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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2003.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 0-20127
______________________________
ESCALON MEDICAL CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
351 EAST CONESTOGA ROAD, WAYNE, PA 19087
(Address of principal executive offices, including zip code)
(610) 688-6830
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the last 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
At December 31, 2002, the aggregate market value of the shares of
Common Stock held by the Registrant's nonaffiliates was approximately $6,189,824
(based upon the last sales price of Common Stock on the Nasdaq SmallCap Market
on such date).
At September 19, 2003, 3,365,359 shares of Common Stock were
outstanding.
Documents Incorporated by Reference
Registrant's proxy statement to be filed in connection with its 2003
Annual Meeting of Stockholders incorporated by reference in Part III, Items 10,
11, 12, 13 and 14.
ESCALON MEDICAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
Item 9A. Controls and Procedures 22
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 22
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accountants Fees and Services 23
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 23
1
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Escalon Medical Corp. ("Escalon") 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. Within this document, the
"Company" collectively shall mean Escalon and its wholly owned subsidiaries:
Sonomed, Inc. ("Sonomed"), Sonomed EMS, Srl. ("Sonomed EMS"), Escalon Vascular
Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("EMI") and Escalon
Pharmaceutical, Inc. ("Pharmaceutical"). The Company operates in the healthcare
market, specializing in the development, manufacture, marketing and distribution
of ophthalmic medical devices, pharmaceuticals and vascular access devices. The
Company and its products are subject to regulation and inspection by the United
States Food and Drug Administration ("FDA"). The FDA requires extensive testing
of new products prior to sale and has jurisdiction over the safety, efficacy and
manufacturing of products, as well as product labeling and marketing.
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. In January 2000, the Company
purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound
diagnostic equipment. In April 2000, EMI formed a joint venture, Escalon Medical
Imaging, LLC with Megavision, Inc. ("Megavision"), a privately held company, to
develop and market a digital camera back for ophthalmic photography. The Company
terminated its joint venture with Megavision and commenced operations within its
EMI business unit on January 1, 2002.
SONOMED BUSINESS
Sonomed develops, manufactures and markets ultrasound systems for
diagnostic or biometric applications in ophthalmology. The systems are of three
types: A-scans, B-scans and pachymeters.
A-SCANS
The A-scan provides information about the internal structure of the eye
by sending a beam of ultrasound along a fixed axis through the eye and
displaying the various echoes reflected from surfaces intersected by the beam.
The principal echoes occur at the cornea, both surfaces of the lens and the
retina. The system displays the position and magnitudes of the echoes on an
electronic display. The A-scan also includes software for measuring distances
within the eye. This information is primarily used to calculate lens power for
implants.
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B-SCANS
The B-Scan is primarily a diagnostic tool, which supplies information
to physicians where the media within the eye are cloudy or opaque. Whereas
physicians normally use light, which cannot pass through such media, the
ultrasound beam is capable of passing through the opacity and displaying an
image of the internal structures of the eye. Unlike the A-scan, the B-scan
transducer is not in a fixed position; it swings through a 60 degree sector to
provide a two dimensional image of the eye.
PACHYMETERS
The pachymeter uses the same principles as the A-scan, but the system
is tailored to measure the thickness of the cornea. With the advent of
refractive surgery (where the cornea is actually cut and reshaped) this
measurement has become critical. Surgeons must know the precise thickness of the
cornea so as to set the blade to make a cut of approximately 20% of the
thickness of the cornea.
VASCULAR BUSINESS
Vascular develops, manufactures and markets vascular access products.
These products are Doppler-guided vascular access assemblies used to locate
desired vessels for access. Primary specialty groups which use the device are
cardiac catheter labs and interventional radiology. The Company's vascular
products include the PD Access(TM) and Smartneedle(TM) lines of monitors,
Doppler-guided bare needles and Doppler-guided infusion needles.
PD ACCESS(TM) AND SMARTNEEDLE(TM) MONITORS, NEEDLES AND CATHETER
PRODUCTS
These patented devices detect blood flow using Doppler ultrasound
technology and differentiate between a venous and arterial vessel. The devices
utilize a miniature Doppler ultrasound probe that is positioned within the lumen
of a vascular access needle. When the Doppler-guided needle pierces the skin of
a patient, the probe and monitor can determine if the user is approaching an
artery or vein, guiding them to a successful access.
MEDICAL/TREK BUSINESS
Medical/Trek develops, manufactures and distributes ophthalmic surgical
products under the Escalon Medical Corp. and/or Trek Medical Products names.
Vitreoretinal ophthalmic surgeons primarily utilize the products. The following
is a summary of the business's key product lines:
ADATOSIL(R) 5000 SILICONE OIL ("SILICONE OIL")
Silicone Oil is a specialty product used in worst-case detached retina
surgery as a mechanical aid in the reattachment procedure. The Company
distributed Silicone Oil until August 13, 1999, at which time the license and
distribution rights for this product were sold to Bausch and Lomb Surgical, Inc.
The license and distribution rights were sold for $2.1 million and additional
cash consideration based on future sales to be received through August 2005 (See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations for additional details).
ISPAN INTRAOCULAR GASES
The Company distributes two intraocular gas products, C3F8 and SF6,
which are used by vitreoretinal surgeons as a temporary tamponade in detached
retina surgery. Under a non-exclusive distribution agreement with Scott Medical
Products ("Scott"), Escalon distributes packages of Scott gases in canisters
containing 25 grams or less of gas. Along with the intraocular gases, the
Company manufactures and distributes a patented disposable universal gas kit,
which delivers the gas from the canister to the patient.
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VISCOUS FLUID TRANSFER SYSTEMS
Escalon markets viscous fluid transfer systems and related disposable
syringe products, which aid surgeons in the process of injecting and extracting
Silicone Oil. Adjustable pressures and vacuums provided by the equipment allow
surgeons to manipulate the flow of silicone oil during surgery.
FIBER OPTIC LIGHT SOURCES
Light source and fiber optic products are widely used by vitreoretinal
surgeons during surgery. The Company offers surgeons a complete line of light
sources along with a variety of fiber optic probes and illuminated tissue
manipulators.
EMI BUSINESS
On December 18, 2000, the Company announced that it received 510(K)
clearance to begin marketing its high-end digital camera system for
ophthalmologists known as the CFA Digital Imaging System. As a result of the
approval, the Company began marketing the system through its joint venture with
MegaVision. The Company terminated its joint venture with Megavision and
commenced operations within its EMI business unit on January 1, 2002.
CFA CAMERA BACK
The images furnished by the CFA camera system furnish a very high level
of detail. The camera back is being marketed to medical institutions,
educational institutions and ophthalmologists for the purpose of diagnosis of
retinal disorders.
PHARMACEUTICAL BUSINESS
The Company obtained the license and distribution rights for
Povidone-Iodine 2.5% solution from Harbor-UCLA Medical Center. Povidone-Iodine
2.5% solution is a broad-spectrum anti-microbial intended to prevent ophthalmia
neonatorum in newborns. The product required further development before
achieving FDA approval. Having exhausted all partnering possibilities, during
fiscal 2003 it was decided that further expenditures on this project were not in
the shareholders' best interest and the project was abandoned. The decision
resulted in the Company taking a charge of $196,000, which included the
write-off of the remaining net book value of the license and distribution rights
subject to normal amortization.
RESEARCH AND DEVELOPMENT
Escalon conducts medical device and vascular access product development
at its New Berlin, Wisconsin facility located near Milwaukee. The development of
ultrasound ophthalmic equipment is performed at the Company's Lake Success, New
York facility located on Long Island. Research and development expenditures for
the fiscal years ended June 30, 2003, 2002 and 2001 were $780,333, $554,760 and
$491,582, respectively.
MANUFACTURING AND DISTRIBUTION
Escalon leases 13,500 square feet of space in New Berlin, Wisconsin,
near Milwaukee, for its surgical products and vascular access operations. The
facility is currently used for engineering, product design and development,
manufacturing and product assembly. The Company subcontracts component
manufacture, assembly and sterilization to various vendors. Manufacturing
facilities include a class 10,000 clean room. A class 10,000 clean room is a
controlled environment for producing devices while avoiding any significant
contaminants. The cleanliness provided by this class 10,000 clean room exceeds
the requirements of the FDA. All of the Company's ophthalmic surgical products
and vascular access products are distributed from its Wisconsin facility. The
Company designs, develops and services its ultrasound ophthalmic products at its
facility in Lake Success, New York. This facility contains 7,100 square feet.
The Company pursued and achieved ISO9001 certification at both of its
manufacturing facilities for all
4
medical and ultrasound devices produced. ISO9001 requires an implemented quality
system that applies to product design. These certifications can be obtained only
after a complete audit of a Company's quality system by an independent outside
auditor. These certifications require that these facilities undergo periodic
reexamination. European Community ("CE") certification has been obtained for
disposable delivery systems, fiber optic light probes, vascular access products
and certain ultrasound models. The manufacture, testing and marketing of each of
the Company's products entails risk of product liability. Product liability
insurance is carried by Escalon to cover the primary risk.
GOVERNMENTAL REGULATIONS
Escalon's products are subject to stringent ongoing regulation by the
FDA and similar health authorities, and if the FDA's approvals or clearances of
the Company's products are restricted or revoked the Company could face delays
that would impair the Company's ability to generate funds from operations.
The FDA and similar health authorities in foreign countries extensively
regulate Escalon's activities. The Company must obtain either 510(K) clearances
or pre-market approvals and new drug application approvals prior to marketing a
product in the United States. Foreign regulation also requires that we obtain
other approvals from foreign government agencies prior to the sale of products
in those countries. Also, Escalon may be required to obtain FDA approval before
exporting a product or device that has not received FDA marketing clearance or
approval.
Escalon has received the necessary FDA approvals for all products that
the Company currently markets. Any restrictions on or revocation of the FDA
approvals and clearances that the Company has obtained, however, would prevent
the continued marketing of the impacted products and other devices. The
restrictions or revocations could result from the discovery of previously
unknown problems with the product. Consequently, the FDA revocation would impair
the Company's ability to generate funds from operations.
The FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the manufacturing and
marketing of pharmaceutical and medical device equipment and related
disposables, including the obligation to adhere to the FDA's Good Manufacturing
Practice regulations. Compliance with these regulations requires time-consuming
detailed validation of manufacturing and quality control processes, FDA periodic
inspections and other procedures. If the FDA finds any deficiencies in the
validation processes, for example, the FDA may impose restrictions on marketing
the affected products until such deficiencies are corrected.
Escalon has received CE approval on several of the Company's products
that allows the Company to sell the products in the countries comprising the
European Community. In addition to the CE Mark, however, some foreign countries
may require separate individual foreign regulatory clearances. Escalon cannot
assure that the Company will be able to obtain regulatory clearances for other
products in the United States or foreign markets.
The process for obtaining regulatory clearances and approvals and
underlying clinical studies for any new products or devices and for multiple
indications for existing products is lengthy and will require substantial
commitments of our financial resources and our management's time and effort. Any
delay in obtaining clearances or approvals or any changes in existing regulatory
requirements would materially adversely affect the Company's business.
Escalon's failure to comply with applicable regulations would subject
the Company to fines, delays or suspensions of approvals or clearances, seizures
or recalls of products, operating restrictions, injunctions or civil or criminal
penalties, which would affect adversely the Company's business, financial
condition and results of operations.
5
MARKETING AND SALES
The Medical/Trek business unit sells its ophthalmic devices and
instrument products directly to end users through internal sales and marketing
employees located at the Company's Wisconsin facility. Sales are primarily to
teaching institutions, key hospitals and eye surgery centers focusing primarily
on physicians and operating room personnel performing vitreoretinal surgery.
Vascular access products are marketed domestically through internal sales and
marketing employees located in Pennsylvania, Illinois and at its Wisconsin
facility, as well as through five independent distributors and sales
representatives located in Florida, Missouri, Ohio and Washington managed by the
Company's sales team. The Sonomed product line is sold through internal sales
employees located at the Company's New York facility to a large network of
distributors and directly to medical institutions both domestically and abroad.
The EMI product line is sold through independent sales representatives.
SERVICE AND SUPPORT
Escalon maintains a full-service program for all products sold. Limited
warranties are given on all products against defects and performance. Product
repairs are made at the Wisconsin facility for surgical devices and vascular
access products and EMI devices. Sonomed's products are serviced at the New York
facility.
THIRD PARTY REIMBURSEMENT
It is expected that physicians and hospitals will purchase the
Company's ophthalmic products and that they in turn will bill various third
party payers for health care services provided to their patients. These payers
include Medicare, Medicaid and private insurers. Government agencies generally
reimburse health care providers at a fixed rate based on the procedure
performed. Third-party payers may deny reimbursement if they determine that a
procedure performed using any one of the Company's products was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication.
PATENTS, TRADEMARKS AND LICENSES
The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes for the purpose of strengthening the Company's position
in the market place and protecting the Company's economic interests. The
Company's policy is to protect its technology by aggressively obtaining patent
protection for all of its developments and products, both in the United States
and in selected countries outside the United States. It is the Company's policy
to file for patent protection in those foreign countries in which the Company
believes such protection is necessary to protect its economic interests.
Twenty-one United States issued patents, and nineteen patents issued abroad
cover the Company's surgical products and pharmaceutical technology. With
respect to the Company's ultrafast laser technology (licensed to a privately
held company), sixteen patents have been issued in the United States and eleven
overseas. Vascular access products are covered by eighteen patents, which
provide protection in the United States, Europe, Japan and other countries
overseas. The Company intends to vigorously defend its patents if the need
arises.
While in the aggregate the Company's patents are of material importance
to its business taken as a whole, the patents, trademarks and licenses that are
most critical to the Company's ability to generate revenues are as follows:
- The Escalon trademark is due for renewal on January 19, 2013, and the
Company intends to renew the trademark. The Sonomed trademark is due
for renewal on April 16, 2006 and the Company intends to renew the
trademark.
- In the Vascular business, the Company has two patents that are of
material importance. The first patent is the apparatus for the
cannulation of blood vessels. This patent will expire on February 23,
2011. The second patent is also an apparatus for the cannulation of
blood vessels. This patent will expire on January 11, 2009.
6
- The Company licensed its ultrafast laser systems to a privately held
company. The material patents will expire between 2008 and 2014.
- The material terms of the ultrafast laser systems license are that in
exchange for the use of the Company's licensed laser patents Escalon
will receive a 2.5% royalty on future product sales that are based on
the licensed laser patents, subject to deductions for royalties payable
to third parties up to a maximum of 50% of royalties otherwise due and
payable to the Company and a 1.5% royalty on product sales that are not
based on the licensed laser patents. The Company receives a minimum
annual license fee of $15,000 per year during the term of the license.
The minimum annual license fee is offset against the royalty payments.
The license was dated October 23, 1997, and was amended and restated in
October 2000 and expires upon the latest to occur of the following
events: (1) the last to expire of the licensed patents; (2) ten years
from the effective date of the amended and restated agreement; or (3)
the fifth anniversary date of the date of the first commercial sale.
The material termination provisions of the license are as follows: (1)
the default in payment of any royalty; (2) the default in the making of
any required report; (3) making of any false report; (4) the commission
of any material breach of any covenant or promise under the license
agreement; or (5) the termination of the license by the licensee at any
time after 90 days notice. If the licensee were to terminate it would
not be permitted to utilize the licensed technology necessary to
manufacture its current products.
The duration of the Company's patents, trademarks and licenses vary
through 2020.
COMPETITION
There are numerous direct and indirect competitors of the Company in
the United States and abroad. These companies include ophthalmic oriented
companies that market a broad portfolio of products including prescription
ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as
contact lens cleaning solution) and other eye care products; large integrated
pharmaceutical companies that market a limited number of ophthalmic
pharmaceuticals in addition to many other pharmaceuticals; and smaller specialty
pharmaceutical and biotechnology companies that are engaged in the development
and commercialization of prescription ophthalmic pharmaceuticals and products
and, to some extent, drug delivery systems. The Company's competitors for
medical devices and ophthalmic pharmaceuticals include, but are not limited to,
Bausch & Lomb, Inc., Alcon Laboratories, Inc., Paradigm Medical, Inc., Quantel,
Inc. and Accutome, Inc.
Several large companies dominate the ophthalmic market, with the
balance of the industry being highly fragmented. The Company believes that these
large companies capture approximately 85% of the overall ophthalmic market. The
balance of the market is comprised of smaller companies ranging from start-up
entities to established market players. The ophthalmic market in general is
intensely competitive, with each company eager to expand its market share. The
Company's strategy is to compete primarily on the basis of technological
innovation to which it has proprietary rights. The Company believes, therefore,
that its success will depend in large part on protecting its intellectual
property through patents and other governmental regulations. The Company
recognizes that there are other innovative companies that may develop
competitive strategies.
Sonomed designs and manufactures ophthalmic ultrasound products:
A-scans, pachymeters and B-scans. The A-scans and pachymeters furnish internal
measurements of the eye and B-scans provide an image of the rear of the eye. The
principal competitors are Alcon Laboratories, Inc., Quantel, Inc. and Accutome,
Inc. Management believes the Company is in a market leadership position. Sonomed
has had a leading presence in the industry for over thirty years. Management
believes this has helped the Company build a reputation as a long-standing
operation that provides a quality product, which has enabled the Company to
establish effective distribution coverage within the United States market. The
Company seeks to preserve its position in the market through continued product
enhancement. Various competitors offering similar products at a lower price can
threaten Sonomed's market position. The development of laser technologies for
ophthalmic biometrics and imaging may also diminish the Company's market
position. This equipment can be used instead of ultrasound equipment in most,
but not all, patients. Such equipment, however, is more expensive.
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The Trek business sells a broad range of ophthalmic surgical products.
The more significant products are ISPAN(R) gases and delivery systems. Trek also
manufactures various ophthalmic surgical products for major ophthalmic companies
to be sold under their name. To remain competitive the Company needs to maintain
a low cost operation. There are numerous other companies that can provide this
manufacturing service.
There are a variety of other devices that directly compete with
Sonomed's ultrasound products and the camera back marketed by EMI.
The vascular access product line is comprised of disposable devices,
and currently it has no direct competition. However, a significantly higher
priced non-disposable device that facilitates vascular access is currently being
marketed. Vascular produces the only device that can be accommodated within a
standard needle for assisting medical practitioners in gaining access to a
vessel in the human vascular system. There are no similar devices in the market
that enable medical practitioners in gaining access using their normal
procedures. The only similar product utilizes a separate ultrasound monitor, but
no disposables are needed. When using the competing device, medical
practitioners need to look at the monitor while advancing the needle into the
patient. The perceived disadvantage of the Company's vascular product is that
its retail price is substantially greater than the cost of a traditional needle.
HUMAN RESOURCES
As of June 30, 2003, the Company employed 59 full-time employees and 1
part-time employee. Thirty-two of the Company's employees are employed in
manufacturing, 14 are employed in general and administrative positions, eight
are employed in sales and marketing and six are employed in research and
development. Escalon's employees are not covered by a collective bargaining
agreement, and the Company considers its relationship with its employees to be
good.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Annual Report on Form 10-K and
other written and oral statements made from time to time by the Company do not
relate strictly to historical or current facts. As such, they are considered
"forward-looking statements" made pursuant to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995, which provide current
expectations or forecasts of future events. Such statements can be identified by
the use of terminology such as "anticipate," "believe," "could," "estimate,"
"expect," "forecast," "intend," "may," "plan," "possible," "protect," "should,"
"will," and similar words or expressions. The Company's forward-looking
statements include certain information relating to general business strategy,
growth strategies, financial results, liquidity, product development, the
introduction of new products, the potential markets and uses for the Company's
products, the Company's regulatory filings applications with the FDA, the
development of joint venture opportunities, the effect of competition on the
structure of the markets in which the Company competes and defending itself in
litigation matters. One must carefully consider forward-looking statements and
understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be affected by assumptions that fail to materialize
as anticipated. Consequently, no forward-looking statement can be guaranteed;
and actual results may vary materially. It is not possible to foresee or
identify all factors affecting the Company's forward-looking statements, and you
therefore should not consider any list of such factors to be an exhaustive
statement of all risks, uncertainties or potentially inaccurate assumptions. The
Company undertakes no obligation to update any forward-looking statement.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the Company's forward-looking
statements, the most important factors include, without limitation, the
following:
- FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING
Escalon's liquidity is affected by many factors, some of which
are based on the normal ongoing operations of the Company's businesses
and some of which arise from fluctuations related to global markets and
economies. The Company's current term loan with the privately
8
held financial group provides for quarterly principal payments, which
increase every twelve months, including a $2,450,000 final balloon
payment, which is due on September 1, 2005. The Company believes that
cash on hand plus cash available from the Company's line of credit will
be sufficient to satisfy our working capital, capital expenditures and
research and development until the balloon payment is due. The Company
may be required to secure additional debt or equity financing in order
to satisfy the balloon payment, and the Company cannot assure that such
financing will be available when required on acceptable terms.
- CONCENTRATION OF REVENUES
Escalon realized 13.90% and 14.53% of its net revenue during
the fiscal years ended June 30, 2003 and 2002, respectively, from
Bausch & Lomb's sale of Silicone Oil. While management does not expect
this revenue to decline rapidly in the immediate future, any such
decrease would have a significant impact on the Company's financial
position, results of operations and cash flows and the Company's stock
price could be negatively impacted. The Company is entitled to receive
this revenue from Bausch & Lomb, in varying amounts, through fiscal
2005. See Note 15 of the Notes to Consolidated Financial Statements for
further information regarding the Silicone Oil revenue from Bausch &
Lomb.
- ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE
INDUSTRIES IN WHICH THE COMPANY COMPETES
It is difficult to ascertain if the current economic climate
has affected the Company's results. Management believes that any effect
has been limited to the Company's Sonomed business unit. Should it
become necessary due to economic climate, the Company cannot assure you
that it will be able to reduce expenditures quickly enough to maintain
profitability and service the Company's current debt. In addition,
there is a risk that cost-cutting initiatives will impair the Company's
ability to effectively develop and market products and remain
competitive in the industries in which the Company competes. These
measures could have long-term effects on Escalon's business by
decreasing or slowing improvements in the Company's products, making it
more difficult to respond to customers, limiting the Company's ability
to increase production quickly and limiting the Company's ability to
hire and retain key personnel. These circumstances could cause the
Company's earnings to be lower than they otherwise might be.
The Company could be affected by trends toward managed care,
health-care cost containment, and other changes in government and
private sector initiatives, in the United States and other countries in
which the Company does business, that are placing increased emphasis on
the delivery of more cost-effective medical therapies. Changes in
governmental laws, regulations, and accounting standards and the
enforcement thereof and agency or government actions or investigations
involving the industry in general or the Company in particular may be
adverse to the Company.
- INTERNATIONAL BUSINESS ACTIVITY
The Company derives a portion of its revenues from sales
outside the United States. Changes in the laws or policies of
governmental and quasi-governmental agencies, as well as social and
economic conditions, in the countries in which the Company operates
could affect the Company's business in these countries and the
Company's results of operations. In addition, economic factors
(including inflation and fluctuations in interest rates and foreign
currency exchange rates) and competitive factors (such as price
competition, business combinations of competitors or a decline in
industry sales from continued economic weakness) both in the United
States and other countries in which the Company conducts business could
affect the Company's results of operations.
9
- THE ABILITY OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET NEW
PRODUCTS
Escalon 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, Escalon's products will
become technologically obsolete over time, in which case the Company's
revenue and operating results would suffer. The success of Escalon'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 our products in sufficient volumes on time; (v)
differentiate the Company's offerings from our competitors' offerings;
(vi) price the Company's products competitively, and (vii) anticipate
competitors' announcements of new products, services or technological
innovations.
- DEPENDENCE ON KEY PERSONNEL
Escalon's future success depends partly on the continued
service of the Company's key research, engineering, sales, marketing,
manufacturing, executive and administrative personnel. If Escalon fails
to retain and hire a sufficient number of these personnel, the Company
will not be able to maintain or expand its business.
- ESCALON'S ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND
DIVESTITURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN
EXPECTED
In the normal course of business, Escalon engages in
discussions with third parties relating to possible acquisitions,
strategic alliances, joint ventures and divestitures. As a result of
such transactions, the Company's financial results may differ from the
investment community's expectations in a given quarter. In addition,
acquisitions and alliances may require Escalon to integrate a different
company culture, management team and business infrastructure. We may
have difficulty developing, manufacturing and marketing the products of
a newly-acquired company in a way that enhances the performance of the
Company's combined businesses or product lines to realize the value
from expected synergies. Depending on the size and complexity of an
acquisition, Escalon's successful integration of the entity depends on
a variety of factors including: (i) the retention of key employees, and
(ii) the management of facilities and employees in separate
geographical areas. All of these efforts require varying levels of
management resources, which may divert the Company's attention from
other business operations. If Escalon does not realize the expected
benefits or synergies of such transactions, the Company's consolidated
financial position, results of operations and stock price could be
negatively impacted.
- THE OUTCOME OF LITIGATION MATTERS AND UNCERTAIN PROTECTION OF PATENTED
AND PROPRIETARY INFORMATION
Increased public interest in recent years in product liability
claims in the medical device industry could affect the Company should
it become directly involved in such lawsuits. Recent events have made
the investing public particularly sensitive to listed companies'
reporting practices and accounting policies in general. Additionally,
the Company may find it necessary to enforce its legal rights with
respect to patented and proprietary information. The outcome of any of
these matters and the financial impact they may have on the Company
cannot be foreseen.
- VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE ESCALON TO MAINTAIN
THE COMPANY'S 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
10
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 and maintained. If
Escalon's securities were delisted, investors could find it more
difficult to trade in the Company's securities, or to obtain accurate
quotations as to the market value of the Company's securities.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 22,000 square feet of
space for its (i) corporate offices in Wayne, Pennsylvania, (ii)
manufacturing/warehouse facility in New Berlin, Wisconsin and (iii)
manufacturing facility in Lake Success, New York. The corporate offices leased
in Wayne, Pennsylvania cover approximately 1,100 square feet. The Wisconsin
facility lease, covering approximately 13,500 square feet of space expires in
April 2007. The New York facility lease, covering approximately 7,100 square
feet, expires during fiscal 2005. Annual rent under all of the Company's lease
arrangements was $360,484 for the year ended June 30, 2003. The Company's
internet address is www.escalonmed.com.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Escalon's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "ESMC." The Company's Common Stock has traded on the Nasdaq SmallCap
Market since June 7, 2000. The Common Stock previously traded on the Nasdaq
National Market. The table below sets forth, for the periods indicated, the high
and low sales prices as quoted on the Nasdaq Stock Market.
High Low
------ ------
Fiscal Year ended June 30, 2003
Quarter ended September 30, 2002 $ 2.15 $ 1.35
Quarter ended December 31, 2002 $ 2.06 $ 1.52
Quarter ended March 31, 2003 $ 2.26 $ 0.85
Quarter ended June 30, 2003 $ 4.00 $ 1.82
Fiscal Year ended June 30, 2002
Quarter ended September 30, 2001 $ 2.06 $ 1.35
Quarter ended December 31, 2001 $ 4.00 $ 1.60
Quarter ended March 31, 2002 $ 2.73 $ 1.80
Quarter ended June 30, 2002 $ 2.94 $ 1.95
11
As of September 11, 2003, there were 1,091 holders of record of the
Company's Common Stock. On September 19, 2003, the closing price of Escalon's
Common Stock as reported by the Nasdaq SmallCap Stock Market was $4.74 per
share.
Escalon has never declared or paid a cash dividend on its Common Stock
and presently intends to retain any future earnings to finance future growth and
working capital needs. In addition, the Company is party to loan agreements that
prohibit Escalon's payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein in Item 7 and the financial statements and related
notes thereto included herein in Item 8.
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Product revenue, net $ 11,191 $ 10,293 $ 9,626 $ 6,670 $ 7,559
Other revenue 2,174 1,781 2,254 - -
Costs and expenses:
Cost of goods sold 4,896 4,640 4,297 2,874 3,282
Research and development 780 555 492 984 738
Marketing, general and
administrative 5,034 5,097 5,430 4,661 3,332
Writedown of goodwill, license and
and distribution rights and patents 196 - - 418 -
---------- ---------- ---------- --------- ---------
Total costs and expenses 10,906 10,292 10,219 8,937 7,352
---------- ---------- ---------- --------- ---------
Income (loss) from operations 2,459 1,782 1,661 (2,267) 207
---------- ---------- ---------- --------- ---------
Loss from termination of
joint venture - (23) - - -
Sale of Silicone Oil product line - - - 1,864 -
Sale of Betadine product line - - - - 879
Equity in loss of unconsolidated
joint venture - 8 (19) (33) -
Interest income 3 2 2 149 145
Interest expense (638) (791) (1,052) (576) (37)
---------- ---------- ---------- --------- ---------
Income (loss) before taxes 1,824 978 592 (863) 1,194
Income Taxes 112 - - - -
---------- ---------- ---------- --------- ---------
Net income (loss) $ 1,712 $ 978 $ 592 $ (863) $ 1,194
========== ========== ========== ========= =========
Basic net income (loss) per share $ 0.51 $ 0.29 $ 0.18 $ (0.27) $ 0.10
========== ========== ========== ========= =========
Diluted net income (loss) per share $ 0.48 $ 0.29 $ 0.18 $ (0.27) $ 0.10
========== ========== ========== ========= =========
Weighted average shares - basic
used in per share computation 3,365 3,346 3,292 3,242 3,115
========== ========== ========== ========= =========
Weighted average shares - diluted
used in per share computation 3,573 3,360 3,308 3,242 3,115
========== ========== ========== ========= =========
12
AT JUNE 30, AT JUNE 30,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------
BALANCE SHEET DATA
Cash and cash equivalents $ 298 $ 221 $ 81 $ 177 $ 3,854
Working capital (deficit) 889 (240) (3,004) (3,211) 3,801
Total assets 16,890 16,912 17,798 16,845 10,403
Long-term debt, net of
current portion 4,080 5,191 4,502 4,900 733
Total liabilities 7,951 9,719 11,691 11,430 4,125
Accumulated deficit (37,326) (39,039) (40,018) (40,610) (39,629)
Total shareholders' equity 8,939 7,193 6,107 5,415 6,278
- ---------------------------------------
Note: No cash dividends were paid in any of the years presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and notes thereto and other financial
information contained elsewhere in this Form 10-K and the discussion under
"Cautionary Factors that May Affect Future Results" included in Part I of this
Form 10-K.
Escalon operates primarily in four reportable business segments:
Sonomed, Vascular, Medical/Trek and EMI. Sonomed develops, manufactures and
markets ultrasound systems used for diagnostic or biometric applications in
ophthalmology. Vascular develops, manufactures and markets vascular access
products. Medical/Trek develops, manufactures and distributes ophthalmic
surgical products under the Escalon Medical Corp. and/or Trek Medical Products
names. EMI manufactures and markets a digital camera system for ophthalmic
fundus photography. For a more complete description of these businesses and
their products, see Item 1 - Business.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002
The following table presents consolidated product revenues by business
segment as well as identifying trends in business segment product revenues for
the fiscal years ended June 30, 2003 and 2002.
Fiscal Years Ended June 30,
--------------------------------------
2003 2002 % Change
-------- ------- --------
(in thousands)
Product revenues:
Sonomed $ 6,495 $ 6,071 6.98%
Vascular 2,761 2,634 4.82%
Medical / Trek 1,502 1,321 13.70%
EMI 433 267 62.17%
-------- ------- -----
$ 11,191 $10,293 8.72%
======== ======= =====
Product revenues increased $898,000, or 8.72%, to $11,191,000 in fiscal
2003 as compared to $10,293,000 in fiscal 2002. Product revenues in the Sonomed
business unit increased $424,000, or 6.98%, to $6,495,000. The increase is
attributed to a $476,000 increase in the domestic market as well as a $101,000
increase in Asia and the Pacific Rim. The surge in the domestic market primarily
relates to increased demand for the Company's pachymeter product. Usage of
pachymeters has recently been expanded to include glaucoma screening, opening a
new market for the product. The increase in Asia and
13
the Pacific Rim relates primarily to the Company's successful strategy of
increased penetration of those geographic areas. Conversely, Sonomed has
experienced a $77,000 decrease in revenue in Latin America as well as a $60,000
decrease in the Middle East. Management believes that the weak economy in Latin
America and the turmoil in the Middle East have led to these decreases. Product
revenue in the Vascular business unit increased $127,000, or 4.82%, to
$2,761,000. The increase relates primarily to increased usage in the
marketplace. During fiscal 2001, the Company identified certain underperforming
distributors within its Vascular business unit and terminated its relationship
with them. Subsequent to terminating these distributors, the Company began
direct selling in the territories once covered by the distributors. Management
believes that revenues in the territories once covered by the distributors have
remained stable or increased, as revenue in the Vascular business unit increased
24.42% for the fiscal year ended June 30, 2002 as compared to the fiscal year
ended June 30, 2001. During the fiscal year ended June 30, 2003, revenue
continued to build upon this increased base. Product revenue in the Medical/Trek
business unit increased $181,000, or 13.70%, to $1,502,000. OEM revenue from
Bausch & Lomb increased $229,000. On December 18, 2000, the Company announced
that it received 510(K) clearance to begin marketing its high-end digital camera
system for ophthalmologists known as the CFA Digital Imaging System. As a result
of the approval, the Company began marketing the system through its joint
venture with MegaVision. Escalon terminated its joint venture with MegaVision
and commenced operations within the Company's EMI business unit on January 1,
2002. Product revenue in the EMI business unit increased $166,000. The Company
terminated its joint venture and commenced operations within the EMI business
unit on January 1, 2002, and therefore, during the first six months of fiscal
2002, these revenues were recognized within the joint venture.
Other revenue, which is included in the Medical/Trek business unit,
increased $394,000, or 22.12%, to $2,175,000 for the fiscal year ended June 30,
2003 as compared to $1,781,000 for the fiscal year ended June 30, 2002. The
increase primarily relates to a $289,000 increase in royalty payments received
from a privately held entity related to the licensing of Escalon'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 products related to
the Company's intellectual laser technology. The remaining $105,000 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 fiscal year ended June 30, 2003,
the step-down caused a $259,000 decrease in Silicone Oil revenue that Escalon
would have otherwise received had the step-down not occurred. The offsetting
$364,000 increase in Silicone Oil revenue is due to increase in the market
demand for the product. Escalon does not have knowledge as to what factors have
affected Bausch & Lomb's sales of Silicone Oil. See note 15 of the Notes to
Consolidated Financial Statements for a description of the step-down provisions
under the contract with Bausch & Lomb.
The following table presents consolidated cost of goods sold by
reportable business segment and as a percentage of related segment product
revenues for the fiscal years ended June 30, 2003 and 2002.
Fiscal Years Ended June 30,
-------------------------------------------------------
2003 2002
-------------------------- -----------------------
Dollars % Dollars %
-------------- ----- -------------- ------
(in thousands) (in thousands)
Cost of goods sold:
Sonomed $ 2,524 38.86% $ 2,704 44.54%
Vascular 1,195 43.28% 988 37.51%
Medical / Trek 961 26.14% 838 27.01%
EMI 216 49.88% 110 41.20%
-------- ----- ---------- -----
$ 4,896 36.63% $ 4,640 38.43%
======== ===== ========== =====
14
Cost of goods sold totaled $4,896,000, or 36.63% of net revenue, for
the fiscal year ended June 30, 2003 as compared to $4,640,000, or 38.43% of net
revenue, for the same period last fiscal year. Cost of goods sold in the Sonomed
business unit totaled $2,524,000, or 38.86% of net revenue, for the fiscal year
ended June 30, 2003 as compared to $2,704,000, or 44.54% of net revenue, for the
fiscal year ended June 30, 2002. Sonomed experienced a significant shift in
product mix with the increase in demand for the pachymeter product, which has
higher margins than much of the remainder of the Sonomed product line. Cost of
goods sold in the Vascular business unit totaled $1,195,000, or 43.28% of net
revenue, for the fiscal year ended June 30, 2003 as compared to $988,000, or
37.51% of net revenue, for the fiscal year ended June 30, 2002. Vascular's
margins have been adversely affected by several factors including product mix,
having experienced an increase in sales of the over-the-needle catheter ("ONC")
product line, which has lower margins than the remainder of the Vascular product
line due to smaller-scale production; lower price per unit, having experienced
an increase in sales to distributors to whom the Company discounts its products;
and quality issues that led to the Company writing off $52,000 of inventory in
the fourth quarter of fiscal 2003. Cost of goods sold in the Medical/Trek
business unit totaled $961,000, or 26.14% of net revenue, for the fiscal year
ended June 30, 2003 as compared to $838,000, or 27.01% of net revenue, for the
fiscal year ended June 30, 2002. When other revenue is excluded (no costs are
associated with these revenue streams), cost of goods sold, as a percentage of
product revenue, was 63.98% and 63.44% for the fiscal years ended June 30, 2003
and 2002, respectively. Fluctuations in Medical/Trek cost of goods sold emanates
from product mix, which was primarily controlled by market demand. Cost of goods
sold in the EMI business unit was $216,000 or 49.88% of net revenue for the
fiscal year ended June 30, 2003 as compared to $110,000, or 41.20% of net
revenue for the fiscal year ended June 30, 2002. During the first six months of
the previous fiscal year, these expenses were incurred within the joint venture.
The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the fiscal years ended June
30, 2003 and 2002.
Fiscal Years Ended June 30,
-------------------------------
2003 2002 % Change
-------- ------- --------
(in thousands)
Marketing, general and
administrative expenses
Sonomed $ 1,281 $ 1,441 -11.10%
Vascular 1,205 999 20.62%
Medical / Trek 2,294 2,528 -9.26%
EMI 254 129 96.90%
-------- ------- ------
$ 5,034 $ 5,097 -1.24%
======== ======= ======
Marketing, general and administrative expenses decreased $63,000, or
1.24%, for the fiscal year ended June 30, 2003 as compared to the fiscal year
ended June 30, 2002. In the Sonomed business unit, marketing, general and
administrative expenses decreased $160,000, or 11.10%. Salaries and other
personnel-related expenses decreased $201,000, primarily the result of reduced
headcount. Bad debts decreased $55,000, primarily due to the Company reserving
for specific international accounts in the fiscal year ending June 30, 2002,
which did not reoccur in the fiscal year ended June 30, 2003. Offsetting these
decreases were an increase in consulting expense of $60,000, which increased as
a result of the Company's efforts in the international markets and an increase
in commissions of $35,000. In the vascular business unit, marketing, general and
administrative expenses increased $206,000, or 20.62%, for the fiscal year ended
June 30, 2003 as compared to the fiscal year ended June 30, 2002. Salaries and
other personnel-related expenses increased $89,000; primarily the result of
increases in headcount. Travel and sales meeting expenses increased by a
combined $36,000, and samples expense increased by $21,000. Also contributing to
the increase, the Company began allocating from the Medical/Trek business unit
certain overhead expenses related to the Wisconsin facility to the Vascular
business unit. In the Medical/Trek business unit, marketing, general and
administrative expenses decreased $234,000, or 9.26%, for the fiscal year ended
June 30, 2003 as compared to the fiscal year ended June 30, 2002. Legal and
accounting fees decreased $110,000. Legal fees were unusually high during the
fiscal year ended June 30, 2002 due to
15
required filings with the SEC related to the reincorporation into Pennsylvania,
the issuance of Escalon Common Stock shares to Endologix, Inc. Salaries and
other personnel-related expenses decreased $16,000, primarily the result of
reduced headcount. Also contributing to the decrease, the Company began
allocating from the Medical/Trek business unit certain overhead expenses related
to the Wisconsin facility to the Vascular business unit. Offsetting these
decreases was a $77,000 increase in insurance expense. The increase primarily
relates to premium increases being instituted by the insurance industry in
general as well as to an audit of prior year premiums in which the insurance
company discovered that they undercharged premiums by $22,000. The undercharge
was corrected in the first quarter of fiscal 2003. In the EMI business unit,
marketing, general and administrative expenses increased $125,000. The Company
terminated its joint venture and commenced operations within its EMI business
unit on January 1, 2002, and therefore, during the first six months of the
previous fiscal year, these expenses were incurred within the joint venture.
Research and development expenses increased $225,000, or 40.54%, for
the fiscal year ended June 30, 2003 as compared to fiscal 2002. The increase
primarily relates to consulting expenses incurred in connection with product
development. The Company redesigns its products every few years, as technology
changes, to remain competitive in the market place.
Several years ago, Escalon began seeking a corporate partner to fund
commercialization of the Povidone Iodine 2.5% product line. The Company obtained
the license and distribution rights to the product from Harbor-UCLA Medical
Center. Having exhausted all partnering possibilities, the Company decided that
further expenditures on this project were not in the shareholders' best
interest, and the project was abandoned. This decision resulted in the Company
taking an expense of $196,000 during the fiscal year ended June 30, 2003, which
included the write-off of the remaining net book value of the license and
distribution rights.
Escalon recognized a gain of $8,000 related to the operations of the
joint venture with MegaVision and a $23,000 loss related to the termination of
the joint venture during the fiscal year ended June 30, 2002.
Interest income remained relatively unchanged for the fiscal year ended
June 30, 2003 as compared to the fiscal year ended June 30, 2002, $3,000 and
$2,000, respectively.
Interest expense decreased $153,000 for the fiscal year ended June 30,
2003 as compared to the same period last fiscal year primarily due to reduced
total debt levels and lower interest rates.
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. Income taxes of
$112,000 were incurred during the fiscal year ended June 30, 2003 due to
Wisconsin state net operating losses being exhausted.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
The following table presents consolidated product revenues by business
segment as well as identifying trends in business segment product revenues for
the fiscal years ended June 30, 2002 and 2001.
Fiscal Years Ended June 30,
-------------------------------
2002 2001 % Change
-------- ------- --------
(in thousands)
Product revenues:
Sonomed $ 6,071 $ 5,988 1.39%
Vascular 2,634 2,117 24.42%
Medical / Trek 1,321 1,521 -13.15%
EMI 267 - 100.00%
-------- ------- ------
$ 10,293 $ 9,626 6.93%
======== ======= ======
16
Product revenues increased $667,000, or 6.93%, to $10,293,000 in fiscal
2002 as compared to $9,626,000 in fiscal 2001. Product revenues in the Sonomed
business unit increased $83,000, or 1.39%, to $6,071,000. This increase is
attributed to an increase in international revenue of $172,000 offset by an
$89,000 decrease domestically. Sonomed hired a domestic sales person in February
2001 and an international salesperson in September 2001. The hiring of the
international salesperson had the desired effect of increasing sales. The
domestic market was weak. Product revenue in the Vascular business unit
increased $517,000, or 24.42%, to $2,634,000. Vascular's revenue increased as a
result of two factors: (1) increased usage within the marketplace, and (2)
selling direct to the market rather than through distributors caused more sales
to be recognized at retail price rather than wholesale. Vascular's unit sales
increased 16.42% for the fiscal year ended June 30, 2002 as compared to the same
period last fiscal year. The unit sales increase was complemented by increases
in the average unit sales price of the majority of Vascular's needle products,
due to the Company's strategy of eliminating underperforming distributors.
Vascular discounts its products to distributors. Vascular began taking the sales
directly to end users thereby avoiding distributor discounts. Revenues in the
Medical/Trek business unit decreased $200,000, or 13.15%, to $1,321,000. Sales
of the Company's ISPAN(TM) gas products and certain OEM products decreased by
$173,000. Escalon experienced a temporary increase in the sales of its ISPAN(TM)
gas product due to the fulfillment of customers' backorders during the fiscal
year ended June 30, 2001. Revenues in the EMI business unit were $267,000 for
the fiscal year ended June 30, 2002. The Company terminated its joint venture
with MegaVision and commenced operations within its EMI business unit on January
1, 2002.
Other revenue decreased $473,000, or 20.98%, to $1,781,000 in fiscal
2002 as compared to $2,254,000 in fiscal 2001. The decrease was largely due to a
$500,000 decrease in revenue earned from Bausch & Lomb in connection with
Silicone Oil. This decrease was primarily caused by a contractual step-down in
royalties provided for in the sale of the product line. The contract with Bausch
& Lomb provides 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 during the contract. For the fiscal year ended June
30, 2002, the step-down caused a $385,000 decrease in Silicone Oil revenue that
the Company would have otherwise received had the step-down not occurred. The
remaining $115,000 decrease in Silicone Oil revenue is due to fluctuations in
market demand for the product. The Company does not have knowledge as to what
factors have affected Bausch & Lomb's sale of Silicone Oil. See note 15 of the
Notes to Consolidated Financial Statements for a description of the step-down
provisions under the contract with Bausch & Lomb.
The following table presents consolidated cost of goods sold by
reportable business segment and as a percentage of related segment product
revenues for the fiscal years ended June 30, 2002 and 2001.
Fiscal Years Ended June 30,
------------------------------------------------------
2002 2001
------------------------ ---------------------------
Dollars % Dollars %
-------------- ------ -------------- ------
(in thousands) (in thousands)
Cost of goods sold:
Sonomed $ 2,704 44.54% $ 2,237 37.36%
Vascular 988 37.51% 1,016 47.99%
Medical / Trek 838 27.01% 1,043 27.63%
EMI 110 41.20% - 0.00%
-------- ----- -------- -----
$ 4,640 38.43% $ 4,296 36.16%
======== ===== ======== =====
Cost of goods sold totaled $4,640,000, or 38.43% of net revenue, for
the fiscal year ended June 30, 2002 as compared to $4,296,000, or 36.16% of net
revenue, for the fiscal year ended June 30, 2001. Cost of goods sold in the
Sonomed business unit totaled $2,704,000, or 44.54% of net revenue for the
period ended June 30, 2002 as compared to $2,237,000, or 37.36% of net revenue
for the fiscal year ended June 30, 2001. This increase relates primarily to
lower net revenue per unit as Sonomed's revenue concentrated toward sales to
distributors to whom Sonomed discounts its products resulting in lower unit
sales prices.
17
Cost of goods sold in the Vascular business unit totaled $988,000, or 37.51% of
net revenue for the fiscal year ended June 30, 2002 as compared to $1,016,000,
or 47.99% of net revenue for the fiscal year ended June 30, 2001. This decrease
is the result of increases in average unit sales prices across the needle
product line as well as reduced costs due to improved efficiency in the
manufacturing process. The improvement in the Vascular division was the direct
result of the retention of a manufacturing supervisor who strengthened operating
procedures, which improved productivity. Cost of goods sold in the Medical/Trek
business unit totaled $838,000, or 27.01% of net revenue for the fiscal year
ended June 30, 2002 as compared to $1,043,000, or 27.63% of net revenue for the
fiscal year ended June 30, 2001. When other revenue is excluded, cost of goods
sold as a percent of product revenue was 63.44% of product revenue and 68.57% of
net revenue for the fiscal years ended June 30, 2002 and 2001, respectively.
Other revenue consists primarily of Silicone Oil revenue from Bausch & Lomb with
which no costs are associated. The decrease in cost of goods sold as a
percentage of product revenue is attributed to product mix. During fiscal 2002
and 2001, customers placed orders with the Medical/Trek business unit, which
were in turn fulfilled. Product mix is controlled by market demand. The market
had a higher demand for products that can be sold at a lower cost of goods sold
with respect to revenue. Cost of goods sold in the EMI business unit totaled
$110,000, or 41.20% of net revenue.
The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the fiscal years ended June
30, 2002 and 2001.
Fiscal Years Ended June 30,
-------------------------------
2002 2001 % Change
-------- ------- --------
(in thousands)
Marketing, general and
administrative expenses
Sonomed $ 1,441 $ 1,942 -25.80%
Vascular 999 1,127 -11.36%
Medical / Trek 2,528 2,362 7.03%
EMI 129 - 100.00%
-------- ------- --------
$ 5,097 $ 5,431 -6.15%
======== ======= ========
Marketing, general and administrative expenses decreased $334,000, or
6.15%, for the fiscal year ended June 30, 2002 as compared to the fiscal year
ended June 30, 2001. In the Sonomed business unit, marketing, general and
administrative expenses decreased $501,000, or 25.80%. Depreciation and
amortization expenses decreased $735,000, primarily due to the application of
SFAS 142 discussed in Note 3 of the Notes to Consolidated Financial Statements.
Salaries and other personnel-related costs increased $168,000, primarily due to
the addition of a domestic salesperson and a salesperson for Latin America and
the Pacific Rim. Bad Debts increased by $101,000 as the Company reserved for
specific international accounts receivable. In the Vascular business unit,
marketing, general and administrative expenses decreased by $128,000, or 11.36%.
Depreciation and amortization expenses decreased $83,000 primarily due to the
application of SFAS 142. Salaries, commissions and other personnel related
expenses increased $81,000 and consulting expenses decreased $151,000 primarily
due to the addition of a sales and marketing manager and a clinical support
specialist. Marketing, general and administrative expenses in the Medical/Trek
business unit increased $162,000, or 6.90%. Executive and administrative
compensation increased $245,000, primarily due to the Company's strengthening of
its management team and the centralization of the Company's finance function to
the corporate office. The strengthening consisted of the addition of an
executive manager mid way through fiscal 2001 and the addition of clerical
accounting staff. Legal and accounting fees increased $135,000, primarily due to
the amendment of the Company's loans with PNC Bank, N.A., required filings with
the SEC relating to the reincorporation into Pennsylvania and the issuance of
shares to Endologix, Inc. This increase was offset by a $64,000 decrease in
commissions expense related to the termination of contracts with distributors, a
$57,000 decrease in travel, lodging and meals and entertainment due to concerted
cost reduction efforts in this area and a $30,000
18
reduction in temporary services. Marketing, general and administrative expenses
in the EMI business totaled $129,000.
Research and development expenses increased $63,000, or 12.80%, for the
fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30,
2001. In the Sonomed business unit, research and development expenses increased
$88,000. This increase relates largely to the redesign of one of Sonomed's
product lines and was offset by a $15,000 decrease in consulting expenses.
Research and development expenses in the Vascular business unit increased
$42,000, primarily due to a $28,000 increase in prototype and patent expenses
and an $11,000 increase in consulting expenses. Research and development
expenses in the Medical/Trek business unit decreased $81,000, primarily due to a
$45,000 decrease in salaries and other personnel related costs largely due to
reduced headcount, a $15,000 decrease in consulting expenses, an $8,000 decrease
in ISO/CE Marking expenses and a $6,000 decrease in prototype expenses.
Escalon terminated its joint venture with MegaVision and commenced
operations within the Company's EMI business unit on January 1, 2002. Escalon
recognized a joint venture gain of $9,000 for the fiscal year ended June 30,
2002 and a joint venture loss of $19,000 for the fiscal year ended June 30,
2001.
Interest income remained unchanged for the fiscal year ended June 30,
2002 as compared to the fiscal year ended June 30, 2001. Interest income was
$2,000 for both fiscal years.
Interest expense decreased $261,000 for the fiscal year ended June 30,
2002 as compared to the fiscal year ended June 30, 2001. The decrease resulted
from lower average balances in Escalon's term loans and line of credit and from
decreases in the floating interest rates applicable to the term loans and line
of credit.
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 allowance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, Escalon had cash and cash equivalents of $298,000 as
compared to $221,000 at June 30, 2002, an increase of $77,000. This resulted
primarily from increases in cash of $2,171,000 provided by operating activities
and $19,000 provided by the issuance of Common Stock, offset by $2,036,000 used
to pay down the term loans and the line of credit and $76,000 used to purchase
fixed assets.
Management believes that the current rate of cash generated from
operations, cash on hand and cash available from the line of credit should be
sufficient to satisfy the Company's working capital, debt service, capital
expenditures and research and development costs until the balloon payment under
its term loan is due on September 1, 2005. The Company will likely be required
to secure alternative debt or equity financing in order to satisfy the balloon
payment, and Escalon cannot assure that such financing will be available when
required on acceptable terms. Additionally, the Company relies on the Silicone
Oil revenue received from Bausch & Lomb, which is expected to continue in
varying amounts through fiscal 2005. While the Company does not expect this
revenue to decline rapidly in the immediate future, any such decrease would have
a significant impact on the Company's consolidated financial position, results
of operations and cash flows. The Silicone Oil revenues are based on the sales
of the product line by Bausch & Lomb. Additionally, the Silicone Oil revenues
reduce on an annual basis due to a contractual step-down. See note 15 of the
Notes to Consolidated Financial Statements for a description of the step-down
provisions under the contract with Bausch & Lomb.
19
DEBT HISTORY
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 interest rate on the line
of credit was based on prime plus 0.75%. Escalon paid $100,000 in finance fees
related to this refinancing. The finance fees are being amortized over the life
of the loans using the effective interest method. 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 $123,000 in
fees related to these rate cap agreements. The rate cap agreements expired on
December 31, 2002, and the related fees have been completely amortized.
On December 23, 2002, a privately-held financial group acquired the
Company's bank debt, which consisted of term debt of $5,850,000 and $1,475,000
outstanding on the $2,000,000 available line of credit. On February 13, 2003,
the Company entered into an Amended Agreement with the privately held financial
group. The primary amendments of the Amended Loan Agreement were to reduce
quarterly principal payments and extend the term of the repayments, and to alter
the covenants of the original bank agreement. Historically, the Company failed
to meet the EBITDA to current maturities ratio covenant required under its loan
agreements. The new loan agreement was amended to reduce the principal payments,
significantly reducing current maturities, and also amended this required ratio
from 1.05 to 1 to 1.00 to 1. Additionally, the calculation of this ratio has
been amended such that only bank debt is used in the calculation. All
subordinated debt is specifically excluded from the calculation. The schedule
below presents principal amortization for the next three fiscal years under the
new loan agreement as compared to the superseded original bank agreement as of
June 30, 2003:
New Loan
-----------
For the year ending June 30, 2004 $ 1,300,000
For the year ending June 30, 2005 1,500,000
For the year ending June 30, 2006 2,450,000
-----------
$ 5,250,000
===========
As of June 30, 2003, the amounts outstanding under the term loan and
line of credit were $5,250,000 and $975,000, respectively. At June 30, 2003, the
interest rates applicable to the term loan and the line of credit were 6.00% and
5.75%, respectively. The privately held financial group's prime rate at June 30,
2003 was 4.25%. The $5,250,000 term loan balance includes a $2,450,000 balloon
payment that is due on September 1, 2005.
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 payment of the royalties. Pursuant to the amendment, 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 equal quarterly installments that commenced April 15, 2002,
and Escalon issued 50,000 shares of its Common Stock to Endologix.
As of June 30, 2003, the amount outstanding under the Endologix term
loan was $391,393. At June 30, 2003, the interest rate applicable to the
Endologix term loan was 5.25%.
20
ESCALON COMMON STOCK
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, the
following listing requirements must be met:
- Stockholders' equity of $2,500,000 or market value of listed securities
of $35,000,000 or net income from continuing operations (in the latest
fiscal year or two of the last three fiscal years) of $500,000;
- 500,000 publicly held shares;
- $1,000,000 market value of publicly held shares;
- A minimum bid price of $1;
- 300 shareholders (round lot holders);
- Two market makers; and
- Compliance with corporate governance standards
As of June 30, 2003, Escalon complied with these requirements. If the
Company's securities were delisted, a shareholder would find it more difficult
to trade in the Company's securities, or obtain accurate quotations as to the
market value of the Company's securities.
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 further
in Notes 2 and 3 of the Notes to the Consolidated Financial Statements included
in this Form 10-K. The financial statements are prepared in conformity with
generally accepted accounting principles, and, as such, include amounts based on
informed estimates and judgments of management. For example, estimates are used
in determining valuation allowances for uncollectible receivables, obsolete
inventory, sales returns and rebates, deferred income taxes and purchased
intangible assets. Actual results achieved in the future could differ from
current estimates. The Company used what it believes are reasonable assumptions
and, where applicable, established valuation techniques in making its estimates.
REVENUE RECOGNITION
Escalon's standard arrangement for the Company's domestic and
international customers includes a signed purchase order or contract and no
right of return of delivered products without consent of the Company. Revenue
from sales of product is recognized when:
- The Company enters into a legally binding arrangement with a
customer;
- The Company delivers the products;
- Customer payment is deemed fixed and determinable and free of
contingencies or significant uncertainties; and
- Collection is probable
Escalon assesses collectibility based on the credit worthiness of the
customer and past transaction history. The Company performs ongoing credit
evaluations of its customers and does not require collateral from its customers.
For many of Escalon's international customers, the Company requires an
irrevocable letter of credit to be issued by the customer before the purchase
order is accepted.
VALUATION OF INTANGIBLE ASSETS
Escalon periodically evaluates its intangible assets and goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," for
indications of impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. These intangible assets include
goodwill, trademarks and trade names. Factors the Company considers important
that could trigger an impairment review include significant under-performance
relative to historical or projected future operating
21
results or significant negative industry or economic trends. If these criteria
indicate that the value of the intangible asset may be impaired, an evaluation
of the recoverability of the net carrying value of the asset is made. If this
evaluation indicates that the intangible asset is not recoverable, the net
carrying value of the related intangible asset will be reduced to fair value.
Any such impairment charge could be significant and could have a material
adverse effect on the Company's reported financial statements if and when an
impairment charge is recorded. No impairment losses were recorded for goodwill,
trademarks and trade names during any of the periods presented based on these
evaluations.
DEFERRED TAXES
The deferred tax valuation allowance is based on our assessment of the
realizability of our deferred tax assets on an ongoing basis and may be
adjusted from time to time as necessary. In determining the valuation
allowance, we have considered future taxable income and the feasibility of tax
planning initiatives and strategies. Should we determine that it is more likely
than not that we will realize certain of our deferred tax assets in the future,
an adjustment would be required to reduce the existing valuation allowance and
increase income. On the contrary, if we determine that we would not be able to
realize our recorded deferred tax asset, an adjustment to increase our
valuation allowance would be charged to the results of operations in the period
such conclusion was made. Such charge could have an adverse effect on our
provision for income taxes included in our results of operations.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Escalon did not have any off-balance sheet arrangements as of and for
the fiscal years ended June 30, 2003 and 2002.
The following table presents the Company's contractual obligations as
of June 30, 2003:
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
---------- ---------- ---------- ---------- ---------
Long-term debt $5,641,000 $1,561,000 $4,080,000 $ - $ -
Capital lease obligations - - - - -
Operating lease obligations 928,000 322,000 402,000 204,000 -
Purchase obligations - - - - -
Other long-term liabilities - - - - -
---------- ---------- ---------- ---------- ---------
Total $6,569,000 $1,883,000 $4,482,000 $ 204,000 $ -
========== ========== ========== ========== =========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 on the prime rate at June 30, 2003 plus 1.75% on the term loan, the
prime rate plus 1.50% on the line of credit and the prime rate plus 1.00% on the
Endologix note.
2004 2005 2006 2007 2008 Total
------------ ---------- ---------- ----- ---------- ----------
Term Loan $ 1,300,000 $1,500,000 $2,450,000 $ - $ - $5,250,000
Interest rate 6.00% 6.00% 6.00% - -
Line of credit 975,000 - - - - 975,000
Interest rate 5.75% - - - -
Radiance Note 261,000 130,000 - - - 391,000
Interest rate 5.25% 5.25% - - -
Deferred finance fees (51,000) - - - - (51,000)
------------ ---------- ---------- ----- ---------- ----------
Total $ 2,485,000 $1,630,000 $2,450,000 $ - $ - $6,565,000
============ ========== ========== ===== ========== ==========
EXCHANGE RATE RISK
During the fiscal years ended June 30, 2003 and 2002, approximately
18.12% and 20.31%, respectively, of Escalon's consolidated net revenue was
derived from international sales. The price of all product sold overseas is
denominated in United States Dollars and consequently the Company incurs no
exchange rate risk on revenue. The Company's Sonomed business unit began
incurring marketing
22
consulting expenses in the European market during fiscal 2003, the majority of
which are transacted in Euros. These expenses were $92,000 for the fiscal year
ended June 30, 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are filed under this Item 8,
beginning on page F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the
Company's Chief Executive Officer and Senior Vice President of
Finance, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Senior
Vice President of Finance have concluded that, as of the end
of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or
submits under the Exchange Act.
(b) Internal Control Over Financial Reporting
There have not been any changes in the Company's internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the Company's fourth fiscal quarter ended June 30, 2003 that
have materially affected, or are reasonably likely to
materially affect, the Company's internal control over
financial reporting.
A control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are met,
and no evaluation of internal controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference
to the information under the captions "Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" included in Escalon's proxy
statement for the Company's 2003 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information under the caption "Executive Compensation" included in
Escalon's proxy statement for the Company's 2003 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this Item 12 is incorporated by reference
to the information under the captions "Principal Stockholders" and "Management"
included in Escalon's proxy statement for the Company's 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated by reference
to the information under the captions "Principal Accountant Fees and Services"
included in Escalon's proxy statement for the Company's 2003 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
See index to Consolidated Financial Statements on page F-1.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the financial statements or notes
thereto.
EXHIBITS
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K where so indicated by footnote, exhibits, which were previously
filed, are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically,
followed by the footnote reference to the previous filing.
3.1 (a) Restated Articles of Incorporation of Registrant. (10)
(b) Agreement and Plan of Merger dated as of September 28, 2001
between Escalon Pennsylvania, Inc. and Escalon Medical Corp.
(10)
3.2 Bylaws of Registrant. (10)
4.5 (a) Warrant Agreement between Registrant and U.S. Stock Transfer
Corporation. (1)
(b) Amendment to Warrant Agreement between the Registrant and U.S.
Stock Transfer Corporation. (3)
(c) Amendment to Warrant Agreement between the Registrant and
American Stock Transfer Corporation. (4)
4.6 Securities Purchase Agreement, dated as of December 31, 1997
by and among the Registrant and Combination. (6)
4.7 Registration Rights Agreement, dated as of December 31, 1997
by and among the Registrant and Combination. (6)
4.8 Warrant to Purchase Common Stock issued December 31, 1997 to
David Stefansky. (6)
4.9 Warrant to Purchase Common Stock issued December 31, 1997 to
Combination. (6)
4.10 Warrant to Purchase Common Stock issued December 31, 1997 to
Richard Rosenblum. (6)
24
4.11 Warrant to Purchase Common Stock issued December 31, 1997 to
Trautman, Kramer & Company (6)
10.6 Employment Agreement between the Registrant and Richard J.
DePiano dated May 12, 1998. (8) **
10.7 Non-Exclusive Distributorship Agreement between Registrant and
Scott Medical Products dated October 12, 2000. (12)
10.9 Assets Sale and Purchase Agreement between the Registrant and
Endologix, Inc. dated January 21, 1999. (7)
10.13 Supply Agreement between the Registrant and Bausch & Lomb
Surgical, Inc. dated August 13, 1999. (7)
10.15 Registrant's Amendment and Supplement Agreement and Release
between the Registrant and Endologix, Inc. dated February 28,
2001. (13)
10.16 2003 Amendment to Loan Agreement (15)
10.17 Allonge to the Amended and Restated Term/Time Note (15)
10.18 Allonge to the Amended and Restated Line of Credit Note (15)
10.20 PNC Bank, N.A. Letter Agreement dated November 16, 2001. (14)
10.21 PNC Bank, N.A. Amended and Restated Committed Line of Credit
Note dated November 16, 2001. (14)
10.22 PNC Bank, N.A. Amended and Restated Time Note dated November
16, 2001. (14)
10.23 PNC Bank, N.A. Pledge Agreement dated November 16, 2001. (14)
10.24 PNC Bank, N.A. Amended and Restated Security Agreement dated
November 16, 2001. (14)
10.25 Stock Purchase Agreement between the Registrant and the
Stockholders of Sonomed, Inc. dated January 14, 2000. (8)
10.26 Employment Agreement between the Registrant and Louis Katz
dated January 14, 2000. (8) **
10.27 Registrant's 1999 Equity Incentive Plan and Registrant's
Equity Incentive Plan for Employees of Sonomed, Inc. (9)
10.28 Registrant's Amended and Restated 1999 Equity Incentive Plan.
(9)
21 Subsidiaries. (*)
23.1 Consent of Parente Randolph, LLC, independent auditors. (*)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - Richard J. DePiano (*)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - Harry M. Rimmer (*)
32.1 Certification pursuant to Section 1350 of Title 18 of the
United States Code - Richard J. DePiano. (*)
32.2 Certification pursuant to Section 1350 of Title 18 of the
United States Code - Harry M. Rimmer. (*)
- --------------
* Filed Herewith.
** Management contract or compensatory plan
(1) Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 dated November 9, 1993 (Registration
No. 33-69360).
(2) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated June 13, 1994 (Registration No. 33-80162).
(3) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1994.
(4) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1995.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1996.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 20, 1998 (Registration No. 333-44513).
(7) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 1999.
(8) Filed as an exhibit to the Company's Form 8-K/A, dated March 31, 2000.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 25, 2000 (Registration No. 333-31138).
25
(10) Filed as an exhibit to the Company's Proxy Statement on Schedule 14A,
as filed by the Company with the SEC on September 21, 2001.
(11) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 2000.
(12) Filed as an exhibit to the Company's Form 10-K for the year ended June
30, 2001.
(13) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
March 31, 2001.
(14) Filed as an exhibit to the Company's Form 10-K/A for the year ended
June 30, 2002.
(15) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESCALON MEDICAL CORP.
(REGISTRANT)
Dated: September 26, 2003 By: /s/ Richard J. DePiano
----------------------
Richard J. DePiano
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Richard J. DePiano Chairman and Chief Executive September 26, 2003
---------------------- Officer (Principal Executive
Richard J. DePiano Officer) and Director
By: /s/ Harry M. Rimmer Senior Vice President - Finance September 26, 2003
------------------- (Principal Financial and
Harry M. Rimmer Accounting Officer)
By: /s/ Anthony Coppola Director September 26, 2003
-------------------
Anthony Coppola
By: /s/ Jay L. Federman, MD Director September 26, 2003
-----------------------
Jay L. Federman, MD
By: /s/ William Kwan Director September 26, 2003
----------------
William Kwan
By: /s/ Lisa Napolitano Director September 26, 2003
-------------------
Lisa Napolitano
By: /s/ Jeffrey F.O'Donnell Director September 26, 2003
-----------------------
Jeffrey O'Donnell
26
ESCALON MEDICAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-Pages
-------
Independent Auditors' Report F-2
Consolidated Balance Sheets at June 30, 2003 and 2002 F-3
Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001 F-4
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2003, 2002
and 2001 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Escalon Medical Corp.
Wayne, Pennsylvania:
We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries (the "Company") as of June 30, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries as of June 30, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2003 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Parente Randolph, LLC
Philadelphia, Pennsylvania
September 19, 2003
F-2
PART I. FINANCIAL INFORMATION
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 298,390 $ 220,826
Accounts receivable, net 2,364,370 2,093,877
Inventory, net 1,785,480 1,572,067
Other current assets 310,420 400,820
-------------- --------------
Total current assets 4,758,660 4,287,590
-------------- --------------
Long-term note receivable 150,000 150,000
Furniture and equipment, net 516,686 626,377
Goodwill 10,591,795 10,591,795
Trademarks and trade names, net 616,906 601,806
License and distribution rights, net 13,138 246,988
Patents, net 182,811 193,541
Other assets 60,235 214,344
-------------- --------------
Total assets $ 16,890,231 $ 16,912,441
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 975,000 $ 1,250,000
Current portion of long-term debt 1,510,344 2,085,963
Accounts payable 454,711 531,665
Accrued compensation 708,231 498,954
Other current liabilities 222,036 161,115
-------------- --------------
Total current liabilities 3,870,322 4,527,697
Long-term debt, net of current portion 4,080,461 5,191,393
-------------- --------------
Total liabilities 7,950,783 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; 3,365,359 and
3,345,851 shares issued and outstanding at June 30, 2003 and 2002,
respectively 3,365 3,346
Additional paid-in capital 46,262,411 46,228,710
Accumulated deficit (37,326,328) (39,038,705)
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Total shareholders' equity 8,939,448 7,193,351
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Total liabilities and shareholders' equity $ 16,890,231 $ 16,912,441
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See notes to consolidated financial statements
F-3
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS