<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File No. 0-20127
ESCALON MEDICAL CORP.
(Exact name of Registrant as specified in its charter)
California 33-0272839
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
351 East Conestoga Road
Wayne, PA 19087
(610) 688-6830
(Address, including zip code, and
telephone number, including area code,
of Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Date: May 5, 1999 3,242,184 Shares of Common Stock, no par value
----------- ---------
<PAGE> 2
ESCALON MEDICAL CORP.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
ESCALON MEDICAL CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,263,967 $ 2,623,232
Investments 330,016 1,003,781
Note receivable -- 15,000
Accounts receivable, net 940,378 1,227,351
Other receivables 75,000 75,000
Inventory, net 462,042 1,061,915
Other current assets 79,088 141,932
------------ ------------
Total current assets 4,150,491 6,148,211
Furniture and equipment, at cost, net 134,734 446,740
Long-term note receivable 112,500 150,000
License and distribution rights, net 878,838 527,057
Patents, net 475,175 480,419
Acquisition costs, net -- 41,243
Goodwill, net 968,295 1,479,871
Other assets 14,095 14,930
------------ ------------
$ 6,734,128 $ 9,288,471
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 200,000
Accounts payable 287,192 445,506
Accrued and other liabilities 398,284 1,653,481
------------ ------------
Total current liabilities 685,476 2,298,987
------------ ------------
Long-term debt -- 783,333
Shareholders' Equity:
Preferred stock, no par value; 2,000,000 shares authorized; 900 and 0
shares issued and outstanding at June 30, 1998
and March 31, 1999, respectively 747,321 --
Common stock, no par value; 35,000,000 shares authorized;
3,021,027 issued at June 30, 1998 and 3,377,164 shares issued
less 134,980 Treasury shares at March 31, 1999 45,253,597 46,024,812
Treasury stock -- (118,108)
Accumulated deficit (39,952,266) (39,700,553)
------------ ------------
Total shareholders' equity 6,048,652 6,206,151
------------ ------------
$ 6,734,128 $ 9,288,471
============ ============
</TABLE>
Note: The consolidated balance sheet at June 30, 1998 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
<PAGE> 4
ESCALON MEDICAL CORP. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product revenues $ 1,496,301 $ 2,066,009 $ 4,376,941 $ 5,526,106
Costs and expenses:
Cost of goods sold 648,169 922,168 1,925,744 2,431,172
Research and development 127,719 242,251 344,197 583,502
Marketing, general and administrative 727,094 951,845 2,186,855 2,349,818
----------- ----------- ----------- -----------
Total costs and expenses 1,502,982 2,116,264 4,456,796 5,364,492
----------- ----------- ----------- -----------
Income (loss) from operations (6,681) (50,255) (79,855) 161,614
----------- ----------- ----------- -----------
Other income and expenses:
Sale of Betadine product line -- 879,159 -- 879,159
Other income -- -- 75,000 --
Interest income 34,383 31,246 84,150 101,264
Interest expense -- (18,350) (149) (19,802)
----------- ----------- ----------- -----------
Total other income and expense 34,383 892,055 159,001 960,621
----------- ----------- ----------- -----------
Net income $ 27,702 $ 841,800 $ 79,146 $ 1,122,235
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.090) $ (0.001) $ (0.070) $ 0.082
=========== =========== =========== ===========
Diluted net income per share $ (0.090) $ (0.001) $ (0.070) $ 0.081
=========== =========== =========== ===========
Weighted average shares - basic 2,629,375 3,162,184 2,629,375 3,072,524
=========== =========== =========== ===========
Weighted average shares - diluted 2,629,375 3,162,184 2,629,375 3,116,671
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 79,146 $ 1,122,235
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 246,952 283,433
Net loss on retirement of fixed assets 9,601 --
Write off of patents -- 24,805
Gain on sale of Betadine product line -- (879,159)
Change in operating assets and liabilities:
Accounts receivable (351,404) (286,973)
Inventories (1,269) (1,059,625)
Other current assets 13,766 (62,844)
Accounts payable, accrued and other liabilities (92,746) 1,427,011
----------- -----------
Net cash provided from (used in) operating activities (95,954) 568,883
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (470,130) (2,262,780)
Proceeds from maturities of short-term investments 235,000 1,589,016
Proceeds from sale of Betadine product line -- 2,059,835
Purchase of vascular access business -- (1,400,000)
Short term note receivable -- (15,000)
Purchase of furniture and equipment (50,132) (48,312)
Proceeds from sale of furniture and equipment 1,000 --
Long term note receivable (37,500) (37,500)
Long term receivable (75,000) --
License and distribution rights cost (99,752) (11,381)
Acquisition costs -- (42,941)
Patent costs (28,140) (44,815)
Other assets 233 (835)
----------- -----------
Net cash used in investing activities (524,421) (214,713)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan -- 1,000,000
Preferred stock offering costs 1,126,658 --
Retirement of preferred stock -- (818,000)
Principal payments under capital lease obligations (2,910) --
Principal payments on term loan -- (16,667)
Purchase of treasury stock -- (118,108)
Payment of preferred stock dividends (20,250) (42,130)
----------- -----------
Net cash used in financing activities 1,103,498 5,095
----------- -----------
Net increase in cash and cash equivalents 483,123 359,265
Cash and cash equivalents, beginning of period 1,752,648 2,263,967
----------- -----------
Cash and cash equivalents, end of period $ 2,235,771 $ 2,623,232
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Escalon
Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its
subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access, Inc.
(jointly referred to as "Escalon" or the "Company") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. Operating results for interim periods
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999.
For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1998 included in the Company's
annual report on Form 10-K.
2. REVERSE STOCK SPLIT
On November 20, 1997, the Company held its annual meeting of
shareholders at which time the shareholders approved a one-for-four reverse
stock split (the "Reverse Split") of the Company's Common Stock (the "Common
Stock"). As a result of the Reverse Split, each shareholder now has one share of
Common Stock for every four shares owned before the Reverse Split. The Reverse
Split caused certain adjustments to be made to the Company's Class A, B and C
Redeemable Common Stock Purchase Warrants. The number of warrants necessary for
purchase of a Common Stock share has been increased by a factor of four.
All references in the condensed financial statements with regard to
shares, per share amounts and share prices have been adjusted for the Reverse
Split.
3. PER SHARE INFORMATION
Outstanding warrants were excluded from computation of basic and
diluted net income per share for the three and nine-month periods ended March
31, 1998 and 1999 because their exercise prices exceed market price, rendering
the effect of any conversion to be antidilutive. Employee stock options are
included in these computations when the average market price exceeds their
exercise price.
6
<PAGE> 7
3. PER SHARE INFORMATION (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share:
Net income $ 27,702 $ 841,800 $ 79,146 $ 1,122,235
Preferred stock dividends and accretion (263,250) (845,983) (263,250) (870,523)
----------- ----------- ----------- -----------
Numerator for basic and diluted earnings per
share-income available
to Common shareholders $ (235,548) $ (4,183) $ (184,104) $ 251,712
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares 2,629,375 3,162,184 2,629,375 3,072,524
Effect of dilutive securities:
Employee stock options -- -- -- 44,147
----------- ----------- ----------- -----------
Denominator for diluted earnings per
Share-weighted average shares and
assumed conversion 2,629,375 3,162,184 2,629,375 3,116,671
=========== =========== =========== ===========
Basic earnings per share $ (0.090) $ (0.001) $ (0.070) $ 0.082
=========== =========== =========== ===========
Diluted earnings per share $ (0.090) $ (0.001) $ (0.070) $ 0.081
=========== =========== =========== ===========
</TABLE>
4. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in,
first-out basis) or market, consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1999
------------- --------------
<S> <C> <C>
Raw materials/work in process $ 170,370 $ 492,062
Finished goods 472,672 735,753
----------- -----------
643,042 1,227,815
Valuation allowance (181,000) (165,900)
----------- -----------
$ 462,042 $ 1,061,915
=========== ===========
</TABLE>
7
<PAGE> 8
5. SHAREHOLDERS' EQUITY
The following table summarizes the changes in the Company's
shareholders' equity accounts for the nine-months ended March 31, 1999.
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- -------------------------------- Treasury Accumulated
Shares Amount Shares Amount Stock Deficit
-------- -------------- -------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 900 $ 747,321 3,021,027 $ 45,253,597 $ -- $(39,952,266)
Preferred stock conversion (82) (68,090) 131,137 68,090 -- --
Preferred stock retirement (818) (679,231) -- -- -- (138,767)
Issue common stock -- -- 225,000 703,125 -- (703,125)
Purchase of treasury stock -- -- -- -- (118,108) --
Preferred stock dividends -- -- -- -- -- (28,630)
Net income -- -- -- -- -- 1,122,235
---- ----------- --------- ------------ ------------ ------------
Balance at March 31, 1999 -- $ -- 3,377,164 $46,024,812 $ (118,108) $(39,700,553)
==== =========== ========= ============ ============ ============
</TABLE>
7. CONTINGENCIES
Litigation
As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter which the Company is no longer a party to). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in
November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering. On June 6, 1996, the court
denied a motion by the Company and the named officers and directors to dismiss
the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an
answer to the complaint denying all allegations of wrongdoing and asserting
various affirmative defenses. On March 31, 1997, the court issued Pretrial Order
No. 2, which set discovery cut off and ready trial dates, as well as providing
for certain coordination of discovery in the Kozloski case, and certain related
cases involving other issuers and D. Blech & Co. Discovery in the related
actions is ongoing. The final pre-trial conference is presently scheduled for
May 20, 1999. Class certification motions have been dismissed for failure
to prosecute, with leave to renew. On May 12, 1999, the court granted the
plaintiff's motion in the Blech action for class certification.
-----
In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement in
principle to settle this action on its behalf and on behalf of its former and
present officers and directors, for $500,000. This settlement is subject to
agreement upon final documentation and court approval. The Company's directors
and officers insurance carrier has agreed to fund a significant portion of the
settlement amount. In view of the anticipated settlement, no discovery or motion
practice is proceeding in the Kozloski case.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include certain
information relating to pursuit of future acquisitions and joint venture
opportunities, expenses associated with defending itself in litigation matters
and the effect of such matters on the Company's operations, liquidity and
capital resources, fluctuations in results of operations, as well as information
contained elsewhere in this Report where statements are preceded by, followed by
or include the words "believes," "expects," "anticipates," or similar
expressions. For such statements the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements contained in this
document are subject to risks and uncertainties that could cause the assumptions
underlying such forward-looking statements and the actual results to differ
materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals -- and
cause the assumptions underlying the forward-looking statements and the actual
results to differ materially from those expressed in or implied by those
forward-looking statements -- including, without limitation and in addition to
those discussed in the documents filed by the Company with the Securities and
Exchange Commission (including Amendment No. 3 to a Registration Statement on
Form S-3 filed by the Company with the Securities and Exchange Commission on
April 30, 1998 (Registration No. 333-44513)), the following: (i) future capital
needs and the uncertainty of additional funding (whether through the financial
markets, collaborative or other arrangements with strategic partners, or from
other sources); and (ii) the outcome of, and costs associated with, litigation
matters.
OVERVIEW
The following discussion should be read in conjunction with the interim
financial statements and the notes thereto which are set forth elsewhere in this
report on Form 10-Q.
On February 12, 1996, the Company acquired all of the assets and certain
liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the acquisition, the
Company was in the development stage and devoting substantially all of its
resources to the research and development of laser systems designed for the
treatment of ophthalmic disorders. Upon completion of the acquisition, the
Company changed its market focus and is now engaged in developing, marketing and
distributing medical devices and pharmaceuticals. The Company is also developing
its ophthalmic drug delivery system to complement its other businesses. To
further diversify its product portfolio, in January the Company acquired the
vascular access product line from Radiance Medical Systems, Inc. This is the
first step in Escalon's new market strategy of acquiring niche medical products,
outside the ophthalmic market.
In order to further develop and commercialize its laser technology, the
Company, in October 1997, licensed its intellectual laser properties to a newly
formed company, IntraLase Corporation, in return for an equity interest and
future royalties on product sales. IntraLase will have the responsibility of
funding and developing the laser technology through to commercialization. Sales
of products acquired from EOI are made primarily to hospitals and physicians
throughout the United States.
The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
health care market.
9
<PAGE> 10
RESULTS OF OPERATIONS
Three and Nine-Month Periods Ended March 31, 1998 and 1999
Product revenues increased $569,708, or 38%, to $2,066,009 for the
three-month period ended March 31, 1999 as compared to $1,496,301 for the
quarter ended March 31, 1998. For the nine-month period ended March 31, 1999,
product revenues increased $1,149,165, or 26%, to $5,526,106 as compared to
$4,376,941 for the same interim period in 1998. Revenue growth for the quarter
reflects a continued increase in unit sales of Adatosil(R)5000 Silicone Oil,
ISPAN(TM) Intraocular Gases, disposable products and accessories, and its new
vascular access product line (which was acquired in late January 1999).
Betadine(R)5% Sterile Ophthalmic Prep Solution sales decreased 38% for the
quarter reflecting the sale of this product line in early March 1999. The
Company also experienced a quarterly decline in sales of its capital equipment
and OEM products. For the nine-month period ended March 31, 1999, the Company
experienced unit sales increases for all of its products, except OEM products,
when compared to 1998. Contract manufacturing revenues continue to vary from
period to period depending on when orders are received and the lead times to
produce the product.
Cost of goods sold totaled $922,168, or 45% of revenues, for the
three-month period ended March 31, 1999 as compared to $648,168, or 43% of
revenues, for the same period last year. For the nine-month period ended March
31, 1999, cost of good sold totaled $2,431,172, or 44% of revenues, as compared
to $1,925,744, or 44% of revenues for the same period last year. Escalon
experienced unfavorable cost increases for both the quarter and year-to-date due
to a weakening U.S. dollar against the German mark. The increase in cost
associated with purchasing Adatosil(R)5000 Silicone Oil and the corresponding
rise in sales volume of that product increased the quarterly cost of sales
$98,000 over the third quarter of 1998. Manufacturing costs associated with the
new vascular access products line contributed $198,600 during the quarter with
no corresponding expense in 1998. For the nine-month period ended March 31,
1999, silicone oil and vascular access product costs increased $284,100 and
$198,600 over the respective period in 1998.
Research and development expenses increased $114,532, or 90%, for the
three-month period ended March 31, 1999 when compared to the same period in
1998. When compared to the nine-month period ended March 31, 1999 expenses
increased $239,305, or 70% above 1998. On a quarterly basis this increase
resulted from expenses relating to pre-clinical and clinical trails, prototype
development, ISO/CE certification costs and increased staffing. The increase on
a nine-month basis when compared to 1998 resulted from the write-off of patent
costs, increased staff salaries, consulting fees, prototype, ISO/CE and
pre-clinical trial expenditures. On December 28, 1997, an Investigational New
Drug (IND) application for Ocufit SR(R) (sustained release) drug delivery system
was filed with the U. S. Food and Drug Administration (FDA). Initial human
clinical trials began in the third quarter of fiscal 1999.
Marketing, general and administrative expenses increased $224,751, or
31%, for the three-month period ended March 31, 1999 when compared to the same
period in 1998; and increased $162,963, or 7%, for the nine-month periods ending
March 31, 1999 and 1998. The addition of the vascular access division
increased quarterly sales and administrative expenses by $224,500. When
comparing the nine-month periods, cumulative savings reduced the additional
cost incurred by the vascular access division over last year. These savings
primarily originated from reduction of legal expenses over last year, and were
further reduced by elimination of the gain generated in fiscal 1998 from the
discontinuation of laser operations.
Escalon realized an $879,159 gain in the current quarter, resulting
from of the sale our Betadine product line to Alcon Labs, Inc. When reviewing
comparable nine-month periods, the Betadine gain compares with the $75,000
reported in 1998 related to one-time income from licensing its laser technology.
10
<PAGE> 11
Interest income decreased $3,137 to $31,246 for the quarter ended March
31, 1999. The decrease was caused by interest rate declines and slightly less
cash available for investment for the entire quarter. On a nine-month to-date
basis, interest income rose $17,114 to $101,264. This increase resulted from
having greater cash deposits over the course of the year than were available in
fiscal 1998. Interest expense rose $18,350 during the quarter, and $19,653 for
the nine-month period ended March 31, 1999. On February 1, 1999, the Company
made the first draw on its new credit facility with PNC Bank, N.A. This new
borrowing capability allows Escalon the opportunity to begin acquisition of new
products and technologies.
There is no provision for income taxes for the three- and nine-month
periods ended March 31, 1999 due to the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of
$2,623,232 as compared to $2,263,967 at June 30, 1998. The Company's short-term
investments at March 31, 1999 and June 30, 1998 were $1,003,781 and $330,016,
respectively. The net increase in cash and cash equivalents of $359,265 arises
from increased profitability, which included sale of the Betadine product line.
While increasing inventory and receivable levels, acquiring treasury stock,
retiring preferred stock and purchasing a new business unit, the Company
increased its cash position.
The Company anticipates that the cash and cash equivalents and the
interest earned thereon, together with funds generated from future product sales
and external financing, should be adequate to satisfy its capital requirements,
based on current levels of operations, through March 31, 2000. In the longer
term, however, the Company will continue to pursue corporate partnering,
licensing and other fund raising opportunities to satisfy the significant
expenditures anticipated with development of its pharmaceutical products and
drug delivery programs.
In September 1998, the Board of Directors authorized the repurchase of
up to 500,000 shares of the Company's Common Stock. The price, timing and manner
of these purchases are at the discretion of management. No stock has been
repurchased pursuant to this authority.
On January 21, 1999, Escalon completed acquisition of the Vascular
Access Business Unit of Radiance Medical Systems, Inc. (formerly CardioVascular
Dynamics Inc.) The initial payment of $1.1 million was made using the Company's
cash reserves. An additional $1.0 million is payable when operations relocate to
Wisconsin, a move anticipated within the next six months.
Escalon obtained a $2.0 million credit facility with PNC Bank on
January 25, 1999. This includes a $1.0 million working line of credit and a $1.0
million five-year term loan. Portions of these funds were used to repurchase the
outstanding Series A 6% Convertible Preferred Stock. The remainder will be used
to complete funding of the Vascular Access acquisition.
The Company anticipates additional expenditures may be incurred in
connection with the legal proceedings as discussed in Part II. See "Part II.
Item 1. Legal Proceedings."
11
<PAGE> 12
YEAR 2000 ISSUES
As previously reported on in Form 10-Q, the Company is addressing the
potential millennium problem. A Year 2000 software upgrade for the Company's
financial module is on-site and being evaluated. None of the Company's
manufacturing equipment or products use date-sensitive software, thereby
minimizing our risk. The Company also believes that the products and equipment
acquired for the Vascular Access business similarly provide minimal exposure
for the same reason. The cost of further remediation will not have a material
adverse impact on the Company's financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 7 of the Notes to Condensed Financial
Statements in Part I is incorporated herein by reference thereto.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 1, 1999, the Company exercised the option it had obtained
from the holder of its Series A 6% Convertible Preferred Stock to simultaneously
cause such holder to convert a portion of the Series A Preferred Stock into
225,000 shares of Common Stock and redeem the remaining outstanding shares of
Series A Preferred Stock for $818,000 plus accrued and unpaid dividends. The
225,000 shares of Common Stock were issued upon conversion of the Series A
Preferred Stock in reliance upon the exemption set forth in Section 3(a)(9) of
the Securities Act of 1933. The Company received no cash proceeds from the
issuance of such Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on January 21, 1999. The
following matters were acted upon:
1. The following persons were elected as directors of the Company for the next
year until their successors are elected and qualified.
<TABLE>
<CAPTION>
Nominees for Director For Against Withheld
--------------------- --- ------- --------
<S> <C> <C> <C>
Richard J. DePiano 2,339,112 58,671 0
Dr. Jay Federman 2,339,112 58,671 0
Dr. Jack Dodick 2,339,112 58,671 0
Fred G. Choate 2,339,112 58,671 0
</TABLE>
There were no broker held non-voted shares represented at the meeting
with respect to this matter.
2. The shareholders approved an amendment to the Company's 1993 Stock Option
Plan. This increased the number of common shares authorized for issuance
under the plan by 200,000 shares, to a total of 375,000 shares of stock.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
1,117,506 95,475 25,359
</TABLE>
12
<PAGE> 13
There were 1,159,443 broker held non-voted shares represented at the
meeting with respect to this matter.
3. The shareholders approval the sale and issuance of the Series A preferred
stock and issuance of common stock upon conversion of Series A preferred
stock pursuant to NASDAQ Stock Market Rule 4460(i).
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
1,108,192 126,601 3,547
</TABLE>
There were 1,159,443 broker held non-voted shares represented at the
meeting with respect to this matter.
4. The shareholders ratified the appointment of Parente Randolph Orlando Carey
& Associates, LLP as the Company's independent auditors for fiscal year
1999.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
2,330,806 56,344 10,633
</TABLE>
There were no broker held non-voted shares represented at the meeting
with respect to this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on January 21, 1999 (amended on
April 7, 1999) and is incorporated herein by reference. The
content of that report is summarized below:
The Company reported that on January 21, 1999, Escalon Vascular
Access, Inc. (a wholly owned subsidiary) and Radiance Medical
Systems, Inc. entered into an Asset Sale and Purchase Agreement.
Pursuant to this agreement, the Company acquired the assets of
Radiance's Vascular Access Business for an aggregate purchase
price of $2,104,442 in cash. The Company also agreed to pay
royalties based on future sales of products of the Vascular
Access Business for a period of five years following the closing
of this sale. A $1,104.442 payment was made at closing and the
remaining $1 million will be payable upon completion of transfer
of Vascular Access Business to the Company's New Berlin,
Wisconsin production facility. During the interim period,
Radiance will continue manufacturing vascular access products on
a subcontract basis.
13
<PAGE> 14
A report on Form 8-K was filed on March 5, 1999 and is
incorporated herein by reference. The content of that report is
summarized below:
Escalon reported the consummation of transactions under Bill of
Sale and Acceptance Agreements between the Registrant, Alcon
Laboratories, Inc. and Alcon Universal, Ltd. The Company sold
its inventory and exclusive distribution rights for Betadine(R)
5% Sterile Ophthalmic Prep Solution to Alcon. Escalon received
$2,059,835 in cash for these sales, $959,835 for inventory and
$1,100,000 for distribution rights.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
DATE: May 14, 1999 By: /s/ Richard J. DePiano
-------------------------------------------
Richard J. DePiano
Chairman and Chief Executive Officer
DATE: May 14, 1999 By: /s/ Douglas R. McGonegal
-------------------------------------------
Douglas R. McGonegal
Vice President Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer) and Secretary
15
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,623,232
<SECURITIES> 1,003,781
<RECEIVABLES> 1,255,801
<ALLOWANCES> (28,450)
<INVENTORY> 1,061,915
<CURRENT-ASSETS> 6,148,211
<PP&E> 585,948
<DEPRECIATION> (139,208)
<TOTAL-ASSETS> 9,288,471
<CURRENT-LIABILITIES> 2,298,987
<BONDS> 0
0
0
<COMMON> 46,024,812
<OTHER-SE> (39,818,661)
<TOTAL-LIABILITY-AND-EQUITY> 9,288,471
<SALES> 2,066,009
<TOTAL-REVENUES> 2,066,009
<CGS> 922,168
<TOTAL-COSTS> 922,168
<OTHER-EXPENSES> 1,194,096
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 18,350
<INCOME-PRETAX> 841,800
<INCOME-TAX> 0
<INCOME-CONTINUING> 841,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 841,800
<EPS-PRIMARY> (0.001)
<EPS-DILUTED> (0.001)
</TABLE>
