10-Q/A 1 w57384e10-qa.txt FORM 10-Q/A - ESCALON MEDICAL CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q / A Amendment No. 1 (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001. OR ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from.......... to.......... COMMISSION FILE 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 to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to filed 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 8, 2002 Shares of Common Stock, $0.001 par value: 3,292,184 ITEM 1. FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
As reported, As ----------------------- restated, September September 30, 30, June 30, 2001 2001 2001 ------------ ------------ ------------ ASSETS (unaudited) (unaudited) Current Assets: Cash and cash equivalents $ 193,940 $ 193,940 $ 80,830 Accounts receivable, net 2,105,424 2,105,424 2,317,476 Inventory, net 1,366,319 1,366,319 1,499,821 Other current assets 271,112 271,112 287,025 ------------ ------------ ------------ Total current assets 3,936,795 3,936,795 4,185,152 Long-term note receivable 150,000 150,000 150,000 Furniture and equipment, net 616,472 616,472 631,877 Customer lists, net -- 6,823,056 6,951,389 Goodwill, net 10,591,790 2,165,767 2,165,767 Trademarks and trade names 601,806 2,076,439 2,076,439 License and distribution rights, net 252,456 252,456 262,613 Patents, net 201,590 201,590 204,274 Due from joint venture 402,099 402,099 596,758 Other assets 493,890 493,890 574,153 ------------ ------------ ------------ Total assets $ 17,246,898 $ 17,118,564 $ 17,798,422 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ 1,300,000 $ 1,300,000 $ 4,626,009 Current portion of long-term debt 1,795,350 1,795,350 1,530,117 Accounts payable 446,308 446,308 436,684 Accrued compensation 334,694 334,694 399,535 Other current liabilities 171,890 171,890 196,503 ------------ ------------ ------------ Total current liabilities 4,048,242 4,048,242 7,188,848 Long-term debt, net of current portion 6,887,092 6,887,092 4,502,325 ------------ ------------ ------------ Total liabilities 10,935,334 10,935,334 11,691,173 Shareholders' Equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued -- -- -- Common stock, $0.001 par value; 35,000,000 shares authorized; 3,292,184 shares issued at September 30, and June 30, 2001, respectively 3,292 3,292 3,292 Additional paid-in capital 46,121,519 46,121,519 46,121,519 Accumulated deficit (39,813,247) (39,941,581) (40,017,562) ------------ ------------ ------------ Total shareholders' equity 6,311,564 6,183,230 6,107,249 ------------ ------------ ------------ Total liabilities and shareholders' equity $ 17,246,898 $ 17,118,564 $ 17,798,422 ============ ============ ============
Note: The consolidated balance sheet at June 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. - 1 - ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
As restated, As reported, Three Months ----------------- Ended Three Months Ended September 30, September 30, 2001 2001 2000 ------------------------------------------------- Revenues, net $ 2,915,715 $ 2,915,715 $ 2,959,966 ----------- ----------- ----------- Costs and expenses: Cost of goods sold 1,228,262 1,228,262 1,044,671 Research and development 122,786 122,786 111,065 Marketing, general and administrative 1,145,598 1,273,932 1,356,305 ----------- ----------- ----------- Total costs and expenses 2,496,646 2,624,980 2,512,041 ----------- ----------- ----------- Income from operations 419,069 290,735 447,925 ----------- ----------- ----------- Other income and expenses: Equity in loss of unconsolidated joint venture (8,601) (8,601) (54,822) Interest income 889 889 2,918 Interest expense (207,042) (207,042) (288,630) ----------- ----------- ----------- Total other income and expenses (214,754) (214,754) (340,534) ----------- ----------- ----------- Net income $ 204,315 $ 75,981 $ 107,391 =========== =========== =========== Basic net income per share $ 0.062 $ 0.023 $ 0.033 =========== =========== =========== Diluted net income per share $ 0.062 $ 0.023 $ 0.032 =========== =========== =========== Weighted average shares - basic 3,292,184 3,292,184 3,242,184 =========== =========== =========== Weighted average shares - diluted 3,302,379 3,302,379 3,309,033 =========== =========== ===========
- 2 - ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
As reported, As restated, ----------------- Three Months Ended Three Months Ended September 30, September 30, 2001 2001 2000 --------------------------------------- Cash Flows from Operating Activities: Net income $ 204,315 $ 75,981 $ 107,391 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 49,944 178,278 253,719 Equity in net loss of unconsolidated joint venture 8,601 8,601 54,822 Change in operating assets and liabilities: Accounts receivable, net 212,052 212,052 (584,100) Inventory, net 133,502 133,502 31,437 Other current and long-term assets 96,175 96,175 (17,374) Accounts payable, accrued and other liabilities (79,830) (79,830) 165,090 --------- --------- --------- Net cash provided from operating activities 624,759 624,759 10,985 --------- --------- --------- Cash Flows from Investing Activities: Advances to unconsolidated joint venture, net 186,058 186,058 (63,337) Purchase of furniture and equipment (21,698) (21,698) (14,500) --------- --------- --------- Net cash provided from (used in) investing activities 164,360 164,360 (77,837) --------- --------- --------- Cash Flows from Financing Activities: Line of credit borrowing, net (326,009) (326,009) 318,901 Principal payments on term loan (350,000) (350,000) -- --------- --------- --------- Net cash provided from financing activities (676,009) (676,009) 318,901 --------- --------- --------- Net increase in cash and cash equivalents 113,110 113,110 252,049 Cash and cash equivalents, beginning of period 80,830 80,830 177,106 --------- --------- --------- Cash and cash equivalents, end of period $ 193,940 $ 193,940 $ 429,155 ========= ========= ========= Supplemental Schedule of Cash Flow Information: Interest paid during the three-month period $ 233,725 $ 233,725 $ 195,064 ========= ========= =========
-3- 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") 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2002. 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, 2001 included in the Company's annual report on Form 10-K. 2. NEW PRONOUNCEMENT In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." The objectives of SFAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets to be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. 3. 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: - 4 -
As reported, As restated, ----------------- Three Months Ended Three Months Ended September 30, September 30, 2001 2001 2000 ------------------------------------------ Numerator: Numerator for basic and diluted earnings per share: Net income $ 204,315 $ 75,981 $ 107,391 ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 3,292,184 3,292,184 3,242,184 Effect of dilutive securities: Employee stock options 10,195 10,195 66,849 ---------- ---------- ---------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,302,379 3,302,379 3,309,033 ========== ========== ========== Basic earnings per share $ 0.062 $ 0.023 $ 0.033 ========== ========== ========== Diluted earnings per share $ 0.062 $ 0.023 $ 0.032 ========== ========== ==========
4. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
September 30, June 30, 2001 2001 ----------- ----------- Raw materials / work in process $ 1,182,083 $ 1,288,664 Finished goods 286,404 313,325 ----------- ----------- 1,468,487 1,601,989 Valuation allowance (102,168) (102,168) ----------- ----------- $ 1,366,319 $ 1,499,821 =========== ===========
5. GOODWILL AND OTHER INTANGIBLE ASSETS BACKGROUND Escalon Medical Corp. ("Escalon" or "the Company") purchased Sonomed, Inc. ("Sonomed") on January 14, 2000 for $12,314,202. The purchase price exceeded the fair value of assets acquired by $11,212,488. The Company classified the intangible assets as $7,700,000 customer lists, $2,300,000 trademark and trade names, and $1,212,488 goodwill. The intangible assets were to be amortized on a straight-line basis over 15 years. Management made an allocation of the purchase price based on information available at the time without an independent professional appraisal. In November 2001, the Company engaged an independent professional appraiser to assist management in evaluating whether the - 5 - intangible assets were impaired and confirm the allocation of intangible assets related to the purchase of Sonomed as of the January 2000 acquisition date. The independent appraisal concluded in December 2001, that the intangible assets acquired with the purchase of Sonomed should be allocated as $10,547,488 to goodwill and $665,000 to trademarks and trade names. In light of the independent appraisal, management has determined that the original classification was incorrect, and therefore should be restated to that of the independent appraisal. As a result the intangible assets customer lists, trademarks and trade names and goodwill need to be reclassified. This reclassification did not affect the total reported value of intangible assets. In addition, because of the reclassification and the application of SFAS 142 which the Company adopted on July 1, 2001, amortization expense of the customer lists recorded for the three-month period ended September 30, 2001 has been corrected to reflect no amortization taken for customer lists during that period. ESCALON'S APPLICATION OF SFAS 142 The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142 ("SFAS 142") effective June 30, 2001. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with a fiscal year beginning after March 15, 2001. In all cases, SFAS 142 must be adopted as of the beginning of a fiscal year. Also, the application of SFAS 142 requires the Company to determine the life of each intangible asset individually (excluding goodwill) and also determine if the value of any intangible assets has been impaired. This pronouncement requires each of the intangible assets to be individually assessed creating the likely possibility of each having different lives, or one or more becoming impaired to different degrees at any given time. The Company adopted SFAS 142 effective July 1, 2001. EFFECT ON FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS The aforementioned correction affects the reported September 30, 2001 balances of customer lists, net; trademarks and trade names, net; goodwill, net and accumulated deficit. INTANGIBLE ASSETS The independent appraisal completed in December 2001 determined that $665,000 of the Sonomed purchase price should have been classified as trademarks and trade names at the time of acquisition. Amortization related to trademarks and trade names has been recalculated at $63,194 from the date of acquisition through June 30, 2001 using the straight-line method over 15 years. As of July 1, 2001 the Company no longer amortizes trademarks and trade names as a result of the application of SFAS 142. The amended net value of trademarks and trade names at September 30, 2001 was $601,806, which resulted in $1,474,633 being reclassified from trademarks and trade names to goodwill. -6- The independent appraisal completed in December 2001 determined that $10,547,488 of the Sonomed purchase price should have been classified as goodwill. Amortization related to goodwill has been recalculated at $1,021,943 from the date of acquisition through June 30, 2001 using the straight-line method over 15 years. As of July 1, 2001 the Company no longer amortizes goodwill in accordance with SFAS 142. The amended net value of goodwill at September 30, 2001 was as follows:
Sonomed $ 9,525,545 Vascular 941,218 Medical 125,027 ----------- Total $10,591,790 ===========
The independent appraisal completed in December 2001 determined that no portion of the Sonomed purchase price should have been classified as customer lists at the time of acquisition, which resulted in $6,951,389 being reclassified from customer lists to goodwill. The adjustment of previously recorded net income and earnings per share primarily represents previous amortization of goodwill, trademarks and trade names and customer lists. The impact on net income, basic net earnings per share and diluted net earnings per share for the quarter ended September 30, 2000 is $207,856, $0.063 per share and $0.063 per share, respectively. Adjusted net income, basic net earnings per share and diluted net earnings per share for the three months ended September 30, 2000 is $315,247, $0.097 per share and $0.095 per share, respectively. Intangible assets (excluding goodwill) as of September 30, 2001 comprise:
Gross Carrying Accumulated Amount Amortization ---------- ---------- Amortizable intangible assets $ 721,583 $ 267,537 Non-amortizable intangible assets 665,000 63,194 ---------- ---------- Total identifiable intangible assets $1,386,583 $ 330,731 ========== ==========
Amortizable intangible assets consist principally of patents and license and distribution rights. Non-amortizable intangible assets consist of trademarks and trade names. The amortization of intangible assets for the three months ended September 30, 2001 was $12,841. ACCUMULATED DEFICIT The accumulated deficit balance at September 30, 2001 decreased from $(39,941,581) originally reported, to $(39,813,247) as restated, for amortization of the customer lists for the three-month period ended September 30, 2001. CONDENSED CONSOLIDATED STATEMENTS OF OPERATION In accordance with SFAS 142, effective July 1, 2001, Escalon no longer amortizes goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives will continue to be amortized over their useful lives. At the time the Company filed its Form 10-Q for the three-months ended September 30, 2001, $7,700,000 of the Sonomed purchase price was classified as customer lists that continued to be amortized over 15 years using the straight-line method. During the three-month period ended September 30, 2001 the Company recorded $128,334 amortization related to customer lists. The independent appraisal completed in December 2001 determined that none of the purchase price should have been classified as customer lists, and instead should have been classified as goodwill. Reclassifying the -7- customer lists to goodwill per the independent appraisal required reversing the $128,334 amortization recorded during the three-month period ended September 30, 2001, because the Company as of July 1, 2001 is no longer amortizing goodwill in accordance with SFAS 142. This correction decreased marketing, general and administrative expenses by $128,334 and subsequently increased net income by $128,334, or $0.039 and $0.039 per basic and diluted share, respectively. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS The aforementioned correction affects the reported September 30, 2001 net income, which increased by $128,334 and depreciation and amortization, which decreased by $128,334. 6. PNC BANK, N.A. LINE OF CREDIT AND LONG-TERM DEBT On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank, N.A. 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 PNC Bank, N.A. The interest rate on the term loan is based on prime plus 1.0% and the line of credit is based on prime plus 0.75%. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on the floating-rate term loan and line of credit. At September 30, 2001, Escalon was party to interest rate cap agreements covering the term loan through January 1, 2003 and $3,000,000 of the reducing line of credit through January 1, 2002. The agreements entitle the Company to receive from PNC Bank, N.A., the counter-party to both agreements, on a monthly basis, the amounts, if any, by which the Company's interest payments on the $3,000,000 protected portion of the line of credit exceeds 9.0%. Payments are also due monthly from PNC Bank, N.A. if the interest rate on the term loan exceeds 9.5% for the period January 1, 2001 through January 1, 2002 and 10.0% for the period January 1, 2002 through January 1, 2003. At September 30, 2001, the interest rates applicable to the term loan and the line of credit were 7.0% and 6.75%, respectively. PNC Bank, N.A.'s prime rate as of September 30, 2001 was 6.0%. Escalon paid $100,000 in finance fees and $122,800 in interest rate cap protection fees that are recorded in other assets. These fees are being amortized over the term of the loans using the effective interest method. For the three-month periods ended September 30, 2001 and 2000, amortization of these fees was $11,234 and $16,882, respectively. All of the Company's assets collateralize these agreements. The term loan and the line of credit contain various covenants related to required levels of earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined, and the maintenance of net worth levels, among others. Escalon did not achieve the EBITDA and net worth covenants, resulting in technical defaults under the loan agreements. PNC Bank, N.A. has waived these requirements of the agreements as of September 30, 2001, and for the period ending October 1, 2002. PNC Bank, N.A. has also waived the requirement of the loan agreement that states that the line of credit balance cannot exceed $4,000,000 as of June 30, 2001. This requirement has also been waived for the period ending October 1, 2002. On November 8, 2001, Escalon amended its loan agreement with PNC Bank, N.A. 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. As of November 8, 2001, the amount outstanding against this line of credit is $1,300,000. Principal payments due on the term loan have been amended such that the balance is 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 have been increased to prime plus 1.75% and prime plus 1.50%, respectively. In conjunction with the amended agreement, Escalon has issued PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock. The Company paid a $50,000 facility fee upon execution of the loan agreement, and commencing March 1, 2002, will pay a quarterly facility fee of 0.25% of the aggregate principal amount outstanding under the line of credit and the term loan on January 1 of such year. The accompanying condensed consolidated financial statement has been adjusted to account for this transaction. -8- 7. 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 directors, David Blech and D.Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12, and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by Escalon and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related with this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and the insurance carrier have deposited such funds in an escrow account. 8. REVENUE, NET Revenue, net includes quarterly payments earned in connection with the sale of Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line. For the three-month period ended September 30, 2001, this revenue totaled $444,000. This revenue totaled $346,000 for the period beginning on the commencement date of August 11, 2000 through September 30, 2000. The Company is entitled to receive additional consideration, in varying amounts, through fiscal 2005. Included in accounts receivable as of September 30, 2001 and June 30, 2001 was $444,000 and $726,000, respectively. 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 8, 2002 By: /s/ Richard J. DePiano ---------------- ----------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: February 8, 2002 By: /s/ Harry M. Rimmer ---------------- -------------------- Senior Vice-President - Finance -9-