-----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, LSFMOe4k4ZfnW7LO9UzFKMj6t636yduRihvOj7YGYAlzhE2pfJ2Yn0FZRuQmiRV4 Rj3ziVSURTqaXYz/b7DCqQ== 0000893220-99-001291.txt : 19991117 0000893220-99-001291.hdr.sgml : 19991117 ACCESSION NUMBER: 0000893220-99-001291 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20127 FILM NUMBER: 99755705 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 FORM 10-Q ESCALON MEDICAL CORP. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File No. 0-20127 ESCALON MEDICAL CORP. (Exact name of Registrant as specified in its charter) California 33-0272839 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 351 East Conestoga Road Wayne, PA 19087 (610) 688-6830 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Date: November 11, 1999 3,242,184 Shares of Common Stock, no par value 2 ESCALON MEDICAL CORP. AND SUBSIDIARIES INDEX
Part I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and September 30, 1999 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 1998 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1998 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 1999 1999 ---- ---- ASSETS (UNAUDITED) Current Assets: Cash and cash equivalents $ 3,854,240 $ 3,378,951 Cash and cash equivalents - restricted 1,000,000 1,000,000 Note Receivable 15,000 15,000 Accounts receivable, net 1,063,829 2,170,447 Inventory, net 1,117,208 913,704 Other current assets 142,235 141,363 ------------ ------------ Total current assets 7,192,512 7,619,465 Furniture and equipment, at cost, net 449,555 438,283 Long-term note receivable 150,000 150,000 License and distribution rights, net 537,138 261,884 Patents, net 495,923 499,040 Goodwill, net 1,510,207 1,476,457 Other assets 67,438 65,217 ------------ ------------ $ 10,402,773 $ 10,510,346 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank $ 1,000,000 $ -- Current portion of long-term debt 200,000 200,000 Accounts payable 434,308 332,789 Accrued and other liabilities 1,757,432 1,617,604 ------------ ------------ Total current liabilities 3,391,740 2,150,393 Long-term debt, net of current portion 733,332 683,331 ------------ ------------ Total liabilities 4,125,072 2,833,724 ------------ ------------ Shareholders' Equity: Common stock, no par value; 35,000,000 shares authorized; 3,377,164 shares issued less 134,980 Treasury shares at June 30, 1999 and at September 30, 1999 46,024,811 46,024,811 Treasury stock (118,108) (118,108) Accumulated deficit (39,629,002) (38,230,081) ------------ ------------ Total shareholders' equity 6,277,701 7,676,622 ------------ ------------ $ 10,402,773 $ 10,510,346 ============ ============
Note: The consolidated balance sheet at June 30, 1999 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 1999 ---- ---- Sales revenues $ 1,685,422 $ 1,423,677 Costs and expenses: Cost of goods sold 716,856 732,840 Research and development 155,437 235,434 Marketing, general and administrative 682,963 938,601 ----------- ----------- Total costs and expenses 1,555,256 1,906,875 ----------- ----------- Income (loss) from operations 130,166 (483,198) ----------- ----------- Other income and expenses: Sale of Silicone Oil product line -- 1,848,215 Interest income 36,928 48,885 Interest expense (25) (14,981) ----------- ----------- Total other income and expense 36,903 1,882,119 ----------- ----------- Net income $ 167,069 $ 1,398,921 =========== =========== Basic net income per share $ 0.051 $ 0.431 =========== =========== Diluted net income per share $ 0.041 $ 0.429 =========== =========== Weighted average shares - basic 3,040,152 3,242,184 =========== =========== Weighted average shares - diluted 4,114,879 3,264,610 =========== ===========
See notes to condensed consolidated financial statements. 4 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 1999 ---- ---- Cash Flows From Operating Activities: Net income $ 167,069 $ 1,398,921 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 86,140 80,705 Write off of patents 24,805 -- Gain on Sale of Silicone Oil product line -- (1,848,215) Change in operating assets and liabilities: Accounts receivable 70,814 481,267 Inventories (243,390) 203,504 Other current assets (119,827) 8,595 Accounts payable, accrued and other liabilities 119,819 (241,347) ----------- ----------- Net cash provided from operating activities 105,430 83,430 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (259,000) (8,366,508) Proceeds from maturities of short-term investments 255,016 8,366,508 Proceeds from sale of Silicone Oil product line -- 529,295 Long term note receivable (12,500) -- Purchase of furniture and equipment (10,457) (11,861) Other assets (2,400) (18,187) Patent costs (6,681) (7,965) ----------- ----------- Net cash provided from (used in) investing activities (36,022) 491,282 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on line of credit -- (1,000,000) Principal payments on term loan -- (50,001) Purchase of treasury stock (118,108) -- Payment of preferred stock dividends (25,770) -- ----------- ----------- Net cash used in financing activities (143,878) (1,050,001) ----------- ----------- Net decrease in cash and cash equivalents (74,470) (475,289) Cash and cash equivalents, beginning of period 2,263,967 3,854,240 ----------- ----------- Cash and cash equivalents, end of period $ 2,189,497 $ 3,378,951 =========== ===========
See notes to condensed consolidated financial statements. 5 6 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access, Inc. (jointly referred to as "Escalon" or the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Operating results for interim periods are not indicative of the results that may be expected for the fiscal year ending June 30, 2000. For more complete financial information, the accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 1999 included in the Company's annual report on Form 10-K. 2. PER SHARE INFORMATION The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share", in presenting basic and diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SEPTEMBER 30, 1998 1999 ---- ---- Numerator: Numerator for basic earnings per share: Net income $ 167,069 $ 1,398,921 Preferred stock dividends (12,270) -- ----------- ----------- Numerator for basic earnings per share-income available to Common shareholders 154,799 1,398,921 Effect of dilutive securities: Preferred stock dividends 12,270 -- ----------- ----------- Numerator for diluted earnings per share-income available to Common shareholders after assumed conversions $ 167,069 $ 1,398,921 =========== =========== Denominator: Denominator for basic earnings per share - weighted average shares 3,040,152 3,242,184 Effect of dilutive securities: Convertible preferred stock 1,101,661 -- Employee stock options -- 22,426 ----------- ----------- Denominator for diluted earnings per share - weighted average and assumed conversion 4,141,813 3,264,610 =========== ===========
6 7 2. PER SHARE INFORMATION (CONTINUED)
Basic earnings per share $ 0.051 $ 0.431 =========== =========== Diluted earnings per share $ 0.040 $ 0.429 =========== ===========
3. INVENTORIES Inventories, stated at the lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
JUNE 30, 1999 SEPTEMBER 30, 1999 ------------- ------------------ Raw materials/work in process $ 526,553 $ 549,215 Finished goods 623,655 409,489 ----------- ----------- 1,150,208 958,704 Valuation allowance (33,000) (45,000) ----------- ----------- $ 1,117,208 $ 913,704 =========== ===========
4. CONTINGENCIES Litigation As previously reported in reports filed with the Securities and Exchange Commission, on or about June 8, 1995, a purported class action complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern District of New York as a "related action" to In Re Blech Securities Litigation (a litigation matter which the Company is no longer a party to). The plaintiff purports to represent a class of all purchasers of the Company's stock from November 17, 1993, to and including September 21, 1994. The complaint alleges that the Company, together with certain of its officers and directors, David Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts claims under Section 10(b) of the Securities Exchange Act of 1934 and common law. Actual and punitive damages in an unspecified amount are sought, as well as a constructive trust over the proceeds from the sale of stock pursuant to the offering. On June 6, 1996, the court denied a motion by the Company and the named officers and directors to dismiss the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an answer to the complaint denying all allegations of wrongdoing and asserting various affirmative defenses. In an effort to curtail its legal expenses related to this litigation, while continuing to deny any wrongdoing, the Company has reached an agreement, subject to final court approval, to settle this action on its behalf and on behalf of its former and present officers and directors, for $500,000. The Company's directors and officers insurance carrier has agreed to fund a significant portion of the settlement amount. Both the Company and its insurance carrier have deposited such funds in an escrow account. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to the development of acquisition and joint venture opportunities, fluctuations in results of operations, as well as information contained elsewhere in this Report where statements are preceded by, followed by or include the words "believes," "expects," "anticipates," or similar expressions. For such statements the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this document are subject to risks and uncertainties that could cause the assumptions underlying such forward-looking statements and the actual results to differ materially from those expressed in or implied by the statements. The most important factors that could prevent the Company from achieving its goals -- and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements -- include, without limitation and in addition to those discussed in the documents filed by the Company with the Securities and Exchange Commission (including Amendment No. 3 to a Registration Statement on Form S-3 filed by the Company with the Securities and Exchange Commission on April 30, 1998 (Registration No. 333-44513)), the following: (i) Future capital needs and the uncertainty of additional funding (whether through the financial markets, collaborative or other arrangements with strategic partners, or from other sources); and (ii) The outcome of, and costs associated with, litigation matters. OVERVIEW The following discussion should be read in conjunction with the interim financial statements and the notes thereto which are set forth elsewhere in this report on Form 10-Q. Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers, Inc.) and its subsidiaries Escalon Pharmaceutical Inc. and Escalon Vascular Access Inc. (jointly referred to as "Escalon" or the "Company"), operates in the healthcare market specializing in the development, marketing and distribution of ophthalmic medical devices, pharmaceutical and vascular access products. The Company is also developing its ophthalmic drug delivery system to complement its other businesses. On February 12, 1996, the Company acquired all of the assets and certain liabilities of Escalon Ophthalmics, Inc. ("E.O.I.") Prior to the acquisition, the Company was in the development stage and devoting substantially all of its resources to the research and development of laser systems designed for the treatment of ophthalmic disorders. Upon completion of the acquisition, the Company changed its market focus and is now engaged in developing, marketing and distributing ophthalmic medical devices, pharmaceuticals and niche medical products. The Company is continuing development of its ophthalmic drug delivery system to complement its other businesses. Sales of products acquired from EOI are made primarily to hospitals and physicians throughout the United States. Escalon purchased the vascular access business unit of Radiance Medical Systems, Inc. in January 1999. This was significant as the Company's first step in diversification. The vascular access product line is the first niche product acquired outside the ophthalmic medical field. Vascular products are marketed to the pediatric and critical care providers through independent distributors. Escalon's market strategy is to locate and acquire profitable niche medical products that it owns and controls the rights to. To finance this program, in the third quarter of fiscal 1999, the Company sold its 8 9 license and distribution rights to Betadine(R)5% Sterile Ophthalmic Prep Solution ("Betadine"). In August, 1999 the Company sold its license and distribution rights to Adatosil(R)5000 Silicone Oil ("Silicone Oil"). To further develop and commercialize its proprietary laser technology, in October 1997, the Company licensed its intellectual laser properties to a newly formed company, IntraLase, in return for an equity interest in IntraLase and future royalties on product sales. IntraLase has the responsibility of funding and developing the laser technology through to commercialization. The Company expects that results of operations may fluctuate from quarter to quarter for a number of reasons, including: (i) anticipated order and shipment patterns of the Company's products; (ii) lead times to produce the Company's products; and (iii) general competitive and economic conditions of the health care market. RESULTS OF OPERATIONS Three-month Periods Ended September 30, 1998 and 1999 Product revenues decreased $261,745, or 16%, to $1,423,677 for the three-month period ended September 30, 1999 as compared to $1,685,422 for the same period ended September 30, 1998. This revenue decrease reflects a drop in unit sales of Silicone Oil, $424,900, and Betadine, $262,300. The license and distribution rights to these product lines were sold in August and March of 1999, respectively. Revenue from the vascular access business, acquired in January 1999, provided $508,600 to partially replace this revenue decline. In the first quarter of fiscal 2000, Escalon also experienced a decline in unit sales of its capital equipment, disposables and OEM products of $26,400, $17,800 and $61,100, respectively. These declines were offset by a $22,100 increase in sales for ISPAN(TM) gas products. Contract manufacturing revenues vary from quarter to quarter depending on when orders are received and the lead times to produce such products. Cost of goods sold totaled $732,840, or 51% of revenue, for the three-month period ended September 30,1999, as compared to $716,856, or 42% of revenue, for the same period last year. The costs associated with the vascular access product line, for the current quarter, were $253,102. There was no comparable cost for the same period last year. Silicone oil costs decreased by $149,538 to $250,331 in the first quarter of fiscal 2000, this reflects the sale of that product line in mid quarter. Oil costs for the entire first quarter of fiscal 1999 amounted to $399,869. There are no costs shown in the current quarter for Betadine (product line sold in third quarter fiscal 1999), in the comparable first quarter of fiscal 1999; cost of goods sold for this product line amounted to $113,044. Medical product manufacturing costs increased to $229,407 in the first quarter of fiscal 2000, as compared to $203,943 in fiscal 1999. Research and development expenses increased $79,997, or 51%, for the three-month period ended September 30, 1999 when compared to the same period in 1998. Expenses for pre-clinical and clinical trials related to providone-iodine 2.5% and Ocufit SR(R) increased $50,849 over the first quarter of fiscal 1999. The Company also incurred $29,049 in costs for vascular access products that did not exist until the third quarter of fiscal 1999. Marketing, general and administrative expenses increased $255,638, or 37%, for the three-month period ended September 30, 1999 compared to the same period last year. Expenses for the vascular access product line were $302,128, there were no comparable costs in the first fiscal quarter of 1999. The Company experienced an overall decline in administrative and sales cost of $46,490 from the previous year. Most of that reduction relates to amortization and other costs associated with the sale of Silicone Oil and Betadine product lines. 9 10 Interest income increased to $48,885 for the three-month period ended September 30, 1999 from $36,928 for the same period in 1998. This increase is a result of increased cash and cash equivalents available for investment, due to proceeds from received from sale of the Silicone Oil and Betadine product lines. Interest expense increased to $14,981, as a result of corporate borrowing arrangements that did not exist until the third quarter of fiscal 1999. In August 1999, the Company reported the sale of its license and distribution rights for the Adatosil(R) 5000 Silicone Oil product line. This sale resulted in a $1,848,215 gain after writing off of the remaining net book value of license and distribution rights associated with that product line. The Company will also continue to receive additional consideration based on future sales of Adatosil (R) Silicone Oil over the next six years. There is no provision for income taxes for the three-month periods ended September 30, 1999 and 1998 due to the utilization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had cash and cash equivalents of $3,378,951 as compared to $3,854,240 at June 30, 1999. Cash and cash equivalents decreased by $475,289. During the first quarter, the Company paid off the $1,000,000 line of credit facility that was outstanding at June 30, 1999. Offsetting this reduction in cash was a receipt of $529,295, the first installment paid on the Silicone Oil product line sale. In February 1999, the Company obtained a $2,000,000 credit facility from PNC Bank N.A. This marked the first time the Company gained access to traditional mainstream financing sources. As a result of this financing, Escalon obtained a $1,000,000 five-year term loan and access to a $1,000,000 line of credit. In addition, Escalon now maintains a $1,000,000 certificate of deposit with PNC Bank, N.A. The investment is considered current and restricted, since it is pledged as collateral against the loan. All of the Company's assets and cash collateral of $1,000,000 collateralize these agreements. The Board of Directors has authorized the repurchase of up to 500,000 shares of the Company's common stock. The price, timing and manner of these purchases will be at the discretion of management. No purchases have been made, nor are any expected to be made, under this authority. The Company anticipates that the cash and cash equivalents and the interest earned thereon, together with funds generated from future product sales, should be adequate to satisfy its capital requirements, based on current levels of operations, through September 30, 2000. In the longer term, however, the Company will seek corporate partnering, licensing and other fund raising opportunities to satisfy the significant expenditures anticipated with development of its surgical products, pharmaceutical products, vascular access devices and drug delivery programs. YEAR 2000 ISSUES None of the Company's products use date sensitive software; therefore no customer service nor support concerns need to be addressed. The Company utilizes commercially available off the shelf software packages with support packages that specifically address this issue. To date the cost of year 2000 compliance has been insignificant. Additional expenditures are not expected to be of any significant amount. 10 11 Management judges the likelihood of disruption of temporary manufacturing, customer service, sales and marketing, research and development or administrative functions to be minimal in regard to year 2000 compliance of our key suppliers and customers. Based on communications with our key suppliers, including utility and telecommunications providers, the year 2000 issue is being adequately addressed. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Note 4 of the Notes to Condensed Consolidated Financial Statements in Part I is incorporated herein by reference thereto. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.5 Employment Agreement between Registrant and Ronald Hueneke dated July 1, 1999. 10.14 1999 Equity Incentive Plan of Registrant. 27 Financial Data Schedule (b) Reports on Form 8-K: A report on Form 8-K was filed on August 26, 1999, and an Amendment thereto was filed on October 19, 1999, announcing the sale of the Company's inventory and license and distribution rights to Bausch & Lomb Surgical, Inc. The content of that report is summarized below: Effective August 13, 1999, The Company entered into a Termination Agreement (the "Termination Agreement") between the Company and Bausch & Lomb Surgical, Inc. ("BLS") and a Supply Agreement (the "Supply Agreement") between the Company and BLS. Pursuant to the Termination Agreement, the Distribution and Development Agreement dated January 1, 1990, as amended, between the Company and Adatomed GmbH, a wholly owned subsidiary of BLS, was terminated, and the Company transferred its license and distribution rights for Adatosil(R)5000 Silicone Oil, as well as related inventory, back to BLS. In consideration of the transfer, BLS agreed to pay to the Company cash in the amount of $2,117,180, payable in quarterly installments, with the initial installment paid on August 14, 1999, and additional cash consideration based on future sales of Adatosil(R)5000 Silicone Oil over the next six years. Adatosil(R)5000 Silicone Oil represented approximately 56% of the Company's sales in the fiscal year ended June 30, 1999. Pursuant to the Supply Agreement, BLS agreed to purchase from the Company, and the Company agreed to manufacture and sell to BLS, certain viscous fluid systems for a period of six years. 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCALON MEDICAL CORP. (Registrant) DATE: November 15, 1999 By: /s/ Douglas R. McGonegal ---------------------------------------- Douglas R. McGonegal Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary 12 EX-10.5 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Employment Agreement is made as of July 1, 1999 by and between Escalon Medical Corp., a California corporation ("Employer"), and Ronald L. Hueneke, an individual residing at 8846 Lake Drive, West Lake, Wisconsin 53129 ("Employee"). RECITALS: WHEREAS, Employer desires to employ Employee as President and Chief Operating Officer and Employee desires to accept such employment on the terms set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DUTIES. Employer hereby employs Employee to serve as President and Chief Operating Officer. Employee agrees to be so employed by Employer and to devote his best efforts to advance the interests of Employer. Employee agrees to devote substantially all of his business time to performing duties hereunder; provided, however, that Employee shall be permitted to devote a portion of his business time to serve as an advisor to the Medical College of Wisconsin. Employee shall not be required to relocate from Wisconsin to any other location at which Employer conducts business. 2. TERM. Subject to the provisions of Section 4 hereof, the term of Em- ployee's employment hereunder shall commence on the date hereof and shall continue for a term of one year; provided, however, that the term of this Agreement shall thereafter be renewed automatically from year to year unless Employer or Employee shall have given the other notice of termination, effective at the end of the current term, not less than 90 days prior to the expiration thereof. 3. COMPENSATION. (a) BASE SALARY. For the services rendered by Employee under this Agreement, Employer agrees to pay Employee a salary at the rate of $105,000 per annum (such salary, as adjusted from time to time, is herein called the "Salary"), payable in accordance with Employer's normal payroll practices. (b) BONUS. At the end of each fiscal year of Employer that ends during the term of this Agreement, the Compensation Committee of Employer's Board of Directors shall determine whether to pay Employee a bonus (the "Bonus") -1- 2 with respect to such fiscal year. The award of any Bonus shall be in the sole discretion of the Employer's Compensation Committee. (c) FRINGE BENEFITS. During the term of this Agreement, Employer shall provide to Employee life, health and dental insurance and any other insurance generally provided for executive employees of Employer on the same terms as such insurance is provided to such employees. 4. TERMINATION. The provisions of this Section 4 shall be applicable notwithstanding anything to the contrary contained herein. (a) DEATH. In the event of the death of Employee during the term of this Agreement, this Agreement shall terminate effective as of the date of Employee's death, and Employer shall have no further obligation or liability hereunder except that Employer shall pay to Employee's estate the portion, if any, of Employee's Salary and any earned but unpaid Bonus for the period through the date of Employee's death that remains unpaid. (b) TOTAL DISABILITY. In the event of a mental or physical condition that in the reasonable opinion of Employer renders Employee unable or incompetent to perform his duties hereunder ("Total Disability") which continues for a period of 180 consecutive days during the term of this Agreement, Employer shall have the right to terminate Employee's employment hereunder by giving Employee ten days' written notice thereof and, upon expiration of such ten-day period, Employer shall have no further obligation or liability under this Agreement except Employer shall pay to Employee the portion, if any, of Employee's Salary and any earned but unpaid Bonus for the period through the date of termination that remains unpaid. (c) NO OTHER TERMINATION. Except upon a breach of this Agreement by Employee or as otherwise expressly set forth in this Section 4, Employer shall not be permitted to terminate Employee's employment hereunder. In the event of a breach of this Section 4, Employee shall be entitled to receive from Employer as Employee's sole damages and remedy, and Employer agrees to pay as liquidated damages, all compensation to which Employee would have been entitled under Section 3 hereof as and when such compensation would have been received had Employee's employment not been terminated for the remainder of the initial one-year term of this Agreement, without regard to other events occurring thereafter that would cause a termination of employment under this Section 4, except for a violation of Section 5 hereof. Employee shall receive the liquidated damages agreed to herein without any obligation to prove actual damages. 5. NON-DISCLOSURE AND NON-COMPETITION. (a) NON-DISCLOSURE. Employee acknowledges that in the course of performing services for Employer, Employee will obtain knowledge of Employer's -2- 3 business plans, products, processes, software, know-how, trade secrets, formulas, methods, models, prototypes, discoveries, inventions, improvements, disclosures, names and positions of employees and/or other proprietary and/or confidential information (collectively the "Confidential Information"). Employee agrees to keep the Confidential Information secret and confidential and not to publish, disclose or divulge to any other party, and Employee agrees not to use any of the Confidential Information for Employee's own benefit or to the detriment of Employer without the prior written consent of Employer, whether or not such Confidential Information was discovered or developed by Employee. Employee also agrees not to divulge, publish or use any proprietary and/or confidential information of others that Employer is obligated to maintain in confidence. (b) NON-COMPETITION. Employee agrees that, during his employment by Employer hereunder and for an additional period of one year after the termination of Employee's employment, neither Employee nor any corporation or other entity in which Employee may be interested as a partner, trustee, director, officer, employee, agent, shareholder, lender of money or guarantor, or for which he performs services in any capacity (including as a consultant or independent contractor) shall at any time during such period (i) be engaged, directly or indirectly, in any Competitive Business (as that term is hereinafter defined) or (ii) solicit, hire, contract for services or otherwise employ, directly or indirectly, any of the employees of Employer. Nothing herein contained shall be deemed to prevent Employee from investing in or acquiring one per cent or less of any class of securities of any company if such class of securities is listed on a national securities exchange or is quoted on the Nasdaq Stock Market. For purposes of this Section 5(b), the term "Competitive Business" shall mean any business that engages in the design, development, manufacture, sale, lease, marketing or distribution of any products or provides any services that are designed, developed, manufactured, sold, marketed or distributed by Employer during the term of this Agreement. 6. INVENTIONS AND DISCOVERIES. (a) DISCLOSURE. Employee shall promptly and fully disclose to Employer with all necessary detail, all developments, know-how, discoveries, inventions, improvements, concepts, ideas, formulae, processes and methods (whether copyrightable, patentable or otherwise) made, received, conceived, acquired or written by Employee (whether or not at the request or upon the suggestion of Employer, solely or jointly with others, during the period of his employment with Employer that relate to any line of business, activities or fields of interest or investigation engaged in by Employer) from time to time during the course of Employee's employment by Employer, or that are otherwise made through the use of Employer's time, facilities or materials (collectively, the "Inventions"). (b) ASSIGNMENT AND TRANSFER. Employee agrees to assign and transfer to Employer all of Employee's right, title and interest in and to the Inventions, and Employee further agrees to deliver to Employer any and all drawings, -3- 4 notes, specifications and data relating to the Inventions, and to sign, acknowledge and deliver all such further papers, including applications for and assignments of copyrights and patents, and all renewals thereof, as may be necessary to obtain copyrights and patents for any Inventions in any and all countries and to vest title thereto in Employer and its successors and assigns and to otherwise protect Employer's interests therein. (c) RECORDS. Employee agrees that in connection with any research, development or other services performed for Employer, Employee will maintain careful, adequate and contemporaneous written records of all Inventions, which records shall be the property of Employer. 7. EMPLOYER DOCUMENTATION. Employee shall hold in a fiduciary capacity for the benefit of Employer all documentation, disks, programs, data, records, drawings, manuals, reports, sketches, blueprints, letters, notes, notebooks and all other writings, electronic data, graphics and tangible information and materials of a secret, confidential or proprietary information nature relating to Employer or Employer's business that are in the possession or under the control of Employee. 8. INJUNCTIVE RELIEF. Employee acknowledges that his compliance with the agreements in Sections 5, 6 and 7 hereof is necessary to protect the good will and other proprietary interests of Employer and that Employee is one of the principal executives of Employer and conversant with its affairs, its trade secrets and other proprietary information. Employee acknowledges that a breach of any of his agreements in Sections 5, 6 and 7 hereof will result in irreparable and continuing damage to Employer for which there will be no adequate remedy at law; and Employee agrees that in the event of any breach of the aforesaid agreements, Employer and its successors and assigns shall be entitled to injunctive relief and to such other and further relief as may be proper. 9. SUPERSEDES OTHER AGREEMENTS. This Agreement represents the entire agreement between the parties regarding the subject matter hereof and supersedes and is in lieu of any and all other employment arrangement or agreement, oral or written, between Employer and Employee. 10. AMENDMENTS. Any amendment to this Agreement shall be made in writing and signed by the parties hereto. 11. ENFORCEABILITY. If any provision of this Agreement shall be invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so -4- 5 modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 12. CONSTRUCTION. This Agreement shall be construed and interpreted in accordance with the laws of the State of Wisconsin. 13. ASSIGNMENT. (a) BY EMPLOYER. The rights and obligations of Employer under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of Employer. (b) BY EMPLOYEE. This Agreement and the obligations created hereunder may not be assigned by Employee. 14. NOTICES. All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given when mailed by certified or registered mail, return receipt requested, or sent by overnight courier, addressed to the intended recipient as follows: If to Employee: Ronald L. Hueneke 8846 Lake Drive West Lake, Wisconsin 53129 If to Employer: Escalon Medical Corp. 351 East Conestoga Road Wayne, PA 19087 Attention: Richard J. DePiano, Chairman and CEO Any party may from time to time change its address for the purpose of notices to that party by a similar notice specifying a new address, but no such change shall be deemed to have been given until it is actually received by the party sought to be charged with its contents. 15. WAIVER. No claim or right arising out of a breach or default under this Agreement shall be discharged in whole or in part by a waiver of that claim or right unless the waiver is supported by consideration and is in writing and executed by the aggrieved party hereto or its or his duly authorized agent. A waiver by any party hereto of a breach or default by the other party hereto of any provision of this Agreement shall not be deemed a waiver of future compliance therewith, and such provisions shall remain in full force and effect. -5- 6 16. SURVIVAL OF COVENANTS. The provisions of Sections 5, 6, 7 and 8 hereof shall survive the termination of this Agreement. Furthermore, any provision of this Agreement that provides a benefit to Employee and which by the express terms hereof does not terminate upon the termination of Employee's employment shall remain binding upon Employer until such time as such benefits are paid in full to Employee or his successors. IN WITNESS WHEREOF, this Agreement has been executed by the parties on the date first above written. /s/ Ronald L. Hueneke ------------------------------- Ronald L. Hueneke ESCALON MEDICAL CORP. By: /s/ Richard J. DePiano ---------------------------- Richard J. DePiano, Chairman and Chief Executive Officer -6- EX-10.14 3 1999 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.14 ESCALON MEDICAL CORP. 1999 EQUITY INCENTIVE PLAN 1. PURPOSE. The purpose of the Escalon Medical Corp. 1999 Equity Incentive Plan is to enhance the ability of Escalon Medical Corp. (the "Company") and any subsidiaries to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to such personnel and to promote the success of the Company. To accomplish these purposes, this Plan provides a means whereby employees, directors and consultants may receive stock options ("Options") to purchase the Company's Common Stock, no par value, (the "Common Stock"). 2. ADMINISTRATION. (a) COMPOSITION OF THE COMMITTEE. This Plan shall be administered by a committee (the "Committee"), which shall be appointed by and serve at the pleasure of the Company's Board of Directors (the "Board"). The Committee shall be comprised of two or more members of the Board. Each member of the Committee shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and (ii) an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Subject to the foregoing, from time to time the Board may increase or decrease the size of the Committee, appoint additional members thereof, remove members (with or without cause), appoint new members in substitution therefor, fill vacancies or remove all members of the Committee and thereafter directly administer this Plan. (b) AUTHORITY OF THE COMMITTEE. The Committee shall have full and final authority, in its sole discretion, to interpret the provisions of this Plan and to decide all questions of fact arising in its application; to determine the employees, directors and consultants to whom awards shall be made and the type, amount, size and terms of each such award; to determine the time when awards shall be granted; and to make all other determinations necessary or advisable for the administration of this Plan. The Committee shall have the authority to adopt, amend and rescind such rules, regulations and procedures as, in its opinion, may be advisable in the administration of this Plan, including, without limitation, rules, regulations and procedures that: (i) deal with satisfaction of an optionee's tax withholding obligations pursuant to Section 13 hereof, (ii) include arrangements to facilitate an optionee's ability to borrow funds for the payment of the exercise price of an Option, if applicable, from securities' brokers and dealers, and (iii) include arrangements that provide for the payment of some or all of an Option's exercise price by delivery of previously owned shares of Common Stock or other property and/or by withholding some of the shares of Common Stock being acquired upon exercise of an 2 Option. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees and all other holders of Options granted under this Plan. (c) AUTHORITY OF THE BOARD. Notwithstanding anything to the contrary set forth in this Plan, all authority granted hereunder to the Committee may be exercised at any time and from time to time by the Board. All decisions, determinations and interpretations of the Board shall be final and binding on all optionees and all other holders of Options granted under this Plan. 3. STOCK SUBJECT TO THIS PLAN. Subject to Section 16 hereof, the shares that may be issued under this Plan shall not exceed in the aggregate 235,000 shares of Common Stock. Such shares may be authorized and unissued shares or shares issued and subsequently reacquired by the Company. Except as otherwise provided herein, any shares subject to an Option that for any reason expires or is terminated unexercised as to such shares shall again be available under this Plan. 4. ELIGIBILITY TO RECEIVE OPTIONS. Persons eligible to receive Options under this Plan shall be limited to those consultants, directors, officers and other employees of the Company and any subsidiary (as defined in Section 425 of the Code or any amendment or substitute thereto), who are in positions in which their decisions, actions and counsel significantly impact upon the profitability and success of the Company and any subsidiary. Directors of the Company who are not also employees of the Company or any subsidiary and consultants shall not be eligible to be awarded Incentive Stock Options (as defined in Section 5 hereof). Notwithstanding anything to the contrary set forth in this Plan, the maximum number of shares of Common Stock for which Options may be granted to any employee in any calendar year shall be 100,000 shares. 5. TYPES OF OPTIONS. Grants may be made at any time and from time to time by the Committee in the form of Options to purchase shares of Common Stock. Options granted hereunder may be Options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code or any amendment or substitute thereto ("Incentive Stock Options") or Options that are not intended to so qualify ("Nonqualified Stock Options"). 6. OPTION AGREEMENTS. Options for the purchase of Common Stock shall be evidenced by written agreements in such form not inconsistent with this Plan as the Committee shall approve from time to time. The Options granted hereunder may be evidenced by a single agreement or by multiple agreements, as determined by the Committee in its sole discretion. Each Option agreement shall contain in substance the following terms and conditions: (a) TYPE OF OPTION. Each Option agreement shall identify the Options represented thereby as Incentive Stock Options or Nonqualified Stock Options, as the case may be. 3 (b) OPTION PRICE. Each Option agreement shall set forth the purchase price of the Common Stock purchasable upon the exercise of the Option evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii) hereof, the purchase price of the Common Stock subject to an Incentive Stock Option shall be not less than 100% of the fair market value of such stock on the date the Option is granted, as determined by the Committee, but in no event less than the par value of such stock. The purchase price of the Common Stock subject to a Nonqualified Stock Option shall be not less than 85% of the fair market value of such stock on the date the Option is granted, as determined by the Committee. For this purpose, fair market value on any date shall mean the closing price of the Common Stock, as reported in The Wall Street Journal or if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System, or if the Common Stock is not reported by Nasdaq, the fair market value shall be as determined by the Committee pursuant to Section 422 of the Code. (c) EXERCISE TERM. Each Option agreement shall state the period or periods of time within which the Option may be exercised, in whole or in part, which shall be such a period or periods of time as may be determined by the Committee, provided that no Option shall be exercisable after ten years from the date of grant thereof. The Committee shall have the power to permit an acceleration of previously established exercise terms, subject to the requirements set forth herein, upon such circumstances and subject to such terms and conditions as the Committee deems appropriate. (d) INCENTIVE STOCK OPTIONS. In the case of an Incentive Stock Option, each Option agreement shall contain such other terms, conditions and provisions as the Committee determines necessary or desirable in order to qualify such Option as a tax-favored Option (within the meaning of Section 422 of the Code or any amendment or substitute thereto or regulation thereunder) including without limitation, each of the following, except that any of these provisions may be omitted or modified if it is no longer required in order to have an Option qualify as a tax-favored Option within the meaning of Section 422 of the Code or any substitute therefor: (i) The aggregate fair market value (determined as of the date the Option is granted) of the Common Stock with respect to which Incentive Stock Options are first exercisable by any employee during any calendar year (under all plans of the Company) shall not exceed $100,000. (ii) No Incentive Stock Options shall be granted to any employee if, at the time the Option is granted, the employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or its subsidiaries unless, at the time such Option is granted, the Option price is at least 110% of the fair market value of the stock subject to the Option and, 4 by its terms, the Option is not exercisable after the expiration of five years from the date of grant. (iii) No Incentive Stock Options shall be exercisable more than three months (or one year, in the case of an employee who dies or becomes disabled within the meaning of Section 72(m)(7) of the Code or any substitute therefor) after termination of employment. (e) SUBSTITUTION OF OPTIONS. Options may be granted under this Plan from time to time in substitution for stock options held by directors, consultants and employees of other corporations who are about to become, and who do concurrently with the grant of such options become, directors, consultants or employees of the Company or a subsidiary as a result of a merger or consolidation of the employing corporation with the Company or a subsidiary, or the acquisition by the Company or a subsidiary of the assets or capital stock of the employing corporation or a subsidiary of the employing corporation. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Section 6 to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. 7. DATE OF GRANT. The date on which an Option shall be deemed to have been granted under this Plan shall be the date of the Committee's authorization of the Option or such later date as may be determined by the Committee at the time the Option is authorized. Notice of the determination shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant. 8. EXERCISE AND PAYMENT FOR SHARES. Options may be exercised in whole or in part, from time to time, by giving written notice of exercise to the Secretary of the Company, specifying the number of shares to be purchased, except that no Option may be exercised in whole or in part during the first six months after the Option is granted unless expressly permitted by the Committee. The purchase price of the shares with respect to which an Option is exercised shall be payable in full at the time notice is given in cash, Common Stock at fair market value, or a combination thereof, as the Committee may determine from time to time and subject to such terms and conditions as may be prescribed by the Committee for such purpose. The Committee may also, in its discretion and subject to prior notification to the Company by an optionee, permit an optionee to enter into an agreement with the Company's transfer agent or a brokerage firm of national standing whereby the optionee will simultaneously exercise the Option and sell the shares acquired thereby through the Company's transfer agent or such a brokerage firm and either the Company's transfer agent or the brokerage firm executing the sale will remit the Company from the proceeds of sale the exercise price of the shares as to which the Option has been exercised. 5 9. RIGHTS UPON TERMINATION OF SERVICE. In the event that an optionee ceases to be a consultant, director, officer or employee of the Company or any subsidiary, for any reason other than death, retirement, as hereinafter defined, or disability (within the meaning of Section 72(m)(7) of the Code or any substitute therefor), the optionee shall have the right to exercise the Option during its term within a period of three months after such termination to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions as may be specified by the Committee. In the event that an optionee dies, becomes disabled or, in the case of any employee, retires prior to the expiration of his Option and without having fully exercised his Option, the optionee or his successor shall have the right to exercise the Option during its term within a period of one year after termination of service due to death, disability (within the meaning of Section 72(m)(7) of the Code) or, in the case of an employee, retirement, in each case only to the extent that the Option was exercisable at the time of termination, or within such other period, and subject to such terms and conditions as may be specified by the Committee. As used in this Section 9, "retirement" means a termination of employment by reason of an optionee's retirement at or after his earliest permissible retirement date pursuant to and in accordance with his employer's regular retirement plan or personnel practices. Notwithstanding the provisions of Section 6(d)(iii) hereof, an Incentive Stock Option may be exercised more than three months after termination of employment due to retirement, as provided in this Section 9, but in that event, the Option shall lose its status as an Incentive Stock Option and shall be treated as a Nonqualified Stock Option. 10. GENERAL RESTRICTIONS. Each Option granted under this Plan shall be subject to the requirement that if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an Option with respect to the disposition of shares of Common Stock is necessary or desirable as a condition of or in connection with the granting of such Option or the issuance or purchase of shares of Common Stock thereunder, such Option shall not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 11. RIGHTS OF A SHAREHOLDER. The recipient of any Option under this Plan, unless otherwise provided by this Plan, shall have no rights as a shareholder unless and until certificates for shares of Common Stock are issued and delivered to him. 12. RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in this Plan or in any agreement entered into pursuant to this Plan shall confer upon any optionee the right to continue in the employment of the Company or any subsidiary 6 or affect any right that the Company or any subsidiary may have to terminate the employment of such optionee or consulting relationship with such optionee. 13. WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under this Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If and to the extent authorized by the Committee, in its sole discretion, an optionee may make an election, by means of a form of election to be prescribed by the Committee, to have shares of Common Stock that are acquired upon exercise of an Option withheld by the Company or to tender other shares of Common Stock or other securities of the Company owned by the optionee to the Company at the time of exercise of an Option to pay the amount of tax that would otherwise be required by law to be withheld by the Company as a result of any exercise of an Option. Any such election shall be irrevocable and shall be subject to the disapproval of the Committee at any time. Any securities so withheld or tendered will be valued by the Committee as of the date of exercise. 14. NON-ASSIGNABILITY. No Option under this Plan shall be assignable or transferable by the recipient thereof except by will or by the laws of descent and distribution or by such other means as the Committee may approve. During the life of the recipient such Option shall be exercisable only by such person or by such person's guardian or legal representative. 15. NON-UNIFORM DETERMINATIONS. The Committee's determinations under this Plan (including without limitation determinations of the persons to receive Options, the form, amount and timing of such grants, the terms and provisions of Options, and the agreements evidencing same) need not be uniform and may be made selectively among persons who receive, or are eligible to receive, grants of Options under this Plan whether or not such persons are similarly situated. 16. ADJUSTMENTS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and the number of shares of Common Stock that have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to 7 have been "effected without receipt of consideration." Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its discretion in such instances, declare that any Option shall terminate as of a date fixed by the Committee and give each Option holder the right to exercise his Option as to all or any part of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable. (c) SALE OR MERGER. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Committee, in the exercise of its sole discretion, may take such action as it deems desirable, including, but not limited to: (i) causing an Option to be assumed or an equivalent option to be substituted by the successor corporation or a parent or subsidiary of such successor corporation, (ii) providing that an Option holder shall have the right to exercise his Option as to all of the shares of Common Stock covered by the Option, including shares as to which the Option would not otherwise be exercisable, or (iii) declaring that an Option shall terminate at a date fixed by the Committee provided that the Option holder is given notice and opportunity to exercise the then exercisable portion of his Option prior to such date. 17. AMENDMENT. The Board may terminate or amend this Plan at any time with respect to shares as to which Options have not been granted, subject to any required shareholder approval or any shareholder approval that the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements. The Board may not, without the consent of the holder of an Option, alter or impair any Option previously granted under this Plan, except as specifically authorized herein. 18. CONDITIONS UPON ISSUANCE OF SHARES. (a) COMPLIANCE WITH SECURITIES LAWS. Shares of the Company's Common Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Common Stock of the Company may then be listed, and shall be 8 further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such representation is required by any of the aforementioned relevant provisions of law. 19. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares as shall be sufficient to satisfy the requirements of this Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. 20. EFFECT ON OTHER PLANS. Participation in this Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Company or any subsidiary. Any Options granted pursuant to this Plan shall not be used in determining the benefits provided under any other plan of the Company or any subsidiary unless specifically provided. 21. DURATION OF THIS PLAN. This Plan shall remain in effect until all Options granted under this Plan have been satisfied by the issuance of shares, but no Option shall be granted more than ten years after the earlier of the date this Plan is adopted by the Company or is approved by the Company's shareholders. 22. FORFEITURE FOR DISHONESTY. Notwithstanding anything to the contrary in this Plan, if the Committee finds, by a majority vote, after full consideration of the facts presented on behalf of both the Company and any optionee, that the optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonest conduct in the course of his employment or retention by the Company or any subsidiary that damaged the Company or any subsidiary or that the optionee has disclosed trade secrets of the Company or any subsidiary, the optionee shall forfeit all unexercised Options and all exercised Options under which the Company has not yet delivered the certificates. The decision of the Committee in interpreting and applying the provisions of this Section 22 shall be final. No decision of the Committee, however, shall affect the finality of the discharge or termination of such optionee by the Company or any subsidiary in any manner. 23. NO PROHIBITION ON CORPORATE ACTION. No provision of this Plan shall be construed to prevent the Company or any officer or director thereof from 9 taking any corporate action deemed by the Company or such officer or director to be appropriate or in the Company's best interest, whether or not such action could have an adverse effect on this Plan or any Options granted hereunder, and no optionee or optionee's estate, personal representative or beneficiary shall have any claim against the Company or any officer or director thereof as a result of the taking of such action. 24. INDEMNIFICATION. With respect to the administration of this Plan, the Company shall indemnify each present and future member of the Committee and the Board against, and each member of the Committee and the Board shall be entitled without further action on his part to indemnity from the Company for all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of, any action, suit or proceeding in which he may be involved by reason of his being or having been a member of the Committee and the Board, whether or not he continues to be such member at the time of incurring such expenses; provided, however, that such indemnity shall not include any expenses incurred by any such member of the Committee or the Board (i) in respect of matters as to which he shall be finally adjudged in any such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duty as such member of the Committee or the Board; or (ii) in respect of any matter in which any settlement is effected for an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or enforceable by any such member of the Committee and the Board unless, within 60 days after institution of any such action, suit or proceeding, he shall have offered the Company in writing the opportunity to handle and defend same at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Committee and the Board and shall be in addition to all other rights to which such member may be entitled as a matter of law, contract or otherwise. 25. MISCELLANEOUS PROVISIONS. (a) COMPLIANCE WITH PLAN PROVISIONS. No optionee or other person shall have any right with respect to this Plan, the Common Stock reserved for issuance under this Plan or in any Option until a written option agreement shall have been executed by the Company and the optionee and all the terms, conditions and provisions of this Plan and the Option applicable to such optionee (and each person claiming under or through him) have been met. (b) APPROVAL OF COUNSEL. In the discretion of the Committee, no shares of Common Stock, other securities or property of the Company, or other forms of payment shall be issued hereunder with respect to any Option unless counsel for the Company shall be satisfied that such issuance will be in compliance with 10 applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (c) COMPLIANCE WITH RULE 16b-3. To the extent that Rule 16b-3 under the Exchange Act applies to this Plan or to Options granted under this Plan, it is the intention of the Company that this Plan comply in all respects with the requirements of Rule 16b-3, that any ambiguities or inconsistencies in construction of this Plan be interpreted to give effect to such intention and that, if this Plan shall not so comply, whether on the date of adoption or by reason of any later amendment to or interpretation of Rule 16b-3, the provisions of this Plan shall be deemed to be automatically amended so as to bring them into full compliance with such rule. (d) UNFUNDED PLAN. This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets under this Plan. (e) EFFECTS OF ACCEPTANCE OF OPTION. By accepting any Option or other benefit under this Plan, each optionee and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under this Plan by the Company, the Board and/or the Committee or its delegates. (f) CONSTRUCTION. The masculine pronoun shall include the feminine and neuter, and the singular shall include the plural, where the context so indicates. 26. SHAREHOLDER APPROVAL. The Company shall submit this Plan to the shareholders entitled to vote hereon for approval within twelve months after the date of adoption by the Board in order to meet the requirements of Section 422 of the Code and the regulations thereunder, Section 162(m) of the Code and regulations thereunder, and the National Association of Securities Dealers, Inc. for the quotation of the Common Stock on the Nasdaq System. The exercise of any Option granted under this Plan shall be subject to the approval of this Plan by the shareholders. Date of Adoption by the Board: July 15, 1999. Date of Approval by the Shareholders: November 9, 1999. EX-27 4 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 1 3,378,951 0 2,228,237 (42,790) 913,704 7,619,465 623,023 (185,319) 10,510,346 2,150,393 0 0 0 46,024,811 (38,348,189) 10,510,346 1,423,677 1,423,677 732,840 732,840 1,174,035 3,000 14,981 1,398,921 0 1,398,921 0 0 0 1,398,921 0.431 0.429
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