-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NYB7HyPuoSpYaubRbXe6Jl/U4CbXuFwa8J3Dc3vAWzjsjfrgElakX1c4j90Cp4FI 6U+7BwP9MBrVqDICZRKV/w== 0000893220-01-500900.txt : 20020410 0000893220-01-500900.hdr.sgml : 20020410 ACCESSION NUMBER: 0000893220-01-500900 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20127 FILM NUMBER: 1791188 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-Q 1 w55023e10-q.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 09/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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) -------------------------------------------- PENNSYLVANIA 33-0272839 (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 351 EAST CONESTOGA ROAD, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to filed such reports), and (2) has been subject to such filing requirements for the last 90 days. YES [X] NO [ ] Indicate the number of shares of outstanding stock of each of the issuer's classes of Common Stock, as of the latest practicable date. Date: NOVEMBER 8, 2001 Shares of Common Stock, $0.001 par value: 3,292,184 ESCALON MEDICAL CORP. FORM 10-Q QUARTERLY REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2001 and June 30, 2001 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 17
2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30, 2001 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 193,940 $ 80,830 Accounts receivable, net 2,105,424 2,317,476 Inventory, net 1,366,319 1,499,821 Other current assets 271,112 287,025 ------------ ------------ Total current assets 3,936,795 4,185,152 Long-term note receivable 150,000 150,000 Furniture and equipment, net 616,472 631,877 Customer lists, net 6,823,056 6,951,389 Goodwill, net 2,165,767 2,165,767 Trademarks and trade names, net 2,076,439 2,076,439 License and distribution rights, net 252,456 262,613 Patents, net 201,590 204,274 Due from joint venture 402,099 596,758 Other assets 493,891 574,153 ------------ ------------ Total assets $ 17,118,564 $ 17,798,422 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ 1,300,000 $ 4,626,009 Current portion of long-term debt 1,795,350 1,530,117 Accounts payable 446,308 436,684 Accrued compensation 334,694 399,535 Other current liabilities 171,890 196,503 ------------ ------------ Total current liabilities 4,048,242 7,188,848 Long-term debt, net of current portion 6,887,092 4,502,325 ------------ ------------ Total liabilities 10,935,334 11,691,173 ------------ ------------ Shareholders' Equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued -- -- Common stock, $0.001 par value; 35,000,000 shares authorized; 3,292,184 shares issued at September 30, 2001 and June 30, 2001, respectively 3,292 3,292 Additional paid-in capital 46,121,519 46,121,519 Accumulated deficit (39,941,581) (40,017,562) ------------ ------------ Total shareholders' equity 6,183,230 6,107,249 ------------ ------------ Total liabilities and shareholders' equity $ 17,118,564 $ 17,798,422 ============ ============
Note: The consolidated balance sheet at June 30, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements 3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2001 2000 ----------- ----------- Revenues, net $ 2,915,715 $ 2,959,966 ----------- ----------- Costs and expenses: Cost of goods sold 1,228,262 1,044,671 Research and development 122,786 111,065 Marketing, general and administrative 1,273,932 1,356,305 ----------- ----------- Total costs and expenses 2,624,980 2,512,041 ----------- ----------- Income from operations 290,735 447,925 ----------- ----------- Other income and expenses: Equity in loss of unconsolidated joint venture (8,601) (54,822) Interest income 889 2,918 Interest expense (207,042) (288,630) ----------- ----------- Total other income and expenses (214,754) (340,534) ----------- ----------- Net income $ 75,981 $ 107,391 =========== =========== Basic net income per share $ 0.023 $ 0.033 =========== =========== Diluted net income per share $ 0.023 $ 0.032 =========== =========== Weighted average shares - basic 3,292,184 3,242,184 =========== =========== Weighted average shares - diluted 3,302,379 3,309,033 =========== ===========
See notes to condensed consolidated financial statements 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 75,981 $ 107,391 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 178,278 253,719 Equity in net loss of unconsolidated joint venture 8,601 54,822 Change in operating assets and liabilities: Accounts receivable, net 212,052 (584,100) Inventory, net 133,502 31,437 Other current and long-term assets 96,175 (17,374) Accounts payable, accrued and other liabilities (79,830) 165,090 --------- --------- Net cash provided from operating activities 624,759 10,985 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (advances to) unconsolidated joint venture, net 186,058 (63,337) Purchase of furniture and equipment (21,698) (14,500) --------- --------- Net cash provided from (used in) investing activities 164,360 (77,837) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit (payments) borrowing, net (326,009) 318,901 Principal payments on term loan (350,000) -- --------- --------- Net cash provided from financing activities (676,009) 318,901 --------- --------- Net increase in cash and cash equivalents 113,110 252,049 Cash and cash equivalents, beginning of period 80,830 177,106 --------- --------- Cash and cash equivalents, end of period $ 193,940 $ 429,155 ========= ========= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid during the three-month period $ 233,725 $ 195,064 ========= =========
See notes to condensed consolidated financial statements 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital") and Escalon Pharmaceutical, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2002. For more complete financial information, the accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2001 included in the Company's annual report on Form 10-K. 2. NEW PRONOUNCEMENT In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." The objectives of SFAS 144 are to address significant issues relating to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets to be Disposed Of, and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS 144 is effective for financial statements beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. 3. PER SHARE INFORMATION The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," in presenting basic and diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share: 6
Three Months Ended September 30, 2001 2000 ---- ---- Numerator: Numerator for basic and diluted earnings per share: Net income $ 75,982 $ 107,391 ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 3,292,184 3,242,184 Effect of dilutive securities: Employee stock options 10,195 66,849 ---------- ---------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,302,379 3,309,033 ========== ========== Basic earnings per share $ 0.023 $ 0.033 ========== ========== Diluted earnings per share $ 0.023 $ 0.032 ========== ==========
4. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
September 30, June 30, 2001 2001 ---- ---- Raw materials / work in process $ 1,182,083 $ 1,288,664 Finished goods 286,404 313,325 ----------- ----------- 1,468,487 1,601,989 Valuation allowance (102,168) (102,168) ----------- ----------- $ 1,366,319 $ 1,499,821 =========== ===========
5. GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with SFAS No. 142, effective July 1, 2001, Escalon discontinued the amortization of goodwill and identifiable intangible assets that have indefinite useful lives. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. The standard requires this impairment assessment to be completed by December 31, 2001. As implementation guidance continues to evolve, the assessment of goodwill impairment has not been finalized. However, it is management's preliminary assessment that goodwill impairment will not result from this assessment. The adjustment of previously reported net income and earnings per share primarily represents previous amortization of goodwill and trademarks and trade names. The impact on net income, basic net earnings per share and diluted net earnings per share for the quarter ended September 30, 2000 is $86,693, 7 $0.027 per share and $0.026 per share, respectively. Adjusted net income, basic net earnings per share and diluted earnings per share for the three months ended September 30, 2000 is $193,528, $0.060 per share and $0.058 per share, respectively. Goodwill as of September 30, 2001, as allocated by reportable segment is as follows: Sonomed $ 1,099,522 Vascular 941,218 Medical / Trek 125,027 ----------- $ 2,165,767 ===========
There were no material changes in the carrying value of goodwill during the three months ended September 30, 2001. Intangible assets as of September 30, 2001 comprise:
Gross Carrying Accumulated Amount Amortization ----------- ----------- Amortizable intangible assets $ 8,421,583 $ 1,144,481 Non-amortizable intangible assets 2,300,000 223,561 ----------- ----------- Total identifiable intangible assets $10,721,583 $ 1,368,042 =========== ===========
Amortizable intangible assets consist principally of patents, license and distribution rights, and customer lists. Non-amortizable intangible assets consist principally of trademarks and trade names. The amortization of intangible assets for the three months ended September 30, 2001 was $141,175. 6. PNC BANK, N.A. LINE OF CREDIT AND LONG-TERM DEBT On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank, N.A. granted a new $12,000,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the term loan 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 September 30, 2001, Escalon was party to interest rate cap agreements covering the 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 PNC Bank, N.A., 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, N.A. 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 September 30, 2001, the interest rates applicable to the term loan and the line of credit were 7.0% and 6.75%, respectively. PNC Bank, N.A.'s prime rate as of September 30, 2001 was 6.0%. 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 three-month periods ended September 30, 2001 and 2000, amortization of these fees was $11,234 and $16,882, respectively. All of the Company's assets collateralize these agreements. 8 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. PNC Bank, N.A. has waived these requirements of the agreements as of September 30, 2001, and for the period ending October 1, 2002. PNC Bank, N.A. has also 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 October 1, 2002. On November 8, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. As of November 8, 2001, the amount outstanding against this line of credit is $1,300,000. Principal payments due on the term loan have been amended such that the balance is due within the five-year term of the original agreement including a $2,000,000 balloon payment due on June 30, 2004. Interest rates on the term loan and line of credit have been increased to prime plus 1.75% and prime plus 1.50%, respectively. In conjunction with the amended agreement, Escalon has issued PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock. The Company paid a $50,000 facility fee upon execution of the loan agreement, and commencing March 1, 2002, will pay a quarterly facility fee of 0.25% of the aggregate principal amount outstanding under the line of credit and the term loan on January 1 of such year. The accompanying condensed consolidated financial statement has been adjusted to account for this transaction. 7. LITIGATION As previously reported in reports filed with the SEC, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc. et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter to which the Company is no longer a party). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D.Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12, and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by Escalon and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related with this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and the insurance carrier have deposited such funds in an escrow account. 9 8. REVENUE, NET Revenue, net includes quarterly payments earned in connection with the sale of Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line. For the three-month period ended September 30, 2001, this revenue totaled $444,000. This revenue totaled $346,000 for the period beginning on the commencement date of August 11, 2000 through September 30, 2000. The Company is entitled to receive additional consideration, in varying amounts, through fiscal 2005. Included in accounts receivable as of September 30, 2001 and June 30, 2001 was $444,000 and $726,000, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to general business strategy, the introduction of new products, the potential market and uses for the Company's products, expansion plans, the Company's plans to file applications with the Food and Drug Administration (the "FDA"), the development of joint venture opportunities, the effects of competition on the structure of the markets in which the Company competes, defending itself in litigation matters, operating performance and liquidity, as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates" or similar expressions. For such statements the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. The most important factors that could prevent the Company from achieving its goals - and cause the assumptions underlying the forward-looking statements and the actual results of the Company to differ materially from those expressed in or implied by those forward-looking statements - include, without limitation, the following: (i) the competitive nature of the industries in which the Company competes and the ability of the Company to (a) successfully maintain existing strategic relationships and (b) negotiate and enter into new strategic relationships and otherwise distinguish its products from those of other companies on the basis of quality, value and reliability; (ii) economic and regulatory conditions which could adversely affect sales of the Company's products, including uncertainty of FDA approval for any new applications; (iii) the ability of the Company to successfully develop and market new products; (iv) future capital needs and the uncertainty of additional funding (whether through the financial markets, collaborative or other arrangements with strategic partners, or from other sources); (v) 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. OVERVIEW The following discussion should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. was incorporated in California in 1987 as Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August 1996. Escalon reincorporated in Delaware in November 1999, and then reincorporated in Pennsylvania in November 2001. The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. 10 In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources to the research and development of ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase Corporation ("IntraLase"), in return for an equity interest and future royalties on product sales. IntraLase has responsibility of funding and developing the laser technology through to commercialization. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Radiance Medical Systems, Inc. This was the first step in a plan of diversification to acquire profitable niche medical products. Vascular's products use Doppler technology to aid medical personnel in locating difficult arteries and veins. Currently, this product line concentrates on the cardiac catheterization market. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, the Company established Escalon 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; (iii) general competitive and economic conditions of the healthcare market; and (iv) availability from suppliers of component parts and supplies. RESULTS OF OPERATIONS The Company operates in 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. ACCOUNTING CHANGES There are two additional areas for which additional discussion is provided: accounting for goodwill and intangible amortization. Effective July 1, 2001, Escalon adopted FASB Statement No. 142, Accounting for Goodwill and Other Intangible Assets. FASB Statement No. 142 ("SFAS 142") eliminates the amortization of goodwill and certain intangible assets. Rather, goodwill and intangibles not subject to amortization will be tested for impairment at least annually by comparing their fair values with their recorded amounts. The impact of adopting these new requirements is discussed further in Note 5 of the Notes to the Consolidated Financial Statements.. THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 Product revenues decreased $44,000, or 1.49%, to $2,916,000 for the three-month period ended September 30, 2001 as compared to $2,960,000 for the same period last fiscal year. During the first quarter of fiscal 2002, Sonomed's unit sales decreased 8.40% from the same period last fiscal year. Changes in product mix have resulted in revenues in the Sonomed business unit decreasing by $9,000, or 0.59%, to $1,527,000. Sonomed's percentage of sales to distributors during the three-month period ended September 30, 2001 increased substantially when compared to the same period last fiscal year. This resulted in lower average sales price per unit as distributors are given a discount from list price. Revenues in the Vascular 11 business unit increased by $163,000, or 32.72%, to $658,000. During the first quarter of fiscal 2002, Vascular's unit sales increased 17.96% from the same period last fiscal year. The unit sales increase was complemented by increases in the average unit sales prices of all of Vascular's products, due to the Company's strategy of eliminating underperforming distributors. Revenues in the Medical / Trek business unit decreased $198,000, or 21.31%. The decrease was largely due to declines in sales of the Company's ISPAN(TM) gas product and certain OEM products. Escalon experienced a temporary increase in sales of its ISPAN(TM) gas product due to the fulfillment of customers' backorders during the three-month period ended September 30, 2000. These decreases were partially offset by a $98,000 increase in revenue earned from Bausch & Lomb in connection with Silicone Oil. Cost of goods sold totaled $1,229,000, or 42.12% of net revenue for the three-month period ended September 30, 2001, as compared to $1,045,000, or 35.30% of net revenue for the same period last fiscal year. Cost of goods sold in the Sonomed business unit increased $220,000 primarily due to a shift toward more expensive units being produced. Cost of goods sold in the Vascular business unit increased $109,000 primarily due to material costs increasing $82,000, or 12.46% of net revenues, largely due to increased component costs. The reduction of cost of goods sold as a percentage of net revenue in the Medical / Trek business is primarily due to the $98,000 increase in revenues received from Bausch & Lomb related to Silicone Oil. The Silicone Oil revenue does not have any costs associated with the revenue. When Silicone Oil revenue is excluded, cost of goods sold as a percentage of revenue was 59.58% for the three-month period ended September 30, 2001 as compared to 54.20% for the same period last fiscal year. This increase is largely attributed to product mix. Marketing, general and administrative expenses decreased $82,000, or 6.04%, for the three-month period ended September 30, 2001 as compared to the same period last fiscal year. Marketing, general and administrative expenses remained basically unchanged in the Sonomed business unit. Within the Sonomed unit, administrative employee-related expenses increased by $41,000; this increase was offset by a $58,000 decrease in amortization largely due to the application of SFAS 142. Marketing, general and administrative expenses in the Vascular business unit decreased by $54,000. The main factors leading to this decrease were a $28,000 decrease in consulting and a $20,000 decrease in amortization largely due to the application of SFAS 142. Marketing, general and administrative expenses in the Medical / Trek business unit decreased $30,000. The main factors leading to this decrease were a $29,000 decrease in investor relations expenses and a $10,000 decrease in amortization largely due to the application of SFAS 142. Research and development expenses increased $12,000, or 10.81%, for the three-month period ended September 30, 2001 as compared to the same period last fiscal year. In the Sonomed business unit, research and development expenses increased $6,000, largely due to an $11,000 increase in CE marking expenses, as the Company gained approval for certain products in the European marketplace. Research and development expenses in the Vascular business segment increased by $13,000 largely due to a $6,000 increase in prototype expense and reclassification of employee-related expenses from the Medical / Trek business segment. On December 18, 2000, the Company announced that it was granted 510(K) clearance to begin marketing its high-end digital camera system for ophthalmologists known as the CFA Digital Imaging System. The system is marketed through the Company's joint venture with MegaVision. As a result of the approval, the joint venture began selling the product in December 2000. Escalon recognized net losses of $9,000 and $55,000 for the three-month periods ended September 30, 2001 and 2000, respectively. Interest income decreased by $2,000 for the three-month period ended September 30, 2001 as compared to the same period last fiscal year. This decrease resulted from the decrease in cash and cash equivalents available for investment. 12 Interest expense decreased by $82,000 for the three-month period ended September 30, 2001 as compared to the same period last fiscal year. This decrease resulted from lower average balances in Escalon's term loan and line of credit with PNC Bank, N.A, and from decreases in the floating interest rates applicable to the term loan and line of credit. There is no provision or credit for federal or state income taxes for the periods presented as a result of utilization of net operating loss carryforwards and related changes in the deferred valuation allowance. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, Escalon had cash and cash equivalents of $194,000 as compared to $81,000 at June 30, 2001, an increase of $113,000. This resulted primarily from increases in cash of $625,000 provided by operating activities and $186,000 proceeds from the joint venture, offset by $676,000 used to pay down the term loan and line of credit and equipment purchases of $22,000. On January 14, 2000, Escalon replaced its $2,000,000 credit facility obtained in January 1999. PNC Bank, N.A. granted a new $12,000 credit facility to assist with the Sonomed acquisition. This included a $7,000,000 five-year term loan, a $5,000,000 line of credit and the release of the requirement to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the term loan is based upon 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 September 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 PNC Bank, N.A., 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, N.A. 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 September 30, 2001, the interest rates applicable to the term loan and the line of credit were 7.0% and 6.75%, respectively. PNC Bank, N.A.'s prime rate as of September 30, 2001 was 6.0%. 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 three-month periods ended September 30, 2001 and 2000, amortization of these fees was $11,234 and $16,882, respectively. 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 technical defaults under the loan agreements. PNC Bank, N.A. has waived these requirements of the agreements as of September 30, 2001, and for the period ending October 1, 2002. PNC Bank, N.A. has also 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 was waived. On November 8, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. As of November 8, 2001, the amount outstanding against this line of credit was $1,300,000. Principal payments due on the term loan have been amended such that the balance is due within the five-year term of the original agreement including a $2,000,000 balloon payment due on June 30, 2004. The Company will be continuously assessing its options for repaying its long-term debt. Interest rates on the term loan and line of credit have been increased to prime plus 1.75% and prime plus 1.50%, respectively. In conjunction with the amended agreement, Escalon has issued PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's 13 Common Stock. The Company paid a $50,000 facility fee upon execution of the loan agreement, and commencing March 1, 2002, will pay a quarterly facility fee of 0.25% of the aggregate principal amount outstanding under the line of credit and the term loan on January 1 of such year. The accompanying condensed consolidated financial statement has been adjusted to account for this transaction. On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for cash the assets of Radiance's vascular access business, and also agreed to pay royalties based on future sales of the products of the vascular access business for a period of five years following the close of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 28, 2001, the parties amended the agreement to provide an adjustment in the terms of the payment of the royalties. Pursuant to the amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note in the amount of $64,884, an additional note in the amount of $717,558 and has issued 50,000 shares of Escalon Common Stock to Radiance. Escalon anticipates that the cash generated from future product sales and cash received from the Silicone Oil divestment should be adequate to satisfy its capital requirements, based on the current levels of operation. 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 made at the discretion of management. No purchases have been made, nor are any currently expected to be made under this authority. The Company's Common Stock is currently listed on the Nasdaq SmallCap Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain listing requirements must be met. As of September 30, 2001, Escalon has complied with such requirements. If Escalon's securities were delisted, an investor would find it more difficult to dispose of them, or obtain accurate quotations as to the market value of the Company's securities. 14 SEGMENTAL REPORTING During the three-month periods ended September 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 segment is subject to different marketing, production and technology strategies.
- ---------------------------------------------------------------------------------------------------------------------------- Sonomed Vascular Medical / Trek Other Total ------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Revenue, net $ 1,529 $ 1,536 $ 658 $ 495 $ 731 $ 929 $ -- $ -- $ 2,918 $ 2,960 Interest income -- -- -- -- 1 3 -- -- 1 3 Interest expense 207 289 -- -- -- -- -- -- 207 289 Equity in loss of unconsolidated joint venture -- -- -- -- -- -- (9) (55) (9) (55) Net profit (loss) -- -- -- (19) 89 181 (13) (55) 76 107 - ---------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 132 189 11 31 31 30 5 4 179 254 Assets 11,990 12,123 2,495 2,652 2,042 2,180 592 843 17,119 17,798 Expenditures for long-lived assets 15 7 6 -- -- 8 -- -- 21 15 - ----------------------------------------------------------------------------------------------------------------------------
During the three-month periods ended September 30, 2001 and 2000, Sonomed derived its revenues from the sale of A-scans, B-scans and pachymeters. These products are used for diagnostic or biometric applications in ophthalmology. Vascular derived its revenues from the sale of PD Access(TM) and SmartNeedle(TM) monitors, needles and catheter products. These products are used by medical personnel to assist in gaining access to arteries and veins in difficult cases. Medical / Trek derived its revenues from the sale of ISPAN(TM) gas products, various disposable ophthalmic surgical products and revenues derived from Bausch & Lomb's sales of Silicone Oil. During the three-month periods ended September 30, 2001 and 2000, the Company had one customer, Bausch & Lomb, from which 10% of consolidated net revenues were derived. Revenues from Bausch & Lomb were $500,000, or 17.14% of consolidated net revenues during the three-month period ended September 30, 2001, and were $544,000, or 18.38% of consolidated revenues during the same period last fiscal year. This revenue is recorded in the Medical / Trek business segment. Of the external revenues reported above $587,000, $42,000 and $9,000 were derived internationally in Sonomed, Vascular and Medical / Trek, respectively, during the three-month period ended September 30, 2001. $639,000, $40,000 and $22,000 were derived internationally in Sonomed, Vascular and Medical / Trek, respectively, during the three-month period ended September 30, 2000. Refer to the Results of Operations section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q for analysis between the fiscal 2002 information disclosed here and the comparative results from fiscal 2001. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about Escalon's financial instruments, consisting primarily of debt obligations that are sensitive to changes in interest rates. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. Interest rates are based upon the prime rate at September 30, 2001 plus 1.75% on the term loan and 1.50% 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 September 30, 2001, the Company had $4,550,000 of its term loan and $3,000,000 of its line of credit protected under these agreements.
- ------------------------------------------------------------------------------------------------------------------------------- Long-term debt classified as current as of September 30, ------------------------------------------------------------------------------------------- 2001 2002 2003 2004 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------------- Term loan - capped $ 1,600,000 $ 2,150,000 $ 800,000 $ - $ - $ 4,550,000 Interest rate - capped 7.75% 7.75% 7.75% - - Term loan - no cap $ - $ - $ 3,350,000 $ - $ - $ 3,350,000 Interest rate - no cap - - 7.75% - - - ------------------------------------------------------------------------------------------------------------------------------- Line of credit - capped $ 1,300,000 $ - $ - $ - $ - $ 1,300,000 Interest rate - capped 7.50% - - - - Line of credit - no cap $ - $ - $ - $ - $ - $ - Interest rate - no cap - - - - - - ------------------------------------------------------------------------------------------------------------------------------- Radiance Note 1 $ 65,000 $ - $ - $ - $ - $ 65,000 Interest rate 7.00% - - - - Radiance Note 2 $ 130,000 $ 261,000 $ 261,000 $ 65,000 - $ 717,000 Interest rate 7.00% 7.00% 7.00% 7.00% - - -------------------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE RISK During the three-month periods ended September 30, 2001 and 2000, approximately 21.86% and 23.68% of Escalon's consolidated net revenue was derived from international sales. The price of all products sold overseas is denominated in United States dollars and consequently incurs no exchange rate risk. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 7 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 2. CHANGES IN SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 10.14 Registrant's Amended and Restated 1999 Equity Incentive Plan filed herewith. 10.15 Registrant's Agreement and Plan of Merger of Escalon Pennsylvania, Inc. and Escalon Medical Corp. filed as an exhibit to the Company's definitive Proxy filed on Schedule 14A on October 1, 2001. Reports on Form 8-K - None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) Date: November 14, 2001 By: /s/ Richard J. DePiano ----------------- ------------------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: November 14, 2001 By: /s/ Harry M. Rimmer ----------------- ------------------------------- Harry M. Rimmer Senior Vice-President - Finance 17 EX-10.14 3 w55023ex10-14.txt REGISTRANT'S AMENDED AND RESTATED 1999 EQUITY PLAN Exhibit 10.14 APPENDIX (FOR EDGAR TRANSMISSION ONLY) ESCALON MEDICAL CORP. AMENDED AND RESTATED 1999 EQUITY INCENTIVE PLAN 1. PURPOSE. The purpose of the Escalon Medical Corp. 1999 Equity Incentive Plan is to enhance the ability of Escalon Medical Corp. (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to such personnel and to promote the success of the Company. To accomplish these purposes, this Plan provides a means whereby employees, directors and consultants may receive stock options ("Options") to purchase the Company's Common Stock, no par value, (the "Common Stock"). 2. ADMINISTRATION. (a) COMPOSITION OF THE COMMITTEE. This Plan shall be administered by a committee (the "Committee"), which shall be appointed by and serve at the pleasure of the Company's Board of Directors (the "Board"). The Committee shall be comprised of two or more members of the Board. Each member of the Committee shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and (ii) an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the foregoing, from time to time the Board may increase or decrease the size of the Committee, appoint additional members thereof, remove members (with or without cause), appoint new members in substitution therefor, fill vacancies or remove all members of the Committee and thereafter directly administer this Plan. (b) AUTHORITY OF THE COMMITTEE. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of this Plan and to decide all questions of fact arising in its application; to determine the employees, directors and consultants to whom awards shall be made and the type, amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of this Plan. The Committee shall have the authority to adopt, amend and rescind such rules, regulations and procedures as, in its opinion, may be advisable in the administration of this Plan, including, without limitation, rules, regulations and procedures that: (i) deal with satisfaction of an optionee's tax withholding obligations pursuant to Section 13 hereof, (ii) include arrangements to facilitate an optionee's ability to borrow funds for the payment of the exercise price of an Option, if applicable, from securities' brokers and dealers, and (iii) include arrangements that provide for the payment of some or all of an Option's exercise price by delivery of previously owned shares of Common Stock or other property and/or by withholding some of the shares of Common Stock being acquired upon exercise of an Option. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under this Plan. (c) AUTHORITY OF THE BOARD. Notwithstanding anything to the contrary set forth in this Plan, all authority granted hereunder to the Committee may be exercised at any time and from time to time by the Board. All decisions, determinations and interpretations of the Board shall be final and binding on all optionees and all other holders of Options granted under this Plan. 3. STOCK SUBJECT TO THIS PLAN. Subject to Section 16 hereof, the shares that may be issued under this Plan shall not exceed in the aggregate 635,000 shares of Common Stock. Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under this Plan. 4. ELIGIBILITY TO RECEIVE OPTIONS. Persons eligible to receive Options under this Plan shall be limited to those consultants, directors, officers and other employees of the Company and any subsidiary (as defined in Section 424 of the Code or any amendment or substitute thereto), who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and any subsidiary. Directors of the Company who are not also employees of the Company or any subsidiary and consultants shall not be eligible to be awarded Incentive Stock Options (as defined in Section 5 hereof). Notwithstanding anything to the contrary set forth in this Plan, the maximum number of shares of Common Stock for which Options may be granted to any employee in any calendar year shall be 100,000 shares. 5. TYPES OF OPTIONS. Grants may be made at any time and from time to time by the Committee in the form of Options to purchase shares of Common Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. OPTION AGREEMENTS. Options for the purchase of Common Stock shall be evidenced by written agreements in such form not inconsistent with this Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) TYPE OF OPTION. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. (b) OPTION PRICE. Each Option agreement shall set forth the purchase price of the Common Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii) hereof, the purchase price of the Common Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Common Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Common Stock, as reported in The Wall Street Journal or if not so -2- reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System, or if the Common Stock is not reported by Nasdaq, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. (c) EXERCISE TERM. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) INCENTIVE STOCK OPTIONS. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Common Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if, at the time the Option is granted, the employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or its subsidiaries unless, at the time such Option is granted, the Option price is at least 110% of the fair market value of the stock subject to the Option and, by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) SUBSTITUTION OF OPTIONS. Options may be granted under this Plan from time to time in substitution for stock options held by directors, consultants and employees of other corporations who are about to become, and who do concurrently with the grant of such options become, directors, consultants or employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets or capital stock of the employing corporation or a subsidiary of the employing corporation. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to -3- such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 7. DATE OF GRANT. The date on which an Option shall be deemed to have been granted under this Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. EXERCISE AND PAYMENT FOR SHARES. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased, except that no Option may be exercised in whole or in part during the first six months after the Option is granted unless expressly permitted by the Committee. The purchase price of the shares with respect to which an Option is exercised shall be payable in full at the time notice is given in cash, Common Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. The Committee may also, in its discretion and subject to prior notification to the Company by an optionee, permit an optionee to enter into an agreement with the Company's transfer agent or a brokerage firm of national standing whereby the optionee will simultaneously exercise the Option and sell the shares acquired thereby through the Company's transfer agent or such a brokerage firm and either the Company's transfer agent or the brokerage firm executing the sale will remit the Company from the proceeds of sale the exercise price of the shares as to which the Option has been exercised. 9. RIGHTS UPON TERMINATION OF SERVICE. In the event that an optionee ceases to be a consultant, director, officer or employee of the Company or any subsidiary, for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions as may be specified by the Committee. In the event that an optionee dies, becomes disabled or, in the case of any employee, retires prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of service due to death, disability (within the meaning of Section 72(m)(7) of the Code) or, in the case of an employee, retirement, in each case only to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. -4- 10. GENERAL RESTRICTIONS. Each Option granted under this Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Common Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Common Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. RIGHTS OF A SHAREHOLDER. The recipient of any Option under this Plan, unless otherwise provided by this Plan, shall have no rights as a shareholder unless and until certificates for shares of Common Stock are issued and delivered to him. 12. RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in this Plan or in any agreement entered into pursuant to this Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee or consulting relationship with such optionee. 13. WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under this Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Common Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. NON-ASSIGNABILITY. No Option under this Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. 15. NON-UNIFORM DETERMINATIONS. The Committee's determinations under this Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under this Plan whether or not such persons are similarly situated. -5- 16. ADJUSTMENTS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock that have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) SALE OR MERGER. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by the successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that an Option holder shall have the right to exercise his Option as to all of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declaring that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity to exercise the then exercisable portion of his Option prior to such date. 17. AMENDMENT. The Board may terminate or amend this Plan at any time with respect to shares as to which Options have not been granted, subject to any required shareholder approval or any shareholder approval that the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements. The Board may not, without the consent of the holder of an Option, alter or impair any Option previously granted under this Plan, except as specifically authorized herein. -6- 18. CONDITIONS UPON ISSUANCE OF SHARES. (a) COMPLIANCE WITH SECURITIES LAWS. Shares of the Company's Common Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Common Stock of the Company may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of this Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. EFFECT ON OTHER PLANS. Participation in this Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to this Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. 21. DURATION OF THIS PLAN. This Plan shall remain in effect until all Options granted under this Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date this Plan is adopted by the Company or is approved by the Company's shareholders. 22. FORFEITURE FOR DISHONESTY. Notwithstanding anything to the contrary in this Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options under which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, -7- however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. NO PROHIBITION ON CORPORATE ACTION. No provision of this Plan shall be construed to prevent the Company or any officer or director thereof from taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on this Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. INDEMNIFICATION. With respect to the administration of this Plan, the Company shall indemnify each present and future member of the Committee and the Board against, and each member of the Committee and the Board shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee or the Board (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee or the Board; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and the Board and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. MISCELLANEOUS PROVISIONS. (a) COMPLIANCE WITH PLAN PROVISIONS. No optionee or other person shall have any right with respect to this Plan, the Common Stock reserved for issuance under this Plan or in any Option until a written option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of this Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) APPROVAL OF COUNSEL. In the discretion of the Committee, no shares of Common Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such -8- issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) COMPLIANCE WITH RULE 16B-3. To the extent that Rule 16b-3 under the Exchange Act applies to this Plan or to Options granted under this Plan, it is the intention of the Company that this Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of this Plan be interpreted to give effect to such intention and that, if this Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of this Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) UNFUNDED PLAN. This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under this Plan. (e) EFFECTS OF ACCEPTANCE OF OPTION. By accepting any Option or other benefit under this Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under this Plan by the Company, the Board and/or the Committee or its delegates. (f) CONSTRUCTION. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. 26. SHAREHOLDER APPROVAL. The Company shall submit this Plan to the shareholders entitled to vote hereon for approval within twelve months after the date of adoption by the Board in order to meet the requirements of Section 422 of the Code and the regulations thereunder, Section 162(m) of the Code and regulations thereunder, and the National Association of Securities Dealers, Inc. for the quotation of the Common Stock on the Nasdaq System. The exercise of any Option granted under this Plan shall be subject to the approval of this Plan by the shareholders. As Amended by the Board of Directors through August 14, 2001. -9- -----END PRIVACY-ENHANCED MESSAGE-----