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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.
OR
| | Transitional report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transitional period
from _________to__________
COMMISSION FILE NUMBER 0-20127
ESCALON MEDICAL CORP.
(exact name of Registrant as specified in its charter)
PENNSYLVANIA 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
351 EAST CONESTOGA ROAD, WAYNE, PA 19087
(Address of principal executive offices, including zip code)
(610) 688-6830
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the last 90 days. YES |X| NO | |
Indicate the number of shares of outstanding stock of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Date: FEBRUARY 14, 2003 Shares of Common Stock, $0.001 par value: 3,345,851
ESCALON MEDICAL CORP.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of December 31, 2002
(Unaudited) and June 30, 2002 3
Condensed Consolidated Statements of Operations for the three and six
month periods ended December 31, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flow for the six
month periods ended December 31, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
2
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2002
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 296,163 $ 220,826
Accounts receivable, net 1,976,871 2,093,877
Inventory, net 1,806,585 1,572,067
Other current assets 390,589 400,820
------------ ------------
Total current assets 4,470,208 4,287,590
------------ ------------
Long-term note receivable 150,000 150,000
Furniture and equipment, net 558,305 626,377
Goodwill 10,591,795 10,591,795
Trademarks and trade names, net 601,806 601,806
License and distribution rights, net 225,475 246,988
Patents, net 188,175 193,541
Other assets 88,443 214,344
------------ ------------
Total assets $ 16,874,207 $ 16,912,441
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,475,000 $ 1,250,000
Current portion of long-term debt 2,542,874 2,085,963
Accounts payable 683,918 531,665
Accrued compensation 449,233 498,954
Other current liabilities 162,072 161,115
------------ ------------
Total current liabilities 5,313,097 4,527,697
Long-term debt, net of current portion 3,760,927 5,191,393
------------ ------------
Total liabilities 9,074,024 9,719,090
Shareholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares -- --
issued
Common stock, $0.001 par value; 35,000,000 shares authorized; 3,345,851
shares issued and outstanding at December 31, 2002 and June 30, 2002 3,346 3,346
Additional paid-in capital 46,228,710 46,228,710
Accumulated deficit (38,431,873) (39,038,705)
------------ ------------
Total shareholders' equity 7,800,183 7,193,351
------------ ------------
Total liabilities and shareholders' equity $ 16,874,207 $ 16,912,441
============ ============
See notes to condensed consolidated financial statements
3
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Product revenue $ 2,749,368 $ 2,413,266 $ 5,262,887 $ 4,884,504
Other revenue 517,810 418,455 1,012,631 862,932
----------- ----------- ----------- -----------
Revenues, net 3,267,178 2,831,721 6,275,518 5,747,436
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 1,279,044 992,668 2,357,963 2,220,930
Research and development 183,736 132,483 374,053 255,270
Marketing, general and administrative 1,278,014 1,295,245 2,566,142 2,440,838
----------- ----------- ----------- -----------
Total costs and expenses 2,740,794 2,420,396 5,298,158 4,917,038
----------- ----------- ----------- -----------
Income from operations 526,384 411,325 977,360 830,398
----------- ----------- ----------- -----------
Other income and expenses:
Equity in income of unconsolidated joint venture -- 20,967 -- 12,365
Interest income 828 466 1,478 1,356
Interest expense (179,540) (177,330) (372,007) (384,372)
----------- ----------- ----------- -----------
Total other income and expenses (178,712) (155,897) (370,529) (370,651)
----------- ----------- ----------- -----------
Net income $ 347,673 $ 255,428 $ 606,831 $ 459,747
=========== =========== =========== ===========
Basic net income per share $ 0.104 $ 0.078 $ 0.181 $ 0.140
=========== =========== =========== ===========
Diluted net income per share $ 0.103 $ 0.077 $ 0.178 $ 0.139
=========== =========== =========== ===========
Weighted average shares - basic 3,345,851 3,292,184 3,345,851 3,292,184
=========== =========== =========== ===========
Weighted average shares - diluted 3,390,122 3,318,740 3,409,933 3,318,740
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
4
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
2002 2001
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 606,831 $ 459,747
Adjustments to reconcile net income to net cash
provided by in operating activities:
Depreciation and amortization 176,332 101,012
Equity in net income of unconsolidated joint venture -- (12,365)
Disposal of furniture and equipment 927 --
Change in operating assets and liabilities:
Accounts receivable, net 117,006 227,515
Inventory, net (234,518) (50,916)
Other current and long-term assets 136,132 131,534
Accounts payable, accrued and other liabilities 103,490 102,043
----------- -----------
Net cash provided by operating activities 906,200 958,570
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from unconsolidated joint venture, net -- 206,611
Purchase of fixed assets (25,397) (52,366)
----------- -----------
Net cash (used in) / provided by investing activities (25,397) 154,245
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing 625,000 550,000
Line of credit repayment (400,000) (876,009)
Principal payments on term loans (1,030,466) (700,000)
Payments of financing fees -- (73,506)
----------- -----------
Net cash used in financing activities (805,466) (1,099,515)
----------- -----------
Net increase in cash and cash equivalents 75,337 13,300
Cash and cash equivalents, beginning of period 220,826 80,830
----------- -----------
Cash and cash equivalents, end of period $ 296,163 $ 94,130
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 377,053 $ 397,305
=========== ===========
See notes to condensed consolidated financial statements
5
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon
Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital"),
Sonomed EMS Srl ("Sonomed EMS") and Escalon Pharmaceutical, Inc. (jointly
referred to as "Escalon" or the "Company") have been prepared in accordance with
the rules and regulations of the United States Securities and Exchange
Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of financial position, results of operations
and cash flows for the interim periods presented. Operating results for interim
periods are not indicative of the results that may be expected for the fiscal
year ending June 30, 2003.
For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 2002 included in the Company's
annual report on Form 10-K.
2. COMPANY OVERVIEW
The following discussion should be read in conjunction with interim
condensed consolidated financial statements and the notes thereto, which are set
forth elsewhere in this report on Form 10-Q.
Escalon Medical Corp. was incorporated in California in 1987 as Intelligent
Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon
reincorporated in Delaware in November 1999, and then reincorporated in
Pennsylvania in November 2001. The Company operates in the healthcare market,
specializing in the development, marketing and distribution of ophthalmic
medical devices, vascular access devices and pharmaceuticals. The principal
regulatory body overseeing Escalon is the United States Food and Drug
Administration ("the FDA"). The FDA is authorized, at any time, to conduct an
inspection of registered medical device facilities to ensure compliance.
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 to the research and
development of ultrafast laser systems designed for the 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 privately held company in return
for an equity interest and future royalties on sales of products relating to the
laser technology. The privately held company undertook responsibility for
funding and developing the laser technology through to commercialization. The
privately held company began selling products related to the laser technology
during fiscal 2002.
To further diversify its product portfolio, in January 1999, the Company's
Vascular subsidiary acquired the vascular access product line from Endologix,
Inc. ("Endologix"), formerly Radiance Medical Systems, Inc. Vascular's products
use Doppler technology to aid medical personnel in locating arteries and veins
in difficult circumstances. Currently, this product line is concentrated in the
cardiac catheterization
6
market; however, the Company began marketing the products in the area of
oncology during fiscal 2002. In January 2000, the Company purchased Sonomed,
Inc., a privately held manufacturer of ophthalmic ultrasound diagnostic
equipment. In April 2000, Digital formed a joint venture, Escalon Medical
Imaging, LLC ("Imaging") with MegaVision, Inc. ("MegaVision"), a privately held
company, to develop and market a digital camera back for ophthalmic photography.
The Company terminated its joint venture with MegaVision and commenced
operations within its Digital business unit on January 1, 2002.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Sonomed, Vascular, Pharmaceutical, Digital
and Sonomed EMS. All intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and actions
management may undertake in the future, actual results in the future may
ultimately differ from those estimates presently being made.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of its products at the time
of shipment, when title and risk of loss transfer. The Company provides products
to distributors at agreed wholesale prices and to the balance of its customers
at set retail prices. Distributors can achieve discounts for accepting high
volume shipments. The discounts are reflected immediately in the net invoice
price, which is the basis for revenue recognition. No further discounts or
material sales incentives are given.
With respect to additional consideration related to the sale of the
Company's Silicone Oil product line and the licensing of the Company's
intellectual laser property, other revenue is recognized upon notification from
the licensees of amounts earned.
ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade are reported at net realizable value. Accounts
are written off when they are determined to be uncollectible based on
management's assessment of individual accounts. The allowance for doubtful
accounts is estimated based on the Company's historical losses and upon a
periodic review of individual accounts.
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 the 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 the grant.
7
INTANGIBLE ASSETS
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), "Goodwill and Other Intangible Assets," which discontinues the
amortization of goodwill and identifiable intangible assets that have indefinite
lives.
RECLASSIFICATIONS
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
4. NEW PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed of." SFAS No. 144 retains the previously
existing accounting requirements related to the recognition and measurement of
the impairment of long lived assets to be held and used, while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on
the Company's financial position or results of operations.
In January 2002, the SEC issued an interpretive release on disclosure
related to liquidity and capital resources, including off-balance sheet
arrangements. The Company does not have material off-balance sheet arrangements
or related party transactions and is not aware of factors that are reasonably
likely to adversely affect liquidity trends, other than those risk factors
presented in this and other Company filings.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This Statement
updates, clarifies and simplifies existing pronouncements related primarily to
accounting for extinguishment of debt and for leases. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002. The Company is currently
evaluating the impact of applying SFAS No. 145, but does not expect it to have a
material impact on its results of operations or its financial condition.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on its results of
operations or its financial condition.
On November 25, 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34 clarifies the requirements of FASB
Statement No. 5, Accounting for Contingencies (FAS 5), relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of the Interpretation
8
are effective for financial statements of interim or annual periods that end
after December 15, 2002. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's year-end. The Company is
currently evaluating the impact of adopting FIN 45, but does not expect it to
have a material impact on its results of operations or its financial condition.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - and amendment of FASB Statement No. 123." This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for the first interim period beginning after December 15, 2002. The
Company does not expect the adoption of SFAS No. 148 to have a material impact
on its results of operations or its financial condition.
On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of
Variable Interest Entities, an Interpretation of ARB 51. The primary objectives
of FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This new
model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective immediately, for VIE's created after January
31, 2003. FIN 46 is effective no later than the beginning of the first interim
or annual financial reporting period beginning after June 15, 2003. The Company
is currently evaluating the impact of adopting FIN 46, but does not expect it to
have a material impact on its results of operations or its financial condition.
9
5. PER SHARE INFORMATION
The Company follows Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share, "in presenting basic and diluted earnings per share. The
following table sets forth the computation of basic and diluted earnings per
share:
Three Months ended Six Months ended
December 31, December 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Numerator for basic and diluted
earnings per share:
Net income $ 347,672 $ 255,428 $ 606,831 $ 459,747
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,345,851 3,292,184 3,345,851 3,292,184
Effect of dilutive securities:
Employee stock options 44,271 26,556 64,082 26,556
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average and
assumed conversion 3,390,122 3,318,740 3,409,933 3,318,740
========== ========== ========== ==========
Basic earnings per share $ 0.104 $ 0.078 $ 0.181 $ 0.140
========== ========== ========== ==========
Diluted earnings per share $ 0.103 $ 0.077 $ 0.178 $ 0.139
========== ========== ========== ==========
6. INVENTORIES
Inventories, stated at lower of cost (determined on a first-in, first-out
basis) or market, consisted of the following:
December 31, June 30,
2002 2002
----------- -----------
Raw Materials/Work in Process $ 1,325,266 $ 1,273,611
Finished Goods 516,779 343,409
----------- -----------
1,842,045 1,617,020
Valuation Allowance (35,460) (44,953)
----------- -----------
Total inventory $ 1,806,585 $ 1,572,067
=========== ===========
7. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, effective July 1, 2001, Escalon
discontinued the amortization of goodwill and identifiable intangible assets
that have indefinite lives. Intangible assets that have finite lives will
continue to be amortized over their useful lives. The standard required that an
initial impairment assessment be completed by December 31, 2001. In November
2001, the Company evaluated whether the intangible assets were impaired and
reviewed the allocation of intangible assets related to the purchase of Sonomed
as of the January 2000 acquisition date, when the purchase price was allocated
based on information available at that time. Management concluded in December
2001 that the intangible assets
10
acquired with the purchase of Sonomed should be allocated as $10,547,488 to
goodwill and $665,000 to trademarks and trade names. The result of this
correction was solely a reclassification of the intangible assets among customer
lists, trademarks and trade names and goodwill. The total reported value of the
intangible assets did not change. Therefore, this correction had no affect on
reported earnings, net worth or cash flow for any prior fiscal years.
In November 2001, the Company evaluated whether the goodwill and other
non-amortizable intangible assets in the Sonomed and Vascular business units
were impaired. The Company concluded that the carrying value of goodwill and
other intangible assets did not exceed their fair values and therefore were not
impaired. The Company evaluated the carrying value of goodwill as compared to
its fair value in the Medical/Trek business unit and concluded that its carrying
value did not exceed its fair value and therefore was not impaired. The Company
made this conclusion after evaluating the discounted cash flow of the
Medical/Trek business unit. In accordance with SFAS No. 142, the Company's
intangible assets will be assessed for impairment on an annual basis.
The changes in the carrying amount of goodwill for the six-months ended
December 31, 2002 are as follows:
Medical/Trek Sonomed Vascular Total
------------ ---------- -------- -----------
Balance as of June 30, 2002 $125,027 $9,525,550 $941,218 $10,591,795
Goodwill acquired -- -- -- --
Impairment losses -- -- -- --
Goodwill written off related
to sale of business unit -- -- -- --
-------- ---------- -------- -----------
Balance as of December 31, 2002 $125,027 $9,525,550 $941,218 $10,591,795
======== ========== ======== ===========
Other intangible assets as of December 31, 2002, as allocated by reportable
segment are as follows:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------- ------------ --------
AMORTIZED INTANGIBLE ASSETS
Patents
Medical / Trek $ 257,301 $(106,041) $151,260
Vascular
36,915 -- 36,915
--------- --------- --------
Total $ 294,216 $(106,041) $188,175
========= ========= ========
License and distribution rights
Medical / Trek $ 180,182 $(155,784) $ 24,398
Pharmaceutical
272,185 (71,108) 201,077
--------- --------- --------
Total $ 452,367 $(226,892) $225,475
========= ========= ========
UNAMORTIZED INTANGIBLE ASSETS
Trademarks and trade names
Sonomed $ 601,806
---------
Total $ 601,806
=========
11
Amortization expense for the six-month periods ended December 31, 2002 and
2001, as allocated by business segment are as follows:
For the six-month period
ended December 31, 2002
------------------------
2002 2001
------- -------
Goodwill amortization
Medical / Trek $ -- $ --
Sonomed -- --
Vascular -- --
Patent amortization
Medical / Trek $ 5,366 $ 5,366
Vascular
License and distribution rights
amortization
Medical / Trek $11,261 $11,261
Pharmaceutical 10,251 9,251
Trademarks and trade names
Sonomed $ -- $ --
Estimated Annual Amortization Expense
For the year ending June 30, 2003 $53,764
For the year ending June 30, 2004 $42,502
For the year ending June 30, 2005 $31,241
8. LINE OF CREDIT AND LONG-TERM DEBT
On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. The lender granted a new $12,000,000 credit facility
to assist with the Sonomed acquisition. This included a $7,000,000 five-year
term loan, a $5,000,000 line of credit and the release of the requirement to
maintain a $1,000,000 certificate of deposit with the lender. The interest rate
on the term loan was based on prime plus 1.0% and the line of credit was based
on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this
financing. Interest rate cap agreements were used to reduce the potential impact
of increases in interest rates on the floating rate term loan and line of
credit. The Company incurred $122,800 in fees related to these rate cap
agreements. As of December 31, 2002, the interest rate cap agreements expired
and the related fees have been completely amortized. The finance fees are being
amortized over the term of the loans using the effective interest method. The
unamortized finance fees offset the outstanding balance of the loans.
On November 28, 2001, Escalon amended its loan agreement with the lender.
The amendment included converting the existing balances on the term loan and the
line of credit into a $7,900,000 term loan and a $2,000,000 available line of
credit. The aggregate balance of the debt outstanding did not change as a result
of this refinancing. As of December 31, 2002, the amount outstanding against the
line of credit was $1,475,000. Principal payments due on the term loan were
amended such that the balance remains due within the five-year term of the
original agreement, including a $2,000,000 balloon payment due on June 30, 2004.
Interest rates on the term loan and line of credit were increased to prime plus
1.75% and prime plus 1.50%, respectively. At December 31, 2002, the interest
rates applicable to the term loan and the line of credit were 6.00% and 5.75%,
respectively. The lender's prime rate at December 31, 2002 was 4.25%. In
connection with the amended agreement, Escalon issued to the lender warrants to
purchase 60,000 shares
12
of the Company's Common Stock at an exercise price of $3.66 per share. The
warrants were valued at $4,800 using the Black-Sholes option pricing method with
the following assumptions: risk-free interest rate of 5.0%, expected volatility
of .18, expected warrant life of 42 months from vesting and an expected dividend
rate of 0.0%. The Company also paid a $50,000 facility fee upon the execution of
the loan agreement, which is being amortized over the life of the term loan. The
unamortized finance fees offset the outstanding balance of the loans. Pursuant
to the amended agreement, on March 1, 2002, the Company began paying a 1.0%
facility fee that is payable quarterly through June 30, 2004, and is calculated
based on the aggregate principal amount outstanding under the term loan and line
of credit on January 1 of each year. All of the Company's assets collateralize
this amended agreement.
As of December 31, 2002, the term loan and line of credit contained various
covenants, among which was a requirement to maintain a defined ratio of earnings
before interest, taxes, depreciation and amortization ("EBITDA") to debt.
Escalon did not achieve the EBITDA to debt ratio, resulting in a technical
default under the loan agreement. The lender waived this requirement of the
agreement as of December 31, 2002, and for the twelve-month period ending
January 1, 2004.
On December 23, 2002, Spring Street Capital, L.L.C., acquired the Company's
bank debt. Bank debt consisted of term debt of $5,850,000 and $1,475,000
outstanding on a $2,000,000 line of credit.
9. SUBSEQUENT EVENT
On February 13, 2003, the Company entered into an Amended Agreement with
Spring Street Capital, L.L.C. The primary amendments of the Amended Agreement
were to reduce quarterly principal payments and extend the term of the
repayments, and to alter the covenants of the original bank agreement to make
them more reasonably attainable. The schedule below presents the amortization
under the Amended Agreement as compared to the superseded original bank
agreement:
2/13/03 Agreement 11/28/01 Agreement
----------------- ------------------
March 1, 2003 $ 300,000 $ 525,000
June 1, 2003 300,000 525,000
September 1, 2003 300,000 650,000
December 1, 2003 300,000 650,000
March 1, 2004 350,000 750,000
June 1, 2004 350,000 750,000
June 30, 2004 -- 2,000,000
September 1, 2004 350,000 --
December 1, 2004 350,000 --
March 1, 2005 400,000 --
June 1, 2005 400,000 --
September 1, 2005 2,450,000 --
---------- ----------
$5,850,000 $5,850,000
========== ==========
10. LITIGATION
As previously reported in reports filed with the SEC, on or about June 8,
1995, a purported class action complaint captioned George Kozloski v.
Intelligent Surgical Lasers, Inc. et al., 95 Civ. 4299, was filed in the U.S.
District Court for the Southern District of New York as a "related action" to In
Re Blech Securities Litigation (a litigation matter to which the Company is no
longer a party). The plaintiff purports to represent a class of all purchasers
of the Company's stock from November 17, 1993, to and including September 21,
1994. The complaint alleges that the Company, together with certain of its
officers and
13
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 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 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 reached an agreement to
settle this action on its behalf and on the behalf of its former and present
officers and directors, for $500,000. The Company's directors and officers
insurance carrier agreed to fund a significant portion of the settlement amount.
Both the Company and the insurance carrier deposited such funds in an escrow
account in 1996. The court approved the settlement after a fairness hearing on
September 11, 2002.
11. SEGMENTAL INFORMATION
During the six-month periods ended December 31, 2002 and 2001, Escalon's
operations were classified into four principal reporting segments that provide
different products or services. Each segment is subject to different marketing,
production and technology strategies.
For the six-month periods ended December 31,
(all numbers in the table below are reported in thousands)
-------------------------------------------------------------------------------------------------
Sonomed Vascular Medical / Trek Digital Total
-------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Product Revenue $ 3,019 $ 3,015 $ 1,342 $ 1,269 $ 650 $ 601 $252 $- $ 5,263 $ 4,885
Other revenue -- -- -- -- 1,013 863 -- -- 1,013 863
Revenue, net 3,019 3,015 1,342 1,269 1,663 1,464 252 -- 6,276 5,748
Income from operations 356 356 16 28 606 446 -- -- 978 830
Other income and
expenses:
Equity in loss of
unconsolidated JV -- -- -- -- -- -- -- 12 -- 12
Interest income -- -- -- -- 1 1 -- -- 1 1
Interest expense (356) (356) (16) (28) -- -- -- -- (372) (384)
Total other income
and expenses (356) (356) (16) (28) 1 1 -- 12 (371) (371)
Income before taxes -- -- -- -- 607 447 -- 12 607 459
Income taxes -- -- -- -- -- -- -- -- -- --
Net income (loss) -- -- -- -- 607 447 -- 12 607 459
Depreciation and
amortization 9 8 20 22 135 71 12 -- 176 101
Assets 11,754 11,981 2,173 2,465 2,600 2,205 347 261 16,874 16,912
Expenditures for long-
lived assets -- 26 -- -- 25 26 -- -- 25 52
14
The Company operates in the healthcare market, specializing in the
development, manufacture, marketing and distribution of ophthalmic medical
devices, pharmaceuticals and vascular access devices. The business segments
reported above are segments for which separate financial information is
available and for which operating results are evaluated regularly by executive
management in deciding how to allocate resources and assessing performance. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies disclosed on the Company's most
recently filed Form 10-K. For the purposes of this illustration, corporate
expenses, which principally consist of executive management and administrative
support functions, are allocated across the business segments based primarily on
each segment's net revenue. These expenses are otherwise included in the
Medical/Trek business unit.
During the six-month periods ended December 31, 2002 and 2001, Sonomed
derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These
products are used for diagnostic or biometric applications in ophthalmology.
Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM)
monitors, needles and catheter products. These products are used by medical
personnel to assist in gaining access to arteries and veins in difficult cases.
Medical/Trek derived its revenue from the sale ISPAN(TM) gas products, various
disposable ophthalmic surgical products, revenues derived from Bausch & Lomb's
sale of Silicone Oil and royalty revenue derived from a privately held entity.
Commencing January 1, 2002, Digital derived its revenue from the sale of the CFA
digital imaging system and related products.
During the six-month periods ended December 31, 2002 and 2001, there was
one entity, Bausch & Lomb, from which Escalon derived greater than 10% of its
consolidated net revenues. Revenues were $1,114,000 or 17.75% of consolidated
net revenues for the six-month period ended December 31, 2002 and were
$1,011,000, or 17.59% of consolidated net revenues for the six-month period
ended December 31, 2001. This revenue is included in the Medical/Trek business
unit. Of the consolidated net revenues reported above, $1,046,000, $77,000,
$19,000 and $32,000 were derived internationally in Sonomed, Vascular,
Medical/Trek and Digital, respectively, during the six-month period ended
December 31, 2002; and $1,070,000, $91,000 and $23,000 were derived
internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively,
during the six-month period ended December 31, 2001.
12. FORMATION OF SUBSIDIARY AND JOINT VENTURE
The Company formed Sonomed EMS, Srl. ("Sonomed EMS") on September 26, 2002
as a wholly owned subsidiary. Sonomed EMS, based in Milan, Italy, is in the
process of completing its organization under Italian law. Sonomed EMS will
operate as a marketing division of Sonomed in Europe. The Company is forming a
joint venture with one of its Asian distributors to expand its presence in that
market. Sonoscan Holdings, Inc. ("Sonoscan") will be a British Virgin Islands
company, of which, Escalon will own fifty percent. The formation of Sonoscan is
in the preliminary stages, but the joint venture is intended to assist Sonomed
in making further progress in the Asian market.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Form 10-Q Report and other written and
oral statements made from time to time by the Company do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "could," "estimate," "expect," "forecast," "intend,"
"may," "plan," "possible," "protect," "should," "will," and similar words or
expressions. The Company's forward-looking statements include certain
information relating to general business strategy, growth strategies, financial
results, liquidity, product
15
development, the introduction of new products, the potential markets and uses
for the Company's products, 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 and defending itself in litigation matters. One must
carefully consider forward-looking statements and understand that such
statements involve a variety of risks and uncertainties, known and unknown, and
may be affected by assumptions that fail to materialize as anticipated.
Consequently, no forward-looking statement can be guaranteed; and actual results
may vary materially. It is not possible to foresee or identify all factors
affecting the Company's forward-looking statements, and this list of factors
should not be considered an exhaustive statement of all risks, uncertainties or
potentially inaccurate assumptions. The Company undertakes no obligation to
update any forward-looking statement. Although it is not possible to create a
comprehensive list of all factors that may cause actual results to differ from
the Company's forward-looking statements, the most important factors include,
without limitation, the following:
FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING
Escalon's liquidity is affected by many factors, some of which arise from
fluctuations related to global markets and economies and some of which are based
on the normal ongoing operations of the Company's businesses. For instance, the
Company's current term loan with the Lender provides for quarterly principal
payments, and a $2,450,000 final balloon payment, which is due on
September 1, 2005. Although cash on hand, cash generated from operations and
cash available from the line of credit may be sufficient to satisfy the
Company's working capital, debt service, capital expenditures and research and
development until the balloon payment is due, the Company will be required to
secure alternative debt or equity financing in order to satisfy the balloon
payment, and management cannot assure that such financing will be available when
required on acceptable terms.
CONCENTRATION OF REVENUES
The Company realized 14.24% and 15.02% of its net revenue during the
six-month periods ended December 31, 2002 and 2001, respectively, from Bausch &
Lomb's sale of Silicone Oil. While management does not expect this revenue to
decline rapidly in the foreseeable future any such decrease would have a
significant impact on the Company's consolidated financial position; results of
operations and cash flows, and the Company's stock price could be negatively
impacted.
ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE INDUSTRIES
IN WHICH THE COMPANY COMPETES
It is difficult to ascertain whether the current economic downturn has
affected the Company's results. Management believes any effect has been limited
to the Sonomed business unit. Any further decline in customers' markets or
further decline in general economic conditions could result in reduction in
demand for Escalon's products and services and could harm the Company's
consolidated financial position, results of operations, cash flows and stock
price. Should it become necessary due to economic climate, the Company may not
be able to reduce expenditures quickly enough to maintain profitability and
service the Company's current debt. In addition, there is a risk that
cost-cutting initiatives would impair Escalon's ability to effectively develop
and market products and remain competitive in the industries in which the
Company competes. These measures could have long-term effects on Escalon's
business by reducing the Company's pool of technical talent, decreasing or
slowing improvements in products, making it more difficult for the Company to
respond to customers, limiting the Company's ability to increase production
quickly if and when the demand for Escalon's product increases and limiting the
Company's ability to hire and retain key personnel. These circumstances could
cause Escalon's earnings to be lower than they otherwise might be.
16
The Company could be affected by trends toward managed care, health care
cost containment, and other changes in government and private sector
initiatives, in the United States and other countries in which the Company does
business, that are placing increased emphasis on delivery of more cost-effective
medical therapies. Changes in governmental laws, regulations and accounting
standards and the enforcement thereof and agency or governmental actions or
investigations involving the industry in general or the Company in particular
may be adverse to the Company.
THE ABILITY OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS
The Company generally sells its products in industries that are
characterized by rapid technological changes, frequent new product introductions
and changing industry standards. Without timely introduction of new products and
enhancements, the Company's products will become technologically obsolete over
time, in which case the Company's revenue and operating results would suffer.
The success of the Company's new product offerings will depend on several
factors, including the Company's ability to: (i) properly identify customer
needs, (ii) innovate and develop new technologies, services and applications,
(iii) successfully commercialize new technologies in a timely manner, (iv)
manufacture and deliver Company products in sufficient volumes on time, (v)
differentiate Company offerings from competitors' offerings, (vi) price Company
products competitively, and (vii) anticipate competitors' announcements of new
products, services or technological innovations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends partly on the continued service of key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If the Company fails to retain and hire a sufficient
number of these personnel, the Company will not be able to maintain or expand is
business.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY RESULT IN
FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED
In the normal course of business, the Company engages in discussions with
third parties relating to strategic alliances, joint ventures and divestitures.
As a result of such transactions, the Company's financial results may differ
from the investment community's expectations in a given quarter. In addition,
strategic alliances may require the Company to integrate a different company
culture, management team and business infrastructure. The Company may have
difficulty developing, manufacturing and marketing the products of a strategic
alliance or joint venture in a way that enhances the performance of the product
lines to realize the value from the expected synergies. Depending on the size
and complexity of a strategic alliance or joint venture, the Company's
successful integration of the entity depends on a variety of factors including:
(i) the retention of key employees, (ii) the management of facility employees in
separate geographical areas. These efforts require varying levels of management
resources, which may divert the Company's attention away from other business
operations. If the Company does not realize the expected benefits or synergies
of such transactions, the Company's consolidated financial position, results of
operations and stock price could be negatively impacted.
THE OUTCOME OF LITIGATION MATTERS AND UNCERTAIN PROTECTION OF PATENTED AND
PROPRIETARY INFORMATION
Increased public interest in recent years in product liability claims in
the medical device industry could affect the Company should it become directly
involved. Recent events have made the investing public particularly sensitive to
listed companies' reporting practices and accounting policies in general. The
SEC could make regulatory changes that could have a direct affect on the
Company. Additionally, the Company may find it necessary to enforce its legal
right with respect to patented and proprietary information. The outcome of any
of these matters and the financial impact they may have on the Company cannot be
foreseen.
17
VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN ITS LISTING
ON THE NASDAQ SMALLCAP MARKET
The public stock markets have experienced significant volatility in stock
prices in recent years, which could cause the Company's stock price to
experience severe price changes that are unrelated or disproportionate to the
operating performance of the Company. The trading price of the Company's Common
Stock could be subject to wide fluctuations in response to, among other factors,
quarter to quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the healthcare industry or the global economy generally,
or market volatility unrelated to the Company's business and operating results.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain
listing requirements must be met. If the Company's securities were delisted,
investors could find it more difficult to dispose of them, or to obtain accurate
quotations as to the market value of the Company's securities.
COMPANY OVERVIEW
The following discussion should be read in conjunction with the interim
condensed consolidated financial statements and the notes thereto, which are set
forth elsewhere in this report on Form 10-Q.
Escalon Medical Corp. was incorporated in California in 1987 as Intelligent
Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon
reincorporated in Delaware in November 1999, and then reincorporated in
Pennsylvania in November 2001. The Company operates in the healthcare market,
specializing in the development, marketing and distribution of ophthalmic
medical devices, vascular access devices and pharmaceuticals. The principle
regulatory body overseeing Escalon is the United States Food and Drug
Administration ("the FDA"). The FDA is authorized, at any time, to conduct an
inspection of registered medical device facilities to ensure compliance. The
Company is in compliance with the FDA.
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 to the research and
development of ultrafast laser systems designed for the 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 privately held company in return
for an equity interest and future royalties on sales of products relating to the
laser technology. The privately held company undertook responsibility for
funding and developing the laser technology through to commercialization. The
privately held company began selling products related to the laser technology
during fiscal 2002.
To further diversify its product portfolio, in January 1999, the Company's
Vascular subsidiary acquired the vascular access product line from Endologix,
Inc. ("Endologix"), formerly Radiance Medical Systems, Inc. Vascular's products
use Doppler technology to aid medical personnel in locating arteries and veins
in difficult circumstances. Currently, this product line is concentrated in the
cardiac catheterization market; however, the Company began marketing the
products in the area of oncology during fiscal 2002. In January 2000, the
Company purchased Sonomed, Inc., a privately held manufacturer of ophthalmic
ultrasound diagnostic equipment. In April 2000, Digital formed a joint venture,
Escalon Medical Imaging, LLC ("Imaging") with MegaVision, Inc. ("MegaVision"), a
privately held company, to develop and market a digital camera back for
ophthalmic photography. The Company terminated its joint venture with MegaVision
and commenced operations within its Digital business unit on January 1, 2002.
18
The Company expects that results of operations may fluctuate from quarter
to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; (iii) general competitive and economic conditions of the
healthcare market; and (iv) availability of component parts and supplies from
suppliers.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed of." SFAS No. 144 retains the previously
existing accounting requirements related to the recognition and measurement of
the impairment of long lived assets to be held and used, while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on
the Company's financial position or results of operations.
In January 2002, the SEC issued an interpretive release on disclosure
related to liquidity and capital resources, including off-balance sheet
arrangements. The Company does not have material off-balance sheet arrangements
or related party transactions and is not aware of factors that are reasonably
likely to adversely affect liquidity trends, other than those risk factors
presented in this and other Company filings.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This Statement
updates, clarifies and simplifies existing pronouncements related primarily to
accounting for extinguishment of debt and for leases. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002. The Company is currently
evaluating the impact of applying SFAS No. 145, but does not expect it to have a
material impact on its results of operations or its financial condition.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on its results of
operations or its financial condition.
On November 25, 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34 clarifies the requirements of FASB
Statement No. 5, Accounting for Contingencies (FAS 5), relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of the Interpretation are effective for
financial statements of interim or annual periods that end after December 15,
2002. The provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company is currently
evaluating the impact of adopting FIN 45, but does not expect it to have a
material impact on its results of operations or its financial condition.
19
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - and amendment of FASB Statement No. 123." This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for the first interim period beginning after December 15, 2002. The
Company does not expect the adoption of SFAS No. 148 to have a material impact
on its results of operations or its financial condition.
On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of
Variable Interest Entities, an Interpretation of ARB 51. The primary objectives
of FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This new
model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective immediately, for VIE's created after January
31, 2003. FIN 46 is effective no later than the beginning of the first interim
or annual financial reporting period beginning after June 15, 2003. The Company
is currently evaluating the impact of adopting FIN 46, but does not expect it to
have a material impact on its results of operations or its financial condition.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The most
significant of those involve the application of SFAS No. 142, discussed above in
Note 7 to the Consolidated Financial Statements. The financial statements are
prepared in conformity with generally accepted accounting principles, and, as
such, include amounts based on informed estimates and judgments of management.
For example, estimates are used in determining valuation allowances for
uncollectible receivables, obsolete inventory, deferred income taxes and
purchased intangible assets. Actual results achieved in the future could differ
from current estimates. The Company used what it believes are reasonable
assumptions and, where applicable, established valuation techniques in making
its estimates.
THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001
Product revenues increased $336,000, or 13.92%, to $2,749,000 for the
three-month period ended December 31, 2002 as compared to $2,413,000 for the
same period in the prior fiscal year. Product revenue in the Sonomed business
unit increased $142,000, or 9.54%, to $1,629,000. This increase is primarily
attributed to the domestic market, where revenue increased $138,000. Product
revenue in the Vascular business unit increased $64,000, or 10.47%, to $675,000.
The increase primarily relates to increased usage in the marketplace. Product
revenue in the Medical/Trek business unit decreased $8,000, or 2.55%, to
$306,000. Revenue in the Digital business unit increased $139,000. The Company
terminated its joint venture and commenced operations within the Digital
business unit on January 1, 2002.
20
Product revenues increased $378,000, or 7.74%, to $5,263,000 for the
six-month period ended December 31, 2002 as compared to $4,885,000 for the same
period last fiscal year. Product revenue in the Sonomed business unit increased
$4,000, or 0.13%, to $3,019,000. Product revenue in Latin America and Europe has
decreased by $139,000. In Asia and Mexico product revenue has increased $98,000.
Domestic product revenue increased $30,000. Product revenue in the Vascular
business unit increased $73,000, or 5.75%, to $1,342,000. The increase primarily
relates to increased usage in the marketplace. Product revenue in the
Medical/Trek business unit increased $49,000, or 8.15%, to $650,000. OEM revenue
from Bausch & Lomb increased $74,000.
Other revenue increased $100,000, or 23.92%, to $518,000 for the
three-month period ended December 31, 2002 as compared to $418,000 for the same
period last fiscal year. The increase relates primarily to a $67,000 royalty
payment received from a privately held entity related to licensing of the
Company's intellectual laser technology. Escalon licensed the technology to the
privately held company in October 1997. These royalty payments commenced during
the fourth quarter of fiscal 2002 when the privately held company began selling
product related to the Company's intellectual laser technology. The remaining
$33,000 increase in other revenue relates to revenue earned from Bausch & Lomb
in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls
for annual step-downs in the calculation of Silicone Oil revenues to be received
by the Company. These step-downs occur during the first quarter of each fiscal
year through the remainder of the contract. For the three-month period ended
December 31, 2002, the step-down caused a $63,000 decrease in Silicone Oil
revenue that the Company would have otherwise received had the step-down not
occurred. The offsetting $96,000 increase in Silicone Oil revenue is due to
fluctuations in the market demand for the product. The Company does not have
knowledge as to what factors have affected Bausch & Lomb's sale of Silicone Oil.
Other revenue increased $150,000, or 17.38%, to $1,013,000 for the
six-month period ended December 31, 2002 as compared to $863,000 for the same
period last fiscal year. The increase relates primarily to $119,000 royalty
payments received from a privately held entity related to licensing of the
Company's intellectual laser technology. Escalon licensed the technology to the
privately held company in October 1997. These royalty payments commenced during
the fourth quarter of fiscal 2002 when the privately held company began selling
product related to the Company's intellectual laser technology. The remaining
$31,000 increase in other revenue relates to revenue earned from Bausch & Lomb
in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls
for annual step-downs in the calculation of Silicone Oil revenues to be received
by the Company. These step-downs occur during the first quarter of each fiscal
year through the remainder of the contract. For the six-month period ended
December 31, 2002, the step-down caused an approximate $125,000 decrease in
Silicone Oil revenue that the Company would have otherwise received had the
step-down not occurred. The offsetting $156,000 increase in Silicone Oil revenue
is due to fluctuations in the market demand for the product. The Company does
not have knowledge as to what factors have affected Bausch & Lomb's sale of
Silicone Oil.
Cost of goods sold totaled $1,279,000, or 39.12% of net revenue, for the
three-month period ended December 31, 2002 as compared to $993,000, or 35.06% of
net revenue for the same period last fiscal year. Cost of goods sold in the
Sonomed business unit totaled $726,000, or 44.57% of net revenue, as compared to
$635,000, or 42.67% of net revenue, for the same period last fiscal year. Cost
of goods sold in the Vascular business unit totaled $293,000, or 43.41% of net
revenue as compared to $161,000, or 26.35% of net revenue for the same period
last fiscal year. Cost of goods sold in the Medical/Trek business unit totaled
$194,000, or 63.30% of net revenue, as compared to $197,000, or 62.54% of net
revenue, for the same period last fiscal year. Fluctuations in Medical/Trek cost
of goods sold emanates from product mix, which is controlled primarily by market
demand
21
Cost of goods sold totaled $2,358,000, or 37.58% of net revenue, for the
six-month period ended December 31, 2002 as compared to $2,221,000, or 38.65% of
net revenue, for the same period last fiscal year. Cost of goods sold in the
Sonomed business unit totaled $1,306,000, or 43.26% of net revenue as compared
to $1,348,000, or 44.71% of net revenue for the same period last fiscal year.
Cost of goods sold in the Vascular business unit totaled $533,000, or 39.72% of
net revenue, as compared to $505,000, or 39.80% of net revenue, for the same
period last fiscal year. Cost of goods sold in the Medical/Trek business unit
totaled $411,000, or 63.23% of net revenue, as compared to $368,000, or 61.23%
of net revenue, for the same period last fiscal year. Fluctuations in
Medical/Trek cost of goods sold emanates from product mix, which is controlled
primarily by market demand.
Marketing, general and administrative expenses decreased $17,000, or 1.31%,
for the three-month period ended December 31, 2002 as compared to the same
period last fiscal year. In the Sonomed business unit, marketing, general and
administrative expenses increased $26,000, or 7.85%. Commissions increased
$35,000 primarily due to the Company commencing payments to certain
international distributors. Salaries and other personnel-related costs decreased
$16,000, primarily the result of decreased headcount. In the Vascular business
unit, marketing, general and administrative expenses increased $36,000, or
14.40%. Salaries and other personnel related costs increased $14,000, primarily
the result of increased headcount. Also contributing to the increase, the
Company began allocating from the Medical/Trek business unit certain expenses
related to the Wisconsin facility to the Vascular business unit. Marketing,
general and administrative expenses in the Medical/Trek business unit decreased
$167,000, or 23.52%. Legal expenses decreased $99,000. Expenditures last fiscal
year were unusually high due to required filings with the SEC relating to the
reincorporation into Pennsylvania, the issuance of shares to Endologix, Inc. and
certain litigation matters. Salaries and other personnel related costs decreased
$24,000, primarily the result of decreased headcount. Investor relations expense
decreased $18,000 and accounting fees decreased $16,000. Also contributing to
the decrease, the Company began allocating from the Medical/Trek business unit
certain expenses related to the Wisconsin facility to the Vascular business
unit. Offsetting these decreases was a $38,000 increase in corporate insurance
premiums related increases being instituted by the insurance industry in
general. Marketing, general and administrative expenses in the Digital business
unit were $62,000 for the three-month period ended December 31, 2002. The
Company terminated its joint venture and commenced operations within its Digital
business unit on January 1, 2002, and, therefore, during the previous fiscal
year these expenses were incurred within the joint venture.
Marketing, general and administrative expenses increased $125,000, or
5.12%, for the six-month period ended December 31, 2002 as compared to the same
period last fiscal year. In the Sonomed business unit, marketing, general and
administrative increased $68,000, or 10.59%. Commissions increased $52,000,
primarily due to the Company commencing payments to certain international
distributors. In the Vascular business unit, marketing, general and
administrative expenses increased $93,000, or 19.58%. Salaries and other
personnel related costs increased $46,000, primarily the result of increased
headcount. Also contributing to the increase, the Company began allocating from
the Medical/Trek business unit certain expenses related to the Wisconsin
facility to the Vascular business unit. Marketing, general and administrative
expenses in the Medical/Trek business unit decreased $205,000, or 15.60%. Legal
expenses decreased $96,000. Expenditures last fiscal year were unusually high
due to required filings with the SEC relating to the reincorporation into
Pennsylvania, the issuance of shares to Endologix, Inc. and certain litigation
matters. Salaries and other personnel related costs decreased $40,000, primarily
the result of decreased headcount. Investor relations expense decreased $14,000
and accounting fees decreased $17,000. Also contributing to the decrease, the
Company began allocating from the Medical/Trek business unit certain expenses
related to the Wisconsin facility to the Vascular business unit. Offsetting
these decreases was a $69,000 increase in corporate insurance premiums related
to an audit of prior year premiums and premium increases being instituted by the
insurance industry in general. Marketing, general and administrative expenses in
the Digital business unit were $144,000 for the six-month period ended December
31, 2002. The Company terminated its joint venture and commenced operations
within its Digital business unit on January 1, 2002, and therefore, during the
previous fiscal year these expenses were incurred within the joint venture.
22
Research and development expenses increased $52,000, or 39.39%, for the
three-month period ended December 31, 2002 as compared to the same period last
fiscal year. The increase primarily relates to consulting expenses incurred in
connection with product development.
Research and development expenses increased $119,000, or 46.67%, for the
six-month period ended December 31, 2002 as compared to the same period last
fiscal year. The increase primarily relates to consulting expenses incurred in
connection with product development.
The Company terminated its joint venture and commenced operations within
its Digital business unit on January 1, 2002. The Company recognized $21,000 and
$12,000 net income during the three and six-month periods ended December 31,
2001, respectively.
Interest income remained relatively unchanged for the three-month period
ended December 31, 2002 as compared to the same period last fiscal year; $800
and $500, respectively. Interest income remained relatively unchanged for the
six-month period ended December 31, 2002 as compared to the same period last
fiscal year; $1,500 and $1,400, respectively.
Interest expense increased $3,000 for the three-month period ended December
31, 2002 as compared to the same period last fiscal year. Interest expense
decreased $12,000 for the six-month period ended December 31, 2002 as compared
to the same period last fiscal year.
There is no provision for federal income taxes for the periods presented as
a result of utilization of net operating loss carryforwards and related changes
in the deferred tax valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, Escalon had cash and cash equivalents of $296,000 as
compared to $221,000 at June 30, 2002, an increase of $75,000. Cash provided
from operations was $906,000. These funds, in addition to $225,000 provided by
additional net borrowings on the line of credit with the lender were used to pay
down the Company's term loan with the lender as well as the Company's note
payable to Endologix, Inc. by a combined $1,030,000. The Company also purchased
$25,000 of fixed assets during the six-month period ended December 31, 2002.
On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. The lender granted a new $12,000,000 credit facility
to assist with the Sonomed acquisition. This included a $7,000,000 five-year
term loan, a $5,000,000 line of credit and the release of the requirement to
maintain a $1,000,000 certificate of deposit with the lender. The interest rate
on the term loan was based on prime plus 1.0% and the line of credit was based
on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this
financing. Interest rate cap agreements were used to reduce the potential impact
of increases in interest rates on the floating rate term loan and line of
credit. The Company incurred $122,800 in fees related to these rate cap
agreements. As of December 31, 2002, the interest rate cap agreements expired
and the related fees have been completely amortized. The finance fees are being
amortized over the term of the loans using the effective interest method. The
unamortized finance fees offset the outstanding balance of the loans.
On November 28, 2001, Escalon amended its loan agreement with the lender.
The amendment included converting the existing balances on the term loan and the
line of credit into a $7,900,000 term loan and $2,000,000 available line of
credit. The aggregate balance of debt outstanding did not change as a result of
this refinancing. As of December 31, 2002, the amount outstanding against the
line of credit was $1,475,000. Principal payments due on the term loan were
amended such that the balance remains due within the five-year term of the
original agreement, including a $2,000,000 balloon payment due on June 30, 2004.
Interest rates on the term loan and line of credit were increased to prime plus
1.75% and prime plus 1.50%, respectively. At December 31, 2002, the interest
rates applicable to the term loan and the line
23
of credit were 6.00% and 5.75%, respectively. The lender's prime rate at
December 31, 2002 was 4.25%. In connection with the amended agreement, Escalon
issued to the lender, warrants to purchase 60,000 shares of the Company's Common
Stock at an exercise price of $3.66 per share. The warrants were valued at
$4,800 using the Black-Sholes option pricing method with the following
assumptions: risk-free interest rate of 5.0%, expected volatility of .18,
expected warrant life of 42 months from vesting and an expected dividend rate of
0.0%. The Company also paid a $50,000 facility fee upon execution of the loan
agreement that is being amortized over the life of the loans. The unamortized
balance offsets the outstanding balance of the loans. Pursuant to the amended
agreement, on March 1, 2002, the Company began paying a 1.0% per annum facility
fee that is payable quarterly through June 30, 2004, and is calculated based on
the aggregate principal amount outstanding under the term loan and line of
credit on January 1 of each year. All of the Company's assets collateralize this
amended agreement.
As of December 31, 2002, the term loan and line of credit contained various
covenants among which was a requirement to maintain a defined ratio of earnings
before interest, taxes, depreciation and amortization ("EBITDA") to debt.
Escalon did not achieve the EBITDA to debt ratio, resulting in a technical
default under the loan agreement. The lender waived this requirement of the
agreement as of December 31, 2002, and for the twelve-month period ending
January 1, 2004.
On December 23, 2002, Spring Street Capital, L.L.C., acquired the Company's
bank debt. Bank debt consisted of term debt of $5,850,000 and $1,475,000
outstanding on a $2,000,000 line of credit. On February 13, 2003, the Company
entered into an Amended Agreement with Spring Street Capital, L.L.C. The primary
amendments of the Amended Agreement were to reduce quarterly principal payments
and extend the term of the repayments, and to alter the covenants of the
original bank agreement to make them more reasonably attainable. The schedule
below presents the amortization under the Amended Agreement as compared to the
superseded original bank agreement:
2/13/03 Agreement 11/28/01 Agreement
----------------- ------------------
March 1, 2003 $ 300,000 $ 525,000
June 1, 2003 300,000 525,000
September 1, 2003 300,000 650,000
December 1, 2003 300,000 650,000
March 1, 2004 350,000 750,000
June 1, 2004 350,000 750,000
June 30, 2004 -- 2,000,000
September 1, 2004 350,000 --
December 1, 2004 350,000 --
March 1, 2005 400,000 --
June 1, 2005 400,000 --
September 1, 2005 2,450,000 --
----------------- ------------------
$5,850,000 $5,850,000
================= ==================
On January 21, 1999, the Company's Vascular subsidiary and Endologix, Inc.
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
Escalon acquired for cash the assets of Endologix's vascular access business,
and also agreed to pay royalties based on future sales of the products of the
vascular access business for a period of five years following the close of the
sale, with a guaranteed minimum royalty of $300,000 per year. On February 1,
2001, the parties amended the agreement to provide an adjustment in the terms of
the payment of the royalties. Pursuant to the amendments, Escalon paid $17,558
in cash to Endologix, delivered a short-term note in the amount of $64,884 that
was satisfied in January 2002, and an additional note in the amount of $717,558,
payable in eleven quarterly installments that commenced April 15, 2002, and
Escalon issued 50,000 shares of its Common Stock to Endologix.
24
Cash on hand, cash generated from operations and cash available from the
line of credit may be sufficient to satisfy the Company's working capital, debt
service, capital expenditures and research and development until the balloon
payment is due. Management has refinanced its debt such that repayment terms are
consistent with cash generated from operations. The Company may be required to
secure alternative debt or equity financing in order to satisfy any balloon
payment of the amended loan agreement, and management cannot assure that such
financing will be available when required on acceptable terms. Additionally, the
Company relies on the Silicone Oil revenue received from Bausch & Lomb, which
are expected to continue in varying amounts through fiscal 2005. While
management does not expect this revenue to decline rapidly in the foreseeable
future, any such decrease would have a significant impact on the Company's
consolidated financial position, results of operations and cash flows. The
Company's stock price could be negatively impacted as well. The Bausch & Lomb
revenues reduce on an annual basis due to a contractual step-down. Additionally,
the revenues are based on sales of the Silicone Oil product line by Bausch &
Lomb and will be dependant on their ability to maintain their market share.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, the
following listing requirements must be met:
- Stockholder's equity of $2,500,000 or market value of listed
securities of $35,000,000 or net income from continuing operations (in
latest fiscal year or two of the last three fiscal years) of $500,000;
- 500,000 publicly held shares;
- $1,000,000 market value of publicly held shares;
- A minimum bid price of $1;
- 300 shareholders (round lot holders);
- Two market makers; and
- Established corporate governance
As of December 31, 2002, Escalon has complied with these requirements. If
Escalon's securities were delisted, a shareholder would find it more difficult
to dispose of them, or obtain accurate quotations as to the market value of the
Company's securities.
SEGMENTAL REPORTING
During the six-month periods ended December 31, 2002 and 2001, Escalon's
operations were classified into four principal reporting segments that provide
different products or services. Separate management of each segment is required
because each business segment is subject to different marketing, production and
technology strategies.
25
For the six-month periods ended December 31,
(all numbers in the table below are reported in thousands)
-------------------------------------------------------------------------------------------------
Sonomed Vascular Medical / Trek Digital Total
-------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Product Revenue $ 3,019 $ 3,015 $ 1,342 $ 1,269 $ 650 $ 601 $252 $- $ 5,263 $ 4,885
Other revenue -- -- -- -- 1,013 863 -- -- 1,013 863
Revenue, net 3,019 3,015 1,342 1,269 1,663 1,464 252 -- 6,276 5,748
Income from operations 356 356 16 28 606 446 -- -- 978 830
Other income and
expenses:
Equity in loss of
unconsolidated JV -- -- -- -- -- -- -- 12 -- 12
Interest income -- -- -- -- 1 1 -- -- 1 1
Interest expense (356) (356) (16) (28) -- -- -- -- (372) (384)
Total other income
and expenses (356) (356) (16) (28) 1 1 -- 12 (371) (371)
Income before taxes -- -- -- -- 607 447 -- 12 607 459
Income taxes -- -- -- -- -- -- -- -- -- --
Net income (loss) -- -- -- -- 607 447 -- 12 607 459
Depreciation and
amortization 9 8 20 22 135 71 12 -- 176 101
Assets 11,754 11,981 2,173 2,465 2,600 2,205 347 261 16,874 16,912
Expenditures for long-
lived assets -- 26 -- -- 25 26 -- -- 25 52
The Company operates in the healthcare market, specializing in the
development, manufacture, marketing and distribution of ophthalmic medical
devices, pharmaceuticals and vascular access devices. The business segments
reported above are segments for which separate financial information is
available and for which operating results are evaluated regularly by executive
management in deciding how to allocate resources and assessing performance. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies disclosed on the Company's most
recently filed Form 10-K. For the purposes of this illustration, corporate
expenses, which principally consist of executive management and administrative
support functions, are allocated across the business segments based primarily on
each segment's net revenue. These expenses are otherwise included in the
Medical/Trek business unit.
During the six-month periods ended December 31, 2002 and 2001, Sonomed
derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These
products are used for diagnostic or biometric applications in ophthalmology.
Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM)
monitors, needles and catheter products. These products are used by medical
personnel to assist in gaining access to arteries and veins in difficult cases.
Medical/Trek derived its revenue from the sale ISPAN(TM) gas products, various
disposable ophthalmic surgical products, revenues derived from Bausch & Lomb's
sale of Silicone Oil and royalty revenue derived from a privately held entity.
Commencing January 1, 2002, Digital derived its revenue from the sale of the CFA
digital imaging system and related products.
During the six-month periods ended December 31, 2002 and 2001, Escalon had
one entity, Bausch & Lomb, from which greater than 10% of consolidated net
revenues were derived. Revenues were $1,114,000 or 17.75% of consolidated net
revenues for the six-month period ended December 31, 2002 and
26
were $1,011,000, or 17.59% of consolidated net revenues for the six-month period
ended December 31, 2001. This revenue is included in the Medical/Trek business
unit. Of the consolidated net revenues reported above, $1,046,000, $77,000,
$19,000 and $32,000 were derived internationally in Sonomed, Vascular,
Medical/Trek and Digital, respectively, during the six-month period ended
December 31, 2002; and $1,070,000, $91,000 and $23,000 were derived
internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively,
during the six-month period ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about Escalon's financial instruments,
consisting primarily of debt obligations that are sensitive to changes in
interest rates. For debt obligations, the table represents principal cash flows
and related interest rates by expected maturity dates. Interest rates are based
upon the prime rate at December 31, 2002 plus 1.75% on the term loan, the prime
rate plus 1.50% on the line of credit and the prime rate plus 1.00% on the
Endologix note.
Long-term debt classified as current as of December 31,
---------------------------------------------------------------------
2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---------- -----
Term loan 2,350,000 3,500,000 -- -- -- 5,850,000
Interest rate 6.50% -- -- -- --
Line of credit 1,475,000 -- -- -- -- 1,475,000
Interest rate 6.25% -- -- -- --
Endologix note 260,932 260,927 -- -- -- 521,859
Interest rate 5.75% 5.75% -- -- --
Deferred finance fees (68,058) -- -- -- -- (68,058)
---------------------------------------------------------------------
Total 4,017,874 3,760,927 -- -- -- 7,778,801
=====================================================================
EXCHANGE RATE RISK
During the six-month periods ended December 31, 2002 and 2001,
approximately 16.67% and 18.62% of Escalon's consolidated net revenue was
derived from international sales. The price of all products sold overseas is
denominated in United States dollars and consequently the Company incurs no
exchange rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Senior Vice President of
Finance, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Exchange Act) as of a date ("the Evaluation Date") within 90
days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and Senior Vice President of
Finance concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the
material information relating to the Company (or the Company's
consolidated subsidiaries) required to be included in our periodic SEC
filings.
27
(b) Changes in Internal Controls
There were no significant changes in our internal controls during the
period covered by this report or, to management's knowledge, in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 10 of the Notes to Condensed Consolidated
Financial Statements in Part I is incorporated herein by reference thereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 1, 2002. The
following matters were acted upon:
1. The following persons were elected as directors of the Company for the
next three years until their successors are elected and qualified.
Nominees for Director For Against Abstain
--------------------- --------- ------- -------
Richard J. DePiano 2,943,367 126,870 0
Jay L. Federman, MD 2,943,367 126,870 0
There were no broker held non-voted shares represented at the meeting
with respect to this matter.
2. The shareholders approved an amendment to the Company's 1999 Equity
Incentive Plan to increase the number of shares available under the
Plan from 635,000 to 835,000 shares of common stock.
For Against Abstain
--------- ------- -------
525,048 261,047 0
There were 2,275,606 broker held non-voted shares represented at the
meeting with respect to this matter.
3. The shareholders ratified the appointment of Parente Randolph, LLC as
the Company's independent auditors for the fiscal year 2003.
For Against Abstain
--------- ------- -------
2,964,657 99,905 5,675
There were no broker held non-voted shares represented at the meeting
with respect to this matter.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The following is a list of exhibits filed as a part of this quarterly
report on Form 10-Q.
10.14 2003 Amendment to Loan Agreement
10.15 Allonge to Amended and Restated Term / Time Note
10.16 Allonge to Amended and Restated Line of Credit Note
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard J. DePiano
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Harry M. Rimmer
Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
Date: February 14, 2002 By: /s/ Richard J. DePiano
----------------- -----------------------
Richard J. DePiano
Chairman and
Chief Executive Officer
Date: February 14, 2002 By: /s/ Harry M. Rimmer
----------------- -------------------
Harry M. Rimmer
Senior Vice-President - Finance
CERTIFICATION
I, Richard J. DePiano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
29
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Richard J. DePiano Date: February 14, 2003
-----------------------
Richard J. DePiano
Chairman and Chief Executive Officer
CERTIFICATION
I, Harry M. Rimmer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
30
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Harry M. Rimmer Date: February 14, 2003
--------------------
Harry M. Rimmer
Senior Vice President - Finance
31
Exhibits
The following is a list of exhibits filed as a part of this quarterly
report on Form 10-Q.
10.14 2003 Amendment to Loan Agreement
10.15 Allonge to Amended and Restated Term / Time Note
10.16 Allonge to Amended and Restated Line of Credit Note
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard J. DePiano
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Harry M. Rimmer