-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TCG+3DavRrY8A5ZBzTHJMEeNMCoLAXKRIADsXEvEFa3/ozrbmrHC2YAcojAllOdz jwIMcNu0KrfL0Uzd5x6OBg== 0000893220-99-001092.txt : 19990923 0000893220-99-001092.hdr.sgml : 19990923 ACCESSION NUMBER: 0000893220-99-001092 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990922 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 99715011 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 10-K 1 FORM 10-K ESCALON MEDICAL CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended JUNE 30, 1999 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 NUMBER 0-20127 ESCALON MEDICAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
California 33-0272839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 351 East Conestoga Road 19087 Wayne, PA (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-688-6830 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class: Name of each exchange on which registered: None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, without par value Class A Redeemable Common Stock Purchase Warrants, exercisable for the purchase of one share of Common Stock, without par value Class B Redeemable Common Stock Purchase Warrants, exercisable for the purchase of one share of Common Stock, without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [__] On September 10, 1999 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $7,649,933. The number of shares of the registrant's Common Stock outstanding as of September 10, 1999 was 3,242,184. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement relating to the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. 2 ESCALON MEDICAL CORP. FORM 10-K ANNUAL REPORT For Fiscal Year Ended June 30, 1999 TABLE OF CONTENTS PART I
Page ---- Item 1. Business ......................................................................................................... 1 Item 2. Properties ....................................................................................................... 6 Item 3. Legal proceedings ................................................................................................ 6 Item 4. Submission of Matters to a Vote of Security Holders .............................................................. 6 PART II Item 5. Market for registrant's common equity and related stockholder matters ............................................ 6 Item 6. Selected financial data .......................................................................................... 8 Item 7. Management's discussion and analysis of financial condition and results of operations ............................ 9 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................... 12 Item 8. Financial statements and supplementary data ...................................................................... 12 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure ............................. 12 PART III Item 10. Directors and executive officers of the registrant ............................................................... 13 Item 11. Executive compensation ........................................................................................... 13 Item 12. Security ownership of certain beneficial owners and management ................................................... 13 Item 13. Certain relationships and related transactions ................................................................... 13 PART IV Item 14. Exhibits, financial statement schedules, and reports on form 8-K ................................................. 13
3 This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to general business strategy, the introduction of new products, the potential market and uses for the Company's products, expansion plans, the Company's plans to file applications with the Food and Drug Administration (the "FDA"), the development of joint venture opportunities, the effects of competition on the structure of the markets in which the Company competes, defending itself in litigation matters, operating performance and liquidity, 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 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 of the Company 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 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; and (ix) The ability of the Company to maintain its listing on NASDAQ. PART I ITEM 1. BUSINESS COMPANY OVERVIEW Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access, Inc. (jointly referred to as "Escalon" or the "Company"), operates in the healthcare market specializing in the development, marketing and distribution of ophthalmic medical devices, pharmaceutical and vascular access products. The Company is also developing its ophthalmic drug delivery system to complement its other businesses. In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources into research and development of ultrafast laser systems designed for treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase Corporation ("IntraLase"), in return for an equity interest and future royalties on product sales. IntraLase will have the responsibility of funding and developing laser technology through to commercialization. To further diversify its product portfolio, in January 1999, the Company acquired the vascular access product line from Radiance Medical Systems, Inc. These products use doppler technology to aid medical personnel in locating difficult arteries and veins. Currently, this product line concentrates on the pediatric and critical care market. This was the first step in a plan of diversification to acquire profitable niche medical products. The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; and (iii) general competitive and economic conditions of the health care market. -1- 4 Escalon now maintains its executive offices in Wayne, Pennsylvania. Day-to-day finance functions operate out of its production facility in New Berlin, Wisconsin. To accommodate the needs of vascular access production, the Company will soon be adding 3,500 square feet to that facility. SURGICAL PRODUCTS BUSINESS The Company develops, manufactures and distributes over 40 ophthalmic surgical products, which are utilized primarily by the vitreoretinal ophthalmic surgeon. In addition, the Company manufactures, on a contract basis, certain of its products for other third-party companies. The following is a summary of the Company's key surgical product lines: AdatoSil(R)5000 Silicone Oil ("AdatoSil 5000") During fiscal year 1999, the Company distributed AdatoSil 5000 under a license and distribution agreement with Adatomed/Chiron Vision, an affiliate of Bausch & Lomb Surgical, Inc. This is a specialty product used in "worst case" detached retina surgery as a mechanical aid in the reattachment procedure. The use of highly purified silicone oil, like AdatoSil 5000, as a tamponade has become a standard of care in AIDS patients suffering from retinal detachment secondary to CMV retinitis infection. During fiscal 1999, sales of AdatoSil(R) 5000 accounted for approximately 56% of the Company's sales revenues. On August 13, 1999, Escalon sold the license and distribution rights for this product to Bausch & Lomb Surgical, Inc. for $2.1 million and additional cash consideration payable over the next six years. See Form 8-K, as filed on August 26, 1999, for additional details. ISPAN Intraocular Gases The Company distributes two intraocular gas products, C3F8 and SF6, which are used by vitreoretinal surgeons as a temporary tamponade in detached retina surgery. Under a non-exclusive distribution agreement from Scott Medical Products ("Scott"), Escalon distributes packages of Scott gases in canisters containing 25 grams or less of gas. Along with the intraocular gases, the Company manufactures and distributes a patented disposable universal gas kit, which delivers the gas from the canister to the patient. Viscous Fluid Transfer Systems To complement the use of AdatoSil 5000, Escalon markets several viscous fluid transfer systems and related disposable syringe products, which aid the surgeon in the process of injecting and extracting the oil. Adjustable pressures and vacuums provided by the equipment allow the surgeon to manipulate the flow of oil during surgery. Fiber Optic Light Source Products Light source and fiber optic products are widely used by the vitreoretinal surgeon during surgery. The Company offers the surgeon a complete line of light sources along with a variety of fiber optic probes and illuminated tissue manipulators. PHARMACEUTICAL PRODUCTS BUSINESS Betadine(R) 5% Sterile Ophthalmic Prep Solution ("Betadine 5%") Until March 1999, Escalon distributed one pharmaceutical product, Betadine 5%, a prescription pre-operative povidone-iodine preparation used to sterilize the cornea, conjunctiva, and periocular (surfaces around the eye) regions of the eye prior to ophthalmic surgery. This product was distributed under a license and distribution agreement with The Purdue Frederick Company. In March, Escalon sold these license and distribution rights to Alcon Universal, Ltd. for $1.1 million. Alcon Labs, Inc. purchased the Company's remaining inventory of this product for $959,835. Sales for this product (excluding the inventory purchased by Alcon Labs, Inc.) accounted for approximately 9.5% of Company sales revenues in fiscal 1999. -2- 5 Ocufit SR(R) One of the Company's major development projects relates to its Ocufit SR (sustained release) drug delivery system. Ocufit SR is designed to make the treatment of eye disease easier and more effective for people requiring topical eye drop therapy. The patented Ocufit SR ocular insert, a flexible rod-shaped formulation made of medical grade silicone rubber, can be loaded with a variety of drugs. This insert, which can be retained comfortably in the upper or lower fornix, is not affected by eye or lid movement. Drug release can be controlled so that targeted amounts of drug are delivered for defined time periods, lasting weeks to months. The first Ocufit SR product, which is being developed jointly by Escalon and The West Company, which has expertise in injection molded elastomers and drug delivery systems development, is Ocufit diclofenac. Diclofenac, a non-steroidal anti-inflammatory drug ("NSAID"), is prescribed post-operatively to reduce inflammation of the ocular tissue. Current U.S. sales of diclofenac in a topical drop form approximate $30 million per year. It is anticipated that this market will grow as NSAID compounds are becoming more widely prescribed. Escalon filed an Investigational New Drug (IND) application with the Food and Drug Administration (FDA) in December 1998. Phase I clinical trials of the drug delivery system began at Duke University in March 1999. These trials will continue through the end of 1999. The Company's overall strategy is to seek strategic partnership arrangements for the further development and commercialization of Ocufit diclofenac and other Ocufit applications. Povidone-Iodine 2.5% Solution -- Ophthalmia Neonatorum In an effort to prevent ophthalmia neonatorum, newborns in the United States are treated with erythromycin. However, bacterial resistance to erythromycin can occur. Povidone-iodine, a broad-spectrum antimicrobial, active against bacteria, viruses and fungi, has often been suggested as a viable alternative for the prevention of this disease. Recently, a clinical study completed outside the United States by Drs. Isenberg, Apt and Wood of UCLA has provided support for this hypothesis. A patent claiming this use was issued to UCLA. Escalon has acquired an exclusive license from UCLA to develop and market the 2.5% solution. The Company's intent is to seek joint venture or strategic partnership arrangements to fund the development and potential commercialization of this product. An IND application for this product will be filed with the FDA by December 1999. Once approved, the drug will proceed directly to Phase Three trials. These are expected to last approximately one year. The Company expects the testing and approval process to take about 2-1/2 years. VASCULAR ACCESS PRODUCTS BUSINESS In January 1999, the Company acquired the vascular access product line from Radiance Medical Systems, Inc. This added the PD Access(TM) and Smartneedle(TM) lines of monitors, needles and catheter products. These patented devices utilize a miniature doppler ultrasound probe that is inserted in the lumen of a vascular access needle. When the device is placed subcutaneously in a patient, the probe and monitor can determine if the user is approaching an artery or vein, guiding them to a successful access. ULTRAFAST LASER PRODUCTS BUSINESS From it inception through 1996, the Company devoted substantially all of its resources toward the development of proprietary ultrafast laser systems for the treatment of a broad range of eye disorders. Escalon's solid-state picosecond (one trillionth of a second) Nd: YLF (Neodymium: Yitrium-Lithium-Fluoride) laser system was designed to be more precise than those utilizing currently available technology. -3- 6 With the acquisition of EOI, the Company chose to concentrate its focus on surgical and pharmaceutical products, and ceased manufacturing its laser systems. In order to continue development and commercialization of its technology, the Company licensed its intellectual laser properties to IntraLase in exchange for an initial 25% equity interest. This equity position has been diluted to 11% during fiscal 1999. As IntraLase obtains additional equity investors the percentage is expected to continue declining. The Company is also entitled to a 2.5% royalty on future products sales, which are based on the Company's patented technology, a 1.5% royalty on product sales not dependent on the Company's technology and an annual license fee. RESEARCH AND DEVELOPMENT The Company conducts medical device product development at its New Berlin, Wisconsin facility. The Ocufit SR research and development is being conducted at The West Company laboratories pursuant to a collaborative arrangement. Given the change in market focus, research and development activities at the Company's former laser laboratory in Irvine, California were discontinued in fiscal 1997. Research and development expenditures for fiscal years 1999, 1998 and 1997 amounted to $.7 million, $.5 million and $1.6 million, respectively. MANUFACTURING AND DISTRIBUTION Escalon leases 10,000 square feet of space in New Berlin, Wisconsin for its surgical products operations. The facility is currently used for engineering, product design and development, manufacturing and product assembly. Various vendors are used for subcontract component manufacture, assembly and sterilization. Manufacturing facilities include a class 10,000 clean room. All of the Company's ophthalmic surgical products are distributed from its Wisconsin facility. Radiance Medical Systems, Inc., in Irvine, California currently manufactures, warehouses and ships the vascular access products on a subcontract basis. This will continue through the first quarter of fiscal 2000, until the New Berlin facility is ready to commence production. For each new product Escalon develops, the manufacture, testing and marketing of such product entails risk of product liability. Product liability insurance is carried by Escalon to cover the primary risk. The Company has aggressively pursued ISO9001 and CE certification to demonstrate the high quality of its products and expand its marketing horizons. In fiscal 1999, CE certification for its disposable delivery systems was received. Escalon has also received ISO9001 certification for the design, manufacture and distribution of its viscous fluid system. MARKETING AND SALES Escalon's independent sales force carries out direct promotion and sales of its products. Currently, Escalon sells most of its ophthalmic device and instrument products directly to the end user. Vascular access products are marketed domestically through a series of ten specialty distributors. The Company's nine independent sales representatives are based in Pennsylvania, New York, Wisconsin, Massachusetts, Missouri, Michigan, Minnesota, Florida and California. These independent representatives market to teaching institutions, key hospitals and eye surgery centers, focusing primarily on physicians and operating room personnel performing vitreoretinal surgery. SERVICE AND SUPPORT Escalon maintains a full service program for all products sold. Warranties exist on all products against defects and performance. Product repairs are made at the Wisconsin facility and customer service personnel handle returns. THIRD PARTY REIMBURSEMENT It is expected that physicians and hospitals will purchase the Company's ophthalmic products. They in turn will bill various third-party payors for health care services provided to their patients. These payors include Medicare, Medicaid and private insurers. Government agencies generally reimburse at a fixed rate based on the procedure performed. In addition, third-party payors may deny reimbursement if they determine that a procedure performed using -4- 7 any one of the Company's products was unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. PATENTS AND ROYALTIES The pharmaceutical and medical device communities place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Escalon's policy is to protect its technology by aggressively obtaining patent protection for all of its developments and products, both in the United States and in selected countries outside the United States. Eleven United States issued patents, and one issued Taiwanese patent, cover the Company's surgical products and pharmaceutical technology. In addition, one United States patent is currently pending. With respect to the Company's ultrafast laser systems (licensed to IntraLase), fourteen patents have been issued or allowed and two additional patent applications have been filed in the United States. Vascular access products are covered by five issued United States patents, there are also four Japanese and European patents and two Canadian patents that are issued and based on the United States patents. It is the Company's policy to file for patent protection in those foreign countries in which the Company believes such protection is necessary to protect its economic interests. The Company intends to vigorously defend its patents if the need arises. COMPETITION There are numerous direct and indirect competitors of Escalon in the United States and abroad. These companies include: ophthalmic-oriented companies that market a broad portfolio of products, including prescription ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as contact lens cleaning solution) and other eye care products; large integrated pharmaceutical companies that market a limited number of ophthalmic pharmaceuticals in addition to many other pharmaceuticals; and smaller specialty pharmaceutical and biotechnology companies that are engaged in the development and commercialization of prescription ophthalmic pharmaceuticals and products, and possibly drug delivery systems. The ophthalmic market is highly fragmented with several large companies dominating the industry. The Company believes that these large companies capture approximately 85% of the overall ophthalmic market. The balance of the market is composed of smaller companies ranging from start-up entities to established niche market players. The ophthalmic market in general is intensely competitive with each company eager to expand its market share. As a result of this competition, the Company believes that many of the industry's smaller companies will either consolidate or fail. Escalon's strategy is to compete primarily on the basis of technological innovation to which it has proprietary rights. Escalon believes, therefore, that its success will depend in large part upon protecting its intellectual property through patents and other government registrations. At the same time, Escalon recognizes that there are other young and innovative companies, which may develop competitive technologies. Although the Company has numerous competitors in the vitreoretinal market, Escalon believes that it will be in a niche market with regard to its proposed Ocufit SR business. Specifically, the Company is unaware of any competitors which have sustained drug release technology similar to Ocufit SR. There is, however, at least one company that Escalon is aware of that has developed technology based on "once-a-day" drug release. The Company can make no assurance that additional competition will not develop in the vitreoretinal market. There are a variety of other devices that directly compete with the products acquired from Radiance. HUMAN RESOURCES As of June 30, 1999, Escalon employed 25 full-time employees and two part-time employees. Ten of Escalon's full-time employees are in general administrative and marketing positions, five are employed in vascular access sales, five are in surgical products manufacturing, four are in surgical products engineering and one is in quality assurance. In addition, the Company utilizes one consultant to handle the Company's regulatory and clinical affairs. Escalon also has nine independent sales representatives who market primarily Escalon products. Escalon's employees are not covered by a collective bargaining agreement and Escalon considers its relations with employees to be good. -5- 8 ITEM 2. PROPERTIES The Company leases an aggregate of approximately 13,500 square feet of space for its (a) executive offices in Wayne, Pennsylvania, (b) manufacturing/warehouse facility in New Berlin, Wisconsin, (c) consultant's office/storage facility in Turnersville, New Jersey and (d) laser research and development facility in Irvine, California. The Wisconsin facility lease covering approximately 10,000 square feet of space expires in April 2007. The Company's 3,000 square feet of space in California is subleased to IntraLase, with that lease expiring in September 1999. Both the executive office and consultant's office space leases expire in December 1999; these amount to 500 square feet of space. The property leased in Wayne, Pennsylvania is subleased from a company that is 100% owned by the Chief Executive Officer and Chairman of the Board of the Company. Ocufit drug delivery research and development is conducted principally at The West Company in Lionville, Pennsylvania. Annual rent under all of the Company's lease arrangements approximates $84,200. ITEM 3. LEGAL PROCEEDINGS As previously reported in reports filed with the Securities and Exchange Commission, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter which the Company is no longer a party to). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by the Company and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and their insurance carrier have deposited such funds in an escrow account. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the National Market segment of the NASDAQ Stock Market under the symbol "ESMC." The following table sets forth, for the periods indicated the high and low sales prices as quoted on the NASDAQ Stock Market. -6- 9
Period High Low ------ ---- --- Fiscal 1998: First Quarter $2.50 $1.38 Second Quarter 10.44 1.38 Third Quarter 10.25 1.56 Fourth Quarter 2.38 0.77 Fiscal 1999: First Quarter $1.00 $0.56 Second Quarter 2.19 0.56 Third Quarter 3.38 2.31 Fourth Quarter 2.81 1.88
As of September 10, 1999, there were 180 holders of record of the Company's Common Stock. On September 10, 1999, the closing sale price of the Common Stock as reported by the NASDAQ Stock Market was $2.313. The Common stock is currently listed on the NASDAQ National Market. In order to continue to be listed on the NASDAQ National Market, however, the Company must maintain $4,000,000 in net tangible assets, a $5,000,000 market value of the public float, two market makers and a minimum bid price of $1.00 per share. If the Company's securities were delisted, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the Company's securities. The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain its earnings to finance future growth and working capital needs and therefore does not anticipate paying any cash dividends in the foreseeable future. -7- 10 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the financial statements of the Company. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included herein in Item 8.
FOR THE YEARS ENDED JUNE 30, ---------------------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales ..................................... $ 170 $ 2,341 $ 5,431 $ 5,942 $ 7,559 Costs and expenses: Cost of sales ............................... 99 1,229 2,650 2,589 3,282 Research and development .................... 2,776 1,723 1,571 495 738 Marketing, general and administrative ....... 1,905 2,723 3,716 2,805 3,332 Write down of goodwill and license and distribution rights ................. -- -- 3,319 -- -- Acquired research and development ........... -- 1,000 -- -- -- -------- -------- -------- -------- -------- Total costs and expenses .................. 4,780 6,675 11,256 5,889 7,352 -------- -------- -------- -------- -------- Income (loss) from operations ................. (4,610) (4,334) (5,825) 53 207 Sale of Betadine product line ................. -- -- -- -- 879 Interest income ............................... 342 257 141 119 145 Interest expense .............................. -- (5) (1) (1) (37) -------- -------- -------- -------- -------- Net income (loss) ............................. $ (4,268) $ (4,082) $ (5,685) $ 171 $ 1,194 ======== ======== ======== ======== ======== Basic net income (loss) per share ............. $ (2.97) $ (2.16) $ (2.16) $ (0.04) $ 0.10 ======== ======== ======== ======== ======== Diluted net income (loss) per share ........... $ (2.97) $ (2.16) $ (2.16) $ (0.04) $ 0.10 ======== ======== ======== ======== ======== Weighted average shares - basic Used in per share computation .............. 1,436 1,893 2,630 2,673 3,115 ======== ======== ======== ======== ======== Weighted average shares - diluted Used in per share computation .............. 1,436 1,893 2,630 2,673 3,151 ======== ======== ======== ======== ========
FOR THE YEARS ENDED JUNE 30, ------------------------------------------------------------------------------------ 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Cash and cash equivalents ........... $ 3,518 $ 2,585 $ 1,753 $ 2,264 $ 3,854 Working capital ..................... 6,764 3,754 2,170 3,465 3,801 Total assets ........................ 7,847 11,600 5,834 6,734 10,403 Accumulated deficit ................. (30,079) (34,162) (39,847) (39,952) (39,629) Total shareholders' equity .......... 7,470 10,483 4,798 6,049 6,278
-8- 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the notes thereto which are set forth elsewhere herein. OVERVIEW On February 12, 1996, the Company acquired all of the assets and certain liabilities of Escalon Ophthalmics, Inc. Prior to the acquisition, the Company was in the development stage and devoting substantially all of its resources to the research and development of laser systems designed for the treatment of ophthalmic disorders. Upon completion of the acquisition, the Company changed its market focus and is now engaged in developing, marketing and distributing ophthalmic medical devices, pharmaceuticals and niche medical products. The Company is continuing development of its ophthalmic drug delivery system to complement its other businesses. Sales of products acquired from EOI are made primarily to hospitals and physicians throughout the United States. Escalon purchased the vascular access business unit of Radiance Medical Systems, Inc. in January 1999. This was significant as the Company's first step in diversification. The vascular access product line is the first niche product acquired outside the ophthalmic medical field. Vascular products are marketed to the pediatric and critical care providers through a series of independent distributors. Escalon's market strategy is to locate and acquire profitable niche medical products that it owns and controls the rights to. To finance this program, the Company in March sold its license and distribution rights to Betadine(R)5% Sterile Ophthalmic Prep Solution to Alcon. Subsequent to year-end, it also sold the license and distribution rights to Adatosil(R)5000 Silicone Oil. To further develop and commercialize its proprietary laser technology, in October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase, in return for an equity interest in IntraLase and future royalties on product sales. IntraLase has the responsibility of funding and developing the laser technology through to commercialization. The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; and (iii) general competitive and economic conditions of the health care market. RESULTS OF OPERATIONS Years Ended June 30, 1998 and 1999 Product revenues increased to $7,559,010 in fiscal year 1999 from $5,942,004 in fiscal year 1998. This increase of $1,617,006, or 27%, is due to the increase in unit sales of Adatosil(R)5000 Silicone Oil, vascular access products, contract manufactured equipment and ISPAN(TM)Intraocular Gases. These increases were negatively impacted by a decrease in unit sales of the Company's equipment, related disposable product lines and Betadine(R)5% Sterile Ophthalmic Prep Solution (this product line was sold in March 1999). Contract manufacturing revenues vary from quarter to quarter depending on when orders are received and the lead times to produce such products. Cost of goods sold totaled $3,282,177, or 43% of revenues, for fiscal year 1999 as compared to $2,588,500, or 44% of revenues, for the year ended June 30, 1998. The slight decrease in cost of goods sold as a percentage of revenues is due primarily to a change in the product sales mix during the respective periods, with the addition of vascular access products and the disposal of the Betadine product line. -9- 12 Research and development expenses increased from $494,895 in fiscal year 1998 to $738,124 in fiscal year 1999, an increase of $243,229 or 49%. This represents increased spending for Ocufit SR(R), which entered the clinical trial stage; and preliminary spending for Providone-Iodine 2.5% Solution, which will enter that stage of development by the second quarter of fiscal 2000, these categories contributed $120,000 over fiscal 1998 spending. The addition of vascular access manufacturing to the Wisconsin facility caused the Company to incur $45,000 in additional costs, in preparation for the relocation. The abandonment of two medical patents and additional ISO 9000 expenses contributed $25,000 and $35,000, respectively. Staffing levels for Wisconsin also increased to help prepare for future growth and maintain the required documentation for the ISO/CE program. Marketing and general and administrative expenses increased $526,108, or 19%, to $3,331,562 for the year ended June 30, 1999 as compared to $2,805,454 in fiscal year 1998. Administrative, sales and marketing costs for five and a half months to promote vascular access products accounted for $537,000. IntraLase's fiscal 1998 contribution to intellectual property costs incurred by Escalon also reduced 1998 expenses by $75,000. Marketing and administrative expenses related to the ophthalmic business declined $86,000 from those reported in fiscal 1998. In March 1999, the Company reported the sale of its inventory, license and distribution rights for Betadine(R)5% Sterile Ophthalmic Prep Solution. This sale resulted in a $879,159 gain, after adjusting for the cost of inventory sold, and the write-off of the remaining goodwill and license and distribution rights associated with that product line. Interest income increased to $144,877 in fiscal year 1999 from $118,471 in fiscal year 1998. This increase is due to greater levels of cash and cash equivalents available for investment; the result of the product line sale, aggressive collection efforts and corporate borrowing. Interest expense increased $37,243 to $37,397 in fiscal 1999. In February 1999, the Company obtained a $2 million credit facility from PNC Bank, N.A. This marks the first time the Company gained access to traditional mainstream financing sources. As a result of this financing, Escalon obtained a $1 million five-year term loan and access to a $1 million line of credit. In prior years, interest expense was virtually non-existent since the Company had no borrowing capability. Years Ended June 30, 1997 and 1998 Product revenues increased to $5,942,004 in fiscal year 1998 from $5,431,282 in fiscal year 1997. This increase of $510,722, or 9%, is due to the increase in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile Ophthalmic Prep Solution and ISPAN(TM)Intraocular Gases. These increases were partially offset by a decrease in unit sales of the Company's capital equipment, related disposable product lines and contract manufacturing product lines. Contract manufacturing revenues vary from quarter to quarter depending on when orders are received and the lead times to produce such products. Cost of goods sold totaled $2,588,500, or 44% of revenues, for fiscal year 1998 as compared to $2,650,360, or 49% of revenues, for the year ended June 30, 1997. The 5% decrease in cost of goods sold as a percentage of revenues is due primarily to (i) the strengthening of the U.S. dollar against the German mark which has lowered the cost associated with the purchases of Adatosil(R)5000 Silicone Oil, the Company's primary product; and (ii) a change in the product sales mix during the respective periods. Research and development expenses decreased from $1,570,674 in fiscal year 1997 to $494,895 in fiscal year 1998, a decrease of $1,075,779 or 68%. This decrease relates to the elimination of expenditures associated with the Company's laser development program, as a result of the Company's change in market focus, and a decrease in expenditures associated with the Company's drug delivery technology. Marketing and general and administrative expenses decreased $910,273, or 24%, to $2,805,454 for the year ended June 30, 1998 as compared to $3,715,727 in fiscal year 1997. This decrease is due principally to (i) the reduction in the amortization expense of goodwill and license and distribution rights resulting from the write down of such assets during the fourth quarter of fiscal 1997; and (ii) the decrease in commission expense as a result of a change in the -10- 13 Company's commission structure. These decreases were offset partially by costs associated with the closing of the Company's New Jersey office and relocation of the Company's Wisconsin production facility. Included in the results of operations for the year ended June 30, 1997 was a non-cash charge to operations of $3,318,888 in connection with the write down of goodwill and license and distribution rights acquired from EOI. This write down was due to the impairment of value resulting from changes in the estimates of future sales associated with the license and distribution agreements. No similar charges were incurred in fiscal 1998. During fiscal year 1998, the Company accrued $100,000 representing its anticipated contribution to settle the claims related to outstanding litigation (George Kozlowski v. Intelligent Surgical Lasers, Inc., et al.). See Note 16 of the Notes to Consolidated Financial Statements for further details surrounding this litigation. Pursuant to the licensing agreement with IntraLase, the Company is to be reimbursed $75,000 for previously expensed patent costs. In October 1997, the Company recorded this receivable and credited marketing, general and administrative expense for this future reimbursement. Interest income decreased to $118,471 in fiscal year 1998 from $140,705 in fiscal year 1997. The decrease is due to a reduction in the levels of cash and cash equivalents available for investment prior to the completion of the preferred stock offering in January 1998. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999 the Company had cash and cash equivalents of $3,854,240 as compared to $2,263,967 at June 30, 1998. In addition, Escalon now maintains a $1,000,000 certificate of deposit with PNC Bank, N.A. This investment is considered current and restricted, since it is pledged as collateral against the term loan. The Company's short-term investments at June 30, 1999 and 1998 were $ 0 and $330,016, respectively. The net increase in cash and cash equivalents relates primarily to the Betadine product line sale and borrowing against the line of credit. The Company anticipates that the cash and cash equivalents and the interest earned thereon, together with funds generated from future product sales, should be adequate to satisfy its capital requirements, based on current levels of operations, through the end of fiscal 2000. In the longer term, however, the Company will seek corporate partnering, licensing and other fund raising opportunities necessary to satisfy the significant expenditures anticipated in connection with the development of its surgical products and ophthalmic drug delivery operations. In January 1999, the Company entered into a financing agreement with PNC Bank, N.A. This agreement provided Escalon a $1,000,000 line of credit (outstanding at year-end and subsequently repaid) and a $1,000,000 five-year term loan. The line of credit expires on December 31, 1999 and has its interest rate set at prime plus one quarter of one percentage point (8% at June 30, 1999). The term loan has scheduled monthly repayments of $16,667 for principal plus interest through February 2004. The interest rate on this debt is 2.0 percentage points above the rate payable on the restricted certificate of deposit that collateralizes the note (6.6% at June 30, 1999). All of the Company's assets and cash collateral of $1,000,000 collateralize these agreements. Pursuant to various collaborative research and development, technology license and consulting arrangements relating to the Company's drug delivery technology, the Company has financial commitments of $100,000 to be paid during fiscal year 2000; $150,000 in fiscal year 2001; and $200,000 in fiscal years 2002, 2003 and 2004. As part of the asset purchase from Radiance, the Company is obligated to pay $1,000,000 once the vascular access technology transfer to Wisconsin is complete. The anticipated completion date will occur by the end of the first quarter of fiscal 2000. The Company is also obligated to make minimum royalty payments in the amount of $300,000 to Radiance for five years. -11- 14 The Board of Directors 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 expected to be made, under this authority. Subsequent to year-end, Escalon sold its licensing and distribution rights to AdatoSil(R)5000 Silicone Oil for $2.1 million, payable in quarterly installments. The first payment was received August 16, 1999. The Company will receive additional cash consideration based on future silicon oil sales over the next six years. The Company anticipates additional expenditures may be incurred in connection with the legal proceedings as discussed in "Item 3. Legal Proceedings." As of June 30, 1999, the Company had federal income tax and state income tax net operating loss carryforwards of approximately $40.3 million and $16.3 million, respectively. Under the provision of Section 382 of the Internal Revenue Code, use of the Company's net operating loss carryforwards is subject to an annual limitation as a change in ownership of more than 50% occurred within a three-year specified testing period. Federal and state net operating loss carryforwards will begin to expire in 2001. The Company also had federal and state research credit carryforwards of $562,000 and $118,000, respectively, as of June 30, 1999. YEAR 2000 ISSUES None of the Company's products use date-sensitive software, therefore no customer service or support concerns need to be addressed. The Company does not utilize any custom developed programs, but rather commercially available off-the-shelf software packages with support contracts that specifically address this issue. A year 2000 software upgrade for all financial packages is currently in place. Based on communications with our key suppliers, including utility and telecommunication providers, the year 2000 issue is being adequately addressed. Management judges the likelihood of temporary disruption of our manufacturing, customer service, sales and marketing, research and development or administrative functions to be minimal in regard to year 2000 compliance of our key suppliers and customers. To date, the cost of year 2000 compliance has been insignificant. Any further activities are not expected to result in significant incremental operating expenses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are filed under this Item 8, beginning on page F-2 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 26, 1998, the Company and Ernst & Young LLP, the Company's independent auditors, mutually agreed to terminate their relationship. In connection with its audit for the period ended June 30, 1997 and the subsequent interim periods, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, -12- 15 financial statement disclosure or auditing scope procedures which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report. Ernst & Young LLP's report on the Company's financial statements for the period ended June 30, 1997 contained no adverse opinion or disclaimer of opinion and was not modified or qualified as to uncertainty, audit scope or accounting principles. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item will be contained in the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders (the "Proxy Statement"), which is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item will be contained in the Proxy Statement, which is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Consolidated Financial Statements See Index to Consolidated Financial Statements at page F-1. Consolidated Financial Statement Schedules All schedules have been omitted because they are not applicable, or not required, or the information is shown in the financial statements or notes thereto. Reports on Form 8-K A report on Form 8-K was filed on August 26, 1999, announcing the sale of the Company's inventory and license and distribution rights to Bausch & Lomb Surgical, Inc. and is incorporated herein by reference. The content of that report is summarized below: Effective August 13, 1999, Escalon Medical Corp. (the "Registrant") entered into a Termination Agreement (the "Termination Agreement") between the Registrant and Bausch & Lomb Surgical, Inc. ("BLS") and a Supply Agreement (the "Supply Agreement") between the Registrant and BLS. -13- 16 Pursuant to the Termination Agreement, the Distribution and Development Agreement dated January 1, 1990, as amended, between the Registrant and Adatomed GmbH, a wholly owned subsidiary of BLS, was terminated, and the Registrant transferred its license and distribution rights for Adatosil(R)5000 Silicone Oil, as well as related inventory, back to BLS. In consideration of the transfer, BLS agreed to pay to the Registrant cash in the amount of $2,117,180, payable in quarterly installments, with the initial installment paid on August 14, 1999, and additional cash consideration based on future sales of Adatosil(R)5000 Silicone Oil over the next six years. Adatosil(R)5000 Silicone Oil represented approximately 56% of the Registrant's sales in the fiscal year ended June 30, 1999. Pursuant to the Supply Agreement, BLS agreed to purchase from the Registrant, and the Registrant agreed to manufacture and sell to BLS, certain viscous fluid systems for a period of six years. Exhibits The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits, which were previously filed, are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated parenthetically, followed by the footnote reference to the previous filing. 3.1 (a) Restated Articles of Incorporation of Registrant. (6) (b) Certificate of Amendment of Restated Articles of Incorporation of Registrant dated November 8, 1993. (6) (c) Certificate of Amendment of Restated Articles of Incorporation of Registrant dated February 12, 1996. (6) (d) Certificate of Determination of Series A 6% Convertible Preferred Stock. (8) 3.2 Amended and Restated Bylaws of Registrant. * 4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (2) 4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (2) 4.3 Form of Underwriters Class A Common Stock Purchase Warrants. (2) 4.4 Form of Underwriters Class B Common Stock Purchase Warrants. (2) 4.5 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer Corporation. (2) (b) Amendment to Warrant Agreement between Registrant and U.S. Stock Transfer Corporation. (4) (c) Amendment to Warrant Agreement between Registrant and American Stock Transfer Company. (5) 4.6 Securities Purchase Agreement, dated as of December 31, 1997 by and among the Company and Combination. (8) 4.7 Registration Rights Agreement, dated as of December 31, 1997 by and among the Company and Combination. (8) 4.8 Warrant to Purchase Common Stock issued December 31, 1997 to David Stefansky. (8) 4.9 Warrant to Purchase Common Stock issued December 31, 1997 to Combination. (8) 4.10 Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum. (8) 4.11 Warrant to Purchase Common Stock issued December 31, 1997 to Trautman Kramer & Company. (8) 10.1 (a) 1993 Stock Option Plan of Registrant. (3) (b) Form of Nonqualified Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3) (c) Form of Incentive Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3) 10.2 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. (1) 10.3 Underwriting Agreement between the Registrant and the Underwriter. (2) 10.4 Unit Purchase Option between the Registrant and the Underwriter. (2)
-14- 17 10.5 Employment Agreement between Registrant and Ronald Hueneke dated October 4, 1991. (6) 10.6 Employment Agreement between Registrant and Richard J. DePiano dated March 1, 1997, as amended. (7) 10.7 Distributorship Agreement between Registrant and Scott Medical Products dated as of September 8, 1992, as amended September 8, 1995. (6) 10.8 Research and Development Agreement between Registrant and The West Company, Incorporated dated April 3, 1995. (6) 10.9 Assets Sale and Purchase Agreement between the Registrant and Radiance Medical Systems, Inc., dated January 21, 1999. (9) 10.10 Bill of Sale and Acceptance Agreement between the Registrant and Alcon Laboratories, Inc., dated March 5, 1999. (10) 10.11 Bill of Sale and Acceptance Agreement between the Registrant and Alcon Universal, Ltd., dated March 5, 1999. (10) 10.12 Termination Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999. (11) 10.13 Supply Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999. (11) 21 Subsidiaries. * 23.1 Consent of Ernst & Young LLP, independent auditors. * 23.2 Consent of Parente, Randolph, Orlando, Carey & Associates, LLC, independent auditors. * 27.1 Financial Data Schedule. *
- --------------- * Filed herewith (1) Filed as an exhibit to Pre-Effective Amendment No. 7 to the Company's Registration Statement on Form S-1 dated August 20, 1992 (Registration No. 33-47439). (2) Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 dated November 9, 1993 (Registration No. 33-69360). (3) Filed as an exhibit to the Company's Registration Statement on Form S-8 dated June 13, 1994 (Registration Number 33-80162). (4) Filed as an exhibit to the Company's Form 10-K for year ended June 30, 1994. (5) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1995. (6) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1996. (7) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1997. (8) Filed as an exhibit to the Company's Registration Statement on Form S-3 dated January 20, 1998 (Registration No. 333-44513). (9) Filed as an exhibit to the Company's Form 8-K, dated February 1, 1999. (10) Filed as an exhibit to the Company's Form 8-K, dated March 19, 1999. (11) Filed as an exhibit to the Company's Form 8-K, dated August 26, 1999. -15- 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Dated: September 17, 1999 By:/s/Richard J. DePiano --------------------- Richard J. DePiano Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- By:/s/ Richard J. DePiano Chairman and Chief Executive Officer September 17, 1999 -------------------------- (Principal Executive Officer) and Director Richard J. DePiano By:/s/ Douglas R. McGonegal Vice President of Finance and Chief Financial September 17, 1999 -------------------------- Officer (Principal Financial Officer and Douglas R. McGonegal Principal Accounting Officer) and Secretary By:/s/ Jay L. Federman, M.D. Director September 17, 1999 -------------------------- Jay L. Federman, M.D. By:/s/ Jack M. Dodick, M.D. Director September 17, 1999 -------------------------- Jack M. Dodick, M.D. By:/s/ Fred G. Choate Director September 17, 1999 -------------------------- Fred G. Choate By:/s/ Jeffrey F. O'Donnell Director September 17, 1999 -------------------------- Jeffrey F. O'Donnell
19 ESCALON MEDICAL CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Reports.......................................................................... F-2 Consolidated Balance Sheets at June 30, 1998 and 1999.................................................. F-4 Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999................. F-5 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1998 and 1999....... F-6 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999................. F-7 Notes to Consolidated Financial Statements............................................................. F-8
F-1 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Escalon Medical Corp.: We have audited the accompanying consolidated balance sheets of Escalon Medical Corp. and subsidiaries at June 30, 1998 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. 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 generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Escalon Medical Corp. and subsidiaries at June 30, 1998 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES, LLC Philadelphia, Pennsylvania August 13, 1999 F-2 21 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Escalon Medical Corp. We have audited the statements of operations, shareholders' equity and cash flows of Escalon Medical Corp. for the year ended June 30, 1997. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Escalon Medical Corp. for the year ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Princeton, New Jersey August 14, 1997, except for Note 6 - Reverse Stock Split, as to which the date is November 20, 1997 F-3 22 ESCALON MEDICAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, -------------------------------- ASSETS 1998 1999 ------------ ------------ Current Assets: Cash and cash equivalents $ 2,263,967 $ 3,854,240 Cash and cash equivalents - restricted -- 1,000,000 Investments 330,016 -- Note receivable -- 15,000 Accounts receivable, net of allowance for doubtful accounts of $4,519 and $39,790 at June 30, 1998 and 1999, respectively 940,378 1,063,829 Other receivables 75,000 -- Inventory, net 462,042 1,117,208 Other current assets 79,088 142,235 ------------ ------------ Total current assets 4,150,491 7,192,512 Furniture and equipment, at cost, net 134,734 449,555 Long-term receivables 112,500 150,000 License and distribution rights, net 878,838 537,138 Patents, net 475,175 495,923 Goodwill, net 968,295 1,510,207 Other assets 14,095 67,438 ------------ ------------ $ 6,734,128 $ 10,402,773 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank $ - - $ 1,000,000 Current portion of long-term debt -- 200,000 Accounts payable 287,192 434,308 Accrued compensation 110,125 325,204 Accrued professional expenses 72,670 45,795 Accrued dividends payable 13,500 -- Accrued litigation settlement 100,000 100,000 Other accrued expenses 101,989 1,286,433 ------------ ------------ Total current liabilities 685,476 3,391,740 Long-term debt, net of current portion -- 733,332 ------------ ------------ Total liabilities 685,476 4,125,072 ------------ ------------ Shareholders' Equity: Preferred stock, no par value; 2,000,000 shares authorized; 900 and 0 shares issued and outstanding at June 30, 1998 and 1999, respectively 747,321 -- Common stock, no par value; 35,000,000 shares authorized; 3,021,027 and 3,377,164 shares issued at June 30, 1998 and 1999, respectively 45,253,597 46,024,811 Treasury stock, 134,980 shares in 1999 at cost -- (118,108) Accumulated deficit (39,952,266) (39,629,002) ------------ ------------ Total shareholders' equity 6,048,652 6,277,701 ------------ ------------ $ 6,734,128 $ 10,402,773 ============ ============
See notes to consolidated financial statements F-4 23 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 1998 1999 ---- ---- ---- Sales revenues $ 5,431,282 $ 5,942,004 $ 7,559,011 ------------ ------------ ------------ Costs and expenses: Cost of goods sold 2,650,360 2,588,500 3,282,177 Research and development 1,570,674 494,895 738,124 Marketing, general and administrative 3,715,727 2,805,454 3,331,562 Write down of goodwill and license and distribution rights 3,318,888 -- -- ------------ ------------ ------------ Total costs and expenses 11,255,649 5,888,849 7,351,863 ------------ ------------ ------------ Income (loss) from operations (5,824,367) 53,155 207,148 ------------ ------------ ------------ Other income and expenses: Sale of Betadine product line -- -- 879,159 Interest income 140,705 118,471 144,877 Interest expense (1,308) (154) (37,397) ------------ ------------ ------------ Total other income and expenses 139,397 118,317 986,639 ------------ ------------ ------------ Net income (loss) $ (5,684,970) $ 171,472 $ 1,193,787 ============ ============ ============ Basic net income (loss) per share $ (2.16) $ (0.04) $ 0.10 ============ ============ ============ Diluted net income (loss) per share $ (2.16) $ (0.04) $ 0.10 ============ ============ ============ Weighted average shares - basic 2,629,624 2,673,093 3,114,823 ============ ============ ============ Weighted average shares - diluted 2,629,624 2,673,093 3,150,721 ============ ============ ============
See notes to consolidated financial statements F-5 24 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
PREFERRED STOCK COMMON STOCK ------------------------------ -------------------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ Balance at June 30, 1996 -- $-- 2,629,704 $ 44,645,440 Cancellation of previously issued shares -- -- (329) -- Net loss -- -- -- -- ------------ ------------ ------------ ------------ Balance at June 30, 1997 -- -- 2,629,375 44,645,440 Preferred stock offering, net of offering costs 1,350 1,112,478 -- -- Warrants issued in connection with preferred stock offering -- (234,500) -- 234,500 Deemed dividend from incremental yield in conversion terms of preferred stock -- 243,000 -- -- Preferred stock conversions (450) (373,657) 391,652 373,657 Preferred stock dividends -- -- -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance at June 30, 1998 900 747,321 3,021,027 45,253,597 Preferred stock conversions (82) (68,090) 131,137 68,090 Preferred stock retirement (818) (679,231) -- -- Common stock issued in connection with preferred stock retirement -- -- 225,000 703,124 Purchase of treasury stock -- -- -- -- Preferred stock dividends -- -- -- -- Net income -- -- -- -- ------------ ------------ ------------ ------------ Balance at June 30, 1999 -- $-- 3,377,164 $ 46,024,811 ============ ============ ============ ============ TREASURY STOCK TOTAL -------------------------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT DEFICIT EQUITY ------ ------ ------- ------ Balance at June 30, 1996 -- $-- $(34,162,018) $ 10,483,422 Cancellation of previously issued shares -- -- -- -- Net loss -- -- (5,684,970) (5,684,970) ------------- ------------ ------------ ------------ Balance at June 30, 1997 -- -- (39,846,988) 4,798,452 Preferred stock offering, net of offering costs -- -- -- 1,112,478 Warrants issued in connection with preferred stock offering -- -- -- -- Deemed dividend from incremental yield in conversion terms of preferred stock -- -- (243,000) -- Preferred stock conversions -- -- -- -- Preferred stock dividends -- -- (33,750) (33,750) Net income -- -- 171,472 171,472 ------------- ------------ ------------ ------------ Balance at June 30, 1998 -- -- (39,952,266) 6,048,652 Preferred stock conversions -- -- -- -- Preferred stock retirement -- -- (138,769) (818,000) Common stock issued in connection with preferred stock retirement -- -- (703,124) -- Purchase of treasury stock 134,980 (118,108) -- (118,108) Preferred stock dividends -- -- (28,630) (28,630) Net income -- -- 1,193,787 1,193,787 ------------- ------------ ------------ ------------ Balance at June 30, 1999 134,980 $ (118,108) $(39,629,002) $ 6,277,701 ============= ============ ============ ============
See notes to consolidated financial statements F-6 25 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 1998 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(5,684,970) $ 171,472 $ 1,193,787 Adjustments to reconcile net income (loss) to net cash provided from (used in) operating activities: Depreciation and amortization 854,402 331,987 363,687 Income from license of intellectual laser property -- (75,000) -- Write off of intangible assets 3,329,868 -- 24,805 Net loss (gain) on disposition of assets (2,450) 9,315 -- Net gain on sale of Betadine product line -- -- (879,159) Change in operating assets and liabilities: Accounts and other receivables 148,645 (353,113) (48,451) Inventory 92,214 115,740 (1,114,918) Other current and long-term assets 28,041 (26,238) (116,491) Accounts payable and accrued expenses (73,357) (360,396) 1,519,764 ----------- ----------- ----------- Net cash provided from (used in) operating activities (1,307,607) (186,233) 943,024 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (235,000) (470,180) (259,000) Proceeds from maturities of investments 795,970 375,164 589,016 Cash and cash equivalents - restricted -- -- (1,000,000) Proceeds from sale of Betadine product line -- -- 2,059,835 Purchase of vascular access business -- -- (1,460,887) Short-term note receivable -- -- (15,000) Purchase of furniture and equipment (37,022) (90,792) (74,106) Proceeds from sale of furniture and equipment 5,900 1,000 -- License and distribution rights -- (126,894) (45,036) Other assets 65,338 61 -- Patent costs (49,099) (30,411) (65,167) Long term note receivable (62,500) (50,000) (37,500) ----------- ----------- ----------- Net cash (used in) provided from investing activities 483,587 (392,052) (307,845) CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowing, net -- -- 1,000,000 Proceeds from term loan -- -- 1,000,000 Principal payments under capital lease obligations (7,835) (2,624) -- Proceeds from preferred stock offering, net of offering costs -- 1,112,478 -- Retirement of preferred stock -- -- (818,000) Payment of preferred stock dividend -- (20,250) (42,130) Purchase of treasury stock -- -- (118,108) Principal payments on term loan -- -- (66,668) ----------- ----------- ----------- Net cash provided from (used in) financing activities (7,835) 1,089,604 955,094 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (831,855) 511,319 1,590,273 Cash and cash equivalents, beginning of year 2,584,503 1,752,648 2,263,967 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 1,752,648 $ 2,263,967 $ 3,854,240 =========== =========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid during the year $ 1,308 $ 154 $ 32,041 =========== =========== =========== NON-CASH OPERATING AND INVESTING ACTIVITY: Common stock issued in connection with preferred stock retirement $ -- $ -- $ 703,124 =========== =========== ===========
See notes to consolidated financial statements F-7 26 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ORGANIZATION AND DESCRIPTION OF BUSINESS Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries, Escalon Pharmaceutical Inc. and Escalon Vascular Access, Inc. (jointly referred to as "Escalon" or the "Company"), develop, market and distribute ophthalmic medical devices, pharmaceutical products and vascular access devices. From the Company's inception until 1996, it engaged in research and development into laser technology to be used in ophthalmic surgery. With the February 1996 acquisition of Escalon Ophthalmics, Inc. ("EOI") (which business combination was accounted for as a purchase) the marketing focus changed and laser development ceased. To further develop and commercialize this technology, in October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase Corp. ("IntraLase")(Note 12). IntraLase will have the responsibility of funding and developing the laser technology through to commercialization. Escalon retains an equity position in the new company, along with future royalty rights on product sales. EOI's acquisition brought the Company a catalog of ophthalmic products, a profitable customer base and an opportunity to become a manufacturer and distributor of niche medical products. Sales of these new products were directed primarily at hospitals and physicians throughout the United States. In January 1999, the Company acquired the vascular access product line from Radiance Medical Systems, Inc. ("Radiance") (Note 13). These products use doppler technology to aid medical personnel in locating difficult arteries and veins. Presently, this product line concentrates on pediatric and critical care markets. (1) SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents The Company considers all highly liquid investments with maturity of three months or less at the time of purchase to be cash equivalents. The Company invests its excess cash in money market accounts with financial institutions having strong credit ratings. Investments with maturities of one year or less are considered current assets. The Company has established practices relative to diversification and maturities for safety and liquidity purposes. These practices are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any losses on its cash equivalents and investments. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation As permitted by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock option plans. Under APB 25, no compensation expense is recognized at the time of option grant because the exercise price of the Company's employee stock option equals the fair market value of the underlying common stock on the date of grant. F-8 27 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) Accounts Receivable The Company performs ongoing credit evaluations of its customers' financial condition and does not require collateral for accounts receivable arising from the normal course of business. The Company maintains allowances for potential credit losses which, when realized have been within the range of management's expectations. Revenue Recognition The Company recognizes revenue from the sales of its products at the time of shipment. Inventories Raw materials/work in process and finished goods inventories are recorded at lower of cost (first-in, first-out) or market. The composition of inventories is as follows:
JUNE 30, ------------------------------ 1998 1999 ----------- ----------- Raw materials/work in process $ 170,370 $ 526,553 Finished goods 472,672 623,655 ----------- ----------- 643,042 1,150,208 Valuation allowance (181,000) (33,000) ----------- ----------- $ 462,042 $ 1,117,208 =========== ===========
In fiscal 1997 the Company's inventory valuation allowance totaled $660,998. There was a net decrease in the inventory valuation allowance of $479,998 in fiscal 1998. This reduction consisted of (i) $470,998 relating to the transfer of laser inventory to IntraLase Corporation and (ii) $9,000 credited against expenses. Fiscal 1999 experienced another net decrease in the allowance of $148,000, which resulted from (i) scrapping $183,100 of obsolete inventory and (ii) taking an additional $35,100 charge against expense for other slow moving parts. Furniture and Equipment Furniture and equipment is recorded at cost. Depreciation is computed using the straight-line method over the economic useful life of the related assets, which are estimated to be eighteen months to ten years. Depreciation expense for the years ended June 30, 1997, 1998 and 1999 was $107,687, $43,433 and $73,174 respectively. Furniture and equipment consist of the following at:
JUNE 30, -------------------------- 1998 1999 --------- --------- Equipment $ 170,444 $ 521,870 Furniture and fixtures 25,863 35,351 Leasehold improvements 27,804 54,521 --------- --------- 224,111 611,742 Less accumulated depreciation and amortization (89,377) (162,187) --------- --------- $ 134,734 $ 449,555 ========= =========
Acquired License and Distribution Rights In connection with the acquisition of EOI a portion of the purchase price was allocated to certain product license and distribution agreements. This cost allocation was based on an independent valuation, with such costs being amortized over an eight-year period using the straight-line method. The values of these assets are re-evaluated annually to determine if the estimated lives continue to be appropriate. At June 30, 1997, the Company evaluated the ongoing F-9 28 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) value assigned to these license and distribution agreements. Based on such evaluation, the Company determined that an asset, with a carrying value of $2,199,000, was impaired due to changes in estimates relating to the future sales associated with such agreements. The change in the sales estimates resulted from (i) anticipated competition related to one of the Company's major products and (ii) delays in the development of the international distribution for another of the Company's products, which could result in the loss of the exclusive distributorship for such product. As a result, the Company wrote down its license and distribution rights by $918,253 to its estimated fair value. Fair value was based on estimated future cash flows to be generated from the license and distribution agreements, discounted at a market rate of interest. Sale of the Betadine product line in March 1999 reduced the cost and accumulated amortization by $421,781 and $162,561, respectively. Accumulated amortization of license and distribution rights was $332,647 and $297,602 at June 30, 1998 and 1999, respectively. Amortization expense for the years ended June 30, 1997, 1998 and 1999 was $274,208, $140,584 and $127,517, respectively. Patents It is the Company's practice to seek patent protection on processes and products in various countries. Patent application costs are capitalized and amortized over their estimated useful lives, not exceeding 17 years, on a straight-line basis from the date the related patents are issued. Costs associated with patents no longer being pursued are expensed. In fiscal 1999, two ophthalmic patents were abandoned; this resulted in the write-off of $27,182 in cost and $2,376 in accumulated amortization. Accumulated patent amortization was $80,823 and $98,061 at June 30, 1998 and 1999, respectively. Amortization expense for the years ended June 30, 1997, 1998 and 1999 was $20,067, $20,282 and $19,614, respectively. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. For the preexisting Escalon ophthalmic assets these costs are being amortized over a ten-year period using the straight-line method. Intangible assets acquired from Radiance Medical Systems are being primarily amortized over 15 years. The Company periodically reviews the value of its goodwill to determine if impairment has occurred. As noted in the above paragraph, "Acquired License and Distribution Rights," the Company wrote down the value of its license and distribution rights due to impairment. As required by the Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), goodwill associated with the acquired license and distribution rights was likewise written down by $2,400,635 at June 30, 1997. Sale of the Betadine product line caused the Company to write-off $667,523 in cost assigned to that product line and $205,819 in associated accumulated amortization in fiscal 1999. Accumulated amortization of goodwill at June 30, 1998 and 1999 was $308,576 and $241,380, respectively. Amortization expense for the years ended June 30, 1997, 1998 and 1999 was $404,979, $127,687 and $138,623, respectively. In connection with the acquisition of the vascular access product line, the Company incurred $60,887 in costs related to the purchase of those assets. These costs consisted primarily of legal and auditing fees for the transaction. Amortization for the year ended June 30, 1999 was $4,758. Research and Development All research and development costs are charged to operations as incurred. F-10 29 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) Net Income (Loss) Per Share 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:
1997 1998 1999 ---- ---- ---- Numerator: Numerator for basic and dilutive earnings per share: Net income (loss) $(5,684,970) $ 171,472 $ 1,193,787 Preferred stock dividends and accretion -- (276,750) (870,523) ----------- ----------- ----------- Income (loss) available to common shareholders $(5,684,970) $ (105,278) $ 323,264 =========== =========== =========== Denominator: Denominator for basic earnings per share- weighted-average shares 2,629,624 2,673,093 3,114,823 Effect of dilutive securities: Employee stock options -- -- 35,898 ----------- ----------- ----------- Denominator for diluted earning per share-adjusted weighted-average shares and assumed conversions 2,629,624 2,673,093 3,150,721 =========== =========== =========== Basic earnings income (loss) per share $ (2.16) $ (0.04) $ 0.10 =========== =========== =========== Diluted earnings income (loss) per share $ (2.16) $ (0.04) $ 0.10 =========== =========== ===========
Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its 100 percent investments in Escalon Pharmaceutical, Inc. and Escalon Vascular Access, Inc. All intercompany transactions and balances have been eliminated. Advertising Costs Advertising costs are charged to expense when incurred. Advertising expense for the years ended June 30, 1997, 1998 and 1999 was $99,364, $58,495 and $41,824, respectively. (3) INVESTMENTS As of June 30, 1998 and 1999, the Company held investments consisting of fixed-rate certificates of deposits and money market funds of $1,980,016 and $1,765,047, respectively. Such investments are recorded at cost, which approximates fair value at June 30, 1998 and 1999. Included in cash and cash equivalents at June 30, 1998 were certificates of deposits totaling $1,650,000 with original maturities of 90 days or less. F-11 30 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTMENTS - (CONTINUED) The Company also maintained a $1,015,609 certificate of deposit at June 30, 1999. This investment matures within 30 days and $1,000,000 is pledged as collateral against the five-year term loan at PNC Bank, NA. and is reported as cash and cash equivalents, restricted. (4) LONG-TERM RECEIVABLE The Company entered into a loan agreement with an individual who is involved in the development of its Ocufit SR drug delivery system. The note for $150,000, with principal and accrued interest at 3%, is due in May 2005. (5) NOTES PAYABLE, BANK In January 1999, the Company entered into a line of credit agreement with its financial institution. The available amount under the agreement, which expires on December 31, 1999, is $1,000,000. The interest rate on this line is set at prime plus one quarter of one percentage point (8% at June 30, 1999). The balance outstanding on the line of credit as of June 30, 1999 was $1,000,000. All of the Company's assets and cash collateral of $1,000,000 collateralize the agreement. The average amount outstanding and average interest rate for the year ended June 30, 1999 was $190,097 and 8%, respectively, from January 28, 1999 the date of the note's inception. (6) LONG-TERM DEBT In January 1999, the Company entered into a term loan with its financial institution for $1,000,000. The proceeds were used to redeem all outstanding shares of the Company's Series A preferred stock and the remaining balance to pay a portion of the purchase price for the acquisition of Radiance's Vascular Access Business Unit. Repayment of debt is principal of $16,667 plus interest through February 2004. The interest rate on the debt is 2.0 percentage points above the rate payable on the cash collateral as described under Notes payable, bank (Note 5) as long as the cash collateral is comprised of a Bank certificate of deposit (6.6% at June 30, 1999). If the cash collateral were comprised of liquid assets, as defined in the agreement, the interest rate on the debt would be equal to the prime rate. All of the Company's assets and cash collateral of $1,000,000 collateralize the agreement. The bank term loan and line of credit agreements contain various covenants pertaining to maintenance of tangible net worth and certain debt ratios. Maturities of long-term debt are as follows:
Year ending June 30 Amount ------------------- ------ 2000 $ 200,000 2001 200,000 2002 200,000 2003 200,000 2004 133,332 --------- $ 933,332 =========
(7) CAPITAL STOCK TRANSACTIONS Reverse Stock Split On November 20, 1997, the Company held its annual meeting of shareholders at which time the shareholders approved a one-for-four reverse stock split (the "Reverse Split") of the Company's Common Stock (the "Common Stock"). F-12 31 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) CAPITAL STOCK TRANSACTIONS - (CONTINUED) Reverse Stock Split As a result of the Reverse Split, each shareholder now has one share of Common Stock for every four shares owned before the Reverse Split. As a result of the Reverse Split, there were adjustments made to the Company's Class A Redeemable Common Stock Purchase Warrant, Class B Redeemable Common Stock Purchase Warrant and Class C Common Stock Purchase Warrant such that the number of warrants that must be delivered to the Company in order to purchase a share of Common Stock has been increased by a factor of four. All references in these consolidated financial statements with regard to shares, per share amounts, units and share prices have been adjusted for the Reverse Split. Fractional shares were paid out on conversion. PREFERRED STOCK OFFERING AND REDEMPTION On December 31, 1997, the Company issued $1,350,000 of Series A 6% Convertible Preferred Stock ("Preferred Stock") in a private placement. This stock issue was retired on February 1, 1999 with the payment of $818,000 plus accrued interest and the issuance of 225,000 shares of the Company's Common Stock. At time of issuance the net proceeds of $1,194,750 from this offering were received on January 2, 1998. After March 1, 1998, the Preferred Stock may be converted at the option of the holder into shares of the Company's Common Stock at a rate determined by dividing the liquidation value of the Preferred Stock being converted by the conversion price then in effect. The conversion price will be the lesser of (i) $8.6125 (which is the average of the closing bid price of the Common Stock for each of the five trading days immediately prior to December 31, 1997) or, (ii) up to 82% of the five-day average closing bid price prior to the conversion date. The Preferred Stock paid cumulative dividends of 6% per annum payable quarterly in cash. The Preferred Stock was accompanied by an immediately exercisable five-year Warrant to purchase 40,000 shares of Common Stock at exercise prices ranging from $8.6125 to $11.626875. The Company also issued to the private placement agent and its designees a similar warrant to purchase an aggregate of 50,000 shares of Common Stock at an exercise price of $10.335 per share. The warrants were valued at $234,500 using the Black-Scholes option pricing method with the following assumptions: risk-free interest rate of 5.5%; expected volatility of .0879; expected warrant life of one-half year from vesting; and an expected dividend rate of 0.0%. The value of the warrants was accounted for as part of the offering related expenses. The incremental yield imbedded in the conversion terms of the Preferred Stock has been accounted for as a dividend of approximately $243,000 and was amortized over the period from the date of issuance to March 1, 1998, the first date at which conversion could occur. During fiscal 1998, the preferred shareholder converted blocks of 197, 143 and 110 shares at conversion prices of $1.5016, $1.0967 and $0.8457 per share, respectively. These conversions increased the Common Stock outstanding by 391,652 shares. In July 1998, the holder of Preferred Stock converted 82 additional shares into 131,137 shares of the Company's Common Stock at a conversion price of $0.6253 per share. In February 1999, the Company simultaneously converted shares of Preferred Stock into 225,000 shares of its common stock and redeemed all the remaining shares of its preferred stock for $818,000. In connection with the redemption and issuance, the Company recognized a $841,893 imputed dividend. Redeemable Common Stock Purchase Warrants During November 1993, the Company successfully completed an underwritten public offering of 862,500 Units (the "Units"), each Unit consisting of one share of Common Stock, one Class A Redeemable Common Stock Purchase Warrant and one Class B Redeemable Common Stock Purchase Warrant (the "Public Offering"). Each Class A and Class B Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $25 and $30, respectively. F-13 32 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) CAPITAL STOCK TRANSACTIONS - (CONTINUED) Redeemable Common Stock Purchase Warrants The warrants are currently exercisable and expire in November 2000. The Public Offering price for the Units was $20 per Unit. The net proceeds to the Company from that Public Offering, after deducting underwriting discounts, commissions and related expenses was approximately $14,800,000. Stock Option Plans The Company has adopted five employee stock option plans, which provide for incentive stock options and non-qualified stock options to purchase 416,242 shares of the Company's common stock. Under the terms of the plans, options may be granted at not less than fair market value of the Common Stock at the date of grant. Vesting generally occurs ratably over four years and is exercisable over a period no longer than ten years after the grant date. At June 30, 1999, options to purchase 314,500 shares of the Company's Common Stock were exercisable and 101,742 shares are reserved for future grants. Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123") requires pro forma information regarding net income and earnings per share as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of SFAS No. 123. The fair value of these equity awards was estimated at the date of grant using the Black-Scholes option pricing method. For all years presented, the expected option life of one year from vesting and an expected dividend rate of 0.0% were used. The weighted average assumptions used in fiscal 1999 were risk-free interest rates of 5.08% and 5.31% and an expected volatility of 1.427. Fiscal 1998's assumptions were a risk-free interest rate of 5.11%, and an expected volatility of 1.359. The assumptions used in fiscal 1997 were a risk-free interest rate of 5.6% and expected volatility of 0.865. For purposes of the pro forma disclosures, the estimated fair value of the equity awards is amortized to expense over the options' vesting period. The pro forma net income for fiscal 1999 would have been $1,031,037, and the basic and diluted earnings per share of Common Stock would be $0.05. For the fiscal year ended June 30, 1998, the pro forma net loss and basic and diluted net loss per share were $(162,993) and $(0.06), respectively. Fiscal 1997's pro forma net loss and basic and diluted net loss per share were $(5,774,970) and ($2.20), respectively. The following is a summary of the Company's stock option activity and related information for the fiscal years ended June 30, 1997, 1998 and 1999:
1997 1998 1999 ----------------------------- ---------------------------- ----------------------------- COMMON WEIGHTED COMMON WEIGHTED COMMON WEIGHTED STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------------ -------------- ------------ -------------- ------------ -------------- Outstanding at beginning of year 72,422 $ 16.564 112,500 $ 2.252 172,000 $ 2.120 Granted 112,500 $ 2.252 59,500 $ 1.875 152,500 $ 2.108 Forfeited (72,422) $ 16.564 -- -- (10,000) $ 1.875 ------------ ------------ ------------ ------------ ------------ ------------ Outstanding at end of year 112,500 $ 2.252 172,000 $ 2.120 314,500 $ 2.122 ============ ============ ============ ============ ============ ============ Exercisable at end of year 112,500 172,000 314,500 ============ ============ ============ Weighted average fair value of options granted during year $ 0.800 $ 0.970 $ 1.131
F-14 33 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) CAPITAL STOCK TRANSACTIONS - (CONTINUED) Stock Option Plans Options issued in fiscal 1997 have an exercise price of $2.252 and a remaining contractual life of 7.9 years. Those issued in fiscal 1998, have an exercise price of $1.875 and a remaining contractual life of 8.7 years. Fiscal 1999 options have a weighted average exercise price of $2.108 and a remaining contractual life of 9.8 years. Non-plan options to purchase 1,367 and 1,367 shares of Common Stock, at prices of $1.460 and $7.308, respectively, were outstanding and exercisable at June 30, 1999. These options generally have vesting and exercise provisions consistent with options granted under the plans. (8) TREASURY STOCK In July 1998, the Company entered into an agreement with a stockholder to repurchase 114,285 shares of the Company's common stock for $100,000 and accept an additional 20,695 shares in satisfaction of a $18,108 receivable. (9) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liability, which are primarily considered to be noncurrent, consisted of the following at:
JUNE 30, -------------------------------- 1998 1999 ---- ---- Deferred tax assets: Reserves and allowances $ 31,000 $ 28,000 NOL carryforward 15,110,000 14,308,000 Tax credit carryforwards 680,000 680,000 ------------ ------------ Total deferred tax assets 15,821,000 15,016,000 Deferred tax liability: License and distribution rights (297,000) (192,000) ------------ ------------ Net deferred tax assets 15,524,000 14,824,000 Valuation allowances (15,524,000) (14,824,000) ------------ ------------ Net deferred taxes $ -- $ -- ============ ============
At June 30, 1999, the Company has federal income tax and state income tax net operating loss carryforwards of approximately $40.3 million and $16.3 million, respectively. The difference between the federal and state carryforward amounts is primarily attributable to differences in research and development expenses and to California's statutory 50% annual reduction rule. In addition, the Company has federal and California research credit carryforwards of $562,000 and $118,000, respectively, at June 30, 1999. Federal and state operating losses and tax credits will expire at various dates between 2001 and 2013. For the years ended June 30, 1998 and 1999, the Company recorded valuation allowances of $15,524,000 and $14,824,000, respectively. Under the provisions of Section 382 of the Internal Revenue Code, use of net operating loss (NOL) and credit carryforwards is subject to an annual limitation if there is a change in ownership during a specified testing period. No formal study has been performed to test for ownership changes from the date of inception until June 30, 1999 for losses generated by the Company. F-15 34 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) INCOME TAXES - (CONTINUED) An internal calculation was performed assuming that ownership changes of the Company occurred in fiscal 1990, 1994 and 1995 (at the time of acquisition of EOI (Note 1)). As a result of such ownership changes approximately $27,700,000 of federal NOL carryforwards are subject to limitation, which would leave available approximately $12,600,000 of NOL's to offset future taxable income, prior to any valuation allowance. If an additional ownership change did occur subsequent to the EOI acquisition, an additional limitation would apply to all the NOL carryforwards attributable after that change. Depending on the existence and time of such change, potentially all of the federal NOL carryforwards at June 30, 1999 could be subject to a limitation. The limitation could also restrict use of the tax credit carryforwards and approximately $16,300,000 of the NOL carryforwards for state purposes. Approximately $8.2 million of the federal NOL carryforward at June 30, 1999 represents amounts that were transferred to the Company as a result of the acquisition of EOI. It was determined that an ownership change of EOI occurred in fiscal 1990, but no limitation calculation was performed. Use of this transferred NOL is also limited under Section 382. Any tax benefit realized from such use would first reduce acquired goodwill. Although the Company believes that the acquisition of EOI qualified as a tax-free reorganization, there is no certainty that the Internal Revenue Service will agree. If the acquisition were not to qualify as a tax-free reorganization, the NOL carryforward of EOI would be treated as a purchase of assets and the tax basis of the acquired assets would be increased. (10) OPERATING LEASES The Company leases its research, manufacturing and corporate office facilities and certain equipment under non-cancelable operating lease arrangements. The future minimum rentals to be paid under these leasing arrangements as of June 30, 1999 are as follows:
YEAR ENDING JUNE 30, AMOUNT - -------------------- ------ 2000 $132,493 2001 120,478 2002 121,442 2003 119,124 2004 116,055 -------- $609,592 ========
Total minimum future rental payments have not been reduced by $8,174, the value of sublease rentals to be received under non-cancelable subleases. Rent expense charged to operations during the years ended June 30, 1997, 1998 and 1999 was $190,153, $123,408 and $111,835, respectively. The Company leases its Pennsylvania office from an entity that is 100% owned by the Chief Executive Officer and Chairman of the Board of the Company. The lease is classified as an operating lease and provides for minimum annual rentals of $8,500 through December 31, 1999. (11) RETIREMENT PLAN The Company adopted a 401(k) retirement plan effective January 1, 1994. Employees become eligible for the plan commencing on the date of employment. Company contributions are discretionary and no contributions have been made since the plan's inception. (12) LICENSE OF INTELLECTUAL LASER PROPERTIES In October 1997, the Company licensed its intellectual laser properties to IntraLase in exchange for an initial 25% equity interest in IntraLase. As a result of raising money from outside investors, as of June 30, 1999, the Company's F-16 35 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) LICENSE OF INTELLECTUAL LASER PROPERTIES - (CONTINUED) interest has been diluted to 11%. Escalon is entitled to a 2.5% royalty on future products sales which are based on the Company's patented technology; a 1.5% royalty on product sales not dependent on the Company's technology; and an annual license fee of $5,000 and $10,000 in 1999 and 2000, respectively, and $15,000 in 2001 and each year thereafter during the term of the license. The license fee may be credited in full against all royalties otherwise due to be paid to the Company. Also contributed to the venture were the Company's laser inventory, equipment and related furniture having a net book value of $0. As of June 30, 1999, IntraLase is still in the clinical stage and is in the process of raising additional funds. (13) ACQUISITION OF RADIANCE BUSINESS UNIT On January 21, 1999, the Company acquired substantially all of the assets used exclusively in Radiance's Vascular Access Business Unit, which uses doppler technology to aid medical personnel in locating difficult arteries and veins. This business combination was accounted for as a purchase. The results of operations for this business unit are included in the accompanying financial statements since the date of acquisition. The total cost of the acquisition was $2,104,442, which exceeded the fair value of the net assets of Radiance by $1,086,110. The excess is being amortized on a straight-line basis over a fifteen-year period. Of the $2,104,442 purchase price, $1,000,000 is included in other accrued expenses as of June 30, 1999. The Company is obligated to pay that amount when all vascular access production is relocated to Wisconsin. In addition, the Company is obligated to pay Radiance minimum royalties, base on product sales, of $300,000 per year for a five-year period. The following pro forma results of operations information has been prepared to give effect to the purchase as if such transaction had occurred at the beginning of the period presented. The information presented is not necessarily indicative of results of future operations of the combined companies. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, ------------------------------- 1998 1999 ----------- ----------- Revenues $ 8,605,609 $ 8,737,853 Net income (loss) $ (213,879) 1,143,589 Basic net income (loss) per share $ (0.184) $ 0.088 Diluted net income (loss) per share $ (0.184) $ 0.088 Weighted average shares - basic 2,673,093 3,114,823 Weighted average shares - diluted 2,673,093 3,150,721
(14) SALE OF BETADINE PRODUCT LINE On March 5, 1999, the Company sold its license and distribution rights along with the remaining inventory of Betadine(R) 5% Sterile Ophthalmic Prep Solution to Alcon Laboratories, Inc. and Alcon Universal, Ltd. Escalon received approximately $2,060,000 in cash from this transaction. After writing-off remaining net book value of license and distribution rights, goodwill and inventory of $259,000, $462,000 and $460,000, respectively, the Company realized a $879,000 gain from this sale. Betadine has historically accounted for approximately 15% of Escalon's sales revenues. (15) COMMITMENTS Pursuant to various collaborative research and development, technology license, and consulting arrangements relating to the Company's drug delivery technology, the Company has financial commitments of $100,000 to be paid F-17 36 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) COMMITMENTS - (CONTINUED) during fiscal 2000; $150,000 in fiscal 2001; and $200,000 in fiscal 2002, 2003 and 2004. The Company is also obligated to pay $1,000,000, which is included in other accrued expenses, to Radiance Medical Systems, Inc. when all vascular access production is relocated to Wisconsin. This will be completed by the second quarter of fiscal 2000. (16) CONTINGENCIES Litigation As previously reported in reports filed with the Securities and Exchange Commission, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter which the Company is no longer a party to). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by the Company and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and their insurance carrier have deposited such funds in an escrow account. (17) SUBSEQUENT EVENTS On August 13, 1999 the Company sold the license and distribution rights to its major product, AdatoSil(R)5000 Silicone Oil, to Bausch & Lomb Surgical, Inc. Under the terms of this agreement, Escalon received $2.1 million cash, payable in quarterly installments, and additional cash consideration based on future sales of Silicone Oil over the next six years. Silicone Oil represented approximately 56% of the Company's revenue in fiscal 1999. F-18 37 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1 (a) Restated Articles of Incorporation of Registrant. (6) (b) Certificate of Amendment of Restated Articles of Incorporation of Registrant dated November 8, 1993.(6) (c) Certificate of Amendment of Restated Articles of Incorporation of Registrant dated February 12, 1996.(6) (d) Certificate of Determination of Series A 6% Convertible Preferred Stock. (8) 3.2 Amended and Restated Bylaws of Registrant. * 4.1 Form of Class A Redeemable Common Stock Purchase Warrants. (2) 4.2 Form of Class B Redeemable Common Stock Purchase Warrants. (2) 4.3 Form of Underwriters Class A Common Stock Purchase Warrants. (2) 4.4 Form of Underwriters Class B Common Stock Purchase Warrants. (2) 4.5 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer Corporation. (2) (b) Amendment to Warrant Agreement between Registrant and U.S. Stock Transfer Corporation. (4) (d) Amendment to Warrant Agreement between Registrant and American Stock Transfer Company. (5) 4.6 Securities Purchase Agreement, dated as of December 31, 1997 by and among the Company and Combination. (8) 4.7 Registration Rights Agreement, dated as of December 31, 1997 by and among the Company and Combination. (8) 4.8 Warrant to Purchase Common Stock issued December 31, 1997 to David Stefansky. (8) 4.9 Warrant to Purchase Common Stock issued December 31, 1997 to Combination. (8) 4.10 Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum. (8) 4.11 Warrant to Purchase Common Stock issued December 31, 1997 to Trautman Kramer & Company. (8) 10.1 (a) 1993 Stock Option Plan of Registrant. (3) (b) Form of Nonqualified Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3) (c) Form of Incentive Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3) 10.2 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. (1) 10.3 Underwriting Agreement between the Registrant and the Underwriter. (2) 10.4 Unit Purchase Option between the Registrant and the Underwriter. (2) 10.5 Employment Agreement between Registrant and Ronald Hueneke dated October 4, 1991. (6) 10.6 Employment Agreement between Registrant and Richard J. DePiano dated March 1, 1997, as amended. (7) 10.7 Distributorship Agreement between Registrant and Scott Medical Products dated as of September 8, 1992, as amended September 8, 1995. (6) 10.8 Research and Development Agreement between Registrant and The West Company, Incorporated dated April 3, 1995. (6) 10.9 Assets Sale and Purchase Agreement between the Registrant and Radiance Medical Systems, Inc., dated January 21, 1999. (9) 10.10 Bill of Sale and Acceptance Agreement between the Registrant and Alcon Laboratories, Inc., dated March 5, 1999. (10) 10.11 Bill of Sale and Acceptance Agreement between the Registrant and Alcon Universal, Ltd., dated March 5, 1999. (10)
38
Exhibit No. Description - ----------- ----------- 10.12 Termination Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999. (11) 10.13 Supply Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999. (11) 21 Subsidiaries. * 23.1 Consent of Ernst & Young LLP, independent auditors. * 23.2 Consent of Parente, Randolph, Orlando, Carey & Associates, LLC, independent auditors. * 27.1 Financial Data Schedule. *
- --------------- * Filed herewith (1) Filed as an exhibit to Pre-Effective Amendment No. 7 to the Company's Registration Statement on Form S-1 dated August 20, 1992 (Registration No. 33-47439). (2) Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 dated November 9, 1993 (Registration No. 33-69360). (3) Filed as an exhibit to the Company's Registration Statement on Form S-8 dated June 13, 1994 (Registration Number 33-80162). (4) Filed as an exhibit to the Company's Form 10-K for year ended June 30, 1994. (5) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1995. (6) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1996. (7) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 1997. (8) Filed as an exhibit to the Company's Registration Statement on Form S-3 dated January 20, 1998 (Registration No. 333-44513). (9) Filed as an exhibit to the Company's Form 8-K, dated February 1, 1999. (10) Filed as an exhibit to the Company's Form 8-K, dated March 19, 1999. (11) Filed as an exhibit to the Company's Form 8-K, dated August 26, 1999. EX-3.2 2 AMENDED AND RESTATED BYLAWS OF REGISTRANT 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF ESCALON MEDICAL CORP. (A CALIFORNIA CORPORATION) (AS AMENDED THROUGH NOVEMBER 20, 1997) 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I - Applicability....................................................................................... 1 Section 1. Applicability of Bylaws.............................................................. 1 ARTICLE II - Offices............................................................................................ 1 Section 1. Principal Offices.................................................................... 1 Section 2. Change in Location or Number of Offices.............................................. 1 ARTICLE III - Meetings of Shareholders.......................................................................... 1 Section 1. Place of Meetings.................................................................... 1 Section 2. Annual Meetings...................................................................... 1 Section 3. Special Meetings..................................................................... 2 Section 4. Notice of Annual, Special or Adjourned Meetings...................................... 2 Section 5. Record Date.......................................................................... 3 Section 6. Quorum............................................................................... 4 Section 7. Adjournment.......................................................................... 4 Section 8. Validation of Actions Taken at Defectively Called, Noticed or Held Meetings.......... 4 Section 9. Voting for Election of Directors..................................................... 5 Section 10. Proxies.............................................................................. 5 Section 11. Inspectors of Election............................................................... 6 Section 12. Action by Written Consent............................................................ 6 ARTICLE IV - Directors.......................................................................................... 7 Section 1. Number of Directors.................................................................. 7 Section 2. Election of Directors................................................................ 7 Section 3. Term of Office....................................................................... 7 Section 4. Vacancies............................................................................ 7 Section 5. Removal.............................................................................. 8 Section 6. Resignation.......................................................................... 8 Section 7. Fees and Compensation................................................................ 8 ARTICLE V - Committees of the Board of Directors................................................................ 9 Section 1. Designation of Committees............................................................ 9 Section 2. Powers of Committees................................................................. 9 ARTICLE VI - Meetings of the Board of Directors and Committees Thereof.......................................... 9 Section 1. Place and Meetings................................................................... 9 Section 2. Annual Meeting...................................................................... 10 Section 3. Other Regular Meetings.............................................................. 10 Section 4. Special Meetings.................................................................... 10
i 3 TABLE OF CONTENTS
PAGE ---- Section 5. Notice of Special Meetings.......................................................... 10 Section 6. Waivers, Consents and Approvals..................................................... 10 Section 7. Quorum; Action at Meetings; Telephone Meetings...................................... 10 Section 8. Adjournment......................................................................... 11 Section 9. Action Without a Meeting............................................................ 11 Section 10. Meetings of and Action by Committees................................................ 11 ARTICLE VII - Officers......................................................................................... 11 Section 1. Officers............................................................................ 11 Section 2. Election of Officers................................................................ 11 Section 3. Subordinate Officers, etc........................................................... 11 Section 4. Removal and Resignation............................................................. 12 Section 5. Vacancies........................................................................... 12 Section 6. Chairman of the Board............................................................... 12 Section 7. President........................................................................... 12 Section 8. Vice President...................................................................... 12 Section 9. Secretary........................................................................... 12 Section 10. Chief Financial Officer............................................................. 13 ARTICLE VIII - Records and Reports............................................................................. 13 Section 1. Minute Book......................................................................... 13 Section 2. Share Register...................................................................... 13 Section 3. Books and Records of Account........................................................ 13 Section 4. Bylaws.............................................................................. 14 Section 5. Inspection of Records............................................................... 14 Section 6. Annual Report to Shareholders....................................................... 14 ARTICLE IX - Miscellaneous..................................................................................... 14 Section 1. Checks, Drafts, etc................................................................. 14 Section 2. Contracts, etc. - How Executed...................................................... 14 Section 3. Certificates of Stock............................................................... 14 Section 4. Lost Certificates................................................................... 15 Section 5. Representation of Shares of Other Corporations...................................... 15 Section 6. Construction and Definitions........................................................ 15 Section 7. Indemnification of Corporate Agents; Purchase of Liability Insurance................ 15 ARTICLE X - Amendments......................................................................................... 16 Section 1. Amendments.......................................................................... 16
ii 4 BYLAWS OF ESCALON MEDICAL CORP. (A CALIFORNIA CORPORATION) ARTICLE I. APPLICABILITY SECTION 1. APPLICABILITY OF BYLAWS. These Bylaws govern, except as otherwise provided by statute or its Articles of Incorporation, the management of the business and the conduct of the affairs of the Corporation. ARTICLE II. OFFICES SECTION 1. PRINCIPAL OFFICES. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the Corporation has one or more business offices in this state, the Board of Directors shall designate a principal business office in the State of California. SECTION 2. CHANGE IN LOCATION OR NUMBER OF OFFICES. The Board of Directors may change any office from one location to another or eliminate any office or offices. ARTICLE III. MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. Meetings of the shareholders shall be held at any place within or without the State of California designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the Corporation. SECTION 2. ANNUAL MEETINGS. An annual meeting of the shareholders shall be held within 180 days following the end of the fiscal year of the Corporation at a date and time designated by the Board of Directors. Directors shall be elected at each annual meeting and any other proper business may be transacted thereat. -1- 5 SECTION 3. SPECIAL MEETINGS. (a) Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board and the President or by the shareholders upon the request of the holders of shares entitled to cast not less than 10 percent of the votes at such meeting. (b) Any request for the calling of a special meeting of the shareholders shall (1) be in writing, (2) specify the date and time thereof, which date shall be not less than 35 nor more than 60 days after receipt of the request, (3) specify the general nature of the business to be transacted thereat and (4) be given either personally or by first-class mail, postage prepaid, or other means of written communication to the Chairman of the Board, President, any Vice President or Secretary of the Corporation. The officer receiving a proper request to call a special meeting of the shareholders shall cause notice to be given pursuant to the provisions of Section 4 of this Article III to the shareholders entitled to vote thereat that a meeting will be held at the date and time specified by the person or persons calling the meeting. If notice is not given within 20 days of the receipt of the request, the shareholders making the request may give notice of such meeting so long as the notice given complies with the other provisions of this subsection. (c) No business may be transacted at a special meeting unless the general nature thereof was stated in the notice of such meeting. SECTION 4. NOTICE OF ANNUAL, SPECIAL OR ADJOURNED MEETINGS. (a) Whenever any meeting of the shareholders is to be held, a written notice of such meeting shall be given in the manner described in subdivision (d) of this section not less than 10 nor more than 60 days before the date thereof to each shareholder entitled to vote thereat. The notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the giving of the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, management intends to present for election. (b) Any proper matter may be presented at an annual meeting for action. However, any action to approve (1) a contract or transaction in which a director has a direct or indirect financial interest under Section 310 of the California Corporations Code (the "Code"), (2) an amendment of the Articles of Incorporation under Section 902 of the Code, (3) a reorganization of the Corporation under Section 1201 of the Code, (4) a voluntary dissolution of the Corporation under Section 1900 of the Code, or (5) a distribution in dissolution (other than in accordance with the rights of outstanding preferred shares) under Section 2007 of the Code may be taken only if the notice of the meeting states the general nature of the matter to be approved. (c) Notice need not be given of an adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except that if the -2- 6 adjournment is for more than 45 days or if after the adjournment a new record date is provided for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at that meeting. (d) Notice of any meeting of the shareholders shall be given personally, by first class mail, or by telegraph or other written communication, addressed to the shareholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice shall be deemed to have been given at the time when delivered personally to the recipient, deposited in the mail, delivered to a common carrier for transmission to the recipient or sent by other means of written communication. An affidavit of the mailing or other means of giving notice may be executed by the Secretary, Assistant Secretary or any transfer agent of the Corporation giving the notice and shall be prima facie evidence of the giving of the notice. Such affidavits shall be filed and maintained in the minute books of the Corporation. (e) If any notice or report addressed to the shareholder at his address appearing on the books of the corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon his written demand at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. SECTION 5. RECORD DATE. (a) The Board of Directors may fix a time in the future as a record date for determination of the shareholders who are (1) entitled to receive notice of any meeting or to vote thereat, (2) entitled to give written consent to any corporate action without a meeting, (3) entitled to receive payment of any dividend or other distribution or allotment of any rights or (4) entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall be not more than 60 or less than 10 days prior to the date of any meeting of the shareholders, or more than 60 days prior to any other action. (b) In the event no record date is fixed: (1) The record date for determining the shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. -3- 7 (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) Notwithstanding any transfer of any shares on the books of the Corporation after the record date, only shareholders of record an the close of business on the record date are entitled to receive notice and to vote, to give written consent, to receive a dividend, distribution or allotment of rights or to exercise rights, as the case may be. (d) A determination of shareholders of record entitled to receive notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board shall fix a now record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. SECTION 6. QUORUM. (a) A majority of the shares entitled to vote at a meeting of the shareholders, represented in person or by proxy, shall constitute a quorum for the transaction of business thereat. (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. SECTION 7. ADJOURNMENT. Any meeting of the shareholders may be adjourned from time to time whether or not a quorum is present by the vote of a majority of the shares represented thereat either in person or by proxy. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. SECTION 8. VALIDATION OF ACTIONS TAKEN AT DEFECTIVELY CALLED, NOTICED OR HELD MEETINGS. (a) The transactions of any meeting of the shareholders, however called and noticed and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote thereat, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Any written waiver of notice shall comply with subdivision (f) of Section 601 of the Code. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. -4- 8 (b) Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except (1) when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and (2) that attendance at a meeting is not a waiver of any right to object to the consideration of any matter required by the Code to be included in the notice but not so included, if such objection is expressly made at the meeting. SECTION 9. VOTING FOR ELECTION OF DIRECTORS. (a) Except as provided in subdivision (c) of this section, the affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number is required by law or the Articles of Incorporation. (b) Every shareholder complying with subdivision (c) of this section and entitled to vote at any election of directors may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are normally entitled, or distribute his votes on the same principle among as many candidates as he thinks fit. (c) No shareholder shall be entitled to cumulate his votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidate's or candidates name(s) for which he desires to cumulate his votes has or have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of his intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (d) Elections for directors may be by voice vote or by ballot unless any shareholder entitled to vote demands election by ballot at the meeting prior to the voting, in which case the vote shall be by ballot. (e) In any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected as directors. SECTION 10. PROXIES. (a) Every person entitled to vote shares may authorize another person or persons to act with respect to such shares by a written proxy signed by him or his attorney-in-fact and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by him or his attorney-in-fact. -5- 9 (b) Any validly executed proxy, except a proxy which is irrevocable pursuant to subdivision (c) of this Section 10, shall continue in full force and effect until the expiration of the term specified therein or upon its earlier revocation by the person executing it prior to the vote pursuant thereto (1) by a writing delivered to the Corporation stating that it is revoked, (2) by written notice of the death of the person executing the proxy, delivered to the Corporation, (3) by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting or (4) as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. The date contained on the form of proxy shall be deemed to be the date of its execution. (c) A proxy which states that it is irrevocable is irrevocable for the period specified therein subject to the provisions of subdivisions (e) and (f) of Section 705 of the Code. SECTION 11. INSPECTORS OF ELECTION. (a) In advance of any meeting of the shareholders, the Board of Directors may appoint either one or three persons (other than nominees for the office of director) as inspectors of election to act at such meeting or any adjournments thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairman of any such meeting may, and on the request of any shareholder or his proxyholder shall, appoint inspectors of election (or persons to replace those who so fail or refuse to act) at the meeting. If appointed at a meeting on the request of one or more shareholders or the proxyholders thereof, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) The duties of inspectors of election and the manner of performance thereof shall be as prescribed in subdivisions (b) and (c) of Section 707 of the Code. SECTION 12. ACTION BY WRITTEN CONSENT. (a) Subject to subdivisions (b) and (c) of this section, any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting, without a vote and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and maintained with the corporate records. (b) Except for the election of a director by written consent to fill a vacancy on the Board of Directors (other than a vacancy created by removal), directors may be elected by written consent only by the unanimous written consent of all shares entitled to vote for the election of directors. In the case of an election of a director by written consent to fill a vacancy (other than a vacancy created by removal), any such election requires the consent of a majority of the outstanding shares entitled to vote for the election of directors. -6- 10 (c) Unless the consents of all shareholders entitled to vote have been solicited in writing, the Secretary of the Corporation shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in subdivision (d) of Section 4 of this Article III. In the case of approval of (1) contracts or transactions in which a director has a direct or indirect financial interest under Section 310 of the Code, (2) indemnification of agents of the Corporation under Section 317 of the Code, (3) a reorganization of the Corporation under Section 1201 of the code, or (4) a distribution in dissolution (other than in accordance with the rights of outstanding preferred shares) under Section 2007 of the Code, notice of such approval shall be given at least ten (10) days before the consummation of any action authorized by that approval. (d) Any shareholder giving a written consent, or his proxyholder, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the Corporation. ARTICLE IV. DIRECTORS SECTION 1. NUMBER OF DIRECTORS. The authorized number of directors shall be not less than three (3) nor more than five (5), the exact number of directors to be fixed from time to time within such range by a duly adopted resolution of the Board of Directors or shareholders. SECTION 2. ELECTION OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders. SECTION 3. TERM OF OFFICE. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which he is elected and until a successor has been elected and qualified. SECTION 4. VACANCIES. (a) A vacancy on the Board of Directors exists whenever any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors or otherwise. (b) Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the directors then in office, or, if the number of directors then in office is less than a quorum, by (1) the unanimous written consent of the directors then in office, (2) the affirmative vote of the majority of the directors then in office at a meeting held -7- 11 pursuant to notice or waivers of notice or (3) a sole remaining director. A vacancy created by the removal of a director shall be filled only by a person elected by a majority of the shareholders entitled to vote at a duly held meeting at which there is a quorum present or by the unanimous written consent of the holders of the outstanding shares entitled to vote at such a meeting. (c) The shareholders may elect a director at any time to fill any vacancy not filled by the directors. SECTION 5. REMOVAL. (a) The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (b) Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote; provided, however, that no director may be removed (unless the entire Board of Directors is removed) whenever the votes cast against his removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of his most recent election were then being elected; and provided, further, if the Corporation's Articles of Incorporation provide that the shareholders of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the shareholders of such class or series. (c) Any reduction of the authorized number of directors does not remove any director prior to the expiration of his term of office. (d) A director may not be removed prior to the expiration of his term of office except as provided in this section and except as ordered by the superior court of the proper county at the suit at shareholders of at least 10 percent of the outstanding shares of any class. SECTION 6. RESIGNATION. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. SECTION 7. FEES AND COMPENSATION. Directors may be paid for their services in such capacity a sum in such amounts, at such times and upon such conditions as may be determined from time to time by resolution of the Board of Directors and may be reimbursed for their expenses, if any, for attendance at each meeting of the Board. No such payments shall preclude any director from serving the Corporation in any other capacity and receiving compensation in any manner therefor. -8- 12 ARTICLE V. COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. DESIGNATION OF COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate (a) one or more committees, each consisting of two or more directors and (b) one or more directors as alternate members of any committee, who may replace any absent member at any meeting thereof. Any member or alternate member of a committee shall serve at the pleasure of the Board. SECTION 2. POWERS OF COMMITTEES. Any committee, to the extent provided in the resolution of the Board of Directors designating such committee, shall have all the authority of the Board, except with respect to: (a) The approval of any action for which the Code also requires any action by the shareholders; (b) The filling of vacancies on the Board or in any committee thereof; (c) The fixing of compensation of the directors for serving on the Board or on any committee thereof; (d) The amendment or repeal of these Bylaws or the adoption of new bylaws; (e) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) A distribution to the shareholders of the Corporation, except at a rate, in a periodic amount or within a price range determined by the Board of Directors; or (g) The designation of other committees of the Board or the appointment of members or alternate members thereof. ARTICLE VI. MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES THEREOF SECTION 1. PLACE AND MEETINGS. Regular meetings of the Board of Directors shall be held at any place within or without the State of California which has been designated from time to time by the Board or, in the absence of such designation, at the principal executive office of the Corporation. Special meetings of the Board shall be held either at any place within or without the State of California which has been designated in the notice of meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the Corporation. -9- 13 SECTION 2. ANNUAL MEETING. Immediately following each annual meeting of the shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization and the transaction of other business. Notice of any such meeting is not required. SECTION 3. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held without call at such time as shall be designated from time to time by the Board. Notice of any such meeting is not required. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time for any purpose or purposes by the Chairman of the Board or the President or any Vice President or the Secretary or any two directors of the Corporation. Notice shall be given of any special meeting of the Board. SECTION 5. NOTICE OF SPECIAL MEETINGS. Notice of the time and place of special meetings of the Board of Directors shall be delivered personally or by telephone to each director or sent to each director by first-class mail or telegraph, charges prepaid, addressed to each director at that director's address as shown on the records of the Corporation. Such notice shall be given four days prior to the holding of the special meeting if sent by mail or 48 hours prior to the holding thereof if delivered personally or given by telephone or telegraph. The notice or report shall be deemed to have been given at the time when delivered personally to the recipient or deposited in the mail or sent by other means of written communication. Notice of any special meeting of the Board of Directors need not specify the purpose thereof. SECTION 6. WAIVERS, CONSENTS AND APPROVALS. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 7. QUORUM; ACTION AT MEETINGS; TELEPHONE MEETINGS. (a) A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the directors present is the act of the Board of Directors, unless action by a greater proportion of the directors is required by law or the Articles of Incorporation. (b) A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. (c) Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment so long as all members participating in such meeting can hear one another. -10- 14 SECTION 8. ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. SECTION 10. MEETINGS OF AND ACTION BY COMMITTEES. The provisions of this Article VI apply to committees of the Board of Directors and action by such committees with such changes in the language of those provisions as are necessary to substitute the committee and its members for the Board and its members. ARTICLE VII. OFFICERS SECTION 1. OFFICERS. The Corporation shall have as officers, a President, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Chief Financial Officers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article VII. One person may hold two or more offices. SECTION 2. ELECTION OF OFFICERS. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article VII, shall be chosen by the Board of Directors. SECTION 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint by resolution, and may empower the Chairman of the Board, if there be such an officer, or the President, to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are determined from time to time by resolution of the Board or, in the absence of any such determination, as are provided in these Bylaws. Any appointment of an officer shall be evidenced by a written instrument filed with the Secretary of the Corporation and maintained with the corporate records. -11- 15 SECTION 4. REMOVAL AND RESIGNATION. (a) Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by resolution of the Board. (b) Subject to the rights, if any, of the corporation under any contract of employment, any officer may resign at any time effective upon giving written notice to the Chairman of the Board, President, any Vice President or the Secretary of this Corporation, unless the notice specifies a later time for the effectiveness of such resignation. SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. SECTION 6. CHAIRMAN OF THE BOARD. If there is a Chairman of the Board, he shall, if present, preside at all meetings of the Board of directors, exercise and perform such other powers and duties as may be from time to time assigned to him by resolution of the Board or prescribed by these Bylaws and, if there is no President, the Chairman of the Board shall be the chief executive officer of the Corporation and have the power and duties set forth in Section 7 of this Article VII. SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by these Bylaws or the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer and general manager of the Corporation and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by resolution of the Board. SECTION 8. VICE PRESIDENT. In the event of the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or, if not ranked, the Vice President designated by the Board, shall perform all duties of the President, and when so acting shall have all powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or as the President may from time to time delegate. SECTION 9. SECRETARY. (a) The Secretary shall keep or cause to be kept (1) the minute book, (2) the share register and (3) the seal, if any, of the Corporation. -12- 16 (b) The Secretary, an Assistant Secretary, or if they are absent or unable to act, any other officer shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or any committee of the Board of Directors. SECTION 10. CHIEF FINANCIAL OFFICER. (a) The Chief Financial Officer shall keep, or cause to be kept, the books and records of account of the Corporation. (b) The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated from time to time by resolution of the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the President and the Board, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed from time to time by the Board or as the President may from time to time delegate. ARTICLE VIII. RECORDS AND REPORTS SECTION 1. MINUTE BOOK. The Corporation shall keep or cause to be kept in written form at its principal executive office or such other place as the Board of Directors may order, a minute book which shall contain a record of all actions by its shareholders, Board or committees of the Board including the time, date and place of each meeting; whether a meeting is regular or special and, if special, how called; the manner of giving notice of each meeting and a copy thereof; the names of those present at each meeting of the Board or committees thereof; the number of shares present or represented at each meeting of the shareholders; the proceedings of all meetings; any written waivers of notice, consents to the holding of a meeting or approvals of the minutes thereof; and written consents for action without a meeting. SECTION 2. SHARE REGISTER. The Corporation shall keep or cause to be kept at its principal executive office or, if so provided by resolution of the Board of Directors, at the Corporation's transfer agent or registrar, a share register, or a duplicate share register, which shall contain the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. SECTION 3. BOOKS AND RECORDS OF ACCOUNT. The Corporation shall keep or cause to be kept at its principal executive office or such other place as the Board of Directors may order, adequate and correct books and records of account. -13- 17 SECTION 4. BYLAWS. The Corporation shall keep at its principal executive office or, in the absence of such office in the State of California, at its principal business office in the state, the original or a copy of the Bylaws as amended to date. SECTION 5. INSPECTION OF RECORDS. The shareholders and directors of the Corporation shall have all of the rights to inspect the books and records of the Corporation that are specified in Sections 213 and 1600 through 1602 of the Code. SECTION 6. ANNUAL REPORT TO SHAREHOLDERS. The Board of Directors shall cause a report to be sent to the shareholders not later than 120 days after the end of each fiscal year of the Corporation. Such report shall comply with the provisions of Section 1501 of the Code and shall be sent in the manner specified in subdivision (d) of Section 4 of Article III at least 15 days prior to the annual meeting of shareholders to be held during the next fiscal year. ARTICLE IX. MISCELLANEOUS SECTION 1. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, and any assignment or endorsement thereof, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. SECTION 2. CONTRACTS, ETC. - HOW EXECUTED. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board, no officer, employee or other agent shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. SECTION 3. CERTIFICATES OF STOCK. A certificate or certificates for shares of the capital stock of the Corporation shall be issued to each shareholder when the shares are fully paid or the Board of Directors may authorize the issuance of certificates for shares as partly paid provided that these certificates shall conspicuously state the amount of the consideration to be paid for them and the amount already paid. All certificates shall be signed in the name of the Corporation by the Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an Assistant Chief Financial Officer or the secretary or an Assistant Secretary, certifying the number of shares and the class or series thereof owned by the shareholder. Any or all of the signatures on a certificate may be by facsimile signature. In the event any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. -14- 18 SECTION 4. LOST CERTIFICATES. Except as provided in this section, no new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the Corporation and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. SECTION 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. Any person designated by resolution of the Board of Directors or, in the absence of such designation, the Chairman of the Board, the President or any Vice President, or by any other person authorized by any of the foregoing, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, owned by the corporation. SECTION 6. CONSTRUCTION AND DEFINITIONS. Unless the context other wise requires, the general provisions, rules of construction and definitions contained in the Code shall govern the construction of these Bylaws. SECTION 7. INDEMNIFICATION OF CORPORATE AGENTS; PURCHASE OF LIABILITY INSURANCE. (a) Subject only to the express limitations of the Corporation's Articles of Incorporation and Sections 204 and 317 of the Code, as the same may from time to time be amended, (i) the Corporation shall indemnify each of its directors and officers from and against any expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding to which such person was or is a party or is threatened to be made a party arising by reason of the fact that such person is or was a director or officer of the Corporation; and (ii) the Corporation may indemnify any other agent of the Corporation with respect to such proceedings if and to the extent the Board of Directors so determines by resolution. (b) The Corporation shall, if and to the extent the Board of Directors so determines by resolution, enter into indemnification agreements with its agents on the terms and conditions determined by the Board of Directors, subject to those limitations upon the Corporation's capacity to indemnify its agents set forth in the Corporation's Articles of Incorporation and Sections 204 and 317 of the Code, as the same may from time to time be amended. (c) Subject to the provisions of subdivision (i) of Section 317 of the Code, as the same may from time to time be amended, the Corporation shall, if and to the extent the Board of Directors so determines by resolution, purchase and maintain insurance in an amount and on behalf of such agents of the Corporation as the Board may specify in such resolution against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the capacity to indemnify the agent against such liability under the provisions of this Section 7. -15- 19 (d) The Corporation shall, if and to the extent the Board of Directors so determines by resolution, advance expenses incurred by an agent in defending any proceeding prior to the final disposition of such proceeding, subject to the provisions of subdivision (f) of Section 317 of the Code, as the same may from time to time be amended. (e) This Section 7 shall not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may be an agent, as defined in subdivision (f) hereof. (f) For purposes of this Section 7, an "agent" of the corporation includes any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, and includes an action or proceeding by or in the right of the Corporation to procure a judgment in its favor; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under subdivisions (d) or (e)(3) of Section 317 of the Code. ARTICLE X. AMENDMENTS SECTION 1. AMENDMENTS. New bylaws may be adopted or these Bylaws may be amended or repealed by the approval of an affirmative vote of a majority of the outstanding shares entitled to vote or by the Board of Directors. Notwithstanding the preceding sentence, the adoption of a bylaw (a) specifying or changing a fixed number of directors or the minimum or maximum number of directors, or (b) changing from a variable to a fixed board or vice versa may only be adopted by the approval of an affirmative vote of a majority of the outstanding shares [, SUBJECT TO THE PROVISIONS OF SECTION 1 OF ARTICLE IV OF THESE BYLAWS]. -16- EX-21 3 SUBSIDIARIES 1 Exhibit 21 Subsidiaries of Escalon Medical Corp. Escalon Pharmaceutical, Inc. Escalon Vascular Access, Inc. EX-23.1 4 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-4382 and Form S-3 No. 333-44513) of Escalon Medical Corp. and in the related Prospectuses, in the Registration Statement (Form S-8 No. 33-54994) pertaining to the 1988, 1989, 1990, 1991 and 1992 Stock Option Plans of Escalon Medical Corp., and in the Registration Statement (Form S-8 No. 33-80162) pertaining to the 1993 Stock Option Plan of Escalon Medical Corp. of our report dated August 14, 1997, except for Note 6 - Reverse Stock Split, as to which the date is November 20, 1997 with respect to the financial statements of Escalon Medical Corp. for the year ended June 30, 1997 included in its Annual Report (Form 10-K) for the year ended June 30, 1999. /s/ Ernst & Young LLP Princeton, New Jersey September 17, 1999 EX-23.2 5 CONSENT OF INDEPENDENT AUDITORS' 1 Exhibit 23.2 Consent of Independent Auditors' We consent to the incorporation by reference in the Registration Statements No. 33-54994 on Form S-8 pertaining to the 1988, 1989, 1990, 1991 and 1992 Stock Option Plans of Escalon Medical Corp., the Registration Statement No. 33-80162 on Form S-8 pertaining to the 1993 Stock Option Plan of Escalon Medical Corp. and the related Prospectus of our report dated August 13, 1999, with respect to the financial statements of Escalon Medical Corp. included in its Annual Report (Form 10-K) for the year ended June 30, 1999. /s/ PARENTE, RANDOLPH, ORLANDO CAREY & ASSOCIATES Philadelphia, Pennsylvania September 17, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 1 3,854,240 0 1,103,619 39,790 1,117,208 7,192,512 611,742 162,187 10,402,773 3,391,740 0 0 0 46,024,811 (39,747,110) 10,402,773 7,559,011 7,559,011 3,282,177 3,282,177 4,069,686 48,000 37,397 1,193,787 0 1,193,787 0 0 0 1,193,787 0.10 0.10
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