<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended JUNE 30, 1996
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ___________
COMMISSION FILE NUMBER 0-20127
ESCALON MEDICAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.)
California 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
182 Tamarack Circle
Skillman, New Jersey 08558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 609-497-9141
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class: Name of each exchange on which registered:
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, without par value
Class A Redeemable Common Stock Purchase Warrants, exercisable for the purchase
of one share of Common Stock, without par value
Class B Redeemable Common Stock Purchase Warrants, exercisable for the purchase
of one share of Common Stock, without par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $6,479,534. Such aggregate market value was
computed by reference to the bid and asked price of the Common Stock in the
when-issued trading market on September 23, 1996. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors and beneficial owners of more than ten percent of the Common Stock of
the Company.
The number of shares of the registrant's Common Stock outstanding as of
September 23, 1996 was 10,518,814.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement relating to the 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof
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ESCALON MEDICAL CORP.
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended June 30, 1996
TABLE OF CONTENTS
<TABLE>
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PART I
Page
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for registrant's common equity and related stockholder matters . . . . . . . . . . . . . . . . . . 13
Item 6. Selected financial data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's discussion and analysis of financial condition and results of operations . . . . . . . . . . 14
Item 8. Financial statements and supplementary data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure . . . . . . . . . . 17
PART III
Item 10. Directors and executive officers of the registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 11. Executive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Security ownership of certain beneficial owners and management . . . . . . . . . . . . . . . . . . . . . 17
Item 13. Certain relationships and related transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART IV
Item 14. Exhibits, financial statement schedules, and reports on form 8-K . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain
information relating to general business strategy, the potential market and
uses for the Company's pharmaceutical and laser products, expansion plans, the
effects of competition on the structure of the markets in which the Company
competes, operating performance and liquidity, as well as information contained
elsewhere in this Report where statements are preceded by, followed by or
include the words "believes," "expects," "anticipates" or similar expressions.
For such statements the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including without limitation, those discussed elsewhere in this Report and in
the documents incorporated herein by reference.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) ("Escalon" or the "Company") develops, markets and distributes ophthalmic
medical devices and pharmaceuticals and is in the process of developing
ophthalmic lasers and drug delivery systems. In February 1996, the Company
acquired substantially all of the assets and certain liabilities of Escalon
Ophthalmics, Inc. ("EOI"), a developer and distributor of more than 40
ophthalmic surgical products. Subsequent to this acquisition, the Company
changed its name from Intelligent Surgical Lasers, Inc. to Escalon Medical
Corp. and moved its corporate headquarters from San Diego, California to
Skillman, New Jersey.
Escalon concentrates its efforts in three core segments of the
ophthalmic market: Surgical Products, Pharmaceuticals and Ultrafast Lasers.
Research and development programs are in progress in all three segments.
Product marketing and distribution is largely confined to the Surgical Products
and Pharmaceutical businesses. The following table summarizes the three core
businesses:
CORE BUSINESSES
<TABLE>
<CAPTION>
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BUSINESS KEY PRODUCTS/TECHNOLOGY STATUS
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<S> <C> <C>
Surgical Products a) AdatoSil 5000 Silicone Oil a) Marketed
b) Silicone oil dispensing devices b) Marketed
c) Fiberoptic light sources c) Marketed
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Pharmaceuticals a) Betadine(R)5% Sterile a) Marketed
Ophthalmic Prep Solution
b) Ocufit SR(R)drug delivery b) Preclinical development
for Diclofenac and Timolol
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Ultrafast Lasers a) Refractive surgery a) Preclinical development
(Picosecond Lasers) b) Therapeutic surgery b) 510 (k)'s and
preclinical
development
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</TABLE>
The Company's Surgical Products and Pharmaceutical businesses were
acquired through the EOI acquisition. The Ultrafast Laser business has been
the Company's primary focus since December 1987, and the Company's proprietary
technology for picosecond lasers has led to thirteen United States patents
being issued to the Company.
Prior to the EOI acquisition, EOI had been active in establishing its
market presence, particularly among vitreoretinal specialists. Marketing more
than 40 ophthalmic surgical products, EOI's effort was to provide new
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products to meet unfulfilled market needs. In addition, through its
in-licensing program, EOI had under development a proprietary and novel drug
delivery technology, namely the Ocufit SR System ("Ocufit").
The Surgical Products portfolio is key to the Company's immediate
term growth plans. While most of Escalon's Surgical Products are utilized by
vitreoretinal specialists, one prescription pharmaceutical is for general
ophthalmic surgical use, namely Betadine 5% Sterile Ophthalmic Prep Solution,
and was acquired under a licensing agreement from The Purdue Frederick Company.
Two other significant Surgical Products, AdatoSil 5000 Silicone Oil and the
ISPAN intraocular gases are licensed from Adatomed/Chiron Vision and Scott
Medical Products, respectively. These three in-licensed products account for
more than 60% of the Company's revenues.
While Escalon intends to continue developing its Surgical Products
business, a second objective is to advance Escalon's proprietary drug delivery
technology (Ocufit) and market a series of ophthalmic pharmaceuticals. This
drug delivery program has focused on enhancing drug delivery to the eye by
sustaining drug release, for periods of seven or more days, and to improve
patient compliance and efficacy and reduce toxicity of new and existing drugs.
Ocufit is a device which fits comfortably under the eyelid and slowly releases
medication for seven or more days. It is currently being developed with various
drugs for the treatment of ocular inflammations or infections and diseases such
as glaucoma.
The Ocufit drug delivery technology is protected thus far by three
United States patents, and is the basis for a recently established research and
development collaboration with The West Company, Incorporated, Lionville,
Pennsylvania ("West"). West is widely known within the pharmaceutical industry
as a premier supplier of packaging components, including silastic or silicone
materials. Since Ocufit can utilize unique silicones for its drug delivery
capability, a research, development and manufacturing agreement now provides
Escalon with access to the capabilities of West, including its team of drug
delivery experts. Escalon and West are initially directing their mutual efforts
on Ocufit to develop generic drugs for Escalon to market. The specific
products which may result from the Ocufit development process would be a novel
method of treating eye diseases, and would offer significant improvements over
existing ophthalmic pharmaceutical therapies. Escalon intends to initially
develop leading generic drugs in the Ocufit system which will have benefits in
sustained delivery format. Escalon will also seek to develop other systems to
deliver pharmaceuticals to various locations in the eye. Some of these
technologies may be licensed to third parties in the field.
Prior to the acquisition of EOI, the Company devoted its attention
solely to the development of its innovative, technologically advanced laser
systems for the treatment of a broad range of ophthalmic disorders. Currently,
Escalon is focusing its laser development towards the corneal refractive
surgical market and is interested in marketing the Escalon laser system as a
tool for cutting the corneal flap in a procedure known as LASIK. The Company
is preparing to file an Investigational Device Exemption ("IDE") with the Food
and Drug Administration ("FDA") to further study this use of the Company's
laser in the United States.
SURGICAL PRODUCTS
While the longer term goal of Escalon is to provide leadership in the
development and marketing of its ophthalmic drug delivery and laser systems,
Escalon has placed considerable emphasis on the development, licensing and
marketing of cost effective, innovative Surgical Products for the ophthalmic
surgeon.
The Surgical Products business, which is summarized in the following
table and described below, is comprised of unique and proprietary products, as
well as various generic type products. As a whole, the Surgical Products
business has provided the company with a significant entry into the ophthalmic
market.
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SURGICAL PRODUCTS BY STAGE OF DEVELOPMENT
<TABLE>
<CAPTION>
COMPETITIVE
PRODUCTS STAGE SITUATION
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<S> <C> <C>
Tamponade:
AdatoSil 5000 -- Silicone Oil . . . . . . . . . . . . . Marketed Proprietary
ISPAN Gas (SF6 and C3F8) . . . . . . . . . . . . . . . . Marketed Semi-proprietary
Fluid Transfer Systems and Disposables . . . . . . . . . Marketed Generic
Other Surgical Products:
Light Sources/Fiber Optics . . . . . . . . . . . . . . . Marketed Generic
Fluid/Air Machines and Fluid/Gas Systems . . . . . . . . Marketed Generic
Iris Expander . . . . . . . . . . . . . . . . . . . . . Development Proprietary
</TABLE>
AdatoSil 5000 -- Silicone Oil Tamponade
AdatoSil 5000 Silicone Oil, which Escalon sources from Adatomed/Chiron
Vision Europe, is a specialty product for use in "worst case" detached retina
surgery cases as a mechanical aid in the reattachment procedure. Until AdatoSil
5000 Silicone Oil was approved by the FDA in late 1994, the use of silicone oil
was limited by law to those vitreoretinal surgeons operating under an FDA
approved IDE. Even under the IDE status, silicone oil as a tamponade had
become the standard of care in AIDS patients suffering from retinal detachment
secondary to CMV retinitis infection. Of the more than 100,000 retinal
detachment cases per year, approximately 15-25% are candidates for use of
silicone oil. Moreover, this market is growing due to AIDS-related retinal
detachments. Escalon directs its marketing efforts to the vitreoretinal
surgeons who do the majority of these surgeries, many of whom have already used
Adatomed silicone oil under the IDE program.
ISPAN Gas Tamponades (SF6 and C3F8)
Since the mid-1980's, medical-grade intraocular tamponading gases have
been recognized by ophthalmic surgeons as important materials for the temporary
tamponading of detached retinas. The two primary gases used in ophthalmology,
SF6 and C3F8, are injected into the vitreous cavity whereupon they expand and
hold the retina in place. At the same time, laser photocoagulation is performed
to attach the retina to the choroid. Prior to injection (typically in a
hospital setting), the pure gas is diluted with air to a concentration selected
by the surgeon. This technique of "pneumatic retinopexy" (which can be
performed on an outpatient basis), utilizes minute quantities of pure gas
injected into the eye to provide continuous gas pressure on the detached
retina.
The only FDA approved source of SF6 and C3F8 gas for this use is Scott
Medical Products ("Scott"). Scott received the first FDA approval to market
these products in 1993. Under an agreement with Scott, Escalon has been granted
exclusive worldwide rights to distribute packages of Scott ophthalmic gases in
canisters containing 25 grams or less of gas. In addition to Escalon's
distribution of ISPAN gas products, it also markets a proprietary Universal Gas
Kit usable with all existing gas products. The Universal Gas Kit is protected
by a recently issued patent.
Fluid Transfer Systems
To complement the use of the AdatoSil 5000 Silicone Oil, Escalon also
markets several viscous fluid transfer systems which simplify and automate the
process of injecting and extracting the oil. The adjustable pressures and
vacuums provided by the equipment allow the surgeon to manipulate the flow of
oil during surgery. These products have been developed with features
specifically required by vitreoretinal surgeons, including disposable syringe
and tubing sets.
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Light Sources/Fiber Optics
Light source and fiber optic products, which are used widely in
vitreoretinal surgery, constitute an important medical device product line of
Escalon. The following products are included in Escalon's product line: the
Single Fiber Optic Illuminator (SFI-10), the Dual Fiber Optic Illuminator
(DFI-20), SITE machines of Chiron Vision, the new VitLite System, and a
variety of disposable fiber optic light probes and illuminated tissue
manipulators or instruments.
PHARMACEUTICAL PRODUCTS
Betadine 5% Sterile Ophthalmic Prep Solution ("Betadine 5%")
Escalon markets Betadine 5%, a prescription pre-operative preparation
used to sterilize the cornea, conjunctiva, and periocular (surfaces around the
eye) regions of the eye, to all ophthalmic surgeons. The active ingredient of
Betadine 5% is povidone-iodine, a broad spectrum antimicrobial active against
bacteria, viruses and fungi. Although patents on the compound have expired, The
Purdue Frederick Company (the original patent holder) has proprietary
manufacturing technology and knowledge which protect Betadine products.
Betadine 5% is the only FDA-approved prescription povidone-iodine
formulation that is sterile, isotonically balanced and conveniently packaged
for use on both the periocular region as well as the cornea and conjunctiva.
Escalon's objective is to have this product used in most of the two million
ophthalmic surgeries which take place in the United States each year. To this
end, Escalon has an agreement with Akorn, Inc., under which the parties jointly
market the product nationwide. Akorn's 30-person sales force augments Escalon's
direct promotional efforts.
Betadine 2.5% -- Ophthalmia Neonatorum
Under its agreement with The Purdue Frederick Company, Escalon has
the exclusive right to develop other forms of Betadine for the ophthalmic
market. Another form of povidone-iodine planned for development by Escalon is
Betadine 2.5% for the prevention and/or treatment of ophthalmia neonatorum and
other eye diseases. Ophthalmia neonatorum, commonly known as neonatal
conjunctivitis, continues to be a leading cause of blindness in the third
world, and is increasing in frequency in the United States. All newborns in the
United States are usually treated with either erythromycin or silver nitrate to
prevent the disease. However, resistant strains of bacteria are increasingly
resistant to erythromycin, and chemical toxicity is common with silver nitrate.
The use of a 2.5% concentration of povidone-iodine has often been
suggested as a viable alternative to erythromycin or silver nitrate. Recently,
a clinical study completed outside the United States by Drs. Isenberg, Apt and
Wood of UCLA has provided support for this hypothesis. A patent claiming this
use was recently issued to UCLA and Escalon has acquired an exclusive license
from UCLA to distribute the solution. No assurances can be given that Escalon
will develop the product until the Company is satisfied, after pending
discussions with the FDA, that the new Betadine 2.5% formulation can be
developed cost effectively. There are over 3.5 million births per year in the
United States alone, and 80 million per year worldwide. Escalon desires to
develop a unit dose product for the United States market and for export
throughout the world.
Ocufit SR(R)
Ocufit is a device which fits comfortably under the eyelid and is
capable of releasing medication for up to 30 days. The device, which is easily
installed out of the field of vision, is composed of nontoxic materials and is
capable of releasing a drug evenly over the required time period.
Additionally, because Ocufit is out of the field of vision, unaffected by
movement of the eye, and imperceptible to most patients, the device can be used
for the requisite period of time with little inconvenience to the patient.
OCUFIT BACKGROUND
Ocufit, Escalon's patented drug delivery insert, was developed as the
result of studies which began in the early 1970's by Professor Sohrab Darougar,
an ophthalmologist formerly with the Institute of Ophthalmology in London.
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Professor Darougar conducted extensive animal studies to test for the ideal
shape, size and placement of an ocular surface insert with the goal of
designing a device that could be retained on the eye for seven days or longer.
Ocufit is covered by three issued United States patents. It is
expected that additional patents will result from future research and
development. The existing patents specifically describe the correct anatomical
placement of the device into an anatomical position known as the "fornix" which
is critical to the long term retention of Ocufit.
The Ocufit insert is a cylindrical rod designed to fit into the upper
fornix of the eye, which is a cavity of defined diameter. Precise placement to
match the dimensions of the fornix keeps the insert out of the field of vision
and does not cause foreign body sensation in most people. The insert can be
composed of a wide array of polymers, although silicone-based polymers have
yielded the best drug release kinetics to date.
WEST COLLABORATION
Pursuant to a research and development agreement between the Company
and West, the companies initiated an Ocufit research and development program
at West's laboratories. The parties have selected Diclofenac, a non-steroidal
anti-inflammatory drug ("NSAID") as a candidate for development. The
development of Diclofenac in Ocufit is at the preclinical stage. Work is also
in progress to evaluate the feasibility of delivering Timolol, a leading
antiglaucoma drug, in Ocufit. The preclinical phase of the project is managed
by the West research and development team at its facilities, with Escalon
playing a consulting role. West is providing the majority of the funding. One
of the advantages of Ocufit is that it can potentially be used to deliver a
number of widely used generic and proprietary drugs, thereby allowing Escalon
to develop a broad-based ophthalmic pharmaceutical business using this
technology. Two such drug applications are summarized below.
Ocufit Diclofenac
Post-operative inflammation of ocular tissues is normal following any
ophthalmic surgical procedure. Because of this, anti-inflammatory compounds in
eye drops are almost always prescribed for patients postoperatively over a
period of seven to 14 days. If a steroid is used, the patient may experience
side effects. NSAID compounds often exhibit a lower ocular side-effect profile
than steroids. To date, there are few NSAIDs which have been commercialized for
topical application. Voltaren or Diclofenac product is the market leader with
sales in the United States exceeding $30 million per year.
Escalon plans to develop Ocufit Diclofenac for post surgical treatment
which can deliver sustained release over a two week period. The market for such
a product comprises approximately 2 million patients who require eye surgery
every year, of which the majority (1.3-1.4 million) undergo cataract surgery.
Ocufit Timolol
The largest market in ophthalmology is in the treatment of glaucoma,
or increased intraocular pressure (IOP). In the United States, approximately
1.8 million patients are treated for glaucoma each year, and a patient may
spend $120-$200 annually for medicinal therapy. The total United States
glaucoma market exceeds $300 million. Timolol, sold by Merck as Timoptic, is
the largest selling antiglaucoma agent and loses patent protection in 1997.
Although effective at reducing aqueous humor production and subsequent
intraocular pressure, Timoptic, like most other topical ocular medication
requires at least two doses per day for efficacy. Because of the chronic nature
of glaucoma and because it predominantly affects an older population,
compliance with this dosing schedule is often poor. Escalon believes that an
Ocufit Timolol system designed for once per month administration, if
successfully developed, will improve the quality of life for these patients and
improve the efficacy of the drug as a result of compliance and continuous drug
supplementation of the eye.
ULTRAFAST LASER PRODUCTS (PICOSECOND LASERS)
Prior to the acquisition of EOI, the Company devoted its sole
attention to the design and development of innovative, technologically advanced
laser systems for the treatment of a broad range of ophthalmic disorders.
Escalon's laser systems are designed both to improve on conventional treatments
and to permit applications which are not
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currently possible using conventional laser systems or traditional medical
instruments. Escalon is utilizing its core proprietary technology and expertise
in lasers and computer-automated delivery systems to develop fully-integrated
medical laser systems to treat refractive disorders (nearsightedness,
farsightedness and astigmatism), glaucoma and vitreoretinal disorders. In 1989,
Escalon received 510(k) clearance from the FDA for its Model 2001 Laser System
for posterior capsulotomy, a procedure for clearing post-cataract surgery
clouded intraocular lens capsules. In 1994, Escalon received 510(k) clearance
from the FDA for its Model 2001 Laser System for discission of pupillary
membranes, a procedure to restore or improve vision impaired by abnormal tissue
growth. Escalon has received other FDA-approved IDEs which have authorized
Escalon to perform additional clinical testing of its laser systems for various
applications.
Escalon's solid-state picosecond (one-trillionth of a second) Nd:YLF
(Neodymium:Yttrium-Lithium-Fluoride) laser systems are designed to be more
precise than laser systems utilizing other currently available technologies.
Preclinical studies and clinical trials to date indicate that the precision and
accuracy afforded by Escalon's low-energy technology results in significantly
less trauma to adjacent tissue and fewer adverse effects from thermal and
acoustic shock, which may lead to greater efficacy and shorter patient recovery
periods. Escalon believes that the greater precision afforded by its laser
systems could significantly expand the number of ophthalmic surgical
applications performed, many of which would not otherwise be possible utilizing
conventional laser systems or other traditional medical instruments.
Escalon's Core Technology
Escalon's laser systems are developed on the premise that short-pulse
(picosecond), high-repetition rate laser energy produced with a
computer-controlled Nd:YLF laser system would provide ophthalmic surgeons with
more precise and less traumatic alternatives in ophthalmic surgery.
Conventional solid-state lasers, such as the Nd:YAG laser, have proven
effective and reliable in clinical use for many years. However, Nd:YAG lasers,
due to their relatively long nanosecond pulse widths, utilize millijoules of
energy (one thousandth of a joule) to perform ophthalmic surgical procedures,
causing damage to adjacent tissue. In contrast, Escalon's picosecond pulse
width, which is one thousand times shorter, utilizes micro joules of energy
(one millionth of a joule) thereby permitting the delivery of the laser beam
with one thousand times less energy. Less energy in the beam, in turn, permits
greater precision in targeting the laser's zone of effect.
Escalon's laser systems are not being promoted or marketed at this
time due to the post-EOI acquisition restructuring, and due to the fact that a
complete re-evaluation of the Company's laser program was required. As a
result of recent steps taken by management, the direction of Escalon's laser
research and development has shifted to refractive surgery.
Clinical Applications
Escalon believes that its laser technology will permit the use of
lasers for an increasingly broad number of indications and will permit laser
surgery to displace manual surgery as the preferred method of treatment for an
increasing number of indications.
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The following table summarizes the current and potential applications
and United States regulatory status for Escalon's laser systems.
<TABLE>
<CAPTION>
PROCEDURE/INDICATION REGULATORY STATUS
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<S> <C>
Corneal Refractive Surgery
Myopia Preclinical
Hyperopia Preclinical
Astigmatism Preclinical
Posterior Capsulotomy Cleared 510(k)
Discission of Pupillary Membranes Cleared 510(k)
Glaucoma
Iridotomy Phase II Clinical
Internal Sclerostomy Phase I Clinical
Laser Vitreolysis Phase II Clinical
</TABLE>
CORNEAL REFRACTIVE SURGERY: Refractive disorders result from the
inability of the optical system to correctly focus images on the retina. In
a properly functioning eye, the cornea bends (refracts) incoming images,
causing the images to focus on the retina. The inability of the cornea to
properly refract incoming images results in blurred vision and is called a
refractive disorder. Myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism are three of the most common refractive disorders. In a nearsighted
eye, images are focused in front of the retina. In a farsighted eye, images are
focused behind the retina. In an astigmatic eye, images are not focused at any
one point. It is estimated that in excess of 140 million people in the United
States, and a much larger number worldwide, use eyeglasses and/or contact
lenses to correct refractive disorders.
Currently, there are two accepted treatments for reshaping the cornea
to relieve nearsightedness, farsightedness and astigmatism. The current
techniques for corneal reshaping involve either manual radial scalpel incisions
on the surface of the cornea (known as radial keratotomy, or "RK") or removal of
tissue from the surface of the eye by excimer laser (known as photo refractive
keratectomy, or "PRK"). Both RK and PRK are used primarily to correct
nearsightedness and are known to have potentially undesirable side-effects. RK
is known to (i) weaken the cornea; (ii) present the potential for infection; and
(iii) produce inconsistent results in terms of visual correction. PRK is
associated with (i) post- surgical haze, pain and scarring; and (ii) the
required use of anti-inflammatory steroids for a period of time following
surgery. Despite these limitations, industry sources estimate that approximately
one million RK procedures and 100,000 PRK procedures have been performed in the
United States.
Escalon evaluated a procedure called ISPRK (Intrastromal Photo
Refractive Keratectomy), the removal of central corneal tissue without
affecting the corneal surface, with the belief it could treat all three major
types of refractive disorders. Since 1994, Escalon has conducted European
clinical studies designed to establish the safety of the procedure and assist
in defining treatment parameters for use in a Phase I clinical trial in the
United States for nearsightedness (myopia). In February 1995, the patient
treatment portion of this Phase I clinical trial in the United States was
completed for ten non-sighted volunteers. In June 1995, Escalon announced that
a preliminary review of the ten patients, after three months of follow-up,
indicated that while the results preliminarily confirmed the safety of the
procedure, there were no clinically significant refractive changes noted. Based
on this data and the recommendations from Escalon's medical advisors, Escalon
concluded that it could not seek FDA approval to advance into a Phase II for
this trial without performing further research, including additional
preclinical studies, to develop suitable algorithms which might produce the
desired refractive changes.
Subsequently, research efforts were directed to define a suitable
protocol, including continued pre-clinical studies in both animal models and
human non-sighted volunteers, corneal computer modeling, detailed bio-physical
tissue interaction studies and the continued review of the data by the medical
advisors. The Company then determined that the LASIK procedure (laser assisted
in situ keratomileusis) being adopted outside the United States, and being
evaluated in the United States, presented an opportunity for the picosecond
laser. Escalon's laser has been tested to cut
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a corneal flap prior to ablation of the stromal bed with an eximer laser. The
Company is preparing to file an IDE with the FDA to allow it to evaluate this
procedure more thoroughly in the United States.
Given its limited financial resources, the Company is presently
limiting its research and development activities for refractive procedures.
Management is continuing its efforts to target and develop corporate and other
partnering and other opportunities to fund the significant capital requirements
necessary for clinical trials and laser development for these applications.
POSTERIOR CAPSULOTOMY: The rear portion of the capsule containing the
lens can become clouded following cataract surgery. Posterior capsulotomy
involves the use of laser energy to remove the clouding by perforating the
posterior capsule to allow light to pass through to the retina. The laser
procedure is intended to eliminate the clouding and restore visual clarity. In
recent years, posterior capsulotomies have been performed on approximately 50%
of all patients who have undergone cataract surgery in the United States.
Escalon believes its laser technology offers three advantages over current
methods: (i) little or no rise in intraocular pressure (a common post-surgical
observation); (ii) computer-controlled accuracy resulting in less inadvertent
pitting of the post-cataract artificial lens implant; and (iii) less likelihood
of post-laser treatment retinal detachment, a condition which may lead to
blindness. Escalon has received 510(k) clearance from the FDA for use of its
Model 2001 Laser System in posterior capsulotomies.
DISCISSION OF PUPILLARY MEMBRANES: Pupillary membranes are abnormal
growths which cover the pupillary space, restricting vision and interfering
with normal pupillary change in response to varying ambient light conditions.
These growths occur most frequently as a result of trauma or inflammation, and
can occur secondary to ocular surgical procedures, including, in some cases,
cataract extraction. In order to restore normal pupillary function and allow
light to pass through the pupil in a normal manner, such membranes must be
surgically removed. This can be accomplished by means of manual surgery or by
the use of an ophthalmic laser. Currently, the most common method of removal is
the use of the Nd:YAG laser, using a technique very similar to that used in
posterior capsulotomy. Escalon believes that its laser technology has several
advantages over other current methods, including: (i) a higher degree of
accuracy in the placement of the laser energy; (ii) reduced laser energy
applied to any given area; and (iii) reduced area of possible collateral damage
to adjacent tissue. Escalon has received 510(k) clearance from the FDA for use
of its Model 2001 Laser System in the discussion of pupillary membranes.
GLAUCOMA (IRIDOTOMY AND INTERNAL SCLEROSTOMY): Glaucoma is the second
most common cause of blindness in the United States which affects, according to
industry sources, approximately 3% of people over the age of 40. Glaucoma occurs
when an increase in pressure inside the eye, caused by a decrease in fluid
drainage from the eye, results in damage to the optic nerve. Intraocular
pressure can be lowered, by varying degrees and for varying duration, by a
variety of medical treatments, including medications and surgical procedures,
such as laser surgery, which treatments can be utilized alone or in combination.
While the choice of initial treatment depends on numerous considerations,
medication is most frequently utilized. If medications fail to relieve elevated
intraocular pressure or patients fail to strictly adhere to the required regimen
of multiple daily dosages of such medications, surgery or laser treatment may be
necessary to open a drainage channel to permit the exit of fluid from within the
eye.
Several laser techniques have been developed to permit the drainage of
fluid from the eye. These include (i) external sclerostomy, in which a laser is
utilized to perform a sclerostomy (which involves opening a drainage channel
through the entire thickness of the eye by cutting from the outside of the
"white" of the eye (sclera); (ii) iridotomy, in which a hole is made in the
iris to allow unobstructed aqueous flow within the eye; and (iii)
trabecuplasty, in which a laser is focused on the trabecular meshwork (the
structure through which fluid drains out from the eye) in order to cause a
shrinkage of the trabecular meshwork and an increase in the outflow of fluid.
These applications are conducted in an outpatient setting and are considered
significantly less invasive than manual surgical procedures.
While laser external sclerostomy, trabeculectomy and iridotomy can be
performed by many types of lasers, Escalon's picosecond laser systems are
designed to perform these types of laser procedures with less energy and
without producing clinically significant heat or shockwave impact. Escalon
believes that this may result in less trauma, inflammation and discomfort to
the patient than that afforded by current laser technology. Escalon also
believes that the precision of its technology could lead to fewer and less
severe post-surgical complications and, in turn, offer a more stable long-term
therapy. Presently, Escalon has an IDE open to test the safety and efficacy of
the picosecond laser system for use in performing laser iridotomies.
- 8 -
<PAGE> 11
LASER VITREOLYSIS: Vitreous bands are common eye disorders consisting
of harmful growths in the vitreous. As these bands form and contract they may
cause traction on the retina, leading to retinal detachments, holes and
ultimately blindness. Demand for treatment of this form of disorder is
estimated to be of roughly the same magnitude as demand for glaucoma treatment;
however, this disorder is not commonly treated with conventional nanosecond
Nd:YAG lasers due to their induced shockwave side effects. The most commonly
used treatment requires invasive surgical intervention, requiring a three-to
four-hour manual surgical procedure in an operating room environment. Escalon
has been granted an IDE to evaluate, in human clinical trials, the use of its
laser system for an outpatient, less invasive approach to cutting these bands
without trauma to adjacent tissue. To date, Escalon has successfully completed
Phase I of a clinical trial and has received approval from the FDA to expand
this study to compare the non-invasive use of the picosecond laser to
conventional invasive surgery in the treatment of tractional retinal
detachment. Escalon believes that this procedure can be performed in minutes
and that the delivery of picosecond pulses and lower energy may help make this
procedure safer and minimally invasive, as compared with conventional vitreous
surgery. At this time, continuation of the laser vitreolysis study is on hold
pending further funding.
RESEARCH AND DEVELOPMENT
The Company conducts its medical device product development at its
Mukwonago, Wisconsin facility. Its laser research and development program
which was being conducted in San Diego, California, was moved to Irvine,
California in September 1996 as part of the Company's cost reduction program.
The Ocufit drug delivery research and development is being conducted at the
West Company laboratories pursuant to a collaborative arrangement. Given the
Company's limited financial resources, laser development is currently being
limited to the development of the Company's laser system as a corneal cutting
tool to be used during the LASIK procedure. Further, the Company continues to
seek third party collaborations to assist in the funding and development of its
laser and drug delivery programs.
Escalon-sponsored research and development expenditures, relating
primarily to the ophthalmic picosecond laser system and regulatory activities,
in fiscal years 1994, 1995, and 1996 totaled $3.4 million $2.8 million and
$2.7 million, respectively.
MANUFACTURING AND DISTRIBUTION
Escalon leases 7,500 square feet of space in Mukwonago, Wisconsin for
its Surgical Products operations. The facility is currently used for
engineering, product design and development and some manufacturing and product
assembly. Various vendors are used for subcontract component manufacture,
assembly and sterilization. Manufacturing facilities include a class 10,000
clean room. All of the Company's Surgical Products are distributed from its
Wisconsin facility. Livingston Healthcare Services Inc., New Castle, Delaware,
currently serves as a warehousing and distribution facility for Betadine 5%.
For each new product Escalon develops, the manufacture, testing and marketing
of such product entails risk of product liability. Product liability insurance
is carried by Escalon to cover the primary risk.
Manufacturing of laser systems consists of component assembly and
systems integration of electronic, mechanical and optical components and
modules. The Company also designs and develops the software necessary for the
operation of its laser systems. While the Company has produced only a limited
number of systems to date, management believes that its manufacturing capacity
is sufficient to satisfy current demand. However, in order to achieve its
long-term objectives, the Company is seeking a collaborative partner to
manufacture the Company's laser systems while retaining distribution rights.
The Company purchases all of the components for its laser systems from
third party vendors. The Company currently purchases certain key components,
including laser rods, slit-lamp operating microscopes, pockels cells, optical
components and electronic printed circuit boards, from single suppliers. Key
components are then assembled by Company personnel for inclusion into the final
product. The Company's inventory level of these key components is sufficient to
meet current demands. Although the Company believes it could obtain these
components from other suppliers, it could experience increased costs and
significant delays in switching to new suppliers of these components. To date,
there has been no material delays or problems in obtaining key components or
in dealing with single source suppliers.
- 9 -
<PAGE> 12
MARKETING AND SALES
Escalon's independent sales force carries out direct promotion and
sales of its products. Currently, Escalon sells most of its ophthalmic device
and instrument products directly to the end user. However, Betadine 5% is
primarily sold through traditional drug wholesaler channels.
The Company's eight independent sales representatives are based in
Massachusetts, New York, New Jersey, Wisconsin, Minnesota, Missouri, Florida
and California. These independent sales representatives market to teaching
institutions, key hospitals and eye surgery centers, focusing primarily on
physicians and operating room personnel performing vitreoretinal surgery.
Notwithstanding Escalon's vitreoretinal interest, the sales associates pursue
leads for Betadine 5% in all institutions and promote other products as
required. To broaden the sales base for many of the Company's products,
distribution and marketing agreements were entered into with Storz and Akorn.
The Company's laser system was first introduced at a meeting of the
American Academy of Ophthalmology in 1989. Since that time, its marketing and
sales strategy has been to actively participate in ophthalmic conferences and
meetings in order to gain broad exposure to ophthalmologists. The Company has
sold 24 laser systems to date with the majority of these sales in fiscal 1992
and 1993. The principal purchasers of these systems are ophthalmologists,
universities, clinics and hospitals participating in the Company's clinical
trials in the United States, with additional sales coming from international
markets. The FDA stipulates the number of domestic sites that can participate
as investigators in each phase of a clinical trial thereby limiting the number
of domestic sales available to the Company prior to approval by the FDA for
the particular indication. The Company has sold the maximum number of systems
allowed by the FDA for each of its domestic clinical trials based on the
current phase of those trials. International sales, while not directly limited
by the FDA, are impacted by, among other factors, the status of the clinical
trials in the United States.
Upon receipt of the necessary regulatory approvals to market the laser
systems, the Company may expand its current independent sales force, establish
a new sales force, or utilize a third party to serve the United States market.
The Company intends to sell its products outside the United States through
distributors. The distributors will be entitled to purchase the laser systems
at reduced prices but will be responsible for selling, installing, servicing
and supporting the product.
SERVICE AND SUPPORT
Escalon maintains a full service program for all products sold.
Warranties exist on all products against defects and performance. Surgical
Product repairs are made at the Wisconsin facility and returns are handled by
customer service personnel.
The Company installs and maintains its laser systems through a
combination of directly employed technicians and Company-educated employees of
its distributors. Service for the laser products is provided from the Company's
Irvine, California facility and by distributor field service engineers
internationally. Installation, and a combination warranty and service agreement
for the first year following sale, is included as part of the standard terms of
sale, except for sales to distributors, who are required to install systems and
provide ongoing system maintenance. Thereafter, service and maintenance are
available either on a time and materials basis or pursuant to a yearly service
agreement for an annual fee. Upon installation of the laser system, a
specialist from the Company travels to the site to train the ophthalmologist in
the clinical use and operation of the system.
THIRD PARTY REIMBURSEMENT
It is expected that the Company's products will generally be
purchased by ophthalmologists and hospitals, which will then bill various
third-party-payers for the health care services provided to their patients.
These payers include Medicare, Medicaid and private insurers. Government
agencies generally reimburse at a fixed rate based on the procedure performed.
Some of the potential procedures for which the Company's laser systems may be
used, including refractive surgery, may be determined to be elective in nature
and third party reimbursement is not likely to be available for those
procedures, even if approved by the FDA. In addition, third party payers may
deny reimbursement if they determine that the procedure was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication.
- 10 -
<PAGE> 13
PATENTS AND ROYALTIES
The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new
technologies, products and processes. Escalon's policy is to protect its
technology by aggressively obtaining patent protection for all of its
developments and products, both in the United States and in selected countries
outside the United States. The Company's Surgical Products and pharmaceutical
technology are covered by thirteen issued United States patents and one issued
Taiwanese patent. In addition, one United States patent is currently pending.
With respect to the Company's ultrafast laser systems, thirteen patents have
been issued or allowed and two additional patent applications have been filed
by the Company in the United States. It is the Company's policy to file for
patent protection in those foreign countries in which the Company believes that
protection is necessary to protect its economic interests. The Company intends
to vigorously defend its patents if the need arises.
The Company licenses a laser patent from Patlex Corporation. Under
the patent license agreement, the company has agreed to pay royalties on a
royalty-bearing component of the laser systems with respect to laser system
sales until the expiration of the licensed patent in May 2005.
COMPETITION
There are numerous direct and indirect competitors of Escalon in the
United States and abroad. These companies include: ophthalmic- oriented
companies that market a broad portfolio of products, including prescription
ophthalmic pharmaceuticals, ophthalmic devices, consumer products (such as
contact lens cleaning solution) and other eye care products; large integrated
pharmaceutical companies that market a limited number of ophthalmic
pharmaceuticals in addition to many other pharmaceuticals; and smaller
specialty pharmaceutical and biotechnology companies that are engaged in the
development and commercialization of prescription ophthalmic pharmaceuticals
and products, and possibly drug delivery systems.
The ophthalmic market is highly fragmented with several large
companies dominating the industry. The Company believes that these large
companies capture approximately 50% of the overall ophthalmic market. The
balance of the market is composed of smaller companies ranging from start-up
entities to established niche market players. The ophthalmic market in general
is intensely competitive with each company eager to expand its market share.
As a result of the intense competition, the Company believes that many of
industry's smaller companies will either consolidate or fail. Escalon's
strategy is to compete primarily on the basis of technological innovation to
which it has proprietary rights. Escalon believes, therefore, that its success
will depend in large part upon obtaining and maintaining exclusive marketing
rights covering its current and future products through licenses, the issuance
of patents and certain other government actions. At the same time Escalon
recognizes that there are other young and innovative companies which may
develop competitive technologies.
Although the Company has numerous competitors in the vitreoretinal
market, Escalon believes that it is in a niche market with regards to its
Ocufit business. Specifically, the Company is unaware of any competitors which
have sustained drug release technology similar to Ocufit. There is, however, at
least one company that Escalon is aware of that has developed technology based
on "once-a-day" drug release. The Company can make no assurance that
additional competition will not develop in the vitreoretinal market.
With respect to its ultrafast laser systems, the Company is and will
be subject to competition in both the therapeutic and refractive markets
principally from: (i) other surgical and non-surgical treatments for
therapeutic disorders; (ii) other surgical and non-surgical treatments for
refractive disorders, including RK, PRK and certain types of implants; (iii)
corrective eyewear (such as eyeglasses and contact lenses); and (iv) existing
and developing technologies or therapies including lasers other than excimer,
Nd:YAG and holmium lasers for treatment of ophthalmic disorders. The Company
also expects other companies to enter the marketplace. Significant competitive
factors which will affect future sales in the marketplace include regulatory
approvals, performance, pricing, timely product shipment, customer support,
convenience and ease of use, and patient and general market acceptance. The
market for ophthalmic lasers is subject to rapid technological change,
including advances in laser technology and the potential development of
alternative surgical techniques or new pharmaceutical products.
- 11 -
<PAGE> 14
HUMAN RESOURCES
As of June 30, 1996, Escalon employed 18 full-time employees and one
part-time employee. Seven of Escalon's full-time employees are in general
administrative and marketing positions, five are in Surgical Products
manufacturing, three are in Surgical Products engineering, two are in laser
research and development, and one is in quality assurance. In addition, the
Company utilizes two consultants in its laser operations and one consultant to
handle the Company's regulatory and clinical affairs. Further, Escalon has
eight independent sales representatives who market primarily Escalon products.
Escalon's employees are not covered by a collective bargaining agreement and
Escalon considers its relations with employees to be good.
ITEM 2. PROPERTIES
The Company leases a total of approximately 14,000 square feet of
space for its (a) executive offices in Skillman, New Jersey, (b)
manufacturing/warehouse facility in Mukwonago, Wisconsin and (c) laser research
and development facility in Irvine, California. Leases covering approximately
11,000 square feet of this space expire in June 1997 with the remaining lease
for 3,000 square feet expiring in September 1999. Ocufit drug delivery
research and development is conducted principally at The West Company in
Lionville, Pennsylvania. Annual rent under lease arrangements approximates
$114,000.
ITEM 3. LEGAL PROCEEDINGS
As disclosed in previous filings with the Securities and Exchange
Commission, on April 3, 1995, the Company was served with a pleading entitled
Amended Consolidated Class Action Complaint in an action captioned In Re Blech
Securities Litigation, 94 Civ. 9696, which was filed in the United States
District Court for the Southern District of New York on or about March 28, 1995.
On June 6, 1996, the court granted in part and denied in part motions by the
Company and certain of the other defendants to dismiss the complaint which
dismissed all claims against the Company. On July 26, 1996, the plaintiffs
filed an amended complaint. The amended complaint does not name the Company as
a defendant.
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. 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 Section Section 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. On August 15, 1996, the Company,
together with three other companies against whom similar claims have been
asserted in separate actions filed as "related" to In Re Blech Securities
Litigation, filed a motion for permission to appeal, which currently is
scheduled to be heard on October 10, 1996. No discovery has taken place to
date.
The Company believes it has meritorious defenses and intends to
vigorously defend the Kozloski litigation. Regardless of the outcome, the
Company could be required to incur substantial expense in defending these
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 12 -
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the National Market segment of
the Nasdaq Stock Market under the symbol "ESMC." The following table sets
forth, for the periods indicated, the high and low sales prices as quoted on
the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Period High Low
------ -------- -----
<S> <C> <C>
Fiscal 1995:
First Quarter $7.38 $1.69
Second Quarter 2.94 1.63
Third Quarter 2.03 1.13
Fourth Quarter 3.00 1.63
Fiscal 1996:
First Quarter $3.38 $2.50
Second Quarter 2.63 1.50
Third Quarter 4.38 1.63
Fourth Quarter 3.00 2.19
</TABLE>
As of September 23, 1996, there were 65 holders of record of the
Company's Common Stock. On September 23, 1996, the closing sale price of the
Common Stock as reported by the Nasdaq Stock Market was $1.25.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain its earnings to finance
future growth and working capital needs and therefore does not anticipate
paying any cash dividends in the foreseeable future.
- 13 -
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein in Item 8.
<TABLE>
<CAPTION>
FOR YEAR ENDED JUNE 30,
-------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . . $ 1,938 $ 1,894 $ 100 $ 170 $ 2,341
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . 1,247 1,017 64 99 1,229
Research and development . . . . . . . . . 2,818 3,578 3,419 2,776 1,723
Marketing, general and administrative . . . 1,865 2,746 2,916 1,905 2,723
Acquired research and development . . . . . -- -- -- -- 1,000
---------- ---------- --------- --------- ---------
Total costs and expenses . . . . . . . . 5,930 7,341 6,399 4,780 6,675
---------- ---------- --------- --------- ---------
Loss from operations . . . . . . . . . . . . (3,992) (5,447) (6,299) (4,610) (4,334)
Interest income . . . . . . . . . . . . . . . 43 38 232 342 257
Interest expense . . . . . . . . . . . . . . (64) (22) (30) -- (5)
---------- ---------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . $ (4,013) $ (5,431) $ (6,097) $ (4,268) $ (4,082)
========== ========== ========= ========= =========
Net loss per share . . . . . . . . . . . . . $ (2.26) $ (2.73) $ (1.41) $ (0.74) $ (0.54)
========== ========== ========= ========= =========
Shares used in the computation of net loss
per share . . . . . . . . . . . . . . . . 1,775 1,987 4,327 5,746 7,571
========== ========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . $ 146 $ 441 $ 2,933 $ 3,518 $ 2,585
Working capital (deficiency) . . . . . . . . (265) 1,167 7,937 6,764 3,754
Total assets . . . . . . . . . . . . . . . . 3,689 2,917 12,461 7,847 11,600
Accumulated deficit . . . . . . . . . . . . . (14,283) (19,713) (25,811) (30,079) (34,162)
Total shareholders' equity . . . . . . . . . 1,030 1,903 11,650 7,470 10,483
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and the notes thereto which are set forth elsewhere
herein.
OVERVIEW
On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). 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 and
pharmaceuticals. The Company is also developing its ophthalmic laser and drug
delivery systems to complement its other businesses. The results of operations
for the year ended June 30, 1996 include the results
- 14 -
<PAGE> 17
of operations of EOI subsequent to the acquisition. Sales of products acquired
from EOI are made primarily to hospitals and physicians throughout the United
States. As a result of the acquisition, the Company is no longer in the
development stage for financial reporting purposes.
The Company has recorded losses from inception, and for the period
from inception through February 12, 1996, the date of the EOI acquisition, had
an accumulated deficit of approximately $31.9 million. The Company expects
that operating losses will continue as the Company continues research and
development relating to the application of its various laser and drug delivery
technologies and until product sales generate sufficient revenues to fund its
continuing operations.
The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) limited laser system
sales in the near term as the Company pursues required regulatory clearances
and approvals for its laser systems; (ii) anticipated order and shipment
patterns of the Company's other products; and (iii) general competitive and
economic conditions of the health care market.
RESULTS OF OPERATIONS
Years Ended June 30, 1995 and 1996
Product revenues increased to $2,341,073 in fiscal year 1996 from
$170,000 in fiscal year 1995. This increase of $2,171,073 is attributable to
the February 12, 1996 EOI acquisition, offset by a decrease in laser system
sales of approximately $33,000. The Company's ability to sell its laser
systems in the United States is subject to certain FDA limitations based on
the status of the Company's various clinical trials. International sales of
its laser systems, while not directly limited by the FDA, are also indirectly
impacted by the status of these clinical trials in the United States. In
addition, the Company has reduced the size of its laser operations workforce in
order to preserve working capital. Given these factors, it is not likely that
laser sales volumes will increase significantly beyond the current levels,
until such time as the viability of these various applications are further
demonstrated through FDA approvals to advance into later phases of the clinical
trials.
Cost of sales totaled $1,228,907, or 52% of revenues, for the year
ended June 30, 1996 as compared to $98,803, or 58% of revenues, for fiscal year
1995. The increase in cost of sales is attributable to the EOI acquisition.
As such, a gross margin analysis comparing fiscal years would not be
meaningful.
Research and development expenses decreased from $2,776,474 in fiscal
year 1995 to $1,722,998 in fiscal year 1996, a decrease of $1,053,476 or 38%.
The decrease in research and development expenses is a direct result of a
reduction in workforce and other cost reduction programs implemented in
connection with the Company's change in focus of its operations. The decrease
in research and development expenses during fiscal year 1996 were offset by
increases in certain non-cash expenses, including the write-down of inventories
to anticipated net realizable value, the ongoing depreciation of test and
applications research systems, the write-down of certain patents pending and the
research and development operations acquired from EOI. The Company's research
and development expenses consist primarily of direct expenses associated with
compensation and benefits and indirect expenses such as materials, equipment and
supplies.
Included in the results of operations for the year ended June 30, 1996
is a $1.0 million charge for the in-process technology acquired from EOI.
Marketing and general and administrative expenses increased $818,663
or 43% to $2,723,606 for the year ended June 30, 1996 as compared to $1,904,943
in fiscal year 1995. This increase relates primarily to (i) the inclusion of
the results of operations from EOI; (ii) severance costs associated with the
acquisition of EOI; and (iii) legal fees associated with the Company's ongoing
litigation. The increase was offset by decreases in personnel, travel and
marketing costs related to the workforce and other cost reduction programs
involving the Company's laser operations.
Interest income decreased to $257,093 in fiscal year 1996 from
$341,685 in fiscal year 1995. The decrease is due to a reduction in the levels
of cash and cash equivalents available for investment.
- 15 -
<PAGE> 18
Years Ended June 30, 1994 and 1995
Sales increased to $170,000 in fiscal year 1995 from $100,000 in
fiscal year 1994. In each of these fiscal years, however, there were only a
limited number of systems sold as compared to the preceding two fiscal years.
This decrease relates directly to the fact that the Company's ability to sell
laser systems in the United States is subject to certain FDA limitations based
on the status of the Company's various clinical trials. Likewise,
international sales, while not directly limited by the FDA, are also indirectly
impacted by the status of these United States clinical trials. In addition,
the Company reduced the size of its workforce in order to preserve working
capital and shifted its focus from therapeutic applications to refractive
applications.
Cost of sales totaled $98,803 for fiscal year 1995, or 58% of
revenues, compared to $63,992 or 64% of revenues, in fiscal year 1994. Gross
margin analysis would not be meaningful based on the limited number of sales in
each of the fiscal years.
Research and development expenses decreased from $3,419,412 in fiscal
year 1994 to $2,776,474 in fiscal year 1995, a decrease of 19% or $642,938.
Research and development expenditures include both system design and
development as well as costs associated with the implementation and monitoring
of pre-clinical and clinical trials. The decrease in research and development
expenses is a direct result of (i) the reduction in workforce and other cost
reduction programs implemented in connection with the Company's change in focus
of its operations discussed earlier and (ii) the completion of a project to
develop a prototype for the Model 5000 Refractive Laser System which was
started in fiscal year 1994, and was substantially completed in the second
quarter of fiscal year 1995. These expenses consist primarily of direct
expenses associated with compensation and benefits and indirect expenses such
as materials, equipment and supplies.
Marketing, general and administrative expenses decreased to $1,904,943
in fiscal year 1995 from $2,916,552 in fiscal year 1994, a decrease of
$1,011,609 or 35%. This decrease is attributable primarily to (i) a reduction
in non-recurring legal fees and a non-refundable advanced royalty payment
incurred in connection with a patent litigation suit settled by the Company in
the third quarter of fiscal year 1994 and (ii) overall cost reduction programs
designed to reduce personnel, travel and marketing related costs.
Interest income increased to $341,685 in fiscal year 1995 from
$232,734 in fiscal year 1994, an increase of $108,951 or 47%, due to increased
levels of cash and cash equivalents available for investment. In fiscal year
1994, the Company had cash and cash equivalents available for investment only
during the period from the completion of its public offering in November 1993
through June 30, 1994. In fiscal year 1995, the Company had funds available
for investment during the entire fiscal year.
The Company incurred no interest expense in fiscal year 1995 compared
to $30,482 in fiscal year 1994. The interest expense in fiscal year 1994
resulted solely from interest accrued and paid on $1,675,000 of secured notes
issued as bridge financing prior to the Company's public offering in November
1993.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and cash equivalents of
$2,584,503 as compared to $3,518,410 at June 30, 1995. The Company's
short-term investments at June 30, 1996 and 1995 were $795,970 and 3,113,396,
respectively. The decrease in short-term investments is attributable to the
maturing of short-term investments since June 30, 1995. The net decrease in
cash and cash equivalents and short-term investments of approximately $3.25
million relates to the loss from operations, payment of acquisition costs and
payments made to bring current the trade payables acquired from EOI.
Through June 30, 1996, the Company had incurred approximately $928,000
in expenses related to the acquisition of EOI. In addition, severance costs of
approximately $266,000 have been incurred relating to the resignation of the
Company's former Chairman and Chief Executive Office, Executive Vice President
of Finance and Administration and other personnel.
- 16 -
<PAGE> 19
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 the end of fiscal year 1997. In the longer term,
however, the Company will seek corporate partnering, licensing and other fund
raising opportunities necessary to satisfy the significant expenditures
anticipated in connection with the development of its business.
Pursuant to a collaborative research and development arrangement
relating to the Company's drug delivery technology, the Company has committed
to pay $250,000 during fiscal year 1997. Other significant expenditures may be
incurred in connection with the legal proceedings discussed in "Item 3. Legal
Proceedings."
As of June 30, 1996, the Company had federal income tax and state
income tax net operating loss carryforwards of approximately $39.5 million and
$16.2 million, respectively. Pursuant to the Tax Reform Act of 1986, annual
utilization of the Company's net operating loss carryforwards will be limited
since a change in ownership of more than 50% occurred within a three-year
period. Such limitation is estimated to be approximately $1.7 million per year.
Federal and state net operating loss carryforwards will begin to expire in
2001. However, the timing of the utilization of the net operating loss
carryforwards could be impacted on an annual basis. The Company also had
federal and state research credit carryforwards of $524,000 and $139,000,
respectively, as of June 30, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are filed under this Item 8,
beginning on page F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the
Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders (the
"Proxy Statement"), which is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.
- 17 -
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
Financial Statements
See Index to Financial Statements at page F-1.
Financial Statement Schedules
All schedules have been omitted because they are not applicable, or
not required, or the information is shown in the financial statements or notes
thereto.
Reports on Form 8-K
A report on Form 8-K was filed on April 10, 1996 and related to the
resignation of Mr. Heinz R. Gisel, former Chairman of the Company, and Mr.
Edward M. Lake, former Executive Vice President of the Company.
Exhibits
The following is a list of exhibits filed as part of this annual
report on Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated
parenthetically, followed by the footnote reference to the previous filing.
<TABLE>
<S> <C>
2.1 Assets Sale and Purchase Agreement between Registrant and
Escalon Ophthalmics, Inc., dated
October 9, 1995. (8)
3.1 (a) Restated Articles of Incorporation of Registrant. *
(b) Certificate of Amendment of Restated Articles of
Incorporation of Registrant dated November 8, 1993.*
(c) Certificate of Amendment of Restated Articles of
Incorporation of Registrant dated February 12, 1996.*
3.2 Amended and Restated Bylaws of Registrant. (1)
4.1 Form of Class A Redeemable Common Stock Purchase Warrants.
(4)
4.2 Form of Class B Redeemable Common Stock Purchase Warrants.
(4)
4.3 Form of Class C Common Stock Purchase Warrants. (4)
4.4 Form of Underwriters Class A Common Stock Purchase Warrants.
(4)
4.5 Form of Underwriters Class B Common Stock Purchase Warrants.
(4)
4.6 (a) Warrant Agreement between the Registrant and U.S. Stock
Transfer Corporation. (4)
(b) Amendment to Warrant Agreement between Registrant and U.S.
Stock Transfer Corporation. (6)
(c) Amendment to Warrant Agreement between Registrant and
American Stock Transfer Company. (7)
10.1 (a) 1988 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1988 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1988 Stock Option Plan. (1)
10.2 (a) 1989 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1989 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1989 Stock Option Plan. (1)
10.3 (a) 1990 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1990 Stock Option Plan. (1)
</TABLE>
-18-
<PAGE> 21
<TABLE>
<S> <C>
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1990 Stock Option Plan. (1)
10.4 (a) 1991 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1991 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1991 Stock Option Plan. (1)
10.5 (a) 1992 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1992 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1992 Stock Option Plan. (1)
10.6 (a) 1993 Stock Option Plan of Registrant. (5)
(b) Form of Nonqualified Stock Option Agreement of Registrant
under the 1993 Stock Option Plan. (5)
(c) Form of Incentive Stock Option Agreement of Registrant under
the 1993 Stock Option Plan. (5)
10.7 Series D Preferred Stock Purchase Agreement dated January
17, 1992. (1)
10.8 Amendment No. 1 to Series D Preferred Stock Purchase
Agreement dated March 6, 1992. (1)
10.9 (a) Registration Rights Agreement dated as of January 17, 1992,
among Registrant; Stuart I. Brown, M.D.; Josef F. Bille,
Ph.D.; and the Purchasers of Preferred Stock of Registrant
pursuant to Preferred Stock Purchase Agreements. (1)
(b) Amendment No. 1 to Registration Rights Agreement dated as of
March 6, 1992. (1)
(c) Amendment No. 2 to Registration Rights Agreement dated as of
April 24, 1992. (1)
(d) Waiver and Consent dated June 8, 1992. (3)
10.10 Proprietary Information and Patent Royalty Agreement dated
January 13, 1989, between Registrant and Shui T. Lai. (1)
10.11 Manufacturing Agreement dated March 12, 1990, between
Registrant and Carl-Zeiss-Stiftung. (1)
10.12 LTS License Agreement dated April 6, 1990, between
Registrant and Heidelberg Instruments, GmbH. (1)
10.13 Distributor Agreement dated November 30, 1990, between
Registrant and Europhtalmica. (1)
10.14 Rescission and Stock Option Agreement dated August 2, 1989,
between Registrant and David J. Schanzlin, M.D., assigned by
Assignment dated October 1990, from Dr. Schanzlin to
Bethesda Eye Institute. (1)
10.15 Stock Option Agreement dated January 22, 1992, between
Registrant and Shiley Eye Center. (1)
10.16 Consultant Agreement dated December 13, 1994, between
Registrant and Carmen A. Puliafito, M.D. (7)
10.17 Independent Contractor Agreement dated March 1, 1988,
between Registrant and Josef F. Bille, Ph.D., as amended by
Amendment to Independent Contractor Agreement dated as of
February 28, 1990. (1)
10.18 Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers. (2)
10.19 Research Agreement dated July 6, 1989, between Registrant
and Bethesda Eye Institute. (1)
10.20 Form of Proprietary Information Agreement. (1)
10.21 Consulting Agreement dated June 17, 1993, between Registrant
and Forster Systems Engineering. (3)
10.22 Distribution Agreement dated July 27, 1993, between
Registrant and ASKIN & Co. (3)
10.23 Distribution Agreement dated April 15, 1992, between
Registrant and Designs for Vision. (3)
10.24 Distribution Agreement between Registrant and Sigmacon
(Canada) Ltd. (3)
10.25 Distribution Agreement dated May 28, 1993, between
Registrant and KOWA Company, Ltd. (3)
10.26 Employment Agreement dated August 26, 1993, between
Registrant and Edward M. Lake. (4) +
10.27 Non-Qualified Unit Option Agreement. (4)
10.28 Underwriting Agreement between the Registrant and the
Underwriter. (4)
10.29 Unit Purchase Option between the Registrant and the
Underwriter. (4)
10.30 Consulting Agreement dated May 13, 1991, between the Company
and Carmen A. Puliafito, M.D. (4)
10.31 Letter Agreement respecting the employment of S. Michael
Sharp dated February 16, 1994. (7)+
</TABLE>
-19-
<PAGE> 22
<TABLE>
<S> <C>
10.32 Consulting Agreement entered into between the Registrant and
Mark G. Speaker, M.D., Ph.D. dated as of December 1, 1993.
(6)
10.33 Registration Rights Agreement between Registrant and
Genentech, Inc. dated as of February 12, 1996.*
10.34 Registration Rights Agreement between Registrant and EOI
Corp. dated as of February 12, 1996.*
10.35 Employment Agreement between Registrant and Sterling C.
Johnson dated April 30, 1989, as amended as of January 1,
1991 and as further amended as of January 1, 1995. (P)+*
10.36 Employment Agreement between Registrant and John T. Rich
dated January 15, 1990, as amended as of January 15, 1995
and as further amended on September 12, 1995. (P)+*
10.37 Employment Agreement between Registrant and Ronald Hueneke
dated October 4, 1991. (P)+*
10.38 Distribution and License Agreement between Registrant and
The Purdue Frederick Company dated August 31, 1995. (P)*
10.39 Distribution and Development Agreement between Registrant
and Adatomed Pharmazeutische Und Medizintechnische
Gesellschaft Mbh dated January 1, 1990, as amended January
26, 1993 and as further amended May 17, 1993. (P)*
10.40 Distributorship Agreement between Registrant and Scott
Medical Products dated as of September 8, 1992, as amended
September 8, 1995. (P)*
10.41 Joint Marketing Agreement between Registrant and Akorn, Inc.
dated June 23, 1993. (P)*
10.42 Research and Development Agreement between Registrant and
The West Company, Incorporated dated April 3, 1995. (P)*
10.43 Supply and Distribution Agreement between Registrant and
Storz Instrument Company dated as of July 7, 1995. (P)*
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Statement Schedule.*
</TABLE>
- ---------------
* Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 dated April 24, 1992 (Registration No. 33-47439).
(2) Filed as an exhibit to Pre-Effective Amendment No. 7 to the
Company's Registration Statement on Form S-1 dated August 20,
1992 (Registration No. 33-47439).
(3) Filed as an exhibit to the Company's Registration Statement on
Form S-1 dated September 24, 1993 (Registration No. 33-
69360).
(4) Filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 dated November 9,
1993 (Registration No. 33-69360).
(5) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated June 13, 1994 (Registration Number 33-80162).
(6) Filed as an exhibit to the Company's Form 10-K for year ended
June 30, 1994.
(7) Filed as an exhibit to the Company's Form 10-K for the year
ended June 30, 1995.
(8) Filed as an appendix to the Registration Statement on Form S-4
dated December 5, 1995 (Registration Statement No. 33-80037).
(P) Filed in paper under cover of Form SE pursuant to Rule 202 of
Regulation S-T under the Securities Act of 1933.
+ Management contract or compensatory plan.
-20-
<PAGE> 23
ESCALON MEDICAL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Escalon Medical Corp.
We have audited the accompanying balance sheets of Escalon Medical
Corp. as of June 30, 1995 and 1996 and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Escalon Medical
Corp. at June 30, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Princeton, New Jersey
August 16, 1996
F-2
<PAGE> 25
ESCALON MEDICAL CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
ASSETS 1995 1996
------------ -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,518,410 $2,584,503
Investments 3,113,396 795,970
Accounts receivable, net of allowance for doubtful
accounts of $6,677 at June 30, 1996 -- 735,910
Inventory, net 388,698 669,996
Other current assets 119,745 80,891
---------- ----------
Total current assets 7,140,249 4,867,270
Furniture and equipment, at cost, net 564,617 172,092
License and distribution rights, net -- 2,074,990
Patents, net 142,056 446,995
Goodwill, net -- 3,959,055
Other assets -- 79,494
----------- ------------
$7,846,922 $11,599,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ -- $ 7,510
Accounts payable 96,973 653,871
Accrued compensation 151,294 246,250
Accrued professional expenses 64,800 41,108
Accrued customer expenses -- 75,000
Other accrued expenses 20,004 46,020
Customer deposits 43,480 43,480
----------- ------------
Total current liabilities 376,551 1,113,239
------------ -------------
Long term capital lease obligations -- 3,235
------------ ---------
Commitments
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares
authorized; 5,746,073 and 10,518,814 shares
issued and outstanding at June 30, 1995
and 1996, respectively 37,514,481 44,645,440
Warrants to purchase common stock 51,957 --
Accumulated deficit (30,079,723) (34,162,018)
Deferred compensation (16,344) --
------------ -------------
Total shareholders' equity 7,470,371 10,483,422
$7,846,922 $11,599,896
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 26
ESCALON MEDICAL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales revenues $ 100,000 $ 170,000 $ 2,341,073
----------- ----------- -----------
Costs and Expenses:
Cost of goods sold 63,992 98,803 1,228,907
Research and development 3,419,412 2,776,474 1,722,998
Marketing, general and administrative 2,916,552 1,904,943 2,723,606
Acquired research and development - - - - 1,000,000
----------- ----------- -----------
Total costs and expenses 6,399,956 4,780,220 6,675,511
----------- ----------- -----------
Loss from operations (6,299,956) (4,610,220) (4,334,438)
----------- ----------- -----------
Other Income and Expenses:
Interest income 232,734 341,685 257,093
Interest expense (30,482) - - (4,950)
----------- ----------- -----------
Total other income and expense 202,252 341,685 252,143
----------- ----------- -----------
Net loss $(6,097,704) $(4,268,535) $(4,082,295)
=========== =========== ===========
Net loss per share $ (1.41) $ (0.74) $ (0.54)
=========== =========== ===========
Shares used in computation of net
loss per share 4,327,500 5,745,572 7,570,913
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 27
ESCALON MEDICAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Warrants to
Common Stock Purchase Total
------------------------- Common Accumulated Deferred Shareholders'
Shares Amount Stock Deficit Compensation Equity
------------ ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 2,078,766 $21,739,698 $ 56,505 $(19,713,484) $(180,216) $1,902,503
Amortization of deferred compensation -- -- -- -- 81,936 81,936
Issuance of common stock for cash, net of
offering costs of $2,447,711 3,450,000 14,802,289 -- -- -- 14,802,289
Exercise of stock options 27,652 36,448 -- -- -- 36,448
Conversion of notes payable into common
stock 185,000 925,000 -- -- -- 925,000
Net loss -- -- -- (6,097,704) -- (6,097,704)
---------- ----------- -------- ------------ --------- -----------
Balance at June 30, 1994 5,741,418 37,503,435 56,505 (25,811,188) (98,280) 11,650,472
Amortization of deferred compensation -- -- -- -- 81,936 81,936
Exercise of warrants to purchase stock and
common stock options 4,655 11,046 (4,548) -- -- 6,498
Net loss -- -- -- (4,268,535) -- (4,268,535)
---------- ----------- -------- ------------ --------- -----------
Balance at June 30, 1995 5,746,073 37,514,481 51,957 (30,079,723) (16,344) 7,470,371
Amortization of deferred compensation -- -- -- -- 16,344 16,344
Issuance of common stock pursuant to
acquisition agreement 4,720,772 6,996,184 -- -- -- 6,996,184
Exercise of stock options 51,460 82,463 -- -- -- 82,463
Exercise/expiration of warrants to purchase
common stock 509 52,312 (51,957) -- 355
Net loss -- -- -- (4,082,295) -- (4,082,295)
---------- ----------- -------- ------------ --------- -----------
Balance at June 30, 1996 10,518,814 $44,645,440 $ -- $(34,162,018) $ -- $10,483,422
========== =========== ======== ============ ========= ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 28
ESCALON MEDICAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,097,704) $(4,268,535) $(4,082,295)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 325,215 376,400 757,951
Amortization of deferred compensation 81,936 81,936 16,344
Write off of patents -- 75,716 61,044
Acquired research and development -- -- 1,000,000
Net loss on retirement of assets -- -- 58,769
Change in current assets and liabilities
(Increase) decrease in accounts receivable -- -- (33,326)
(Increase) decrease in inventory 406,715 672,115 165,122
(Increase) decrease in other current assets 102,265 (15,707) (17,119)
Increase (decrease) in accounts payable, accrued
compensation, professional and customer expenses,
and other accrued expenses (221,578) (406,795) (1,201,530)
Increase (decrease) in customer deposits 17,500 (27,500) --
----------- ---------- ----------
Net cash used in operating activities (5,385,651) (3,512,370) (3,275,040)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (8,156,872) (719,524) (890,970)
Proceeds from maturities of short-term investments 690,000 5,073,000 3,208,396
Purchase of furniture and equipment (269,362) (352,424) (52,963)
Other assets (92,972) 124,319 61,146
Patent costs (56,774) (34,111) (66,050)
Cash acquired in acquisition -- -- 1,756
----------- ---------- ----------
Net cash provided from (used in) investing
activities (7,885,980) 4,091,260 2,261,315
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 15,525,499 6,498 82,818
Proceeds from the issuance of notes payable 1,675,000 -- --
Payments on notes payable (750,000) -- --
Offering costs (686,762) -- --
Principal payments under capital lease obligations -- -- (3,000)
----------- ---------- ----------
Net cash provided from financing activities 15,763,737 6,498 79,818
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,492,106 585,388 (933,907)
Cash and cash equivalents, beginning of year 440,916 2,933,022 3,518,410
----------- ---------- ----------
Cash and cash equivalents, end of year $ 2,933,022 $3,518,410 $2,584,503
=========== ========== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid during the year $ 30,482 $ -- $ 4,950
=========== ========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 29
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) (the "Company"), was incorporated on December 24, 1987 in the State of
California. The Company develops, markets and distributes ophthalmic medical
devices and pharmaceutical products and is currently developing ophthalmic
laser and drug delivery systems. Activities from inception have included
development and testing of laser technology and the sales of a minimal number
of laser systems. Such laser sales have been to physicians, clinics and
university hospitals in connection with their participation in the Company's
clinical trials and for investigation of additional applications for the
Company's laser systems. As described more fully in Note 4, the Company
acquired substantially all of the assets and certain of the liabilities of
Escalon Ophthalmics, Inc. ("EOI"), a Pennsylvania corporation, on February 12,
1996 pursuant to the Assets Sale and Purchase Agreement dated October 9, 1995
and as amended December 19, 1995. The results of operations for the year ended
June 30, 1996 include the results of operations of EOI subsequent to the
acquisition. Sales of the products acquired from EOI are made primarily to
hospitals and physicians throughout the United States. As a result of this
acquisition, the Company is no longer in the development stage for financial
reporting purposes. Included in the accumulated deficit is approximately $31.9
million which was accumulated during the development stage.
(2) SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of
three months or less at the time of purchase to be cash equivalents.
The Company invests its excess cash in money market accounts with
financial institutions having strong credit ratings. Investments with
maturities of one year or less are considered current assets.
The Company has established practices relative to diversification and
maturities for safety and liquidity purposes. These practices are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any losses on its cash equivalents and
investments.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock options in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
F-7
<PAGE> 30
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of fiscal year 1997 and,
based on current circumstances, does not believe the effect of adoption will be
material.
Inventories
Raw materials, work in process and finished goods inventories are
recorded at lower of cost (first-in, first-out) or market. The composition of
inventories is as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1995 1996
--------- ----------
<S> <C> <C>
Raw materials/work in process $ 784,889 $ 623,460
Finished goods 103,809 643,915
--------- ----------
888,698 1,267,375
Valuation allowance (500,000) (597,379)
--------- ----------
$ 388,698 $ 669,996
========= ==========
</TABLE>
Furniture and Equipment
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets which are estimated to be eighteen months to seven years. Depreciation
expense for the years ended June 30, 1994, 1995 and 1996 was $325,215,
$376,400, and $459,553, respectively.
Assets under capital leases, consisting of office equipment, are
amortized over the lesser of the useful life or the applicable lease terms,
whichever is shorter, which range from 3 to 5 years.
Furniture and equipment consist of the following at:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Equipment $ 708,511 $ 630,681
Furniture and fixtures 90,057 36,211
Leasehold improvements 7,393 14,475
Assets under capital leases -- 11,840
Testing and applications research systems 1,120,856 1,061,409
----------- -----------
1,926,817 1,754,616
Less accumulated depreciation and amortization (1,362,200) (1,582,524)
----------- -----------
$ 564,617 $ 172,092
=========== ===========
</TABLE>
F-8
<PAGE> 31
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Acquired License and Distribution Rights
In connection with the acquisition described in Note 4, a portion of
the purchase price was allocated to certain product license and distribution
agreements. Such cost allocation was based on an independent valuation, with
such costs being amortized over an eight-year period using the straight-line
method. Accumulated amortization of license and distribution rights amounted
to $114,010 at June 30, 1996.
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 $38,506 and $40,474 at June 30, 1995 and 1996,
respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired (see Note 4). These costs are being amortized
over a ten-year period using the straight-line method. Amortization of
goodwill for the year ended June 30, 1996 amounted to $172,133.
Research and Development
All research and development costs are charged to operations as
incurred. Included in such costs for the year ended June 30, 1994 was
consulting expenses of $57,000 paid to related parties. Pursuant to a
collaborative research and development arrangement relating to the Company's
drug delivery technology, the Company has committed to pay $250,000 during
fiscal year 1997.
Net Loss Per Share
Net loss per share is computed based upon the weighted average number
of common shares outstanding. Common stock equivalents have not been included
in computing net loss per share since their effect would have been
antidilutive.
Income Taxes
The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Reclassifications
Certain June 30, 1995 balances have been reclassified to conform with
the current year presentation.
F-9
<PAGE> 32
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(3) INVESTMENTS - HELD-TO-MATURITY
All debt securities are classified as held-to-maturity and are carried
at amortized cost. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. The amortization, along with
realized gains and losses, interest and dividends, are included in interest
income. The cost of securities sold is based on the specific identification
method.
The following is a summary of investments held-to-maturity, at
amortized cost:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1995 1996
---------------- -------------
<S> <C> <C>
Corporate debt securities $2,199,496 $ --
Securities of the U.S. Treasury 913,900 --
Certificates of deposits -- 2,890,970
----------- ------------
$3,113,396 $2,890,970
=========== ===========
</TABLE>
At June 30, 1995 and 1996, the difference between amortized cost and
estimated fair market value of held-to-maturity securities was not material.
Included in cash and cash equivalents at June 30, 1996 were held-to-maturity
securities totaling $2,095,000 with original maturities of 90 days or less.
All held-to-maturity securities are due in one year or less.
(4) ACQUISITION OF ESCALON OPHTHALMICS, INC.
On February 12, 1996, the Company acquired substantially all of the
assets and certain of the liabilities of EOI, a developer, marketer and
distributor of ophthalmic medical devices, pharmaceuticals and drug delivery
systems, in exchange for 4,770,772 shares of the Company's Common Stock. Total
estimated cost of the acquisition was $8.9 million, including liabilities
assumed of $1,016,340 and estimated transaction costs of approximately
$928,000. The acquisition is being accounted for using the purchase method of
accounting as prescribed by Accounting Principal Board Opinion No. 16 and
includes the acquisition of accounts receivable, inventories, equipment and
various other tangible and intangible assets. The total purchase price over
the fair value of net assets acquired approximates $4.1 million and is being
amortized over a ten-year period. Another $1.0 million of the purchase price
was assigned to in-process technology and was charged to operations immediately
following the acquisition.
The following pro forma results of operations information has been
prepared to give effect to the purchase as if such transaction had occurred at
the beginning of the respective periods presented. The historical results of
operations, included in the pro forma results, reflect additional amortization
expense base on the independent valuation of assets acquired as well as the
$1.0 million charge to operations related to the acquired in-process
technology. The information presented is not necessarily indicative of results
of future operations of the combined companies.
F-10
<PAGE> 33
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(4) ACQUISITION OF ESCALON OPHTHALMICS, INC. - (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Revenues $ 3,571,305 $ 5,031,862
Net loss $(6,488,656) $(4,864,327)
Net loss per share $ (0.62) $ (0.46)
Weighted average shares outstanding 10,466,344 10,498,824
</TABLE>
(5) LEASES
Capital Leases
The Company's investment in office equipment under capital leases at
June 30, 1996 totaled $11,840 with accumulated amortization of $2,794.
The following is a schedule, by year, of the future minimum lease
payments under capital leases, together with the present value of the net
minimum lease payments as of June 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------- --------
<S> <C>
1997 $ 8,747
1998 3,463
--------
Total minimum lease payments 12,210
Amount representing interest ( 1,465)
-------
Present value of future minimum
lease payments $ 10,745
========
</TABLE>
Operating Leases
The Company leases its research, manufacturing and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future minimum rentals to be paid under these leasing
arrangements as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- --------
<S> <C>
1997 $182,480
1998 56,360
1999 51,310
2000 8,094
--------
$298,244
========
</TABLE>
Rent expense charged to operations during the years ended June 30,
1994, 1995 and 1996 was $250,000, $250,000 and $239,732, respectively.
F-11
<PAGE> 34
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(6) CAPITAL STOCK TRANSACTIONS
Redeemable Common Stock Purchase Warrants
During November 1993, the Company successfully completed an
underwritten public offering of 3,450,000 Units (the "Units"), each Unit
consisting of one share of Common Stock, one Class A Redeemable Common Stock
Purchase Warrant and one Class B Redeemable Common Stock Purchase Warrant (the
"Public Offering"). Each Class A and Class B Warrant entitles the holder
thereof to purchase one share of Common Stock at a price of $6.25 and $7.50,
respectively. The warrants are currently exercisable and expire in November
2000. The underwriter of the Public Offering was granted an option to purchase
300,000 Units at $8.00 per unit. The option is exercisable commencing November
1994 and expires in November 1998. The Public Offering price for the Units was
$5.00 per Unit. The net proceeds to the Company from the Public Offering,
after deducting underwriting discounts and commissions and related expenses
payable by the Company was approximately $14,800,000.
In October 1993, in connection with the certain loan arrangements, the
Company issued an aggregate of 167,500 Class C Common Stock warrants. Each
Class C warrant entitles the holder to purchase one share of Common Stock at
$5.00 per share. The warrants are currently exercisable and expire in November
1998.
Stock Option Plans
The Company has adopted seven employee stock option plans which
provide for incentive stock options and non-qualified stock options to purchase
662,455 shares of the Company's common stock. Under the terms of the plans,
options may be granted at not less than fair market value of the Common Stock
at the date of grant. Options granted under the plans vest ratably over four
years and are exercisable over a period no longer than ten years after the
grant date. Activity under these plans is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------------
<S> <C> <C>
Outstanding at June 30, 1993 160,096 $0.365 - $1.827
Granted 239,369 6.000 - 8.000
Exercised (27,652) 0.365 - 1.827
Forfeited (15,330) 0.808 - 8.000
------- ---------------
Outstanding at June 30, 1994 356,483 0.365 - 8.000
Granted 105,500 1.880
Exercised (4,409) 0.365 - 1.827
Forfeited (29,734) 0.808 - 8.000
------- ---------------
Outstanding at June 30, 1995 427,840 1.371 - 8.000
Granted -- --
Exercised (51,460) 1.371 - 1.827
Forfeited (86,692) 1.371 - 8.000
------- ---------------
Outstanding at June 30, 1996 289,688 $1.371 - $8.000
======= ===============
</TABLE>
Options granted under these plans which are exercisable at June 30,
1996 total 269,587. In addition, non-plan options to purchase 5,470 and 5,470
shares of Common Stock, at prices of $.365 and $1.827,
F-12
<PAGE> 35
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(6) CAPITAL STOCK TRANSACTIONS - (CONTINUED)
respectively, were outstanding and exercisable at June 30, 1996. These options
generally have vesting and exercise provisions consistent with options granted
under the plans. As of June 30, 1996, 241,505 shares of Common Stock are
reserved for issuance upon the exercise of stock options which may be granted
in the future.
For certain options granted, the Company recognized as compensation
expense the excess of the deemed value for accounting purposes of the Common
Stock issuable upon exercise of such options over the aggregate exercise price
of such options. At June 30, 1996, this compensation expense was fully
amortized.
Warrants
During the year ended June 30, 1996, warrants to purchase 509 shares
of Common Stock were exercised and 2,409 warrants expired.
(7) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liability,
which are considered to be noncurrent, consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 200,000 $ 220,000
NOL carryforward 10,700,000 14,421,000
Tax credit carryforwards 663,000 663,000
------------ ------------
Total deferred tax assets 11,563,000 15,304,000
Deferred tax liability:
License and distribution rights -- (830,000)
------------ ------------
Net deferred tax assets 11,563,000 14,474,000
Valuation allowance (11,563,000) (14,474,000)
------------ ------------
Net deferred taxes $ -- $ --
============ =============
</TABLE>
At June 30, 1996, the Company has federal income tax and state income
tax net operating loss carryforwards of approximately $39.5 million and $16.2
million, respectively. The difference between the federal and state
carryforward amounts is primarily attributable to differences in research and
development expenses and to California's statutory 50% annual reduction rule.
In addition, the Company has federal and California research credit
carryforwards of $524,000 and $139,000, respectively, at June 30, 1996.
Federal and state operating losses and tax credits will expire at various dates
between 2001 and 2011.
For the years ended June 30, 1994, 1995 and 1996, the Company provided
valuation allowances of $9,240,000, $11,563,000 and $14,474,000, respectively.
F-13
<PAGE> 36
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(7) INCOME TAXES - (CONTINUED)
Under provisions of the 1986 Tax Reform Act of 1986, the Company's use
of federal and California net operating loss carryforwards of $1.1 million and
$118,000, respectively, are subject to limitations as a result of an ownership
change which occurred during fiscal 1990. With the issuance of shares related
to the acquisition of EOI (see Note 4), there may have occurred an additional
ownership change. If so, Company use of federal income tax and state income
tax net operating loss carryforwards of approximately $31.3 million and $12.2
million, respectively, may be limited. Such limitation is estimated to be
approximately $1.7 million per year. However, the timing of the utilization of
the net operating loss carryovers could be impacted on an annual basis.
In connection with the acquisition described in Note 4, the Company
has federal and state net operating loss carryforwards of $8.2 million and $4.0
million, respectively, which were included in the above net operating loss
carryforwards. Use of these net operating losses is subject to limitations as
a result of the ownership change that occurred at the time of the acquisition
and would result in a reduction of goodwill if utilized.
(8) CONTINGENCIES
Litigation
On April 3, 1995, the Company was served with a pleading entitled
Amended Consolidated Class Action Complaint in an action captioned In Re Blech
Securities Litigation, 94 Civ. 7696 (RWS), which was filed on or about March
28, 1995, in the United States District Court for the Southern District of New
York (the "Blech Complaint"). On June 6, 1996, the court granted in part and
denied in part motions by the Company and certain of the other defendants to
dismiss the complaint which dismissed all claims against the Company. On July
26, 1996, plaintiffs filed an amended complaint. The amended complaint does
not name the Company as a defendant.
On or about June 8, 1995, a purported class action complaint captioned
George Kozloski v. Intelligent Surgical Lasers, Inc., et. al., 95 Civ. 4299 was
filed in the United States District Court for the Southern District of New York
(the "Kozloski Complaint") as a "related action" to In Re Blech Securities
Litigation. 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 Kozloski 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, as amended. The Kozloski Complaint
also asserts claims under Section 10(b) of the Exchange Act 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. On
August 15, 1996, The Company, together with three other companies against whom
similar claims have been asserted in separate actions filed as 'related" to In
Re Blech Securities Litigation, a motion for permission to appeal, which
currently is scheduled to be heard on October 10, 1996. No discovery has taken
place to date.
F-14
<PAGE> 37
ESCALON MEDICAL CORP.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(8) CONTINGENCIES - (CONTINUED)
The Company believes that it has meritorious defenses and intends to
vigorously defend the Kozloski Complaint. Regardless of the outcome, the
Company could be required to incur substantial expense in defending the
lawsuit.
Notice of Rescission of Distribution and Clinical Agreement
On October 24, 1995, Kowa Company Ltd. ("Kowa"), a distributor of the
Company's surgical laser systems, notified the Company of its intent to rescind
its Distribution and Clinical Agreements with the Company. Kowa has offered to
restore to the Company three ISL Model 2001 surgical laser systems purchased by
Kowa under the Distribution Agreement and has demanded restitution of all
consideration paid by Kowa under said agreement, together with accrued interest
thereon from the date of Kowa's purchase of those units and reimbursement of
expenses incurred by Kowa, for a total sum of $633,000.
The Company believes that these claims are without merit and believes
that the Company has fulfilled all of its obligations under the terms and
conditions of its agreement with Kowa. If the Company and Kowa are unable to
settle these alleged claims and if Kowa elects to proceed to arbitration under
the terms of the agreement, such as action could have a materially adverse
effect on the liquidity and capital resources of the Company.
F-15
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ESCALON MEDICAL CORP.
(Registrant)
Dated: September 27, 1996
By:/s/Sterling C. Johnson
----------------------
Sterling C. Johnson
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
By:/s/ Sterling C. Johnson President (Principal Executive Officer) September 27, 1996
----------------------------- and Director
Sterling C. Johnson
By:/s/ John T. Rich Vice President of Finance (Principal September 27, 1996
--------------------------------- Financial Officer and Principal Accounting
John T. Rich Officer) and Assistant Secretary
By:/s/ Anthony B. Evnin Director September 27, 1996
------------------------------
Anthony B. Evnin
By:/s/ Robert J. Kunze Director September 27, 1996
-------------------------------
Robert J. Kunze
By:/s/ Jay L. Federman, M.D. Director September 27, 1996
--------------------------
Jay L. Federman, M.D.
By:/s/ Richard J. DePiano Director September 27, 1996
----------------------------
Richard J. DePiano
By:/s/ Jack M. Dodick, M.D. Director September 27, 1996
-------------------------
Jack M. Dodick, M.D.
</TABLE>
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Assets Sale and Purchase Agreement between Registrant
and Escalon Ophthalmics, Inc., dated October 9, 1995.
(8)
3.1 (a) Restated Articles of Incorporation of Registrant. *
(b) Certificate of Amendment of Restated Articles of
Incorporation of Registrant dated November 8, 1993.*
(c) Certificate of Amendment of Restated Articles of
Incorporation of Registrant dated February 12, 1996.*
3.2 Amended and Restated Bylaws of Registrant. (1)
4.1 Form of Class A Redeemable Common Stock Purchase
Warrants. (4)
4.2 Form of Class B Redeemable Common Stock Purchase
Warrants. (4)
4.3 Form of Class C Common Stock Purchase Warrants. (4)
4.4 Form of Underwriters Class A Common Stock Purchase
Warrants. (4)
4.5 Form of Underwriters Class B Common Stock Purchase
Warrants. (4)
4.6 (a) Warrant Agreement between the Registrant and U.S.
Stock Transfer Corporation. (4)
(b) Amendment to Warrant Agreement between Registrant and
U.S. Stock Transfer Corporation. (6)
(c) Amendment to Warrant Agreement between Registrant and
American Stock Transfer Company. (7)
10.1 (a) 1988 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1988 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1988 Stock Option Plan. (1)
10.2 (a) 1989 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1989 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1989 Stock Option Plan. (1)
10.3 (a) 1990 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1990 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1990 Stock Option Plan. (1)
10.4 (a) 1991 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1991 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1991 Stock Option Plan. (1)
10.5(a) 1992 Stock Option Plan of Registrant. (1)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1992 Stock Option Plan. (1)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1992 Stock Option Plan. (1)
10.6 (a) 1993 Stock Option Plan of Registrant. (5)
(b) Form of Nonqualified Stock Option Agreement of
Registrant under the 1993 Stock Option Plan. (5)
(c) Form of Incentive Stock Option Agreement of Registrant
under the 1993 Stock Option Plan. (5)
10.7 Series D Preferred Stock Purchase Agreement dated
January 17, 1992. (1)
10.8 Amendment No. 1 to Series D Preferred Stock Purchase
Agreement dated March 6, 1992. (1)
10.9 (a) Registration Rights Agreement dated as of January 17,
1992, among Registrant; Stuart I. Brown, M.D.; Josef
F. Bille, Ph.D.; and the Purchasers of Preferred Stock
of Registrant pursuant to Preferred Stock Purchase
Agreements. (1)
(b) Amendment No. 1 to Registration Rights Agreement dated
as of March 6, 1992. (1)
(c) Amendment No. 2 to Registration Rights Agreement dated
as of April 24, 1992. (1)
(d) Waiver and Consent dated June 8, 1992. (3)
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.10 Proprietary Information and Patent Royalty Agreement
dated January 13, 1989, between Registrant and Shui T.
Lai. (1)
10.11 Manufacturing Agreement dated March 12, 1990, between
Registrant and Carl-Zeiss-Stiftung. (1)
10.12 LTS License Agreement dated April 6, 1990, between
Registrant and Heidelberg Instruments, GmbH. (1)
10.13 Distributor Agreement dated November 30, 1990, between
Registrant and Europhtalmica. (1)
10.14 Rescission and Stock Option Agreement dated August 2,
1989, between Registrant and David J. Schanzlin, M.D.,
assigned by Assignment dated October 1990, from Dr.
Schanzlin to Bethesda Eye Institute. (1)
10.15 Stock Option Agreement dated January 22, 1992, between
Registrant and Shiley Eye Center. (1)
10.16 Consultant Agreement dated December 13, 1994, between
Registrant and Carmen A. Puliafito, M.D. (7)
10.17 Independent Contractor Agreement dated March 1, 1988,
between Registrant and Josef F. Bille, Ph.D., as
amended by Amendment to Independent Contractor
Agreement dated as of February 28, 1990. (1)
10.18 Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers. (2)
10.19 Research Agreement dated July 6, 1989, between
Registrant and Bethesda Eye Institute. (1)
10.20 Form of Proprietary Information Agreement. (1)
10.21 Consulting Agreement dated June 17, 1993, between
Registrant and Forster Systems Engineering. (3)
10.22 Distribution Agreement dated July 27, 1993, between
Registrant and ASKIN & Co. (3)
10.23 Distribution Agreement dated April 15, 1992, between
Registrant and Designs for Vision. (3)
10.24 Distribution Agreement between Registrant and Sigmacon
(Canada) Ltd. (3)
10.25 Distribution Agreement dated May 28, 1993, between
Registrant and KOWA Company, Ltd. (3)
10.26 Employment Agreement dated August 26, 1993, between
Registrant and Edward M. Lake. (4) +
10.27 Non-Qualified Unit Option Agreement. (4)
10.28 Underwriting Agreement between the Registrant and the
Underwriter. (4)
10.29 Unit Purchase Option between the Registrant and the
Underwriter. (4)
10.30 Consulting Agreement dated May 13, 1991, between the
Company and Carmen A. Puliafito, M.D. (4)
10.31 Letter Agreement respecting the employment of S.
Michael Sharp dated February 16, 1994. (7)+
10.32 Consulting Agreement entered into between the
Registrant and Mark G. Speaker, M.D., Ph.D. dated as
of December 1, 1993. (6)
10.33 Registration Rights Agreement between Registrant and
Genentech, Inc. dated as of February 12, 1996.*
10.34 Registration Rights Agreement between Registrant and
EOI Corp. dated as of February 12, 1996.*
10.35 Employment Agreement between Registrant and Sterling
C. Johnson dated April 30, 1989, as amended as of
January 1, 1991 and as further amended as of January
1, 1995. (P)+*
10.36 Employment Agreement between Registrant and John T.
Rich dated January 15, 1990, as amended as of January
15, 1995 and as further amended on September 12, 1995.
(P)+*
10.37 Employment Agreement between Registrant and Ronald
Hueneke dated October 4, 1991. (P)+*
10.38 Distribution and License Agreement between Registrant
and The Purdue Frederick Company dated August 31,
1995. (P)*
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.39 Distribution and Development Agreement between
Registrant and Adatomed Pharmazeutische Und
Medizintechnische Gesellschaft Mbh dated January 1,
1990, as amended January 26, 1993 and as further
amended May 17, 1993. (P)*
10.40 Distributorship Agreement between Registrant and Scott
Medical Products dated as of September 8, 1992, as
amended September 8, 1995. (P)*
10.41 Joint Marketing Agreement between Registrant and
Akorn, Inc. dated June 23, 1993. (P)*
10.42 Research and Development Agreement between Registrant
and The West Company, Incorporated dated April 3,
1995. (P)*
10.43 Supply and Distribution Agreement between Registrant
and Storz Instrument Company dated as of July 7, 1995.
(P)*
23.1 Consent of Ernst & Young LLP, independent auditors.*
27.1 Financial Statement Schedule.*
</TABLE>
- ---------------
* Filed herewith
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 dated April 24, 1992 (Registration No. 33-47439).
(2) Filed as an exhibit to Pre-Effective Amendment No. 7 to the
Company's Registration Statement on Form S-1 dated August 20,
1992 (Registration No. 33-47439).
(3) Filed as an exhibit to the Company's Registration Statement on
Form S-1 dated September 24, 1993 (Registration No.
33-69360).
(4) Filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 dated November 9,
1993 (Registration No. 33-69360).
(5) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated June 13, 1994 (Registration Number 33-80162).
(6) Filed as an exhibit to the Company's Form 10-K for year ended
June 30, 1994.
(7) Filed as an exhibit to the Company's Form 10-K for the year
ended June 30, 1995.
(8) Filed as an appendix to the Registration Statement on Form S-4
dated December 5, 1995 (Registration Statement No. 33-80037).
(P) Filed in paper under cover of Form SE pursuant to Rule 202 of
Regulation S-T under the Securities Act of 1933.
+ Management contract or compensatory plan.
<PAGE> 1
EXHIBIT 3.1(a)
RESTATED ARTICLES OF INCORPORATION OF
INTELLIGENT SURGICAL LASERS, INC.
William T. Kelley and Robert J. Feeney, Jr. certify that:
1. They are the President and the Secretary, respectively, of
INTELLIGENT SURGICAL LASERS, INC., a California corporation.
2. The articles of incorporation of this corporation are amended
and rested to read as follows:
I
The name of this corporation is INTELLIGENT SURGICAL LASERS, INC.
II
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
Corporations Code.
III
This corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this corporation shall have authority to issue is
15,000,000. The total number of shares of Preferred Stock this corporation
shall have authority to issue is 2,000,00. The Board of Directors is authorized
to determine the number of shares of any series of Preferred Stock, the
designation of any series of Preferred Stock, and the rights, preferences,
privileges and restrictions granted to or imposed upon any such series of
Preferred Stock.
IV
1. Limitation of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
2. Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
<PAGE> 2
3. Repeal or Modification. Any repeal or modification
of the foregoing provisions of this Article IV shall not adversely affect any
right of indemnification or limitation of liability of an agent of this
corporation relating to acts or omissions occurring prior to such repeal or
modification."
3. The foregoing amendment and restatement of articles of
incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of articles of
incorporation has been duly approved by the required vote of the shareholders
in accordance with section 903 of the Corporations Code. The corporation has
two classes of shares outstanding, each of which is entitled to vote with
respect to the amendments herein set forth. The number of outstanding shares
of the corporation at the time of approval of this amendment and restatement
(without giving effect to (i) a .683688 for one reverse stock split of the
shares of Common Stock effected on April 23, 1992, and (ii) the conversion of
all then issued and outstanding shares of Preferred Stock into shares of Common
stock at the then effective Conversion Price effected on September 18, 1992)
is 1,114,253 shares of Common Stock, 1,000,000 shares of Series A Preferred
Stock, 726,244 shares of Series B Preferred Stock 3,002,668 shares of Series C
Preferred Stock and 300,000 shares of Series D Preferred Stock. The number of
shares voting in favor of the amendments herein set forth equaled or exceeded
the vote required. The percentage vote required for the approval of the
amendments herein set forth was more than 50% of each class and each series
voting separately.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Date: September 18, 1992
________________________________________
William T. Kelley
________________________________________
Robert J. Feeney, Jr.
<PAGE> 1
EXHIBIT 3.1(b)
CERTIFICATE OF AMENDMENT OF RESTATED
ARTICLES OF INCORPORATION OF
INTELLIGENT SURGICAL LASERS, INC.
Heinz R. Gisel and Edward M. Lake certify that:
1. They are the President and the Secretary, respectively, of
INTELLIGENT SURGICAL LASERS, INC., a California corporation.
2. Article III of the articles of incorporation of this
corporation is amended to read as follows:
"This corporation is authorized to issue two classes
of shares to be designated respectively Common Stock
and Preferred Stock. The total number of shares of
Common Stock this corporation shall have authority to
issue is 35,000,000. The total number of shares of
Preferred Stock this corporation shall have authority
to issue is 2,000,000. The Board of Directors is
authorized to determine the number of shares of any
series of Preferred Stock, the designation of any
series of Preferred Stock, and the rights,
preferences, privileges and restrictions granted to
or imposed upon any such series of Preferred Stock.
Upon the amendment of this article to read as herein
set forth, each outstanding share of Common Stock is
consolidated and converted into .4 of a share.
Fractional shares otherwise issuable pursuant to such
conversion shall (after aggregating all shares into
which shares held by each holder could be converted)
be rounded to the nearest whole number and shall be
issued as a whole share."
3. The foregoing amendment of restated articles of incorporation
has been duly approved by the Board of Directors.
4. The foregoing amendment of restated articles of incorporation
has been duly approved by the required vote of the shareholders in accordance
with Section 902 of the Corporations Code. The corporation has one class of
shares outstanding, which is entitled to vote with respect to the amendment
herein set forth. The number of outstanding shares of the corporation at the
time of approval of this amendment (without giving effect to the .4 for-1
reverse split of the shares of Common Stock to be effected hereby) is 5,211,800
shares of Common Stock. The number of shares voting in favor of the amendment
herein set forth equaled or exceeded the vote required. The percentage vote
required for the approval of the amendment herein set forth was more than 50%.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
<PAGE> 2
Date: November 8, 1993
________________________________________
Heinz R. Gisel
________________________________________
Edward M. Lake
<PAGE> 1
EXHIBIT 3.1(c)
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
Heinz R. Gisel and Edward M. Lake certify that:
1. They are the Chief Executive Officer and Secretary, respectively of
INTELLIGENT SURGICAL LASERS, INC., a California corporation.
2. Article I of the articles of incorporation of this corporation is
amended to read as follows:
"The name of this corporation is ESCALON MEDICAL CORP."
3. The foregoing amendment of articles of incorporation has been duly
approved by the board of directors.
4. The foregoing amendment of articles of incorporation has been duly
approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has one class
of shares outstanding which is entitled to vote with respect to the
amendment herein set forth. The total number of outstanding shares of
the corporation at the time of approval of this amendment is
5,769,833. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required
was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATE: February 12, 1996
___________________________________
Heinz R. Gisel
___________________________________
Edward M. Lake
<PAGE> 1
EXHIBIT 10.33
REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of February 12, 1996 between Escalon Medical Corp.
(formerly Intelligent Surgical Lasers, Inc.) (the "Corporation"), a California
corporation; and Genentech, Inc. (the "Security Holder"), a Delaware
corporation.
RECITALS:
EOI Corp. (formerly Escalon Ophthalmics, Inc.) ("EOI"), a Pennsylvania
corporation, and the Corporation are parties to an Asset Sale and Purchase
Agreement (as amended, the "Purchase Agreement") dated as of October 9, 1995,
and amended as of December 19, 1995, pursuant to which the Corporation has
agreed to purchase substantially all of the assets and assume certain
liabilities of EOI in consideration of the issuance by the Corporation to EOI
of shares of the Corporation's Common Stock representing 45% of the
Corporation's total issued and outstanding Common Stock on the closing date
under the Purchase Agreement (the "EOI Shares"). Under the terms of the
Purchase Agreement, EOI has the right to request that the Corporation issue a
portion of the EOI Shares directly to the Security Holder.
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein, and intending to be legally bound hereby, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement:
"Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
"Common Stock" shall mean the Corporation's no par value
Common Stock.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Registrable Securities" shall mean the Shares and any shares
of Common Stock received as a stock dividend or other distribution in respect
to the Shares.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
<PAGE> 2
"Shares" shall mean the 240,000 shares of Common Stock that
are being issued and transferred to the Security Holder on the date hereof in
connection with the closing under the Purchase Agreement.
2. REGISTRATION RIGHTS.
2.1. DEMAND REGISTRATION RIGHTS. If, at any time after the
date of this Agreement, the Security Holder requests the Corporation to effect
any registration (including, without limitation, any undertaking to file
post-effective amendments, appropriate qualification under applicable blue sky
or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) under the Securities Act with respect to all or
part of the Registrable Securities, the Corporation shall thereupon promptly
use its best efforts to register under the Securities Act the number of shares
of Registrable Securities so requested to be registered by the Security Holder.
Except as provided in Section 2.4 below, the Corporation is obligated to effect
a maximum of one such demand registration. If the Corporation includes in any
registration required under this Section 2.1 a number of shares other than
Registrable Securities that exceeds the number of Registrable Securities to be
registered, then such registration shall be treated for all purposes as a
registration under Section 2.2 instead of this Section 2.1. In all other cases
where the Corporation includes in such registration any shares of Common Stock
other than Registrable Securities, such registration shall remain subject to
this Section 2.1 and the inclusion of such shares shall not prevent the
Security Holder from registering all Registrable Securities requested by it.
2.2. PIGGYBACK REGISTRATION RIGHTS. Whenever the
Corporation proposes to register any Common Stock for its own or others'
account under the Securities Act for a public offering for cash, other than a
registration relating to (i) employee benefit plans or (ii) outstanding
warrants and options covered by a current registration statement, the
Corporation shall give the Security Holder 20 days' advance written notice of
its intent to do so. Upon the written request of the Security Holder given
within 10 days after receipt of such notice, the Corporation shall use its best
efforts to cause to be included in such registration (and any related
qualification under blue sky laws or other compliance) all of the Registrable
Securities that the Security Holder requests. If the Corporation is advised in
writing in good faith by any managing underwriter of the securities being
offered pursuant to any registration statement under this Section 2.2 that the
number of shares to be sold by persons other than the Corporation is greater
than the number of such shares that can be offered without adversely affecting
the offering, the Corporation may reduce the number of shares offered for the
accounts of such persons and the Security Holder to a number deemed
satisfactory by such managing underwriter; provided, however, that the number
of shares to be included in such registration statement by any such persons and
the Security Holder shall be reduced pro rata.
- 2 -
<PAGE> 3
2.3. REGISTRATION PROCEDURES AND EXPENSES. In connection
with registrations under this Section 2, the Corporation shall (i) use its best
efforts to prepare and file with the Commission, as soon as reasonably
practicable, a registration statement under the Securities Act with respect to
the Registrable Securities so as to permit the sale thereof and use its best
efforts to cause such registration to promptly become and remain effective for
the period set forth in Section 2.4 hereof (or such shorter period during which
the Security Holder shall have sold all Registrable Securities which it
requested to be registered) and shall furnish to the Security Holder such
number of copies of the registration statement and the prospectus included
therein as the Security Holder may reasonably request; (ii) use its best
efforts to register and qualify the Registrable Securities covered by such
registration statement under applicable state securities laws as the Security
Holder shall reasonably request for the distribution of the Registrable
Securities; and (iii) take such other actions as are reasonable and necessary
to comply with the requirements of the Securities Act and the regulations
thereunder, or with the reasonable request of the Security Holder, with respect
to the registration and sale or other distribution of the Registrable
Securities, including, at the Corporation's expense, furnishing the Security
Holder with unlegended certificates representing ownership of the Registrable
Securities registered hereunder; provided, however, that if any of the
Registrable Securities are not sold while such registration statement is
effective, the Security Holder shall promptly return the certificates
representing ownership of such unsold Registrable Securities to the Corporation
for the purpose of placing appropriate restrictive legends thereon. The
Corporation is not obligated to effect registration or qualification under this
Section 2 in any jurisdiction requiring it to qualify to do business (unless
the Corporation is otherwise required to be so qualified) or to execute a
general consent to service of process. All fees and expenses incident to the
Corporation's performance of or compliance under Section 2.1 of this Agreement
(including, without limitation, (i) all registration and filing fees including,
without limitation, fees and expenses (A) with respect to filings required to
be made with the National Association of Securities Dealers, Inc., and (B) of
compliance with securities or Blue Sky laws (including, without limitation,
fees and disbursements of counsel for the underwriters in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters or holders of a majority in number
of the Registrable Securities being sold may designate), (ii) printing
expenses, (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Corporation, and Special Counsel or other
counsel for the Security Holder, (v) fees and disbursements of all independent
certified public accountants (including the expenses of any special audit and
"cold comfort" letters required by or incident to such performance), (vi)
underwriters' fees, expenses, commissions and discounts, (vii) Securities Act
liability insurance if the Corporation so desires such insurance, (viii) fees
and expenses of all other persons retained by the Corporation and (ix) fees and
expenses incurred in connection with the performance of any act contemplated by
Sections 2.5, 2.7 or 2.8 of this Agreement ((i) through (ix) are hereinafter
collectively and individually referred to as "Registration Expenses")) shall be
borne by EOI whether or not any
- 3 -
<PAGE> 4
Registration Statement become effective. In connection with registrations
under Section 2.2 of this Agreement, Registration Expenses applicable solely to
the shares being sold by the Security Holder shall be borne by EOI. In the
event EOI fails to pay any Registration Expenses payable by it hereunder, the
Security Holder shall not be responsible for the payment of any such
Registration Expenses and the Corporation shall be responsible for the payment
of such Registration Expenses.
2.4. UPDATING OF REGISTRATION STATEMENT. With respect to
registration under Section 2, the Corporation shall prepare and file such
amendments, post-effective amendments and periodic reports under the Exchange
Act as may be necessary to keep such registration statement continuously
effective for a period of one year subsequent to the effective date of such
registration statement. Notwithstanding the foregoing, the Corporation shall
not be required to update, pursuant to this Section 2.4, any document during a
period when the Corporation shall, in good faith and using reasonable business
judgment, believe that the premature disclosure of any event or information
would have a material adverse effect on the Corporation or its prospects. The
Security Holder hereby agrees, that upon receipt of notice from the Corporation
of the happening of any occurrence described in the preceding sentence, the
Security Holder shall forthwith discontinue disposition of Registrable
Securities until the Security Holder's receipt of copies of the supplemented or
amended prospectus, and, if so directed by the Corporation, the Security Holder
shall deliver to the Corporation all copies in its possession, other than
permanent file copies then in its possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice. In
addition, and notwithstanding the foregoing, in the event the Security Holder
has not sold within one year of effectiveness all Registrable Securities which
it requested to be registered, the Corporation shall have the option to
determine whether to keep the registration statement effective until all such
Registrable Securities are sold or, if it elects not to keep the registration
statement effective, the Security Holder shall receive an additional right to
demand registration under Section 2.1 hereof. The Corporation shall keep the
registration statement with respect to such second demand, if any, continuously
effective for a period of 180 days.
2.5. UNDERWRITING ARRANGEMENT. In connection with each
registration pursuant to Section 2.1 or 2.2 above covering an underwritten
public offering, the Corporation and the Security Holder agree to enter into a
written agreement with the managing underwriter in such form and containing
such provisions as is then customary in the securities business for such an
arrangement between such underwriter and companies of the Corporation's size
and investment stature.
2.6. NOTIFICATION. The Corporation and the Security
Holder shall promptly notify each other of any event which results in the
prospectus included in the registration statement covering any Registrable
Securities, as then in effect, containing an untrue statement of a material
fact or omitting to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
- 4 -
<PAGE> 5
2.7. FURNISHING OF DOCUMENTS. In connection with each
registration pursuant to Section 2.1 or 2.2 above, at the request of the
Security Holder, the Corporation will furnish to each underwriter, if any, and
the Security Holder, a legal opinion of its counsel and a letter from its
independent certified public accountants, each in customary form and substance,
at such time or times as such documents are customarily provided in the type of
offering involved.
2.8. PREPARATION OF REGISTRATION STATEMENTS. Whenever the
Corporation is registering any Common Stock under the Securities Act and the
Security Holder is selling any securities under such registration or determines
that it may be a controlling person under the Securities Act, the Corporation
will allow the Security Holder to participate in the preparation of the
registration statement, will include in the registration statement such
information as the Security Holder may reasonably request and will take all
such other action as the Security Holder may reasonably request.
2.9. TRANSFERS NOT REQUIRING REGISTRATION.
Notwithstanding anything to the contrary set forth herein, the Corporation
shall not be obligated to file any registration statement pursuant to this
Section 2 if, in the opinion of counsel satisfactory to the Corporation and the
Security Holder, the proposed transfer may be effected without registration
under the Securities Act and any certificate evidencing the shares to be
transferred need not bear a restrictive legend.
3. INDEMNIFICATION.
3.1. INDEMNIFICATION BY THE CORPORATION. The Corporation
will indemnify and hold harmless the Security Holder and its officers,
directors, lawyers and accountants, and each underwriter of the Registrable
Securities being sold by the Security Holder, and each controlling person of
the Security Holder and underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement relating to such Registrable Securities (or in any
related registration statement, prospectus, amendment or supplement thereto,
notification or the like) or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Corporation of any
rule or regulation promulgated under the Securities Act applicable to the
Corporation and relating to action or inaction required of the Corporation in
connection with any such registration, qualification or compliance, and will
enter into an indemnification agreement with the Security Holder and
underwriter containing customary provisions, including provisions for
contribution, as the Security Holder or underwriter shall reasonably request;
provided, however, that the Corporation will not be liable in any such case to
the extent that any such claim, loss, damage or liability arises out of or is
based on any untrue statement or omission based upon and in conformity with
information furnished to the Corporation by the Security Holder or underwriter
specifically for
- 5 -
<PAGE> 6
use in connection with the preparation of any registration statement relating
to such Registrable Securities or any filings to be made by the Corporation
under the Securities Act and/or the Exchange Act and incorporated by reference
in such registration statement.
3.2. INDEMNIFICATION BY THE SECURITY HOLDER. In
connection with each registration pursuant to Section 2.1 or 2.2 hereof, the
Security Holder will indemnify and hold harmless the Corporation, and its
directors, officers, agents and each person, if any, who controls the
Corporation within the meaning of Section 15 of the Securities Act and
underwriter against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any registration statement
relating to the Registrable Securities (or in any related registration
statement, notification or the like) or any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, if such statement or omission shall
have been made based upon and in conformity with information furnished in
writing to the Corporation by the Security Holder specifically for use in
connection with the preparation of such registration statement, and will enter
into an indemnification agreement with the Corporation containing customary
provisions, including provisions for contribution, as the Corporation or each
such person shall reasonably request; provided, however, that the Security
Holder will not be liable in any such case to the extent that any such claim,
loss, damage or liability arises out of or is based on any untrue statement or
omission made by the Corporation.
3.3. PROCEDURE FOR INDEMNIFICATION. Each party entitled
to indemnification under this Section 3 (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be approved by the Indemnified Party (whose approval shall
not unreasonably be withheld), and the Indemnified Party may participate in
such defense at such party's expense, and provided further that the failure of
any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 3. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation.
4. REPORTS UNDER THE EXCHANGE ACT. With a view to making
available to the Security Holder the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the Commission that may at
any time permit a
- 6 -
<PAGE> 7
holder to sell securities of the Corporation to the public without registration
or pursuant to a registration on Form S-3, the Corporation agrees to use its
best efforts to satisfy the requirements of all such rules and regulations
(including the requirements for public information, registration under the
Exchange Act and timely reporting to the Commission) at the earliest possible
date.
5. HOLDBACK AGREEMENT. The Security Holder and each transferee
pursuant to Section 7 hereof agrees (but only if each officer, director,
shareholder owning beneficially 10% or more of the Corporation's equity
securities, and each shareholder selling shares in such offering, also agrees)
that with respect to any underwritten registered offering of the Corporation's
securities and upon request of the Corporation or the underwriters managing any
underwritten offering of the Corporation's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any equity securities of the Corporation (other than those included in the
registration) without the prior written consent of the Corporation or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as the Corporation or the
underwriters may specify. Notwithstanding the foregoing, the provisions of
this Section 5 shall not apply from and after the time a demand is made
pursuant to Section 2.1 hereof to any Registrable Securities requested to be
registered under Section 2.1 hereof.
6. COOPERATION OF THE SECURITY HOLDER. Upon proposing to sell
Registrable Securities registered or to be registered under any registration
hereunder, the Security Holder shall furnish to the Corporation such
information and execute such documents regarding the shares held by the
Security Holder and the intended method of disposition thereof as the
Corporation shall reasonably request in writing and as shall be required in
connection with the registration, qualification or compliance referred to in
this Agreement to be taken by the Corporation.
7. TRANSFER OF REGISTRATION RIGHTS. All covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not, provided that upon a transfer of
shares of Registrable Securities, the transferee shall send the Corporation
written notice setting forth its address and its agreement to be bound by the
terms of this Agreement. Without limiting the generality of the foregoing, the
registration rights conferred herein on the Security Holder shall inure to the
benefit of any and all subsequent holders from time to time of the Registrable
Securities.
8. CHANGES IN COMMON STOCK. If, and as often as, there are any
changes in the Common Stock by way of stock split, stock dividend, combination
or reclassification, or through merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made
in the provisions hereof, as may be required, so that the rights and privileges
granted hereby shall continue with respect to the Common Stock as so changed.
- 7 -
<PAGE> 8
9. NOTICES. Any notice provided for in this Agreement must be in
writing and must be mailed by certified mail, return receipt requested, or sent
via overnight delivery service or confirmed telecopy, to the recipient at the
address indicated below:
To the Corporation:
Escalon Medical Corp.
182 Tamarack Circle
Skillman, NJ 08558
Attention: President
To the Security Holder:
Genentech, Inc.
460 Point San Bruno Boulevard
South San Francisco, CA 94080
Attention: Corporate Secretary
To any subsequent holder of Registrable Securities, at such
address as may be furnished to the Corporation in writing by
such holder
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when received by
the party to whom it is addressed.
10. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
11. COUNTERPARTS. This Agreement may be executed on separate
counterparts, each of which is deemed to be an original and all of which taken
together shall constitute one and the same agreement.
12. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by each of the parties hereto
and their respective heirs, personal representatives, successors and assigns.
13. CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement shall be governed by the internal
law, and not the law of conflicts, of the State of California.
- 8 -
<PAGE> 9
14. SUPERSEDES OTHER AGREEMENTS. If this Agreement shall conflict
in any respect with all or any portion of any other agreement or instrument to
which any party hereto is a party, the provisions of this Agreement shall
supersede such conflicting agreement or instrument or portion thereof.
15. INTEGRATION. This Agreement is intended by the parties as a
final expression of their agreement with respect to the subject matter herein
and is intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter herein.
16. AMENDMENTS AND WAIVERS. Changes in or additions to any
provision of this Agreement may be made or compliance with any term, covenant,
agreement, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively), upon written consent of the Corporation and the Security
Holder.
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day, month and year first above written.
ESCALON MEDICAL CORP.
By:____________________________________
Title:______________________________
GENENTECH, INC.
By:____________________________________
Title:______________________________
IN WITNESS WHEREOF, EOI Corp. has executed this Agreement as of the
day, month and year first above written, for the sole purpose of indicating its
agreement to be bound by the terms of Section 2.3 of this Agreement.
EOI CORP.
By:____________________________________
Title:______________________________
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<PAGE> 1
EXHIBIT 10.34
REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of February 12, 1996 between Escalon Medical Corp.
(formerly Intelligent Surgical Lasers, Inc.) (the "Corporation"), a California
corporation; and EOI Corp. (formerly Escalon Ophthalmics, Inc.) (the "Security
Holder"), a Pennsylvania corporation.
RECITALS:
The Corporation and the Security Holder are parties to an Asset Sale
and Purchase Agreement (as amended, the "Purchase Agreement") dated as of
October 9, 1995, and amended as of December 19, 1995, pursuant to which the
Corporation has agreed to purchase substantially all of the assets and assume
certain liabilities of the Security Holder in consideration of the issuance by
the Corporation to the Security Holder of shares of the Corporation's Common
Stock representing 45% of the Corporation's total issued and outstanding Common
Stock on the closing date under the Purchase Agreement (the "Shares").
The Security Holder has requested and required, as a condition to
closing under the Purchase Agreement, and the Corporation wishes to afford the
Security Holder, certain registration rights with respect to the Shares.
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein, and intending to be legally bound hereby, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement:
"Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
"Common Stock" shall mean the Corporation's no par value
Common Stock.
"Registrable Securities" shall mean the Shares of Common Stock
issued to the Security Holder under the Purchase Agreement or received as a
stock dividend or other distribution in respect to any such Shares.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
<PAGE> 2
"Shares" shall have the meaning set forth in the Recitals to
this Agreement.
2. REGISTRATION RIGHTS.
2.1. DEMAND REGISTRATION RIGHTS. If, at any time after the
date of this Agreement, the Security Holder requests the Corporation to effect
any registration (including, without limitation, any undertaking to file
post-effective amendments, appropriate qualification under applicable blue sky
or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) under the Securities Act with respect to all or
part of the Registrable Securities, the Corporation shall thereupon promptly
use its best efforts to register under the Securities Act the number of shares
of Registrable Securities so requested to be registered by the Security Holder.
The Corporation is obligated to effect a maximum of three such demand
registrations. If the Corporation includes in any registration required under
this Section 2.1 a number of shares other than Registrable Securities that
exceeds the number of Registrable Securities to be registered, then such
registration shall be treated for all purposes as a registration under Section
2.2 instead of this Section 2.1. In all other cases where the Corporation
includes in such registration any shares of Common Stock other than Registrable
Securities, such registration shall remain subject to this Section 2.1 and the
inclusion of such shares shall not prevent the Security Holder from registering
all Registrable Securities requested by it.
2.2. PIGGYBACK REGISTRATION RIGHTS. Whenever the
Corporation proposes to register any Common Stock for its own or others'
account under the Securities Act for a public offering for cash, other than a
registration relating to (i) employee benefit plans or (ii) outstanding
warrants and options covered by a current registration statement, the
Corporation shall give the Security Holder prompt written notice of its intent
to do so. Upon the written request of the Security Holder given within 30 days
after receipt of such notice, the Corporation shall use its best efforts to
cause to be included in such registration (and any related qualification under
blue sky laws or other compliance) all of the Registrable Securities that the
Security Holder requests. If the Corporation is advised in writing in good
faith by any managing underwriter of the securities being offered pursuant to
any registration statement under this Section 2.2 that the number of shares to
be sold by persons other than the Corporation is greater than the number of
such shares that can be offered without adversely affecting the offering, the
Corporation may reduce the number of shares offered for the accounts of such
persons and the Security Holder to a number deemed satisfactory by such
managing underwriter; provided, however, that the number of shares to be
included in such registration statement by any such persons and the Security
Holder shall be reduced pro rata.
2.3. REGISTRATION PROCEDURES AND EXPENSES. In connection
with registrations under this Section 2, the Corporation shall (i) use its best
efforts to
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<PAGE> 3
prepare and file with the Commission, as soon as reasonably practicable, a
registration statement with respect to the Registrable Securities and use its
best efforts to cause such registration to promptly become and remain effective
for a period of at least 180 days (or such shorter period during which the
Security Holder shall have sold all Registrable Securities which it requested
to be registered); (ii) use its best efforts to register and qualify the
Registrable Securities covered by such registration statement under applicable
state securities laws as the Security Holder shall reasonably request for the
distribution of the Registrable Securities; and (iii) take such other actions
as are reasonable and necessary to comply with the requirements of the
Securities Act and the regulations thereunder, or with the reasonable request
of the Security Holder, with respect to the registration and distribution of
the Registrable Securities. The Corporation is not obligated to effect
registration or qualification under this Section 2 in any jurisdiction
requiring it to qualify to do business (unless the Corporation is otherwise
required to be so qualified) or to execute a general consent to service of
process. All fees and expenses incident to the Corporation's performance of or
compliance under Section 2.1 of this Agreement (including, without limitation,
(i) all registration and filing fees including, without limitation, fees and
expenses (A) with respect to filings required to be made with the National
Association of Securities Dealers, Inc., and (B) of compliance with securities
or Blue Sky laws (including, without limitation, fees and disbursements of
counsel for the underwriters in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters or holders of a majority in number of the Registrable Securities
being sold may designate), (ii) printing expenses, (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the
Corporation, and Special Counsel or other counsel for the Security Holder, (v)
fees and disbursements of all independent certified public accountants
(including the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) underwriters' fees,
expenses, commissions and discounts, (vii) Securities Act liability insurance
if the Corporation so desires such insurance, (viii) fees and expenses of all
other persons retained by the Corporation and (ix) fees and expenses incurred
in connection with the performance of any act contemplated by Sections 2.4, 2.6
or 2.7 of this Agreement ((i) through (ix) are hereinafter collectively and
individually referred to as "Registration Expenses")) shall be borne by the
Security Holder whether or not any Registration Statement become effective.
Registration Expenses incurred in connection with registrations under Section
2.2 of this Agreement shall be borne by the Corporation, except for
Registration Expenses applicable solely to the shares being sold by the
Security Holder, which Registration Expenses shall be borne by the Security
Holder.
2.4. UNDERWRITING ARRANGEMENT. In connection with each
registration pursuant to Section 2.1 or 2.2 above covering an underwritten
public offering, the Corporation and the Security Holder agree to enter into a
written agreement with the managing underwriter in such form and containing
such provisions as is then custom-
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<PAGE> 4
ary in the securities business for such an arrangement between such
underwriter and companies of the Corporation's size and investment stature.
2.5. NOTIFICATION. The Corporation and the Security
Holder shall promptly notify each other of any event which results in the
prospectus included in the registration statement covering any Registrable
Securities, as then in effect, containing an untrue statement of a material
fact or omitting to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
2.6. FURNISHING OF DOCUMENTS. In connection with each
registration pursuant to Section 2.1 or 2.2 above, at the request of the
Security Holder, the Corporation will furnish to each underwriter, if any, and
the Security Holder, a legal opinion of its counsel and a letter from its
independent certified public accountants, each in customary form and substance,
at such time or times as such documents are customarily provided in the type of
offering involved.
2.7. PREPARATION OF REGISTRATION STATEMENTS. Whenever the
Corporation is registering any Common Stock under the Securities Act and the
Security Holder is selling any securities under such registration or determines
that it may be a controlling person under the Securities Act, the Corporation
will allow the Security Holder to participate in the preparation of the
registration statement, will include in the registration statement such
information as the Security Holder may reasonably request and will take all
such other action as the Security Holder may reasonably request.
2.8. TRANSFERS NOT REQUIRING REGISTRATION.
Notwithstanding anything to the contrary set forth herein, the Corporation
shall not be obligated to file any registration statement pursuant to this
Section 2 if, in the opinion of counsel satisfactory to the Corporation and the
Security Holder, the proposed transfer may be effected without registration
under the Securities Act and any certificate evidencing the shares to be
transferred need not bear a restrictive legend.
3. INDEMNIFICATION.
3.1. INDEMNIFICATION BY THE CORPORATION. The Corporation
will indemnify and hold harmless the Security Holder and its officers,
directors, lawyers and accountants, and each underwriter of the Registrable
Securities being sold by the Security Holder, and each controlling person of
the Security Holder and underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement relating to such Registrable Securities (or in any
related registration statement, prospectus, amendment or supplement thereto,
notification or the like) or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements
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<PAGE> 5
therein not misleading, or any violation by the Corporation of any rule or
regulation promulgated under the Securities Act applicable to the Corporation
and relating to action or inaction required of the Corporation in connection
with any such registration, qualification or compliance, and will enter into an
indemnification agreement with the Security Holder and underwriter containing
customary provisions, including provisions for contribution, as the Security
Holder or underwriter shall reasonably request; provided, however, that the
Corporation will not be liable in any such case to the extent that any such
claim, loss, damage or liability arises out of or is based on any untrue
statement or omission based upon and in conformity with information furnished
to the Corporation by the Security Holder or underwriter.
3.2. INDEMNIFICATION BY THE SECURITY HOLDER. In
connection with each registration pursuant to Section 2.1 or 2.2 hereof, the
Security Holder, if Registrable Securities held by the Security Holder are
included in the securities as to which such registration is being effected,
will indemnify and hold harmless the Corporation, and its directors, officers,
agents and each person, if any, who controls the Corporation within the meaning
of Section 15 of the Securities Act and underwriter against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement relating to the Registrable Securities
(or in any related registration statement, notification or the like) or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will enter into an indemnification agreement with the Corporation containing
customary provisions, including provisions for contribution, as the Corporation
or each such person shall reasonably request; provided, however, that the
Security Holder will not be liable in any such case except to the extent that
any such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based upon information furnished to the
Corporation by the Security Holder.
3.3. PROCEDURE FOR INDEMNIFICATION. Each party entitled
to indemnification under this Section 3 (the "Indemnified Party") shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting, provided that
counsel for the Indemnifying Party, who shall conduct the defense or such claim
or litigation, shall be approved by the Indemnified Party (whose approval shall
not unreasonably be withheld), and the Indemnified Party may participate in
such defense at such party's expense, and provided further that the failure of
any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 3. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving
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<PAGE> 6
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
4. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to
making available to the Security Holder the benefits of Rule 144 promulgated
under the Securities Act and any other rule or regulation of the Commission
that may at any time permit a holder to sell securities of the Corporation to
the public without registration or pursuant to a registration on Form S-3, the
Corporation agrees to use its best efforts to satisfy the requirements of all
such rules and regulations (including the requirements for public information,
registration under the Securities Exchange Act of 1934 and timely reporting to
the Commission) at the earliest possible date after its first registered public
offering.
5. HOLDBACK AGREEMENT. The Security Holder and each transferee
pursuant to Section 7 hereof agrees (but only if each officer, director,
shareholder owning beneficially 10% or more of the Corporation's equity
securities, and each shareholder selling shares in such offering, also agrees)
upon request of the Corporation or the underwriters managing any underwritten
offering of the Corporation's securities, not to sell, make any short sale of,
loan, grant any option for the purchase of, or otherwise dispose of any equity
securities of the Corporation (other than those included in the registration)
without the prior written consent of the Corporation or such underwriters, as
the case may be, for such period of time (not to exceed 180 days) from the
effective date of such registration as the Corporation or the underwriters may
specify.
6. COOPERATION OF THE SECURITY HOLDER. Upon proposing to sell
Registrable Securities registered or to be registered under any registration
hereunder, the Security Holder shall furnish to the Corporation such
information and execute such documents regarding the shares held by the
Security Holder and the intended method of disposition thereof as the
Corporation shall reasonably request in writing and as shall be required in
connection with the registration, qualification or compliance referred to in
this Agreement to be taken by the Corporation.
7. TRANSFER OF REGISTRATION RIGHTS. All covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not, provided that upon a transfer of
shares of Registrable Securities, the transferee shall send the Corporation
written notice setting forth its address and its agreement to be bound by the
terms of this Agreement. Without limiting the generality of the foregoing, the
registration rights conferred herein on the Security Holder shall inure to the
benefit of any and all subsequent holders from time to time of the Registrable
Securities.
8. CHANGES IN COMMON STOCK. If, and as often as, there are any
changes in the Common Stock by way of stock split, stock dividend, combination
or reclassification, or through merger, consolidation, reorganization or
recapitalization, or by any
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<PAGE> 7
other means, appropriate adjustment shall be made in the provisions hereof, as
may be required, so that the rights and privileges granted hereby shall
continue with respect to the Common Stock as so changed.
9. NOTICES. Any notice provided for in this Agreement must be in
writing and must be mailed by certified mail, return receipt requested, or sent
via overnight delivery service or confirmed telecopy, to the recipient at the
address indicated below:
To the Corporation:
Escalon Medical Corp.
182 Tamarack Circle
Skillman, NJ 08558
Attention: President
To the Security Holder:
EOI Corp.
182 Tamarack Circle
Skillman, NJ 08558
Attention: President
To any subsequent holder of Registrable Securities, at such
address as may be furnished to the Corporation in writing by
such holder
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when received by
the party to whom it is addressed.
10. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
11. COUNTERPARTS. This Agreement may be executed on separate
counterparts, each of which is deemed to be an original and all of which taken
together shall constitute one and the same agreement.
12. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by each of the parties hereto
and their respective heirs, personal representatives, successors and assigns.
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<PAGE> 8
13. CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement shall be governed by the internal
law, and not the law of conflicts, of the Commonwealth of Pennsylvania.
14. SUPERSEDES OTHER AGREEMENTS. If this Agreement shall conflict
in any respect with all or any portion of any other agreement or instrument to
which any party hereto is a party, the provisions of this Agreement shall
supersede such conflicting agreement or instrument or portion thereof.
Notwithstanding anything to the contrary set forth in this Agreement, this
Agreement shall not be deemed to supersede the restrictions on transfer set
forth in the EO Lock-up Agreements (as defined in the Purchase Agreement).
15. AMENDMENTS AND WAIVERS. Changes in or additions to any
provision of this Agreement may be made or compliance with any term, covenant,
agreement, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively), upon written consent of the Corporation and the Security
Holder.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day, month and year first above written.
ESCALON MEDICAL CORP.
By:___________________________________
Title:________________________________
EOI CORP.
By:___________________________________
Title:________________________________
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<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-54994) pertaining to the 1988, 1989, 1990, 1991 and 1992 Stock
Option Plans of Escalon Medical Corp., the Registration Statement (Form S-8 No.
33-80162) pertaining to the 1993 Stock Option Plan of Escalon Medical Corp. and
the related Prospectus of our report dated August 16, 1996, with respect to the
financial statements of Escalon Medical Corp. included in its Annual Report
(Form 10-K) for the year ended June 30, 1996.
Ernst & Young LLP
Princeton, New Jersey
September 25, 1996
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<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,584,503
<SECURITIES> 795,970
<RECEIVABLES> 742,587
<ALLOWANCES> 6,677
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0
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<COMMON> 44,645,440
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