10-Q 1 w83651e10vq.txt FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002. OR | | Transitional report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transitional period from _________to__________ COMMISSION FILE NUMBER 0-20127 ESCALON MEDICAL CORP. (exact name of Registrant as specified in its charter) PENNSYLVANIA 33-0272839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 351 EAST CONESTOGA ROAD, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. YES |X| NO | | Indicate the number of shares of outstanding stock of each of the issuer's classes of Common Stock, as of the latest practicable date. Date: FEBRUARY 14, 2003 Shares of Common Stock, $0.001 par value: 3,345,851 ESCALON MEDICAL CORP. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
Page PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 Condensed Consolidated Balance Sheets as of December 31, 2002 (Unaudited) and June 30, 2002 3 Condensed Consolidated Statements of Operations for the three and six month periods ended December 31, 2002 and 2001 (Unaudited) 4 Condensed Consolidated Statements of Cash Flow for the six month periods ended December 31, 2002 and 2001 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 27 PART II OTHER INFORMATION Item 1. Legal Proceedings 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 29
2 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30, 2002 2002 ------------ ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 296,163 $ 220,826 Accounts receivable, net 1,976,871 2,093,877 Inventory, net 1,806,585 1,572,067 Other current assets 390,589 400,820 ------------ ------------ Total current assets 4,470,208 4,287,590 ------------ ------------ Long-term note receivable 150,000 150,000 Furniture and equipment, net 558,305 626,377 Goodwill 10,591,795 10,591,795 Trademarks and trade names, net 601,806 601,806 License and distribution rights, net 225,475 246,988 Patents, net 188,175 193,541 Other assets 88,443 214,344 ------------ ------------ Total assets $ 16,874,207 $ 16,912,441 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 1,475,000 $ 1,250,000 Current portion of long-term debt 2,542,874 2,085,963 Accounts payable 683,918 531,665 Accrued compensation 449,233 498,954 Other current liabilities 162,072 161,115 ------------ ------------ Total current liabilities 5,313,097 4,527,697 Long-term debt, net of current portion 3,760,927 5,191,393 ------------ ------------ Total liabilities 9,074,024 9,719,090 Shareholders' equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares -- -- issued Common stock, $0.001 par value; 35,000,000 shares authorized; 3,345,851 shares issued and outstanding at December 31, 2002 and June 30, 2002 3,346 3,346 Additional paid-in capital 46,228,710 46,228,710 Accumulated deficit (38,431,873) (39,038,705) ------------ ------------ Total shareholders' equity 7,800,183 7,193,351 ------------ ------------ Total liabilities and shareholders' equity $ 16,874,207 $ 16,912,441 ============ ============
See notes to condensed consolidated financial statements 3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended December 31, December 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Product revenue $ 2,749,368 $ 2,413,266 $ 5,262,887 $ 4,884,504 Other revenue 517,810 418,455 1,012,631 862,932 ----------- ----------- ----------- ----------- Revenues, net 3,267,178 2,831,721 6,275,518 5,747,436 ----------- ----------- ----------- ----------- Costs and expenses: Cost of goods sold 1,279,044 992,668 2,357,963 2,220,930 Research and development 183,736 132,483 374,053 255,270 Marketing, general and administrative 1,278,014 1,295,245 2,566,142 2,440,838 ----------- ----------- ----------- ----------- Total costs and expenses 2,740,794 2,420,396 5,298,158 4,917,038 ----------- ----------- ----------- ----------- Income from operations 526,384 411,325 977,360 830,398 ----------- ----------- ----------- ----------- Other income and expenses: Equity in income of unconsolidated joint venture -- 20,967 -- 12,365 Interest income 828 466 1,478 1,356 Interest expense (179,540) (177,330) (372,007) (384,372) ----------- ----------- ----------- ----------- Total other income and expenses (178,712) (155,897) (370,529) (370,651) ----------- ----------- ----------- ----------- Net income $ 347,673 $ 255,428 $ 606,831 $ 459,747 =========== =========== =========== =========== Basic net income per share $ 0.104 $ 0.078 $ 0.181 $ 0.140 =========== =========== =========== =========== Diluted net income per share $ 0.103 $ 0.077 $ 0.178 $ 0.139 =========== =========== =========== =========== Weighted average shares - basic 3,345,851 3,292,184 3,345,851 3,292,184 =========== =========== =========== =========== Weighted average shares - diluted 3,390,122 3,318,740 3,409,933 3,318,740 =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended December 31, 2002 2001 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 606,831 $ 459,747 Adjustments to reconcile net income to net cash provided by in operating activities: Depreciation and amortization 176,332 101,012 Equity in net income of unconsolidated joint venture -- (12,365) Disposal of furniture and equipment 927 -- Change in operating assets and liabilities: Accounts receivable, net 117,006 227,515 Inventory, net (234,518) (50,916) Other current and long-term assets 136,132 131,534 Accounts payable, accrued and other liabilities 103,490 102,043 ----------- ----------- Net cash provided by operating activities 906,200 958,570 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from unconsolidated joint venture, net -- 206,611 Purchase of fixed assets (25,397) (52,366) ----------- ----------- Net cash (used in) / provided by investing activities (25,397) 154,245 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowing 625,000 550,000 Line of credit repayment (400,000) (876,009) Principal payments on term loans (1,030,466) (700,000) Payments of financing fees -- (73,506) ----------- ----------- Net cash used in financing activities (805,466) (1,099,515) ----------- ----------- Net increase in cash and cash equivalents 75,337 13,300 Cash and cash equivalents, beginning of period 220,826 80,830 ----------- ----------- Cash and cash equivalents, end of period $ 296,163 $ 94,130 =========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 377,053 $ 397,305 =========== ===========
See notes to condensed consolidated financial statements 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital"), Sonomed EMS Srl ("Sonomed EMS") and Escalon Pharmaceutical, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2003. For more complete financial information, the accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2002 included in the Company's annual report on Form 10-K. 2. COMPANY OVERVIEW The following discussion should be read in conjunction with interim condensed consolidated financial statements and the notes thereto, which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. was incorporated in California in 1987 as Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon reincorporated in Delaware in November 1999, and then reincorporated in Pennsylvania in November 2001. The Company operates in the healthcare market, specializing in the development, marketing and distribution of ophthalmic medical devices, vascular access devices and pharmaceuticals. The principal regulatory body overseeing Escalon is the United States Food and Drug Administration ("the FDA"). The FDA is authorized, at any time, to conduct an inspection of registered medical device facilities to ensure compliance. In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources to the research and development of ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser properties to a privately held company in return for an equity interest and future royalties on sales of products relating to the laser technology. The privately held company undertook responsibility for funding and developing the laser technology through to commercialization. The privately held company began selling products related to the laser technology during fiscal 2002. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Endologix, Inc. ("Endologix"), formerly Radiance Medical Systems, Inc. Vascular's products use Doppler technology to aid medical personnel in locating arteries and veins in difficult circumstances. Currently, this product line is concentrated in the cardiac catheterization 6 market; however, the Company began marketing the products in the area of oncology during fiscal 2002. In January 2000, the Company purchased Sonomed, Inc., a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, Digital formed a joint venture, Escalon Medical Imaging, LLC ("Imaging") with MegaVision, Inc. ("MegaVision"), a privately held company, to develop and market a digital camera back for ophthalmic photography. The Company terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. 3. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sonomed, Vascular, Pharmaceutical, Digital and Sonomed EMS. All intercompany transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions management may undertake in the future, actual results in the future may ultimately differ from those estimates presently being made. REVENUE RECOGNITION The Company recognizes revenue from the sales of its products at the time of shipment, when title and risk of loss transfer. The Company provides products to distributors at agreed wholesale prices and to the balance of its customers at set retail prices. Distributors can achieve discounts for accepting high volume shipments. The discounts are reflected immediately in the net invoice price, which is the basis for revenue recognition. No further discounts or material sales incentives are given. With respect to additional consideration related to the sale of the Company's Silicone Oil product line and the licensing of the Company's intellectual laser property, other revenue is recognized upon notification from the licensees of amounts earned. ACCOUNTS RECEIVABLE, TRADE Accounts receivable, trade are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based on management's assessment of individual accounts. The allowance for doubtful accounts is estimated based on the Company's historical losses and upon a periodic review of individual accounts. STOCK-BASED COMPENSATION As permitted by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company has elected to follow Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock option plans. Under APB 25, no compensation expense is recognized at the time of the option grant because the exercise price of the Company's employee stock option equals the fair market value of the underlying common stock on the date of the grant. 7 INTANGIBLE ASSETS The Company follows Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," which discontinues the amortization of goodwill and identifiable intangible assets that have indefinite lives. RECLASSIFICATIONS Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation. 4. NEW PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 144 retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long lived assets to be held and used, while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on the Company's financial position or results of operations. In January 2002, the SEC issued an interpretive release on disclosure related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions and is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than those risk factors presented in this and other Company filings. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement updates, clarifies and simplifies existing pronouncements related primarily to accounting for extinguishment of debt and for leases. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company is currently evaluating the impact of applying SFAS No. 145, but does not expect it to have a material impact on its results of operations or its financial condition. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its results of operations or its financial condition. On November 25, 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5), relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation 8 are effective for financial statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The Company is currently evaluating the impact of adopting FIN 45, but does not expect it to have a material impact on its results of operations or its financial condition. On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - and amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for the first interim period beginning after December 15, 2002. The Company does not expect the adoption of SFAS No. 148 to have a material impact on its results of operations or its financial condition. On January 17, 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of Variable Interest Entities, an Interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective immediately, for VIE's created after January 31, 2003. FIN 46 is effective no later than the beginning of the first interim or annual financial reporting period beginning after June 15, 2003. The Company is currently evaluating the impact of adopting FIN 46, but does not expect it to have a material impact on its results of operations or its financial condition. 9 5. PER SHARE INFORMATION The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share, "in presenting basic and diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
Three Months ended Six Months ended December 31, December 31, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share: Net income $ 347,672 $ 255,428 $ 606,831 $ 459,747 ---------- ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 3,345,851 3,292,184 3,345,851 3,292,184 Effect of dilutive securities: Employee stock options 44,271 26,556 64,082 26,556 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,390,122 3,318,740 3,409,933 3,318,740 ========== ========== ========== ========== Basic earnings per share $ 0.104 $ 0.078 $ 0.181 $ 0.140 ========== ========== ========== ========== Diluted earnings per share $ 0.103 $ 0.077 $ 0.178 $ 0.139 ========== ========== ========== ==========
6. INVENTORIES Inventories, stated at lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
December 31, June 30, 2002 2002 ----------- ----------- Raw Materials/Work in Process $ 1,325,266 $ 1,273,611 Finished Goods 516,779 343,409 ----------- ----------- 1,842,045 1,617,020 Valuation Allowance (35,460) (44,953) ----------- ----------- Total inventory $ 1,806,585 $ 1,572,067 =========== ===========
7. GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with SFAS No. 142, effective July 1, 2001, Escalon discontinued the amortization of goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives will continue to be amortized over their useful lives. The standard required that an initial impairment assessment be completed by December 31, 2001. In November 2001, the Company evaluated whether the intangible assets were impaired and reviewed the allocation of intangible assets related to the purchase of Sonomed as of the January 2000 acquisition date, when the purchase price was allocated based on information available at that time. Management concluded in December 2001 that the intangible assets 10 acquired with the purchase of Sonomed should be allocated as $10,547,488 to goodwill and $665,000 to trademarks and trade names. The result of this correction was solely a reclassification of the intangible assets among customer lists, trademarks and trade names and goodwill. The total reported value of the intangible assets did not change. Therefore, this correction had no affect on reported earnings, net worth or cash flow for any prior fiscal years. In November 2001, the Company evaluated whether the goodwill and other non-amortizable intangible assets in the Sonomed and Vascular business units were impaired. The Company concluded that the carrying value of goodwill and other intangible assets did not exceed their fair values and therefore were not impaired. The Company evaluated the carrying value of goodwill as compared to its fair value in the Medical/Trek business unit and concluded that its carrying value did not exceed its fair value and therefore was not impaired. The Company made this conclusion after evaluating the discounted cash flow of the Medical/Trek business unit. In accordance with SFAS No. 142, the Company's intangible assets will be assessed for impairment on an annual basis. The changes in the carrying amount of goodwill for the six-months ended December 31, 2002 are as follows:
Medical/Trek Sonomed Vascular Total ------------ ---------- -------- ----------- Balance as of June 30, 2002 $125,027 $9,525,550 $941,218 $10,591,795 Goodwill acquired -- -- -- -- Impairment losses -- -- -- -- Goodwill written off related to sale of business unit -- -- -- -- -------- ---------- -------- ----------- Balance as of December 31, 2002 $125,027 $9,525,550 $941,218 $10,591,795 ======== ========== ======== ===========
Other intangible assets as of December 31, 2002, as allocated by reportable segment are as follows:
Gross Net Carrying Accumulated Carrying Amount Amortization Amount --------- ------------ -------- AMORTIZED INTANGIBLE ASSETS Patents Medical / Trek $ 257,301 $(106,041) $151,260 Vascular 36,915 -- 36,915 --------- --------- -------- Total $ 294,216 $(106,041) $188,175 ========= ========= ======== License and distribution rights Medical / Trek $ 180,182 $(155,784) $ 24,398 Pharmaceutical 272,185 (71,108) 201,077 --------- --------- -------- Total $ 452,367 $(226,892) $225,475 ========= ========= ======== UNAMORTIZED INTANGIBLE ASSETS Trademarks and trade names Sonomed $ 601,806 --------- Total $ 601,806 =========
11 Amortization expense for the six-month periods ended December 31, 2002 and 2001, as allocated by business segment are as follows:
For the six-month period ended December 31, 2002 ------------------------ 2002 2001 ------- ------- Goodwill amortization Medical / Trek $ -- $ -- Sonomed -- -- Vascular -- -- Patent amortization Medical / Trek $ 5,366 $ 5,366 Vascular License and distribution rights amortization Medical / Trek $11,261 $11,261 Pharmaceutical 10,251 9,251 Trademarks and trade names Sonomed $ -- $ -- Estimated Annual Amortization Expense For the year ending June 30, 2003 $53,764 For the year ending June 30, 2004 $42,502 For the year ending June 30, 2005 $31,241
8. LINE OF CREDIT AND LONG-TERM DEBT On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. The lender granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with the lender. The interest rate on the term loan was based on prime plus 1.0% and the line of credit was based on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this financing. Interest rate cap agreements were used to reduce the potential impact of increases in interest rates on the floating rate term loan and line of credit. The Company incurred $122,800 in fees related to these rate cap agreements. As of December 31, 2002, the interest rate cap agreements expired and the related fees have been completely amortized. The finance fees are being amortized over the term of the loans using the effective interest method. The unamortized finance fees offset the outstanding balance of the loans. On November 28, 2001, Escalon amended its loan agreement with the lender. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and a $2,000,000 available line of credit. The aggregate balance of the debt outstanding did not change as a result of this refinancing. As of December 31, 2002, the amount outstanding against the line of credit was $1,475,000. Principal payments due on the term loan were amended such that the balance remains due within the five-year term of the original agreement, including a $2,000,000 balloon payment due on June 30, 2004. Interest rates on the term loan and line of credit were increased to prime plus 1.75% and prime plus 1.50%, respectively. At December 31, 2002, the interest rates applicable to the term loan and the line of credit were 6.00% and 5.75%, respectively. The lender's prime rate at December 31, 2002 was 4.25%. In connection with the amended agreement, Escalon issued to the lender warrants to purchase 60,000 shares 12 of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and an expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon the execution of the loan agreement, which is being amortized over the life of the term loan. The unamortized finance fees offset the outstanding balance of the loans. Pursuant to the amended agreement, on March 1, 2002, the Company began paying a 1.0% facility fee that is payable quarterly through June 30, 2004, and is calculated based on the aggregate principal amount outstanding under the term loan and line of credit on January 1 of each year. All of the Company's assets collateralize this amended agreement. As of December 31, 2002, the term loan and line of credit contained various covenants, among which was a requirement to maintain a defined ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the EBITDA to debt ratio, resulting in a technical default under the loan agreement. The lender waived this requirement of the agreement as of December 31, 2002, and for the twelve-month period ending January 1, 2004. On December 23, 2002, Spring Street Capital, L.L.C., acquired the Company's bank debt. Bank debt consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 line of credit. 9. SUBSEQUENT EVENT On February 13, 2003, the Company entered into an Amended Agreement with Spring Street Capital, L.L.C. The primary amendments of the Amended Agreement were to reduce quarterly principal payments and extend the term of the repayments, and to alter the covenants of the original bank agreement to make them more reasonably attainable. The schedule below presents the amortization under the Amended Agreement as compared to the superseded original bank agreement:
2/13/03 Agreement 11/28/01 Agreement ----------------- ------------------ March 1, 2003 $ 300,000 $ 525,000 June 1, 2003 300,000 525,000 September 1, 2003 300,000 650,000 December 1, 2003 300,000 650,000 March 1, 2004 350,000 750,000 June 1, 2004 350,000 750,000 June 30, 2004 -- 2,000,000 September 1, 2004 350,000 -- December 1, 2004 350,000 -- March 1, 2005 400,000 -- June 1, 2005 400,000 -- September 1, 2005 2,450,000 -- ---------- ---------- $5,850,000 $5,850,000 ========== ==========
10. LITIGATION As previously reported in reports filed with the SEC, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc. et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter to which the Company is no longer a party). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and 13 directors, David Blech and D. Blech & Co., Inc. issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts claims under section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by the Company and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company reached an agreement to settle this action on its behalf and on the behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier agreed to fund a significant portion of the settlement amount. Both the Company and the insurance carrier deposited such funds in an escrow account in 1996. The court approved the settlement after a fairness hearing on September 11, 2002. 11. SEGMENTAL INFORMATION During the six-month periods ended December 31, 2002 and 2001, Escalon's operations were classified into four principal reporting segments that provide different products or services. Each segment is subject to different marketing, production and technology strategies.
For the six-month periods ended December 31, (all numbers in the table below are reported in thousands) ------------------------------------------------------------------------------------------------- Sonomed Vascular Medical / Trek Digital Total ------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------- Product Revenue $ 3,019 $ 3,015 $ 1,342 $ 1,269 $ 650 $ 601 $252 $- $ 5,263 $ 4,885 Other revenue -- -- -- -- 1,013 863 -- -- 1,013 863 Revenue, net 3,019 3,015 1,342 1,269 1,663 1,464 252 -- 6,276 5,748 Income from operations 356 356 16 28 606 446 -- -- 978 830 Other income and expenses: Equity in loss of unconsolidated JV -- -- -- -- -- -- -- 12 -- 12 Interest income -- -- -- -- 1 1 -- -- 1 1 Interest expense (356) (356) (16) (28) -- -- -- -- (372) (384) Total other income and expenses (356) (356) (16) (28) 1 1 -- 12 (371) (371) Income before taxes -- -- -- -- 607 447 -- 12 607 459 Income taxes -- -- -- -- -- -- -- -- -- -- Net income (loss) -- -- -- -- 607 447 -- 12 607 459 Depreciation and amortization 9 8 20 22 135 71 12 -- 176 101 Assets 11,754 11,981 2,173 2,465 2,600 2,205 347 261 16,874 16,912 Expenditures for long- lived assets -- 26 -- -- 25 26 -- -- 25 52
14 The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. The business segments reported above are segments for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources and assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies disclosed on the Company's most recently filed Form 10-K. For the purposes of this illustration, corporate expenses, which principally consist of executive management and administrative support functions, are allocated across the business segments based primarily on each segment's net revenue. These expenses are otherwise included in the Medical/Trek business unit. During the six-month periods ended December 31, 2002 and 2001, Sonomed derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These products are used for diagnostic or biometric applications in ophthalmology. Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM) monitors, needles and catheter products. These products are used by medical personnel to assist in gaining access to arteries and veins in difficult cases. Medical/Trek derived its revenue from the sale ISPAN(TM) gas products, various disposable ophthalmic surgical products, revenues derived from Bausch & Lomb's sale of Silicone Oil and royalty revenue derived from a privately held entity. Commencing January 1, 2002, Digital derived its revenue from the sale of the CFA digital imaging system and related products. During the six-month periods ended December 31, 2002 and 2001, there was one entity, Bausch & Lomb, from which Escalon derived greater than 10% of its consolidated net revenues. Revenues were $1,114,000 or 17.75% of consolidated net revenues for the six-month period ended December 31, 2002 and were $1,011,000, or 17.59% of consolidated net revenues for the six-month period ended December 31, 2001. This revenue is included in the Medical/Trek business unit. Of the consolidated net revenues reported above, $1,046,000, $77,000, $19,000 and $32,000 were derived internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively, during the six-month period ended December 31, 2002; and $1,070,000, $91,000 and $23,000 were derived internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively, during the six-month period ended December 31, 2001. 12. FORMATION OF SUBSIDIARY AND JOINT VENTURE The Company formed Sonomed EMS, Srl. ("Sonomed EMS") on September 26, 2002 as a wholly owned subsidiary. Sonomed EMS, based in Milan, Italy, is in the process of completing its organization under Italian law. Sonomed EMS will operate as a marketing division of Sonomed in Europe. The Company is forming a joint venture with one of its Asian distributors to expand its presence in that market. Sonoscan Holdings, Inc. ("Sonoscan") will be a British Virgin Islands company, of which, Escalon will own fifty percent. The formation of Sonoscan is in the preliminary stages, but the joint venture is intended to assist Sonomed in making further progress in the Asian market. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements contained in this Form 10-Q Report and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts. As such, they are considered "forward-looking statements" which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "protect," "should," "will," and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, product 15 development, the introduction of new products, the potential markets and uses for the Company's products, the Company's plans to file applications with the Food and Drug Administration ("the FDA"), the development of joint venture opportunities, the effects of competition on the structure of the markets in which the Company competes and defending itself in litigation matters. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed; and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and this list of factors should not be considered an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. The Company undertakes no obligation to update any forward-looking statement. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company's forward-looking statements, the most important factors include, without limitation, the following: FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING Escalon's liquidity is affected by many factors, some of which arise from fluctuations related to global markets and economies and some of which are based on the normal ongoing operations of the Company's businesses. For instance, the Company's current term loan with the Lender provides for quarterly principal payments, and a $2,450,000 final balloon payment, which is due on September 1, 2005. Although cash on hand, cash generated from operations and cash available from the line of credit may be sufficient to satisfy the Company's working capital, debt service, capital expenditures and research and development until the balloon payment is due, the Company will be required to secure alternative debt or equity financing in order to satisfy the balloon payment, and management cannot assure that such financing will be available when required on acceptable terms. CONCENTRATION OF REVENUES The Company realized 14.24% and 15.02% of its net revenue during the six-month periods ended December 31, 2002 and 2001, respectively, from Bausch & Lomb's sale of Silicone Oil. While management does not expect this revenue to decline rapidly in the foreseeable future any such decrease would have a significant impact on the Company's consolidated financial position; results of operations and cash flows, and the Company's stock price could be negatively impacted. ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE INDUSTRIES IN WHICH THE COMPANY COMPETES It is difficult to ascertain whether the current economic downturn has affected the Company's results. Management believes any effect has been limited to the Sonomed business unit. Any further decline in customers' markets or further decline in general economic conditions could result in reduction in demand for Escalon's products and services and could harm the Company's consolidated financial position, results of operations, cash flows and stock price. Should it become necessary due to economic climate, the Company may not be able to reduce expenditures quickly enough to maintain profitability and service the Company's current debt. In addition, there is a risk that cost-cutting initiatives would impair Escalon's ability to effectively develop and market products and remain competitive in the industries in which the Company competes. These measures could have long-term effects on Escalon's business by reducing the Company's pool of technical talent, decreasing or slowing improvements in products, making it more difficult for the Company to respond to customers, limiting the Company's ability to increase production quickly if and when the demand for Escalon's product increases and limiting the Company's ability to hire and retain key personnel. These circumstances could cause Escalon's earnings to be lower than they otherwise might be. 16 The Company could be affected by trends toward managed care, health care cost containment, and other changes in government and private sector initiatives, in the United States and other countries in which the Company does business, that are placing increased emphasis on delivery of more cost-effective medical therapies. Changes in governmental laws, regulations and accounting standards and the enforcement thereof and agency or governmental actions or investigations involving the industry in general or the Company in particular may be adverse to the Company. THE ABILITY OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS The Company generally sells its products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Without timely introduction of new products and enhancements, the Company's products will become technologically obsolete over time, in which case the Company's revenue and operating results would suffer. The success of the Company's new product offerings will depend on several factors, including the Company's ability to: (i) properly identify customer needs, (ii) innovate and develop new technologies, services and applications, (iii) successfully commercialize new technologies in a timely manner, (iv) manufacture and deliver Company products in sufficient volumes on time, (v) differentiate Company offerings from competitors' offerings, (vi) price Company products competitively, and (vii) anticipate competitors' announcements of new products, services or technological innovations. DEPENDENCE ON KEY PERSONNEL The Company's future success depends partly on the continued service of key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. If the Company fails to retain and hire a sufficient number of these personnel, the Company will not be able to maintain or expand is business. ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED In the normal course of business, the Company engages in discussions with third parties relating to strategic alliances, joint ventures and divestitures. As a result of such transactions, the Company's financial results may differ from the investment community's expectations in a given quarter. In addition, strategic alliances may require the Company to integrate a different company culture, management team and business infrastructure. The Company may have difficulty developing, manufacturing and marketing the products of a strategic alliance or joint venture in a way that enhances the performance of the product lines to realize the value from the expected synergies. Depending on the size and complexity of a strategic alliance or joint venture, the Company's successful integration of the entity depends on a variety of factors including: (i) the retention of key employees, (ii) the management of facility employees in separate geographical areas. These efforts require varying levels of management resources, which may divert the Company's attention away from other business operations. If the Company does not realize the expected benefits or synergies of such transactions, the Company's consolidated financial position, results of operations and stock price could be negatively impacted. THE OUTCOME OF LITIGATION MATTERS AND UNCERTAIN PROTECTION OF PATENTED AND PROPRIETARY INFORMATION Increased public interest in recent years in product liability claims in the medical device industry could affect the Company should it become directly involved. Recent events have made the investing public particularly sensitive to listed companies' reporting practices and accounting policies in general. The SEC could make regulatory changes that could have a direct affect on the Company. Additionally, the Company may find it necessary to enforce its legal right with respect to patented and proprietary information. The outcome of any of these matters and the financial impact they may have on the Company cannot be foreseen. 17 VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN ITS LISTING ON THE NASDAQ SMALLCAP MARKET The public stock markets have experienced significant volatility in stock prices in recent years, which could cause the Company's stock price to experience severe price changes that are unrelated or disproportionate to the operating performance of the Company. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to, among other factors, quarter to quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of new strategic relationships by the Company or its competitors, general conditions in the healthcare industry or the global economy generally, or market volatility unrelated to the Company's business and operating results. The Company's Common Stock is currently listed on the Nasdaq SmallCap Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain listing requirements must be met. If the Company's securities were delisted, investors could find it more difficult to dispose of them, or to obtain accurate quotations as to the market value of the Company's securities. COMPANY OVERVIEW The following discussion should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto, which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. was incorporated in California in 1987 as Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon reincorporated in Delaware in November 1999, and then reincorporated in Pennsylvania in November 2001. The Company operates in the healthcare market, specializing in the development, marketing and distribution of ophthalmic medical devices, vascular access devices and pharmaceuticals. The principle regulatory body overseeing Escalon is the United States Food and Drug Administration ("the FDA"). The FDA is authorized, at any time, to conduct an inspection of registered medical device facilities to ensure compliance. The Company is in compliance with the FDA. In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources to the research and development of ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser properties to a privately held company in return for an equity interest and future royalties on sales of products relating to the laser technology. The privately held company undertook responsibility for funding and developing the laser technology through to commercialization. The privately held company began selling products related to the laser technology during fiscal 2002. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Endologix, Inc. ("Endologix"), formerly Radiance Medical Systems, Inc. Vascular's products use Doppler technology to aid medical personnel in locating arteries and veins in difficult circumstances. Currently, this product line is concentrated in the cardiac catheterization market; however, the Company began marketing the products in the area of oncology during fiscal 2002. In January 2000, the Company purchased Sonomed, Inc., a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, Digital formed a joint venture, Escalon Medical Imaging, LLC ("Imaging") with MegaVision, Inc. ("MegaVision"), a privately held company, to develop and market a digital camera back for ophthalmic photography. The Company terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. 18 The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; (iii) general competitive and economic conditions of the healthcare market; and (iv) availability of component parts and supplies from suppliers. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of." SFAS No. 144 retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long lived assets to be held and used, while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on the Company's financial position or results of operations. In January 2002, the SEC issued an interpretive release on disclosure related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions and is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than those risk factors presented in this and other Company filings. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement updates, clarifies and simplifies existing pronouncements related primarily to accounting for extinguishment of debt and for leases. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company is currently evaluating the impact of applying SFAS No. 145, but does not expect it to have a material impact on its results of operations or its financial condition. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its results of operations or its financial condition. On November 25, 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (FAS 5), relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The Company is currently evaluating the impact of adopting FIN 45, but does not expect it to have a material impact on its results of operations or its financial condition. 19 On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - and amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for the first interim period beginning after December 15, 2002. The Company does not expect the adoption of SFAS No. 148 to have a material impact on its results of operations or its financial condition. On January 17, 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of Variable Interest Entities, an Interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective immediately, for VIE's created after January 31, 2003. FIN 46 is effective no later than the beginning of the first interim or annual financial reporting period beginning after June 15, 2003. The Company is currently evaluating the impact of adopting FIN 46, but does not expect it to have a material impact on its results of operations or its financial condition. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of those involve the application of SFAS No. 142, discussed above in Note 7 to the Consolidated Financial Statements. The financial statements are prepared in conformity with generally accepted accounting principles, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for uncollectible receivables, obsolete inventory, deferred income taxes and purchased intangible assets. Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates. THREE AND SIX-MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001 Product revenues increased $336,000, or 13.92%, to $2,749,000 for the three-month period ended December 31, 2002 as compared to $2,413,000 for the same period in the prior fiscal year. Product revenue in the Sonomed business unit increased $142,000, or 9.54%, to $1,629,000. This increase is primarily attributed to the domestic market, where revenue increased $138,000. Product revenue in the Vascular business unit increased $64,000, or 10.47%, to $675,000. The increase primarily relates to increased usage in the marketplace. Product revenue in the Medical/Trek business unit decreased $8,000, or 2.55%, to $306,000. Revenue in the Digital business unit increased $139,000. The Company terminated its joint venture and commenced operations within the Digital business unit on January 1, 2002. 20 Product revenues increased $378,000, or 7.74%, to $5,263,000 for the six-month period ended December 31, 2002 as compared to $4,885,000 for the same period last fiscal year. Product revenue in the Sonomed business unit increased $4,000, or 0.13%, to $3,019,000. Product revenue in Latin America and Europe has decreased by $139,000. In Asia and Mexico product revenue has increased $98,000. Domestic product revenue increased $30,000. Product revenue in the Vascular business unit increased $73,000, or 5.75%, to $1,342,000. The increase primarily relates to increased usage in the marketplace. Product revenue in the Medical/Trek business unit increased $49,000, or 8.15%, to $650,000. OEM revenue from Bausch & Lomb increased $74,000. Other revenue increased $100,000, or 23.92%, to $518,000 for the three-month period ended December 31, 2002 as compared to $418,000 for the same period last fiscal year. The increase relates primarily to a $67,000 royalty payment received from a privately held entity related to licensing of the Company's intellectual laser technology. Escalon licensed the technology to the privately held company in October 1997. These royalty payments commenced during the fourth quarter of fiscal 2002 when the privately held company began selling product related to the Company's intellectual laser technology. The remaining $33,000 increase in other revenue relates to revenue earned from Bausch & Lomb in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls for annual step-downs in the calculation of Silicone Oil revenues to be received by the Company. These step-downs occur during the first quarter of each fiscal year through the remainder of the contract. For the three-month period ended December 31, 2002, the step-down caused a $63,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The offsetting $96,000 increase in Silicone Oil revenue is due to fluctuations in the market demand for the product. The Company does not have knowledge as to what factors have affected Bausch & Lomb's sale of Silicone Oil. Other revenue increased $150,000, or 17.38%, to $1,013,000 for the six-month period ended December 31, 2002 as compared to $863,000 for the same period last fiscal year. The increase relates primarily to $119,000 royalty payments received from a privately held entity related to licensing of the Company's intellectual laser technology. Escalon licensed the technology to the privately held company in October 1997. These royalty payments commenced during the fourth quarter of fiscal 2002 when the privately held company began selling product related to the Company's intellectual laser technology. The remaining $31,000 increase in other revenue relates to revenue earned from Bausch & Lomb in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls for annual step-downs in the calculation of Silicone Oil revenues to be received by the Company. These step-downs occur during the first quarter of each fiscal year through the remainder of the contract. For the six-month period ended December 31, 2002, the step-down caused an approximate $125,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The offsetting $156,000 increase in Silicone Oil revenue is due to fluctuations in the market demand for the product. The Company does not have knowledge as to what factors have affected Bausch & Lomb's sale of Silicone Oil. Cost of goods sold totaled $1,279,000, or 39.12% of net revenue, for the three-month period ended December 31, 2002 as compared to $993,000, or 35.06% of net revenue for the same period last fiscal year. Cost of goods sold in the Sonomed business unit totaled $726,000, or 44.57% of net revenue, as compared to $635,000, or 42.67% of net revenue, for the same period last fiscal year. Cost of goods sold in the Vascular business unit totaled $293,000, or 43.41% of net revenue as compared to $161,000, or 26.35% of net revenue for the same period last fiscal year. Cost of goods sold in the Medical/Trek business unit totaled $194,000, or 63.30% of net revenue, as compared to $197,000, or 62.54% of net revenue, for the same period last fiscal year. Fluctuations in Medical/Trek cost of goods sold emanates from product mix, which is controlled primarily by market demand 21 Cost of goods sold totaled $2,358,000, or 37.58% of net revenue, for the six-month period ended December 31, 2002 as compared to $2,221,000, or 38.65% of net revenue, for the same period last fiscal year. Cost of goods sold in the Sonomed business unit totaled $1,306,000, or 43.26% of net revenue as compared to $1,348,000, or 44.71% of net revenue for the same period last fiscal year. Cost of goods sold in the Vascular business unit totaled $533,000, or 39.72% of net revenue, as compared to $505,000, or 39.80% of net revenue, for the same period last fiscal year. Cost of goods sold in the Medical/Trek business unit totaled $411,000, or 63.23% of net revenue, as compared to $368,000, or 61.23% of net revenue, for the same period last fiscal year. Fluctuations in Medical/Trek cost of goods sold emanates from product mix, which is controlled primarily by market demand. Marketing, general and administrative expenses decreased $17,000, or 1.31%, for the three-month period ended December 31, 2002 as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative expenses increased $26,000, or 7.85%. Commissions increased $35,000 primarily due to the Company commencing payments to certain international distributors. Salaries and other personnel-related costs decreased $16,000, primarily the result of decreased headcount. In the Vascular business unit, marketing, general and administrative expenses increased $36,000, or 14.40%. Salaries and other personnel related costs increased $14,000, primarily the result of increased headcount. Also contributing to the increase, the Company began allocating from the Medical/Trek business unit certain expenses related to the Wisconsin facility to the Vascular business unit. Marketing, general and administrative expenses in the Medical/Trek business unit decreased $167,000, or 23.52%. Legal expenses decreased $99,000. Expenditures last fiscal year were unusually high due to required filings with the SEC relating to the reincorporation into Pennsylvania, the issuance of shares to Endologix, Inc. and certain litigation matters. Salaries and other personnel related costs decreased $24,000, primarily the result of decreased headcount. Investor relations expense decreased $18,000 and accounting fees decreased $16,000. Also contributing to the decrease, the Company began allocating from the Medical/Trek business unit certain expenses related to the Wisconsin facility to the Vascular business unit. Offsetting these decreases was a $38,000 increase in corporate insurance premiums related increases being instituted by the insurance industry in general. Marketing, general and administrative expenses in the Digital business unit were $62,000 for the three-month period ended December 31, 2002. The Company terminated its joint venture and commenced operations within its Digital business unit on January 1, 2002, and, therefore, during the previous fiscal year these expenses were incurred within the joint venture. Marketing, general and administrative expenses increased $125,000, or 5.12%, for the six-month period ended December 31, 2002 as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative increased $68,000, or 10.59%. Commissions increased $52,000, primarily due to the Company commencing payments to certain international distributors. In the Vascular business unit, marketing, general and administrative expenses increased $93,000, or 19.58%. Salaries and other personnel related costs increased $46,000, primarily the result of increased headcount. Also contributing to the increase, the Company began allocating from the Medical/Trek business unit certain expenses related to the Wisconsin facility to the Vascular business unit. Marketing, general and administrative expenses in the Medical/Trek business unit decreased $205,000, or 15.60%. Legal expenses decreased $96,000. Expenditures last fiscal year were unusually high due to required filings with the SEC relating to the reincorporation into Pennsylvania, the issuance of shares to Endologix, Inc. and certain litigation matters. Salaries and other personnel related costs decreased $40,000, primarily the result of decreased headcount. Investor relations expense decreased $14,000 and accounting fees decreased $17,000. Also contributing to the decrease, the Company began allocating from the Medical/Trek business unit certain expenses related to the Wisconsin facility to the Vascular business unit. Offsetting these decreases was a $69,000 increase in corporate insurance premiums related to an audit of prior year premiums and premium increases being instituted by the insurance industry in general. Marketing, general and administrative expenses in the Digital business unit were $144,000 for the six-month period ended December 31, 2002. The Company terminated its joint venture and commenced operations within its Digital business unit on January 1, 2002, and therefore, during the previous fiscal year these expenses were incurred within the joint venture. 22 Research and development expenses increased $52,000, or 39.39%, for the three-month period ended December 31, 2002 as compared to the same period last fiscal year. The increase primarily relates to consulting expenses incurred in connection with product development. Research and development expenses increased $119,000, or 46.67%, for the six-month period ended December 31, 2002 as compared to the same period last fiscal year. The increase primarily relates to consulting expenses incurred in connection with product development. The Company terminated its joint venture and commenced operations within its Digital business unit on January 1, 2002. The Company recognized $21,000 and $12,000 net income during the three and six-month periods ended December 31, 2001, respectively. Interest income remained relatively unchanged for the three-month period ended December 31, 2002 as compared to the same period last fiscal year; $800 and $500, respectively. Interest income remained relatively unchanged for the six-month period ended December 31, 2002 as compared to the same period last fiscal year; $1,500 and $1,400, respectively. Interest expense increased $3,000 for the three-month period ended December 31, 2002 as compared to the same period last fiscal year. Interest expense decreased $12,000 for the six-month period ended December 31, 2002 as compared to the same period last fiscal year. There is no provision for federal income taxes for the periods presented as a result of utilization of net operating loss carryforwards and related changes in the deferred tax valuation allowances. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, Escalon had cash and cash equivalents of $296,000 as compared to $221,000 at June 30, 2002, an increase of $75,000. Cash provided from operations was $906,000. These funds, in addition to $225,000 provided by additional net borrowings on the line of credit with the lender were used to pay down the Company's term loan with the lender as well as the Company's note payable to Endologix, Inc. by a combined $1,030,000. The Company also purchased $25,000 of fixed assets during the six-month period ended December 31, 2002. On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. The lender granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with the lender. The interest rate on the term loan was based on prime plus 1.0% and the line of credit was based on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this financing. Interest rate cap agreements were used to reduce the potential impact of increases in interest rates on the floating rate term loan and line of credit. The Company incurred $122,800 in fees related to these rate cap agreements. As of December 31, 2002, the interest rate cap agreements expired and the related fees have been completely amortized. The finance fees are being amortized over the term of the loans using the effective interest method. The unamortized finance fees offset the outstanding balance of the loans. On November 28, 2001, Escalon amended its loan agreement with the lender. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. The aggregate balance of debt outstanding did not change as a result of this refinancing. As of December 31, 2002, the amount outstanding against the line of credit was $1,475,000. Principal payments due on the term loan were amended such that the balance remains due within the five-year term of the original agreement, including a $2,000,000 balloon payment due on June 30, 2004. Interest rates on the term loan and line of credit were increased to prime plus 1.75% and prime plus 1.50%, respectively. At December 31, 2002, the interest rates applicable to the term loan and the line 23 of credit were 6.00% and 5.75%, respectively. The lender's prime rate at December 31, 2002 was 4.25%. In connection with the amended agreement, Escalon issued to the lender, warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and an expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon execution of the loan agreement that is being amortized over the life of the loans. The unamortized balance offsets the outstanding balance of the loans. Pursuant to the amended agreement, on March 1, 2002, the Company began paying a 1.0% per annum facility fee that is payable quarterly through June 30, 2004, and is calculated based on the aggregate principal amount outstanding under the term loan and line of credit on January 1 of each year. All of the Company's assets collateralize this amended agreement. As of December 31, 2002, the term loan and line of credit contained various covenants among which was a requirement to maintain a defined ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the EBITDA to debt ratio, resulting in a technical default under the loan agreement. The lender waived this requirement of the agreement as of December 31, 2002, and for the twelve-month period ending January 1, 2004. On December 23, 2002, Spring Street Capital, L.L.C., acquired the Company's bank debt. Bank debt consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 line of credit. On February 13, 2003, the Company entered into an Amended Agreement with Spring Street Capital, L.L.C. The primary amendments of the Amended Agreement were to reduce quarterly principal payments and extend the term of the repayments, and to alter the covenants of the original bank agreement to make them more reasonably attainable. The schedule below presents the amortization under the Amended Agreement as compared to the superseded original bank agreement:
2/13/03 Agreement 11/28/01 Agreement ----------------- ------------------ March 1, 2003 $ 300,000 $ 525,000 June 1, 2003 300,000 525,000 September 1, 2003 300,000 650,000 December 1, 2003 300,000 650,000 March 1, 2004 350,000 750,000 June 1, 2004 350,000 750,000 June 30, 2004 -- 2,000,000 September 1, 2004 350,000 -- December 1, 2004 350,000 -- March 1, 2005 400,000 -- June 1, 2005 400,000 -- September 1, 2005 2,450,000 -- ----------------- ------------------ $5,850,000 $5,850,000 ================= ==================
On January 21, 1999, the Company's Vascular subsidiary and Endologix, Inc. entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for cash the assets of Endologix's vascular access business, and also agreed to pay royalties based on future sales of the products of the vascular access business for a period of five years following the close of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 1, 2001, the parties amended the agreement to provide an adjustment in the terms of the payment of the royalties. Pursuant to the amendments, Escalon paid $17,558 in cash to Endologix, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, and an additional note in the amount of $717,558, payable in eleven quarterly installments that commenced April 15, 2002, and Escalon issued 50,000 shares of its Common Stock to Endologix. 24 Cash on hand, cash generated from operations and cash available from the line of credit may be sufficient to satisfy the Company's working capital, debt service, capital expenditures and research and development until the balloon payment is due. Management has refinanced its debt such that repayment terms are consistent with cash generated from operations. The Company may be required to secure alternative debt or equity financing in order to satisfy any balloon payment of the amended loan agreement, and management cannot assure that such financing will be available when required on acceptable terms. Additionally, the Company relies on the Silicone Oil revenue received from Bausch & Lomb, which are expected to continue in varying amounts through fiscal 2005. While management does not expect this revenue to decline rapidly in the foreseeable future, any such decrease would have a significant impact on the Company's consolidated financial position, results of operations and cash flows. The Company's stock price could be negatively impacted as well. The Bausch & Lomb revenues reduce on an annual basis due to a contractual step-down. Additionally, the revenues are based on sales of the Silicone Oil product line by Bausch & Lomb and will be dependant on their ability to maintain their market share. The Company's Common Stock is currently listed on the Nasdaq SmallCap Market. In order to continue to be listed on the Nasdaq SmallCap Market, the following listing requirements must be met: - Stockholder's equity of $2,500,000 or market value of listed securities of $35,000,000 or net income from continuing operations (in latest fiscal year or two of the last three fiscal years) of $500,000; - 500,000 publicly held shares; - $1,000,000 market value of publicly held shares; - A minimum bid price of $1; - 300 shareholders (round lot holders); - Two market makers; and - Established corporate governance As of December 31, 2002, Escalon has complied with these requirements. If Escalon's securities were delisted, a shareholder would find it more difficult to dispose of them, or obtain accurate quotations as to the market value of the Company's securities. SEGMENTAL REPORTING During the six-month periods ended December 31, 2002 and 2001, Escalon's operations were classified into four principal reporting segments that provide different products or services. Separate management of each segment is required because each business segment is subject to different marketing, production and technology strategies. 25
For the six-month periods ended December 31, (all numbers in the table below are reported in thousands) ------------------------------------------------------------------------------------------------- Sonomed Vascular Medical / Trek Digital Total ------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------------------- Product Revenue $ 3,019 $ 3,015 $ 1,342 $ 1,269 $ 650 $ 601 $252 $- $ 5,263 $ 4,885 Other revenue -- -- -- -- 1,013 863 -- -- 1,013 863 Revenue, net 3,019 3,015 1,342 1,269 1,663 1,464 252 -- 6,276 5,748 Income from operations 356 356 16 28 606 446 -- -- 978 830 Other income and expenses: Equity in loss of unconsolidated JV -- -- -- -- -- -- -- 12 -- 12 Interest income -- -- -- -- 1 1 -- -- 1 1 Interest expense (356) (356) (16) (28) -- -- -- -- (372) (384) Total other income and expenses (356) (356) (16) (28) 1 1 -- 12 (371) (371) Income before taxes -- -- -- -- 607 447 -- 12 607 459 Income taxes -- -- -- -- -- -- -- -- -- -- Net income (loss) -- -- -- -- 607 447 -- 12 607 459 Depreciation and amortization 9 8 20 22 135 71 12 -- 176 101 Assets 11,754 11,981 2,173 2,465 2,600 2,205 347 261 16,874 16,912 Expenditures for long- lived assets -- 26 -- -- 25 26 -- -- 25 52
The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. The business segments reported above are segments for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources and assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies disclosed on the Company's most recently filed Form 10-K. For the purposes of this illustration, corporate expenses, which principally consist of executive management and administrative support functions, are allocated across the business segments based primarily on each segment's net revenue. These expenses are otherwise included in the Medical/Trek business unit. During the six-month periods ended December 31, 2002 and 2001, Sonomed derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These products are used for diagnostic or biometric applications in ophthalmology. Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM) monitors, needles and catheter products. These products are used by medical personnel to assist in gaining access to arteries and veins in difficult cases. Medical/Trek derived its revenue from the sale ISPAN(TM) gas products, various disposable ophthalmic surgical products, revenues derived from Bausch & Lomb's sale of Silicone Oil and royalty revenue derived from a privately held entity. Commencing January 1, 2002, Digital derived its revenue from the sale of the CFA digital imaging system and related products. During the six-month periods ended December 31, 2002 and 2001, Escalon had one entity, Bausch & Lomb, from which greater than 10% of consolidated net revenues were derived. Revenues were $1,114,000 or 17.75% of consolidated net revenues for the six-month period ended December 31, 2002 and 26 were $1,011,000, or 17.59% of consolidated net revenues for the six-month period ended December 31, 2001. This revenue is included in the Medical/Trek business unit. Of the consolidated net revenues reported above, $1,046,000, $77,000, $19,000 and $32,000 were derived internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively, during the six-month period ended December 31, 2002; and $1,070,000, $91,000 and $23,000 were derived internationally in Sonomed, Vascular, Medical/Trek and Digital, respectively, during the six-month period ended December 31, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about Escalon's financial instruments, consisting primarily of debt obligations that are sensitive to changes in interest rates. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. Interest rates are based upon the prime rate at December 31, 2002 plus 1.75% on the term loan, the prime rate plus 1.50% on the line of credit and the prime rate plus 1.00% on the Endologix note.
Long-term debt classified as current as of December 31, --------------------------------------------------------------------- 2002 2003 2004 2005 Thereafter Total ---- ---- ---- ---- ---------- ----- Term loan 2,350,000 3,500,000 -- -- -- 5,850,000 Interest rate 6.50% -- -- -- -- Line of credit 1,475,000 -- -- -- -- 1,475,000 Interest rate 6.25% -- -- -- -- Endologix note 260,932 260,927 -- -- -- 521,859 Interest rate 5.75% 5.75% -- -- -- Deferred finance fees (68,058) -- -- -- -- (68,058) --------------------------------------------------------------------- Total 4,017,874 3,760,927 -- -- -- 7,778,801 =====================================================================
EXCHANGE RATE RISK During the six-month periods ended December 31, 2002 and 2001, approximately 16.67% and 18.62% of Escalon's consolidated net revenue was derived from international sales. The price of all products sold overseas is denominated in United States dollars and consequently the Company incurs no exchange rate risk. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice President of Finance, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date ("the Evaluation Date") within 90 days prior to the filing date of this report. Based on that evaluation, the Chief Executive Officer and Senior Vice President of Finance concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or the Company's consolidated subsidiaries) required to be included in our periodic SEC filings. 27 (b) Changes in Internal Controls There were no significant changes in our internal controls during the period covered by this report or, to management's knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on November 1, 2002. The following matters were acted upon: 1. The following persons were elected as directors of the Company for the next three years until their successors are elected and qualified.
Nominees for Director For Against Abstain --------------------- --------- ------- ------- Richard J. DePiano 2,943,367 126,870 0 Jay L. Federman, MD 2,943,367 126,870 0
There were no broker held non-voted shares represented at the meeting with respect to this matter. 2. The shareholders approved an amendment to the Company's 1999 Equity Incentive Plan to increase the number of shares available under the Plan from 635,000 to 835,000 shares of common stock.
For Against Abstain --------- ------- ------- 525,048 261,047 0
There were 2,275,606 broker held non-voted shares represented at the meeting with respect to this matter. 3. The shareholders ratified the appointment of Parente Randolph, LLC as the Company's independent auditors for the fiscal year 2003.
For Against Abstain --------- ------- ------- 2,964,657 99,905 5,675
There were no broker held non-voted shares represented at the meeting with respect to this matter. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits The following is a list of exhibits filed as a part of this quarterly report on Form 10-Q. 10.14 2003 Amendment to Loan Agreement 10.15 Allonge to Amended and Restated Term / Time Note 10.16 Allonge to Amended and Restated Line of Credit Note 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard J. DePiano 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Harry M. Rimmer
Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) Date: February 14, 2002 By: /s/ Richard J. DePiano ----------------- ----------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: February 14, 2002 By: /s/ Harry M. Rimmer ----------------- ------------------- Harry M. Rimmer Senior Vice-President - Finance CERTIFICATION I, Richard J. DePiano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 29 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Richard J. DePiano Date: February 14, 2003 ----------------------- Richard J. DePiano Chairman and Chief Executive Officer CERTIFICATION I, Harry M. Rimmer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 30 b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Harry M. Rimmer Date: February 14, 2003 -------------------- Harry M. Rimmer Senior Vice President - Finance 31 Exhibits The following is a list of exhibits filed as a part of this quarterly report on Form 10-Q. 10.14 2003 Amendment to Loan Agreement 10.15 Allonge to Amended and Restated Term / Time Note 10.16 Allonge to Amended and Restated Line of Credit Note 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard J. DePiano 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Harry M. Rimmer