Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of July 23, 2004, Escalon Medical Corp. ("Escalon" or the "Company") acquired
approximately 67% of the outstanding ordinary shares of Drew Scientific Group
PLC, a United Kingdom company ("Drew"), pursuant to the Company's exchange offer
in which the Company offered 900,000 shares of the Company's common stock for
all of the outstanding ordinary shares of Drew. Each Drew stockholder,
therefore, has received or will receive 0.01010 shares of the Company's common
stock for each ordinary share of Drew owned by the stockholder. The closing
price of the Company's common stock on July 23, 2004 was $9.40 per share. As of
September 28, 2004, the Company had acquired approximately 94% of the
outstanding issued ordinary shares of Drew for the issuance of an aggregate of
approximately 843,000 shares of the Company's common stock. The Company has
instituted procedures established under United Kingdom law to acquire the
remaining Drew ordinary shares.
For purposes of the pro forma financial information included in this report, the
Company has assumed the issuance of 900,000 shares of the Company's common stock
for the acquisition of all of the outstanding ordinary shares of Drew. The value
of the Company's common stock of $8,181,000 was calculated by multiplying the
900,000 shares by $9.09, which was the average closing price of the Company's
common stock for the five day trading period beginning July 21, 2004 and ending
July 27, 2004. The estimated acquisition-related costs of $1,225,000 consist
primarily of investment banking, legal and accounting fees that are directly
related to the acquisition of Drew. Therefore, the total consideration for the
acquisition of Drew has been valued approximately at $16,147,000 which includes
approximately $6,790,000 of assumed liabilities net of approximately $49,000
acquired cash.
Escalon is providing the following unaudited pro forma condensed consolidated
financial statements to provide a view of what the results of operations and
financial position of Escalon might have been had the acquisition been completed
at an earlier date. The unaudited pro forma condensed consolidated statements of
operations for the year ended June 30, 2004 give effect to the acquisition of
Drew by Escalon as if it had occurred on July 1, 2003. The pro forma statement
of operations for the twelve months ended June 30, 2004 is based on historical
results of operations of Escalon for the twelve months ended June 30, 2004 and
the historical results of operations of Drew for the twelve months ended March
31, 2004. The unaudited pro forma condensed consolidated balance sheet as of
June 30, 2004 gives effect to the acquisition of Drew as if the transaction had
occurred on that date. The pro forma balance sheet is based on the historical
balance sheet of Escalon as of June 30, 2004 and the historical balance sheet of
Drew as of March 31, 2004.
Escalon's acquisition of Drew will be accounted for using the purchase method of
accounting, as prescribed by Statement of Financial Accounting Standards No. 141
("SFAS 141"), "Business Combinations." Accordingly, the purchase price will be
allocated to the estimated fair value of identifiable net assets acquired. Any
excess purchase price remaining after this allocation will be accounted for as
goodwill, which will not be amortized.
Escalon has prepared these unaudited pro forma condensed consolidated financial
statements based on available information, using assumptions that Escalon's
management believes are reasonable. These unaudited pro forma condensed
consolidated financial statements are being provided for
informational purposes only. They do not purport to represent Escalon's actual
financial position or results of operations had the acquisition occurred on the
dates specified nor do they project Escalon's results of operations or financial
position for any future period or date.
The unaudited pro forma consolidated statement of operations does not reflect
any adjustments for nonrecurring items or operating synergies expected to occur
after assimilation of Drew operations. The pro forma adjustments are based on
certain assumptions and other information that are subject to change as
additional information becomes available. Accordingly, the adjustments included
in Escalon's financial statements published after the completion of the
acquisition will vary from the adjustments included in these unaudited pro forma
condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with Escalon's and Drew's audited and unaudited historical
financial statements and related notes as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Drew's audited
historical financial statements and related notes.
ESCALON MEDICAL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
Escalon Drew
June 30, March 31, Pro Forma Pro Forma
2004 2004 Adjustments(1) As Adjusted
------------ ------------ -------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,601,971 $ 49,137 $12,651,108
Accounts receivable, net 2,492,689 2,190,653 4,683,342
Inventory, net 1,781,592 2,322,560 2d $ 126,155 4,230,307
Note receivable 150,000 -- 150,000
Other current assets 539,508 635,644 2c (231,014) 944,138
------------ ------------ ----------- ------------
Total current assets 17,565,760 5,197,994 (104,859) 22,658,895
Furniture and equipment, net 409,187 1,475,500 1,884,687
Goodwill 10,591,795 8,097,685 2e (8,097,685) 20,156,284
2b 9,564,489
Trademarks and trade names, net 616,906 -- 616,906
License and distribution rights, net -- 168,995 168,995
Patents, net 172,078 299,117 471,195
Other assets 101,389 -- 101,389
------------ ------------ ----------- ------------
Total assets $ 29,457,115 $ 15,239,291 $ 1,361,945 $46,058,351
============ ============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 250,000 $ 1,941,540 $ 2,191,540
Current portion of long-term debt 1,621,687 412,476 2,034,163
Accounts payable 499,242 1,851,293 2,350,535
Accrued compensation and taxes 908,568 381,640 1,290,208
Other current liabilities 320,930 1,492,154 2c $ 993,986 2,807,070
------------ ------------ ----------- ------------
Total current liabilities 3,600,427 6,079,103 993,986 10,673,516
Long-term debt, net of current portion 2,396,019 711,503 3,107,522
------------ ------------ ----------- ------------
Total liabilities 5,996,446 6,790,606 993,986 13,781,038
Shareholders' equity 23,460,669 8,448,685 2b 9,564,489 32,277,313
2c (1,225,000)
2d 126,155
2e (8,097,685)
------------ ------------ ----------- ------------
Total liabilities and shareholders' equity $ 29,457,115 $ 15,239,291 $ 1,361,945 $46,058,351
============ ============ =========== ============
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
ESCALON MEDICAL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 2004
Pro Forma Pro Forma
Escalon Drew Adjustments(1) As Adjusted
------------ ------------ -------------- ------------
Product revenue $ 12,347,922 $ 14,970,458 $ 27,318,380
Other revenue 2,372,845 -- 2,372,845
------------ ------------ -------- ------------
Revenues, net 14,720,767 14,970,458 29,691,225
------------ ------------ -------- ------------
Costs and expenses:
Cost of goods sold 5,475,703 11,540,684 3a $139,094 17,155,481
Research and development 776,496 1,239,720 2,016,216
Marketing, general and administrative 5,206,067 6,051,896 11,257,963
Restructuring costs 991,100 991,100
Impairment of long-lived assets 369,142 369,142
------------ ------------ -------- ------------
Total costs and expenses 11,458,266 20,192,542 139,094 31,789,902
------------ ------------ -------- ------------
Income from operations 3,262,501 (5,222,084) (139,094) (2,098,677)
------------ ------------ -------- ------------
Other income and expenses:
Interest income 59,072 -- 59,072
Interest expense (406,543) (226,848) (633,391)
------------ ------------ -------- ------------
Total other income and expenses (347,471) (226,848) (574,319)
------------ ------------ -------- ------------
Income loss before income taxes 2,915,030 (5,448,932) (139,094) (2,672,996)
Income taxes (173,300) 34,665 (138,635)
------------ ------------ -------- ------------
Net income (loss) $ 2,741,730 $ (5,414,267) $(139,094) $ (2,811,631)
============ ============ ======== ============
Basic net income (loss) per share $ 0.704 $ (0.586)
============ ============
Diluted net income (loss) per share $ 0.637 $ (0.586)
============ ============
Weighted average shares - basic 3,896,951 3b 900,000 4,796,951
============ ============
Weighted average shares - diluted 4,304,375 3b 492,576 4,796,951
============ ============
The accompanying notes are an integral part of these unaudited pro forma
condensed consolidated financial statements.
- --------------------------------------------------------------------------------
Notes to the Unaudited
Pro Forma Condensed Consolidated Financial Statements
1. Basis of Presentation
The following summary of pro forma adjustments is based on available
information and certain estimates and assumptions. Therefore, the actual
adjustments will differ from the pro forma adjustments. Escalon believes that
such assumptions provide a reasonable basis for presenting the significant
effects of the acquisition and that the pro forma adjustments give appropriate
effect to those assumptions and are properly applied in the statements.
Escalon has accounted for the acquisition in accordance with the
requirements of SFAS No. 141, "Business Combinations." Accordingly, Escalon
recognized certain intangible assets acquired separately from goodwill, which
represents the excess of the purchase price over the estimated fair value of
identifiable assets acquired and liabilities assumed. In accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
will not be amortized but will be reviewed for impairment in accordance with the
provisions of SFAS No. 142.
Amounts for Escalon and Drew were derived from the historical financial
statements of Escalon and Drew.
2. Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet
(a) The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the following transactions and events: (1) the issuance of Escalon common stock
in exchange for all outstanding Drew common stock; and (2) the allocation of the
purchase price to the assets acquired and liabilities assumed based on a
preliminary estimate of their respective fair values at March 31, 2004 without
consideration for the recognition of deferred income taxes that may exist,
arising from differences in the fair values of assets acquired and liabilities
assumed for financial reporting purposes and their respective tax bases, and
related valuation allowances, if any.
The market value of the Escalon common stock to be issued will be based on the
average closing price of Escalon's common stock for the five-day trading period
beginning July 21, 2004 and ending July 27, 2004, which was $9.09.
The following represents the estimated pro forma purchase price allocation. The
final purchase price allocation will be based on fair values of the acquired
assets and assumed liabilities as of the actual acquisition date. Assuming the
transaction occurred on June 30, 2004, the estimated purchase price allocation
for the acquisition of Drew would have been as follows:
Common stock to be issued $ 8,181,000
Estimated direct costs of acquisition 1,225,000
Liabilities assumed:
Accounts payable and accrued expenses 3,725,087
Debt 3,065,519
Cash acquired (49,137)
-----------
Total purchase price $16,147,469
===========
Accounts receivable 2,190,653
Inventory 2,448,715
Property & equipment 1,475,500
Other non-current assets 468,112
-----------
Estimated fair value of identifiable assets acquired 6,582,980
-----------
Excess of purchase price over net assets acquired $ 9,564,489
===========
(b) As of September 28, 2004, Escalon received acceptance of its offer
by approximately 94% of outstanding Drew shareholders. The Company has
instituted procedures established under United Kingdom law to acquire
the remaining 6% of Drew shares. The unaudited condensed pro forma
financial information assumes that Escalon has acquired 100% of the
Drew outstanding shares in exchange for 900,000 Escalon common shares.
The unaudited pro forma condensed consolidated balance sheet reflects
the issuance of 900,000 shares of Escalon common stock at a par value
$0.001 per share. The market value of the Escalon common stock to be
issued is based on the average closing price of Escalon's common stock
for the five-day trading period beginning July 21, 2004 and ending July
27, 2004, which was $9.09. The excess fair value over the par value of
Escalon common stock issued amounting to $9,564,489 was recorded as an
adjustment to paid-in capital.
(c) The pro forma adjustments reflect the accrual of $993,986 of estimated
acquisition costs which consist primarily of investment banker, legal
and accounting fees to be incurred directly related to the acquisition
of Drew. Additionally, Escalon incurred $231,014 of related costs that
were capitalized in its June 30, 2004 Balance Sheet.
(d) The pro forma adjustment reflects the adjustment to fair market value
of finished goods and work in process inventory.
(e) The pro forma balance sheet includes adjustments to eliminate
$8,097,685 of goodwill from the historical balance sheet of Drew.
The purchase price allocation for the acquisition of Drew is preliminary and is
subject to adjustment upon finalization of purchase accounting as of the date of
the consummation of the acquisition. Additionally, Escalon has not completed its
valuation of the tangible and intangible assets and liabilities acquired
including deferred income taxes and resulting valuation allowance, if any,
arising from the differences between the fair value of assets acquired and
liabilities assumed and their respective tax bases. As a result, the final
allocation of the excess of purchase price over the book value of the net assets
acquired could differ materially. Upon completion of its valuation of the
tangible and intangible assets and liabilities to be acquired, certain
identifiable intangible assets may be recorded that would be subject to
amortization. Assuming a ten-year life, every $100,000 of identifiable
intangible assets recorded would result in approximately $10,000 of annual
amortization expense in the pro forma statement of operations.
3. Adjustments to Unaudited Pro Forma Condensed Consolidated Statement of
Operations
(a) Reflects the net effect of the adjustment to fair market value for finished
goods and work in process inventory.
(b) Reflects an adjustment for the issuance of 900,000 shares of Escalon for all
of the outstanding shares of Drew and assumes that such shares were issued and
outstanding as of the beginning of the period. The adjustment to the diluted
weighted average shares outstanding reflects the 900,000 shares, reduced by
407,424 shares representing dilutive securities (options and warrants)
reflected in Escalon's diluted weighted average shares.
Escalon and Drew have deferred tax assets at June 30, 2004 and March 31, 2004,
respectively, primarily consisting of the tax effect of net operating loss
carryforwards. There are 100% valuation allowances against both deferred tax
assets, due to the uncertainty of realizing such assets in the future. The
accompanying unaudited pro forma condensed consolidated statement of operations
do not reflect any change to management's evaluation of the realization of the
deferred tax asset.