-----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, WVKJK+wBI+7ZT/tW73vtPEkiKGkAdEqy6pW+n69nVZBcvggvZfFbDvRbl1POmb6g 2hIaIDEZFSAn/TM9xixGqA== 0000893220-04-001056.txt : 20040517 0000893220-04-001056.hdr.sgml : 20040517 20040517103358 ACCESSION NUMBER: 0000893220-04-001056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20127 FILM NUMBER: 04810227 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 10-Q 1 w97573e10vq.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004. ( ) Transitional report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transitional 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) 575 EAST SWEDESFORD ROAD, SUITE 100, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required 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 past 90 days. YES [X] NO [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] At May 14, 2004, 5,015,872 shares of Common Stock were outstanding. ESCALON MEDICAL CORP. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
Page ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and June 30, 2003 3 Condensed Consolidated Statements of Operations for the three- and nine- month periods ended March 31, 2004 and 2003 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended March 31, 2004 and 2003 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures 33 Part II. Other Information Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 35
2 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30, 2004 2003 ------------ ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 12,916,378 $ 298,390 Accounts receivable, net 2,025,453 2,364,370 Inventory, net 1,868,625 1,785,480 Other current assets 223,174 310,420 ------------ ------------ Total current assets 17,033,630 4,758,660 ------------ ------------ Long-term note receivable 150,000 150,000 Furniture and equipment, net 424,289 516,686 Goodwill 10,591,795 10,591,795 Trademarks and trade names, net 616,906 616,906 License and distribution rights, net - 13,138 Patents, net 174,760 182,811 Other assets 67,955 60,235 ------------ ------------ Total assets $ 29,059,335 $ 16,890,231 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 250,000 $ 975,000 Current portion of long-term debt 1,626,623 1,510,344 Accounts payable 430,404 454,711 Accrued compensation 693,281 708,231 Other current liabilities 319,671 222,036 ------------ ------------ Total current liabilities 3,319,979 3,870,322 Long-term debt, net of current portion 2,796,019 4,080,461 ------------ ------------ Total liabilities 6,115,998 7,950,783 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; 5,015,872 and 3,365,359 shares issued and outstanding at March 31, 2004 and June 30, 2003, respectively 5,016 3,365 Common stock warrants 1,601,346 - Additional paid-in capital 56,480,012 46,262,411 Accumulated deficit (35,143,037) (37,326,328) ------------ ------------ Total shareholders' equity 22,943,337 8,939,448 ------------ ------------ Total liabilities and shareholders' equity $ 29,059,335 $ 16,890,231 ============ ============
See notes to condensed consolidated financial statements 3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended March 31, March 31, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Product revenue $ 3,019,536 $ 2,776,415 $ 9,004,696 $ 8,039,301 Other revenue 593,242 610,477 1,777,649 1,623,107 ------------ ------------ ------------ ------------ Revenues, net 3,612,778 3,386,892 10,782,345 9,662,408 ------------ ------------ ------------ ------------ Costs and expenses: Cost of goods sold 1,364,600 1,178,377 3,827,059 3,536,340 Research and development 167,123 204,283 600,245 578,337 Marketing, general and administrative 1,254,516 1,220,007 3,789,801 3,786,148 Write-down of Povidone Iodine license and distribution rights - 195,950 - 195,950 ------------ ------------ ------------ ------------ Total costs and expenses 2,786,239 2,798,617 8,217,105 8,096,775 ------------ ------------ ------------ ------------ Income from operations 826,539 588,275 2,565,240 1,565,633 ------------ ------------ ------------ ------------ Other income and expenses: Interest income 9,356 609 10,317 2,087 Interest expense (93,794) (133,750) (320,233) (505,757) ------------ ------------ ------------ ------------ Total other income and expenses (84,438) (133,141) (309,916) (503,670) ------------ ------------ ------------ ------------ Income before income taxes 742,101 455,134 2,255,324 1,061,963 Income taxes 2,927 - 72,033 - ------------ ------------ ------------ ------------ Net income $ 739,174 $ 455,134 $ 2,183,291 $ 1,061,963 ============ ============ ============ ============ Basic net income per share $ 0.192 $ 0.136 $ 0.619 $ 0.316 ============ ============ ============ ============ Diluted net income per share $ 0.172 $ 0.133 $ 0.564 $ 0.309 ============ ============ ============ ============ Weighted average shares - basic 3,839,937 3,355,851 3,524,603 3,355,851 ============ ============ ============ ============ Weighted average shares - diluted 4,286,761 3,420,474 3,869,901 3,441,180 ============ ============ ============ ============
See notes to condensed consolidated financial statements 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended March 31, 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,183,291 1,061,963 Adjustments to reconcile net income to net cash provided by in operating activities: Depreciation and amortization 186,745 245,765 Write-down of license and distribution rights - 195,950 Disposal of furniture and equipment - 927 Change in operating assets and liabilities: Accounts receivable, net 338,917 (249,991) Inventory, net (83,145) (224,485) Other current and long-term assets 79,525 227,608 Accounts payable, accrued and other liabilities 58,379 (10,621) ------------ ------------ Net cash provided by operating activities 2,763,712 1,247,116 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (41,647) (64,609) ------------ ------------ Net cash used in investing activities (41,647) (64,609) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowing 153,981 650,000 Line of credit repayment (878,981) (525,000) Principal payments on term loans (1,199,675) (1,395,699) Issuance of common stock - private placement 9,834,485 - Issuance of common stock - stock options 1,986,113 - ------------ ------------ Net cash provided by (used in) financing activities 9,895,923 (1,270,699) ------------ ------------ Net increase (decrease) in cash and cash equivalents 12,617,988 (88,192) Cash and cash equivalents, beginning of period 298,390 220,826 ------------ ------------ Cash and cash equivalents, end of period $ 12,916,378 $ 132,634 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 251,309 $ 500,127 ============ ============ Issuance of Common Stock for EMS trade name $ - $ 15,100 ============ ============
See notes to condensed consolidated financial statements 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
Common Stock Common Additional Total -------------------------- Stock Paid-in Accumulated Shareholders' Shares Amount Warrants Capital Deficit Equity --------- ------------ ------------ ------------ ------------ ------------ Balance at June 30, 2003 3,365,359 $ 3,365 - $ 46,262,411 $(37,326,328) $ 8,939,448 Private placement offering 800,000 800 1,601,346 8,232,339 - 9,834,485 Exercise of stock options 855,162 855 - 2,015,617 - 2,016,472 Treasury stock retirement (4,649) (4) - (30,355) - (30,359) Net income - - - - 2,183,291 2,183,291 --------- ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2004 5,015,872 $ 5,016 $ 1,601,346 $ 56,480,012 $(35,143,037) $ 22,943,337 ========= ============ ============ ============ ============ ============
See notes to condensed consolidated financial statements ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, ophthalmic pharmaceuticals and vascular devices. The accompanying unaudited condensed consolidated financial statements include accounts of Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("EMI"), Sonomed EMS, Srl ("Sonomed EMS") and Escalon Pharmaceutical, Inc. ("Pharmaceutical") (collectively referred to as "Escalon" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, these condensed consolidated financial statements should be read in conjunction with consolidated financial statements and notes thereto contained in the Company's 2003 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial position, results of operations and cash flows for interim periods presented. The results of operations are not necessarily indicative of the results that may be expected for the full year. 6 2. SIGNIFICANT ACCOUNTING POLICIES 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 estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For the purposes of reporting cash flows, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties and highly liquid investments with original maturities of 90 days or less to be cash and cash equivalents. REVENUE RECOGNITION The Company recognizes revenue from the sale of its products at the time of shipment, when title and risk of loss transfer. The Company provides products to its distributors at agreed wholesale prices and to the balance of its customers at set retail prices. Distributors can receive discounts for accepting high volume shipments. The discounts are reflected immediately in the net invoice price, which is the basis for revenue recognition. No further material discounts or sales incentives are given. The Company's considerations for recognizing revenue upon shipment of products to a distributor are based on the following: - Persuasive evidence that an arrangement (purchase order and sales invoice) exists between a willing buyer (distributor) and the Company that outlines the terms of the sale (company information, quantity of goods, purchase price and payment terms). The buyer (distributor) does not have an immediate right of return. - Shipping terms are ex-factory shipping point. At this point the buyer (distributor) takes title to the goods and is responsible for all risks and rewards of ownership, including insuring the goods as necessary. - The Company's price to the buyer (distributor) is fixed and determinable as specifically outlined on the sales invoice. The sales arrangement does not have customer cancellation or termination clauses. - The buyer (distributor) places a purchase order with the Company; the terms of the sale are cash, COD or credit. Customer credit is determined based on the Company's policies and procedures related to the buyer's (distributor's) creditworthiness. Based on this determination, the Company believes that collectibility is reasonably assured. Provision has been made for estimated sales returns based on historical experience. With respect to additional consideration related to the sale of Silicone Oil by Bausch & Lomb and the licensing of the Company's intellectual laser technology, revenue is recognized upon notification from the other parties of amount earned or upon receipt of royalty payments. SHIPPING AND HANDLING REVENUES AND COSTS Shipping and handling revenues are included in product revenue and the related costs are included in cost of goods sold. 7 INVENTORIES Raw materials/work in process and finished goods are recorded at lower of cost (first-in, first-out) or market. ACCOUNTS RECEIVABLE Accounts receivable are recorded at net realizable value. The Company performs ongoing credit evaluations of 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 based on the Company's historical losses and upon periodic review of individual balances. Accounts are written off when they are determined to be uncollectible based on management's assessment of individual accounts. Credit losses, when realized, have been within the range of management's expectations. Allowance for doubtful accounts was $120,805 and $261,351 at March 31, 2004 and June 30, 2003, respectively. FURNITURE AND EQUIPMENT Furniture and equipment is recorded at cost. Depreciation is recorded using the straight-line method over the economic useful life of the related assets, which are estimated to be over three to ten years. Depreciation for the three-month periods ended March 31, 2004 and 2003 was $43,255 and $46,223, respectively. Depreciation for the nine-month periods ended March 31, 2004 and 2003 was $134,044 and $138,765, respectively. LONG-LIVED ASSETS Management assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from its future undiscounted cash flows. If it is determined that impairment has occurred, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds its estimated fair value. INTANGIBLE ASSETS The Company follows Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which discontinues the amortization of goodwill and identifiable intangible assets that have indefinite lives. In accordance with SFAS 142, these assets are tested for impairment on an annual basis. STOCK-BASED COMPENSATION The Company reports stock-based compensation through the disclosure-only requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB No. 123." Compensation expense for options is measured using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options is generally equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS 123 establishes an alternative method of expense recognition for stock-based compensation awards based on fair values. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123. 8
Three-Month Period Ended Nine-Month Period Ended March 31, March 31, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net Income, as reported $ 739,174 $ 455,134 $ 2,183,291 $ 1,061,963 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (48,440) (18,103) (359,097) (97,083) ------------ ------------ ------------ ------------ Pro forma net income $ 690,734 $ 437,031 $ 1,824,194 $ 964,880 ============ ============ ============ ============ Earnings per share: Basic - as reported $ 0.192 $ 0.136 $ 0.619 $ 0.316 ============ ============ ============ ============ Basic - pro forma $ 0.180 $ 0.130 $ 0.518 $ 0.288 ============ ============ ============ ============ Diluted - as reported $ 0.172 $ 0.133 $ 0.564 $ 0.309 ============ ============ ============ ============ Diluted - pro forma $ 0.161 $ 0.128 $ 0.471 $ 0.280 ============ ============ ============ ============
The Company has followed the guidelines of SFAS 123 to establish the valuation of its stock options. The commonly accepted method of valuing these options is the Black-Sholes option valuation model that requires assumptions for the expected holding period and the expected volatility. The Company does not have a reliable history of employee stock options being exercised and consequently cannot estimate the expected holding period. For the sake of this valuation, the expected holding period is assumed to be the life of the stock option as defined in the stock option plan (10 years). The volatility assumption is based on the volatility seen in the Company's stock over the last five years. This assumption was made according to the guidance of SFAS 123. There is no reason to believe that future volatility will compare with the historical volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the value of its options. RESEARCH AND DEVELOPMENT All research and development costs are charged to operations as incurred. ADVERTISING COSTS Advertising costs are charged to operations as incurred. Advertising expense for the three-month periods ended March 31, 2004 and 2003 was $1,926 and $5,733, respectively. Advertising expense for the nine-month periods ended March 31, 2004 and 2003 was $16,686 and $19,197, respectively. 9 EARNINGS 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 set forth the computation of basic and diluted earnings per share:
Three-Month Periods Nine-Month Periods Ended March 31, Ended December 31, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Numerator: Numerator for basic and diluted earnings per share: Net income $ 739,174 $ 455,134 $ 2,183,291 $ 1,061,963 ------------ ------------ ------------ ------------ Denominator: Denominator for basic earnings per share - weighted average shares 3,839,937 3,355,851 3,524,603 3,355,851 Effect of dilutive securities: Stock options and warrants 446,824 64,623 345,298 85,329 ------------ ------------ ------------ ------------ Denominator for diluted earnings earnings per share - weighted average and assumed conversion 4,286,761 3,420,474 3,869,901 3,441,180 ------------ ------------ ------------ ------------ Basic earnings per share $ 0.192 $ 0.136 $ 0.619 $ 0.316 ============ ============ ============ ============ Diluted earnings per share $ 0.172 $ 0.133 $ 0.564 $ 0.309 ============ ============ ============ ============
INCOME TAXES The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates, should a change occur, is recognized in income in the period that include the enactment date. 3. INVENTORIES Inventories, stated at lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
March 31, June 30, 2004 2003 ------------ ------------ Raw materials/Work in process $ 1,493,472 $ 1,374,184 Finished goods 439,048 475,316 ------------ ------------ 1,932,520 1,849,500 Valuation allowance (63,895) (64,020) ------------ ------------ Total inventory $ 1,868,625 $ 1,785,480 ============ ============
10 4. INTANGIBLE ASSETS ACQUIRED LICENSE AND DISTRIBUTION RIGHTS In connection with the Company's acquisition of assets of Escalon Ophthalmics, Inc. ("EOI") in February 1996, a portion of the purchase price was allocated to certain license and distribution agreements. This cost allocation was based on an evaluation by management, with such costs being amortized over an eight-year period using the straight-line method. The value of these assets is reevaluated periodically to determine if the estimated lives continue to be appropriate. Accumulated amortization of license and distribution rights was $180,182 and $167,044 at March 31, 2004 and June 30, 2003, respectively. Amortization expense for the three-month periods ended March 31, 2004 and 2003 was $1,877 and $10,756, respectively. Amortization expense for the nine-month periods ended March 31, 2004 and 2003 was $13,138 and $32,269, respectively. PATENTS It is the Company's practice to seek patent protection on processes and products in various countries. Patent application costs are capitalized and amortized over their estimated useful lives, not exceeding 17 years, on a straight-line basis from the date the related patents are issued. Costs associated with patents no longer being pursued are expensed. Accumulated patent amortization was $119,455 and $111,406 at March 31, 2004 and June 30, 2003, respectively. Amortization expense for the three-month periods ended March 31, 2004 and 2003 was $2,683 and $2,683, respectively. Amortization expense for the nine-month periods ended March 31, 2004 and 2003 was $8,051 and $8,049, respectively. The aggregate amortization expense for each of the next five years for acquired license and distribution rights and patents is as follows:
Year ending June 30, 2004 ------------- 2004 $ 23,871 2005 10,733 2006 10,733 2007 10,733 2008 10,733 -------- $ 66,803 ========
GOODWILL, TRADEMARKS AND TRADE NAMES Goodwill, trademarks and trade names represent intangible assets obtained from the Escalon Ophthalmics, Inc. ("EOI"), Endologix, Inc. ("Endologix") and Sonomed acquisitions. Goodwill represents the excess of purchase price over the fair market value of net assets acquired. In accordance with SFAS 142, effective July 1, 2001, Escalon discontinued the amortization of goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives will continue to be amortized over their useful lives. Management evaluated the carrying value of goodwill and its identifiable intangible assets that have indefinite lives during each of the fiscal years subsequent to July 1, 2001. Management concluded that the carrying value of goodwill and identifiable intangible assets did not exceed their fair values and therefore were not impaired. Management made this conclusion after evaluating the discounted cash flow of each of its business units. In accordance with SFAS 142, these intangible assets will continue to be assessed on an annual basis. 11 The following table presents intangible assets by business unit as of March 31, 2004:
Adjusted Gross Gross Net Carrying Carrying Accumulated Carrying Amount Impairment Amount Amortization Value ------------ ------------ ------------ ------------ ------------ GOODWILL Sonomed $ 10,547,488 $ - $ 10,547,488 $ (1,021,938) $ 9,525,550 Vascular 1,149,813 - 1,149,813 (208,595) $ 941,218 Medical/Trek 272,786 - 272,786 (147,759) $ 125,027 Sonomed EMS - - - - $ - ------------ ------------ ------------ ------------ ------------ Balance as of March 31, 2004 $ 11,970,087 $ - $ 11,970,087 $ (1,378,292) $ 10,591,795 ============ ============ ============ ============ ============
Adjusted Gross Gross Net Carrying Carrying Accumulated Carrying Amount Impairment Amount Amortization Value ------------ ------------ ------------ ------------ ------------ PATENTS Sonomed $ - $ - $ - $ - $ - Vascular (pending issuance) 36,915 - 36,915 - $ 36,915 Medical/Trek 257,301 - 257,301 (119,456) $ 137,845 Sonomed EMS - - - - $ - ------------ ------------ ------------ ------------ ------------ Balance as of March 31, 2004 $ 294,216 $ - $ 294,216 $ (119,456) $ 174,760 ============ ============ ============ ============ ============
Adjusted Gross Gross Net Carrying Carrying Accumulated Carrying Amount Impairment Amount Amortization Value ------------ ------------ ------------ ------------ ------------ LICENSE AND DISTRIBUTION RIGHTS Sonomed $ - $ - $ - $ - $ - Vascular - - - - $ - Medical/Trek 180,182 - 180,182 (180,182) $ - Sonomed EMS - - - - $ - ------------ ------------ ------------ ------------ ------------ Balance as of March 31, 2004 $ 180,182 $ - $ 180,182 $ (180,182) $ - ============ ============ ============ ============ ============
Adjusted Gross Gross Net Carrying Carrying Accumulated Carrying Amount Impairment Amount Amortization Value ------------ ------------ ------------ ------------ ------------ UNAMORTIZED INTANGIBLE ASSETS Sonomed $ 665,000 $ - $ 665,000 $ (63,194) $ 601,806 Vascular - - - - $ - Medical/Trek - - - - $ - Sonomed EMS 15,100 - 15,100 - $ 15,100 ------------ ------------ ------------ ------------ ------------ Balance as of March 31, 2004 $ 680,100 $ - $ 680,100 $ (63,194) $ 616,906 ============ ============ ============ ============ ============
5. LONG-TERM RECEIVABLE Escalon entered into an agreement with an individual who was involved in the development of the Company's Ocufit SR(R) drug delivery system. The Company holds a note receivable from the individual in the amount of $150,000 that is due in May 2005. 12 6. LINE OF CREDIT AND LONG-TERM DEBT On December 23, 2002, a privately held fund (the "lender") acquired the Company's bank debt, which consisted of outstanding term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 available line of credit. On February 13, 2003, the Company entered into an Amended Loan Agreement with the lender. The primary amendments of the Amended Loan Agreement were to reduce quarterly principal payments, extend the term of the repayments and to alter the covenants of the original loan agreement. As of March 31, 2004, the amounts outstanding under the term loan and the line of credit were $4,246,019 and $250,000, respectively. At March 31, 2004, the interest rates applicable to the term loan and line of credit were 5.75% (prime plus 1.75%) and 5.50% (prime plus 1.50%), respectively. The lender's prime rate at March 31, 2004 was 4.00%. The $4,246,019 term loan balance includes a $2,450,000 balloon payment that is due on September 1, 2005. The Company paid $100,000 in finance fees in January 2000 to the prior lender, when this date was originally incurred. The finance fees are recorded as a reduction of long-term debt and are being amortized over the life of the loans using the effective interest method. On January 21, 1999, the Company's Vascular subsidiary and Endologix entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, the Company acquired for cash the assets of Endologix's vascular access business in exchange for cash and also agreed to pay royalties to Endologix based on future sales of the vascular access business for a period of five years following the closing of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 1, 2001, the parties amended the agreement to eliminate any future royalty payments to Endologix. Pursuant to the amendment, the Company paid $17,558 in cash to Endologix, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, a note in the amount of $717,558 payable in 11 quarterly installments that commenced on April 15, 2002, and the Company issued 50,000 shares of its Common Stock to Endologix. As of March 31, 2004, the amount outstanding under the Endologix term loan was $195,694. At March 31, 2004, the interest rate applicable to the Endologix term loan was 5.00%. The schedule below presents principal amortization for the next five years under each of the Company's loan agreements as of March 31, 2004.
Twelve-month period Private Group Endologix Deferred ending March 31, Term Loan Term Loan Finance Fees Total - ------------------- ------------- --------- ------------ ----------- 2004 $ 1,450,000 $ 196,000 $ (19,000) $ 1,627,000 2005 2,796,000 - - 2,796,000 2006 - - - - 2007 - - - - 2008 - - - - ------------- --------- ------------ ----------- $ 4,246,000 $ 196,000 $ (19,000) $ 4,423,000 ============= ========= ============ ===========
7. SALE OF SILICONE OIL PRODUCT LINE, LICENSING OF LASER TECHNOLOGY AND OTHER REVENUE SALE OF SILICONE OIL In the first quarter of fiscal 2000, Escalon received $2,117,000 from the sale to Bausch & Lomb 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 continue to receive additional consideration based on future sales of Silicone Oil through August 2005. 13 The agreement with Bausch & Lomb, which commenced on August 13, 2000, is structured so that the Company receives consideration from Bausch & Lomb based on its adjusted gross profit from its sales of Silicone Oil on a quarterly basis. The consideration is subject to a factor, which steps down according to the following schedule: From 8/13/00 to 8/12/01 100% From 8/13/01 to 8/12/02 82% From 8/13/02 to 8/12/03 72% From 8/13/03 to 8/12/04 64% From 8/13/04 to 8/13/05 45% LICENSING OF LASER TECHNOLOGY The material terms of the license of the Company's laser patents, which expires in 2014, provide that the Company will receive a 2.5% royalty on 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 remaining term of the license. The minimum annual license fee is offset against the royalty payments. The license was dated October 23, 1997, was amended and restated in October 2000 and expires on the latest of the following events: 1. the last to expire of the laser patents; 2. ten years from the effective date of the amended and restated agreement; 3. the fifth anniversary date of the first commercial sale. The material termination provisions of the license of the laser technology are as follows: 1. the Company has the right to terminate if the licensee defaults in the payment of any royalty; 2. the Company has the right to terminate if the licensee defaults in the making of any required report; 3. the Company has the right to terminate if the licensee makes any false report; 4. the commission of any material breach of any covenant or promise under the license agreement; or 5. the termination of the license by the licensee after 90 days notice (if the licensee were to terminate, the licensee would not be permitted to utilize the licensed technology necessary to manufacture its current products). OTHER REVENUE Other revenue includes quarterly payments received from Bausch & Lomb in connection with the sale of the Silicone Oil product line as well as royalty payments received from a privately held entity relating to the licensing of the Company's intellectual laser technology. For the three-month periods ended March 31, 2004 and 2003, Silicone Oil revenue totaled $447,000 and $455,000, respectively, and laser technology revenue totaled $147,000 and $156,000, respectively. For the nine-month periods ended March 31, 2004 and 2003, Silicone Oil revenue totaled $1,481,000 and $1,348,000, respectively, and laser technology revenue totaled $297,000 and $275,000, respectively. Accounts receivable at March 31, 2004 and June 30, 2003 related to other revenue was $447,000 and $443,000, respectively. 14 8. SEGMENTAL INFORMATION During the nine-month periods ended March 31, 2004 and 2003, the Company's operations were classified into four principal reportable segments that provide different products or services. Separate management of each segment is required because each business unit is subject to different marketing, production and technology strategies. SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) - THREE-MONTH PERIODS ENDED MARCH 31,
Sonomed Vascular Medical/Trek EMI Total 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Product revenue $ 1,978 $ 1,621 $ 728 $ 689 $ 308 $ 406 $ 6 $ 60 $ 3,020 $ 2,776 Other revenue - - - - 593 610 - - 593 610 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenue 1,978 1,621 728 689 901 1,016 6 60 3,613 3,386 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of goods sold 811 516 362 340 190 277 2 45 1,365 1,178 Operating expenses 757 930 367 343 260 300 37 47 1,421 1,620 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total costs and expenses 1,568 1,446 729 683 450 577 39 92 2,786 2,798 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income from operations 410 175 (1) 6 451 439 (33) (32) 827 588 Other income/expenses Interest income - - - - 9 1 - - 9 1 Interest expense (91) (128) (3) (6) - - - - (94) (134) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total other income and expenses (91) (128) (3) (6) 9 1 - - (85) (133) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before taxes 319 47 (4) - 460 440 (33) (32) 742 455 Income taxes - - (1) - 4 - - - 3 - -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 319 $ 47 $ (3) $ - $ 456 $ 440 $ (33) $ (32) $ 739 $ 455 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Depreciation/Amortization $ 6 $ 4 $ 11 $ 11 $ 38 $ 48 $ 3 $ 6 $ 58 $ 69 Assets $ 12,169 $ 12,198 $ 2,107 $ 2,256 $ 14,613 $ 2,071 $ 170 $ 365 $ 29,059 $ 16,890 Expenditures for long-lived assets $ 5 $ 34 $ - $ 6 $ - $ - $ - $ - $ 5 $ 40
15 SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) - NINE-MONTH PERIODS ENDED MARCH 31,
Sonomed Vascular Medical/Trek EMI Total 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Product revenue $ 5,648 $ 4,640 $ 2,191 $ 2,031 $ 985 $ 1,056 $ 181 $ 312 $ 9,005 $ 8,039 Other revenue - - - - 1,778 1,623 - - 1,778 1,623 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenue 5,648 4,640 2,191 2,031 2,763 2,679 181 312 10,783 9,662 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of goods sold 2,191 1,822 942 873 611 689 83 153 3,827 3,537 Operating expenses 2,251 2,288 1,239 1,136 721 944 180 191 4,391 4,559 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total costs and expenses 4,442 4,110 2,181 2,009 1,332 1,633 263 344 8,218 8,096 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income from operations 1,206 530 10 22 1,431 1,046 (82) (32) 2,565 1,566 Other income/expenses: Interest income - - - - 10 2 - - 10 2 Interest expense (310) (484) (10) (22) - - - - (320) (506) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total other income and expenses (310) (484) (10) (22) 10 2 - - (310) (504) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before taxes 896 46 - - 1,441 1,048 (82) (32) 2,255 1,062 Income taxes - - - - 72 - - - 72 - -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 896 $ 46 $ - $ - $ 1,369 $ 1,048 $ (82) $ (32) $ 2,183 $ 1,062 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Depreciation/Amortization $ 18 $ 13 $ 33 $ 31 $ 122 $ 183 $ 14 $ 18 $ 187 $ 245 Assets $ 12,169 $ 12,198 $ 2,107 $ 2,256 $ 14,613 $ 2,071 $ 170 $ 365 $ 29,059 $ 16,890 Expenditures for long-lived assets $ 5 $ 34 $ - $ 6 $ 37 $ 24 $ - $ - $ 42 $ 64
9. SALE OF COMMON STOCK AND WARRANTS On March 17, 2004, The Company completed a $10,400,000 private placement of Common Stock and Common Stock purchase warrants to accredited and institutional investors. The Company sold 800,000 shares of Common Stock at $13.00 per share. The investors also received warrants to purchase an additional 120,000 shares of Common Stock at an exercise price of $15.60 per share. The warrants cannot be exercised for 181 days from the private placement date and expire on September 13, 2009, if not exercised. The securities were sold pursuant to the exemptions from registration of Rule 506 of Regulation D and Section 4(2) under the Securities Act of 1933. The Company has subsequently filed a registration statement with the Securities and Exchange Commission, to register all of the Common Stock and of the Common Stock purchasable upon exercise of the warrants, which was declared effective on April 20, 2004. The net proceeds to the Company from the offering, after costs associated with the offering, of $9,834,485, have been allocated among the Common Stock and warrants based on their relative fair values. The Company used the Black-Scholes pricing model to determine the fair value of the warrants at $1,601,346. 10. SUBSEQUENT EVENT - EXCHANGE OFFER TO ACQUIRED THE SHARES OF DREW SCIENTIFIC GROUP PLC On May 14, 2004, Escalon issued a press release announcing the Company's exchange offer for the shares of Drew Scientific Group PLC ("Drew"), headquartered in the United Kingdom. The exchange offer valued each Drew share at 0.06 pounds sterling (approximately $0.11). Based on the closing price of $21.00 per share of Escalon Common Stock and the foreign currency exchange rate on May 12, 2004, Escalon offered 0.0051 shares of Escalon Common Stock in exchange for each ordinary share of Drew that is validly tendered. If all of the outstanding shares of Drew Scientific are exchanged, Escalon would issue approximately 454,010 shares of Escalon Common Stock in the exchange offer. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This Quarterly Report on Form 10-Q, including the information incorporated by reference herein and the exhibits hereto may include "forward-looking" statements. Forward-looking statements broadly involve the Company's current expectations for future results. The Company's forward-looking statements generally relate to growth strategies, financial results, product development, regulatory approvals, competitive strengths, the scope of the Company's intellectual property rights and sales efforts. Words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends," "may," "plan," "possible," "project," "should," "will" and similar expressions generally identify the Company's forward-looking statements. Any statement that is not historical fact, including estimates, projections, future trends and the outcome of events that have not yet occurred, are forward-looking statements. The Company's ability to actually achieve results consistent with the Company's current expectations depends significantly on certain factors that may cause actual future results to differ materially from the Company's current expectations. Some of these factors include: THE COMPANY'S PRODUCTS ARE SUBJECT TO STRINGENT ONGOING REGULATION BY THE FOOD AND DRUG ADMINISTRATION, KNOWN AS THE FDA, AND SIMILAR HEALTH AUTHORITIES, AND IF THE FDA'S APPROVALS OR CLEARANCES OF THE COMPANY'S PRODUCTS ARE RESTRICTED OR REVOKED, THE COMPANY COULD FACE DELAYS THAT WOULD IMPAIR THE COMPANY'S ABILITY TO GENERATE FUNDS FROM OPERATIONS. The FDA and similar health authorities in foreign countries extensively regulate the Company's activities. The Company 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 the Company obtain other approvals from foreign government agencies prior to the sale of products in those countries. Also, the Company may be required to obtain FDA approval before exporting a product or device that has not received FDA marketing clearance or approval. The Company has received the necessary FDA approvals for all products that the Company currently markets. Any restrictions on or revocation of the FDA approvals and clearances that the Company has obtained, however, would prevent the continued marketing of the impacted products and other devices. The restrictions or revocations could result from the discovery of previously unknown problems with the product. Consequently, the FDA revocation would impair the Company's 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 disposables, 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. The Company has received CE approval on several of the Company's products that allows the Company 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. The Company cannot assure you that the Company 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 the Company's financial resources and our management's time and effort. Any delay in obtaining clearances or approvals or any changes in existing regulatory requirements would materially adversely affect the Company's business. 17 A failure to comply with applicable regulations would subject the Company 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 the Company's business, financial condition and results of operations. FAILURE OF THE MARKET TO ACCEPT THE COMPANY'S PRODUCTS COULD ADVERSELY IMPACT THE COMPANY'S BUSINESS AND FINANCIAL CONDITION. The Company's business and financial condition will depend upon the market acceptance of the Company's products. The Company cannot assure you that the Company's products will achieve market acceptance. Market acceptance depends upon a number of factors: - the price of the products; - the receipt of regulatory approvals for multiple indications; - the establishment and demonstration of the clinical safety and efficacy of the Company's products; and - the advantages of the Company's products over those marketed by the Company's competitors. Any failure to achieve significant market acceptance of the Company's products will have a material adverse effect on the Company's business. THE SUCCESS OF COMPETITIVE PRODUCTS COULD HAVE AND ADVERSE EFFECT ON THE COMPANY'S BUSINESS. The Company faces intense competition in the medical device and pharmaceutical markets, which are characterized by rapidly changing technology, short product life cycles, cyclical oversupply and rapid price erosion. Many of the Company's competitors have substantially greater financial, technical, marketing, distribution and other resources. The Company's strategy is to compete primarily on the basis of technological innovation, reliability, quality and price of the Company's products. Without timely introductions of new products and enhancements, the Company's products will become technologically obsolete over time, in which case the Company's revenues and operating results would suffer. The success of the Company's new product offerings will depend on several factors, including the Company's ability to: - properly identify customer needs; - innovate and develop new technologies, services and applications; - establishing adequate product distribution coverage; - obtain and maintain required regulatory approvals from the FDA and other regulatory agencies; - protect the Company's intellectual property; - successfully commercialize new technologies in a timely manner; - manufacture and deliver the Company's products in sufficient volumes on time; - differentiate the Company's offerings from the Company's competitors' offerings; - price the Company's products competitively; - anticipate competitors' announcements of new products, services or 18 technological innovations; and - general market and economic conditions. The Company cannot assure you that the Company will be able to compete effectively in this competitive environment. THE COMPANY'S PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY, AND THIS TECHNOLOGY MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. The Company holds several United States and foreign patents for the Company's Products. Other parties, however, hold patents relating to similar products and technologies. The Company believes that the Company is not infringing on any patents held by others. However, if patents held by others were adjudged valid and interpreted broadly in an adversarial proceeding, the court or agency could deem them to cover one or more aspects of the Company's products or procedures. Any claims for patent infringement or claims by the Company for patent enforcement would consume time, result in costly litigation, divert technical and management personnel or require the Company to develop non-infringing technology or enter into royalty or licensing agreements. The Company cannot be certain that the Company will not be subject to one or more claims for patent infringement, that the Company would prevail in any such action or that the Company's patents will afford protection against competitors with similar technology. If a court determines that any of the Company's products infringes, directly, or indirectly, a patent in a particular market, the court may enjoin the Company from making, using and selling the product. Furthermore, the Company may be required to pay damages or obtain a royalty-bearing license, if available, on acceptable terms. A SIGNIFICANT DECREASE IN THE SALE OF SILICONE OIL BY BAUSCH & LOMB WOULD HAVE A NEGATIVE IMPACT ON THE COMPANY'S FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS. The Company realized 13.73% and 13.95% of the Company's net revenue during the nine-month periods ended March 31, 2004 and 2003, respectively, from Bausch & Lomb's sales of Silicone Oil. The Company is entitled to receive this revenue from Bausch & Lomb, in varying amounts, through August 2005. The agreement with Bausch & Lomb, which commenced on August 13, 2000, is structured so that the Company receives consideration from Bausch & Lomb based on its adjusted gross profit from its sales of Silicone Oil on a quarterly basis. The consideration is subject to a factor, which steps down according to the following schedule: From 8/13/00 to 8/12/01 100% From 8/13/01 to 8/12/02 82% From 8/13/02 to 8/12/03 72% From 8/13/03 to 8/12/04 64% From 8/13/04 to 8/12/05 45% The revenue associated with sale of Silicone Oil by Bausch & Lomb has no associated expenses and consequently provides a gross margin of 100%. Any significant reduction in this revenue can have a significant negative impact on gross margin. Any significant decrease in Silicone Oil revenue received by the Company would have an impact on the Company's financial position, results of operations and cash flows and the Company's stock price could be negatively impacted. LACK OF AVAILABILITY OF KEY SYSTEM COMPONENTS COULD RESULT IN DELAYS, INCREASE COSTS OR COSTLY REDESIGN OF PRODUCT. Although some of the parts and components used to manufacture the Company's products are available from multiple sources, the Company currently purchases most of the Company's components from single sources in an effort to obtain volume discounts. Lack of availability of any of these parts and components could result in production delays, increased costs, or costly redesign of the Company's 19 products. Any loss of availability of an essential component could result in a material adverse change to the Company's business, financial condition and results of operations. Some of the Company's suppliers are also subject to the FDA's Good Manufacturing Practice regulations. Failure of these suppliers to comply with these regulations could result in the delay or limitation of the supply of parts or components to the Company, which would adversely affect the Company's financial condition and results of operations. THE COMPANY'S ABILITY TO MARKET AND SELL THE COMPANY'S PRODUCTS MAY BE ADVERSELY AFFECTED BY LIMITATIONS ON REIMBURSEMENTS BY GOVERNMENT PROGRAMS, PRIVATE INSURANCE PLANS AND OTHER THIRD PARTY PAYORS. The Company's customers bill various third party payors, including government programs and private insurance plans, for the health care services provided to their patients. Third party payors may reimburse the customer, usually at a fixed rate based on the procedure performed, or may deny reimbursement if they determine that the use of the Company's products was elective, unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. Third party payors may deny reimbursement notwithstanding FDA approval or clearance of a product and may challenge the prices charged for the medical products and services. The Company's ability to sell the Company's products on a profitable basis may be adversely impacted by denials of reimbursement or limitations on reimbursement, compared with reimbursement available for competitive products and procedures. New legislation that further reduces reimbursements under the capital cost pass-through system utilized in connection with the Medicare program could also adversely affect the marketing of the Company's products. FUTURE LEGISLATION OR CHANGES IN GOVERNMENT PROGRAMS MAY ADVERSELY AFFECT THE MARKET FOR THE COMPANY'S PRODUCTS. In the past several years, the federal government and Congress have made proposals to change aspects of the delivery and financing of health care services. The Company cannot predict what form any future legislation may take or its effect on the Company's business. Legislation that sets price limits and utilization controls may adversely affect the rate of growth of ophthalmic and vascular access product markets. If any future health care legislation were to adversely impact those markets, the Company's product marketing could also suffer, which could adversely impact the Company's business. THE COMPANY MAY BECOME INVOLVED IN PRODUCT LIABILITY LITIGATION, WHICH MAY SUBJECT THE COMPANY TO LIABILITY AND DIVERT MANAGEMENT ATTENTION. The testing and marketing of the Company's products for applications in ophthalmology and vascular access, the Company's pharmaceutical products and vascular access products entail an inherent risk of product liability, resulting in claims based upon injuries or alleged injuries associated with a defect in the product's performance. Some of these injuries may not become evident for a number of years. Although the Company is not currently involved in any product liability litigation, the Company may be a party to litigation in the future as a result of an alleged claim. Litigation, regardless of the merits of the claim or outcome, could consume a great deal of the Company's time and money and would divert management time and attention away from the Company's core business. The Company maintains limited product liability insurance coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate, with umbrella policy coverage up to $5,000,000 in excess of such amounts. A successful product liability claim in excess of any insurance coverage may adversely impact the Company's financial condition and results of operations. The Company cannot assure you that product liability insurance coverage will continue to be available to the Company in the future on reasonable terms or at all. THE COMPANY'S INTERNATIONAL SALES OPERATIONS COULD BE ADVERSELY IMPACTED BY CHANGES IN LAWS OR POLICIES OF FOREIGN GOVERNMENTAL AGENCIES AND SOCIAL AND ECONOMIC CONDITIONS IN THE COUNTRIES IN WHICH THE COMPANY OPERATES. The Company derives a portion of the Company's revenues from sales outside the United States. Changes in the laws or policies of governmental agencies, as well as social and economic conditions, in the 20 countries in which the Company operates could affect the Company's business in these countries and the Company's results of operations. Also, economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates, and competitive factors, such as price competition, business combinations of competitors or a decline in industry sales from continued economic weakness, both in the United States and other countries in which the Company conducts business, could adversely affect the Company's results of operations. THE COMPANY IS DEPENDENT ON THE COMPANY'S MANAGEMENT AND KEY PERSONNEL TO SUCCEED. The Company's principal executive officers and technical personnel have extensive experience with the Company's products, the Company's research and development efforts, the development of marketing and sales programs and the necessary support services to be provided to the Company's customers. Also, the Company competes with other companies, universities, research entities and other organizations to attract and retain qualified personnel. The loss of the services of any of the Company's executive officers or other technical personnel, or the Company's failure to attract and retain other skilled and experienced personnel, could have a material adverse effect on the Company's ability to manufacture, sell and market the Company's products and the Company's ability to maintain or expand the Company's business. ANY ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES THAT THE COMPANY EFFECTS COULD RESULT IN FINANCIAL RESULTS THAT DIFFER FROM MARKET EXPECTATIONS. In the normal course of business, the Company engages in discussions with third parties regarding possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of any such transactions, the Company's financial results may differ from the investment community's expectations in a given quarter. In addition, acquisitions and alliances may require the Company to integrate a different company culture, management team and business infrastructure. The Company may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances the performance of the Company's combined businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, the Company's successful integration of the entity depends on a variety of factors including the retention of key employees and the management of facilities and employees in separate geographical areas. These efforts require varying levels of management resources, which may divert the Company's attention from other business operations. If the Company does not realize the expected benefits or synergies of such transactions, the Company's consolidated financial position, results of operations and stock price could be negatively impacted. THE MARKET PRICE OF THE COMPANY'S STOCK HAS HISTORICALLY BEEN VOLATILE, AND THE COMPANY HAS NOT PAID CASH DIVIDENDS. The volatility of the Company's Common Stock imposes a greater risk of capital losses on shareholders as compared to less volatile stocks. In addition, such volatility makes it difficult to ascribe a stable valuation to a shareholder's holdings of the Company's common stock. The following factors have and may continue to have a significant impact on the market price of the Company's common stock: - announcements of technological innovations; - changes in marketing, product pricing and sales strategies or new products by the Company's competitors; - any acquisitions, strategic alliances, joint ventures and divestitures that the Company effects; - changes in domestic or foreign governmental regulations or regulatory requirements; and - developments or disputes relating to patent or proprietary rights and public concern as to the safety and efficacy of the procedures for which the Company's products are used. 21 Moreover, the possibility exists that the stock market, and in particular the securities of medical device companies, could experience extreme price and volume fluctuations unrelated to operating performance. The Company has not paid any cash dividends on the Company's common stock and does not anticipate paying any cash dividends in the foreseeable future. THE COMPANY'S RESULTS FLUCTUATE FROM QUARTER TO QUARTER The Company has experienced quarterly fluctuations in operating results and anticipates continued fluctuations in the future. A number of factors contribute to these fluctuations: - changes in the mix of products sold; - the timing and expense of new product introductions by the Company or the Company's competitors; - fluctuations in royalty income; - announcements of new strategic relationships by the Company or the Company's competitors; - the cancellation or delays in the purchase of the Company's products; - the gain or loss of significant customers; - fluctuations in customer demand for the Company's products; and - competitive pressures on prices at which the Company can sell the Company's products. The Company sets spending levels in advance of each quarter based, in part, on the Company's expectations of product orders and shipments during that quarter. A shortfall in revenue, therefore, in any particular quarter as compared to the Company's plan could have a material adverse effect on the Company's results of operations and cash flows. Also, the Company's quarterly results could fluctuate due to general conditions in the healthcare industry or global economy generally, or market volatility unrelated to the Company's business and operating results. THE IMPACT OF TERRORISM OR ACTS OF WAR COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANYS' BUSINESS. Terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to the Company's operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse effect on the Company's business. THE COMPANY'S CHARTER DOCUMENTS AND PENNSYLVANIA LAW MAY INHIBIT A TAKEOVER. Certain provisions of Pennsylvania law and the Company's bylaws could delay or impede the removal of incumbent directors and could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire, control of the Company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Board of Directors is divided into three classes, with directors in each class elected for three-year terms. The bylaws impose various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. The Company's Board of Directors may issue shares of preferred stock without shareholder approval on such terms and conditions, and having such rights, privileges and preferences, as the Board may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Company has no current plans to issue any shares of preferred stock. 22 The reader 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 inaccurate assumptions. It is not possible to foresee or identify all factors that may affect the Company's forward-looking statements, and the reader should not consider any list of such factors to be an exhaustive list of all risks, uncertainties or potentially inaccurate assumptions affecting such forward-looking statements. The Company cautions the reader to consider carefully these factors as well as the specific factors discussed with each specific forward-looking statement in this quarterly report and in the Company's other filings with the Securities and Exchange Commission. In some cases, these factors have affected, and in the future (together with other unknown factors) could affect the Company's ability to implement the Company's business strategy and may cause actual results to differ materially from those contemplated by such forward-looking statements. No assurance can be made that any expectation, estimate or projection contained in a forward-looking statement can be achieved. The Company also cautions the reader that forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the Company on this subject in the Company's filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K, in which the Company discusses in more detail various important factors that could cause actual results to differ from expected or historical results. The Company intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding the Company's forward-looking statements, and are including this sentence for the express purpose of enabling the Company to use the protections of the safe harbor with respect to all forward-looking statements. EXECUTIVE OVERVIEW - NINE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2003 The following highlights are discussed in further detail within this Form 10-Q. The reader is encouraged to read this Form 10-Q in its entirety to gain a more complete understanding of factors affecting Company performance and financial condition. - The Company completed a $10.4 million private placement of Common Stock and Common Stock purchase warrants on March 17, 2004. The net proceeds to the Company of approximately $9.8 million will enable the Company to strengthen its balance sheet and provide additional working capital for general corporate purposes. - Product revenue, up 12.01% from last year, is benefiting from increased domestic demand for the Company's pachymeter product as well as increased market penetration in Europe. - Other revenue, up 9.52% from last year, was received primarily from Bausch & Lomb in connection with the Silicone Oil product line. The contract for this revenue expires in August 2005. - Cost of goods sold as a percentage of revenue decreased to 35.49% from 36.60% primarily due to product mix, an increase in other revenue that has no associated costs and increased productivity. - Operating expenses increased by less than 1% as the Company continued to benefit from the reduction of certain administrative costs while, at the same time, investing in product development and strengthening of the Company's sales channels domestically and overseas. - Interest expense decreased by 36.68% primarily due to reduced debt levels. 23 COMPANY OVERVIEW The following discussion should be read in conjunction with interim condensed consolidated financial statements and the notes thereto, which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. was incorporated in California in 1987 as Intelligent Surgical Lasers, Inc. The Company's present name was adopted in August 1996. The Company reincorporated in Delaware in 1999, and then reincorporated in Pennsylvania in November 2001. The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of ophthalmic medical devices, pharmaceuticals and vascular access devices. The Company and its products are subject to regulation and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and manufacturing of products, as well as labeling and marketing. In February 1996, the Company acquired substantially all of the assets and certain liabilities of 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, the Company changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser technology 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. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Endologix. 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. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000, EMI formed a joint venture, Escalon Medical Imaging, LLC with a privately held company, to develop and market a digital camera back for ophthalmic photography. The Company terminated its joint venture and commenced direct operations within its EMI business unit on January 1, 2002. On May 14, 2004, Escalon issued a press release announcing the Company's exchange offer of the Company's Common Stock for the shares of Drew Scientific Group PLC, headquartered in the United Kingdom. Drew is a diagnostics company specializing in the design, manufacture, sale and distribution of analytical systems for laboratory testing world-wide. Drew provides instrumentation and consumables for the diagnosis and monitoring of medical disorders in the rapidly growing areas of diabetes, cardiovascular diseases and hematology, as well as veterinary hematology and blood chemistry. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires management to make estimates and assumptions that affect the amount reported therein. The most significant of those involve the application of SFAS 142, discussed further in the Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q. 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, sales returns and rebates, deferred income taxes and purchased intangible assets. Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates. 24 REVENUE RECOGNITION The Company's standard arrangement for the Company's domestic and international customers includes a signed purchase order or contract and no right of return of delivered products without the consent of the Company. Revenue from sales of product is recognized when: - The Company enters into a legally binding arrangement with a buyer; - The Company delivers the products; - Buyer payment is deemed fixed and determinable and free of contingencies or significant uncertainties; and - Collection is probable. The Company assesses collectibility based on the creditworthiness of the buyer and past transaction history. The Company performs ongoing credit evaluations of its customers and does not require collateral from its customers. For many of the Company's international customers, the Company requires prepayment or an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. VALUATION OF INTANGIBLE ASSETS The Company periodically evaluates its intangible assets and goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets," for indications of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. These intangible assets include goodwill, trademarks and trade names. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results or significant negative industry or economic trends. If these criteria indicate that the value of the intangibles may be impaired, an evaluation of the recoverability of the net carrying value of the asset is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value. Any such impairment charge could be significant and could have a material adverse effect on the Company's reported financial statements if and when an impairment charge is recorded. DEFERRED TAXES The deferred tax valuation allowance is based on the Company's assessment of the realizability of the Company's deferred tax assets on an ongoing basis and may be adjusted from time to time as necessary. In determining the valuation allowance, the Company has considered future taxable income and the feasibility of tax planning initiatives and strategies. Should the Company determine that it is more likely than not that it will realize certain of the Company's deferred tax assets in the future, an adjustment would be required to reduce the existing valuation allowance and increase income. On the contrary, if the Company determines that it would not be able to realize the Company's recorded deferred tax asset, an adjustment to increase its valuation allowance would be charged to the results of operations in the period such conclusion was made. Such charge could have an adverse effect on the Company's provision for income taxes included in the Company's results of operations. 25 THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2003 The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the three and nine-month periods ended March 31, 2004 and 2003.
Three-Month Periods Nine-Month Periods Ended March 31, Ended March 31, ------------------------------------------------------------------------------------------ 2004 2003 % Change 2004 2003 % Change ------------ ------------ -------- ------------ ------------ -------- Product revenue: Sonomed $ 1,978 $ 1,621 22.02% $ 5,648 $ 4,640 21.72% Vascular 728 690 5.51% 2,191 2,031 7.88% Medical/Trek 308 406 -24.14% 985 1,056 -6.72% EMI 6 59 -89.83% 181 312 -41.99% ------------ ------------ ------ ------------ ------------ ------ $ 3,020 $ 2,776 8.79% $ 9,005 $ 8,039 12.02% ============ ============ ====== ============ ============ ======
Product revenues increased $244,000, or 8.79%, to $3,020,000 for the three-month period ended March 31, 2004 as compared to $2,776,000 for the same period in the prior fiscal year. Product revenue in the Sonomed business unit increased $357,000, or 22.02%, to $1,978,000. The increase is attributed to a $132,000 increase in the Middle East, a $117,000 increase in Europe and a $72,000 increase in Latin America. The increases in the Middle East and Europe are the result of additional sales and marketing resources and management attention to developing these markets. The increase in Latin America is the result of recovering economies in South American countries. Product revenue in the Vascular business unit increased $38,000, or 5.51%, to $728,000. The increase relates primarily to increased market coverage in Europe as a result of the engagement of a marketing consultant in December 2003. Product revenue in the Medical/Trek business unit decreased $98,000, or 24.14%, to $308,000. The decrease primarily relates to decreased OEM shipments to Bausch & Lomb of $50,000. Product revenue in the EMI business unit decreased $53,000, or 89.83%, to $6,000. EMI did not ship any of its CFA systems during the three-month period ended March 31, 2004. Product revenues increased $966,000, or 12.02%, to $9,005,000 for the nine-month period ended March 31, 2004 as compared to $8,039,000 for the same period in the prior fiscal year. Product revenue in the Sonomed business unit increased $1,008,000, or 21.72%, to $5,648,000. The increase is attributed to a $525,000 increase in the domestic market, a $290,000 increase in Europe, a $210,000 increase in the Middle East and a $133,000 increase in Latin America offset by a $126,000 decrease in Asia and the Pacific Rim. The increase in the domestic market primarily relates to increased demand for the Company's pachymeter product. The domestic market for pachymeters has expanded due to enhanced techniques in glaucoma screening performed by optometrists. Historically, the typical optometrist has not been a user of the pachymeter. The increases in Europe and the Middle East are the result of additional sales and marketing resources and management attention to developing these markets, whereas the increase in Latin America is a result of recovering economies in South American countries. Product revenue in the Vascular business unit increased $160,000, or 7.88%, to $2,191,000. The increase relates primarily to increased usage in the domestic marketplace. Product revenue in the Medical/Trek business unit decreased $71,000, or 6.72%, to $985,000. The decrease primarily relates to decreased market demand for Medical/Trek's products. Product revenue in the EMI business unit decreased $131,000, or 41.99%, to $181,000. Other revenue, which is included in the Medical/Trek business unit, decreased $17,000, or 2.79%, to $593,000 for the three-month period ended March 31, 2004 as compared to $610,000 from the same period in the prior fiscal year. Royalty payments from a privately held entity related to the licensing of the Company's intellectual laser technology decreased $9,000 and the revenue received from Bausch & Lomb in connection with their sales of Silicone Oil decreased $8,000. The Company's contract with Bausch & Lomb calls for annual step-downs in the calculation of Silicone Oil revenue to be received by the Company. These step-downs occur during the first quarter of each fiscal year through the remainder of the contract, which ends in August 2005. For the three-month period ended March 31, 2004, the step-down 26 caused a $56,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The offsetting $48,000 increase in Silicone Oil revenue is due to increased market demand for the product. The Company does not have any further knowledge as to what factors have affected Bausch & Lomb's sales of Silicone Oil. See the Notes to Condensed Consolidated Financial Statements for a description of the step-down provisions under the contract with Bausch & Lomb. Other revenue, which is included in the Medical/Trek business unit, increased $155,000, or 9.55%, to $1,778,000 for the nine-month period ended March 31, 2004 as compared to $1,623,000 for the same period in the prior fiscal year. The increase primarily relates to a $133,000 increase in revenue received from Bausch & Lomb in connection with its sales of Silicone Oil. The Company's contract with Bausch & Lomb calls for annual step-downs in the calculation of Silicone Oil revenue to be received by the Company. These step-downs occur during the first quarter of each fiscal year through the remainder of the contract, which ends in August 2005. For the nine-month period ended March 31, 2004, the step-down caused a $185,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The offsetting $317,000 increase in Silicone Oil revenue is due to increased market demand for the product. The Company does not have any further knowledge as to what factors have affected Bausch & Lomb's sales of Silicone Oil. See the Notes to Condensed Consolidated Financial Statements for a description of the step-down provisions under the contract with Bausch & Lomb. The remaining $22,000 increase in other revenue relates to royalty payments from a privately held entity related to the licensing of the Company's intellectual laser technology. The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the three and nine-month periods ended March 31, 2004 and 2003.
Three-Month Periods Nine-Month Periods Ended March 31, Ended March 31, ------------------------------------------------------------------------------------------ 2004 2003 2004 2003 -------------------- -------------------- -------------------- -------------------- Dollars % Dollars % Dollars % Dollars % Cost of goods sold: Sonomed $ 813 41.10% $ 517 31.89% $ 2,191 38.79% $ 1,822 39.27% Vascular 362 49.73% 339 49.13% 942 42.99% 873 42.98% Medical/Trek 188 61.04% 277 68.23% 611 62.03% 689 65.25% EMI 2 33.33% 45 76.27% 83 45.86% 153 49.04% -------- ----- -------- ----- -------- ----- -------- ----- $ 1,365 45.20% $ 1,178 42.44% $ 3,827 42.50% $ 3,537 44.00% ======== ===== ======== ===== ======== ===== ======== =====
Cost of goods sold totaled $1,365,000, or 45.20%, of product revenue, for the three-month period ended March 31, 2004 as compared to $1,178,000, or 42.44% of product revenue, for the same period last fiscal year. Cost of goods sold in the Sonomed business unit totaled $813,000, or 41.10% of product revenue, for the three-month period ended March 31, 2004 as compared to $517,000, or 31.89% of product revenue for the same period last fiscal year. The increase in cost of goods sold as a percentage of product revenues is a result of a decrease in price per unit of several of Sonomed's products primarily as a result of increased international sales. Sonomed generally experiences lower price per unit on products sold internationally. Cost of goods sold in the Vascular business unit totaled $362,000, or 49.73% of product revenue as compared to $339,000, or 49.13% of product revenue for the same period last fiscal year. Cost of goods sold in the Medical/Trek business unit totaled $188,000, or 61.04%, as compared to $277,000, or 68.23% of product revenue for the same period last fiscal year. Fluctuations in Medical/Trek cost of goods sold emanates from product mix, which was primarily controlled by market demand. Cost of goods sold in the EMI business unit was $2,000, or 33.33%, of product revenue as compared to $45,000, or 76.27% of product revenue for the same period last fiscal year. Cost of goods sold totaled $3,827,000, or 42.50%, of product revenue for the nine-month period ended March 31, 2004 as compared to $3,537,000, or 44.00%, of product revenue for the same period last fiscal year. Cost of goods sold in the Sonomed business unit was $2,191,000, or 38.79%, of product 27 revenue as compared to $1,822,000, or 39.27%, of product revenue for the same period last fiscal year. Cost of goods in the Vascular business unit was $942,000, or 42.99% of product revenue as compared to $873,000, or 42.98% of product revenue for the same period last fiscal year. Cost of goods sold in the Medical/Trek business unit totaled $611,000, or 62.03%, as compared to $689,000, or 65.25% of product revenue for the same period last fiscal year. Fluctuations in Medical/Trek cost of goods sold emanates from product mix, which was primarily controlled by market demand. Cost of goods sold in the EMI business unit was $83,000, or 45.86%, of product revenue as compared to $153,000, or 49.04% of product revenue for the same period last fiscal year. 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 three and nine-month periods ended March 31, 2004 and 2003.
Three-Month Periods Nine-Month Periods Ended March 31, Ended March 31, ---------------------------------------------------------------------------------------- 2004 2003 % Change 2004 2003 % Change ------------ ------------ -------- ------------ ------------ -------- Marketing, general and administrative expenses: Sonomed $ 285 $ 265 7.55% $ 851 $ 999 -14.81% Vascular 328 289 13.49% 982 858 14.45% Medical/Trek 604 619 -2.42% 1,777 1,738 2.24% EMI 37 47 -21.28% 180 191 -5.76% ------------ ------------ ------ ------------ ------------ ------ $ 1,254 $ 1,220 2.79% $ 3,790 $ 3,786 0.11% ============ ============ ====== ============ ============ ======
Marketing, general and administrative expenses increased $34,000, or 2.79%, for the three-month period ended March 31, 2004, as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative expenses increased $20,000, or 7.55%, to $285,000. Salaries and other personnel-related expenses increased $23,000, primarily the result of increased headcount. In the Vascular business unit, marketing, general and administrative expenses increased $39,000, or 13.49%, to $328,000. Salaries and other personnel-related expenses increased $40,000, primarily the result of increases in headcount. Consulting expenses increased $26,000 as a result of marketing efforts in the international markets. Sales and marketing travel-related expenses also increased $28,000. The Company agreed to pay royalties for a period of five years following the acquisition of the vascular access division of Endologix. That five-year period ended in December 2003. This resulted in a $59,000 decrease in royalty expense. In the Medical/Trek business unit, marketing, general and administrative expenses decreased $15,000, or 2.42%, to $604,000. Corporate franchise taxes, which had been over-accrued, and were corrected during the three-month period ended March 31, 2004 decreased $89,000, whereas, accrued compensation increased $105,000. Additionally, legal expenses and consulting expense decreased $23,000 and $12,000, respectively. In the EMI business unit, marketing, general and administrative expenses decreased $10,000, or 21.28%, to $37,000. Marketing, general and administrative expenses increased $4,000, or 0.11%, for the nine-month period ended March 31, 2004 as compared to the same period last fiscal year. In the Sonomed business unit, marketing, general and administrative expenses decreased $148,000, or 14.81%, to $851,000. Salaries and other personnel-related expenses decreased $189,000, primarily the result of headcount changes. Commission expense decreased $33,000 as a result of changes in the commission structure with an international distributor. Offsetting these decreases was an $80,000 increase in consulting expense, which increased as a result of the Company's marketing efforts in the international markets. In the Vascular business unit, marketing, general and administrative expenses increased $124,000, or 14.45%, to $982,000. Salaries and other personnel-related expenses increased $106,000, primarily the result of increases in headcount. Consulting expenses increased $38,000 as a result of marketing efforts in the international markets. Sales and marketing travel-related expenses also increased $56,000. The Company agreed to pay royalties for a period of five years following the acquisition of the vascular access division of Endologix. That five-year period ended in December 2003. This resulted in a $65,000 decrease in royalty expense. In 28 the Medical/Trek business unit, marketing, general and administrative expenses increased $39,000, or 2.24%, to $1,777,000. Accrued compensation increased $183,000. Depreciation and amortization expense decreased $26,000 primarily due to the abandonment of the Company's license and distribution rights to Povidone Iodine 2.5% in March 2003. Consulting expense decreased $24,000 as the Company incurred expenses in the year ago period that related to the Company's search for alternate debt financing. Corporate franchise taxes, legal expenses and temporary labor decreased $15,000, $15,000 and $11,000, respectively. In the EMI business unit, marketing, general and administrative expenses decreased $11,000, or 5.76%, to $180,000. Research and development expenses decreased $37,000, or 18.14%, to $167,000, for the three- month period ended March 31, 2004 as compared to the same period last fiscal year, whereas research and development expenses increased $22,000, or 3.81%, to $600,000, for the nine-month period ended March 31, 2004 as compared to the same period last fiscal year. The decrease in the three-month period ended March 31, 2004 was primarily caused by reduced headcount. The increase in the nine-month period ended March 31, 2004 relates primarily to consulting expenses incurred in connection with product development. The Company redesigns its products as technology changes to remain competitive in the marketplace. Several years ago, the Company began seeking a corporate partner to fund commercialization of the Povidone Iodine 2.5% product line. The Company obtained the license and distribution rights to the product from Harbor UCLA Medical Center. Having exhausted all partnering possibilities, during the three-month period ended March 31, 2003, it was decided that further expenditures on this project were not in the shareholders' best interest, and the project was abandoned. This decision resulted in the Company taking a charge of $195,000, which included the write-off of the remaining net book value of the license and distribution rights subsequent to normal amortization. Interest income increased $9,000 and $8,000 for the three and nine-month periods ended March 31, 2004, respectively, as compared to the same periods last fiscal year due to increased average cash balances. Interest expense decreased $40,000 and $186,000 for the three and nine-month periods ended March 31, 2004, respectively, as compared to the same periods last fiscal year due to reduced total debt levels and lower interest rates. 29 LIQUIDITY AND CAPITAL RESOURCES In recent years, the Company's principal source of liquidity generally has been net cash provided by operating activities. The Company, however, completed a private placement of its Common Stock during the three-month period ended March 31, 2004, that significantly affected the Company's liquidity. Additionally, a significant number of stock options were exercised during the three-month period ended March 31, 2004 providing the Company with additional cash. Changes in the Company's overall liquidity and capital resources from continuing operations during fiscal 2004 are reflected in the following table:
March 31, June 30, (Dollars are in thousands) 2004 2003 ------------ ------------- Current Assets $ 17,034 $ 4,759 Less: Current Liabilities 3,320 3,870 ------------ ------------ Working Capital $ 13,714 $ 889 Current Ratio 5.1:1 1.2:1 - ---------------------------------------------------------------------------------- Notes Payable and Current Maturities $ 1,877 $ 2,485 Long-Term Debt 2,796 4,080 ------------ ------------ Total Debt $ 4,673 $ 6,565 Total Equity 22,943 8,939 ------------ ------------ Total Capital $ 27,616 $ 15,504 Total Debt to Total Capital 16.92% 42.34%
WORKING CAPITAL POSITION Working capital increased $12,825,000 as of March 31, 2004 and the current ratio increased to 5.1:1 when compared with June 30, 2003. Current assets increased by $12,275,000 primarily due to the issuance of common stock totaling $11,821,000. Current liabilities decreased by $550,000 as a result of several offsetting changes that included the following: - A $725,000 decrease in the Company's outstanding line of credit as the Company used cash from operations to pay down its debt. - A $116,000 increase in current portion of long-term debt primarily due to the step-up of principal payments due on the Company's term debt. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities increased $1,517,000 to $2,764,000, for the nine-month period ended March 31, 2004, when compared to the same period last fiscal year. Apart from year-over-year increased net profitability of $1,121,000, the following are the primary offsetting factors affecting the increase in net cash provided by operating activities: - The Company collected a substantial amount of aged receivables in its EMI business unit during the first quarter of fiscal 2004 which significantly reduced accounts receivable in that business unit. Revenue in the Company's Medical/Trek business unit during the third quarter of fiscal 2004 was lower than revenue during the fourth quarter of fiscal 2003, which had the effect of significantly reducing accounts receivable in that business unit. 30 - The Company wrote-down license and distribution rights in fiscal 2003. The absence of this write-down of license and distribution rights in fiscal 2004 had the effect of decreasing year-over-year net cash provided by operations. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Cash flows used in investing activities related solely to the purchase of fixed assets for the nine-month periods ended March 31, 2004 and 2003, and remained largely unchanged. Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels not to be indicative of capital expenditures in the future and, accordingly, does not believe that it will have to commit material resources to capital investment for the foreseeable future. Cash flows from financing activities were $9,896,000 for the nine-month period ended March 31, 2004. Cash flows from financing activities primarily related to proceeds from a private placement of common stock and common stock warrants as well as proceeds from the issuance of common stock through the exercise of stock options. This was offset by repayments of the Company's term debt and line of credit. On March 17, 2004, the Company completed a private placement of Common stock resulting in net proceeds of $9,834,000 and, during the nine-month period ended March 31, 2004, issued common stock related to the exercise of stock options resulting in proceeds to the Company of $1,986,000. The Company paid down its line of credit by $725,000 and paid down its term debt by $1,200,000. The Company utilized cash from operations to pay down its term loan and line of credit. Cash flows used in financing activities financing activities were $1,271,000 during the nine-month period ended March 31, 2003. During the nine-month period ended March 31, 2003, cash flows used in financing activities primarily related to repayments of the Company's term debt offset by borrowings from the line of credit. The Company paid down its term debt by $1,396,000 and drew $125,000, net, from the line of credit. The reduction in repayments of term debt relates to a reduction in required principal payments that resulted from the Company's renegotiating its debt in February 2003. The Company utilized cash from operations to pay down its term debt. Management believes that cash on hand, cash generated from operations and cash available from the line of credit should be sufficient to satisfy the Company's working capital, debt service, capital expenditures and research and development costs for the foreseeable future. FORWARD-LOOKING STATEMENT ABOUT SIGNIFICANT ITEMS LIKELY TO AFFECT LIQUIDITY The Company realized 13.74% and 13.95% of its net revenue during the nine-month periods ended March 31, 2004 and 2003, respectively, from Bausch & Lomb's sale of Silicone Oil. Silicone Oil revenues are based on sales of the product line by Bausch & Lomb multiplied by a contractual factor that reduces on an annual basis due to a contractual step-down provision. While the Company does not expect total Silicone Oil revenue to decline rapidly during the remainder of the contract, any such decrease would have an impact on the Company's financial position, results of operations and cash flows and the Company's stock price could be negatively impacted. The Company is entitled to receive this revenue from Bausch & Lomb, in varying amounts, through August 2005. See the Notes to Condensed Consolidated Financial Statements for a description of the step-down provisions under the contract with Bausch & Lomb. The Company issued 120,000 Common Stock purchase warrants in connection with the private placement on March 17, 2004. The warrants are exercisable 181 days from the placement date at $15.60 per share. If all 120,000 shares were to be exercised, it would provide gross proceeds to the Company of $1,872,000. The Company cannot assure, however, that the warrant exercise price will be less than the market price of the Company's Common Stock when the warrants are exercisable or that even if the exercise price is less than the market price that any of the warrants will be exercised. See the Notes to Condensed Consolidated Financial Statements for a description of the private placement of the Company's Common Stock and Common Stock purchase warrants. 31 DEBT HISTORY On December 23, 2002, a lender acquired the Company's bank debt, which consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 available line of credit. On February 13, 2003, the Company entered into an Amended Agreement with the lender. The primary amendments of the Amended Loan Agreement were to reduce quarterly principal payments, extend the term of the repayments and to alter the covenants of the original bank agreement. As of March 31, 2004, the amounts outstanding under the term loan and the line of credit were $4,246,019 and $250,000, respectively. At March 31, 2004, the interest rates applicable to the term loan and the line of credit were 5.75% and 5.50%, respectively. The lender's prime rate at March 31, 2004 was 4.00%. The $4,596,019 term loan balance includes a $2,450,000 balloon payment that is due on September 1, 2005. The Company paid $100,000 in finance fees on January 14, 2000, when this debt was originally incurred. The finance fees are being amortized over the life of the loans using the effective interest method. On January 21, 1999, the Company's Vascular subsidiary and Endologix entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, the Company acquired for cash the assets of Endologix'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 1, 2001, the parties amended the agreement to provide an adjustment in the terms of payment of the royalties. Pursuant to the amendment, the Company paid $17,558 in cash to Endologix, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, an additional note in the amount of $717,558, payable in eleven quarterly installments that commenced April 15, 2002 and the Company issued 50,000 shares of its Common Stock to Endologix. As of March 31, 2004, the amount outstanding under the Endologix term loan was $196,000. At March 31, 2004, the interest rate applicable to the Endologix term loan was 5.00%. ESCALON COMMON STOCK 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, the following listing requirements must be met: - Stockholders' equity of $2,500,000 or market value of listed securities of $35,000,000 or net income from continuing operations (in the latest fiscal year or two of the last three fiscal years) of $500,000; - 500,000 publicly held shares; - $1,000,000 market value of publicly held shares; - A minimum bid price of $1; - 300 round lot shareholders - Two market makers; and - Compliance with corporate governance standards. As of March 31, 2004, the Company complied with these requirements. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The table below provides information about the Company'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 on the prime rate at March 31, 2004 plus 1.75% on the term loan, the prime rate plus 1.50% on the line of credit and the prime rate plus 1.00% on the Endologix note. See the Notes to Condensed Consolidated Financial Statements for further information regarding the Company's debt obligations.
Long-term debt classified as current as of March 31, ------------------------------------------------------------------------------------- 2004 2005 2006 Thereafter Total ------------ ------------ -------------- -------------- ------------ Term loan $ 1,450,000 $ 2,796,000 $ - $ - $ 4,246,000 Interest rate 5.75% 5.75% Line of credit 250,000 - - - 250,000 Interest rate 5.50% Endologix note 196,000 - - - 196,000 Interest rate 5.00% Deferred finance fees (19,000) - - - (19,000) ------------ ------------ -------------- -------------- ------------ Total $ 1,877,000 $ 2,796,000 $ - $ - $ 4,673,000 ============ ============ ============== ============== ============
EXCHANGE RATE RISK During the three and nine-month periods ended March 31, 2004 and 2003, approximately 19.93% and 17.11%, respectively, of the Company's consolidated net revenue was derived from international sales. The price of all product sold overseas is denominated in United States Dollars and consequently the Company incurs no exchange rate risk on revenue. The Company's Sonomed business unit began incurring marketing expenses in the European market during the second quarter of fiscal 2003, the majority of which are transacted in Euros. These expenses were $23,000 and $72,000 for the three- and nine-month periods ended March 31, 2004, respectively, and were $41,000 and $59,000 for the three- and nine-month periods ended March 31, 2003, respectively. The Company's Vascular business unit began incurring marketing expenses in the European market during the second quarter of fiscal 2004, the majority of which are transacted in Euros. These expenses were $41,000 and $50,000 for the three- and nine-month periods ended March 31, 2004. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and the Senior Vice President of Finance, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Senior Vice President of Finance have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. (b) Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange 33 Act) during the Company's third fiscal quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. A control system, no matter how well-designed and operated, cannot provide absolute assurance that the objectives of the control systems are met, and no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. On March 17, 2004, the Company completed a $10,400,000 private placement of Common Stock and Common Stock purchase warrants to a limited number of accredited and institutional investors. The Company sold 800,000 shares of Common Stock at $13.00 per share. The investors also received warrants to purchase an additional 120,000 shares of Common Stock at an exercise price of $15.60 per share. The warrants cannot be exercised for 181 days from the private placement date and expire on September 13, 2009, if not exercised. The Company received net proceeds from the offering, after costs associated with the offering, of $9,834,485. The securities were offered and sold pursuant to the exemptions from registration of Rule 506 of Regulation D and Section 4(2) under the Securities Act of 1933. The Company subsequently filed a registration statement with the Securities and Exchange Commission, to register all of the Common Stock and Common Stock purchasable upon the exercise of the warrants, which registration statement was declared effective on April 20, 2004. The Company did not effect any repurchases of its Common Stock during the quarter ended March 31, 2004. ITEM 5. OTHER INFORMATION On May 14, 2004, Escalon issued a press release announcing the Company's exchange offer for the shares of Drew Scientific Group PLC ("Drew"), headquartered in the United Kingdom. The exchange offer valued each Drew share at 0.06 pounds sterling (approximately $0.11). Based on the closing price of $21.00 per share of Escalon Common Stock and the foreign currency exchange rate on May 12, 2004, Escalon offered 0.0051 shares of Escalon Common Stock in exchange for each ordinary share of Drew that is validly tendered. If all of the outstanding shares of Drew Scientific are exchanged, Escalon would issue approximately 454,010 shares of Escalon Common Stock in the exchange offer. 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. Exhibit (a) Exhibits 10.30 Securities Purchase Agreement dated as of March 16, 2004 (the "Securities Purchase Agreement") between the Company and the Purchasers signatory thereto. (Incorporated by reference to Form S-3 filed with the Securities and Exchange Commission on April 8, 2004.) 10.31 Registration Rights Agreement dated as of March 16, 2004 between the Company and the Purchasers signatory thereto. (Incorporated by reference to Form S-3 filed with the Securities and Exchange Commission on April 8, 2004.) 10.32 Form of Warrant to Purchase Common Stock issued to each Purchaser under the Securities Purchase Agreement. (Incorporated by reference to Form S-3 filed with the Securities and Exchange Commission on April 8, 2004.) 10.33 Manufacturing Supply and Distribution Agreement between Sonomed, Inc. and Ophthalmic Technologies, Inc. dated as of March 11, 2004.* 31.1 Certificate of Chief Executive Officer under Rule 13a-14(a).* 31.2 Certificate of Senior Vice President of Finance under Rule 13a-14(a).* 32.1 Certificate of Chief Executive Officer under Section 1350 of Title 18 of the United States Code.* 32.2 Certificate of Senior Vice President of Finance under Section 1350 of Title 18 of the United States Code.* * Filed herewith (b) Reports on Form 8-K Form 8-K filed with the Securities and Exchange Commission on March 18, 2004, reporting information regarding the Company's completed private placement under Item 5. Form 8-K filed with the Securities and Exchange Commission on April 8, 2004, reporting information regarding its intention to make an exchange offer for all of the outstanding shares of Drew Scientific Group PLC under Item 5. Form 8-K filed with the Securities and Exchange Commission on April 21, 2004, reporting additional information regarding its intention to make an exchange offer for all of the outstanding shares of Drew Scientific Group PLC under Item 5. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) Date: May 17, 2004 By: /s/ Richard J.DePiano ----------------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: May 17, 2004 By: /s/ Harry M. Rimmer ----------------------------- Harry M. Rimmer Senior Vice President of Finance 35 EX-10.33 2 w97573exv10w33.txt MANUFACTURING SUPPLY AND DISTRIBUTION AGREEMENT EXHIBIT 10.33 MANUFACTURING SUPPLY AND DISTRIBUTION AGREEMENT BETWEEN SONOMED, INC. AND OPHTHALMIC TECHNOLOGIES, INC. DATED AS OF MARCH 11, 2004 MANUFACTURING, SUPPLY AND DISTRIBUTION AGREEMENT THIS AGREEMENT by and between SONOMED, INC., incorporated in the State of New York, in the Unites States of America ("SONOMED"), and Ophthalmic Technologies, Inc., a Canadian Corporation ("OTI"). WHEREAS, SONOMED desires to purchase, market and sell certain products manufactured by OTI and OTI is willing and able to manufacture and supply such products to SONOMED under the terms and conditions described in this Agreement; NOW, THEREFORE, SONOMED and OTI agree as follows: 1. DEFINITIONS The following terms shall have the meaning specified in this SECTION: 1.1 "ACCESSORIES" shall mean the individual PRODUCT components which may be sold separately as replacement parts, accessories to the Product as well as software upgrades to the system not included as standard features to Combination Products. 1.2 "AFFILIATE" shall mean corporations, partnerships or other business entities, which, directly or indirectly are controlled by, control, or are under common control with a party to this Agreement. 1.3 "ANNUAL FORECAST" shall mean a non-binding production planning forecast setting forth SONOMED's estimated requirements for PRODUCTS, including both estimated quantities and delivery dates, during a specified rolling twelve (12) month period. 1.4 "ANNUAL MINIMUM" shall mean the quantities of Products set forth in SCHEDULE A for each YEAR. 1.5 "ANNUAL ORDERS" shall mean binding blanket purchase orders specifying the minimum quantity, but not delivery dates, of PRODUCTS to be purchased by SONOMED during a YEAR. 1.6 "BUSINESS DAY" shall mean every day with the exception of Saturday, Sunday or national holidays in the United States or Canada. 1.7 "COMBINATION PRODUCTS" shall mean ultrasound devices, which have the capability to obtain images of both the anterior and posterior segments of the eye, or high frequency 40 anterior segment device upgrades to posterior segment devices previously sold to OTI ("Upgrades"). For greater certainty, an Anterior Segment Device is one that utilizes a 35-50 mhz probe. A posterior segment device is one that utilizes a 10-20 mhz probe. 1.8 "CONFIDENTIAL INFORMATION" means any proprietary information or materials belonging to OTI or SONOMED, whether or not patentable, including but not limited to: formulations, techniques, methodology, equipment, data, reports, know-how, sources of supply, patent positioning, consultants and business plans, which are communicated to, learned of, developed or other wise acquired by the party receiving such information or material during or in the course of the agreement including information concerning the existence, scope or activities of any research and development project of OTI or SONOMED. 1.9 "DELIVERY ORDERS" shall mean irrevocable, written purchase orders for PRODUCTS which specify the (i) product(s), by SKU, (ii) quantity to be delivered, (iii) designated carrier and (iv) requested delivery date. SONOMED shall purchase for delivery a minimum of 10 units of Product at any one time. 1.10 "EFFECTIVE DATE" shall mean March 1 1, 2004. 1.11 "FDA" shall mean the United States Food and Drug Administration. 1.12 "FIELD" AND OR "ANTERIOR SEGMENT DEVICE" shall mean medical devices utilizing 35MHz to 50 MHz ultrasound to obtain images of the anterior segment of the eye. 1.13 "MASTER ARTWORK TEXT" shall mean the specific text or graphics for all items of labeling, including, but not limited to all special packaging, labels, markings and graphical screen representations, if any, to be included in the GUI. All of the same to be provided by SONOMED at its cost and expense and utilized by OTI in connection with the packaging and labeling of the PRODUCT. 1.14 "NON-CONFORMING PRODUCT" shall mean any PRODUCT, WHICH DOES NOT CONFORM, to the SPECIFICATIONS, QSRS or other requirements of this Agreement. 1.15 "PRODUCTS" or "PRODUCT" shall mean the 35 MHz and 50 MHz Anterior Segment ultrasound device, along with associated software and computer hardware, conforming to the SPECIFICATIONS and the QSRS. 1.16 "QUARTER" shall mean the three-month periods commencing on the Effective Date of each Year of the Term. 1.17 "QSRS" shall mean the quality system regulations for manufacture of medical devices promulgated under the United States Federal Food, Drug and Cosmetic Act, as amended. 1.18 "SPECIFICATIONS" shall mean the descriptions, criteria, standards, and other requirements set forth in the attached Schedule B. The parties agree that the Products shall be provided with up to date configurations similar to the basic features offered as standard to the Anterior Segment systems on the OTI Combined Products, except that the systems may differ in terms of computer platform, and graphical user interface. The database will be removed from the Products but will be reinstalled if requested by SONOMED. OTI may make modifications to the design of or features to any of the 41 Products or make improvements to them at any time but shall be under no obligation to apply the same to any Products previously purchased by SONOMED. 1.19 "SUPPLY FAILURE" shall mean failure by OTI for any reason to supply at least seventy-five percent (75%) of the Product quantities specified in SONOMED's DELIVERY ORDERS in any two consecutive QUARTERS, excluding any NON-CONFORMING PRODUCTS supplied by OTI, provided such DELIVERY ORDERS are consistent with the ANNUAL ORDER for such period. 1.20 "TERM" shall mean the period beginning on the EFFECTIVE DATE and ending on the last day of YEAR 3. 1.21 "TERRITORY" shall mean the United States of America. 1.22 "YEAR" SHall mean consecutive twelve (12) month periods, with Year 1 beginning on the EFFECTIVE DATE. 2. APPOINTMENT AS EXCLUSIVE DISTRIBUTOR 2.1 Exclusive Rights. Subject to OTI's retained rights as provided in SECTION 2.2, OTI hereby appoints SONOMED as OTI's exclusive vendor to market, sell and distribute the Products throughout the Territory during the Term. Products may not be resold outside the Territory. 2.2 OTI Retained Rights. OTI shall retain the right to sell Combined Products in the Territory. 2.3 Branding. The Products will be branded and identified as SONOMED Product. SONOMED to Provide OTI with all Master Artwork Text. 3. SONOMED OBLIGATIONS TO MARKET 3.1 Purchase of Products; Sales Efforts. SONOMED shall purchase Products from OTI on the terms and conditions set forth in this Agreement, and shall use commercially reasonable efforts to maximize sales of the Products in the Territory. 3.2 General Duties. SONOMED shall, at its expense, be responsible for: (i) All marketing decisions regarding the Products including, but not limited to, pricing, provided that SONOMED shall make reasonable efforts to maintain an average resale price of less than Forty Thousand US Dollars ($40,000) in the United States. (ii) Customer order processing, billing and collection for Products sold by SONOMED in the Territory. (iii) Preparing all promotional materials and conducting all promotional activities relating to the Products sold by SONOMED in compliance with all applicable laws and regulations of the regulatory authorities in each country in the Territory; 42 (iv) Establishing and maintaining a system of record keeping, with the support and assistance of OTI, including a register of lot numbers and individual Product numbers and customer names and addresses for all Product sold by SONOMED in order to assist OTI with traceability in the event of a Product recall and require any customer that is not the end user of Products, to maintain a similar register, including names and addresses of its end users. 3.3 Conference Presence. SONOMED shall display the Product at its booth at the AAO and ASCRS and other conferences and trades shows in the United States at which it attends. An OTI product specialist will assist SONOMED at its booth at the yearly AAO and ASCRS. 3.4 Training Courses. IF requested by SONOMED, OTI will attend up to three times per year at its cost, a sales training session for SONOMED sales staff, distributors and agents. 3.5 Advertising. SONOMED will advertise the Product on its web site and other product promotions and advertisements. 3.6 Product Manager. SONOMED will assign a product manager responsible for the Product. 3.7 Employee Training. SONOMED will send selected sales, marketing, and development personnel for training by OTI at OTI's offices in Toronto, Canada at such times as shall be mutually agreed by the parties. Each party shall bear its own expenses associated with such training. 4. MANUFACTURE AND SUPPLY; RIGHTS TO PURCHASE 4.1 Requirements. During the Term, SONOMED shall have the obligation to purchase the quantity of Products set out in Schedule A and shall have the right to purchase and OTI shall manufacture and supply SONOMED's requirements for the Products at such times and in such quantities as specified by SONOMED in its Annual Forecasts and Delivery Orders as provided herein. OTI shall be responsible for maintaining an adequate inventory of Products and shall exercise its best efforts to ensure that a sufficient quantity of Product will be available to satisfy SONOMED's Annual Orders. 4.2 Accessories. SONOMED shall have the right to purchase Accessories on an as needed basis. 4.3 Service. SONOMED to provide service after the expiration of the warranty period. 4.4 Documentation. OTI shall provide SONOMED with a current operating and service manual text in English and all current photographs in electronic format. 5. ANNUAL ORDERS; INITIAL PAYMENT; DEMONSTRATION UNITS 5.1 Initial Annual Order. Within ten (10) Business Days following the Effective Date, SONOMED shall agree to purchase and shall submit to OTI the Annual Order for the 43 Year 1 Annual Minimum or such greater number it may desire (less the 5 demonstration units referred it in 5.4). 5.2 Subsequent Annual Orders. SONOMED agrees to purchase and submit an Annual Order for no less than the applicable Annual Minimum at least sixty (60) days prior to the beginning of each Year. 5.3 Initial Deposit. SONOMED shall pay to OTI the sum of seventy thousand dollars $70,000 (US) which sum shall be applied as a credit against SONOMED's order of demonstration units. 5.4 Demonstration Units. SONOMED hereby agrees to purchase five (5) demonstration units at a per unit purchase price of Fourteen Thousand US Dollars ($14,000), for use by its salesman and for display and use in its various courses, conferences and trades shows. The Initial Deposit will be applied by OTI against this order. 5.5 Delivery Order Commitment. In the event that as of the expiration of any Year during the Term, SONOMED has failed to submit Delivery Orders for the Annual Order for such Year, OTI shall have the right to invoice SONOMED for such remaining units and SONOMED shall pay for such units in full within thirty (30) calendar days following receipt of invoice. Upon receipt of such payment, OTI shall deliver the remaining units to SONOMED's designated carrier for shipment. Failure to pay shall be considered a material breach of this Agreement. 5.6 UPGRADE CREDIT. OTI SHALL WITHIN TWO WEEKS OF EACH QUARTER PROVIDE A WRITTEN REPORT TO SONOMED AS TO THE NUMBER OF UPGRADES OTI HAS SOLD IN SUCH QUARTER. THE ANNUAL MINIMUM FOR SUBSEQUENT ANNUAL ORDERS REFERRED TO IN 5. 2 ABOVE MAY BE REDUCED BY SONOMED BY THE NUMBER OF UPGRADES SOLD BY OTI IN THE PREVIOUS YEAR. THE ANNUAL MINIMUM IN ANY GIVEN YEAR MAY NOT BE REDUCED BY GREATER THAN ONE THIRD OF THE ANNUAL MINIMUM. IF SONOMED WISHES TO REDUCE THE ANNUAL MINIMUM IT MUST GIVE NOTICE TO OTI OF SUCH DESIRE AND THE QUANTITY BY WHICH IT DESIRES TO REDUCE THE ANNUAL MINIMUM AT THE TIME IT DELIVERS TO OTI ITS ANNUAL ORDER IN ACCORDANCE WITH SECTION 5.2 ABOVE. 6. FORECASTS, ORDERS, SHIPMENTS 6.1 Annual Forecasts. SONOMED will provide OTI with an initial Annual Forecast upon execution of this Agreement and shall update the Annual Forecast on a rolling basis no later than thirty (30) calendar days prior to the first day of each subsequent Quarter. 6.2 Delivery Orders. SONOMED will provide OTI with an initial Delivery Order within ten (10) Business Days following the Effective Date and will submit subsequent Delivery Orders to OTI at least ninety (90) calendar days in advance of SONOMED's requested delivery date. SONOMED agrees to submit with its Annual Order each Year Delivery Orders for a minimum of twenty-five per cent (25%) of the Annual Order for each applicable Year of the Term to be delivered during the first Quarter of each such Year . SONOMED further agrees to purchase and take delivery each Quarter of each Year twenty-five percent of the Annual Order for each applicable Year. 6.3 Shipment. Title and risk of loss or damages to the Products shall pass to SONOMED upon OTI's delivery to SONOMED's designated carrier for shipment at OTI's warehouse facility in Toronto, Canada. SONOMED shall bear any costs of shipment of 44 the Products from the point of delivery to SONOMED's designated carrier as well as the amount of any and all taxes (other than income or franchise taxes of OTI), custom duties or other charges which may be required to be paid or collected on the sale, delivery, or transportation of the Products. OTI shall not be responsible for delays, loss or damage in shipment. SONOMED assumes and agrees to pay all costs and charges for transportation, handling and insurance of the Products from the point of shipment. 6.4 Invoicing. OTI shall submit an invoice for payment to SONOMED as of the date of fulfillment of any Delivery Order. 7. PRICE AND PAYMENT 7.1 Purchase Price. The per unit purchase price for all Products purchased by SONOMED in Year 1 shall be Fourteen Thousand US Dollars ($14,000). OTI may upon three months' prior written notice, increase the price of the Products after Year two and for each subsequent year by an amount not to exceed five (5%) per annum. If SONOMED disagrees with the price increase it may terminate the Agreement within five business days of receipt of such price increase notice in which event OTI will have five business days to retract such price increase in which even this Agreement continues or to accept such termination in which event section 18.4 will apply. 7.2 Payment Terms. Except for the initial payment under SECTION 5.3 and as otherwise indicated in this agreement, SONOMED shall pay for the applicable purchase price within thirty (30) calendar days from the later of (i) receipt of invoice from OTI or (ii) date of delivery of Products to SONOMED's designated carrier for shipment. 7.3 Accessories. SONOMED shall pay the purchase price for Accessories within thirty (30) calendar days from the later of (i) receipt of invoice from OTI or (ii) date of delivery of Products to SONOMED's designated carrier for shipment. 7.4 Currency. All payments due hereunder shall be made in U.S. Dollars to OTI at its headquarters in Toronto, Canada, or such other place as OTI may designate. 8. INTELLECTUAL PROPERTY 8.1 Ownership. OTI shall retain all rights, title and interest in and to all intellectual property rights relating to the Products held by OTI prior the Effective Date or developed by OTI during the Term. Neither party shall use any trademark of the other party without prior written consent. 8.2 Prosecution and Maintenance. Each party will undertake, diligently pursue, and bear all costs of the prosecution and maintenance of its respective patent rights. 8.3 Response to Infringement. If either party becomes aware of any infringement or threatened infringement of the patent rights of either party, the party having such knowledge will give notice to the other. The party whose rights are so infringed shall have the responsibility to take such action as may be necessary, at its own expense, to prevent or eliminate such infringement. The other party shall cooperate in any reasonable manner. OTI shall not compromise or settle any suit for infringement of its patent rights relating to the Products in the Territory without the prior written 45 approval of SONOMED, which approval shall not be unreasonably withheld, conditioned or delayed. 8.4 Damage Awards. Any damages recovered by the party bringing the action for patent infringement will be used first to compensate that party for its out-of-pocket expenses in the prosecution of any such action, suit or proceeding for infringement. Any remaining damages recovered by that party will be apportioned between SONOMED and OTI in proportion to the damage incurred by each party as a result of the infringement. 9. THIRD PARTY RIGHTS 9.1 Notice of Claims. If either party becomes aware of any action, or suit, or threat of action or suit, by a third party alleging that the manufacture, use or sale or offer for sale of the Products infringes a patent, or violates any other proprietary rights of any third party, such party will promptly notify the other party of the same and fully disclose all information relating thereto. 9.2 Defense. OTI shall use commercially reasonable efforts to defend any such action relating to the Products. OTI shall cooperate and consult with SONOMED during the course of such defense and shall keep SONOMED fully informed with respect to all significant aspects of such action. SONOMED shall assist OTI by providing information in the possession and control of SONOMED and to provide such fact witnesses as may be reasonably necessary to such defense. 9.3 Judgments and Settlements. If, by the terms of a (i) settlement of any claim against SONOMED or OTI, or (ii) judgment, decree or decision of a court, tribunal or other authority of competent jurisdiction finding that sale of any of the Products infringes a patent, or violates any other proprietary rights of any third party, SONOMED is required to compensate or pay damages to such third party, OTI will pay all such damages. 10. REGULATORY COMPLIANCE 10.1 Product Registrations. OTI shall obtain and maintain all site licenses, device registrations and other regulatory approvals, which may be or become necessary to enable OTI to manufacture and sell the Products to SONOMED and for SONOMED to market and sell the Products in the United States. 10.2 Agency Inspections. OTI will notify SONOMED of the outcome of any inspection of any of its manufacturing or warehouse facilities utilized in connection with this Agreement by the FDA, and shall notify SONOMED within five (5) Business Days of any regulatory action taken. 11. QUALITY ASSURANCE AND IMPROVEMENTS 11.1 Master Artwork Text. SONOMED shall develop and provide Master Artwork Text no less than thirty (30) Business Days prior to the delivery date specified in SONOMED's initial Delivery Order. 46 11.2 Packaging. All Products shall be packaged in OTI's designated packaging, unless otherwise agreed by the parties. If SONOMED requires special packaging with SONOMED's designated brand names, model numbers and Master Artwork Text it shall either provide for it at its cost or pay OTI for it. 11.3 Quality Assurance. OTI shall conduct quality testing on the Products prior to delivery to SONOMED as set forth in the Specifications and as required under the QSRs and shall deliver to SONOMED concurrently with each shipment a Certificate of Compliance stating that each unit shipped has been produced in accordance therewith. OTI shall retain all manufacturing records for no less than ten (10) years following the date of manufacture. OTI shall maintain documentation regarding each serialized unit and software revision level (as applicable) for each Product manufactured by or on behalf of OTI hereunder. 12. WARRANTY 12.1 OTI Warranties. OTI hereby represents and warrants that (i) OTI shall satisfy all requirements of the QSRs; (ii) all Products supplied to SONOMED hereunder shall have been manufactured, quality tested and packaged in accordance with, and shall conform to, the Specifications, all other requirements set forth in this Agreement and all laws and regulations, including but not limited to the QSRs, which may be or become applicable to the production of the Products during the term of this Agreement, (iii) OTI will maintain the integrity of the practices and processes upon which SONOMED has relied for Qualification. 12.2 Product Warranties. All Products sold by SONOMED shall under normal and reasonable use and maintenance be warranted by OTI against defects in materials and workmanship for a period equal to the earlier of eighteen months (18) from the date of delivery to SONOMED's designated carrier for shipment or twelve months (12) from the date of delivery by SONOMED to the designated carrier for shipment of SONOMED's end user. 12.3 Limitations. Except for the warranties set forth above, OTI makes no other warranty of any kind with regard to Products whether express, arising by operation of law, or otherwise, including without limitation any implied warranties of merchantability and fitness for a particular purpose. OTI shall not in any circumstance be liable for incidental or consequential damages. OTI excludes and disclaims, to the extent permitted by applicable law, any and all implies warranties including without limitation, implied warranties in connection with the design, sale, merchantability or fitness of the Products for any particular purpose of use. OTI shall not have any other liability for direct, consequential or incidental damages or damages arising from personal injury, loss of life or lost profits, and any and all liability of OTI shall be limited to the cost of the repair of replacement of the Products. 12.4 Indemnity. If SONOMED makes any warranty or representation in consistent with or in addition to the warranties stated in this section, it shall, at its own expense, defend and hold OTI harmless from any claim to the extent it is based upon such inconsistent or additional warranty or representation. In addition, SONOMED agrees to indemnify and save harmless OTI from and against any and all claims, liabilities, costs and damages of any kind or amount whatsoever (including reasonable legal fees and other litigation costs, regardless of outcome) which arise in connection with the performance 47 of any servicing provided by SONOMED to the users of the Product other than in accordance with procedures established by OTI or common to the industry. OTI shall similarly indemnify the Distributor to the extent of claims relating to such servicing where the SOMOMED has complied with such procedures 12.5 Service. OTI shall provide at its Toronto facility, or, at OTI's discretion arrange to provide through a mutually agreed upon third party, covered service under the terms of the warranty provided under SECTION 12.2 without additional charge to SONOMED or SONOMED's customers except for the cost of shipping Product to OTI's service location, which shall be borne by SONOMED or its customer. Costs and terms for service outside the scope of the warranty shall be determined by OTI. Any product that is serviced or refurbished by OTI shall be tested against the current finished good specification prior to release back to the customer. 13. RECALLS, COMPLAINTS, RETURNS 13.1 Notification. The parties shall immediately contact each other in the event that either party has any reason to believe that a voluntary withdrawal or recall of any Product may be necessary. SONOMED and OTI shall jointly confer and cooperate to resolve any issues with respect to a voluntary withdrawal or recall, including without limitation, the necessity of declaring the voluntary withdrawal or recall, the manner in which the voluntary withdrawal or recall should be conducted and the duration of the voluntary withdrawal or recall, provided that either party shall have the right to require a voluntary withdrawal of any Product in the event of a reasonable and good faith concern regarding the safety of such Product. SONOMED shall be responsible for notification of the applicable health authorities in the event of a voluntary withdrawal or recall. 13.2 SONOMED Responsibility. SONOMED shall be responsible for the costs of a recall or voluntary withdrawal, and shall reimburse OTI for any costs reasonably incurred by OTI, in the event a recall or voluntary withdrawal is determined, by mutual agreement of the parties (or by an independent third party if the parties are unable to agree upon the cause), to have been caused by SONOMED's storage, promotion or distribution of Products. 13.3 OTI Responsibility. OTI shall be responsible for the costs of a recall or voluntary withdrawal, and shall reimburse SONOMED for any costs reasonably incurred by SONOMED, in the event the recall is determined, by mutual agreement of the parties (or by an independent third party if the parties are unable to agree upon the cause), to have been caused by a defect in the design, packaging or manufacture of the Product. 13.4 Market Complaints. SONOMED shall establish and maintain an appropriate system for collecting market complaints relating to Products sold by SONOMED, communicating market complaint information to OTI, facilitating corrective actions and product recalls. SONOMED will report all Product or packaging related complaints to OTI within twenty (20) Business Days following receipt of the complaint. Any suspected adverse incident shall be reported to OTI within five (5) Business Days following receipt of the complaint. OTI shall provide SONOMED with a written acknowledgement of receipt of the complaint or suspected adverse incident and take appropriate investigative and, if necessary corrective action, as required by the QSRs and shall provide SONOMED with all relevant information relating to any such 48 investigation and corrective action. SONOMED shall be responsible, in consultation with OTI, for reporting any adverse incident to the relevant regulatory authorities as required by the QSRs. 13.5 Returns. SONOMED shall be responsible for responding to inquiries or complaints concerning any Product and for the collection and processing of any Products returned by customers as defective. SONOMED shall return such Product to OTI for evaluation. Any Product which is confirmed by OTI to be Non-Conforming shall be repaired or replaced without additional charge. OTI shall use reasonable commercial efforts to repair or replace any Non-Conforming Products within twenty (20) Business Days. 14. INDEMNIFICATION 14.1 OTI shall indemnify and hold harmless SONOMED, its officers, agents and employees against any claim, loss, damage, penalty, assessment or expense (including reasonable attorneys fees) ("Claim") arising directly or indirectly from OTI's (i) manufacture, testing, handling or storage of the Product, (ii) breach of warranty, (iii) breach of any of its other obligations under this Agreement; or (iv) infringement of any intellectual property rights belonging to any third party. 14.2 SONOMED shall indemnify and hold harmless OTI and its officers, agents and employees against any Claim arising directly or indirectly from SONOMED's (i) manufacture, testing, handling or storage of Eye Seals purchased by OTI, (ii) handling or storage of the Product, (ii) marketing, sale or distribution of the Product in any manner which is inconsistent with the Product's applicable regulatory approvals, (iii) breach of any of its obligations under this Agreement, or (iv) infringement of any intellectual property rights belonging to any third party. 14.3 In the event that either party (the "Indemnified Party") receives notice of, or becomes aware of, a Claim for which the Indemnified Party intends to seek indemnity hereunder, the Indemnified Party shall promptly provide the other party (the "Indemnifying Party") with notice of such Claim. The Indemnifying Party shall have the right, at its option and its own expense, to be represented by counsel of its own choice and to defend against, negotiate, settle or otherwise deal with any such Claim, provided the Indemnifying Party shall not enter into any settlement or compromise of any such Claim which could lead to liability or create any financial or other obligation on the part of the Indemnified Party without the Indemnified Party's prior written consent which consent shall not be unreasonably withheld. The Indemnified Party may participate in the defense of any Claim with counsel of its own choice and at its own expense. The parties agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such Claim. In the event that the Indemnifying Party does not undertake the defense, compromise or settlement of a Claim, the Indemnified Party shall have the right to control the defense or settlement of such Claim with counsel of its choosing provided, however, that the Indemnified Party shall not settle or compromise any such claim without the Indemnifying Party's prior written consent, which consent shall not be unreasonably withheld. 15. INSURANCE During the term of this Agreement and for 2 years thereafter OTI shall maintain product liability insurance on the Products with a minimum of One Million US Dollars 49 ($1,000,000) for bodily injury and One Million US Dollars ($1,000,000) for property damage. OTI shall, upon SONOMED's request, provide a Certificate of Insurance evidencing such insurance. 16. NON- COMPETITION 16.1 SONOMED shall not be concerned or interested either directly or indirectly in the manufacture, production, importation, sale or advertisement of any goods in the Territory which are like or similar to or in conjunction with some other product might otherwise compete or interfere with the sale of any of the Products ("Competing Products"). 16.2 SONOMED shall not either directly or through any agents sell any of the Products outside the Territory or, knowingly, or having reason to believe that they would be so resold, sell the Products to any person or body corporate with the view to their resale outside the Territory. 16.3 OTI shall not either directly or through any agents sell any of the Products within the Territory or, knowingly, or having reason to believe that they would be so resold, sell the Products to any person or body corporate with the view to their resale within the Territory. 16.4 SONOMED, shall not and shall ensure that its subsidiaries, affiliates and agents, shall not purchase from any third party or modify, adapt, translate, decompile nor create or attempt to create, by reverse engineering or otherwise, the Products, the software supplied in the Products or the original component hardware (components engineered specifically for the Products, in particular the probe, emitter receiver and video capture boards) that form the components of the Products nor shall SONOMED do same with respect to the Products, the original hardware components forming the Products or the software contained in and distributed with the Products for the purpose of creating a derivative work or competitive work, nor shall SONOMED use CONFIDENTIAL INFORMATION (defined in section 17) for the purpose of the same. SONOMED acknowledges that any contravention of this section and section 17 of this Agreement will have severe adverse economic consequences for OTI. 16.5 SONOMED agrees that if it or any of its subsidiaries or affiliated companies decided to develop, market and or manufacture in house or purchase from a third party on AN OEM basis COMPETING PRODCUTS than SONOMED must give OTI prior written notice of its desire so to do a minimum of nine (9) months' prior to the introduction by SONOMED of such COMPETING PRODUCT to the Territory. Upon receipt of such notice, OTI shall have the right to terminate this Agreement at anytime following receipt of such notice in which event OTI will fill all unfilled Delivery Orders but shall not be obliged to fill the balance of the Annual Order. In the event that OTI delivers notice of termination pursuant to this section the provisions of section 18.4 shall apply. For greater clarity it is agreed that if OTI does terminate the agreement in accordance with this section 16.5 SONOMED shall not sell or market its COMPETING PRODUCT into the Territory until the completion of such 9 month notice period. It is agreed that failure on the part of SONOMED to provide such notice will lead to severe adverse economic consequences for OTI. 50 17. CONFIDENTIALITY AND ANNOUNCEMENTS 17.1 DURING THE TERM OF THIS AGREEMENT AND FOR A PERIOD OF TWO (2) YEARS AFTER THE EXPIRATION OR TERMINATION OF THIS AGREEMENT, A PARTY RECEIVING (THE "RECEIVING PARTY") CONFIDENTIAL INFORMATION OF THE OTHER PARTY (THE "DISCLOSING PARTY") PURSUANT TO THIS AGREEMENT SHALL NOT: (i) USE SUCH CONFIDENTIAL INFORMATION FOR ANY REASON OTHER THAN FOR THE PURPOSE OF FULFILLING THE RECEIVING PARTY'S OBLIGATIONS AND COMMITMENTS UNDER THIS AGREEMENT; (ii) DISCLOSE SUCH CONFIDENTIAL INFORMATION TO ANY PERSON OTHER THAN EMPLOYEES OF THE RECEIVING PARTY WHO HAVE A NEED TO KNOW SUCH INFORMATION AND TO THIRD PARTIES SUBJECT TO WRITTEN AGREEMENTS PROHIBITING THE DISCLOSURE OR USE OF SUCH CONFIDENTIAL INFORMATION OTHER THAN FOR THE PURPOSES CONTEMPLATED BY THIS AGREEMENT. (iii) UPON THE DISCLOSING PARTY'S REQUEST, THE RECEIVING PARTY SHALL RETURN OR DESTROY, AT THE DISCLOSING PARTY'S OPTION, ALL MATERIALS, DOCUMENTS OR RECORDS INCORPORATING THE DISCLOSING PARTY'S CONFIDENTIAL INFORMATION, PROVIDED THAT THE RECEIVING PARTY SHALL BE ENTITLED TO RETAIN ONE COPY OF SUCH RECORDS FOR ARCHIVE PURPOSES, WHICH SHALL REMAIN SUBJECT TO THE RESTRICTIONS AGAINST USE AND DISCLOSURE SET FORTH HEREIN. 17.2 THE OBLIGATIONS SET FORTH IN Section 17.1 ABOVE SHALL NOT APPLY TO ANY INFORMATION THAT THE RECEIVING PARTY CAN SHOW BY COMPETENT PROOF (i) WAS GENERALLY KNOWN TO THE PUBLIC AT THE TIME OF DISCLOSURE BY THE DISCLOSING PARTY; (ii) BECOMES GENERALLY KNOWN TO THE PUBLIC THEREAFTER THROUGH NO ACT OR OMISSION OF THE RECEIVING PARTY OR ITS OFFICERS, EMPLOYEES, AGENTS, OR REPRESENTATIVES;(iii) IS DEVELOPED BY THE RECEIVING PARTY THROUGH ENTIRELY INDEPENDENT EFFORTS AND WITHOUT USE OF THE CONFIDENTIAL INFORMATION. 17.3 NEITHER PARTY SHALL MAKE ANY PRESS RELEASE OR TRADE ANNOUNCEMENT RELATING TO THIS AGREEMENT, OR OTHERWISE DISCLOSE THE TERMS OF THIS AGREEMENT, WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTHER PARTY, EXCEPT AS REQUIRED BY A COURT OF COMPETENT JURISDICTION OR PURSUANT TO THE DISCLOSURE REQUIREMENTS OF A GOVERNMENTAL AGENCY. 18. TERM AND TERMINATION 18.1 TERM. THIS AGREEMENT WILL COMMENCE ON THE EFFECTIVE DATE AND WILL CONTINUE IN EFFECT UNTIL THE EXPIRATION OF THE TERM. THE TERM SHALL BE AUTOMATICALLY RENEWED FOR A FURTHER TERM OF ONE YEAR PROVIDED SONOMED HAS COMPLIED WITH ALL OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND PROVIDED FURTHER THAT OTI AND SONOMED HAVE, AT LEAST THREE MONTHS' PRIOR TO THE TERM AGREED UPON MINIMUM QUANTITIES AND PRICING FOR THE RENEWAL 18.2 EARLY TERMINATION. EITHER PARTY MAY TERMINATE THIS AGREEMENT AT ANY TIME IN THE EVENT OF THE OTHER PARTY'S (i) FAILURE TO CURE ANY NONCOMPLIANCE WITH ANY MATERIAL TERM OF THIS AGREEMENT WITHIN SIXTY (60) DAYS FOLLOWING RECEIPT OF WRITTEN NOTICE FROM THE NON-DEFAULTING PARTY, OR (ii) BANKRUPTCY OR INITIATION OF SIMILAR PROCEEDINGS BY OR AGAINST SUCH PARTY. 18.3 FAILURE TO PURCHASE ANNUAL MINIMUM. IN ADDITION TO OTHER RIGHTS IT MAY HAVE OTI SHALL HAVE THE RIGHT TO TERMINATE THIS AGREEMENT IN THE EVENT THAT SONOMED FAILS TO SUBMIT AN ANNUAL ORDER FOR THE ANNUAL MINIMUM IN ACCORDANCE WITH Section 5.2. OTI SHALL EXERCISE SUCH RIGHT BY DELIVERY OF WRITTEN NOTICE TO SONOMED AND SUCH TERMINATION SHALL BE EFFECTIVE AS OF THE LAST DAY OF THE SIXTH MONTH OF THE YEAR FOR WHICH THE ANNUAL ORDER WAS DUE. IN WHICH EVENT SONOMED SHALL BE OBLIGATE TO PURCHASE AND PAY FOR FIFTY PER CENT OF THE ANNUAL MINIMUM FOR SUCH YEAR, WHICH PRODUCT WILL BE SHIPPED TO SONOMED IN 6 EQUAL BATCHES SPREAD OVER A SIX MONTH PERIOD COMMENCING ON THE FIRST DAY OF THE YEAR. ALL PRODUCT TO BE PURCHASED BY SONOMED DURING THIS PERIOD SHALL PREPAID BY SONOMED. 18.4 EFFECT OF TERMINATION. IN THE EVENT OF TERMINATION OF THIS IN ACCORDANCE WITH SECTION 18.2 ALL AMOUNTS OWED OR TO BE OWED BY SONOMED TO OTI SHALL BECOME IMMEDIATELY DUE AND PAYABLE NET OF ANY AMOUNTS JUSTLY OWED BY OTI TO SONOMED AND ALL UNFILLED DELIVERY ORDERS OF PRODUCT SPECIFYING SHIPMENT DATES BEYOND 60 51 DAYS WILL BE TERMINATED. THE TERMINATION OF THE DELIVERY ORDERS HOWEVER DOES NOT LIMIT EITHER PARTIES RIGHTS PURSUANT TO SECTION 18.7. 18.5 SURVIVAL. NOTWITHSTANDING ANY TERMINATION OF THIS AGREEMENT, THE PROVISIONS OF Sections 8.1, 8.3, 8.4, 9, 13, 14, 15, AND 17 SHALL SURVIVE THE TERMINATION OR EXPIRATION OF THIS AGREEMENT FOR A PERIOD OF 5 YEARS. 18.6 EARLY TERMINATION AFTER SIX MONTHS. After six months and only on the commencement date of each Quarter, including the date of the sixth month, EITHER PARTY MAY TERMINATE THIS AGREEMENT UPON SIX MONTHS' PRIOR WRITTEN NOTICE . IF SONOMED TERMINATES IN THIS MANNER IT MUST AT A MINIMUM DURING THE SIX MONTH NOTICE PERIOD PURCHASE, TAKE DELIVERY OF AND PAY FOR, IN ADDITION TO PRODUCT ALREADY SUBJECT TO DELIVERY ORDERS, AN ADDITIONAL NUMBER OF PRODUCT EQUAL TO 50% OF THE ANNUAL ORDER FOR SUCH YEAR (WHICH NUMBER TOGETHER WITH PREVIOULSY PLACED AND UNFILLED DELIVERY ORDERS SHALL NOT EXCEED 50% OF THE ANNUAL ORDER. SONOMED WILL PREPAY FOR ALL PRODUCT PURCHASED DURING THIS PERIOD INCLUDING PRODUCT FOR WHICH A DELIVERY ORDER HAS BEEN GIVEN BUT NOT YET DELIVERED BY OTI. IF OTI TERMINATES IN THIS MANNER IT MUST CONTINUE TO SUPPLY SONOMED AND SONOMED AGREES TO PURCHASE DURING SUCH NOTICE PERIOD IN ACCORDANCE WITH SONOMED'S DELIVERY ORDERS SUBMITTED PRIOR TO THE DATE OF NOTICE OF TERMINATION. IN ADDITION, SONOMED SHALL HAVE THE RIGHT (WHICH RIGHT MUST BE EXERCISED BY SONOMED PLACING A DELIVERY ORDER WITHIN FIFTEEN DAYS OF RECEIVING NOTICE OF TERMINATION) BUT NOT THE OBLIGATION, TO PURCHASE DURING SUCH SIX MONTH PERIOD AN ADDITIONAL NUMBER OF PRODUCT UP TO 50% OF THE ANNUAL ORDER FOR SUCH YEAR (WHICH NUMBER TOGETHER WITH PREVIOUSLY PLACED AND UNFILLLED DELIVERY ORDERS SHALL NOT EXCEED 50% OF THE ANNUAL ORDER), WHICH PRODUCT WILL BE SHIPPED TO SONOMED IN 6 EQUAL BATCHES SPREAD OVER A SIX MONTH PERIOD. 18.7 NO TERMINATION OF THIS AGREEMENT SHALL IN ANY MANNER WHATSOEVER RELEASE, OR BE CONSTRUED AS RELEASING, ANY PARTY FROM ANY LIABILITY TO THE OTHER ARISING OUT OF OR IN CONNECTION WITH A PARTY'S BREACH OF, OR FAILURE TO PERFORM, ANY COVENANT, AGREEMENT, DUTY OR OBLIGATION CONTAINED HEREIN. 18.8 DISCONTINUANCE OF MANUFACTURE . IF AS A RESULT OF A CHANGE IN COMPUTER PLATFORM CONFIGURATION OR COMPUTER OPERATING SYSTEM SOFTWARE SUCH THAT IT IS NO LONGER ECONOMICALLY FEASIBLE FOR OTI TO ENSURE COMPATIBILITY OF SUCH SYSTEMS WITH THE ORIGINAL COMPONENT HARDWARE AND/OR PRODUCT SOFTWARE OTI DECIDES TO CEASE MANUFACTURING THE PRODUCT OTI MAY TERMINATE THIS AGREEMENT ON 90 DAYS PRIOR WRITTEN NOTICE . THIS NOTICE MAY ONLY BE GIVEN IF OTI ALSO CEASES MANUFACTURE OF COMBINATION PRODUCTS AT THE SAME TIME. 19. FORCE MAJEURE Neither party shall be liable to the other for loss or damages for any default or delay attributable to any cause beyond the reasonable control of that party, including, but not limited to an act of God, flood, fire, explosion, strike, war, acts of terrorism, governmental action other regulatory enforcement action arising from any violation of law, rule or regulation by the party seeking the protection of this provision. If any such event occurs, the party affected shall notify the other party and shall exercise diligent efforts to resume performance of its obligations as soon as possible. In the event the party affected is unable to resume performance within sixty (60) days, the other party shall have the right to terminate this Agreement upon ten (10) days prior written notice. 52 20. MISCELLANEOUS 20.1 WAIVER. NO WAIVER OF ANY OF THE TERMS OF THIS AGREEMENT SHALL BE EFFECTIVE UNLESS MADE IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTY WAIVING ITS RIGHTS HEREUNDER. 20.2 NO LICENSE. NO LICENSE UNDER ANY TRADEMARK, PATENT, COPYRIGHT OR OTHER PROPERTY RIGHT IS GRANTED UNDER THIS AGREEMENT EXCEPT TO THE EXTENT REQUIRED FOR SONOMED TO MARKET AND SELL THE PRODUCTS IN ACCORDANCE WITH THIS AGREEMENT. 20.3 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED PURSUANT TO THE LAWS OF ONTARIO, CANADA, DISREGARDING ANY CONFLICTS OF LAWS PROVISIONS. 20.4 INDEPENDENT CONTRACTORS. NOTHING IN THIS AGREEMENT IS INTENDED OR SHALL BE DEEMED TO CONSTITUTE A PARTNERSHIP, AGENCY, OR JOINT VENTURE RELATIONSHIP BETWEEN THE PARTIES. ALL ACTIVITIES BY THE PARTIES HEREUNDER SHALL BE PERFORMED BY THEM AS INDEPENDENT CONTRACTORS. NEITHER PARTY SHALL INCUR ANY DEBTS OR MAKE ANY COMMITMENTS FOR THE OTHER PARTY, EXCEPT TO THE EXTENT SPECIFICALLY PROVIDED HEREIN. 20.5 ASSIGNMENT. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES, THEIR SUCCESSORS AND PERMITTED ASSIGNS. SONOMED MAY NOT ASSIGN THIS AGREEMENT WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTI, PROVIDED THAT SONOMED SHALL HAVE THE RIGHT TO ASSIGN THIS AGREEMENT TO A AN AFFILIATE OR SUBSIDIARY. THIS TERM IS CONSIDERED A MATERIAL TERM OF THE CONTRACT. 20.6 ARBITRATION. IN THE EVENT THAT THE PARTIES ARE UNABLE TO RESOLVE ANY DISPUTE ARISING UNDER THIS AGREEMENT THOUGH DIRECT NEGOTIATIONS, THE PARTIES AGREE AND CONSENT TO THE RESOLUTION OF SUCH DISPUTE BY BINDING ARBITRATION. ANY SUCH ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH THE PROCEDURES OF THE INTERNATIONAL CHAMBER OF COMMERCE, OR AS OTHERWISE AGREED BY THE PARTIES, AND SHALL BE HELD IN TORONTO, CANADA BEFORE A SINGLE ARBITRATOR SELECTED BY MUTUAL AGREEMENT OF THE PARTIES. NOTWITHSTANDING THE FOREGOING, EITHER PARTY SHALL HAVE THE RIGHT TO SEEK INJUNCTIVE RELIEF IN A COURT OF COMPETENT JURISDICTION TO PREVENT ANY BREACH OF THIS AGREEMENT BY THE OTHER PARTY. 20.7 NOTICES. ALL NOTICES HEREUNDER SHALL BE IN WRITING AND SHALL BE CONSIDERED DELIVERED ON THE DAY OF HAND DELIVERY, ONE DAY AFTER DELIVERY TO A NATIONALLY RECOGNIZED OVERNIGHT DELIVERY SERVICE, CHARGES PREPAID, THREE DAYS AFTER BEING SENT BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID: If to SONOMED, as follows: SONOMED ,Inc. 300 Marcus Avenue Lake Success, New York 11042 Attn: Barry Durante, EVP Tel: 516 -354-0900 Fax: 516-354-5902 E-mail: bdurante@escalon.com 53 If to OTI, as follows: 37 Kodiak Cres., Unit 16 Toronto, Ontario, Canada M3J 3E5 Attn: President Tel: 416 631-9123 Fax: 416 631-6932 E-mail: info@oti-canada.com or to such other address as any party shall have specified by notice to the other in accordance with this paragraph. 20.8 COMPLIANCE WITH LAW. EACH PARTY SHALL COMPLY WITH ALL LEGAL AND REGULATORY REQUIREMENTS APPLICABLE TO THE CONDUCT OF ITS BUSINESS, INCLUDING BUT NOT LIMITED TO, COMPLIANCE WITH ALL SAFETY, HEALTH, ENVIRONMENTAL AND EMPLOYMENT LAWS APPLICABLE TO THE ACTIVITIES TO BE UNDERTAKEN BY SUCH PARTY PURSUANT TO THIS AGREEMENT. 20.9 ENTIRE AGREEMENT, MODIFICATION, COUNTER PARTS. THE TERMS OF THIS AGREEMENT REPRESENT THE ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREIN AND SHALL NOT BE MODIFIED OR SUPPLEMENTED EXCEPT IN A WRITTEN DOCUMENT DULY EXECUTED BY THE PARTIES EXPRESSLY STATING THAT IT IS INTENDED TO MODIFY, SUPPLEMENT OR AMEND THIS AGREEMENT. THIS AGREEMENT SHALL PREVAIL IN THE EVENT OF ANY INCONSISTENCIES BETWEEN IT AND THE TERMS OF ANY PURCHASE ORDER, INVOICE OR OTHER FORM UTILIZED BY THE PARTIES. THIS AGREEMENT MAY BE EXECUTED IN ONE OR MORE COUNTERPARTS, EACH OF WHICH SHALL BE DEEMED AN ORIGINAL, BUT ALL OF WHICH TOGETHER SHALL BE DEEMED ONE AND THE SAME INSTRUMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers the day and year first above written. SONOMED, INC. By: /s/ Richard J. DePiano ------------------------- TITLE: CEO OPHTHALMIC TECHNOLOGIES, INC. By: /s/ Rishard Weitz ------------------------- Title: President 54 SCHEDULE A ANNUAL MINIMUMS
YEAR: Year 1 Year 2 Year 3 ------ ------ ------ UNITS: 80 120 150
55 SCHEDULE B PRODUCT SPECIFICATIONS HF 35-50 (UBM) PROBE Type: Motor Driven, compact probe with inter-changeable High Frequency Transducers Transducers Frequency: 35 MHz. and/or 50 Mhz. Scanning Method: variable field sector scanner Sector angle: 22.5 degrees and 10 degrees fields Scanning speed: Variable 12.5 and 25 Frames/Second (fps) Display: Observable range: variable: 18.5mm. Wide x 14mm Deep @ 38 degrees sector 12.0mm. Wide x 14mm Deep @ 20 degrees sector DUAL SCREEN SIMULTANEOUS DISPLAY WITH LIVE ZOOM AND STANDARD SCREEN DISPLAY. ELECTRONIC RESOLUTION In Sector of 38 degrees fielD Axial (depth) direction: 0.027 mm. Lateral (width) direction: max. 0.035 mm. In Sector of 20 degrees field Axial (depth) direction: 0.027 mm. Lateral (width) direction: max. 0.23 mm. ACOUSTIC AXIAL RESOLUTION 0.068 mm. with 35 MHz. Transducer 0.050 mm. with 50 MHz. Transducer Gain curves: Logarithmic with user-selectable window (contrast) & level (brightness) control COMPUTER- minimum configuration required to drive software together with 17 inch monitor, may change from time to time MEASUREMENTS - A-Scan Profile with 2 markers, Dual Calipers measurements, - Anterior Segment Biometry - single measurement of Cornea thickness, Anterior Chamber Depth (ACD) and Lens thickness. - Distance Measurement; Angle to Angle, Sulcus to Sulcus, Corneal and Scleral thickness - Angle in degrees 56 DYNAMIC RECORDING Recording time: Depends on memory, 20 sec. or more Recording Frame rate: 12.5 or 25 fps Sound sampling rate: CD quality, 44.1 KHz ELECTRICAL: Voltage: AC 90 - 240 V Frequency: 50/60 Hz Exact specifications may change from time to time 57 EX-31.1 3 w97573exv31w1.txt CERTIFICATION OF CEO UNDER RULE 13A-14(A) CERTIFICATION EXHIBIT 31.1 I, Richard J. DePiano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp. 2. Based on my knowledge, this 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 the statements were made, not misleading with respect to the periods covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report. 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: May 17, 2004 /s/ Richard J. DePiano ----------------------------- Richard J. DePiano Chairman and Chief Executive Officer (Principal Executive Officer) 36 EX-31.2 4 w97573exv31w2.txt CERTIFICATION OF SENIOR VP OF FINANCE CERTIFICATION EXHIBIT 31.2 I, Harry M. Rimmer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp. 2. Based on my knowledge, this 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 the statements were made, not misleading with respect to the periods covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report. 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: May 17, 2004 /s/ Harry M. Rimmer ---------------------------- Harry M. Rimmer Senior Vice President of Finance 37 EX-32.1 5 w97573exv32w1.txt CERTIFICATION OF CEO UNDER SECTION 1350 EXHIBIT 32.1 STATEMENT OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE Pursuant to Section 1350 of Title 18 of the United States Code, I, Richard J. DePiano, the Chairman and Chief Executive Officer of Escalon Medical Corp. (the "Company"), hereby certify that, to the best of my knowledge: 1. The Company's Form 10-Q Quarterly Report for the period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Act of 1934; and 2. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 17, 2004 /s/ Richard J. DePiano ------------------------------ Richard J. DePiano Chairman and Chief Executive Officer A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Escalon Medical Corp. and will be retained by Escalon Medical Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 38 EX-32.2 6 w97573exv32w2.txt CERTIFICATION OF SENIOR VP OF FINANCE EXHIBIT 32.2 STATEMENT OF SENIOR VICE PRESIDENT - FINANCE PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE Pursuant to Section 1350 of Title 18 of the United States Code, I, Harry M. Rimmer, the Senior Vice President - Finance of Escalon Medical Corp. (the "Company"), hereby certify that, to the best of my knowledge: 1. The Company's Form 10-Q Quarterly Report for the period ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Act of 1934; and 2. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 17, 2004 /s/ Harry M. Rimmer -------------------------------- Harry M. Rimmer Senior Vice President - Finance A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Escalon Medical Corp. and will be retained by Escalon Medical Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 39 -----END PRIVACY-ENHANCED MESSAGE-----