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