursuant to the licensing agreement with IntraLase, the Company is to
be reimbursed $75,000 for previously expensed patent costs. In October 1997, the
Company recorded this receivable and credited marketing, general and
administrative expense for this future reimbursement.
Interest income decreased to $118,471 in fiscal year 1998 from $140,705
in fiscal year 1997. The decrease is due to a reduction in the levels of cash
and cash equivalents available for investment prior to the completion of the
preferred stock offering in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company had cash and cash equivalents of
$3,854,240 as compared to $2,263,967 at June 30, 1998. In addition, Escalon now
maintains a $1,000,000 certificate of deposit with PNC Bank, N.A. This
investment is considered current and restricted, since it is pledged as
collateral against the term loan. The Company's short-term investments at June
30, 1999 and 1998 were $ 0 and $330,016, respectively. The net increase in cash
and cash equivalents relates primarily to the Betadine product line sale and
borrowing against the line of credit.
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 2000. 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.
In January 1999, the Company entered into a financing agreement with
PNC Bank, N.A. This agreement provided Escalon a $1,000,000 line of credit
(outstanding at year-end and subsequently repaid) and a $1,000,000 five-year
term loan. The line of credit expires on December 31, 1999 and has its interest
rate set at prime plus one quarter of one percentage point (8% at June 30,
1999). The term loan has scheduled monthly repayments of $16,667 for principal
plus interest through February 2004. The interest rate on this debt is 2.0
percentage points above the rate payable on the restricted certificate of
deposit that collateralizes the note (6.6% at June 30, 1999). All of the
Company's assets and cash collateral of $1,000,000 collateralize these
agreements.
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 $100,000 to be paid during
fiscal year 2000; $150,000 in fiscal year 2001; and $200,000 in fiscal years
2002, 2003 and 2004.
As part of the asset purchase from Radiance, the Company is obligated
to pay $1,000,000 once the vascular access technology transfer to Wisconsin is
complete. The anticipated completion date will occur by the end of the first
quarter of fiscal 2000. The Company is also obligated to make minimum royalty
payments in the amount of $300,000 to Radiance for five years.
-11-
<PAGE> 14
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. No purchases have been made,
nor are any expected to be made, under this authority.
Subsequent to year-end, Escalon sold its licensing and distribution
rights to AdatoSil(R)5000 Silicone Oil for $2.1 million, payable in quarterly
installments. The first payment was received August 16, 1999. The Company will
receive additional cash consideration based on future silicon oil sales over the
next six years.
The Company anticipates additional expenditures may be incurred in
connection with the legal proceedings as discussed in "Item 3. Legal
Proceedings."
As of June 30, 1999, the Company had federal income tax and state
income tax net operating loss carryforwards of approximately $40.3 million and
$16.3 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 as a change in ownership of more than 50% occurred
within a three-year specified testing period. 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 $118,000, respectively,
as of June 30, 1999.
YEAR 2000 ISSUES
None of the Company's products use date-sensitive software, therefore
no customer service or support concerns need to be addressed.
The Company does not utilize any custom developed programs, but rather
commercially available off-the-shelf software packages with support contracts
that specifically address this issue. A year 2000 software upgrade for all
financial packages is currently in place.
Based on communications with our key suppliers, including utility and
telecommunication providers, the year 2000 issue is being adequately addressed.
Management judges the likelihood of temporary disruption of our
manufacturing, customer service, sales and marketing, research and development
or administrative functions to be minimal in regard to year 2000 compliance of
our key suppliers and customers.
To date, the cost of year 2000 compliance has been insignificant. Any
further activities are not expected to result in significant incremental
operating expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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
On June 26, 1998, the Company and Ernst & Young LLP, the Company's
independent auditors, mutually agreed to terminate their relationship. In
connection with its audit for the period ended June 30, 1997 and the subsequent
interim periods, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices,
-12-
<PAGE> 15
financial statement disclosure or auditing scope procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report. Ernst & Young LLP's
report on the Company's financial statements for the period ended June 30, 1997
contained no adverse opinion or disclaimer of opinion and was not modified or
qualified as to uncertainty, audit scope or accounting principles.
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 1999 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.
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
Consolidated Financial Statements
See Index to Consolidated Financial Statements at page F-1.
Consolidated 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 August 26, 1999, announcing the sale
of the Company's inventory and license and distribution rights to Bausch & Lomb
Surgical, Inc. and is incorporated herein by reference. The content of that
report is summarized below:
Effective August 13, 1999, Escalon Medical Corp. (the "Registrant")
entered into a Termination Agreement (the "Termination Agreement")
between the Registrant and Bausch & Lomb Surgical, Inc. ("BLS") and a
Supply Agreement (the "Supply Agreement") between the Registrant and
BLS.
-13-
<PAGE> 16
Pursuant to the Termination Agreement, the Distribution and Development
Agreement dated January 1, 1990, as amended, between the Registrant and
Adatomed GmbH, a wholly owned subsidiary of BLS, was terminated, and
the Registrant transferred its license and distribution rights for
Adatosil(R)5000 Silicone Oil, as well as related inventory, back to
BLS. In consideration of the transfer, BLS agreed to pay to the
Registrant cash in the amount of $2,117,180, payable in quarterly
installments, with the initial installment paid on August 14, 1999, and
additional cash consideration based on future sales of Adatosil(R)5000
Silicone Oil over the next six years. Adatosil(R)5000 Silicone Oil
represented approximately 56% of the Registrant's sales in the fiscal
year ended June 30, 1999.
Pursuant to the Supply Agreement, BLS agreed to purchase from the
Registrant, and the Registrant agreed to manufacture and sell to BLS,
certain viscous fluid systems for a period of six years.
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.
<TABLE>
<S> <C> <C>
3.1 (a) Restated Articles of Incorporation of Registrant. (6)
(b) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated November 8, 1993. (6)
(c) Certificate of Amendment of Restated Articles of Incorporation of
Registrant dated February 12, 1996. (6)
(d) Certificate of Determination of Series A 6% Convertible Preferred
Stock. (8)
3.2 Amended and Restated Bylaws of Registrant. *
4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (2)
4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (2)
4.3 Form of Underwriters Class A Common Stock Purchase Warrants. (2)
4.4 Form of Underwriters Class B Common Stock Purchase Warrants. (2)
4.5 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer
Corporation. (2)
(b) Amendment to Warrant Agreement between Registrant and U.S. Stock
Transfer Corporation. (4)
(c) Amendment to Warrant Agreement between Registrant and American
Stock Transfer Company. (5)
4.6 Securities Purchase Agreement, dated as of December 31, 1997
by and among the Company and Combination. (8)
4.7 Registration Rights Agreement, dated as of December 31, 1997 by
and among the Company and Combination. (8)
4.8 Warrant to Purchase Common Stock issued December 31, 1997
to David Stefansky. (8)
4.9 Warrant to Purchase Common Stock issued December 31, 1997 to
Combination. (8)
4.10 Warrant to Purchase Common Stock issued December 31, 1997 to
Richard Rosenblum. (8)
4.11 Warrant to Purchase Common Stock issued December 31, 1997 to
Trautman Kramer & Company. (8)
10.1 (a) 1993 Stock Option Plan of Registrant. (3)
(b) Form of Nonqualified Stock Option Agreement of Registrant under
the 1993 Stock Option Plan. (3)
(c) Form of Incentive Stock Option Agreement of Registrant under the
1993 Stock Option Plan. (3)
10.2 Form of Indemnification Agreement between the Registrant and each
of its directors and executive officers. (1)
10.3 Underwriting Agreement between the Registrant and the Underwriter.
(2)
10.4 Unit Purchase Option between the Registrant and the Underwriter.
(2)
</TABLE>
-14-
<PAGE> 17
<TABLE>
<S> <C>
10.5 Employment Agreement between Registrant and Ronald Hueneke dated
October 4, 1991. (6)
10.6 Employment Agreement between Registrant and Richard J. DePiano dated
March 1, 1997, as amended. (7)
10.7 Distributorship Agreement between Registrant and Scott Medical Products
dated as of September 8, 1992, as amended September 8, 1995. (6)
10.8 Research and Development Agreement between Registrant and The West
Company, Incorporated dated April 3, 1995. (6)
10.9 Assets Sale and Purchase Agreement between the Registrant and Radiance
Medical Systems, Inc., dated January 21, 1999. (9)
10.10 Bill of Sale and Acceptance Agreement between the Registrant and Alcon
Laboratories, Inc., dated March 5, 1999. (10)
10.11 Bill of Sale and Acceptance Agreement between the Registrant and Alcon
Universal, Ltd., dated March 5, 1999. (10)
10.12 Termination Agreement between the Registrant and Bausch & Lomb
Surgical, Inc., dated August 13, 1999. (11)
10.13 Supply Agreement between the Registrant and Bausch & Lomb Surgical,
Inc., dated August 13, 1999. (11)
21 Subsidiaries. *
23.1 Consent of Ernst & Young LLP, independent auditors. *
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates, LLC,
independent auditors. *
27.1 Financial Data Schedule. *
</TABLE>
- ---------------
* Filed herewith
(1) 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).
(2) 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).
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated June 13, 1994 (Registration Number 33-80162).
(4) Filed as an exhibit to the Company's Form 10-K for year ended June 30,
1994.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1995.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1996.
(7) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1997.
(8) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 20, 1998 (Registration No. 333-44513).
(9) Filed as an exhibit to the Company's Form 8-K, dated February 1, 1999.
(10) Filed as an exhibit to the Company's Form 8-K, dated March 19, 1999.
(11) Filed as an exhibit to the Company's Form 8-K, dated August 26, 1999.
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<PAGE> 18
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 17, 1999
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 17, 1999
-------------------------- (Principal Executive Officer) and Director
Richard J. DePiano
By:/s/ Douglas R. McGonegal Vice President of Finance and Chief Financial September 17, 1999
-------------------------- Officer (Principal Financial Officer and
Douglas R. McGonegal Principal Accounting Officer) and Secretary
By:/s/ Jay L. Federman, M.D. Director September 17, 1999
--------------------------
Jay L. Federman, M.D.
By:/s/ Jack M. Dodick, M.D. Director September 17, 1999
--------------------------
Jack M. Dodick, M.D.
By:/s/ Fred G. Choate Director September 17, 1999
--------------------------
Fred G. Choate
By:/s/ Jeffrey F. O'Donnell Director September 17, 1999
--------------------------
Jeffrey F. O'Donnell
</TABLE>
<PAGE> 19
ESCALON MEDICAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Reports.......................................................................... F-2
Consolidated Balance Sheets at June 30, 1998 and 1999.................................................. F-4
Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999................. F-5
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1998 and 1999....... F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999................. F-7
Notes to Consolidated Financial Statements............................................................. F-8
</TABLE>
F-1
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Escalon Medical Corp.:
We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries at June 30, 1998 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries at June 30, 1998 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
PARENTE, RANDOLPH, ORLANDO,
CAREY & ASSOCIATES, LLC
Philadelphia, Pennsylvania
August 13, 1999
F-2
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Escalon Medical Corp.
We have audited the statements of operations, shareholders' equity and cash
flows of Escalon Medical Corp. for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Escalon
Medical Corp. for the year ended June 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
August 14, 1997, except for Note 6 - Reverse Stock Split,
as to which the date is November 20, 1997
F-3
<PAGE> 22
ESCALON MEDICAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,263,967 $ 3,854,240
Cash and cash equivalents - restricted -- 1,000,000
Investments 330,016 --
Note receivable -- 15,000
Accounts receivable, net of allowance for doubtful accounts
of $4,519 and $39,790 at June 30, 1998 and 1999, respectively 940,378 1,063,829
Other receivables 75,000 --
Inventory, net 462,042 1,117,208
Other current assets 79,088 142,235
------------ ------------
Total current assets 4,150,491 7,192,512
Furniture and equipment, at cost, net 134,734 449,555
Long-term receivables 112,500 150,000
License and distribution rights, net 878,838 537,138
Patents, net 475,175 495,923
Goodwill, net 968,295 1,510,207
Other assets 14,095 67,438
------------ ------------
$ 6,734,128 $ 10,402,773
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable, bank $ - - $ 1,000,000
Current portion of long-term debt -- 200,000
Accounts payable 287,192 434,308
Accrued compensation 110,125 325,204
Accrued professional expenses 72,670 45,795
Accrued dividends payable 13,500 --
Accrued litigation settlement 100,000 100,000
Other accrued expenses 101,989 1,286,433
------------ ------------
Total current liabilities 685,476 3,391,740
Long-term debt, net of current portion -- 733,332
------------ ------------
Total liabilities 685,476 4,125,072
------------ ------------
Shareholders' Equity:
Preferred stock, no par value; 2,000,000 shares authorized;
900 and 0 shares issued and outstanding at June 30, 1998
and 1999, respectively 747,321 --
Common stock, no par value; 35,000,000 shares authorized;
3,021,027 and 3,377,164 shares issued at June 30, 1998
and 1999, respectively 45,253,597 46,024,811
Treasury stock, 134,980 shares in 1999 at cost -- (118,108)
Accumulated deficit (39,952,266) (39,629,002)
------------ ------------
Total shareholders' equity 6,048,652 6,277,701
------------ ------------
$ 6,734,128 $ 10,402,773
============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 23
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Sales revenues $ 5,431,282 $ 5,942,004 $ 7,559,011
------------ ------------ ------------
Costs and expenses:
Cost of goods sold 2,650,360 2,588,500 3,282,177
Research and development 1,570,674 494,895 738,124
Marketing, general and administrative 3,715,727 2,805,454 3,331,562
Write down of goodwill and license and distribution rights 3,318,888 -- --
------------ ------------ ------------
Total costs and expenses 11,255,649 5,888,849 7,351,863
------------ ------------ ------------
Income (loss) from operations (5,824,367) 53,155 207,148
------------ ------------ ------------
Other income and expenses:
Sale of Betadine product line -- -- 879,159
Interest income 140,705 118,471 144,877
Interest expense (1,308) (154) (37,397)
------------ ------------ ------------
Total other income and expenses 139,397 118,317 986,639
------------ ------------ ------------
Net income (loss) $ (5,684,970) $ 171,472 $ 1,193,787
============ ============ ============
Basic net income (loss) per share $ (2.16) $ (0.04) $ 0.10
============ ============ ============
Diluted net income (loss) per share $ (2.16) $ (0.04) $ 0.10
============ ============ ============
Weighted average shares - basic 2,629,624 2,673,093 3,114,823
============ ============ ============
Weighted average shares - diluted 2,629,624 2,673,093 3,150,721
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 24
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 -- $-- 2,629,704 $ 44,645,440
Cancellation of previously issued shares -- -- (329) --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1997 -- -- 2,629,375 44,645,440
Preferred stock offering,
net of offering costs 1,350 1,112,478 -- --
Warrants issued in connection with preferred
stock offering -- (234,500) -- 234,500
Deemed dividend from incremental yield
in conversion terms of preferred stock -- 243,000 -- --
Preferred stock conversions (450) (373,657) 391,652 373,657
Preferred stock dividends -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1998 900 747,321 3,021,027 45,253,597
Preferred stock conversions (82) (68,090) 131,137 68,090
Preferred stock retirement (818) (679,231) -- --
Common stock issued in connection with
preferred stock retirement -- -- 225,000 703,124
Purchase of treasury stock -- -- -- --
Preferred stock dividends -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30, 1999 -- $-- 3,377,164 $ 46,024,811
============ ============ ============ ============
TREASURY STOCK TOTAL
-------------------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------ ------ ------- ------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 -- $-- $(34,162,018) $ 10,483,422
Cancellation of previously issued shares -- -- -- --
Net loss -- -- (5,684,970) (5,684,970)
------------- ------------ ------------ ------------
Balance at June 30, 1997 -- -- (39,846,988) 4,798,452
Preferred stock offering,
net of offering costs -- -- -- 1,112,478
Warrants issued in connection with preferred
stock offering -- -- -- --
Deemed dividend from incremental yield
in conversion terms of preferred stock -- -- (243,000) --
Preferred stock conversions -- -- -- --
Preferred stock dividends -- -- (33,750) (33,750)
Net income -- -- 171,472 171,472
------------- ------------ ------------ ------------
Balance at June 30, 1998 -- -- (39,952,266) 6,048,652
Preferred stock conversions -- -- -- --
Preferred stock retirement -- -- (138,769) (818,000)
Common stock issued in connection with
preferred stock retirement -- -- (703,124) --
Purchase of treasury stock 134,980 (118,108) -- (118,108)
Preferred stock dividends -- -- (28,630) (28,630)
Net income -- -- 1,193,787 1,193,787
------------- ------------ ------------ ------------
Balance at June 30, 1999 134,980 $ (118,108) $(39,629,002) $ 6,277,701
============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 25
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,684,970) $ 171,472 $ 1,193,787
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 854,402 331,987 363,687
Income from license of intellectual laser property -- (75,000) --
Write off of intangible assets 3,329,868 -- 24,805
Net loss (gain) on disposition of assets (2,450) 9,315 --
Net gain on sale of Betadine product line -- -- (879,159)
Change in operating assets and liabilities:
Accounts and other receivables 148,645 (353,113) (48,451)
Inventory 92,214 115,740 (1,114,918)
Other current and long-term assets 28,041 (26,238) (116,491)
Accounts payable and accrued expenses (73,357) (360,396) 1,519,764
----------- ----------- -----------
Net cash provided from (used in) operating activities (1,307,607) (186,233) 943,024
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (235,000) (470,180) (259,000)
Proceeds from maturities of investments 795,970 375,164 589,016
Cash and cash equivalents - restricted -- -- (1,000,000)
Proceeds from sale of Betadine product line -- -- 2,059,835
Purchase of vascular access business -- -- (1,460,887)
Short-term note receivable -- -- (15,000)
Purchase of furniture and equipment (37,022) (90,792) (74,106)
Proceeds from sale of furniture and equipment 5,900 1,000 --
License and distribution rights -- (126,894) (45,036)
Other assets 65,338 61 --
Patent costs (49,099) (30,411) (65,167)
Long term note receivable (62,500) (50,000) (37,500)
----------- ----------- -----------
Net cash (used in) provided from investing activities 483,587 (392,052) (307,845)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing, net -- -- 1,000,000
Proceeds from term loan -- -- 1,000,000
Principal payments under capital lease obligations (7,835) (2,624) --
Proceeds from preferred stock offering, net of offering costs -- 1,112,478 --
Retirement of preferred stock -- -- (818,000)
Payment of preferred stock dividend -- (20,250) (42,130)
Purchase of treasury stock -- -- (118,108)
Principal payments on term loan -- -- (66,668)
----------- ----------- -----------
Net cash provided from (used in) financing activities (7,835) 1,089,604 955,094
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (831,855) 511,319 1,590,273
Cash and cash equivalents, beginning of year 2,584,503 1,752,648 2,263,967
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,752,648 $ 2,263,967 $ 3,854,240
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the year $ 1,308 $ 154 $ 32,041
=========== =========== ===========
NON-CASH OPERATING AND INVESTING ACTIVITY:
Common stock issued in connection with preferred stock retirement $ -- $ -- $ 703,124
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 26
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ORGANIZATION AND DESCRIPTION OF BUSINESS
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiaries, Escalon Pharmaceutical Inc. and Escalon Vascular
Access, Inc. (jointly referred to as "Escalon" or the "Company"), develop,
market and distribute ophthalmic medical devices, pharmaceutical products and
vascular access devices.
From the Company's inception until 1996, it engaged in research and
development into laser technology to be used in ophthalmic surgery. With the
February 1996 acquisition of Escalon Ophthalmics, Inc. ("EOI") (which business
combination was accounted for as a purchase) the marketing focus changed and
laser development ceased. To further develop and commercialize this technology,
in October 1997, the Company licensed its intellectual laser properties to a
newly formed company, IntraLase Corp. ("IntraLase")(Note 12). IntraLase will
have the responsibility of funding and developing the laser technology through
to commercialization. Escalon retains an equity position in the new company,
along with future royalty rights on product sales.
EOI's acquisition brought the Company a catalog of ophthalmic
products, a profitable customer base and an opportunity to become a manufacturer
and distributor of niche medical products. Sales of these new products were
directed primarily at hospitals and physicians throughout the United States.
In January 1999, the Company acquired the vascular access product line
from Radiance Medical Systems, Inc. ("Radiance") (Note 13). These products use
doppler technology to aid medical personnel in locating difficult arteries and
veins. Presently, this product line concentrates on pediatric and critical care
markets.
(1) 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 Principles 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.
F-8
<PAGE> 27
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Accounts Receivable
The Company performs ongoing credit evaluations of its customers'
financial condition and does not require collateral for accounts receivable
arising from the normal course of business. The Company maintains allowances for
potential credit losses which, when realized have been within the range of
management's expectations.
Revenue Recognition
The Company recognizes revenue from the sales of its products at the
time of shipment.
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,
------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials/work in process $ 170,370 $ 526,553
Finished goods 472,672 623,655
----------- -----------
643,042 1,150,208
Valuation allowance (181,000) (33,000)
----------- -----------
$ 462,042 $ 1,117,208
=========== ===========
</TABLE>
In fiscal 1997 the Company's inventory valuation allowance totaled
$660,998. There was a net decrease in the inventory valuation allowance of
$479,998 in fiscal 1998. This reduction consisted of (i) $470,998 relating to
the transfer of laser inventory to IntraLase Corporation and (ii) $9,000
credited against expenses. Fiscal 1999 experienced another net decrease in the
allowance of $148,000, which resulted from (i) scrapping $183,100 of obsolete
inventory and (ii) taking an additional $35,100 charge against expense for other
slow moving parts.
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 ten years. Depreciation
expense for the years ended June 30, 1997, 1998 and 1999 was $107,687, $43,433
and $73,174 respectively.
Furniture and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
--------- ---------
<S> <C> <C>
Equipment $ 170,444 $ 521,870
Furniture and fixtures 25,863 35,351
Leasehold improvements 27,804 54,521
--------- ---------
224,111 611,742
Less accumulated depreciation and amortization (89,377) (162,187)
--------- ---------
$ 134,734 $ 449,555
========= =========
</TABLE>
Acquired License and Distribution Rights
In connection with the acquisition of EOI a portion of the purchase
price was allocated to certain product license and distribution agreements. This
cost allocation was based on an independent valuation, with such costs being
amortized over an eight-year period using the straight-line method. The values
of these assets are re-evaluated annually to determine if the estimated lives
continue to be appropriate. At June 30, 1997, the Company evaluated the ongoing
F-9
<PAGE> 28
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 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.
Sale of the Betadine product line in March 1999 reduced the cost and accumulated
amortization by $421,781 and $162,561, respectively. Accumulated amortization of
license and distribution rights was $332,647 and $297,602 at June 30, 1998 and
1999, respectively. Amortization expense for the years ended June 30, 1997, 1998
and 1999 was $274,208, $140,584 and $127,517, 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. In fiscal 1999,
two ophthalmic patents were abandoned; this resulted in the write-off of $27,182
in cost and $2,376 in accumulated amortization. Accumulated patent amortization
was $80,823 and $98,061 at June 30, 1998 and 1999, respectively. Amortization
expense for the years ended June 30, 1997, 1998 and 1999 was $20,067, $20,282
and $19,614, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired. For the preexisting Escalon ophthalmic assets
these costs are being amortized over a ten-year period using the straight-line
method. Intangible assets acquired from Radiance Medical Systems are being
primarily amortized over 15 years.
The Company periodically reviews the value of its goodwill to determine
if 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 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" ("SFAS No. 121"), goodwill
associated with the acquired license and distribution rights was likewise
written down by $2,400,635 at June 30, 1997. Sale of the Betadine product line
caused the Company to write-off $667,523 in cost assigned to that product line
and $205,819 in associated accumulated amortization in fiscal 1999.
Accumulated amortization of goodwill at June 30, 1998 and 1999 was
$308,576 and $241,380, respectively. Amortization expense for the years ended
June 30, 1997, 1998 and 1999 was $404,979, $127,687 and $138,623, respectively.
In connection with the acquisition of the vascular access product line,
the Company incurred $60,887 in costs related to the purchase of those assets.
These costs consisted primarily of legal and auditing fees for the transaction.
Amortization for the year ended June 30, 1999 was $4,758.
Research and Development
All research and development costs are charged to operations as
incurred.
F-10
<PAGE> 29
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Net Income (Loss) Per Share
The Company follows Financial Accounting Standards Board Statement No.
128, "Earnings Per Share", in presenting basic and diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Numerator:
Numerator for basic and dilutive earnings per share:
Net income (loss) $(5,684,970) $ 171,472 $ 1,193,787
Preferred stock dividends and accretion -- (276,750) (870,523)
----------- ----------- -----------
Income (loss) available to common shareholders $(5,684,970) $ (105,278) $ 323,264
=========== =========== ===========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 2,629,624 2,673,093 3,114,823
Effect of dilutive securities:
Employee stock options -- -- 35,898
----------- ----------- -----------
Denominator for diluted earning per
share-adjusted weighted-average shares and
assumed conversions 2,629,624 2,673,093 3,150,721
=========== =========== ===========
Basic earnings income (loss) per share $ (2.16) $ (0.04) $ 0.10
=========== =========== ===========
Diluted earnings income (loss) per share $ (2.16) $ (0.04) $ 0.10
=========== =========== ===========
</TABLE>
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its 100 percent investments in Escalon Pharmaceutical, Inc. and
Escalon Vascular Access, Inc. All intercompany transactions and balances have
been eliminated.
Advertising Costs
Advertising costs are charged to expense when incurred. Advertising
expense for the years ended June 30, 1997, 1998 and 1999 was $99,364, $58,495
and $41,824, respectively.
(3) INVESTMENTS
As of June 30, 1998 and 1999, the Company held investments consisting
of fixed-rate certificates of deposits and money market funds of $1,980,016 and
$1,765,047, respectively. Such investments are recorded at cost, which
approximates fair value at June 30, 1998 and 1999. Included in cash and cash
equivalents at June 30, 1998 were certificates of deposits totaling $1,650,000
with original maturities of 90 days or less.
F-11
<PAGE> 30
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENTS - (CONTINUED)
The Company also maintained a $1,015,609 certificate of deposit at June
30, 1999. This investment matures within 30 days and $1,000,000 is pledged as
collateral against the five-year term loan at PNC Bank, NA.
and is reported as cash and cash equivalents, restricted.
(4) LONG-TERM RECEIVABLE
The Company entered into a loan agreement with an individual who is
involved in the development of its Ocufit SR drug delivery system. The note for
$150,000, with principal and accrued interest at 3%, is due in May 2005.
(5) NOTES PAYABLE, BANK
In January 1999, the Company entered into a line of credit agreement
with its financial institution. The available amount under the agreement, which
expires on December 31, 1999, is $1,000,000. The interest rate on this line is
set at prime plus one quarter of one percentage point (8% at June 30, 1999). The
balance outstanding on the line of credit as of June 30, 1999 was $1,000,000.
All of the Company's assets and cash collateral of $1,000,000 collateralize the
agreement. The average amount outstanding and average interest rate for the year
ended June 30, 1999 was $190,097 and 8%, respectively, from January 28, 1999 the
date of the note's inception.
(6) LONG-TERM DEBT
In January 1999, the Company entered into a term loan with its
financial institution for $1,000,000. The proceeds were used to redeem all
outstanding shares of the Company's Series A preferred stock and the remaining
balance to pay a portion of the purchase price for the acquisition of Radiance's
Vascular Access Business Unit. Repayment of debt is principal of $16,667 plus
interest through February 2004. The interest rate on the debt is 2.0 percentage
points above the rate payable on the cash collateral as described under Notes
payable, bank (Note 5) as long as the cash collateral is comprised of a Bank
certificate of deposit (6.6% at June 30, 1999). If the cash collateral were
comprised of liquid assets, as defined in the agreement, the interest rate on
the debt would be equal to the prime rate.
All of the Company's assets and cash collateral of $1,000,000
collateralize the agreement.
The bank term loan and line of credit agreements contain various
covenants pertaining to maintenance of tangible net worth and certain debt
ratios.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending June 30 Amount
------------------- ------
<S> <C>
2000 $ 200,000
2001 200,000
2002 200,000
2003 200,000
2004 133,332
---------
$ 933,332
=========
</TABLE>
(7) CAPITAL STOCK TRANSACTIONS
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").
F-12
<PAGE> 31
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) CAPITAL STOCK TRANSACTIONS - (CONTINUED)
Reverse Stock Split
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. As a result
of the Reverse Split, there were adjustments made to the Company's Class A
Redeemable Common Stock Purchase Warrant, Class B Redeemable Common Stock
Purchase Warrant and Class C Common Stock Purchase Warrant such that the number
of warrants that must be delivered to the Company in order to purchase a share
of Common Stock has been increased by a factor of four.
All references in these consolidated financial statements with regard
to shares, per share amounts, units and share prices have been adjusted for the
Reverse Split. Fractional shares were paid out on conversion.
PREFERRED STOCK OFFERING AND REDEMPTION
On December 31, 1997, the Company issued $1,350,000 of Series A 6%
Convertible Preferred Stock ("Preferred Stock") in a private placement. This
stock issue was retired on February 1, 1999 with the payment of $818,000 plus
accrued interest and the issuance of 225,000 shares of the Company's Common
Stock.
At time of issuance the net proceeds of $1,194,750 from this offering
were received on January 2, 1998. After March 1, 1998, the Preferred Stock may
be converted at the option of the holder into shares of the Company's Common
Stock at a rate determined by dividing the liquidation value of the Preferred
Stock being converted by the conversion price then in effect. The conversion
price will be the lesser of (i) $8.6125 (which is the average of the closing bid
price of the Common Stock for each of the five trading days immediately prior to
December 31, 1997) or, (ii) up to 82% of the five-day average closing bid price
prior to the conversion date. The Preferred Stock paid cumulative dividends of
6% per annum payable quarterly in cash. The Preferred Stock was accompanied by
an immediately exercisable five-year Warrant to purchase 40,000 shares of Common
Stock at exercise prices ranging from $8.6125 to $11.626875. The Company also
issued to the private placement agent and its designees a similar warrant to
purchase an aggregate of 50,000 shares of Common Stock at an exercise price of
$10.335 per share. The warrants were valued at $234,500 using the Black-Scholes
option pricing method with the following assumptions: risk-free interest rate of
5.5%; expected volatility of .0879; expected warrant life of one-half year from
vesting; and an expected dividend rate of 0.0%. The value of the warrants was
accounted for as part of the offering related expenses.
The incremental yield imbedded in the conversion terms of the Preferred
Stock has been accounted for as a dividend of approximately $243,000 and was
amortized over the period from the date of issuance to March 1, 1998, the first
date at which conversion could occur.
During fiscal 1998, the preferred shareholder converted blocks of 197,
143 and 110 shares at conversion prices of $1.5016, $1.0967 and $0.8457 per
share, respectively. These conversions increased the Common Stock outstanding by
391,652 shares. In July 1998, the holder of Preferred Stock converted 82
additional shares into 131,137 shares of the Company's Common Stock at a
conversion price of $0.6253 per share.
In February 1999, the Company simultaneously converted shares of
Preferred Stock into 225,000 shares of its common stock and redeemed all the
remaining shares of its preferred stock for $818,000. In connection with the
redemption and issuance, the Company recognized a $841,893 imputed dividend.
Redeemable Common Stock Purchase Warrants
During November 1993, the Company successfully completed an
underwritten public offering of 862,500 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 $25 and $30, respectively.
F-13
<PAGE> 32
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) CAPITAL STOCK TRANSACTIONS - (CONTINUED)
Redeemable Common Stock Purchase Warrants
The warrants are currently exercisable and expire in November 2000. The Public
Offering price for the Units was $20 per Unit. The net proceeds to the Company
from that Public Offering, after deducting underwriting discounts, commissions
and related expenses was approximately $14,800,000.
Stock Option Plans
The Company has adopted five employee stock option plans, which provide
for incentive stock options and non-qualified stock options to purchase 416,242
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 is exercisable over
a period no longer than ten years after the grant date.
At June 30, 1999, options to purchase 314,500 shares of the Company's
Common Stock were exercisable and 101,742 shares are reserved for future grants.
Financial Accounting Standards Board Statement No. 123 ("SFAS No. 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 SFAS No. 123. The fair value of
these equity awards was estimated at the date of grant using the Black-Scholes
option pricing method. For all years presented, the expected option life of one
year from vesting and an expected dividend rate of 0.0% were used. The weighted
average assumptions used in fiscal 1999 were risk-free interest rates of 5.08%
and 5.31% and an expected volatility of 1.427. Fiscal 1998's assumptions were a
risk-free interest rate of 5.11%, and an expected volatility of 1.359. The
assumptions used in fiscal 1997 were a risk-free interest rate of 5.6% and
expected volatility of 0.865.
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
pro forma net income for fiscal 1999 would have been $1,031,037, and the basic
and diluted earnings per share of Common Stock would be $0.05. For the fiscal
year ended June 30, 1998, the pro forma net loss and basic and diluted net loss
per share were $(162,993) and $(0.06), respectively. Fiscal 1997's pro forma net
loss and basic and diluted net loss per share were $(5,774,970) and ($2.20),
respectively.
The following is a summary of the Company's stock option activity and
related information for the fiscal years ended June 30, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------- ---------------------------- -----------------------------
COMMON WEIGHTED COMMON WEIGHTED COMMON WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 72,422 $ 16.564 112,500 $ 2.252 172,000 $ 2.120
Granted 112,500 $ 2.252 59,500 $ 1.875 152,500 $ 2.108
Forfeited (72,422) $ 16.564 -- -- (10,000) $ 1.875
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 112,500 $ 2.252 172,000 $ 2.120 314,500 $ 2.122
============ ============ ============ ============ ============ ============
Exercisable at end of year 112,500 172,000 314,500
============ ============ ============
Weighted average fair value
of options granted during year $ 0.800 $ 0.970 $ 1.131
</TABLE>
F-14
<PAGE> 33
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) CAPITAL STOCK TRANSACTIONS - (CONTINUED)
Stock Option Plans
Options issued in fiscal 1997 have an exercise price of $2.252 and a
remaining contractual life of 7.9 years. Those issued in fiscal 1998, have an
exercise price of $1.875 and a remaining contractual life of 8.7 years. Fiscal
1999 options have a weighted average exercise price of $2.108 and a remaining
contractual life of 9.8 years.
Non-plan options to purchase 1,367 and 1,367 shares of Common Stock, at
prices of $1.460 and $7.308, respectively, were outstanding and exercisable at
June 30, 1999. These options generally have vesting and exercise provisions
consistent with options granted under the plans.
(8) TREASURY STOCK
In July 1998, the Company entered into an agreement with a stockholder
to repurchase 114,285 shares of the Company's common stock for $100,000 and
accept an additional 20,695 shares in satisfaction of a $18,108 receivable.
(9) 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
primarily considered to be noncurrent, consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 31,000 $ 28,000
NOL carryforward 15,110,000 14,308,000
Tax credit carryforwards 680,000 680,000
------------ ------------
Total deferred tax assets 15,821,000 15,016,000
Deferred tax liability:
License and distribution rights (297,000) (192,000)
------------ ------------
Net deferred tax assets 15,524,000 14,824,000
Valuation allowances (15,524,000) (14,824,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
At June 30, 1999, the Company has federal income tax and state income
tax net operating loss carryforwards of approximately $40.3 million and $16.3
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 $118,000, respectively, at June 30, 1999. Federal and state operating losses
and tax credits will expire at various dates between 2001 and 2013.
For the years ended June 30, 1998 and 1999, the Company recorded
valuation allowances of $15,524,000 and $14,824,000, 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.
No formal study has been performed to test for ownership changes from the date
of inception until June 30, 1999 for losses generated by the Company.
F-15
<PAGE> 34
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES - (CONTINUED)
An internal calculation was performed assuming that ownership changes
of the Company occurred in fiscal 1990, 1994 and 1995 (at the time of
acquisition of EOI (Note 1)). As a result of such ownership changes
approximately $27,700,000 of federal NOL carryforwards are subject to
limitation, which would leave available approximately $12,600,000 of NOL's to
offset future taxable income, prior to any valuation allowance. If an additional
ownership change did occur subsequent to the EOI acquisition, an additional
limitation would apply to all the NOL carryforwards attributable after that
change. Depending on the existence and time of such change, potentially all of
the federal NOL carryforwards at June 30, 1999 could be subject to a limitation.
The limitation could also restrict use of the tax credit carryforwards and
approximately $16,300,000 of the NOL carryforwards for state purposes.
Approximately $8.2 million of the federal NOL carryforward at June 30,
1999 represents amounts that were transferred to the Company as a result of the
acquisition of EOI. It was determined that an ownership change of EOI occurred
in fiscal 1990, but no limitation calculation was performed. 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.
(10) 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, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- -------------------- ------
<S> <C>
2000 $132,493
2001 120,478
2002 121,442
2003 119,124
2004 116,055
--------
$609,592
========
</TABLE>
Total minimum future rental payments have not been reduced by $8,174,
the value of sublease rentals to be received under non-cancelable subleases.
Rent expense charged to operations during the years ended June 30,
1997, 1998 and 1999 was $190,153, $123,408 and $111,835, respectively.
The Company leases its Pennsylvania office from an entity that is 100%
owned by the Chief Executive Officer and Chairman of the Board of the Company.
The lease is classified as an operating lease and provides for minimum annual
rentals of $8,500 through December 31, 1999.
(11) RETIREMENT PLAN
The Company adopted a 401(k) retirement plan effective January 1, 1994.
Employees become eligible for the plan commencing on the date of employment.
Company contributions are discretionary and no contributions have been made
since the plan's inception.
(12) LICENSE OF INTELLECTUAL LASER PROPERTIES
In October 1997, the Company licensed its intellectual laser properties
to IntraLase in exchange for an initial 25% equity interest in IntraLase. As a
result of raising money from outside investors, as of June 30, 1999, the
Company's
F-16
<PAGE> 35
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) LICENSE OF INTELLECTUAL LASER PROPERTIES - (CONTINUED)
interest has been diluted to 11%. Escalon is entitled to a 2.5% royalty on
future products sales which are based on the Company's patented technology; a
1.5% royalty on product sales not dependent on the Company's technology; and an
annual license fee of $5,000 and $10,000 in 1999 and 2000, respectively, and
$15,000 in 2001 and each year thereafter during the term of the license. The
license fee may be credited in full against all royalties otherwise due to be
paid to the Company. Also contributed to the venture were the Company's laser
inventory, equipment and related furniture having a net book value of $0. As of
June 30, 1999, IntraLase is still in the clinical stage and is in the process of
raising additional funds.
(13) ACQUISITION OF RADIANCE BUSINESS UNIT
On January 21, 1999, the Company acquired substantially all of the
assets used exclusively in Radiance's Vascular Access Business Unit, which uses
doppler technology to aid medical personnel in locating difficult arteries and
veins. This business combination was accounted for as a purchase. The results of
operations for this business unit are included in the accompanying financial
statements since the date of acquisition. The total cost of the acquisition was
$2,104,442, which exceeded the fair value of the net assets of Radiance by
$1,086,110. The excess is being amortized on a straight-line basis over a
fifteen-year period.
Of the $2,104,442 purchase price, $1,000,000 is included in other
accrued expenses as of June 30, 1999. The Company is obligated to pay that
amount when all vascular access production is relocated to Wisconsin.
In addition, the Company is obligated to pay Radiance minimum
royalties, base on product sales, of $300,000 per year for a five-year period.
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 period presented. 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,
-------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenues $ 8,605,609 $ 8,737,853
Net income (loss) $ (213,879) 1,143,589
Basic net income (loss) per share $ (0.184) $ 0.088
Diluted net income (loss) per share $ (0.184) $ 0.088
Weighted average shares - basic 2,673,093 3,114,823
Weighted average shares - diluted 2,673,093 3,150,721
</TABLE>
(14) SALE OF BETADINE PRODUCT LINE
On March 5, 1999, the Company sold its license and distribution rights
along with the remaining inventory of Betadine(R) 5% Sterile Ophthalmic Prep
Solution to Alcon Laboratories, Inc. and Alcon Universal, Ltd. Escalon received
approximately $2,060,000 in cash from this transaction. After writing-off
remaining net book value of license and distribution rights, goodwill and
inventory of $259,000, $462,000 and $460,000, respectively, the Company realized
a $879,000 gain from this sale. Betadine has historically accounted for
approximately 15% of Escalon's sales revenues.
(15) 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 $100,000 to be paid
F-17
<PAGE> 36
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) COMMITMENTS - (CONTINUED)
during fiscal 2000; $150,000 in fiscal 2001; and $200,000 in fiscal 2002, 2003
and 2004.
The Company is also obligated to pay $1,000,000, which is included in
other accrued expenses, to Radiance Medical Systems, Inc. when all vascular
access production is relocated to Wisconsin. This will be completed by the
second quarter of fiscal 2000.
(16) 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.
In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement,
subject to final court approval, to settle this action on its behalf and on
behalf of its former and present officers and directors, for $500,000. The
Company's directors and officers insurance carrier has agreed to fund a
significant portion of the settlement amount. Both the Company and their
insurance carrier have deposited such funds in an escrow account.
(17) SUBSEQUENT EVENTS
On August 13, 1999 the Company sold the license and distribution rights
to its major product, AdatoSil(R)5000 Silicone Oil, to Bausch & Lomb Surgical,
Inc. Under the terms of this agreement, Escalon received $2.1 million cash,
payable in quarterly installments, and additional cash consideration based on
future sales of Silicone Oil over the next six years.
Silicone Oil represented approximately 56% of the Company's revenue in
fiscal 1999.
F-18
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
3.1 (a) Restated Articles of Incorporation of Registrant. (6)
(b) Certificate of Amendment of Restated Articles of Incorporation
of Registrant dated November 8, 1993.(6)
(c) Certificate of Amendment of Restated Articles of Incorporation
of Registrant dated February 12, 1996.(6)
(d) Certificate of Determination of Series A 6% Convertible
Preferred Stock. (8)
3.2 Amended and Restated Bylaws of Registrant. *
4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (2)
4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (2)
4.3 Form of Underwriters Class A Common Stock Purchase Warrants.
(2)
4.4 Form of Underwriters Class B Common Stock Purchase Warrants.
(2)
4.5 (a) Warrant Agreement between the Registrant and U.S. Stock
Transfer Corporation. (2)
(b) Amendment to Warrant Agreement between Registrant and U.S.
Stock Transfer Corporation. (4)
(d) Amendment to Warrant Agreement between Registrant and American
Stock Transfer Company. (5)
4.6 Securities Purchase Agreement, dated as of December 31, 1997
by and among the Company and Combination. (8)
4.7 Registration Rights Agreement, dated as of December 31, 1997
by and among the Company and Combination. (8)
4.8 Warrant to Purchase Common Stock issued December 31, 1997 to
David Stefansky. (8)
4.9 Warrant to Purchase Common Stock issued December 31, 1997 to
Combination. (8)
4.10 Warrant to Purchase Common Stock issued December 31, 1997 to
Richard Rosenblum. (8)
4.11 Warrant to Purchase Common Stock issued December 31, 1997 to
Trautman Kramer & Company. (8)
10.1 (a) 1993 Stock Option Plan of Registrant. (3)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1993 Stock Option Plan. (3)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1993 Stock Option Plan. (3)
10.2 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers. (1)
10.3 Underwriting Agreement between the Registrant and the
Underwriter. (2)
10.4 Unit Purchase Option between the Registrant and the
Underwriter. (2)
10.5 Employment Agreement between Registrant and Ronald Hueneke
dated October 4, 1991. (6)
10.6 Employment Agreement between Registrant and Richard J. DePiano
dated March 1, 1997, as amended. (7)
10.7 Distributorship Agreement between Registrant and Scott Medical
Products dated as of September 8, 1992, as amended September
8, 1995. (6)
10.8 Research and Development Agreement between Registrant and The
West Company, Incorporated dated April 3, 1995. (6)
10.9 Assets Sale and Purchase Agreement between the Registrant and
Radiance Medical Systems, Inc., dated January 21, 1999. (9)
10.10 Bill of Sale and Acceptance Agreement between the Registrant
and Alcon Laboratories, Inc., dated March 5, 1999. (10)
10.11 Bill of Sale and Acceptance Agreement between the Registrant
and Alcon Universal, Ltd., dated March 5, 1999. (10)
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.12 Termination Agreement between the Registrant and Bausch & Lomb
Surgical, Inc., dated August 13, 1999. (11)
10.13 Supply Agreement between the Registrant and Bausch & Lomb
Surgical, Inc., dated August 13, 1999. (11)
21 Subsidiaries. *
23.1 Consent of Ernst & Young LLP, independent auditors. *
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates,
LLC, independent auditors. *
27.1 Financial Data Schedule. *
</TABLE>
- ---------------
* Filed herewith
(1) 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).
(2) 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).
(3) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated June 13, 1994 (Registration Number 33-80162).
(4) Filed as an exhibit to the Company's Form 10-K for year ended
June 30, 1994.
(5) Filed as an exhibit to the Company's Form 10-K for the year
ended June 30, 1995.
(6) Filed as an exhibit to the Company's Form 10-K for the year
ended June 30, 1996.
(7) Filed as an exhibit to the Company's Form 10-K for the year
ended June 30, 1997.
(8) Filed as an exhibit to the Company's Registration Statement on
Form S-3 dated January 20, 1998 (Registration No. 333-44513).
(9) Filed as an exhibit to the Company's Form 8-K, dated February
1, 1999.
(10) Filed as an exhibit to the Company's Form 8-K, dated March 19,
1999.
(11) Filed as an exhibit to the Company's Form 8-K, dated August
26, 1999.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
ESCALON MEDICAL CORP.
(A CALIFORNIA CORPORATION)
(AS AMENDED THROUGH NOVEMBER 20, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - Applicability....................................................................................... 1
Section 1. Applicability of Bylaws.............................................................. 1
ARTICLE II - Offices............................................................................................ 1
Section 1. Principal Offices.................................................................... 1
Section 2. Change in Location or Number of Offices.............................................. 1
ARTICLE III - Meetings of Shareholders.......................................................................... 1
Section 1. Place of Meetings.................................................................... 1
Section 2. Annual Meetings...................................................................... 1
Section 3. Special Meetings..................................................................... 2
Section 4. Notice of Annual, Special or Adjourned Meetings...................................... 2
Section 5. Record Date.......................................................................... 3
Section 6. Quorum............................................................................... 4
Section 7. Adjournment.......................................................................... 4
Section 8. Validation of Actions Taken at Defectively Called, Noticed or Held Meetings.......... 4
Section 9. Voting for Election of Directors..................................................... 5
Section 10. Proxies.............................................................................. 5
Section 11. Inspectors of Election............................................................... 6
Section 12. Action by Written Consent............................................................ 6
ARTICLE IV - Directors.......................................................................................... 7
Section 1. Number of Directors.................................................................. 7
Section 2. Election of Directors................................................................ 7
Section 3. Term of Office....................................................................... 7
Section 4. Vacancies............................................................................ 7
Section 5. Removal.............................................................................. 8
Section 6. Resignation.......................................................................... 8
Section 7. Fees and Compensation................................................................ 8
ARTICLE V - Committees of the Board of Directors................................................................ 9
Section 1. Designation of Committees............................................................ 9
Section 2. Powers of Committees................................................................. 9
ARTICLE VI - Meetings of the Board of Directors and Committees Thereof.......................................... 9
Section 1. Place and Meetings................................................................... 9
Section 2. Annual Meeting...................................................................... 10
Section 3. Other Regular Meetings.............................................................. 10
Section 4. Special Meetings.................................................................... 10
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 5. Notice of Special Meetings.......................................................... 10
Section 6. Waivers, Consents and Approvals..................................................... 10
Section 7. Quorum; Action at Meetings; Telephone Meetings...................................... 10
Section 8. Adjournment......................................................................... 11
Section 9. Action Without a Meeting............................................................ 11
Section 10. Meetings of and Action by Committees................................................ 11
ARTICLE VII - Officers......................................................................................... 11
Section 1. Officers............................................................................ 11
Section 2. Election of Officers................................................................ 11
Section 3. Subordinate Officers, etc........................................................... 11
Section 4. Removal and Resignation............................................................. 12
Section 5. Vacancies........................................................................... 12
Section 6. Chairman of the Board............................................................... 12
Section 7. President........................................................................... 12
Section 8. Vice President...................................................................... 12
Section 9. Secretary........................................................................... 12
Section 10. Chief Financial Officer............................................................. 13
ARTICLE VIII - Records and Reports............................................................................. 13
Section 1. Minute Book......................................................................... 13
Section 2. Share Register...................................................................... 13
Section 3. Books and Records of Account........................................................ 13
Section 4. Bylaws.............................................................................. 14
Section 5. Inspection of Records............................................................... 14
Section 6. Annual Report to Shareholders....................................................... 14
ARTICLE IX - Miscellaneous..................................................................................... 14
Section 1. Checks, Drafts, etc................................................................. 14
Section 2. Contracts, etc. - How Executed...................................................... 14
Section 3. Certificates of Stock............................................................... 14
Section 4. Lost Certificates................................................................... 15
Section 5. Representation of Shares of Other Corporations...................................... 15
Section 6. Construction and Definitions........................................................ 15
Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance................ 15
ARTICLE X - Amendments......................................................................................... 16
Section 1. Amendments.......................................................................... 16
</TABLE>
ii
<PAGE> 4
BYLAWS
OF
ESCALON MEDICAL CORP.
(A CALIFORNIA CORPORATION)
ARTICLE I.
APPLICABILITY
SECTION 1. APPLICABILITY OF BYLAWS. These Bylaws govern, except as
otherwise provided by statute or its Articles of Incorporation, the management
of the business and the conduct of the affairs of the Corporation.
ARTICLE II.
OFFICES
SECTION 1. PRINCIPAL OFFICES. The Board of Directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the Corporation has one or more business offices
in this state, the Board of Directors shall designate a principal business
office in the State of California.
SECTION 2. CHANGE IN LOCATION OR NUMBER OF OFFICES. The Board of
Directors may change any office from one location to another or eliminate any
office or offices.
ARTICLE III.
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the shareholders shall be
held at any place within or without the State of California designated by the
Board of Directors, or, in the absence of such designation, at the principal
executive office of the Corporation.
SECTION 2. ANNUAL MEETINGS. An annual meeting of the shareholders shall
be held within 180 days following the end of the fiscal year of the Corporation
at a date and time designated by the Board of Directors. Directors shall be
elected at each annual meeting and any other proper business may be transacted
thereat.
-1-
<PAGE> 5
SECTION 3. SPECIAL MEETINGS.
(a) Special meetings of the shareholders may be called by the
Board of Directors, the Chairman of the Board and the President or by the
shareholders upon the request of the holders of shares entitled to cast not less
than 10 percent of the votes at such meeting.
(b) Any request for the calling of a special meeting of the
shareholders shall (1) be in writing, (2) specify the date and time thereof,
which date shall be not less than 35 nor more than 60 days after receipt of the
request, (3) specify the general nature of the business to be transacted thereat
and (4) be given either personally or by first-class mail, postage prepaid, or
other means of written communication to the Chairman of the Board, President,
any Vice President or Secretary of the Corporation. The officer receiving a
proper request to call a special meeting of the shareholders shall cause notice
to be given pursuant to the provisions of Section 4 of this Article III to the
shareholders entitled to vote thereat that a meeting will be held at the date
and time specified by the person or persons calling the meeting. If notice is
not given within 20 days of the receipt of the request, the shareholders making
the request may give notice of such meeting so long as the notice given complies
with the other provisions of this subsection.
(c) No business may be transacted at a special meeting unless
the general nature thereof was stated in the notice of such meeting.
SECTION 4. NOTICE OF ANNUAL, SPECIAL OR ADJOURNED MEETINGS.
(a) Whenever any meeting of the shareholders is to be held, a
written notice of such meeting shall be given in the manner described in
subdivision (d) of this section not less than 10 nor more than 60 days before
the date thereof to each shareholder entitled to vote thereat. The notice shall
state the place, date and hour of the meeting and (1) in the case of a special
meeting, the general nature of the business to be transacted or (2) in the case
of the annual meeting, those matters which the Board of Directors, at the time
of the giving of the notice, intends to present for action by the shareholders.
The notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees who, at the time of the notice, management
intends to present for election.
(b) Any proper matter may be presented at an annual meeting for
action. However, any action to approve (1) a contract or transaction in which a
director has a direct or indirect financial interest under Section 310 of the
California Corporations Code (the "Code"), (2) an amendment of the Articles of
Incorporation under Section 902 of the Code, (3) a reorganization of the
Corporation under Section 1201 of the Code, (4) a voluntary dissolution of the
Corporation under Section 1900 of the Code, or (5) a distribution in dissolution
(other than in accordance with the rights of outstanding preferred shares) under
Section 2007 of the Code may be taken only if the notice of the meeting states
the general nature of the matter to be approved.
(c) Notice need not be given of an adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, except that if the
-2-
<PAGE> 6
adjournment is for more than 45 days or if after the adjournment a new record
date is provided for the adjourned meeting, a notice of the adjourned meeting
shall be given to each shareholder of record entitled to vote at that meeting.
(d) Notice of any meeting of the shareholders shall be given
personally, by first class mail, or by telegraph or other written communication,
addressed to the shareholder at his address appearing on the books of the
Corporation or given by him to the Corporation for the purpose of notice; or if
no such address appears or is given, at the place where the principal executive
office of the Corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. Notice shall be deemed to have been given at the time when
delivered personally to the recipient, deposited in the mail, delivered to a
common carrier for transmission to the recipient or sent by other means of
written communication. An affidavit of the mailing or other means of giving
notice may be executed by the Secretary, Assistant Secretary or any transfer
agent of the Corporation giving the notice and shall be prima facie evidence of
the giving of the notice. Such affidavits shall be filed and maintained in the
minute books of the Corporation.
(e) If any notice or report addressed to the shareholder at his
address appearing on the books of the corporation is returned to the Corporation
by the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver the notice or report to the shareholder at
such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available for the shareholder
upon his written demand at the principal executive office of the Corporation for
a period of one year from the date of the giving of the notice or report to all
other shareholders.
SECTION 5. RECORD DATE.
(a) The Board of Directors may fix a time in the future as a
record date for determination of the shareholders who are (1) entitled to
receive notice of any meeting or to vote thereat, (2) entitled to give written
consent to any corporate action without a meeting, (3) entitled to receive
payment of any dividend or other distribution or allotment of any rights or (4)
entitled to exercise any rights in respect of any other lawful action. The
record date so fixed shall be not more than 60 or less than 10 days prior to the
date of any meeting of the shareholders, or more than 60 days prior to any other
action.
(b) In the event no record date is fixed:
(1) The record date for determining the shareholders
entitled to notice of or to vote at a meeting of shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
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(2) The record date for determining shareholders entitled
to give consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors has been taken, shall be the day on which the
first written consent is given.
(3) The record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the 60th day prior to the
date of such other action, whichever is later.
(c) Notwithstanding any transfer of any shares on the books of
the Corporation after the record date, only shareholders of record an the close
of business on the record date are entitled to receive notice and to vote, to
give written consent, to receive a dividend, distribution or allotment of rights
or to exercise rights, as the case may be.
(d) A determination of shareholders of record entitled to
receive notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board of Directors fixes a new record date
for the adjourned meeting, but the Board shall fix a now record date if the
meeting is adjourned for more than 45 days from the date set for the original
meeting.
SECTION 6. QUORUM.
(a) A majority of the shares entitled to vote at a meeting of
the shareholders, represented in person or by proxy, shall constitute a quorum
for the transaction of business thereat.
(b) The shareholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum.
SECTION 7. ADJOURNMENT. Any meeting of the shareholders may be
adjourned from time to time whether or not a quorum is present by the vote of a
majority of the shares represented thereat either in person or by proxy. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting.
SECTION 8. VALIDATION OF ACTIONS TAKEN AT DEFECTIVELY CALLED, NOTICED
OR HELD MEETINGS.
(a) The transactions of any meeting of the shareholders, however
called and noticed and wherever held, are as valid as though had at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, each of the persons
entitled to vote thereat, not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. Any written waiver of notice shall comply with subdivision
(f) of Section 601 of the Code. All such waivers, consents and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
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(b) Attendance of a person at a meeting shall constitute a
waiver of notice of and presence at such meeting, except (1) when the person
objects, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened and (2) that attendance
at a meeting is not a waiver of any right to object to the consideration of any
matter required by the Code to be included in the notice but not so included, if
such objection is expressly made at the meeting.
SECTION 9. VOTING FOR ELECTION OF DIRECTORS.
(a) Except as provided in subdivision (c) of this section, the
affirmative vote of the majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number is required by law or the
Articles of Incorporation.
(b) Every shareholder complying with subdivision (c) of this
section and entitled to vote at any election of directors may cumulate his votes
and give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which his shares are normally
entitled, or distribute his votes on the same principle among as many candidates
as he thinks fit.
(c) No shareholder shall be entitled to cumulate his votes
(i.e., cast for any candidate a number of votes greater than the number of votes
which such shareholder normally is entitled to cast) unless the candidate's or
candidates name(s) for which he desires to cumulate his votes has or have been
placed in nomination prior to the voting and the shareholder has given notice at
the meeting prior to the voting of his intention to cumulate his votes. If any
one shareholder has given such notice, all shareholders may cumulate their votes
for candidates in nomination.
(d) Elections for directors may be by voice vote or by ballot
unless any shareholder entitled to vote demands election by ballot at the
meeting prior to the voting, in which case the vote shall be by ballot.
(e) In any election of directors, the candidates receiving the
highest number of affirmative votes of the shares entitled to be voted for them
up to the number of directors to be elected by such shares are elected as
directors.
SECTION 10. PROXIES.
(a) Every person entitled to vote shares may authorize another
person or persons to act with respect to such shares by a written proxy signed
by him or his attorney-in-fact and filed with the Secretary of the Corporation.
A proxy shall be deemed signed if the shareholder's name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission or
otherwise) by him or his attorney-in-fact.
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(b) Any validly executed proxy, except a proxy which is
irrevocable pursuant to subdivision (c) of this Section 10, shall continue in
full force and effect until the expiration of the term specified therein or upon
its earlier revocation by the person executing it prior to the vote pursuant
thereto (1) by a writing delivered to the Corporation stating that it is
revoked, (2) by written notice of the death of the person executing the proxy,
delivered to the Corporation, (3) by a subsequent proxy executed by the person
executing the prior proxy and presented to the meeting or (4) as to any meeting,
by attendance at such meeting and voting in person by the person executing the
proxy. No proxy shall be valid after the expiration of 11 months from the date
thereof unless otherwise provided in the proxy. The date contained on the form
of proxy shall be deemed to be the date of its execution.
(c) A proxy which states that it is irrevocable is irrevocable
for the period specified therein subject to the provisions of subdivisions (e)
and (f) of Section 705 of the Code.
SECTION 11. INSPECTORS OF ELECTION.
(a) In advance of any meeting of the shareholders, the Board of
Directors may appoint either one or three persons (other than nominees for the
office of director) as inspectors of election to act at such meeting or any
adjournments thereof. If inspectors of election are not so appointed, or if any
person so appointed fails to appear or refuses to act, the chairman of any such
meeting may, and on the request of any shareholder or his proxyholder shall,
appoint inspectors of election (or persons to replace those who so fail or
refuse to act) at the meeting. If appointed at a meeting on the request of one
or more shareholders or the proxyholders thereof, the majority of shares
represented in person or by proxy shall determine whether one or three
inspectors are to be appointed.
(b) The duties of inspectors of election and the manner of
performance thereof shall be as prescribed in subdivisions (b) and (c) of
Section 707 of the Code.
SECTION 12. ACTION BY WRITTEN CONSENT.
(a) Subject to subdivisions (b) and (c) of this section, any
action which may be taken at any annual or special meeting of the shareholders
may be taken without a meeting, without a vote and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. All such consents shall
be filed with the Secretary of the Corporation and maintained with the corporate
records.
(b) Except for the election of a director by written consent to
fill a vacancy on the Board of Directors (other than a vacancy created by
removal), directors may be elected by written consent only by the unanimous
written consent of all shares entitled to vote for the election of directors. In
the case of an election of a director by written consent to fill a vacancy
(other than a vacancy created by removal), any such election requires the
consent of a majority of the outstanding shares entitled to vote for the
election of directors.
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(c) Unless the consents of all shareholders entitled to vote
have been solicited in writing, the Secretary of the Corporation shall give
prompt notice of the corporate action approved by the shareholders without a
meeting. This notice shall be given in the manner specified in subdivision (d)
of Section 4 of this Article III. In the case of approval of (1) contracts or
transactions in which a director has a direct or indirect financial interest
under Section 310 of the Code, (2) indemnification of agents of the Corporation
under Section 317 of the Code, (3) a reorganization of the Corporation under
Section 1201 of the code, or (4) a distribution in dissolution (other than in
accordance with the rights of outstanding preferred shares) under Section 2007
of the Code, notice of such approval shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
(d) Any shareholder giving a written consent, or his
proxyholder, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the Corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the Corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the Corporation.
ARTICLE IV.
DIRECTORS
SECTION 1. NUMBER OF DIRECTORS. The authorized number of directors
shall be not less than three (3) nor more than five (5), the exact number of
directors to be fixed from time to time within such range by a duly adopted
resolution of the Board of Directors or shareholders.
SECTION 2. ELECTION OF DIRECTORS. Directors shall be elected at each
annual meeting of the shareholders.
SECTION 3. TERM OF OFFICE. Each director, including a director elected
to fill a vacancy, shall hold office until the expiration of the term for which
he is elected and until a successor has been elected and qualified.
SECTION 4. VACANCIES.
(a) A vacancy on the Board of Directors exists whenever any
authorized position of director is not then filled by a duly elected director,
whether caused by death, resignation, removal, change in the authorized number
of directors or otherwise.
(b) Except for a vacancy created by the removal of a director,
vacancies on the Board of Directors may be filled by a majority of the directors
then in office, or, if the number of directors then in office is less than a
quorum, by (1) the unanimous written consent of the directors then in office,
(2) the affirmative vote of the majority of the directors then in office at a
meeting held
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pursuant to notice or waivers of notice or (3) a sole remaining director. A
vacancy created by the removal of a director shall be filled only by a person
elected by a majority of the shareholders entitled to vote at a duly held
meeting at which there is a quorum present or by the unanimous written consent
of the holders of the outstanding shares entitled to vote at such a meeting.
(c) The shareholders may elect a director at any time to fill
any vacancy not filled by the directors.
SECTION 5. REMOVAL.
(a) The Board of Directors may declare vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony.
(b) Any or all of the directors may be removed without cause if
such removal is approved by a majority of the outstanding shares entitled to
vote; provided, however, that no director may be removed (unless the entire
Board of Directors is removed) whenever the votes cast against his removal, or
not consenting in writing to such removal, would be sufficient to elect such
director if voted cumulatively at an election at which the same total number of
votes were cast (or, if such action is taken by written consent, all shares
entitled to vote were voted) and the entire number of directors authorized at
the time of his most recent election were then being elected; and provided,
further, if the Corporation's Articles of Incorporation provide that the
shareholders of any class or series, voting as a class or series, are entitled
to elect one or more directors, any director so elected may be removed only by
the applicable vote of the shareholders of such class or series.
(c) Any reduction of the authorized number of directors does not
remove any director prior to the expiration of his term of office.
(d) A director may not be removed prior to the expiration of his
term of office except as provided in this section and except as ordered by the
superior court of the proper county at the suit at shareholders of at least 10
percent of the outstanding shares of any class.
SECTION 6. RESIGNATION. Any director may resign effective upon giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board of Directors of the Corporation, unless the notice specifies a later time
for the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
SECTION 7. FEES AND COMPENSATION. Directors may be paid for their
services in such capacity a sum in such amounts, at such times and upon such
conditions as may be determined from time to time by resolution of the Board of
Directors and may be reimbursed for their expenses, if any, for attendance at
each meeting of the Board. No such payments shall preclude any director from
serving the Corporation in any other capacity and receiving compensation in any
manner therefor.
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ARTICLE V.
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. DESIGNATION OF COMMITTEES. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate (a) one or more committees, each consisting of two or more directors
and (b) one or more directors as alternate members of any committee, who may
replace any absent member at any meeting thereof. Any member or alternate member
of a committee shall serve at the pleasure of the Board.
SECTION 2. POWERS OF COMMITTEES. Any committee, to the extent provided
in the resolution of the Board of Directors designating such committee, shall
have all the authority of the Board, except with respect to:
(a) The approval of any action for which the Code also requires
any action by the shareholders;
(b) The filling of vacancies on the Board or in any committee
thereof;
(c) The fixing of compensation of the directors for serving on
the Board or on any committee thereof;
(d) The amendment or repeal of these Bylaws or the adoption of
new bylaws;
(e) The amendment or repeal of any resolution of the Board which
by its express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the Corporation,
except at a rate, in a periodic amount or within a price range determined by the
Board of Directors; or
(g) The designation of other committees of the Board or the
appointment of members or alternate members thereof.
ARTICLE VI.
MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES THEREOF
SECTION 1. PLACE AND MEETINGS. Regular meetings of the Board of
Directors shall be held at any place within or without the State of California
which has been designated from time to time by the Board or, in the absence of
such designation, at the principal executive office of the Corporation. Special
meetings of the Board shall be held either at any place within or without the
State of California which has been designated in the notice of meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the Corporation.
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SECTION 2. ANNUAL MEETING. Immediately following each annual meeting of
the shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization and the transaction of other business. Notice of any
such meeting is not required.
SECTION 3. OTHER REGULAR MEETINGS. Other regular meetings of the Board
of Directors shall be held without call at such time as shall be designated from
time to time by the Board. Notice of any such meeting is not required.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called at any time for any purpose or purposes by the Chairman of the
Board or the President or any Vice President or the Secretary or any two
directors of the Corporation. Notice shall be given of any special meeting of
the Board.
SECTION 5. NOTICE OF SPECIAL MEETINGS. Notice of the time and place of
special meetings of the Board of Directors shall be delivered personally or by
telephone to each director or sent to each director by first-class mail or
telegraph, charges prepaid, addressed to each director at that director's
address as shown on the records of the Corporation. Such notice shall be given
four days prior to the holding of the special meeting if sent by mail or 48
hours prior to the holding thereof if delivered personally or given by telephone
or telegraph. The notice or report shall be deemed to have been given at the
time when delivered personally to the recipient or deposited in the mail or sent
by other means of written communication. Notice of any special meeting of the
Board of Directors need not specify the purpose thereof.
SECTION 6. WAIVERS, CONSENTS AND APPROVALS. Notice of any meeting of
the Board of Directors need not be given to any director who signs a waiver of
notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to him. All
such waivers, consents and approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
SECTION 7. QUORUM; ACTION AT MEETINGS; TELEPHONE MEETINGS.
(a) A majority of the authorized number of directors shall
constitute a quorum for the transaction of business. Every act or decision done
or made by a majority of the directors present is the act of the Board of
Directors, unless action by a greater proportion of the directors is required by
law or the Articles of Incorporation.
(b) A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors, if
any action taken is approved by at least a majority of the required quorum for
such meeting.
(c) Members of the Board of Directors may participate in a
meeting through use of conference telephone or similar communications equipment
so long as all members participating in such meeting can hear one another.
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SECTION 8. ADJOURNMENT. A majority of the directors present, whether or
not a quorum is present, may adjourn any meeting to another time and place. If
the meeting is adjourned for more than 24 hours, notice of any adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.
SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Directors may be taken without a meeting, if all
members of the Board individually or collectively consent in writing to such
action. Such written consent or consents shall be filed with the minutes of the
proceedings of the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
SECTION 10. MEETINGS OF AND ACTION BY COMMITTEES. The provisions of
this Article VI apply to committees of the Board of Directors and action by such
committees with such changes in the language of those provisions as are
necessary to substitute the committee and its members for the Board and its
members.
ARTICLE VII.
OFFICERS
SECTION 1. OFFICERS. The Corporation shall have as officers, a
President, a Secretary and a Chief Financial Officer. The corporation may also
have, at the discretion of the Board, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Chief
Financial Officers and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article VII. One person may hold two or
more offices.
SECTION 2. ELECTION OF OFFICERS. The officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article VII, shall be chosen by the Board of
Directors.
SECTION 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may
appoint by resolution, and may empower the Chairman of the Board, if there be
such an officer, or the President, to appoint such other officers as the
business of the Corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are determined from time
to time by resolution of the Board or, in the absence of any such determination,
as are provided in these Bylaws. Any appointment of an officer shall be
evidenced by a written instrument filed with the Secretary of the Corporation
and maintained with the corporate records.
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SECTION 4. REMOVAL AND RESIGNATION.
(a) Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by the Board of Directors or, except in the case of an officer chosen by
the Board, by any officer upon whom such power of removal may be conferred by
resolution of the Board.
(b) Subject to the rights, if any, of the corporation under any
contract of employment, any officer may resign at any time effective upon giving
written notice to the Chairman of the Board, President, any Vice President or
the Secretary of this Corporation, unless the notice specifies a later time for
the effectiveness of such resignation.
SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
SECTION 6. CHAIRMAN OF THE BOARD. If there is a Chairman of the Board,
he shall, if present, preside at all meetings of the Board of directors,
exercise and perform such other powers and duties as may be from time to time
assigned to him by resolution of the Board or prescribed by these Bylaws and, if
there is no President, the Chairman of the Board shall be the chief executive
officer of the Corporation and have the power and duties set forth in Section 7
of this Article VII.
SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by these Bylaws or the Board of Directors to the Chairman of the
Board, if there be such an officer, the President shall be the chief executive
officer and general manager of the Corporation and shall, subject to the control
of the Board, have general supervision, direction and control of the business
and affairs of the Corporation. He shall preside at all meetings of the
shareholders and, in the absence of the Chairman of the Board, or if there be
none, at all meetings of the Board. He shall have the general powers and duties
of management usually vested in the office of president of a corporation, and
shall have such other powers and duties as may be prescribed from time to time
by resolution of the Board.
SECTION 8. VICE PRESIDENT. In the event of the absence or disability of
the President, the Vice Presidents in order of their rank as fixed by the Board
of Directors, or, if not ranked, the Vice President designated by the Board,
shall perform all duties of the President, and when so acting shall have all
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board or as the
President may from time to time delegate.
SECTION 9. SECRETARY.
(a) The Secretary shall keep or cause to be kept (1) the minute
book, (2) the share register and (3) the seal, if any, of the Corporation.
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(b) The Secretary, an Assistant Secretary, or if they are absent
or unable to act, any other officer shall give, or cause to be given, notice of
all meetings of the shareholders and of the Board of Directors required by these
Bylaws or by law to be given, and shall have such other powers and perform such
other duties as may be prescribed from time to time by the Board of Directors or
any committee of the Board of Directors.
SECTION 10. CHIEF FINANCIAL OFFICER.
(a) The Chief Financial Officer shall keep, or cause to be kept,
the books and records of account of the Corporation.
(b) The Chief Financial Officer shall deposit all monies and
other valuables in the name and to the credit of the Corporation with such
depositories as may be designated from time to time by resolution of the Board
of Directors. He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, shall render to the President and the Board, whenever
they request it, an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation, and shall have such
other powers and perform such other duties as may be prescribed from time to
time by the Board or as the President may from time to time delegate.
ARTICLE VIII.
RECORDS AND REPORTS
SECTION 1. MINUTE BOOK. The Corporation shall keep or cause to be kept
in written form at its principal executive office or such other place as the
Board of Directors may order, a minute book which shall contain a record of all
actions by its shareholders, Board or committees of the Board including the
time, date and place of each meeting; whether a meeting is regular or special
and, if special, how called; the manner of giving notice of each meeting and a
copy thereof; the names of those present at each meeting of the Board or
committees thereof; the number of shares present or represented at each meeting
of the shareholders; the proceedings of all meetings; any written waivers of
notice, consents to the holding of a meeting or approvals of the minutes
thereof; and written consents for action without a meeting.
SECTION 2. SHARE REGISTER. The Corporation shall keep or cause to be
kept at its principal executive office or, if so provided by resolution of the
Board of Directors, at the Corporation's transfer agent or registrar, a share
register, or a duplicate share register, which shall contain the names of the
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same and the number and date
of cancellation of every certificate surrendered for cancellation.
SECTION 3. BOOKS AND RECORDS OF ACCOUNT. The Corporation shall keep or
cause to be kept at its principal executive office or such other place as the
Board of Directors may order, adequate and correct books and records of account.
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SECTION 4. BYLAWS. The Corporation shall keep at its principal
executive office or, in the absence of such office in the State of California,
at its principal business office in the state, the original or a copy of the
Bylaws as amended to date.
SECTION 5. INSPECTION OF RECORDS. The shareholders and directors of the
Corporation shall have all of the rights to inspect the books and records of the
Corporation that are specified in Sections 213 and 1600 through 1602 of the
Code.
SECTION 6. ANNUAL REPORT TO SHAREHOLDERS. The Board of Directors shall
cause a report to be sent to the shareholders not later than 120 days after the
end of each fiscal year of the Corporation. Such report shall comply with the
provisions of Section 1501 of the Code and shall be sent in the manner specified
in subdivision (d) of Section 4 of Article III at least 15 days prior to the
annual meeting of shareholders to be held during the next fiscal year.
ARTICLE IX.
MISCELLANEOUS
SECTION 1. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, and any assignment
or endorsement thereof, issued in the name of or payable to the Corporation,
shall be signed or endorsed by such person or persons and in such manner as,
from time to time, shall be determined by resolution of the Board of Directors.
SECTION 2. CONTRACTS, ETC. - HOW EXECUTED. The Board of Directors,
except as otherwise provided in these Bylaws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the corporation, and such authority may be
general or confined to specific instances; and, unless so authorized or ratified
by the Board, no officer, employee or other agent shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or to any amount.
SECTION 3. CERTIFICATES OF STOCK. A certificate or certificates for
shares of the capital stock of the Corporation shall be issued to each
shareholder when the shares are fully paid or the Board of Directors may
authorize the issuance of certificates for shares as partly paid provided that
these certificates shall conspicuously state the amount of the consideration to
be paid for them and the amount already paid. All certificates shall be signed
in the name of the Corporation by the Chairman of the Board or the President or
a Vice President and by the Chief Financial Officer or an Assistant Chief
Financial Officer or the secretary or an Assistant Secretary, certifying the
number of shares and the class or series thereof owned by the shareholder. Any
or all of the signatures on a certificate may be by facsimile signature. In the
event any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
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SECTION 4. LOST CERTIFICATES. Except as provided in this section, no
new certificate for shares shall be issued in lieu of an old certificate unless
the latter is surrendered to the Corporation and cancelled at the same time. The
Board of Directors may, in case any share certificate or certificate for any
other security is lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, upon such terms and conditions as the Board may
require, including provision for indemnification of the Corporation secured by a
bond or other adequate security sufficient to protect the Corporation against
any claim that may be made against it, including any expense or liability, on
account of the alleged loss, theft or destruction of such certificate or the
issuance of such new certificate.
SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. Any person
designated by resolution of the Board of Directors or, in the absence of such
designation, the Chairman of the Board, the President or any Vice President, or
by any other person authorized by any of the foregoing, is authorized to vote on
behalf of the Corporation any and all shares of any other corporation or
corporations, foreign or domestic, owned by the corporation.
SECTION 6. CONSTRUCTION AND DEFINITIONS. Unless the context other wise
requires, the general provisions, rules of construction and definitions
contained in the Code shall govern the construction of these Bylaws.
SECTION 7. INDEMNIFICATION OF CORPORATE AGENTS; PURCHASE OF LIABILITY
INSURANCE.
(a) Subject only to the express limitations of the Corporation's
Articles of Incorporation and Sections 204 and 317 of the Code, as the same may
from time to time be amended, (i) the Corporation shall indemnify each of its
directors and officers from and against any expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding to which such person was or is a party or is threatened to
be made a party arising by reason of the fact that such person is or was a
director or officer of the Corporation; and (ii) the Corporation may indemnify
any other agent of the Corporation with respect to such proceedings if and to
the extent the Board of Directors so determines by resolution.
(b) The Corporation shall, if and to the extent the Board of
Directors so determines by resolution, enter into indemnification agreements
with its agents on the terms and conditions determined by the Board of
Directors, subject to those limitations upon the Corporation's capacity to
indemnify its agents set forth in the Corporation's Articles of Incorporation
and Sections 204 and 317 of the Code, as the same may from time to time be
amended.
(c) Subject to the provisions of subdivision (i) of Section 317
of the Code, as the same may from time to time be amended, the Corporation
shall, if and to the extent the Board of Directors so determines by resolution,
purchase and maintain insurance in an amount and on behalf of such agents of the
Corporation as the Board may specify in such resolution against any liability
asserted against or incurred by the agent in such capacity or arising out of the
agent's status as such whether or not the Corporation would have the capacity to
indemnify the agent against such liability under the provisions of this Section
7.
-15-
<PAGE> 19
(d) The Corporation shall, if and to the extent the Board of
Directors so determines by resolution, advance expenses incurred by an agent in
defending any proceeding prior to the final disposition of such proceeding,
subject to the provisions of subdivision (f) of Section 317 of the Code, as the
same may from time to time be amended.
(e) This Section 7 shall not apply to any proceeding against any
trustee, investment manager or other fiduciary of an employee benefit plan in
such person's capacity as such, even though such person may be an agent, as
defined in subdivision (f) hereof.
(f) For purposes of this Section 7, an "agent" of the
corporation includes any person who is or was a director, officer, employee or
other agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer, employee or agent of a foreign or domestic corporation
which was a predecessor corporation of the Corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, and includes an action or proceeding by or in
the right of the Corporation to procure a judgment in its favor; and "expenses"
includes, without limitation, attorneys' fees and any expenses of establishing a
right to indemnification under subdivisions (d) or (e)(3) of Section 317 of the
Code.
ARTICLE X.
AMENDMENTS
SECTION 1. AMENDMENTS. New bylaws may be adopted or these Bylaws may be
amended or repealed by the approval of an affirmative vote of a majority of the
outstanding shares entitled to vote or by the Board of Directors.
Notwithstanding the preceding sentence, the adoption of a bylaw (a) specifying
or changing a fixed number of directors or the minimum or maximum number of
directors, or (b) changing from a variable to a fixed board or vice versa may
only be adopted by the approval of an affirmative vote of a majority of the
outstanding shares [, SUBJECT TO THE PROVISIONS OF SECTION 1 OF ARTICLE IV OF
THESE BYLAWS].
-16-
<PAGE> 1
Exhibit 21
Subsidiaries of Escalon Medical Corp.
Escalon Pharmaceutical, Inc.
Escalon Vascular Access, Inc.
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-4382 and Form S-3 No. 333-44513) of Escalon Medical Corp. and
in the related Prospectuses, 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., and in the Registration Statement (Form S-8 No.
33-80162) pertaining to the 1993 Stock Option Plan of Escalon Medical Corp. of
our report dated August 14, 1997, except for Note 6 - Reverse Stock Split, as to
which the date is November 20, 1997 with respect to the financial statements of
Escalon Medical Corp. for the year ended June 30, 1997 included in its Annual
Report (Form 10-K) for the year ended June 30, 1999.
/s/ Ernst & Young LLP
Princeton, New Jersey
September 17, 1999
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors'
We consent to the incorporation by reference in the Registration
Statements No. 33-54994 on Form S-8 pertaining to the 1988, 1989, 1990, 1991 and
1992 Stock Option Plans of Escalon Medical Corp., the Registration Statement No.
33-80162 on Form S-8 pertaining to the 1993 Stock Option Plan of Escalon Medical
Corp. and the related Prospectus of our report dated August 13, 1999, with
respect to the financial statements of Escalon Medical Corp. included in its
Annual Report (Form 10-K) for the year ended June 30, 1999.
/s/ PARENTE, RANDOLPH, ORLANDO
CAREY & ASSOCIATES
Philadelphia, Pennsylvania
September 17, 1999
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