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ESCALON MEDICAL CORP.
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[ESCALON(R) LOGO] Escalon Medical Corp.
565 East Swedesford Road, Suite 200
Wayne, PA 19087
Tel.610-688-6830 - Fax. 610-688-3641
--------------------------------------------------------------------------------
NOTICE OF 2005 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 29, 2005
To the Shareholders of Escalon Medical Corp.:
The annual meeting of shareholders of Escalon Medical Corp. will be held at
9:00 a.m., local time, on November 29, 2005, at the offices of Duane Morris LLP,
30 South 17th Street, 12th Floor, Philadelphia, Pennsylvania. At our annual
meeting, our shareholders will act on the following matters:
1. Election of two Class III directors, each for a term of three years and
until their respective successors have been elected to serve;
2. To consider a proposal to approve an amendment to the Escalon Medical
Corp. 2004 Equity Incentive Plan (the "2004 Plan") to increase the
number of shares available for award under the 2004 Plan; and
3. Any other matters that properly come before our annual meeting.
All shareholders of record as of the close of business on September 22,
2005 are entitled to vote at our annual meeting.
Our 2005 Annual Report is being mailed to shareholders together with this
Notice.
It is important that your shares be voted at our annual meeting. Please
complete, sign and return the enclosed proxy card in the envelope provided
whether or not you expect to attend our annual meeting in person.
By Order of the Board of Directors,
(-s- Richard J. DePiano)
Richard J. DePiano
Chairman and Chief Executive Officer
October 28, 2005
Wayne, Pennsylvania
ESCALON MEDICAL CORP.
PROXY STATEMENT
This proxy statement contains information relating to the annual meeting of
shareholders of Escalon Medical Corp. to be held on November 29, 2005, at the
offices of Duane Morris LLP, 30 South 17th Street, 12th Floor, Philadelphia,
Pennsylvania at 9:00 a.m., local time, and at any adjournment, postponement or
continuation of the annual meeting. This proxy statement and the accompanying
proxy are first being mailed to shareholders on or about October 28, 2005.
Unless the context indicates otherwise, all references in this proxy statement
to "we," "us," "our" "Escalon" or the "Company" mean Escalon Medical Corp. and
its subsidiaries.
CONTENTS
PAGE
----
ABOUT OUR ANNUAL MEETING.................................... 1
What is the purpose of our annual meeting?................ 1
VOTING...................................................... 1
Who is entitled to vote at our meeting?................... 1
What are the voting rights of our shareholders?........... 1
Who can attend our annual meeting?........................ 1
What constitutes a quorum?................................ 1
How do I vote?............................................ 1
May I change my vote after I return my proxy card?........ 1
What are our Board's recommendations?..................... 2
What vote is required to approve each matter?............. 2
Who will pay the costs of soliciting proxies on behalf of
our Board of Directors?................................ 2
STOCK OWNERSHIP............................................. 3
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..... 3
ELECTION OF DIRECTORS....................................... 4
ITEM 1 -- ELECTION OF CLASS III DIRECTORS................... 4
INTRODUCTION................................................ 4
Governance and Nominating Procedures...................... 4
Actions Taken by Our Governance and Nominating
Committee.............................................. 4
Candidates for Election................................... 4
Directors Continuing in Office............................ 5
CORPORATE GOVERNANCE........................................ 6
Our Board of Directors and Its Committees................. 6
Director -- Shareholder Communication..................... 7
COMPENSATION OF DIRECTORS................................... 7
EXECUTIVE OFFICERS OF THE COMPANY........................... 8
EXECUTIVE COMPENSATION...................................... 9
Summary Compensation Table................................ 9
Options Grants in Last Fiscal Year........................ 9
Options Exercised in the Last Fiscal Year and Values For
Fiscal Year 2005....................................... 10
Employment Agreement...................................... 10
i
PAGE
----
AUDIT AND NON-AUDIT FEES.................................... 11
Report of the Audit Committee............................. 11
ITEM 2 -- AMENDMENT OF THE ESCALON MEDICAL CORP. 2004....... 12
EQUITY COMPENSATION PLAN.................................... 12
SHAREHOLDER PROPOSALS....................................... 18
OTHER MATTERS............................................... 19
ii
ABOUT OUR ANNUAL MEETING
WHAT IS THE PURPOSE OF OUR ANNUAL MEETING?
At our annual meeting, shareholders will act upon the matters outlined in
the notice of meeting on the cover page of this proxy statement, including the
election of two Class III directors, approve an amendment to the Escalon Medical
Corp. 2004 Equity Incentive Plan and any other matters that properly come before
our annual meeting. In addition, our management will report on our performance
during fiscal 2005 and respond to appropriate questions from shareholders.
VOTING
WHO IS ENTITLED TO VOTE AT OUR MEETING?
Holders of common stock of record at the close of business on the record
date, September 22, 2005, are entitled to receive notice of and to vote at our
annual meeting, and any adjournment, postponement or continuation of our annual
meeting.
WHAT ARE THE VOTING RIGHTS OF OUR SHAREHOLDERS?
As of the record date, 5,969,727 shares of common stock were outstanding,
each of which is entitled to one vote with respect to each matter to be voted on
at our annual meeting.
WHO CAN ATTEND OUR ANNUAL MEETING?
All shareholders as of the record date, or their duly appointed proxies,
may attend our annual meeting. Even if you currently plan to attend our annual
meeting, we recommend that you also submit your proxy as described below so that
your vote will be counted if you later decide not to attend our annual meeting.
If you hold your shares in "street name" (that is, through a broker or
other nominee), you will need to bring a copy of a brokerage statement
reflecting your stock ownership as of the record date and check in at the
registration desk at our annual meeting.
WHAT CONSTITUTES A QUORUM?
The presence at our annual meeting, in person or by proxy, of the holders
of a majority of the shares of our common stock outstanding on the record date
will constitute a quorum, permitting the conduct of business at our annual
meeting. Proxies received but marked as abstentions and broker non-votes will be
included in the calculation of the number of shares present at our annual
meeting.
HOW DO I VOTE?
If you or your duly authorized attorney-in-fact complete, properly sign and
return the accompanying proxy card to us, it will be voted as you direct. If you
are a registered shareholder and attend our annual meeting, you may deliver your
completed proxy card in person. "Street name" shareholders who wish to vote at
our annual meeting will need to obtain a signed proxy from the institution that
holds their shares.
MAY I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with our Secretary either a
notice of revocation or a duly executed proxy bearing a later date. The powers
of the proxy holders will be revoked if you attend our annual meeting in person
and request that your proxy be revoked, although attendance at our annual
meeting will not by itself revoke a previously granted proxy.
1
WHAT ARE OUR BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons named as
proxy holders on the proxy card will vote in accordance with the recommendations
of our Board of Directors. Our Board of Directors recommends a vote:
- FOR election of our nominees for Class III directors (see pages 4 through
6), and
- FOR an amendment to the 2004 Plan to increase the number of shares
available for award under the 2004 Plan (see pages 14 through 21).
WHAT VOTE IS REQUIRED TO APPROVE EACH MATTER?
Election of Class III Directors. The two persons receiving the highest
number of "FOR" votes cast by the holders of our common stock for election as
Class III directors will be elected. A properly executed proxy marked "WITHHOLD
AUTHORITY" with respect to the election of one or more directors will not be
voted with respect to the director or directors indicated, although the proxy
will be counted for purposes of determining whether a quorum is present.
Abstentions and shares held by brokers or nominees as to which voting
instructions have not been received from the beneficial owner of or persons
otherwise entitled to vote the shares and as to which the broker or nominee does
not have discretionary voting power, i.e., broker non-votes, will not be taken
into account in determining the outcome of the election. We do not permit
cumulative voting in the election of directors.
Approval of the Amendment to the 2004 Plan. The affirmative vote of a
majority of the votes cast on the proposal will be required to approve the
amendment to the 2004 Plan. Abstentions and broker non-votes do not constitute
votes cast and therefore will not effect the outcome of the vote.
Other Matters. The affirmative vote of a majority of the votes cast by the
holders of our common stock on the proposal will be required to approve any
other matter that properly comes before our annual meeting. Abstentions and
broker non-votes do not constitute votes cast and therefore will not effect the
outcome of the vote.
If you sign your proxy card or broker voting instruction card with no
further instructions, your shares will be voted in accordance with the
recommendations of our Board, i.e., FOR the election of our nominees for Class
III directors and for an amendment to the 2004 Plan to increase the number of
shares available for award under the 2004 Plan.
WHO WILL PAY THE COSTS OF SOLICITING PROXIES ON BEHALF OF OUR BOARD OF
DIRECTORS?
We are making this solicitation and will pay the cost of soliciting proxies
on behalf of our Board of Directors, including expenses of preparing and mailing
this proxy statement. In addition to mailing these proxy materials, the
solicitation of proxies or votes may be made in person or by telephone or
telegram by our regular officers and employees, none of whom will receive
special compensation for such services. Upon request, we will also reimburse
brokers, nominees, fiduciaries and custodians and persons holding shares in
their names or in the names of nominees for their reasonable expenses in sending
proxies and proxy material to beneficial owners.
2
STOCK OWNERSHIP
The following table shows the amount and percentage of our outstanding
common stock beneficially owned by each director, each nominee for director,
each executive officer named in the Summary Compensation Table, Mark Karsch, who
was appointed Chief Financial Officer in July 2005, persons or groups who
beneficially own more than 5% of our outstanding common stock and all of our
executive officers and directors as a group as of September 22, 2005.
BENEFICIAL OWNERSHIP TABLE
AMOUNT OF
AMOUNT OF BENEFICIAL
BENEFICIAL OWNERSHIP
NAME AND ADDRESS OF 5% BENEFICIAL OWNERSHIP OF OF SHARES AMOUNT OF AGGREGATE
OWNERS AND OFFICERS, OUTSTANDING PERCENT UNDERLYING AGGREGATE BENEFICIAL PERCENT
DIRECTORS AND GROUP SHARES(1) OF CLASS OPTIONS(2) OWNERSHIP OF CLASS
--------------------------------- ------------ -------- ---------- -------------------- ----------
Richard J. DePiano................ 31,778 0.53% 327,522 359,300 5.71%
Fidelity Management & Research Co.
82 Devonshire St.,
Boston, MA 02109................ 585,100 9.80% -- 585,100 9.80%
Barclays Global Investors, N.A.
45 Fremont St.,
San Francisco, CA 94105......... 383,072 6.42% -- 383,072 6.42%
Anthony J. Coppola................ -- * 25,000 25,000 *
Jay L. Federman, MD............... 12,072 * 45,000 57,072 *
Mark Karsch....................... -- * 7,500 7,500 *
William L. Kwan................... -- * 50,000 50,000 *
Harry M. Rimmer................... 3,000 * 84,750 87,750 1.45%
Lisa A. Napolitano................ -- * 22,000 22,000 *
All Directors and executive
officers as a group (7
persons)........................ 46,850 * 554,272 601,122 9.20%
---------------
* Less than 1%
(1) Information furnished by each individual named. This table includes shares
that are owned jointly, in whole or in part with the person's spouse, or
individually by his or her spouse.
(2) This table includes options to purchase shares that will vest within 60 days
of the annual meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires that our officers and directors, as well as persons who own 10% or more
of a class of our equity securities, file reports of their ownership of our
securities, as well as statements of changes in such ownership, with us and the
Securities Exchange Commission (the "SEC"). Based upon written representations
received by us from our officers, directors and 10% or greater shareholders, and
our review of the statements of beneficial ownership changes filed with us by
our officers, directors and 10% or greater shareholders during fiscal 2005, all
filing requirements applicable to our officers and directors were complied with
during fiscal 2005.
3
ELECTION OF DIRECTORS
ITEM 1 - ELECTION OF CLASS III DIRECTORS
INTRODUCTION
The election of our directors by our shareholders is governed by the
Pennsylvania Business Corporation Law and our Bylaws. The following discussion
summarizes these provisions and describes the process our Governance and
Nominating Committee will follow in connection with the nomination of candidates
for election as directors by the holders of our common stock.
GOVERNANCE AND NOMINATING PROCEDURES
Our Governance and Nominating Committee is responsible for recommending to
the Board of Directors candidates to stand for election to the Board of
Directors at the annual meeting. Our Governance and Nominating Committee will
also consider director candidates recommended by shareholders in accordance with
the advance notice procedures in Section 2.3 of our Bylaws. These procedures are
described under "Shareholder Proposals" in this proxy statement. The Governance
and Nominating Committee may also consider director candidates proposed by our
management. We have not utilized third-party executive search firms to identify
candidates for director.
With the exception of applicable rules of the SEC and the Nasdaq Stock
Market(SM) ("Nasdaq"), our Governance and Nominating Committee does not have any
specific, minimum qualifications for candidates for election to our Board of
Directors, and our Governance and Nominating Committee may take into account
such factors as it deems appropriate. Our Governance and Nominating Committee
examines the specific attributes of candidates for election to our Board of
Directors and also considers the judgment, skill, diversity, business
experience, the interplay of the candidate's experience with the experience of
the other members of our Board of Directors and the extent to which the
candidate would contribute to the overall effectiveness of our Board of
Directors.
Our Governance and Nominating Committee will utilize the following process
in identifying and evaluating candidates for election as members of our Board of
Directors:
- Evaluation of the performance and qualifications of the members of our
Board of Directors whose term of office will expire at the forthcoming
annual meeting of shareholders and determination of whether they should
be nominated for re-election.
- Consideration of the suitability of the candidates for election,
including incumbent directors.
- Review of the qualifications of any candidates proposed by shareholders
in accordance with our Bylaws, candidates proposed by management and
candidates proposed by individual members of our Board of Directors.
- After such review and consideration, propose to the Board of Directors a
slate of candidates for election at the forthcoming annual meeting of
shareholders.
ACTIONS TAKEN BY OUR GOVERNANCE AND NOMINATING COMMITTEE
Our Governance and Nominating Committee met once this year, but our entire
Board of Directors performed the functions of the Governance and Nominating
Committee with respect to the nominating of candidates for election at the 2005
Annual Meeting. The Board of Directors met on August 17, 2005 for the purpose of
nominating candidates for election as directors by our shareholders at our 2005
annual meeting of shareholders and approved the nomination of the persons named
below.
CANDIDATES FOR ELECTION
Our Board of Directors currently consists of six members, three of whom are
considered independent for purposes of the applicable Nasdaq rules. The current
independent directors are Anthony J. Coppola, Lisa A.
4
Napolitano Fred Choate and William L. G. Kwan. Each director is elected for a
three-year term and until his successor has been duly elected. The current
three-year terms of our directors expire in the years 2005, 2006 and 2007,
respectively.
Two Class III directors are to be elected at our annual meeting. Unless
otherwise instructed, the proxies solicited by our Board of Directors will be
voted for the election of the nominees named below. The two Class III nominees
are currently directors of the Company.
If any of the nominees becomes unavailable for any reason, the proxies
intend to vote for a substitute nominee designated by our Board of Directors.
Our Board of Directors has no reason to believe the nominees named will be
unable to serve if elected. Any vacancy occurring on our Board of Directors for
any reason may be filled by a majority of our directors then in office until the
expiration of the term of the class of directors in which the vacancy exists.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES NAMED
BELOW.
The names of the nominees for Class III directors and the Class I directors
and Class II directors who will continue in office after our annual meeting
until the expiration of their respective terms, together with certain
information regarding them, are as follows:
NOMINEES FOR
CLASS III
------------ DIRECTOR YEAR TERM PRINCIPAL OCCUPATION DURING PAST FIVE
NAME OF DIRECTOR SINCE WILL EXPIRE AGE YEARS AND CERTAIN DIRECTORSHIPS
---------------- -------- ----------- --- -------------------------------------
Richard J. DePiano....... 1996 2008* 64 Chairman and CEO of Escalon Medical Corp.
since March 1997. CEO of the Sandhurst
Company, L.P. and Managing Director of the
Sandhurst Venture Fund since 1986; Chairman
of the Board of Directors of PhotoMedex,
Inc.
Jay L. Federman, M.D. ... 1996 2008* 66 Chief of the Division of Ophthalmology at
the Medical College of Pennsylvania and
Drexel University School of Medicine and
Co-Director of the Retina Service at Wills
Eye Hospital, Chairman of the Board of
Directors, of the Company from February
1996 to March 1997
---------------
* If elected at the Annual Meeting.
DIRECTORS CONTINUING IN OFFICE
NAME OF DIRECTOR DIRECTOR YEAR TERM PRINCIPAL OCCUPATION DURING PAST FIVE
CLASS II SINCE WILL EXPIRE AGE YEARS AND CERTAIN DIRECTORSHIPS
---------------- -------- ----------- --- -------------------------------------
Lisa A. Napolitano... 2003 2007 42 Tax Manager, Global Tax Management, Inc., a
provider of compliance support services for both
federal and state taxes, since 1998
Fred G. Choate....... 2005 2007 59 Managing Member of Atlantic Capital Funding LLC
from 2003 to present, Managing Member of
Atlantic Capital Management LLC from 2004 to
present; Baltic-American Enterprise Fund, Chief
Investment Officer from 2003 to present;
Managing Member of Greater Philadelphia Venture
Capital Corp from 1992 to present. Mr. Choate
has been a director of Parke Bank since 2003.
Mr. Choate was formerly a director of Escalon
Medical from 1998 to 2003 and was appointed to
fill the vacancy on the board after Mr.
O'Donnell's resignation.
5
NAME OF DIRECTOR DIRECTOR YEAR TERM PRINCIPAL OCCUPATION DURING PAST FIVE
CLASS I SINCE WILL EXPIRE AGE YEARS AND CERTAIN DIRECTORSHIPS
---------------- -------- ----------- --- -------------------------------------
William L.G. Kwan..... 1999 2006 64 Retired; Vice President of Business Development
of Alcon Laboratories, Inc. a medical products
company, from October 1996 to 1999, and Vice
President of International Surgical Instruments
from November 1989 to October 1999
Anthony J. Coppola.... 2000 2006 67 Principal and operator of The Historic Town of
Smithville, Inc., a real estate and commercial
property company from 1988 to present; Retired
Division President of SKF Industries, a
manufacturing company, from 1963 to 1986
CORPORATE GOVERNANCE
The SEC and Nasdaq have adopted regulations and listing requirements that
relate to our corporate governance. Our Board of Directors has adopted standards
and practices in order to comply with those regulations that apply to us. The
Company has adopted a Code of Ethics, which can be accessed on the Company's web
site at www.escalonmed.com. Our independent directors meet at regularly
scheduled meetings at which only independent directors are present.
OUR BOARD OF DIRECTORS AND ITS COMMITTEES
Our Board of Directors met eight times in fiscal 2005. Our Board of
Directors has an Executive Committee, an Audit Committee, a Governance and
Nominating Committee and a Compensation Committee.
AUDIT COMMITTEE
Our Audit Committee consists of Anthony J. Coppola, William L.G. Kwan and
Lisa A. Napolitano. The Committee met four times in 2005. Each member of the
Audit Committee is independent within the meaning of the rules of Nasdaq and of
the SEC. Consistent with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the
Audit Committee has responsibility for:
- the selection of our independent public accountants;
- reviewing the scope and results of the audit;
- reviewing related-party transactions; and
- reviewing the adequacy of our accounting, financial, internal and
operating controls.
Our Audit Committee operates pursuant to a written charter, the full text
of which was attached to our proxy statement for our 2004 annual meeting and is
available on our website.
GOVERNANCE AND NOMINATING COMMITTEE
Our Governance and Nominating Committee consists of Anthony J. Coppola,
Fred G. Choate, Lisa A. Napolitano and Jay L. Federman, M.D. Each member of the
Governance and Nominating Committee is independent within the meaning of the
rules of Nasdaq and of the SEC. Our Governance and Nominating Committee has
responsibility for:
- developing and recommending to the Board corporate governance guidelines,
establishing procedures to ensure effective functioning of the Board;
- reviewing of director compensation;
6
- identifying of individuals believed to be qualified to become members of
our Board of Directors and to recommend to our Board of Directors
nominees to stand for election as directors; and
- identifying of members of our Board of Directors qualified to serve on
the various committees of our Board of Directors.
Our Governance and Nominating Committee operates pursuant to a written
charter, the full text of which was attached to our proxy statement for our 2004
annual meeting and is available on our website.
COMPENSATION COMMITTEE
Our Compensation Committee consists of Anthony J. Coppola and Jay L.
Federman, M.D. The Committee met one time in 2005. Each member of the
Compensation Committee is independent within the meaning of the rules of Nasdaq
and of the SEC. Our Compensation Committee has responsibility for:
- the annual review and determination of the compensation of our executive
officers;
- providing annual compensation recommendations to our Board of Directors
for all of our officers;
- determining the employees who participate in our equity incentive plans
and the provision of recommendations to our Board of Directors as to
individual stock option grants and other awards; and
- the general oversight of our employee benefit plans.
Our Compensation Committee operates pursuant to a written charter, the full
text of which was attached to our proxy statement for our 2004 annual meeting
and is available on our website.
DIRECTOR -- SHAREHOLDER COMMUNICATIONS
Our shareholders may communicate with our Board of Directors through our
Secretary. Shareholders who wish to communicate with any of our directors may do
so by sending their communication in writing addressed to a particular director,
or in the alternative, to "Non-management Directors" as a group, in care of our
Secretary at our headquarters, 565 East Swedesford Road, Suite 200, Wayne, PA
19087. All such communications that are received by our Secretary will be
promptly forwarded to the addressee or addressees set forth in the
communication.
We actively encourage our directors to attend our annual meetings of
shareholders because we believe director attendance at our annual meetings
provides our shareholders with an opportunity to communicate with the members of
our Board of Directors. All of our directors, with the exception of Mr. Kwan,
attended our annual meeting of shareholders in 2004 and, with the exception of
Mr. Kwan, intend to be in attendance at the 2005 annual meeting.
COMPENSATION OF DIRECTORS
None of the Company's directors were paid any directors fees by the Company
during the fiscal year ended June 30, 2005. On August 17, 2005, each
non-employee director was issued stock options to purchase 10,000 shares of the
Company's common stock. The exercise price for each of these options was $8.06
per share. Upon appointment to the Board effective on October 27, 2005. Fred
Choate was issued stock options to purchase 10,000 shares of the Company's
common stock. The exercise price for each of these options was $5.59 per share.
Each option expires ten years after the date of grant and is exercisable in full
on the grant date. In addition, directors are reimbursed for expenses incurred
in connection with attending meetings of the Board and Board Committees.
7
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers are as follows:
NAME AGE POSITION
---- --- --------
Richard J. DePiano.................... 64 Chairman and Chief Executive Officer
Mark Karsch........................... 49 Chief Financial Officer
Harry M. Rimmer....................... 59 President, Drew Scientific, Secretary
and Treasurer
Mr. DePiano has been a director of the Company since February 1996 and has
served as Chairman and Chief Executive Officer of the Company since March 1997.
Mr. DePiano has been the Chief Executive Officer of the Sandhurst Company, L.P.
and Managing Director of the Sandhurst Venture Fund since 1986. Mr. DePiano also
serves Chairman of the Board of Directors of PhotoMedex, Inc.
Mr. Karsch was appointed Chief Financial Officer for of the Company in July
2005. From August 2003 to July 2005, Mr. Karsch served as Chief Financial
Officer of Multimedia Marketing Training Solutions, a privately held full
service interactive marketing agency. From September 2002 to August 2003, Mr.
Karsch served as a Senior Vice President and Chief Financial Officer of
Integrated Marketing Communications, LLC, a privately held custom promotional
products company and full services agency. From January 2001 to March 2002, Mr.
Karsch served as a Senior Vice President and Chief Financial Officer of
eonDigital, Inc. a privately held electronic records management and storage
company. From February 1999 to August 2000, Mr. Karsch served as a Vice
President and Chief Financial Officer of 4anything.com, Inc, a privately held
web portal and e-commerce company. From 1991 to 1998 Mr. Karsch served as Senior
Vice President and Chief Financial Officer of a publicly-traded company. Mr.
Karsch is a certified public accountant, who began his career and spent thirteen
years with Arthur Andersen.
Mr. Rimmer was appointed Vice President, Corporate Development of the
Company in March 2000. In August 2000 his role was expanded to include Vice
President, Finance and Secretary. In August 2001 he became Senior Vice
President, Finance, Secretary and Treasurer, and in 2005 he became President of
our Drew Scientific subsidiary. From 1996 until 1999 Mr. Rimmer served as the
Finance Director for Irving Tissue, Inc., a manufacturing and marketing company
based in Philadelphia. In 1995 Mr. Rimmer was the Finance Officer for a division
of Scott Paper, and for the first eight months of 1996 Mr. Rimmer was employed
by the Kimberly Clark organization in connection with the divestiture of a
business unit.
8
EXECUTIVE COMPENSATION
The following table shows the compensation paid during each of the three
fiscal years ended June 30, 2005 for services rendered in all capacities to our
Chief Executive Officer and our other most highly compensated executive officer
whose compensation exceeded $100,000 in the fiscal year ended June 30, 2005.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
--------------------------- ---- -------- -------- ------------ ---------- ---------------
Richard J. DePiano.................. 2005 $300,000 $200,000 $ -- 25,000 $32,600
Chairman and Chief 2004 $261,375 $200,000 $ -- 25,000 $33,148
Executive Officer 2003 $256,250 $169,000 $ -- 50,000 $19,600
Harry M. Rimmer..................... 2005 $150,000 $ 50,000 $ -- 20,000 $ 6,900
President, Drew 2004 $125,460 $ 75,000 $ -- 20,000 $ 7,200
Scientific 2003 $123,000 $ 50,000 $ -- 25,000 $ 3,600
---------------
(1) Includes payment by the Company of (i) in the case of Mr. DePiano, (a) an
automobile allowance and (b) insurance premiums paid for life insurance; and
(ii) in the case of Mr. Rimmer, an automobile allowance.
As of June 30, 2005, we granted the following stock options to the persons
named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN FISCAL (PER EXPIRATION
NAME GRANTED YEAR SHARE) DATE
---- ---------- ---------- ---------- ----------
Richard J. DePiano........................ 25,000 10.33% $6.19 8/17/2014
Harry M. Rimmer........................... 20,000 8.26% $6.19 8/17/2014
---------------
(1) These options were granted under the Company's 1999 Equity Incentive Plan
and have a term of ten years, subject to earlier termination in certain
events. See "Employment Agreements". The options of Mr. Rimmer vest monthly
over a five-year period. The options of Mr. DePiano vest monthly over a two-
year period.
9
The following table show information with respect to options exercised
during the year ended June 30, 2005 and held on June 30, 2005 by the persons
named in the Summary Compensation Table and the status of their options at June
30, 2005.
AGGREGATE OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JUNE 30, 2005 AT JUNE 30, 2005
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Richard J. DePiano... -- $ -0- 289,605 19,792 $1,943,250 $132,804
Mark Karsch.......... --
Harry M. Rimmer...... -- $ -0- 71,333 51,667 $ 478,644 $346,686
No awards were made to any named executive officer during such fiscal year
under any long-term incentive plan. The Company does not currently sponsor any
defined benefit or actuarial plans at this time.
EMPLOYMENT AGREEMENT
On May 12, 1998, the Company entered into an employment agreement with
Richard J. DePiano as the Chairman and Chief Executive Officer of the Company.
The initial term of the employment agreement commenced on May 12, 1998 and
continued through June 30, 2001. The employment agreement renews on July 1 of
each year for successive terms of three years unless either party notifies the
other party at least 30 days prior to such date of the notifying party's
determination not to renew the agreement. The current base salary provided under
the agreement, as adjusted for yearly cost of living adjustments, is $300,000
per year, and the agreement provides for additional incentive compensation in
the form of a cash bonus to be paid by the Company to Mr. DePiano at the
discretion of the Board of Directors. The agreement also provides for health and
long-term disability insurance and other fringe benefits as well as an
automobile allowance of $800 per month.
On June 23, 2005, the Company entered into a Supplemental Executive
Retirement Benefit Agreement with Mr. DePiano. The agreement provides for the
payment of supplemental retirement benefits to Mr. DePiano in the event of his
termination of service Mr. DePiano with the Company under the following
circumstances:
- If Mr. DePiano retires at age 65 or older, the Company is obligated to
pay the executive $8,000 per month for life, with payments commencing the
month after retirement. If Mr. DePiano were to die within a period of
three years after such retirement, the Company would be obligated to
continue making such payments until a minimum of 36 monthly payments have
been made to the covered executive and his beneficiaries in the
aggregate.
- If Mr. DePiano dies before his retirement while employed by the Company,
the Company would be obligated to make 36 monthly payments to his
beneficiaries of $8,000 per month commencing in the month after his
death.
- If Mr. DePiano were to become permanently disabled while employed by the
Company, the Company would be obligated to pay the executive $8,000 per
month for life, with payments commencing the month after he suffers such
disability. If Mr. DePiano were to die within three years after suffering
such disability, the Company would be obligated to continue making such
payments until a minimum of 36 monthly payments have been made to the
covered executive and his beneficiaries in the aggregate.
- If Mr. DePiano's employment with the Company is terminated by the
Company, prior to his attaining age 65 or if he terminates his employment
with the Company for good reason, as defined in the agreement, the
Company would be obligated to pay him $8,000 per month for life. If Mr.
DePiano were to die within a period of three years after such
termination, the Company would be obligated to
10
continue making such payments until a minimum of 36 monthly payments have been
made to him and his beneficiaries in the aggregate.
During the fourth quarter of fiscal 2005, the Company recorded as an
expense in our Consolidated Statement of Income, $1,087,000, which represents
the present value of the supplemental retirement benefits awarded.
Mr. Karsch became the Company's Chief Financial Officer in July 2005. Mr.
Karsch's base salary is $150,000 and he will be entitled to receive a bonus in
year one for up to 33% of his base salary. Mr. Karsch was granted stock options
to purchase 60,000 shares of the Company's common stock, which will vest monthly
in equal installments over four years. The exercise price of these stock options
is $7.18 per share. Mr. Karsch will also be entitled to six months severance and
the automatic vesting of his stock options in connection with a change of
control of the Company.
AUDIT AND NON-AUDIT FEES
Our Audit Committee approves the fees and other significant compensation to
be paid to our independent public accountants for the purpose of preparing or
issuing an audit report or related work. We provide appropriate funding, as
determined by our Audit Committee, for payment of fees and other significant
compensation to our independent public accountants. Our Audit Committee also
preapproves all auditing services and permitted non-audit services, including
the fees and terms thereof, to be performed for us by our independent public
accountants. The Audit Committee does not delegate its responsibilities to
pre-approve services performed by the independent public auditors to management,
but may delegate pre-approval authority to one or more of its members. The
member or members to whom such authority is delegated is required to report any
pre-approval decisions to the Audit Committee at its next scheduled meeting.
Our Audit Committee reviewed and discussed with its current independent
public accountants, BDO Seidman, LLP ("BDO Seidman"), the following fees for
services rendered for the 2005 fiscal year and considered the compatibility of
non-audit services with BDO Seidman's independence.
Audit Fees. BDO Seidman, our independent public accountants, billed us
$104,000 in total for the fiscal year ended June 30, 2005 in connection with (i)
the audit of our annual consolidated financial statements for the fiscal year
ended June 30, 2005, and (ii) the reviews of our consolidated financial
statements included in our Form 10-Q quarterly reports.
Parente Randolph, LLC, our former independent public accountants, billed us
$78,772 in total for the fiscal year ended June 30, 2004 in connection with (i)
the audit of our annual consolidated financial statements for the fiscal year
ended June 30, 2004, and (ii) the reviews of our consolidated financial
statements included in our Form 10-Q quarterly reports for 2004.
Audit-Related Fees. We did not pay any audit-related fees to BDO Seidman
during 2005 or to Parente Randolph, LLC during 2004.
Tax Fees. We did not pay any fees to BDO Seidman for tax services during
the fiscal year ended June 30, 2005. The aggregate fees billed to Parente
Randolph for tax services were $5,000 during the fiscal year ended June 30,
2004.
All Other Fees. We did not pay any fees to BDO Seidman for all any other
services during the fiscal year ended June 30, 2005. The total fees billed by
Parente Randolph for all other services were $6,000 during the fiscal year ended
June 30, 2004 for services relating to our Form S-3 during fiscal year 2004.
REPORT OF THE AUDIT COMMITTEE
The following report of our Audit Committee shall not be deemed proxy
solicitation material, and shall not be deemed filed with the SEC or
incorporated by reference into any of our filings under the Exchange Act or the
Securities Act of 1933.
The Audit Committee of our Board of Directors was established in accordance
with the Exchange Act and reviews the financial reporting process, including the
overview of our financial reports and other financial information we provide to
governmental or regulatory bodies, the public and others who rely thereon; our
11
systems of internal accounting and financial controls; the selection, evaluation
and retention of our independent public accountants; and the annual independent
audit of our financial statements.
Each of our Audit Committee members satisfies the independence requirements
of the Exchange Act and Nasdaq rules and complies with the financial literacy
requirements thereof. Our Board of Directors has determined that all members of
Audit Committee, Anthony J. Coppola, Lisa A. Napolitano and William L.G. Kwan,
satisfy the financial expertise requirements and have the requisite experience
as defined by the SEC's rules. Our Board of Directors adopted a written charter
for our Audit Committee on May 9, 2000 and amended such charter on July 8, 2004
to comply with new Nasdaq rules. The full text of the Audit Committee Charter as
currently in effect was included as an exhibit to our proxy statement for our
2004 Annual Meeting and is available on our website. Our Audit Committee reviews
and reassesses the adequacy of the charter on an annual basis.
Our Audit Committee has reviewed our audited consolidated financial
statements and discussed those statements with management. Our Audit Committee
has also discussed with BDO Seidman our independent public accountants during
fiscal 2005, the matters required to be discussed by Statement of Auditing
Standards No. 61 (Communication with Audit Committees, as amended).
Our Audit Committee received from BDO Seidman and reviewed the written
disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and discussed with BDO Seidman
matters relating to its independence. Our Audit Committee also considered the
compatibility of the provision of non-audit services by BDO Seidman with the
maintenance of BDO Seidman's independence.
Our Audit Committee has determined that the provision of the non-audit
services to us by BDO Seidman is compatible with maintaining BDO Seidman's
independence.
On the basis of these reviews and discussions, our Audit Committee
recommended to the Board of Directors that our audited consolidated financial
statements be included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2005 and be filed with the SEC.
Submitted By:
Audit Committee
Anthony J. Coppola
William L.G. Kwan
Lisa A. Napolitano
October 28, 2005
ITEM 2 - AMENDMENT OF THE ESCALON MEDICAL CORP. 2004
EQUITY COMPENSATION PLAN
At the Annual Meeting, there will be presented to the shareholders a
proposal to approve and adopt an amendment to the Company's 2004 Equity
Compensation Plan (the "2004 Plan") to increase the number of shares available
for award under the 2004 Plan. On August 17, 2005 the Board of Directors of the
Company approved the proposed amendment to the 2004 Plan subject to shareholder
approval at the Annual Meeting. The amendment will not be effective unless and
until shareholder approval is obtained.
The 2004 Plan is integral to the Company's compensation strategies and
programs. The purpose of the 2004 Plan is to provide a means by which certain
employees and directors of, and others providing services to or having a
relationship with, the Company and its subsidiaries may be given an opportunity
to acquire shares of the Company's Common Stock. The Company intends that the
2004 Plan will promote the interests of the Company by encouraging stock
ownership on the part of such individuals, by enabling the Company and its
subsidiaries to secure and retain services of highly qualified persons and by
providing such individuals with an additional incentive to advance the success
of the Company and its subsidiaries.
12
The 2004 Plan permits stock option grants, stock grants, restricted stock
grants, restricted stock unit grants, stock appreciation rights grants ("SARs")
and cash awards. Shareholder approval of the 2004 Plan permits the
performance-based awards discussed below to qualify for deductibility under
Section 162(m) of the Internal Revenue Code (the "Code").
The amendment would increase the number of shares available for issuance
under the 2004 Plan from 555,000 to 755,000 shares of Common Stock. The Board of
Directors believes that the Company's ability to grant options under the 2004
Plan is a valuable and necessary compensation tool that aligns the long-term
financial interests of eligible director, officers, key employees and
consultants with the financial interests of the Company's shareholders. As of
September 22, 2005, options to purchase 1,136,264 shares of Common Stock were
outstanding under the Company's 1999 Equity Incentive Plan and 2004 Plan and
options to purchase 299,946 shares remained available for future grants. An
increase in the number of shares available for issuance is necessary to meet the
objectives described above.
A summary of the principal features of the 2004 Plan is provided below, but
is qualified in its entirety by reference to the full text of the 2004 Plan
which was filed electronically with our proxy statement for our 2004 annual
meeting. Such text is not included in the printed version of this proxy
statement. A copy of the 2004 Plan is available from the Company's Secretary at
Escalon Medical Corp., 575 East Swedesford Road, Suite 100, Wayne, Pennsylvania
19087; telephone (610) 688-6830.
SHARES AVAILABLE FOR ISSUANCE
The aggregate number of shares of Common stock that may be issued under the
2004 Plan will not exceed 755,000 shares (subject to the adjustment provisions
discussed below). The 200,000 new shares represent approximately 3% of the
current outstanding shares of common stock.
ADMINISTRATION AND ELIGIBILITY
The 2004 Plan will be administered by a Committee of the Board (the
Committee) consisting of two or more directors, each of whom will satisfy the
requirements established for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 under the Exchange Act, for outside
directors acting under plans intended to qualify for exemption under Section
162(m) of the Code and with any applicable requirements established by Nasdaq.
The Committee will approve the aggregate Awards and the individual Awards for
Participants. The 2004 Plan provides for indemnification of Committee and Board
Members with respect to the administration of the 2004 Plan.
No Participant may receive in any calendar year Awards relating to more
than 125,000 shares of the Company's Common stock.
AWARDS
STOCK OPTIONS
Grants of Stock Options
The Committee is authorized to grant stock options to Participants
("Optionees"), which may be either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). NSOs and ISOs are collectively referred to
as "Stock Options." The exercise price of any ISO must be equal to or greater
than 100% of the fair market value of the shares on the date of the grant. In
the case of ISOs granted to an Optionee who owns more than 10% of the voting
power of all classes of stock of the Company, the exercise price must not be
less than 110% of the fair market value of the common stock on the date of
grant. The exercise price of any NSO must be equal to or greater than 85% of the
fair market value of the shares on the date of the grant. The aggregate fair
market value of Common stock with respect to which ISOs are first exercisable by
any employee during any calendar year under all plans of the Company and its
subsidiaries may not exceed $100,000. The term of a Stock Option cannot exceed
ten years, and the term of an ISO granted to an Optionee who owns more than 10%
of the voting power of all classes of stock of the Company cannot exceed five
years.
13
ISOs may not be granted more than ten years after the date that the 2004 Plan
was adopted by the Board. The maximum number of shares that may be subject to
ISO's is 550,000 shares.
For purposes of the 2004 Plan, fair market value shall be determined in
such manner as the Committee may deem equitable, within the requirements of any
applicable law or regulation. Generally, fair market value means the closing
price on the last trading day preceding the day of the transaction, as reported
on Nasdaq.
Exercisability and Termination
At the time of grant, the Committee in its sole discretion will determine
when Stock Options are exercisable and when they expire. The Committee has the
power to permit the exercise of unvested Stock Options, or portions thereof, for
the purchase of shares of restricted stock subject to a repurchase right in
favor of the Company and to accelerate previously established exercise terms, in
each case upon such circumstances and subject to such terms and conditions as
the Committee determines.
Payment of Stock Option Exercise Price
Payment for shares purchased upon exercise of a Stock Option must be made
in full at the time of purchase. Payment may be made in cash, or, in the
discretion of the Committee, by the transfer to the Company of shares owned by
the Participant (held at least six months if the Company is accounting for Stock
Options using APB Opinion 25 or purchased on the open market) having a fair
market value on the date of transfer equal to the option exercise price or in
such other manner as may be authorized by the Committee.
SARS
The Committee has the authority to grant SARs to Participants and to
determine the number of shares subject to each SAR, the term of the SAR, the
time or times at which the SAR may be exercised and all other terms and
conditions of the SAR. A SAR is a right, denominated in shares, to receive, upon
exercise of the right, in whole or in part, without payment to the Company an
amount, payable in shares, in cash or a combination thereof, that is equal to
the excess of: (i) the fair market value of common stock on the date of exercise
of the right over (ii) the fair market value of common stock on the date of
grant of the right multiplied by the number of shares for which the right is
exercised. The Committee also may, in its discretion, substitute SARs that can
be settled only in common stock for outstanding Stock Options at any time when
the Company is subject to fair value accounting. The terms and conditions of any
substitute SAR shall be substantially the same as those applicable to the Stock
Option that it replaces and the term of the substitute SAR may not exceed the
term of the Stock Option that it replaces.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
Restricted Stock consists of shares which that transferred or sold by the
Company to a Participant, but are subject to substantial risk of forfeiture and
to restrictions on their sale or other transfer by the Participant. Restricted
Stock Units are the right to receive shares at a future date in accordance with
the terms of such grant upon the attainment of certain conditions specified by
the Committee, which may include substantial risk of forfeiture and restrictions
on their sale or other transfer by the Participant. The Committee determines the
eligible Participants to whom, and the time or times at which, grants of
Restricted Stock or Restricted Stock Units will be made, the number of shares or
units to be granted, the price to be paid, if any, the time or times within
which the shares covered by such grants will be subject to forfeiture, the time
or times at which the restrictions will terminate, and all other terms and
conditions of the grants. Restrictions or conditions could include, but are not
limited to, the attainment of performance goals (as described below), continuous
service with the Company, the passage of time or other restrictions or
conditions.
PERFORMANCE GOALS
Awards under the 2004 Plan may be made subject to the attainment of
performance goals relating to one or more business criteria within the meaning
of Section 162(m) of the Code, including, but not limited to: cash flow; cost;
ratio of debt to debt plus equity; profit before tax; economic profit; earnings
before interest and
14
taxes; earnings before interest, taxes, depreciation and amortization; earnings
per share; operating earnings; economic value added; ratio of operating earnings
to capital spending; free cash flow; net profit; net sales; sales growth; price
of the Common stock; return on net assets, equity, or shareholders' equity;
market share; or total return to shareholders ("Performance Criteria").
Any Performance Criteria may be used to measure the performance of the
Company as a whole or any business unit of the Company and may be measured
relative to a peer group or index. Any Performance Criteria may be adjusted to
include or exclude special items as identified in the Company's quarterly or
annual earnings releases.
AMENDMENT OF THE 2004 PLAN
The Board or the Committee has the right and power to amend the 2004 Plan
provided, however, neither the Board nor the Committee may amend the 2004 Plan
in a manner that would impair or adversely affect the rights of the holder of an
Award without the holder's consent. No material amendment of the Plan shall be
made without shareholder approval.
TERMINATION OF THE 2004 PLAN
The Board may terminate the 2004 Plan at any time. Termination will not in
any manner impair or adversely affect any Award outstanding at the time of
termination.
COMMITTEE'S RIGHT TO MODIFY AWARDS
The Committee may grant Awards on terms and conditions different than those
specified in the 2004 Plan to comply with the laws and regulations of any
foreign jurisdiction, or to make the Awards more effective under such laws and
regulations.
The Committee may permit or require a Participant to have amounts or shares
of Common stock that otherwise would be paid or delivered to the Participant as
a result of the exercise or settlement of an award under the 2004 Plan credited
to a deferred compensation or stock unit account established for the Participant
by the Committee on the Company's books of account.
Neither the Board nor the Committee may cancel any outstanding Stock Option
for the purpose of reissuing the option to the Participant at a lower exercise
price, or to reduce the option price of an outstanding option.
ACCELERATION OF VESTING OR LAPSING OF RESTRICTIONS
The Committee will have the discretion at the time of grant of an Award or
at any time, under such circumstances and upon such terms and conditions as
shall be established by the Committee, to authorize the acceleration of the
vesting or exercisability of an Award, or that all or part of the restrictions
to which an Award is subject shall lapse, or that an Award shall be paid out or
delivered on an accelerated basis.
ADJUSTMENTS
If there is any change in the Common stock by reason of any stock split,
stock dividend, spin-off, split-up, spin-out, recapitalization, merger,
consolidation, reorganization, combination, or exchange of shares, the total
number of shares available for Awards, the maximum number of shares that may be
subject to an Award in any calendar year and the number of shares subject to
outstanding Awards, and the price of each of the foregoing, as applicable, will
be equitably adjusted by the Committee in its discretion.
In the event of a proposed sale of all or substantially all of the assets
of the Company, or the merger of the Company with or into another corporation,
the Committee, in the exercise of its sole discretion, may take such action as
it deems desirable, including, but not limited to: (i) causing a Stock Option to
be assumed or an equivalent option to be substituted by the successor
corporation or a parent or subsidiary of such successor corporation, (ii)
providing that a Stock Option holder shall have the right to exercise the Stock
Option as to
15
all of the shares of Common stock covered by the Stock Option, including shares
as to which the Stock Option would not otherwise be exercisable, or (iii)
declaring that a Stock Option shall terminate at a date fixed by the Committee
provided that the Stock Option holder is given notice and opportunity to
exercise the then exercisable portion of the Stock Option prior to such date.
SUBSTITUTION AND ASSUMPTION OF AWARDS
Without affecting the number of shares reserved or available under the 2004
Plan, either the Board or the Committee may authorize the issuance of Awards in
connection with the assumption of, or substitution for, outstanding benefits
previously granted to individuals who become employees of the Company or any
subsidiary as the result of any merger, consolidation, acquisition of property
or stock, or reorganization, upon such terms and conditions as it deems
appropriate.
REUSAGE
If a Stock Option granted under the 2004 Plan expires or is terminated,
surrendered or canceled without having been fully exercised or if Restricted
Stock, Restricted Stock Units or SARs granted under the 2004 Plan are forfeited
or terminated without the issuance of all of the shares subject thereto, the
shares covered by such Awards will again be available for use under the 2004
Plan. Shares covered by an Award granted under the 2004 Plan would not be
counted as used unless and until they are actually issued and delivered to a
Participant. Any shares of Common stock covered by a SAR shall be counted as
used only to the extent shares are actually issued to the Participant upon
exercise of the SAR. Shares covered by an Award granted under the 2004 Plan that
is settled in cash will not be counted as used.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences as they relate to Awards are as
follows:
ISOS
An Optionee does not generally recognize taxable income upon the grant or
upon the exercise of an ISO. Upon the sale of ISO shares, the Optionee
recognizes income in an amount equal to the difference, if any, between the
exercise price of the ISO shares and the fair market value of those shares on
the date of sale. The income is taxed at long-term capital gains rates if the
Optionee has not disposed of the stock within two years after the date of the
grant of the ISO and has held the shares for at least one year after the date of
exercise and the Company is not entitled to a federal income tax deduction. The
holding period requirements are waived when an Optionee dies.
The exercise of an ISO may in some cases trigger liability for the
alternative minimum tax.
If an Optionee sells ISO shares before having held them for at least one
year after the date of exercise and two years after the date of grant, the
Optionee recognizes ordinary income to the extent of the lesser of: (i) the gain
realized upon the sale; or (ii) the difference between the exercise price and
the fair market value of the shares on the date of exercise. Any additional gain
is treated as long-term or short-term capital gain depending upon how long the
Optionee has held the ISO shares prior to disposition. In the year of
disposition, the Company receives a federal income tax deduction in an amount
equal to the ordinary income that the Optionee recognizes as a result of the
disposition.
NSOS
An Optionee does not recognize taxable income upon the grant of an NSO.
Upon the exercise of such a Stock Option, the Optionee recognizes ordinary
income to the extent the fair market value of the shares received upon exercise
of the NSO on the date of exercise exceeds the exercise price. The Company
receives an income tax deduction in an amount equal to the ordinary income that
the Optionee recognizes upon the exercise of the Stock Option.
16
RESTRICTED STOCK
A Participant who receives an award of Restricted Stock does not generally
recognize taxable income at the time of the award. Instead, the Participant
recognizes ordinary income in the first taxable year in which his or her
interest in the shares becomes either: (i) freely transferable; or (ii) no
longer subject to substantial risk of forfeiture. The amount of taxable income
is equal to the fair market value of the shares less the cash, if any, paid for
the shares.
A Participant may elect in writing under Section 83(b) of the Code to
recognize income at the time he or she receives Restricted Stock in an amount
equal to the fair market value of the Restricted Stock (less any cash paid for
the shares) on the date of the award. Any such election must be made by the
Participant within 30 days after the award date.
The Company receives a compensation expense deduction in an amount equal to
the ordinary income recognized by the Participant in the taxable year in which
restrictions lapse (or in the taxable year of the award if, at that time, the
Participant had filed a timely election to accelerate recognition of income).
RESTRICTED STOCK UNITS
A Participant who receives an Award of a Restricted Stock Unit will
generally recognize ordinary income in an amount equal to the fair market value
of any shares received on the date of delivery of the shares. In that taxable
year, the Company will receive a federal income tax deduction in an amount equal
to the ordinary income that the Participant has recognized.
OTHER AWARDS
In the case of an exercise of a SAR or an Award of Restricted Stock Units
or Common stock or cash, the Participant will generally recognize ordinary
income in an amount equal to any cash received and the fair market value of any
shares received on the date of payment or delivery. In that taxable year, the
Company will receive a federal income tax deduction in an amount equal to the
ordinary income which the Participant has recognized.
MILLION DOLLAR DEDUCTION LIMIT
The Company may not deduct compensation of more than $1,000,000 that is
paid to an individual who, on the last day of the taxable year, is either the
Company's chief executive officer or is among one of the four other most
highly-compensated officers for that taxable year as reported in the Company's
proxy statement. The limitation on deductions does not apply to certain types of
compensation, including qualified performance-based compensation. The Company
believes that Awards in the form of Stock Options, SARs, performance-based
Restricted Stock and Restricted Stock Units constitute qualified
performance-based compensation and, as such, will be exempt from the $1,000,000
limitation on deductible compensation.
17
MISCELLANEOUS
The following benefits table sets forth the total number of Common Stock
for which stock options have been awarded to the persons and groups listed below
under the 2004 Plan as of October 28, 2005 and all Awards are discretionary. On
October 26, 2005, the closing price of the Common stock was $5.62.
AWARDS MADE UNDER THE 2004 PLAN
NAME NUMBER OF OPTIONS
---- -----------------
Richard J. DePiano.......................................... 40,000
Mark Karsch................................................. 70,000
Harry M. Rimmer............................................. 20,000
Jay L. Federman, MD......................................... 10,000
William L. Kwan............................................. 10,000
Fred G. Choate.............................................. 10,000
Lisa A. Napolitano.......................................... 10,000
All Directors and executive officers as a group (7
persons).................................................. 170,000
APPROVAL BY SHAREHOLDERS
In order to be approved, the 2004 Plan must be approved by the holders of
shares representing a majority of votes cast on the proposal at the Annual
Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE 2004 PLAN.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions of
Rule 14a-8 of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in our proxy statement for our 2006 annual meeting of shareholders
must deliver such proposal in writing to our Secretary at our principal
executive offices at 565 East Swedesford Road, Suite 200, Wayne, PA 19087 no
later than June 30, 2006.
Pursuant to Section 2.3 of our Bylaws, if a shareholder wishes to present
at our 2006 annual meeting of shareholders (i) a proposal relating to
nominations for and election of directors for consideration by the Governance
and Nominating Committee of our Board of Directors or (ii) a proposal relating
to a matter other than nominations for and election of directors, otherwise than
pursuant to Rule 14a-8 of the proxy rules of the SEC, the shareholder must
comply with the provisions relating to shareholder proposals set forth in our
Bylaws, which are summarized below. Written notice of any such proposal
containing the information required under our Bylaws, as described herein, must
be delivered in person, by first class United States mail postage prepaid or by
reputable overnight delivery service to the Governance and Nominating Committee
in care of our Secretary, for nomination proposals only, or to the attention of
our Secretary for all other matters, at our principal executive offices at 565
East Swedesford Road, Suite 200, Wayne, PA 19087 during the period commencing on
June 30, 2006 and ending on July 30, 2006.
A written proposal of nomination for a director must set forth:
- the name and address of the shareholder who intends to make the
nomination (the "Nominating Shareholder");
- the name, age, business address and, if known, residence address of each
person so proposed;
- the principal occupation or employment of each person so proposed for the
past five years;
- the number of shares of our capital stock beneficially owned within the
meaning of SEC Rule 13d-3 by each person so proposed and the earliest
date of acquisition of any such capital stock;
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- a description of any arrangement or understanding between each person so
proposed and the Nominating Shareholder with respect to such person's
proposal for nomination and election as a director and actions to be
proposed or taken by such person as a director;
- the written consent of each person so proposed to serve as a director if
nominated and elected as a director; and
- such other information regarding each such person as would be required
under the proxy rules of the SEC if proxies were to be solicited for the
election as a director of each person so proposed.
Only candidates nominated by shareholders for election as a member of our
Board of Directors in accordance with our Bylaw provisions as summarized herein
will be eligible for consideration by the Governance and Nominating Committee to
be nominated for election as a member of our Board of Directors at our 2006
annual meeting of shareholders, and any candidate not nominated in accordance
with such provisions will not be considered or acted upon for election as a
director at our 2006 annual meeting of shareholders.
A written proposal relating to a matter other than a nomination for
election as a director must set forth information regarding the matter
equivalent to the information that would be required under the proxy rules of
the SEC if proxies were solicited for shareholder consideration of the matter at
a meeting of shareholders. Only shareholder proposals submitted in accordance
with the Bylaw provisions summarized above will be eligible for presentation at
our 2006 annual meeting of shareholders, and any matter not submitted to our
Board of Directors in accordance with such provisions will not be considered or
acted upon at our 2006 annual meeting of shareholders.
OTHER MATTERS
Our Board of Directors does not know of any matters to be presented for
consideration at our annual meeting other than the matters described in the
notice of annual meeting, but if any matters are properly presented, proxies in
the enclosed form returned to us will be voted in accordance with the
recommendation of our Board of Directors or, in the absence of such a
recommendation, in accordance with the judgment of the proxy holder.
19
PROXY PROXY
ESCALON MEDICAL CORP.
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
NOVEMBER 29, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned
hereby appoints Richard J. DePiano and Mark Karsch, or either of them acting
alone in the absence of the other, the attorneys, agents and proxies of the
undersigned, with full powers of substitution (the "Proxies"), to attend and act
as proxy or proxies of the undersigned at the Annual Meeting of shareholders
(the "Annual Meeting") of Escalon Medical Corp. (the "Company") to be held at
the offices of Duane Morris LLP, 30 South 17th Street, 12th Floor, Philadelphia,
Pennsylvania, on November 29, 2005 at 9:00 a.m. or any adjournment or
continuation thereof, and to vote as specified herein the number of shares which
the undersigned, if personally present, would be entitled to vote.
1. ELECTION OF CLASS III DIRECTORS ___ FOR all nominees listed ___ WITHHOLD AUTHORITY
below (except as marked to vote for the all nominees
to contrary)
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME ON THE FOLLOWING LIST:
Richard J. DePiano
Jay Federman, M.D.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR EACH OF THE NOMINEES IN
PROPOSAL 1.
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE ESCALON MEDICAL CORP. 2004
EQUITY INCENTIVE PLAN, (THE "2004 PLAN") WHICH WOULD INCREASE THE
NUMBER OF SHARES AVAILABLE FOR AWARD UNDER THE 2004 PLAN.
FOR ___ AGAINST ___ ABSTAIN ___
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR PROPOSAL NO. 2.
3. OTHER BUSINESS. In their discretion, the Proxies are authorized to
vote upon such other business as may come before the Annual Meeting and any and
all adjournments thereof. The Board of Directors at present knows of no other
business to be presented by or on behalf of the Company or the Board of
Directors at the Annual Meeting.
IMPORTANT - PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN
THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED. IF NO
INSTRUCTION IS SPECIFIED WITH RESPECT TO A MATTER TO BE ACTED UPON, THE SHARES
REPRESENTED BY THE PROXY WILL BE VOTED "FOR" EACH NOMINEE FOR CLASS III
DIRECTOR, "FOR" TO APPROVE AN AMENDMENT TO THE ESCALON MEDICAL CORP. 2004 EQUITY
INCENTIVE PLAN. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY
CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS
OF THE BOARD OF DIRECTORS. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE BY FILING WITH THE SECRETARY
OF THE COMPANY A DULY EXECUTED PROXY BEARING A LATER DATE OR AN INSTRUMENT
REVOKING THIS PROXY, OR BY ATTENDING THE MEETING AND ELECTING TO VOTE IN PERSON.
Please sign exactly as name or names appear on this Proxy. If stock is
held jointly, each holder should sign. If signing as attorney, trustee,
executor, administrator, custodian or corporate officer, please give full title.
DATE _________________________________, 2005
____________________________________________
SIGNATURE
____________________________________________
SIGNATURE
I Do ___ I Do Not ___ expect to attend the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.