-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LAhB4sS22gFFaxBsjCYxk0U5N9oi3BiXzzRqZ6fsftL2qu70K+399CwFLP4foXkC vYUiheVczohwk1tIqMtEzw== 0000893220-98-000080.txt : 19980121 0000893220-98-000080.hdr.sgml : 19980121 ACCESSION NUMBER: 0000893220-98-000080 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980120 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-44513 FILM NUMBER: 98509235 BUSINESS ADDRESS: STREET 1: 182 TAMARACK CIRCLE CITY: SKILLMAN STATE: NJ ZIP: 08558 BUSINESS PHONE: 609497-9141 MAIL ADDRESS: STREET 1: 182 TAMARACK CIRCLE CITY: SKILLMAN STATE: NJ ZIP: 08558 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 S-3 1 FORM S-3 FOR ESCALON MEDICAL CORP. 1 As filed with the Securities and Exchange Commission on January 20, 1998 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------- FORM S-3 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 --------------------- ESCALON MEDICAL CORP. (Exact name of registrant as specified in its charter) California 33-0272839 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 351 East Conestoga Road Wayne, PA 19087 (610) 688-6830 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- RICHARD J. DEPIANO Chairman and Chief Executive Officer Escalon Medical Corp. 351 East Conestoga Road Wayne, PA 19087 (610) 688-6830 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: James W. McKenzie, Jr., Esquire Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 (215) 963-5000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.[ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================================== TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED AGGREGATE PRICE PER SHARE(1) AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, no par value . . 1,510,193(2) $6.78125 $10,240,996 $3,022 ====================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act based upon the average of the high and low sales prices reported for such security by the Nasdaq National Market on January 16, 1998. (2) Includes (i) the estimated maximum number of shares that may be issued upon conversion of the Series A 6% Convertible Preferred Stock; (ii) 1,080,193 shares held by EOI Corp., a Pennsylvania corporation; and (iii) 90,000 shares issuable upon the exercise of certain outstanding purchase warrants. In the event of a stock split, stock dividend or similar transaction involving the Common Stock, in order to prevent dilution, or in the event of an increase in the number of shares issuable upon conversion of the Series A 6% Convertible Preferred Stock by reason of the floating rate conversion price, the number of shares registered shall be automatically increased to cover additional shares in an indeterminate amount in accordance with Rule 416(a) under the Securities Act. ======================================================================= THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 SUBJECT TO COMPLETION, DATED JANUARY 20, 1998 PROSPECTUS ESCALON MEDICAL CORP. 1,510,193 SHARES OF COMMON STOCK This Prospectus covers 1,510,193 shares (the "Shares") of Common Stock, without par value (the "Common Stock"), of Escalon Medical Corp. ("Escalon" or the "Company") offered for the account of certain shareholders of the Company (the "Selling Shareholders") as described more fully herein. 340,000 of the shares of Common Stock offered hereby have been issued or are issuable upon the conversion of Series A 6% Convertible Preferred Stock, no par value, (the "Series A Preferred Stock") issued to Combination, Inc., a Turks and Caicos Islands corporation ("Combination"), in a December 1997 private placement (the "Private Placement"). An additional 40,000 shares of Common Stock offered hereby have been issued or are issuable upon conversion of warrants to purchase Common Stock issued to Combination in the Private Placement. 1,080,193 shares of Common Stock offered hereby were acquired by EOI Corp., a Pennsylvania corporation ("EOI Corp."), pursuant to a registered offering on a Form S-4 Registration Statement filed with the Securities and Exchange Commission on December 20, 1995 (File No. 33-80037). The remaining 50,000 shares of Common Stock offered hereby are held by, or are issuable upon conversion of certain warrants to purchase Common Stock held by the placement agent of the Series A Preferred Stock ("Trautman Kramer" or "Placement Agent") and two individuals affiliated with the Placement Agent. If all shares of the Series A Preferred Stock had been converted on January 13, 1998, the Company would have been obligated to issue 168,769 shares of Common Stock in respect thereto. The foregoing estimate is for illustrative purposes only. The actual number of shares of Common Stock issued or issuable upon conversion of the Series A Preferred Stock is subject to adjustment and could be materially less or more than such estimated amount, depending upon factors that cannot be predicted by the Company at this time, including, among others, the future market price of the Common Stock. See"Risk Factors--Potential Volatility of Stock Price." The Shares may be offered by the Selling Shareholders from time to time in transactions (which may include block transactions) on the Nasdaq National Market, in negotiated transactions, through a combination of such methods of sale, or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Selling Shareholders may effect such transactions by selling the Shares to or through broker-dealers, who may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchasers of the Shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Company will not receive any of the proceeds from the sale of the Shares by the Selling Shareholders. The Company has agreed to bear all expenses of registration of the Shares, but all selling and other expenses incurred by the Selling Shareholders will be borne by the Selling Shareholders. The Selling Shareholders and any broker-dealers, agents or underwriters that participate with the Selling Shareholders in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and any commissions paid or any discounts or concessions allowed to any such persons, and any profits received on the resale of the Shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Selling Shareholders" and "Plan of Distribution." The Common Stock is traded on the Nasdaq National Market under the symbol "ESMC." On January 16, 1998, the last reported sale price of the Common Stock reported on the Nasdaq National Market was $6 3/8 per share. ----------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4. ----------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. The date of this Prospectus is ________, 1998 3 TABLE OF CONTENTS
Page ---- AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . 3 DOCUMENTS INCORPORATED BY REFERENCE . . . . . . . . . . . . . . . 3 THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 4 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 10 SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . 10 PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . 12 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 12 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements, and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., as well as the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois and 7 World Trade Center, Suite 1300, New York, New York. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements, and other information that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq National Market. Reports, proxy statements and other information concerning the Company may be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission described above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by the Company with the Commission are incorporated by reference herein: (a) Annual Report on Form 10-K, as amended by Form 10-K/A filed on October 27, 1997, for the year ended June 30, 1997, filed by the Company pursuant to Section 13(a) of the Exchange Act. -3- 4 (b) Quarterly Report on Form 10-Q filed by the Company pursuant to Section 13(a) of the Exchange Act for the quarter ended September 30, 1997. (c) Current Reports on Form 8-K filed January 2, 1998 and December 1, 1997, in each case pursuant to Section 13(a) of the Exchange Act. (d) Registration Statement on Form 8-A filed on September 30, 1993 registering the Common Stock under Section 12(g) of the Exchange Act. All documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not, except as so modified or superseded, be deemed to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the foregoing documents incorporated by reference herein, other than exhibits to such documents unless such exhibits are specifically incorporated by reference herein. Such requests should be addressed to: Richard J. DePiano, Chairman, Escalon Medical Corp., 351 East Conestoga Road, Wayne, PA 19087 (telephone: (610) 688-6830). THE COMPANY The Company operates in the health care market specializing in the development, marketing and distribution of ophthalmic medical devices and pharmaceutical products. In addition, it is currently developing its proprietary ophthalmic drug delivery system. 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 the 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 acquisition of EOI, Escalon changed its market focus to its surgical products and pharmaceutical business and is no longer manufacturing laser systems. The Company has licensed its intellectual laser properties to a newly formed company in return for an equity interest in the new company and future royalties on product sales. This new company will have the responsibility of funding and developing the laser technology through to commercialization. The Company is a California corporation formed in December 1987. Its principal executive offices are located at 351 East Conestoga Road, Wayne, PA 19087, and its telephone number is (610) 688-6830. RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the securities offered hereby. An investment in the securities offered hereby is speculative in nature and involves a high degree of risk. No investment in the securities offered hereby should be made by any person who is not in a position to lose the entire amount of such investment. Product Development and Technological Uncertainty The Company will be engaged in fields increasingly characterized by extensive research and development efforts. New developments in drug research as well as new drug delivery systems are expected to continue at a rapid pace. Certain of the Company's surgical products, drug delivery systems and novel pharmaceuticals will each require significant further research, development, testing and, for certain products, regulatory clearances, and are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibility that all of the proposed products will be found to be ineffective, unsafe or otherwise fail to receive necessary regulatory clearances or that all of the completed products will be uneconomical to market. In addition, third parties may (i) hold proprietary rights that preclude the Company from marketing its products or (ii) be able to market products superior or equivalent to the Company's products. Accordingly, there can be no assurance that the Company's research and development activities will result in any commercially viable products. See "No Assurance of Market Acceptance." -4- 5 History of Operating Losses; Accumulated Deficit Prior to the acquisition of EOI, the Company was deemed a development stage company for financial reporting purposes and has experienced significant operating losses since its inception in 1987. As of September 30, 1997, the Company had an accumulated deficit of approximately $39.8 million. With respect to the Company, such losses have resulted principally from costs incurred in connection with research and development and clinical trials. The Company, alone or in collaboration with others, must successfully develop, manufacture and market its products and obtain required regulatory approvals. It may seek acquisition of companies or product lines to generate resources to fund the development of new products. There can be no assurance that the Company will successfully develop, commercialize, manufacture or market additional products or ever achieve or sustain product revenues or profitability. See "Government Regulation; Uncertainty of FDA Approval"; and "Limited Manufacturing Capacity and Marketing Experience." Future Capital Needs and Uncertainty of Additional Funding The development of the Company's products will require substantial funds in order to conduct research and development and preclinical and clinical testing of such products and to manufacture and market the products that are approved for commercial sale. Additionally, the Company will need to support the ongoing costs of the existing shareholder lawsuits, which are more fully described under the heading "Pending Shareholder Litigation." In the longer term, however, the Company anticipates the need to seek additional capital through public or private sales of its securities, including equity securities. Adequate funds, whether through financial markets, collaborative or other arrangements with strategic partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to delay, scale back or eliminate certain or all of its research and development programs or to license third parties to commercialize products or technologies that the Company would otherwise seek to develop itself, which may adversely affect the Company's financial condition and results of operations. Dependence on Principal Products; Distribution and License Rights; Collaborative Relationships The Company derives revenue from products which it (i) owns, manufactures and produces through its manufacturing facility in Wisconsin or (ii) has rights to under distribution and licensing agreements. Each of the Company's distribution and licensing agreements has a limited initial term, and there can be no assurance that any of such agreements would be renewed at the end of the initial term. If one or more of the Company's distribution and license agreements, joint marketing programs or research and development collaborations were to cease to be in effect, the Company could be adversely affected. Further, there can be no assurance that the Company will be successful in expanding its product lines. If the Company is unsuccessful in expanding its product lines, revenues will be highly dependent on sustained market acceptance of existing products. See "No Assurance of Market Acceptance." Dependence on Patents; Uncertain Protection of Important Proprietary Technology The Company's financial and business success depends on, among other things, the Company's ability to (i) obtain patents, (ii) execute confidentiality agreements with its employees and consultants to maintain the proprietary nature of its technology and (iii) operate without infringing on the proprietary rights of third parties. United States patents have been issued to the Company and additional United States patent applications have been filed by the Company, each covering the method, use and major systems components of the Company's laser systems. In addition, foreign patents have been issued, and additional foreign patent applications have been filed. The Company's other key products and technology are covered by thirteen issued United States patents and one pending United States patent. In addition, one issued Taiwan patent covers a key product, and six of the issued United States patents are also the subject of multiple foreign patent applications that have been filed in Europe and Southeast Asia. There can be no assurance, however, that any of the pending applications will be approved, the Company will develop additional patentable proprietary products or any patents presently issued will provide the Company with any significant protection or will not be successfully challenged by third parties. Furthermore, there can also be no assurance that third parties will not design around the patented products owned by the Company. There can also be no assurance that the Company's products will not infringe upon the patents of others. If the Company's products are found to infringe upon the patents of third parties or to otherwise impermissibly utilize the intellectual property of third parties, the development, manufacture and sale of such products could be severely restricted or prohibited. Further, the Company may be required to obtain licenses to utilize patents or proprietary rights of third parties. No assurance can be given that any licenses could be obtained on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, the development, manufacture or sale of products requiring such licenses could be materially adversely affected. In addition, the Company could incur substantial costs in enforcing its patents. Government Regulation; Uncertainty of FDA Approval The Company is subject to substantial regulation by the Food and Drug Administration (the "FDA") and other federal and state regulatory agencies. FDA regulations require that the Company obtain either 510(k) clearances or pre-marketing approvals -5- 6 ("PMAs") and new drug applications ("NDAs") prior to marketing a product in the United States for any application. The Company is also subject to foreign regulation and is dependent on the receipt of various types of approvals from certain foreign government agencies prior to the sale of products in those countries. The clearance and approval processes for both the FDA and foreign regulatory authorities are costly, time consuming and uncertain. In addition, the Company may be required to obtain FDA approval before exporting a device that has not received FDA marketing clearance or approval. Escalon is dependent on its ability to obtain regulatory clearances and there can be no assurance that the Company will receive such clearances in a timely manner, or at all, nor can there be any assurance that the Company will have sufficient resources to complete the regulatory process. See "Future Capital Needs and Uncertainty of Additional Funding." Any delay in obtaining such clearances or any change in existing regulatory requirements could materially adversely affect the financial condition and results of operations of the Company. Certain of the Company's products are, and certain of the Company's anticipated new products will be, regulated by the FDA as pharmaceutical products. The steps required by the FDA before new pharmaceutical products may be marketed in the United States include preclinical studies, human clinical trials to establish the safety and efficacy of the pharmaceutical product for its intended uses, submission to the FDA of an NDA with respect to the product and review, and approval of the NDA by the FDA before the product may be shipped or sold commercially. The process of completing clinical testing and obtaining FDA approval for a new pharmaceutical product is likely to take a number of years and require the expenditure of substantial resources. If an NDA is submitted, there can be no assurance that the FDA will review and approve the NDA in a timely manner. Even after initial FDA approval has been obtained, further studies, including post-market studies, may be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA will require post-market reporting and may require surveillance programs to monitor the side effects of the product. Results of post-marketing programs may limit or expand the further marketing of such products. Further, if there are any modifications to a product, including changes in indication, manufacturing process, labeling, or a change in manufacturing facility, an NDA supplement may be required to be submitted to the FDA. The Company has received the necessary FDA approvals for all of its products currently being marketed. Subsequent to FDA approval however, if discovery of previously unknown problems arise with a product, the FDA may impose restrictions on the product, including withdrawal of the product from the market. Further, FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical and medical device equipment and related disposables, including the obligation to adhere to the FDA's Good Manufacturing Practice ("GMP") regulations. Detailed validation of manufacturing and quality control processes and other time-consuming procedures are required. Periodic inspections by the FDA and other comparable agencies are also made. If deficiencies in the validation processes are found, restrictions on marketing the affected products may be imposed until such deficiencies are corrected. No assurance can be given that the FDA will not uncover deficiencies under the GMP. The failure to comply with applicable regulations could result in fines, delays or suspensions of clearances, seizures or recalls of products, operating restrictions, injunctions or civil or criminal penalties. The imposition of any such penalty, if substantial, would have a material adverse effect on the financial condition and results of operations of the Company. No Assurance of Market Acceptance The Company's future business and financial success will depend upon the market acceptance of its products. There can be no assurance that Escalon's products will achieve market acceptance. Such acceptance will depend upon a number of factors, including the receipt of regulatory approvals for multiple indications and the establishment and demonstration in the ophthalmic community of the clinical safety and efficacy of the Company's products and their advantages over the products developed or marketed by the Company's competitors. Accordingly, there can be no assurance that the Company will be able to successfully manufacture and market its products even if they perform successfully in clinical applications. Pending Shareholder Litigation 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 which the Company is no longer a party to and which was reported in the Company's Form 10-Q for the quarter ended September 30, 1996). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., was 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 the Company 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 -6- 7 asserting various affirmative defenses. On August 15, 1996, the Company, together with three other companies against whom similar claims have been asserted in separate actions filed as "related" to In Re Blech Securities Litigation, filed a motion for permission to take an immediate appeal. On January 16, 1997, the motion was denied. On March 31, 1997, the Court issued a Pretrial Order No. 2, which sets January 31, 1998 as the cutoff date for discovery and directs that the case be ready for trial by March 31, 1998. The Pretrial Order No. 2 also provides for certain coordination of discovery in the Kozloski case, related cases making similar allegations arising from other issuers' offerings and In Re Blech Securities Litigation. Discovery has commenced in all related actions but is in its preliminary stages. While continuing to deny any wrongdoing and in an effort to curtail its legal expenses related to this litigation, the Company has reached an agreement in principle to settle this action for $500,000 on its behalf and on behalf of its former and present officers and directors. This settlement is subject to agreement upon final documentation and court approval. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. In the event that settlement discussions are not successful, the Company could be required to incur substantial expense in defending this lawsuit. Moreover, an adverse outcome of this matter could have a material adverse effect upon the financial condition and results of operations of the Company. Dependence on Key Personnel The Company is dependent upon its technical personnel and its ability to attract and retain qualified scientific, management, manufacturing and marketing personnel. The Company has entered into non-competition agreements only with its executive officers and therefore could suffer a material adverse effect if key employees without non-competition agreements were to become employed by competitors. The Company must compete with other companies, universities, research entities and other organizations to attract and retain qualified personnel, and competition for such personnel is intense. There can be no assurance that Escalon will be able to attract and retain the personnel necessary for the development and success of its business. Because much of the know-how and many of the processes developed by the Company reside in its key technical and other personnel, the loss of the services of such personnel could have a material adverse effect on the financial condition and results of operations of the Company. Limitations on Third-Party Reimbursement The Company's products are purchased generally by ophthalmologists and hospitals that bill various third-party payors, such as government programs and private insurance plans, for the health care services provided to their patients. Third-party payors generally reimburse at a fixed rate based on the procedure performed. In addition, third-party payors may deny reimbursement if they determine that the use of the Company's products was elective, unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. Even if the Company receives FDA clearances or PMA's for its products, third-party payors may nevertheless deny reimbursement. Furthermore, third-party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that reimbursement from third-party payors will be available or, if available, that reimbursement will not be limited when compared with reimbursement available in connection with competitive procedures, thereby materially adversely affecting Escalon's ability to sell its products on a profitable basis. The market for the Company's products could also be adversely affected by any new federal legislation that further reduces reimbursements under the capital cost pass-through system utilized in connection with the Medicare program. Failure by hospitals and other users of Escalon's products to obtain reimbursement from third-party payors or changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products could have a material adverse effect on the Company's financial condition and results of operations. See "Possible Adverse Impact of Health Care Reform on Delivery Payment of Health Care Services." Possible Adverse Impact of Health Care Reform on Delivery Payment of Health Care Services The federal government and Congress have previously made proposals to change aspects of the delivery and financing of health care services. The Company cannot predict what form future legislation, if any, may take or the effect of any such legislation on its business. Such legislation may contain provisions resulting in price limits and utilization controls that may reduce the rate of increase in the growth of ophthalmic product markets or otherwise adversely affect the Company's business. It is also possible that future legislation could result in modifications to the nation's public and private health care insurance systems that will affect reimbursement policies in a manner adverse to the Company. The Company cannot predict the effect that any future legislation, including legislation relating to the health care industry, could have on the Company's financial condition or results of operations. -7- 8 Reliance on Current Suppliers Pursuant to various distribution and license agreements, the Company currently markets three key products, Adatosil(R) 5000 Silicone Oil, Betadine(R) 5% Sterile Ophthalmic Prep Solution ("Betadine 5%") and ISPAN(TM) intraocular gases, all of which are manufactured for the Company by a licensor or by contract manufacturers for the licensor under separate contract. Such licensors and contract manufacturers must adhere to the GMP regulations prescribed and enforced by the FDA. Should any of the licensors or contract manufacturers not meet the GMP requirements, supply of related products could be severely delayed or limited, which would adversely affect the Company's financial condition or results of operations. See "Government Regulation; Uncertainty of FDA Approval." Limited Manufacturing Capacity and Marketing Experience The Company currently assembles and manufactures most of its surgical equipment and instruments at its Wisconsin facility. The Company will seek to expand its product lines, but no assurance can be given that the required manufacturing expertise or the physical capacity will be available at its current location to produce new product lines. As such, the Company may have to rely on contract manufacturers to meet production needs. Contract manufacturers must adhere to GMP regulations enforced by the FDA. There is no assurance that the FDA will approve any of the contract manufacturing facilities in which any of the Company's products may be produced. The Company's dependence on third parties to manufacture products may adversely affect its ability to develop and deliver products on a timely and competitive basis. The Company currently markets its products directly with a sales force made up of independent representatives located throughout the United States. In addition, the Company has entered into co-marketing and co-promotional arrangements with third parties in marketing and selling most of its current products. For Betadine 5%, the Company sells both direct and through drug wholesale distribution channels. The Company's revenues are therefore dependent on third parties who are marketing and selling its products. No assurance can be given that these third party arrangements will continue, or, if they continue, that they will provide successful distribution channels for the Company's products. If they do not continue, the Company may need to hire its own sales force to market and sell its products, which would increase the Company's costs and could adversely affect the Company's financial condition or results of operations. Product Liability and Possible Insufficiency of Insurance The nature of the Company's business exposes it to product liability claims, and there can be no assurance that the Company can avoid significant product liability exposure. The Company maintains product liability insurance in the amount of $1,000,000 per claim with an annual aggregate limit of $2,000,000 plus general umbrella coverage of $5,000,000. However, product liability insurance is becoming increasingly expensive, and there can be no assurance that the Company's insurance will be adequate to cover future product liability claims, or that the Company will be successful in maintaining adequate product liability insurance at acceptable rates, or at all. Should the Company be unable to maintain adequate product liability insurance, the Company's ability to market its products may be significantly impaired. Any losses that the Company may suffer from future liability claims, a voluntary or involuntary recall of Escalon's products, and the damage that any product liability litigation or voluntary or involuntary recall may do to the reputation and marketability of the Company's products may have a material adverse effect on the Company's financial condition or results of operations. Market Volatility; Absence of Dividends The market prices for securities of emerging growth companies have historically been highly volatile. Future announcements concerning Escalon or its competitors, including quarterly results, the results of product testing and clinical trials, technological innovations, the introduction of competitive products, regulatory matters, developments concerning proprietary rights, litigation or public concern as to the safety of the Company's products may have a material impact on the market price for the Common Stock. Sales of a substantial number of shares of Common Stock by existing shareholders or the exercise of outstanding warrants or options to purchase Common Stock may also have a material adverse effect on the market price for the Common Stock. See "Series A Preferred Stock, Warrants and Options; Potential Dilution and Adverse Impact on Additional Financing." The Company has not paid any cash dividends on the Common Stock and does not anticipate paying any such dividends in the foreseeable future. Series A Preferred Stock, Warrants and Options; Potential Dilution and Adverse Impact on Additional Financing As of January 13, 1998, the Company had outstanding options and warrants to purchase an aggregate of 2,286,875 shares of Common Stock. The Company is also obligated to issue a currently indeterminate number of shares of Common Stock upon conversion of the Series A Preferred Stock. The exact number of shares of Common Stock issuable pursuant to such conversion cannot be estimated with certainty because, generally, such issuances of Common Stock will vary inversely with the market price of the Common Stock at the time of such conversion. The Series A Preferred Stock is also subject to various adjustments to prevent dilution resulting from stock splits, stock dividends or similar transactions. Further, the Company may, at its election, choose to -8- 9 issue additional shares of Common Stock in lieu of cash dividends due to the holder of the Series A Preferred Stock. If all of the shares of the Series A Preferred Stock had been converted on January 13, 1998, the Company would have been obligated to issue 168,769 shares of Common Stock in respect thereto. If at any time the aggregate number of shares of Common Stock then issued upon the conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon exercise of the warrants issued in connection with the Private Placement equals 19.9% of the (x) number of shares of the Common Stock outstanding on the date of issuance of the Series A Preferred Stock pursuant to the Securities Purchase Agreement plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event, then the Series A Preferred Stock will, from that time forward, cease to be convertible into Common Stock, unless the Company (i) has obtained approval of the issuance of the underlying Common Stock by the affirmative vote of a majority of the total votes cast on the proposal, in person or by proxy, under Nasdaq Rule 4460(i)(6) or any successor rule, by the holders of the then-outstanding Common Stock, or (ii) will have otherwise obtained permission to allow such issuances from The Nasdaq Stock Market in accordance with Nasdaq Rule 4460(i). To the extent that such options and warrants are exercised, shares of Common Stock are issued in lieu of cash dividends or the Series A Preferred Stock is converted (and the warrants issuable upon such conversion are exercised), substantial dilution of the interests of the Company's shareholders is likely to result and the market price of the Common Stock may be materially adversely affected. Such dilution will be greater if the future market price of the Common Stock decreases. For the life of the warrants, options and Series A Preferred Stock the holders will have the opportunity to profit from a rise in the price of the Common Stock. The existence of the warrants, options and Series A Preferred Stock is likely to affect materially and adversely the terms on which the Company can obtain additional financing and the holders of the warrants, options and Series A Preferred Stock can be expected to exercise them at a time when the Company would otherwise, in all likelihood, be able to obtain additional capital by an offering of its unissued capital stock on terms more favorable to the Company than those provided by the warrants, options and Series A Preferred Stock. Market Implication of Sales/Distributions by EOI Corp. EOI Corp. has informed the Company that it intends, in the near future, to sell shares of the Common Stock to its creditors and/or in market transactions to satisfy outstanding liabilities in accordance with its plan of liquidation. To the extent there are shares remaining after EOI Corp. sells shares to extinguish its debts, EOI Corp. has informed the Company that EOI Corp. intends to distribute such excess shares to its shareholders in final liquidation of the assets of EOI Corp. There can be no assurance that the recipients of the shares will hold the Common Stock for any period of time and it is possible that such holders will immediately resell such shares into the market. Given the significant number of shares offered hereunder by EOI Corp., the sale into the market of some or all of such shares by EOI Corp., the debtholders or shareholders of EOI Corp. is likely to have a material adverse effect on the market price of the Common Stock. Fluctuations in Quarterly Results The Company has experienced significant quarterly fluctuations in operating results and anticipates that these fluctuations will continue. These fluctuations have been caused by a number of factors, including changes in the mix of products sold, the timing of new product introductions by the Company or its competitors, cancellation or delays of purchases of the Company's products, the gain or loss of significant customers, fluctuations in customer demand for the Company's products and competitive pressures on prices. A decline in demand in the markets served by the Company, lack of success in developing new markets or new products, or increased research and development expenses relating to new product introductions could have a material adverse effect on the Company. Moreover, because the Company sets spending levels in advance of each quarter based, in part, on expectations of product orders and shipments during that quarter, a shortfall in revenue in any particular quarter as compared to the Company's plan could have a material adverse effect on the Company. Risks Relating to Failure to Meet Nasdaq Listing Requirements The Common Stock is currently listed on the Nasdaq National Market. In order to continue to be listed on the Nasdaq National Market, however, the Company must maintain $4,000,000 in net tangible assets, a $5,000,000 market value of the public float, two market-makers and a minimum bid price of $1.00 per share. In the future, if the Company fails to meet these maintenance criteria, it may result in the delisting of the Company's securities from the Nasdaq National Market, and trading, if any, in the Company's securities would thereafter be conducted in the Small Cap Market or in the non-Nasdaq over-the-counter market. If the Company's securities are delisted, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the Company's securities. In addition, if the Common Stock were to fall below $5.00 per share, trading in the Common Stock could become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with the trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who -9- 10 sell penny stock to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to the sale. If the Common Stock were to become subject to the rules on penny stocks, the market liquidity for the Common Stock could be materially adversely affected. Competition The medical device and pharmaceutical market is intensely competitive and is characterized by rapidly changing technology, short-product life cycles, cyclical oversupply and rapid price erosion. The Company competes with large domestic and international companies, most of which have substantially greater financial, technical, marketing, distribution, and other resources than the Company. In addition, other manufacturers can be expected to enter the Company's markets. The ability of the Company to compete successfully depends, to a certain extent, on elements outside its control, including the rate at which customers utilize the Company's products, the receipt and maintenance of necessary regulatory approvals from the FDA, the Company's protection of its intellectual property, the number, nature, and success of its competitors and their product introductions, and general market and economic conditions. In addition, the Company's success will depend in large part on its ability to develop, introduce, and manufacture in a timely manner products that compete effectively on the basis of efficiency, availability, quality, reliability, and price, together with other factors including the availability of sufficient capacity. There is no assurance that the Company will be able to compete successfully in this competitive environment. Potential Volatility of Stock Price The trading price of the Common Stock is subject to wide fluctuations in response to variations in operating results of the Company and other companies that operate in Escalon's markets, actual or anticipated announcements of medical/pharmaceutical innovations or new products by the Company or its competitors, actual or anticipated announcements of FDA approval of the Company's products (or those of its competitors), general economic conditions in the industries in which the Company competes and the strength of the domestic and international economy, to name a few. The Company's stock traded from a high of $17.50 in the first quarter of 1996 to a low of $1.00 in the third quarter of 1997. Some fluctuations, particularly those affecting the market prices for many small companies, have often been unrelated to the operating performance of the specific companies. USE OF PROCEEDS The Company will not receive any of the proceeds from the sale of the Shares offered hereunder by the Selling Shareholders. The offering is made to fulfill the Company's contractual obligations to the Selling Shareholders to register certain shares held by the Selling Shareholders. However, certain of the shares of Common Stock offered hereby are issuable in the future upon the exercise of outstanding or issuable warrants, and the Company will receive the exercise prices payable upon any exercise of the warrants. There can be no assurance that all or any part of the warrants will be exercised. SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of January 13, 1998 by each of the Selling Shareholders. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to the shares of Common Stock, except to the extent authority is shared by spouses under applicable law. Except for EOI Corp., as disclosed below in footnote 3, none of the Selling Shareholders has had a material relationship with the Company during the last three years, other than as a result of the ownership of the Common Stock or other securities of the Company. The information included below is based upon information provided by the Selling Shareholders. Because the Selling Shareholders may offer all, some or none of their Common Stock, no definitive estimate as to the number of shares thereof that will be held by the Selling Shareholders after such offering can be provided and the following table has been prepared on the assumption that all shares of Common Stock offered under this Prospectus will be sold. -10- 11
Common Stock Common Stock To Be Beneficially Beneficially Owned Owned If All Shares Offered On January 13, 1998(1) Hereunder Are Sold(1) -------------------------------- ----------------------------------- Shares That May be Name Shares Percent Offered Hereunder Shares Percent ---- ------ ------- ----------------- ------ ------- Combination, Inc.(2) 208,769 7.4 380,000 0 0 EOI Corp.(3) 1,109,406 42.2 1,080,193 29,213 * Richard Rosenblum(4) 12,500 * 12,500 0 0 David Stefansky(4) 12,500 * 12,500 0 0 Trautman Kramer & Company, Incorporated(4) 25,000 * 25,000 0 0
------------ *Less than 1%. (1) As required by regulations of the Securities and Exchange Commission, the number of shares shown as beneficially owned includes shares which can be purchased within 60 days after January 13, 1998. The actual number of shares of Common Stock beneficially owned is subject to adjustment and could be materially less than the estimated amount indicated depending upon factors which cannot be predicted by the Company at this time, including, among others, the market price of the Common Stock prevailing at the actual date of conversion of Series A Preferred Stock, and whether or to what extent dividends to the holders of the Series A Preferred Stock are paid in Common Stock. (2) Beneficial ownership is based upon the conversion of all of the Series A Preferred Stock at $7.999125 per share of Common Stock (which price is 83% of the average of the closing bid prices of the Common Stock for each of the five trading days immediately preceding January 13, 1998). If all shares of the Series A Preferred Stock held by such Selling Shareholder had been converted on January 13, 1998 (assuming conversion of all of the Series A Preferred Stock at $7.999125 per share of Common Stock) the Company would have been obligated to issue 168,769 shares of Common Stock in respect thereto. The actual number of shares of Common Stock issued or issuable upon the conversion of the Series A Preferred Stock is subject to adjustment and could be materially less or more than such estimated amount depending on factors that cannot be predicted by the Company at this time, including, among others, the future market price of the Common Stock. Pursuant to the terms of the Series A Preferred Stock, the Series A Preferred Stock is convertible by the holders thereof only to the extent that the number of shares of Common Stock thereby issuable, together with the number of shares of Common Stock then issued upon exercise of the warrants issued in connection with the Private Placement would not exceed 19.9% of the then outstanding Common Stock as determined in accordance with Section 13(d) of the Exchange Act. In addition, the holder of the Series A Preferred Stock has agreed contractually not to convert the Series A Preferred Stock to the extent that such a conversion would result in such holder owning more than 4.99% of the then outstanding Common Stock unless at such time the Company shall be in default under any provision of the Certificate of Designation of Series A Preferred Stock or under the Securities Purchase Agreement, dated December 31, 1997, between the Company and Combination, or any of the agreements contemplated therein. The amount shown includes 40,000 shares of Common Stock, issuable upon the conversion of warrants issued to Combination in connection with the Private Placement, at various initial exercise prices ranging from $8.6125 to $11.626875 per share, subject to further adjustments as detailed in the warrant attached to the Registration Statement of which this Prospectus is a part. The warrants may be exercised at any time through December 31, 2002. The address of this Selling Shareholder is: c/o ISRC, 310 Madison Avenue, Suite 503, New York, NY 10017. (3) The Company and EOI Corp. entered into an Assets Sale and Purchase Agreement dated as of October 9, 1995 and amended on December 19, 1995, pursuant to which EOI Corp. agreed to sell substantially all of its assets subject to certain of its liabilities to the Company in exchange for shares of the Common Stock representing 45% of the then issued and outstanding shares of Common Stock. Richard J. DePiano, the Chairman and Chief Executive Officer of the Company is a director of EOI Corp. and two other directors of the Company are also directors of EOI Corp. EOI Corp. has contractual rights, pursuant to a registration rights agreement entered into between the Company and EOI Corp. as of February 12, 1996, entitling it to register the shares set forth above next to its name. The address of this Selling Shareholder is: 351 East Conestoga Road, Wayne, PA 19087. (4) Includes 25,000 shares of Common Stock issuable to Trautman Kramer upon the exercise of immediately exercisable warrants granted to Trautman Kramer for serving as the Placement Agent in connection with the Private Placement. Also includes 25,000 shares of Common Stock issuable, in equal amounts, to Richard Rosenblum and David Stefansky upon the exercise of immediately exercisable warrants. Messrs. Rosenblum and Stefansky are designees of Trautman Kramer. The initial exercise price for the warrants is $10.335 per share of Common Stock, subject to further adjustments as detailed in the warrants attached to the Registration Statement of which this Prospectus is a part. The warrants may be exercised at any time through December 31, 2002. A copy of each warrant is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The address for each of these Selling Shareholder is as follows: 500 Fifth Avenue, 14th Floor, New York, NY 10110. -11- 12 PLAN OF DISTRIBUTION Sales of the Shares may be effected by or for the account of the Selling Shareholders from time to time in transactions (which may include block transactions) on the Nasdaq National Market, in negotiated transactions, through a combination of such methods of sale, or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale or at negotiated prices. The Selling Shareholders may effect such transactions by selling the Shares directly to purchasers, through broker-dealers acting as agents for the Selling Shareholders, or to broker-dealers acting as agents for the Selling Shareholders, or to broker-dealers who may purchase Shares as principals and thereafter sell the Shares from time to time in transactions (which may include block transactions) on the Nasdaq National Market, in negotiated transactions, through a combination of such methods of sale, or otherwise. In effecting sales, broker-dealers engaged by a Selling Shareholders may arrange for other broker-dealers to participate. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchasers of the Shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Shareholders and any broker-dealers, agents or underwriters that participate with the Selling Shareholders in the distribution of the Shares may be deemed to be "underwriters" within the meaning of the Securities Act. Any commissions paid or any discounts or concessions allowed to any such persons, and any profits received on the resale of the Shares purchased by them may be deemed to be underwriting commission or discounts under the Securities Act. The Company has agreed to bear all expenses of registration of the Shares other than legal fees and expenses (except for the payment of up to $3,500 in legal fees incurred by counsel to Combination), if any, of counsel or other advisors to the Selling Shareholders. Any commissions, discounts, concessions or other fees, if any, payable to broker-dealers in connection with any sale of the Shares will be borne by the Selling Shareholders selling such Shares. EOI Corp. has informed the Company that pursuant to a plan of liquidation, EOI Corp. intends to (i) sell a portion of its ownership of the Common Stock to existing creditors and/or in market transactions in order to satisfy its remaining liabilities and (ii) distribute any remaining shares representing its ownership of the Common Stock to its shareholders in a final liquidation. The Company has agreed to indemnify the Selling Shareholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Selling Shareholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect thereof. LEGAL MATTERS The valid issuance of the shares of Common Stock offered hereby has been passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. EXPERTS The financial statements of Escalon Medical Corp. appearing in Escalon Medical Corp.'s Annual Report (Form 10-K), as amended, for the year ended June 30, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. -12- 13 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table shows the estimated expenses of the issuance and distribution of the securities offered hereby (all such expenses will be borne by the Company): Registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,022 Printing and engraving expenses . . . . . . . . . . . . . . . . . . . 1,500 Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 5,000 Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . 5,000 Miscellaneous, including Nasdaq listing fees . . . . . . . . . . . . . 10,000 ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,522 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Sections 204 and 317 of the California General Corporation Law provide the Company the power to indemnify any officer or director acting in that persons capacity as a representative of the Company who was, is, or is threatened to be made a party to any proceeding (other than an action by or in the right of the Corporation to procure a judgment in its favor) against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interest of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. Generally, the limitations on the ability of the Company to indemnify its officers and directors are if the act is a knowing and culpable violation of law, if the act or failure to act is finally determined by a court to have constituted willful misconduct or recklessness or if the act involved an absence of good faith. The Company's Bylaws provide a right to indemnification to the full extent permitted by law, for expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by any director or officer whether or not the indemnified liability arises or arose from any threatened, pending or completed proceeding by or in the right of the Company (a derivative action) by reason of the fact that such director or officer is or was serving as a director, officer, employee or agent of the Company or, at the request of the Company, as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation unless the act or failure to act giving rise to the claim for indemnification is financially determined by a court to have constituted willful misconduct or recklessness. The indemnification provisions in the Company's Bylaws do not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan. The Bylaws provide for the advancement of expenses to an indemnified party upon receipt of an undertaking by the party to repay those amounts if it is finally determined that the indemnified party is not entitled to indemnification. The Company's Bylaws authorize the Company to take steps to ensure that all persons entitled to the indemnification are properly indemnified, including, if the Board of Directors so determines, purchasing and maintaining insurance. II-1 14 ITEM 16. EXHIBITS The exhibits filed as part of this Registration Statement are as follows:
Exhibit Number Description ------ ----------- 4.1 Certificate of Determination of Series A 6% Convertible Preferred Stock. 4.2 Securities Purchase Agreement, dated as of December 31, 1997, by and among the Company and Combination. 4.3 Registration Rights Agreement, dated as of December 31, 1997, by and among the Company and Combination. 4.4 Warrant to Purchase Common Stock issued December 31, 1997, to David Stefansky. 4.5 Warrant to Purchase Common Stock issued December 31, 1997, to Combination. 4.6 Warrant to Purchase Common Stock issued December 31, 1997, to Richard Rosenblum. 4.7 Warrant to Purchase Common Stock issued December 31, 1997, to Trautman Kramer & Company, Incorporated. 5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered. 10.34 Registration Rights Agreement between the Company and EOI Corp. dated as of February 12, 1996.* 23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP.
- -------------------- *Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1996. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act, of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to its Certificate of Incorporation, its Bylaws, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against a public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) II-2 15 if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraph (1)(i) and (1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is incorporated by reference from periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 16 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wayne, Commonwealth of Pennsylvania on the 20th day of January, 1998. ESCALON MEDICAL CORP. By: /s/Richard J. DePiano ----------------------------- Richard J. DePiano Chairman, Director and Chief Executive Officer Each person whose signature appears below constitutes and appoints John T. Rich and Richard J. DePiano and each of them, with full power of substitution and resubstitution and each with full power to act without the other, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) and all other documents in connection therewith, with the Securities and Exchange Commission or any state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ------------ ------------- ------------ /s Richard J. DePiano Chairman, Director and Chief January 20, 1998 ------------------------------ Executive Officer Richard J. DePiano /s/Jack M. Dodick, M.D. Director January 20, 1998 ------------------------------ Jack M. Dodick, M.D. /s/Jay L. Federman, M.D. Director January 20, 1998 ------------------------------ Jay L. Federman, M.D. /s/Robert J. Kunze Director January 20, 1998 ------------------------------ Robert J. Kunze /s/John T. Rich Vice President, Finance and January 20, 1998 ------------------------------ Administration and Secretary John T. Rich
17 EXHIBIT INDEX
Exhibit Number Description ------ ----------- 4.1 Certificate of Determination of Series A 6% Convertible Preferred Stock. 4.2 Securities Purchase Agreement, dated as of December 31, 1997, by and among the Company and Combination. 4.3 Registration Rights Agreement, dated as of December 31, 1997, by and among the Company and Combination. 4.4 Warrant to Purchase Common Stock issued December 31, 1997, to David Stefansky. 4.5 Warrant to Purchase Common Stock issued December 31, 1997, to Combination. 4.6 Warrant to Purchase Common Stock issued December 31, 1997, to Richard Rosenblum. 4.7 Warrant to Purchase Common Stock issued December 31, 1997, to Trautman Kramer & Company, Incorporated. 5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered. 10.34 Registration Rights Agreement between the Company and EOI Corp. dated as of February 12, 1996.* 23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP.
- ------------------------- *Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1996. EX-4.1 2 CERTIFICATE OF DETERMINATION 1 EXHIBIT 4.1 CERTIFICATE OF DETERMINATION OF SERIES A 6% CONVERTIBLE PREFERRED STOCK OF ESCALON MEDICAL CORP. This Certificate of Determination is being filed by Escalon Medical Corp., a California corporation (the "Corporation"), in the office of the Secretary of State of the State of California pursuant to Section 401(a) of the California Corporations Code. The undersigned, Richard J. DePiano and John T. Rich, certify as follows: FIRST: They are the Chairman and the Secretary, respectively, of the Corporation. SECOND: The authorized number of shares of Preferred Stock of the Corporation is 2,000,000; the number of shares constituting designation of this Series A 6% Convertible Preferred Stock is 1,350, none of which has been issued. THIRD: The Board of Directors of the Corporation duly adopted the following resolution: WHEREAS, the Articles of Incorporation authorize the Preferred Stock of the corporation to be issued in series and authorize the Board of Directors to determine the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares and designation of any such series; NOW, THEREFORE, IT IS RESOLVED, that the Board of Directors hereby provides for the issue of an initial series of Preferred Stock of the Corporation and hereby fixes and determines the rights, preferences, restrictions, and other matters relating to said series as follows: Section 1. Designation. A series of the Preferred Stock of the Corporation is hereby designated as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock"), without par value, and the number of shares of such series is 1,350. Section 2. Dividends. (a) General Obligation. When and as declared by the Corporation's Board of Directors and to the extent legally permitted under the General Corporation Law of the State of California, the Corporation shall pay preferential dividends to the holders of the Series A Preferred Stock as provided in this Section 2. Dividend payments shall be made quarterly in - 1 - 2 arrears and shall be made, at the sole discretion of the Corporation, either (i) in cash or (ii) by issuing additional fully paid and nonassessable shares of Common Stock at the then applicable Conversion Price. Except as otherwise provided herein, dividends on each share of the Series A Preferred Stock (a "Share") shall accrue at the rate of 6% per annum of the sum of the Liquidation Value thereof plus all accumulated and unpaid dividends thereon, from and including the Date of Issuance to and including the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid or the date on which such Share is converted into shares of Underlying Common Stock hereunder. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. The date on which the Corporation initially issues any Share shall be deemed to be its "Date of Issuance" regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share. (b) Dividend Periods. Quarterly dividend periods (each a "Quarterly Dividend Period") shall commence on January 1, April 1, July 1 and October 1 in each year, except that the first Quarterly Dividend Period shall commence on the Date of Issuance and shall end on and include the day immediately preceding the first day of the next Quarterly Dividend Period. Dividends on the shares of Series A Preferred Stock shall be payable on March 31, June 30, September 30 and December 31 of each year (each a "Dividend Payment Date"). Each such dividend shall be paid to the holders of record of the Series A Preferred Stock as they shall appear on the Stock register of the Corporation on such record date. To the extent not paid on each Dividend Payment Date, all dividends which have accrued on each Share outstanding during the three-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date shall be accumulated and shall remain accumulated dividends with respect to such Share until paid. (c) Distribution of Partial Dividend Payments. Except as otherwise provided herein, if at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Series A Preferred Stock, such payment shall be distributed ratably among the holders thereof based upon the aggregate accrued but unpaid dividends on the Shares held by each such holder. Section 3. Liquidation. (a) Payment Upon Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of Series A Preferred Stock shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value (plus all accrued and unpaid dividends) of all Shares held by such holder, and the holders of Series A Preferred shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Corporation, the Corporation's assets to be distributed among the holders of the Series A - 2 - 3 Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Series A Preferred Stock held by each such holder. Prior to the liquidation, dissolution or winding up of the Corporation, the Corporation shall declare for payment all accrued and unpaid dividends with respect to the Series A Preferred Stock. (b) Consolidation or Merger. A consolidation or merger of the Corporation into any other entity or entities, or a sale or transfer by the Corporation of all or substantially all of its assets, or the effectuation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 3 if the holders of at least 70% of the outstanding Series A Preferred Stock elect to have such transaction treated as a liquidation with respect to such series. (c) Notice of Liquidation. The Corporation shall mail written notice of such liquidation, dissolution or winding up, not less than 30 days prior to the payment date stated therein, to each record holder of Series A Preferred Stock. Section 4. Priority. (a) Priority as to Dividends. Holders of shares of Series A Preferred Stock shall be entitled to receive the dividends provided for in Section 2 hereof in preference to and in priority over any dividends upon any Junior Stock. No dividends shall be declared or paid or set apart for payment on any Junior Stock, for any period unless at the time of such declaration or payment or setting apart for payment (A) full cumulative dividends have been or contemporaneously are declared and paid in accordance with Section 2 hereof (or declared and a sum sufficient for the payment thereof set apart for such payment) on the Series A Preferred Stock for all Quarterly Dividend Periods terminating on or prior to the date of payment of such dividends on Junior Stock, (B) the Corporation shall not be in default with respect to any obligation to redeem or retire shares of Series A Preferred Stock, and (C) an amount equal to the dividends accrued on the Series A Preferred Stock from the last Dividend Payment Date to the date of payment of such dividends on Junior Stock has been declared and set apart in cash for payment on the Series A Preferred Stock. (b) Priority on Redemption. The Corporation shall not, directly or indirectly, redeem or purchase or otherwise acquire for value any Junior Stock unless, at the time of making such redemption, purchase or other acquisition, the Corporation shall have redeemed, or shall contemporaneously redeem, all of the then outstanding shares of Series A Preferred Stock in accordance with Section 5 hereof. - 3 - 4 Section 5. Redemption. (a) Redemption at Option of Corporation. On or after 60 days following the Date of Issuance, so long as any Series A Preferred Stock is outstanding and at any time that the Corporation has sufficient funds legally available, the Series A Preferred Stock may be redeemed, in whole or in part, at the election of the Corporation by resolution of its Board of Directors by giving not less than 10 trading days prior written notice of such election to each holder of record of the Series A Preferred Stock to be redeemed (the "Redemption Notice") as specifically provided in Section 5(c) hereof. Upon mailing or otherwise sending the Corporation Redemption Notice, the Corporation shall become obligated to redeem all outstanding Shares of Series A Preferred Stock identified in such notice on the date specified therein (the "Redemption Date"). In the event that at any time less than all of the Series A Preferred Stock outstanding is to be redeemed, the shares to be redeemed will be selected pro rata. (b) Redemption Procedure. The holders of all shares of Series A Preferred Stock being redeemed shall tender the certificates representing such shares to the Corporation at its principal office, or, if the Corporation shall have appointed a transfer agent for the Series A Preferred Stock (the "Transfer Agent"), at the office of such Transfer Agent, on or after the Redemption Date. Notwithstanding that a certificate representing an outstanding share of Series A Preferred Stock to be redeemed shall not have been tendered on the Redemption Date, the certificate shall no longer be deemed outstanding and the accrual of dividends and all other rights with respect to such share shall terminate, except only the right of the holder to receive the Redemption Price, without interest, upon tendering of the certificate. (c) Redemption Payment. For each Share which is to be redeemed on any date, the Corporation shall be obligated on such Redemption Date to pay to the holder thereof (upon surrender by such holder of the certificate representing such Share) an amount in immediately available funds equal to the Redemption Price. For purposes of this paragraph, "Redemption Price" shall be equal to (x) the number of Underlying Common Shares equal to the fraction, of which (i) the numerator is the Liquidation Value of each Share plus any accrued but unpaid interest or dividends thereon and (ii) the denominator is the Conversion Price in effect, multiplied by (y) the Market Price for the Common Stock. If the funds of the Corporation legally available for redemption of Shares on any Redemption Date are insufficient to redeem the total number of Shares to be redeemed on such date, then those funds which are legally available shall be used to redeem the maximum possible number of Shares ratably among the holders of the Shares to be redeemed based upon the aggregate Liquidation Value of such Shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds shall immediately be used to redeem the balance of the Shares which the Corporation has become obligated to redeem on the Redemption Date but which it has not redeemed. Prior to any redemption of Series A Preferred Stock, the Corporation shall declare for payment all accrued and unpaid dividends with respect to the Shares which are to be redeemed. - 4 - 5 (d) Anything in the preceding provisions of this Section 5 to the contrary notwithstanding, the Redemption Price shall, unless otherwise agreed to in writing by the holder after receiving the Notice of Redemption, be paid to the holder at least five (5) but not more than ten (10) business days from the date of the Redemption Notice, except that, with respect to any Shares for which a Notice of Conversion (as defined below) is submitted to the Corporation within five (5) business days of the holder's receipt of the Corporation's Redemption Notice, the Notice of Conversion shall take precedence and such Shares shall be converted in accordance with the terms hereof. Furthermore, in the event such Redemption Price is not timely made, any rights of the Corporation to redeem outstanding Shares shall terminate, and the Redemption Notice shall, at the option of the holder, be null and void. (e) Other Redemptions or Acquisitions. Neither the Corporation nor any Subsidiary shall redeem or otherwise acquire any Series A Preferred Stock, except as expressly authorized herein. Section 6. Voting Rights. Except as required by law, the holders of the Series A Preferred Stock shall have no special voting rights and their consent shall not be required for the taking of any corporate action. Section 7. Conversion Rights. (a) Conversion. (i) General Obligation. At any time during the period commencing upon that day which is 60 days following the Date of Issuance and concluding at 5:00 p.m. New York, New York time on the second anniversary of the Date of Issuance, any holder of Series A Preferred Stock may convert all or any portion of the Series A Preferred Stock (including any fraction of a Share) held by such holder into a number of shares of Underlying Common Stock computed by multiplying the number of Shares to be converted by the Liquidation Value and dividing the result by the Conversion Price then in effect. At 5:00 p.m. New York, New York time on the second anniversary of the Date of Issuance, any shares of Series A Preferred Stock that have not been converted into Underlying Common Stock shall convert automatically as of that date into a number of shares of Underlying Common Stock computed by multiplying the number of Shares to be converted by the Liquidation Value (plus accrued but unpaid interest on dividends thereon) and dividing the result by the Conversion Price then in effect. (ii) Maximum Share Amount Issuable Upon Conversion. Notwithstanding anything to the contrary herein, if at any time the aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon exercise of the Warrants equals 19.9% of the "Outstanding Common Amount" (as hereinafter defined), then the Series A Preferred Stock shall, from that time forward, cease to be convertible into Common Stock in accordance with the terms of this Section 7, unless the Corporation (i) has obtained approval of the issuance of the - 5 - 6 Underlying Common Stock by the affirmative vote of a majority of the total votes cast on the proposal, in person or by proxy, under Nasdaq Rule 4460(i)(6) or any successor rule, by the holders of the then-outstanding Common Stock ("Shareholder Approval"), or (ii) shall have otherwise obtained permission to allow such issuances from The Nasdaq Stock Market in accordance with Nasdaq Rule 4460(i). For purposes of this paragraph, "Outstanding Common Amount" means (x) the number of shares of the Common Stock outstanding on the date of issuance of the Series A Preferred Stock pursuant to the Securities Purchase Agreement plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.9% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." With respect to each holder of Series A Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata share thereof. In the event the Corporation obtains Shareholder Approval or the approval of The Nasdaq Stock Market or otherwise concludes that it is able to increase the number of shares to be issued in excess of the Maximum Share Amount (such increase being the "New Maximum Share Amount"), then the references to Maximum Share Amount, above, shall be deemed to be, instead, references to the greater New Maximum Share Amount. (iii) If the Corporation is limited in the number of shares of Common Stock it may issue upon conversion of the Series A Preferred Stock by Section 7(a)(ii), then (a) the Corporation will take all steps reasonably necessary to be in a position to issue shares of Common Stock on conversion of the Series A Preferred Stock without violating any rules or regulations covering the number of shares of Common Stock that may be issued on conversion of the Series A Preferred Stock, including obtaining Shareholder Approval (the "Cap Regulations"), and (ii) if, despite taking such steps, the Corporation still can not issue such shares of Common Stock without violating the Cap Regulations, the holder of Series A Preferred Stock which can not be converted as result of the Cap Regulations (each such share, an "Unconverted Share") shall have the option, exercisable in such holders' sole and absolute discretion, to elect to require the Corporation to issue shares of Common Stock in accordance with such holder's notice of conversion at a conversion price equal to the average of the closing bid price per share of Common Stock for the five (5) consecutive trading days ending on the day immediately preceding the date of notice of conversion, so long as such conversion does not violate the Cap Regulations. (b) Conversion Mechanics. (i) Notice of Conversion. A holder of Series A Preferred Stock may exercise its right to convert the Series A Preferred Stock by telecopying an executed notice ("Notice of Conversion") specifying the number of shares to be converted and the date the conversion is to occur to the Corporation at (610) 688-6830, Attn: Chairman (or such other telecopier number or addressee as may be identified by notice from the Corporation to the holder) and delivering to the Corporation within five (5) business days thereafter by express - 6 - 7 courier, the original Notice of Conversion and the certificates for the Series A Preferred Stock being converted, with a copy to the Transfer Agent. (ii) Determination of Conversion Date. Each conversion of Series A Preferred Stock shall be deemed to have been effected as of the close of business on the date specified in the Notice of Conversion, provided that the copy of the Notice of Conversion is telecopied to or otherwise delivered to the Corporation in accordance with the provisions of Section 7(b)(i) hereof so that it is received by the Corporation on or before such specified date. If any of the foregoing conditions is not met, the Conversion Date shall be the first business day following actual receipt by the Corporation of the Notice of Conversion and the certificates for the Series A Preferred Stock being converted. (iii) Alteration of Rights as Holder. At such time as such conversion has been effected, the rights of the holder of such Series A Preferred Stock as such holder shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Underlying Common Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Underlying Common Stock represented thereby. (iv) Public Offering. Notwithstanding any other provision hereof, if a conversion of Series A Preferred Stock is to be made in connection with a Public Offering, the conversion of any Shares of Series A Preferred Stock may, at the election of the holder of such Shares, be conditioned upon the consummation of the Public Offering in which case such conversion shall not be deemed to be effective until the consummation of the Public Offering. (v) Deliveries to Converting Holder. As soon as possible after a conversion has been effected (but in any event within three business days in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder by express courier, electronic transfer or otherwise: a) a certificate or certificates representing the number of shares of Underlying Common Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; and b) a certificate representing any Shares of Series A Preferred Stock which were represented by the certificates delivered to the Corporation in connection with such conversion but which were not converted. (vi) Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the converting holder and its compliance with the provisions contained - 7 - 8 in this paragraph, so long as the certificates therefor do not bear a legend and the converting holder is not obligated to return such certificate for the placement of a legend thereon, the Corporation shall use its best efforts to case the Transfer Agent to electronically transmit the Common Stock issuable upon conversion to the converting holder by crediting the account of the converting holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. (vii) Costs of Conversion. The issuance of certificates for shares of Underlying Common Stock upon conversion of Series A Preferred Stock shall be made without charge to the holders of such Series A Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Underlying Common Stock. Upon conversion of each Share of Series A Preferred Stock, the Corporation shall take all such actions as are necessary in order to insure that the Underlying Common Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. (viii)Fractional Shares. If any fractional interest in a share of Underlying Common Stock would, except for the provisions of this subparagraph, be deliverable upon any conversion of the Series A Preferred Stock, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (ix) Reservation of Shares. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Underlying Common Stock, solely for the purpose of issuance upon the conversion of the Series A Preferred Stock, such number of shares of Underlying Common Stock sufficient to yield 150% of the number of shares of Common Stock issuable upon the conversion of all outstanding Series A Preferred Stock; provided however, that the Corporation shall not be obligated to reserve and keep available any number of shares of Common Stock in excess of the Maximum Share Amount. All shares of Underlying Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Underlying Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Underlying Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). 8. Conversion Price. (a) Initial Conversion Price. The initial Conversion Price shall be the lesser of (i) the price equal (x) to the average closing bid prices of the Corporation's Common Stock as quoted by the Nasdaq for the 5-day trading period ending on the day before the Conversion Date, multiplied by the (y) Applicable Percentage, or (ii) 100% of the average closing bid prices for the - 8 - 9 5-day trading period ending on the day before the Date of Issuance. For the purposes of the this Section 8, the Applicable Percentage shall be defined as follows: for the period 60 - 90 days following the Date of Issuance - 83% for the period commencing 91 days following the Date of Issuance - 82% (b) In order to prevent dilution of the conversion rights granted under hereunder, the Conversion Price shall be subject to adjustment by the Corporation from time to time upon the occurrence of the events enumerated in this Section 8(b). (i) Changes in Capital Stock. If the Corporation (A) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock, (B) subdivides its outstanding shares of Common Stock into a greater number of shares, (C) combines its outstanding shares of Common Stock into a smaller number of shares, (D) makes a distribution on its Common Stock in shares of its capital Stock other than Common Stock or (E) issues by reclassification of its Common Stock any shares of its capital Stock, then the Conversion Price (and each component thereof) in effect immediately prior to such action shall be proportionately adjusted so that each holder of shares of Series A Preferred Stock may receive the aggregate number and kind of shares of capital Stock of the Corporation which such holder would have owned immediately following such action if it had converted all of its shares of Series A Preferred Stock into Common Stock immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. Any adjustments made pursuant to this Section 8(b)(i) shall be made successively. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (iii) Record Date. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (iv) Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any Stock split, Stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately - 9 - 10 reduced, and if the Corporation at any time combines (by reverse Stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (v) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets to another Person or other transaction which is effected in such a manner that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) Stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A Preferred Stock then outstanding) to insure that each of the holders of Series A Preferred Stock shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Underlying Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A Preferred Stock, such shares of Stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A Preferred Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A Preferred Stock then outstanding) to insure that the provisions of this Section 8 hereof shall thereafter be applicable to the Series A Preferred Stock (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Underlying Common Stock acquirable and receivable upon conversion of Series A Preferred Stock, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). (vi) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8(b) but not expressly provided for by such provisions (including, without limitation, the granting of Stock appreciation rights, phantom Stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A Preferred Stock. (vii) De Minimis Adjustment. Anything herein to the contrary notwithstanding, no adjustment in the Conversion Price shall be required unless such adjustment, either by itself or with other adjustments not previously made, would require a change of at least one percent (1%) in the Conversion Price; provided, however, that any adjustment which by reason of this Section 8(b)(vii) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 8(b) shall be made to - 10 - 11 the nearest one-tenth of a cent ($.001) (rounded to the nearest cent ($.01)) with respect to any monetary amount to be actually paid or to the nearest one hundredth (0.01) of a share, as the case may be. (viii)Notices. a) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Series A Preferred Stock, setting forth in reasonable detail and certifying the calculation of such adjustment. b) The Corporation shall give written notice to all holders of Series A Preferred Stock at least 5 days prior to the date on which the Corporation closes its books or takes a record (A) with respect to any dividend or distribution upon Common Stock, (B)with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. c) The Corporation shall also give written notice to the holders of Series A Preferred Stock at least 20 days prior to the date on which any Organic Change shall take place. Section 9. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Series A Preferred Stock. Upon the surrender of any certificate representing Series A Preferred Stock at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Series A Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Series A Preferred Stock represented by the surrendered certificate. Section 10. Replacement of Lost and Destroyed Certificates. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Series A Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate - 11 - 12 from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 11. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices and (ii) to any shareholder, at such holder's address as it appears in the Stock records of the Corporation (unless otherwise indicated by any such holder). Section 12. Definitions. "Common Stock" means, collectively, the Corporation's Common Stock and any capital Stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Date of Issuance" means December 31, 1997. "Junior Securities" means any of the Corporation's equity securities other than the Series A Preferred Stock. "Liquidation Value" of any Share as of any particular date shall be equal to $1,000. "Market Price" of any security means the average of the closing bid price for a period of five trading days on the principal securities exchange on which such security is listed or if not so listed, as quoted in the Nasdaq System, or, if not quoted in the Nasdaq System, the average of the closing bid price for a period of five trading days in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. "Person" means an individual, a partnership, a corporation, an association, a joint Stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or potential subdivision thereof. "Public Offering" means any offering by the Corporation of its equity securities to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force. - 12 - 13 "Registration Rights Agreement" means the Registration Rights Agreement as defined in the Securities Purchase Agreement. "Securities Purchase Agreement" means the Securities Purchase Agreement, dated as of December 31, 1997, by and among the Corporation and the Buyer named therein, as such agreement may from time to time be amended in accordance with its terms. "Subsidiary" means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons shall be allocated a majority of partnership, association or other business entity gains or losses or shall be or control the managing general partner of such partnership, association or other business entity. "Underlying Common Stock" means shares of the Corporation's Common Stock, no par value. "Warrants" means the Common Stock Purchase Warrant issued December 31, 1997 to the Buyer under the Securities Purchase Agreement to purchase 40,000 shares of Common Stock, and the Common Stock Purchase Warrants issued December 31, 1997 to Trautman, Kramer & Company, Inc. and its assignees in connection with the issuance of the Series A Preferred Stock to purchase an aggregate of 50,000 shares of Common Stock. RESOLVED FURTHER, that the Chairman, President or any Vice President and the Secretary or any Assistant Secretary of this Corporation be and they hereby are authorized and directed to prepare and file a Certificate of Determination in accordance with this resolution and as required by law. * * * - 13 - 14 Each of us declares under penalty of perjury under the Laws of the State of California that the foregoing is true and correct of our own knowledge. Executed at Skillman, New Jersey on this 31st day of December, 1997. [City/State] /s/ Richard J. DePiano ------------------------------------------------ Richard J. DePiano, Chairman /s/ John T. Rich ------------------------------------------------ John T. Rich, Vice President, Finance and Administration, and Secretary - 14 - EX-4.2 3 SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 4.2 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance set forth below, is entered into by and between ESCALON MEDICAL CORP., a California corporation, with headquarters currently located at 182 Tamarack Circle, Skillman, NJ 08558 (as of January 1, 1998: 351 East Conestoga Road, Wayne, PA 19087) (the "Company"), and the undersigned (the "Buyer"). W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933 Act; and WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the conditions of this Agreement, shares of the Series A 6% Convertible Preferred Stock, no par value (the "Convertible Preferred Stock"), of the Company which which will be convertible into shares of Common Stock, no par value per share. of the Company (the "Common Stock"), upon the terms and subject to the conditions of the such Convertible Preferred Stock, together with the Warrants (as defined below) exercisable for the purchase of shares of Common Stock (the "Warrant Shares"), and subject to acceptance of this Agreement by the Company; NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO PURCHASE; PURCHASE PRICE. A. PURCHASE; CERTAIN DEFINITIONS. (i) The undersigned hereby agrees to purchase from the Company shares of the Convertible Preferred Stock in the amount set forth on the signature page of this Agreement (the "Preferred Stock"), out of a total offering of $1,350,000 of such Convertible Preferred Stock, and having the terms and conditions set forth in the Certificate of Determination of Series A 6% Convertible Preferred Stock of the Company attached hereto as ANNEX I (the "Certificate of Designations"). Without limiting the terms provided in the Certificate of Designations, the Convertible Preferred Stock shall provide that any outstanding shares of such Convertible Preferred Stock shall automatically convert into Common Stock on the second anniversary of the Closing Date (as defined below) on the terms provided in the Certificate of Designations for a voluntary conversion (a "Mandatory Conversion"). The purchase price for the 1 2 Preferred Stock shall be as set forth on the signature page hereto (the "Purchase Price") and shall be payable in United States Dollars. (ii) As used herein, the term "Preferred Stock" means the Preferred Stock, together with all shares, if any, of the securities of the Company issued as dividends thereon, unless the context otherwise requires. (iii) As used herein, the term "Securities" means the Preferred Stock, the Warrants and the Common Stock issuable upon conversion of the Preferred Stock or the exercise of the Warrants. b. FORM OF PAYMENT. The Buyer shall pay the Purchase Price by delivering immediately available good funds in United States Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). No later than the Closing Date (as defined below), but in any event promptly following payment by the Buyer to the Escrow Agent of such amount of the Purchase Price, the Company shall deliver the Preferred Stock duly executed on behalf of the Company to the Escrow Agent. By signing this Agreement, each of the Buyer and the Company, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. c. METHOD OF PAYMENT. Payment into escrow on account of the Purchase Price shall be made by wire transfer of funds to: Bank of New York 350 Fifth Avenue New York, New York 10001 ABA# 021000018 For credit to the account of Krieger & Prager, Esqs. Account No.: - Not later than 1:00 p.m., New York time, on the date which is two (2) New York Stock Exchange trading days after the Company shall have accepted this Agreement and returned a signed counterpart of this Agreement to the Escrow Agent by facsimile, the Buyer shall deposit with the Escrow Agent the Purchase Price for the Preferred Stock, in currently available funds. Time is of the essence with respect to such payment, and failure by the Buyer to make such payment, shall allow the Company to cancel this Agreement. d. ESCROW PROPERTY. Funds deposited on account of the Purchase Price and certificates representing the Preferred Stock delivered to the Escrow Agent as contemplated by Sections 1(b) and (c) hereof are referred to as the "Escrow Property." 2 3 2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: a. Without limiting the Buyer's right to sell the Common Stock pursuant to the Registration Statement (as that term is defined in the Registration Rights Agreement defined below), the Buyer is purchasing the Preferred Stock and the Warrants and will be acquiring the shares of Common Stock issuable upon conversion of the Preferred Stock (the "Converted Shares") and the Warrant Shares for its own account for investment only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof. b. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and (iv) able to afford the entire loss of its investment in the Securities. c. All subsequent offers and sales of the Preferred Stock and the shares of Common Stock representing the Converted Shares and the Warrant Shares (such Common Stock sometimes referred to as the "Shares") by the Buyer shall be made pursuant to registration of the Shares under the 1933 Act or pursuant to an exemption from registration. d. The Buyer understands that the Preferred Stock is being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Preferred Stock. e. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Preferred Stock and the offer of the Shares which have been requested by the Buyer, including ANNEX V hereto. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Buyer has had the opportunity to obtain and review the Company's (1) Annual Report on Form 10-K for the fiscal year ended June 30, 1997, (2) Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, (3) Form 8-K , dated November 25, 1997, and (4) Form S-3, file August 26, 1996 (the "Company's SEC Documents"). 3 4 f. The Buyer understands that its investment in the Securities involves a high degree of risk. g. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities. h. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Buyer and is a valid and binding agreement of the Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. i. Notwithstanding the provisions hereof or of the Preferred Stock, in no event (except (i) with respect to a Mandatory Conversion or (ii) if the Company is in default under any provision of the Certificate of Designations or of any of the Transaction Agreements, as defined below) shall the holder be entitled to convert any Preferred Stock or exercise any Warrants to the extent that, after such conversion or exercise, the sum of (1) the number of shares of Common Stock beneficially owned by the Buyer and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Preferred Stock), and (2) the number of shares of Common Stock issuable upon the conversion of the Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Buyer and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), except as otherwise provided in clause (1) of such proviso. 3. COMPANY REPRESENTATIONS, ETC. The Company represents and warrants to the Buyer that, except as provided in ANNEX V hereto: a. CONCERNING THE PREFERRED STOCK AND THE SHARES. The Preferred Stock has been duly authorized, and when issued, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive rights of any stockholder of the Company, as such, to acquire the Preferred Stock, the Warrants or the Shares. b. REPORTING COMPANY STATUS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not 4 5 have a material adverse effect on the business, operations, prospects or condition (financial or otherwise) of the Company. The Company has registered its Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock is listed and traded on The NASDAQ/National Market. The Company has received no notice, either oral or written, with respect to the continued eligibility of the Common Stock for such listing, and the Company has maintained all requirements for the continuation of such listing. c. AUTHORIZED SHARES. The Company has sufficient authorized and unissued Shares as may be reasonably necessary to effect the conversion of the Preferred Stock and to issue the Warrant Shares. The Converted Shares and the Warrant Shares have been duly authorized and, when issued upon conversion of, or as interest on, the Preferred Stock or upon exercise of the Warrants, each in accordance with its respective terms, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. d. SECURITIES PURCHASE AGREEMENT; REGISTRATION RIGHTS AGREEMENT AND STOCK. This Agreement and the Registration Rights Agreement, the form of which is attached hereto as ANNEX IV (the "Registration Rights Agreement"), and the transactions contemplated thereby, have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered by the Company and this Agreement is, and the Warrants and the Registration Rights Agreement, when executed and delivered by the Company, will be, valid and binding agreements of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally; and the Preferred Stock will be duly and validly authorized and, when executed and delivered on behalf of the Company in accordance with this Agreement, will be a valid and binding obligation of the Company in accordance with its terms, subject to general principles of equity and to bankruptcy, insolvency, moratorium, or other similar laws affecting the enforcement of creditors' rights generally. e. NON-CONTRAVENTION. The execution and delivery of this Agreement and the Registration Rights Agreement by the Company, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated by this Agreement, the Registration Rights Agreement, and the Preferred Stock do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the articles of incorporation or by-laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock except as herein set forth, (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, or (iv) the Company's listing agreement for its Common Stock, except such conflict, breach or default which would not have a material adverse effect on the Company or on the transactions contemplated herein. 5 6 f. APPROVALS. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the Stockholders of the Company is required to be obtained by the Company for the issuance and sale of the Securities to the Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained. g. SEC FILINGS. None of the Company's SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. The Company has since October 1, 1996 timely filed all requisite forms, reports and exhibits thereto with the SEC. h. ABSENCE OF CERTAIN CHANGES. Since July 1, 1997, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or otherwise), or results of operations of the Company, except as disclosed in the Company's SEC Documents. Since July 1, 1997, except as provided in the Company's SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to stockholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business consistent with past practices; (v) suffered any substantial losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any changes in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment. i. FULL DISCLOSURE. There is no fact known to the Company (other than general economic conditions known to the public generally or as disclosed in the Company's SEC Documents), that has not been disclosed in writing to the Buyer that (i) would reasonably be expected to have a material adverse effect on the business or financial condition of the Company or (ii) would reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement or any of the agreements contemplated hereby (collectively, including this Agreement, the "Transaction Agreements"). j. ABSENCE OF LITIGATION. Except as set forth in the Company's SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a material adverse effect on the properties, business or financial condition, results of operation or prospects of the 6 7 Company and its subsidiaries taken as a whole or the transactions contemplated by any of the Transaction Agreements or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Agreements. k. ABSENCE OF EVENTS OF DEFAULT. Except as set forth in Section 3(e) hereof, no Event of Default (or its equivalent term), as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (or its equivalent term) (as so defined in such agreement), has occurred and is continuing, which would have a material adverse effect on the Company's financial condition or results of operations. l. PRIOR ISSUES. During the twelve (12) months preceding the date hereof, the Company has not issued any convertible securities. m. NO UNDISCLOSED LIABILITIES OR EVENTS. Except as set forth in ANNEX V hereto, the Company has no liabilities or obligations other than those disclosed in the Company's SEC Documents or those incurred in the ordinary course of the Company's business since July 1, 1997, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations, or prospects of the Company. No event or circumstances has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations, or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. n. NO DEFAULT. The Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it or its property is bound. o. NO INTEGRATED OFFERING. Neither the Company nor any of its affiliates nor any person acting on its or their behalf has, directly or indirectly, at any time since October 1, 1996, made any offer or sales of any security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale of the Securities as contemplated hereby. p. DILUTION. The number of Shares issuable upon conversion of the Preferred Stock and the exercise of the Warrants may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines prior to the conversion of the Preferred Stock. The Company's executive officers and directors have studied and fully understand the nature of the Securities being sold hereby and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Shares upon 7 8 conversion of the Preferred Stock and upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. a. TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the Preferred Stock has not been and is not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Agreement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such Securities under circumstances in which the seller, or the person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other person is under any obligation to register the Securities (other than pursuant to the Registration Rights Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder. b. RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that the Preferred Stock and the Warrants, and, until such time as the Common Stock has been registered under the 1933 Act as contemplated by the Registration Rights Agreement and sold in accordance with an effective Registration Statement, certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities): THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. c. REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into the Registration Rights Agreement on or before the Closing Date. d. FILINGS. The Company undertakes and agrees to make all necessary filings in connection with the sale of the Preferred Stock to the Buyer under any United States laws and 8 9 regulations or by any domestic securities exchange or trading market, and to provide a copy thereof to the Buyer promptly after such filing. e. REPORTING STATUS. So long as the Buyer beneficially owns any of the Preferred Stock, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company will take all action under its control to continue the listing and trading of its Common Stock on The NASDAQ/National Market (or, if not so listed, to obtain and to continue the listing and trading of its Common Stock on The NASDAQ/SmallCap Market) and will comply in all respects with the Company's reporting, filing and other obligations under the by-laws or rules of the National Association of Securities Dealers, Inc. ("NASD") or such NASDAQ Market. f. USE OF PROCEEDS. The Company will use the proceeds from the sale of the Preferred Stock (excluding amounts paid by the Company for legal fees, finder's fees and escrow fees in connection with the sale of the Preferred Stock) for internal working capital purposes, and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person. g. CERTAIN AGREEMENTS. (i) The Company covenants and agrees that it will not, without the prior written consent of the Buyer, enter into any subsequent or further offer or sale of Common Stock or securities convertible into Common Stock (collectively, "New Common Stock") with any third party pursuant to a transaction which in any manner permits the sale of the New Common Stock on any date which is earlier than sixty (60) days after the Effective Date (as defined below). (ii) The provisions of subparagraph (g)(i) will not apply to (x) the issuance of securities (other than for cash) in connection with an acquisition, merger, consolidation, sale of assets, disposition, or (y) the exchange of the capital stock for assets, stock or other joint venture interests; provided, however, that any action contemplated under this subparagraph (g)(ii) is subject to the condition that registration rights, if any, in connection with such action shall not require the filing of a Registration Statement in respect of such stock prior to sixty (60) days after the Effective Date. (iii) The provisions of subparagraph g(i) will also not apply to the inclusion of certain securities of the Company, which are identified in ANNEX V hereto and as to which the holders thereof have been granted certain registration rights prior to the date hereof (the "Existing Securities"), in the Registration Statement covering the Registrable Securities (as defined in the Registration Rights Agreement) or in a separate registration statement filed by the Company after February 15, 1998 for such shares. Any other provision in this Agreement, the Registration Rights Agreement or any of the other Transaction Agreements to the contrary notwithstanding, the Company hereby agrees that, from the Closing Date through and including February 15, 1998, 9 10 without the prior written consent of the Buyer, which consent may withheld in the Buyer's sole and absolute discretion, the Company (x) will not file any registration statement, other than the Registration Statement, seeking to register for sale any shares of the Company's stock and (y) will not include in the Registration Statement shares of the Company's stock other than the Registrable Securities and the Existing Securities. (iv) The term "Effective Date" means the effective date of the Registration Statement covering the Registrable Securities. h. AVAILABLE SHARES. The Company shall have at all times authorized and reserved for issuance, free from preemptive rights, shares of Common Stock sufficient to yield one hundred fifty percent (150%) of the number of shares of Common Stock issuable (i) at conversion as may be required to satisfy the conversion rights of the Buyer pursuant to the terms and conditions of the Preferred Stock (assuming for such purposes that all Preferred Stock is currently eligible to be converted, whether or not such eligibility in fact exists at any given time) and (ii) upon exercise as may be required to satisfy the exercise rights of the Buyer pursuant to the terms and conditions of the Warrants (assuming for such purposes that all Warrants are currently eligible to be exercised, whether or not such eligibility in fact exists at any given time). i. WARRANTS. The Company agrees to issue to the Buyer no later than two days after the Closing Date transferable, divisible warrants with cashless exercise rights(the "Warrants") for the purchase of 40,000 shares of Common Stock. The Warrants shall bear an exercise price equal to a percentage of the closing bid price of the Common Stock on the Closing Date in accordance with the following schedule:
At Price (as Percentage of Amount of Warrants Exercisable Closing Date Closing Bid Price) ------------------------------ ------------------------------- 25% of the Warrants 100% 25% of the Warrants 115% 25% of the Warrants 120% 25% of the Warrants 135%
The Warrants shall be exercisable immediately and for a period of five (5) years thereafter and shall be in the form annexed hereto as ANNEX VI, together with registration rights as provided in the Registration Rights Agreement. j. HEDGING TRANSACTIONS. The Company understands that the Buyer may be a so-called "hedge" fund, and the Company hereby expressly agrees that the Buyer shall not in any way be prohibited or restricted from any purchases or sales of any securities or other instruments of, or related to, the Company or any of its securities, including, but not necessarily limited to, puts, calls, futures contracts, short sales and hedging and arbitrage transactions. The Buyer acknowledges that such purchases, sales and other transactions may be subject to various federal and state securities laws and agrees to comply with all such applicable securities laws. 10 11 5. TRANSFER AGENT INSTRUCTIONS. a. Promptly following the Closing Date, the Company will irrevocably instruct its transfer agent to issue Common Stock from time to time upon conversion of the Preferred Stock in such amounts as specified from time to time by the Company to the transfer agent, bearing the restrictive legend specified in Section 4(b) of this Agreement prior to registration of the Shares under the 1933 Act, registered in the name of the Buyer or its nominee and in such denominations to be specified by the Buyer in connection with each conversion of the Preferred Stock. The Company warrants that no instruction other than such instructions referred to in this Section 5 and stop transfer instructions to give effect to Section 4(a) hereof prior to registration and sale of the Shares under the 1933 Act will be given by the Company to the transfer agent and that the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement, and applicable law. Nothing in this Section shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of the Securities and, in the case of the Converted Shares or the Warrant Shares, as the case may be, promptly instruct the Company's transfer agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Buyer. b. Subject to the completeness and accuracy of the Buyer's representations and warranties herein, upon the conversion of any Preferred Stock by a person who is a non-U.S. Person, and following the expiration of any applicable Restricted Period (as those terms are defined in Regulation S), the Company, shall, at its expense, take all necessary action (including the issuance of an opinion of counsel) to assure that the Company's transfer agent shall issue stock certificates without restrictive legend or stop orders in the name of Buyer (or its nominee (being a non-U.S. Person) or such non-U.S. Persons as may be designated by Buyer) and in such denominations to be specified at conversion representing the number of shares of Common Stock issuable upon such conversion, as applicable. Nothing in this Section 5, however, shall affect in any way Buyer's or such nominee's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. c. (i) The Company will permit the Buyer to exercise its right to convert the Preferred Stock by (x) telecopying an executed and completed Notice of Conversion to the Company at (610) 254-8958, Attn: Chairman (or such other telecopier number or addressee as may be identified by notice from the Company to the Buyer in the manner contemplated by Section 11 hereof) and (y) delivering, within five (5) business days thereafter, the original Notice of Conversion and the certificates for the Preferred Stock being converted to the Company by express courier, with a copy to the transfer agent. 11 12 (ii) The term "Conversion Date" means, with respect to any conversion elected by the holder of the Preferred Stock, the date specified in the Notice of Conversion, provided the copy of the Notice of Conversion is telecopied to or otherwise delivered to the Company in accordance with the provisions hereof so that is received by the Company on or before such specified date. If any of the foregoing conditions is not met, the Conversion Date shall be the first business day following actual receipt by the Company of the Notice of Conversion. (iii) The Company will transmit (or cause it transfer agent to transmit) the certificates representing the Converted Shares issuable upon conversion of any Preferred Stock (together with certificates representing the Preferred Stock not being so converted) to the Buyer via express courier, by electronic transfer or otherwise, within three (3) business days after receipt by the Company of the original Notice of Conversion and the certificate(s) representing the Preferred Stock being converted (the "Delivery Date"). d. The Company understands that a delay in the issuance of the shares of Common Stock beyond the Delivery Date could result in economic loss to the Buyer. As compensation to the Buyer for such loss, the Company agrees to pay late payments to the Buyer for late issuance of Shares upon Conversion in accordance with the following schedule (where "No. of Business Days Late" is defined as the number of business days beyond five (5) business days from Delivery Date:
Late Payment For Each $10,000 No. of of Preferred Stock Liquidation Business Days Late Amount Being Converted ------------------ ------------------------------ 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000+$200 for each Business Day Late beyond 10 days
The Company shall pay any payments incurred under this Section in immediately available funds upon demand. Nothing herein shall limit the Buyer's right to pursue actual damages for the Company's failure to issue and deliver the Common Stock to the Buyer. Furthermore, in addition to any other remedies which may be available to the Buyer, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within five (5) business days after the Delivery Date, the Buyer will be entitled to revoke the relevant Notice of Conversion by delivering 12 13 a notice to such effect to the Company whereupon the Company and the Buyer shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion. e. If, by the relevant Delivery Date, the Company fails for any reason to deliver the Shares to be issued upon conversion of the Preferred Stock and after such Delivery Date, the holder of the Preferred Stock being converted (a "Converting Holder") purchases, in an open market transaction or otherwise, shares of Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Converting Holder (the "Sold Shares"), which delivery such Converting Holder anticipated to make using the Shares to be issued upon such conversion (a "Buy-In"), the Company shall pay to the Converting Holder, in addition to all other amounts contemplated in other provisions of the Transaction Agreements, and not in lieu thereof, the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the amount equal to the excess, if any, of (x) the Converting Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds (after brokerage commissions, if any) received by the Converting Holder from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Company in immediately available funds immediately upon demand by the Converting Holder. By way of illustration and not in limitation of the foregoing, if the Converting Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required to pay to the Converting Holder will be $1,000. f. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the Buyer and its compliance with the provisions contained in this paragraph, so long as the certificates therefor do not bear a legend and the Buyer thereof is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Buyer by crediting the account of Buyer's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system. 6. DELIVERY INSTRUCTIONS. The Preferred Stock shall be delivered by the Company to the Escrow Agent pursuant to Section 1(b) hereof, on a delivery against payment basis, no later than on the Closing Date. 7. CLOSING DATE. (i) The closing of the issuance and sale of the Preferred Stock shall occur on the date (the "Closing Date") which is the first NYSE trading day after the fulfillment or waiver of all closing conditions pursuant to Sections 8 and 9 hereof or such other date and time as is mutually agreed upon by the Company and the Buyer, but in no event later than December 31, 1997. 13 14 (ii) The closing of the purchase and issuance of Preferred Stock shall occur on the Closing Date at the offices of the Escrow Agent and shall take place no later than 12:00 Noon, New York time, on such day or such other time as is mutually agreed upon by the Company and the Buyer. (iii) Notwithstanding anything to the contrary contained herein, the Escrow Agent will be authorized to release the Escrow Property only upon satisfaction of the conditions set forth in Sections 8 and 9 hereof. 8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyer understands that the Company's obligation to sell the Preferred Stock to the Buyer pursuant to this Agreement on the Closing Date is conditioned upon: a. The execution and delivery of this Agreement by the Buyer; b. Delivery by or the Buyer to the Escrow Agent of good funds as payment in full of the Purchase Price in accordance with this Agreement; c. The accuracy on the Closing Date of the representations and warranties of the Buyer contained in this Agreement, as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; and d. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained. 9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Preferred Stock on the Closing Date is conditioned upon: a. The execution and delivery of this Agreement and the Registration Rights Agreement by the Company; b. Delivery by the Company to the Escrow Agent of the Preferred Stock in accordance with this Agreement; c. The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement. as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date; 14 15 d. The Registration Rights Agreement shall be in full force and effect on the Closing Date and the Company shall not be in default thereunder; and e. On or before the Closing Date, the Buyer or the Escrow Agent shall have received an opinion of counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer, substantially to the effect set forth in ANNEX III attached hereto. 10. GOVERNING LAW: MISCELLANEOUS. a. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. b. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. c. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. d. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Terms used in the singular case shall be deemed to refer to the plural case and terms used in the plural case shall be deemed to refer to the singular case, unless the context otherwise requires. Terms used in the masculine, feminine or neuter gender shall be deemed to refer to any other gender, unless the context otherwise requires. e. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. f. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. g. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 11. NOTICES. Except as and to the extent otherwise specified herein (such as with respect to the giving of a Notice of Conversion), any notice which shall be required or permitted hereunder shall be given in writing and shall be deemed effectively given on the earliest of 15 16 (i) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile transmission, (ii) the seventh business day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or (iii) the third business day after mailing by recognized international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days' advance written notice similarly given to each of the other parties hereto): COMPANY: ESCALON MEDICAL CORP. 351 East Conestoga Road Wayne, PA 19087 ATTN: President Telephone No.: (610) 688-6830 Telecopier No.: (610) 254-8958 with a copy to: Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 ATTN: James W. McKenzie, Esq. Telephone No.: (215) 963-4852 Telecopier No.: (215) 963-5299 BUYER: At the address set forth on the signature page of this Agreement. ESCROW AGENT: Krieger & Prager, Esqs. 319 Fifth Avenue New York, New York 10016 Telecopier No. (212) 213-2077 Telephone No.: (212) 689-3322 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the Buyer's representations and warranties herein shall survive the execution and delivery of this Agreement and the delivery of the Preferred Stock and the Purchase Price, and shall inure to the benefit of the Buyer and the Company and their respective successors and assigns. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK.] 16 17 IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or one of its officers thereunto duly authorized as of the date set forth below. NUMBER OF SHARES OF PREFERRED STOCK TO BE PURCHASED: 1,350 AGGREGATE PURCHASE PRICE OF SUCH PREFERRED STOCK: $1,350,000 SIGNATURES FOR ENTITIES IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf this 31st day of December, 1997. c/o ISRC, 310 Madison Avenue, Suite 503 Combination, Inc. - --------------------------------------- --------------------------------- Address Printed Name of Subscriber New York, New York 10017 - --------------------------------------- By: /s/ David Freund Telecopier No. ------------------------------- ------------------------- (Signature of Authorized Person) David Freund, President ---------------------------------- Printed Name and Title Turks and Caicos - --------------------------------------- Jurisdiction of Incorporation or Organization As of the date set forth below, the undersigned hereby accepts this Agreement and represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf. ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ------------------------ Title: Chairman & C.E.O. ------------------------ Date: December 31, 1997 ------------------------ EX-4.3 4 REGISTRATION RIGHTS AGREEMENT DATED 12-31-1997 1 EXHIBIT 4.3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of December 31, 1997 (this "Agreement"), is made by and between ESCALON MEDICAL CORP., a California corporation (the "Company"), and each entity named on the signature page hereto (the "Initial Investor"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Securities Purchase Agreement, dated as of December 31, 1997, between the Initial Investor and the Company (the "Securities Purchase Agreement"; capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement), the Company has agreed to issue and sell to the Initial Investor 1,350 shares of Series A 6% Convertible Preferred Stock, no par value, of the Company, in an aggregate purchase price (the "Purchase Price") of $1,350,000 (the "Preferred Stock," which term, as used herein shall have the meaning ascribed to it in the Securities Purchase Agreement); and WHEREAS, the Company has agreed to issue the Warrants to the Initial Investor in connection with the issuance of the Preferred Stock; and WHEREAS, the Preferred Stock is convertible into shares of Common Stock (the "Conversion Shares") upon the terms and subject to the conditions contained in the Certificate of Designations and the Warrants may be exercised for the purchase of shares of Common Stock (the "Warrant Shares") upon the terms and conditions of the Warrants; and WHEREAS, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), with respect to the Conversion Shares and the Warrant Shares; and WHEREAS, the Company has agreed to issue to Trautman, Kramer & Company, Incorporated or its designees (collectively, the "Distributor") warrants (the "Distributor's Warrants") exercisable for the purchase of shares of Common Stock (the "Distributor's Shares"); 1 2 NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Initial Investor and the Distributor hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "Investor" means the Initial Investor and any permitted transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (b) "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. (c) "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (d) "Registrable Securities" means, (i) as to the Investor, the Conversion Shares and the Warrant Shares and (ii) as to the Distributor, the Distributor's Shares. (e) "Registration Statement" means a registration statement of the Company under the Securities Act. 2. REGISTRATION. (a) MANDATORY REGISTRATION. The Company shall prepare and file with the SEC, as soon as possible after the Closing Date but no later than thirty (30) days following the Closing Date, either a Registration Statement on Form S-3 registering for resale by the Investor a sufficient number of shares of Common Stock for the Initial Investors to sell the Registrable Securities (or such lesser number as may be required by the SEC, but in no event less than two hundred percent (200%) of the aggregate number of shares (i) into which the Preferred Stock would be convertible at the time of filing of the Form S-3 [assuming for such purposes that all Preferred Stock had been eligible to be converted, and had been converted, into Conversion Shares in accordance with their 2 3 terms, whether or not such eligibility or conversion had in fact occurred as of such date] and (ii) which would be issued upon exercise of all of the Warrants and Distributor's Warrants at the time of filing of the Form S-3 [assuming for such purposes that all Warrants and Distributor's Warrants had been eligible to be exercised and had been exercised in accordance with their terms, whether or not such eligibility or exercise had in fact occurred as of such date]. Such Registration Statement or amended Registration Statement shall also state that, in accordance with Rule 416 and 457 under the Securities Act, it also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Stock and the exercise of the Warrants resulting from adjustment in the Conversion Price or the Warrant exercise price, as the case may be, or to prevent dilution resulting from stock splits, or stock dividends. Such Registration Statement shall be declared effective no later than sixty (60) days after the Closing Date. If at any time the number of shares of Common Stock into which the Preferred Stock may be converted and which would be issued upon exercise of the Warrants or Distributor's Warrants exceeds the aggregate number of shares of Common Stock then registered, the Company shall, within ten (10) business days after receipt of a written notice from any Investor or from the Distributor, as the case may be, either (i) amend the Registration Statement filed by the Company pursuant to the preceding sentence, if such Registration Statement has not been declared effective by the SEC at that time, to register all shares of Common Stock into which the Preferred Stock may currently or in the future be converted and which would be issued currently or in the future upon exercise of the Warrants or Distributor's Warrants, or (ii) if such Registration Statement has been declared effective by the SEC at that time, file with the SEC an additional Registration Statement on Form S-3 to register the shares of Common Stock into which the Preferred Stock may currently or in the future be converted and which would be issued currently or in the future upon exercise of the Warrants or Distributor's Warrants that exceed the aggregate number of shares of Common Stock already registered. (b) PAYMENTS BY THE COMPANY. (i) If the Registration Statement covering the Registrable Securities is not effective by the date which is ninety (90) days after the Closing Date (the "Required Effective Date"), then the Company will make payments to the Initial Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (ii) The amount (the "Periodic Amount") to be paid by the Company to the Initial Investor shall be determined as of each Computation Date (as defined below) and such amount shall be equal to (A) two percent (2%) of the Purchase Price for the period from the date following the Required Effective Date to the first relevant Computation Date, and (B) three percent (3%) of the Purchase Price to each Computation Date thereafter. By way of illustration and not in limitation of the foregoing, if the Registration Statement is timely filed but is not declared effective until one hundred sixty-five (165) days after the Closing Date, the Periodic Amount will aggregate eight percent (8%) of the Purchase Price of the Preferred Stock (2% for days 91-120, plus 3% for days 121-150, plus 3% for days 151-165) 3 4 (iii) Each Periodic Amount will be payable to the Investor by the Company upon demand of the Investor and shall be payable in cash or other immediately available funds. (iv) The parties acknowledge that the damages which may be incurred by the Investor if the Registration Statement has not been declared effective by the Required Registration Date may be difficult to ascertain. The parties agree that the Periodic Amount represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of such damages. (v) Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Initial Investor or its counsel, or in the event all of the Registrable Securities may be sold pursuant to Rule 144 or another available exemption under the Act. (vi) "Computation Date" means (i) the date which is the earlier of (A) thirty (30) days after the Required Effective Date, or (B) the date after the Required Effective Date on which the Registration Statement is declared effective, and (ii) each date which is the earlier of (A) thirty (30) days after the previous Computation Date or (B) the date after the previous Computation Date on which the Registration Statement is declared effective. 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall do each of the following. (a) Prepare promptly, and file with the SEC by thirty (30) days after the Closing Date, a Registration Statement with respect to not less than the number of Registrable Securities provided in Section 2(a) above, and thereafter use its reasonable best efforts to cause each Registration Statement relating to Registrable Securities to become effective within sixty (60) days of the Closing Date and keep the Registration Statement effective at all times until the earliest (the "Registration Period") of (i) the date that is two (2) years after the Closing Date, (ii) the date when the Investors may sell all Registrable Securities under Rule 144 or (iii) the date the Investors no longer own any of the Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration effective at all times during the Registration Period, and, during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been 4 5 disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) The Company shall permit a single firm of counsel designated by the Initial Investors to review the Registration Statement and all amendments and supplements thereto a reasonable period of time (but not less than three (3) business days) prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. (d) Furnish to each Investor and to the Distributor whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company, (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one (1) copy of the Registration Statement, each preliminary prospectus and prospectus, and each amendment or supplement thereto, and (ii) such number of copies of a prospectus, and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (e) As promptly as practicable after becoming aware of such event, notify each Investor and the Distributor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement or other appropriate filing with the SEC to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (f) As promptly as practicable after becoming aware of such event, notify each Investor and the Distributor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time; (g) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the Investors and the Distributor in writing of the existence of a Potential Material Event, the Investors and the Distributor shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until such Investor or Distributor receives written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Registrable Securities for more than two twenty (20) day periods in the aggregate during any 12-month period ("Suspension Period") with at least a ten (10) business day interval between such periods, during the periods the Registration Statement is required to be in effect; 5 6 (h) Use its reasonable efforts to secure designation of all the Registrable Securities covered by the Registration Statement on the "Small Capitalization Market" of the National Association of Securities Dealers Automated Quotations System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on The NASDAQ SmallCap Market; or if, despite the Company's reasonable efforts to satisfy the preceding clause, the Company is unsuccessful in doing so, to secure NASDAQ/OTC Bulletin Board authorization and quotation for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities; (i) Provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (j) Cooperate with the Investors and with the Distributor who hold Registrable Securities or securities convertible into Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts as the case may be, as the Investors may reasonably request, and, within three (3) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities or securities convertible into Registrable Securities are included in such Registration Statement) an appropriate instruction and opinion of such counsel; and (k) Take all other reasonable actions necessary to expedite and facilitate disposition by the Investor and the Distributor of the Registrable Securities pursuant to the Registration Statement. 4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of the Registrable Securities, the Investors and the Distributor shall independently have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor or the Distributor, as the case may be, that such Investor or the Distributor shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five (5) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor and the Distributor of the information the Company requires from each such Investor and 6 7 the Distributor (the "Requested Information") if such Investor or Distributor elects to have any of its Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the filing date the Company has not received the Requested Information from an Investor or Distributor (each such person or entity, a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor; (b) Each Investor or Distributor, by its acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor or Distributor has notified the Company in writing of its election to exclude all of such party's Registrable Securities from the Registration Statement; and (c) Each Investor or Distributor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e) or 3(f), above, such party will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such party's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by the Company, such party shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such party's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. EXPENSES OF REGISTRATION. All reasonable expenses (other than underwriting discounts and commissions of the Investor or Distributor) incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company and a fee for a single counsel for the Investor not exceeding $3,500, shall be borne by the Company. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor or Distributor who holds such Registrable Securities, the directors, if any, of such Investor or Distributor, the officers, if any, of such Investor or Distributor, each person, if any, who controls any Investor or the Distributor within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act") (each, an "Indemnified Person" or "Indemnified Party"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of 7 8 a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to clause (b) of this Section 6, the Company shall reimburse the Investors, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (I) apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (II) be available to the extent such Claim is based on a failure of the Investor to deliver or cause to be delivered the prospectus made available by the Company; or (III) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Each Investor or the Distributor will indemnify the Company and its officers, directors and agents against any claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such party, expressly for use in connection with the preparation of the Registration Statement, subject to such limitations and conditions as are applicable to the Indemnification provided by the Company to this Section 6. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action, (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be. In case any such action is brought against any Indemnified Person or Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the 8 9 indemnifying party to such Indemnified Person or Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Person or Indemnified Party under this Section 6 for any legal or other reasonable out-of-pocket expenses subsequently incurred by such Indemnified Person or Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action of its final conclusion. The Indemnified Person or Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and reasonable out-of-pocket expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Person or Indemnified Party. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation; and (c) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most 9 10 recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors or the Distributor to any transferee of the Registrable Securities (or all or any portion of any Preferred Stock of the Company which is convertible into such securities) only if: (a) the Investor or Distributor, as the case may be, agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. The copies to be provided to the Company as referred to in the immediately preceding sentence may be redacted to delete certain financial and other details of the transaction between the Investor or the Distributor, on the one hand, and the transferee, on the other hand, if the same is included in the document to be provided to the Company. In the event of any delay in filing or effectiveness of the Registration Statement as a result of such assignment, the Company shall not be liable for any damages arising from such delay, or the payments set forth in Section 2(c) hereof. 10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold an eighty (80%) percent interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor, the Distributor and the Company. 11. MISCELLANEOUS. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered (by hand, by courier, by telephone line facsimile transmission, receipt confirmed, or other means) or sent by certified mail, 10 11 return receipt requested, properly addressed and with proper postage pre-paid (i) if to the Company, ESCALON MEDICAL CORP.,351 East Conestoga Road, Wayne, PA 19087, ATTN: Chairman, Telecopier No.: (610) 254-8958; with a a copy to Morgan, Lewis & Bockius, LLP, 2000 One Logan Square, Philadelphia, PA 19103, ATTN: James W. McKenzie, Esq., Telecopier No.: (215) 963-5299; (ii) if to the Initial Investor, at the address set forth under its name in the Securities Purchase Agreement, with a copy to Samuel Krieger, Esq., Krieger & Prager, 319 Fifth Avenue, Third Floor, New York, NY 10016, Telecopier No.: (212) 213-2077; (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, (iv) if to Trautman Kramer & Company, Incorporated, to it at 500 Fifth Avenue, New York, NY 10110, ATTN: Richard Rosenblum, Telecopier No.: (212) 575-6589, with a copy to Samuel Krieger, Esq., Krieger & Prager, 319 Fifth Avenue, Third Floor, New York, NY 10016, Telecopier No.: (212) 213-2077, and (v) if to any other designee of Trautman Kramer & Company, Incorporated, at such address as such designee shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b), and shall be effective, when personally delivered, upon receipt and, when so sent by registered or certified mail, four (4) calendar days after deposit with the United States Postal Service. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non coveniens, to the bringing of any such proceeding in such jurisdictions. (e) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (h) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. 11 12 (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (j) The Company acknowledges that any failure by the Company to perform its obligations under Section 3(a) hereof, or any delay in such performance could result in loss to the Investors, and the Company agrees that, in addition to any other liability the Company may have by reason of such failure or delay, the Company shall be liable for all direct damages caused by any such failure or delay, unless the same is the result of force majeure. Neither party shall be liable for consequential damages. (k) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. ESCALON MEDICAL CORP.. By: /s/ Richard J. DePiano ------------------------------------ Name: Richard J. DePiano Title: Chairman and C.E.O. Combination, Inc. By: /s/ David Freund ------------------------------------ Name: David Freund Title: President TRAUTMAN KRAMER & COMPANY, INCORPORATED By: /s/ Richard Rosenblum ------------------------------------ Name: Richard Rosenblum Title: Director EX-4.4 5 WARRANT TO PURCHASE COMMON STOCK-DAVID STEFANSKY 1 EXHIBIT 4.4 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. ESCALON MEDICAL CORP. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. For good and valuable consideration, the receipt of which is hereby acknowledged by ESCALON MEDICAL CORP., a California corporation (the "Company"), DAVID STEFANSKY or registered assigns (collectively, the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 31, 2002 (the "Expiration Date"), Twelve Thousand Five Hundred (12,500) fully paid and nonassessable shares of the Company's Common Stock, no par value $.001 per share (the "Common Stock") at an initial exercise price of $10.335 per share (the "Exercise Price"), subject to further adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. 2.1 General. This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by certified or official bank check, or by "cashless exercise," by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock, as reported, at the option of the Holder, by Bloomberg, LP or the National Association of Securities Dealers, for the ten (10) days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. 2.2 Maximum Share Amount Issuable Upon Exercise. Notwithstanding anything to the contrary herein, if at any time the aggregate number of shares of Common Stock then issued upon exercise of this Warrant, plus the aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon the exercise of (i) the Common Stock Purchase Warrants issued 2 December 31, 1997 to the Buyer named in the Securities Purchase Agreement and its assignees (the "Buyer Warrant") and (ii) the Common Stock Purchase Warrants issued December 31, 1997 to Trautman Kramer & Company, Incorporated and its designees (other than the Holder) and their respective assignees (the "Distributor Warrants") equals 19.9% of the "Outstanding Common Amount" (as hereinafter defined), then this Warrant shall, from that time forward, cease to be exercisable into Common Stock in accordance with the terms of this Section 2 (although the cashless exercise right shall remain in effect), unless the Company (i) has obtained approval of the issuance of the Common Stock issuable under this Warrant by the requisite vote, in person or by proxy, by the holders of the then outstanding Common Stock (not including any of the shares of Common Stock held by present or former holders of this Warrant, the Buyer Warrant, the Distributor Warrants or Series A Preferred Stock, to the extent that such shares were issued upon conversion of Series A Preferred Stock or exercise of such Warrants) ("Shareholder Approval"), or (ii) shall have otherwise obtained permission to allow such issuances from the NASDAQ Stock Market in accordance with NASDAQ Rule 4460(i). For purposes of this paragraph, "Outstanding Common Amount" means (x) the number of shares of the Common Stock outstanding on the date of issuance of this Warrant pursuant to the Securities Purchase Agreement, plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.9% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." In the event the Company obtains Shareholder Approval or the approval of The NASDAQ Stock Market or otherwise conclude that it is able to increase the number of shares which can be issued in excess of the Maximum Share Amount (such increased number being referred to as the "New Maximum Share Amount"), then the references to the Maximum Share Amount above shall be deemed to refer instead to the New Maximum Share Amount. If the Company is limited in the number of shares of Common Stock it may issue upon exercise of this Warrant as contemplated by the provisions of this Section 2.2, then the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock upon exercise of this Warrant without violating any rules or regulations covering the number of shares of Common Stock that may be issued by the Company, including, but not necessarily limited to, obtaining Shareholder Approval. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are 2 3 limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total purchase price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original purchase price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the average Market Price of the Common Stock (as defined in that certain Securities Purchase Agreement, dated as of December 31, 1997 [the "Securities Purchase Agreement"], between the Company and the 3 4 Buyer named therein) on the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. 7. Transfer to Comply with the Securities Act; Registration Rights. (a) This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. (b) The Company agrees to file a registration statement, which shall include the Warrant Shares subject to this Warrant, assuming for such purposes that the Warrant has been exercised to purchase the maximum number of shares eligible to be purchased thereunder (but without regard to whether or not the Warrant is eligible to be exercised or has in fact been exercised), on Form S-3 or another available form (the "Registration Statement"), pursuant to the Act, by the 30th calendar day after the Closing Date and to have the registration of the Warrant Shares completed and effective by the 90th calendar day after the Closing Date (the "Effective Date"). 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: ESCALON MEDICAL CORP. 351 East Conestoga Road Wayne, PA 19087 ATTN: President Telephone No.: (610) 688-6830 Telecopier No.: (610) 254-8958 (ii) if to the Holder, to: DAVID STEFANSKY 4 5 Telephone: ( ) - Telecopier: ( ) - Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 10. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant of even date herewith contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 11. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 12. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 13. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 31st day of December, 1997. ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ------------------------------------- Name: Richard J. DePiano Its: Chairman and C.E.O. Attest: /s/ Richard J. DePiano, Jr. - --------------------------- Name: Richard J. DePiano, Jr. Title: Assistant Secretary 5 6 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate, dated as of December _____, 1997, to purchase _____ shares of the Common Stock, no par value per share, of ESCALON MEDICAL CORP. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:______________________ By:__________________________________ / / CASH: $ _______________________ / / CASHLESS EXERCISE EX-4.5 6 WARRANT TO PURCHASE COMMON STOCK TO COMBINATION 1 EXHIBIT 4.5 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. ESCALON MEDICAL CORP. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by ESCALON MEDICAL CORP., a California corporation (the "Company"), COMBINATION, INC. or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 31, 2002 (the "Expiration Date"), Forty Thousand (40,000) fully paid and nonassessable shares of the Company's Common Stock, no par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price") specified in the schedule below subject to further adjustment as set forth in Section 6 hereof: (a) Warrants for 10,000 shares of Common Stock shares at $8.6125 per share. (b) Warrants for 10,000 shares of Common Stock shares at $9.904375 per share. (c) Warrants for 10,000 shares of Common Stock shares at $10.335 per share. (d) Warrants for 10,000 shares of Common Stock shares at $11.626875 per share. 2. Exercise of Warrants. 2.1 General. This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by certified or official bank check, or by "cashless exercise," by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock, as reported, at the option of the Buyer, by Bloomberg, LP or the National Association of Securities Dealers, for the ten (10) days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. 2 2.2 Maximum Share Amount Issuable Upon Exercise. Notwithstanding anything to the contrary herein, if at any time the aggregate number of shares of Common Stock then issued upon exercise of this Warrant, plus the aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon the exercise of the Common Stock Purchase Warrants issued December 31, 1997 to Trautman Kramer & Company, Incorporated and its designees and their respective assignees (the "Distributor Warrants") equals 19.9% of the "Outstanding Common Amount" (as hereinafter defined), then this Warrant shall, from that time forward, cease to be exercisable into Common Stock in accordance with the terms of this Section 2 (although the cashless exercise right shall remain in effect), unless the Company (i) has obtained approval of the issuance of the Common Stock issuable under this Warrant by the requisite vote, in person or by proxy, by the holders of the then outstanding Common Stock (not including any of the shares of Common Stock held by present or former holders of this Warrant, the Distributor Warrants or Series A Preferred Stock, to the extent that such shares were issued upon conversion of Series A Preferred Stock or exercise of such Warrants) ("Shareholder Approval"), or (ii) shall have otherwise obtained permission to allow such issuances from the NASDAQ Stock Market in accordance with NASDAQ Rule 4460(i). For purposes of this paragraph, "Outstanding Common Amount" means (x) the number of shares of the Common Stock outstanding on the date of issuance of this Warrant pursuant to the Securities Purchase Agreement, plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.9% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." In the event the Company obtains Shareholder Approval or the approval of The NASDAQ Stock Market or otherwise conclude that it is able to increase the number of shares which can be issued in excess of the Maximum Share Amount (such increased number being referred to as the "New Maximum Share Amount"), then the references to the Maximum Share Amount above shall be deemed to refer instead to the New Maximum Share Amount. If the Company is limited in the number of shares of Common Stock it may issue upon exercise of this Warrant as contemplated by the provisions of this Section 2.2, then the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock upon exercise of this Warrant without violating any rules or regulations covering the number of shares of Common Stock that may be issued by the Company, including, but not necessarily limited to, obtaining Shareholder Approval. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new 2 3 Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total purchase price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original purchase price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding 3 4 Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the average Market Price of the Common Stock (as defined in the Securities Purchase Agreement, dated December 31, 1997, between the Company and the Holder or the Holder's predecessor in interest with respect to this Warrant) on the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. 7. Transfer to Comply with the Securities Act; Registration Rights. (a) This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. (b) The Company agrees to file a registration statement, which shall include the Warrant Shares, on Form S-3 or another available form (the "Registration Statement"), pursuant to the Act, by the 30th calendar day after the date this Warrant was issued (the "Original Issuance Date") and to have the registration of the Warrant Shares completed and effective by the 90th calendar day after the Original Issuance Date (the "Effective Date"). 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: ESCALON MEDICAL CORP. 351 East Conestoga Road 4 5 Wayne, PA 19087 ATTN: President Telephone No.: (610) 688-6830 Telecopier No.: (610) 254-8958 (ii) if to the Holder, to: COMBINATION, INC. c/o ISRC 310 Madison Avenue, Suite 503 New York, NY 10017 ATTN: Telecopier No.: ( ) - Telephone No.: ( ) - with a copy to: Krieger & Prager, Esqs. 319 Fifth Avenue New York, New York 10016 Telecopier No. (212) 213-2077 Telephone No.: (212) 689-3322 Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant of even date herewith contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 11. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Balance of page intentionally left blank] 5 6 12. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 31st day of December, 1997. ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ------------------------------------- Name: Richard J. DePiano Its: Chairman and C.E.O. Attest: /s/ Richard J. DePiano, Jr. - --------------------------- Name: Richard J. DePiano, Jr. Title: Assistant Secretary 6 7 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of _________________, 1997, to purchase _____ shares of the Common Stock, no par value per share, of ESCALON MEDICAL CORP. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:______________________ By:__________________________________ / / CASH: $ _______________________ / / CASHLESS EXERCISE EX-4.6 7 WARRANT TO PURCHASE COMMON STOCK-RICHARD ROSENBLUM 1 EXHIBIT 4.6 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. ESCALON MEDICAL CORP. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. For good and valuable consideration, the receipt of which is hereby acknowledged by ESCALON MEDICAL CORP., a California corporation (the "Company"), RICHARD ROSENBLUM or registered assigns (collectively, the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 31, 2002 (the "Expiration Date"), Twelve Thousand Five Hundred (12,500) fully paid and nonassessable shares of the Company's Common Stock, no par value $.001 per share (the "Common Stock") at an initial exercise price of $10.335 per share (the "Exercise Price"), subject to further adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. 2.1 General. This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by certified or official bank check, or by "cashless exercise," by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock, as reported, at the option of the Holder, by Bloomberg, LP or the National Association of Securities Dealers, for the ten (10) days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. 2.2 Maximum Share Amount Issuable Upon Exercise. Notwithstanding anything to the contrary herein, if at any time the aggregate number of shares of Common Stock then issued upon exercise of this Warrant, plus the aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon the exercise of (i) the Common Stock Purchase Warrants issued 2 December 31, 1997 to the Buyer named in the Securities Purchase Agreement and its assignees (the "Buyer Warrant") and (ii) the Common Stock Purchase Warrants issued December 31, 1997 to Trautman Kramer & Company, Incorporated and its designees (other than the Holder) and their respective assignees (the "Distributor Warrants") equals 19.9% of the "Outstanding Common Amount" (as hereinafter defined), then this Warrant shall, from that time forward, cease to be exercisable into Common Stock in accordance with the terms of this Section 2 (although the cashless exercise right shall remain in effect), unless the Company (i) has obtained approval of the issuance of the Common Stock issuable under this Warrant by the requisite vote, in person or by proxy, by the holders of the then outstanding Common Stock (not including any of the shares of Common Stock held by present or former holders of this Warrant, the Buyer Warrant, the Distributor Warrants or Series A Preferred Stock, to the extent that such shares were issued upon conversion of Series A Preferred Stock or exercise of such Warrants) ("Shareholder Approval"), or (ii) shall have otherwise obtained permission to allow such issuances from the NASDAQ Stock Market in accordance with NASDAQ Rule 4460(i). For purposes of this paragraph, "Outstanding Common Amount" means (x) the number of shares of the Common Stock outstanding on the date of issuance of this Warrant pursuant to the Securities Purchase Agreement, plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.9% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." In the event the Company obtains Shareholder Approval or the approval of The NASDAQ Stock Market or otherwise conclude that it is able to increase the number of shares which can be issued in excess of the Maximum Share Amount (such increased number being referred to as the "New Maximum Share Amount"), then the references to the Maximum Share Amount above shall be deemed to refer instead to the New Maximum Share Amount. If the Company is limited in the number of shares of Common Stock it may issue upon exercise of this Warrant as contemplated by the provisions of this Section 2.2, then the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock upon exercise of this Warrant without violating any rules or regulations covering the number of shares of Common Stock that may be issued by the Company, including, but not necessarily limited to, obtaining Shareholder Approval. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are 2 3 limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total purchase price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original purchase price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the average Market Price of the Common Stock (as defined in that certain Securities Purchase Agreement, dated as of December 31, 1997 [the "Securities Purchase Agreement"], between the Company and the 3 4 Buyer named therein) on the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. 7. Transfer to Comply with the Securities Act; Registration Rights. (a) This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. (b) The Company agrees to file a registration statement, which shall include the Warrant Shares subject to this Warrant, assuming for such purposes that the Warrant has been exercised to purchase the maximum number of shares eligible to be purchased thereunder (but without regard to whether or not the Warrant is eligible to be exercised or has in fact been exercised), on Form S-3 or another available form (the "Registration Statement"), pursuant to the Act, by the 30th calendar day after the Closing Date and to have the registration of the Warrant Shares completed and effective by the 90th calendar day after the Closing Date (the "Effective Date"). 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: ESCALON MEDICAL CORP. 351 East Conestoga Road Wayne, PA 19087 ATTN: President Telephone No.: (610) 688-6830 Telecopier No.: (610) 254-8958 (ii) if to the Holder, to: RICHARD ROSENBLUM 4 5 Telephone: ( ) - Telecopier: ( ) - Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 10. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant of even date herewith contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 11. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 12. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 13. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 31st day of December, 1997. ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ------------------------------------- Name: Richard J. DePiano Its: Chairman and C.E.O. Attest: /s/ Richard J. DePiano, Jr. - --------------------------- Name: Richard J. DePiano, Jr. Title: Assistant Secretary 5 6 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate, dated as of December _____, 1997, to purchase _____ shares of the Common Stock, no par value per share, of ESCALON MEDICAL CORP. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:______________________ By:__________________________________ / / CASH: $ _______________________ / / CASHLESS EXERCISE EX-4.7 8 WARRANT TO PURCHASE COMMON STOCK-TRAUTMAN KRAMER 1 EXHIBIT 4.7 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. ESCALON MEDICAL CORP. COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. For good and valuable consideration, the receipt of which is hereby acknowledged by ESCALON MEDICAL CORP., a California corporation (the "Company"), TRAUTMAN KRAMER & COMPANY, INCORPORATED ("TKCI") or registered assigns (collectively, including TKCI, the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 31, 2002 (the "Expiration Date"), Twenty-Five Thousand (25,000) fully paid and nonassessable shares of the Company's Common Stock, no par value $.001 per share (the "Common Stock") at an initial exercise price of $10.335 per share (the "Exercise Price"), subject to further adjustment as set forth in Section 6 hereof. 2. Exercise of Warrants. 2.1 General. This Warrant is exercisable in whole or in part at the Exercise Price per share of Common Stock payable hereunder, payable in cash or by certified or official bank check, or by "cashless exercise," by means of tendering this Warrant Certificate to the Company to receive a number of shares of Common Stock equal in Market Value to the difference between the Market Value of the shares of Common Stock issuable upon exercise of this Warrant and the total cash exercise price thereof. Upon surrender of this Warrant Certificate with the annexed Notice of Exercise Form duly executed, together with payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. For the purposes of this Section 2, "Market Value" shall be an amount equal to the average closing bid price of a share of Common Stock, as reported, at the option of the Holder, by Bloomberg, LP or the National Association of Securities Dealers, for the ten (10) days preceding the Company's receipt of the Notice of Exercise Form duly executed multiplied by the number of shares of Common Stock to be issued upon surrender of this Warrant Certificate. 2.2 Maximum Share Amount Issuable Upon Exercise. Notwithstanding anything to the contrary herein, if at any time the aggregate number of shares of Common Stock then issued upon exercise of this Warrant, plus the aggregate number of shares of Common Stock then issued upon conversion of the Series A Preferred Stock plus the aggregate number of shares of Common Stock then issued upon the exercise of the Common Stock Purchase Warrants issued 2 December 31, 1997 to the Buyer named in the Securities Purchase Agreement and its assignees (the "Buyer Warrant") equals 19.9% of the "Outstanding Common Amount" (as hereinafter defined), then this Warrant shall, from that time forward, cease to be exercisable into Common Stock in accordance with the terms of this Section 2 (although the cashless exercise right shall remain in effect), unless the Company (i) has obtained approval of the issuance of the Common Stock issuable under this Warrant by the requisite vote, in person or by proxy, by the holders of the then outstanding Common Stock (not including any of the shares of Common Stock held by present or former holders of this Warrant, the Buyer Warrant or Series A Preferred Stock, to the extent that such shares were issued upon conversion of Series A Preferred Stock or exercise of such Warrants) ("Shareholder Approval"), or (ii) shall have otherwise obtained permission to allow such issuances from the NASDAQ Stock Market in accordance with NASDAQ Rule 4460(i). For purposes of this paragraph, "Outstanding Common Amount" means (x) the number of shares of the Common Stock outstanding on the date of issuance of this Warrant pursuant to the Securities Purchase Agreement, plus (y) any additional shares of Common Stock issued thereafter in respect of such shares pursuant to a stock dividend, stock split or similar event. The maximum number of shares of Common Stock issuable as a result of the 19.9% limitation set forth herein is hereinafter referred to as the "Maximum Share Amount." In the event the Company obtains Shareholder Approval or the approval of The NASDAQ Stock Market or otherwise conclude that it is able to increase the number of shares which can be issued in excess of the Maximum Share Amount (such increased number being referred to as the "New Maximum Share Amount"), then the references to the Maximum Share Amount above shall be deemed to refer instead to the New Maximum Share Amount. If the Company is limited in the number of shares of Common Stock it may issue upon exercise of this Warrant as contemplated by the provisions of this Section 2.2, then the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock upon exercise of this Warrant without violating any rules or regulations covering the number of shares of Common Stock that may be issued by the Company, including, but not necessarily limited to, obtaining Shareholder Approval. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 2 3 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock Holder is entitled to purchase before adjustment multiplied by the total purchase price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original purchase price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the average Market Price of the Common Stock (as defined in that certain Securities Purchase Agreement, dated as of December 31, 1997 [the "Securities Purchase Agreement"], between the Company and the Buyer named therein) on the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and 3 4 such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. 7. Transfer to Comply with the Securities Act; Registration Rights. (a) This Warrant has not been registered under the Securities Act of 1933, as amended (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. (b) The Company agrees to file a registration statement, which shall include the Warrant Shares subject to this Warrant, assuming for such purposes that the Warrant has been exercised to purchase the maximum number of shares eligible to be purchased thereunder (but without regard to whether or not the Warrant is eligible to be exercised or has in fact been exercised), on Form S-3 or another available form (the "Registration Statement"), pursuant to the Act, by the 30th calendar day after the Closing Date and to have the registration of the Warrant Shares completed and effective by the 90th calendar day after the Closing Date (the "Effective Date"). 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: ESCALON MEDICAL CORP. 351 East Conestoga Road Wayne, PA 19087 ATTN: President Telephone No.: (610) 688-6830 Telecopier No.: (610) 254-8958 4 5 (ii) if to the Holder, to: TRAUTMAN KRAMER & COMPANY, INCORPORATED 500 Fifth Avenue 14th Floor New York, NY 10110 Attn: Richard Rosenblum Telephone: (212) 575-5500 Telecopier: (212) 271-0611 with a copy to: Krieger & Prager, Esqs. 319 Fifth Avenue New York, NY 10016 Attn: Samuel M. Krieger, Esq. Telephone: (212) 689-3322 Telecopier: (212) 213-2077 Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 10. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant of even date herewith contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 11. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 12. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. [Balance of page intentionally left blank] 5 6 13. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the 31st day of December, 1997. ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ----------------------------------- Name: Richard J. DePiano Its: Chairman and C.E.O. Attest: /s/ Richard J. DePiano, Jr. - --------------------------- Name: Richard J. DePiano, Jr. Title: Assistant Secretary 6 7 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate, dated as of December _____, 1997, to purchase _____ shares of the Common Stock, no par value per share, of ESCALON MEDICAL CORP. and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated:______________________ By:__________________________________ / / CASH: $ _______________________ / / CASHLESS EXERCISE EX-5.1 9 OPINION OF MORGAN, LEWIS & BOCKIUS LLP 1 EXHIBIT 5.1 OPINION OF MORGAN, LEWIS & BOCKIUS LLP January 20, 1998 Escalon Medical Corp. 351 East Conestoga Road Wayne, PA 19087 RE: Escalon Medical Corp. -- Registration Statement on Form S-3 Ladies and Gentlemen: We have acted as counsel for Escalon Medical Corp., a California corporation (the "Company"), in connection with the preparation of the registration statement (the "Registration Statement") filed by the Company with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), relating to the public offering of up to 1,510,193 shares of the Company's common stock, $.01 par value (the "Common Stock"), to be sold by the entities and individuals listed as the selling shareholders in the Registration Statement (the "Selling Shareholders") including (i) 340,000 shares of Common Stock issuable upon the conversion of Series A 6% Convertible Preferred Stock (subject to adjustment based on, among other things, the market price of the Common Stock at the time of conversion) and (ii) 90,000 shares of Common Stock issuable upon the exercise of warrants issued to certain of the Selling Shareholders (the "Warrants"). In this connection, we have reviewed (a) the Registration Statement; (b) the Company's Amended and Restated Articles of Incorporation; (c) the Company's By-laws; (d) certain records of the Company's corporate proceedings as reflected in its minute books; (e) the Certificate of Determination of Series A 6% Convertible Preferred Stock (the "Certificate"); (f) the Warrants; and (g) such other documents and records as we have considered necessary or desirable in connection with this opinion. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original of all documents submitted to us as copies thereof. Based upon the foregoing, we are of the opinion that the shares of Common Stock to be sold by: (i) EOI Corp., as described in the Registration Statement, are duly authorized, validly issued, fully paid and non-assessable, and (ii) the other Selling Shareholders as described in the Registration Statement, when and to the extent issued by the Company upon the conversion of the Series A 6% Convertible Preferred Stock and upon the exercise of the Warrants in the manner contemplated in the Certificate and the Warrants, respectively, will be duly authorized, validly issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to all references to our firm in the Registration Statement. In giving such consent, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act and the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ MORGAN, LEWIS & BOCKIUS LLP EX-23.2 10 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3 No. 333-00000) and related Prospectus of Escalon Medical Corp. for the registration of 1,510,193 shares of its common stock and to the incorporation by reference therein of our report dated August 14, 1997, with respect to the financial statements of Escalon Medical Corp. included in its Annual Report (Form 10-K) for the year ended June 30, 1997, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Princeton, New Jersey January 15, 1998 -----END PRIVACY-ENHANCED MESSAGE-----