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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, 2001
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 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 of outstanding stock of each of the issuer's
classes of common stock, as of the latest practicable date.
Date: May 2, 2001 3,292,184 Shares of Common Stock, $0.001 par value
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ESCALON MEDICAL CORP.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and
March 31, 2001 3
Condensed Consolidated Statements of Operations for the Three
And Nine Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2000 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 177,106 $ 205,366
Accounts receivable, net 1,331,783 2,051,756
Inventory, net 1,574,678 1,740,437
Prepaid insurance 166,667 35,021
Other current assets 69,063 45,307
------------ ------------
Total current assets 3,319,297 4,077,887
Long-term note receivable 150,000 150,000
Furniture and equipment, net 479,018 608,629
Customer lists, net 7,464,722 7,079,722
Goodwill, net 2,278,576 2,197,746
Trademarks and trade names, net 2,229,722 2,114,772
License and distribution rights, net 266,843 245,106
Patents, net 215,006 209,278
Due from joint venture 80,961 646,494
Other assets 361,145 909,182
------------ ------------
Total assets $ 16,845,290 $ 18,238,816
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 4,032,105 $ 4,801,009
Current portion of long-term debt 1,400,000 1,464,884
Accounts payable 462,086 358,051
Accrued compensation 355,074 390,920
Other current liabilities 280,976 369,426
------------ ------------
Total current liabilities 6,530,241 7,384,290
Long-term debt, net of current portion 4,900,000 4,917,558
------------ ------------
Total liabilities 11,430,241 12,301,848
Shareholders' Equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued -- --
Common stock, $0.001 par value; 35,000,000 shares
authorized, 3,292,184 and 3,242,184 shares issued at
March 31, 2001 and June 30, 2000, respectively 3,242 3,292
Additional paid-in capital 46,021,569 46,121,519
Accumulated deficit (40,609,762) (40,187,843)
------------ ------------
Total shareholders' equity 5,415,049 5,936,968
------------ ------------
Total liabilities and shareholders' equity $ 16,845,290 $ 18,238,816
============ ============
Note: The consolidated balance sheet at June 30, 2000 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
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues, net $ 2,109,521 $ 2,824,555 $ 4,419,733 $ 8,721,915
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 820,866 979,007 1,975,064 3,007,098
Research and development 296,930 160,586 764,313 361,190
Marketing, general and administrative 1,383,349 1,297,754 3,361,419 4,017,034
----------- ----------- ----------- -----------
Total costs and expenses 2,501,145 2,437,347 6,100,796 7,385,322
----------- ----------- ----------- -----------
Income (loss) from operations (391,624) 387,208 (1,681,063) 1,336,593
----------- ----------- ----------- -----------
Other income and expenses:
Gain on Sale of Silicone Oil product line -- -- 1,848,215 --
Write-off of Ocufit 22,253 -- (432,859) --
Equity in income (loss) of unconsolidated
joint venture -- 14,565 -- (15,404)
Interest income 32,561 -- 126,348 2,929
Interest expense (252,573) (264,990) (282,345) (824,008)
----------- ----------- ----------- -----------
Total other income and expenses (197,759) (250,425) 1,259,359 (836,483)
----------- ----------- ----------- -----------
Income (loss) before income taxes (589,383) 136,783 (421,704) 500,110
Income taxes 43,860 21,166 43,860 78,191
----------- ----------- ----------- -----------
Net (loss) income $ (633,243) $ 115,617 $ (465,564) $ 421,919
=========== =========== =========== ===========
Basic net (loss) income per share $ (0.195) $ 0.035 $ (0.144) $ 0.128
=========== =========== =========== ===========
Diluted net (loss) income per share $ (0.195) $ 0.035 $ (0.144) $ 0.126
=========== =========== =========== ===========
Weighted average shares - basic 3,242,184 3,292,184 3,242,184 3,292,184
=========== =========== =========== ===========
Weighted average shares - diluted 3,242,184 3,334,727 3,242,184 3,340,713
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended March 31,
2000 2001
------------ ------------
Cash Flows from Operating Activities:
Net income $ (465,564) $ 421,919
Adjustments to reconcile net income to net cash (used in)
provided from operating activities:
Depreciation and amortization 513,281 849,191
Gain on sale of Silicone Oil (1,848,215) --
Write-off of Ocufit 432,859 --
Loss of unconsolidated joint venture -- 15,404
Change in operating assets and liabilities:
Accounts receivable, net 687,283 (719,973)
Inventory, net 153,551 (165,759)
Other operating assets, current and long-term 45,495 247,828
Accounts payable, accrued and other liabilities (336,949) 85,144
------------ ------------
Net cash (used in) provided from operating activities (818,259) 733,754
------------ ------------
Cash Flows from Investing Activities:
Purchase of short-term investments (7,043,061) --
Proceeds from maturities of short-term investments 7,043,061 --
Proceeds from sale of Silicone Oil product line 1,587,885 --
Release of restricted cash 1,000,000 --
Final payment for Vascular Access Business (1,000,000) --
Purchase of Sonomed, Inc. (12,050,000) --
Due from joint venture -- (565,533)
Purchase of furniture and equipment (86,648) (126,187)
Other assets (114,252) --
Goodwill, license and distribution rights and patents (67,716) (79,528)
------------ ------------
Net cash used in investing activities (10,730,731) (771,248)
------------ ------------
Cash Flows from Financing Activities:
Line of credit borrowing, net 4,000,000 768,904
Proceeds from term loan 7,000,000 --
Principal payments on term loan (933,332) (703,150)
Payment of deferred finance charge (100,000) --
------------ ------------
Net cash provided by financing activities 9,966,668 65,754
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,582,322) 28,260
Cash and cash equivalents, beginning of period 3,854,240 177,106
------------ ------------
Cash and cash equivalents, end of period $ 2,271,918 $ 205,366
============ ============
Supplemental Schedule of Cash Flow Information:
Interest paid $ 259,789 $ 734,015
============ ============
Supplemental Schedule of Noncash Activity:
Accrued royalties converted to short-term debt $ -- $ 64,884
Long-term debt obligation incurred as a result of a royalty
agreement $ -- $ 717,558
Accrued royalties converted to common stock $ -- $ 100,000
Deposit on furniture and equipment reclassed from
other assets $ -- $ 105,044
See notes to condensed consolidated financial statements
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ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Escalon Medical Corp. and its subsidiaries Escalon Pharmaceutical Inc.,
Escalon Vascular Access, Inc., Sonomed, Inc. and Escalon Digital Vision,
Inc. (jointly referred to as "Escalon" or the "Company") have been prepared
in accordance with the rules and regulations of the U.S. Securities and
Exchange Commission ("SEC"). 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, 2001.
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, 2000 included
in the Company's annual report on Form 10-K.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 in the fourth quarter of fiscal 2001. Management
does not expect to adoption of SAB 101 to have a material effect on the
Company's operations or financial position.
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:
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
----------- ----------- ----------- -----------
Numerator:
Numerator for basic and diluted earnings (loss) per share:
Net (loss) income $ (633,243) $ 115,616 $ (465,564) $ 421,919
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,242,184 3,292,184 3,242,184 3,292,184
Effect of dilutive securities:
Employee stock options -- 42,543 -- 48,529
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - weighted average and
assumed conversion 3,242,184 3,334,727 3,242,184 3,340,713
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.195) $ 0.035 $ (0.144) $ 0.128
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.195) $ 0.035 $ (0.144) $ 0.126
=========== =========== =========== ===========
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3. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in, first-out
basis) or market, consisted of the following:
June 30, March 31,
2000 2001
----------- -----------
Raw materials / work in process $ 1,336,754 $ 1,427,981
Finished goods 365,092 414,624
----------- -----------
1,701,846 1,842,605
Valuation allowance (127,168) (102,168)
----------- -----------
$ 1,574,678 $ 1,740,437
=========== ===========
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 $12,314,202,
of which $11,212,488 was allocated to proprietary rights and intangible assets,
including: $7,700,000 to customer lists, $2,300,000 to trademarks and trade
names and $1,212,488 to goodwill. The intangible assets are being amortized on a
straight-line basis over a fifteen-year period.
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 at least three percent of Sonomed's net quarterly sales for a
period of three years.
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 being presented. The information presented is not necessarily
indicative of results of future operations of the combined companies.
PRO FORMA RESULTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
2000 2001 2000 2001
----------- ----------- ----------- -----------
Revenues $ 2,342,000 $ 2,825,000 $ 7,852,000 $ 8,722,000
Net income $ (531,104) $ 116,000 $ 299,000 $ 422,000
Basic net income per share $ (0.164) $ 0.035 $ 0.092 $ 0.128
Diluted net income per share $ (0.164) $ 0.035 $ 0.092 $ 0.126
Weighted average shares - basic 3,242,184 3,292,184 3,242,184 3,292,184
Weighted average shares - diluted 3,242,184 3,334,727 3,242,184 3,340,713
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5. BANK LOANS
In connection with the acquisition of Sonomed on January 14, 2000, PNC Bank,
N.A. refinanced the Company's $2,000,000 credit facility. In doing so, the Bank
released $1,000,000 of restricted cash held as collateral for the Company's
prior term loan. The Company repaid the outstanding balances on its line of
credit ($1,000,000) and term loan ($833,330). The Bank then granted a new
$12,000,000 credit facility to provide financing for 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 on prime plus 1.0% and the line of
credit is 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 though January 2002. The maximum interest rate that may be charged on
the term loan and on the protected portion of the line of credit for calendar
year 2000 was 9%. 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 collateralize these
agreements. At March 31, 2001, the interest rates applicable to the term loan
and the line of credit were 9.00% and 8.75% (9.50% on the unprotected portion),
respectively.
The term loan and the line of credit agreements contain various covenants
related to required levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined, and the maintenance of net worth levels,
among others. The Company did not achieve the EBITDA and net worth covenants and
also violated other covenants regarding investments and advances and the
creation of further indebtedness, which are breaches of the loan agreements. The
Bank has waived these requirements of the agreements as of March 31, 2001, and
for the period ending April 1, 2002.
6. CONTINGENCY
Litigation
As previously reported in reports filed with the SEC, 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 lawsuit 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, 1983, 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 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.
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7. REVENUES, NET
Revenues, net include quarterly payments earned in connection with the sale of
the AdatoSil(R) 5000 Silicone Oil ("Silicone Oil") product line. This revenue
totaled $1,528,000 for the period beginning on the commencement date of August
11, 2000 through March 31, 2001. The Company is entitled to receive additional
consideration, in varying amounts, through fiscal 2005. Included in accounts
receivable as of March 31, 2001 is $623,000.
8. AMENDMENT AND SUPPLEMENT TO ASSETS SALE AND PURCHASE AGREEMENT AND RELEASE
On January 21, 1999, Escalon Vascular Access, Inc., the Company's wholly owned
subsidiary and Radiance Medical Systems, Inc., ("Radiance") formerly
CardioVascular Dynamics Inc., entered into an Assets Sale and Purchase
Agreement. Pursuant to this Assets Sale and Purchase Agreement, the Company
acquired the assets of Radiance's Vascular Access Business for an aggregate
purchase price of $2,104,442.19 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, with a guaranteed
minimum royalty of $300,000 per year. In lieu of the Company paying guaranteed
minimum royalties over the remaining three years, the Company has renegotiated
with Radiance a lump-sum amount of $717,558 plus interest to be paid over three
years, as set forth in the Amendment and Supplement to Assets Sale and Purchase
Agreement and Release dated February 28, 2001. In connection therewith, the
Company delivered to Radiance an additional term note in the amount of $717,558,
with interest at the prime rate as published in The Wall Street Journal (New
York edition) plus 1%, with interest only payable quarterly beginning on May 31,
2001 through January 15, 2002 and principal and interest payable in eleven
quarterly installments beginning on April 15, 2002. In addition, the Amendment
also accounts for $182,442 of accrued royalties for the period ended January 21,
2001. Pursuant to the Amendment the Company paid $17,558 to Radiance, delivered
a Short Term Note in the amount of $64,884, with interest at the prime rate as
published in The Wall Street Journal (New York edition) plus 1%, with interest
only payable quarterly beginning on May 31, 2001 and the principal and interest
payable in full on January 15, 2002, and issued to Radiance 50,000 shares of the
Company's common stock valued at $100,000 (See Part I, Item 2 "LIQUIDITY AND
CAPITAL RESOURCES."). The Company agreed to use its best efforts to register the
shares of the Company's common stock issued to Radiance in the amendment on Form
S-3 under the Securities Act of 1933 (the "Securities Act") in a manner that
will, upon being declared effective, constitute a "shelf" registration for
purposes of Rule 415 under the Securities Act.
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, the following: (i) the competitive
nature of the industries in which the Company competes and the ability of the
Company to (a) successfully maintain existing strategic relationships and (b)
negotiate and enter into new strategic relationships and otherwise distinguish
its products from those of other companies on the basis of quality, value and
reliability; (ii) economic and regulatory conditions which could adversely
affect sales of the Company's products, including the uncertainty of FDA
approval for any new applications; (iii) the ability of the Company to
successfully develop and market new products; (iv) future capital needs and the
uncertainty of additional funding (whether through the financial markets,
collaborative or other arrangements with strategic partners, or from other
sources); (v) uncertain protection of
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important proprietary technology; (vi) the outcome of litigation matters; (vii)
limitation on third-party reimbursement and the possible adverse impact of
health care reform on the payment of health care services; (viii) dependence on
key personnel; (ix) an uninterrupted supply of materials vital to the Company's
revenue streams; and (x) the ability of the Company to maintain its listing on
the NASDAQ SmallCap Market.
OVERVIEW
The following discussion should be read in conjunction with the interim
condensed consolidated financial statements and the notes thereto which are set
forth elsewhere in this report on Form 10-Q.
Escalon Medical Corp. and its subsidiaries, Sonomed, Inc., Escalon
Pharmaceutical Inc., Escalon Vascular Access, Inc. and Escalon Digital Vision,
Inc., (jointly referred to as "Escalon" or the "Company") operate in the
healthcare market specializing in the development, manufacture, 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 the completion of the
acquisition, the Company changed its market focus and is now engaged in
developing, manufacturing, marketing and distributing ophthalmic diagnostic,
surgical and pharmaceutical products as well as niche medical products. Sales of
the products acquired from EOI are made primarily to hospitals and physicians
throughout the United States.
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.
Escalon's present and expected future market strategy is to locate and
acquire profitable niche medical products that it will own and control 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, in March and August 1999, respectively.
Escalon purchased the vascular access business unit of Radiance Medical
Systems, Inc. in January 1999. This was significant as the Company's first step
in diversification. The vascular access product line was the first niche product
acquired outside the ophthalmic medical field. Vascular products are marketed to
cardiac catheterization laboratories through the Company's sales force and a
series of 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.
The Company entered into a joint venture with MegaVision, Inc. in April
2000. The joint venture has been named Escalon Medical Imaging, LLC ("Imaging").
The purpose of Imaging is to develop, manufacture and market hardware and
software to retro-fit existing ophthalmic photographic equipment to digital
technology. The Company (through its subsidiary Escalon Digital Vision, Inc.)
and MegaVision, Inc. each own 50% of Imaging.
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; (iii) general competitive and economic conditions of the
healthcare market; and (iv) availability from suppliers of component parts and
supplies.
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RESULTS OF OPERATIONS
The Company currently operates in three business units: Medical, which includes
the original ophthalmic surgical products; Sonomed, which includes ophthalmic
diagnostic devices; and Vascular, which includes vascular access devices.
Three and Nine-Month Periods Ended March 31, 2000 and 2001
Product revenues increased $715,000 or 33.89%, to $2,825,000 for the three-month
period ended March 31, 2001 as compared to $2,110,000 for the same period ended
March 31, 2000. Revenue from the Sonomed business unit increased $237,000 to
$1,398,000 for the three-month period ended March 31, 2001 as compared to
$1,161,000 for the same period ended March 31, 2000. Sonomed was acquired in
mid-January 2000, therefore contributing only two-and-one half months' revenue
during the three-month period ended March 31, 2000. In the Company's Medical
business unit, revenue earned in connection with Silicone Oil was $623,000 for
the three-month period ended March 31, 2001. Revenues from the balance of the
Medical product line experienced a nominal decrease of $48,000 for the
three-month period ended March 31, 2001 as compared to the same period ended
March 31, 2000. The Vascular business unit experienced a $97,000 decrease in
revenue to $524,000 for the three-month period ended March 31, 2001 compared to
the same period last year. This decrease occurred as distributors experienced a
surplus of inventory and reduced orders.
Product revenues increased $4,302,000 or 97.33%, to $8,722,000 for the
nine-month period ended March 31, 2001 as compared to $4,420,000 for the same
period ended March 31, 2001. Revenue from the Sonomed business unit increased
$3,320,000 to $4,481,000 for the nine-month period ended March 31, 2001 as
compared to $1,161,000 for the same period ended March 31, 2000. Sonomed was
acquired in mid-January 2000, therefore contributing only two-and-one half
months' revenue during the nine-month period ended March 31, 2000. In the
Company's Medical business unit, revenue earned in connection with Silicone Oil
was $574,000 from July 1, 1999 through August 13, 1999. The Company sold its
rights to the product to Bausch & Lomb on August 13, 1999, and did not recognize
any revenue from Silicone Oil for a period of one year from the date of sale.
Beginning on August 13, 2000, the Company is entitled to receive from Bausch &
Lomb a percentage of Bausch & Lomb's gross profit from sales of the oil product
through fiscal 2005. From August 13, 2000 through March 31, 2001 revenue earned
in connection with Silicone Oil was $1,528,000, $954,000 more than the Silicone
Oil revenue recognized during the period ended March 31, 2000. Revenues from the
balance of the Medical product line increased by $210,000. This increase was due
mainly to the fulfillment of customers' backorders for the Company's ISPAN(TM)
gas product during the first quarter of fiscal 2001. The Vascular business unit
experienced an $182,000 decrease compared to the same period last year. This
decrease occurred as distributors experienced a surplus of inventory and reduced
orders.
Cost of goods sold totaled $979,000, or 34.65% of revenue, for the three-month
period ended March 31, 2001, as compared to $821,000, or 38.91% of revenue for
the same period last year. The reduction in cost of goods sold as a percentage
of revenue is due to a favorable product mix resulting from the acquisition of
Sonomed and revenues received from Bausch & Lomb related to Silicone Oil. Cost
of goods sold in the Sonomed unit totaled $526,000, or 37.63% of revenue during
the three-month period ended March 31, 2001. Cost of goods sold in the Medical
unit decreased $33,000 to $187,000, or 20.73% of revenue. Cost of goods sold as
a percentage of revenue was 67.28% during the same period last fiscal year. This
decrease is due to the fact that the Silicone Oil revenue recognized during
fiscal 2001 does not have any costs associated with the revenue. Cost of goods
sold for the Medical business unit was 67.03% of sales for the three-month
period ended March 31, 2001, when Silicone Oil revenue is excluded. Cost of
goods sold in the Vascular unit increased $3,000 to $266,000, or 50.76% of
revenue, as compared to 42.35% of revenue during the same period last year.
Materials represented 29.96%, while labor and other employee-related expenses
represented 20.80% for the three-month period ended March 31, 2001. Materials
represented 29.63%, while labor and other employee-related expenses represented
12.72% for the three-month period ended March 31, 2000.
Cost of goods sold totaled $3,007,000, or 34.48% of revenue, for the nine-month
period ended March 31, 2001, as compared to $1,975,000, or 44.68% of revenue for
the same period last year.
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The reduction in cost of goods sold as a percentage of revenue is due to a
favorable product mix resulting from the acquisition of Sonomed and revenues
received from Bausch & Lomb related to Silicone Oil. Cost of goods sold in the
Sonomed unit totaled $1,647,000, or 36.76% of revenue. Cost of goods sold in the
Medical unit decreased $234,000 to $638,000, or 23.36% of revenue. Cost of goods
sold as a percentage of revenue was 55.62% during the same period last fiscal
year. This decrease is due to the fact that the Silicone Oil revenue recognized
during fiscal 2001 does not have any costs associated with the revenue. Cost of
goods sold for the Medical business unit was 53.03% of sales for the nine-month
period ended March 31, 2001, when Silicone Oil revenue is excluded. Cost of
goods sold in the Vascular unit decreased $43,000 to $722,000, or 47.85% of
revenue, as compared to 45.19% of revenue during the same period last year.
Research and development expenses decreased $136,000, or 45.79%, to $161,000 for
the three-month period ended March 31, 2001 when compared to the same period
last fiscal year. Research and development in the Sonomed unit increased
$34,000, or 56.67%, to $94,000 for the three-month period ended March 31, 2001.
This is largely due to increased consulting activity related to a new product
expected to be released in the fourth quarter of fiscal 2001. Research and
development in the Medical and Vascular business units decreased $170,000 when
compared to the same period last year. The Company has suspended development of
Povidone-Iodine 2.5% and is seeking a partner for further development of this
product line; development of Ocufit SR(R) has been terminated. The Company's
present strategy for research and development, as well as what it expects to
implement in the future, entails undertaking shorter-term projects with quicker
anticipated returns.
Research and development expenses decreased $403,000, or 52.75%, to $361,000 for
the nine-month period ended March 31, 2001 when compared to the same period last
fiscal year. Research and development expense in the Sonomed unit increased
$172,000 to $232,000 for the nine-month period ended March 31, 2001. This
increase is largely due to the fact that Sonomed was acquired in January 2000,
and therefore contributed only two-and-one-half months' expenses during the same
period last fiscal year. Research and development in the Medical and Vascular
business units decreased $575,000 when compared to the same period last year.
The Company has suspended development of Povidone-Iodine 2.5% and is seeking a
partner for further development of this product line; development of Ocufit
SR(R) has been terminated.
Marketing, general and administrative expenses decreased $85,000, or 6.15%, to
$1,298,000 for the three-month period ended March 31, 2001 when compared to the
same period last fiscal year. Marketing, general and administrative expenses in
the Sonomed and Medical units decreased $9,000 to $1,007,000 for the three-month
period ended March 31, 2001. This decrease is due largely to a decrease in
administrative bonuses, as year-to-date balances were adjusted to reflect the
company's cost-cutting focus. Marketing, general and administrative expenses in
the Vascular business unit decreased $76,000, or 20.94%, to $291,000. This
decrease was largely due to reduced salaries and employee-related expenses due
to reduced headcount.
Marketing, general and administrative expenses increased $656,000, or 19.52%, to
$4,017,000 for the nine-month period ended March 31, 2001 when compared to the
same period last fiscal year. Marketing, general and administrative expenses in
the Sonomed and Medical units increased $818,000 to $3,182,000 for the
nine-month period ended March 31, 2001. This increase is largely due to the fact
that Sonomed was acquired in January 2000, and therefore contributed only
two-and-one-half months expenses during the same period last fiscal year. This
increase is offset by the following reductions in the Medical business unit:
Royalties decreased by $51,000 as a result of the Company's decision to
discontinue clinical trials of Ocufit SR(R) in December 1999. Travel-related
expenses decreased $58,000, the direct result of a concerted effort in this
area. Marketing, general and administrative expenses in the Vascular business
unit decreased $162,000 to $835,000. The main factors contributing to this
decrease were decreased salaries and employee-related costs, which reduced by
$154,000, the result of reduced headcount; and a decrease in travel-related
expenses, which reduced by $82,000, the direct result of a concerted effort in
this area. These decreases were partially offset by an increase in consulting
expense of $83,000, mostly due to the retention of a sales and marketing
consultant.
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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 $1,848,000 gain after writing off the remaining net book value of license and
distribution rights associated with that product line.
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 non-cash charge of $411,000 in the second and
third quarter of fiscal 2000, which included write-off of the net book value for
remaining goodwill and patent costs associated with this project.
On December 18, 2000, the Company announced that it was granted 510(K) clearance
to begin marketing its high-end digital camera system for ophthalmologists known
as the CFA Digital Imaging System. The system will be marketed through the
Company's joint venture with MegaVision, Inc. As a result of the approval, the
joint venture began selling the product in December 2000, resulting in Escalon
recognizing a $15,000 profit for the three months ended March 31, 2001. For the
nine months ended March 31, 2001, the Company has recorded a $15,000 loss from
the joint venture.
Interest income decreased $33,000 and $123,000 for the three- and nine-month
periods ended March 31, 2001 as compared to the same periods last year. On a
quarterly basis, the Company's cash balance has been substantially lower than
during the same period last fiscal year. This decrease resulted from the
decrease in cash and cash equivalents available for investment due to the
significant changes in the Company arising from the Sonomed acquisition.
Interest expense increased $12,000 and $542,000 for the three- and nine-month
periods ended March 31, 2001 as compared to the same periods last year. This is
largely the result of corporate borrowing arrangements that did not exist until
the third quarter of fiscal 2000. In connection with the Sonomed acquisition,
PNC Bank refinanced its existing debt, providing $12,000,000 of financing to the
Company.
There is no provision for federal income taxes for the periods presented as a
result of utilization of net operating loss carryforwards. The Company has
recognized a $78,000 expense related to state income taxes for the nine-month
period ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company had cash and cash equivalents of $205,000 as
compared to $177,000 at June 30, 2000, an increase of $28,000. This increase
consists of $734,000 provided by operating activities, and $771,000 additional
borrowing against the line of credit offset by $700,000 used to pay down the
term loan, $566,000 additional investment in the joint venture with MegaVision,
Inc., $126,000 used to purchase assets, the large portion of which includes a
new accounting software package and related hardware, and $80,000 which has been
classified as goodwill related to the Sonomed acquisition. The additions to
goodwill were the result of an agreement between the Company and the former
owner of Sonomed, whereby the Company agreed to indemnify the former owner for
certain taxes incurred as a result of the acquisition.
On January 14, 2000, the Company replaced its $2,000,000 credit facility
obtained in January 1999. PNC Bank granted a new $12,000,000 credit facility to
assist with the Sonomed acquisition. This included a $7,000,000 five-year term
loan and a $5,000,000 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 term loan is based on prime plus 1.0% and the line of credit is based on
prime plus 0.75%. Interest rate cap agreements are used to reduce the potential
impact of increases in interest rates on the floating-rate term loan and line of
credit. At March 31, 2001, the Company was party to interest rate cap agreements
covering the $7,000,000 term loan through January 1, 2003 and $3,000,000 of the
reducing line of credit through January 1, 2002. The agreements entitle the
Company to receive from the Bank, the counter-party to both agreements, on a
monthly basis the amounts, if any, by which the Company's interest payments on
the $3,000,000 protected portion of the line of credit exceed 9%. Payments are
also due monthly from the Bank if the interest rate on the loan exceeds 9.5% for
the period January 1, 2001 through January 1, 2002 and 10% for the period
January 1, 2002 through January 1, 2003. At March 31, 2001, the interest rates
applicable to the term loan and the line of credit were 9.0% and 8.75% (9.50% on
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the unprotected portion), respectively. Escalon also paid $100,000 in finance
fees that are recorded in other assets. These fees are being 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 Bank's prime rate as of March 31, 2001 was 8.0%.
The term loan and the line of credit agreements contain various covenants
related to required levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined, and the maintenance of net worth levels,
among others. The Company did not achieve the EBITDA and net worth covenants and
also violated other covenants regarding investments and advances and the
creation of further indebtedness, which are breaches of the loan agreements. The
Bank has waived these requirements of the agreements as of March 31, 2001, and
for the period ending April 1, 2002. In addition, the Company is currently
negotiating with the Bank to amend the covenant conditions of the line of credit
and the term loan.
On January 21, 1999, the Company's wholly owned subsidiary, Escalon Vascular
Access, Inc., and Radiance Medical Systems, Inc. entered into an Assets Sale and
Purchase Agreement. Pursuant to this agreement, the Company acquired for cash,
the assets of Radiance's vascular access business, and 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 with a guaranteed
minimum royalty of $300,000 per year. On February 28, 2001 the parties amended
the agreement (see Part II. Other Information, Item 6. Exhibits and reports on
Form 8-K, Exhibit 10.15 Registrant's Amendment and Supplement Agreement and
Release between the Registrant and Radiance Medical Systems, Inc.) to provide an
adjustment in the terms of payment of the royalties. Pursuant to the Agreement
the Company will pay $17,558 in cash to Radiance, delivered a short-term note in
the amount of $64,884, an additional term note in the amount of $717,558 and has
issued 50,000 shares of Escalon Common Stock to Radiance. The Company
anticipates that additional expenditures may be incurred in connection with
registration of the Common stock, which will require the filing of Form S-3 .
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 anticipates that the cash generated from future product sales and
cash received from the Silicone Oil divestment should be adequate to satisfy its
capital requirements, based on current levels of operations. In the longer term,
the Company will seek corporate partnering, licensing and other financing
opportunities to satisfy the significant expenditures needed to fund its'
growth-through-acquisition strategy.
The Common Stock is currently listed on the Nasdaq SmallCap Market. In order to
continue to be listed on the Nasdaq SmallCap Market, certain listing
requirements must be met. If the Company's securities were delisted, an investor
could find it more difficult to dispose of them, or to obtain accurate
quotations as to the market value of the Company's securities.
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Reportable Segments
Nine Months Ended March 31, 2001
Medical Vascular Sonomed Other Total
------- -------- ------- ----- -----
Revenue, net $ 2,731,000 $ 1,510,000 $ 4,481,000 $ -- $ 8,722,000
Interest income 3,000 -- -- -- 3,000
Interest expense -- 5,000 819,000 -- 824,000
Equity in loss of
unconsolidated joint venture -- -- -- --
Net profit (loss) 505,000 (68,000) -- (15,000) 422,000
- --------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 107,000 155,000 576,000 11,000 849,000
Assets 2,469,000 2,896,000 12,096,000 778,000 18,239,000
Expenditures for long
lived assets 91,000 21,000 14,000 -- 126,000
- --------------------------------------------------------------------------------------------------------------------------
During the nine-month period ended March 31, 2001, Medical derived the majority
of its revenues from the sales of ISPAN(TM) gas products and disposable products
and from additional consideration in connection with the sale of the Silicone
Oil product line. Vascular derived the majority of its revenues from the sales
of Smartneedles and PD Access needles, both of which are used by personnel in
the medical field to aid in locating difficult arteries and veins. Sonomed
derived the majority of its revenues from the sales of A-Scans, B-Scans and
pachymeters, which are ultrasound systems used for diagnostic or biometric
applications in ophthalmology.
During the nine-month period ended March 31, 2001, the Company had one entity,
Bausch & Lomb, from which greater than 10% of consolidated net revenues were
derived. Revenues from Bausch & Lomb were $1,863,000, or 21.36% of consolidated
net revenues, during the period. This revenue is recorded in the Medical
business segment. Included in accounts receivable is $623,000 owed to the
Company from Bausch & Lomb. Of the external revenues reported above, $62,000,
$132,000 and $1,657,000 were derived internationally in Medical, Vascular and
Sonomed, respectively.
Refer to the Results of Operations section of Management's Discussion and
Analysis of Financial Condition and Results of Operations included in this Form
10Q for analysis between the fiscal 2001 information disclosed here and the
comparative results from fiscal 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's financial instruments
consisting primarily of debt obligations that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows
and related interest rates by expected maturity dates. Interest rates are based
upon the federal prime rate at March 31, 2001 plus 1.0% on the term loan and
0.75% on the line of credit. Interest rate cap agreements are used to reduce the
potential impact of increases on the floating-rate term loan and line of credit.
At March 31, 2001, the Company was party to interest rate cap agreements
covering the entire term loan through January 1, 2003 and $3,000,000 of the line
of credit through January 1, 2002.
Expected Maturity Date, Fiscal
-----------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Total
------------ ------------ ------------ ------------ --------- ---------
Term loan 350,000 1,400,000 1,400,000 1,400,000 1,050,000 5,600,000
Interest rate - capped 9.00% 9.00% 9.00% -- --
Interest rate - no cap -- -- 9.75% 9.75%
Line of credit - capped 3,000,000 -- -- -- -- 3,000,000
Interest rate 8.75% -- -- -- --
Line of credit - no cap 1,801,000 -- -- -- -- 1,801,000
Interest rate 9.50% -- -- -- --
Radiance Note 1 -- 65,000 -- -- -- 65,000
Interest rate -- 9.00% -- -- --
Radiance note 2 -- 130,000 261,000 261,000 65,000 717,000
Interest rate -- 9.00% 9.00% 9.00% 9.00%
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 6 of the Notes to Condensed Consolidated
Financial Statements in Part I is incorporated herein by reference thereto.
ITEM 2. CHANGES IN SECURITIES
The Company previously had outstanding Class A and Class B Redeemable Common
Stock Purchase Warrants, with respect to which four Warrants plus $25 and $30,
respectively, were exercisable for one share of Common Stock. These Warrants
expired on November 17, 2000.
On February 28, 2001, Escalon Vascular Access, Inc. and Radiance Medical
Systems, Inc. entered into and Amendment and Supplement Agreement and Release
(see Item 6, Exhibit 10.15). Pursuant to this Amendment, the Company has issued
50,000 shares of Escalon Medical Corp. Common Stock to Radiance Medical Systems,
Inc. See footnote 8 for a complete discussion of this Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.15 Registrant's Amendment and Supplement Agreement and Release
between the Registrant and Radiance Medical Systems, 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 8, 2001 By: /s/ Richard J. DePiano
----------- -----------------------
Richard J. DePiano
Chairman and
Chief Executive Officer
DATE: May 8, 2001 By: /s/ Harry M. Rimmer
----------- ---------------------
Harry M. Rimmer
Vice President - Corporate Development
and Finance, Secretary
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