0000893220-01-500721.txt : 20011009
0000893220-01-500721.hdr.sgml : 20011009
ACCESSION NUMBER: 0000893220-01-500721
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010928
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: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-20127
FILM NUMBER: 1748444
BUSINESS ADDRESS:
STREET 1: 351 EAST CONESTOGA ROAD
STREET 2: PLZ LEVEL
CITY: WAYNE
STATE: PA
ZIP: 19087
BUSINESS PHONE: 6106886830
MAIL ADDRESS:
STREET 1: 351 EAST CONESTOGA ROAD
CITY: WAYNE
STATE: PA
ZIP: 19087
FORMER COMPANY:
FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC
DATE OF NAME CHANGE: 19930328
10-K
1
w53606e10-k.txt
ANNUAL REPORT FOR FISCAL YEARD ENDED JUNE 30,2001
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2001.
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from......... to........
COMMISSION FILE NUMBER 0-20127
ESCALON MEDICAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
351 EAST CONESTOGA ROAD, WAYNE, PA 19087
(Address of principal executive offices, including zip code)
(610) 688-6830
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the last 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 21, 2001, 3,292,184 shares of Common Stock were
outstanding, and the aggregate market value of the shares of Common Stock held
by the Registrant's nonaffiliates was approximately $5,563,791 (based upon the
closing price of the Common Stock on the Nasdaq SmallCap Market on such date).
DOCUMENTS INCORPORATED BY REFERENCE: None
2
ESCALON MEDICAL CORP.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
SIGNATURES 18
3
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to general business strategy, the introduction of new products, the
potential market and uses for the Company's products, expansion plans, the
Company's plans to file applications with the Food and Drug Administration (the
"FDA"), the development of joint venture opportunities, the effects of
competition on the structure of the markets in which the Company competes,
defending itself in litigation matters, operating performance and liquidity, as
well as information contained elsewhere in this Report where statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For such statements the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
in this document are subject to risks and uncertainties that could cause the
assumptions underlying such forward-looking statements and the actual results to
differ materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals - and
cause the assumptions underlying the forward-looking statements and the actual
results of the Company to differ materially from those expressed in or implied
by those forward-looking statements - include, without limitation, the
following: (i) the competitive nature of the industries in which the Company
competes and the ability of the Company to (a) successfully maintain existing
strategic relationships and (b) negotiate and enter into new strategic
relationships and otherwise distinguish its products from those of other
companies on the basis of quality, value and reliability; (ii) economic and
regulatory conditions which could adversely affect sales of the Company's
products, including the uncertainty of FDA approval for any new applications;
(iii) the ability of the Company to successfully develop and market new
products; (iv) future capital needs and the uncertainty of additional funding
(whether through the financial markets, collaborative or other arrangements with
strategic partners, or from other sources); (v) uncertain protection of
important proprietary technology; (vi) the outcome of litigation matters; (vii)
limitation on third-party reimbursement and the possible adverse impact of
health care reform on the payment of health care services; (viii) dependence on
key personnel; and (ix) the ability of the Company to maintain its listing on
the Nasdaq SmallCap Market.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Escalon Medical Corp. ("Escalon") was incorporated in California in
1987 as Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in
August 1996. In November 1999, Escalon reincorporated in Delaware. Within this
document, the "Company" collectively shall mean Escalon and its wholly-owned
subsidiaries: Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc.
("Vascular"), Escalon Digital Vision, Inc. ("Digital") and Escalon
Pharmaceutical, Inc. ("Pharmaceutical"). The Company operates in the healthcare
market, specializing in the development, manufacture, marketing and distribution
of ophthalmic medical devices, pharmaceutical and vascular access products.
In February 1996, the Company acquired substantially all of the assets
and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and
distributor of ophthalmic surgical products. Prior to this acquisition, the
Company devoted substantially all of its resources to the research and
development of ultrafast laser systems designed for treatment of ophthalmic
disorders. As a result of the EOI acquisition, Escalon changed its market focus
and is no longer developing laser technology. In October 1997, the Company
licensed its intellectual laser properties to a newly formed company, IntraLase
Corporation ("Intralase"), in return for an equity interest and future royalties
on product sales. IntraLase will have the responsibility of funding and
developing the laser technology through to commercialization.
1
4
To further diversify its product portfolio, in January 1999, the
Company acquired the vascular access product line from Radiance Medical Systems,
Inc. This was the first step in a plan of diversification to acquire profitable
niche medical products. Vascular's products use Doppler technology to aid
medical personnel in locating difficult arteries and veins. Currently, this
product line concentrates on the cardiac catheterization market. In January
2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic
ultrasound diagnostic equipment. In April 2000, the Company established Digital
as a wholly-owned subsidiary. This subsidiary formed a joint venture, Escalon
Medical Imaging, LLC ("Imaging"), with MegaVision, Inc. ("MegaVision"), a
privately-held company, to develop and market a digital camera back for
ophthalmic photography.
The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
health care market.
SONOMED BUSINESS
Sonomed develops, manufactures and markets ultrasound systems used for
diagnostic or biometric applications in ophthalmology. The systems are of three
types: A-scans, B-scans and pachymeters.
A-scans
The A-scan provides information about the internal structure of the eye
by sending a beam of ultrasound along a fixed axis through the eye and
displaying the various echoes reflected from surfaces intersected by the beam.
The principal echoes occur at the cornea, both surfaces of the lens and the
retina. The system displays the position and magnitudes of the echoes on an
electronic display. This allows ophthalmologists to view structures within the
eye and differentiate between normal tissue and pathology, such as tumors and
cysts. The A-scan also includes software for measuring distances within the eye.
This information is primarily used to calculate lens power for implants; for
example, in preparation for cataract operations.
B-scans
The B-scan is primarily a diagnostic tool, which supplies information
to physicians where the media within the eye are cloudy or opaque. Whereas
physicians normally uses light, which cannot pass through such media, the
ultrasound beam is capable of passing through the opacity and displaying an
image of the internal structures of the eye. Unlike the A-scan, the B-scan
transducer is not in a fixed position; it swings through a 60 degree sector to
provide a two dimensional image of the eye.
Pachymeters
The pachymeter uses the same principles as the A-scan, but the system
is tailored to measure the thickness of the cornea. With the advent of
refractive surgery (where the cornea is actually cut and reshaped), this
measurement has become critical. Surgeons must know the precise thickness of the
cornea so as to set the blade to make a cut of approximately 20 percent of the
thickness of the cornea.
2
5
VASCULAR ACCESS BUSINESS
Vascular develops, manufactures and markets vascular access products presently
focusing on selling to cardiac catheterization laboratories. The Company's
vascular products include the PD Access(TM) and Smartneedle(TM) lines of
monitors, needles and catheter products.
PD Access(TM) and Smartneedle(TM) Monitors, Needles and Catheter
Products
These patented devices utilize a miniature Doppler ultrasound probe
that is inserted in the lumen of a vascular access needle. When the device is
placed subcutaneously in a patient, the probe and monitor can determine if the
user is approaching an artery or vein, guiding them to a successful access.
MEDICAL / TREK BUSINESS
The Company develops, manufactures and distributes ophthalmic surgical products
under the Escalon Medical Corp. and/or Trek Medical Products names. The products
are primarily utilized by vitreoretinal ophthalmic surgeons. The following is a
summary of the Company's key surgical product lines:
AdatoSil(R)5000 Silicone Oil ("Silicone Oil")
Until August 1999, the Company distributed Silicone Oil, a specialty
product used in "worst case" detached retina surgery as a mechanical aid in the
reattachment procedure. The license and distribution rights for this product
were sold to Bausch & Lomb Surgical, Inc. for $2.1 million and additional cash
consideration payable through August 2005. See Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations for additional
details.
Viscous Fluid Transfer Systems
Escalon markets several viscous fluid transfer systems and related
disposable syringe products, which aid surgeons in the process of injecting and
extracting Silicone Oil. Adjustable pressures and vacuums provided by the
equipment allow surgeons to manipulate the flow of Silicone Oil during surgery.
ISPAN Intraocular Gases
The Company distributes two intraocular gas products, C3F8 and SF6,
which are used by vitreoretinal surgeons as a temporary tamponade in detached
retina surgery. Under a non-exclusive distribution agreement with Scott Medical
Products ("Scott"), Escalon distributes packages of Scott gases in canisters
containing 25 grams or less of gas. Along with the intraocular gases, the
Company manufactures and distributes a patented disposable universal gas kit,
which delivers the gas from the canister to the patient.
Fiber Optic Light Sources
Light source and fiber optic products are widely used by vitreoretinal
surgeons during surgery. The Company offers surgeons a complete line of light
sources along with a variety of fiber optic probes and illuminated tissue
manipulators.
3
6
DIGITAL / IMAGING BUSINESS
The Company entered into a joint venture with MegaVision in April 2000 to
develop, manufacture and market a digital camera back for use in the field of
ophthalmology. The camera back technology developed by Megavision, based in
Santa Barbara, California, is at the cutting edge of digital photography.
CFA Camera Back
Imaging, the joint venture between Digital and MegaVision developed the
CFA Camera Back. The images produced by this system furnish a very high level of
detail. The camera back is being marketed to medical institutions, educational
institutions and ophthalmologists preeminent in their field for the purpose of
photographic diagnosis of retinal disorders.
PHARMACEUTICAL BUSINESS
The Company retains the license and distribution rights for
Povidone-Iodine 2.5% Solution. The product will require further development
before achieving FDA approval. The Company has suspended further development
pending the establishment of strategic partnership arrangements. Povidone-Iodine
2.5% Solution is a broad-spectrum anti-microbial intended to prevent ophthalmia
neonatorum in newborns.
RESEARCH AND DEVELOPMENT
The Company conducts medical device and vascular access product
development at its New Berlin, Wisconsin facility. The development of ultrasound
ophthalmic equipment is performed at the Company's Lake Success, New York
facility located on Long Island. Research and development expenditures for the
fiscal years ended 2001, 2000 and 1999 amounted to $0.5 million, $1.0 million
and $0.7 million, respectively. Following the suspension of Ocufit SR, the
Company took a net writedown of $418,000 in fiscal 2000.
MANUFACTURING AND DISTRIBUTION
Escalon leases 13,500 square feet of space in New Berlin, Wisconsin for
its surgical products and vascular access operations. The facility is currently
used for engineering, product design and development, manufacturing and product
assembly. Various vendors are used for subcontract component manufacture,
assembly and sterilization. Manufacturing facilities include a class 10,000
clean room. All of the Company's ophthalmic surgical products are distributed
from its Wisconsin facility. The Company designs, develops and services its
ultrasound ophthalmic products at its facility in Lake Success, New York. This
facility contains 7,100 square feet. The Company has aggressively pursued and
achieved ISO9001 certification at both of its manufacturing facilities for all
medical and ultrasound devices produced. CE certification has been obtained for
disposable delivery systems, vascular access products and certain ultrasound
models. The manufacture, testing and marketing of each of the Company's products
entails risk of product liability. Product liability insurance is carried by
Escalon to cover the primary risk.
MARKETING AND SALES
The Medical / Trek business unit sells its ophthalmic device and
instrument products directly to end users through internal sales and marketing
employees at its Wisconsin facility as well as through a distributor in
Missouri. Sales are made primarily to teaching institutions, key hospitals and
eye surgery centers focusing primarily on physicians and operating room
personnel performing vitreoretinal surgery.
4
7
Vascular access products are marketed domestically through internal
sales and marketing employees in Pennsylvania, Illinois and at its Wisconsin
facility as well as through six independent distributors and sales
representatives located in Florida, Massachusetts, Missouri, Ohio and Washington
managed by the Company's sales team.
The Sonomed product line is sold through internal sales employees at
its New York facility to a vast network of distributors and directly to medical
institutions both domestically and abroad.
SERVICE AND SUPPORT
Escalon maintains a full-service program for all products sold.
Warranties exist on all products against defects and performance. Product
repairs are made at the Wisconsin facility for surgical devices and vascular
access products. Sonomed's products are serviced at the New York facility.
THIRD PARTY REIMBURSEMENT
It is expected that physicians and hospitals will purchase the
Company's ophthalmic products. They in turn will bill various third-party payers
for health care services provided to their patients. These payers include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. In addition, third-party
payers may deny reimbursement if they determine that a procedure performed using
any one of the Company's products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication.
PATENTS AND ROYALTIES
The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Escalon's policy is to protect its technology by
aggressively obtaining patent protection for all of its developments and
products, both in the United States and in selected countries outside the United
States. It is the Company's policy to file for patent protection in those
foreign countries in which the Company believes such protection is necessary to
protect its economic interests. Twenty-one United States issued patents, and
nineteen patents issued abroad, cover the Company's surgical products and
pharmaceutical technology. With respect to the Company's ultrafast laser systems
(licensed to IntraLase), sixteen patents have been issued in the United States
and eleven overseas. Vascular access products are covered by a total of eighteen
patents, which provide protection in the United States, Europe, Japan and other
countries overseas. The Company intends to vigorously defend its patents if the
need arises.
COMPETITION
There are numerous direct and indirect competitors of Escalon in the
United States and abroad. These companies include: ophthalmic-oriented companies
that market a broad portfolio of products, including prescription ophthalmic
pharmaceuticals, ophthalmic devices, consumer products (such as contact lens
cleaning solution) and other eye care products; large integrated pharmaceutical
companies that market a limited number of ophthalmic pharmaceuticals in addition
to many other pharmaceuticals; and smaller specialty pharmaceutical and
biotechnology companies that are engaged in the development and
commercialization of prescription ophthalmic pharmaceuticals and products, and
possibly drug delivery systems.
5
8
Several large companies dominate the ophthalmic market with the balance
of the industry being highly fragmented. The Company believes that these large
companies capture approximately 85% of the overall ophthalmic market. The
balance of the market is composed of smaller companies ranging from start-up
entities to established niche market players. The ophthalmic market in general
is intensely competitive with each company eager to expand its market share. As
a result of this competition, the Company believes that many of the industry's
smaller companies will either consolidate or fail. Escalon's strategy is to
compete primarily on the basis of technological innovation to which it has
proprietary rights. Escalon believes, therefore, that its success will depend in
large part upon protecting its intellectual property through patents and other
governmental registrations. At the same time, Escalon recognizes that there are
other young and innovative companies that may develop competitive technologies.
The vascular access product line is comprised of low-price, disposable
devices, and currently it has no direct competition. However, a significantly
higher priced non-disposable device that also facilitates vascular access is
currently marketed.
There are a variety of other devices that directly compete with
Sonomed's ultrasound products and the camera back developed by Escalon Medical
Imaging.
HUMAN RESOURCES
As of June 30, 2001, Escalon employed 53 full-time employees and 4
part-time employees. 31 of Escalon's full-time employees are employed in
manufacturing, 14 are employed in general and administrative positions, Four are
employed in sales and marketing and four are employed in research and
development. Escalon's employees are not covered by a collective bargaining
agreement and the Company considers its relations with employees to be good.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 22,000 square feet of
space for its (a) executive offices in Wayne, Pennsylvania, (b) manufacturing /
warehouse facility in New Berlin, Wisconsin, (c) manufacturing facility in Lake
Success, New York and (d) consultant's office / storage facility in
Turnersville, New Jersey. The Wisconsin facility lease covering approximately
13,500 square feet of space expires in April 2007. The executive offices leased
in Wayne, Pennsylvania covers approximately 1,000 square feet. The Lake Success
facility lease, covering approximately 7,100 square feet expires during fiscal
2005. Annual rent under all of the Company's lease arrangements was $294,050 for
the year ended June 30, 2001.
ITEM 3. LEGAL PROCEEDINGS
As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter to which the Company is no longer a party). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in
November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering.
6
9
On June 6, 1996, the court denied a motion by Escalon and the named
officers and directors to dismiss the Kozloski complaint and, on July 22, 1996,
the Company Defendants filed an answer to the complaint denying all allegations
of wrongdoing and asserting various affirmative defenses.
In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement,
subject to final court approval, to settle this action on its behalf and on the
behalf of its former and present officers and directors, for $500,000. The
Company's directors and officers insurance carrier has agreed to fund a
significant portion of the settlement amount. Both the Company and the insurance
carrier have deposited such funds in an escrow account.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Escalon's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "ESMC." The Company's Common Stock has traded on the Nasdaq SmallCap
Market since June 7, 2000. The Common Stock previously traded on the Nasdaq
National Market. The table below sets forth, for the periods indicated, the high
and low sales prices as quoted on the Nasdaq Stock Market.
Fiscal Year Ended June 30, 2000 High Low
------------------------------- ----- -----
Quarter ended September 30, 1999 $2.50 $1.82
Quarter ended December 31, 1999 $2.50 $1.50
Quarter ended March 31, 2000 $7.38 $2.00
Quarter ended June 30, 2000 $4.25 $1.50
Fiscal Year Ended June 30, 2001 High Low
------------------------------- ----- -----
Quarter ended September 30, 2000 $3.13 $1.50
Quarter ended December 31, 2000 $3.00 $1.41
Quarter ended March 31, 2001 $2.75 $1.44
Quarter ended June 30, 2001 $2.38 $1.48
As of September 21, 2001, there were 150 holders of record of the
Company's Common Stock. On September 21, 2001, the closing sale price of
Escalon's Common Stock as reported by the Nasdaq Stock Market was $1.69.
Escalon has never declared or paid a cash dividend on its Common Stock
and presently intends to retain any future earnings to finance future growth and
working capital needs. In addition, the Company is party to loan agreements
which prohibit Escalon's payment of dividends.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain
listing requirements must be met. If Escalon's securities were delisted,
investors could find it more difficult to dispose of them, or to obtain accurate
quotations as to the market value of the Company's securities.
7
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein in Item 8.
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 2001 2000 1999 1998 1997
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------
Sales revenues, net $ 11,880 $ 6,670 $ 7,559 $ 5,942 $ 5,431
Costs and expenses:
Cost of goods sold 4,297 2,874 3,282 2,589 2,650
Research and development 492 984 738 495 1,571
Marketing, general and
administrative 5,430 4,661 3,332 2,805 3,716
Writedown of goodwill, license and
distribution rights and patents -- 418 -- -- 3,319
-------- -------- -------- -------- --------
Total costs and expenses 10,219 8,937 7,352 5,889 11,256
-------- -------- -------- -------- --------
Income (loss) from operations 1,661 (2,267) 207 53 (5,825)
-------- -------- -------- -------- --------
Sale of Silicone Oil product line -- 1,864 -- -- --
Sale of Betadine product line -- -- 879 -- --
Equity in loss of unconsolidated
joint venture (19) (33) -- -- --
Interest income 2 149 145 119 141
Interest expense (1,052) (576) (37) (1) (1)
-------- -------- -------- -------- --------
Net income (loss) $ 592 $ (863) $ 1,194 $ 171 $ (5,685)
======== ======== ======== ======== ========
Basic net income (loss) per share $ 0.18 $ (0.27) $ 0.10 $ (0.04) $ (2.16)
======== ======== ======== ======== ========
Diluted net income (loss) per share $ 0.18 $ (0.27) $ 0.10 $ (0.04) $ (2.16)
======== ======== ======== ======== ========
Weighted average shares - basic
used in per share computation 3,292 3,242 3,115 2,673 2,630
======== ======== ======== ======== ========
Weighted average shares - diluted
used in per share computation 3,308 3,242 3,115 2,673 2,630
======== ======== ======== ======== ========
AT JUNE 30,
----------------------------------------------------------------
BALANCE SHEET DATA 2001 2000 1999 1998 1997
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------
Cash and cash equivalents $ 81 $ 177 $ 3,854 $ 2,264 $ 1,753
Working capital (deficit) (3,004) (3,211) 3,801 3,465 2,170
Total assets 17,798 16,845 10,403 6,734 5,834
Long-term debt 4,502 4,900 733 -- --
Total liabilities 11,691 11,430 4,125 685 1,035
Accumulated deficit (40,018) (40,610) (39,629) (39,952) (39,847)
Total shareholders' equity 6,107 5,415 6,278 6,049 4,798
----------
Note: No cash dividends were paid in any of the years presented.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and the notes thereto and other financial
information contained elsewhere in this Form 10-K.
Escalon operates primarily in three reportable business segments: Sonomed,
Vascular and Medical / Trek. Sonomed develops, manufactures and markets
ultrasound systems used for diagnostic or biometric applications in
ophthalmology. Vascular develops, manufactures and markets vascular access
products. Medical / Trek develops, manufactures and distributes ophthalmic
surgical products. For a more complete description of these businesses and their
products, see Item 1 - Business, on page one.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
The following tables present consolidated net revenues by business segment
as well as identifying trends in business segment net revenues for the fiscal
years ended June 30, 2001 and 2000.
Fiscal Years Ended June 30,
-------------------------------
2001 2000 % Change
------- ------- --------
Net revenues: (in thousands)
Sonomed $ 5,988 $ 2,536 136.12%
Vascular 2,117 2,345 -9.72%
Medical/Trek 3,775 1,789 111.01%
------- ------- -------
$11,880 $ 6,670 78.11%
======= ======= =======
Product revenues increased $5,210,000, or 78.11%, to $11,880,000 in fiscal
2001 as compared to $6,670,000 in fiscal 2000. Revenues in the Sonomed business
increased $3,452,000, or 136.12%, to $5,988,000. This increase is due primarily
to the fact that Sonomed's revenues represent a full year of operation in fiscal
2001 as compared to only five and a half months of activity in fiscal 2000
(Sonomed was acquired in January 2000, see notes to consolidated financial
statements for a discussion of the Sonomed acquisition). Product revenues in the
Vascular business decreased $228,000, or 9.72%, to $2,117,000. This decrease is
due primarily to the Company shifting its sales strategy in this business unit.
During fiscal 2001, Escalon identified underperforming distributors and
terminated the Company's relationship with them, with internal sales staff
picking up the territories previously covered by these distributors. Also
contributing to the overall decrease was the fact that distributors experienced
a surplus of inventory during fiscal 2001 and subsequently reduced orders to the
Company. In the Company's Medical / Trek business unit, product revenues
increased $1,986,000, or 111.01%, to $3,775,000. Revenue earned in connection
with Silicone Oil was $574,000 from July 1, 1999 through August 13, 1999.
Escalon sold its rights to the product to Bausch & Lomb on August 13, 1999, and
did not recognize any revenue from Silicone Oil for a period of one year from
the date of the sale. Beginning on August 13, 2000, Escalon is entitled to
receive from Bausch & Lomb a percentage of their gross profit from the sales of
the product through fiscal 2005. From August 13, 2000 through June 30, 2001,
revenue earned from Bausch & Lomb in connection with Silicone Oil was
$2,254,000, $1,680,000 more than the Silicone Oil revenue recognized during the
fiscal year ended June 30, 2000. Revenue from the balance of the Medical / Trek
product line increased by $306,000. This increase is primarily due to the
fulfillment of customers' backorders for the Company's ISPAN(TM) gas product
during the first quarter of fiscal 2001.
9
12
The following table presents consolidated cost of goods sold by reportable
business segment and as a percentage of related segment net revenues for the
fiscal years ended June 30, 2001 and 2000.
Fiscal Years Ended June 30,
----------------------------------------
2001 2000
----------------- -----------------
Cost of goods sold: Dollars % Dollars %
------- ------- ------- -------
(in thousands) (in thousands)
Sonomed $ 2,237 37.36% $ 927 36.55%
Vascular 1,016 47.99% 1,010 43.07%
Medical/Trek 1,044 27.66% 937 52.38%
------- ------- ------- -------
$ 4,297 36.17% $ 2,874 43.09%
======= ======= ======= =======
Cost of goods sold totaled $4,297,000, or 36.17% of net revenue for fiscal
2001, as compared to $2,874,000, or 43.09% of net revenue, for fiscal 2000. Cost
of goods sold in the Sonomed business increased $1,310,000, primarily due to the
fact that Sonomed's cost of goods sold represent a full year of operation in
fiscal 2001 as compared to only five and a half months of activity in fiscal
2000. Cost of goods sold in fiscal 2001in the vascular unit increased $6,000 to
$1,016,000, or 47.99% of net revenue, as compared to 43.07% of net revenue in
fiscal 2000. The net increase in cost of goods sold as a percentage of net
revenue was the result of material costs increasing 0.89% and labor and other
employee-related expenses decreasing 4.03%. The reduction of cost of goods sold
as a percentage of net revenue in the Medical / Trek business is primarily due
to the revenues received from Bausch & Lomb related to Silicone Oil. Cost of
goods sold in this unit in fiscal 2001 increased $107,000 to $1,044,000, or
27.66% of net revenue. Cost of goods sold as a percent of net revenues was
52.38% during the same period last year. This decrease is due to the fact that
Silicone Oil revenue recognized during fiscal 2001 does not have any costs
associated with the revenue. Cost of goods sold for the Medical / Trek business
unit was 68.64% of net revenue for the fiscal year ended June 30, 2001, when
Silicone Oil revenue is excluded. The increase in cost of goods sold as a
percentage of net revenue was the result of material costs increasing 6.65% and
labor and other employee-related expenses increasing 9.61%.
The following table presents consolidated marketing, general and
administrative expenses by business segment as well as identifying changes in
these expenses for the fiscal years ended June 30, 2001 and 2000.
Fiscal Years Ended June 30,
-----------------------------
2001 2000 % Change
------ ------ --------
Marketing, general and (in thousands)
administrative expenses
Sonomed $1,928 $ 951 102.73%
Vascular 1,126 1,310 -14.05%
Medical/Trek 2,376 2,400 -1.00%
------ ------ ------
$5,430 $4,661 16.50%
====== ====== ======
Marketing, general and administrative expenses increased $769,000, or
16.50%, for fiscal 2001 as compared to fiscal 2000. Marketing, general and
administrative expenses in the Sonomed business increased $977,000, primarily
due to the fact that Sonomed's expenses represent a full year of operation in
fiscal 2001 as compared to only five and a half months of activity in fiscal
2000. This increase is offset by Vascular's $184,000 decrease. The main factors
contributing to this decrease were decreased salaries and employee-related
costs, which decreased by $163,000, the result of reduced headcount; and a
decrease in travel-related expenses, which reduced by $90,000, the direct result
of a concerted effort in this area.
10
13
The decreases were partially offset by an increase in consulting expense of
$85,000, largely due to the retention of a sales and marketing consultant.
Marketing, general and administrative expenses in the Medical / Trek business
decreased by $24,000, largely due to a $51,000 decrease in royalties as a result
of the Company's decision to discontinue clinical trials of Ocufit SR(R) in
December 1999.
The following table presents consolidated research and development
expenses by business segment as well as identifying trends in these expenses for
the fiscal years ended June 30, 2001 and 2000.
Fiscal Years Ended June 30,
-----------------------------
2001 2000 % Change
------ ------ --------
Research and (in thousands)
development
Sonomed $ 321 $ 126 154.76%
Vascular 22 72 -69.44%
Medical/Trek 149 786 -81.04%
------ ------ ------
$ 492 $ 984 -50.00%
====== ====== ======
Research and development expenses decreased $492,000, or 50.00%, for
fiscal 2001 as compared to fiscal 2000. Research and development expenses in the
Sonomed business increased $195,000, primarily due to the fact that Sonomed's
expenses represent a full year of operation in fiscal 2001 as compared to only
five and a half months of activity in fiscal 2000. Research and development in
the Vascular and Medical / Trek business units decreased $687,000 when compared
to the same period last year. This is largely due to the fact that Escalon has
suspended development of Povidone-Iodine 2.5%, and also due to the fact that
development of Ocufit SR(R) was terminated in December 1999.
In August 1999, the Company reported the sale of its license and
distribution rights for the AdatoSil(R) 5000 Silicone Oil product line. This
sale resulted in a $1,864,000 gain after writing off the remaining net book
value of license and distribution rights associated with that product line.
After completing the initial Phase I human clinical trials in late
December 1999, management reevaluated its Ocufit SR(R) ophthalmic drug delivery
system project. It was decided that further expenditures on this project were
not in the shareholders' best interest, and the project was discontinued. This
decision resulted in Escalon taking a non-cash charge of $418,000 in the second
and third quarter of fiscal 2000, which included a write-off of the net book
value for remaining goodwill and patent costs associated with this project.
On December 18, 2000, Escalon announced it was granted 510(K) clearance to
begin marketing its high-end digital camera system for ophthalmologists known as
the CFA Digital Imaging System. The system is marketed through Imaging, the
Company's joint venture with MegaVision. As a result of the approval, Imaging
began selling the product in December 2000. The Company recognized a $19,000
loss from the joint venture during the fiscal year ended June 30, 2001 as
compared to a $33,000 loss during the fiscal year ended June 30, 2000.
Interest income decreased by $147,000 for the fiscal year ended June 30,
2001, as compared to the fiscal year ended June 30, 2000. This decrease resulted
from the decrease in cash and cash equivalents available for investment due to
the significant changes in the Company arising from the Sonomed acquisition.
11
14
Interest expense increased by $476,000 for the fiscal year ended June 30,
2001, as compared to the fiscal year ended June 30, 2001. This is primarily the
result of corporate borrowing arrangements that did not exist until the third
quarter of fiscal 2000. In connection with the Sonomed acquisition, the Company
refinanced its existing bank debt, providing $12,000,000 of financing to the
Company.
There is no provision or credit for federal or state income taxes for the
periods presented as a result of utilization of net operating loss carryforwards
and related changes in the deferred tax valuation allowance.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Product revenues decreased $889,000, or 11.76%, to $6,670,000 in fiscal
year 2000 as compared to $7,559,000 in fiscal year 1999. Product revenue from
Silicone Oil and Betadine declined $4,390,000 as compared to fiscal 1999 as a
result of the sale of the license and distribution rights to those product lines
in August and March of 1999, respectively. The five and a half months of revenue
acquired from Sonomed contributed $2,536,000 and revenue from the Company's
vascular access business increased $1,405,000, or 149.47%, to $2,345,000 in
fiscal year 2000 as compared to $940,000 in fiscal year 1999. Escalon
experienced a decline in sales of OEM, ISPAN(TM) gas products, capital equipment
and disposable products of $377,000, or 25.89%, to $1,079,000 in fiscal year
2000 as compared to $1,456,000 in fiscal year 1999. The Company did not change
the price of any of its products over this period.
Cost of goods sold totaled $2,874,000, or 43.09% of revenue, for fiscal
year 2000, as compared to $3,282,000, or 43.42% of revenue, for fiscal year
1999. The $408,000 decrease in total cost of goods sold is due to discontinued
product lines (Betadine and Silicone Oil) in the Company's medical business
unit. Cost of goods sold in the medical business unit decreased $1,927,000 to
$937,000 for fiscal 2000 as compared to $2,864,000 for fiscal 1999. Sonomed's
product line costs for the 2000 fiscal year were $927,000; there were no
comparable costs for fiscal 1999 as the Company began selling the Sonomed
product line in mid-January 2000. In fiscal 2000, the vascular business unit's
product manufacturing costs increased $592,000 when compared to fiscal 1999.
This increase is in proportion to the corresponding increase in vascular
revenues. Vascular's costs represent a full year of operation in fiscal 2000 as
compared to only five and a half months of activity for fiscal 1999.
Marketing, general and administrative expenses increased $1,329,262, or
39.90%, for fiscal 2000 as compared to fiscal 1999. Marketing, general and
administrative expenses related to Sonomed contributed $951,000 to the increase,
as there were no comparable expenses for fiscal 1999. Marketing, general and
administrative expenses in the vascular business unit increased $773,000 to
$1,310,000. This is due to the fact that there was only five and a half months
of activity in vascular in 1999 as compared to a full year in fiscal 2000.
Expenses in the medical business unit offset the Sonomed and vascular increases
by $395,000. This decrease is attributed to discontinued product lines (Betadine
and Silicone Oil). Specifically, employee-related expenses (salaries, bonuses,
commissions and benefits) decreased $371,000 to $163,000, product royalties
(mainly Betadine and Silicone Oil) decreased $71,000 to $51,000 and meeting
expenses decreased $37,000 to $24,000 in fiscal 2000 as compared to fiscal 1999.
Research and development expenses increased $246,000, or 33.33%, for
fiscal 2000 as compared to fiscal 1999. Research and development related to
Sonomed increased $126,000 in fiscal 2000 as there were no comparable expenses
in fiscal 1999. Research and development in the vascular business unit increased
$47,000 to $72,000. This is due to the fact that there was only five and a half
months of activity in vascular in 1999 as compared to a full year in fiscal
2000. Expenses in the medical business unit increased $72,000 to $786,000. The
increase is explained by the growth in the number of personnel necessary at the
Wisconsin facility to support the vascular business.
12
15
After completing the initial Phase I human clinical trials in late
December 1999, management reevaluated its Ocufit SR (R) ophthalmic drug delivery
system project. It was decided that further expenditures on this project were
not in the shareholders' best interest, and the project was discontinued. This
decision resulted in the company taking a charge of $418,000, which included
write-off of the net book value for remaining goodwill and patent costs
associated with this project.
In March 1999, the Company sold its inventory, license and distribution
rights for Betadine. This sale resulted in a $879,000 gain, after adjusting for
the cost of inventory sold, and the write-off of the remaining goodwill and
license and distribution rights associated with that product line.
In August 1999, the Company sold its license and distribution rights for
Silicone Oil. This sale resulted in a $1,864,000 gain after writing off the
remaining net book value of license and distribution rights associated with that
product line. Beginning in the second quarter of fiscal 2001, the Company will
also receive additional payments based upon future sales of Silicone Oil through
2004.
At June 30, 2000, Imaging was still in the development stage. Escalon has
recognized a $33,000 loss for its portion of fourth quarter 2000 activity of the
joint venture. The expenses relate to initial marketing ($20,000) and
development/engineering ($13,000).
Interest expense increased $539,000 to $576,000 in fiscal 2000 from
$37,000 in fiscal 1999. This is the result of corporate borrowing arrangements
that did not exist until the third quarter of fiscal 1999 and 2000. In
connection with the Sonomed acquisition, the Company refinanced its existing
bank debt, providing $12,000,000 of financing to the Company.
There is no provision or credit for federal income taxes for fiscal years
2000 and 1999 due to the allowance against the tax benefit of the net operating
loss incurred in fiscal 2000, and due to the utilization of the net operating
loss carryforward for fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, Escalon had cash and cash equivalents of $81,000 as
compared to $177,000 at June 30, 2000, a decrease of $96,000. This resulted
primarily from increases in cash of $1,210,000 provided by operating activities,
and $594,000 additional borrowing against the line of credit, offset by
$1,050,000 used to pay down the term loan, $558,000 additional investment in the
joint venture with MegaVision, $187,000 used to purchase assets, the large
portion of which includes a new accounting software package and related
hardware., and $71,000 which has been classified as goodwill related to the
Sonomed acquisition. The additions to goodwill were the result of an agreement
between Escalon and the former owner of Sonomed, whereby the Company agreed to
indemnify the former owner for certain taxes incurred as a result of the
acquisition.
On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. Escalon's bank granted a new $12,000,000 credit
facility to assist with the Sonomed acquisition. This included a $7,000,000
five-year term loan and a $5,000,000 line of credit and the release of the
requirement to maintain a $1,000,000 certificate of deposit with the Bank. The
interest rate on the term loan is based on prime plus 1.0% and the line of
credit is based on prime plus 0.75%. Interest rate cap agreements are used to
reduce the potential impact of increases in interest rates on the floating-rate
term loan and line of credit. At June 30, 2001, Escalon was party to interest
rate cap agreements covering the $7,000,000 term loan through January 1, 2003
and $3,000,000 of the reducing line of credit through January 1, 2002. The
agreements entitle the Company to receive from the Bank, the counter-party to
both agreements, on a monthly basis, the amounts, if any, by which the Company's
interest payments on the $3,000,000 protected portion of the line of credit
exceeds 9.0%. Payments are also due monthly from PNC Bank if the interest rate
on the term loan exceeds 9.5% for the period January 1, 2001 through January 1,
2002 and 10.0% for the period January 1, 2002 through January 1, 2003. At June
30, 2001, the interest rates applicable to the term loan and the line of credit
were 8.0% and 7.75%, respectively.
13
16
The Bank's prime rate as of June 30, 2000 was 7.0%. Escalon paid $100,000 in
finance fees and $122,800 in interest rate cap protection fees that are recorded
in other assets. These fees are being amortized over the term of the loans using
the effective interest method. All of the Company's assets, including those
acquired from Sonomed, collateralize these agreements.
The term loan and the line of credit contain various covenants related to
required levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined, and the maintenance of net worth levels,
among others. Escalon did not achieve the EBITDA and net worth covenants
resulting in breaches of the loan agreements. The Bank has waived these
requirements of the agreements as of June 30, 2001, and for the period ending
July 1, 2002. The Bank has waived the requirement of the loan agreement that
states that the line of credit balance cannot exceed $4,000,000 as of June 30,
2001. This requirement has also been waived for the period ending July 1, 2002.
In addition, the Company is currently negotiating with the Bank to amend the
covenant conditions of the term loan and line of credit.
On January 21, 1999, the Company's wholly owned subsidiary, Escalon
Vascular Access, Inc., and Radiance Medical Systems, Inc. entered into an Assets
Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for
cash, the assets of Radiance's vascular access business, and also agreed to pay
royalties based on future sales of products of the vascular access business for
a period of five years following the closing of this sale with a guaranteed
minimum royalty of $300,000 per year. On February 28, 2001, the parties amended
the agreement (Exhibit 10.15 Registrant's Amendment and Supplement Agreement and
Release between the Registrant an Radiance Medical Systems, Inc.) to provide an
adjustment in the terms of payment of the royalties. Pursuant to the Agreement
Escalon paid $17,558 in cash to Radiance, delivered a short-term note in the
amount of $64,884, an additional term note in the amount of $717,558 and has
issued 50,000 shares of Escalon Common Stock to Radiance.
Escalon anticipates that cash generated from future product sales and cash
received from the Silicone Oil divestment should be adequate to satisfy its
capital requirements, based on the current levels of operation. In the longer
term, the Company will seek corporate partnering, licensing and other financing
opportunities to satisfy the expenditures needed to fund its'
growth-through-acquisition strategy.
The Board of Directors has authorized the repurchase of up to 500,000
shares of the Company's Common Stock. The price, timing and manner of these
purchases will be at the discretion of management. No purchases have been made,
nor are any currently expected to be made under this authority.
The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain
listing requirements must be met. As of June 30, 2001, Escalon has complied with
such requirements. If Escalon's securities were delisted, an investor could find
it more difficult to dispose of them, or obtain accurate quotations as to the
market value of the Company's securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about Escalon's financial
instruments, consisting primarily of debt obligations that are sensitive to
changes in interest rates. For debt obligations, the table represents principal
cash flows and related interest rates by expected maturity dates. Interest rates
are based upon the federal prime rate at June 30, 2001 plus 1.0% on the term
loan and 0.75% on the line of credit. Interest rate cap agreements are used to
reduce the potential impact of increases on the floating-rate term loan and line
of credit. The Company is party to interest rate cap agreements covering the
term loan through January 1, 2003 and the line of credit through January 1,
2002. As of June 30, 2001, the Company had $4,900,000 of its term loan and
$3,000,000 of its line of credit protected under these agreements.
14
17
Expected Maturity Date, Fiscal
--------------------------------------------------------------------------
2001 2002 2003 2004 2005 Total
--------- --------- --------- --------- --------- ---------
Term loan 350,000 1,400,000 1,400,000 1,400,000 350,000 4,900,000
Interest rate - capped 9.00% 9.00% 9.00% -- --
Term loan - no cap -- -- -- -- 350,000 350,000
Interest rate - no cap -- -- 9.75% 9.75%
Line of credit - capped 3,000,000 -- -- -- -- 3,000,000
Interest rate 8.75% -- -- -- --
Line of credit - no cap 1,626,009 -- -- -- -- 1,626,009
Interest rate 9.50% -- -- -- --
Radiance Note 1 -- 65,000 -- -- -- 65,000
Interest rate -- 9.00% -- -- --
Radiance note 2 -- 130,000 261,000 261,000 65,000 717,000
Interest rate -- 9.00% 9.00% 9.00% 9.00%
EXCHANGE RATE RISK
In fiscal 2001 approximately 17 percent of Escalon's net revenue was
derived from international sales. The price of all products sold overseas is
denominated in United States dollars and consequently incurs no exchange rate
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are filed under this Item 8,
beginning on F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to
the information under the captions "Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" included in Escalon's proxy
statement for our 2001 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in Escalon's
proxy statement for our 2001 Annual Meeting of stockholders to be filed with the
Securities and Exchange Commission.
15
18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
the information under the captions "Principle Stockholders" and "Management"
included in Escalon's proxy statement for our 2001 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
See index to Consolidated Financial Statements on page F-1.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the financial statements or notes
thereto.
EXHIBITS
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits, which were previously
filed, are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically,
followed by the footnote reference to the previous filing.
3.1 Certificate of Incorporation of Registrant.(10)
3.2 Bylaws of Registrant.(10)
4.5 (a) Warrant Agreement between the Registrant and U.S. Stock Transfer
Corporation.(1)
(b) Amendment to Warrant Agreement between the Registrant and U.S. Stock
Transfer Corporation.(3)
(c) Amendment to Warrant Agreement between the Registrant and American
Stock Transfer Corporation.(4)
4.6 Securities Purchase Agreement, dated as of December 31, 1997 by and
among the Company and Combination.(6)
4.7 Registration Rights Agreement, dated as of December 31, 1997 by and
among the Company and Combination.(6)
4.8 Warrant to Purchase Common Stock issued December 31, 1997 to David
Stefansky.(6)
4.9 Warrant to Purchase Common Stock issued December 31, 1997 to
Combination.(6)
4.10 Warrant to Purchase Common Stock issued December 31, 1997 to Richard
Rosenblum.(6)
4.11 Warrant to Purchase Common Stock issued December 31, 1997 to
Trautman Kramer & Company.(6)
16
19
10.1 1993 Stock Option Plan of Registrant.(2)(12)
10.2 Form of Indemnification Agreement pursuant to Delaware law between
Registrant and each of its directors and executive officers.(*)
10.3 Employment Agreement between the Registrant and Ronald L. Hueneke
dated July 1, 1999.(*)(12)
10.4 Employment Agreement between the Registrant and Richard J. DePiano
dated May 12, 1998.(*)(12)
10.5 Non-Exclusive Distributorship Agreement between Registrant and Scott
Medical Products dated October 12, 2000.(*)
10.6 Research and Development Agreement between the Registrant and The
West Company, Incorporated dated April 3, 1995.(6)
10.7 Assets Sale and Purchase Agreement between the Registrant and
Radiance Medical Systems, Inc. dated January 21, 1999.(7)
10.8 Amendment and Supplement to Assets Sale and Purchase Agreement and
Release dated as of February 28, 2001.(*)
10.9 Supply Agreement between the Registrant and Bausch & Lomb Surgical,
Inc., dated August 13, 1999.(7)
10.10 Stock Purchase Agreement between the Registrant, Sonomed, Inc. and
the stockholders of Sonomed, Inc. dated January 14, 2000.(8)
10.11 Employment Agreement between the Registrant and Louis Katz dated
January 14, 2000.(8)(12)
10.12 Registrant's 1999 Equity Incentive Plan and Registrant's Equity
Incentive Plan for Employees of Sonomed, Inc.(9)(12)
10.13 Registrant's Amended and Restated 1999 Equity Incentive Plan.(11)(12)
21 Subsidiaries.(*)
23.1 Consent of Parente Randolph, LLC, independent auditors.(*)
----------
* Filed herewith.
(1) Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 dated November 9, 1993 (Registration
No. 33-69360).
(2) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated June 13, 1994 (Registration No. 33-80162).
(3) Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
1994.
(4) Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
1995.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
1996.
(6) Filed as an exhibit to the Company's Registration Statement of Form S-3
dated January 20, 1998 (Registration No. 333-44513).
(7) Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
1999.
(8) Filed as an exhibit to the Company's Form 8-K, dated January 14, 2000.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated February 25, 2000 (Registration No. 333-31138).
(10) Filed as an exhibit to the Company's Definitive Proxy Statement on
Schedule 14A, as filed by the Company with the SEC on October 12, 1999.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-8
dated February 5, 2001 (Registration No. 333-54980)
(12) Management Contract, Compensatory Plan or Arrangement.
17
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
Dated: September 27, 2001
By: /s/ Richard J. DePiano
-----------------------
Richard J. DePiano
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/ Richard J. DePiano Chairman and Chief Executive Officer September 27, 2001
----------------------- (Principal Executive Officer) and
Richard J. DePiano Director
By: /s/ Ronald L. Hueneke President and Chief Operating Officer September 27, 2001
----------------------
Ronald L. Hueneke
By: /s/ Harry M. Rimmer Senior Vice-President - Finance September 27, 2001
-------------------- (Principal Financial Officer)
Harry M. Rimmer
By: /s/ Jay L. Federman, MD Director September 27, 2001
------------------------
Jay L. Federman, MD
By: /s/ Fred G. Choate Director September 27, 2001
-------------------
Fred G. Choate
By: /s/ Jeffrey F. O'Donnell Director September 27, 2001
-------------------------
Jeffrey F. O'Donnell
By: /s/ William Kwan Director September 27, 2001
-----------------
William Kwan
By: /s/ Anthony Coppola Director September 27, 2001
--------------------
Anthony Coppola
18
21
ESCALON MEDICAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheets at June 30, 2000 and 2001 F-3
Consolidated Statements of Operations for the years ended
June 30, 1999, 2000 and 2001 F-4
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1999, 2000 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended June 30,
1999, 2000 and 2001 F-6
Notes to Consolidated Financial Statements F-8
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Escalon Medical Corp.:
We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries (the "Company") at June 30, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries at June 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2001 in conformity with accounting principles generally accepted
in the United States of America.
PARENTE RANDOLPH, LLC
Philadelphia, Pennsylvania
August 17, 2001
F-2
23
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 80,830 $ 177,106
Accounts receivable, net 2,317,476 1,331,783
Inventory, net 1,499,821 1,574,678
Prepaid insurance 22,864 166,667
Other current assets 264,161 69,063
------------ ------------
Total current assets 4,185,152 3,319,297
Long-term note receivable 150,000 150,000
Furniture and equipment, net 631,877 584,063
Customer lists, net 6,951,389 7,464,722
Goodwill, net 2,165,767 2,278,576
Trademarks and trade names, net 2,076,439 2,229,722
License and distribution rights, net 262,613 266,843
Patents, net 204,274 215,006
Due from joint venture 639,304 80,961
Other assets 531,607 256,100
------------ ------------
Total assets $ 17,798,422 $ 16,845,290
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 4,626,009 $ 4,032,105
Current portion of long-term debt 1,530,117 1,400,000
Accounts payable 436,684 462,086
Accrued compensation 399,535 355,074
Other current liabilities 196,503 280,976
------------ ------------
Total current liabilities 7,188,848 6,530,241
Long-term debt, net of current portion 4,502,325 4,900,000
------------ ------------
Total liabilities 11,691,173 11,430,241
Shareholders' Equity:
Preferred stock, $0.001 par value; 2,000,000
shares authorized; no shares issued -- --
Common stock, $0.001 par value; 35,000,000
shares authorized, 3,292,184 and 3,242,184
shares issued at June 30, 2001 and June 30,
2000, respectively 3,292 3,242
Additional paid-in capital 46,121,519 46,021,569
Accumulated deficit (40,017,562) (40,609,762)
------------ ------------
Total shareholders' equity 6,107,249 5,415,049
------------ ------------
Total liabilities and shareholders' equity $ 17,798,422 $ 16,845,290
============ ============
See notes to consolidated financial statements
F-3
24
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues, net $11,880,017 $ 6,670,214 $ 7,559,011
----------- ----------- -----------
Costs and expenses:
Cost of goods sold 4,296,525 2,874,194 3,282,177
Research and development 491,582 983,853 738,124
Marketing, general and
administrative 5,430,813 4,660,824 3,331,562
Write-down of patent costs and
goodwill, Ocufit -- 417,849 --
----------- ----------- -----------
Total costs and expenses 10,218,920 8,936,720 7,351,863
----------- ----------- -----------
Income (loss) from operations 1,661,097 (2,266,506) 207,148
----------- ----------- -----------
Other income and (expenses):
Gain on sale of Silicone Oil
product line -- 1,863,915 --
Gain on sale of Betadine product
line -- -- 879,159
Equity in loss of unconsolidated
joint venture (19,164) (33,382) --
Interest income 2,297 149,086 144,877
Interest expense (1,052,030) (575,765) (37,397)
----------- ----------- -----------
Total other income and (expenses) (1,068,897) 1,403,854 986,639
----------- ----------- -----------
Net income (loss) $ 592,200 $ (862,652) $ 1,193,787
=========== =========== ===========
Basic net income (loss) per share $ 0.18 $ (0.27) $ 0.10
=========== =========== ===========
Diluted net income (loss) per share $ 0.18 $ (0.27) $ 0.10
=========== =========== ===========
Weighted average shares - basic 3,292,184 3,242,184 3,114,823
=========== =========== ===========
Weighted average shares - diluted 3,307,986 3,242,184 3,150,721
=========== =========== ===========
See notes to consolidated financial statements
F-4
25
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Preferred Stock Common Stock Treasury Stock
----------------- ----------------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at June 30, 1998 900 $ 747,321 3,021,027 $ 45,253,597 -- $ --
Preferred stock conversions (82) (68,090) 131,137 68,090 -- --
Preferred stock retirement (818) (679,231) -- -- -- --
Common stock issued in
connection with
preferred stock retirement -- -- 225,000 703,124 -- --
Purchase of treasury stock -- -- -- -- 134,980 (118,108)
Preferred stock dividends -- -- -- -- -- --
Net income -- -- -- -- -- --
---- --------- ---------- ------------ -------- ---------
Balance at June 30, 1999 -- $ -- 3,377,164 $ 46,024,811 134,980 $(118,108)
Treasury stock retirement -- -- (134,980 ) -- (134,980) 118,108
Common stock conversion
from no par to
$.001 par value -- -- -- (46,021,569) -- --
Net loss -- -- -- -- -- --
---- --------- ---------- ------------ -------- ---------
Balance at June 30, 2000 -- $ -- 3,242,184 $ 3,242 -- $ --
Common stock issued in
connection with
restructuring of liabilities -- -- 50,000 50 -- --
Net income -- -- -- -- -- --
---- --------- ---------- ------------ -------- ---------
Balance at June 30, 2001 -- $ -- 3,292,184 $ 3,292 -- $ --
==== ========= ========== ============ ======== =========
Additional Total
Paid-in Accumulated Shareholders'
Capital Deficit Equity
------- ------- ------
Balance at June 30, 1998 $ -- $(39,952,266) $ 6,048,652
Preferred stock conversions -- -- --
Preferred stock retirement -- (138,769) (818,000)
Common stock issued in connection with
preferred stock retirement -- (703,124) --
Purchase of treasury stock -- -- (118,108)
Preferred stock dividends -- (28,630) (28,630)
Net income -- 1,193,787 1,193,787
----------- ------------ -----------
Balance at June 30, 1999 $ -- $(39,629,002) $ 6,277,701
Treasury stock retirement -- (118,108) --
Common stock conversion from no par to
$.001 par value 46,021,569 -- --
Net loss -- (862,652) (862,652)
----------- ------------ -----------
Balance at June 30, 2000 $46,021,569 $(40,609,762) $ 5,415,049
Common stock issued in connection with
restructuring of liabilities 99,950 -- 100,000
Net income -- 592,200 592,200
----------- ------------ -----------
Balance at June 30, 2001 $46,121,519 $(40,017,562) $ 6,107,249
=========== ============ ===========
See notes to consolidated financial statements
F-5
26
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
2001 2000 1999
------------- -------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 592,200 $ (862,652) $ 1,193,787
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization 1,038,741 666,770 363,687
Net gain on sale of Silicone Oil product line -- (1,863,915) --
Net gain on sale of Betadine product line -- -- (879,159)
Write-down of patent costs and goodwill, Ocufit, net -- 417,849 --
Write-down of intangible assets -- -- 24,805
Equity in net loss of unconsolidated joint venture 19,164 33,382 --
Change in operating assets and liabilities:
Accounts receivable, net (985,693) 586,424 (48,451)
Inventory, net 74,857 162,862 (410,476)
Other current and long-term assets 406,358 (59,915) (116,491)
Accounts payable, accrued and other liabilities 64,701 (416,506) 519,764
----------------------------------------------
Net cash provided from (used in) operating activities 1,210,328 (1,335,701) 647,466
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments -- (7,043,061) (259,000)
Proceeds from maturities of investments -- 7,043,061 589,016
Proceeds from sale of Silicone Oil product line -- 2,117,180 --
Proceeds from sale of Betadine product line -- -- 2,059,835
Net change in cash and cash equivalents - restricted -- 1,000,000 (1,000,000)
Purchase of Vascular Access Business -- (1,000,000) (1,165,329)
Purchase of Sonomed, Inc., net of cash acquired (70,662) (12,250,540) --
Advances to unconsolidated joint venture (558,343) (80,961) --
Purchase of furniture and equipment (187,477) (209,109) (74,106)
Payment of deferred finance and interest rate cap fees -- (222,800) --
Disbursements under short and long-term note receivable -- -- (52,500)
Payment for patent costs -- (52,748) (65,167)
Payment for license and distribution rights (34,027) (41,228) (45,036)
----------------------------------------------
Net cash used in investing activities (850,509) (10,740,206) (12,287)
----------------------------------------------
See notes to consolidated financial statements
F-6
27
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES: 2001 2000 1999
------------ ------------- -------------
Line of credit borrowing, net 593,905 3,032,105 1,000,000
Proceeds from term loan -- 7,000,000 1,000,000
Principal payments on term loan (1,050,000) (1,633,332) (66,668)
Retirement of preferred stock -- -- (818,000)
Payment of preferred stock dividend -- -- (42,130)
Purchase of treasury stock -- -- (118,108)
-------------------------------------------
Net cash (used in) provided from financing activities (456,095) 8,398,773 955,094
-------------------------------------------
Net (decrease) increase in cash and cash equivalents (96,276) (3,677,134) 1,590,273
Cash and cash equivalents, beginning of period 177,106 3,854,240 2,263,967
-------------------------------------------
Cash and cash equivalents, end of period $ 80,830 $ 177,106 $ 3,854,240
===========================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 962,275 $ 575,765 $ 32,041
===========================================
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY:
Accrued royalties converted to long-term debt $ 64,884 $ -- $ --
===========================================
Long-term debt obligation incurred as a result
of a royalty agreement $ 717,558 $ -- $ --
===========================================
Accrued royalties converted to common stock $ 100,000 $ -- $ --
===========================================
See notes to consolidated financial statements
F-7
28
ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Escalon Medical Corp. ("Escalon" or the "Company") was incorporated
in California in 1987 as Intelligent Surgical Lasers, Inc. Escalon's present
name was adopted in August 1996. In November 1999, Escalon reincorporated in
Delaware. Within this document, the "Company" collectively shall mean Escalon
and its wholly-owned subsidiaries: Sonomed, Inc. ("Sonomed"), Escalon Vascular
Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital") and Escalon
Pharmaceutical, Inc. ("Pharmaceutical"). The Company operates in the healthcare
market, specializing in the development, manufacture, marketing and distribution
of ophthalmic medical devices, pharmaceutical and vascular access products. The
products are sold domestically and internationally either directly to the
customer or through a series of independent distributors.
In February 1996, the Company acquired substantially all of the
assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer
and distributor of ophthalmic surgical products. Prior to this acquisition, the
Company devoted substantially all of its resources to the research and
development of ultrafast laser systems designed for treatment of ophthalmic
disorders. As a result of the EOI acquisition, Escalon changed its market focus
and is no longer developing laser technology. In October 1997, the Company
licensed its intellectual laser properties to a newly formed company, IntraLase
Corporation ("Intralase"), in return for an equity interest and future royalties
on product sales. IntraLase will have the responsibility of funding and
developing the laser technology through to commercialization.
To further diversify its product portfolio, in January 1999, the
Company acquired the vascular access product line from Radiance Medical Systems,
Inc. ("Radiance"). This was the first step in a plan of diversification to
acquire profitable niche medical products. Vascular's products use Doppler
technology to aid medical personnel in locating difficult arteries and veins.
Currently, this product line concentrates on the cardiac catheterization market.
In January 2000, the Company purchased Sonomed, a privately held manufacturer of
ophthalmic ultrasound diagnostic equipment. In April 2000, the Company
established Digital as a wholly-owned subsidiary. This subsidiary formed a joint
venture, Escalon Medical Imaging, LLC ("Imaging"), with MegaVision, Inc.
("MegaVision"), a privately-held company, to develop and market a digital camera
back for ophthalmic photography.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Sonomed, Vascular, Pharmaceutical,
and Digital. All intercompany transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and actions
management may undertake in the future, actual results may ultimately differ
from those estimates.
F-8
29
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturity of
three months or less at the time of purchase to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts
receivable, line of credit, accounts payable and accrued liabilities approximate
their fair value because of their short-term maturity. The carrying amounts of
long-term debt approximate fair value since the Company's interest rates
approximate current interest rates.
INVENTORIES
Raw materials / work in process and finished goods inventories are
recorded at lower of cost (first-in, first-out) or market. The composition of
inventories is as follows:
JUNE 30, JUNE 30,
2001 2000
-------- --------
Raw materials / work in process $ 1,288,664 $ 1,336,754
Finished goods 313,325 365,092
----------- -----------
1,601,989 1,701,846
Valuation allowance (102,168) (127,168)
----------- -----------
$ 1,499,821 $ 1,574,678
=========== ===========
In fiscal 2001, the Company's valuation allowance was decreased to
$102,168 as a result of the write off of certain obsolete raw materials at the
Company's Wisconsin facility. The valuation allowance has been established
primarily because the Company believes it may not be able to utilize all small
gauge vascular product components it acquired in its acquisition of the Radiance
product line.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers'
financial condition and does not require collateral for accounts receivable
arising in the normal course of business. The Company maintains allowances for
potential credit losses which, when realized, have been within the range of
management's expectations. Allowance for doubtful accounts was $67,148 and
$52,786 at June 30, 2001 and 2000, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets, which are estimated to be eighteen months to ten years. Depreciation
expense for the years ended June 30, 2001, 2000 and 1999 was $139,663, $103,925
and $73,174, respectively.
F-9
30
Furniture and equipment consist of the following at:
JUNE 30, JUNE 30,
2001 2000
-------- --------
Equipment $ 874,146 $ 702,714
Furniture and fixtures 65,435 51,356
Leasehold improvements 95,102 93,136
----------- ----------
1,034,683 847,206
Less accumulated depreciation
and amortization (402,806) (263,143)
----------- ----------
$ 631,877 $ 584,063
=========== =========
ACQUIRED LICENSE AND DISTRIBUTION RIGHTS
In connection with the acquisition of EOI assets (see Company
Overview in Part I of this Form 10-K), a portion of the purchase price was
allocated to certain product license and distribution agreements. This cost
allocation was based on an independent evaluation, with such costs being
amortized over an eight-year period using the straight-line method. The values
of these assets are reevaluated periodically to determine if the estimated lives
continue to be appropriate. The sale of the Silicone Oil product line caused the
Company to write off $483,000 in cost and $214,000 in accumulated amortization
in fiscal 2000.
Accumulated amortization of license and distribution rights was $164,754 and
$126,498 at June 30, 2001 and 2000, respectively. The sale of the Betadine
product line caused the Company to write off $422,000 in cost and $163,000 in
accumulated amortization in fiscal 1999. Amortization expense for the years
ended June 30, 2001, 2000 and 1999 was $38,256, 42,558 and 127,517,
respectively.
PATENTS
It is the Company's practice to seek patent protection on processes
and products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding seventeen years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. In fiscal 1999,
two ophthalmic patents were abandoned; this resulted in a write off of $27,182
in cost and $2,376 in accumulated amortization. In fiscal 2000, the Company
discontinued its Ocufit project resulting in the write-off of $353,000 in cost
and $34,000 in accumulated amortization. Accumulated patent amortization was
$89,943 and $79,209 at June 30, 2001 and 2000, respectively. Amortization
expense for the years ended June 30, 2001, 2000 and 1999 was $10,733, $15,062
and $19,614, respectively.
GOODWILL, TRADEMARKS, TRADE NAMES AND CUSTOMER LISTS
Goodwill represents the excess of purchase price over the fair market
value of the net assets acquired. For the preexisting EOI assets, these costs
are being amortized over a ten-year period using the straight-line method.
Intangible assets from Radiance are being amortized using the straight-line
method, primarily over fifteen years. Intangible assets, consisting of goodwill,
trademarks, trade names and customer lists, resulting from the Sonomed
acquisition are being amortized over fifteen years using the straight-line
method. The Company periodically reviews the value of goodwill and other
intangible assets to determine if impairment has occurred. No impairment was
indicated in fiscal 2001 or 2000. Sale of the Betadine product line caused the
Company to write off $668,000 of goodwill and $206,000 in associated accumulated
amortization in fiscal 1999. Accumulated amortization of goodwill at
F-10
31
June 30, 2001 and 2000 was $469,320 and $285,849, respectively. Amortization of
goodwill for the years ended June 30, 2001, 2000 and 1999 was $185,625, $168,718
and $143,381, respectively. Accumulated amortization of trademarks, trade names
and customers lists at June 30, 2001 and 2000 was $972,222 and $305,558,
respectively. Amortization of trademarks, trade names and customer lists for the
years ended June 30, 2001 and 2000 was $666,616 and $305,558, respectively.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of its products at the
time of shipment. With respect to additional consideration related to the sale
of the Company's Silicone Oil product line (Note 13), revenue is recognized
after notification from the customer of sales associated with the product.
STOCK-BASED COMPENSATION
As permitted by Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," ("APB 25") and related interpretations in accounting for its
employee stock option plans. Under APB 25, no compensation expense is recognized
at the time of the option grant because the exercise price of the Company's
employee stock option equals the fair market value of the underlying common
stock on the date of the grant.
RESEARCH AND DEVELOPMENT
All research and development costs are charged to operations as
incurred.
DEFERRED INTEREST RATE CAP FEES
Premiums paid for purchased interest rate cap arrangements are
amortized using the effective interest method over the terms of the caps.
Unamortized premiums are included in other assets on the balance sheet. Amounts
receivable under cap agreements are recorded as a reduction of interest expense.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred. Advertising
expense for the years ended June 30, 2001, 2000 and 1999 was $71,654, $47,437
and $41,824, respectively.
NET INCOME (LOSS) PER SHARE
The Company follows Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share," in presenting basic and diluted earnings per
share. The following table sets forth the computation of basic and diluted
earnings per share:
F-11
32
JUNE 30, JUNE 30, JUNE 30,
2001 2000 1999
-------- -------- --------
Numerator:
Numerator for basic and diluted
earnings (loss) per share:
Net income (loss) $ 592,200 $ (863,652) $ 1,193,787
Preferred stock dividends and accretion -- -- (870,523)
---------- ----------- -----------
Income (loss) available to common shareholders $ 592,200 $ (863,652) $ 323,264
========== =========== ===========
Denominator:
Denominator for basic earnings (loss)
per share - weighted average shares 3,292,184 3,242,184 3,114,823
Effect of dilutive securities:
Employee stock options 15,802 -- 35,898
---------- ----------- -----------
Denominator for diluted earnings (loss)
per share - weighted average and
assumed conversion 3,307,986 3,242,184 3,150,721
========== =========== ===========
Basic earnings (loss) per share $ 0.18 $ (0.27) $ 0.10
========== =========== ===========
Diluted earnings (loss) per share $ 0.18 $ (0.27) $ 0.10
========== =========== ===========
INCOME TAXES
The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted rates and laws that will be in effect when
the differences are expected to reverse.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 presentation.
JOINT VENTURE
In April 2000, the Company through its wholly-owned subsidiary,
Digital, entered into a joint venture with MegaVision, Inc., with each entity
having a 50% interest. The joint venture has been named Escalon Medical Imaging,
LLC. Amounts due from this joint venture amounted to $639,304 and $80,961 at
June 30, 2001 and 2000, respectively. No interest is being charged and no
repayment terms exist at this time. Loss from this joint venture was $19,164 and
$33,382 for the years ended June 30, 2001 and 2000, respectively.
F-12
33
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the financial Accounting Standards Board issued FASB
Statements No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on certain criteria in SFAS 141.
SFAS 142 requires, among other things, that the Company no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with guidelines in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
Currently, the Company is assessing but has not yet determined how
the adoption of SFAS 141 and SFAS 142 will impact its future financial position
and results of operation.
(3) LONG-TERM RECEIVABLE
The Company entered into a loan agreement with an individual who was
involved in the development of its Ocufit SR(R) drug delivery system. The note
for $150,000, principal and accrued interest at three percent, is due in May
2005.
(4) PNC LINE OF CREDIT AND LONG-TERM DEBT
On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. The Bank granted a new $12,000,000 credit facility to
assist with the Sonomed acquisition. This included a $7,000,000 five-year term
loan and a $5,000,000 line of credit and the release of the requirement to
maintain a $1,000,000 certificate of deposit with the Bank. The interest rate on
the term loan is based on prime plus 1.0% and the line of credit is based on
prime plus 0.75%. Interest rate cap agreements are used to reduce the potential
impact of increases in interest rates on the floating-rate term loan and line of
credit. At June 30, 2001, Escalon was party to interest rate cap agreements
covering the $7,000,000 term loan through January 1, 2003 and $3,000,000 of the
reducing line of credit through January 1, 2002. The agreements entitle the
Company to receive from the Bank, the counter-party to both agreements, on a
monthly basis, the amounts, if any, by which the Company's interest payments on
the $3,000,000 protected portion of the line of credit exceeds 9.0%. Payments
are also due monthly from the Bank if the interest rate on the term loan exceeds
9.5% for the period January 1, 2001 through January 1, 2002 and 10.0% for the
period January 1, 2002 through January 1, 2003. At June 30, 2001, the interest
rates applicable to the term loan and the line of credit were 8.0% and 7.75%,
respectively. The Bank's prime rate as of June 30, 2000 was 7.0%. Escalon paid
$100,000 in finance fees and $122,800 in interest rate cap protection fees that
are recorded in other assets. These fees are being amortized over the term of
the loans using the effective interest method. For the fiscal years ended June
30, 2001 and 2000, amortization of these fees was $23,778 and $30,951,
respectively. All of the Company's assets, including those acquired from
Sonomed, collateralize these agreements.
F-13
34
The term loan and the line of credit contain various covenants
related to required levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as defined, and the maintenance of net worth levels,
among others. Escalon did not achieve the EBITDA and net worth covenants
resulting in technical defaults under the loan agreements. The Bank has waived
these requirements of the agreements as of June 30, 2001, and for the period
ending July 1, 2002. In addition, the Company is currently negotiating with the
Bank to amend the covenant conditions of the term loan and line of credit.
Following are maturities of the long-term debt for each of the next
five years:
PNC Bank Radiance
Year ending June 30, Term Loan Loans Total
-------------------- ---------- --------- ----------
2002 $1,400,000 $ 130,000 $1,530,000
2003 1,400,000 261,000 1,661,000
2004 1,400,000 261,000 1,661,000
2005 1,050,000 130,000 1,180,000
2006 - - -
---------- -------- ----------
$5,250,000 $782,000 $6,032,000
========== ======== ==========
Balances available under the reducing line of credit with The Bank
for each period in the term of the agreement are as follows:
Period Amount
------ ------
1/14/00 to 6/29/01 $5,000,000
6/30/01 to 6/29/02 4,000,000
6/30/02 to 6/29/03 3,000,000
Thereafter 1,500,000
The Bank has waived the requirement of the loan agreement, that
states that the line of credit balance cannot exceed $4,000,000 as of June 30,
2001. This requirement has also been waived for the period ending July 1, 2002.
(5) CAPITAL STOCK TRANSACTIONS
CAPITALIZATION
On November 17, 1999, Escalon Medical Corp., a California corporation
("Escalon California"), merged with and into one of its wholly owned
subsidiaries, Escalon Medical Corp. (formerly Escalon Delaware, Inc.), a
Delaware corporation for the purpose of reincorporating Escalon California in
the state of Delaware. Pursuant to the merger, the separate corporate existence
of Escalon California ceased and the Company is the surviving corporation.
PREFERRED STOCK OFFERING AND REDEMPTION
On December 31, 1997, Escalon issued $1,350,000 of Series A 6% Convertible
Preferred Stock ("Preferred Stock") in a private placement. This stock issue was
redeemed on February 1, 1999 with the payment of $818,000 plus accrued interest
and the issuance of 225,000 shares of the Company's Common Stock.
F-14
35
The Company succeeded to all of the assets, rights and properties of
Escalon California and assumed all of the debts, liabilities and obligations of
Escalon California. Each share of Escalon California, no par value, issued and
outstanding immediately prior to the effective date of the merger was
automatically converted into one fully paid share of Common Stock, par value
$.001 per share, of the Company certificate representing issued and outstanding
shares of Common Stock of Escalon California immediately prior to the effective
date of the merger is deemed to represent the number of shares of Common Stock
of the Company into which shares of Escalon California Common Stock were
converted in the merger.
At the time of issuance the net proceeds of $1,194,750 from this
offering were received on January 2, 1998. After March 1, 1998, the Preferred
Stock was capable of being converted at the option of the holder into shares of
the Company's Common Stock at a rate determined by dividing the liquidation
value of the Preferred Stock being converted by the conversion price then in
effect. The conversion price was the lesser of (i) $8.6125 (which was the
average of the closing bid price of the Common Stock for each of the five
trading days immediately prior to December 31, 1997) or, (ii) up to 82% of the
five-day average closing price prior to the conversion date. The Preferred Stock
paid cumulative dividends of 6% per annum payable quarterly in cash. The
Preferred Stock was accompanied by an immediately exercisable five-year warrant
to purchase 40,000 shares of Common Stock at exercise prices ranging from
$8.6125 to $11.626875. The Company also issued to the private placement agent
and its designees a similar warrant to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $10.335 per share. The warrants were valued
at $234,500 using the Black-Sholes option pricing method with the following
assumptions: risk-free interest rate of 5.5%; expected volatility of .0879;
expected warrant life of one-half year from vesting; and an expected dividend
rate of 0.0%. The value of the warrants was accounted for as part of the
offering related expenses.
The incremental yield imbedded in the conversion terms of the
Preferred Stock was accounted for as a dividend of approximately $243,000 and
was amortized over the period from the date of issuance to March 1, 1998, the
first date at which conversions could occur.
During fiscal 1998, the preferred shareholder converted blocks of
197, 143 and 110 shares at conversion prices of $1.5016, $1.0967 and $0.8457 per
share, respectively. The conversions increased the Common Stock outstanding by
391,652 shares. In July 1998, the holder of Preferred Stock converted 82
additional shares into 131,137 shares of the Company's Common Stock at a
conversion price of $0.6253 per share.
In February 1999, Escalon simultaneously converted shares of
Preferred Stock into 225,000 shares of its Common Stock and redeemed all of the
remaining shares of its preferred stock for $818,000. In connection with the
redemption and issuance, the Company recognized an $841,893 imputed dividend.
STOCK OPTION PLANS
Escalon has in effect five employee stock option plans, which provide
for incentive and non-qualified stock options to purchase a total of 1,173,268
shares of the Company's Common Stock. One of the plans, for 330,000 options, was
an element of the purchase agreement for Sonomed. Under the terms of the plans,
options may be granted at not less than the fair market value of the Common
Stock at the date of grant. Vesting generally occurs ratably over five years and
is exercisable over a period no longer than ten years after the grant date.
As of June 30, 2001, options to purchase 1,090,000 shares of the
Company's Common Stock were granted, 841,542 were exercisable and 83,268 are
reserved for future grants.
F-15
36
Financial Accounting Standards Board Statement No. 123 ("SFAS No.
123") requires pro forma information regarding net income and earnings per share
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS No. 123. The
fair value of these equity awards was estimated at the date of grant using the
Black-Sholes option pricing method. For all years presented, the expected option
life of one year from vesting and an expected dividend rate of 0.0% were used.
The weighted average assumptions used in fiscal 2000 were a risk-free interest
rate of 5.94% and an expected volatility of 1.502. Fiscal 1999's assumptions
were risk-free interest rates of 5.08% and 5.31%, and an expected volatility of
1.427.
For the purposes of pro forma disclosures, the estimated fair value
of the equity awards is amortized to expense over the options' vesting period.
The pro forma net loss for fiscal 2000 would have been $1,022,768, and the basic
and diluted earnings per share of Common Stock would be $(0.32). For the fiscal
year ended June 30, 1999, the pro forma net income and basic and diluted
earnings per share were $1,031,037 and $0.05, respectively.
The following is a summary of Escalon's stock option activity and
related information for the fiscal years ended June 30, 2001, 2000 and 1999:
2001 2000 1999
------------------------- ------------------------- ----------------------------
Common Weighted Common Weighted Common Weighted
Stock Average Stock Average Stock Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at beginning
of year 837,000 $2.377 314,500 $2.122 172,000 $2.120
Granted 264,500 $2.046 546,000 $2.510 152,500 $2.108
Forfeited (11,500) $1.962 (23,500) $1.949 (10,000) $1.875
--------- ------ ------- ------ ------- ------
Outstanding at end of year 1,090,000 $2.301 837,000 $2.377 314,500 $2.122
Exercisable at end of year 841,542 468,743 100,633
========= ======= =======
Weighted average fair value of
options granted during year $0.000 $0.733 $1.131
Options granted during fiscal 1999, have an exercise price of $2.108 and a
remaining contractual life of 7.79 years. Those issued in fiscal 2000 have an
exercise price of $2.510 and a remaining contractual life of 8.49 years. Fiscal
2001 options have a weighted average exercise price of $2.046 and a remaining
contractual life of 9.29 years.
Non-plan options to purchase 1,367 and 1,367 shares of Common Stock, at prices
of $1.460 and $7.380, respectively, were outstanding and exercisable at June 30,
2001. These options generally have vesting and exercise provisions consistent
with options granted under the plans.
F-16
37
(6) TREASURY STOCK
In July 1998, Escalon entered into an agreement with a stockholder to
repurchase 114,285 shares of the Company's Common Stock for $100,000 and accept
an additional 20,695 shares in satisfaction of a $18,108 receivable. The
treasury stock was retired on November 17, 1999 in connection with the Company's
recapitalization and reincorporation in the State of Delaware.
(7) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets, which are primarily considered
to be noncurrent, consisted of the following at:
At June 30,
-----------------------
2001 2000
---------- -----------
Deferred tax assets:
Reserves and allowances $ 58,000 $ 73,000
Net operating loss carryforwards 9,206,000 3,563,000
Tax credit carryforwards 562,000 562,000
----------- -----------
9,826,000 4,198,000
Valuation allowance (9,826,000) (4,198,000)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
At June 30, 2001, Escalon had federal income tax and state income tax
net operating loss carryforwards of approximately $27,000,000 and $326,000,
respectively. The difference between federal and state carryforward amounts is
primarily attributable to the Company's discontinuing its operations in
California. The state net operating loss carryforwards arising in California
will not be offset against future taxable income and were written off. Federal
and state operating loss carryforwards and tax credits will expire at various
dates between 2002 and 2013.
The timing and manner in which the Company will utilize net operating
loss carryforwards to reduce federal taxable income in any year, or in total,
will be limited by provisions of the Internal Revenue Code, Section 382, and
related sections, which address changes in stock ownership. The annual
limitation is $2,763,638, of which $18,305,541 is cumulatively available to
reduce 2001 federal taxable income. Such limitations may have an impact on the
ultimate realization of these federal income tax carryforwards. The increase in
the deferred tax asset arising from net operating loss carryforwards and the
related valuation allowance from 2001 to 2000 is primarily attributable to the
impact of section 382.
For the years ended June 30, 2001 and 2000, Escalon recorded
valuation allowances of $9,826,000 and $4,198,000, respectively, based on the
uncertainty with respect to the ultimate realization of the net deferred tax
assets.
In 2001 no provision was required because of net operating loss
carryforwards. In 2000, Escalon recognized a tax benefit of approximately
$300,000 which was offset by a related valuation allowance. In 1999, no
provision was required because of net operating loss carryforwards.
F-17
38
Approximately $8,200,000 of the federal net operating loss
carryforward at June 30, 2001 represents amounts that were transferred to the
Company as a result of the acquisition of EOI. Use of this transferred net
operating loss is also limited under section 382. Any tax benefit realized from
such use would first reduce acquired goodwill. Although the Company believes
that the acquisition of EOI qualified as a tax-free reorganization, there is no
certainty that the Internal Revenue Service will agree. If the acquisition were
not to qualify as a tax-free reorganization, the net operating loss carryforward
of EOI would be treated as a purchase of assets and the tax basis of the
acquired assets would be increased.
(8) OPERATING LEASES
Escalon leases its manufacturing, research and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future minimum rentals to be paid under these leasing
arrangements as of June 30, 2001 are as follows:
YEAR ENDING JUNE 30, AMOUNT
-------------------- ----------
2002 $ 297,350
2003 274,440
2004 271,371
2005 144,696
2006 119,040
thereafter 128,960
----------
Total $1,235,857
==========
Rent expense charged to operations during the years ended June 30,
2001, 2000 and 1999 was $294,050, $210,118 and $111,835, respectively. Through
June 30, 2000, the Company leased its Pennsylvania office from an entity that is
100% owned by the Chief Executive Officer and Chairman of the Board of the
Company. The lease was classified as an operating lease. In August 2000, the
facility was sold to a party unrelated to Escalon. Rent expense was
approximately $24,000 in fiscal 2000.
(9) RETIREMENT PLAN
Escalon adopted a 401(k) retirement plan effective January 1, 1994.
Employees become eligible for the plan commencing on the date of employment.
Company contributions are discretionary and no contributions have been made
since the plans inception.
On January 14, 2000, Escalon acquired Sonomed. Sonomed adopted a
401(K) profit sharing plan, which became effective on January 1, 1993. This plan
has continued subsequent to the acquisition and is available only to Sonomed
employees. Under the terms of the plan, which covers all employees who qualify
under certain age and length of service requirements, the Company makes
non-elective contributions on behalf of each participant eligible to share in
matching contributions for the plan year.
The Company's matching contribution is equal to 50% of such
participant's voluntary employee contributions, up to a maximum of 10% of each
employee's compensation. Escalon's contribution for the years ending June 30,
2001 and 2000 was $25,615 and $10,008, respectively.
F-18
39
(10) LICENSE OF INTELLECTUAL LASER PROPERTIES
In October 1997, Escalon licensed its intellectual laser properties to IntraLase
in exchange for an initial 25 percent equity interest in IntraLase. As a result
of raising money from outside investors, as of June 30, 2001, the Company's
interest has been diluted to 2.48%. Escalon is entitled to a 2.5% royalty on
future product sales that are based on the Company's patented technology; a 1.5%
royalty on product sales not dependent on the Company's technology; an annual
license fee of $5,000 and $10,000 in 1999 and 2000, respectively, and $15,000 in
2001 and each year thereafter during the term of the license. The license fee
may be credited in full against all royalties otherwise due to be paid to the
Company. Also contributed to the venture were the Company's laser inventory,
equipment and related furniture having a net book value of $0. In December 1999,
IntraLase received its first 510(k) approval from the FDA. As of June 30, 2001,
IntraLase was still in the development stage, with marketing of its products
intended to begin during the next twelve months.
(11) ACQUISITION OF RADIANCE'S VASCULAR BUSINESS UNIT
On January 21, 1999, Escalon acquired substantially all of the assets
used exclusively in Radiance's Vascular Access Business Unit, which uses Doppler
technology to aid medical personnel in locating difficult arteries and veins.
This business combination was accounted for as a purchase. The results of
operations for this business unit are included in the accompanying financial
statements since the date of acquisition. The total cost of the acquisition was
$2,104,442, which exceeded the fair value of the net assets of Radiance by
$1,086,110. The excess is being amortized on a straight-line basis over a
fifteen-year period.
At the time of acquisition, the Company and Radiance entered into an
Assets Sale and Purchase Agreement. Pursuant to this Assets Sale and Purchase
Agreement, the Company agreed to pay royalties based on future sales of products
of the Vascular business unit for a period of five years following the close of
this sale, with a guaranteed minimum royalty of $300,000 per year. In lieu of
the Company paying guaranteed minimum royalties over the remaining three years,
the Company has renegotiated with Radiance a lump-sum amount of $717,558 plus
interest to be paid over three years, as set forth in the Amendment and
Supplement to Assets Sale and Purchase Agreement and Release dated February 28,
2001. In connection therewith, the Company delivered to Radiance a term note in
the amount of $717,558, with interest at the prime rate as published in the Wall
Street Journal (New York Edition) plus 1%, with interest only payable quarterly
beginning on May 31, 2001 through January 15, 2002 and principle and interest
payable in eleven quarterly installments beginning on April 15, 2002. In
addition, the Amendment also accounts for $182,442 of accrued royalties for the
period ended January 21, 2001. Pursuant to the Amendment the Company paid
$17,558 to Radiance, delivered a Short Term Note in the amount of $64,884, with
interest at the prime rate as published in The Wall Street Journal (New York
Edition) plus 1%, with interest only payable quarterly beginning on May 31, 2001
and principal and interest payable in full on January 15, 2002, and issued to
Radiance 50,000 shares of the Company's Common Stock valued at $100,000. The
Company used its best efforts to register the shares of the Company's Common
Stock issued to Radiance in the Amendment on Form S-3 under the Securities Act
of 1933 in a manner that, upon being declared effective, constituted a "shelf"
registration for the purposes of Rule 415 under the Securities Act of 1933.
(12) SALE OF BETADINE PRODUCT LINE
In the third quarter of fiscal 1999, Escalon sold its license and
distribution rights along with the remaining inventory of Betadine. The sale
resulted in a $879,000 gain after writing off the remaining net book value of
license and distribution rights, goodwill and inventory associated with that
product line. Betadine had historically accounted for approximately 15 percent
of the Company's sales revenues.
F-19
40
(13) SALE OF ADATOSIL PRODUCT LINE
In the first quarter of fiscal 2000, Escalon received $2,117,000 from
the sale of its license and distribution rights for the Silicone Oil product
line. This sale resulted in a $1,864,000 gain after writing off the remaining
net book value of license and distribution rights associated with that product
line. The Company will also continue to receive additional consideration based
on future sales of Silicone Oil through August 2005.
(14) ACQUISITION OF SONOMED, INC.
On January 14, 2000, Escalon purchased all of the outstanding capital
stock of Sonomed, a privately held manufacturer and marketer of ophthalmic
ultrasound diagnostic devices. This business combination was accounted for as a
purchase. The total cost of the acquisition (net of cash acquired) was
$12,250,540, $11,148,826 was allocated to proprietary rights and intangible
assets, including: $7,700,000 to customer lists, $2,300,000 to trademarks and
trade names and $1,148,826 to goodwill. The intangible assets are being
amortized on a straight-line basis over a fifteen-year period.
In addition, Escalon entered into a three-year employment agreement
with the president of Sonomed, which provides for a $175,000 annual salary (plus
cost of living adjustments). The Company also issued certain employees of
Sonomed incentive stock options exercisable for the purchase of 330,000 shares
of the Company's Common Stock and agreed to make available to certain employees
of Sonomed, a bonus program of at least three percent of Sonomed's net quarterly
sales for a period of three years.
The following pro forma results of operations information has been
provided to give effect to the purchase as if such transaction had occurred at
the beginning of the period presented. The information presented is not
necessarily indicative of future operations of the combined companies.
PRO FORMA RESULTS OF OPERATIONS
(UNAUDITED)
For the Years Ended June 30,
2000 1999
------------- ---------------
Revenues $ 10,553,616 $ 14,728,368
Net income $ 136,164 $ 2,956,833
Basic net income per share $ 0.042 $ 0.670
Diluted net income per share $ 0.042 $ 0.660
Weighted average shares - basic 3,242,184 3,114,823
Weighted average shares - diluted 3,254,250 3,150,721
F-20
41
(15) SEGMENTAL REPORTING
During the years ended June 30, 2001 and 2000, Escalon's operations
were classified into three principal reportable segments that provide different
products or services. Separate management of each segment is required because
each business unit is subject to different marketing, production and technology
strategies.
Reportable Segments
(in thousands)
Medical / Trek Vascular
--------------------- --------------------
2001 2000 2001 2000
--------------------- --------------------
Revenue, net $ 3,775 $ 1,789 $ 2,117 $ 2,345
Interest income 2 149 -- --
Interest expense (1,029) (576) (23) --
Gain on sale of
Silicone Oil -- 1,864 -- --
Equity in loss of
unconsolidated
joint venture -- -- -- --
Net profit (loss) 686 (33) (70) (619)
----------------------------------------------
Depreciation and
amortization 161 192 128 120
Assets 2,180 1,746 2,652 2,472
Expenditures for
long-lived
assets 149 61 22 26
----------------------------------------------
Sonomed Other Total
--------------------- -------------------- ----------------------
2001 2000 2001 2000 2001 2000
--------------------- -------------------- ----------------------
Revenue, net $ 5,988 $ 2,536 $ - $ - $ 11,880 $ 6,670
Interest income - - - - 2 149
Interest expense - - - - (1,052) (576)
Gain on sale of
Silicone Oil - - - - - 1,864
Equity in loss of
unconsolidated
joint venture - - (19) (33) (19) (33)
Net profit (loss) - (178) (24) (33) 592 (863)
------------------------------------------------------------------------
Depreciation and
amortization 750 355 - - 1,039 667
Assets 12,123 12,394 843 233 17,798 16,845
Expenditures for
long-lived
assets 16 18 - - 187 105
------------------------------------------------------------------------
In fiscal 2001 and 2000, Medical / Trek derived its revenues from the
sale of Silicone Oil, ISPAN(TM) gas products and various disposable ophthalmic
surgical products. These products are used primarily by vitreoretinal ophthalmic
surgeons. Vascular derives its revenues from the sale of PD Access(TM) and
SmartNeedle(TM) monitors, needles and catheter products. These products are used
by medical personnel to assist in gaining access to arteries and veins in
difficult cases. Sonomed derived its revenues from the sale of A-scans, B-scans
and pachymeters. These products are used for diagnostic or biometric
applications in ophthalmology.
In fiscal 2001, Escalon had one entity, Bausch & Lomb, from which
greater than 10 percent of consolidated net revenues were derived. Revenues from
Bausch & Lomb were $2,675,000, or 22.52% of consolidated net revenues during
fiscal 2001. This revenue is recorded in the Medical / Trek business unit.
Included in accounts receivable is $726,000 owed to the Company from Bausch &
Lomb. During fiscal 2000, Escalon did not have any customers from which greater
than 10 percent of consolidated net revenues were derived. Of the revenues
reported above, $74,000, $170,000 and $2,068,000 were derived internationally in
Medical / Trek, Vascular and Sonomed, respectively, in fiscal 2001. Of the
revenues reported above, $100,000, $162,000 and $1,259,000 were derived
internationally in Medical / Trek, Vascular and Sonomed, respectively, in fiscal
2000.
F-21
42
It is Escalon's policy to allocate corporate administrative expenses
to the Company's segments based on management's time devoted to these segments
(16) DERIVATIVE FINANCIAL INSTRUMENT
The Company entered into an interest rate collar transaction with a
financial institution, which is considered a derivative financial instrument, to
hedge its variable interest rate on its term loan and line of credit (Note 4).
The agreements are used to reduce the potential impact of increases in interest
rates on the Company's floating-rate debt. The Company does not utilize interest
rate swap agreements or other financial instruments for trading or other
speculative purposes. The notional amounts of the interest rate cap agreements
are $4,900,000 and $3,000,000 and management believes that losses related to
credit risk are remote.
The fair value of the derivative financial instrument, which is the
amount the Company would receive or pay to terminate the agreement is not
significant. No carrying amounts were recorded in the accompanying balance sheet
and no gains or losses were recognized in income during 2001.
(17) LITIGATION
As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter to which the Company is no longer a party). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in
November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering.
On June 6, 1996, the court denied a motion by Escalon and the named
officers and directors to dismiss the Kozloski complaint and, on July 22, 1996,
the Company Defendants filed an answer to the complaint denying all allegations
of wrongdoing and asserting various affirmative defenses.
In an effort to curtail its legal expenses related with this
litigation, while continuing to deny any wrongdoing, the Company has reached an
agreement, subject to final court approval, to settle this action on its behalf
and on the behalf of its former and present officers and directors, for
$500,000. The Company's directors and officers insurance carrier has agreed to
fund a significant portion of the settlement amount. Both the Company and the
insurance carrier have deposited such funds in an escrow account.
(18) REVENUE, NET
Revenues, net include quarterly payments earned in connection with
the sale of the Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line.
This revenue totaled $2,254,000 for the period beginning on the commencement
date of August 11, 2000 through June 30, 2001. The Company is entitled to
receive additional consideration , in varying amounts, through fiscal 2005.
Included in accounts receivable as of June 30, 2001 is $726,000.
F-22
EX-10.2
3
w53606ex10-2.txt
FORM OF INDEMNIFICATION AGREEMENT
1
Exhibit 10.2
INDEMNIFICATION AND ADVANCEMENT AGREEMENT
INDEMNIFICATION AND ADVANCEMENT AGREEMENT dated as of March ___, 2000
between Escalon Medical Corp., a Delaware corporation (the "Company"), and the
undersigned [DIRECTOR AND/OR OFFICER] of the Company ("Indemnitee").
RECITALS
The Company has determined that in order for the Company to attract and
retain highly qualified personnel to serve as directors and officers of the
Company, it is in the best interest of the Company to indemnify its directors
and officers against claims and other actions arising out of their service to
and actions on behalf of the Company and its affiliates to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL"). Indemnitee is a
[DIRECTOR AND/OR OFFICER] of the Company that the Company has determined should
be granted such indemnification.
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, and intending to be legally bound hereby, the
parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliate" shall mean any person or entity controlling,
controlled by or under common control with the Company.
(b) "Disinterested Director" shall mean a director of the
Company who is not or was not a party to a Proceeding in respect of which
indemnification is being sought by Indemnitee.
(c) "Expenses" shall mean all reasonable attorneys' fees and
costs, retainers, court costs, transcripts, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees and all other disbursements or expenses
customarily incurred in connection with asserting or defending a claim.
(d) "Independent Counsel" shall mean any counsel that neither
is presently nor in the past five years has been retained to represent: (i) the
Company or Indemnitee in any matter material to either such party or (ii) any
other party to a Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any firm or person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's right to indemnification under this Agreement.
(e) "Judgments" shall mean all awards, penalties, fines,
settlements and all other related liabilities.
2
(f) "Proceeding" shall mean any pending, completed or
threatened action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether civil,
criminal, administrative or investigative; provided, however, that the term
"Proceeding" shall include an action instituted by or on behalf of Indemnitee
(other than an action to enforce Indemnitee's rights under this Agreement) only
if such action has been authorized by a majority of the Disinterested Directors.
2. INDEMNIFICATION. The Company shall indemnify and hold harmless
Indemnitee from and against any Judgments and Expenses that Indemnitee may
sustain, suffer or incur that result from, arise out of or relate to Indemnitee
serving or having had served as an officer or director of the Company or an
Affiliate or otherwise acting for or on behalf of the Company or an Affiliate
(collectively referred to as an "Officer or Director of the Company") to the
fullest extent permitted by the laws of the State of Delaware in effect on the
date hereof, or as such laws may from time to time hereafter be amended to
increase the scope of such permitted indemnification, including, but not limited
to, the following rights of indemnification:
(a) If Indemnitee was or is made a party or is threatened to
be made a party to any Proceeding, other than an action by or in the right of
the Company, by reason of (i) the fact that Indemnitee is or was an Officer or
Director of the Company or any other entity that Indemnitee is or was serving at
the request of the Company or (ii) any act or omission by Indemnitee in any such
capacity, the Company shall indemnify Indemnitee from and against all Judgments
and Expenses incurred by Indemnitee or on Indemnitee's behalf in connection with
any such Proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful; or
(b) If Indemnitee was or is made a party or is threatened to
be made a party to any Proceeding brought by or in the right of the Company to
procure a judgment in its favor by reason of (i) the fact that Indemnitee is or
was an Officer or Director of the Company or any other entity that Indemnitee is
or was serving at the request of the Company or (ii) any act or omission by
Indemnitee in any such capacity, the Company shall indemnify Indemnitee from and
against all Expenses incurred by Indemnitee or on Indemnitee's behalf in
connection with any such Proceeding if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, that no indemnification shall be
made in respect of any claim, issue or matter as to which the DGCL expressly
prohibits such indemnification by reason of an adjudication of liability of
Indemnitee to the Company, unless and to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine equitable under the circumstances.
Notwithstanding the foregoing, the Company shall indemnify Indemnitee in
connection with any Proceeding instituted by or on behalf of Indemnitee (other
than an action to enforce Indemnitee's rights under this Agreement) only if such
Proceeding is authorized by a majority of the Disinterested Directors.
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3
3. INDEMNIFICATION OF PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL.
Notwithstanding any other provision of this Agreement to the contrary, to the
extent that Indemnitee has been wholly successful on the merits or otherwise
involved in any Proceeding on any claim, issue or matter, the Company shall
indemnify Indemnitee from and against all Expenses incurred by Indemnitee or on
Indemnitee's behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise, as
to one or more but less than all claims, issues or matters in such Proceeding,
the Company shall indemnify Indemnitee to the maximum extent permitted by the
DGCL from and against all Expenses incurred by Indemnitee regarding each
successfully resolved claim, issue or matter. For purposes of this Section 3,
the termination of any such claim, issue or matter by dismissal with or without
prejudice shall be deemed to be a successful result as to such claim, issue or
matter.
4. ADVANCEMENT OF EXPENSES. All Expenses incurred by or on behalf of
Indemnitee shall be paid by the Company in advance of the final disposition of
such Proceeding upon receipt by the Company of a statement from Indemnitee
requesting such advance. Such statement shall reasonably evidence such Expenses
incurred by Indemnitee in connection therewith and shall be accompanied by a
written undertaking in form and substance satisfactory to the Company by
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified therefor pursuant to the terms of
this Agreement. Solely for purposes of advancing Expenses under this Section 4,
attorneys' fees and costs shall be deemed reasonable and shall be advanced by
the Company if Indemnitee has submitted with Indemnitee's statement requesting
advancement an affidavit stating (i) that Indemnitee has reviewed the relevant
legal statements, bills, invoices (if the fees and costs have already been
incurred) or retainers or advancement requests (if such fees and costs have not
yet been incurred) and (ii) that the fees and costs in question are necessary
and reasonable to the best of Indemnitee's knowledge and belief; provided,
however, that the Company shall retain its right to contest the reasonableness
of all Expenses advanced after the final disposition of the Proceeding for which
advancement was sought.
5. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) When seeking indemnification pursuant to Sections 2 or 3
hereof, Indemnitee shall submit a written request for indemnification to the
Company. Such request shall include documentation or information that is
reasonably necessary for the Company to make a determination of Indemnitee's
entitlement to indemnification hereunder and that is reasonably available to
Indemnitee. Determination of Indemnitee's entitlement to indemnification shall
be made not later than 30 days after receipt by the Company of Indemnitee's
written request for indemnification.
(b) The entitlement of Indemnitee to indemnification under
this Agreement shall be determined by a majority of the Disinterested Directors,
or, at the discretion of such directors, such determination shall be made by
Independent Counsel.
(c) In the event that determination of entitlement is to be
made by Independent Counsel, such Independent Counsel shall be selected by the
Board of Directors of the Company and approved by Indemnitee. Upon the failure
of the Board of Directors to select such Independent Counsel or upon the failure
of Indemnitee to approve the Board's selection, such Independent
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Counsel shall be selected by the Chancellor of the State of Delaware or such
other person as the Chancellor shall designate to make such selection.
6. EFFECT OF CERTAIN PROCEEDINGS.
(a) If the person or persons empowered to make a determination
with respect to entitlement to indemnification shall have failed to make the
requested determination within 30 days after receipt by the Company of such
request, the requisite determination of entitlement to indemnification shall be
deemed to have been made and Indemnitee shall be absolutely entitled to such
indemnification, absent (i) misrepresentation by Indemnitee of a material fact
in the request for indemnification or (ii) a final judicial determination that
all or any part of such indemnification is expressly prohibited by the DGCL. The
termination of any Proceeding by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself,
adversely affect the rights of Indemnitee to indemnification hereunder except as
may be specifically provided herein, or create a presumption that Indemnitee did
not act in good faith and in a manner that Indemnitee reasonably believed to be
in or not opposed to the best interests of the Company or create a presumption
that (with respect to any criminal action or proceeding) Indemnitee had
reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is
based on the records or books of account of the Company or an Affiliate,
including financial statements, or on information supplied to Indemnitee by the
officers of the Company or an Affiliate in the course of their duties, or on the
advice of legal counsel for the Company or an Affiliate or on information or
records given or reports made to the Company or an Affiliate by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Company or an Affiliate. The provisions of this Section
6(b) shall not be deemed to be exclusive or to limit in any way the other
circumstances in which the Indemnitee may be deemed to have met the applicable
standard of conduct set forth in this Agreement.
(c) The knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Company or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement.
7. DURATION OF AGREEMENT. This Agreement shall apply to any claim
asserted and any expenses incurred in connection with any claim asserted on or
after the date of this Agreement and shall continue until and terminate upon the
later of (a) 10 years after Indemnitee has ceased to occupy any of the positions
or have any of the relationships described in Section 2 of this Agreement or (b)
the final termination of all pending or threatened Proceedings of the kind
described herein with respect to Indemnitee. This Agreement shall be binding
upon the Company and its successors and assigns and shall inure to the benefit
of Indemnitee and Indemnitee's spouse, assigns, heirs, devisee, executors,
administrators or other legal representatives.
-4-
5
8. SEVERABILITY. Should any part, term or condition hereof be declared
illegal or unenforceable or in conflict with any other law, the validity of the
remaining portions or provisions of this Agreement shall not be affected
thereby, and the illegal or unenforceable portions of the Agreement shall be and
hereby are redrafted to conform with applicable law, while leaving the remaining
portions of this Agreement intact.
9. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
10. HEADINGS. Section headings are for convenience only and do not
control or affect meaning or interpretation of any terms or provisions of this
Agreement.
11. MODIFICATION AND WAIVER. This Agreement may not be amended or
otherwise modified except by a writing duly executed by each party. A waiver by
any party of any breach or violation of this Agreement shall not be deemed or
construed as a waiver of any subsequent breach or violation thereof. No
amendment, alteration, rescission or replacement of this Agreement or any
provision hereof shall be effective as to Indemnitee with respect to any action
taken or omitted by such Indemnitee in Indemnitee's position with the Company or
an Affiliate or any other entity that Indemnitee is or was serving at the
request of the Company prior to such amendment, alteration, rescission or
replacement.
12. NO DUPLICATIVE PAYMENT. The Company shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.
13. NOTICES. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when mailed by
certified mail, return receipt requested, or delivered by a national overnight
delivery service addressed to the intended recipient as follows:
If to the Company:
Escalon Medical Corp.
351 East Conestoga Road
Wayne, PA 19087
Attention: Richard J. DePiano
Chairman and Chief Executive Officer
If to Indemnitee, to his address set forth on the signature page to
this Agreement.
Any party may from time to time change its address for the purpose of
notices to that party by a similar notice specifying a new address, but no such
change shall be deemed to have been given until it is actually received by the
party sought to be charged with its contents.
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14. GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the internal laws of
the State of Delaware, without reference to its conflicts of law principles.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties and supersedes all proposals, commitments,
writings, negotiations and understandings, oral and written, and all other
communications between the parties relating to the subject matter of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ESCALON MEDICAL CORP.
By:
--------------------------------------
Title:
-----------------------------------
--------------------------------------
Signature of Indemnitee
--------------------------------------
Name of Indemnitee
(please print or type)
Address of Indemnitee:
--------------------------------------
--------------------------------------
--------------------------------------
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EX-10.3
4
w53606ex10-3.txt
EMPLOYMENT AGREEMENT DATED JULY 1, 1999
1
Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of July 1, 1999 by and between
Escalon Medical Corp., a California corporation ("Employer") and Ronald L.
Hueneke, an individual residing at 8846 Lake Drive, West Lake, Wisconsin 53129
("Employee").
RECITALS:
WHEREAS, Employer desires to employ Employee as President and Chief
Operating Officer and Employee desires to accept such employment on the terms
set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. DUTIES. Employer hereby employs Employee to serve as President and
Chief Operating Officer. Employee agrees to be so employed by Employer and to
devote his best efforts to advance the interests of Employer. Employee agrees
to devote substantially all of his business time to performing duties
hereunder; provided, however, the Employee shall be permitted to devote a
portion of his business time to serve as an advisor to the Medical College of
Wisconsin. Employee shall not be required to relocate from Wisconsin to any
other location at which Employer conducts business.
2. TERM. Subject to the provisions of Section 4 hereof, the term of
Employee's employment hereunder shall commence on the date hereof and shall
continue for a term of one year; provided, however, that the term of this
Agreement shall thereafter be renewed automatically from year to year unless
Employer or Employee shall have given the other notice of termination,
effective at the end of the current term, not less than 90 days prior to the
expiration thereof.
3. COMPENSATION.
(a) BASE SALARY. For the services rendered by Employee under this
Agreement, Employer agrees to pay Employee a salary at the rate of $105,000 per
annum (such salary, as adjusted from time to time, is herein called the
"Salary"), payable in accordance with Employer's normal payoff practices.
(b) BONUS. At the end of each fiscal year of Employer that ends
during the term of this Agreement, the Compensation Committee of Employer's
Board of Directors shall determine whether to pay Employee a bonus (the
"Bonus") with
2
respect to such fiscal year. The award of any Bonus shall be in the sole
discretion of the Employer's Compensation Committee.
(c) FRINGE BENEFITS. During the term of this Agreement, Employer
shall provide to Employee life, health and dental insurance and any other
insurance generally provided for executive employees of Employer on the same
terms as such insurance is provided to such employees.
4. TERMINATION. The provisions of this Section 4 shall be applicable
notwithstanding anything to the contrary contained herein.
(a) DEATH. In the event of the death of Employee during the term of
this Agreement, this Agreement shall terminate effective as of the date of
Employee's death, and Employer shall have no further obligation or liability
hereunder except that Employer shall pay to Employee's estate the portion, if
any, of Employee's Salary and any earned but unpaid Bonus for the period through
the date of Employee's death that remains unpaid.
(b) TOTAL DISABILITY. In the event of a mental or physical condition
that in the reasonable opinion of Employer renders Employee unable or
incompetent to perform his duties hereunder ("Total Disability") which continues
for a period of 180 consecutive days during the term of this Agreement, Employer
shall have the right to terminate Employee's employment hereunder by giving
Employee ten days' written notice thereof and, upon expiration of such ten-day
period, Employer shall have no further obligation or liability under this
Agreement except Employer shall pay to Employee the portion, if any, of
Employee's Salary and any earned but unpaid Bonus for the period through the
date of termination that remains unpaid.
(c) NO OTHER TERMINATION. Except upon a breach of this Agreement by
Employee or as otherwise expressly set forth in this Section 4, Employer shall
not be permitted to terminate Employee's employment hereunder. In the event of a
breach of this Section 4, Employee shall be entitled to receive from Employer as
Employee's sole damages and remedy, and Employer agrees to pay as liquidated
damages, all compensation to which Employee would have been entitled under
Section 3 hereof as and when such compensation would have been received had
Employee's employment not been terminated for the remainder of the initial
one-year term of this Agreement, without regard to other events occurring
thereafter that would cause a termination of employment under this Section 4,
except for a violation of Section 5 hereof. Employee shall receive the
liquidated damages agreed to herein without any obligation to prove actual
damages.
5. NON-DISCLOSURE AND NON-COMPETITION.
(a) NON-DISCLOSURE. Employee acknowledges that in the course of
performing services for Employer, Employee will obtain knowledge of Employer's
busi-
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ness plans, products, processes, software, know-how, trade secrets, formulas,
methods, models, prototypes, discoveries, inventions, improvements,
disclosures, names and positions of employees and/or other proprietary and/or
confidential information (collectively the "Confidential Information").
Employee agrees to keep the Confidential Information secret and confidential
and not to publish, disclose or divulge to any other party, and Employee agrees
not to use any of the Confidential Information for Employee's own benefit or to
the detriment of Employer without the prior written consent of Employer,
whether or not such Confidential Information was discovered or developed by
Employee. Employee also agrees not to divulge, publish or use any proprietary
and/or confidential information of others that Employer is obligated to
maintain in confidence.
(b) NON-COMPETITION. Employee agrees that, during his employment by
Employer hereunder and for an additional period of one year after the
termination of Employee's employment, neither Employee nor any corporation or
other entity in which Employee may be interested as a partner, trustee,
director, officer, employee, agent, shareholder, lender of money or guarantor,
or for which he performs services in any capacity (including as a consultant or
independent contractor) shall at any time during such period (i) be engaged,
directly or indirectly, in any Competitive Business (as that term is
hereinafter defined) or (ii) solicit, hire, contract for services or otherwise
employ, directly or indirectly, any of the employees of Employer. Nothing
herein contained shall be deemed to prevent Employee from investing in or
acquiring one per cent or less of any class of securities of any company if
such class of securities is listed on a national securities exchange or is
quoted on the Nasdaq Stock Market. For purposes of this Section 5(b), the term
"Competitive Business" shall mean any business that engages in the design,
development, manufacture, sale, lease, marketing or distribution of any
products or provides any services that are designed, developed, manufactured,
sold, marketed or distributed by Employer during the term of this Agreement.
6. INVENTIONS AND DISCOVERIES.
(a) DISCLOSURE. Employee shall promptly and fully disclose to
Employer with all necessary detail, all developments, know-how, discoveries,
inventions, improvements, concepts, ideas, formulae, processes and methods
(whether copyrightable, patentable or otherwise) made, received, conceived,
acquired or written by Employee (whether or not at the request or upon the
suggestion of Employer, solely or jointly with others, during the period of his
employment with Employer that relate to any line of business, activities or
fields of interest or investigation engaged in by Employer) from time to time
during the course of Employee's employment by Employer, or that are otherwise
made through the use of Employer's time, facilities or materials
(collectively, the "Inventions").
(b) ASSIGNMENT AND TRANSFER. Employee agrees to assign and transfer
to Employer all of Employee's right, title and interest in and to the Inven-
3
4
tions, and Employee further agrees to deliver to Employer any and all drawings,
notes, specifications and data relating to the Inventions, and to sign,
acknowledge and deliver all such further papers, including applications for and
assignments of copyrights and patents, and all renewals thereof, as may be
necessary to obtain copyrights and patents for any Inventions in any and all
countries and to vest title thereto in Employer and its successors and assigns
and to otherwise protect Employer's interest therein.
(c) RECORDS. Employee agrees that in connection with any research,
development or other services performed for Employer, Employee will maintain
careful, adequate and contemporaneous written records of all Inventions, which
records shall be the property of Employer.
7. EMPLOYER DOCUMENTATION. Employee shall hold in a fiduciary capacity
for the benefit of Employer all documentation, disks, programs, data, records,
drawings, manuals, reports, sketches, blueprints, letters, notes, notebooks and
all other writings, electronic data, graphics and tangible information and
materials of a secret, confidential or proprietary information nature relating
to Employer or Employer's business that are in the possession or under the
control of Employee.
8. INJUNCTIVE RELIEF. Employee acknowledges that his compliance with the
agreements in Sections 5, 6 and 7 hereof is necessary to protect the good will
and other proprietary interests of Employer and that Employee is one of the
principal executives of Employer and conversant with its affairs, its trade
secrets and other proprietary information. Employee acknowledges that a breach
of any of his agreements in Sections 5, 6 and 7 hereof will result in
irreparable and continuing damage to Employer for which there will be no
adequate remedy at law; and Employee agrees that in the event of any breach of
the aforesaid agreements, Employer and its successors and assigns shall be
entitled to injunctive relief and to such other and further relief as may be
proper.
9. SUPERSEDES OTHER AGREEMENTS. This Agreement represents the entire
agreement between the parties regarding the subject matter hereof and supersedes
and is in lieu of any and all other employment arrangement or agreement, oral or
written, between Employer and Employee.
10. AMENDMENTS. Any amendment to this Agreement shall be made in writing
and signed by the parties hereto.
11. ENFORCEABILITY. If any provision of this Agreement shall be invalid or
unenforceable, in whole or in part, then such provision shall be deemed to be
modified or restricted to the extent and in the manner necessary to render the
same valid and enforceable, or shall be deemed excised from this Agreement, as
the case may require, and this Agreement shall be construed and enforced to the
maximum extent permitted by law, as if such provision had been originally
incorporated herein as so modified or
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restricted, or as if such provision had not been originally incorporated
herein, as the case may be.
12. CONSTRUCTION. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Wisconsin.
13. ASSIGNMENT.
(a) BY EMPLOYER. The rights and obligations of Employer under this
Agreement shall inure to the benefit of, and shall be binding upon, the
successors and assigns of Employer.
(b) BY EMPLOYEE. This Agreement and the obligations created
hereunder may not be assigned by Employee.
14. NOTICES. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when mailed by
certified or registered mail, return receipt requested, or sent by overnight
courier, addressed to the intended recipient as follows:
If to Employee:
Ronald L. Hueneke
8846 Lake Drive
West Lake, Wisconsin 53129
If to Employer:
Escalon Medical Corp.
351 East Conestoga Road
Wayne, PA 19087
Attention: Richard J. DePiano,
Chairman and CEO
Any party may from time to time change its address for the purpose of notices
to that party by a similar notice specifying a new address, but no such change
shall be deemed to have been given until it is actually received by the party
sought to be charged with its contents.
15. WAIVER. No claim or right arising out of a breach or default under
this Agreement shall be discharged in whole or in part by a waiver of that
claim or right unless the waiver is supported by consideration and is in
writing and executed by the aggrieved party hereto or its or his duly
authorized agent. A waiver by any party hereto of a breach or default by the
other party hereto of any provision of this Agree-
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ment shall not be deemed a waiver of future compliance therewith, and such
provisions shall remain in full force and effect.
16. SURVIVAL OF COVENANTS. The provisions of Sections 5, 6, 7 and 8
hereof shall survive the termination of this Agreement. Furthermore, any
provision of this Agreement that provides a benefit to Employee and which by
the express terms hereof does not terminate upon the termination of Employee's
employment shall remain binding upon Employer until such time as such benefits
are paid in full to Employee or his successors.
IN WITNESS WHEREOF, this Agreement has been executed by the parties on the
date first above written.
/s/ Ronald L. Hueneke
-----------------------------------------
Ronald L. Hueneke
ESCALON MEDICAL CORP.
By: /s/ Richard J. DePiano
--------------------------------------
Richard J. DePiano,
Chairman and Chief Executive Officer
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EX-10.4
5
w53606ex10-4.txt
EMPLOYMENT AGREEMENT DATED MAY 12, 1998
1
Exhibit 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement dated May 12, 1998 is made by and between Escalon
Medical Corp. (the "Company"), a California corporation with its principal
offices located at 351 East Conestoga Road, Wayne, Pennsylvania 19087, and
Richard J. DePiano (the "Executive"), an individual residing at 44 Righters Mill
Road, Gladwyne, Pennsylvania 19035.
RECITALS:
The parties hereto desire to enter into this Agreement to set forth the
terms and conditions pursuant to which the Executive will be employed as
Chairman and Chief Executive Officer of the Company and to address certain other
matters in connection with such employment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. EMPLOYMENT.
1.1 POSITION AND DUTIES. The Company hereby employs the Executive as
Chairman and Chief Executive Officer of the Company upon the terms and
conditions set forth in this Agreement, and the Executive hereby accepts such
employment. Subject to the direction and control of the Board of Directors
(the "Board"), the Executive, as Chairman and Chief Executive Officer, shall
perform such executive, managerial and administrative duties as are from time
to time assigned to him by the Board and are consistent with his position as
Chairman and Chief Executive Officer.
1.2 OBLIGATIONS OF THE EXECUTIVE. The Executive shall devote
sufficient business time, attention and energies to the business of the Company
to perform his duties hereunder. The Company understands that the Executive has
been engaged and will continue to engage in certain other business and
investment activities and agrees that the Executive may continue to engage in
such other activities provided that the Executive shall continue to fulfill the
obligations of his position with the Company as provided in the preceding
sentence.
2. TERM OF AGREEMENT. The initial term of this Agreement shall commence
on the date hereof and shall continue through June 30, 2001. This Agreement
shall be renewed automatically on July 1 of each year for successive terms of
three years each, unless either party notifies the other party at least 30 days
prior to such date of such party's determination not to renew this Agreement
beyond the then existing term. It is the intention of the parties that this
Agreement be "Evergreen" unless (i) either party gives written notice to the
other party of his or its intention
2
not to renew this Agreement as provided above or (ii) this Agreement is
terminated pursuant to Section 7 hereof. Each reference herein to "the term of
this Agreement" shall include the initial term and any renewal term.
3. BASE SALARY. The Executive shall be paid, as base compensation for
all services to be rendered by the Executive hereunder, a salary at the rate of
$240,000 per year, payable on a current basis in accordance with the Company's
standard payroll practices for executives. Such annual rate of base
compensation in effect at any time during the term of this Agreement shall
hereinafter be referred to as the "Base Salary."
4. BONUS. At the end of each fiscal year of the Company that ends during
the term of this Agreement, the Compensation Committee of the Board shall
determine whether to pay to the Executive a bonus (the "Bonus") with respect to
such fiscal year. The award of any Bonus shall be in the sole discretion of the
Compensation Committee.
5. ADDITIONAL BENEFITS. While this Agreement is in effect, the Company
shall provide the following additional benefits, which benefits shall be
continued after the termination of this Agreement to the extent provided in
Section 7.2 hereof:
5.1 VACATION. The Executive shall receive six weeks paid vacation
each calendar year.
5.2 AUTOMOBILE OR AUTOMOBILE ALLOWANCE. The Company shall provide
the Executive with an automobile allowance of $800 per month.
5.3 EXPENSE REIMBURSEMENT. Upon submission of proper vouchers, the
Company shall pay or reimburse the Executive for all necessary business and
entertainment expenses reasonably incurred by the Executive in connection with
the business of the Company.
5.4 INSURANCE BENEFITS. The Company shall reimburse the Executive
medical, hospital, disability, life and other insurance benefits having a total
cost comparable to the cost of such benefits provided to the other senior
executive officers of the Company.
5.5 RETIREMENT PLAN. The Executive shall be entitled to participate
in any profit sharing or pension plan made available to full-time employees of
the Company in accordance with the terms of such plans.
5.6 OTHER BENEFITS. Without limiting any of the foregoing benefits,
the Executive shall receive all benefits and participate in all benefit
programs generally made available to other senior executive officers of the
Company.
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6. STOCK OPTIONS. Promptly after the date of this Agreement, the
Company's Board of Directors shall consider the grant to the Executive of
additional incentive stock options exercisable for the purchase of shares of the
Company's Common Stock at a per share exercise price equal to the fair market
value per share of the Company's Common Stock on the date of grant. Such stock
options shall be vested in full on the date of grant.
7. TERMINATION.
7.1 TERMINATION UPON DEATH. The Executive's employment hereunder and
any and all rights under this Agreement or otherwise as an employee of the
Company shall terminate upon the death of the Executive, and thereafter the
Company shall have no liability or obligation to the Executive's estate or legal
representatives hereunder, provided that the Executive shall be entitled to
receive the Base Salary, Bonus and other compensation earned by the Executive,
but not paid, prior to his death.
7.2 OTHER TERMINATION. The Company may terminate the Executive's
employment at any time, with or without cause. If the Company terminates the
Executive's employment during the term of this Agreement, the Company shall pay
to the Executive, as severance pay or liquidated damages or both, salary
continuance equal to his full Base Salary that would have been paid to the
Executive had the Executive's employment continued hereunder for a period of one
year from the date of termination of service. If a termination of the
Executive's employment occurs pursuant to this Section 7.2, the Company shall
continue to provide the benefits described in Section 5 hereof for one year
after the date of termination unless the Executive is paid such severance
amounts in a lump sum, in which event all entitlement to benefit continuation
shall cease upon the payment of such lump sum.
8. CONFIDENTIALITY; PUBLIC STATEMENTS. The Company may, pursuant to the
Executive's employment hereunder, provide to him and confide in him business
methods and systems, techniques and methods of operation developed at great
expense by the Company ("Trade Secrets") and which the Executive recognizes to
be unique assets of the Company hereunder, directly or indirectly, in any manner
utilize or disclose to any person, firm, corporation, association or other
entity, except to directors, consultants or employees of the Company in the
course of his duties and where required by law: (a) any such Trade Secrets, (b)
any sales prospects, customers lists, products, research or data of any kind, or
(c) any information relating to strategic plans, sales costs, profits or the
financial condition of the Company or any of its customers or prospective
customers, which are not generally known to the public or recognized as standard
practice in the industries in which the Company shall be engaged. The Executive
further covenants and agrees that he will promptly deliver to the Company all
tangible evidence of the knowledge and information described in (a), (b)
and (c), above, prior to or at the termination of the Executive's employment.
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4
9. Entire Agreement. Except for any agreement evidencing the stock
options to be granted pursuant to Section 6 hereof, this Agreement constitutes
the full and complete understanding and agreement of the Executive and the
Company respecting the subject matter hereof, and supersedes all prior
understandings and agreements, oral or written, express or implied. This
Agreement may not be modified or amended orally, but only by an agreement in
writing, signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
10. Headings. The section headings of this Agreement are for convenience
of reference only and are not to be considered in the interpretation of the
terms and conditions of this Agreement.
11. Definition of Company. The Company is governed by its Board and,
accordingly, all references in this Agreement to the actions and discretion of
the Company are meant and deemed to refer to the actions and discretion of the
Board.
12. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when sent
by certified mail, postage prepaid, addressed as follows:
If to the Company:
Escalon Medical Corp.
351 East Conestoga Road
Wayne, PA 19087
Attn: Compensation Committee Chairman
If to the Executive, at his personal residence as set forth above.
Any party may change the persons and address to which notices or other
communications are to be sent by giving written notice of such change to the
other party in the manner provided herein for giving notice.
13. Waiver of Breach. No waiver by either party of any condition or of the
breach by the other of any term or covenant contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition, or of the breach of any other term or covenant
set forth in this Agreement. Moreover, the failure of either party to exercise
any right hereunder shall not bar the later exercise thereof.
14. Inure and Bind; Nonalienation. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors in
interest. The Executive shall not pledge, hypothecate, anticipate or in any way
create a lien
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upon any amounts provided under this Agreement. This Agreement and the benefits
payable hereunder shall not be assignable by either party without the prior
written consent of the other; provided, however, that nothing in this Section
shall preclude the Executive from designating a beneficiary to receive any
benefit payable hereunder upon his death, or the executors, administrators or
other legal representatives of the Executive or his estate from assigning any
rights hereunder to which they become entitled to the person or persons
entitled thereto.
15. GOVERNING LAW. This Agreement is entered into and shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania.
16. INVALIDITY OR UNENFORCEABILITY. If any term of provision of this
Agreement is held to be invalid or unenforceable, for any reason, such
invalidity or unenforceability shall not affect any other term or provision
hereof and this Agreement shall continue in full force and effect as if such
invalid or unenforceable term or provision (to the extent of the invalidity or
unenforceability) had not been contained herein.
17. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or the breach hereof, shall be settled by arbitration in
Philadelphia, Pennsylvania, in accordance with the laws of the Commonwealth of
Pennsylvania by three arbitrators, one of whom shall be appointed by the
Company, one by the Executive and third of whom shall be appointed by the first
two arbitrators. If either party fails to select an arbitrator within 30 days
after written notice of demand for arbitration from the other, the other party
may have such arbitrator appointed by the American Arbitration Association. If
the first two arbitrators cannot agree on the appointment of a third arbitrator
within 30 days after their selection, then the third arbitrator shall be
appointed by the American Arbitration Association. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association.
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction hereof. In the event that it shall be necessary or desirable
from the Company and/or the Executive to retain legal counsel and/or incur other
costs and expenses in connection with the enforcement of any or all of either
party's rights under this Agreement, each party shall bear its own costs and
expenses in connection with the enforcement of its rights (including the
enforcement of any arbitration award in court), regardless of the final outcome.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written.
ESCALON MEDICAL CORP.
By: /s/ Ronald L. Hueneke
--------------------------------------
Title: President COO
--------------------------------
/s/ Richard J. DePiano
-----------------------------------------
Richard J. DePiano
Approved:
/s/ Robert J. Kunze
-----------------------------------------
Robert J. Kunze
/s/ Jay L. Federman, M.D.
-----------------------------------------
Jay L. Federman, M.D.
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EX-10.5
6
w53606ex10-5.txt
NON-EXCLUSIVE DISTRIBUTOR AGREEMENT
1
Exhibit 10.5
NON-EXCLUSIVE DISTRIBUTOR AGREEMENT
This Non-Exclusive Distributor Agreement ("this Agreement"), effective as of the
date of the latest signature below (the "Effective Date") is entered into by
SCOTT MEDICAL PRODUCTS ("Scott"), located at 6141 Easton Road, Plumsteadville,
Pennsylvania 18949-0310, and ESCALON OPTHALMIC, INC. ("Escalon"), located at 351
Easton Conestoga Road, Wayne, PA 19087.
RECITALS
A. Scott and Escalon are parties to a Distributorship Agreement, dated as of
September 8, 1992 (the "Former Agreement"), which the parties desire to
terminate.
B. Scott and Escalon desire to enter into this Agreement to allow Escalon the
non-exclusive right to distribute products manufactured by Scott Medical
Products. The products covered in this agreement ("Products") are limited
to those products set forth in Exhibit A attached hereto and made a part
hereof, as amended from time to time pursuant to Section 2.7.
THEREFORE, in consideration of the mutual promises contained in the following
provisions, and intending to be legally bound by this Agreement, the parties
agree as follows:
ARTICLE I -- TERMINATION OF FORMER AGREEMENT
1.1 Termination. The Former Agreement is hereby terminated effective as of the
Effective Date. In connection with the termination of the Former Agreement,
the parties agree that:
(a.) Any products ordered by Escalon under the Former Agreement and not
shipped by Scott prior to the Effective Date shall be deemed to have
been ordered under this Agreement and shall be shipped by Scott and
paid for by Escalon in accordance with the terms of this Agreement.
(b.) Any products shipped by Scott under the Former Agreement and not
paid for by Escalon as of the Effective Date shall be paid for by
Escalon in accordance with the pricing and terms current at the time
the product was shipped.
1.2 Release. In consideration of the execution and delivery by Scott of this
Agreement, and the rights granted to Escalon in this Agreement, Escalon
does hereby, for itself, its affiliates, successors and assigns, release,
disclaim and discharge any and all manner of actions and causes of action,
suits, debts, accounts, covenants, contracts, agreements, damages, claims,
demands and liabilities whatsoever, of every name and nature, in law or
equity, or otherwise (any of the foregoing, a "Claim"), which any of them
ever had, now have, or which they hereafter can, shall or may have, against
Scott and its affiliates, officers, directors, shareholders, distributors
and customers under the Former Agreement or by reason of Scott's
development, manufacture and sale of products to Escalon or any other
person, or for infringement of any patents owned by, or licensed or
assigned to, Escalon or any of its affiliates (filed in the United States
or elsewhere) for, or relating to,
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ophthalmic gases, whether a Claim arises or arose out of any agreement, oral or
written, a course of conduct or otherwise. Escalon covenants and agrees that it
will forever refrain from, directly or indirectly, instituting, prosecuting,
maintaining or pressing any Claim against Scott or any other person based upon
any matter purported to be released hereby.
ARTICLE 2 - Supply of Products
2.1 General. Scott shall use commercially reasonable efforts to supply the
Products to Escalon in accordance with Escalon's written purchase orders and the
terms and conditions of this Agreement.
2.2 Estimated Purchases. Escalon will provide Scott at the beginning of each
month with a rolling twelve (12) month forecast of its requirements for the
Products, such forecasts to be considered good-faith estimates only, for
planning purposes, and not to be considered as guarantees of the volumes or
timing of such requirements; provided that the first three (3) months of such
rolling forecast shall constitute a firm commitment unless modified by the
parties by subsequent written agreement.
2.3 Exclusivity of Supplier. Scott shall be considered Escalon's exclusive
supplier of the Products and Escalon agrees to purchase all of its requirements
for the Products from Scott. If Scott is unable to meet the required demand for
the Products for four consecutive calendar months, then Escalon will not be
required to purchase all of its requirements for the Products from Scott and may
purchase from an additional supplier the amount of Products not available from
Scott. Escalon will resume purchasing all of its requirements of the Products
once Scott has demonstrated that it once again has the ability to supply Escalon
with the amount of the Products needed.
2.4 Specifications. All the Products that Scott supplies shall meet or exceed
the relevant specifications set forth in Exhibit A (the "Specifications").
2.5 Manufacturing. All the Products that Scott supplies shall be manufactured
in compliance with or pursuant to: (a) all applicable CGMP procedures; (b) all
other applicable FDA regulations or requirements; (c) all other applicable
federal, state, and local laws and regulations; and (e) all required FDA and
other regulatory validations, permits, registrations, licenses, and approvals.
2.6 Manufacture of Finished Products by Escalon. Upon receipt of the Products
from Scott, Escalon shall integrate the Products into finished products as
components thereof. Escalon shall package and label the finished products in a
manner mutually agreeable to the parties and in conformity with applicable law
and governmental approvals.
2.6 Modifications to Products. From time to time Scott may modify, alter or
improve the Products listed in Exhibit A in whole or in part. Any such
modification, alteration or improvement of the Products shall only occur with
the prior written consent of Escalon, except that Escalon's consent shall not be
required if Scott determines that the modification, alteration or improvement is
necessary in order to correct a defect in a Product or enhance the safety of a
Product, or if the modification, alteration or improvement is required by any
law or regulation or is in conformity with any administrative or regulatory
order or standard. In the event Escalon fails to respond within 30 days of
receipt of notice of a proposed modification, alteration or improvement,
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the modification, alteration or improvement shall be deemed approved by
Escalon. The term "Products" shall be deemed to include the modified,
altered or improved Products.
2.8 Price. The prices for all Products shall be as set forth in Exhibit B
attached hereto and made a part hereof. Such prices shall remain firm
for one year after the signing of the Agreement. Thereafter, these
prices shall be subject to adjustment at the discretion of Scott.
2.9 Escalon Purchase Orders. A specific commitment to purchase the Products
will be established by Escalon's issuance of a purchase order against
this Agreement. All Escalon purchase orders shall be deemed to
incorporate the pricing, delivery, Specification, and other terms and
conditions contained in this Agreement. None of the terms and
conditions set forth on any purchase or order form, invoice or like
document shall change or modify the provisions of this Agreement, unless
mutually agreed to by the parties in writing. Each purchase order shall
be considered firm, and shall not be subject to change or cancellation
without Scott's written consent and will be subject to Scott's normal
cancellation fees. A purchase order shall be deemed to have been issued
on the date that it bears if it is received by Scott no later than the
fourth business day following that date; if it is received later than
the fourth business day, it shall be considered to have been issued when
received by Scott.
2.10 Payment. Escalon's payment for all orders of the Products shall be due
net 30 days after shipment from Scott.
2.11 Interest. Interest shall accrue on any delinquent amounts owed by
Escalon for Products at the lesser of 10% per year, or the maximum rate
permitted by applicable law.
2.12 Shipment. Scott shall ship each order of the Products to the destination
specified in Escalon's purchase order. All shipments will be F.O.B.
Plumsteadville, PA. Escalon may specify in its purchase order the common
carrier to be used. If Escalon fails to specify a qualified common
carrier, Scott shall select the common carrier.
2.13 Risk of Loss. Title and all risk of loss of or damage to the Products
(other than loss or damage resulting from the acts or omissions of
Scott, including without limitation acts or omissions in packing the
Products) will pass to Escalon, or to such financing institution or
other party or parties as may have been designated to Scott by Escalon,
upon delivery by Scott to a mutually agreed upon carrier in accordance
with Section 2.9.
2.14 Partial Delivery. With Escalon's prior written consent, Scott may make
partial shipment of Escalon's orders, to be separately invoiced and paid
for when due.
2.15 Delivery Schedule; Delays. Scott will use commercially reasonable efforts
to meet Escalon's requested delivery schedules for the Products, but
Scott reserves the right to refuse, cancel or delay shipment to Escalon
when Escalon is delinquent in payments to Scott, or when Escalon has
failed to perform its obligations under this Agreement or any other
Agreement between Escalon and Scott. Reasonable delay in delivery of any
order shall not relieve Escalon of its obligation to accept the delivery.
Should orders for Products exceed Scott's available inventory, Scott will
allocate its available inventory among its customers on a pro rata basis
based upon orders for the preceding six months. In any event, Scott shall
not be liable for indirect, consequential, or special damages to
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Escalon for failure to deliver or for any delay or error in delivery of
Products for any reason whatsoever.
2.16 Sales and Use Tax. Escalon shall pay any and all applicable sales or use
taxes or any other assessment levied upon the sale, transportation,
delivery, use or consumption of the Products or upon the cylinders in
connection with any order of the Products.
2.17 Certificate of Analysis. Scott shall provide a certificate of compliance
for each lot produced for each item of the Products indicating that the
material has been produced and tested in accordance with the
Specifications. Scott agrees to provide Escalon (upon request) final
acceptance and in-process test data to indicate that the process used to
produce the Products is under control for each lot/batch supplied.
2.18 Acceptance of the Products by Escalon. Escalon shall perform and complete
its receiving and quality assurance tests and inspections for units of the
Products shipped to Escalon under this Agreement by no later than 30 days
after its receipt of such units of the Products from time to time, and
shall be conclusively deemed to have accepted such units of the Products
unless it gives written notice of rejection of any such units to Scott
within such 30 day period and returns the rejected units to Scott within 30
days after receiving a written return authorization from Scott. Scott shall
not unreasonably withhold its return authorization and will be deemed to
have authorized the return of rejected units if it fails to deny such
return authorization within ten days of receiving Escalon's notice of
rejection. All shipping charges on authorized returns shall be borne by
Scott. Escalon acknowledges that the Specification for the Products is as
set forth in Exhibit A to this Agreement. Escalon's acceptance of the
Products shall in no way relieve Scott of its obligations and/or warranties
hereunder.
2.19 Remedies for Failure to Comply with Specification. Should any failure of a
Product to conform with the Specification appear within the Product
Warranty Period (as discovered by Escalon) as a result of the testing
outlined in Section 2.18, and if Escalon gives written notice of such
failure to Scott within 30 days following discovery of the failure, Scott
shall replace the nonconforming Product or refund the purchase price
thereof within 90 days after Escalon's notice to Scott. The foregoing shall
constitute Escalon's sole remedy with respect to the non-conforming
Products.
ARTICLE 3 -- Escalon's Duties
3.1 No Additional Warranties. Escalon agrees that it will not make any
representations, guarantees or warranties (whether written or oral)
regarding the efficacy or any other characteristics of the Products on
Scott's behalf other than as contained in written promotional literature
prepared by Scott, or as required by any governmental law, regulation or
agency.
3.2 Claims. Escalon will provide Scott with copies of all product liability
claims and complaint letters relating to the Products within 72 hours of
claim. Scott agrees to promptly notify Escalon of any laws, regulations,
decrees, orders or judgments of courts, tribunals or government agencies,
of which Scott is aware, that require any of the Products sold or
distributed by Escalon to be recalled. If the Products are required by any
government agency to be recalled, Escalon shall be responsible for properly
effecting the
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recall. The party causing the problem resulting in a recall, decree, order
or judgment of a court, tribunal or agency shall bear the expense related
thereto. If both parties contributed to the problem resulting in a recall,
decree, order or judgment of a court, tribunal or agency, the expenses
thereof shall be split in proportion to each party's relative
responsibility. The party liable for the cost of a recall shall retain all
of the Product so recalled. To the extent that the costs of a recall are
shared, each party shall be entitled to its pro rata share of the recalled
Products.
3.3 FDA INSPECTION. Escalon will permit the FDA and corresponding drug
regulatory agencies of foreign jurisdictions to inspect its manufacturing
facility for finished products in accordance with applicable laws and
regulations. Escalon will provide Scott with a copy of all FDA
correspondence relating to finished products which is reasonably necessary
to Scott's performance hereunder or which could adversely affect Scott.
3.4 SCOTT ACCESS. On reasonable prior notice to Escalon, Escalon will permit a
representative employed by Scott to have reasonable access during business
hours to its manufacturing facility solely for the purposes of auditioning
Escalon's regulatory compliance and its quality control processes, but the
representative will not have access to any of Escalon's Confidential
Information (as defined in Section 5.2).
3.5 COMPLIANCE WITH GOVERNMENTAL APPROVALS. Escalon will sell and distribute the
Products only as a component of finished products and only in the United
States of America and in such other countries, nations, territories or other
political subdivisions for which it has received all required Governmental
Approvals at Escalon's expense and will do so only in accordance with those
Governmental Approvals and all applicable laws, rules and regulations.
"Governmental Approval" as used herein shall mean governmental or other
licenses, consents or approvals necessary for the resale and distribution of
finished products by Escalon in any country, nation, territory or other
political subdivision in which Escalon markets or sells the Products.
3.6 QUALITY CONTROL. From time to time, Escalon will notify Scott in writing of
any problems or concerns that arise out of its quality control and
regulatory compliance inspections. Escalon will also notify Scott in writing
of any material quality control problems of which Escalon has knowledge.
Upon receipt of notice under this Section 3.6, Scott shall use commercially
reasonable efforts to endeavor to remedy the problem and shall, within 30
days after receipt of notice, and monthly thereafter for so long as the
problem continues, provide Escalon a written report of the status of the
problem and the measures that have been taken to correct it.
3.7 INSURANCE. Escalon shall obtain and maintain comprehensive or commercial
general liability insurance coverage including products and completed
operations coverage, blanket contractual coverage and broad form commercial
general liability coverages affording a minimum limit of liability of
$1,000,000 combined single limit for bodily injury/property damage per
occurrence and a minimum limit of liability of $5,000,000 in the aggregate.
Such policy of insurance shall name Scott as an additional insured
thereunder and shall provide Scott with 30 days' prior written notice in the
event of policy cancellation or a material change in its terms or
provisions. Escalon will, concurrently or within ten days of its execution
of this Agreement, deliver a certificate evidencing such insurance to Scott.
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3.8 Continuous Compliance by Escalon. Each finished product sold by Escalon
shall not be adulterated or misbranded and shall not be an article that may
not be introduced into interstate commerce pursuant to applicable law. With
respect to labeling, promotional material, packaging, or other
representations, Escalon shall indemnify Scott for any liability arising
from (i) errors in translation performed by Escalon or (ii) Escalon's
failure to comply with applicable law.
ARTICLE 4 -- Scott's Duties
4.1 Documentation Transfer. Scott hereby agrees to provide the necessary
documentation that will allow Escalon to inspect and distribute the
Products covered by this Agreement ("Documentation"). For purposes of this
Section 4.1, Documentation includes, but is not limited to CAD engineering
drawings detailing the contents and labeling of the Products.
4.2 Escalon Reports. Unless required by applicable law, Scott will not directly
or indirectly through any third party deliver any report, study or other
similar documentation received from Escalon pursuant to Article 3 to any
governmental agency or body in connection with any governmental or other
licenses, consents or approvals necessary for the resale and distribution
of the Products and/or finished products without Escalon's prior written
consent.
4.3 FDA Inspection. Scott will permit the FDA and corresponding drug regulatory
agencies of foreign jurisdictions to inspect its manufacturing facility for
the Products in accordance with applicable laws and regulations. Scott will
provide Escalon with a copy of all FDA correspondence relating to the
Products which is reasonably necessary to Escalon's performance hereunder
or which could adversely affect Escalon.
4.4 Insurance. Scott shall obtain and maintain comprehensive or commercial
general liability insurance coverage including products and completed
operations coverage, blanket contractual coverage and broad form commercial
general liability coverages affording a minimum limit of liability of
$1,000,000 combined single limit for bodily injury/property damage per
occurrence and a minimum limit of liability of $5,000,000 in the aggregate.
Such policy of insurance shall name Escalon as an additional insured
thereunder and shall provide Escalon with 30 days prior written notice in
the event of policy cancellation or a material change in its terms or
provisions. Scott will deliver a certificate evidencing such insurance to
Escalon within ten days of execution of the Agreement.
ARTICLE 5 --Confidentiality
5.1 Obligations of the Parties. Each party acknowledges that this Agreement
requires the disclosure to it by the other party of Confidential
Information. Each party (the "Receiving Party") shall regard and preserve
Confidential Information that it obtains from the other party (the
"Disclosing Party") as secret and confidential. During the term of this
Agreement and for a period of ten years thereafter, no Receiving Party
shall publish or disclose any Confidential Information in any manner
without the Disclosing Party's prior written consent. The Receiving Party
shall use the same level of care to prevent the disclosure of Confidential
Information that it exercises in protecting its own Confidential
Information, and shall in any event take all reasonable precautions to
prevent the disclosure of Confidential Information to third parties.
Notwithstanding these restrictions,
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a Receiving Party may disclose Confidential Information to the FDA, to
persons conducting preclinical or clinical trials of any Product, and to
such other persons (such as consultants) as may be necessary to the
performance of this Agreement, upon securing from those persons (except the
FDA) executed confidentiality agreements in the form customarily employed
by the Receiving Party when required to disclose its own confidential
information.
5.2 Confidential Information. "Confidential Information" means information in
the possession of a party that is not generally known and that gives that
party a competitive advantage over third parties, including but not limited
to techniques, designs, drawings, data, processes, inventions, concepts,
substances, specifications, developments, equipment, protocols, sales and
customer information, trade secrets, and business and financial information
relating to the research, products, practices, and businesses of that
party.
5.3 Exceptions. The following shall not be considered Confidential Information:
(a.) Information that is public knowledge or that becomes public knowledge
through no fault of the Receiving Party.
(b.) Information that is lawfully obtained by the Receiving Party from a
third party (that to the knowledge of the Receiving Party itself
lawfully obtained the Confidential Information and has no obligation
of confidentiality.)
(c.) Information that is in the Receiving Party's lawful possession, as
documented by its records, prior to its initial disclosure by the
Disclosing Party. This exception shall not apply to release either
party from the terms of any confidentiality agreement it entered into
prior to the Effective Date.
(d.) Information that is independently developed by the Receiving Party
without reference to any Confidential Information of the Disclosing
Party.
ARTICLE 6 -- Terms and Termination
6.1 Term. This Agreement shall commence on the Effective Date and shall
continue in effect for a period of five years from that date (the
"Initial Term") unless terminated in accordance with the provisions hereof.
Upon expiration of the Initial Term, the Agreement shall automatically
renew on the relevant anniversary date for successive one year terms unless
either Party, upon not less than 90 days written notice to the other Party
prior to expiration of the term then in effect, signifies its intention to
permit the Agreement to expire, whereupon the Agreement shall end upon the
expiration of such term.
6.2 Termination. This Agreement may be terminated earlier than Section 6.1
provides under the following circumstances:
(a.) Insolvency. This Agreement may be terminated by either party by notice
to the other in the event such other party shall dissolve, cease
active business operations or liquidate, or in the event such other
party shall have been determined to be insolvent by a court of
competent jurisdiction, or insolvency or reorganization
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proceedings shall have been commenced by such other party, or
such proceedings shall have been brought against such other party
and remained undismissed for a period of 60 days, or such other
party shall have made a general assignment for the benefit of
creditors, or a receiver of all or substantially all of such
other party's assets shall have been appointed and not discharged
within 60 days.
(b.) Party's Default. This Agreement may be terminated by either
party if the other materially breaches any provision of this
Agreement, except that this Agreement shall not be deemed
breached by a party unless (i) the claiming party has given the
breaching party written notice specifying the respects in which
the claiming party claims the Agreement has been breached (the
"Notice of Breach"); (ii) the breaching party fails to remedy
such breach, or fails to provide information to the claiming
party sufficient to show that it has not breached this Agreement,
within 60 days following the receipt of the Notice of Breach; and
(iii) no later than 30 days following the expiration of said
60-day period, the claiming party has served final written notice
of termination. If this Agreement is terminated by Scott due to a
material breach of this Agreement by Escalon, Escalon shall,
within 30 days after the termination, pay to Scott (i) all of
Scott's costs associated with the purchase of raw materials for
the purpose of manufacturing the Products; (ii) all of Scott's
costs associated with work in process relating to the Products;
and (iii) the price for all finished Products, as set forth in
Exhibit B. All raw materials, work in process and finished
Products for which Escalon pays pursuant to the preceding
sentence shall, at the request of Escalon, be shipped by Scott
to Escalon at Escalon's expense.
6.3 No Damages On Termination. Both parties have considered the
expenditures necessary in preparing for performance of Agreement and
the possible losses and damages incident to each in the event of
termination. Each party understands that the other party may terminate
this Agreement and the distributorship created hereunder as provided
in Section 6.2 or permit this Agreement to expire without extension or
renewal. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY
FOR ANY INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES, INCLUDING BUT
NOT LIMITED TO LOSS OF PROFITS AND GOODWILL, IN CONNECTION WITH THIS
AGREEMENT, ITS PERFORMANCE OR TERMINATION (WHETHER OR NOT IN
ACCORDANCE WITH ITS TERMS), WHETHER OR NOT THE OTHER PARTY'S CLAIM
ARISES IN TORT, CONTRACT OR OTHERWISE.
ARTICLE 7 -- WARRANTIES
7.1 Product Warranty. Scott warrants that the Products as delivered to
Escalon hereunder, shall conform to the Specifications, shall comply
with all applicable FDA requirements, and shall be free from
manufacturing and workmanship defects under normal care and use for
their intended purpose. The warranty for defects in material and
workmanship shall extend for a period of three years after delivery of
the Product to Escalon ("Product Warranty Period"); except that in the
case of the Product's failure to comply with the Specifications, the
Product Warranty Period (and Scott's obligations in respect thereof)
shall be extended to be consistent with the Specifications. THE
WARRANTIES SET FORTH IN THIS SECTION 7.1 ARE IN LIEU OF ALL OTHER
WARRANTIES.
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EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
7.2 Intellectual Property Indemnity. Escalon shall indemnify and hold harmless
Scott and its affiliates, officers, directors, employees and shareholders
against and from all claims, demands, suits, costs (including reasonable
attorneys' fees and costs of investigation) and actions in each case with
respect to claims that the manufacture, sale and/or use of the Product by
Escalon or its affiliates infringes any intellectual property right of a
third party.
7.3 Indemnification Against Product Liability. Escalon shall indemnify and hold
harmless Scott and its affiliates, officers, directors, employees and
shareholders against and from all claims, demands, suits, costs (including
reasonable attorneys' fees), and actions in each case with respect to
damages to property or injuries to persons that may be sustained by any
third party and that are asserted against such an indemnified party on the
basis of a defect in the manufacture or supply of the Products or any other
products manufactured or sold by Escalon or its affiliates.
7.4 Continuing Obligations. The obligations of the parties set forth in this
Article 7 shall continue notwithstanding the termination of this Agreement.
7.5 Limitation of Liability. NEITHER PARTY SHALL IN ANY EVENT HAVE OBLIGATIONS
OR LIABILITIES TO THE OTHER PARTY FOR LOSS OF PROFITS, LOSS OF USE OR
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON CONTRACT,
TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR ANY OTHER THEORY OR FORM
OF ACTION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY THEREOF,
ARISING OUT OF OR IN CONNECTION WITH THE MANUFACTURE, SALE, DELIVERY, USE,
REPAIR OR PERFORMANCE OF THE PRODUCTS, OR ANY FAILURE OR DELAY IN
CONNECTION WITH ANY OF THE FOREGOING OR FOR BREACH OF ANY REPRESENTATION,
WARRANTY OR COVENANT IN THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF
THE PRECEDING SENTENCE, SCOTT SHALL NOT BE LIABLE TO ESCALON FOR PERSONAL
INJURY OR PROPERTY DAMAGE, EXCEPT FOR BODILY INJURY, DEATH OR TANGIBLE
PROPERTY DAMAGE CAUSED BY THE NEGLIGENCE OF SCOTT OR ANY OF SCOTT'S
EMPLOYEES. IN NO EVENT SHALL THE LIABILITY OF SCOTT TO ESCALON ARISING
UNDER OR IN CONNECTION WITH THIS AGREEMENT EXCEED FIVE HUNDRED THOUSAND
DOLLARS ($500,000) IN THE AGGREGATE FOR ALL CLAIMS UNDER THIS AGREEMENT.
ARTICLE 8 - GENERAL PROVISIONS
8.1 Assignment. This Agreement may not be assigned by either party without the
prior written consent of the other. Notwithstanding the foregoing, either party
may assign this Agreement without such consent to a wholly-owned subsidiary,
and Scott may assign this Agreement to a transferee of substantially all of the
assets of its business unit dedicated to the Products. Nothing in this Section
8.1 shall preclude Scott from subcontracting all or any portion of the
manufacturing of the Products.
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8.2 Notice. Any notices permitted or required to be given hereunder shall
be effective if they are delivered personally, by certified mail
(return receipt requested), by overnight air courier (with return
receipt), or by facsimile machine (with proof of transmission) and
delivered:
in the case of Escalon, to:
President/CEO
Escalon Ophthalmic, Inc.
351 East Conestoga Road
Wayne, PA 19087
and in the case of Scott, to:
Vice President/General Manager
Scott Medical Products, Inc.
6141 Easton Road, Building 3
P.O. Box 310
Plumsteadville, Pennsylvania 18949-0310
215-766-7250 Facsimile
Notices may be sent to any changed address of any of the above of
which the sender has actual knowledge.
8.3 Integration. This Agreement represents the entire agreement of the
parties with respect to its subject matter, and supersedes any and all
prior agreements, understandings, promises, and representations by any
party to any other respecting its subject matter, including, but not
limited to, the Former Agreement.
8.4 No Brokers. No party to this Agreement employed any broker or agent in
connection with this transaction or its subject matter.
8.5 Captions; Exhibits. All captions contained in this Agreement are
inserted for convenience or reference only shall not be deemed a part
of this Agreement. The Exhibits are incorporated into and deemed a
part of this Agreement.
8.6 Severability. If any provision of this Agreement is held
unenforceable, the provision shall be regarded as severable from this
Agreement and the remaining provisions shall remain in full force and
effect.
8.7 Status of the Parties. Escalon and Scott shall not be deemed to be
partners, joint ventures or one another's agents, and neither shall
have the right to act on behalf of the other except as expressly
provided herein or otherwise expressly agreed in writing.
8.8 Waiver. The failure or neglect of Escalon or Scott to enforce the
terms and conditions of this Agreement shall not be deemed a waiver
thereof nor shall it be deemed a condonation of any breach. Such
failure or neglect shall not be deemed a waiver or condonation of any
later breach. All remedies under this Agreement are cumulative and are
not exclusive of other remedies.
11
11
8.9 Force Majeure. Neither Party will be held liable or responsible to the
other Party nor be deemed to have defaulted under or breached this
Agreement for failure or delay in fulfilling or performing any term of
this Agreement, except for the payment of any sums owing hereunder,
when such failure or delay is caused by or results from causes beyond
the reasonable control of the affected Party including but not limited
to such causes attributable to fire, floods, earthquakes, shortages,
failure or delays of energy, materials, supplies or equipment,
breakdowns in machinery or equipment, embargoes, wars, acts of war
(whether war be declared or not), insurrection, riots, civil
commotion, acts of God or acts, omissions or delays in acting by any
governmental authority or the other Party.
8.10 Amendment. This Agreement may only be amended by a writing signed by
the parties hereto and expressly designated as an amendment to this
Agreement.
8.11 Binding Effect, Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their
subsidiaries, divisions, business units, successors and permitted
assigns.
8.12 Affiliate. Affiliate means, in the case of each party, any
corporation, company, partnership, joint venture and/or firm that is
directly or indirectly controlled by that party, or that controls or
is under common control with that party. For purposes of this Section
8.12, control means (a) in the case of corporate entities, direct or
indirect ownership of at least 50% of the shares entitled to vote for
the election of directors; and (b) in the case of non-corporate
entities, direct or indirect ownership of at least 50% of the equity.
8.13 Choice of Law. This Agreement shall be construed in accordance with
the substantive laws of Pennsylvania, without giving effect to the
choice of law provisions applicable in that or any other jurisdiction.
8.14 Alternative Dispute Resolution. Disputes under this Agreement will be
resolved as follows:
(a.) If a dispute arises under this Agreement which cannot be
resolved by the personnel directly involved, either party may
invoke this dispute resolution procedure by giving written notice
to the other designating a senior executive officer of such party
or its affiliate with appropriate authority to be its
representative in negotiations relating to the dispute.
(b.) Upon receipt of the notice, the other party shall, within five
business days, designate a senior executive officer of such party
or its affiliate with similar authority to be its representative.
(c.) Within 14 business days of the designation of both executives,
the designated executives shall enter into good-faith
negotiations concerning the dispute.
(d.) If an agreement cannot be reached within one month after the
commencement of negotiations, either party may commence
litigation to resolve the dispute in question.
8.15 Counterparts. This Agreement may be executed in counterparts, to be
evidenced by the simultaneous (within physical limits) exchange of
signature pages (telefaxed if necessary)
12
12
and confirmatory cover letters, and the counterparts together shall be regarded
as a single instrument binding on the parties.
13
13
WHEREFORE, the parties have executed this Agreement as of the date of the
latest signature below.
ESCALON OPTHAMALIC, INC. SCOTT MEDICAL PRODUCTS, INC.
By: /s/ Ronald L. Hueneke By: /s/ Thomas W. Barford
------------------------- -----------------------------------
Its: President COO Its: Vice President and General Manager
------------------------- ----------------------------------
Date: 10-12-00 Date: 10-13-00
------------------------ ----------------------------------
EX-10.8
7
w53606ex10-8.txt
AMENDMENT & SUPPLEMENT TO ASSETS SALE&PURCH. AGREE
1
Exhibit 10.8
FINAL VERSION 3/15/01
AMENDMENT AND SUPPLEMENT TO ASSETS
SALE AND PURCHASE AGREEMENT AND RELEASE
THIS AMENDMENT AND SUPPLEMENT AGREEMENT AND RELEASE (THE "AMENDMENT")
is entered into as of the 28th day of February 2001, by and between ESCALON
MEDICAL CORP., a Delaware corporation ("Escalon"), ESCALON VASCULAR ACCESS, INC.
("Buyer") and RADIANCE MEDICAL SYSTEMS, INC. (formerly CARDIOVASCULAR DYNAMICS,
INC.), a Delaware corporation ("Radiance").
BACKGROUND
WHEREAS, Escalon, Buyer and Radiance entered into an Assets Sale and
Purchase Agreement (the "Asset Agreement") dated January 21, 1999, and
WHEREAS, any capitalized term used herein and not defined shall have
the meaning ascribed to it in the Asset Agreement, and
WHEREAS, the parties wish to amend the Asset Agreement to provide an
adjustment in the terms of payment of the royalties pursuant to Section 2.3(c)
of the Asset Agreement,;
WITNESSETH
NOW, THEREFORE, in consideration of the respective covenants contained
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
1. The last two sentences of Section 2.3(c) of the Asset
Agreement shall be amended to read as follows:
"With respect to Net Sales made during each 12-month period
during the Royalty Period commencing on January 21, 2001, (each such
period a "Royalty Year"), Buyer shall pay to Seller royalty payments
under this Section 2.3(c) only with respect to Net Sales in excess of
$3,000,000 in any Royalty Year."
2. Radiance, Escalon and Buyer agree that Buyer owes to Radiance
an additional $182,442 for royalties for the 12 months ended January 21, 2001,
and agree that as payment therefor, and as consideration for the amendment of
Section 2.3(c) of the Asset Agreement set forth above, Escalon and Buyer shall
make the issuances and payments and deliver promissory notes, and agrees to the
obligations, as set forth in Sections 3, 4, 5, 6 and 7 below.
3. Escalon shall within three (3) days of the date of this
Amendment issue to Radiance 50,000 shares of Escalon's common stock (to be
valued at $100,000). Radiance understands and acknowledges that (i) the shares
of Escalon Common Stock to be issued to the Radiance pursuant to this Amendment
will be issued under certain
2
exemptions from the registration provisions of the Securities Act of 1933 (the
"Securities Act"), (ii) Radiance is acquiring the shares of Escalon Common Stock
without being furnished any offering literature or prospectus, (iii) the
issuance of the shares of Escalon Common Stock has not been examined by the
Securities and Exchange Commission (the "Commission") or by any agency charged
with the administration of the securities laws of any state or other
jurisdiction and (iv) it has had the opportunity to review certain materials,
including financial information, regarding Escalon and to ask questions of
officers of Escalon regarding Escalon. Radiance represents and warrants that it
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of an investment in the shares of
Escalon Common Stock and of making an informed investment decision with respect
thereto. Radiance understand that Escalon is relying on the truth and accuracy
of the representations, declarations and warranties made in this Section 3 by
Radiance in issuing the shares of Escalon Common Stock without having first
registered the shares under the Securities Act or under the securities laws of
any state or other jurisdiction. Radiance also confirms that (i) it understands
that there are substantial restrictions on the transferability of the shares of
Escalon Common Stock it is to receive pursuant to this Amendment and,
accordingly, it may not be possible for it to liquidate its investment in the
shares of Escalon Common Stock in case of emergency and (ii) it is able to bear
the economic risk of its investment in the shares and to hold the shares for an
indefinite period of time. The shares of Escalon Common Stock are being acquired
by the Radiance in good faith solely for its own account, for investment
purposes only, and are not being acquired with a view to or for the resale,
distribution, subdivision or fractionalization thereof. Radiance does not have
any contract, undertaking, understanding, agreement or arrangement, formal or
informal, with any person to sell, transfer or pledge to any person the shares
of Escalon Common Stock, or any part thereof, and has no current plan to enter
into any such contract, undertaking, agreement or arrangement. Radiance
understands that the legal consequences of the foregoing representations and
warranties are that it must bear the economic risk of its investment in the
shares of the Escalon Common Stock for an indefinite period of time because the
shares have not been registered under the Securities Act.
4. Registration Rights.
(i) Registration Rights. Escalon shall use its best efforts to register
the shares of Escalon Common Stock issued to Radiance in this Amendment within
the seventy-five (75) days following the execution of this Amendment or as soon
as practicable thereafter on Form S-3 under the Securities Act, or any successor
to such form, (or if Escalon is not eligible to use Form S-3, then any other
appropriate form) in a manner that will, upon being declared effective,
constitute a "shelf" registration for purposes of Rule 415 under the Securities
Act, pursuant to which Radiance may sell the shares of Escalon Common Stock
received by it in this Amendment, from time to time and in such amounts as
Radiance may hereafter determine, all in a manner consistent with all applicable
provisions of the Securities Act and the Exchange Act.
(ii) Registration Procedure. With respect to registration under Section
4(i), Escalon shall prepare and file such amendments, post-effective amendments
and periodic
3
reports under the Exchange Act as may be necessary to keep such registration
statement continuously effective until the second anniversary of this Amendment.
Notwithstanding the foregoing, Escalon shall not be required to update, pursuant
to this Section 4, any document during a period when Escalon shall, in good
faith and using reasonable business judgment, believe that the premature
disclosure of any event or information would have a material adverse effect on
Escalon or its prospects. Radiance hereby agrees, that upon receipt of notice
from Escalon of the happening of any occurrence described in the preceding
sentence, Radiance shall forthwith discontinue disposition of the shares of
Escalon Common Stock received by it in this Amendment pursuant to such
registration statement until Radiance receipt of the copies of the supplemented
or amended prospectus, and, if so directed by Escalon, Radiance shall deliver to
Escalon all copies in its possession, other than permanent file copies then in
Radiance's possession, of the prospectus covering such Escalon Common Stock
current at the time of receipt of such notice.
(iii) Expenses. The costs and expenses, other than selling discounts or
commissions, of registration pursuant to this Section 4 shall be paid by Escalon
(including, without limitation, all registration and filing fees, printing
expenses, and costs of special audits incident to or required by such
registration).
(iv) Indemnification. To the extent permitted by law, Escalon will
indemnify and hold harmless Radiance, any underwriter (as defined in the
Securities Act) for Radiance and each person, if any, who controls Radiance or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement on or after the effective date, or
final prospectus contained therein or any amendments or supplements thereto;
(ii) 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; or (iii) any violation or alleged violation by Escalon of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law; and the Company will pay to each the Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action.
4
5. Upon execution of this Amendment Escalon or Buyer shall pay
$17,558 to Radiance in immediately available funds.
6. Escalon and Buyer, jointly and severally, shall execute and
deliver to Radiance a term note, in the form attached hereto as Exhibit 1, (the
"Short Term Note") in the amount of $64,884, with interest at the Prime Rate as
published in the Wall Street Journal (New York edition) plus 1%, payable
interest only quarterly beginning on May 31, 2001 and the principal and interest
shall be due in full on January 15, 2002;
7. Escalon and Buyer, jointly and severally, shall execute and
deliver to Radiance an additional term note, in the form attached hereto as
Exhibit 2, (the "Long Term Note") in the amount of $717,558, with interest at
the Prime Rate as published in the Wall Street Journal (New York edition) plus
1%, payable interest only quarterly beginning on May 31, 2001 through January
15, 2002 and thereafter principal and interest payable in eleven (11) quarterly
installments beginning on April 15, 2002;
8. In the event of a Change of Control (as defined therein) of
either Escalon or Buyer then all obligations under the Short Term Note and the
Long Term Note (collectively, the "Notes") shall be immediately due and payable,
with a prepayment premium as set forth in the Notes.
9. Each of Buyer and Escalon, on behalf of itself and each of its
Affiliates, and the predecessors, successors and assigns of each acknowledges
full and complete satisfaction of, and hereby irrevocably, unconditionally,
forever and finally releases and fully discharges Radiance and its Affiliates,
and the shareholders, Affiliates, officers, directors, employees, agents,
attorneys, representatives, predecessors, successors and assigns of each (the
"Radiance Releasees") from, any and all claims, demands, actions, causes of
action, promises, covenants, contracts, agreements, bonds, obligations,
liabilities, losses, damages, costs, expenses and moneys otherwise accrued, due
or unpaid, of whatsoever character, nature or kind, whether in law or in equity,
in contract or in tort, under statute or at common law, whether now known or
unknown, suspected or unsuspected, fixed or contingent, against the Radiance
Releasees arising out of, in connection with, or in any way related to the Asset
Agreement.
10. Each of Buyer and Escalon, on behalf of itself and its
Affiliates, having been fully advised by its respective counsel, hereby
expressly and voluntarily waives all rights or benefits that it might otherwise
have under the provisions of Section 1542 of the Civil Code of the State of
California, which provides as follows, and under any and all federal, state,
foreign and/or common-law statutes or principles of similar effect:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY IT MUST HAVE MATERIALLY AFFECTED ITS
SETTLEMENT WITH DEBTOR.
11. Each of Buyer and Escalon, on behalf of itself and its
Affiliates, represents and acknowledges that (a) the terms of this Amendment
have been completely read and fully understood and accepted for the purpose of
effecting a full, complete and final compromise,
5
adjustment, and settlement of the matters referred to herein; (b) it intends to
be fully bound hereby and may not hereafter raise any claim of mistake of fact,
misunderstanding, or inadequacy of consideration in connection herewith; and (c)
in executing this Agreement, it relies solely upon its own judgment, belief, and
knowledge, and the advice and recommendations of its own independently selected
counsel, concerning the nature, extent, and duration of its rights and claims,
and it has not been influenced to any extent whatsoever in executing the same by
any representation or statement made or omitted to be made by the other parties
hereto or by any person representing another party.
12. This Amendment shall be governed by the terms in the Asset
Agreement, provided however that in the event of any conflict or variance
between the terms of this Amendment and the Asset Agreement, this Amendment
shall control.
13. The parties acknowledge and agree that all of the terms,
provisions, covenants and conditions of the Asset Agreement shall hereafter
continue in full force and effect in accordance with the terms thereof, except
to the extent amended, modified, deleted or revised in this Amendment.
14. This Amendment may be executed in any number of counterparts
by facsimile or otherwise, each of which shall be deemed an original, but which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the day and year first written above.
RADIANCE MEDICAL SYSTEMS, INC.
By: /s/ Stephen R. Kull
----------------------------------------
Title: VP Finance and Adm.
--------------------------------------
ESCALON MEDICAL CORP.
By: /s/ Richard J. DePiano, CEO
----------------------------------------
Richard J. DePiano, CEO
--------------------------------------------
ESCALON VASCULAR ACCESS, INC.
By: /s/ Richard J. DePiano, CEO
-----------------------------------------
Richard J. DePiano, CEO
--------------------------------------------
[SIGNATURE PAGE TO THE AMENDMENT TO ASSETS SALE AND PURCHASE AGREEMENT
ESCALON MEDICAL CORP. AND RADIANCE MEDICAL SYSTEMS, INC.]
6
ESMC Final 3/15/01
EXHIBIT 1
SHORT TERM NOTE
February 28, 2001
$64,884.00
FOR VALUE RECEIVED, Escalon Medical Corp, a Delaware corporation, and
Escalon Vascular Access, Inc., a Delaware corporation, both having an address at
351 East Conestoga Road, Wayne, PA 19087 (each a "Maker"), hereby, jointly and
severally, covenant and promise to pay to Radiance Medical Systems, Inc., a
Delaware corporation, having an address at 13700 Alton Parkway, Suite 160,
Irvine, CA 92618 ("Payee"), at Payee's address first above written or at such
other address as Payee may designate in writing, Sixty Four Thousand Eight
Hundred Eighty Four Dollars ($64,884.00), lawful money of the United States of
America, together with interest thereon computed from the date hereof at a rate
per annum equal to 1 percentage point above the prime rate as published in the
Wall Street Journal (New York Edition) on the last business day of each quarter
(to be applicable to the succeeding quarter), which only interest shall be
payable in quarterly installments commencing on the 31st day of May, 2001, and
on the 31st day of August and the 30th day of November, until January 15, 2002,
on which date all outstanding principal and interest shall be due and payable.
To the extent any payment of principal or interest is not paid when due, it
shall accrue interest until paid at the rate of one and one-half percent
(1-1/2%) per month, or the maximum rate permitted by law, which is less.
EACH MAKER JOINTLY AND SEVERALLY COVENANTS AND AGREES WITH PAYEE AS FOLLOWS:
1. Maker will pay the indebtedness evidenced by this Note as
provided herein.
2. Maker shall not have the right to prepay the indebtedness
evidenced by this Note, in whole or in part, unless Maker shall give Payee ten
(10) days notice of its intention to prepay such indebtedness and shall pay to
Payee on the date of the prepayment all interest accrued to said date and a
prepayment premium. The prepayment premium shall be calculated by multiplying
the remaining principal balance times the excess, if any of the rate of return
achieved by Payee on cash or cash equivalents owned by Payee for the most recent
quarter prior to the date of prepayment over the Prime Rate plus 1% on the date
of prepayment, divided by twelve (12) months, multiplied by the number of
remaining months to maturity (see attached example on Exhibit A) The Prime Rate
shall be defined as the published Prime Rate in the Wall Street Journal (New
York edition) on the date of prepayment.
3. If any of the following events shall occur:
7
(1) the Maker defaults in the payment of any principal or
interest due under this Note or the Long Term Note issued in conjunction with
this Note under the Amendment and Supplement Agreement and Release, dated as of
February 28, 2001, by and among Payee and each Maker, (together with this Note,
the "Notes");
(2) any material default by either Maker of any other
material obligation under the Notes or the Assets Sale and Purchase Agreement,
dated January 21, 1999, by and among Payee and each Maker, as amended;
(3) there shall be a Change in Control of either Maker.
then, and in each and every such case, the Payee shall provide notice to either
or both Makers and provide Makers ten (10) days to begin to cure such default.
Thereafter, if Makers shall not have cured such default, Payee may by written
notice to either or both Makers declare all amounts under this Note to be
forthwith due and payable and thereupon the balance shall become so due and
payable, along with a prepayment premium as calculated in Section 2 above,
without presentation, protest or further demand or notice of any kind, all of
which are hereby expressly waived.
4. For purposes hereof a Change in Control of Escalon Vascular
Access, Inc., shall be deemed to have occurred if Escalon Vascular Access, Inc.
is no longer a wholly owned subsidiary of Escalon Medical Corp. For purposes
hereof a Change of Control of Escalon Medical Corp. shall be deemed to have
occurred only (i) if Escalon Medical Corp. is liquidated or dissolved, (ii) if
Escalon Medical Corp. sells substantially all of its assets or (iii) if Escalon
Medical Corp is acquired by another entity.
5. Maker hereby waives presentment for payment, demand, protest,
and notice of dishonor. If an action is brought for collection under this Note,
the Payee shall be entitled to receive all costs of collection, including,
without limitation, its reasonable attorneys' fees.
6. Any notice or demand required or permitted to be made or given
hereunder shall be deemed sufficiently made and given if given by the mailing of
such notice or demand by certified or registered mail, return receipt requested,
with postage prepaid, addressed, if to either Maker, at such Maker's address
first above written, or if to Payee, at Payee's address first above written. Any
party may change its address by like notice to the other party.
7. This Note may not be changed or terminated orally, but only by
an agreement in writing signed by the party against whom enforcement of any
change, modification, termination, waiver, or discharge is sought. This Note
shall be construed and enforced in accordance with the laws of Delaware.
8
IN WITNESS WHEREOF, Maker has executed this Note as of the date first
above written.
ESCALON MEDICAL CORP
ATTEST:
By:
----------------------------------------
Richard J. DePiano, CEO
By
------------------------
Secretary
ESCALON VASCULAR ACCESS, INC.
By:
----------------------------------------
Richard J. DePiano, CEO
[SIGNATURE PAGE TO SHORT TERM NOTE]
9
Exhibit A
See Exhibit 3 of Amendment Agreement
10
COMMONWEALTH OF PENNSYLVANIA, COUNTY OF , ss.
On this ___ day of February, 2001, before me, the undersigned officer,
personally appeared ____ , to me known, who being duly sworn, did depose and say
and did acknowledge that he is the CEO of Escalon Medical Corp, the corporation
described in and which executed the foregoing Note; that he knows the seal of
said corporation; that the seal affixed to said Note is such corporate seal;
that it was so affixed by the order of the board of directors of the said
corporation; and that he signed his name thereto by like order for the uses and
purposes therein contained.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
-------------------------------
Notary Public
My commission expires on
11
Exhibit 3
Payment # Date Payment of Principal Balance
2/28/01 717,558
1 4/15/02 65,233 652,325
2 7/15/02 65,233 587,092
3 10/15/02 65,233 521,859
4 1/15/03 65,233 456,626
5 4/15/03 65,233 391,393
* 6 7/15/03 65,233 326,160
7 10/15/03 65,233 260,927
8 1/15/04 65,233 195,694
9 7/15/04 65,233 130,461
10 10/15/04 65,233 65,228
11 1/15/05 65,228 0
Assumptions
* Sale of Company 7/16/2003, Prime Rate 8 1/2%, Radiance Earn Rate 5 1/2%
Formula
Remaing Outstanding Principal X [Prime Rate + 1% -
(Radiance Earn Rate)] / 12 X Remaining Months to Maturity = Prepayment Premium
326,160 X [(8 1/2 % + 1 %) / 12] X 15 = 16,308
12
ESMC Final 3/15/01
EXHIBIT 2
LONG TERM NOTE
February 28, 2001
$717,558.00
FOR VALUE RECEIVED, Escalon Medical Corp., a Delaware corporation, and
Escalon Vascular Access, Inc., a Delaware corporation, both having an address at
351 East Conestoga Road, Wayne, PA 19087 (each a "Maker"), hereby, jointly and
severally, covenant and promise to pay to Radiance Medical Systems, Inc., a
Delaware corporation, having an address at 13700 Alton Parkway, Suite 160,
Irvine, CA 92618 ("Payee"), at Payee's address first above written or at such
other address as Payee may designate in writing, Seven Hundred and Seventeen
Thousand Five Hundred and Fifty Eight Dollars ($717,558.00), lawful money of the
United States of America, together with interest thereon computed from the date
hereof at a rate per annum equal to 1 percentage point above the prime rate as
published in the Wall Street Journal (New York Edition) on the last business day
of each quarter (to be applicable to the succeeding quarter), which only
interest shall be payable in quarterly installments commencing on the 31st day
of May, 2001, and continuing on the 31st day of August, the 30th day of November
and the 28th day of February. Thereafter, beginning on the 15th day of April,
2002 Maker shall pay principal and interest in eleven (11) quarterly
installments. To the extent any payment of principal or interest is not paid
when due, it shall accrue interest until paid at the rate of one and one-half
percent (1 1/2%) per month, or the maximum rate permitted by law, which is less.
EACH MAKER JOINTLY AND SEVERALLY COVENANTS AND AGREES WITH PAYEE AS FOLLOWS:
1. Maker will pay the indebtedness evidenced by this Note as provided
herein.
2. Maker shall not have the right to prepay the indebtedness evidenced
by this Note, in whole or in part, unless Maker shall give Payee ten (10) days
notice of its intention to prepay such indebtedness and shall pay to Payee on
the date of the prepayment all interest accrued to said date and a prepayment
premium. The prepayment premium shall be calculated by multiplying the
remaining principal balance times the excess, if any of the rate of return
achieved by Payee on cash or cash equivalents owned by Payee for the most
recent quarter prior to the date of prepayment over the Prime Rate plus 1% on
the date of prepayment, divided by twelve (12) months, multiplied by the number
of remaining months to maturity (see attached example on Exhibit A). The Prime
Rate shall be defined as the published Prime Rate in the Wall Street Journal
(New York edition) on the date of prepayment.
13
3. If any of the following events shall occur:
(1) the Maker defaults in the payment of any principal or interest
due under this Note or the Long Term Note issued in conjunction with this Note
under the Amendment and Supplement Agreement and Release, dated as of February
28, 2001, by and among Payee and each Maker, (together with this Note, the
"Notes");
(2) any material default by either Maker of any other material
obligation under the Notes or the Assets Sale and Purchase Agreement, dated
January 21, 1999, by and among Payee and each Maker, as amended;
(3) there shall be a Change in Control of either Maker.
then, and in each and every such case, the Payee shall provide notice to either
or both Makers and provide Makers ten (10) days to begin to cure such default.
Thereafter, if Makers shall not have cured such default, Payee may by written
notice to either or both Makers declare all amounts under this Note to be
forthwith due and payable and thereupon the balance shall become so due and
payable, along with a prepayment premium as calculated in Section 2 above,
without presentation, protest or further demand or notice of any kind, all of
which are hereby expressly waived.
4. For purposes hereof a Change in Control of Escalon Vascular Access,
Inc., shall be deemed to have occurred if Escalon Vascular Access, Inc. is no
longer a wholly owned subsidiary of Escalon Medical Corp. For purposes hereof a
Change of Control of Escalon Medical Corp. shall be deemed to have occurred
only (i) if Escalon Medical Corp. is liquidated or dissolved, (ii) if Escalon
Medical Corp. sells substantially all of its assets or (iii) if Escalon Medical
Corp. is acquired by another entity.
5. Maker hereby waives presentment for payment, demand, protest, and
notice of dishonor. If an action is brought for collection under this Note, the
Payee shall be entitled to receive all costs of collection, including, without
limitation, its reasonable attorneys' fees.
6. Any notice or demand required or permitted to be made or given
hereunder shall be deemed sufficiently made and given if given by the mailing
of such notice or demand by certified or registered mail, return receipt
requested, with postage prepaid, addressed, if to either Maker, at such Maker's
address first above written, or if to Payee, at Payee's address first above
written. Any party may change its address by like notice to the other party.
7. This Note may not be changed or terminated orally, but only by an
agreement in writing signed by the party against whom enforcement of any
change, modification, termination, waiver, or discharge is sought. This Note
shall be construed and enforced in accordance with the laws of Delaware.
14
IN WITNESS WHEREOF, Maker has executed this Note as of the date first above
written.
ESCALON MEDICAL CORP
ATTEST:
By:
--------------------------
Richard J. DePiano, CEO
By
-------------------
Secretary
ESCALON VASCULAR ACCESS, INC.
By:
--------------------------
Richard J. DePiano, CEO
[SIGNATURE PAGE TO LONG TERM NOTE]
15
Exhibit A
See Exhibit 3 of Amendment Agreement
16
COMMONWEALTH OF PENNSYLVANIA, COUNTY OF , ss.
On this day of February, 2001, before me, the undersigned officer,
personally appeared , to me known, who
being duly sworn, did depose and say and did acknowledge that he is the CEO of
Escalon Medical Corp, the corporation described in and which executed the
foregoing Note; that he knows the seal of said corporation; that the seal
affixed to said Note is such corporate seal; that it was so affixed by the order
of the board of directors of the said corporation; and that he signed his name
thereto by like order for the uses and purposes therein contained.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
----------------------------
Notary Public
My commission expires on
EX-21
8
w53606ex21.txt
SUBSIDIARIES
1
EXHIBIT 21
SUBSIDIARIES OF ESCALON MEDICAL CORP.
ESCALON PHARMACEUTICAL, INC.
ESCALON VASCULAR ACCESS, INC.
SONOMED, INC.
ESCALON DIGITAL VISION, INC.
ESCALON PENNSYLVANIA, INC.
EX-23.1
9
w53606ex23-1.txt
CONSENT OF PARENTERANDOLPH, LLC
1
ParenteRandolph
The Power of Ideas
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Escalon Medical Corp.:
We have audited the accompanying consolidated balance sheets of Escalon Medical
Corp. and subsidiaries (the "Company") at June 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Escalon Medical
Corp. and subsidiaries at June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001 in conformity with accounting principles generally accepted in the
United States of America.
Parente Randolph, LLC
Philadelphia, Pennsylvania
August 17, 2001