<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 14, 2000
Escalon Medical Corp.
(Exact name of registrant as specified in its charter)
Delaware 0-20127 33-0272839
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
351 East Conestoga Road, Wayne, Pennsylvania 19087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 688-6830
N/A
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 14, 2000, Escalon Medical Corp. (the "Registrant") purchased
all of the outstanding capital stock of Sonomed, Inc. ("Sonomed"), a privately
held manufacturer and marketer of ophthalmic ultrasound diagnostics devices,
pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as
of January 14, 2000, among the Registrant, Sonomed and the stockholders of
Sonomed. 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 the
rate of 10% per annum in the event of a default. The purchase price is subject
to adjustment under certain circumstances. As a result of the transaction,
Sonomed became a wholly owned subsidiary of the Registrant.
In connection with the Stock Purchase Agreement, Sonomed entered into
an Employment Agreement with Louis Katz, whereby Sonomed agreed to employ Mr.
Katz as its president for a period of three years at a salary of $175,000 per
year, which salary will be increased after one year for each subsequent one-year
period by a percentage equal to not less than the sum of (i) the percentage
increase in the cost of living in the County of Nassau, State of New York for
the year then ended and (ii) 2%; provided, however, that in no event will any
annual increase exceed 5%. After its three-year initial term, the Employment
Agreement will renew automatically for successive terms of one year each unless
either party notifies the other party in writing at least 90 days prior to the
expiration of the existing term of such party's determination not to renew the
Employment Agreement beyond the existing term. The Employment Agreement also
provides for participation by Mr. Katz in a bonus program, health insurance and
other fringe benefits, including an automobile allowance not to exceed $850 per
month.
In connection with the acquisition of Sonomed, the Registrant adopted
the Escalon Medical Corp. Equity Incentive Plan for Employees of Sonomed, Inc.,
pursuant to which options for the purchase of 330,000 shares of the Company's
Common Stock were issued to management employees of Sonomed at an exercise price
of $2.625 per share. Mr. Katz was granted an option to purchase 90,000 of these
shares.
Also in connection with the acquisition of Sonomed, Sonomed established
a management bonus program whereby Mr. Katz and other management employees of
Sonomed designated by him will be paid quarterly bonuses in the aggregate amount
of at least 3% of Sonomed's net sales with respect to each calendar quarter.
Other than as set forth above, no material relationship exists between
(i) the Registrant or any of its affiliates, other than Sonomed, and Sonomed or
any of its stockholders, (ii) any director or officer of the Registrant and any
director or officer of Sonomed or (iii) any associate of any director or officer
of the Registrant and any associate of any director or officer of Sonomed. The
consideration under the Stock Purchase Agreement was determined by arms' length
negotiations between the Registrant and the stockholders of Sonomed.
-2-
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of the business acquired include the
balance sheets of Sonomed, Inc. as of December 31, 1999 and 1998, and the
related statements of income, shareholders' equity and cash flows for the three
years in the period ended December 31, 1999.
Exhibit 99.1 - Financial Statements of Sonomed, Inc.
(b) Unaudited Pro Forma Financial Information.
The following unaudited pro forma condensed consolidated financial
information has been prepared to reflect the transaction under the Stock
Purchase Agreement (the "Transaction") among Escalon Medical Corp. (the
"Buyer"), Sonomed, Inc. and the stockholders of Sonomed, Inc. The unaudited pro
forma condensed consolidated financial information should be read in conjunction
with the audited historical consolidated financial statements and related notes
included in the Registrant's Annual Report on Form 10-K for the periods ended
June 30, 1999, and the condensed consolidated financial statements for the six
months ended December 31, 1999 in the Registrant's Quarterly Report on Form 10-Q
for period ended December 31, 1999, which reports are incorporated herein by
reference.
The unaudited pro forma condensed consolidated statement of operations
gives effect to the Transaction as if it had occurred at the beginning of the
period presented.
The unaudited pro forma condensed consolidated financial information is
presented for illustrative purposes only and does not purport to be indicative
of the operating results or financial position that would have actually occurred
if the Transaction had been in effect on the dates indicated, nor is it
necessarily indicative of future operating results or financial position.
-3-
<PAGE> 4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C> <C>
Sales revenues $ 7,559,011 $ 7,169,357 (1) $ 14,728,368
Costs and expenses:
Cost of goods sold 3,282,177 1,989,436 (1) 5,271,613
Research and development 738,124 211,837 (1) 949,961
Marketing, general and
administrative 3,331,562 2,216,015 (1)(2) 5,547,577
-------------- --------------- -------------
Total costs and expenses 7,351,863 4,417,288 11,769,151
-------------- --------------- -------------
Income from operations 207,148 2,752,069 2,959,217
Other income, net 986,639 (966,098) (1)(3) 20,541
-------------- --------------- -------------
Income before income taxes 1,193,787 1,785,971 2,979,758
Income taxes - 22,925 (1)(4) 22,925
-------------- --------------- -------------
Net income $ 1,193,787 $ 1,763,046 $ 2,956,833
============== =============== =============
Basic net income per share (A) $ 0.10 $ 0.67
====== ============
Diluted net income per share $ 0.10 $ 0.66
====== ============
(1) Weighted average shares-basic 3,114,823 3,114,823
========= =========
Weighted average shares-diluted 3,150,721 3,150,721
========= =========
</TABLE>
(A) Historical and pro forma net income available to common shareholders at
June 30, 1999 was decreased by $870,523, for preferred stock dividends
and accretion.
(1) Net sales and expenses as per the Sonomed, Inc. audited Statement of
Income for the year ended December 31, 1999 (Exhibit 99.1).
(2) Sonomed historical selling and administrative expenses, $515,499 and
$748,769, respectively, additional compensation (bonus plan enumerated
in Item 2 above) $215,080 and goodwill arising from the acquisition of
$736,667.
(3) Sonomed historical interest and other income, $145,478, gain on sale of
investments, $12,080, less interest expense associated with this
acquisition (adjustable rate loans with interest rate cap) reported at
the cap limit for presentation purposes, $1,123,656. The annual effect
of a 1/8th % rate reduction would be $14,344.
-4-
<PAGE> 5
(4) Sonomed was a Subchapter S corporation. The income tax provision
reflects only New York State and other local taxes. There is no
provision for federal income tax for both Escalon and Sonomed due to
utilization of net operating loss carryforwards.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Sales revenues $ 2,310,212 $ 3,584,679 (1) $ 5,894,891
Costs and expenses:
Cost of goods sold 1,154,198 994,718 (1) 2,148,916
Research and development 467,383 105,919 (1) 573,302
Marketing, general and
Administrative 1,978,070 1,108,008 (1)(2) 3,086,078
-------------- -------------- -------------
Total costs and expenses 3,599,651 2,208,645 5,808,296
-------------- -------------- -------------
Income (loss) from operations (1,289,439) 1,376,034 86,595
Gain on sale of Silicone Oil product
line 1,848,215 - 1,848,215
Write-off of Ocufit (455,112) - (455,112)
Other income, net 64,015 (492,013) (1)(3) (427,998)
-------------- -------------- -------------
Income (loss) before income taxes 167,679 884,021 1,051,700
Income taxes - 11,463 (1)(4) 11,463
============== ============== =============
Net income (loss) $ 167,679 $ 872,558 $ 1,040,237
============== ============== =============
Basic net loss per share $ 0.05 $ 0.32
============== =============
Diluted net loss per share $ 0.05 $ 0.32
============== =============
Weighted average shares-basic 3,242,184 3,242,184
=============== =============
Weighted average shares-diluted 3,254,250 3,254,250
=============== =============
</TABLE>
(1) Net sales and expenses as per Sonomed, Inc. audited Statement of Income
for the year ended December 31, 1999, reduced by 50%.
(2) Sonomed historical selling and administrative expenses, $257,750 and
$374,384, respectively, additional compensation (bonus plan enumerated
in Item 2 above) $107,540 and goodwill arising from the acquisition of
$368,334.
-5-
<PAGE> 6
(3) Sonomed historical interest and other income, $72,739, gain on sale of
investments, $6,040, less interest expense associated with this
acquisition (adjustable rate loans with interest rate cap) reported at
the cap limit for presentation purposes, $570,792. The annual effect of
a 1/8th % rate reduction would be $7,391.
(4) Sonomed was a Subchapter S corporation. The income tax provision
reflects only New York State and other local taxes. There is no
provision for federal income tax for both Escalon and Sonomed due to
utilization of net operating loss carryforwards.
-6-
<PAGE> 7
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Current Assets: $ (12,365,000) (a)
Cash and cash equivalents $3,039,913 12,400,000 (b) $ 2,241,583
(833,330) (c)
Cash and cash equivalents - restricted 1,000,000 (1,000,000) (c) -
Accounts receivable, net 1,479,590 897,000 (a) 2,376,590
Inventory, net 1,017,481 600,000 (a) 1,617,481
Other current assets 195,143 19,000 (a) 214,143
---------- ------------ ------------
TOTAL CURRENT ASSETS 6,732,127 (282,330) 6,449,797
Long-term receivables 150,000 - 150,000
License and distribution rights, net 251,585 - 251,585
Goodwill, net 1,187,385 11,050,000 (a) 12,237,385
29,000 (a)
Other assets 808,840 30,000 (a) 967,840
100,000 (b)
---------- ------------ ------------
TOTAL ASSETS $9,129,937 $10,926,670 $20,056,607
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
$5,000,000 (b)
Line of credit $1,000,000 (1,000,000) (c) $ 5,000,000
Current portion of long-term debt 1,050,000 (b)
200,000 (200,000) (c) 1,050,000
Note payable - 500,000 (b) 500,000
Accounts payable and accrued expenses 851,227 260,000 (a) 1,111,227
---------- ------------ ------------
TOTAL CURRENT LIABILITIES 2,051,227 5,610,000 7,661,227
5,950,000 (b)
Long-term debt 633,330 (633,330)(c) 5,950,000
---------- ------------ ------------
TOTAL LIABILITIES 2,684,557 10,926,670 13,611,227
SHAREHOLDERS' EQUITY:
Common stock 46,024,811 - 46,024,811
Accumulated deficit (39,579,431) - (39,579,431)
----------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,445,380 - 6,445,380
----------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $9,129,937 $ 10,926,670 $ 20,056,607
========== ==-========= ==-=========
</TABLE>
-7-
<PAGE> 8
(a) Sonomed was acquired January 14, 2000 in a business combination accounted
for as a purchase. The total estimated cost of the acquisition was
$12,550,000, which exceeded the fair value of the net assets acquired by
$11,050,000. The excess will be amortized on the straight-line method over
15 years.
The preliminary estimate of the purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash $ 185,000
Receivables 897,000
Inventories 600,000
Other current assets 19,000
Property and equipment 29,000
Other assets 30,000
Goodwill 11,050,000
Accounts payable and accrued expenses (260,000)
------------
Total cost of acquisition $ 12,550,000
</TABLE>
These opening estimates are subject to change within 120 days, pending
subsequent verification and review.
(b) The acquisition was financed through a five-year line of credit of $
5,000,000, a five-year term loan of $7,000,000 and a $500,000 note
payable to the Sonomed shareholders.
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. The interest rate on the note payable is 10%.
Escalon 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
(c) In connection with the financing this acquisition, Escalon repaid all
of its existing debt utilizing cash on hand and the restricted
certificate of deposit that secured a portion of that debt.
-8-
<PAGE> 9
(c) Exhibits.
Exhibit No. Document
----------- --------
2.1 Stock Purchase Agreement dated as of January 14, 2000 among
Escalon Medical Corp., Sonomed, Inc. and the Stockholders of
Sonomed, Inc. (1)
2.2 Note dated January 14, 2000 in the principal amount of
$500,000 from the Registrant to Louis Katz. (1)
2.3 Employment Agreement dated as of January 14, 2000 between
Sonomed, Inc. and Louis Katz. (1)
2.4 Bonus Plan for Management Employees of Sonomed, Inc. (1)
2.5 Escalon Medical Corp. Equity Incentive Plan for Employees of
Sonomed, Inc. (1)
2.6 News Release of the Registrant dated January 18,2000. (1)
99.1 Financial Statements of Sonomed, Inc. for the years ended
December 31, 1999, 1998 and 1997 with Report of Independent
Auditors. *
----------
* Filed herewith
(1) Filed as an exhibit to the Company's Form 8-K, dated January 19,
2000.
-9-
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
ESCALON MEDICAL CORP.
Date: March 29, 2000 By: /s/ Douglas R. McGonegal
--------------------------
Douglas R. McGonegal,
Vice President - Finance
Chief Financial Officer
<PAGE> 1
Exhibit 99.1
Sonomed, Inc.
Financial Statements
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................................... 1
Financial Statements
Balance Sheets as of December 31, 1999 and 1998...................................................... 2
Statements of Income for the years ended December 31, 1999, 1998 and 1997............................ 3
Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997............. 4
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................ 5
Notes to Financial Statements........................................................................ 6
</TABLE>
<PAGE> 2
Report of Independent Auditors
The Board of Directors and Shareholders
Sonomed, Inc.
We have audited the accompanying balance sheets of Sonomed, Inc. as of December
31, 1999 and 1998, and the related statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sonomed, Inc. at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Melville, New York
March 27, 2000
1
<PAGE> 3
Sonomed, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,250,578 $ 1,708,656
Investments (Note 2) -- 2,434,369
Accounts receivable, net of allowance for doubtful accounts
of $18,145 in 1999 and 1998 794,980 632,037
Inventories (Note 3) 549,007 422,463
Prepaid expenses and other current assets 6,951 5,720
------------------------------
Total current assets 5,601,516 5,203,245
Fixed assets (Note 4) 29,324 22,200
Other assets 30,130 18,153
------------------------------
Total assets $ 5,660,970 $ 5,243,598
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 125,481 $ 178,258
Accrued expenses and other liabilities 497,965 334,165
------------------------------
Total current liabilities 623,446 512,423
Commitments and contingencies (Notes 6, 7 and 8)
Shareholders' equity (Note 5):
Common stock, $.01 par value:
Authorized shares -- 10,000,000
Issued shares -- 2,944,495 in 1999 and 1998 29,445 29,445
Additional paid-in capital 746,582 746,582
Retained earnings 4,761,497 4,455,148
------------------------------
5,537,524 5,231,175
Less treasury stock, at cost (227,495 shares) (500,000) (500,000)
------------------------------
5,037,524 4,731,175
------------------------------
Total liabilities and shareholders' equity $ 5,660,970 $ 5,243,598
==============================
</TABLE>
See accompanying notes.
2
<PAGE> 4
Sonomed, Inc.
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Net sales $7,169,357 $6,380,181 $5,156,235
Cost of sales 1,989,436 2,077,727 1,715,346
--------------------------------------------
5,179,921 4,302,454 3,440,889
Expenses:
Selling 515,499 530,800 511,128
General and administrative 748,769 568,268 515,678
Research and development 211,837 252,447 287,677
-------------------------------------------
1,476,105 1,351,515 1,314,483
-------------------------------------------
Income from operations 3,703,816 2,950,939 2,126,406
Gain on sale of investments 12,080 40,488 --
Interest and other income 145,478 160,795 100,073
-------------------------------------------
157,558 201,283 100,073
-------------------------------------------
Income before income taxes 3,861,374 3,152,222 2,226,479
Income taxes (Note 2) 22,925 28,882 22,590
-------------------------------------------
Net income $3,838,449 $3,123,340 $2,203,889
-------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE> 5
Sonomed, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,944,495 $ 29,445 $ 746,582 $ 2,523,669 $ (500,000) $ 2,799,696
Dividends paid -- -- -- (2,037,750) -- (2,037,750)
Net income -- -- -- 2,203,889 -- 2,203,889
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,944,495 29,445 746,582 2,689,808 (500,000) 2,965,835
Dividends paid -- -- -- (1,358,000) -- (1,358,000)
Net income -- -- -- 3,123,340 -- 3,123,340
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,944,495 29,445 746,582 4,455,148 (500,000) 4,731,175
Dividends paid -- -- -- (3,532,100) -- (3,532,100)
Net income -- -- -- 3,838,449 -- 3,838,449
--------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,944,495 $ 29,445 $ 746,582 $ 4,761,497 $ (500,000) $ 5,037,524
============================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 6
Sonomed, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,838,449 $ 3,123,340 $ 2,203,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investments (40,488) -
(12,080)
Depreciation and amortization 15,686 15,766
22,600
Provision for losses on accounts receivable - 3,505 6,297
Changes in operating assets and liabilities:
Accounts receivable (162,943) (98,310) 10,230
Inventories (126,544) 6,666 (56,968)
Prepaid expenses and other assets (13,208) (3,675) -
Accounts payable, accrued expenses and other
liabilities 111,023 116,017 (86,449)
------------------------------------------------------
Net cash provided by operating activities 3,657,297 3,122,741 2,092,765
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (29,724) (2,321) -
Purchases of investments - (1,629,292) (1,998,638)
Proceeds from sales of investments 2,446,449 1,234,049 499,660
------------------------------------------------------
Net cash provided by (used in) investing activities 2,416,725 (397,564) (1,498,978)
FINANCING ACTIVITIES
Dividends paid (3,532,100) (1,358,000) (2,037,750)
------------------------------------------------------
Net cash used in financing activities (3,532,100) (1,358,000) (2,037,750)
------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,541,922 1,367,177 (1,443,963)
Cash and cash equivalents at beginning of year 1,708,656 341,479 1,785,442
------------------------------------------------------
Cash and cash equivalents at end of year $ 4,250,578 $ 1,708,656 $ 341,479
======================================================
SUPPLEMENTAL INFORMATION
Interest paid $ 724 $ 724 $ 664
======================================================
Taxes paid $ 22,925 $ 28,882 $ 22,590
======================================================
Purchase of property, plant and equipment
with a note payable $ - $ - $ 21,875
======================================================
</TABLE>
See accompanying notes.
5
<PAGE> 7
Sonomed, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Sonomed, Inc. (the "Company") was organized in 1983 to manufacture and service
ultrasound diagnostic and surgical devices for the medical profession in both
the United States and abroad. Approximately 90% of the Company's revenues are
derived from the sale of manufactured goods. Sales to foreign customers
accounted for approximately 36%, 41% and 50% of the Company's revenues for the
years ended December 31, 1999, 1998 and 1997, respectively. A geographic
breakdown of sales for the years ended December 31, 1999, 1998 and 1997 is
impractical.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVESTMENTS
The Company accounts for its investments using Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Management determines the proper classifications of
investments at the time of purchase and reevaluates such designations as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, which approximates the
market. Marketable equity securities are classified as available-for-sale and
are stated at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. The cost of securities
sold is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest and other
income.
6
<PAGE> 8
Sonomed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1999, the Company did not hold any investments. At December 31,
1998, securities consisted of three U.S. Treasury Notes classified as
held-to-maturity and a mutual fund, which is classified as available-for-sale.
There was no unrealized gain or loss on available-for-sale securities at
December 31, 1998.
CONCENTRATION OF CREDIT RISK
At December 31, 1999, accounts receivable from health care providers and foreign
distributors totaled $425,684 and $387,441, respectively. At December 31, 1998,
accounts receivable from health care providers and foreign distributors totaled
$276,363 and $373,819, respectively. One customer accounted for 13% of sales in
1999. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses are provided
for in the financial statements and consistently have been within management's
expectations.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FIXED ASSETS
Fixed assets are carried at cost, less depreciation and amortization computed by
the straight-line method over the estimated useful lives of the assets.
ADVERTISING EXPENSE
The Company's policy is to expense all advertising costs when incurred.
Advertising expense for the year ended December 31, 1999, 1998 and 1997 was
approximately $50,000, $43,000 and $40,000, respectively.
7
<PAGE> 9
Sonomed, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Effective October 1, 1987, the shareholders of the Company elected to be taxed
under Subchapter S of the Internal Revenue Code. Under such provisions, income
of the Company will be included in the income tax returns of its shareholders.
Accordingly, no provision for federal income taxes has been recorded by the
Company. The Company has recorded provisions for New York State Subchapter S and
other local taxes of $22,925, $28,882 and $22,590 for 1999, 1998 and 1997,
respectively.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Raw materials $373,280 $287,619
Work in process and finished goods 175,727 134,844
----------------------
$549,007 $422,463
=======================
</TABLE>
4. FIXED ASSETS
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
Equipment $285,164 $255,440
Leasehold improvements 3,000 3,000
-----------------------
288,164 258,440
Less accumulated depreciation and amortization
258,840 236,240
-----------------------
$ 29,324 $ 22,200
=======================
</TABLE>
8
<PAGE> 10
Sonomed, Inc.
Notes to Financial Statements (continued)
5. STOCK PURCHASE PLAN
On July 15, 1984, the shareholders of the Company approved an Incentive Stock
Option Plan for Company employees and a Non-qualified Stock Option Plan for
Company employees, directors and other individuals providing service to the
Company. Pursuant to each plan, 150,000 shares of common stock have been
reserved at prices to be determined by the Board of Directors. All options are
exercisable at times as determined by the Board of Directors not to exceed five
years after the grant date provided the optionee continues his/her relationship
with the Company. There were no options granted or exercised in 1999, 1998 and
1997 and no options were outstanding under either plan at December 31, 1999.
At December 31, 1999, 258,000 shares of common stock were reserved for future
issuance under these plans.
6. OPERATING LEASE OBLIGATIONS
The Company leases premises under operating leases expiring September 30, 2004.
The leases provide for additional rental payments for increases in real estate
taxes and certain operating expenses. The accompanying financial statements
include rent expense of approximately $133,000, $132,000 and $130,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The minimum rental
commitments, under noncancellable operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000 $129,000
2001 129,000
2002 129,000
2003 129,000
2004 97,000
========
Total minimum lease payments $613,000
========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation which arises in the ordinary course of
business. The Company believes that these actions will not have a material
adverse effect on the Company's financial position or results of operations.
9
<PAGE> 11
Sonomed, Inc.
Notes to Financial Statements (continued)
8. PROFIT SHARING PLAN
Effective January 1, 1993, the Company adopted a 401(k) profit sharing plan.
Under the terms of the plan, which covers all employees who qualify under
certain age and length of service requirements, the Company makes non-elective
contributions on behalf of each participant eligible to share in matching
contributions for the plan year. The Company's matching contribution is equal to
50% of such participant's voluntary employee contributions, up to a maximum of
10% of each employee's compensation. The Company's contribution for the years
ended December 31, 1999, 1998 and 1997 was $48,468, $28,762 and $27,190,
respectively.
9. SUBSEQUENT EVENTS
On January 14, 2000, the Company was acquired by Escalon Medical Corp.
("Escalon"), a Delaware corporation, located in Wayne, Pennsylvania for
$12,550,000, including cash of $12,050,000 and a promissory note of $500,000.
The promissory note is due 125 days from the closing date. A portion
($1,000,000) of the purchase price was placed in escrow for a period of the
later of twenty-four months or until claims, if any, are settled. In addition,
Escalon entered into a renewable employment agreement with the former principal
shareholder of the Company for a period of three years at an annual salary of
$175,000.
10
