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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.)
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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.
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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.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
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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
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Net income $ 1,193,787 $ 1,763,046 $ 2,956,833
============== =============== =============
Basic net income per share (A) $ 0.10 $ 0.67
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Diluted net income per share $ 0.10 $ 0.66
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(1) Weighted average shares-basic 3,114,823 3,114,823
========= =========
Weighted average shares-diluted 3,150,721 3,150,721
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(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.
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(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
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
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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
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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
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Net income (loss) $ 167,679 $ 872,558 $ 1,040,237
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Basic net loss per share $ 0.05 $ 0.32
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Diluted net loss per share $ 0.05 $ 0.32
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Weighted average shares-basic 3,242,184 3,242,184
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Weighted average shares-diluted 3,254,250 3,254,250
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(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.
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(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.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
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ASSETS
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
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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)
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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
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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
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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)
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TOTAL SHAREHOLDERS' EQUITY 6,445,380 - 6,445,380
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TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $9,129,937 $ 10,926,670 $ 20,056,607
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(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:
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)
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Total cost of acquisition $ 12,550,000
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.
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(c) Exhibits.
Exhibit No. Document
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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. *
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* Filed herewith
(1) Filed as an exhibit to the Company's Form 8-K, dated January 19,
2000.
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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
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Douglas R. McGonegal,
Vice President - Finance
Chief Financial Officer