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, 2003.
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)
575 EAST SWEDESFORD ROAD, SUITE 100, WAYNE, PA 19087
(Address or 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 past 90 days. YES (X) NO ( )
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES ( ) NO (X)
At February 2, 2004, 3,409,829 shares of Common Stock were outstanding.
ESCALON MEDICAL CORP.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003
(Unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations for the three- and
six-month periods ended December 31, 2003 and 2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six-month
periods ended December 31, 2003 and 2002 (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 26
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 28
2
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2003 2003
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 422,600 $ 298,390
Accounts receivable, net 2,038,567 2,364,370
Inventory, net 1,854,658 1,785,480
Other current assets 150,513 310,420
------------- -------------
Total current assets 4,466,338 4,758,660
------------- -------------
Long-term note receivable 150,000 150,000
Furniture and equipment, net 462,773 516,686
Goodwill 10,591,795 10,591,795
Trademarks and trade names, net 616,906 616,906
License and distribution rights, net 1,877 13,138
Patents, net 177,445 182,811
Other assets 50,398 60,235
------------- -------------
Total assets $ 16,517,532 $ 16,890,231
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 250,000 $ 975,000
Current portion of long-term debt 1,631,350 1,510,344
Accounts payable 274,813 454,711
Accrued compensation 498,827 708,231
Other current liabilities 223,528 222,036
------------- -------------
Total current liabilities 2,878,518 3,870,322
Long-term debt, net of current portion 3,196,019 4,080,461
------------- -------------
Total liabilities 6,074,537 7,950,783
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; 3,408,271 and
3,365,359 shares issued and outstanding at December 31, 2003 and June 30,
2003, respectively 3,408 3,365
Additional paid-in capital 46,321,798 46,262,411
Accumulated deficit (35,882,211) (37,326,328)
------------- -------------
Total shareholders' equity 10,442,995 8,939,448
------------- -------------
Total liabilities and shareholders' equity $ 16,517,532 $ 16,890,231
============= =============
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,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Product revenue $ 3,144,034 $ 2,749,368 $ 5,985,160 $ 5,262,887
Other revenue 613,891 517,810 1,184,407 1,012,631
----------- ----------- ----------- -----------
Revenues, net 3,757,925 3,267,178 7,169,567 6,275,518
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 1,249,660 1,279,044 2,462,459 2,357,963
Research and development 225,992 183,736 433,122 374,053
Marketing, general and administrative 1,321,653 1,278,014 2,535,285 2,566,142
----------- ----------- ----------- -----------
Total costs and expenses 2,797,305 2,740,794 5,430,866 5,298,158
----------- ----------- ----------- -----------
Income from operations 960,620 526,384 1,738,701 977,360
----------- ----------- ----------- -----------
Other income and expenses:
Interest income 282 828 961 1,478
Interest expense (107,880) (179,540) (226,439) (372,007)
----------- ----------- ----------- -----------
Total other income and expenses (107,598) (178,712) (225,478) (370,529)
----------- ----------- ----------- -----------
Income before income taxes $ 853,022 $ 347,672 $ 1,513,223 $ 606,831
Income taxes 32,061 - 69,106 -
----------- ----------- ----------- -----------
Net income $ 820,961 $ 347,672 $ 1,444,117 $ 606,831
=========== =========== =========== ===========
Basic net income per share $ 0.243 $ 0.104 $ 0.429 $ 0.181
=========== =========== =========== ===========
Diluted net income per share $ 0.196 $ 0.103 $ 0.357 $ 0.178
=========== =========== =========== ===========
Weighted average shares - basic 3,371,920 3,345,851 3,368,643 3,345,851
=========== =========== =========== ===========
Weighted average shares - diluted 4,187,117 3,390,122 4,046,118 3,409,933
=========== =========== =========== ===========
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,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,444,117 606,831
Adjustments to reconcile net income to net cash
provided by in operating activities:
Depreciation and amortization 128,422 176,332
Disposal of furniture and equipment - 927
Change in operating assets and liabilities:
Accounts receivable, net 325,803 117,006
Inventory, net (69,178) (234,518)
Other current and long-term assets 169,744 136,132
Accounts payable, accrued and other liabilities (387,810) 103,490
------------ ------------
Net cash provided by operating activities 1,611,098 906,200
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (36,876) (25,397)
------------ ------------
Net cash used in investing activities (36,876) (25,397)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing 153,981 625,000
Line of credit repayment (878,981) (400,000)
Principal payments on term loans (784,442) (1,030,466)
Issuance of common stock, net of retirement 59,430 -
------------ ------------
Net cash used in financing activities (1,450,012) (805,466)
------------ ------------
Net increase in cash and cash equivalents 124,210 75,337
Cash and cash equivalents, beginning of period 298,390 220,826
------------ ------------
Cash and cash equivalents, end of period $ 422,600 $ 296,163
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 222,696 $ 377,053
============ ============
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 Company operates in the healthcare market, specializing in the
development, manufacture, marketing and distribution of ophthalmic medical
devices, ophthalmic pharmaceuticals and vascular devices.
The accompanying unaudited condensed consolidated financial statements
include accounts of Escalon Medical Corp. and its subsidiaries Sonomed, Inc.
("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon Digital Vision,
Inc. ("EMI"), Sonomed EMS, Sr1 ("Sonomed EMS") and Escalon Pharmaceutical, Inc.
("Pharmaceutical") (collectively referred to as "Escalon" or the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying condensed consolidated financial statements are
unaudited and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Accordingly, these condensed
consolidated financial statements should be read in conjunction with
consolidated financial statements and notes thereto contained in the Company's
2003 Annual Report on Form 10-K. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial position,
results of operations and cash flows for interim periods presented. The results
of operations are not necessarily indicative of the results that may be expected
for the full fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Sonomed, Vascular, EMI, Sonomed EMS
and Pharmaceutical. All intercompany accounts and 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 estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For the purposes of reporting cash flows, the Company considers all
cash accounts that are not subject to withdrawal restrictions or penalties and
highly liquid investments with original maturities of 90 days or less to be cash
and cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products at the
time of shipment, when title and risk of loss transfer. The Company provides
products to its distributors at agreed wholesale prices and to the balance of
its customers at set retail prices. Distributors can receive 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
material discounts or sales incentives are given.
6
The Company's considerations for recognizing revenue upon shipment of
products to a distributor are based on the following:
- Persuasive evidence that an arrangement (purchase order and sales
invoice) exists between a willing buyer (distributor) and the Company
that outlines the terms of the sale (company information, quantity of
goods, purchase price and payment terms). The buyer (distributor) does
not have an immediate right of return, as the Company must first
consent in writing and is not required to do so.
- Shipping terms are ex-factory shipping point. At this point the buyer
(distributor) takes title to the goods and is responsible for all risks
and rewards of ownership, including insuring the goods as necessary.
- The Company's price to the buyer (distributor) is fixed and
determinable as specifically outlined on the sales invoice. The sales
arrangement does not have customer cancellation or termination clauses.
- The buyer (distributor) places a purchase order with the Company; the
terms of the sale are cash, COD or credit. Customer credit is
determined based on the Company's policies and procedures related to
the buyer's (distributor's) creditworthiness. Based on this
determination, the Company believes that collectibility is reasonably
assured.
Provision has been made for estimated sales returns based on historical
experience.
With respect to additional consideration related to the sale of
Silicone Oil by Bausch & Lomb and the licensing of the Company's intellectual
laser technology, revenue is recognized upon notification from the licensees of
amount earned or upon receipt of royalty payments.
SHIPPING AND HANDLING REVENUES AND COSTS
Shipping and handling revenues are included in product revenue and the
related costs are included in cost of goods sold.
INVENTORIES
Raw materials/work in process and finished goods are recorded at lower
of cost (first-in, first-out) or market.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at net realizable value. The Company
performs ongoing credit evaluations of customers' financial condition and does
not require collateral for accounts receivable arriving in the normal course of
business. The Company maintains allowances for potential credit losses based on
the Company's historical losses and upon periodic review of individual balances.
Accounts are written off when they are determined to be uncollectible based on
management's assessment of individual accounts. Credit losses, when realized,
have been within the range of management's expectations. Allowance for doubtful
accounts was $121,904 and $261,351 at December 31, 2003 and June 30, 2003,
respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets, which are estimated to be over three to ten years. Depreciation for the
three-month periods ended December 31, 2003 and 2002 was $45,230 and $46,542,
respectively. Depreciation for the six-month periods ended December 31, 2003 and
2002 was $90,789 and $92,548, respectively.
7
LONG-LIVED ASSETS
Management assesses the recoverability of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable from its future undiscounted cash flows. If it is
determined that impairment has occurred, an impairment loss is recognized for
the amount by which the carrying amount of the assets exceeds its estimated fair
value.
INTANGIBLE ASSETS
The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," which discontinues the
amortization of goodwill and identifiable intangible assets that have indefinite
lives. In accordance with SFAS 142, these assets are tested for impairment on an
annual basis.
STOCK-BASED COMPENSATION
The Company reports stock-based compensation through the
disclosure-only requirements of Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," as amended by
Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting
for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB
No. 123." Compensation expense for options is measured using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the
exercise price of the Company's employee stock options is generally equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
SFAS 123 establishes an alternative method of expense recognition for
stock-based compensation awards based on fair values. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123.
Three-Month Period Ended Six-Month Period Ended
December 31, December 31,
2003 2002 2003 2002
---------- ----------- ----------- -----------
Net Income, as reported $ 820,961 $ 347,672 $ 1,444,117 $ 606,831
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects (292,554) (23,658) (310,657) (78,980)
---------- ----------- ----------- -----------
Pro forma net income $ 528,407 $ 324,014 $ 1,133,460 $ 527,851
========== =========== =========== ===========
Earnings per share:
Basic - as reported $ 0.243 $ 0.104 $ 0.429 $ 0.181
========== =========== =========== ===========
Basic - pro forma $ 0.157 $ 0.097 $ 0.336 $ 0.158
========== =========== =========== ===========
Diluted - as reported $ 0.196 $ 0.103 $ 0.357 $ 0.178
========== =========== =========== ===========
Diluted - pro forma $ 0.126 $ 0.096 $ 0.280 $ 0.155
========== =========== =========== ===========
The Company has followed the guidelines of SFAS 123 to establish the
valuation of its stock options. The commonly accepted method of valuing these
options is the Black-Sholes option valuation model that requires assumptions for
the expected holding period and the expected volatility. The Company does not
have a reliable history of employee stock options being exercised and
consequently cannot estimate the expected holding period. For the sake of this
valuation, the expected holding period is assumed to be the life of the stock
option as defined in the stock option plan (10 years). The volatility
8
assumption is based on the volatility seen in the Company's stock over the last
five years. This assumption was made according to the guidance of SFAS 123.
There is no reason to believe that future volatility will compare with the
historical volatility. Because the Company's options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the value of its options.
RESEARCH AND DEVELOPMENT
All research and development costs are charged to operations as
incurred.
ADVERTISING EXPENSES
Advertising costs are charged to operations as incurred. Advertising
expense for the three-month periods ended December 31, 2003 and 2002 was $12,525
and $6,294, respectively. Advertising expense for the six-month periods ended
December 31, 2003 and 2002 was $14,760 and $13,464, respectively.
EARNINGS PER SHARE
The Company follows Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," in presenting basic and diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per
share:
Three-Month Periods Six-Month Periods
Ended December 31, Ended December 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator:
Numerator for basic and diluted
earnings per share:
Net income $ 820,961 $ 347,672 $ 1,444,117 $ 606,831
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,371,920 3,345,851 3,368,643 3,345,851
Effect of dilutive securities:
Employee stock options 815,197 44,271 677,475 64,082
----------- ----------- ----------- -----------
Denominator for diluted earnings
earnings per share - weighted average and
assumed conversion 4,187,117 3,390,122 4,046,118 3,409,933
----------- ----------- ----------- -----------
Basic earnings per share $ 0.243 $ 0.104 $ 0.429 $ 0.181
=========== =========== =========== ===========
Diluted earnings per share $ 0.196 $ 0.103 $ 0.357 $ 0.178
=========== =========== =========== ===========
As of December 31, 2003, options to purchase shares of Common Stock at
$6.94 per share were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
based on the difference between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect in the
years when those temporary differences are
9
expected to reverse. The effect on deferred taxes of a change in tax rates,
should a change occur, is recognized in income in the period that includes the
enactment date.
3. INVENTORIES
Inventories, stated at the lower of cost (determined on a first-in,
first-out basis) or market, consisted of the following:
December 31, June 30,
2003 2003
----------- -----------
Raw materials/Work in process $ 1,357,105 $ 1,374,184
Finished goods 560,678 475,316
----------- -----------
1,917,783 1,849,500
Valuation allowance (63,125) (64,020)
----------- -----------
Total inventory $ 1,854,658 $ 1,785,480
=========== ===========
4. INTANGIBLE ASSETS
ACQUIRED LICENSE AND DISTRIBUTION RIGHTS
In connection with the Company's acquisition of assets of Escalon
Ophthalmics, Inc. ("EOI") in February 1996, a portion of the purchase price was
allocated to certain license and distribution agreements. This cost allocation
was based on an evaluation by management, with such costs being amortized over
an eight-year period using the straight-line method. The value of these assets
is reevaluated periodically to determine if the estimated lives continue to be
appropriate.
Accumulated amortization of license and distribution rights was
$178,305 and $167,044 at December 31, 2003 and June 30, 2003, respectively.
Amortization expense for the three-month periods ended December 31, 2003 and
2002 was $5,631 and $5,631, respectively. Amortization expense for the six-month
periods ended December 31, 2003 and 2002 was $11,261 and $11,261, respectively.
PATENTS
It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 17 years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. Accumulated patent
amortization was $116,772 and $111,406 at December 31, 2003 and June 30, 2003,
respectively. Amortization expense for the three-month periods ended December
31, 2003 and 2002 was $2,683 and $2,683, respectively. Amortization expense for
the six-month periods ended December 31, 2003 and 2002 was $5,366 and $5,366,
respectively.
10
The aggregate amortization expense for each of the next five years for
acquired license and distribution rights and patents is as follows:
Year ending
June 30,
-----------
2004 $ 23,871
2005 10,733
2006 10,733
2007 10,733
2008 10,733
-----------
$ 66,803
===========
GOODWILL, TRADEMARKS AND TRADE NAMES
Goodwill, trademarks and trade names represent intangible assets
obtained from the EOI, Endologix, Inc. ("Endologix") and Sonomed acquisitions.
Goodwill represents the excess of purchase price over the fair market value of
net assets acquired.
In accordance with SFAS 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. Management evaluated the
carrying value of goodwill and its identifiable intangible assets that have
indefinite lives during each of the fiscal years subsequent to July 1, 2001.
Management concluded that the carrying value of goodwill and identifiable
intangible assets did not exceed their fair values and therefore were not
impaired. Management made this conclusion after evaluating the discounted cash
flow of each of its business units. In accordance with SFAS 142, these
intangible assets will continue to be assessed on an annual basis.
The following table presents intangible assets by business unit as of
December 31, 2003:
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
GOODWILL Amount Impairment Amount Amortization Value
------------- ----------- ------------- ------------ -----------
Sonomed $ 10,547,488 $ - $ 10,547,488 $ (1,021,938) $ 9,525,550
Vascular 1,149,813 - 1,149,813 (208,595) $ 941,218
Medical/Trek 272,786 - 272,786 (147,759) $ 125,027
Sonomed EMS - - - - $ -
------------- ----------- ------------- ------------ -----------
Balance as of December 31, 2003 $ 11,970,087 $ - $ 11,970,087 $ (1,378,292) $10,591,795
============= =========== ============= ============ ===========
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
PATENTS Amount Impairment Amount Amortization Value
------------- ----------- ------------- ------------ -----------
Sonomed $ - $ - $ - $ - $ -
Vascular (pending issuance) 36,915 - 36,915 - $ 36,915
Medical/Trek 257,302 - 257,302 (116,772) $ 140,530
Sonomed EMS - - - - $ -
------------- ----------- ------------- ------------ -----------
Balance as of December 31, 2003 $ 294,217 $ - $ 294,217 $ (116,772) $ 177,445
============= =========== ============= ============ ===========
11
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
LICENSE AND DISTRIBUTION RIGHTS Amount Impairment Amount Amortization Value
------------- ----------- ------------- ------------ -----------
Sonomed $ - $ - $ - $ - $ -
Vascular - - - - $ -
Medical/Trek 180,182 - 180,182 (178,305) $ 1,877
Sonomed EMS - - - - $ -
------------- ----------- ------------- ------------ -----------
Balance as of December 31, 2003 $ 180,182 $ - $ 180,182 $ (178,305) $ 1,877
============= =========== ============= ============ ===========
Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
UNAMORTIZED INTANGIBLE ASSETS Amount Impairment Amount Amortization Value
------------- ----------- ------------- ------------ -----------
Sonomed $ 665,000 $ - $ 665,000 $ (63,194) $ 601,806
Vascular - - - - $ -
Medical/Trek - - - - $ -
Sonomed EMS 15,100 - 15,100 - $ 15,100
------------- ----------- ------------- ------------ -----------
Balance as of December 31, 2003 $ 680,100 $ - $ 680,100 $ (63,194) $ 616,906
============= =========== ============= ============ ===========
5. LONG-TERM RECEIVABLE
Escalon entered into an agreement with an individual who was involved
in the development of the Company's Ocufit SR(R) drug delivery system. The
Company holds a note receivable from the individual in the amount of $150,000
that is due May 2005.
6. LINE OF CREDIT AND LONG-TERM DEBT
On December 23, 2002, a privately-held fund (the "lender") acquired the
Company's bank debt, which consisted of outstanding term debt of $5,850,000 and
$1,475,000 outstanding on a $2,000,000 available line of credit. On February 13,
2003, the Company entered into an Amended Agreement with the lender. The primary
amendments of the Amended Loan Agreement were to reduce quarterly principal
payments, extend the term of the repayments, and to alter the covenants of the
original bank agreement.
As of December 31, 2003, the amounts outstanding under the term loan
and the line of credit were $4,596,019 and $250,000, respectively. At December
31, 2003, the interest rates applicable to the term loan and line of credit were
5.75% (prime plus 1.75%) and 5.50% (prime plus 1.50%), respectively. The
lender's prime rate at December 31, 2003 was 4.00%. The $4,596,019 term loan
balance includes a $2,450,000 balloon payment that is due on September 1, 2005.
The Company paid $100,000 in finance fees in January 2000 to the prior lender,
when this debt was originally incurred. The finance fees are being amortized
over the life of the loans using the effective interest method.
On January 21, 1999, the Company's Vascular subsidiary and Endologix
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
the Company acquired for cash the assets of Endologix's vascular access business
in exchange for cash and also agreed to pay royalties to Endologix based on
future sales of the vascular access business for a period of five years
following the closing of the sale, with a guaranteed minimum royalty of $300,000
per year. On February 1, 2001, the parties amended the agreement to eliminate
any future royalty payments to Endologix. Pursuant to the amendment, the Company
paid $17,558 in cash to Endologix, delivered a short-term note in the amount of
$64,884 that was satisfied in January 2002, a note in the amount of $717,558
payable in 11 quarterly installments that commenced on April 15, 2002, and the
Company issued 50,000 shares of its Common Stock to Endologix.
12
As of December 31, 2003, the amount outstanding under the Endologix
term loan was $260,927. At December 31, 2003, the interest rate applicable to
the Endologix term loan was 5.00%.
The schedule below presents principal amortization for the next five
years under each of the Company's loan agreements as of December 31, 2003.
Twelve-month period Lender's Endologix Deferred
ending December 31, Term Loan Term Loan Finance Fees Total
- ------------------- ----------- ------------ ------------ -----------
2004 $ 1,400,000 $ 261,000 $ (30,000) $ 1,631,000
2005 3,196,000 - - 3,196,000
2006 - - - -
2007 - - - -
2008 - - - -
----------- ------------ ------------ -----------
$ 4,596,000 $ 261,000 $ (30,000) $ 4,827,000
=========== ============ ============ ===========
7. SALE OF SILICONE OIL PRODUCT LINE, LICENSING OF LASER TECHNOLOGY AND
OTHER REVENUE
In the first quarter of fiscal 2000, Escalon received $2,117,000 from
the sale of its license and distribution rights for the Silicone oil product
line. This sale resulted in a $1,864,000 gain after writing off the remaining
net book value of license and distribution rights associated with that product
line. The Company will also continue to receive additional consideration based
on future sales of Silicone Oil through August 2005.
The agreement with Bausch & Lomb, which commenced on August 13, 2000,
is structured so that the Company receives consideration from Bausch & Lomb
based on its adjusted gross profit from its sales of Silicone Oil on a quarterly
basis. The consideration is subject to a factor, which steps down according to
the following schedule:
From 8/13/00 to 8/12/01 100%
From 8/13/01 to 8/12/02 82%
From 8/13/02 to 8/12/03 72%
From 8/13/03 to 8/12/04 64%
From 8/13/04 to 8/12/05 45%
LICENSED TECHNOLOGY
The material terms of the license of the laser technology are that in
exchange for licensing the Company's laser patents, which expire in 2014, the
Company will receive a 2.5% royalty on future product sales that are based on
the licensed laser patents, subject to deductions for royalties payable to third
parties up to a maximum of 50% of royalties otherwise due and payable to the
Company and a 1.5% royalty on product sales that are not based on the licensed
laser patents. The Company receives a minimum annual license fee of $15,000 per
year during the remaining term of the license. The minimum annual license fee is
offset against the royalty payments.
The license was dated October 23, 1997 and was amended and restated in
October 2000 and expires on the latest of the following events:
1. the last to expire of the laser patents;
2. ten years from the effective date of the amended and restated
agreement; or
3. the fifth anniversary date of the first commercial sale.
13
The material termination provisions of the license of the laser
technology are as follows:
1. the Company has the right to terminate if the licensee default
in payment of any royalty;
2. the Company has the right to terminate if the licensee default
in the making of any required report;
3. the Company has the right to terminate if the licensee make
any false report;
4. the commission of any material breach of any covenant or
promise under the license agreement; or
5. the termination of the license by the licensee after 90 days
notice (if the licensee were to terminate, the licensee would
not be permitted to utilize the licensed technology necessary
to manufacture its current products).
OTHER REVENUE
Other revenue includes quarterly payments received from Bausch & Lomb
in connection with the sale of the Silicone Oil product line as well as royalty
payments received from a privately held entity related to the licensing of the
Company's intellectual laser technology. For the three-month periods ended
December 31, 2003 and 2002, Silicone Oil revenue totaled $526,000 and $450,000,
respectively, and laser technology revenues totaled $88,000 and $67,000,
respectively. For the six-month periods ended December 31, 2003 and 2002,
Silicone Oil revenue totaled $1,034,000 and $894,000, respectively, and laser
technology revenues totaled $150,000 and $119,000, respectively. Accounts
receivable at December 31, 2003 and June 30, 2003 related to other revenue was
$526,000 and $443,000, respectively.
8. SEGMENTAL INFORMATION
During the six-month periods ended December 31, 2003 and 2002, the
Company's operations were classified into four principal reportable segments
that provide different products or services. Separate management of each segment
is required because each business unit is subject to different marketing,
production and technology strategies.
SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) -
THREE-MONTH PERIODS ENDED DECEMBER 31,
Sonomed Vascular Medical/Trek EMI Total
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------- ------------------- ------------------ ------------------ -------------------
Product revenue $ 1,965 $ 1,630 $ 729 $ 676 $ 320 $ 305 $ 130 $ 139 $ 3,144 $ 2,750
Other revenue - - - - 613 518 - - 613 518
------------------- ------------------- ------------------ ------------------ -------------------
Total revenue 1,965 1,630 729 676 933 823 130 139 3,757 3,268
------------------- ------------------- ------------------ ------------------ -------------------
Costs and expenses:
Cost of goods sold 698 727 284 293 215 194 53 65 1,250 1,279
Operating expenses 782 731 441 376 250 293 73 62 1,546 1,462
------------------- ------------------- ------------------ ------------------ -------------------
Total costs and expenses 1,480 1,458 725 669 465 487 126 127 2,796 2,741
------------------- ------------------- ------------------ ------------------ -------------------
Income from operations 485 172 4 7 468 336 4 12 961 527
Other income/expenses
Interest income - - - - - - - - - -
Interest expense (104) (172) (4) (7) - - - - (108) (179)
------------------- ------------------- ------------------ ------------------ -------------------
Total other income and
expenses (104) (172) (4) (7) - - - - (108) (179)
------------------- ------------------- ------------------ ------------------ -------------------
Income before taxes 381 - - - 468 336 4 12 853 348
Income taxes - - - - 32 - - - 32 -
------------------- ------------------- ------------------ ------------------ -------------------
Net income (loss) $ 381 $ - $ - $ - $ 436 $ 336 $ 4 $ 12 $ 821 $ 348
=================== =================== ================== ================== ===================
Depreciation/Amortization $ 6 $ 4 $ 11 $ 10 $ 4 $ 68 $ 5 $ 6 $ 26 $ 88
Assets $ 12,027 $ 12,198 $ 2,211 $ 2,256 $ 2,113 $ 2,071 $ 167 $ 365 $ 16,518 $ 16,890
Expenditures for
long-lived assets $ - $ - $ - $ - $ 21 $ 7 $ - $ - $ 21 $ 7
14
SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) -
SIX-MONTH PERIODS ENDED DECEMBER 31,
Sonomed Vascular Medical/Trek EMI Total
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------- ------------------- ------------------ ------------------- -------------------
Product revenue $ 3,670 $ 3,019 $ 1,463 $ 1,342 $ 677 $ 650 $ 175 $ 252 $ 5,985 $ 5,263
Other revenue - - - - 1,184 1,013 - - 1,184 1,013
------------------- ------------------- ------------------ ------------------- -------------------
Total revenue 3,670 3,019 1,463 1,342 1,861 1,663 175 252 7,169 6,276
------------------- ------------------- ------------------ ------------------- -------------------
Costs and expenses:
Cost of goods sold 1,379 1,306 580 533 423 411 81 108 2,463 2,358
Operating expenses 1,494 1,357 875 793 456 646 143 144 2,968 2,940
------------------- ------------------- ------------------ ------------------- -------------------
Total costs and expenses 2,873 2,663 1,455 1,326 879 1,057 224 252 5,431 5,298
------------------- ------------------- ------------------ ------------------- -------------------
Income from operations 797 356 8 16 982 606 (49) - 1,738 978
Other income/expenses:
Interest income - - - - 1 1 - - 1 1
Interest expense (218) (356) (8) (16) - - - - (226) (372)
------------------- ------------------- ------------------ ------------------- -------------------
Total other income and
expenses (218) (356) (8) (16) 1 1 - - (225) (371)
------------------- ------------------- ------------------ ------------------- -------------------
Income before taxes 579 - - - 983 607 (49) - 1,513 607
Income taxes - - - - 69 - - - 69 -
------------------- ------------------- ------------------ ------------------- -------------------
Net income (loss) $ 579 $ - $ - $ - $ 914 $ 607 $ (49) $ - $ 1,444 $ 607
=================== =================== ================== =================== ===================
Depreciation/Amortization $ 12 $ 9 $ 22 $ 20 $ 46 $ 135 $ 11 $ 12 $ 91 $ 176
Assets $ 12,027 $ 12,198 $ 2,211 $ 2,256 $ 2,113 $ 2,071 $ 167 $ 365 $ 16,518 $ 16,890
Expenditures for
long-lived assets $ - $ - $ - $ - $ 37 $ 25 $ - $ - $ 37 $ 25
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 quarterly 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" made pursuant to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995, 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 development, the
introduction of new products, the potential markets and uses for the Company's
products, the Company's regulatory filings with the United States Food and Drug
Administration (the "FDA"), the development of joint venture opportunities, the
effect 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 one therefore should not consider the
following list of such factors to be 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:
15
- CONCENTRATION OF REVENUES
The Company realized 14.43% and 14.24% of its net revenue during the
six-month periods ended December 31, 2003 and 2002, respectively, from Bausch &
Lomb's sales of Silicone Oil. Any significant decrease in Silicone Oil revenue
received by the Company would have an impact on the Company's financial
position, results of operations and cash flows and the Company's stock price
could be negatively impacted. The Company is entitled to receive this revenue
from Bausch & Lomb, in varying amounts, through August 2005. See the Notes to
Condensed Consolidated financial statements for further information regarding
the Silicone Oil revenue from Bausch & Lomb.
- FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING
The Company's current term loan with the lender provides for quarterly
principal payments, which increase every 12 months, including a $2,450,000 final
balloon payment, which is due on September 1, 2005. The Company believes that
cash on hand plus cash available from the Company's line of credit will be
sufficient to satisfy its working capital, capital expenditures and research and
development until the balloon payment is due. The Company may be required to
secure additional debt or equity financing in order to satisfy the balloon
payment, and the Company cannot be sure that such financing will be available
when required on acceptable terms, or at all.
- 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 introductions 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 its products in sufficient volumes on time,
(v) differentiate the Company's offerings from its competitors' offerings, (vi)
price the Company's products competitively, and (vii) anticipate competitors'
announcements of new products, services or technological innovations.
- ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE
INDUSTRIES IN WHICH THE COMPANY COMPETES
Changes in the economic climate or the competitive status of the
markets in which the Company operates could result in a decline in revenue.
Under such circumstances, the Company cannot assure you that it will 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 will impair the Company'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 the Company's business by
decreasing or slowing improvements in the Company's products, making it more
difficult to respond to customers, limiting the Company's ability to increase
production quickly and limiting the Company's ability to hire and retain key
personnel. These circumstances could cause the Company's earnings to be lower
than they otherwise might be.
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 the delivery of more
cost-effective medical therapies. Changes in governmental laws, regulations and
accounting standards and the enforcement thereof and agency or government
actions or investigations involving the industry in general or the Company in
particular may be adverse to the Company.
16
- INTERNATIONAL BUSINESS ACTIVITY
The Company derives a portion of its revenues from sales outside the
United States. Changes in the laws or policies of governmental agencies, as well
as social and economic conditions, in the countries in which the Company
operates could affect the Company's business in these countries and the
Company's results of operations. In addition, economic factors (including
inflation and fluctuations in interest rates and foreign currency exchange
rates) and competitive factors (such as price competition, business combinations
of competitors or a decline in industry sales from continued economic weakness)
both in the United States and other countries in which the Company conducts
business could affect the Company's results of operations.
- DEPENDENCE ON KEY PERSONNEL
The Company's future success depends partly on the continued service of
the Company's research and engineering, sales, marketing, manufacturing,
executive and administrative personnel. If Escalon fails to hire and retain a
sufficient number of these personnel, the Company will not be able to maintain
or expand its business.
- THE COMPANY'S 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 regarding possible acquisitions, 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, acquisitions and 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 newly acquired company in a way that enhances the
performance of the Company's combined businesses or product lines to realize the
value from expected synergies. Depending on the size and complexity of an
acquisition, the Company's successful integration of the entity depends on a
variety of factors including the retention of key employees and the management
of facilities and employees in separate geographical areas. These efforts
require varying levels of management resources, which may divert the Company's
attention 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 in such lawsuits. Recent events have also made the investing
public particularly sensitive to listed companies' reporting practices and
accounting policies in general. Additionally, the Company may find it necessary
to enforce its legal rights with respect to patented and proprietary
information. The outcome of any of these potential legal matters and the
resulting financial impact they may have on the Company cannot be foreseen.
- VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN
ITS LISTING ON 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 global economy generally, or
market volatility unrelated to the Company's business and operating results.
17
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 and maintained. If Escalon's securities were
delisted, investors could find it more difficult to trade in the Company's
securities, or to obtain accurate quotations as to the market value of the
Company's securities.
- IMPACT OF TERRORISM OR ACTS OF WAR
Terrorist acts or acts of war, whether in the United States or abroad,
could cause damage or disruption to our operations, our suppliers, channels to
market or customers, or could cause costs to increase, or create political or
economic instability, any of which could have a material adverse effect on our
business.
EXECUTIVE OVERVIEW - SIX-MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002
The following highlights are discussed in further detail within this Form
10-Q. The reader is encouraged to read this Form 10-Q in its entirety to gain a
more complete understanding of factors affecting Company performance and
financial condition.
- Product revenue, up 14% from last year, is benefiting from increased
domestic demand for the Company's pachymeter product as well as
increased market penetration in Europe.
- Other revenue, up 17% from last year, is received primarily from Bausch
& Lomb in connection with the Silicone Oil product line. The contract
for this revenue ends in August 2005.
- Cost of goods sold as a percentage of revenue decreased to 34% from 38%
primarily due to product mix, an increase in other revenue that has no
associated costs and increased productivity.
- Operating expenses increased by less than 1% as the Company continued
to benefit from the reduction of certain administrative costs while, at
the same time, investing in product development and strengthening of
the Company's sales channels domestically and overseas.
- Interest expense decreased by 39% primarily due to reduced debt levels.
- Included in the Company's term debt is a $2,450,000 balloon payment
that is due on September 1, 2005.
COMPANY OVERVIEW
The following discussions 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. The Company's present name was adopted in
August 1996. The Company reincorporated in Delaware in 1999, and then
reincorporated in Pennsylvania in November 2001. 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 Company and its products are subject to regulation and inspection
by the FDA. The FDA requires extensive testing of new products prior to sale and
has jurisdiction over the safety, efficacy and manufacturing of products, as
well as labeling and marketing.
In February 1996, the Company acquired substantially all of the assets
and certain liabilities of 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, the Company 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.
18
To further diversify its product portfolio, in January 1999, the
Company's Vascular subsidiary acquired the vascular access product line from
Endologix. 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. In January
2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic
ultrasound diagnostic equipment. In April 2000, EMI formed a joint venture,
Escalon Medical Imaging, LLC 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 direct operations within its EMI business unit on January 1, 2002.
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 142, discussed further in
the Notes to the Condensed Consolidated Financial Statements included in this
Form 10-Q. 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, sales returns and rebates, 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.
REVENUE RECOGNITION
The Company's standard arrangement for the Company's domestic and
international customers includes a signed purchase order or contract and no
right of return of delivered products without the consent of the Company.
Revenue from sales of product is recognized when:
- The Company enters into a legally binding arrangement with a buyer;
- The Company delivers the products;
- Buyer payment is deemed fixed and determinable and free of
contingencies or significant uncertainties; and
- Collection is probable.
The Company assesses collectibility based on the creditworthiness of
the buyer and past transaction history. The Company performs ongoing credit
evaluations of its customers and does not require collateral from its customers.
For many of the Company's international customers, the Company requires an
irrevocable letter of credit to be issued by the customer before the purchase
order is accepted.
VALUATION OF INTANGIBLE ASSETS
The Company periodically evaluates its intangible assets and goodwill
in accordance with SFAS 142, "Goodwill and Other Intangible Assets," for
indications of impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. These intangible assets include
goodwill, trademarks and trade names. Factors the Company considers important
that could trigger an impairment review include significant under-performance
relative to historical or projected future operating results or significant
negative industry or economic trends. If these criteria indicate that the value
of the intangible assets may be impaired, an evaluation of the recoverability of
the net carrying value of the asset is made. If this evaluation indicates that
the intangible asset is not recoverable, the net carrying value of the related
intangible asset will be reduced to fair value. Any such impairment charge could
be significant and could have a material adverse effect on the Company's
reported financial statements if and when an impairment charge is recorded.
19
DEFERRED TAXES
The deferred tax valuation allowance is based on the Company's
assessment of the realizability of the Company's deferred tax assets on an
ongoing basis and may be adjusted from time to time as necessary. In determining
the valuation allowance, the Company has considered future taxable income and
the feasibility of tax planning initiatives and strategies. Should the Company
determine that it is more likely than not that it will realize certain of the
Company's deferred tax assets in the future, an adjustment would be required to
reduce the existing valuation allowance and increase income. On the contrary, if
the Company determines that it would not be able to realize the Company's
recorded deferred tax asset, an adjustment to increase its valuation allowance
would be charged to the results of operations in the period such conclusion was
made. Such charge could have an adverse effect on the Company's provision for
income taxes included in the Company's results of operations.
THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002
The following table shows consolidated product revenue by business
segment as well as identifying trends in business segment product revenues for
the three and six-month periods ended December 31, 2003 and 2002.
Three-Month Periods Six-Month Periods
Ended December 31, Ended December 31,
----------------------------- -----------------------------
2003 2002 % Change 2003 2002 % Change
------- ------- -------- ------- ------- --------
Product revenue:
Sonomed $ 1,965 $ 1,629 20.63% $ 3,670 $ 3,019 21.56%
Vascular 729 675 8.00% 1,463 1,342 9.02%
Medical/Trek 320 306 4.58% 677 650 4.15%
EMI 130 139 -6.47% 175 252 -30.56%
------- ------- ----- ------- ------- ------
$ 3,144 $ 2,749 14.37% $ 5,985 $ 5,263 13.72%
======= ======= ===== ======= ======= ======
Product revenues increased $395,000, or 14.37%, to $3,144,000 for the
three-month period ended December 31, 2003 as compared to $2,749,000 for the
same period in the prior fiscal year. Product revenue in the Sonomed business
unit increased $336,000, or 20.63%, to $1,965,000. The increase is attributed to
a $165,000 increase in the domestic market, a $107,000 increase in Europe, a
$56,000 increase in Latin America and a $49,000 increase in the Middle East
offset by a $42,000 decrease in Asia and the Pacific Rim. The increase in the
domestic market primarily relates to increased demand for the Company's
pachymeter product. The domestic market for pachymeters has expanded due to
enhanced techniques in glaucoma screening performed by optometrists.
Historically, the typical optometrist has not been a user of the pachymeter. The
increase in Europe is a result of increased coverage in the region through
distributors. The increase in Latin America is a result of recovering economies
in South American countries. Product revenue in the Vascular business unit
increased $54,000, or 8.00%, to $729,000. The increase relates primarily to
increased usage in the domestic marketplace. Product revenue in the Medical/Trek
business unit increased $14,000, or 4.58%, to $320,000. Product revenue in the
EMI business unit decreased $9,000, or 6.47%, to $130,000.
Product revenues increased $722,000, or 13.72%, to $5,985,000 for the
six-month period ended December 31, 2003 as compared to $5,263,000 for the same
period in the prior fiscal year. Product revenue in the Sonomed business unit
increased $651,000, or 21.56%, to $3,670,000. The increase is attributed to a
$509,000 increase in the domestic market, a $173,000 increase in the Europe, a
$65,000 increase in the Middle East and a $61,000 increase in Latin America
offset by a $153,000 decrease in Asia. The increase in the domestic market
primarily relates to increased demand for the Company's pachymeter product. The
domestic market for pachymeters has expanded due to enhanced techniques in
glaucoma screening performed by optometrists. Historically, the typical
optometrist has not been a user of the pachymeter. The increase in Europe is a
result of increased coverage in the region through distributors. The increase in
Latin America is a result of recovering economies in South American countries.
Product
20
revenue in the Vascular business unit increased $121,000, or 9.02%, to
$1,463,000. The increase relates primarily to increased usage in the domestic
marketplace. Product revenue in the Medical/Trek business unit increased
$27,000, or 4.15%, to $677,000. Product revenue in the EMI business unit
decreased $77,000, or 30.56%, to $175,000.
Other revenue, which is included in the Medical/Trek business unit,
increased $96,000, or 18.53%, to $614,000 for the three-month period ended
December 31, 2003 as compared to $518,000 for the same period in the prior
fiscal year. The increase primarily relates to a $75,000 increase in revenue
received from Bausch & Lomb in connection with sales of Silicone Oil. The
Company's contract with Bausch & Lomb calls for annual step-downs in the
calculation of Silicone Oil revenue to be received by the Company. These
step-downs occur during the first quarter of each fiscal year through the
remainder of the contract, which ends in August 2005. For the three-month period
ended December 31, 2003, the step-down caused a $66,000 decrease in Silicone Oil
revenue that the Company would have otherwise received had the step-down not
occurred. The offsetting $141,000 increase in Silicone Oil revenue is due to
increased market demand for the product. The Company does not have any further
knowledge as to what factors have affected Bausch & Lomb's sales of Silicone
Oil. See the Notes to Condensed Consolidated Financial Statements for a
description of the step-down provisions under the contract with Bausch & Lomb.
The remaining $21,000 increase in other revenue relates to royalty payments from
a privately held entity related to the licensing of the Company's intellectual
laser technology.
Other revenue, which is included in the Medical/Trek business unit,
increased $171,000, or 16.88%, to $1,184,000 for the six-month period ended
December 31, 2003 as compared to $1,013,000 for the same period in the prior
fiscal year. The increase primarily relates to a $141,000 increase in revenue
received from Bausch & Lomb in connection with sales of Silicone Oil. The
Company's contract with Bausch & Lomb calls for annual step-downs in the
calculation of Silicone Oil revenue to be received by the Company. These
step-downs occur during the first quarter of each fiscal year through the
remainder of the contract, which ends in August 2005. For the six-month period
ended December 31, 2003, the step-down caused a $129,000 decrease in Silicone
Oil revenue that the Company would have otherwise received had the step-down not
occurred. The offsetting $269,000 increase in Silicone Oil revenue is due to
increased market demand for the product. The Company does not have any further
knowledge as to what factors have affected Bausch & Lomb's sales of Silicone
Oil. See the Notes to Condensed Consolidated Financial Statements for a
description of the step-down provisions under the contract with Bausch & Lomb.
The remaining $31,000 increase in other revenue relates to royalty payments from
a privately held entity related to the licensing of the Company's intellectual
laser technology.
The following table presents consolidated cost of goods sold by
reportable business segment and as a percentage of related segment product
revenues for the three and six-month periods ended December 31, 2003 and 2002.
Three-Month Periods Six-Month Periods
Ended December 31, Ended December 31,
----------------------------------------------------------------------------------------------------
Cost of goods 2003 2002 2003 2002
sold: ------------------- ------------------- ------------------- -----------------------
Dollars % Dollars % Dollars % Dollars %
Sonomed $ 700 35.61% $ 726 44.57% $1,378 37.55% $1,306 43.26%
Vascular 284 38.96% 293 43.41% 580 39.64% 533 39.72%
Medical/Trek 213 66.56% 194 63.40% 423 62.48% 411 63.23%
EMI 53 40.77% 66 47.48% 81 46.29% 108 42.86%
------ ----- ------ ----- ------ ----- ------ -----
$1,250 39.75% $1,279 46.53% $2,462 41.14% $2,358 44.80%
====== ===== ====== ===== ====== ===== ====== =====
Cost of goods sold totaled $1,250,000, or 39.75% of product revenue,
for the three-month period ended December 31, 2003 as compared to $1,279,000, or
46.53% of product revenue, for the same period last fiscal year. Cost of goods
sold in the Sonomed business unit totaled $700,000, or 35.61% of product
revenue, for the three-month period ended December 31, 2003 as compared to
$726,000, or 44.57% of
21
product revenue for the same period last fiscal year. Sonomed experienced a
significant change in product mix, due to the increase in sales of the
pachymeter product, which has higher margins than much of the remainder of the
product line. Sonomed also significantly increased its units of production to
meet the increased demand for its pachymeter product. The Company leveraged this
increased production in conjunction with the fact that the labor and overhead
component of manufacturing, for the most part, remained fixed, subsequently
driving down per unit costs associated with labor and overhead. Cost of goods
sold in the Vascular business unit totaled $284,000, or 38.96% of product
revenue, for the three-month period ended December 31, 2003 as compared to
$293,000, or 43.41% of product revenue for the same period last fiscal year.
Vascular's margins were positively affected by higher sales price per unit
across its product line. Cost of goods sold in the Medical/Trek business unit
totaled $213,000, or 66.56% of product revenue, for the three-month period ended
December 31, 2003, as compared to $194,000, or 63.40% of product revenue for the
same period last fiscal year. Medical/Trek's margins were negatively impacted by
higher material costs. Cost of goods sold in the EMI business unit totaled
$53,000, or 40.77% of product revenue, for the three-month period ended December
31, 2003 as compared to $66,000, or 47.48% of product revenue, for the same
period last fiscal year.
Cost of goods sold totaled $2,462,000, or 41.14% of product revenue,
for the six-month period ended December 31, 2002 as compared to $2,358,000, or
44.80% of product revenue, for the same period last fiscal year. Cost of goods
sold in the Sonomed business unit totaled $1,378,000, or 37.55% of product
revenue, for the six-month period ended December 31, 2003 as compared to
$1,306,000, or 43.26% of product revenue for the same period last fiscal year.
Sonomed experienced a significant change in product mix, due to the increase in
sales of the pachymeter product, which has higher margins than much of the
remainder of the product line. Sonomed also significantly increased its units of
production to meet the increased demand for its pachymeter product. The Company
leveraged this increased production in conjunction with the fact that the labor
and overhead component of manufacturing, for the most part, remained fixed,
subsequently driving down per unit costs associated with labor and overhead.
Cost of goods sold in the Vascular business unit totaled $580,000, or 39.64% of
product revenue, for the six-month period ended December 31, 2003, as compared
to $533,000, or 39.72% of product revenue, for the same period last fiscal year.
Vascular's margins were positively affected by higher sales price per unit
across its product line. Cost of goods sold in the Medical/Trek business unit
totaled $423,000, or 62.48% of product revenue, for the six-month period ended
December 31, 2003, as compared to $411,000, or 63.23% of product revenue, for
the same period last fiscal year. Medical/Trek's margins have increased due to a
change in product mix toward product with higher margins. Cost of goods sold in
the EMI business unit totaled $81,000, or 46.29% of product revenue, as compared
to $108,000, or 42.86% of product revenue, for the same period last fiscal year.
The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the three and six-month
periods ended December 31, 2003 and 2002.
Three-Month Periods Six-Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------
2003 2002 % Change 2003 2002 % Change
---- ---- -------- ---- ---- --------
Marketing, general and
administrative expenses:
Sonomed $ 306 $ 382 -19.90% $ 564 $ 735 -23.27%
Vascular 340 286 18.88% 654 568 15.14%
Medical/Trek 602 548 9.85% 1,174 1,119 4.92%
EMI 74 62 19.35% 143 144 -0.69%
------ ------ ---- ------ ------ ----
$1,322 $1,278 3.44% $2,535 $2,566 -1.21%
====== ====== ==== ====== ====== ====
Marketing, general and administrative expenses increased $44,000, or
3.44%, for the three-month period ended December 31, 2003 as compared to the
same period last fiscal year. In the Sonomed business unit, marketing, general
and administrative expenses decreased $76,000, or 19.90%, to $306,000. Salaries
22
and other personnel-related expenses decreased $97,000, primarily the result of
reduced headcount, and commissions expense decreased $31,000 as a result of
changes in the commission structure with an international distributor.
Offsetting these decreases was an increase in consulting expense of $53,000, as
a result of the Company's marketing efforts in the international markets. In the
Vascular business unit, marketing, general and administrative expenses increased
$54,000, or 18.88%, to $340,000. Salaries and other personnel-related expenses
increased $41,000, primarily the result of increases in headcount. Sales and
marketing travel-related expenses also increased by $19,000. In the Medical/Trek
business unit, marketing, general and administrative expenses increased $54,000,
or 9.85%, to $602,000. Accrued compensation increased $30,000. Legal expenses
increased by $20,000 in part due to costs associated with standard filings with
the SEC for compliance purposes. In the EMI business unit, marketing, general
and administrative expenses increased $12,000, or 19.35%, to $74,000. Sales
meeting expenses increased $7,000.
Marketing, general and administrative expenses decreased $31,000, or
1.21%, for the six-month period ended December 31, 2003 as compared to the same
period last fiscal year. In the Sonomed business unit, marketing, general and
administrative expense decreased $171,000, or 23.27%, to $564,000. Salaries and
other personnel-related expenses decreased $212,000, primarily the result of
reduced headcount, and commissions expenses decreased $35,000 as a result of
changes in the commission structure with an international distributor.
Offsetting these decreases was an increase in consulting expense of $80,000,
which increased as a result of the Company's marketing efforts in the
international markets. In the Vascular business unit, marketing, general and
administrative expenses increased $86,000, or 15.14%, to $654,000. Salaries and
other personnel-related expenses increased $66,000, primarily the result of
increases in headcount. Sales and marketing travel-related expenses increased by
$32,000. In the Medical/Trek business unit, marketing, general and
administrative expenses increased $55,000, or 4.92%, to $1,174,000. Accrued
compensation increased $78,000. Accounting expenses increased $29,000 in part
due to costs associated with standard filings with the SEC for compliance
purposes. Insurance expense decreased $19,000. The decrease primarily relates to
an audit of premiums conducted in the first quarter of last fiscal year
conducted by the Company's insurer, during which they discovered that they
undercharged premiums by $22,000. The undercharge was corrected in the first
quarter of fiscal 2003. Consulting expenses decreased by $12,000. The Company
incurred expenses in the year ago period that related to the Company's search
for alternate debt financing. In the EMI business unit, marketing, general and
administrative expenses remained largely unchanged at $143,000.
Research and development expenses increased $42,000, or 22.83%, to
$226,000, for the three-month period ended December 31, 2003 as compared to the
same period last fiscal year. The increase relates primarily to consulting
expenses incurred in connection with product development. The Company redesigns
its products as technology changes to remain competitive in the marketplace.
Research and development expenses increased $59,000, or 15.78%, to
$433,000, for the six-month period ended December 31, 2003 as compared to the
same period last fiscal year. The increase relates primarily to consulting
expenses incurred in connection with product development. The Company redesigns
its products as technology changes to remain competitive in the marketplace.
Interest income decreased $500 and $500 for the three and six-month
periods ended December 31, 2003 as compared to the same periods last fiscal
year, respectively.
Interest expense decreased $72,000 and $146,000 for the three and
six-month periods ended December 31, 2003 as compared to the same periods last
fiscal year, respectively, due to reduced total debt levels and lower interest
rates.
23
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is net cash provided by
operating activities. Changes in the Company's overall liquidity and capital
resources from continuing operations during fiscal 2004 are reflected in the
following table:
December 31, June 30,
(Dollars are in thousands) 2003 2003
----------- --------
Current Assets $ 4,466 $ 4,759
Less: Current Liabilities 2,879 3,870
------- -------
Working Capital $ 1,587 $ 889
Current Ratio 1.6:1 1.2:1
- -------------------------------------------------------------------
Notes Payable and Current Maturities $ 1,881 $ 2,485
Long-Term Debt 3,196 4,080
------- -------
Total Debt $ 5,077 $ 6,565
Total Equity 10,443 8,939
------- -------
Total Capital $15,520 $15,504
Total Debt to Total Capital 32.71% 42.34%
WORKING CAPITAL POSITION
Working capital increased 78.52% as of December 31, 2003 and the
current ratio increased to 1.6:1 when compared with June 30, 2003. Current
assets decreased by $293,000 primarily due to a decrease in accounts receivable
of $326,000 while current liabilities decreased by $991,000 due to several
offsetting factors.
The $326,000 decrease in accounts receivable was due in part to
decreased sales in the second quarter of fiscal 2004 versus the fourth quarter
of fiscal 2003 in the Company's Medical/Trek business unit as well as the
collection of a substantial amount of aged receivables in the Company's EMI
business unit.
Offsetting the decrease in current assets was a $991,000 decrease in
current liabilities. This net decrease was the result of several offsetting
changes that included the following:
- A $725,000 decrease in the Company's outstanding line of credit as
the Company used cash from operations to pay down its debt.
- A $209,000 decrease in accrued compensation primarily due to the
pay-out of fiscal year end bonuses during the first quarter of fiscal
2004.
- A $180,000 decrease in accounts payable.
- A $121,000 increase in current portion of long-term debt primarily
due to the step-up of principal payments due on the Company's term
debt.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities increased $705,000, to
$1,611,000, for the six-month period ended December 31, 2003, when compared to
the same period last fiscal year. Apart from year-over-year increased net
profitability of $837,000 of the Company, the following are the primary
offsetting factors affecting the increase in net cash provided by operating
activities:
24
- Revenue in the Company's Medical/Trek business unit during the second
quarter of fiscal 2004 was lower than revenue during the fourth
quarter of fiscal 2003 having the effect of significantly reducing
accounts receivable in that business unit. The Company also collected
a substantial amount of aged receivables in its EMI business unit
during the first quarter of fiscal 2004.
- Reductions in the build-up of inventory as compared to fiscal 2003
when the Company increased overall inventory levels to be more
quickly responsive to customer orders.
- Offsetting the above were reductions in accrued compensation and
accounts payable primarily due to the payout of fiscal year end
bonuses during the first quarter of fiscal 2004.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Cash flows from investing activities related solely to the purchase
of fixed assets for the six-month periods ended December 31, 2003 and 2002, and
remained largely unchanged. Any necessary capital expenditures have generally
been funded out of cash from operations, and the Company is not aware of any
factors that would cause historical capital expenditure levels not to be
indicative of capital expenditures in the future and, accordingly, does not
believe that it will have to commit material resources to capital investment for
the foreseeable future.
Cash flows used in financing activities increased $645,000, to
$1,450,000, for the six-month period ended December 31, 2003, when compared to
the same period last fiscal year. Cash flows from financing activities primarily
relate to repayments of the Company's term debt and line of credit, and to a
lesser extent, proceeds from the issuance of Common Stock from the exercise of
stock options. The Company paid down its line of credit by $725,000 during the
six-month period ended December 31, 2003, whereas, the Company drew $225,000
from its line of credit during the same period last fiscal year. During the
six-month period ended December 31, 2003, the Company paid down its term debt by
$784,000 as compared to $1,030,000 during the same period last fiscal year. This
reduction relates to a reduction in required principal payments that resulted
from the Company's renegotiating its debt in February 2003. The Company utilized
cash from operations to pay down its term loans and line of credit. Proceeds
from the issuance of Common Stock reflect the exercising of Company stock
options by various individuals during the second quarter of fiscal 2004.
Management believes that the current rate of cash generated from
operations, cash on hand and cash available from the line of credit should be
sufficient to satisfy the Company's working capital, debt service, capital
expenditures and research and development costs until the balloon payment under
its term loan is due on September 1, 2005. The Company may be required to secure
alternative debt or equity financing in order to satisfy the balloon payment,
and the Company 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 is expected to continue in
varying amounts through fiscal 2005. Silicone Oil revenues are based on sales of
the product line by Bausch & Lomb multiplied by a contractual factor that
reduces on an annual basis due to a contractual step-down provision. While the
Company does not expect total Silicone Oil revenue to decline rapidly during the
remainder of the Bausch & Lomb contract, any such decrease would have a
significant impact on the Company's consolidated financial position, results of
operations and cash flows. See Note 6 of the Notes to Condensed Consolidated
Financial Statements for a description of the step-down provisions under the
contract with Bausch & Lomb.
DEBT HISTORY
On December 23, 2002, a lender acquired the Company's bank debt,
which consisted of term debt of $5,850,000 and $1,475,000 outstanding on a
$2,000,000 available line of credit. On February 13, 2003, the Company entered
into an Amended Agreement with the lender. The primary amendments of the Amended
Loan Agreement were to reduce quarterly principal payments and extend the term
of the repayments, and to alter the covenants of the original bank agreement.
As of December 31, 2003, the amounts outstanding under the term loan
and the line of credit were $4,596,019 and $250,000, respectively. At December
31, 2003, the interest rates applicable to the term
25
loan and the line of credit were 5.75% and 5.50%, respectively. The lender's
prime rate at December 31, 2003 was 4.00%. The $4,596,019 term loan balance
includes a $2,450,000 balloon payment that is due on September 1, 2005. The
Company paid $100,000 in finance fees on January 14, 2000, when this debt was
originally incurred. The finance fees are being amortized over the life of the
loans using the effective interest method.
On January 21, 1999, the Company's Vascular subsidiary and Endologix
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
the Company 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 term
of payment of the royalties. Pursuant to the amendment, the Company 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 the
Company issued 50,000 shares of its Common Stock to Endologix.
As of December 31, 2003, the amount outstanding under the Endologix
term loan was $261,000. At December 31, 2003, the interest rate applicable to
the Endologix term loan was 5.00%.
ESCALON COMMON STOCK
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:
- Stockholders' equity of $2,500,000 or market value of listed
securities of $35,000,000 or net income from continuing operations
(in the 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
- Compliance with corporate governance standards
As of December 31, 2003, the Company complied with these
requirements. If the Company's securities were delisted, a shareholder would
find it more difficult to trade in the Company's securities, or obtain accurate
quotations as to the market value of the Company's securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's financial
instruments, consisting primarily of debt obligations that are sensitive to
changes in interest rates. For debt obligations, the table represents principal
cash flows and related interest rates by expected maturity dates. Interest rates
are based on the prime rate at December 31, 2003 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. See the Notes to Condensed Consolidated financial statements
for further information regarding the Endologix note.
26
Long-term debt classified as current as of December 31,
------------------------------------------------------------------------------------------
2003 2004 2005 Thereafter Total
------------------------------------------------------------------------------------------
Term loan $ 1,400,000 $ 3,196,000 $ - $ - $ 4,596,000
Interest rate 5.75% 5.75%
Line of credit 250,000 - - - 250,000
Interest rate 5.50%
Endologix note 261,000 - - - 261,000
Interest rate 5.00%
Deferred finance fees (30,000) - - - (30,000)
----------- ----------- ----------- ----------- -----------
Total $ 1,881,000 $ 3,196,000 $ - $ - $ 5,077,000
=========== =========== =========== =========== ===========
EXCHANGE RATE RISK
During the three and six-month periods ended December 31, 2003 and
2002, approximately 17.72% and 16.67%, respectively, of the Company's
consolidated net revenue was derived from international sales. The price of all
product sold overseas is denominated in United States Dollars and consequently
the Company incurs no exchange rate risk on revenue. The Company's Sonomed
business unit began incurring marketing expenses in the European market during
the second quarter of fiscal 2003, the majority of which are transacted in
Euros. These expenses were $35,509 and $48,913 for the three and six-month
periods ended December 31, 2003, respectively, and were $24,602 and $24,602 for
the three and six-month periods ended December 31, 2002, respectively. The
Company's Vascular business unit began incurring marketing expenses in the
European market during the second quarter of fiscal 2004, the majority of which
are transacted in Euros. These expenses were $8,897 for the three-month period
ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the
Company's Chief Executive Officer and the Senior Vice
President of Finance, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief
Executive Officer and Senior Vice President of Finance have
concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the
Company in the reports that it files or submits under that
Exchange Act.
(b) Internal Control Over Financial Reporting
There have not been any changes in the Company's internal
control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the Company's second fiscal quarter ended December
31, 2003 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control
over financial reporting.
A control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control systems are met,
and no evaluation of internal controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Shareholders was held on November 11, 2003. 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
- --------------------- --- ------- -------
William L. G. Kwan 3,008,863 0 105,448
Anthony J. Coppola 3,008,863 0 105,448
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 835,000 to 1,035,000 shares
of common stock.
For Against Abstain
--- ------- -------
508,268 204,401 8,000
3. The shareholders ratified the appointment of Parente
Randolph, LLC as the Company's independent auditors for the
fiscal year 2004.
For Against Abstain
--- ------- -------
3,106,833 500 6,978
Broker non-votes had no effect on the above proposals because they
were not represented votes cast at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Exhibit
----------- -------
(a) 10.29 Registrant's Amended and Restated 1999
Equity Incentive Plan
31.1 Certificate of Chief Executive Officer under
Rule 13a-14(a)
31.2 Certificate of Senior Vice President - Finance
under Rule 13a-14(a)
32.1 Certificate of Chief Executive Officer under
Section 1350 of Title 18 of the United States Code
32.2 Certificate of Senior Vice President - Finance
under Section 1350 of Title 18 of the United
States Code
(b) Reports on Form 8-K
None.
28
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 11, 2004 By: /s/ Richard J. DePiano
-----------------------
Richard J. DePiano
Chairman and Chief
Executive Officer
Date: February 11, 2004 By: /s/ Harry M. Rimmer
--------------------
Harry M. Rimmer
Senior Vice President -
Finance
29