-----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, J4fgAcoKT6Px1IOz3DvHIPsMbcHEoam67mxbVpT2PvqAg5Q+PqXPnpQuxB7owXdk FzA6txeGnI08ast8P9/o9g== 0000893220-03-000239.txt : 20030304 0000893220-03-000239.hdr.sgml : 20030304 20030303214436 ACCESSION NUMBER: 0000893220-03-000239 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20030304 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20127 FILM NUMBER: 03590301 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/A 1 w84090e10vkza.txt FORM 10-K/A ESCALON MEDICAL CORP UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K/A [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from .......... to .......... COMMISSION FILE NUMBER 0-20127 ----------------------------- ESCALON MEDICAL CORP. (Exact name of registrant as specified in its charter) ----------------------------------------- PENNSYLVANIA 33-0272839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
351 EAST CONESTOGA ROAD, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) 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 August 22, 2002, 3,345,851 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 $6,122,908 (based upon the closing price of the Common Stock on the Nasdaq SmallCap Market on such date). A list of Exhibits to this Annual Report on Form 10-K begins on page 21. ESCALON MEDICAL CORP. ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED JUNE 30, 2002 TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 22 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23 PART III Item 10. Directors and Executive Officers of the Registrant 23 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 24 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 24 SIGNATURES 26 CERTIFICATIONS 27
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. Escalon reincorporated in Delaware in November 1999, and then reincorporated in Pennsylvania in November 2001. 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, pharmaceuticals and vascular access devices. The Company and its products are subject to regulation and inspection by the U.S. Food and Drug Administration (FDA). The FDA requires extensive testing of new products prior to sale and have jurisdiction over the safety, efficacy and manufacturing of products, as well as product labeling and marketing. 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 privately held company, in return for an equity interest and future royalties on sales of products relating to the laser technology. The privately held company undertook responsibility for funding and developing the laser technology through to commercialization. The privately held company began selling products related to the laser technology during fiscal 2002. The material terms of the license are that in exchange for licensing the Company's laser patents, which expire in 2014, it will receive a 2.5 percent royalty on future product sales that are based on the licensed laser patents, subject to deductions for royalties payable to third parties up to a maximum of 50% of royalties otherwise due and payable to the Company and a 1.5% royalty on product sales that are not based on the licensed laser patents. The Company receives a minimum annual license fee of $15,000 per year during the term of the license. The minimum annual license fee is offset against the royalty payments. The license was dated October 23, 1997 and Amended and Restated in October 2000 and expires upon the later of the following events: (1) the last to expire of the laser patents; (2) ten years from the effective date of the amendment and restated agreement; or (3) the fifth anniversary date of the first commercial sale. The material termination provisions are as follows: (1) the default in payment of any royalty; (2) the default in the making of any required report; (3) making of any false report; (4) the commission of any material breech of any covenant or promise under the license agreement; or (5) Licensee may terminate at any time after ninety days notice. If the Licensee were to terminate the agreement, it would not be permitted to utilize the licensed technology necessary to manufacture its current products. 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. ("Radiance"). Vascular's products use Doppler technology to aid medical personnel in locating arteries and veins in difficult circumstances. Currently, this product line is concentrated in the cardiac catheterization market; however, the Company began marketing the products in the area of oncology during fiscal 2002. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment, accounted for as an asset purchase. In April 2000, Digital 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 terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. 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 use 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. VASCULAR BUSINESS Vascular develops, manufactures and markets vascular access products. These products are Doppler-guided vascular access assemblies used to locate desired vessels for access. Primary specialty groups which use the device are cardiac catheter labs, interventional radiology, vascular labs, critical care units, anesthesia and cancer centers. The Company's vascular products include the PD Access (TM) and Smartneedle(TM) lines of monitors, Doppler-guided bare needles and Doppler-guided infusion needles. PD Access(TM) and Smartneedle(TM) Monitors, needles and catheter Products These patented devices detect blood flow using Doppler ultrasound technology and differentiate between a venous and arterial vessel. The devices utilize a miniature Doppler ultrasound probe that is positioned within the lumen of a vascular access needle. When the Doppler-guided needle pierces the skin of 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 Medical/Trek 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 business's key product lines: Adatosil(R) 5000 Silicone Oil ("Silicone Oil") Silicone Oil is a specialty product used in worst-case detached retina surgery as a mechanical aid in the reattachment procedure. The Company distributed Silicone Oil until August 13, 1999, at which time the license and distribution rights for this product were sold to Bausch & Lomb Surgical, Inc. The license and distribution rights were sold for $2.1 million and additional cash consideration based on future sales to be received through August 2005 (See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional details). 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. Viscous Fluid Transfer Systems Escalon markets 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. 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. DIGITAL BUSINESS Digital formed the joint venture with MegaVision to develop a digital camera system for ophthalmic fundus photography. The Company terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. CFA Camera Back The images furnished by the CFA camera system furnish a very high level of detail. The camera back is being marketed to medical institutions, educational institutions and ophthalmologists 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 opthalmia neonatorum in newborns. RESEARCH AND DEVELOPMENT Escalon conducts medical device and vascular access product development at its New Berlin, Wisconsin facility located near Milwaukee. The development of ultrasound ophthalmic equipment is performed at the Company's Lake Success, New York facility located on Long Island. 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 to subcontract component manufacture, assembly and sterilization. Manufacturing facilities include a class 10,000 clean room. A class 10,000 clean room is a controlled environment for producing devices while avoiding any significant contaminants. The cleanliness provided by this class 10,000 clean room exceeds the requirements of the FDA. All of the Company's ophthalmic surgical products and vascular access 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. ISO9001 requires an implemented quality system that applies to product design. These certifications can be obtained only after a complete audit of a company's quality system by an independent outside auditor. These certifications require that these facilities undergo periodic reexamination. CE certification has been obtained for disposable delivery systems, fiber optic light probes, 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. GOVERNMENTAL REGULATIONS The Company's products are subject to stringent ongoing regulation by the FDA and similar health authorities, and if the FDA's approvals or clearances of our products are restricted or revoked we could face delays that would impair our ability to generate funds from operations. The FDA and similar health authorities in foreign countries extensively regulate our activities. We must obtain either 510(k) clearances or pre-market approvals and new drug application approvals prior to marketing a product in the United States. Foreign regulation also requires that we obtain other approvals from foreign government agencies prior to the sale of products in those countries. Also, we may be required to obtain FDA approval before exporting a product or device that has not received FDA marketing clearance or approval. We have received the necessary FDA approvals for all of our products that we currently market. Any restrictions on or revocation of the FDA approvals and clearances that we have obtained, however, would prevent the continued marketing of the impacted products and other devices. These restrictions or revocations could result from the discovery of previously unknown problems with the product. Consequently, FDA revocation would impair our ability to generate funds from operations. The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical and medical device equipment and related disposable, including the obligation to adhere to the FDA's Good Manufacturing Practice regulations. Compliance with these regulations requires time-consuming detailed validation of manufacturing and quality control processes, FDA periodic inspections and other procedures. If the FDA finds any deficiencies in the validation processes, for example, the FDA may impose restrictions on marketing the affected products until such deficiencies are corrected. We have received CE (European Community) Mark of approval on several of our products that allow us to sell the products in the countries comprising the European Community. In addition to the CE Mark, however, some foreign countries may require separate individual foreign regulatory clearances. We cannot assure that we will be able to obtain regulatory clearances for other products in the United States or foreign markets. The process for obtaining regulatory clearances and approvals and underlying clinical studies for any new products or devices and for multiple indications for existing products is lengthy and will require substantial commitments of our financial resources and our management's time and effort. Any delay in obtaining clearances or approvals or any change in existing regulatory requirements would materially adversely affect our business. Our failure to comply with applicable regulations would subject us to fines, delays or suspensions of approvals or clearances, seizures or recalls of products, operating restrictions, injunctions or civil or criminal penalties, which would affect adversely our business, financial condition and results of operations. 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 located at the Company's Wisconsin facility. Sales are primarily to teaching institutions, key hospitals and eye surgery centers focusing primarily on physicians and operating room personnel performing vitreoretinal surgery. Vascular access products are marketed domestically through internal sales and marketing employees located in Pennsylvania, Illinois and at its Wisconsin facility, as well as through five independent distributors and sales representatives located in Florida, Missouri, Ohio and Washington managed by the Company's sales team. The Sonomed product line is sold through internal sales employees located at the Company's New York facility to a large 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. Limited warranties are given 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 and that 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 health care providers at a fixed rate based on the procedure performed. 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, TRADEMARKS AND LICENSES The pharmaceutical and medical device communities place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. The Company'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 a privately held company), sixteen patents have been issued in the United States and eleven overseas. Vascular access products are covered by 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. While in the aggregate the Company's patents are of material importance to its business taken as a whole; these patents, trademarks and license are those which are critical to the Company's ability to generate revenues are as follows: - In the ophthalmic business, the Company has developed significant consumer and eye care professional recognition of products sold under the Escalon and Sonomed trademark. The Escalon trademark is currently due for renewal on January 19, 2013, and the Company intends to renew the trademark. The Sonomed trademark is currently due for renewal on April 16, 2006 and the Company intends to renew the trademark. - In the Vascular business, the company has two patents which are of material importance. The first patent is the apparatus for the cannulation of blood vessels. The apparatus includes a needle for penetrating a blood vessel. The needle is connected to a syringe and an improved flow sensing assembly is positioned within the syringe for locating blood vessels. The improved flow sensing assembly has a hollow, tubular interior conductor construction that provides for simplified manufacture and assembly while providing improved sensitivity. This patent expires twenty years from its filing date and will expire on February 23, 2011. The second patent is an apparatus similar to the first patent. This second patent is also an apparatus for the cannulation of blood vessels. The apparatus includes a needle for penetrating a blood vessel. The needle is connected to a syringe and a flow sensing assembly, unlike the hollow, tubular interior conductor of the first patent, this includes a solid inner conductor spaced from an outer conductor by a plastic support rod. This patent expires twenty years from it's filing date and will expire on January 11, 2009. - The Company licensed its ultrafast laser systems to a privately held company. The patents are concerning a multiwavelength laser source for providing a plurality of pulsed laser beams comprises a plurality of laser diodes optically connected with an oscillator to establish a beam of pulses of monochromatic light. A dispersion line for spreading wavelengths in each pulse optically connects the oscillator to a regenerative amplifier. An electro-optical crystal in the regenerative amplifier establishes the repetition rate of pulses in the laser beam and a pulse compressor is optically connected to the regenerative amplifier to establish the duration of each pulse. The laser source may also include a frequency doubler which is optically connected to the output of the pulse compressor to split the laser beam into components having different wavelengths. The material patents expire twenty years from their filing date and will expire between 2008 and 2014. - The material terms of the license are that in exchange for the use of the Company's licensed laser patents it will receive a 2.5 percent royalty on future product sales that are based on the licensed laser patents, subject to deductions for royalties payable to third parties up to a maximum of 50% of royalties otherwise due and payable to the Company and a 1.5% royalty on product sales that are not based on the licensed laser patents. The Company receives a minimum annual license fee of $15,000 per year during the term of the license. The minimum annual license fee is offset against the royalty payments. The license was dated October 23, 1997 and Amended and Restated in October 2000 and expires upon the later of the following events: (1) the last to expire of the license patents; (2) ten years from the effective date of the amendment and restated agreement; or (3) the fifth anniversary date of the date of the first commercial sale. The material termination provision are as follows: (1) the default in payment of any royalty; (2) the default in the making of any required report; (3) making of any false report; (4) the commission of any material breach of any covenant or promise under the license agreement; or (5) licensee may terminate the agreement at any time after ninety days notice. If the licensee were to terminate it would not be permitted to utilize the licensed technology necessary to manufacture its current products. The duration of the Company's patents, trademarks and licenses vary through 2020. The effects of the patents, trademarks and licenses are to strengthen the Company's position in the market. COMPETITION There are numerous direct and indirect competitors of the Company 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. 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 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. The Company's strategy is to compete primarily on the basis of technological innovation to which it has proprietary rights. The Company believes, therefore, that its success will depend in large part upon protecting its intellectual property through patents and other governmental regulations. At the same time, the Company 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 marketed by Digital. Sonomed designs and manufacturers ophthalmic ultrasound products: A-Scans, Pachymeters and B-Scans. The A-scans and pachymeters furnish internal measurements of the eye and B-scans provide an image of the rear of the eye. The principal competitors are Alcon Laboratories, Inc., Quantel, Inc. and Medtronic, Inc. Management believes the Company to be in a market leadership position. Sonomed has had a leading presence in the industry for over thirty years. Management believes this has helped us build a reputation as a long-standing operation that provides a quality product. This has enabled the Company to establish effective distribution coverage within the USA market. The Company seeks to preserve its position in the market through continued product enhancement. Sonomed's market position can be threatened by various smaller competitors offering similar products at a lower price. The development of laser technologies for ophthalmic biometrics and imaging may also diminish the Company's market position. This equipment can be used instead of ultrasound equipment in most, but not all patients. Such equipment, however, is more expensive. Vascular produces the only device, which can be accommodated within a standard needle for assisting a medical practitioner to gain access to a vessel in the human vascular system. There are no similar devices in the market, which enables a medical practitioner to gain access using their normal procedures. The only similar product utilizes a separate ultrasound monitor but no disposables are needed. When using the competing device the medical practitioner needs to look at the monitor while advancing the needle into the patient. The perceived disadvantage of the Company's vascular product is that its retail price is substantially greater than the cost of a traditional needle. The Trek business sells a broad range of ophthalmic surgical products. The more significant products are ISPAN(R) gases and delivery systems. Medical/Trek also manufactures various ophthalmic surgical products for major ophthalmic companies to be sold under their name. To remain competitive the Company needs to maintain a low cost operation. There are numerous other companies, which can provide this manufacturing service. There are numerous direct and indirect competitors of the Company in the United States and abroad. The Company's competitors for medical devices and ophthalmic pharmaceuticals include, but are not limited to Bausch & Lomb, Inc, Alcon Laboratories, Inc., Paradigm Medical, Inc., Quantel, Inc. and Medtronic, Inc. HUMAN RESOURCES As of June 30, 2002, the Company employed 57 full-time employees and 3 part-time employees. Thirty-one of the Company's full-time employees are employed in manufacturing, 15 are employed in general and administrative positions, 6 are employed in sales and marketing and 5 are employed in research and development. Escalon's employees are not covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements contained in this Annual Report on Form 10-K and other written and oral statements made from time to time by the Company do not relate strictly to historical or current facts. As such, they are considered "forward-looking statements" which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "protect," "should," "will," and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, product development, the introduction of new products, the potential markets and uses for the Company's products, 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 and defending itself in litigation matters. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed; and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and investors therefore should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. The Company undertakes no obligation to update any forward-looking statement. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company's forward-looking statements, the most important factors include, without limitation, the following: FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING Our liquidity is affected by many factors, some of which are based on the normal ongoing operations of our businesses and some of which arise from fluctuations related to global markets and economies. The Company's current term loan with PNC Bank, N.A. provides for quarterly principal payments, which increase every six months, including a $2,000,000 final balloon payment, which is due on June 30, 2004. We believe that cash on hand plus cash available from our line of credit will be sufficient to satisfy our working capital, capital expenditures and research and development until the balloon payment is due. We may be required to secure additional debt or equity financing in order to satisfy the balloon payment, and we cannot assure you that such financing will be available when required on acceptable terms. CONCENTRATION OF REVENUES The Company realized 14.53% and 18.97% of its net revenue during the fiscal years ended June 30, 2002 and 2001, respectively, from Bausch & Lomb's sale of Silicone Oil. While management does not expect this revenue to decline rapidly in the foreseeable future, any such decrease would have a significant impact on our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted. The Company is entitled to receive additional consideration, in varying amounts, through fiscal 2005. ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE INDUSTRIES IN WHICH THE COMPANY COMPETES It is difficult to ascertain if the current economic downturn has affected the Company's results. Management believes any effect has been limited to our Sonomed business unit. Any further decline in our customers' markets or further decline in general economic conditions would likely result in reduction in demand for our products and services and could harm our consolidated financial position, results of operations, cash flows and stock price. Should it become necessary due to economic climate, we cannot assure you that the Company will be able to reduce expenditures quickly enough to maintain profitability and service our current debt. In addition, there is a risk that cost-cutting initiatives will impair our ability to effectively develop and market products and remain competitive in the industries in which we compete. These measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our products increases and limiting our ability to hire and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be. The Company could be affected by trends toward managed care, health-care cost containment, and other changes in government and private sector initiatives, in the United States and other countries in which the Company does business, that are placing increased emphasis on the delivery of more cost-effective medical therapies. Changes in governmental laws, regulations, and accounting standards and the enforcement thereof and agency or government actions or investigations involving the industry in general or the Company in particular may be averse to the Company. THE ABILITY OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS We generally sell our products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards. Without timely introduction of new products and enhancements, our products will become technologically obsolete over time, in which case our revenue and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to: (i) properly identify customer needs, (ii) innovate and develop new technologies, services and applications, (iii) successfully commercialize new technologies in a timely manner, (iv) manufacture and deliver our products in sufficient volumes on time, (v) differentiate our offerings from our competitors' offerings, (vi) price our products competitively, and (vii) anticipate our competitors' announcements of new products, services or technological innovations. DEPENDENCE ON KEY PERSONNEL Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. If we fail to retain and hire a sufficient number of these personnel, we will not be able to maintain or expand our business. OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED In the normal course of business, we engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of such transactions, our financial results may differ from the investment community's expectations in a given quarter. In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure. We may have difficulty developing, manufacturing and marketing the products of a newly-acquired company in a way that enhances the performance of our combined businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors including: (i) the retention of key employees, (ii) the management of facilities and employees in separate geographic areas. All of these efforts require varying levels of management resources, which may divert our attention from other business operations. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations and stock price could be negatively impacted. THE OUTCOME OF LITIGATION MATTERS AND UNCERTAIN PROTECTION OF PATENTED AND PROPRIETARY INFORMATION Increased public interest in recent years in product liability claims in the medical device industry could affect the Company should it become directly involved. Recent events have made the investing public particularly sensitive to listed companies reporting practices and accounting policies in general. The SEC could make regulatory changes that could have a direct effect on the Company. Additionally, the Company may find it necessary to enforce its legal right with respect to patented and proprietary information. The outcome of any of these matters and the financial impact they may have on the Company cannot be foreseen. VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN OUR LISTING ON THE NASDAQ SMALLCAP MARKET The public stock markets have experienced significant volatility in stock prices in recent years, which could cause, the Company's stock price to experience severe price changes that are unrelated or disproportionate to the operating performance of the Company. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to, among other factors, quarter to quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of new strategic relationships by the Company or its competitors, general conditions in the healthcare industry or the global economy generally, or market volatility unrelated to the Company's business and operating results. 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. ITEM 2. PROPERTIES The Company leases an aggregate of approximately 22,000 square feet of space for its (i) corporate offices in Wayne, Pennsylvania, (ii) manufacturing/warehouse facility in New Berlin, Wisconsin, (iii) manufacturing facility in Lake Success, New York and (iv) consultant's office/storage facility in Turnersville, New Jersey. The corporate offices leased in Wayne, Pennsylvania covers approximately 1,100 square feet. The Wisconsin facility lease, covering approximately 13,500 square feet of space expires in April 2007. The New York facility lease, covering approximately 7,100 square feet expires during fiscal 2005. Annual rent under all of the Company's lease arrangements was $338,540 for the year ended June 30, 2002. 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 United States 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 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 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 reached an agreement to settle this action on its behalf and on the behalf of its former and present officers and directors, for $500,000. The court approved the settlement after a fairness hearing on September 11, 2002. 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. On November 8, 2001, Digital, a wholly owned subsidiary of the Company, initiated an action against MegaVision, Inc., Ken Boydston, Mark Maio and Ophthalmic Imaging Services, Inc. in the United States District Court for the Eastern District Court for the Eastern District of Pennsylvania seeking damages and equitable relief for disputes arising between the parties and arising from the operations of Escalon Medical Imaging, LLC. Escalon Medical Imaging, LLC is a joint venture between Escalon Digital Vision, Inc. and MegaVision, Inc. The action was docketed as Escalon Medical Imaging, LLC and Escalon Digital Vision, Inc. v. MegaVision, Inc., Ken Boydston, Ophthalmic Imaging Systems and Mark Maio, Civil Action No.: 01-CV-5669. Without admitting liability, fault or wrongdoing and to provide and amicable resolution to the dispute, the parties have executed agreements to settle the lawsuit. As part of the settlement Digital is conducting all operations concerning manufacture, marketing, distribution and support of the CFA camera system. Without admitting liability, fault, or wrongdoing and in order to avoid the time and expense of the Lawsuit, Digital, Escalon Medical Imaging, LLC and Mark Maio executed settlement agreement and mutual release to settle the Lawsuit. The settlements did not have a material financial impact on the Company. The Company received $363,536 net assets, largely in the form of accounts receivable, inventory and fixed assets, in lieu of cash, to reduce its balance due of $432,692 from Escalon Medical Imaging, LLC as a condition of the settlement. The remaining balance due of $23,434 was charged as a loss from termination of joint venture. 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, 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
Fiscal Year Ended June 30, 2002 High Low ------------------------------- ---- --- Quarter ended September 30, 2001 $2.06 $1.35 Quarter ended December 31, 2001 $4.00 $1.60 Quarter ended March 31, 2002 $2.73 $1.80 Quarter ended June 30, 2002 $2.94 $1.95
As of August 22, 2002, there were 126 holders of record of the Company's Common Stock. On August 22, 2002, the closing sale price of Escalon's Common Stock as reported by the Nasdaq SmallCap Stock Market was $1.83 per share. 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 that 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. 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: 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales revenue, net $ 12,074 $ 11,880 $ 6,670 $ 7,559 $ 5,942 Costs and expenses: Cost of goods sold 4,640 4,297 2,874 3,282 2,589 Research and development 555 492 984 738 495 Marketing, general and administrative 5,097 5,430 4,661 3,332 2,805 Writedown of goodwill, license and distribution rights and patents -- -- 418 -- -- -------- -------- -------- -------- -------- Total costs and expenses 10,292 10,219 8,937 7,352 5,889 -------- -------- -------- -------- -------- Income (loss) from operations 1,782 1,661 (2,267) 207 53 -------- -------- -------- -------- -------- Loss from termination of joint venture (23) -- -- -- -- Sale of silicone oil product line -- -- 1,864 -- -- Sale of Betadine product line -- -- -- 879 -- Equity in income (loss) of unconsolidated joint venture 8 (19) (33) -- -- Interest income 2 2 149 145 119 Interest expense (791) (1,052) (576) (37) (1) Income tax expense -- -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) $ 978 $ 592 $ (863) $ 1,194 $ 171 ======== ======== ======== ======== ======== Basic net income (loss) per share $ 0.29 $ 0.18 $ (0.27) $ 0.10 $ (0.04) ======== ======== ======== ======== ======== Diluted net income (loss) per share $ 0.29 $ 0.18 $ (0.27) $ 0.10 $ (0.04) ======== ======== ======== ======== ======== Weighted average shares - basic used in per share computation 3,346 3,292 3,242 3,115 2,673 ======== ======== ======== ======== ======== Weighted average shares - diluted used in per share computation 3,360 3,308 3,242 3,115 2,673 ======== ======== ======== ======== ========
AT JUNE 30, ----------- BALANCE SHEET DATA: 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Cash and cash equivalents $ 221 $ 81 $ 177 $ 3,854 $ 2,264 Working capital (deficit) (240) (3,004) (3,211) 3,801 3,465 Total assets 16,912 17,798 16,845 10,403 6,734 Long-term debt 5,191 4,502 4,900 733 -- Total liabilities 9,719 11,691 11,430 4,125 685 Accumulated deficit (39,039) (40,018) (40,610) (39,629) (39,952) Total shareholders' equity 7,193 6,107 5,415 6,278 6,049
Note: No cash dividends were paid in any of the years presented. 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 notes thereto and other financial information contained elsewhere in this Form 10-K/A. Escalon operates primarily in four reportable business segments: Sonomed, Vascular, Medical/Trek and Digital. Sonomed develops, manufactures and markets ultrasound systems used for diagnostic or biometric applications in ophthalmology. Vascular develops, manufactures and markets vascular access products. Medical/Trek develops, manufactures and distributes ophthalmic surgical products under the Escalon Medical Corp. and/or Trek Medical Products names. Digital manufactures, markets and distributes a digital camera system for ophthalmic fundus photography. 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, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001 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, 2002 and 2001.
Fiscal Years Ended June 30, --------------------------------- 2002 2001 % change ---- ---- -------- Net revenues: (in thousands) Sonomed $ 6,071 $ 5,988 1.39% Vascular 2,634 2,117 24.42% Medical/Trek 3,102 3,775 -17.83% Digital 267 -- 100.00% ------- ------- ------ $12,074 $11,880 1.63% ======= ======= ======
Product revenues increased $194,000, or 1.63%, to $12,074,000 in fiscal 2002 as compared to $11,880,000 in fiscal 2001. Revenues in the Sonomed business increased $83,000, or 1.39%, to $6,071,000. This increase is attributed to an increase in international revenue of $172,000 offset by an $89,000 decrease domestically. Sonomed hired a domestic sales person in February 2001 and an international salesperson in September 2001. The hiring of the international salesperson has the desired effect. However, the domestic market was weak. Revenues in the Vascular business unit increased $517,000, or 24.42%, to $2,634,000. Vascular's revenue increased as a result of two factors: (1) increased usage within the marketplace, and (2) selling direct to the market rather than through distributors caused more sales to be recognized at retail price rather than wholesale. Vascular's unit sales increased 16.42% for the fiscal year ended June 30, 2002 as compared to the same period last fiscal year. The unit sales increase was complemented by increases in the average unit sales prices of the majority of Vascular's needle products, due to the Company's strategy of eliminating underperforming distributors. Vascular discounts its products to distributors. Vascular began taking the sales directly to end users thereby avoiding distributor discounts. Revenues in the Medical/Trek business unit decreased $673,000, or 17.83%, to $3,098,000. The decrease was largely due to a $500,000 decrease in revenue earned from Bausch & Lomb in connection with Silicone Oil. This decrease was caused by a major competitor of Bausch & Lomb introducing an alternative Silicone Oil product line as well as a contractual step-down in royalties provided for in the sale of the product line. The contract with Bausch & Lomb provides annual step-downs in the calculation of Silicone Oil revenues to be received by the Company. These step-downs occur during the first quarter of each fiscal year during the contract. For the fiscal year ended June 30, 2002, the step-down caused a $385,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The remaining $115,000 decrease in Silicone Oil revenue is due to fluctuations in the market demand for the product. The Company does not have knowledge as to what factors have affected Bausch & Lomb's sale of Silicone Oil. Sales of the Company's ISPAN(TM) gas products and certain OEM products decreased by $173,000. Escalon experienced a temporary increase in the sales of its ISPAN (TM) gas product due to the fulfillment of customers' backorders during the fiscal year ended June 30, 2001. Revenues in the Digital business unit were $267,000 for the fiscal year ended June 30, 2002. The Company terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. 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, 2002 and 2001.
Fiscal Years Ended June 30, --------------------------- 2002 2001 --------------------- --------------------- Cost of goods sold: Dollars % Dollars % ------- ----- ------- ----- (in thousands) (in thousands) Sonomed $2,704 45.16% $2,237 37.36% Vascular 988 37.51% 1,016 47.99% Medical/Trek 838 22.20% 1,043 27.63% Digital 110 41.20% -- 0.00% ------ ----- ------ ----- $4,640 38.43% $4,296 36.16% ====== ===== ====== =====
Cost of goods sold totaled $4,640,000, or 38.43% of net revenue for the fiscal year ended June 30, 2002 as compared to $4,296,000, or 36.16% of net revenue for the fiscal year ended June 30, 2001. Cost of goods sold in the Sonomed business unit totaled $2,704,000, or 45.16% of net revenue for the fiscal year ended June 30, 2002 as compared to $2,237,000, or 37.36% of net revenue for the fiscal year ended June 30, 2001. This increase relates primarily to lower net revenue per unit as Sonomed's revenue concentrated toward sales to distributors to whom Sonomed discounts its products resulting in lower unit sales prices. Cost of goods sold in the Vascular business unit totaled $988,000, or 37.51% of net revenue for the fiscal year ended June 30, 2002 as compared to $1,016,000 or 47.99% of net revenue for the fiscal year ended June 30, 2001. This decrease is the result of increases in average unit sales prices across the needle product line as well as reduced costs due to improved efficiency in the manufacturing process. The improvement in the Vascular division was the direct result of the retention of a manufacturing supervisor who strengthened operating procedures which improved productivity. Cost of goods sold in the Medical/Trek business unit totaled $838,000, or 22.20% of net revenue for the fiscal year ended June 30, 2002 as compared to $1,043,000 or 27.63% of net revenue for the fiscal year ended June 30, 2001. When Silicone Oil revenue is excluded, cost of goods sold as a percentage of net revenue was 62.35% of net revenue and 68.64% of net revenue for the fiscal years ended June 30, 2002 and 2001, respectively. No costs are associated with Silicone Oil. The decrease in cost of goods sold is attributed to product mix. During fiscal 2002 and 2001, customers placed orders with the Medical/Trek business unit, which were in turn fulfilled. Product mix is controlled by market demand. The market place had a higher demand for products that can be produced at a lower cost of goods sold with respect to revenue. Cost of goods sold in the Digital business unit totaled $110,000, or 41.20% of net revenue. The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business segment marketing, general and administrative expenses for the fiscal years ended June 30, 2002 and 2001.
Fiscal Years Ended June 30, ----------------------------- 2002 2001 % change ------ ------ -------- Marketing, general and (in thousands) administrative expenses Sonomed $1,441 $1,942 -25.80% Vascular 999 1,127 -11.36% Medical/Trek 2,510 2,348 6.90% Digital 129 -- 100.00% Other 18 14 28.57% ------ ------ ------ $5,097 $5,431 -6.15% ====== ====== ======
Marketing, general and administrative expenses decreased $334,000, or 6.15%, for the fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30, 2001. In the Sonomed business unit, marketing, general and administrative expenses decreased $501,000, or 25.80%. Depreciation and amortization expenses decreased $735,000, primarily due to the application of SFAS 142 discussed in Note 3 of the Notes to Consolidated Financial Statements. Salaries and other personnel related costs increased $168,000, primarily due to the addition of a domestic salesperson and a salesperson for Latin America and the Pacific Rim. Bad debts increased by $101,000 as the Company reserved for specific international accounts receivable. In the Vascular business unit, marketing, general and administrative expenses decreased by $128,000, or 11.36%. Depreciation and amortization expenses decreased $83,000 primarily due to the application of SFAS 142. Salaries, commissions and other personnel related expenses increased $81,000 and consulting expenses decreased $151,000 primarily due to the addition of a sales and marketing manager and a clinical support specialist. Marketing, general and administrative expenses in the Medical/Trek business unit increased $162,000, or 6.90%. Executive and administrative compensation increased primarily due to the Company's strengthening of its management team and the centralization of the Company's finance function to the corporate office. The addition of an executive manager mid way through fiscal 2000 and the addition of clerical accounting staff resulted in the strengthening of the management team. This increase amounted to $245,000. Legal and accounting fees increased $135,000, primarily due to the amendment of the Company's loans with PNC Bank, N.A., required filings with the SEC relating to the reincorporation into Pennsylvania and the issuance of shares to Radiance Medical Systems, Inc., and the litigation discussed in Note 16 of the Notes to Consolidated Financial Statements. This increase was offset by a $64,000 decrease in commissions expense related to the termination of contracts with distributors, a $57,000 decrease in travel, lodging and meals and entertainment due to concerted cost reduction efforts in this area and a $30,000 reduction in temporary services. Marketing, general and administrative expenses in the Digital business unit totaled $129,000. The following table presents consolidated research and development expenses as well as identifying trends in business segment research and development expenses for the fiscal years ended June 30, 2002 and 2001.
Fiscal Years Ended June 30, --------------------------- 2002 2001 % change ---- ---- -------- Research and (in thousands) development Sonomed $ 409 $ 321 27.41% Vascular 64 22 190.91% Medical/Trek 76 157 -51.59% Digital -- -- 0.00% Other 6 (8) -175.00% ----- ----- ------ $ 555 $ 492 12.80% ===== ===== ======
Research and development expenses increased $63,000, or 12.80%, for the fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30, 2001. In the Sonomed business unit, research and development expenses increased $88,000. This relates largely to the redesign of one of Sonomed's product lines and was offset by a $15,000 decrease in consulting expenses. Research and development expenses in the Vascular business unit increased $42,000, primarily due to a $28,000 increase in prototype and patent expenses and an $11,000 increase in consulting expenses. Research and development in the Medical/Trek business unit decreased $81,000, primarily due to $45,000 decrease in salaries and other personnel related costs largely due to reduced headcount, a $15,000 decrease in consulting expenses, an $8,000 decrease in ISO/CE marking expenses and a $6,000 decrease in prototype expenses. On December 18, 2000, the Company announced that it received 510(K) clearance to begin marketing its high-end digital camera system for ophthalmologists known as the CFA Digital Imaging System. As a result of the approval, the Company began marketing the system through its joint venture with MegaVision through December 31, 2001. The Company terminated its joint venture with MegaVision and commenced operations within the Company's Digital business unit on January 1, 2002. Escalon recognized a joint venture gain of $9,000 for the fiscal year ended June 30, 2002 and a joint venture loss of $19,000 for the fiscal year ended June 30, 2001. Interest income remained unchanged for the fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30, 2001. Interest income was $2,000 for both fiscal years. Interest expense decreased $261,000 for the fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30, 2001. These decreases resulted from lower average balances in Escalon's term loan and line of credit with PNC Bank, N.A., and from decreases in the floating interest rates applicable to the term loan and line of credit. There is no provision for federal 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, 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 was 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 was primarily due 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 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 was primarily due to the fulfillment of customers' backorders for the Company's ISPAN(TM) gas product during the first quarter of fiscal 2001. 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 1,043 27.63% 937 52.38% ------ ----- ------ ----- $4,296 36.16% $2,874 43.09% ====== ===== ====== =====
Cost of goods sold totaled $4,296,000, or 36.16% 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 $1,130,000, 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 2001 in 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 unit was primarily due to the revenues received from Bausch & Lomb related to Silicone Oil. Cost of goods sold in this business unit in fiscal 2001 increased $107,000 to $1,043,000, or 27.63% of net revenue. Cost of goods sold as a percent of net revenues was 52.38% during the same period last year. This decrease was 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 $1,942 $ 951 104.21% Vascular 1,127 1,310 -13.97% Medical/Trek 2,348 2,400 -0.22% ------ ------ ----- $5,431 $4,661 16.52% ====== ====== =====
Marketing, general and administrative expenses increased $769,000, or 16.52%, for fiscal 2001 as compared to fiscal 2000. Marketing, general and administrative expenses in the Sonomed business increased $991,000, primarily due to the fact that Sonomed's expenses represent a full year of operation in fiscal 2001 as compared to only five-and-half months of activity in fiscal 2000. This increase was offset by Vascular's $183,000 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 resulted by $90,000, the direct result of a concerted effort in this area. 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 businesses decreased by $52,000, 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 157 786 -80.03% ---- ---- ------- $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 $679,000 when compared to the same period last year. This was 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. The 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 was 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. 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 was 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 was no provision 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. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, Escalon had cash and cash equivalents of $221,000 as compared to $81,000 at June 30, 2001, an increase of $140,000. This resulted primarily from increases in cash of $2,029,000 provided by operating activities, $204,000 net proceeds from due from joint venture and $107,000 provided by the issuance of Common Stock, offset by $2,006,000 used to pay down the term loan and the line of credit, $73,000 in loan finance fees, $96,000 used to purchase fixed assets and a $25,000 payment for license and distribution rights. 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 of the company to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the term loan was based on prime plus 1.0% and the line of credit rate was based on prime plus 0.75%. An interest rate cap agreement is used to reduce the potential impact of increases in interest rates on the floating-rate term loan. At June 30, 2002, Escalon was party to an interest rate cap agreement covering the term loan through January 1, 2003. The agreement entitles the Company to receive from PNC Bank, N.A., the counter-party to the agreement, on a monthly basis, the amounts, if any, by which the Company's interest payments exceed 10.0% for the period July 1, 2002 through January 1, 2003. Escalon paid $100,000 in finance fees that offset the outstanding balance of the term loan and are being amortized over the term of the loans using the effective interest method. Escalon paid $122,800 in interest rate cap protection fees that also offset the outstanding balance of the loans. These fees are being amortized over the term of the loans using the effective interest method. On November 28, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. The aggregate balance of debt outstanding did not change as a result of this refinancing. As of June 30, 2002, the amount outstanding against this line of credit was $1,250,000. 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 were increased to prime plus 1.75% and prime plus 1.50, respectively. At June 30, 2002, the interest rates applicable to the term loan and line of credit were 6.50% and 6.25%, respectively. PNC Bank, N.A.'s prime rate as of June 30, 2002 was 4.75%. In connection with the amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon execution of the loan agreement. Commencing March 1, 2002, the Company began paying a 1.0% facility payable quarterly based on the aggregate principal amount outstanding under the line of credit and term loan on January 1 of each year until June 30, 2004. All of the Company's assets collateralize these agreements. The term loan and the line of credit contain various covenants, including a requirement to maintain a defined ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the EBITDA to debt ratio for the fiscal year ended June 30, 2002, resulting in a technical default under the loan agreements. PNC Bank, N.A. has waived this requirement of the agreement as of June 30, 2002, and for the period ending July 1, 2003. On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for cash the assets of Radiance's vascular access business, and also agreed to pay royalties based on future sales of the products of the vascular access business for a period of five years following the close of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 21, 2001, the parties amended the agreement to provide an adjustment in the terms of the payment of the royalties. Pursuant to the amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, and an additional note in the amount of $717,558, payable in eleven quarterly installments commencing April 15, 2002, and issued 50,000 shares of Escalon Common Stock to Radiance. The Company believes that cash on hand plus cash available from our line of credit will be sufficient to satisfy our working capital, capital expenditures and research and development until the balloon payment is due on June 30, 2004. We may be required to secure additional debt or equity financing in order to satisfy the balloon payment, and we cannot assure you that such financing will be available when required on acceptable terms. Additionally, the Company relies on the revenues received from Bausch & Lomb. While management does not expect this revenue to decline rapidly in the foreseeable future, any such decrease would have a significant impact on our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted. 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, 2002, Escalon complied with these 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. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of those involve the application of SFAS No. 142, which is discussed further in Notes 2 and 3. The financial statements are prepared in conformity with generally accepted accounting principles, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for uncollectible receivables, obsolete inventory, deferred income taxes and purchased intangible assets. Actual results could differ from those estimates. The Company used what it believes are reasonable assumptions and where applicable, established valuation techniques in making its estimates. 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 prime rate at June 30, 2002 plus 1.75% on the term loan and 1.50% on the line of credit. The Company is party to an interest rate cap agreement covering the term loan through January 1, 2003. The interest rate cap agreement is used to reduce the potential impact of increases on the floating-rate term loan.
Long-term debt classified as current as of June 30, --------------------------------------------------- 2002 2003 2004 2005 Thereafter Total ---- ---- ---- ---- ---------- ----- Term loan - capped 900,000 -- -- -- -- 900,000 Interest rate - capped 6.50% -- -- -- -- Term loan - no cap 1,050,000 4,800,000 -- -- -- 5,850,000 Interest rate - no cap 6.50% 6.50% -- -- -- Line of credit - no cap 1,250,000 -- -- -- -- 1,250,000 Interest rate - no cap 6.25% -- -- -- -- Radiance note 260,932 260,932 130,461 -- -- 652,325 Interest rate 6.25% -- -- -- -- Deferred finance fees (124,969) -- -- -- -- (124,969) Total 3,335,963 5,060,932 130,461 -- -- 8,527,356
EXCHANGE RATE RISK In fiscal 2002 approximately 20% 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 page 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 the Company's 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
Principal Occupation During Director Year Term Past Five Years and Name of Director Since Will Expire Age Certain Directorships - ---------------- ----- ----------- --- --------------------- Anthony Coppola 2000 2003 64 Principal and operator of The Historic Town of Smithville, Inc., a real estate and commercial property company from 1998 to present; Retired division President of SKF Industries, a manufacturing Company from 1963 to 1986
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 the Company's 2002 Annual Meeting of Stockholders' to be filed with the Securities and Exchange Commission. 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 "Principal Stockholders" and "Management" included in Escalon's proxy statement for the Company's 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available exercise of outstanding for future issuance outstanding options options, warrants under equity warrants and rights and rights compensation plans Equity Compensation Plans approved by Security Holders 1,151,750 $2.39 180,205 Equity Compensation Plans not approved by Security Holders -0- -0- -0-
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/A 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 (a) Restated Articles of Incorporation of Registrant. (10) (b) Agreement and Plan of Merger dated as of September 28, 2001 between Escalon Pennsylvania, Inc. and Escalon Medical Corp. (10) 3.2 Bylaws of Registrant. (10) 4.5 (a) Warrant Agreement between 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) 10.5 Employment Agreement between the Registrant and Ronald L. Hueneke dated July 1, 1999. (12) 10.6 Employment Agreement between the Registrant and Richard J. DePiano dated May 12, 1998. (8) 10.7 Non-Exclusive Distributorship Agreement between Registrant and Scott Medical Products dated October 12, 2000. (12) 10.9 Assets Sale and Purchase Agreement between the Registrant and Radiance Medical Systems, Inc. dated January 21, 1999. (7) 10.13 Supply Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999. (7) 10.15 Registrant's Amendment and Supplement Agreement and Release between the Registrant and Radiance Medical Systems, Inc., Dated February 28, 2001 (13) 10.20 PNC Bank, N.A. Letter Agreement dated November 16, 2001. (*) 10.21 PNC Bank, N.A. Amended and Restated Committed Line of Credit Note dated November 16, 2001. (*) 10.22 PNC Bank, N.A. Amended and Restated Time Note dated November 16, 2001. (*) 10.23 PNC Bank, N.A. Pledge Agreement dated November 16, 2001, (*) 10.24 PNC Bank, N.A. Amended and Restated Security Agreement dated November 16, 2001. (*) 11.1 Stock Purchase Agreement between the Registrant and the stockholders of Sonomed, Inc. dated January 14, 2000. (8) 11.2 Employment Agreement between the Registrant and Louis Katz dated January 14, 2000. (8) 11.3 Registrant's 1999 Equity Incentive Plan and Registrant's Equity Incentive Plan for Employees of Sonomed, Inc. (9) 11.4 Registrant's Amended and Restated 1999 Equity Incentive Plan. (9) 21 Subsidiaries. (11) 23.1 Consent of Parente Randolph, LLC, independent auditors. (*) 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard J. DePiano (*) 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Harry M. Rimmer (*)
- -------------- * 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 on 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/A, dated March 31, 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 Proxy Statement on Schedule 14A, as filed by the Company with the SEC on September 21, 2001. (11) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 2000. (12) Filed as an exhibit to the Company's Form 10-K for the year ended June 30, 2001. (13) Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 2001. 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: March 3, 2003 By:/s/ Richard J.DePiano ---------------------- Richard J. DePiano Chairman and Chief Executive Officer CERTIFICATION I Richard J. DePiano, certify that: 1. I have reviewed this Annual Report on Form 10-K/A of Escalon Medical Corp. 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; and 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report. Date: March 3, 2003 /s/ Richard J. DePiano -------------------- ----------------------- Richard J. DePiano Chairman and Chief Executive Officer (Principal Executive Officer) CERTIFICATION I, Harry M. Rimmer, certify that: 1. I have reviewed this Annual Report on Form 10-K/A of Escalon Medical Corp. 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; and 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report. Date: March 3, 2003 /s/ Harry M. Rimmer -------------------- -------------------- Harry M. Rimmer Senior Vice President - Finance (Principal Financial and Accounting Officer) ESCALON MEDICAL CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report F-2 Consolidated Balance Sheets at June 30, 2002 and 2001 F-3 Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000 F-4 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2002, 2001 and 2000 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 F-6 Notes to Consolidated Financial Statements F-8
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, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the Consolidated Financial Statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective July 2001. PARENTE RANDOLPH, LLC Philadelphia, Pennsylvania August 16, 2002 F-2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, June 30, 2002 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 220,826 $ 80,830 Accounts receivable, net 2,093,877 2,317,476 Inventory, net 1,572,067 1,499,821 Other current assets 400,820 287,027 ------------ ------------ Total current assets 4,287,590 4,185,154 Long-term note receivable 150,000 150,000 Furniture and equipment, net 626,377 631,877 Goodwill, net 10,591,795 10,591,795 Trademarks and trade names, net 601,806 601,806 License and distribution rights, net 246,988 262,613 Patents, net 193,541 204,274 Due from joint venture -- 596,758 Other assets 214,344 418,185 ------------ ------------ Total assets $ 16,912,440 $ 17,642,462 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line of credit $ 1,250,000 $ 4,626,009 Current portion of long-term debt 2,085,963 1,374,157 Accounts payable 531,665 436,684 Accrued compensation 498,954 399,535 Other current liabilities 161,115 196,503 ------------ ------------ Total current liabilities 4,527,697 7,032,888 Long-term debt, net of current portion 5,191,393 4,502,325 ------------ ------------ Total liabilities 9,719,090 11,535,213 Commitments and Contingencies 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; 3,345,851 and 3,292,184 shares issued and outstanding at June 30, 2002 and 2001, respectively 3,346 3,292 Additional paid-in capital 46,228,710 46,121,519 Accumulated deficit (39,038,706) (40,017,562) ------------ ------------ Total shareholders' equity 7,193,350 6,107,249 ------------ ------------ Total liabilities and shareholders' equity $ 16,912,440 $ 17,642,462 ============ ============
See notes to consolidated financial statements F-3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002 2001 2000 ------------ ------------ ------------ Revenues, net $ 12,073,932 $ 11,880,017 $ 6,670,214 ------------ ------------ ------------ Costs and expenses: Cost of goods sold 4,640,325 4,296,525 2,874,194 Research and development 554,760 491,582 983,853 Marketing, general and administrative 5,096,994 5,430,813 4,660,824 Write-down of patent costs and goodwill, Ocufit -- -- 417,849 ------------ ------------ ------------ Total costs and expenses 10,292,079 10,218,920 8,936,720 ------------ ------------ ------------ Income from operations 1,781,853 1,661,097 (2,266,506) ------------ ------------ ------------ Other income and expenses: Loss from termination of joint venture (23,434) -- -- Gain on sale of Silicone Oil product line -- -- 1,863,915 Equity in net income (loss) of unconsolidated joint venture 8,848 (19,164) (33,382) Interest income 2,347 2,297 149,086 Interest expense (790,757) (1,052,030) (575,765) ------------ ------------ ------------ Total other income and expenses (802,996) (1,068,897) 1,403,854 ------------ ------------ ------------ Income before taxes $ 978,856 $ 592,200 $ (862,652) Income taxes -- -- -- ------------ ------------ ------------ Net income (loss) $ 978,856 $ 592,200 $ (862,652) ============ ============ ============ Basic net income (loss) per share $ 0.293 $ 0.180 $ (0.266) ============ ============ ============ Diluted net income (loss) per share $ 0.291 $ 0.179 $ (0.266) ============ ============ ============ Weighted average shares - basic 3,345,851 3,292,184 3,242,184 ============ ============ ============ Weighted average shares - diluted 3,360,492 3,307,986 3,242,184 ============ ============ ============
See notes to consolidated financial statements F-4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Common Stock Treasury Stock Additional Total ------------------------ --------------------- Paid-in Accumulated Shareholders' Shares Amount Shares Amount Capital Deficit Equity --------- ------------ -------- ---------- ----------- ------------ ---------- Balance at June 30, 1999 3,377,164 $ 46,024,811 134,980 $(118,108) $ -- $(39,629,002) $6,277,701 Treasury stock retirement (134,980) -- (134,980) 118,108 -- (118,108) -- Common stock conversion from no par to $.001 par value -- (46,021,569) -- -- 46,021,569 -- -- Net loss -- -- -- -- -- (862,652) (862,652) --------- ------------ -------- ---------- ----------- ------------ ---------- Balance at June 30, 2000 3,242,184 $ 3,242 -- $ -- $46,021,569 $(40,609,762) $5,415,049 Common stock issued in connection with restructuring of liabilities 50,000 50 -- -- 99,950 -- 100,000 Net income -- -- -- -- -- 592,200 592,200 --------- ------------ -------- ---------- ----------- ------------ ---------- Balance at June 30, 2001 3,292,184 $ 3,292 -- $ -- $46,121,519 $(40,017,562) $6,107,249 Exercise of stock options 53,667 54 -- -- 107,191 -- 107,245 Net income -- -- -- -- -- 978,856 978,856 --------- ------------ -------- ---------- ----------- ------------ ---------- 3,345,851 $ 3,346 -- $ -- $46,228,710 $(39,038,706) $7,193,350 ========= ============ ======== ========== =========== ============ ==========
See notes to consolidated financial statements F-5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001 2000 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 978,856 $ 592,200 $ (862,652) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 215,165 1,038,741 666,770 Net gain on sale of Silicone Oil product line -- -- (1,863,915) Write-down of patent costs and goodwill, Ocufit, net -- -- 417,849 Loss from termination of joint venture 23,434 -- -- Equity in net (income) loss of unconsolidated joint venture (8,848) 19,164 33,382 Change in operating assets and liabilities: Accounts receivable, net 350,546 (985,693) 586,424 Inventory, net 116,479 74,857 162,862 Other current and long-term assets 194,545 406,358 (59,915) Accounts payable, accrued and other liabilities 159,013 64,701 (416,506) ------------ ------------ ------------ Net cash provided by (used in) operating activities 2,029,190 1,210,328 (1,335,701) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments -- -- (7,043,061) Proceeds from maturities of investments -- -- 7,043,061 Proceeds from sale of Silicone Oil product line -- -- 2,117,180 Net change in cash and cash equivalents - restricted -- -- 1,000,000 Purchase of Vascular Access business -- -- (1,000,000) Purchase of Sonomed, Inc., net of cash acquired -- (70,662) (12,250,540) Proceeds from (advances to) unconsolidated joint venture, net 204,247 (558,343) (80,961) Purchase of fixed assets (96,054) (187,477) (209,109) Payment for patent costs -- -- (52,748) Payment for license and distribution rights (25,000) (34,027) (41,228) ------------ ------------ ------------ Net cash provided by (used in) investing activities 83,193 (850,509) (10,517,406) ------------ ------------ ------------
See notes to consolidated financial statements F-6 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES: 2002 2001 2000 ---------- ---------- ----------- Line of credit (repayment) borrowing, net (376,009) 593,905 3,032,105 Proceeds from term loan -- -- 7,000,000 Principal payments on term loan (1,630,117) (1,050,000) (1,633,332) Issuance of common stock 107,245 -- -- Payment of finance fees (73,506) -- (222,800) ---------- ---------- ----------- Net cash provided by (used in) financing activities (1,972,387) (456,095) 8,175,973 ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents 139,996 (96,276) (3,677,134) Cash and cash equivalents, beginning of period 80,830 177,106 3,854,240 ---------- ---------- ----------- Cash and cash equivalents, end of period $ 220,826 $ 80,830 $ 177,106 ========== ========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 793,005 $ 962,275 $ 575,765 ========== ========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY: Accrued royalties converted to short-term debt $- $ 64,884 $- ========== ========== =========== Long-term debt obligation incurred as a result of a royalty agreement $- $ 717,558 $- ========== ========== =========== Accrued royalties converted to common stock $- $ 100,000 $- ========== ========== =========== Deposit on furniture and equipment reclassed from other assets $- $ 105,044 $- ========== ========== =========== Restructure of line of credit to long-term debt $3,000,000 $- $- ========== ========== =========== Transfer of title to assets in settlement of due from joint venture -- Accounts receivable $ 126,947 $- $- ========== ========== =========== Inventory $ 188,725 $- $- ========== ========== =========== Furniture and equipment $ 62,253 $- $- ========== ========== ===========
See notes to consolidated financial statements F-7 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND DESCRIPTION OF BUSINESS Escalon Medical Corp. ("Escalon") 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. 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, pharmaceuticals and vascular access devices. In February 1996, the Company acquired substantially all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources to the research and development of ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser properties to a privately held company in return for an equity interest and future royalties on product sales. The privately held company had responsibility for funding and developing the laser technology through to commercialization. The privately held company began selling products related to the laser technology during fiscal 2002. 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. ("Radiance"). Vascular's products use Doppler technology to aid medical personnel in locating difficult arteries and veins. Currently, this product line is concentrated in the cardiac catheterization market; however, the Company began marketing the products in the area of oncology during fiscal 2002. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, Digital 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 terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. (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 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. Due from joint venture is valued at cost, which approximates fair value. 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 are recorded at lower of cost (first-in, first-out) or market. The composition of inventories is as follows:
June 30, June 30, 2002 2001 ----------- ----------- Raw materials / work in process $ 1,273,611 $ 1,288,664 Finished goods 343,409 313,325 ----------- ----------- 1,617,020 1,601,989 Valuation allowance (44,953) (102,168) ----------- ----------- $ 1,572,067 $ 1,499,821 =========== ===========
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 $216,836 and $67,148 at June 30, 2002 and 2001, 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, 2002, 2001 and 2000 was $163,807, $139,663 and $103,925, respectively. F-9 Furniture and equipment consist of the following at:
JUNE 30, JUNE 30, 2002 2001 ----------- ----------- Equipment $ 1,052,405 $ 874,146 Furniture and fixtures 58,000 65,435 Leasehold improvements 95,101 95,102 ----------- ----------- 1,205,506 1,034,683 Less: Accumulated depreciation and amortization (579,129) (402,806) ----------- ----------- $ 626,377 $ 631,877 =========== ===========
LONG-LIVED ASSETS The Company follows Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires impairment losses to be recorded on long-lived assets when indications of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles held for sale be reported at the lower of carrying amount or fair value less cost to sell. The Company continually evaluates whether events and circumstances have occurred that indicate that the remaining useful life of long-lived assets may warrant revision or that the remaining balance may not be recoverable. INTANGIBLE ASSETS The Company follows Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," which discontinues the amortization of goodwill and identifiable intangible assets that have indefinite lives. REVENUE RECOGNITION The Company recognizes revenue from the sales of its products at the time of shipment when title and risk of loss transfer. With respect to additional consideration related to the sale of the Company's Silicone Oil product line (Note 12), 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. F-10 RESEARCH AND DEVELOPMENT All research and development costs are charged to operations as incurred. DEFERRED INTEREST RATE CAP FEES Premiums paid for a purchased interest rate cap arrangement is amortized using the effective interest method over the term of the cap. Unamortized premiums are included as an offset to the balance of the current portion of long-term debt. Amounts receivable under the cap agreement 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, 2002, 2001 and 2000 was $37,959, $71,654 and $47,437, 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:
JUNE 30, JUNE 30, JUNE 30, 2002 2001 2000 ----------- ----------- ----------- Numerator: Numerator for basic and diluted earnings per share: Net income $ 978,857 $ 592,200 $ (862,652) ----------- ----------- ----------- Denominator: Denominator for basic earnings per share - weighted average shares 3,345,851 3,292,184 3,242,184 Effect of dilutive securities: Employee stock options 14,641 15,802 -- ----------- ----------- ----------- Denominator for diluted earnings per share - weighted average and assumed conversion 3,360,492 3,307,986 3,242,184 =========== =========== =========== Basic earnings per share $ 0.293 $ 0.180 $ (0.266) =========== =========== =========== Diluted earnings per share $ 0.291 $ 0.179 $ (0.266) =========== =========== ===========
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. F-11 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 percent interest. Amounts due from this joint venture amounted to $-0- and $596,758 at June 30, 2002 and 2001, respectively. Income (loss) from the joint venture was $8,848 and ($19,164) for the years ended June 30, 2002 and 2001, respectively. The Company terminated its joint venture with MegaVision and commenced operations within its Digital business unit on January 1, 2002. RECLASSIFICATIONS Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." It supercedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used, while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not expect the adoption of SFAS No. 144 to have a material impact on financial position or results of operations. In January 2002, the SEC issued an interpretive release on disclosure related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions and is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than those risk factors presented in other Company filings. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that certain intangible assets in a business combination be recognized as assets separately from goodwill and existing intangible assets and goodwill be evaluated for these new separation requirements upon adoption of SFAS No. 142. (3) INTANGIBLE ASSETS 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, a portion of the purchase price was allocated to certain product license and distribution agreements. This cost allocation was based an evaluation by management, 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 $205,379 and $164,754 at June 30, 2002 and 2001, respectively. Amortization expense for the years ended June 30, 2002, 2001 and 2000 was $40,625, $38,256 and $42,558, respectively. F-12 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 2000, the Company discontinued its Ocufit project in the Medical / Trek business unit resulting in the write-off of $353,000 in cost and $34,000 in accumulated amortization. Accumulated patent amortization was $100,675 and $89,943 at June 30, 2002 and 2001, respectively. Amortization expense for the years ended 2002, 2001 and 2000 was $10,733, $10,733 and 15,062, respectively. The aggregate amortization expense for each of the next five years for acquired license and distribution rights and patents are as follows:
Year ending June 30, ----------- 2003 $ 51,358 2004 41,973 2005 28,835 2006 28,835 2007 27,093 -------- $178,094 ========
GOODWILL, TRADEMARKS AND TRADE NAMES Goodwill, trademarks and trade names represent intangible assets obtained from the EOI, Radiance and Sonomed acquisitions. Goodwill represents the excess of purchase price over the fair market value of the net assets acquired. In accordance with SFAS No. 142, effective July 2001, Escalon discontinued the amortization of goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives will continue to be amortized over their useful lives. Goodwill will be assessed annually for impairment. The standard required this impairment test to be completed by December 31, 2001. In November 2001, management evaluated whether the intangible assets were impaired and reviewed the allocation of intangible assets related to the purchase of Sonomed as of the January 2000 acquisition date, when the purchase price was allocated based on information available at that time. Management concluded in December 2001 that the intangible assets acquired with the purchase of Sonomed should be allocated as $10,547,488 to goodwill and $665,000 to trademarks and trade names. Management has decided that the original classification was incorrect, and therefore should be restated. The result of this correction is solely a reclassification of the intangible assets among customer lists, trademarks and trade names and goodwill. The total reported value of the intangible assets has not changed. Therefore, this correction had no effect on reported earnings, net worth or cash flows for any prior fiscal years. Management evaluated whether the goodwill and other non-amortizable intangible assets in the Sonomed and Vascular business units were impaired. Management concluded that the carrying value of goodwill and other intangible assets did not exceed their fair values and therefore were not impaired. The Company evaluated the carrying value of goodwill as compared to its fair value in the Medical / Trek business unit and concluded that its carrying value did not exceed its fair value and therefore was not impaired. The Company made this conclusion after evaluating the discounted cash flow of the Medical / Trek business unit. In accordance with SFAS 142, the Company's intangible assets will be assessed on an annual basis. Management also concluded that trademarks and trade names had an indefinite life. F-13 Goodwill as of June 30, 2002, as allocated by reportable segment is as follows:
Goodwill -------- Sonomed $ 9,525,550 Vascular 941,218 Medical / Trek 125,027 ----------- $10,591,795 ===========
Accumulated amortization of goodwill at June 30, 2002 and 2001 was $1,378,292 and $1,378,292, respectively. Amortization of goodwill for the years ended June 30, 2002, 2001 and 2000 was $-0-, $813,347 and $433,799, respectively. Accumulated amortization of trademarks and trade names at June 30, 2002 and 2001 was $63,194 and $63,194, respectively. Amortization of trademarks and trade names for the years ended June 30, 2002, 2001 and 2000 was $-0-, $43,332 and $19,862, respectively. The adjustment of previously reported net income and earnings per share related to SFAS 142 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 each of the last three fiscal years is disclosed below:
Fiscal year ended June 30, -------------------------------------------------- 2002 2001 2000 -------------- -------------- -------------- Net income: Reported net income (loss) $ 978,857 $ 592,200 $ (863,652) Add: SFAS 142 adjustment -- 856,679 453,661 -------------- -------------- -------------- Adjusted net income $ 978,857 $ 1,448,879 $ (409,991) ============== ============== ============== Basic net income (loss) per share: Reported net income (loss) $ 0.293 $ 0.180 $ (0.266) Add: SFAS 142 adjustment -- 0.260 0.140 -------------- -------------- -------------- Adjusted net income $ 0.293 $ 0.440 $ (0.126) ============== ============== ============== Diluted net income (loss) per share: Reported net income (loss) $ 0.291 $ 0.179 $ (0.266) Add: SFAS 142 adjustment -- 0.259 0.140 -------------- -------------- -------------- Adjusted net income $ 0.291 $ 0.438 $ (0.126) ============== ============== ==============
(4) 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 May 2005. (5) PNC 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 of the company to maintain a $1,000,000 certificate of deposit with PNC Bank, N.A. The interest rate on the F-14 term loan was based on prime plus 1.0% and the line of credit rate was based on prime plus 0.75%. Escalon paid $100,000 in finance fees that offset the outstanding balance of the term loan and are being amortized over the term of the loans using the effective interest method. An interest rate cap agreement is used to reduce the potential impact of increases in interest rates on the floating-rate term loan. At June 30, 2002, Escalon was party to an interest rate cap agreement covering the term loan through January 1, 2003. The agreement entitles the Company to receive from PNC Bank, N.A., the counter-party to the agreement, on a monthly basis, the amounts, if any, by which the Company's interest payments exceed 10.0% for the period July 1, 2002 through January 1, 2003. Escalon paid $122,800 in interest rate cap protection fees that also offset the outstanding balance of the loans. These fees are being amortized over the term of the loans using the effective interest method. On November 28, 2001, Escalon amended its loan agreement with PNC Bank, N.A. The amendment included converting the existing balances on the term loan and the line of credit into a $7,900,000 term loan and $2,000,000 available line of credit. The aggregate balance of debt outstanding did not change as a result of this refinancing. As of June 30, 2002, the amount outstanding against this line of credit is $1,250,000. 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 were increased to prime plus 1.75% and prime plus 1.50, respectively. At June 30, 2002, the interest rates applicable to the term loan and line of credit were 6.50% and 6.25%, respectively. PNC Bank, N.A.'s prime rate as of June 30, 2002 was 4.75%. In connection with the amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000 shares of the Company's Common Stock at an exercise price of $3.66 per share. The warrants were valued at $4,800 using the Black-Sholes option pricing method with the following assumptions: risk-free interest rate of 5.0%, expected volatility of .18, expected warrant life of 42 months from vesting and expected dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon execution of the loan agreement. Commencing March 1, 2002, the Company began paying a 1.0% facility payable quarterly based on the aggregate principle amount outstanding under the line of credit and term loan on January 1 of each year until June 30, 2004. All of the Company's assets collateralize these agreements. The term loan and the line of credit contain various covenants, including a requirement to maintain a defined ratio of historical earnings before interest, taxes, depreciation and amortization ("EBITDA") to future debt repayments. Due to the graduated nature of the debt repayment, Escalon did not achieve the EBITDA to debt ratio, resulting in a technical default under the loan agreements. PNC Bank, N.A. has waived this requirement of the agreement as of June 30, 2002, and for the twelve-month period ending July 1, 2003. On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, Escalon acquired for cash the assets of Radiance's vascular access business, and also agreed to pay royalties based on future sales of the products of the vascular access business for a period of five years following the close of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 21, 2001, the parties amended the agreement to provide an adjustment in the terms of the payment of the royalties. Pursuant to the amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, and an additional note in the amount of $717,558, payable in eleven quarterly installments commencing April 15, 2002, and has issued 50,000 shares of Escalon Common Stock to Radiance. F-15 Following are maturities of long-term debt for each of the next five years:
PNC Bank Radiance Deferred Year ending June 30, Term Loan Loan Finance Fees Total - -------------------- --------- ---- ------------ ----- 2003 $ 1,950,000 $ 260,932 $ (124,969) $ 2,085,963 2004 4,800,000 260,932 -- 5,060,932 2005 -- 130,461 -- 130,461 2006 -- -- -- -- 2007 -- -- -- -- ----------- ----------- ----------- ----------- $ 6,750,000 $ 652,325 $ (124,969) $ 7,277,356 =========== =========== =========== ===========
(6) CAPITAL STOCK TRANSACTIONS CAPITALIZATION In November 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. In November 2001, Escalon Medical Corp., a Delaware corporation ("Escalon Delaware"), merged with and into one of its wholly owned subsidiaries, Escalon Medical Corp. (Formerly Escalon Pennsylvania, Inc.), a Pennsylvania corporation, for the purpose of reincorporating Escalon Delaware in the state of Pennsylvania. Pursuant to the merger, the separate corporate existence of Escalon Delaware ceased and the Company is the surviving corporation. 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 1,373,268 shares of the Company's Common Stock. Under the terms of the plans, options may not be granted for less than the fair market value of the Common Stock at the date of the 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, 2002, options to purchase 1,153,458 shares of the Company's Common Stock were granted, 976,765 were exercisable and 178,497 were reserved for future grants. 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 after 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 percent were used. The weighted average assumptions used in fiscal 2000 were a risk-free interest rate of 5.94 percent and an expected volatility of 1.502. 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). F-16 The following is a summary of Escalon's stock option activity and related information for the fiscal years ended June 30, 2002, 2001 and 2000:
2002 2001 2000 ---- ---- ---- 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 1,090,000 $2.301 837,000 $2.377 314,500 $2.122 Granted 171,750 $2.674 264,500 $2.046 546,000 $2.510 Exercised (53,667) $1.998 -- $ -- $- Forfeited (54,625) $2.008 (11,500) $1.962 (23,500) $1.949 --------- ------ --------- ------ ---------- ------ Outstanding at end of year 1,153,458 $2.385 1,090,000 $2.301 837,000 $2.377 Exercisable at end of year 976,765 841,542 468,743 ========= ========= ========== Weighted average fair value of options granted during year $ -- $ -- $0.733 ====== ====== ======
Options granted during fiscal 2002 have a weighted average exercise price of $2.674 and a remaining contractual life of 9.39 years. Those issued in fiscal 2001 have a weighted average exercise price of $2.046 and a remaining contractual life of 8.29 years. Fiscal 2000 option grants have a weighted average exercise price of $2.510 and a remaining contractual life of 7.49 years. Options were exercised during fiscal 2002 between $1.5625 and $2.3750 per share. (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 non-current, consisted of the following:
At June 30, ---------------------------- 2002 2001 ----------- ----------- Deferred tax assets: Reserves and allowances $ (147,243) $ 58,000 Net operating loss carryforwards 9,009,927 9,206,000 Tax credit carryforwards 562,000 562,000 ----------- ----------- 9,424,684 9,826,000 Valuation allowance (9,424,684) (9,826,000) ----------- ----------- Net deferred taxes $ -- $ -- =========== ===========
At June 30, 2002, Escalon had federal income tax and state income tax net operating loss carryforwards of approximately $25,762,000 and $2,717,000, respectively. The difference between federal and state carryforward amounts is primarily attributable to the Company's discontinuing its operations in F-17 California. Federal and state operating loss carryforwards and tax credits will expire at various dates between 2003 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 $21,069,179 is cumulatively available to reduce 2002 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 2002 to 2001 is primarily attributable to the impact of Section 382. For the years ended June 30, 2002 and 2001, Escalon recorded valuation allowances of $9,424,684 and $9,826,000, respectively, based on uncertainty with respect to the ultimate realization of the net deferred tax assets. The decrease is a result of current taxable income recognized for the fiscal year ended June 30, 2002. In fiscal 2002 and 2001, no provision was required because of net operating loss carryforwards. In fiscal 2000, Escalon recognized a tax benefit of approximately $300,000, which was offset by a related valuation allowance. Approximately $8,200,000 of the federal net operating loss carryforward at June 30, 2002 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, 2002 are as follows:
YEAR ENDING JUNE 30, AMOUNT -------------------- ------ 2003 $296,117 2004 278,461 2005 146,262 2006 119,040 2007 128,960 -------- Total $968,840 ========
Rent expense charged to operations during the years ended June 30, 2002, 2001 and 2000 was $338,540, $294,050 and $210,118, respectively. Through June 30, 2000, Escalon leased its Pennsylvania facility from an entity that is 100 percent 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. F-18 On January 14, 2000, Escalon acquired Sonomed. Sonomed adopted a 401(K) profit sharing plan, which became effective on January 14, 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 percent of such participant's voluntary employee contributions, up to a maximum of 10 percent of each employee's compensation. Escalon's contribution for the fiscal years ended June 30, 2002, 2001 and 2000 was $40,906, $25,615 and $10,008, respectively. (10) LICENSE OF INTELLECTUAL LASER PROPERTIES In October 1997, Escalon licensed its intellectual laser properties to a privately held company in exchange for an initial 25 percent equity interest in the privately held company. As a result of raising money from outside investors, as of June 30, 2002, the Company's interest has been diluted to 2.48 percent. Escalon is entitled to a 2.5 percent royalty on future product sales that are based on the Company's patented technology; a 1.5 percent royalty on product sales not dependent on the Company's technology and an annual license fee of $10,000 in 2000 and $15,000 per 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, the privately held company received its first 510(K) approval from the FDA. The privately held company began selling its products in calendar 2002. (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 classified as goodwill and, in accordance with SFAS No. 142, will be assessed annually for impairment. 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 Asset 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 one percent, 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 one percent, with interest only payable quarterly beginning on May 31, 2001 and principle 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. F-19 (12) SALE OF ADATOSIL(R) 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. (13) 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 $12,212,540, $11,212,488 was allocated to proprietary rights and intangible assets, including $10,547,488 to goodwill and $665,000 to trademarks and trade names. In accordance with FAS 142, these intangible assets will be assessed annually for impairment. 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 has 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 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 (UNAUDITED) Revenues $10,553,616 Net income $ 136,164 Basic net income per share $ 0.042 Diluted net income per share $ 0.042 Weighted average shares - basic 3,242,184 Weighted average shares - diluted 3,254,250
(14) SEGMENTAL REPORTING During the years ended June 30, 2002 and 2001, Escalon's operations were classified into four principle 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. F-20 SEGMENTAL STATEMENTS OF OPERATION - FISCAL YEARS ENDED JUNE 30,
Sonomed Vascular Medical/Trek ------- -------- ------------ 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- Revenue, net $ 6,071 $ 5,988 $ 2,634 $ 2,117 $ 3,102 $ 3,775 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of goods sold 2,704 2,237 988 1,016 838 1,043 Research and development 409 321 64 22 76 157 Marketing, general and administrative 1,441 1,942 999 1,127 2,510 2,348 Corporate admin allocation 782 459 526 -- (1,349) (459) -------- -------- -------- -------- -------- -------- Total costs and expenses 5,336 4,959 2,577 2,165 2,075 3,089 -------- -------- -------- -------- -------- -------- Income from operations 735 1,029 57 (48) 1,027 686 -------- -------- -------- -------- -------- -------- Other income and expenses: Termination of JV -- -- -- -- -- -- Equity in loss of unconsolidated JV -- -- -- -- -- -- Interest income -- -- -- -- 2 2 Interest expense (742) (1,029) (48) (23) -- -- -------- -------- -------- -------- -------- -------- Total other income and expenses (742) (1,029) (48) (23) 2 2 -------- -------- -------- -------- -------- -------- Income taxes -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net income (loss) (7) -- 9 (71) 1,029 688 -------- -------- -------- -------- -------- -------- Depreciation and amortization 16 750 45 128 227 145 Assets 11,988 12,123 2,465 2,652 1,983 2,180 Expenditures for long-lived assets 22 16 -- 22 65 149 -------- -------- -------- -------- -------- --------
Digital Other Total ------- ----- ----- 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- Revenue, net $ 267 $ -- $ -- $ -- $ 12,074 $ 11,880 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of goods sold 110 -- -- -- 4,640 4,296 Research and development -- -- 6 (8) 555 492 Marketing, general and administrative 129 -- 18 14 5,097 5,431 Corporate admin allocation 41 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total costs and expenses 280 -- 24 6 10,292 10,219 -------- -------- -------- -------- -------- -------- Income from operations (13) -- (24) (6) 1,782 1,661 -------- -------- -------- -------- -------- -------- Other income and expenses: Termination of JV (24) -- -- -- (24) -- Equity in loss of unconsolidated JV 8 (19) -- -- 8 (19) Interest income -- -- -- -- 2 2 Interest expense -- -- -- -- (790) (1,052) -------- -------- -------- -------- -------- -------- Total other income and expenses (16) (19) -- -- (804) (1,069) -------- -------- -------- -------- -------- -------- Income taxes -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net income (loss) (29) (19) (24) (6) 978 592 -------- -------- -------- -------- -------- -------- Depreciation and amortization -- -- 18 16 306 1,039 Assets 296 -- 211 843 16,943 17,798 Expenditures for long-lived assets -- -- -- -- 87 187 -------- -------- -------- -------- -------- --------
The Company operates in the healthcare market, specializing in the development, manufacture marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. The business segments reported above are the segments for which separate financial information is available and for which operating results are evaluated regularly by executive management in deciding how to allocate resources and assessing performance. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. For the purpose of this illustration corporate expenses, which principally consist of executive management and administrative support functions, are allocated across the business segments based primarily on each segment's net revenue. These expenses are otherwise included in the Medical / Trek business unit. During the fiscal years ended June 30, 2002, 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, revenues derived from Bausch & Lomb's sales of Silicone Oil. Commencing January 1, 2002, Digital derived its revenues from the sales of the CFA digital imaging system and related products. F-21 During the fiscal years ended June 30, 2002 and 2001, Escalon had one entity, Bausch & Lomb, from which greater than 10 percent of consolidated net revenues were derived. Revenues from Bausch & Lomb were $2,186,000, or 18.11 percent of consolidated net revenues during the fiscal year ended June 30, 2002, and were $2,675,000, or 22.52 percent of consolidated net revenues during the fiscal year ended June 30, 2001. This revenue is recorded in the Medical / Trek business unit. Of the external revenues reported above, $2,240,000, $169,000, $43,000, and $-0- were derived internationally in Sonomed, Vascular, Medical / Trek and Digital, respectively, during the fiscal year ended June 30, 2002; and $2,068,000, $170,000, $74,000, and $-0- were derived internationally in Sonomed, Vascular, Medical / Trek and Digital, respectively, during the fiscal year ended June 30, 2001. (15) 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 (Note 4). The agreement is 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 amount of the interest rate cap agreement is $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 amount was recorded in the accompanying balance sheet and no gains or losses were recognized in income during fiscal 2002. (16) 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 United States 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 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 to this litigation, while continuing to deny any wrongdoing, the Company reached an agreement to settle this action on its behalf and on the behalf of its former and present officers and directors, for $500,000. The court approved the settlement after a fairness hearing on September 11, 2002. 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. On November 8, 2001, Escalon Digital Vision, Inc., a wholly owned subsidiary of the Company, initiated an action against MegaVision, Inc., Ken Boydston, Mark Maio and Ophthalmic Imaging Services, Inc. in the United States District Court for the Eastern District Court for the Eastern District of Pennsylvania seeking damages and equitable relief for disputes arising between the parties and arising from the operations of Escalon Medical Imaging, LLC. Escalon Medical Imaging, LLC is a joint venture between Escalon Digital Vision, Inc. and MegaVision, Inc. The action was docketed as Escalon Medical Imaging, LLC and Escalon Digital Vision, Inc. v. MegaVision, Inc., Ken Boydston, Ophthalmic Imaging Systems and Mark Maio, Civil Action No.: 01-CV-5669 ("Lawsuit"). Without admitting liability, fault or F-22 wrongdoing and to provide an amicable resolution to the dispute, Escalon Digital Vision, Inc., Escalon Medical Imaging, LLC, MegaVision, Inc., Ken Boydston and Mark Maio have executed agreements to settle the Lawsuit. As part of the settlement Digital is conducting all operations concerning manufacture, marketing, distribution and support of the CFA camera system. Without admitting liability, fault, or wrongdoing and in order to avoid the time and expense of the Lawsuit, Digital, Escalon Medical Imaging, LLC and Mark Maio executed settlement agreement and mutual release to settle the Lawsuit. The settlements did not have a material financial impact on the Company. The Company received $363,536 net assets, largely in the form of accounts receivable, inventory and fixed assets, in lieu of cash, to reduce its balance due of $432,692 from Escalon Medical Imaging, LLC as a condition of the settlement. The remaining balance due of $23,434 was charged as a loss from termination of joint venture. (17) 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 $1,754,000 for fiscal 2002 and $2,254,000 for the period beginning on the commencement date of August 13, 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, 2002 and 2001 was $457,000 and $726,000, respectively. F-23 EX-10.20 3 w84090exv10w20.txt PNC BANK, N.A. LETTER AGREEMENT DATED NOV. 16,2001 EXHIBIT 10.20 PNC BANK, NATIONAL ASSOCIATION 1600 Market Street Philadelphia, PA 19103 November 16, 2001 Escalon Medical Corp. Escalon Vascular Access, Inc. Escalon Pharmaceutical, Inc. Sonomed, Inc. Escalon Digital Vision, Inc. 351 East Conestoga Road Wayne, PA 19087 Attn: Richard J. DePiano, CEO and Chairman RE: $2,000,000 COMMITTED LINE OF CREDIT; $7,900,000 TERM LOAN Gentlemen: PNC Bank, National Association (the "Bank"), Escalon Medical Corp. ("Escalon Medical" or the "Borrower"), Escalon Vascular Access, Inc., Escalon Pharmaceutical, Inc., Sonomed, Inc. and Escalon Digital Vision, Inc. (collectively, the "Guarantors; together with the Borrower, the "Obligors") are parties to a letter agreement dated January 14, 2000 (as heretofore amended, supplemented or otherwise modified, the "Existing Letter Agreement") pursuant to which the Bank extended to the Borrower a reducing committed revolving line of credit in the amount of $5,000,000 (the "Existing Line of Credit") and a term loan in the amount of $7,000,000 (the "Existing Term Loan"). This letter (as amended, supplemented or otherwise modified from time to time, this "Letter Agreement"), and the credit facilities established hereby, shall amend and restate the Existing Letter Agreement and the credit facilities established thereby. As a result, on and after the date hereof, this Letter Agreement, the Amended and Restated Notes and the Amended and Restated Security Agreements (as each such term is defined below) shall supercede the Existing Letter Agreement and the Notes and Security Agreements executed in connection with the Existing Letter Agreement Escalon Medical Corp. November 16, 2001 Page 2 Each Guaranty and Suretyship Agreement heretofore executed by a Guarantor in favor of the Bank (as amended, supplemented or otherwise modified from time to time, the "Guaranty and Suretyship Agreements") shall remain in full force and effect and is hereby reaffirmed. Notwithstanding the preceding paragraphs, it is not the intention of any of the parties hereto that the restructuring of the existing indebtedness under the Existing Letter Agreement constitute a payment or discharge of such indebtedness. Accordingly, Borrower's obligation to pay (and the Guarantors' guaranty of) the indebtedness evidenced by this Letter Agreement and the Amended and Restated Notes shall be accepted by the Bank in the renewal and extension of (but not in substitution and exchange for or in payment of) the indebtedness under the Existing Letter Agreement and the credit facilities established thereby. 1. Line of Credit and Use of Proceeds. The first credit facility covered by this Letter Agreement is a committed revolving line of credit under which Borrower may request and the Bank, subject to the terms and conditions of this Letter Agreement, will make advances to Borrower from time to time until the Expiration Date, in an amount in the aggregate at any time outstanding not to exceed the Applicable Credit Limit (the "Line of Credit"). The "Expiration Date" means June 30, 2004 or such later date as may be designated by the Bank by written notice to Borrower. "Applicable Credit Limit" means $2,000,000. Advances under the Line of Credit shall be used for working capital and other general corporate purposes. On the date hereof, and without the necessity of any further action by any party, $2,000,000 of the Existing Principal Amount shall be deemed to be advances outstanding under the Line of Credit. The "Existing Principal Amount" means the principal amount outstanding on the date hereof under the Existing Line of Credit and the Existing Term Loan. 2. Repayment of Line of Credit. Subject to the terms and conditions of this Letter Agreement, Borrower may borrow, repay and reborrow under the Line of Credit until the Expiration Date, on which date the outstanding principal balance and any accrued but unpaid interest shall be due and payable. 3. Term Loan. The second credit facility covered by this Letter Agreement is a $7,900,000 term loan for Borrower ("Term Loan"). On the date hereof, and without the necessity of any further action by any party, $7,900,000 of the Existing Principal Amount shall be converted into an advance under the Term Loan. The Term Loan shall be repaid in accordance with the terms of the applicable Amended and Restated Note. No advances may be made under the Term Loan after the date hereof and any principal payments on the Term Loan may not be reborrowed. Escalon Medical Corp. November 16, 2001 Page 3 4. Interest Rate; Fees; Payments at Closing. a. Interest Rate on Line of Credit. Principal outstanding under the Line of Credit shall bear interest at a per annum rate of interest (computed on the basis of a year of 360 days and the actual number of days elapsed) equal to the sum of (i) the rate of interest in effect from time to time at the Bank as its prime rate, which rate may not be the lowest interest rate then being charged commercial borrowers by the Bank (the "Prime Rate"), plus (ii) one and one half of one percent (1.50%). If and when the Prime Rate changes, the rate of interest on principal of the Line of Credit will change automatically without notice to Borrower, effective on the date of any such change. b. Interest Rate on Term Loan. Principal outstanding under the Term Loan shall bear interest at a per annum rate of interest (computed on the basis of a year of 360 days and the actual number of days elapsed) equal to the Prime Rate plus one and three quarters of one percent (1.75%). If and when the Prime Rate changes, the rate of interest on principal of the Term Loan will change automatically without notice to Borrower, effective on the date of any such change. c. Payment of Interest. Borrower shall pay accrued interest on the unpaid principal balance of the Line of Credit and the Term Loan monthly in arrears. d. Legal Rate. If, at any time, any of the aforesaid rates shall be finally determined by any court of competent jurisdiction, governmental agency or tribunal to exceed the maximum rate of interest permitted by any applicable laws, then, for such time as such rate would be deemed excessive, application thereof shall be suspended, and there shall be charged in lieu thereof the maximum rate of interest permissible under such laws. e. Default Rate. Upon maturity (whether by acceleration, demand or otherwise) and, at the option of the Bank, upon the occurrence of an Event of Default under this Letter Agreement, the documents executed pursuant hereto and/or any Guaranty and Suretyship Agreement, then, notwithstanding anything to the contrary contained herein, interest on the Line of Credit and the Term Loan shall automatically, without notice or demand, increase to a rate per annum (the "Default Rate") which is 4.00 percentage points above the otherwise applicable rate. Interest at the Default Rate shall continue to accrue notwithstanding the entry of any judgment hereon or on any of the Amended and Restated Notes, and all such judgments shall bear interest at the Default Rate provided for herein. f. Fees. Borrower shall pay Bank: (i) Concurrently with the execution hereof, a facility fee of $50,000; and (ii) On the first business day of March, June, September and December of each year, commencing with March 1, 2002, a facility fee equal to .25% multiplied by the aggregate principal Escalon Medical Corp. November 16, 2001 Page 4 amount outstanding under the Line of Credit and the Term Loan on January 1 of such year. In other words, commencing with the year 2002 and through and including 2003, there shall be a facility fee of 1% of the aggregate principal amount outstanding under this Letter Agreement on January 1 of such year, such facility fee to be paid in equal quarterly installments on the first business day of March, June, September and December of such year, and, in the year 2004, there shall be a facility fee of 0.5% of the aggregate principal amount outstanding under this Letter Agreement on January 1 of such year, such facility fee to be paid in equal installments on the first business day of March and June of such year. g. Payments at Closing. In addition to the $50,000 facility fee referred to clause f(i) above, on the date hereof the Obligors shall pay to the Bank the following: (i) All accrued interest under the Existing Line of Credit and the Existing Term Loan; and (ii) The accrued legal fees and expenses of counsel to the Bank incurred in connection with the Existing Letter Agreement and this Letter Agreement, such fees (exclusive of expenses) not to exceed $19,700. 5. Amended and Restated Notes. The obligations of Borrower to repay the Line of Credit and the Term Loan shall be evidenced by amended and restated promissory notes (as amended, supplemented or otherwise modified from time to time, collectively, the "Amended and Restated Notes") in form and content satisfactory to the Bank. 6. Security; Other Conditions. Borrower shall cause the following to be executed, where appropriate, and delivered to the Bank in form and content satisfactory to the Bank: a. Amended and restated security agreements (as amended, supplemented or otherwise modified from time to time, each an "Amended and Restated Security Agreement") by which each Obligor grants to the Bank a perfected first lien (other than Permitted Liens as defined below) on such Obligor's existing and future personal property, including accounts, inventory, equipment, investment property, general intangibles, chattel paper, documents, instruments, patents, trademarks and copyrights; b. One or more pledge agreements (as amended, supplemented or otherwise modified from time to time, each a "Pledge Agreement") pursuant to which the Bank shall be granted a first priority lien on (i) the Escalon Medical Corp. November 16, 2001 Page 5 stock of each of the Guarantors and (ii) all stock of IntraLase, Inc. ("IntraLase") owned by an Obligor; and c. An acknowledgment by each Guarantor that the Guaranty and Suretyship Agreement previously executed by such Guarantor remains in full force and effect and covers the facilities provided herein (as amended, supplemented or otherwise modified from time to time, the "Acknowledgments"). 7. Stock Warrants. On the date hereof, Borrower shall execute and deliver to the Bank a Warrant Agreement in form and content satisfactory to the Bank, entitling the Bank to purchase from Borrower 60,000 number of shares of common stock of the Borrower on the terms provided therein (as amended, supplemented or otherwise modified from time to time, the "Warrant Agreement"). 8. Mandatory Prepayments. a. Simultaneously with the closing of any Asset Sale by an Obligor, such Obligor shall pay to the Bank seventy five percent (75%) (or such other percentage as the Bank and the Borrower shall agree at the time of any such sale) of the net proceeds from such Asset Sale; provided that, in each calendar year the Obligors shall not be required (unless an Event of Default shall exist) to make any prepayments pursuant to this Paragraph 8(a) until the net proceeds in the aggregate from Asset Sales in such year (including with respect to calendar year 2001, any such net proceeds received between the beginning of such year and the date of this Letter Agreement) shall equal or exceed $25,000, whereupon the amount of net proceeds that must be paid to the Bank pursuant to this Paragraph 8(a) shall equal 75% (or such other percentage as the Bank and the Borrower shall agree) of all net proceeds in such year in excess of $25,000. As used herein, the term "Asset Sale" means any sale, lease, transfer or other disposition of assets (each referred to for the purposes of this definition as a "disposition") by an Obligor (other than a disposition by an Obligor to a different Obligor), other than (i) dispositions of inventory in the ordinary course of business and (ii) dispositions of surplus or obsolete inventory or equipment in the ordinary course of business. b. Any prepayments made to the Bank pursuant to this Paragraph 8 shall, unless otherwise designated by the Bank in its sole discretion, be applied first to the principal of the Term Loan in the inverse order of maturity, until the Term Loan is paid in full, and second to the principal of the Line of Credit. The Applicable Credit Limit shall be reduced by an amount equal to the amount of any such payments on the Line of Credit pursuant to this Paragraph 8. Escalon Medical Corp. November 16, 2001 Page 6 c. Nothing herein shall be or be deemed to be a consent by the Bank to any Asset Sale, it being understood and agreed that the consent of the Bank is still required for any such Asset Sale. 9. Covenants. Unless the Bank provides its prior written consent to the contrary, or until payment in full and termination of the Line of Credit and the Term Loan: a. No Obligor will make or permit any change in the nature of its business from the development, marketing and distribution of medical services, devices and pharmaceuticals or cause or permit any change in the present management position and responsibilities of Richard J. DePiano. b. Borrower will deliver to the Bank: (i) Borrower's Financial Statements for its fiscal year, within 120 days after fiscal year end, audited by a certified public accountant reasonably acceptable to the Bank (Bank hereby acknowledging that Borrower's present accounting firm is acceptable), together with a copy of Borrower's SEC Form 10-K filing. (ii) Borrower's Financial Statements for each fiscal quarter, within 60 days after fiscal quarter end, together with year-to-date and comparative figures for the corresponding periods of the prior year, certified as true and correct by its chief financial officer, together with a copy of Borrower's SEC Form 10-Q filing. (iii) With each delivery of Financial Statements, (A) Borrower's chief financial officer shall also deliver a certificate as to Borrower's compliance with the financial covenants set forth herein for the period then ended and whether any Event of Default (as defined in the Amended and Restated Notes) exists, and, if so, the nature thereof and the corrective measures Borrower proposes to take; and (B) Borrower will deliver to the Bank any management letters issued by the accounting firm which prepared said annual audited statements. (iv) Promptly after receipt by any Obligor, any financial statements of IntraLase as and when received by such Obligor. (v) Budgets and forecasts and such other financial information as the Bank may from time to time reasonably request. "Financial Statements" means the balance sheet and statements of income and cash flows for Borrower and its consolidated subsidiaries prepared in accordance with generally accepted Escalon Medical Corp. November 16, 2001 Page 7 accounting principles in effect from time to time ("GAAP") applied on a consistent basis (subject in the case of interim statements to normal year-end adjustments). c. Borrower and all other Obligors (herein, the "Test Group") will maintain on a consolidated basis the following financial covenants as of the end of each fiscal quarter commencing June 30, 2001: (i) a ratio of (a) EBITDA (meaning pre-tax earnings calculated without regard to any gain or loss which is classified as "extraordinary" in accordance with GAAP plus depreciation, amortization and other non-cash charges plus interest expense minus the sum of dividends and Unfunded Capital Expenditures) to (b) Current Maturities plus interest expense plus tax expense, of not less than 1.05 to 1.00, all determined for the four fiscal quarters then ending. For these purposes (A) "Unfunded Capital Expenditures" means capital expenditures made from other than funds borrowed for the purpose of making such capital expenditures, (B) "Current Maturities" means the current principal maturities of long term debt (including capital lease obligations) as well as any prepayments thereof and (without duplication) any principal payments on account of Subordinated Debt, but specifically excluding the principal balance of the Line of Credit, and (C) "Subordinated Debt" means indebtedness of Obligors for borrowed money the repayment of which is subordinated to all of Obligors' indebtedness and liabilities to Bank pursuant to a written subordination agreement executed and delivered to and in form and substance satisfactory to Bank; (ii) net worth (assets minus liabilities per GAAP) of not less than $5,300,000; (iii) a ratio of Total Senior Indebtedness to EBITDA of not more than 5.00 to 1.00 for the period June 30, 2001 through and including June 30, 2002 and 4.00 to 1.00 thereafter, all determined for the four fiscal quarters then ending. For these purposes, "Total Senior Indebtedness" means all indebtedness for borrowed money (including capitalized lease obligations), including guaranties thereof and including the face amount of letters of credit issued for the account of or guaranteed by an Obligor; d. No Obligor will create, assume, incur or suffer to exist any mortgage, pledge, encumbrance, security interest, lien or charge of any kind upon any of its property, now owned or hereafter acquired, or acquire or agree to acquire any kind of property under conditional sales or other title Escalon Medical Corp. November 16, 2001 Page 8 retention agreements, provided, however, that the foregoing restrictions shall not include the following (herein, "Permitted Liens"): (i) liens for taxes, assessments or governmental charges or levies which shall not at the time be due and payable or can thereafter be paid without penalty or are being contested in good faith by appropriate proceedings diligently conducted and with respect to which it has created adequate reserves; (ii) pledges or deposits to secure obligations under workers' compensation laws or similar legislation; (iii) liens or security interests in favor of the Bank; (iv) liens in respect of property or assets of Obligors which are incurred by law, which were incurred in the ordinary course of business and do not secure indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's, mechanics and similar liens and which do materially detract from the value of the Obligors' assets or property or materially impair the use thereof in the Obligors' operation of its business; and (v) Purchase money security interests (including capital leases) in equipment granted to the vendor or financier thereof, provided that the indebtedness secured thereby shall not exceed $100,000 in the aggregate at any time outstanding. e. No Obligor will create, incur, guarantee, endorse (except endorsements in the course of collection), assume or suffer to exist any indebtedness, except (i) indebtedness to the Bank, (ii) open account trade debt incurred in the ordinary course of business and not past due, (iii) Subordinated Debt, (iv) purchase money debt for the acquisition of equipment, including capitalized lease obligations, limited to the purchase price thereof and not in excess of $100,000 in principal amount at any time outstanding in the aggregate and (v) indebtedness to Radiance Medical Systems, Inc. incurred prior to the date hereof in an aggregate principal amount not exceeding $1,367,558 pursuant to those two certain notes each dated February 28, 2001 in the amounts of $64,884 and $717,558, respectively. f. No Obligor will liquidate, merge or consolidate with any person, firm, corporation or other entity, or sell, lease, transfer or otherwise dispose of all or any part of its property or assets, whether now owned or hereafter acquired, other than sale of inventory in the ordinary course of business and disposition of equipment for obsolescence. Escalon Medical Corp. November 16, 2001 Page 9 g. No Obligor will make acquisitions of all or substantially all of the property or assets or stock of any person, firm, corporation or other entity; h. No Obligor will make or have outstanding any loans or advances to or otherwise extend credit to or make any investment in any person, firm or corporation, except for trade credit in the ordinary course of business and except for (i) loans, advances or investments in another Obligor, (ii) investments in Escalon Medical Imaging, LLC in an aggregate amount not to exceed $650,000, (iii) loans and advances to employees and consultants in the ordinary course of business in amount not to exceed $15,000 to any one such employee or consultant, (iv) the loan made by the Borrower to Sohrab Darougar, M.D. on or about May 27, 1997 in the principal amount of $150,000, which loan is due in 2005 and (v) other loans, advances or investments in an amount not to exceed $50,000 for any one such loan, advance or investment and $100,000 for all such other loans, advances and investments in the aggregate. It is understood and agreed that an Obligor's capitalization of costs and expenses relating to intellectual property owned by such Obligor shall not be deemed to be an "investment" by such Obligor for purposes of this clause (h); i. Each Obligor will maintain complete and accurate books and records and will permit access by Bank during business hours to such books and records and will permit Bank to inspect its properties and operations. Bank may at any time and from time to time on reasonable notice (or, if an Event of Default has occurred and is continuing, without prior notice) to Obligors, audit and conduct examinations of Obligors' books and records and accounts receivable and make abstracts and copies thereof, and, if an Event of Default has occurred, Borrower shall reimburse Bank for Bank's costs and expenses for each such audit; j. No Obligor will, directly or indirectly, pay any cash dividends on account of or repurchase any of its capital stock, except that a Guarantor may pay cash dividends to another Guarantor or the Borrower; k. Obligors will not make capital expenditures in excess of $250,000 per fiscal year in the aggregate; and l. No Obligor will form any subsidiary without the prior written consent of Bank. If such consent is granted, the Borrower will cause any such new subsidiary to, at the cost of the Borrower, (i) execute and deliver to the Bank a Guaranty and Suretyship Agreement in a form similar to that previously executed by the Guarantors, (ii) execute a Security Agreement (including intellectual property riders) similar to those executed on the date hereof by the Guarantors and (iii) cause to be delivered to the Bank an opinion from a law firm reasonably acceptable to the Bank, such Escalon Medical Corp. November 16, 2001 Page 10 opinion to be in form and substance reasonably acceptable to the Bank and to be substantially similar to the opinion delivered on the date hereof by counsel to the Borrower. In addition, the stock of any such new subsidiary shall be pledged to the Bank pursuant to documentation reasonably acceptable to the Bank and the certificates representing such stock shall be delivered to the Bank with appropriate stock powers. 10. Representations and Warranties. On the date hereof, to induce the Bank to restructure the indebtedness under the Existing Letter Agreement on the terms hereof, and on the date of any advance to Borrower under the Line of Credit is made, each Obligor represents and warrants to Bank that, except as otherwise set forth on Schedule I hereto: a. Borrower's latest financial statements provided to the Bank are complete and accurate in all material respects and fairly present the financial condition, and the results of the Borrower's operations for the period specified therein. The Borrower's financial statements have been prepared in a manner consistently applied from period to period subject in the case of interim statements to normal year-end adjustments. Since the date of the latest financial statements provided to the Bank, no Obligor has suffered any damage, destruction or loss which has materially adversely affected its business, assets, operations, financial condition or results of operations. b. There are no actions, suits, proceedings or governmental investigations pending or, to the knowledge of Borrower, threatened against any Obligor which could result in a material adverse change in its business, assets, operations, financial condition or results of operations and there is no basis known to Borrower or to Richard J. DePiano for any such action, suit, proceedings or investigation. c. To the knowledge of the Obligors, each Obligor has filed all returns and reports that are required to be filed by it in connection with any United States federal, state or local tax, duty or charge levied, assessed or imposed upon any Obligor or its property, including unemployment, social security and similar taxes and all of such taxes have been either paid or adequate reserve or other provision has been made therefor. d. Each Obligor is duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization and has the power and authority to own and operate its assets and to conduct its business as now or proposed to be carried on, and, to the knowledge of the Obligors, is duly qualified, licensed and in good standing to do business where its ownership of property or the nature of its business requires such qualification or licensing. Escalon Medical Corp. November 16, 2001 Page 11 e. Each Obligor has full power and authority to enter into the transactions provided for in this Letter Agreement and has been duly authorized to do so by all necessary and appropriate action and when executed and delivered by the Obligors, this Letter Agreement and the other loan documents executed and delivered pursuant hereto will constitute, and the Guaranty and Suretyship Agreements previously executed by the Guarantors constitute, the legal, valid and binding obligations of each Obligor party thereto, enforceable in accordance with their terms. f. There does not exist any default or violation by any Obligor of or under any of the terms, conditions or obligations of (i) its organizational documents; (ii) any indenture, mortgage, deed of trust, franchise, permit, contract, agreement, or other instrument to which it is a party or by which it is bound; or (iii) any law, regulation, ruling, order, injunction, decree, condition or other requirement applicable to or imposed upon any Obligor by any law or by any governmental authority, court or agency. g. Borrower has no direct or indirect subsidiaries other than the Guarantors and is not a subsidiary of any other entity. Each Guarantor is a direct wholly-owned subsidiary of the Borrower. h. On November 7, 2001, (i) Escalon Medical Corp. merged into Escalon Pennsylvania, Inc. which was a wholly-owned subsidiary of Escalon Medical Corp. and (ii) Escalon Pennsylvania, Inc. changed its name to Escalon Medical Corp. 11. Depository. Obligors will establish and maintain at the Bank the Obligors' primary depository accounts. 12. Additional Provisions. Borrower and the other Obligors agree simultaneously herewith to sign and deliver to the Bank the Amended and Restated Notes, the Amended and Restated Security Agreements, the Pledge Agreements, the Acknowledgements, the Disclosures for Confession of Judgment, the Warrant Agreement and such other instruments and documents as the Bank may reasonably request, such as certified resolutions, incumbency certificates or other evidence of authority. The Bank will not be obligated to make any advance under the Line of Credit if any Event of Default (as defined in any Amended and Restated Note) or event which with the passage of time, provision of notice or both would constitute an Event of Default under an Amended and Restated Note shall have occurred. This Letter Agreement is governed by the laws of the Commonwealth of Pennsylvania. No modification or waiver of any of the terms of this Letter Agreement will be valid and binding unless agreed to in writing by the Bank. When executed and delivered by the parties hereto, this Letter Agreement and the other documents executed in connection herewith will constitute the entire agreement between the Bank and Obligors concerning the Line of Credit and the Term Loan and shall replace all prior understandings, statements, negotiations and written materials Escalon Medical Corp. November 16, 2001 Page 12 relating to the Line of Credit and the Term Loan; provided that, the Guaranty and Suretyship Agreements shall remain in full force and effect in accordance with their terms as modified by the second paragraph of this Letter Agreement. To accept these terms, please sign this Letter Agreement as set forth below. Very truly yours, PNC BANK, NATIONAL ASSOCIATION By: Frank P. Devine ------------------------------- Escalon Medical Corp. November 16, 2001 Page 13 ACCEPTANCE With the intent to be legally bound hereby, the above terms and conditions are hereby agreed to and accepted this 16th day of November, 2001. ESCALON MEDICAL CORP. By: Richard J. DePiano ----------------------------- Title: CEO -------------------------- ESCALON VASCULAR ACCESS, INC. By: Richard J. DePiano ----------------------------- Title: CEO -------------------------- ESCALON PHARMACEUTICAL, INC. By: Richard J. DePiano ----------------------------- Title: CEO -------------------------- SONOMED, INC. By: Richard J. DePiano ----------------------------- Title: CEO -------------------------- ESCALON DIGITAL VISION, INC. By: Richard J. DePiano ----------------------------- Title: CEO -------------------------- EX-10.21 4 w84090exv10w21.txt PNC BANK, N.A. AMENDED & RESTATED COMMITTED LINE EXHIBIT 10.21 SCHEDULE I Exceptions (if any) to Representations None. [PNCBANK LOGO] AMENDED AND RESTATED COMMITTED LINE OF CREDIT NOTE $2,000,000 November 16, 2001 FOR VALUE RECEIVED, ESCALON MEDICAL CORP, (the "Borrower"), with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087, jointly and severally promise to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank"), in lawful money of the United States of America in immediately available funds at its offices located at 1600 Market Street, Philadelphia, Pennsylvania 19103, or at such other location as the Bank may designate from time to time, the principal sum of TWO MILLION DOLLARS ($2,000,000) (the "Facility") or such lesser amount as may be advanced to or for the benefit of the Borrower hereunder, together with interest accruing on the outstanding principal balance from the date hereof, as provided below: 1. RATE OF INTEREST. Amounts outstanding under this Note will bear interest as set forth in the Letter Agreement referred to in Section 6 hereof. 2. ADVANCE PROCEDURES. A request for advance made by telephone must be promptly confirmed in writing by such method as the Bank may require. The Borrower authorizes the Bank to accept telephonic requests for advances, and the Bank shall be entitled to rely upon the authority of the Chief Executive Officer, the Senior Vice President of Finance and the Corporate Controller of the Borrower in providing such instructions. The Borrower hereby indemnifies and holds the Bank harmless from and against any and all damages, losses, liabilities, costs and expenses (including reasonable attorneys' fees and expenses) which may arise or be created by the acceptance of such telephone requests or making such advances. The Bank will enter on its books and records, which entry when made will be Escalon Medical Corp. November 16, 2001 Page 2 presumed correct, the date and amount of each advance, as well as the date and amount of each payment made by the Borrower. 3. PAYMENT TERMS. Accrued interest will be due and payable on the first day of each month, beginning with the payment due on the first day of the month following the date hereof. The outstanding principal balance and any accrued but unpaid interest shall be due and payable on the Expiration Date (as defined in the Letter Agreement). If any payment under this Note shall become due on a Saturday, Sunday or public holiday under the laws of the State where the Bank's office indicated above is located, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. The Borrower hereby authorizes the Bank to charge the Borrower's deposit account at the Bank for any payment when due hereunder. Payments received will be applied to charges, fees and expenses (including attorneys' fees), accrued interest and principal in any order the Bank may choose, in its sole discretion. 4. LATE PAYMENTS; DEFAULT RATE. If the Borrower fails to make any payment of principal, interest or other amount coming due pursuant to the provisions of this Note within 15 calendar days of the date due and payable, the Borrower also shall pay to the Bank a late charge equal to the lesser of five percent (5%) of the amount of such payment or $100. Such 15 day period shall not be construed in any way to extend the due date of any such payment. The late charge is imposed for the purpose of defraying the Bank's expenses incident to the handling of delinquent payments and is in addition to, and not in lieu of, the exercise by the Bank of any rights and remedies hereunder, under the other Loan Documents or under applicable laws, and any fees and expenses of any agents or attorneys which the Bank may employ. Upon maturity, whether by acceleration, demand or otherwise, and at the option of the Bank upon the occurrence of any Event of Default (as hereinafter defined) and during the continuance thereof, this Note shall bear interest at a rate per annum (based on a year of 360 days and actual days elapsed) which shall be four (4) percentage points in excess of the interest rate in effect from time to time under this Note but not more than the maximum rate allowed by law (the "Default Rate"). The Default Rate shall continue to apply whether or not judgment shall be entered on this Note. 5. PREPAYMENT. The indebtedness evidenced by this Note may be prepaid in whole or in part at any time without penalty. 6. OTHER LOAN DOCUMENTS. This Note is issued in connection with a Letter Agreement (as amended, Escalon Medical Corp. November 16, 2001 Page 3 supplemented or otherwise modified from time to time, the "Letter Agreement") of even date between Bank, Borrower and the subsidiaries of Borrower party thereto and related documents, the terms of which (together with the terms of the Guaranty and Suretyship Agreements previously executed by the subsidiaries of the Borrower) are incorporated herein by reference (the "Loan Documents"), and is secured by the property described in the Loan Documents (if any) and by such other collateral as previously may have been or may in the future be granted to the Bank to secure this Note. 7. EVENTS OF DEFAULT. The occurrence of any of the following events will be deemed to be an "Event of Default" under this note: (i) the nonpayment of any principal, interest or other indebtedness under this Note when due; (ii) the occurrence of any event of default or default and the lapse of any notice or cure period under any Loan Document or any other debt, liability or obligation to the Bank of any Obligor; (iii) the filing by or against any Obligor of any proceeding in bankruptcy, receivership, insolvency, reorganization, liquidation, conservatorship or similar proceeding (and, in the case of any such proceeding instituted against any Obligor, such proceeding is not dismissed or stayed within ninety (90) days of the commencement thereof, provided that the Bank shall not be obligated to advance additional funds during such period); (iv) any assignment by any Obligor for the benefit of creditors, or any levy, garnishment, attachment or similar proceeding is instituted against any property of any Obligor held by or deposited with the Bank; (v) a default with respect to any other indebtedness of one or more Obligors for borrowed money aggregating $100,000 or more, if the effect of such default is to cause or permit the acceleration of such debt; (vi) the commencement of any foreclosure or forfeiture proceeding, execution or attachment against any collateral securing the obligations of any Obligor to the Bank; (vii) the entry of a final judgment against any Obligor and the failure of such Obligor to discharge the judgment within thirty (30) days of the entry thereof; (viii) [INTENTIONALLY OMITTED]; (ix) in the opinion of the Bank, any material adverse change in the financial condition of the Obligors taken as a whole; (x) the Borrower or any other material Obligor ceases doing business as a going concern; (xi) the revocation or attempted revocation, in whole or in part, of any guarantee by any Guarantor; (xii) the death or legal incompetency of any individual Obligor or, if any Obligor is a partnership, the death or legal Escalon Medical Corp. November 16, 2001 Page 4 incompetency of any individual general partner; (xiii) any representation or warranty made by any Obligor to the Bank in any Loan Document, or any other documents now or in the future securing the obligations of any Obligor to the Bank, is false, erroneous or misleading in any material respect; or (xiv) the failure of any Obligor to observe or perform any covenant or other agreement with the Bank contained in any Loan Document or any other documents now or in the future securing the obligations of any Obligor to the Bank which is not cured within fifteen days after the earlier of any Obligor's knowledge thereof and an Obligor's receipt of written notice thereof from the Bank. As used herein, the term "Obligor" means any Borrower and any Guarantor, and the term "GUARANTOR" means any guarantor of the obligations of the Borrower to the Bank existing on the date of this Note or arising in the future. Upon the occurrence of an Event of Default: (a) the Bank shall be under no further obligation to make advances hereunder; (b) if an Event of Default specified in clause (iii) or (iv) above shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder shall be immediately due and payable without demand or notice of any kind; (c) if any other Event of Default shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder, at the option of the Bank and without demand or notice of any kind, may be accelerated and become immediately due and payable; (d) at the option of the Bank, this Note will bear interest at the Default Rate from the date of the occurrence of the Event of Default; and (e) the Bank may exercise from time to time any of the rights and remedies available to the Bank under the Loan Documents or under applicable law. 8. POWER TO CONFESS JUDGMENT. THE BORROWER HEREBY EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD, AFTER THE OCCURRENCE OF ANY EVENT OF DEFAULT HEREUNDER, TO APPEAR FOR THE BORROWER AND, WITH OR WITHOUT COMPLAINT FILED, CONFESS JUDGMENT, OR A SERIES OF JUDGMENTS, AGAINST THE BORROWER IN FAVOR OF THE BANK OR ANY HOLDER HEREOF FOR THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE, ALL ACCRUED INTEREST AND ALL OTHER AMOUNTS DUE HEREUNDER, TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY'S COMMISSION OF THE GREATER OF TEN PERCENT (10%) OF SUCH PRINCIPAL AND INTEREST OR $1,000 ADDED AS A REASONABLE ATTORNEY'S FEE, AND FOR DOING SO THIS NOTE OR A COPY VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT THE BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL RIGHTS OF APPEAL AND ALL RELIEF FROM ANY AND ALL APPRAISEMENT, STAY OR EXEMPTION LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED. INTEREST ON ANY SUCH JUDGMENT SHALL ACCRUE AT THE DEFAULT RATE. Escalon Medical Corp. November 16, 2001 Page 5 NO SINGLE EXERCISE OF THE FOREGOING POWER TO CONFESS JUDGMENT, OR A SERIES OF JUDGMENTS, SHALL BE DEEMED TO EXHAUST THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE INVALID, VOIDABLE, OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND IT MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT UNTIL SUCH TIME AS THE BANK SHALL HAVE RECEIVED PAYMENT IN FULL OF THE DEBT, INTEREST AND COSTS. 9. RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the money, securities or other property of the Borrower given to the Bank by law, the Bank shall have, with respect to the Borrower's obligations to the Bank under this Note and to the extent permitted by law, a contractual possessory security interest in and a contractual right of setoff against, and the Borrower hereby assigns, conveys, delivers, pledges and transfers to the Bank all of the Borrower's right, title and interest in and to, all deposits, moneys, securities and other property of the Borrower now or hereafter in the possession of or on deposit with, or in transit to, the Bank whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to the Borrower. Every such right of setoff shall be deemed to have been exercised immediately upon the occurrence of an Event of Default hereunder without any action of the Bank, although the Bank may enter such setoff on its books and records at a later time. 10. MISCELLANEOUS. No delay or omission of the Bank to exercise any right or power arising hereunder shall impair any such right or power or be considered to be a waiver of any such right or power, nor shall the Bank's action or inaction impair any such right or power. The Borrower agrees to pay on demand, to the extent permitted by law, all costs and expenses incurred by the Bank in the enforcement of its rights in this Note and in any security therefor, including without limitation reasonable fees and expenses of the Bank's counsel. If any provision of this Note is found to be invalid by a court, all the other provisions of this Note will remain in full force and effect. The Borrower and all other makers and endorsers of this Note hereby forever waive presentment, protest, notice of dishonor and notice of nonpayment. Borrower also waives all defenses based on suretyship or impairment of collateral. If this Note is executed by more than one Borrower, the obligations of such persons or Escalon Medical Corp. November 16, 2001 Page 6 entities hereunder will be joint and several. This Note shall bind the Borrower and its heirs, executors, administrators, successors and assigns, and the benefits hereof shall inure to the benefit of the Bank and its successors and assigns. This Note has been delivered to and accepted by the Bank and will be deemed to be made in the State where the Bank's office indicated above is located. THIS NOTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE BANK AND THE BORROWER DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court for the county or judicial district where the Bank's office indicated above is located, and consents that all service of process be sent by nationally recognized overnight courier service directed to the Borrower at the Borrower's address set forth herein and service so made will be deemed to be completed on the business day after deposit with such courier; provided that nothing contained in this Note will prevent the Bank from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower individually, against any security or against any property of the Borrower within any other county, state or other foreign or domestic jurisdiction. The Borrower acknowledges and agrees that the venue provided above is the most convenient forum for both the Bank and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Note. 11. WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS THE BORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. THE BORROWER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE CONFESSION OF JUDGMENT AND WAIVER OF JURY TRIAL, AND HAS BEEN ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE. THE OBLIGATIONS UNDER THIS NOTE ARE JOINT AND SEVERAL. Escalon Medical Corp. November 16, 2001 Page 7 WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby. ESCALON MEDICAL CORP. Attest: /s/ By: /s/ ------------------------------ ---------------------------------- Print Name: H.M. Rimmer Print Name: Richard J. DePiano -------------------------- -------------------------- Title: SVP Finance Title: Chairman & CEO ------------------------------- ------------------------------- EX-10.22 5 w84090exv10w22.txt PNC BANK, N.A. AMENDED & RESTATED TIME NOTE EXHIBIT 10.22 [PNCBANK LOGO] AMENDED AND RESTATED TERM / TIME NOTE $7,900,000 November 16, 2001 FOR VALUE RECEIVED, ESCALON MEDICAL CORP (the "Borrower"), with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087, jointly and severally promise to pay to the order of PNC BANK, NATIONAL ASSOCIATION (the "Bank"), in lawful money of the United States of America in immediately available funds at its offices located at 1600 Market Street, Philadelphia, PA 19103, or at such other location as the Bank may designate from time to time, the principal sum of SEVEN MILLION NINE HUNDRED THOUSAND DOLLARS ($7,900,000), together with interest accruing on the outstanding principal balance from the date hereof as provided below: 1. RATE OF INTEREST. Amounts outstanding under this Note will bear interest as set forth in the Letter Agreement referred to in Section 5 hereof. 2. PAYMENT TERMS. Principal shall be due and payable in 12 consecutive quarterly installments in the amounts and on the dates set forth on Exhibit A hereto commencing on December 1, 2001, and a final installment equal to the unpaid principal balance on June 30, 2004. Interest shall be payable monthly on the first day of each month commencing on the first day of the month following the date hereof. If any payment under this Note shall become due on a Saturday, Sunday or public holiday under the laws of the State where the Bank's office indicated above is located, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. The Borrower hereby authorizes the Bank to charge the Borrower's deposit account at the Bank for any payment when due hereunder. Payments received will be applied to charges, fees and expenses (including attorneys' fees), accrued interest and principal in any order the Bank may choose, in its sole discretion. 3. LATE PAYMENTS; DEFAULT RATE. If the Borrower fails to make any payment of principal, interest or other amount coming due Escalon Medical Corp. November 16, 2001 Page 2 pursuant to the provisions of this Note within 15 calendar days of the date due and payable, the Borrower also shall pay to the Bank a late charge equal to the lesser of five percent (5%) of the amount of such payment or $100. Such 15 day period shall not be construed in any way to extend the due date of any such payment. The late charge is imposed for the purpose of defraying the Bank's expenses incident to the handling of delinquent payments and is in addition to, and not in lieu of, the exercise by the Bank of any rights and remedies hereunder, under the other Loan Documents or under applicable laws, and any fees and expenses of any agents or attorneys which the Bank may employ. Upon maturity, whether by acceleration, demand or otherwise, and at the option of the Bank upon the occurrence of any Event of Default (as hereinafter defined) and during the continuance thereof, this Note shall bear interest at a rate per annum (based on a year of 360 days and actual days elapsed) which shall be four percentage points (4%) in excess of the interest rate in effect from time to time under this Note but not more than the maximum rate allowed by law (the "Default Rate"). The Default Rate shall continue to apply whether or not judgment shall be entered on this Note. 4. PREPAYMENT. If this Note bears interest at a floating rate, the indebtedness may be prepaid in whole or in part at any time without penalty. If this Note bears interest at a fixed rate, notwithstanding anything contained herein to the contrary, upon any prepayment by or on behalf of the Borrower (whether voluntary, on default or otherwise), the Bank may require, if it so elects, the Borrower to pay the Bank as compensation for the cost of being prepared to advance fixed rate funds hereunder an amount equal to the Cost of Prepayment. "Cost of Prepayment" means an amount equal to the present value, if positive, of the product of (a) the difference between (i) the yield, on the beginning date of the applicable interest period, of a U.S. Treasury obligation with a maturity similar to the applicable interest period minus (ii) the yield on the prepayment date, of a U.S. Treasury obligation with a maturity similar to the remaining maturity of the applicable interest period, and (b) the principal amount to be prepaid, and (c) the number of years, including fractional years, from the prepayment date to the end of the applicable interest period. The yield on any U.S. Treasury obligation shall be determined by reference to Federal Reserve Statistical Release H.15(519) "Selected Interest Rates". For purposes of making present value Escalon Medical Corp. November 16, 2001 Page 3 calculations, the yield to maturity of a similar maturity U.S. Treasury obligation on the prepayment date shall be deemed the discount rate. The Cost of Prepayment shall also apply to any payments made after acceleration of the maturity of this Note while a Fixed Rate is in effect. 5. OTHER LOAN DOCUMENTS. This Note is issued in connection with a Letter Agreement (as amended, supplemented or otherwise modified from time to time, the "Letter Agreement") of even date between Bank, Borrower and the subsidiaries of the Borrower party thereto and related documents, the terms of which (together with the terms of the Guaranty and Suretyship Agreements previously executed by the subsidiaries of the Borrower) are incorporated herein by reference (the "Loan Documents"), and is secured by the property described in the Loan Documents (if any) and by such other collateral as previously may have been or may in the future be granted to the Bank to secure this Note. 6. EVENTS OF DEFAULT. The occurrence of any of the following events will be deemed to be an "Event of Default" under this Note: (i) the nonpayment of any principal, interest or other indebtedness under this Note when due; (ii) the occurrence of any event of default or default and the lapse of any notice or cure period under any Loan Document or any other debt, liability or obligation to the Bank of any Obligor; (iii) the filing by or against any Obligor of any proceeding in bankruptcy, receivership, insolvency, reorganization, liquidation, conservatorship or similar proceeding (and, in the case of any such proceeding instituted against any Obligor, such proceeding is not dismissed or stayed within thirty (30) days of the commencement thereof); (iv) any assignment by any Obligor for the benefit of creditors, or any levy, garnishment, attachment or similar proceeding is instituted against any property of any Obligor held by or deposited with the Bank; (v) a default with respect to any other indebtedness of any Obligor for borrowed money, if the effect of such default is to cause or permit the acceleration of such debt; (vi) the commencement of any foreclosure or forfeiture proceeding, execution or attachment against any collateral securing the obligations of any Obligor to the Bank; (vii) the entry of a final judgment against any Obligor and the failure of such Obligor to discharge the judgment within ten (10) days of the entry thereof; (viii) [INTENTIONALLY OMITTED]; (ix) in the opinion of the Bank, any material adverse change in the financial condition of the Obligors taken as a whole; Escalon Medical Corp. November 16, 2001 Page 4 (x) the Borrower or any other material Obligor ceases doing business as a going concern; (xi) the revocation or attempted revocation, in whole or in part, of any guarantee by any Guarantor; (xii) the death or legal incompetency of any individual Obligor or, if any Obligor is a partnership, the death or legal incompetency of any individual general partner; (xiii) any representation or warranty made by any Obligor to the Bank in any Loan Document, or any other documents now or in the future securing the obligations of any Obligor to the Bank, is false, erroneous or misleading in any material respect; or (xiv) the failure of any Obligor to observe or perform any covenant or other agreement with the Bank contained in any Loan Document or any other documents now or in the future securing the obligations of any Obligor to the Bank which is not cured within fifteen days after the earlier of any Obligor's knowledge thereof and an Obligor's receipt of written notice thereof from the Bank. As used herein, the term "OBLIGOR" means any Borrower and any Guarantor, and the term "GUARANTOR" means any Guarantor of the obligations of the Borrower to the Bank existing on the date of this Note or arising in the future. Upon the occurrence of an Event of Default: (a) the Bank shall be under no further obligation to make advances hereunder; (b) if an Event of Default specified in clause (iii) or (iv) above shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder shall be immediately due and payable without demand or notice of any kind; (c) if any other Event of Default shall occur, the outstanding principal balance and accrued interest hereunder together with any additional amounts payable hereunder, at the option of the Bank and without demand or notice of any kind, may be accelerated and become immediately due and payable; (d) at the option of the Bank, this Note will bear interest at the Default Rate from the date of the occurrence of the Event of Default; and (e) the Bank may exercise from time to time any of the rights and remedies available to the Bank under the Loan Documents or under applicable law. 7. POWER TO CONFESS JUDGMENT. THE BORROWER HEREBY EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD, AFTER THE OCCURRENCE OF ANY EVENT OF DEFAULT HEREUNDER, TO APPEAR FOR THE BORROWER AND, WITH OR WITHOUT COMPLAINT FILED, CONFESS JUDGMENT, OR A SERIES OF JUDGMENTS, AGAINST THE BORROWER IN FAVOR OF THE BANK OR ANY HOLDER HEREOF FOR THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE, ALL ACCRUED INTEREST AND ALL OTHER AMOUNTS DUE HEREUNDER, TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY'S COMMISSION OF THE GREATER OF 10% OF SUCH PRINCIPAL AND INTEREST OR $1,000 ADDED AS A REASONABLE ATTORNEY'S FEE, AND FOR DOING SO, THIS NOTE OR A Escalon Medical Corp. November 16, 2001 Page 5 COPY VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. THE BORROWER HEREBY FOREVER WAIVES AND RELEASES ALL RIGHTS OF APPEAL AND ALL RELIEF FROM ANY AND ALL APPRAISEMENT, STAY OR EXEMPTION LAWS OF ANY STATE NOW IN FORCE OR HEREAFTER ENACTED. INTEREST ON ANY SUCH JUDGMENT SHALL ACCRUE AT THE DEFAULT RATE. NO SINGLE EXERCISE OF THE FOREGOING POWER TO CONFESS JUDGMENT, OR A SERIES OF JUDGMENTS, SHALL BE DEEMED TO EXHAUST THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE INVALID, VOIDABLE, OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND IT MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS THE BANK SHALL ELECT UNTIL SUCH TIME AS THE BANK SHALL HAVE RECEIVED PAYMENT IN FULL OF THE DEBT, INTEREST AND COSTS. 8. RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the money, securities or other property of the Borrower given to the Bank by law, the Bank shall have, with respect to the Borrower's obligations to the Bank under this Note and to the extent permitted by law, a contractual possessory security interest in and a contractual right of setoff against, and the Borrower hereby assigns, conveys, delivers, pledges and transfers to the Bank all of the Borrower's right, title and interest in and to, all deposits, moneys, securities and other property of the Borrower now or hereafter in the possession of or on deposit with, or in transit to, the Bank whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise, excluding, however, all IRA, Keogh, and trust accounts. Every such security interest and right of setoff may be exercised without demand upon or notice to the Borrower. Every such right of setoff shall be deemed to have been exercised immediately upon the occurrence of an Event of Default hereunder without any action of the Bank, although the Bank may enter such setoff on its books and records at a later time. 9. MISCELLANEOUS. No delay or omission of the Bank to exercise any right or power arising hereunder shall impair any such right or power or be considered to be a waiver of any such right or power, nor shall the Bank's action or inaction impair any such right or power. The Borrower agrees to pay on demand, to the extent permitted by law, all costs and expenses incurred by the Bank in the enforcement of its rights in this Note and in any security therefor, including without limitation reasonable fees and expenses of the Bank's counsel. If any provision of this Note is found to be invalid by a court, all the other provisions of this Note will remain in full force and effect. The Borrower and all other makers and endorsers of this Escalon Medical Corp. November 16, 2001 Page 6 Note hereby forever waive presentment, protest, notice of dishonor and notice of nonpayment. The Borrower also waives all defenses based on suretyship or impairment of collateral. If this Note is executed by more than one Borrower, the obligations of such persons or entities hereunder will be joint and several. This Note shall bind the Borrower and its heirs, executors, administrators, successors and assigns, and the benefits hereof shall inure to the benefit of the Bank and its successors and assigns. This Note has been delivered to and accepted by the Bank and will be deemed to be made in the State where the Bank's office indicated above is located. THIS NOTE WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE BANK AND THE BORROWER DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Borrower hereby irrevocably consents to the exclusive jurisdiction of any state or federal court for the county or judicial district where the Bank's office indicated above is located, and consents that all service of process be sent by nationally recognized overnight courier service directed to the Borrower at the Borrower's address set forth herein and service so made will be deemed to be completed on the business day after deposit with such courier; provided that nothing contained in this Note will prevent the Bank from bringing any action, enforcing any award or judgment or exercising any rights against the Borrower individually, against any security or against any property of the Borrower within any other county, state or other foreign or domestic jurisdiction. The Borrower acknowledges and agrees that the venue provided above is the most convenient forum for both the Bank and the Borrower. The Borrower waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Note. 10. WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY WAIVES ANY AND ALL RIGHTS THE BORROWER MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. THE BORROWER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE CONFESSION OF JUDGMENT AND WAIVER OF JURY TRIAL, AND HAS BEEN ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE. THE OBLIGATIONS UNDER THIS NOTE ARE JOINT AND SEVERAL. WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby. ESCALON MEDICAL CORP. Attest: /s/ By: /s/ -------------------------- -------------------------------- Print Name: H.M. Rimmer Print Name: Richard J. DePiano ---------------------- ------------------------ Title: SVP Finance Title: Chairman & CEO --------------------------- ----------------------------- EXHIBIT A
DATE AMOUNT ---- ------ December 1, 2001 $ 350,000 March 1, 2002 $ 400,000 June 1, 2002 $ 400,000 September 1, 2002 $ 450,000 December 1, 2002 $ 450,000 March 1, 2003 $ 525,000 June 1, 2003 $ 525,000 September 1, 2003 $ 650,000 December 1, 2003 $ 650,000 March 1, 2004 $ 750,000 June 1, 2004 $ 750,000 June 30, 2004 $2,000,000
EX-10.23 6 w84090exv10w23.txt PNC BANK, N.A. PLEDGE AGREEMENT DATED 11/16/2001 EXHIBIT 10.23 PLEDGE AGREEMENT (STOCKS, BONDS AND COMMERCIAL PAPER) THIS PLEDGE AGREEMENT, dated as of this 16th day of November, 2001, is made by Escalon Medical Corp. (the "PLEDGOR"), with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087, in favor of PNC BANK, NATIONAL ASSOCIATION (the "SECURED PARTY"), with an address at 1600 Market Street, Philadelphia, Pennsylvania 19102. 1. PLEDGE. In order to induce the Secured Party to extend and/or restructure the Obligations (as defined below), the Pledgor hereby grants a security interest in and pledges to the Secured Party, and to all other direct or indirect subsidiaries of PNC Bank Corp., all of the Pledgor's right, title and interest in and to the investment property and other assets described in Exhibit A attached hereto and made a part hereof, together with all certificates relating thereto and all options or rights of any nature whatsoever that may be issued or granted to the Pledgor while this Pledge Agreement is in effect and all security entitlements of the Pledgor with respect thereto, whether now owned or hereafter acquired, together with all additions, substitutions, replacements and proceeds and all income, interest, dividends and other distributions thereon (the "COLLATERAL"). If the Collateral includes certificated securities, such certificates are herewith delivered to the Secured Party accompanied by duly undated executed blank stock powers. The Pledgor hereby authorizes the transfer of possession of all certificates and other evidence of the Collateral to the Secured Party. 2. OBLIGATIONS SECURED. The Collateral secures payment of all loans, advances, debts, liabilities, obligations, covenants and duties owing from the Pledgor to the Secured Party or to any other direct or indirect subsidiary of PNC Bank Corp., of any kind or nature, present or future (including any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Pledgor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other interest rate protection or similar agreement, or in any other manner, whether arising out of overdrafts on deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Secured Party's non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, and any amendments, extensions, renewals or increases and all costs and expenses of the Secured Party incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including reasonable attorneys' fees and expenses (collectively, the "OBLIGATIONS"). 3. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants to the Secured Party as follows: 3.1 There are no restrictions on the pledge or transfer of any of the Collateral, other than, with respect to the pledge of stock in IntraLase, Inc., restrictions referenced on the face of any certificates evidencing the Collateral. 3.2 The Pledgor is the legal owner of the Collateral, which is registered in the name of the Pledgor. 3.3 The Collateral is free and clear of any security interests, pledges, liens, encumbrances, charges, agreements, claims or other arrangements or restrictions of any kind, except as referenced in Section 3.1 above; and the Pledgor will not incur, create, assume or permit to exist any pledge, security interest, lien, charge or other encumbrance of any nature whatsoever on any of the Collateral or assign, pledge or otherwise encumber any right to receive income from the Collateral. 3.4 The Pledgor has the right to transfer the Collateral free of any encumbrances and the Pledgor will defend the Pledgor's title to the Collateral against the claims of all persons, and any registration with, or consent or approval of, or other action by, any federal, state or other governmental authority or regulatory body which was or is necessary for the validity of the pledge of and grant of the security interest in the Collateral has been obtained. 3.5 The pledge of and grant of the security interest in the Collateral is effective to vest in the Secured Party a valid and perfected first priority security interest, superior to the rights of any other person, in and to the Collateral as set forth herein. 1 4. COVENANTS. No part of the proceeds of the Obligations has been or may be used to purchase or carry "margin stock" within the meaning of Regulation U of the Federal Reserve Board. 5. DEFAULT. 5.1 If any of the following occur (each an "EVENT OF DEFAULT"): (i) any Event of Default (as defined in any of the Obligations), (ii) any default under any of the Obligations that does not have a defined set of "Events of Default" and the lapse of any notice or cure period provided in such Obligations with respect to such default, (iii) demand by the Secured Party under any of the Obligations that have a demand feature, (iv) the failure by the Pledgor to perform any of its obligations hereunder which is not cured within fifteen (15) days after the earlier of Pledgor's knowledge thereof and receipt by Pledgor of a written notice thereof from the Secured Party, (v) any written representation or warranty made or furnished by Pledgor to Secured Party is false, erroneous or misleading in any material respect as and when made, (vi) the failure of the Secured Party to have a perfected first priority security interest in the Collateral unless such failure is solely the result of Secured Party failing to maintain possession of the certificates evidencing the Collateral or (vii) any restriction is imposed on the pledge or transfer of any of the Collateral after the date of this Agreement without the prior written consent of the Secured Party, then the Secured Party is authorized in its discretion to declare any or all of the Obligations to be immediately due and payable without demand or notice, which are expressly waived, and may exercise any one or more of the rights and remedies granted pursuant to this Pledge Agreement or given to a secured party under the Uniform Commercial Code of the applicable state, as it may be amended from time to time, or otherwise at law or in equity, including without limitation the right to sell or otherwise dispose of any or all of the Collateral at public or private sale, with or without advertisement thereof, upon such terms and conditions as it may deem advisable and at such prices as it may deem best. 5.2 (a) At any bona fide public sale, and to the extent permitted by law, at any private sale, the Secured Party shall be free to purchase all or any part of the Collateral, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived and released. Any such sale may be on cash or credit. The Secured Party shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account in compliance with Regulation D of the Securities Act of 1933 or any other applicable exemption available under such Act. The Secured Party will not be obligated to make any sale if it determines not to do so, regardless of the fact that notice of the sale may have been given. The Secured Party may adjourn any sale and sell at the time and place to which the sale is adjourned. If the Collateral is customarily sold on a recognized market or threatens to decline speedily in value, the Secured Party may sell such Collateral at any time without giving prior notice to the Pledgor. Whenever notice is otherwise required by law to be sent by the Secured Party to the Pledgor of any sale or other disposition of the Collateral, ten (10) days written notice sent to the Pledgor at its address specified above will be reasonable. (b) The Pledgor recognizes that the Secured Party may be unable to effect or cause to be effected a public sale of the Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "ACT"), so that the Secured Party may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obligated to agree, among other things, to acquire the Collateral for their own account, for investment and without a view to the distribution or resale thereof. The Pledgor understands that private sales so made may be at prices and on other terms less favorable to the seller than if the Collateral were sold at public sales, and agrees that the Secured Party has no obligation to delay or agree to delay the sale of any of the Collateral for the period of time necessary to permit the issuer of the securities which are part of the Collateral (even if the issuer would agree), to register such securities for sale under the Act. The Pledgor agrees that private sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. 5.3 The net proceeds arising from the disposition of the Collateral after deducting expenses incurred by the Secured Party will be applied to the Obligations in the order determined by the Secured Party. If any excess remains after the discharge of all of the Obligations, the same will be paid to the Pledgor. If after exhausting all of the Collateral there is a deficiency, the Pledgor will be liable therefor to the Secured Party. Nothing contained herein will obligate the Secured Party to proceed against any other party obligated under the Obligations or against any other collateral for the Obligations prior to proceeding against the Collateral. 5.4 If any demand is made at any time upon the Secured Party for the repayment or recovery of any amount received by it in payment or on account of any of the Obligations and if the Secured Party repays all or any part of such amount by reason of any judgment, decree or order of any court or administrative body or by reason of any settlement or compromise of any such demand, the Pledgor will be and remain liable for the amounts so repaid or recovered to the same extent as if such amount had never been originally received by the Secured Party. The provisions of this section will be and remain effective notwithstanding the release of any of the Collateral by the Secured Party in reliance upon such payment (in 2 which case the Pledgor's liability will be limited to an amount equal to the fair market value of the Collateral determined as of the date such Collateral was released) and any such release will be without prejudice to the Secured Party's rights hereunder and will be deemed to have been conditioned upon such payment having become final and irrevocable. This Section shall survive the termination of this Pledge Agreement. 6. VOTING RIGHTS AND TRANSFER. Prior to the occurrence of an Event of Default, the Pledgor will have the right to exercise all voting rights with respect to the Collateral. At any time after the occurrence of an Event of Default, the Secured Party may transfer any or all of the Collateral into its name or that of its nominee and may exercise all voting rights with respect to the Collateral, but no such transfer shall constitute a taking of such Collateral in satisfaction of any or all of the Obligations unless the Secured Party expressly so indicates by written notice to the Pledgor. 7. DIVIDENDS, INTEREST AND PREMIUMS. The Pledgor will have the right to receive all cash dividends, interest and premiums declared and paid on the Collateral prior to the occurrence of any Event of Default. In the event any additional shares are issued to the Pledgor as a stock dividend or in lieu of interest on any of the Collateral, as a result of any split of any of the Collateral, by reclassification or otherwise, any certificates evidencing any such additional shares will be immediately delivered to the Secured Party and such shares will be subject to this Pledge Agreement and a part of the Collateral to the same extent as the original Collateral. At any time after the occurrence of an Event of Default, the Secured Party shall be entitled to receive all cash or stock dividends, interest, premiums and other distributions declared or paid on the Collateral, all of which shall be subject to the Secured Party's rights under Section 5 above. 8. FURTHER ASSURANCES. At any time and from time to time, upon demand of the Secured Party, the Pledgor will give, execute, file and record any notice, financing statement, continuation statement, instrument, document or agreement that the Secured Party may reasonably consider necessary or desirable to create, preserve, continue, perfect or validate any security interest granted hereunder or to enable the Secured Party to exercise or enforce its rights hereunder with respect to such security interest. Without limiting the generality of the foregoing, following an Event of Default the Pledgor hereby irrevocably appoints the Secured Party as the Pledgor's attorney-in-fact to do all acts and things in the Pledgor's name that the Secured Party may deem necessary or desirable. This power of attorney is coupled with an interest with full power of substitution and is irrevocable. The Secured Party is authorized to file financing statements, continuation statements and other documents under the Uniform Commercial Code relating to the Collateral without the Pledgor's signature, naming the Pledgor as debtor and the Secured Party as secured party. 9. NOTICES. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder must be in writing and will be effective upon receipt to the Pledgor or the Secured Party. Such notices and other communications may be hand-delivered, sent by facsimile transmission with confirmation of delivery and a copy sent by first-class mail, or sent by nationally recognized overnight courier service, to the address set forth above or to such other address as either the Pledgor or the Secured Party may give to the other in writing for such purpose. 10. PRESERVATION OF RIGHTS. (a) No delay or omission on the Secured Party's part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Secured Party's action or inaction impair any such right or power. The Secured Party's rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Secured Party may have under other agreements, at law or in equity. (b) The Secured Party may, at any time and from time to time, without notice to or the consent of the Pledgor unless otherwise expressly required pursuant to the terms of the Obligations, and without impairing or releasing, discharging or modifying the Pledgor's liabilities hereunder, (i) change the manner, place, time or terms of payment or performance of or interest rates on, or other terms relating to, any of the Obligations; (ii) renew, substitute, modify, amend or alter, or grant consents or waivers relating to any of the Obligations, any other pledge or security agreements, or any security for any Obligations; (iii) apply any and all payments by whomever paid or however realized including any proceeds of any collateral, to any Obligations of the Pledgor in such order, manner and amount as the Secured Party may determine in its sole discretion; (iv) deal with any other person with respect to any Obligations in such manner as the Secured Party deems appropriate in its sole discretion; (v) substitute, exchange or release any security or guaranty; or (vi) take such actions and exercise such remedies hereunder as provided herein. The Pledgor hereby waives (a) presentment, protest, notice of dishonor and notice of non-payment, and (b) all defenses based on suretyship or impairment of collateral. 3 11. ILLEGALITY. In case any one or more of the provisions contained in this Pledge Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12. CHANGES IN WRITING. No modification, amendment or waiver of any provision of this Pledge Agreement nor consent to any departure by the Pledgor therefrom will be effective unless made in a writing signed by the Secured Party and Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Pledgor in any case will entitle the Pledgor to any other or further notice or demand in the same, similar or other circumstance. 13. ENTIRE AGREEMENT. This Pledge Agreement (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the Pledgor and the Secured Party with respect to the subject matter hereof. 14. SUCCESSORS AND ASSIGNS. This Pledge Agreement will be binding upon and inure to the benefit of the Pledgor and the Secured Party and their respective heirs, executors, administrators, successors and assigns; provided, however, that the Pledgor may not assign this Pledge Agreement in whole or in part without the Secured Party's prior written consent and the Secured Party at any time may assign this Pledge Agreement in whole or in part. 15. INTERPRETATION. In this Pledge Agreement, unless the Secured Party and the Pledgor otherwise agree in writing, the singular includes the plural and the plural the singular; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; the word "or" shall be deemed to include "and/or", the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation." Section headings in this Pledge Agreement are included for convenience of reference only and shall not constitute a part of this Pledge Agreement for any other purpose. If this Pledge Agreement is executed by more than one party as Pledgor, the obligations of such persons or entities will be joint and several. 16. INDEMNITY. The Pledgor agrees to indemnify each of the Secured Party, its directors, officers and employees and each legal entity, if any, who controls the Secured Party (the "INDEMNIFIED PARTIES") and to hold each Indemnified Party harmless from and against any and all claims, damages, losses, liabilities and expenses (including all fees and charges of internal or external counsel with whom any Indemnified Party may consult and all expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party as a result of the execution of or performance under this Pledge Agreement and under any Control Agreement; provided, however, that the foregoing indemnity agreement shall not apply to claims, damages, losses, liabilities and expenses solely attributable to an Indemnified Party's gross negligence or willful misconduct. The indemnity agreement contained in this Section shall survive the termination of this Pledge Agreement. The Pledgor may participate at its expense in the defense of any such claim. 17. GOVERNING LAW AND JURISDICTION. This Pledge Agreement has been delivered to and accepted by the Secured Party and will be deemed to be made in the State where the Secured Party's office indicated above is located. THIS PLEDGE AGREEMENT WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PLEDGOR AND THE SECURED PARTY DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE SECURED PARTY'S OFFICE INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES. The Pledgor hereby irrevocably consents to the exclusive jurisdiction of any state or federal court in the county or judicial district where the Secured Party's office indicated above is located; provided that nothing contained in this Pledge Agreement will prevent the Secured Party from bringing any action, enforcing any award or judgment or exercising any rights against the Pledgor individually, against any security or against any property of the Pledgor within any other county, state or other foreign or domestic jurisdiction. The Pledgor acknowledges and agrees that the venue provided above is the most convenient forum for both the Secured Party and the Pledgor. The Pledgor waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Pledge Agreement. 18. WAIVER OF JURY TRIAL. THE PLEDGOR IRREVOCABLY WAIVES ANY AND ALL RIGHT THE PLEDGOR MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS PLEDGE AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE PLEDGOR ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. 4 THE PLEDGOR ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS PLEDGE AGREEMENT, INCLUDING THE WAIVER OF JURY TRIAL, AND HAS BEEN ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE. WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby. WITNESS / ATTEST: ESCALON MEDICAL CORPORATION /s/ By: /s/ - --------------------------------- -------------------- ------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano --------------------- --------------------- Title: SVP Finance Title: CEO -------------------------- -------------------------- (Include title only if an officer of entity signing to the right) 5 EXHIBIT A TO PLEDGE AGREEMENT DESCRIPTION OF PLEDGED STOCK
PERCENTAGE OF ISSUER TYPE OF SHARES NUMBER OF SHARES OUTSTANDING SHARES Escalon Vascular Access, Inc. Common 1,000 100% Escalon Pharmaceutical, Inc. Common 1,000 100% Sonomed, Inc. Common 2,717,000 100% Escalon Digital Vision, Inc. Common 100 100% IntraLase, Inc. Common 350,000 N/A
FORM 11A - MULTISTATE REV. 10/99 EX-10.24 7 w84090exv10w24.txt PNC BANK, N.A. AMENDED & RESTATED SECURITY AGREE. EXHIBIT 10.24 [PNCBANK LOGO] AMENDED AND RESTATED SECURITY AGREEMENT THIS AMENDED AND RESTATED SECURITY AGREEMENT (this "AGREEMENT"), dated as of this 16th day of November, 2001, is made by Escalon Medical Corp. (the "GRANTOR"), with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087, in favor of PNC BANK, NATIONAL ASSOCIATION (the "BANK"), with an address at 1600 Market Street, Philadelphia, Pennsylvania 19103. On the terms hereof, the Bank and the Grantor desire to amend and restate the Security Agreement, dated as of January 14, 2000, between the Bank and the Grantor. NOW, THEREFORE, the Grantor and the Bank, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. (a) "COLLATERAL" shall include all personal property of the Grantor, including the following, all whether now owned or hereafter acquired or arising and wherever located: (i) accounts (including health-care-insurance receivables and credit card receivables); (ii) securities entitlements, securities accounts, commodity accounts, commodity contracts and investment property; (iii) deposit accounts; (iv) instruments (including promissory notes); (v) documents (including warehouse receipts); (vi) chattel paper (including electronic chattel paper and tangible chattel paper); (vii) inventory, including raw materials, work in process, or materials used or consumed in Grantor's business, items held for sale or lease or furnished or to be furnished under contracts of service, sale or lease, goods that are returned, reclaimed or repossessed; (viii) goods of every nature, including stock-in-trade, goods on consignment, standing timber that is to be cut and removed under a conveyance or contract for sale, the unborn young of animals, crops grown, growing, or to be grown, manufactured homes, computer programs embedded in such goods and farm products; (ix) equipment, including machinery, vehicles and furniture; (x) fixtures; (xi) agricultural liens; (xii) as-extracted collateral; (xiii) commercial tort claims, if any, described on Exhibit "A" hereto; (xiv) letter of credit rights; (xv) general intangibles, of every kind and description, including payment intangibles, software, computer information, source codes, object codes, records and data, all existing and future customer lists, choses in action, claims (including claims for indemnification or breach of warranty), books, records, patents and patent applications, copyrights, trademarks, tradenames, tradestyles, trademark applications, goodwill, blueprints, drawings, designs and plans, trade secrets, contracts, licenses, license agreements, formulae, tax and any other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies; (xvi) all supporting obligations of all of the foregoing property; (xvii) all property of the Grantor now or hereafter in the Bank's possession or in transit to or from, or under the custody or control of, the Bank or any affiliate thereof; (xviii) all cash and cash equivalents thereof; and (xix) all cash and noncash proceeds (including insurance proceeds) of all of the foregoing property, all products thereof and all additions and accessions thereto, substitutions therefor and replacements thereof. The Collateral shall also include any and all other tangible or intangible property that is described as being part of the Collateral pursuant to one or more Riders to Security Agreement that may be attached hereto or delivered in connection herewith, including the Rider to Security Agreement - Copyrights, the Rider to Security Agreement - Patents, the Rider to Security Agreement - Trademarks and the Rider to Security Agreement - Cash Collateral Account. (b) "OBLIGATIONS" shall include all loans, advances, debts, liabilities, obligations, covenants and duties owing by the Grantor to the Bank or to any other direct or indirect subsidiary of The PNC Financial Services Group, Inc., of any kind or nature, present or future (including any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to the Grantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, whether or not (i) evidenced by any note, guaranty or other instrument, (ii) arising under any agreement, instrument or document, (iii) for the payment of money, (iv) arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, (v) under any interest or currency swap, future, option or other interest rate protection or similar agreement, (vi) under or by reason of any foreign currency transaction, forward, option or other similar transaction providing for the purchase of one currency in exchange for the sale of another currency, or in any other manner, (vii) arising out of overdrafts on deposit or other accounts or out of electronic funds transfers (whether by wire transfer or through automated clearing houses or otherwise) or out of the return unpaid of, or other failure of the Bank to receive final payment for, any check, item, instrument, payment order or other deposit or credit to a deposit or other account, or out of the Bank's non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository or other similar arrangements; and any amendments, extensions, renewals and increases of or to any of the foregoing, and all costs and expenses of the Bank incurred in the documentation, negotiation, modification, enforcement, collection and otherwise in connection with any of the foregoing, including reasonable attorneys' fees and expenses. (c) "UCC" means the Uniform Commercial Code, as adopted and enacted and as in effect from time to time in the State whose law governs pursuant to the Section of this Agreement entitled "Governing Law and Jurisdiction." Terms used herein which are defined in the UCC and not otherwise defined herein shall have the respective meanings ascribed to such terms in the UCC. To the extent the definition of any category or type of collateral is modified by any amendment, modification or revision to the UCC, such modified definition will apply automatically as of the date of such amendment, modification or revision. 2. GRANT OF SECURITY INTEREST. To secure the Obligations, the Grantor, as debtor, hereby assigns and grants to the Bank, as secured party, a continuing lien on and security interest in the Collateral. 3. CHANGE IN NAME OR LOCATIONS. The Grantor hereby agrees that if the location of the Collateral changes from the locations listed on Exhibit "A" hereto and made part hereof, or if the Grantor changes its name, its type of organization, its state of organization (if Grantor is a registered organization), its principal residence (if Grantor is an individual), its chief executive office (if Grantor is a general partnership or non-registered organization) or establishes a name in which it may do business that is not listed as a tradename on Exhibit "A" hereto, the Grantor will immediately notify the Bank in writing of the additions or changes. 4. REPRESENTATIONS AND WARRANTIES. The Grantor represents, warrants and covenants to the Bank that: (a) all information, including its type of organization, jurisdiction of organization, chief executive office, and (for individuals only) principal residence are as set forth on Exhibit "A" hereto and are true and correct on the date hereof; (b) the Grantor has good, marketable and indefeasible title to the Collateral, has not made any prior sale, pledge, encumbrance, assignment or other disposition of any of the Collateral, and the Collateral is free from all encumbrances and rights of setoff of any kind except the lien in favor of the Bank created by this Agreement; (c) except as herein provided, the Grantor will not hereafter without the Bank's prior written consent sell, pledge, encumber, assign or otherwise dispose of any of the Collateral or permit any right of setoff, lien or security interest to exist thereon except to the Bank; (d) the Grantor will defend the Collateral against all claims and demands of all persons at any time claiming the same or any interest therein; (e) each account and general intangible, if included in the definition of Collateral, is genuine and enforceable in accordance with its terms and the Grantor will defend the same against all claims, demands, setoffs and counterclaims at any time asserted; (f) at the time any account or general intangible becomes subject to this Agreement, such account or general intangible will be a good and valid account representing a bona fide sale of goods or services by the Grantor and such goods will have been shipped to the respective account debtors or the services will have been performed for the respective account debtors, and, except as may occur in the ordinary course of 2 business, no such account or general intangible will be subject to any claim for credit, allowance or adjustment by any account debtor or any setoff, defense or counterclaim and (g) it owns no copyrights, copyright licenses, patents, patent licenses, trademarks or trademark licenses except as described on the Riders hereto. 5. GRANTOR'S COVENANTS. The Grantor covenants that it shall: (a) from time to time and at all reasonable times, allow the Bank, by or through any of its officers, agents, attorneys, or accountants, to examine or inspect the Collateral, and obtain valuations and audits of the Collateral, at the Grantor's expense, wherever located. The Grantor shall do, obtain, make, execute and deliver all such additional and further acts, things, deeds, assurances and instruments as the Bank may require to vest in and assure to the Bank its rights hereunder and in or to the Collateral, and the proceeds thereof, including waivers from landlords, warehousemen and mortgagees. The Grantor agrees that the Bank has the full power and authority to collect, compromise, endorse, sell or otherwise deal with the Collateral in its own name or that of the Grantor at any time upon an Event of Default; (b) keep the Collateral in good order and repair at all times and immediately notify the Bank of any event causing a material loss or decline in value of the Collateral, whether or not covered by insurance, and the amount of such loss or depreciation; (c) only use or permit the Collateral to be used in accordance with all applicable federal, state, county and municipal laws and regulations; and (d) have and maintain insurance at all times with respect to all Collateral against risks of fire (including so-called extended coverage), theft, sprinkler leakage, and other risks (including risk of flood if any Collateral is maintained at a location in a flood hazard zone) as the Bank may require, in such form, in such amount, for such period and written by such companies as may be satisfactory to the Bank in its sole discretion. Each such casualty insurance policy shall contain a standard Lender's Loss Payable Clause issued in favor of the Bank under which all losses thereunder shall be paid to the Bank as the Bank's interest may appear. Such policies shall expressly provide that the requisite insurance cannot be altered or canceled without at least thirty (30) days prior written notice to the Bank and shall insure the Bank notwithstanding the act or neglect of the Grantor. Upon the Bank's demand, the Grantor shall furnish the Bank with duplicate original policies of insurance or such other evidence of insurance as the Bank may require. In the event of failure to provide insurance as herein provided, the Bank may, at its option, obtain such insurance and the Grantor shall pay to the Bank, on demand, the cost thereof. Proceeds of insurance may be applied by the Bank to reduce the Obligations or to repair or replace Collateral, all in the Bank's sole discretion. 6. NEGATIVE PLEDGE; NO TRANSFER. The Grantor will not sell or offer to sell or otherwise transfer or grant or allow the imposition of a lien or security interest upon the Collateral (except for sales of inventory and collections of accounts in the Grantor's ordinary course of business), will not allow any third party to gain control of all or any part of the Collateral, and will not use any portion thereof in any manner inconsistent with this Agreement or with the terms and conditions of any policy of insurance thereon. 7. COVENANTS FOR ACCOUNTS. If accounts are included in the definition of Collateral: (a) The Grantor will, on the Bank's demand, make notations on its books and records showing the Bank's security interest and make available to the Bank shipping and delivery receipts evidencing the shipment of the goods that gave rise to an account, completion certificates or other proof of the satisfactory performance of services that gave rise to an account, a copy of the invoice for each account and copies of any written contract or order from which an account arose. The Grantor shall promptly notify the Bank if an account becomes evidenced or secured by an instrument or chattel paper and upon the Bank's request, will promptly deliver any such instrument or chattel paper to the Bank, including any letter of credit delivered to the Grantor to support a shipment of inventory by the Grantor. 3 (b) The Grantor will promptly advise the Bank whenever an account debtor refuses to retain or returns any goods from the sale of which an account arose and will comply with any instructions that the Bank may give regarding the sale or other disposition of such returns. From time to time upon the Bank's request, the Grantor will report to the Bank all credits given to account debtors on all accounts. (c) The Grantor will immediately notify the Bank if any account arises out of contracts with the United States or any department, agency or instrumentality thereof, and will execute any instruments and take any steps required by the Bank so that all monies due and to become due under such contract shall be assigned to the Bank and notice of the assignment given to and acknowledged by the appropriate government agency or authority under the Federal Assignment of Claims Act. (d) At any time after the occurrence of an Event of Default, and without notice to the Grantor, the Bank may direct any persons who are indebted to the Grantor on any Collateral consisting of accounts or general intangibles to make payment directly to the Bank of the amounts due. The Bank is authorized to collect, compromise, endorse and sell any such Collateral in its own name or in the Grantor's name and to give receipts to such account debtors for any such payments and the account debtors will be protected in making such payments to the Bank. Upon the Bank's written request, the Grantor will establish with the Bank and maintain a lockbox account ("LOCKBOX") with the Bank and a depository account(s) ("CASH COLLATERAL ACCOUNT") with the Bank subject to the provisions of this subparagraph and such other related agreements as the Bank may require, and the Grantor shall notify its account debtors to remit payments directly to the Lockbox. Thereafter, funds collected in the Lockbox shall be transferred to the Cash Collateral Account, and funds in the Cash Collateral Account shall be applied by the Bank, daily, to reduce the outstanding Obligations. 8. FURTHER ASSURANCES. By its signature hereon, the Grantor hereby irrevocably authorizes the Bank to execute (on behalf of the Grantor) and file against the Grantor one or more financing, continuation or amendment statements pursuant to the UCC in form satisfactory to the Bank, and the Grantor will pay the cost of preparing and filing the same in all jurisdictions in which such filing is deemed by the Bank to be necessary or desirable in order to perfect, preserve and protect its security interests. If required by the Bank, the Grantor will execute all documentation necessary for the Bank to obtain and maintain perfection of its security interests in the Collateral. At the Bank's request, the Grantor will execute, in form satisfactory to the Bank, a Rider to Security Agreement - Copyrights (if any Collateral consists of registered or unregistered copyrights), a Rider to Security Agreement - Patents (if any Collateral consists of patents or patent applications), a Rider to Security Agreement - Trademarks (if any Collateral consists of trademarks, tradenames, tradestyles or trademark applications). If any Collateral consists of letter of credit rights, electronic chattel paper, deposit accounts or supporting obligations not maintained with the Bank or one of its affiliates, or any securities entitlement, securities account, commodities account, commodities contract or other investment property, then at the Bank's request the Grantor will execute, and will cause the depository institution or securities intermediary upon whose books and records the ownership interest of the Grantor in such Collateral appears, to execute such Pledge Agreements, Notification and Control Agreements or other agreements as the Bank deems necessary in order to perfect, prioritize and protect its security interest in such Collateral, in each case in a form satisfactory to the Bank. 9. EVENTS OF DEFAULT. The Grantor shall, at the Bank's option, be in default under this Agreement upon the happening of any of the following events or conditions (each, an "EVENT OF DEFAULT"): (a) any Event of Default (as defined in any of the Obligations); (b) any default under any of the Obligations that does not have a defined set of "Events of Default" and the lapse of any notice or cure period provided in such Obligations with respect to such default; (c) demand by the Bank under any of the Obligations that have a demand feature; (d) the failure by the Grantor to perform any of its obligations under this Agreement which is not cured within fifteen (15) days after the earlier of Grantor's knowledge thereof and Grantor's receipt of written notice thereof from the Bank; (e) any written representation or warranty made or furnished by Grantor to the Bank is false, erroneous or misleading in any material respect; (f) an uninsured material loss, theft, damage, or destruction to any of the Collateral, or the entry of any 4 judgment against the Grantor or any lien against or the making of any levy, seizure or attachment of or on the Collateral; provided that, in the case of entry of any such judgment, such entry shall not in and of itself constitute an Event of Default unless the same is not discharged, released or dismissed within thirty (30) days of the entry thereof; (g) the failure of the Bank to have a perfected first priority security interest in the Collateral, unless such failure is solely due to either the Bank's failure to file Uniform Commercial Code Financing Statements in the office of the Secretary of State of the Grantor's State of organization detailed on Exhibit A hereto or the Bank's filing of a termination of such Financing Statement; (h) any indication or evidence received by the Bank that the Grantor may have directly or indirectly been engaged in any type of activity which, in the Bank's discretion, might result in the forfeiture of any property of the Grantor to any governmental entity, federal, state or local; or (i) in the opinion of the Bank, there shall be a material adverse change in the financial condition of the Grantor. 10. REMEDIES. Upon the occurrence of any such Event of Default and at any time thereafter, the Bank may declare all Obligations secured hereby immediately due and payable and shall have, in addition to any remedies provided herein or by any applicable law or in equity, all the remedies of a secured party under the UCC. The Bank's remedies include, but are not limited to, the right to (a) peaceably by its own means or with judicial assistance enter the Grantor's premises and take possession of the Collateral without prior notice to the Grantor or the opportunity for a hearing, (b) render the Collateral unusable, (c) dispose of the Collateral on the Grantor's premises, (d) require the Grantor to assemble the Collateral and make it available to the Bank at a place designated by the Bank, and (e) notify the United States Postal Service to send the Grantor's mail to the Bank. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Bank will give the Grantor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of commercially reasonable notice shall be met if such notice is sent to the Grantor at least ten (10) days before the time of the intended sale or disposition. Expenses of retaking, holding, preparing for disposition, disposing or the like shall include the Bank's reasonable attorneys' fees and legal expenses, incurred or expended by the Bank to enforce any payment due it under this Agreement either as against the Grantor, or in the prosecution or defense of any action, or concerning any matter growing out of or connection with the subject matter of this Agreement and the Collateral pledged hereunder. The Grantor waives all relief from all appraisement or exemption laws now in force or hereafter enacted. 11. POWER OF ATTORNEY. The Grantor does hereby make, constitute and appoint any officer or agent of the Bank as the Grantor's true and lawful attorney-in-fact, with power to (a) endorse the name of the Grantor or any of the Grantor's officers or agents upon any notes, checks, drafts, money orders, or other instruments of payment or Collateral that may come into the Bank's possession in full or part payment of any Obligations; (b) sue for, compromise, settle and release all claims and disputes with respect to, the Collateral; and (c) sign, for the Grantor, such documentation required by the UCC, or supplemental intellectual property security agreements; granting to the Grantor's said attorney full power to do any and all things necessary to be done in and about the premises as fully and effectually as the Grantor might or could do. The Grantor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest, and is irrevocable. 12. PAYMENT OF EXPENSES. At its option, the Bank may discharge taxes, liens, security interests or such other encumbrances as may attach to the Collateral, may pay for required insurance on the Collateral and may pay for the maintenance, appraisal or reappraisal, and preservation of the Collateral, as determined by the Bank to be necessary. The Grantor will reimburse the Bank on demand for any payment so made or any expense incurred by the Bank pursuant to the foregoing authorization, and the Collateral also will secure any advances or payments so made or expenses so incurred by the Bank. 13. NOTICES. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder ("NOTICES") must be in writing and will be effective upon receipt. Notices may be given in any manner to which the parties may separately agree, including electronic mail. Without limiting the foregoing, first-class mail, facsimile transmission and commercial courier service are hereby agreed to as acceptable methods for giving Notices. Regardless of the manner in which provided, 5 Notices may be sent to a party's address as set forth above or to such other address as any party may give to the other for such purpose in accordance with this section. 14. PRESERVATION OF RIGHTS. No delay or omission on the Bank's part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Bank's action or inaction impair any such right or power. The Bank's rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Bank may have under other agreements, at law or in equity. 15. ILLEGALITY. If any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, it shall not affect or impair the validity, legality and enforceability of the remaining provisions of this Agreement. 16. CHANGES IN WRITING. No modification, amendment or waiver of, or consent to any departure by the Grantor from, any provision of this Agreement will be effective unless made in a writing signed by the Bank and Grantor, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Grantor will entitle the Grantor to any other or further notice or demand in the same, similar or other circumstance. 17. ENTIRE AGREEMENT. This Agreement (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 18. COUNTERPARTS. This Agreement may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission. 19. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of the Grantor and the Bank and their respective heirs, executors, administrators, successors and assigns; provided, however, that the Grantor may not assign this Agreement in whole or in part without the Bank's prior written consent and the Bank at any time may assign this Agreement in whole or in part. 20. INTERPRETATION. In this Agreement, unless the Bank and the Grantor otherwise agree in writing, the singular includes the plural and the plural the singular; words importing any gender include the other genders; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; the word "or" shall be deemed to include "and/or", the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to articles, sections (or subdivisions of sections) or exhibits are to those of this Agreement; and references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications to such instruments, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement. Section headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Unless otherwise specified in this Agreement, all accounting terms shall be interpreted and all accounting determinations shall be made in accordance with GAAP. If this Agreement is executed by more than one Grantor, the obligations of such persons or entities will be joint and several. 21. INDEMNITY. The Grantor agrees to indemnify each of the Bank, each legal entity, if any, who controls the Bank and each of their respective directors, officers and employees (the "INDEMNIFIED PARTIES") and to hold each Indemnified Party harmless from and against any and all claims, damages, losses, liabilities and expenses (including all fees and charges of internal or external counsel with whom any Indemnified Party may consult and all expenses of litigation and preparation therefor) which any 6 Indemnified Party may incur or which may be asserted against any Indemnified Party by any person, entity or governmental authority (including any person or entity claiming derivatively on behalf of the Grantor), in connection with or arising out of or relating to the matters referred to in this Agreement or the Obligations or the use of the proceeds of any loan, whether (a) arising from or incurred in connection with any breach of a representation, warranty or covenant by the Grantor, or (b) arising out of or resulting from any suit, action, claim, proceeding or governmental investigation, pending or threatened, whether based on statute, regulation or order, or tort, or contract or otherwise, before any court or governmental authority; provided, however, that the foregoing indemnity agreement shall not apply to any claims, damages, losses, liabilities and expenses solely attributable to an Indemnified Party's gross negligence or willful misconduct. The indemnity agreement contained in this Section shall survive the termination of this Agreement, payment of the Obligations and assignment of any rights hereunder. The Grantor may participate at its expense in the defense of any such claim. 22. GOVERNING LAW AND JURISDICTION. This Agreement has been delivered to and accepted by the Bank and will be deemed to be made in the State where the Bank's office indicated above is located. THIS AGREEMENT WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCEPT THAT THE LAWS OF THE STATE WHERE ANY COLLATERAL IS LOCATED (IF DIFFERENT FROM THE STATE WHERE SUCH OFFICE OF THE BANK IS LOCATED) SHALL GOVERN THE CREATION, PERFECTION AND FORECLOSURE OF THE LIENS CREATED HEREUNDER ON SUCH PROPERTY OR ANY INTEREST THEREIN. The Grantor hereby irrevocably consents to the exclusive jurisdiction of any state or federal court in the county or judicial district where the Bank's office indicated above is located; provided that nothing contained in this Agreement will prevent the Bank from bringing any action, enforcing any award or judgment or exercising any rights against the Grantor individually, against any security or against any property of the Grantor within any other county, state or other foreign or domestic jurisdiction. The Bank and the Grantor agree that the venue provided above is the most convenient forum for both the Bank and the Grantor. The Grantor waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Agreement. 23. SELF HELP REMEDIES. THE GRANTOR BEING FULLY AWARE OF THE RIGHT TO NOTICE AND A HEARING ON THE QUESTION OF THE VALIDITY OF ANY CLAIMS THAT MAY BE ASSERTED AGAINST THE GRANTOR BY THE BANK UNDER THIS AGREEMENT, AND RELATED AGREEMENTS AND DOCUMENTS, BEFORE THE GRANTOR CAN BE DEPRIVED OF ANY PROPERTY IN THE GRANTOR'S POSSESSION, HEREBY WAIVES THESE RIGHTS AND AGREES THAT, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT, THE BANK MAY EMPLOY SELF-HELP OR ANY LEGAL OR EQUITABLE PROCESS PROVIDED BY LAW TO TAKE POSSESSION OF ANY SUCH PROPERTY WITHOUT FIRST OBTAINING A FINAL JUDGMENT OR WITHOUT FIRST GIVING THE GRANTOR NOTICE AND THE OPPORTUNITY TO BE HEARD ON THE VALIDITY OF THE CLAIM UPON WHICH SUCH TAKING IS MADE. THE GRANTOR WAIVES ALL RELIEF FROM ALL APPRAISEMENT OR EXEMPTION LAWS NOW IN FORCE OR HEREAFTER ENACTED. 24. WAIVER OF JURY TRIAL. EACH OF THE GRANTOR AND THE BANK IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH 7 DOCUMENTS. THE GRANTOR AND THE BANK ACKNOWLEDGE THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. THE GRANTOR ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE WAIVER OF JURY TRIAL, AND HAS BEEN ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE. WITNESS the due execution hereof as a document under seal, as of the date first written above. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - --------------------------------------- ----------------- -------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano --------------------------- ------------------- Title: Sr. Vice President of Finance Title: CEO -------------------------------- ------------------------- (Include title only if an officer of entity signing to the right) 8 EXHIBIT "A" TO SECURITY AGREEMENT 1. Grantor's form of organization (i.e., corporation, partnership, limited liability company): Corporation 2. Grantor's State of organization, if a registered organization (i.e., corporation, limited partnership or limited liability company): Pennsylvania 3. Grantor's principal residence, if a natural person or general partnership: 351 E. Conestoga Road Wayne, PA 19087 Chester County 4. Address of Grantor's chief executive office, including the County: 351 E. Conestoga Road Wayne, PA 19087 Chester County 5. Grantor's EIN, if not a natural person: 6. Grantor's SSN, if a natural person: 7. Grantor's organization ID# (if any exists): 3027704 8. Address for books and records, if different: 2440 S. 179th Street New Berlin, WI 53146 Waukescha, County 9. Addresses of other Collateral locations, including Counties, and name and address of landlord or owner if location is not owned by Grantor: 2440 S. 179th Street New Berlin, WI 53146 Waukescha, County Landlord: Liberty Lane Center c/o Judson & Associates, S.C. 1285 Sunnyridge Road Pewaukee, WI 53072 9 5001 Route 42 Turnersville, NJ 08012 Gloucester County Landlord: Joseph J. Master and Louise Master P.O. Box 1115 Turnersville, NJ 08012 3000 Marcus Avenue Lake Suceers, NY 11042 Nassau County Landlord: We're Associates Company 100 Jericho Quadrangle Jericho, NJ 11753 10. Other names or tradenames now or formerly used by the Grantor: Intelligent Surgical Lasers, Inc. Escalon Vascular Access, Inc. EOI Corp. Escalon Ophthamics, Inc. 11. List of all existing Commercial Tort Claims (by case title with court and brief description of claim): None 10 RIDER TO SECURITY AGREEMENT - TRADEMARKS THIS RIDER TO SECURITY AGREEMENT ("RIDER") is executed as of this 16 day of November, 2001, by and between ESCALON MEDICAL CORP. (the "GRANTOR") with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087 and PNC BANK, NATIONAL ASSOCIATION (the "BANK"), with an address at 1600 Market Street, Philadelphia, Pennsylvania 19103. This Rider is incorporated into and made part of that certain Security Agreement ("SECURITY AGREEMENT") between the Grantor and the Bank dated November 16, 2001, and also into certain other financing documents and security agreements executed by and between the Grantor and the Bank (all such documents including this Rider being collectively referred to as "LOAN DOCUMENTS"). All capitalized terms not otherwise defined in this Rider shall have the same meanings ascribed to such terms in the other Loan Documents. The Grantor has adopted, used and is using (or has filed applications, other than intent-to-use applications, for the registration of) the trademarks, service marks and trade names listed on Schedule "A" attached hereto and made part hereof (all such marks or names hereinafter referred to as the "TRADEMARKS"). The Bank desires to acquire a lien and security interest on the Trademarks and the registration thereof, together with all the goodwill of the Grantor associated therewith and represented thereby, as security for all of the Obligations (as defined in the Security Agreement) to the Bank, and the Bank desires to have its security interest in such Trademarks confirmed by a document identifying same and in such form that it may be recorded in the United States Patent and Trademark Office. NOW, THEREFORE, with the foregoing background deemed incorporated by reference and made part hereof, the parties hereto, intending to be legally bound hereby, covenant and agree as follows: 1. GRANT OF SECURITY INTEREST. In consideration of and pursuant to the terms of the Loan Documents, and for other good, valuable and sufficient consideration, the receipt and sufficiency of which is hereby acknowledged, and to secure payment and performance of the Obligations, the Grantor grants a lien and security interest to the Bank in all its present and future right, title and interest in and to the Trademarks, together with all the goodwill and other tangible assets of the Grantor associated with and represented by the Trademarks, and the non-intent-to-use applications for and registration thereof and the right (but not the obligation) to sue for past, present and future infringements, and the proceeds thereof, including, without limitation, license royalties and proceeds of infringement suits. 2. REPRESENTATIONS AND WARRANTIES. The Grantor represents, warrants and covenants that: (a) the Trademarks are subsisting and have not been abandoned, suspended, voluntarily terminated or canceled by the Grantor, have not been adjudged invalid or unenforceable, and to the best of the Grantor's knowledge, there is no reason why the Trademarks should be adjudged invalid or unenforceable; (b) each of the Trademarks is valid and enforceable; (c) the Grantor is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to each of the Trademarks, and each of the Trademarks is free and clear of any liens, charges and encumbrances, including, without limitation, pledges, assignments, licenses and covenants by the Grantor not to sue third persons; (d) the Grantor has the unqualified right to enter into this Rider and perform its terms; (e) the Grantor has used, and will continue to use for the duration of this Rider, proper notice, as required by 15 U.S.C. Sections 1051-1127 in connection with its use of the Trademarks; (f) the Grantor has used, and will continue to use for the duration of this Rider, consistent standards of quality in products leased or sold under the Trademarks; and (g) the Grantor will not (and will not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any of the Trademarks may become invalidated, abandoned, unenforceable, avoided, avoidable or otherwise diminished in value, and shall notify the Bank immediately if it knows of any reason or has any reason to know of any grounds under which any of the foregoing may occur. 3. VERIFICATION OF QUALITY CONTROL. The Grantor hereby grants to the Bank and its employees and agents the right to visit the Grantor's locations which lease, sell, or store products under any of the Trademarks and to inspect the products and quality control records relating thereto at reasonable times during regular business hours to ensure the Grantor's compliance with paragraph 2(f). 4. COVENANTS. The Grantor further covenants that until all of the Obligations have been satisfied in full: (a) the Grantor shall maintain the Trademarks in full force and effect; (b) the Grantor will not enter into any agreement which is inconsistent with the Grantor's obligations under this Rider or which restrict or impair the Bank's rights hereunder; and (c) if the Grantor acquires rights to any new non-intent-to-use Trademarks, the provisions of this Rider shall automatically apply thereto and the Grantor shall give the Bank prompt written notice thereof along with an amended Schedule A; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Grantor shall have the right to enter into agreements in the ordinary course of business with respect to the Trademarks. 5. EXCLUSIVE USE OF TRADEMARKS. So long as this Rider is in effect and so long as the Grantor has not received notice from the Bank that an Event of Default has occurred under the Loan Documents and that the Bank has elected to exercise its rights to assignment hereunder, the Grantor shall continue to have the exclusive right to use the Trademarks including licenses thereof, and the Bank shall have no right to use the Trademarks or issue any exclusive or non-exclusive license with respect thereto, or assign, pledge or otherwise transfer title in the Trademarks to anyone else. 6. NEGATIVE PLEDGE. The Grantor agrees not to sell, assign (by operation of law or otherwise) or further encumber its rights and interest in the Trademarks without prior written consent of the Bank. The Grantor shall defend the Trademarks against and shall take other action as is necessary to remove any lien, security interest, claim, right or other encumbrance of any nature whatsoever in or to the Trademarks, and will defend the right, title and interest of the Bank in and to any of the Grantor's rights under the Trademarks against the claims or demands of all persons whatsoever. 7. NO ADDITIONAL TRADEMARKS. As of the date hereof, the Grantor does not own any Trademarks, or have any Trademarks registered in or the subject of pending applications in the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, other than those grants, registrations or applications for registrations listed on Schedule A annexed hereto and made a part hereof. 8. PLEDGE OF ADDITIONAL TRADEMARKS. In the event the Grantor, either itself or through any agent, employee, licensee or designee shall: (a) file or record an application for the registration of any Trademark with the United States Patent and Trademark Office or any similar office or agency of the United States, any State thereof, or any other country or any political subdivision thereof; or (b) file or record any assignment of any Trademark which the Grantor may acquire, own or license from a third party, with the United States Patent and Trademark Office or any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof; the Grantor shall promptly, but in no event more than fifteen (15) days subsequent to such filing, notify the Bank thereof, and, upon request of the Bank shall promptly, but in no event more than twenty (20) days subsequent to such notice, execute and deliver any and all assignments, agreements, instruments, documents and papers as the Bank may reasonably request to evidence the Bank's interest in such Trademark and the goodwill of the Grantor associated thereto or represented thereby. The Grantor hereby grants the Bank a power of attorney, irrevocable until the Obligations are fully paid and satisfied, to modify this Rider by amending Schedule A, as applicable, to include any future Trademarks or Licenses, including, without limitation, registrations or applications appurtenant thereto, covered by this Rider. 9. REMEDIES UPON DEFAULT. (a) Anything herein contained to the contrary notwithstanding, if and while the Grantor shall be in default hereunder or an Event of Default exists under the Loan Documents, the Grantor hereby covenants and agrees that the Bank, as the holder of a security interest under the Uniform Commercial Code, may take such action permitted under the Loan Documents or permitted by law, in its exclusive discretion, to foreclose upon the Trademarks covered hereby. (b) For such purposes, and in the event of the Grantor's default hereunder or an Event of Default under the Loan Documents and while such default or Event of Default exists, the Grantor hereby authorizes and empowers the Bank to make, constitute and appoint any officer or agent of the Bank as the Bank may select, in its exclusive discretion, as the Grantor's true and lawful attorney-in-fact, with the power to endorse the Grantor's name on all applications, documents, papers and instruments necessary for the Bank to use the Trademarks or to grant or issue any exclusive or non-exclusive license under the Trademarks to anyone else, or necessary for the Bank to assign, pledge, convey or otherwise transfer title in or dispose of the Trademarks to anyone else. The Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof, except for the gross negligence or willful misconduct of such attorney. This power of attorney shall be irrevocable for the life of this Rider and the Loan Documents, and until all the Obligations are satisfied in full. (c) The Grantor expressly acknowledges that this Rider shall be recorded with the Patent and Trademark Office in Washington, D.C. Contemporaneously herewith, the Grantor shall also execute and deliver to the Bank such documents as the Bank shall reasonably request to permanently assign all rights in the Trademarks to the Bank, which documents shall be held by the Bank, until the occurrence of an Event of Default hereunder or under the Loan Documents. After such occurrence, the Bank may, at its sole option, record such documents with the Patent and Trademark Office. 10. SUBJECT TO SECURITY AGREEMENT. This Rider shall be subject to the terms, provisions, and conditions set forth in the Security Agreement and may not be modified without the written consent of the party against whom enforcement is being sought. 11. INCONSISTENT WITH SECURITY AGREEMENT. All rights and remedies herein granted to the Bank shall be in addition to any rights and remedies granted to the Bank under the Loan Documents. In the event of an inconsistency between this Rider and the Security Agreement, the language of the Security Agreement shall control. The terms and conditions of the Security Agreement are hereby incorporated herein by reference. 12. TERMINATION OF AGREEMENT. Upon payment and performance of all Obligations under the Loan Documents, the Bank shall execute and deliver to the Grantor all documents necessary to re-vest all rights in and to the Trademarks in the Grantor and/or terminate any interest of the Bank therein. 13. PROSECUTION OF TRADEMARK APPLICATIONS. (a) Subject to the terms of the Loan Documents, the Grantor shall have the duty to prosecute diligently any trademark application with respect to the Trademarks pending as of the date of this Rider or thereafter, until the Obligations shall have been satisfied in full, to preserve and maintain all rights in the registration and grant of the Trademarks, to halt any infringement of the Trademarks, and upon reasonable request of the Bank, the Grantor shall make federal application on registrable but unregistered trademarks belonging to the Grantor. Any reasonable expenses incurred in connection with such applications or defense of said Trademarks shall be borne by the Grantor. The Grantor shall not abandon any Trademark without the written consent of the Bank. (b) The Grantor shall have the right to bring suit in its own name to enforce the Trademarks, in which event the Bank may, if the Grantor deems it necessary or after an Event of Default under the Loan Documents, be joined as a nominal party to such suit if the Bank shall have been satisfied that it is not thereby incurring any risk of liability because of such joinder. The Grantor shall promptly, upon demand, reimburse and indemnify the Bank for all damages, reasonable costs and reasonable expenses, including attorneys' fees, incurred by the Bank in the fulfillment of the provisions of this paragraph. 14. RESPONSIBILITY AND LIABILITY. The Grantor assumes all responsibility and liability arising from the use of the Trademarks, and hereby indemnifies and holds the Bank and each director, officer, employee, affiliate and agent thereof, harmless from and against any claim, suit, loss, damage or expense (including attorneys' fees and expenses) arising out of any alleged defect in any product manufactured, promoted or sold by the Grantor in connection with any of the Trademarks or otherwise arising out of the Grantor's operation of its business from the use of the Trademarks. In any suit, proceeding or action brought by the Bank under any License for any sum owing thereunder, or to enforce any provisions of such License, the Grantor will indemnify and keep the Bank harmless from and against all expense, loss or damage suffered by reason of any defense, set off, recoupment, claim, counterclaim, reduction or liability whatsoever of the obligee thereunder or arising out of a breach of the Grantor of any obligation thereunder or arising out of any agreement, indebtedness or liability at any time owing to or in favor of such obligee or its successors from the Grantor, and all such Obligations of the Grantor shall be and remain enforceable against and only against the Grantor and shall not be enforceable against the Bank. 15. BANK'S RIGHTS. The Bank may, in its sole discretion, pay any amount or do any act required of the Grantor hereunder or requested by the Bank to preserve, defend, protect, maintain, record or enforce the Grantor's obligations contained herein, the Obligations of the Grantor to the Bank, the Trademarks, or the right, title and interest granted the Bank herein, and which the Grantor fails to do or pay, and any such payment shall be deemed an advance by the Bank to the Grantor and shall be payable on demand together with interest thereon at the default rate specified in the Loan Documents. 16. PROTECTION OF THE TRADEMARKS. The Grantor agrees that if it learns of any use by any person or any term or design likely to cause confusion with any Trademark, or of any claim of any lien, security interest, claim, right or other encumbrance of any nature whatsoever in or to the Trademarks, the Grantor shall promptly notify the Bank of such use, lien, security interest, claim, right or other encumbrance and, if requested by the Bank, shall join with the Bank, at the Grantor's expense, in such action as the Bank, in its reasonable discretion, may deem advisable for the protection of the Bank's interest in and to the Trademarks, it being understood that the foregoing shall not preclude the Grantor from bringing an action against a person for the protection of the Grantor's interest in and to such Trademarks. 17. ADDITIONAL REMEDIES. Upon the occurrence of an Event of Default under the Loan Documents, the Bank may, without any obligation to do so, complete any obligation of the Grantor hereunder, in the Grantor's name or in the Bank's name, but at the Grantor's expense, and the Grantor hereby agrees to reimburse the Bank in full for all reasonable expenses, including reasonable attorney's fees, incurred by the Bank in protecting, defending and maintaining the Trademarks. 18. GOVERNING LAW. This Rider will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the State where the Bank's office indicated above is located, excluding its conflict of laws rules, except that the federal laws of the United States of America shall govern to the extent applicable. 19. COUNTERPARTS. This Rider may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission. WITNESS the due execution hereof as a document under seal, as of the date first written above. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - ---------------------------------- -------------------------- ------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano ---------------------- --------------------------- Title: SVP Finance Title: CEO --------------------------- -------------------------------- (Include title only if an officer of entity signing to the right) PNC BANK, NATIONAL ASSOCIATION By: /s/ ------------------------------------ Print Name: Frank P. Devine --------------------------- Title: Assistant Vice President -------------------------------- SCHEDULE A - TRADEMARKS
APPLICATION OR REGISTRATION OR TRADEMARK REGISTRATION NO. COUNTRY FILING DATE - --------- ---------------- ------- --------------- Trademark "ESCALON" 1,746,993 US 5/13/92 Trademark "ESCALON" 1,768,979 US 5/13/92 Trademark "OCUFIT SR" 1,917,083 US 1/21/93 Trademark "PD ACCESS" 2,327,005 US 5/8/96 Trademark "PD ACCESS" 371.328 CTM 11/11/96 Trademark "PD ACCESS" 126745/96 Japan 11/11/96 Trademark "SMARTNEEDLE" 75/620,674 US 1/13/99 Trademark "SMARTNEEDLE" 469,023 SWIT 1/12/99 Trademark "SMARTNEEDLE" 4,398,260 Japan 1/13/99 Trademark "SMARTNEEDLE" 1239573 CTM 1/15/99 Trademark "SMARTNEEDLE" 1,022,096 Canada 1/13/99 Trademark "NB2000" 76/144,850 US 10/11/00
TRADEMARK ASSIGNMENT WHEREAS, ESCALON MEDICAL CORP. (the "GRANTOR") is the owner of the entire right, title and interest in and to the United States trademarks, trade names and registrations listed on Schedule A attached hereto and made a part hereof (collectively, the "TRADEMARKS"), which are registered in the United States Patent and Trademark Office or which are subject of pending applications in the United States Patent and Trademark Office; and WHEREAS, PNC BANK, NATIONAL ASSOCIATION, having a place of business at 1600 Market Street, Philadelphia, Pennsylvania 19103, identified as the "BANK" under that certain Rider to Security Agreement - Trademarks (the "RIDER") of even date herewith (the "GRANTEE") is desirous of acquiring said Trademarks; WHEREAS, the Grantee has a security interest in the assets of the Grantor adequate to carry on the business of the Grantor; and WHEREAS, the Rider provides that this Assignment shall become effective upon the occurrence of an Event of Default as defined in the Security Agreement dated as of November 16, 2001 by and between the Grantor and the Grantee. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Grantor, for itself and its successors and assigns does hereby collaterally transfer, assign and set over unto Grantee, its successors, transferees and assigns, all of its present and future right, title and interest in and to the Trademarks, the goodwill of the business associated with such Trademarks and all proceeds thereof and all rights and proceeds associated therewith. IN WITNESS WHEREOF, the undersigned has caused this Trademark Assignment to be executed by its duly authorized officer on this 16th day of November, 2001. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - ------------------------------------ ----------------- --------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano ------------------------ -------------------- Title: SVP Finance Title: CEO ----------------------------- ------------------------- (Include title only if an officer of entity signing to the right) RIDER TO SECURITY AGREEMENT - PATENTS THIS RIDER TO SECURITY AGREEMENT ("RIDER") is executed as of this 16th of November, 2001, by and between ESCALON MEDICAL CORP. (the "GRANTOR") with an address at 351 E. Conestoga Road, Wayne, Pennsylvania and PNC BANK, NATIONAL ASSOCIATION (the "BANK"), with an address at 1600 Market Street, Philadelphia, Pennsylvania 19103. This Rider is incorporated into and made part of that certain Security Agreement ("SECURITY AGREEMENT") between the Grantor and the Bank dated November 16, 2001, and also into certain other financing documents and security agreements executed by and between the Grantor and the Bank or by and between the Borrower (as defined in the Security Agreement) and the Bank (all such documents including this Rider being collectively referred to as "LOAN DOCUMENTS"). All capitalized terms not otherwise defined in this Rider shall have the same meanings ascribed to such terms in the other Loan Documents. As collateral security for the Obligations (as defined in the Security Agreement) under the Loan Documents, the Grantor has agreed to grant a security interest in and to assign to the Bank the Patent Collateral (as hereinafter defined). The Bank desires to have its lien and security interest in such Patent Collateral confirmed by a document identifying such security interest and in such form as may be recorded in the United States Patent and Trademark Office. NOW, THEREFORE, with the foregoing background deemed incorporated by reference and made part hereof, the parties hereto, intending to be legally bound hereby, covenant and agree as follows: 1. GRANT OF SECURITY INTEREST. In consideration of and pursuant to the terms of the Security Agreement and for other good, valuable and sufficient consideration, the receipt and sufficiency of which is hereby acknowledged, and to secure the Obligations, the Grantor does hereby assign and grant to the Bank a lien and security interest in (a) all of the Grantor's right, title and interest in and to (i) the United States Letters Patent and the inventions described and claimed therein set forth on Schedule A hereto and any future patents of Grantor (hereinafter referred to collectively as the "PATENTS"); (ii) the applications for Letters Patent and the inventions described and claimed therein set forth on Schedule A hereto and any United States Letters Patent which may be issued upon any of said applications and any future patent applications of Grantor (hereinafter referred to collectively as the "APPLICATIONS"); (iii) any reissue, extension, division or continuation of the Patents or the Applications (such reissues, extensions, divisions and continuations being herein referred to collectively as the "REISSUED PATENTS"); (iv) all future royalties or other fees paid or payment or payments made or to be made to the Grantor in respect of the Patents; and (v) proceeds of any and all of the foregoing (the Patents, Applications, Reissued Patents and Royalties and proceeds being herein referred to collectively as the "PATENT RIGHTS"); and (b) all rights, interests, claims and demands that the Grantor has or may have in existing and future profits and damages for past and future infringements of the Patent Rights (such rights, interests, claims and demands being herein called the "CLAIMS") (the Patent Rights and Claims collectively referred to as the "PATENT COLLATERAL"). 2. REPRESENTATIONS AND WARRANTIES. The Grantor warrants and represents to the Bank that: (a) the Grantor is the true and lawful exclusive owner of the Patent Rights set forth on Schedule A, including all rights and interests herein granted; (b) the Patent Collateral is valid and enforceable; (c) the Grantor has full power and authority to execute and deliver this Rider; (d) the Grantor has no notice of any suits or actions commenced or threatened against it, or notice of claims asserted or threatened against it, with reference to the Patent Rights and the interests granted herein; and (e) the Patent Rights and all interests granted herein are so granted free from all liens, charges, claims, options, licenses, pledges and encumbrances of every kind and character. 3. COVENANTS. The Grantor further covenants that: (a) until all of the Obligations have been satisfied in full, the Grantor will not enter into any agreement, including without limitation, license agreements, which are inconsistent with the Grantor's obligations under this Rider; and (b) if the Grantor acquires rights to any new Patent Collateral, the provisions of this Rider shall automatically apply thereto and the Grantor shall give the Bank prompt written notice thereof along with an amended Schedule A; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Grantor shall have the right to enter into agreements in the ordinary course of business with respect to the Patent Collateral. 4. MAINTENANCE OF PATENT COLLATERAL. The Grantor further covenants that: until all of the Obligations have been satisfied in full, it will (i) not enter into any agreement, including without limitation, license agreements, which are inconsistent with the Grantor's undertakings and covenants under this Rider or which restrict or impair the Bank's rights hereunder and (ii) maintain the Patent Collateral in full force and effect. 5. NEGATIVE PLEDGE. The Grantor shall not sell, assign or further encumber its rights and interest in the Patent Collateral without prior written consent of the Bank. 6. REMEDIES UPON DEFAULT. (a) Anything herein contained to the contrary notwithstanding, if and while the Grantor shall be in default hereunder or an Event of Default exists under the Loan Documents, the Grantor hereby covenants and agrees that the Bank, as the holder of a security interest under the Uniform Commercial Code, may take such action permitted under the Loan Documents or permitted by law, in its exclusive discretion, to foreclose upon the Patent Collateral covered hereby. (b) For such purposes, and in the event of the Grantor's default hereunder or an Event of Default under the Loan Documents and while such default or Event of Default exists, the Grantor hereby authorizes and empowers the Bank to make, constitute and appoint any officer or agent of the Bank as the Bank may select, in its exclusive discretion, as the Grantor's true and lawful attorney-in-fact, with the power to endorse the Grantor's name on all applications, documents, papers and instruments necessary for the Bank to use the Patent Collateral or to grant or issue any exclusive or non-exclusive license under the Patent Collateral to anyone else, or necessary for the Bank to assign, pledge, convey or otherwise transfer title in or dispose of the Patent Collateral itself or to anyone else. The Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof, except for the gross negligence or willful misconduct of such attorney. This power of attorney shall be irrevocable for the life of this Rider and the Loan Documents, and until all the Obligations are satisfied in full. (c) The Grantor expressly acknowledges that this Rider shall be recorded with the Patent and Trademark Office in Washington, D.C. Contemporaneously herewith, the Grantor shall also execute and deliver to the Bank such documents as the Bank shall reasonably require to permanently assign all rights in the Patent Collateral to the Bank, which documents shall be held by the Bank, in escrow, until the occurrence of an Event of Default hereunder or under the Loan Documents. After such occurrence, the Bank may, at its sole option, record such escrowed documents with the Patent and Trademark Office. 7. PROSECUTION OF PATENT APPLICATIONS. (a) The Grantor shall, at its own expense, diligently maintain all patents and diligently file and prosecute all patent applications relating to the inventions described and claimed in the Patent Collateral in the United States Patent and Trademark Office, and shall pay or cause to be paid in their customary fashion all fees and disbursements in connection therewith, and shall not abandon any such application prior to the exhaustion of all administrative and judicial remedies or disclaim or dedicate any Patent without the prior written consent of the Bank. The Grantor shall not abandon any Patent Collateral without the prior written consent of the Bank. (b) Any and all fees, costs and expenses, including reasonable attorneys' fees and expenses incurred by the Bank in connection with the preparation, modification, enforcement or termination of this Rider and all other documents relating hereto and the consummation of this transaction, the filing and recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, counsel fees, maintenance fees, encumbrances or costs otherwise incurred in defending or prosecuting any actions or proceedings arising out of or related to the Patent Collateral shall be paid by the Grantor on demand by the Bank. (c) The Grantor shall have the right to bring suit in the name of the Grantor to enforce the Patent Collateral, in which case the Bank may, at the Bank's option, be joined as a nominal party to such suit if the Bank shall be satisfied that such joinder is necessary and that the Bank is not thereby incurring any risk of liability by such joinder. The Grantor shall promptly, upon demand, reimburse and indemnify, defend and hold harmless the Bank for all damages, costs and expenses, including reasonable attorneys' fees, incurred by the Bank pursuant to this paragraph and all other actions and conduct of the Grantor with respect to the Patent Rights during the term of this Rider. 8. SUBJECT TO SECURITY AGREEMENT. This Rider shall be subject to the terms, provisions, and conditions set forth in the Security Agreement and may not be modified without the written consent of the party against whom enforcement is being sought. 9. INCONSISTENT WITH SECURITY AGREEMENT. All rights and remedies herein granted to the Bank shall be in addition to any rights and remedies granted to the Bank under the Loan Documents. In the event of an inconsistency between this Rider and the Security Agreement, the language of the Security Agreement shall control. The terms and conditions of the Security Agreement are hereby incorporated herein by reference. 10. TERMINATION OF AGREEMENT. Upon payment and performance of all Obligations under the Loan Documents, the Bank shall execute and deliver to the Grantor all documents necessary to terminate the Bank's security interest in the Patent Collateral. 11. FEES AND EXPENSES. Any and all reasonable fees, costs and expenses, of whatever kind or nature, including the reasonable attorneys' fees and legal expenses incurred by the Bank in connection with the preparation of this Rider and all other documents relating hereto and the consummation of this transaction, the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, reasonable counsel fees, maintenance fees, encumbrances or costs otherwise incurred in protecting, maintaining, preserving the Patent Collateral, or in defending or prosecuting any actions or proceedings arising out of or related to the Patent Collateral, in each case in accordance with the terms of this Rider, shall be borne and paid by the Grantor on demand by the Bank and until so paid shall be added to the principal amount of the Obligations to the Bank and shall bear interest at the contract rate therefor. 12. ADDITIONAL REMEDIES. Upon the occurrence of an Event of Default under the Loan Documents, the Bank may, without any obligation to do so, complete any obligation of the Grantor hereunder, in the Grantor's name or in the Bank's name, but at the Grantor's expense, and the Grantor hereby agrees to reimburse the Bank in full for all reasonable expenses, including reasonable attorney's fees, incurred by the Bank in protecting, defending and maintaining the Patent Collateral. 13. GOVERNING LAW. THIS RIDER WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES, EXCEPT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN TO THE EXTENT APPLICABLE. 14. COUNTERPARTS. This Rider may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Rider by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission. WITNESS the due execution hereof as a document under seal, as of the date first written above. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - --------------------------------- -------------------- -------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano ---------------------- ---------------------- Title: SVP Finance Title: CEO -------------------------- --------------------------- (Include title only if an officer of entity signing to the right) PNC BANK, NATIONAL ASSOCIATION By: /s/ ------------------------------ Print Name: Frank P. Devine ---------------------- Title: Assistant Vice President --------------------------- SCHEDULE A - PATENTS
PATENT APPLICATION NO. TITLE ISSUE (FILING) DATE - ---------------------- ----- ------------------- Patent # Issued/ Date Trademark Product Application Issued/applied 2975833 Eye Stabilizing mechanism Issued 11/10/99 662704 Eye Stabilizing mechanism Issued 9/7/95 2106574 Debridement bodily cavities Applied 8/3/00 2112841 Eye Stabilizing mechanism Applied 1/5/94 2115006 P-I Prophylactic Agent Applied 4/28/90 2165071 Ocular insert Issued 8/15/00 4670006 Fluid Air infusion Issued 6/2/87 4712550 Retinal Trak Issued 12/15/87 4878487 Illum. Tissue Manipulation Issued 11/7/89 5147647 Ocular insert for the Fornix Issued 9/15/92 5181922 Ocular coats #1 Issued 1/26/93 5311745 Ocular Insert Issued 10/22/99 5322691 Ocular Insert Issued 6/21/94 5334163 Intraocular gas Issued 8/2/94 5336215 Eye Stabilizing mechanism Issued 8/9/94 5366474 Ocular coats #2 Issued 11/22/94 5395618 Ocular Insert w/anchoring Issued 3/7/95 5541951 High power end pumping Issued 7/30/96 5548234 Control Pockel's cell Issued 8/20/96 5561678 Time-Sharing Laser Issued 10/1/96 5466233 Ocufit Tack for drug delivery Issued 11/14/95 92907746.9 Debridement bodily cavities Applied 8/3/00 4013118C2 P-I Prophylactic Agent Issued 4/9/98 5989579 Ocular Insert w/anchoring Issued 11/23/99 56112 Ocular insert for the Fornix Issued 4/21/92 2955137 Ocular Insert w/anchoring Issued 10/22/99 94923238.3 Ocular Insert w/anchoring Applied 6/20/94 09/707,641 Retractable micro-surgical tool Applied 11/6/00 09/619,120 Retractable ophthalmic surgical tool Applied 7/19/00 4,764,930 Multiwavelength Laser Source Issued 8/16/88 4,901,718 3-D Laser Beam Delivery Issued 2/20/90 1,724,927 3-D Laser Beam Delivery Issued 603532 3-D Laser Beam Delivery Issued 4,848,340 Eyetracker & Method of Use Issued 7/18/89 1,322,779 Eyetracker & Method of Use Issued 4,881,808 Imaging System for Surgical Lasers Issued 11/21/89 4,907,586 Method for Reshaping the Eye Issued 3/13/90 4,988,348 Method for Reshaping the Cornea Issued 1/29/91 2,013,388 High power Diode Pump Laser Issued 10/26/93 5,062,702 Device for Mapping Corneal Topography Issued 11/5/91
PATENT APPLICATION NO. TITLE ISSUE (FILING) DATE - ---------------------- ----- ------------------- 5,221,988 Pockle Cell Damping System Issued 6/22/93 5,246,435 Method for Removing Cataractous Material Issued 9/21/93 5,439,482 Apparatus for Removing Cataractous Mat. Issued 8/8/95 5,336,215 Eye Stabilizing mechanism for use in Ophthalmic Laser Surgery Issued 8/9/94 662,704 Eye Stabilizing mechanism for use in Ophthalmic Laser Surgery Issued 1/23/96 NI-083061 Intrastromal Photo-Refractive Keratectomy Issued 12/21/96 5,541,951 Device & Method for High Power End Pumping Issued 7/30/96 5,548,234 System and Method for Control of a Pockels' Cell Issued 8/20/96 5,561,678 Time-Sharing Laser Issued 10/1/96 10813.34a Eye Stabilizing mechanism for use in Ophthalmic Laser Surgery Pending 10813.40c Intrastromal Photo-Refractive Keratectomy Pending 10813.40.1a Intrastromal Photo-Refractive Keratectomy Pending 10813.40.2 Intrastromal Photo-Refractive Keratectomy Pending 10813.47.1 Method for Corneal Laser Surgery CIP Pending 10813.40.1a Method for Corneal Laser Surgery CIP Pending 10813.48a Time-Sharing Laser Pending
PATENT ASSIGNMENT WHEREAS, ESCALON MEDICAL CORP. (the "GRANTOR") is the owner of the entire right, title and interest in and to the United States patents, patent applications listed on Schedule "A" attached hereto and made a part hereof, the inventions described therein and all rights associated therewith (collectively, the "PATENT COLLATERAL"), which are registered in the United States Patent and Trademark Office or which are the subject of pending applications in the United States Patent and Trademark Office; and WHEREAS, PNC BANK, NATIONAL ASSOCIATION, having a place of business at 1600 Market Street, Philadelphia, Pennsylvania 19103, identified as the "BANK" under that certain Rider to Security Agreement - Patents of even date herewith (the "GRANTEE") is desirous of acquiring said Patent Collateral; WHEREAS, the Grantee has a security interest in the assets of the Grantor adequate to carry on the business of the Grantor; and WHEREAS, the Rider provides that this Assignment shall become effective upon the occurrence of an Event of Default as defined in the Security Agreement dated as of November 16, 2001 by and between the Grantor and the Grantee. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Grantor, its successors and assigns does hereby transfer, assign and set over unto Grantee, its successors, transferees and assigns, all of its present and future right, title and interest in and to the Patent Collateral and all proceeds thereof and all rights and proceeds associated therewith. IN WITNESS WHEREOF, the undersigned has caused this Patent Assignment to be executed by its duly authorized officer on this 16th day of November, 2001. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - -------------------------------------- -------------------- -------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano -------------------------- ---------------------- Title: Chairman and Chief Executive Officer --------------------------- RIDER TO SECURITY AGREEMENT- COPYRIGHTS THIS RIDER TO SECURITY AGREEMENT ("RIDER") is executed as of this 16th day of November, 2001, by and between ESCALON MEDICAL CORP. (the "GRANTOR") with an address at 351 E. Conestoga Road, Wayne, Pennsylvania 19087 and PNC BANK, NATIONAL ASSOCIATION (the "BANK"), with an address at 1600 Market Street, Philadelphia, Pennsylvania 19103. This Rider is incorporated into and made part of that certain Security Agreement ("SECURITY AGREEMENT") between the Grantor and the Bank dated November 16, 2001, and also into certain other financing documents, guarantees and security agreements executed by and between the Grantor and the Bank (all such documents including this Rider being collectively referred to as "LOAN DOCUMENTS"). All capitalized terms not otherwise defined in this Rider shall have the same meanings ascribed to such terms in the other Loan Documents. The Grantor owns the works and has registered (or has filed applications for the registration of) the copyrights therefor listed on Schedule "A" attached hereto and made part hereof (all such copyright rights and any renewals or extensions thereof hereinafter referred to as the "COPYRIGHTS"). The Grantor desires to acquire the Copyrights and the registration thereof, together with all the goodwill of Assignor associated therewith and represented thereby, as security for the Grantor's Obligations referred to and described in the Loan Documents, and the Grantor desires to have its security interest in such Copyrights confirmed by a document identifying same and in such form that it may be recorded in the Library of Congress, Copyright Office. NOW, THEREFORE, with the foregoing background deemed incorporated by reference and made a part hereof, the parties hereto, intending to be legally bound hereby, covenant and agree as follows: 1. GRANT OF SECURITY INTEREST. In consideration of and pursuant to the terms of the Loan Documents, and for other good, valuable and sufficient consideration, the receipt and sufficiency of which is hereby acknowledged, and to secure the Grantor's present and future Obligations, the Grantor grants and assigns to the Bank a lien and security interest in all of the Grantor's present and future right, title and interest in and to the Copyrights, together with all the goodwill of the Grantor associated with and represented by the Copyrights, and the registration thereof and the right (but not the obligation) to sue for past, present and future infringements, and the proceeds thereof, including, without limitation, license royalties and proceeds of infringement suits. 2. REPRESENTATIONS AND WARRANTIES. The Grantor represents, warrants and covenants that: (a) the Copyrights are subsisting and have not been adjudged invalid or unenforceable; (b) each of the Copyrights is valid and enforceable; (c) the Grantor is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to each of the Copyrights, and each of the Copyrights is free and clear of any liens, charges and encumbrances, including, without limitation, pledges, assignments, licenses and covenants by the Grantor not to sue third persons; (d) the Grantor has the unqualified right to enter into this Rider and perform its terms; (e) the Grantor has used, and will continue to use for the duration of this Rider, proper statutory notice in connection with its use of the Copyrights; and (f) the Grantor has used, and will continue to use for the duration of this Rider, consistent standards of quality in products leased or sold under the Copyrights. 3. VERIFICATION OF QUALITY CONTROL. The Grantor hereby grants to the Bank and its employees and agents the right to visit the Grantor's locations which lease, sell, or store products under any of the Copyrights and to inspect the products and quality control records relating thereto at reasonable times during regular business hours to ensure the Grantor's continued compliance with Section 2(f). 4. COVENANTS. The Grantor further covenants that until all of the Obligations have been satisfied in full: (a) the Grantor shall maintain the Copyrights in full force and effect; (b) the Grantor will not enter into any agreement which is inconsistent with the Grantor's obligations under this Rider; and (c) if the Grantor acquires rights to any new Copyrights, whether or not registered, the provisions of this Rider shall automatically apply thereto and the Grantor shall promptly register any new Copyright in the United States Copyright Office, and shall give the Bank prompt written notice thereof along with an amended Schedule A. 5. EXCLUSIVE USE OF COPYRIGHTS. So long as this Rider is in effect and so long as the Grantor has not received notice from the Bank that an Event of Default has occurred under the Loan Documents and that the Bank has elected to exercise its rights to assignment hereunder, the Grantor shall continue to have the exclusive right to use the Copyrights, including the licensing thereof, and the Bank shall have no right to use the Copyrights or issue any exclusive or non-exclusive license with respect thereto, or assign, pledge or otherwise transfer title in the Copyrights to anyone else. 6. REMEDIES UPON DEFAULT. (a) Anything herein contained to the contrary notwithstanding, if and while the Grantor shall be in default hereunder or an Event of Default exists under the Loan Documents, the Grantor hereby covenants and agrees that the Bank as the holder of a security interest under the Uniform Commercial Code, may take such action permitted under the Loan Documents or permitted by law, in its exclusive discretion, to foreclose upon the Copyrights covered hereby. Without limiting the generality of the foregoing, the Bank may immediately, without notice or demand, each of which the Grantor hereby waives, collect directly any payments due the Grantor in respect of the Copyrights, or sell at a public or private sale or otherwise realize upon all or from time to time, any of the Copyrights. No notice of any public or private sale shall be required, provided that, if any notice is required by applicable law, then twenty (20) days written notice to the Grantor of any such sale or other disposition of any of the Copyrights shall be reasonable notice. At any such sale or disposition, the Bank may, to the extent permitted by law, purchase the whole or any part of the Copyrights sold, free from any right of redemption on the part of the Grantor, which right the Grantor hereby waives and releases. After deducting from the proceeds of such sale or other disposition of the Collateral all costs and expenses incurred by the Bank in enforcing its rights hereunder (including, without limitation, brokers' fees, auctioneers' fees and attorneys' fees actually incurred), the Bank shall apply the remainder of the proceeds to the payment of the Obligations in such order and manner as the Bank in its sole discretion may determine. Any remainder of the proceeds after payment in full of the Obligations shall be paid over to the Grantor. If any deficiency shall arise, the Grantor shall remain liable to the Bank therefor. (b) For such purposes, and in the event of the Grantor's default hereunder or Event of Default under the Loan Documents and while such Event of Default exists, the Grantor hereby authorizes and empowers the Bank to make, constitute and appoint any officer or agent of the Bank as the Bank may select, in its exclusive discretion, as the Grantor's true and lawful attorney-in-fact, with the power to endorse the Grantor's name on all applications, documents, papers and instruments necessary for the Bank to use the Copyrights or to grant or issue any exclusive or non-exclusive license under the Copyrights to anyone else, or necessary for the Bank to assign, pledge, convey or otherwise transfer title in or dispose of the Copyrights to anyone else. The Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof, except for the gross negligence or willful misconduct of such attorney. This power of attorney shall be irrevocable for the life of this Rider and the Loan Documents, and until all the Obligations (as defined in the Security Agreement) are satisfied in full. (c) The Grantor expressly acknowledges that this Rider shall be recorded with the Library of Congress, Copyright Office in Washington, D.C. Contemporaneously herewith, the Grantor shall also execute and deliver to the Bank such documents as the Bank shall reasonably request to permanently assign all rights in the Copyrights to the Bank, which documents shall be held by the Bank until the occurrence of an Event of Default hereunder or under the Loan Documents. After such occurrence, the Bank may, at its sole option, record such escrowed documents with the Copyright Office. 7. SUBJECT TO SECURITY AGREEMENT. This Rider shall be subject to the terms, provisions, and conditions set forth in the Security Agreement and may not be modified without the written consent of the party against whom enforcement is being sought. 8. INCONSISTENT WITH SECURITY AGREEMENT. All rights and remedies herein granted to the Bank shall be in addition to any rights and remedies granted to the Bank under the Loan Documents. In the event of an inconsistency between this Rider and the Security Agreement, the language of the Security Agreement shall control. The terms and conditions of the Security Agreement are hereby incorporated herein by reference. 9. RE-ASSIGNMENT OF AND/OR TERMINATION OF ANY INTEREST IN COPYRIGHTS. Upon payment and performance of all Obligations under the Loan Documents and full satisfaction of all of the Grantor's liabilities and obligations to the Bank, the Bank shall execute and deliver to the Grantor all documents necessary to re-vest all rights in and to the Copyrights in the Grantor and/or terminate any interest of the Bank therein. 10. FEES AND EXPENSES. Any and all reasonable fees, costs and expenses, of whatever kind or nature, including the reasonable attorneys' fees and legal expenses incurred by the Bank in connection with the preparation of this Rider and all other documents relating hereto and the consummation of this transaction, the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, reasonable counsel fees, maintenance fees, encumbrances or costs otherwise incurred in protecting, maintaining, preserving the Copyrights, or in defending or prosecuting any actions or proceedings arising out of or related to the Copyrights, in each case in accordance with the terms of this Rider, shall be borne and paid by the Grantor on demand by the Bank and until so paid shall be added to the principal amount of the Obligations to the Bank and shall bear interest at the contract rate therefor. 11. PROSECUTION OF COPYRIGHT APPLICATIONS. (a) Subject to the terms of the Security Agreement, the Grantor shall have the duty to prosecute diligently any copyright application with respect to the Copyrights pending as of the date of this Rider or thereafter, until the Obligations shall have been satisfied in full, to preserve and maintain all rights in the Copyrights, and upon reasonable request of the Bank, the Grantor shall make federal application on registrable but unregistered copyrights belonging to the Grantor. Any reasonable expenses incurred in connection with such applications shall be borne by the Grantor. The Grantor shall not abandon any Copyright without the written consent of the Bank. (b) The Grantor shall have the right to bring suit in its own name to enforce the Copyrights, in which event the Bank may, if the Grantor deems it necessary or after an Event of Default under the Loan Documents, be joined as a nominal party to such suit if the Bank shall have been satisfied that it is not thereby incurring any risk of liability because of such joinder. The Grantor shall promptly, upon demand, reimburse and indemnify the Bank for all damages, reasonable costs and reasonable expenses, including attorneys' fees, incurred by the Bank in the fulfillment of the provisions of this paragraph. 12. ADDITIONAL REMEDIES. Upon the occurrence of an Event of Default under the Loan Documents, the Bank may, at its sole discretion, complete any obligation of the Grantor hereunder, in the Grantor's name or in the Bank's name, but at the Grantor's expense and the Grantor hereby agrees to reimburse the Bank in full for all reasonable expenses, including reasonable attorneys fees, incurred by the Bank protecting, defending and maintaining the Copyrights. 13. GOVERNING LAW. THIS RIDER WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE BANK'S OFFICE INDICATED ABOVE IS LOCATED, EXCLUDING ITS CONFLICT OF LAWS RULES, EXCEPT THAT THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN TO THE EXTENT APPLICABLE. 14. COUNTERPARTS. This Rider may be signed in any number of counterpart copies and by the parties hereto on separate counterparts, but all such copies shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart. Any party so executing this Agreement by facsimile transmission shall promptly deliver a manually executed counterpart, provided that any failure to do so shall not affect the validity of the counterpart executed by facsimile transmission. WITNESS the due execution hereof as a document under seal, as of the date first written above. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - ---------------------------------- -------------------- ------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano ---------------------- --------------------- Title: SVP Finance Title: Chairman & CEO --------------------------- --------------------------- (Include title only if an officer of entity signing to the right) PNC BANK, NATIONAL ASSOCIATION By: /s/ --------------------------------- Print Name: Frank P. Devine ------------------------- Title: Assistant Vice President ----------------------------- SCHEDULE A - COPYRIGHTS
Name of Copyright Registered (Y/N) Registration or Film No. - ----------------- ---------------- ------------------------ None
COPYRIGHT ASSIGNMENT WHEREAS, ESCALON MEDICAL CORP. (the "GRANTOR") is the owner of the entire right, title and interest in and to the United States copyrights listed on Schedule A attached hereto and made part hereof (collectively as the "Copyrights") which are registered in the United States Library of Congress, Copyright Office or which are the subject of pending applications in the United States Library of Congress, Copyright Office; and WHEREAS, PNC BANK, NATIONAL ASSOCIATION, having a place of business at 1600 Market Street, Philadelphia, Pennsylvania 19103, identified as the "BANK" under that certain Rider to Security Agreement - Copyrights of even date herewith (the "Grantee") is desirous of acquiring said Copyrights; WHEREAS, the Grantee has a security interest in the assets of the Grantor adequate to carry on the business of the Grantor; and WHEREAS, the Rider provides that this Assignment shall become effective upon the occurrence of an Event of Default as defined in the Security Agreement dated as of November 16, 2001, by and between the Grantor and the Grantee. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Grantor, for itself and its successors and assigns does hereby transfer, assign and set over unto Grantee, its successors, transferees and assigns, all of its present and future right, title and interest in and to the Copyrights and all proceeds thereof and all goodwill associated therewith. IN WITNESS WHEREOF, the undersigned has caused this Copyright Assignment to be executed by its duly authorized officer on this 16th day of November, 2001. WITNESS / ATTEST: ESCALON MEDICAL CORP. /s/ By: /s/ - --------------------------------- ------------------- -------- (SEAL) Print Name: H.M. Rimmer Print Name: Richard J. DePiano --------------------- --------------------- Title: SVP Finance Title: CEO -------------------------- -------------------------- (Include title only if an officer of entity signing to the right) EX-23.1 8 w84090exv23w1.txt CONSENT OF PARENTE RANDOLPH, LLC EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-83392, No. 333-54980, No. 333-31138) of Escalon Medical Corp. of our reports dated August 17, 2001 and August 16, 2002 relating to the financial statements, which appear in this Annual Report on Form 10-K/A for the years ended June 30, 2001 and June 30, 2002, respectively. /s/ Parente Randolph, LLC Philadelphia, Pennsylvania March 3, 2003 EX-99.1 9 w84090exv99w1.txt CERTIFICATION - RICHARD J. DEPIANO Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Escalon Medical Corp. (the "Company"), that, to his knowledge, the Annual Report of the Company on Form 10-K/A for the fiscal year ended June 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 3, 2003 /s/ Richard J. DePiano -------------------- ----------------------- Richard J. DePiano Chairman and Chief Executive Officer (Principal Executive Officer) EX-99.2 10 w84090exv99w2.txt CERTIFICATION - HARRY M. RIMMER Exhibit 99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Escalon Medical Corp. (the "Company"), that, to his knowledge, the Annual Report of the Company on Form 10-K/A for the fiscal year ended June 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 3, 2003 /s/ Harry M. Rimmer -------------------- -------------------- Harry M. Rimmer Senior Vice President - Finance (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----