<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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)
Delaware 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, 2000 3,242,184 Shares of Common Stock, $0.001 par value
----------- ---------
<PAGE> 2
ESCALON MEDICAL CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and March 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2000 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 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
</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,
1999 2000
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,854,240 $ 2,271,918
Cash and cash equivalents - restricted 1,000,000 -
Note Receivable 15,000 15,000
Accounts receivable, net 1,063,829 1,942,921
Inventory, net 1,117,208 1,559,351
Other current assets 142,235 172,353
------------ ------------
Total current assets 7,192,512 5,961,543
Furniture and equipment, at cost, net 449,555 485,660
Long-term note receivable 150,000 150,000
License and distribution rights, net 537,138 246,647
Patents, net 495,923 217,691
Trademarks and trade names, net - 2,268,056
Customer lists, net - 7,593,055
Goodwill, net 1,510,207 2,350,741
Other assets 67,438 259,064
------------ ------------
$ 10,402,773 $ 19,532,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Line of Credit $ 1,000,000 $ 5,000,000
Notes payable, short-term - 505,147
Current portion of long-term debt 200,000 1,400,000
Accounts payable 434,308 429,774
Accrued and other liabilities 1,757,432 785,399
------------ ------------
Total current liabilities 3,391,740 8,120,320
Long-term debt, net of current portion 733,332 5,600,000
------------ ------------
Total liabilities 4,125,072 13,720,320
------------ ------------
Shareholders' Equity:
Common stock, $0.001 par value; 35,000,000 shares authorized;
3,377,164 and 3,242,184 shares issued, at June 30, 1999
and March 31, 2000, respectively 46,024,811 46,024,811
Treasury stock, at cost 134,980 shares in 1999 (118,108) -
Accumulated deficit (39,629,002) (40,212,674)
------------ ------------
Total shareholders' equity 6,277,701 5,812,137
------------ ------------
$ 10,402,773 $ 19,532,457
============ ============
</TABLE>
Note: The consolidated balance sheet at June 30, 1999 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 STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
1999 2000 1999 2000
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Product revenues $ 2,066,009 $ 2,109,521 $ 5,526,106 $ 4,419,733
Costs and expenses:
Cost of goods sold 922,168 820,866 2,431,172 1,975,064
Research and development 242,251 296,930 583,502 764,313
Marketing, general and administrative 951,845 1,383,349 2,349,818 3,361,419
--------------- ---------------- ---------------- ---------------
Total costs and expenses 2,116,264 2,501,145 5,364,492 6,100,796
--------------- ---------------- ---------------- ---------------
Income (loss) from operations (50,255) (391,624) 161,614 (1,681,063)
--------------- ---------------- ---------------- ---------------
Other income and expenses:
Sale of Betadine product line 879,159 - 879,159 -
Gain on sale of Silicone Oil product line - - - 1,848,215
Write-off of Ocufit - 22,253 - (432,859)
Interest income 31,246 32,561 101,264 126,348
Interest expense (18,350) (252,573) (19,802) (282,345)
--------------- ---------------- ---------------- ---------------
Total other income and expense 892,055 (197,759) 960,621 1,259,359
--------------- ---------------- ---------------- ---------------
Income (loss) before income tax 841,800 (589,383) 1,122,235 (421,704)
Income taxes - 43,860 - 43,860
--------------- ---------------- ---------------- ---------------
Net income (loss) $ 841,800 $ (633,243) $ 1,122,235 $ (465,564)
=============== ================ ================ ===============
Basic net income (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14)
=============== ================ ================ ===============
Diluted net income (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14)
=============== ================ ================ ===============
Weighted average shares - basic 3,162,184 3,242,184 3,072,524 3,242,184
=============== ================ ================ ===============
Weighted average shares - diluted 3,162,184 3,242,184 3,116,671 3,242,184
=============== ================ ================ ===============
</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,
--------------------------------
1999 2000
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,122,235 $ (465,564)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 283,433 513,281
Net loss on retirement of fixed assets -- 4,257
Write off of patents 24,805 --
Gain on sale of Betadine product line (879,159) --
Gain on sale of Silicone Oil product line -- (1,848,215)
Write off of Ocufit -- 432,859
Change in operating assets and liabilities:
Accounts receivable (286,973) 687,283
Inventories (355,183) 153,551
Other current assets (62,844) 41,238
Accounts payable, accrued and other liabilities 427,011 (336,949)
----------- ------------
Net cash provided from (used in) operating activities 273,325 (818,259)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (2,262,780) (7,043,061)
Proceeds from maturities of short-term investments 1,589,016 7,043,061
Release of restricted cash -- 1,000,000
Proceeds from sale of Betadine product line 2,059,835 --
Proceeds from sale of Silicone Oil product line -- 1,587,885
Purchase of vascular access business (1,104,442) (1,000,000)
Purchase of Sonomed Inc. -- (12,050,000)
Short term note receivable (15,000) --
Purchase of furniture and equipment (48,312) (86,648)
Proceeds from sale of furniture and equipment -- 1,300
Long term note receivable (37,500) --
License and distribution rights cost (11,381) (30,801)
Acquisition costs (42,941) --
Patent costs (44,815) (36,915)
Other assets (835) (115,552)
----------- ------------
Net cash used in investing activities 80,845 (10,730,731)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan 1,000,000 7,000,000
Proceeds from line of credit, net -- 4,000,000
Retirement of preferred stock (818,000) --
Principal payments on term loan (16,667) (933,332)
Payment of deferred finance cost -- (100,000)
Purchase of treasury stock (118,108) --
Payment of preferred stock dividends (42,130) --
----------- ------------
Net cash used in financing activities 5,095 9,966,668
----------- ------------
Net increase in cash and cash equivalents 359,265 (1,582,322)
Cash and cash equivalents, beginning of period 2,263,967 3,854,240
----------- ------------
Cash and cash equivalents, end of period $ 2,623,232 $ 2,271,918
=========== ============
</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 consolidated financial statements
of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.)
and its subsidiaries Escalon Pharmaceutical Inc., Escalon Vascular Access, Inc.
and Sonomed, Inc. (jointly referred to as "Escalon" or the "Company") have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. Operating results for interim periods
are not indicative of the results that may be expected for the fiscal year
ending June 30, 2000.
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, 1999 included in the Company's
annual report on Form 10-K.
2. PER SHARE INFORMATION
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>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------- ------------------------------------
1999 2000 1999 2000
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share:
Net income (loss) $ 841,800 $ (633,243) $ 1,122,235 $ (465,564)
Preferred stock dividends and
accretion (845,983) - (870,523) -
----------------- ---------------- ---------------- -----------------
Numerator for basic and diluted
earnings per share-income (loss)
available to common shareholders $ (4,183) $ (633,243) $ 251,712 $ (465,564)
================= ================ ================ =================
</TABLE>
6
<PAGE> 7
2. PER SHARE INFORMATION (CONTINUED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------- ------------------------------------
1999 2000 1999 2000
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic earnings
per share - weighted average shares 3,162,184 3,242,184 3,072,524 3,242,184
Effect of dilutive securities:
Employee stock options - - 44,147
-------------- ---------------- --------------- -----------------
Denominator for diluted earnings
per share - weighted average
and assumed conversion 3,162,184 3,242,184 3,116,671 3,242,184
============== ================ =============== =================
Basic earnings (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14)
============== ================= =============== =================
Diluted earnings (loss) per share $ (0.00) $ (0.20) $ 0.08 $ (0.14)
============== ================= =============== =================
</TABLE>
3. 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, 1999 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Raw materials/work in process $ 526,553 $ 1,160,369
Finished goods 623,655 464,150
----------- -----------
1,150,208 1,624,519
Valuation allowance (33,000) (65,168)
=========== ===========
$ 1,117,208 $ 1,559,351
=========== ===========
</TABLE>
4. ACQUISITION OF SONOMED, INC.
On January 14, 2000, the Company purchased all of the outstanding
capital stock of Sonomed, Inc. ("Sonomed"), a privately held manufacturer and
marketer of ophthalmic ultrasound diagnostic devices. This business combination
was accounted for as a purchase. The total cost of the acquisition was
$12,550,000, $11,050,000 was allocated to proprietary rights and intangible
assets, including: $7,700,000 to customer lists, $2,300,000 to trademarks and
trade names and $1,050,000 to goodwill. The excess costs are being amortized on
a straight-line basis over a fifteen-year period.
Of the $12,550,000 purchase price, $500,000 is included in notes
payable at March 31, 2000. The Company is obligated to pay that amount May 15,
2000 upon resolution of issues related to final valuation of net assets
acquired.
In addition, the Company entered into a three-year employment
agreement with the president of Sonomed, which provides for a $175,000 annual
salary (plus cost of living adjustments). The Company also issued to key
employees of Sonomed incentive stock options exercisable for the purchase of
330,000 shares of the Company's Common Stock and agreed to make available to key
employees of Sonomed a bonus program of a least three per cent of Sonomed's net
quarterly sales for a period of three years.
7
<PAGE> 8
4. ACQUISITION OF SONOMED, INC. (CONTINUED)
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>
NINE MONTHS ENDED MARCH 31
-------------------------------------
1999 2000
------------- -----------
<S> <C> <C>
Revenues $ 10,508,536 $ 8,303,135
Net income $ 2,103,970 $ 499,668
Basic net income per share $0.40 $0.15
Diluted net income per share $0.40 $0.15
Weighted average shares - basic 3,072,524 3,242,184
Weighted average shares - diluted 3,116,671 3,327,309
</TABLE>
5. BANK LOANS
In connection with the Sonomed acquisition, PNC Bank, N.A. refinanced
the Company's $2,000,000 credit facility. In so doing, it released the
$1,000,000 restricted cash held as collateral for the term loan. The Company
repaid the outstanding balances on its letter of credit ($1,000,000) and the
term loan ($833,330). PNC Bank then granted a new $12,000,000 credit facility to
assist with the acquisition. This included a $7,000,000 five-year term loan and
a $5,000,000 reducing line of credit. The interest rate on the term loan is
based on prime plus 1.0% and the line of credit is based on prime plus 0.75%. An
interest rate cap agreement was entered into to cover the $7,000,000 term loan
through January 2003 and $3,000,000 of the line of credit through January 2002.
The maximum interest rate that may be charged on the term loan for calender year
2000 is 10% and 9.75% on the protected portion of the line of credit. Escalon
also paid $100,000 in finance fees that are recorded in other assets. These fees
will be amortized over the term of the loans using the effective interest
method. All of the Company's assets, including those acquired from Sonomed,
collateralize these agreements.
6. 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 to which the Company is no longer a party). 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 its insurance
carrier have deposited such funds in an escrow account.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include certain
information relating to the development of acquisition and joint venture
opportunities, fluctuations in results of operations, as well as information
contained elsewhere in this Report where statements are preceded by, followed by
or include the words "believes," "expects," "anticipates," or similar
expressions. For such statements the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements contained in this
document are subject to risks and uncertainties that could cause the assumptions
underlying such forward-looking statements and the actual results to differ
materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals -- and
cause the assumptions underlying the forward-looking statements and the actual
results to differ materially from those expressed in or implied by those
forward-looking statements -- include, without limitation and in addition to
those discussed in the documents filed by the Company with the Securities and
Exchange Commission, 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).
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.
Escalon Medical Corp. and its subsidiaries Escalon Pharmaceutical Inc.,
Escalon Vascular Access Inc. and Sonomed, Inc., (jointly referred to as
"Escalon" or the "Company"), operate in the healthcare market specializing in
the development, marketing and distribution of ophthalmic diagnostic, surgical
and pharmaceutical products, as well as, vascular access devices.
On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the
acquisition, the Company was in the development stage and devoting substantially
all of its resources to the research and development of laser systems designed
for the treatment of ophthalmic disorders. Upon completion of the acquisition,
the Company changed its market focus and is now engaged in developing, marketing
and distributing ophthalmic medical devices, pharmaceuticals and niche medical
products. 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. The vascular access product line was the first
niche product acquired outside the ophthalmic medical field. Vascular products
are marketed to cardiac cathetarization laboratories through independent
distributors.
In January 2000, the company purchased Sonomed, Inc., a privately held
manufacturer and marketer of ophthalmic ultrasound diagnostic devices. These
products are sold domestically and internationally either directly to the
customer or 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 sold its license and distribution rights to Betadine(R)5%
Sterile Ophthalmic Prep Solution ("Betadine") and Adatosil(R)5000 Silicone Oil
("Silicone Oil"), in third quarter of fiscal 1999 and the first quarter of
fiscal 2000, respectively.
9
<PAGE> 10
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
Three and Nine-Month Periods Ended March 31, 2000 and 1999
Product revenues increased $43,512, or 2%, to $2,109,521 for the
three-month period ended March 31, 2000 as compared to $2,066,009 for the same
period ended March 31, 1999. Product revenue from Silicone Oil and Betadine
declined $1,218,836 from the fiscal 1999 period as a result of the sale of the
license and distribution rights to those product lines in August and March of
1999, respectively. The two and a half months of revenue acquired from Sonomed
contributed $1,160,680 and substantially replaced the entire revenue decline
from product line sales. Revenue from the vascular access business increased
$126,348 over the like period last year. In the third quarter of fiscal 2000,
Escalon also experienced a decline in unit sales of OEM, ISPAN(TM) gas products,
capital equipment and disposable products of $24,680. Contract manufacturing
revenues vary from quarter to quarter depending on when orders are received and
the lead times to produce such products. For the nine-month period ended March
31, 2000, the Company experienced a $1,106,373, or 20%, decline in revenues from
the same period in fiscal 1999. Loss of revenues from product lines sold
amounted to $3,272,237 between the two periods. Addition of Sonomed and vascular
products offset that amount by $1,160,680 and $1,197,548, respectively. The
Company also experienced an overall decline of $192,364 in sales of OEM, capital
and disposable products for this nine-month period, as compared to the
comparable fiscal 1999 period.
Cost of goods sold totaled $820,866, or 40% of revenue, for the
three-month period ended March 31, 2000, as compared to $922,168, or 45% of
revenue, for the same period last year. Product lines sold reduced comparative
quarterly costs by $509,034. Sonomed's product line costs were $337,889 for the
current quarter; there were no comparable costs for the same period last year.
Vascular and ophthalmic product manufacturing costs increased $64,592 and
$5,250, respectively, in the third quarter of fiscal 2000 when compared to the
third fiscal quarter of 1999. For the nine-month period ended March 31, 2000,
cost of goods sold totaled $1,975,064, or 45% of revenue, compared with
$2,431,172, or 44% of revenue, for the first nine months of fiscal 1999. Costs
associated with discontinued product lines decreased $1,327,509 in the fiscal
2000 period. Sonomed's and vascular product costs rose by $337,889 and $566,883,
respectively. The Company began selling the Sonomed product line in mid-January,
2000. Vascular costs represent three full quarters of operation in fiscal 2000,
compared to only two and a half months of fiscal 1999 operations. Ophthalmic
device costs decreased $33,371 for the like period of fiscal 1999.
Research and development expenses increased $54,679, or 23%, for the
three-month period ended March 31, 2000 when compared to the same period in
1999. Expenses for clinical trials related to providone-iodine 2.5% increased
$51,150 and Ocufit SR(R) costs decreased $78,300 (project abandoned in December
1999) over the same quarter of fiscal 1999. The quarterly increase includes
$59,600 for Sonomed products; an additional $14,800 for vascular products; and a
$7,400 increase in other medical device research costs. When comparing the
nine-month periods ending March 31, 2000 and 1999, research and development
costs increased $180,811, or 31%. Expenses for clinical trials (Ocufit and 2.5%
providone-iodine) increased $70,500; Sonomed's and vascular research costs
increased $59,600 and
10
<PAGE> 11
$66,700, respectively, over the same period in fiscal 1999. The Company did
experience favorable reductions in patent and various other developmental costs
that reduced the fiscal 2000 increases by $16,000.
Marketing, general and administrative expenses increased $431,504, or
45%, for the three-month period ended March 31, 2000 compared to the same period
last year. The direct marketing, general and administrative expenses related to
Sonomed increased expenses $252,500. Depreciation and amortization expense also
increased $119,500 due to that acquisition. Expenses for the vascular access
product line increased by $133,800 from fiscal 1999. This resulted from the
Company's effort to promote these products by increasing the sales staff,
related travel expense and additional royalties as sales volume increased. The
sale of Silicone Oil and Betadine reduced quarterly royalty and commission
expenses by $85,200. When comparing the nine-month periods ending March 31, 2000
and 1999, marketing, general and administrative costs increased $1,014,726, or
43%. Vascular products and Sonomed contributed $767,700 and $252,500,
respectively. Increases also occurred in salaries and wages, $98,000;
legal/investor relations costs, $62,600; travel, $41,000; and office expenses,
$40,000. The Company realized a favorable $234,500 reduction in commissions and
royalties related to product lines sold.
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.
In August 1999, the Company reported the sale of its license and
distribution rights for the Adatosil(R) 5000 Silicone Oil product line. This
sale resulted in a $1,848,215 gain after writing off of the remaining net book
value of license and distribution rights associated with that product line.
Beginning in the second quarter of fiscal 2001, the Company will also receive
additional payments based on future sales of Silicone Oil through 2004.
After completing the initial Phase I human clinical trials in late
December 1999, management re-evaluated its Ocufit SR(R) ophthalmic drug delivery
system project. It was decided that further expenditures on this project were
not in the shareholders' best interest, and the project was discontinued. This
decision resulted in the Company taking a charge of $455,112 in the second
quarter of fiscal 2000, which included write-off of the net book value for
remaining goodwill and patent cost associated with this project. That estimate
cost was reduced slightly in the third quarter, but the Company anticipates that
when all related closing expenses are incurred by year-end, the original
estimate will be attained.
Interest income increased to $32,561 and $126,348 for the three- and
nine-month periods ended March 31, 2000 from $31,246 and $101,264 for the same
periods in 1999. On a quarterly basis, the average daily cash balance in fiscal
2000 was slightly less; however, the Company was earning interest at higher
rates. This increase on a nine-month basis is a result of increased cash and
cash equivalents available for investment, due to proceeds received from sale of
the Silicone Oil and Betadine product lines and higher interest rates.
11
<PAGE> 12
Interest expense increased to $252,573 and $282,345 for the three- and
nine-month periods ended March 31, 2000 from $18,350 and $19,802 for the same
periods in 1999. This is the result of corporate borrowing arrangements that did
not exist until the third quarter of fiscal 1999 and 2000. In connection with
the Sonomed acquisition, PNC Bank ("PNC Bank" or "Bank") refinanced its existing
debt, providing $12,000,000 of financing to the Company.
There is no provision for federal income taxes for the three- or
nine-month period ended March 31, 2000 and 1999 due to the utilization of net
operating loss carryforwards. At March 31, 2000, the Company recorded a $43,900
provision for state tax income liabilities that are not covered by net operating
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash and cash equivalents of
$2,271,918 as compared to $3,854,240 at June 30, 1999, a decrease of $1,582,322.
During the third quarter, the Company paid off $1,833,330 in outstanding debt to
PNC Bank N.A. and incurred $100,000 in financing fees. Partially offsetting this
reduction in cash was a receipt of the third $529,295 installment paid on the
Silicone Oil product line sale. The $1,000,000 in restricted cash and cash
equivalents resulted from the Bank's release of its collateral for the term
loan.
On January 14, 2000, the Company completed the acquisition of Sonomed,
Inc. ("Sonomed"), a manufacturer of ophthalmic ultrasound diagnostic devices.
The purchase price was $12,550,000, of which $12,050,000 was paid in cash and
$500,000 was represented by a promissory note, bearing interest at 10% per annum
and due in 125 days.
On January 14, 2000, the Company replaced the $2,000,000 credit
facility obtained in January 1999. The Bank granted a new $12,000,000 credit
facility to assist in the Sonomed acquisition. This included a $7,000,000
five-year term loan, a $5,000,000 reducing line of credit and the release of the
requirement to maintain a $1,000,000 certificate of deposit with the Bank. The
interest rate on the line of credit is based on prime plus 0.75% and the term
loan is based on prime plus 1.0%. Floating interest rate protection is in place
to cover the $7,000,000 term loan through January 2003 and $3,000,000 of the
line of credit through January 2002. The maximum interest rate that may be
charged on the term loan for calendar year 2000 is 10% and 9.75% on the
protected portion of the line of credit.
Escalon also paid $100,000 in finance fees that are recorded in other
assets. These fees will be amortized over the term of the loans using the
effective interest method. All of the Company's assets, including those acquired
from Sonomed, collateralize these agreements.
The Board of Directors has 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 currently expected to be made, under this authority.
The Company's Common Stock is currently listed on the Nasdaq National
Market. In order to maintain that listing, 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. As of March 31, 2000,
the Company does not meet the net tangible asset test by $538,600. Escalon will
seek to have it shares traded on an alternative trading market, should this
listing be suspended.
12
<PAGE> 13
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 March 31, 2001. In the longer term, however, the
Company will seek corporate partnering, licensing and other financing
opportunities to satisfy the significant expenditures anticipated with
development of its surgical products, pharmaceutical products and vascular
access devices.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 4 of the Notes to Condensed
Consolidated Financial Statements in Part I is incorporated herein by reference
thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on January 14, 2000, reporting the
purchase of all of the outstanding Common Stock of Sonomed, Inc.
A report on Form 8-K/A was filed on March 30, 2000, amending the Form
8-K, as filed on January 14, 2000, and reporting the financial information
related to the purchase of Sonomed, Inc.
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 15, 2000 By: /s/ Douglas R. McGonegal
-------------------------------------------
Douglas R. McGonegal
Vice President Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer) and Secretary
13
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