10-Q 1 w60690e10-q.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002. OR ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from.......... to.......... COMMISSION FILE NUMBER 0-20127 ESCALON MEDICAL CORP. (exact name of Registrant as specified in its charter) PENNSYLVANIA 33-0272839 (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 351 EAST CONESTOGA ROAD, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to filed such reports), and (2) has been subject to such filing requirements for the last 90 days. YES [X] NO [ ] Indicate the number of shares of outstanding stock of each of the issuer's classes of Common Stock, as of the latest practicable date. Date: MAY 14, 2002 Shares of Common Stock, $0.001 par value: 3,292,184 ESCALON MEDICAL CORP. FORM 10-Q QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2002 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 PART II OTHER INFORMATION Item 1. Legal Proceedings. 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 19
2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30, 2002 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 59,264 $ 80,830 Accounts receivable, net 2,246,240 2,317,476 Inventory, net 1,644,451 1,499,821 Other current assets 426,231 287,025 ------------ ------------ Total current assets 4,376,186 4,185,152 Long-term note receivable 150,000 150,000 Furniture and equipment, net 695,518 631,877 Goodwill, net 10,591,795 10,591,795 Trademarks and trade names, net 601,806 601,806 License and distribution rights, net 232,144 262,613 Patents, net 192,368 204,274 Due from joint venture -- 596,758 Other assets 342,356 574,147 ------------ ------------ Total assets $ 17,182,172 $ 17,798,422 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ 1,275,000 $ 4,626,009 Current portion of long-term debt 2,085,932 1,530,117 Accounts payable 597,515 436,684 Accrued compensation 376,867 399,535 Other current liabilities 190,264 196,503 ------------ ------------ Total current liabilities 4,525,578 7,188,848 Long-term debt, net of current portion 5,781,626 4,502,325 ------------ ------------ Total liabilities 10,307,204 11,691,173 Shareholders' Equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued - Common stock, $0.001 par value; 35,000,000 shares authorized; 3,292,184 shares issued at December 31, 2001 and June 30, 2001 3,292 3,292 Additional paid-in capital 46,121,519 46,121,519 Accumulated deficit (39,249,843) (40,017,562) ------------ ------------ Total shareholders' equity 6,874,968 6,107,249 ------------ ------------ Total liabilities and shareholders' equity $ 17,182,172 $ 17,798,422 ============ ============
Note: The consolidated balance sheet at June 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements 3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended March 31, March 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues, net $ 3,266,088 $ 2,824,555 $ 9,013,524 $ 8,721,915 ----------- ----------- ----------- ----------- Costs and expenses: Cost of goods sold 1,298,521 979,007 3,519,450 3,007,098 Research and development 144,474 160,586 399,743 361,190 Marketing, general and administrative 1,310,156 1,318,920 3,750,997 4,095,225 ----------- ----------- ----------- ----------- Total costs and expenses 2,753,151 2,458,513 7,670,190 7,463,513 ----------- ----------- ----------- ----------- Income from operations 512,937 366,042 1,343,334 1,258,402 ----------- ----------- ----------- ----------- Other income and expenses: Equity in net income (loss) of unconsolidated joint venture (3,518) 14,565 8,848 (15,404) Interest income 450 -- 1,805 2,929 Interest expense (201,898) (264,990) (586,270) (824,008) ----------- ----------- ----------- ----------- Total other income and expenses (204,966) (250,425) (575,617) (836,483) ----------- ----------- ----------- ----------- Net income $ 307,971 $ 115,617 $ 767,717 $ 421,919 =========== =========== =========== =========== Basic net income per share $ 0.094 $ 0.035 $ 0.233 $ 0.128 =========== =========== =========== =========== Diluted net income per share $ 0.091 $ 0.035 $ 0.230 $ 0.126 =========== =========== =========== =========== Weighted average shares - basic 3,292,184 3,292,184 3,292,184 3,292,184 =========== =========== =========== =========== Weighted average shares - diluted 3,385,263 3,334,727 3,339,627 3,340,713 =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended March 31, 2002 2001 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 767,717 $ 421,919 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 152,479 849,191 Equity in net (income) loss of unconsolidated joint venture (8,848) 15,404 Change in operating assets and liabilities: Accounts receivable, net 238,173 (719,973) Inventory, net (4,824) (165,759) Other current and long-term assets 178,869 247,828 Accounts payable, accrued and other liabilities 131,926 85,144 ----------- ----------- Net cash provided from operating activities 1,455,492 733,754 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (advances to) unconsolidated joint venture, net 206,828 (565,533) License and distribution rights and goodwill -- (79,528) Purchase of fixed assets (94,487) (126,187) ----------- ----------- Net cash provided from (used in) investing activities 112,341 (771,248) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: (Payments to) / borrowings from line of credit (351,009) 768,904 Principal payments on term loan (1,164,884) (703,150) Payment of finance fees (73,506) -- ----------- ----------- Net cash provided from financing activities (1,589,399) 65,754 ----------- ----------- Net (decrease) increase in cash and cash equivalents (21,566) 28,260 Cash and cash equivalents, beginning of period 80,830 177,106 ----------- ----------- Cash and cash equivalents, end of period $ 59,264 $ 205,366 =========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid during the nine-month period $ 575,930 $ 734,015 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY: Accrued royalties converted to short-term debt $ - $ 64,884 =========== =========== Long-term debt obligation incurred as a result of a royalty agreement $ - $ 717,558 =========== =========== Accrued royalties converted to common stock $ - $ 100,000 =========== =========== Deposit on furniture and equipment reclassed from other assets $ - $ 105,044 =========== =========== Transfer of title to assets in settlement of due from joint venture Accounts receivable $ 166,937 $ - =========== =========== Inventory $ 139,806 $ - =========== =========== Fixed assets $ 79,258 $ - =========== ===========
See notes to condensed consolidated financial statements 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital") and Escalon Pharmaceutical, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2002. For more complete financial information, the accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2001 included in the Company's annual report on Form 10-K. 2. NEW PRONOUNCEMENTS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." The objectives of SFAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets to be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. In January 2002, the SEC issued an interpretive release on disclosure related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions and is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than those risk factors presented in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and in other Company filings. 3. PER SHARE INFORMATION The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," in presenting basic and diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share: 6
Three Months Ended Nine Months Ended March 31, March 31, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share: Net income $ 307,971 $ 115,617 $ 767,717 $ 421,919 ---------- ---------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 3,292,184 3,292,184 3,292,184 3,292,184 Effect of dilutive securities: Employee stock options 93,079 42,543 47,443 48,529 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,385,263 3,334,727 3,339,627 3,340,713 ========== ========== ========== ========== Basic earnings per share $ 0.094 $ 0.035 $ 0.233 $ 0.128 ========== ========== ========== ========== Diluted earnings per share $ 0.091 $ 0.035 $ 0.230 $ 0.126 ========== ========== ========== ==========
4. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
March 31, June 30, 2002 2001 ----------- ----------- Raw materials / work in process $ 1,329,221 $ 1,288,664 Finished goods 413,916 313,325 ----------- ----------- 1,743,137 1,601,989 Valuation allowance (98,686) (102,168) ----------- ----------- $ 1,644,451 $ 1,499,821 =========== ===========
5. GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with SFAS No. 142, effective July 1, 2001, Escalon discontinued the amortization of goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. The standard required this impairment assessment to be completed by December 31, 2001. In November 2001, the Company engaged an independent professional appraiser to assist management in evaluating whether the intangible assets were impaired and to review the allocation of intangible assets related to the purchase of Sonomed as of the January 2000 acquisition date, when the purchase price was allocated based on information available at that time. The independent appraisal concluded in December 2001 that the intangible assets acquired with the purchase of Sonomed should be allocated as $10,547,488 7 to goodwill and $665,000 to trademarks and trade names. In light of the independent appraisal, management has determined that the original classification was incorrect, and therefore should be restated to that of the independent appraisal. The result of this correction is solely a reclassification of the intangible assets among customer lists, trademarks and trade names and goodwill. The total reported value of the intangible assets has not changed. Therefore, this correction had no affect on reported earnings, net worth or cash flows for any prior fiscal years. The independent professional appraiser engaged by the Company in November 2001 evaluated whether the goodwill and other non-amortizable intangible assets in the Sonomed and Vascular business units were impaired. The appraiser concluded that the carrying value of goodwill and other intangible assets did not exceed their fair values and therefore were not impaired. The Company evaluated the carrying value of goodwill as compared to its fair value in the Medical / Trek business unit and concluded that its carrying value did not exceed its fair value and therefore was not impaired. The Company made this conclusion after evaluating the discounted cash flow of the Medical / Trek business unit. In accordance with SFAS 142, the Company's intangible assets will be assessed on an annual basis. Goodwill as of March 2002, as allocated by reportable segment is as follows:
Goodwill ------------ Sonomed $ 9,525,550 Vascular 941,218 Medical / Trek 125,027 ------------ $ 10,591,795 ============
There were no material changes in the carrying value of goodwill during the nine months ended March 31, 2002. Intangible assets as of March 31, 2002 comprise:
Gross Carrying Accumulated Amount Amortization ----------- --------- Amortizable intangible assets $ 721,583 $ 297,071 Non-amortizable intangible assets 665,000 63,194 ----------- --------- Total identifiable intangible assets $ 1,386,583 $ 360,265 =========== =========
Amortizable intangible assets consist principally of patents and license and distribution rights. Non-amortizable intangible assets consist principally of trademarks and trade names. The amortization of intangible assets for the nine months ended March 31, 2002 was $48,323. The adjustment of previously reported net income and earnings per share primarily represents previous amortization of goodwill, trademarks and trade names and customer lists. The impact on net income, basic net earnings per share and diluted net earnings per share for the nine months ended March 31, 2001 is $651,493, $0.198 per share and $0.195 per share, respectively. Adjusted net income, basic net earnings per share and diluted earnings per share for the nine months ended March 31, 2001 is $1,073,412, $0.326 per share and $0.321 per share, respectively. 8 6. PNC BANK, N.A. LINE OF CREDIT AND LONG-TERM DEBT On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank, N.A. granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the term loan was based on prime plus 1.0% and the line of credit was based on prime plus 0.75%. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on the floating-rate term loan and line of credit loan and line of credit. At March 31, 2002, Escalon was party to an interest rate cap agreement covering the term loan through January 1, 2003. The agreement entitles the Company to receive from PNC Bank, N.A., the counter-party to the agreement, on a monthly basis, the amounts, if any, by which the Company's interest payments exceed 10.0% for the period January 1, 2002 through January 1, 2003. Escalon paid $100,000 in finance fees that offset the outstanding balance of the term loan and are being amortized over the term of the loans using the effective interest method. Escalon paid $122,800 in interest rate cap protection fees that also offset the outstanding balance of the loans. These fees are being amortized over the term of the loans using the effective interest method. On November 28, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. The aggregate balance of debt outstanding did not change as a result of this refinancing. As of March 31, 2002, the amount outstanding against this line of credit is $1,275,000. Principal payments due on the term loan have been amended such that the balance is due within the five-year term of the original agreement including a $2,000,000 balloon payment due on June 30, 2004. Interest rates on the term loan and line of credit have been increased to prime plus 1.75% and prime plus 1.50%, respectively. At March 31, 2002, the interest rates applicable to the term loan and the line of credit were 6.50% and 6.25%, respectively. PNC Bank, N.A.'s prime rate as of March 31, 2002 was 4.75%. In connection with the amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and an expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon execution of the loan agreement. Commencing March 1, 2002, the Company will pay a 1.0% facility fee payable quarterly calculated based on the aggregate principal amount outstanding under the line of credit and the term loan on January 1 of each year until June 30, 2004. All of the Company's assets collateralize these agreements. The term loan and the line of credit contain various covenants among which is a requirement to maintain a defined ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the EBITDA to debt ratio resulting in a technical default under the loan agreements. PNC Bank, N.A. has waived this requirement of the agreement as of March 31, 2002, and for the period ending April 1, 2003. 7. LITIGATION As previously reported in reports filed with the SEC, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc. et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter to which the Company is no longer a party). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including 9 September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12, and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by Escalon and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related with this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and the insurance carrier deposited such funds in an escrow account in 1996. On November 8, 2001, Escalon Digital Vision, Inc., a wholly owned subsidiary of the Company, initiated an action against MegaVision, Inc., Ken Boydston, Mark Maio and Ophthalmic Imaging Services, Inc. in the United States District Court for the Eastern District of Pennsylvania seeking damages and equitable relief for disputes arising between the parties and arising from the operations of Escalon Medical Imaging, LLC. Escalon Medical Imaging, LLC is a joint venture between Escalon Digital Vision, Inc. and MegaVision, Inc. The action was docketed as Escalon Medical Imaging, LLC and Escalon Digital Vision, Inc. v. MegaVision, Inc., Ken Boydston, Ophthalmic Imaging Systems and Mark Maio, Civil Action No.: 01-CV-5669 ("Lawsuit"). Without admitting liability, fault or wrongdoing and to provide an amicable resolution to the dispute, Escalon Digital Vision, Inc., Escalon Medical Imaging, LLC, MegaVision, Inc., Ken Boydston and Mark Maio have executed agreements to settle the Lawsuit. As part of the settlement Digital is conducting all operations concerning manufacture, marketing, distribution and support of the CFA camera system. Without admitting liability, fault, or wrongdoing and in order to avoid the time and expense of the Lawsuit, Digital, Escalon Medical Imaging, LLC and Mark Maio executed settlement agreement and mutual release to settle the Lawsuit. The settlements did not have a material financial impact on the Company. The Company received $386,970 net assets, largely in the form of accounts receivable, inventory and fixed assets, in lieu of cash, to reduce its balance due from Escalon Medical Imaging, LLC as a condition of the settlement. 8. REVENUE, NET Revenue, net includes quarterly payments earned in connection with the sale of Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line. For the three-month and nine-month periods ended March 31, 2002, this revenue totaled $430,000 and $1,293,000, respectively. This revenue totaled $623,000 for the three-month period ended March 31, 2001 and totaled $1,528,000 for the period beginning on the commencement date of August 11, 2000 through March 31, 2001. The Company is entitled to receive additional consideration, in varying amounts, through fiscal 2005. Included in accounts receivable as of March 31, 2002 and June 30, 2001 was $421,000 and $726,000, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to general business strategy, the introduction of new products, the potential market and uses for the Company's products, expansion plans, the Company's plans to file applications with the Food and Drug Administration (the "FDA"), the development of joint venture opportunities, the effects of competition on the structure of the markets in 10 which the Company competes, defending itself in litigation matters, operating performance and liquidity, as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates" or similar expressions. For such statements the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. The most important factors that could prevent the Company from achieving its goals - and cause the assumptions underlying the forward-looking statements and the actual results of the Company to differ materially from those expressed in or implied by those forward-looking statements - include, without limitation, the following: (i) the competitive nature of the industries in which the Company competes and the ability of the Company to (a) successfully maintain existing strategic relationships and (b) negotiate and enter into new strategic relationships and otherwise distinguish its products from those of other companies on the basis of quality, value and reliability; (ii) economic and regulatory conditions which could adversely affect sales of the Company's products, including uncertainty of FDA approval for any new applications; (iii) the ability of the Company to successfully develop and market new products; (iv) future capital needs and the uncertainty of additional funding (whether through the financial markets, collaborative or other arrangements with strategic partners, or from other sources); (v) concentration of revenues from a single customer over which the Company has no control, the absence of which could have a materially adverse impact on the Company's financial position; (vi) the ability of the Company to service its debt; (vii) uncertain protection of important proprietary technology; (viii) the outcome and settlement of litigation matters; (ix) limitation on third-party reimbursement and the possible adverse impact of health care reform on the payment of health care services; (x) dependence on key personnel; and (xi) the ability of the Company to maintain its listing on the Nasdaq SmallCap Market. OVERVIEW The following discussion should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. was incorporated in California in 1987 as Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon reincorporated in Delaware in November 1999, and then reincorporated in Pennsylvania in November 2001. The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. 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 newly formed company, IntraLase Corporation ("IntraLase"), in return for an equity interest and future royalties on product sales. IntraLase has responsibility for funding and developing the laser technology through to commercialization. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Radiance Medical Systems, Inc. This was the first step in a plan of diversification to acquire profitable niche medical products. Vascular's products use Doppler technology to aid medical personnel in locating difficult arteries and veins. Currently, this product line concentrates on the cardiac catheterization market. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, the Company established Digital as a wholly owned subsidiary. This subsidiary formed a joint venture, Escalon Medical 11 Imaging, LLC ("Imaging") with MegaVision, Inc. ("MegaVision"), a privately held company, to develop and market a digital camera back for ophthalmic photography. Digital is conducting all operations concerning manufacture, marketing, distribution and support of the CFA camera system (see Note 7 of The Notes to Consolidated Financial Statements). The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; (iii) general competitive and economic conditions of the healthcare market; and (iv) availability from suppliers of component parts and supplies. RESULTS OF OPERATIONS The Company operates in four reportable business segments: Sonomed, Vascular, Medical / Trek and Digital. 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. Digital manufactures and markets a digital camera back for ophthalmic photography ACCOUNTING CHANGES There are two additional areas for which additional discussion is provided: accounting for goodwill and intangible amortization. Effective July 1, 2001, Escalon adopted FASB Statement No. 142, Accounting for Goodwill and Other Intangible Assets. FASB Statement No. 142 ("SFAS 142") eliminates the amortization of goodwill and certain intangible assets. Rather, goodwill and intangibles not subject to amortization will be tested for impairment at least annually by comparing their fair values with their recorded amounts. The impact of adopting these new requirements is discussed further in Note 5 of the Notes to the Consolidated Financial Statements. NEW PRONOUNCEMENT In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." The objectives of SFAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets to be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. In January 2002, the SEC issued an interpretive release on disclosure related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions and is not aware of factors that are reasonable likely to adversely affect liquidity trends, other than those risk factors presented in other Company filings. THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 Product revenues increased $441,000, or 15.61%, to $3,266,000 for the three-month period ended March 31, 2002 as compared to $2,825,000 for the same period last fiscal year. Revenues in the Sonomed business unit increased by $255,000, or 18.24%, to $1,653,000. This increase is largely attributed to a one-time wholesale transaction between Sonomed and one of its vendors. Revenues in the Vascular business 12 unit increased by $122,000, or 23.28%, to $646,000. The unit sales increase was complemented by increases in the average unit sales prices of all of Vascular's needle products, due to the Company's strategy of eliminating underperforming distributors. Revenues in the Medical / Trek business unit decreased $72,000, or 7.98%, to $830,000. The decrease was largely due to a $193,000 decrease in revenue earned from Bausch & Lomb in connection with Silicone Oil. Sales of the Company's ISPAN(TM) gas products and certain OEM products increased by $121,000. Revenues in the Digital business unit were $137,000 for the three-month period ended March 31, 2002. Prior to January 1, 2002, these revenues were recognized by the joint venture between the Company and MegaVision, Inc. Product revenues increased $293,000, or 3.35%, to $9,014,000 for the nine-month period ended March 31, 2002 as compared to $8,722,000 for the same period last fiscal year. Revenues in the Sonomed business unit increased by $187,000, or 4.17%, to $4,668,000. This increase is largely attributed to a short-term wholesale arrangement between Sonomed and one of their vendors. Revenues in the Vascular business unit increased by $406,000, or 26.91%, to $1,915,000. Vascular's unit sales increased 17.76% for the nine-month period ended March 31, 2002 as compared to the same period last fiscal year. The unit sales increase was complemented by increases in the average unit sales prices of the majority of Vascular's needle products, due to the Company's strategy of eliminating underperforming distributors. Revenues in the Medical / Trek business unit decreased $437,000, or 16.00%, to $2,294,000. The decrease was largely due to a $235,000 decrease in revenue earned from Bausch & Lomb in connection with Silicone Oil. Sales of the Company's ISPAN(TM) gas products and certain OEM products decreased by $202,000. Escalon experienced a temporary increase in the sales of its ISPAN(TM) gas product due to the fulfillment of customers' backorders during the nine-month period ended March 31, 2001. Cost of goods sold totaled $1,299,000, or 39.77% of net revenue for the three-month period ended March 31, 2002, as compared to $979,000, or 34.65% of net revenue for the same period last fiscal year. Cost of goods sold in the Sonomed business totaled $725,000, or 43.86% of net revenue for the three-month period ended March 31, 2002, as compared to $526,000, or 37.63% of net revenue for the same period last fiscal year. This increase relates to lower net revenue per unit as well as a shift toward more expensive units being produced. Cost of goods sold in the Vascular business unit totaled $247,000, or 38.24% of net revenue for the period ended March 31, 2002, as compared to $266,000 or 50.76% of net revenue for the same period last fiscal year. Average sales price per unit has increased during the three-month period ended March 31, 2002 as compared to the same period last fiscal year. Cost of goods sold in the Medical / Trek business unit totaled $264,000, or 31.81% of net revenue for the three-month period ended March 31, 2002, as compared to $187,000, or 20.73% of net revenue for the same period last fiscal year. The increase of cost of goods sold as a percentage of net revenue in the Medical / Trek business is primarily due to the $193,000 decrease in revenues received from Bausch & Lomb related to Silicone Oil. The Silicone Oil revenue does not have any costs associated with the revenue. When Silicone Oil revenue is excluded, cost of goods sold, as a percentage of revenue, was 66.00% for the three-month period ended March 31, 2002, as compared to 67.03% for the same period last fiscal year. Cost of goods sold in the Digital business unit was $63,000 for the three-month period ended March 31, 2002. Prior to January 1, 2002, these expenses were recognized only by the joint venture between the Company and MegaVision, Inc. Cost of goods sold totaled $3,519,000, or 39.04% of net revenue for the nine-month period ended March 31, 2002, as compared to $3,007,000, or 34.48% of net revenue for the same period last fiscal year. Cost of goods sold in the Sonomed business totaled $2,072,000, or 44.39% of net revenue for the nine-month period ended March 31, 2002, as compared to $1,647,000, or 36.76% of net revenue for the same period last fiscal year. This increase relates to lower net revenue per unit as well as a shift toward more expensive units being produced. Cost of goods sold in the Vascular business unit totaled $752,000, or 39.27% of net revenue for the nine-month period ended March 31, 2002 as compared to $722,000, or 47.85% of net revenue for the same period last fiscal year. This decrease is a result of increases in average unit sales prices across the needle product line as well as reduced costs due to improved efficiencies. Also, 13 the Company experienced an atypically high volume of returns during the three-month period ended December 31, 2000 as a result of the termination of certain underperforming distributors, which temporarily increased cost of goods sold as a percentage of net revenues. Cost of good sold in the Medical / Trek business unit totaled $632,000, or 27.55% of net revenue for the nine-month period ended March 31, 2002 as compared to $638,000, or 23.36% of net revenue for the same period last fiscal year. When Silicone Oil revenue is excluded, cost of goods sold, as a percentage of revenue was 63.14% for the nine-month period ended March 31, 2002 as compared to 53.03% for the same period last fiscal year. No costs are associated with the Silicone Oil revenue. This increase is attributed to product mix and increased material costs. Marketing, general and administrative expenses decreased $8,000, or 0.61%, for the three-month period ended March 31, 2002 as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative expenses increased $6,000, or 1.39%. Depreciation and amortization expenses decreased $191,000 largely due to the application of SFAS 142. Salaries and other personnel-related costs increased $85,000 primarily due to the addition of a domestic salesperson and a salesperson for South America. Bad debts increased by $69,000 as the Company reserved for specific international accounts receivable. Marketing, general and administrative expenses in the Vascular business unit decreased by $40,000, or 13.94%. Depreciation and amortization expenses decreased $21,000 largely due to the application of SFAS 142. Salaries, commissions and other personnel-related costs increased $42,000 and consulting decreased $62,000, primarily due to the addition of a sales and marketing manager. Marketing, general and administrative expenses in the Medical / Trek business unit decreased $38,000, or 16.25%. The main factors leading to this decrease were a $77,000 decrease in Delaware corporate franchise taxes, a $24,000 decrease in legal and accounting fees and a $23,000 decrease in investor relations expense. These decreases were offset by an increase in administrative compensation and the addition of a corporate attorney that totaled $92,000. Marketing, general and administrative expenses in the Digital business unit were $63,000 for the three-month period ended March 31, 2002. Prior to January 1, 2002, these expenses were recognized only by the joint venture between the Company and MegaVision, Inc. Marketing, general and administrative expenses decreased $344,000, or 8.40%, for the nine-month period ended March 31, 2002 as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative expenses decreased $365,000, or 25.72%. Depreciation and amortization expenses decreased $565,000 largely due to the application of SFAS 142. Salaries and other personnel related costs increased $177,000, primarily due to the addition of a domestic salesperson and a salesperson for South America. Bad debts increased by $22,000 as the Company reserved for specific international accounts receivable. In the Vascular business unit, marketing, general and administrative expenses decreased by $115,000, or 13.74%. Depreciation and amortization expenses decreased $63,000 largely due to the application of SFAS 142. Salaries, commissions and other personnel related costs increased $74,000 and consulting decreased $125,000 primarily due to the addition of a sales and marketing manager. Marketing, general and administrative expenses in the Medical / Trek business unit increased $43,000, or 2.35%. The main factors leading to this increase were a $108,000 increase in legal and accounting fees and an increase in administrative compensation and the addition of a corporate attorney that totaled $94,000. The increase in legal and accounting fees was 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 Delaware and the issuance of shares to Radiance Medical Systems, Inc., and the litigation discussed in Note 7 of The Notes to Consolidated Financial Statements. These increases were offset by a $77,000 decrease in Delaware corporate franchise taxes, a $47,000 decrease in commissions expense related to the termination of contracts with distributors and a $43,000 decrease in investor relations expense. Research and development expenses decreased $17,000, or 10.56%, for the three-month period ended March 31, 2002 as compared to the same period last fiscal year. In the Sonomed business unit, research and development expenses increased $2,000. This increase was primarily due to a $27,000 increase in salaries and personnel-related costs due to increased headcount offset by a $22,000 decrease in 14 consulting expenses. Research and development expenses in the Vascular business unit increased $16,000 primarily due to an $11,000 increase in prototype expenses and a $9,000 increase in consulting expense. Research and development expenses in the Medical / Trek business segment decreased $40,000. The decrease is primarily due to a $20,000 reduction in salaries and other personnel related costs due to reduced headcount, a $10,000 decrease in ISO/CE marking expense and a $5,000 decrease in prototype expenses. Research and development expenses increased $39,000, or 10.80%, for the nine-month period ended March 2002 as compared to the same period last fiscal year. In the Sonomed business unit, research and development expenses increased $37,000. This increase is primarily due to a $75,000 increase in salaries and personnel related costs due to increased headcount offset by a $29,000 decrease in consulting expenses. Research and development expenses in the Vascular business unit increased $36,000 primarily due to a $25,000 increase in prototype and patent expenses and a $5,000 increase in consulting expenses. Research and development expenses in the Medical / Trek business segment decreased $62,000, primarily due to a $31,000 reduction in salaries and other personnel related costs due to reduced headcount, an $8,000 reduction in ISO/CE marking expense and a $7,000 decrease in prototype expenses. On December 18, 2000, the Company announced that it was granted 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 through December 31, 2001. Beginning January 1, 2002, Digital is conducting all operations concerning manufacture, marketing, distribution and support of the CFA camera system. Escalon recognized net income of $9,000 for the nine-month period ended March 31, 2002 and a $15,000 net loss for the same period last fiscal year. Interest income remained virtually unchanged for the three-month period ended March 31, 2002 as compared to the same period last fiscal year. Interest income decreased $1,000 for the nine-month period ended March 31, 2002 as compared to the same period last fiscal year. This decrease resulted from the decrease in cash and cash equivalents available for investment and also due to falling interest rates. Interest expense decreased by $63,000 for the three-month period ended March 31, 2002 as compared to the same period last fiscal year and by $238,000 for the nine-month period ended March 31, 2002 as compared to the same period last fiscal year. These decreases resulted from lower average balances in Escalon's term loan and line of credit with PNC Bank, N.A, and from decreases in the floating interest rates applicable to the term loan and line of credit. There is no provision or credit for federal or state income taxes for the periods presented as a result of utilization of net operating loss carryforwards and related changes in the deferred valuation allowance. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, Escalon had cash and cash equivalents of $59,000 as compared to $81,000 at June 30, 2001, a decrease of $22,000. This resulted primarily from increases in cash of $1,455,000 provided by operating activities and $207,000 proceeds from the joint venture, offset by $1,515,000 used to pay down the term loan and line of credit, $74,000 in loan finance fees and equipment purchases of $94,000. On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank, N.A. granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the term loan was based on prime plus 1.0% and the line of credit was based on prime plus 0.75%. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on the floating-rate term 15 loan and line of credit loan and line of credit. At March 31, 2002, Escalon was party to an interest rate cap agreement covering the term loan through January 1, 2003. The agreement entitles the Company to receive from PNC Bank, N.A., the counter-party to the agreement, on a monthly basis, the amounts, if any, by which the Company's interest payments exceed 10.0% for the period January 1, 2002 through January 1, 2003. Escalon paid $100,000 in finance fees that offset the outstanding balance of the term loan and are being amortized over the term of the loans using the effective interest method. Escalon paid $122,800 in interest rate cap protection fees that also offset the outstanding balance of the loans. These fees are being amortized over the term of the loans using the effective interest method. On November 28, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. The aggregate balance of debt outstanding did not change as a result of this refinancing. As of March 31, 2002, the amount outstanding against this line of credit is $1,275,000. Principal payments due on the term loan have been amended such that the balance is due within the five-year term of the original agreement including a $2,000,000 balloon payment due on June 30, 2004. Interest rates on the term loan and line of credit have been increased to prime plus 1.75% and prime plus 1.50%, respectively. At March 31, 2002, the interest rates applicable to the term loan and the line of credit were 6.50% and 6.25%, respectively. PNC Bank, N.A.'s prime rate as of March 31, 2002 was 4.75%. In connection with the amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and an expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon execution of the loan agreement. Commencing March 1, 2002, the Company began paying a 1.0% facility fee payable quarterly calculated based on the aggregate principal amount outstanding under the line of credit and the term loan on January 1 of each year until June 30, 2004. All of the Company's assets collateralize these agreements. The term loan and the line of credit contain various covenants, including a requirement to maintain a defined ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the EBITDA to debt ratio, resulting in a technical default under the loan agreements. PNC Bank, N.A. has waived this requirement of the agreement as of March 31, 2002, and for the period ending April 1, 2003. On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for cash the assets of Radiance'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 28, 2001, the parties amended the agreement to provide an adjustment in the terms of the payment of the royalties. Pursuant to the amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, and an additional note in the amount of $717,558, payable in eleven quarterly installments commencing April 15, 2002, and has issued 50,000 shares of Escalon Common Stock to Radiance. Escalon anticipates that the cash generated from future product sales and cash received from the Silicone Oil divestment should be adequate to satisfy its capital requirements, based on the current levels of operation. However, the Company relies upon the revenues received from Bausch & Lomb, and any material decrease in these revenues could have a materially adverse impact on the Company's financial position. In the longer term, the Company will seek corporate partnering, licensing and other financing opportunities to satisfy the expenditures needed to fund its growth-through-acquisition strategy and to service its debt. 16 The board of directors has authorized the repurchase of up to 500,000 shares of the Company's Common Stock. The price, timing and manner of these purchases can be made at the discretion of management. No purchases have been made, nor are any currently expected to be made under this authority. 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. As of December 31, Escalon has complied with such requirements. If Escalon's securities were delisted, an investor would find it more difficult to dispose of them, or obtain accurate quotations as to the market value of the Company's securities. SEGMENTAL REPORTING During the nine-month periods ended March 31, 2002 and 2001, Escalon's operations were classified into four principal reportable segments that provide different products or services. Separate management of each segment is required because each business segment is subject to different marketing, production and technology strategies. For the nine months ended March 31, (all numbers in the table below are reported in thousands)
Sonomed Vascular Medical/Trek 2002 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- ------- Revenue, net $ 4,668 $ 4,481 $ 1,915 $ 1,509 $ 2,294 $ 2,731 Interest income -- -- -- -- 2 3 Interest expense 548 824 38 -- -- -- Equity in income/ loss of unconsolidated joint venture -- -- -- -- -- -- Net profit (loss) -- -- -- (68) 787 505 ------- ------- ------- ------- ------- ------- Depreciation and amortization 12 576 33 155 95 107 Assets 12,176 12,096 2,504 2,869 2,012 2,469 Expenditures for long-lived assets 26 14 -- 21 68 91 ------- ------- ------- ------- ------- -------
Digital Other Total 2002 2001 2002 2001 2002 2001 ------- --- --- ------ ------- ------- Revenue, net $ 137 $-- $-- $ -- $ 9,014 $ 8,721 Interest income -- -- -- -- 2 3 Interest expense -- -- -- -- 586 824 Equity in income/ loss of unconsolidated joint venture 9 (15) -- -- 9 (15) Net profit (loss) -- (15) (19) (15) 768 422 ------- --- --- ------ ------- ------- Depreciation and amortization -- -- 14 11 154 849 Assets 314 185 778 17,191 18,212 Expenditures for long-lived assets -- -- -- -- 94 126 ------- --- --- ------ ------- -------
The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. The business segments reported above are the segments for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. For the purpose of this illustration corporate expenses, which principally consist of executive management and administrative support functions, are allocated across the business segments based on each segment's contribution to consolidated net earnings. These expenses are otherwise included in the Medical/Trek business unit. During the nine-month periods ended March 31, 2002 and 2001, Sonomed derived its revenues from the sale of A-scans, B-scans and pachymeters. These products are used for diagnostic or biometric applications in ophthalmology. Vascular derived its revenues from the sale of PD Access(TM) and SmartNeedle(TM) monitors, needles and catheter products. These products are used by medical personnel to assist in gaining access to arteries and veins in difficult cases. Medical / Trek derived its revenues from the sale of ISPAN(TM) gas products, various disposable ophthalmic surgical products and revenues derived from 17 Bausch & Lomb's sales of Silicone Oil. Commencing January 1, 2002, Digital derived its revenues from sales of the CFA digital imaging system and related products. During the nine-month periods ended March 31, 2002 and 2001, the Company had one customer, Bausch & Lomb, from which greater than 10% of consolidated net revenues were derived. Revenues from Bausch & Lomb were $1,630,000, or 18.36% of consolidated net revenues during the nine-month period ended March 31, 2002, and were $1,897,000, or 21.75% of consolidated revenues during the same period last fiscal year. This revenue is recorded in the Medical / Trek business segment. Of the external revenues reported above, $1,702,000, $133,000, $32,000 and $-0- were derived internationally in Sonomed, Vascular, Medical / Trek, and Digital, respectively, during the nine-month period ended March 31, 2002; and $1,657,000, $132,000, $62,000 and $-0- were derived internationally in Sonomed, Vascular, Medical / Trek, and Digital, respectively, during the nine-month period ended March 31, 2001. Refer to the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q for analysis between the fiscal 2002 information disclosed here and the comparative results from fiscal 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about Escalon's financial instruments, consisting primarily of debt obligations that are sensitive to changes in interest rates. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. Interest rates are based upon the prime rate at March 31, 2002 plus 1.75% on the term loan and 1.50% on the line of credit. An interest rate cap agreement is used to reduce the potential impact of increases on the floating-rate term loan. The Company is party to an interest rate cap agreement covering the term loan through January 1, 2003.
Long-term debt classified as current as of March 31, 2002 2003 2004 2005 Thereafter Total --------- --------- --------- ------ ---------- --------- Term loan - capped 1,300,000 -- -- -- -- 1,300,000 Interest rate - capped 6.50% -- -- -- -- --------- --------- --------- ------ ---------- --------- Term loan - no cap 525,000 2,575,000 2,750,000 -- -- 5,850,000 Interest rate - no cap 6.50% 6.50% 6.50% -- -- --------- --------- --------- ------ ---------- --------- Line of credit - no cap 1,275,000 -- -- -- -- 1,300,000 Interest rate - no cap 6.25% -- -- -- -- --------- --------- --------- ------ ---------- --------- Radiance Note 2 261,000 261,000 196,000 -- -- 718,000 Interest rate 5.75% 5.75% 5.75% -- -- --------- --------- --------- ------ ---------- ---------
EXCHANGE RATE RISK During the nine-month periods ended March 31, 2002 and 2001, approximately 21.03% and 21.22% of Escalon's consolidated net revenue was derived from international sales. The price of all products sold overseas is denominated in United States dollars and consequently the Company incurs no exchange rate risk. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Reports on Form 8-K 99.1 Report pursuant to Item 5 Other Events, Registrant's restatement of classification of intangible assets related to acquisition of Sonomed, Inc. filed on February 8, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) Date: May 14, 2002 By: /s/ Richard J. DePiano ------------ -------------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: May 14, 2002 By: /s/ Harry M. Rimmer ------------ -------------------------- Harry M. Rimmer Senior Vice-President-- Finance 19