FORM 10-K/A
Amendment No.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission File Number 0-17919
Surgical Laser Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 31-1093148
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
147 Keystone Drive, Montgomeryville, PA 18936
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 619-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
8% Convertible Subordinated Notes Due July 30, 1999
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(Title of Class)
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. [ ]
As of March 15, 1996, the aggregate market value of the voting stock of the
registrant held by non-affiliates was approximately $21,323,112.
On March 15, 1996, the registrant had outstanding 9,853,824 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
Item 1. Business.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Surgical Laser Technologies, Inc. ("SLT" or the "Registrant") was
incorporated in December 1983 under the laws of the State of Delaware.
Registrant's principal offices are located at 147 Keystone Drive,
Montgomeryville, Pennsylvania 18936, and its telephone number is (215) 619-3600.
Registrant is engaged in the development, manufacture and sale of
proprietary laser systems for both contact and non-contact surgery. Registrant's
Contact Laser(TM) System, unlike conventional laser systems, enables the surgeon
to use the laser instrument in direct contact with the tissue being treated,
thereby significantly enhancing the ease of use and precision of laser surgery
in many applications. Registrant's Contact Laser was the first Contact Laser
surgery system developed for commercial application, and Registrant holds
patents on the Wavelength Conversion(TM) effect technology which is the
technological foundation for Contact Laser surgery. Registrant believes that
Contact Laser surgery represents a significant advancement in laser surgery.
Registrant supplements its contact offerings with non-contact products.
Registrant's Contact Laser System is comprised of a portable laser unit
that delivers laser energy through Contact Laser Delivery Systems. Registrant's
current product line includes four portable laser units of various power levels
and a family of over 100 Laser Probes, Laser Scalpels, fibers and handpieces
that provide different Wavelength Conversion(TM) effect properties, power
densities and configurations appropriate for cutting, coagulation or
vaporization. The Wavelength Conversion effect properties permit lasers to
replicate the effect of several different laser systems. As a result of the
system's design, a single Contact Laser System can be used within most surgical
specialties to perform a broad range of minimally invasive and open surgical
procedures. Registrant began commercial shipments of its Contact Laser Systems
in June 1986 and each year seeks to expand and enhance its product line for new
and existing uses by surgical specialists.
In March 1995, Daniel Schuman, M.D. assigned to Registrant his rights in
patent applications covering the Sinu-Clear(TM) apparatus and method. The
agreement is for a minimum of ten years. Royalties are payable based on sales of
product used in the Sinu-Clear procedure. The agreement with Dr. Schuman also
covers the rental of space in a training facility operated by a charitable
foundation established by Dr. Schuman. Under the agreement, Dr. Schuman will
collaborate with Registrant in promoting the Sinu-Clear procedure.
In May 1995, the U.S. Patent and Trademark Office issued to Registrant a
patent covering a device that fuses a tip to a fiberoptic cable in such a manner
that obviates the need for external cooling and that utilizes heat that may be
generated in the transfer of light from the fiberoptic to the fused tip.
In July 1995, Registrant, after experiencing declining sales, implemented a
reduction in force to bring its employment levels in line with the requirements
needed to support its actual sales levels.
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Employment reductions were made in most functional areas within the Company. The
reduction in force reduced employment levels by 27%.
In July 1995, Registrant also received clearance for its stand-alone
cooling system, a critical component of its SLT Select(TM) program. This cooling
system enables Registrant's coaxially cooled fiber delivery systems and Laser
Probes and Scalpels to be used on many other manufacturers' Nd:YAG laser
systems. Based on Registrant's successful test-market of this program in
December 1995, Registrant intends to make the program available nationally in
the second quarter of 1996.
In August 1995, Registrant modified its vendor relationship with Tenet
Healthcare to encourage Tenet to proceed with special programs in urology, ENT
and thoracoscopy. Significant progress in Tenet's programs continues to be made
in the areas of urology and ENT, and similar progress was being made for
thoracoscopic laser bullectomy until the Health Care Financing Administration
declared, in December 1995, a moratorium on reimbursement for bullectomies,
whether utilizing lasers or other modalities. The moratorium is expected to
continue until HCFA has gathered sufficient data on the procedure and determined
that reimbursement is warranted, at which time Registrant would expect that
Tenet would resume its progress in this area.
Also in August, Registrant received clearance for its products, including
its new flat, diffusing probe (the DF2) for use in the Sinu-Clear(TM) procedure.
Supplementing that ENT clearance was a clearance issued in September 1995
covering Registrant's Sinu-Clear(TM) kit, covering suction and irrigation
tubing.
In addition, Registrant received clarification in August 1995 of its
urologic clearances from the U.S. Food and Drug Administration (FDA) including
confirmation of its clearance for prostatectomy. As a result, Registrant can
continue to claim that its Contact Laser devices: "significantly reduce bleeding
time common with traditional TURP, thereby helping to shorten a patient's
hospital stay," and provide "immediate symptom improvement." "TURP" is an
acronym for transurethral resection of the prostate.
In September 1995, the FDA issued a letter to all laser and electrosurgical
instrument manufacturers. In that letter, the FDA stated that the clinical
indication terms "prostatectomy" and "the treatment of BPH" are synonymous. The
FDA had previously informed Registrant that Registrant was the only company in
question that had clearance for the indication of "prostatectomy" and that no
company had the companion indication of "treatment of BPH." The FDA also
indicated in its letter that device companies that wished to secure, or to
retain, such indications had to submit clinical data. Registrant promptly began
to formulate a clinical protocol for such data. In February 1996, the FDA
approved Registrant's clinical protocol that Registrant had submitted in
December 1995 in answer to the FDA's industry-wide mandate that data be
submitted within a 24-month time frame in order to secure or retain the
indications of prostatectomy/treatment of BPH. The data required to support the
prostatectomy/BPH claim is significantly less extensive and intensive than data
which the FDA had previously required to be submitted in a premarket approval
for the BPH claim. Given the relaxed data requirements, Registrant expects that
other device companies will submit data for the prostatectomy/BPH claim to the
FDA, and in fact Trimedyne, Inc. announced in March 1996 that the FDA had
granted it such clearance. Registrant may continue until the October 1997
deadline to market under its current
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urologic indications without submitting data to the FDA. Registrant believes
that it will have successfully compiled and submitted the necessary data to the
FDA well in advance of the October 1997 deadline.
In October 1995, Tenet Healthcare and Registrant began a cooperative effort
aimed at further substantiating the validity of the clinical efficacy of a new
procedure called Sinu-Clear. Through this cooperative effort, Tenet will
maintain a centralized database to track patient outcomes and the procedure's
cost-effectiveness on a long- and short-term basis. The Sinu-Clear technique
utilizes Registrant's patented laser delivery system in combination with a
pending patent that covers the application of lasers and warmed irrigating fluid
to remove nasal polyps and diseased sinus tissue. The procedure is unique and
offers several potential advantages over traditional techniques currently used
to perform endoscopic sinus surgery.
In October 1995, Registrant received clearance for its Thermalite(TM) diode
laser system. However, Registrant does not intend to continue development of
this family of lasers or to introduce it into the market until market demand and
production costs so warrant.
In November 1995, Registrant settled its outstanding litigation against
Heraeus LaserSonics of Milpitas, California. Under the major terms of the
settlement agreement, Registrant will continue to supply Heraeus with its
requirements of sapphire contact probes, pursuant to the Supply Agreement
entered into in March 1989 in connection with the settlement of earlier
litigation. Heraeus and Registrant also have entered into a different supply
contract under which Registrant will begin to supply Heraeus its requirements of
orb-tipped and conical-tipped contact fiber delivery systems, commonly known in
the marketplace as sculpted or sharpened fibers. In addition, Heraeus agreed to
pay Registrant an undisclosed sum of money, 50% of which was paid in 1995.
In December 1995, Registrant settled its outstanding litigation whereby
Sharplan Lasers, Inc. paid Registrant $8,125,000 in cash settlement for damages
relating to the patent infringement suit which Registrant brought against
Sharplan in May 1990, and later against its parent company, Laser Industries
Ltd. In addition to the cash settlement, Laser Industries and Sharplan continue
to be bound by the April 1993 court order under which they were permanently
enjoined and restrained from the unauthorized making or using or selling or
inducing others to use any products in the United States found to infringe.
Also in December 1995, Registrant introduced a new urology product called
the VaporMax(TM) probe which Registrant believes provides the urologist
significant surgical versatility and clinical benefit over electro-surgical
roller-ball type products. This multi-directional product is an important
addition to Registrant's array of urologic products, enhancing the ease of use
and reducing the learning curve associated with the performance of urologic
surgery utilizing Registrant's products.
In the fourth quarter of 1995, Registrant began offering certain of its
products with an SMA-905 proximal connector. Such a connector allows
Registrant's products to be used with other manufacturers' laser systems.
Registrant plans to expand the number of products offered with this connector in
1996.
There were no other significant changes in Registrant's business during the
fiscal year ended December 31, 1995.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not applicable because Registrant does not group its business into more
than one industry segment. See Note 15 of Notes to Consolidated Financial
Statements for geographic segment information.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Registrant is engaged in the development, manufacture and sale of a
proprietary Contact Laser(TM) System for surgery. During fiscal 1995, 1994 and
1993, revenues from sales of Registrant's products were $14,839,000, $21,508,000
and $18,237,000, respectively.
Registrant introduced Contact Laser surgery by combining proprietary
Contact Laser Delivery Systems with its own Nd:YAG laser to create a
multi-specialty surgical instrument that can cut, coagulate or vaporize tissue.
Almost all of the surgery performed today, endoscopic or open-cavity,
utilizes two fundamental technologies -- mechanical cutting and clamping, and
thermal vaporization and coagulation. The mechanical scalpel, scissors and
suture are universally accepted. However, today's surgery increasingly requires
additional control of bleeding, more precision and better access to diseased
sites. Lasers are suited for this requirement.
With the use of Registrant's Contact Laser System, a precise temperature
profile, or gradient, is created upon contact with the tissue by Registrant's
Laser Probes and Laser Scalpels. It is the temperature that directly causes the
therapeutic effect. If the temperature is sufficiently high, the tissue will be
vaporized (turned from liquid or solid into gas), creating a precise surgical
incision or excision. Lower temperatures coagulate tissue and thus control
bleeding or destroy diseased tissue.
Registrant's proprietary Contact Laser probe and scalpel surface treatments
provide the ability to alter selectively the temperature profile of tissue,
replicating the clinical effect of many different types of lasers. These
treatments are marketed under the trademark "Wavelength Conversion(TM) effect"
treatments. In addition, Contact Laser surgery restores to the surgeon the
advantages of tactile feedback lost with conventional lasers.
Registrant's revenues are generated by the sale of Contact Laser Delivery
Systems and accessories and Nd:YAG Laser Systems. Registrant's Contact Laser
Delivery Systems consist of proprietary fiberoptic delivery systems which
deliver the laser beam from Registrant's Nd:YAG Laser Systems to a proprietary
Laser Probe, Laser Scalpel or optical fiber directly to the tissue.
Disposable Fiberoptic Delivery Systems. Registrant has designed disposable
optical quartz fibers to channel the laser beam from Registrant's laser unit to
the fiber end, the Laser Probe or the Laser Scalpel or to one of 19
interchangeable, application-specific handpieces that hold the Laser Scalpel or
Laser Probe. These proprietary optical fibers and handpieces are intended for
single use and range currently in list price from $145 to $215.
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Laser Probes and Laser Scalpels. Registrant's proprietary Laser Probes and
Laser Scalpels are made of either synthetic sapphire crystal or fused silica and
have high mechanical strength, appropriate thermal conductivity and high melting
temperature. Most of these Laser Probes and Laser Scalpels use Registrant's
patented Wavelength Conversion(TM) effect treatments or geometry. Registrant
offers over 60 interchangeable Laser Probes and Laser Scalpels that provide
different power densities through various geometric configurations appropriate
for cutting, coagulation or vaporization. Laser Probes and Laser Scalpels are
made with varying distal tip diameters and surface treatments, each with a
different balance between cutting and coagulation, so that the instrument can be
suited to the particular tissue type. Additionally, Registrant markets
side-firing and direct-firing free-beam laser probes. Instead of changing laser
units, surgeons may choose a different Laser Probe or Laser Scalpel to perform a
different procedure. The Laser Probes and Laser Scalpels are intended for
limited reuse and the list prices currently range from $375 to $495.
Disposable Gas or Fluid Cartridge Systems. Registrant's proprietary
cartridge system provides gas or fluid to cool the junction between the optical
fiber and the Laser Scalpel or the Laser Probe. These cartridges are sterile and
used in one set of procedures. The list price of these cartridges is currently
$60.
Reusable Laser Aspiration Handpieces. Registrant's proprietary reusable
stainless steel handpieces are all used with interchangeable laser aspiration
wands and flexible endoscopic fibers. These proprietary handpieces are intended
for intra-nasal/endoscopic sinus and oropharyngeal procedures requiring smoke
and/or fluid evacuation. Their list price currently ranges from $85 to $395.
Laser Units. Registrant markets four Nd:YAG laser units for use with its
Contact Laser Delivery Systems. Registrant's CLMD line, which Registrant
developed and began to market in 1991, consists of four units: the CLMD 25-watt
to tissue, 110-volt; the CLMD 40-watt to tissue, 110-volt; the CLMD Dual which
operates up to 40-watts to tissue on 110-volts and up to 60-watts to tissue on
220-volts; and the CLMD-100 watt to tissue, 220-volt. The CLMD lasers are
modularly designed to allow the customer to upgrade from the 25-watt laser to
the 40-watt or Dual laser and from the 40-watt laser to the Dual laser, and
provide the customer the flexibility and versatility to change its laser system
easily to meet its changing surgery needs. Current list prices for the lasers
are as follows: CLMD 25-watt, 110-volt - $55,000; CLMD 40-watt, 110-volt -
$70,000; CLMD Dual - $85,000; and CLMD 220-100 watt - $95,000. These prices
include a one-year warranty.
Virtually all of Registrant's products are manufactured and assembled at
Registrant's Oaks, Pennsylvania manufacturing facility. The raw materials used
by Registrant are generally available in adequate supply.
Registrant obtains all of its partially finished Laser Probes and Laser
Scalpels from three suppliers in the United States. Registrant performs final
assembly and materials processing on the Laser Probes and Laser Scalpels using
proprietary and patented treatment processes. The fiberoptic delivery systems,
with and without handpieces, are also manufactured by Registrant. Registrant's
sterile gas and fluid cartridge systems are manufactured exclusively by a
domestic supplier in accordance with Registrant's specifications.
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Registrant's strategy for long-term growth continues to be to develop
next-generation laser units and to expand the disposable delivery systems
business as well as to take advantage of Registrant's unique market position as
a provider of Contact Laser products and delivery systems for multiple surgical
specialties. In the fourth quarter of 1995, Registrant began offering certain of
its products with an SMA-905 proximal connector. Such a connector allows
Registrant's products to be used with other manufacturers' laser systems.
Registrant plans to expand the number of products offered with this connector in
1996. Registrant also seeks to expand current, and investigate new, strategic
business relationships which will enhance the use of Registrant's Contact Laser
units and Contact Laser Delivery Systems.
Marketing
Registrant sells its Contact Laser Systems by forming a responsive
partnership with surgeons and hospitals to develop and apply innovative
technologies that advance therapeutic benefit, improve cost-effectiveness and
enhance access and ease of use across a broad range of surgical procedures and
specialties. Registrant's marketing efforts include sponsoring regional training
courses on a periodic basis. The courses are designed to educate physicians and
nurses in the use of Registrant's Contact Laser System. The course materials
concentrate on the major focus areas of the medical specialties for which the
system can be utilized.
Registrant also participates from time to time in various workshops and
educational programs relating to medical lasers that are sponsored by others.
These programs, together with direct mail, advertising, physician referrals and
trade shows at which Registrant participates, provide substantially all of
Registrant's potential customers. Registrant's laser utilization specialists
provide consultation and assistance to the surgeon and surgical staff on the
effective use of Registrant's products for Contact Laser Surgery. The length of
the sales cycle varies from one month to one year, with the average sale
requiring approximately six months.
Registrant's President and Chief Executive Officer and Executive Vice
President and Chief Operating Officer supervise sales and marketing activities
in the United States, which are conducted predominantly by Registrant-employed
sales personnel. The sale and post-sale support provided by Registrant includes
laser utilization specialists, who provide clinical consultation regarding laser
safety, efficacy and operating room procedures; clinical education specialists,
who provide educational consultation and courses in the effective use of
Registrant's products; and marketing and product managers and technology
engineers, who together provide the link between the surgeon and Registrant to
create innovative solutions and identify new applications for Contact Laser
surgery. Registrant distributes its products internationally through independent
distributors supervised by a Vice President and Managing Director of
International Operations, who is based in the United States.
Registrant entered into a joint venture with Mediq/PRN Life Support
Services, Inc. ("Mediq PRN") in August 1993 to provide rentals of lasers and
related equipment to hospitals and other health care providers in the United
States. Rental offerings by the joint venture, known as Mediq PRN/SLT, furnish
health care providers an alternative source of financing, operating flexibility
and support services to overcome capital constraints and the pressures of health
care cost containment.
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International markets. During 1995, Registrant initiated marketing
activities in Taiwan, receiving in June 1995 regulatory authorization to sell
its products. Working through a distributor in Germany, Registrant has gained
greater distribution coverage in Argentina and Chile. These marketing activities
are in addition to Registrant's other international markets, which include
countries in Europe, the Middle East, the Far East and South America and Mexico
and Canada.
Research and Development
Registrant focuses its research and product development efforts on both
Nd:YAG Laser Systems and Contact Laser Delivery Systems. Registrant's
technological capabilities are designed to be responsive to the surgeon's needs.
Registrant has the ability to respond to development requirements in the areas
of optical/materials technology, laser technology and mechanical and electronics
technology. During 1995, 1994 and 1993, Registrant spent $2.1 million, $2.1
million and $2.5 million in product development expenses, respectively.
Registrant's corporate facility in Oaks, Pennsylvania houses its product
development activities for both Contact Laser units and Contact Laser Delivery
Systems. Registrant utilizes the technologies developed by Advanced Laser
Systems Technology, Inc. ("ALST") and licensed to Registrant in December 1990 in
the development and manufacture of its CLMD laser family. Registrant, in
addition to its internal product development programs, works closely with
medical centers, universities and other companies in the United States and
Europe in an effort to develop additional products and applications for its
technology.
Registrant's core Laser Probe and Laser Scalpel technology was acquired by
Registrant in 1985 in consideration for certain royalty payments on net sales of
probes and scalpels. More recently, the disposable fiberoptic delivery systems,
with and without handpieces, the disposable gas and fluid cartridge systems,
ceramic-enclosed probes especially suited for arthroscopic surgery and
adjustable touch-control handpieces have been developed by employees of
Registrant; Registrant has retained ownership of all such proprietary
technology. In 1994 and 1995, Registrant has focused much of its efforts on
improving its offerings in urology, thoracoscopy and ENT.
Registrant continues to focus on applications in minimally invasive and
open surgery procedures in gynecology, general surgery, orthopedics, urology,
ENT and thoracic surgery. It is also expanding product development into new
specialties where the Contact Laser System can demonstrate distinct clinical
advantages and cost effectivity relative to traditional surgical and non-Contact
Laser methods.
Competition
Registrant faces substantial competition from other manufacturers of
surgical laser systems, whose identity varies depending on the medical
application for which the laser system is being used, and from traditional
surgical methods. Registrant believes that other companies are developing
surgical lasers and related technologies and that certain of these companies are
substantially larger and have substantially greater resources than Registrant.
These efforts could result in additional competitive pressures on Registrant's
operation.
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Registrant continues to be aware that certain companies have introduced
into the market concepts or products that draw on Contact Laser technology.
Registrant has not determined whether these products infringe upon Registrant's
proprietary technology.
Registrant, through its patented Contact Laser Delivery Systems, is able to
produce a wide range of temperature gradients which address a broad range of
surgical procedures within multiple specialties. Registrant's multiple specialty
capability reduces a hospital's need to purchase several lasers to meet its
specialists' varied requirements. These factors, coupled with the tactile
feedback and control provided by its Contact Laser Delivery Systems, are
Registrant's primary competitive strengths.
FDA Matters
Registrant has obtained market clearance from the FDA for a variety of uses
and procedures in gynecology, gastroenterology, urology, pulmonology, general
and plastic surgery, cardio-thoracic surgery, ENT surgery, ophthalmology,
neurology and head and neck surgery.
In December 1994, Registrant received a warning letter from the FDA. The
letter asserted that Registrant had exceeded the bounds of its cleared urologic
indications of use and had made unsubstantiated promotional claims. In 1995,
Registrant successfully defended its urologic indications and promotional
claims. In response to a September 1995 letter sent by the FDA to the medical
device industry, Registrant will conduct clinical trials covering the use of its
products in prostatectomy and treatment of BPH.
In 1995, Registrant received clearances covering a side-firing refractive
fiber and a stand-alone coolant system that can be used to cool the fiber-probe
junction of other laser manufacturers' laser systems. Clearance was also
obtained for a kit providing suction and irrigation tubing for use in the
Sinu-Clear procedure and a flat probe (the DF2) for use in the same fluid medium
procedure. A tonsillectomy claim was later added to the DF2 clearance. Finally,
Registrant received clearance for a series of diode laser systems, called the
Thermalite(TM) laser system. During 1995, Registrant also received clearance
from the FDA for its offerings in percutaneous laser disc decompression, and
expanded its indications in neurosurgery to include incision and excision, in
addition to hemostasis.
Patents
Registrant's patents offer significant protection to the differentiation of
Registrant's Contact Laser Delivery Systems from competitors' products.
Registrant has sought and enjoys such protection principally in the United
States. Registrant's ten patents issued by the U.S. Patent and Trademark Office
expire 17 years from their respective dates of issuance: September 15, 1987
(laser scalpels); April 12, 1988 (coatings); November 22, 1988 (two-piece
disposable laser delivery system); April 18, 1989 (laser probes and scalpels);
January 23, 1990 (supply system for sterile fluids and gases); January 23, 1990
(two-piece disposable laser delivery system); October 13, 1992 (unitary
scalpel); June 22, 1993 (adjustable touch control handpiece); January 10, 1995
(contact or insertion laser probe having wide angle radiation), and May 16, 1995
(fused tip and fiber). Registrant's two Japanese patents, acquired in the fourth
quarter of 1992, relate to an improved laser scalpel and laser surgical
apparatus and will
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aid in the promotion of Registrant's products there. Registrant has several
other patents pending before the U.S. Patent and Trademark Office, as well as
other patents and pending applications overseas.
Registrant intends to continue its policy of defending vigorously the
ownership of and the protection from its proprietary technology. However, no
assurance can be given that such policy will be successful. (See Item 3, Legal
Proceedings).
In March 1995, Daniel Schuman, M.D. assigned to Registrant his rights in
patent applications covering the Sinu-Clear(TM) apparatus and procedure. In
April 1995, Registrant obtained an exclusive license from Mark Robert Fumich,
M.D. on patent rights covering accessories to contact probes and scalpels that
aid in the proper placement of contact probes.
Many of Registrant's products and services are offered under trademarks and
service marks. Registrant believes its trademarks encourage customer loyalty and
aid in the differentiation of Registrant's products from competitors' products.
Accordingly, Registrant has registered four of its trademarks with the U.S.
Patent and Trademark Office. It has filed its intent to register seven other
trademarks. Registrant has other registrations issued or pending abroad.
Employees
As of December 31, 1995, Registrant had 97 employees of whom 38 were
engaged in manufacturing, service and distribution, 18 in research and product
development, 29 in sales and marketing and 12 in general administration.
Registrant's employees are not represented by a union. Registrant considers its
relations with employees to be good.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
In addition to Registrant's domestic sales, Registrant currently sells its
products internationally, concentrating historically throughout Western Europe
and Canada, and more recently in the Middle East, the Far East, South America,
India, China and Brazil. During fiscal 1995, 1994 and 1993, domestic sales
represented 79%, 78% and 88%, respectively, of Registrant's total sales.
Item 2. Properties.
Registrant owns approximately four acres in Oaks, Pennsylvania on which a
57,000 square foot office and research/training facility is located. Registrant
has determined that this facility is larger than Registrant's business requires.
Therefore, Registrant is currently actively pursuing a sublease of the facility.
It is anticipated that Registrant can house its administrative and research
training requirements in the manufacturing facility discussed below, with the
additional rental of approximately 10,000-15,000 square feet.
The property and improvements at the Oaks location are currently subject to
a first mortgage with a balance at December 31, 1995 of $3,183,000. The loan
bears interest at 10.5% per annum and is being repaid in equal monthly payments,
including interest, of approximately $34,000 over 20 years.
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The property and improvements are also subject to a second mortgage held by
Montgomery County Industrial Development Corporation ("MCIDC"), on behalf of
Pennsylvania Industrial Development Authority ("PIDA"), with a balance at
December 31, 1995, of $1,551,000. The loan bears interest at 3% per annum and
incorporates certain job creation targets which Registrant did not achieve as
anticipated. Under the job creation clause a prospective interest rate
adjustment could result from failure to achieve specified levels of employment.
Management believes that if a rate adjustment is levied, it would not exceed a
2% prospective increase. The loan is being repaid in equal monthly installments,
including interest, of approximately $14,000 over 15 years.
As a condition to the second mortgage, Registrant is required to hold
collateral in favor of MCIDC, the terms of which will extend until Registrant
has had four consecutive profitable calendar quarters. At December 31, 1995, the
required amount of this security was $765,036; the form of the collateral was a
standby letter of credit of $576,000, with the remainder covered by certain
fixed assets and a second security interest in Registrant's accounts receivable
and inventories.
Registrant is seeking to sub-lease and/or sell its office and
research/training facility in an effort to rationalize its expenditures. No
assurance can be given that Registrant will find a sub-tenant or buyer, or that
if such should be found, approvals from Registrant's lenders will be secured.
Registrant entered into a lease in October 1992 for 36,300 square feet in
an industrial park located approximately one-quarter of a mile from Registrant's
office facility. This facility houses Registrant's final assembly operations and
proprietary production of Laser Probes and Laser Scalpels and manufacturing
operations of laser units. Registrant's management believes that, if Registrant
were to sublet its office facility, the capacity within the manufacturing
facility, plus an additional 10,000-15,000 square feet, would suffice to absorb
all of Registrant's office, research/training and manufacturing space
requirements. Registrant will consider this facility as well as alternative
leasing possibilities, which management believes are readily available, if it is
successful in subleasing or selling its office facility. The initial five-year
term on the lease of the manufacturing facility expires in January 1997.
Registrant also holds a lease on its former manufacturing facility in
Hebron, Kentucky under which Registrant has sublet approximately 19,500 sq. ft.
Registrant leased 32,000 sq. ft. through August 2000 in this facility.
Registrant continues to seek subletting opportunities for the remaining 12,500
sq. ft. Registrant transitioned the warehousing and distribution center
operations from this facility to the Oaks, Pennsylvania facility during 1992.
Registrant carries fire, casualty, business interruption and public
liability insurance for its facilities in amounts that management deems
adequate.
Item 3. Legal Proceedings.
Sharplan. On May 8, 1990, Registrant brought a patent infringement action
against Sharplan Lasers, Inc. in the United States District Court for the
District of New Jersey. Registrant subsequently joined as co-defendant Laser
Industries Ltd. ("Laser Industries"), which is Sharplan's parent company, as
well as the FDA-regulated manufacturer of the products in question. Registrant
alleged that Sharplan sold contact tips and tapered fibers that infringed
Registrant's patents. Registrant sought damages in an
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<PAGE>
amount to be proven after liability had been determined. Sharplan answered by
denying Registrant's allegations and asserting that Registrant's patents were
invalid and not infringed.
On April 26, 1991, Sharplan received an exclusive license to manufacture,
use and sell products covered by two patents owned by the University of
Washington. Sharplan then asserted that certain of Registrant's products
infringed the University of Washington patents. On May 14, 1991, Registrant
brought a declaratory judgment action in the United States District Court for
the Eastern District of Pennsylvania against Sharplan and Laser Industries
asking the court to hold that Registrant's products did not infringe the patent
licensed to Sharplan from the University of Washington.
On January 5, 1993, the New Jersey and Pennsylvania actions against
Sharplan and Laser Industries were consolidated in the United States District
Court for the Eastern District of Pennsylvania. On March 26, 1993, the jury
delivered a verdict that Sharplan's conical sharpened fibers and the
overwhelming majority of its sapphire contact probes and scalpels infringed
Registrant's patents and that such infringement had been willful. The jury also
upheld the validity of Registrant's core Contact Laser patents and found that
Registrant's products did not infringe the University of Washington patents. The
court issued its order on April 12, 1993.
On October 5, 1993, the court issued an order denying defendants' motions
for judgment and a new trial and wrote a 23-page opinion in support of the
order. Appeals by Registrant and Sharplan and Laser Industries were filed with
the Court of Appeals for the Federal Circuit. Registrant appealed a 1991 grant
of summary judgment in favor of Sharplan by the United States District Court in
the District of New Jersey on the grounds that Sharplan's sapphire conical probe
tips did not infringe Registrant's patent because, in the court's view, the
patent in question covered all optically transmissive materials except sapphire.
Notwithstanding such grant of summary judgment, the jury was given the
opportunity to find, and did find, that Sharplan's sapphire conical probe tips
infringed both the patent in question and another of Registrant's patents
covering probe tip coatings. On August 22, 1994, the Court of Appeals affirmed
the Eastern District finding that Sharplan and Laser Industries had willfully
infringed Registrant's patents. As Registrant had anticipated, the Court of
Appeals also reversed as clearly erroneous the New Jersey district court's grant
of summary judgment on Sharplan's sapphire conical probe tips.
On July 3, 1995, Sharplan filed an action against Registrant, alleging that
Registrant had fraudulently withheld information responsive to a request made by
Sharplan for document production in the discovery phase for the liability trial
for patent infringement held in March 1993. Sharplan asked the court to set
aside the liability judgment resulting from the March 1993 trial and to declare
the Registrant's Contact Laser patents invalid and unenforceable, or in the
alternative, to grant Sharplan a new liability trial. Registrant submitted a
comprehensive rebuttal to all of Sharplan's allegations, all of which Registrant
considered specious.
A separate damages trial to be conducted before the same judge in the
Eastern District of Pennsylvania was targeted to begin in January 1996.
Registrant filed its expert reports on damages in September 1995. Sharplan had
not filed its expert reports. On December 6, 1995, Registrant and Sharplan
settled the suit, with Sharplan paying Registrant cash of $8.125 million in
December 1995. Registrant and Sharplan agreed to dismiss all actions, including
those motions still pending before the
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<PAGE>
court, with prejudice. The court entered the dismissal on December 7, 1995. The
permanent injunction entered against Sharplan and Laser Industries in April 1993
continues in force.
Surgimedics/Heraeus. On December 19, 1990, Registrant brought a patent
infringement action against a company now known as Endeavor Surgical Products,
Inc. ("Surgimedics/ESP"), which is a subsidiary of Surgimedics, Inc., in the
United States District Court for the Eastern District of Pennsylvania.
Registrant alleged that Surgimedics/ESP had manufactured and sold infringing
tapered fibers, had infringed another patent by instructing users how to
pre-coat tapered fibers, had infringed Registrant's registered trademark
"SLT(R)", had engaged in false advertising, and had marketed devices which adapt
non-Registrant fiber delivery systems into Registrant's Contact Laser System and
which also infringed claims of one of Registrant's patents.
As part of the same action, Registrant charged Heraeus LaserSonics, Inc.
("Heraeus") with patent infringement for selling tapered fibers which it
procured from Surgimedics/ESP and which infringed Registrant's patent position.
Heraeus was also charged with advising customers how to pre-coat tapered fibers,
thereby inducing the infringement of another of Registrant's patents. Registrant
charged that Heraeus had made false statements concerning Registrant's Contact
Laser Technology. Moreover, Registrant charged that as a result of the
procurement of tapered fibers from Surgimedics/ESP, Heraeus was in breach of a
supply agreement between itself and Registrant (the "Supply Agreement").
On October 20, 1993, an action was filed against Registrant by
Surgimedics/ESP in the United States District Court for the Southern District of
Texas. Surgimedics/ESP alleged in the Texas action that Registrant had engaged
in unfair competition and in business disparagement and trade libel against
Surgimedics/ESP, and had tortiously interfered with Surgimedics/ESP's
prospective business relationships. Registrant counterclaimed that
Surgimedics/ESP had falsely mischaracterized the quality of Registrant's
products. Surgimedics/ESP asked for a preliminary injunction, but was denied.
A settlement was reached in September 1994 on almost all of the issues
in the patent infringement action which Registrant had brought in the United
States District Court for the Eastern District of Pennsylvania against
Surgimedics/ESP and Heraeus and consolidated with a similar patent infringement
action brought by Registrant in 1991 in the same court against Laserscope, and
also in the action which Surgimedics/ESP brought on October 20, 1993 against
Registrant in the United States District Court for the Southern District of
Texas.
Under the terms of the settlement agreement, Surgimedics/ESP may continue
to market its current line of MicroContact(R) fiber delivery systems. In return,
as part of the agreement, Surgimedics/ESP agreed to pay Registrant an
undisclosed sum of money and to cease providing adapters to customers for use of
non-authorized delivery systems on Registrant's Contact Laser units. As part of
the same settlement, Registrant also settled its claims against Laserscope and
withdrew its patent infringement claims against Heraeus.
However, Registrant continued its other claims against Heraeus, principally
comprising Heraeus' breach of its Supply Agreement with Registrant. On November
9, 1995, Registrant and Heraeus entered into a Settlement Agreement and Mutual
Release, with Heraeus agreeing to pay Registrant a confidential sum of money.
The parties also entered into a Contact Fiber Supply Contract, whereby
Registrant will
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<PAGE>
supply Heraeus its requirements of orb-tipped and conical-tipped fiber delivery
systems. That contract is targeted to go into effect in mid-1996. Registrant
continues to supply Heraeus with sapphire contact probes under the terms of its
March 1989 Supply Agreement.
Bard. On November 21, 1994, Registrant commenced litigation in the United
States District Court for the Eastern District of Pennsylvania against C. R.
Bard, Inc. and the Bard Urological Division due to Bard's failure to comply with
what Registrant believes to be Bard's contractual obligation. The complaint
alleged breach of an agreement between Registrant and Bard, anticipatory
repudiation of such agreement, negligent misrepresentation and unfair
competition. Registrant asks for specific performance and, in addition or in the
alternative, for monetary damages. Registrant also has asked for an injunction
against, and indemnification from, Bard's enforcement against Registrant with
respect to patent rights potentially inuring to Bard. Finally, Registrant has
asked for punitive damages. The complaint demanded specific performance or a
monetary judgment in excess of $62 million. Registrant has amended its complaint
to add a count in contract interference and another count in civil conspiracy.
Registrant also moved the court to add Trimedyne, Inc. as an additional
defendant.
Shortly after culminating the agreement, Bard cited potential exposures
under its Development, Supply and License Agreement dated June 28, 1991 with
Trimedyne as well as threatened litigation by Trimedyne as the reasons for not
going forward with its agreement with Registrant. Bard had represented to
Registrant on numerous occasions over the previous two years that it was not
limited by its agreement with Trimedyne from concluding a comprehensive
relationship with Registrant. Because of these representations and other
commitments made by Bard during the past two years, Registrant forewent
alternative strategic opportunities which would have provided significant
financial benefit to Registrant.
In addition, due to these representations and commitments, Registrant
shared with Bard confidential information regarding Registrant's technologies,
engineering documentation, product development plans, manufacturing processes
and marketing and pricing strategies and plans. Registrant had also modified its
product development direction and plans to meet Bard's requirements.
On October 3, 1995, the court granted Registrant's motion to join Trimedyne
as a necessary party to the action. Trimedyne has filed a motion seeking to be
released from the action for want of personal jurisdiction in the Eastern
District of Pennsylvania. Registrant has vigorously opposed the motion, on which
the court has not yet ruled.
Trimedyne. In January 1995, Trimedyne, Inc. filed a patent infringement
action against Registrant. The suit was brought in the United States District
Court for the Central District of California. Trimedyne has alleged that various
products of Registrant infringe its U.S. Patent Nos. 4,646,737 and 5,380,317.
Registrant has answered the complaint, denying infringement and raising several
affirmative defenses, including the statute of limitations, laches and equitable
estoppel.
U.S. Patent No. 4,646,737 was issued March 3, 1987, well after Registrant's
Contact Laser(TM) probes and scalpels had been in the marketplace. The patent
covers what is referred to in the laser industry as the "hot metal tip" that
Trimedyne had marketed for use in laser angioplasty a number of
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<PAGE>
years ago. On November 9, 1995, the court granted Registrant's motion for
summary judgment that its products do not infringe the '737 Patent, either
literally or under the doctrine of equivalents.
U.S. Patent No. 5,380,317 was issued on January 10, 1995. Trimedyne has
directed this patent against Registrant's side-firing free-beam probe, called
the SFB 1. Registrant believes that the features of the SFB 1 fall within the
public domain, and thus outside the claims of Trimedyne's patent. Registrant
intends to move for summary judgment that its products do not infringe the '317
Patent. No assurance can be given that the court will grant this motion.
Registrant has determined that the '737 and '317 Patents are patents that
confer rights and obligations on C.R. Bard, Inc. pursuant to the June 1991
Development, Supply & License Agreement between Bard and Trimedyne.
On January 12, 1996, Trimedyne filed an amendment to its complaint,
alleging that most of Registrant's probes and scalpels infringe a third patent
in its possession, U.S. Patent No. 4,773,413. The '413 Patent is a divisional
patent of a continuation-in-part patent to the '737 Patent. It covers, among
other things, a form of hot metal tip that allows direct laser irradiation of
tissue by means of a central aperture in the tip. The '413 Patent was issued on
September 27, 1988. Registrant has answered that none of its products infringe
the '413 Patent. On March 6, 1995, Registrant filed a motion for summary
judgment to this effect. No assurance can be given that the court will grant
this motion.
On January 16, 1996, Registrant filed a motion with the court, seeking to
have portions of this case declared extraordinary based on conduct of Trimedyne
that Registrant believes to have been egregious. On March 18, 1996, the court
denied Registrant's motion, finding that Registrant had not proved its
contention with proof that fulfilled the standard that it be clear and
convincing. Registrant is not foreclosed from bringing similar motions with
respect to the remaining counts, but Registrant would have to fulfill the same
clear and convincing standard.
Daikuzono. On February 7, 1995, suit was brought against Registrant by
Norio Daikuzono, the inventor of three of its patents in Contact Laser(TM)
Technology. The suit was brought in United States District Court for the
Southern District of Ohio.
The suit alleges that Registrant breached certain contractual requirements
regarding royalties and the inventor's former employment with Registrant. Among
other things, the suit seeks the return of the patents to Mr. Daikuzono and
payment of allegedly unpaid salary and royalties. Mr. Daikuzono was employed by
Registrant from March 1, 1987 until October 31, 1988, when he resigned his
position as Vice President of Research and Development. He has not performed any
services for Registrant since that date. Registrant has paid, or set aside
pending receipt of appropriate tax documentation, the patent royalties to Mr.
Daikuzono throughout the years in accordance with its understanding of the
contract and Mr. Daikuzono's instructions.
Mr. Daikuzono's claims alleging fraud have been dismissed by the court;
Registrant believes that the remaining three claims are also without merit. In
its answer, Registrant has denied Mr. Daikuzono's allegations and asserted
various defenses, including equitable estoppel, laches, statute of limitations,
unclean hands, and accord and satisfaction. Registrant also has filed
counterclaims against Mr.
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<PAGE>
Daikuzono, including claims for unfair competition, fraud, trademark
infringement, failure to disclose and assign developments and inventions to
Registrant, breach of a territorial sales provision, failure to repay sums owed
Registrant, breach of Registrant's confidences and breach of a non-competition
obligation owed to Registrant.
On December 11, 1995 Registrant filed a motion to transfer venue in this
case from the Southern District of Ohio to the Eastern District of Pennsylvania,
which motion was granted on January 30, 1996. On January 2, 1996, Mr. Daikuzono
filed a motion seeking to impose a constructive trust on his behalf on the
settlement proceeds of the Sharplan suit. Registrant has opposed this filing,
pointing out, among other things, that the matter is premature and not ripe for
decision. That motion remains pending before the court.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Registrant's Common Stock, $.01 par value, is quoted on the Nasdaq Stock
Market under the symbol "SLTI." As of March 15, 1996, there were approximately
780 record holders of Registrant's Common Stock. On March 15, 1996, the closing
price of Registrant's Common Stock on the Nasdaq Stock Market was $2.50 per
share. The following table sets forth the high and low sales prices for
Registrant's Common Stock for each quarterly period within the two most recent
fiscal years.
High Low
---- ---
1995
First Quarter 2.88 1.63
Second Quarter 2.00 1.38
Third Quarter 1.75 1.06
Fourth Quarter 1.88 1.00
1994
First Quarter 3.25 2.00
Second Quarter 4.63 1.63
Third Quarter 4.25 3.25
Fourth Quarter 3.75 2.06
Registrant has never paid any cash dividends on its Common Stock and does
not expect to pay cash dividends in the foreseeable future. Registrant's bank
line of credit agreement prohibits the declaration or payment of any dividends
or distributions on any shares of its capital stock at any time there are
outstanding obligations to the bank, without the bank's prior written consent.
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<PAGE>
Item 6. Selected Consolidated Financial Data.
The following table summarizes certain selected financial data for the five
years in the period ended December 31, 1995. The historical selected financial
data for the Registrant for each of the five years in the period ended December
31, 1995 are derived from, and are qualified by reference to, the financial
statements of the Registrant which are included elsewhere in this report. Such
financial statements have been audited by Arthur Andersen LLP, independent
public accountants, to the extent indicated in their report. This data should be
read in conjunction with the Registrant's financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this report.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $14,839 $21,508 $18,237 $21,736 $28,712
Gross profit 8,702 13,494 11,053 13,687 17,332
Percentage of sales 58.6% 62.7% 60.6% 63.0% 60.4%
Selling, general and administrative expenses 10,047 10,768 10,444 14,886 17,262
Product development expenses 2,143 2,068 2,485 2,764 2,875
Non-recurring charges (credits) 1,915 (1) (892)(1) 397 (1) 2,750 (3) 1,215 (4)
Net gain on settlement of litigation (5,926)(2) - - - -
Operating income (loss) 523 1,532 (2,273) (6,713) (4,020)
Net income (loss) (58) 913 (2,935) (7,248) (3,972)
Net income (loss) per share ($0.01) $0.10 ($0.33) ($0.81) ($0.44)
Shares used in calculation of net income
(loss) per share 9,851 9,309 9,011 8,982 8,936
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $8,147 $4,143 $2,866 $2,918 $10,611
Short-term bank borrowings - - - - 3,500
- ------------------------------------------------------------------------------------------------------------------------------------
Cash position, net of short-term borrowings 8,147 4,143 2,866 2,918 7,111
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable, net 3,225 4,468 3,404 2,896 4,092
Inventories 3,866 4,725 4,626 6,287 6,951
Total assets 24,821 26,454 25,079 27,312 37,930
Long-term debt 4,503 4,719 5,054 5,117 5,681
Convertible subordinated debentures 1,786 1,848 2,165 2,250 -
Stockholders' equity $15,690 $15,685 $12,420 $15,207 $22,387
====================================================================================================================================
</TABLE>
(1) See Note 11 of Notes to Consolidated Financial Statements.
(2) See Note 4 of Notes to Consolidated Financial Statements.
(3) Stockholders' suit settlement.
(4) $815 consolidation and relocation of Kentucky and Florida operations, and
$400 provision for legal fees in stockholders' class action litigation.
No cash dividends were declared during any of the periods presented.
The accompanying Consolidated Financial Statements and Notes thereto are an
integral part of this information.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net Sales
Registrant's net sales of Contact Laser(TM) Systems are primarily comprised
of Nd:YAG Laser Systems and Contact Laser Delivery Systems and related
accessories. For the three years presented above, the U.S market was serviced
predominantly by a direct sales force, while sales outside the United States
were derived through a network of distributors. In 1995, net sales were $14.8
million, a $6.7 million, or 31%, decrease from 1994 sales of $21.5 million.
Net sales of Nd:YAG Laser Systems in 1995 decreased by 61% on a 58% decline
in units. The decrease was mainly caused by the introduction in late 1994 of an
electrosurgical rollerball-type product which competed with Registrant in the
urology market in 1995, negatively impacting the sales of Nd:YAG Laser Systems
in the United States, as well as in international markets. In addition to the
impact specifically on the urology market, capital purchases by hospitals
continued to be generally weak, affecting particularly the U.S. and European
hospital markets. Two other factors were also operative. First, sales to C. R.
Bard in 1994, for which there were no corresponding sales in 1995, accounted for
15% of the decrease. Second, lower sales to Mediq PRN/SLT, Registrant's joint
venture rental company, accounted for 16% of the decrease. During 1995, average
unit prices were 4% and 7% lower than 1994 average unit prices in the
international and domestic markets, respectively.
Net sales of Nd:YAG laser units in 1994 increased by 56% on a 68% increase
in units over 1993. International expansion, excluding sales to C. R. Bard,
accounted for a significant portion of the growth in net sales of Nd:YAG Laser
Systems, increasing by 233%, while domestic net sales of Nd:YAG Laser Systems
grew 24%, partially as a result of sales to Mediq PRN/SLT. Sales to C. R. Bard
in 1994 were approximately the same as in 1993. During 1994, average unit prices
in both the international and domestic markets were consistent with the average
unit price for each market in 1993. The greater percentage increase in unit
sales relative to net sales resulted from a greater percentage increase in sales
in the international markets than in the domestic market.
Net sales of Contact Laser Delivery Systems and related accessories
decreased 14% in 1995 due mainly to competition within the urology market. In
1994, net sales of Contact Laser Delivery Systems increased 4% primarily from
growth in the urology market and from sales to Mediq PRN/SLT.
Management believes that the general market conditions that were
experienced over the three years presented will likely not improve during 1996.
To bring its expenditures in line with its revevues, Registrant effected a
signficant reduction in its workforce in July 1995 (See "Item 1(a), General
Development of Business" and the section below "Operating Expenses"). Registrant
has also been seeking a sub-tenant for its office and research/training facility
(See Item 2, "Properties").
In response to the negative market conditions, management has invested and
will continue to invest in innovative product development and will continue to
develop and expand its strategic business relationships while actively pursuing
business combination or acquisition opportunities aimed at enhancing the
generation of new revenues. In 1996, SLT will continue to expand its cooperative
efforts
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<PAGE>
with Tenet Healthcare in the specialty areas of urology, sinus surgery and
thoracic surgery. In addition, management expects that the recently introduced
VaporMax urologic probe will enhance SLT's competitive position in the urologic
surgery market. Further, to offset the constraints in selling capital equipment,
SLT had introduced its select line of products, equipped with an SMA-905
connector, which makes certain products from SLT's proprietary line of Contact
Laser Delivery Systems available to be used on other manufacturers' laser
systems. The initial products made available with this connector were SLT's
versatile line of urologic products, and expansion into other proprietary
multi-specialty products will be made during 1996.
Gross Profit
Gross profit for the year ended December 31, 1995 decreased $4.8 million or
35% from the prior year on a 31% decrease in net sales. As a percentage of net
sales, gross profit was 59%, down from 63% in 1994. The decrease is attributable
to higher fixed manufacturing costs per unit due to the lower volume of net
sales.
Gross profit for the year ended January 1, 1995 increased $2.4 million or
22% from the prior year. As a percentage of net sales, gross profit was 63%, up
from 61% in the 1993 fiscal year. The increase in gross profit was primarily
attributable to increases in volume and lower costs associated with the
self-manufacture of both Nd:YAG Laser Systems and Contact Laser Delivery
Systems, partially offset by a shift in market mix in favor of international
sales.
Operating Expenses
Selling, general and administrative expenses were $10.1 million in 1995,
compared to $10.8 million in 1994, a decrease of 6%. At the end of the second
quarter of 1995, SLT implemented a reduction in workforce to bring its
employment levels in line with the requirements needed to support its actual
sales levels. Employment reductions totaled 27% and were made in most functional
areas. Following the cost reduction measures, selling, general and
administrative expenses were $4.4 million in the second half of 1995 versus $5.6
million in the first half of 1995, an annualized $2.4 million reduction.
Selling, general and administrative expenses were $10.8 million in 1994, an
increase of 3% from the 1993 level of $10.4 million.
Product Development
Product development costs were $2.1 million in both 1995 and 1994. SLT
continues to focus its product development activities on developing
next-generation lasers and on expanding the utility of its laser systems through
the development of innovative laser delivery systems for use in various surgical
specialties in which lasers have a distinct advantage and are cost effective.
Non-Recurring Charges (Credits)
In 1995, SLT recorded non-recurring charges of $1,915,000 representing
fourth quarter charges of $828,000 for the write-down of certain sharpened fiber
inventories; $697,000 for the write-off of certain intangible assets acquired in
the 1990 technology acquisition from ALST; and a second quarter charge of
$390,000 for severance and other costs incurred in connection with a workforce
reduction. The write-down of certain inventories in the fourth quarter was
primarily predicated on changes in the market for certain sharpened fiber
product offerings. Competitive information gained during this period
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<PAGE>
indicated that the size of the market was smaller than had been anticipated,
lowering SLT's expectations for future sales of these products. The write-off of
certain intangible assets acquired in the 1990 technology acquisition from ALST
resulted from the release in October 1995 of ALST and principals thereof from
certain provisions of the original 1990 agreements.
In 1994, SLT recorded a benefit of $838,000 representing the settlement of
a lawsuit with ALST, partially offset by a separate legal settlement with a
former distributor. The net benefit is reflected in the statement of operations
as a credit of $892,000 included in operating expenses and interest expense of
$54,000. In 1993, SLT recorded a non-recurring charge of $397,000 to increase
the consolidation and relocation reserve established for the 1991 relocation of
its manufacturing facilities from Kentucky to Pennsylvania.
Net Litigation Settlement
In December 1995, SLT received $8,125,000 in cash in settlement for damages
relating to the patent infringement suit which SLT had brought against Sharplan
Lasers, Inc. in May 1990, and later against its parent company, Laser Industries
Ltd. (See Item 3, "Legal Proceedings.") Netted against the gain from the
settlement was the write-off of $2,199,000 for previously capitalized patent
litigation costs (see Note 4 of Notes to Consolidated Financial Statements).
Interest
Net interest expense of $512,000 decreased by $90,000 from $602,000 in
1994. The decrease was due primarily to reduced interest expense on long-term
debt and to higher interest income due to the higher level of cash and cash
equivalents.
Net interest expense in 1994 of $602,000 decreased by $46,000 from $648,000
in 1993. This resulted from a reduction of interest expense due to the
conversion of a portion of the convertible subordinated notes that were issued
in connection with the settlement of the stockholders' litigation (see Note 9 of
Notes to Consolidated Financial Statements), and reduced interest expense on
long-term debt, offset in part by interest expense incurred in settlement of
litigation with a former distributor. Additionally, interest income increased
due to higher levels of cash and cash equivalents.
Income Taxes
The tax provision of $50,000 in 1995 was for federal alternative minimum
and state income taxes; the provision in 1994 of $26,000 was for state income
taxes. There was no provision for income taxes in 1993 due to the net taxable
loss incurred. SLT expects that its effective tax rate for 1996 will remain
significantly lower than the statutory rate, due to continued availability of
its net operating loss carryforwards and tax credit carryforwards.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at December 31, 1995 were
$8.1 million, an increase of $4.0 million over the January 1, 1995 balance of
$4.1 million. In each of the two years, $100,000 was restricted and pledged in
favor of American United Life Insurance Company ("AULIC") as a condition of the
first mortgage with AULIC (see Note 9 of Notes to Consolidated Financial
Statements). At December 31, 1995 and January 1, 1995, letters of credit, issued
under Registrant's bank
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<PAGE>
line of credit, were outstanding in favor of the Montgomery County Industrial
Development Corporation ("MCIDC") as a condition of the Mortgage and
Security Agreement with MCIDC (see Note 9 of Notes to Consolidated Financial
Statements). The letters of credit amounted to $576,000 and $629,000 at the end
of 1995 and 1994, respectively. The letter of credit requirement extends until
Registrant records four consecutive quarters of profitability in a given
calendar year. In addition, Registrant has a $2.75 million credit facility with
a bank. This facility includes a sub-line for letters of credit of $750,000,
under which the aforementioned letters of credit were issued. Other than the
letter of credit requirement, and one other minor trade letter of credit, there
were no borrowings outstanding under the line of credit. Borrowings under the
line are secured by Registrant's accounts receivable and inventories and were
subject to a borrowing base calculation at December 31, 1995 which was
eliminated subsequent to the end of 1995. The line is subject to Registrant
maintaining certain financial covenants as defined. This line of credit facility
expires on June 30, 1996.
Net cash provided from operating activities was $5.6 million in 1995,
compared to $1.1 million in 1994. This increase was due mainly to the net gain
from the patent litigation settlement offset in part by the net loss incurred in
1995 before non-recurring charges, compared to a net profit of $0.1 million
before non-recurring credits in 1994. Of the $8.1 million received in the
settlement, $1.2 million was used to pay legal fees that had been deferred
pending this settlement.
Net cash used in investing activities increased $3.3 million in 1995 to
$4.5 million from $1.2 million in 1994. The increase was due primarily to the
purchase in 1995 of short-term investments. Capital expenditures in 1996 of
approximately $500,000 are anticipated, mainly for manufacturing and research
and development purposes. Registrant, however, is not contractually committed to
spend any of this amount. In 1995 and 1994, Registrant invested $672,000 and
$476,000 respectively in its patents, primarily in defense costs. Due to the
settlement of its litigation with Sharplan Lasers, Inc., and its parent Laser
Industries Ltd., additional investment in defense of Registrant's patents
relative to this suit will not be incurred in 1996.
Net cash used in financing activities was $315,000 in 1995, compared to net
cash provided by financing activities of $1,315,000 in 1994. The decrease in
cash provided by financing activities is due primarily to the 1994 net proceeds
from an Investment Agreement which Registrant entered into with Kontron
Instruments Holding N.V. ("Kontron Instruments") under the terms of which
Kontron Instruments made a $2.0 million equity investment, representing a 7%
ownership position in Registrant.
Management believes that Registrant's current cash position and line of
credit availability will be sufficient to meet its commitments for long-term
debt (see Note 9 of Notes to Consolidated Financial Statements), other
commitments and contingencies (see Note 16 of Notes to Consolidated Financial
Statements) and capital expenditures.
Management believes that inflation has not had a material effect on
operations.
- 21 -
<PAGE>
Item 8. Financial Statements and Supplementary Data. Page
----
Report of Independent Public Accountants .................................. 23
Consolidated Balance Sheets at December 31, 1995 and January 1, 1995 ...... 24
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1995 ........................................ 25
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1995 ............................... 26
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1995 ........................................ 27
Notes to Consolidated Financial Statements ................................ 28
Schedule II - Valuation and Qualifying Accounts ........................... 38
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- 22 -
<PAGE>
ARTHUR ANDERSEN LLP
Report of Independent Public Accountant
To Surgical Laser Technologies, Inc.:
We have audited the accompanying balance sheets of Surgical Laser Technologies,
Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1995 and
January 1, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements and schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. The 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 Surgical Laser Technologies,
Inc. and subsidiaries as of December 31, 1995 and January 1, 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in Item 8 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pa.
February 7, 1996
- 23 -
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par values)
<TABLE>
<CAPTION>
Dec. 31, 1995 Jan. 1, 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $4,903 $4,143
(including restricted amounts of $100)
Short-term investments 3,244 -
Accounts receivable, net of allowance for
doubtful accounts of $118 and $110, respectively 3,225 4,468
Inventories 3,866 4,725
Other 194 257
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 15,432 13,593
Property and equipment, net 8,250 8,869
Patents and licensed technology, net 564 3,627
Other assets 575 365
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $24,821 $26,454
================================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $212 $314
Accounts payable 467 1,298
Accrued liabilities 2,163 2,590
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,842 4,202
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt 6,289 6,567
- --------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (see Note 16)
Stockholders' Equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,854 shares and 9,840 shares issued and outstanding 99 98
Additional paid-in capital 32,588 32,526
Accumulated deficit (16,997) (16,939)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,690 15,685
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $24,821 $26,454
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 24 -
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share)
<TABLE>
<CAPTION>
For the Year Ended
Dec. 31, 1995 Jan. 1, 1995 Jan. 2, 1994
<S> <C> <C> <C>
Net sales $14,839 $21,508 $18,237
Cost of sales 6,137 8,014 7,184
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 8,702 13,494 11,053
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 10,047 10,786 10,444
Product development 2,143 2,068 2,485
Non-recurring charges (credits) (see Note 11) 1,915 (892) 397
- ----------------------------------------------------------------------------------------------------------------------
14,105 11,962 13,326
- ----------------------------------------------------------------------------------------------------------------------
Net litigation settlement (see Note 4) 5,926 - -
Operating income (loss) 523 1,532 (2,273)
Equity in (income) loss of joint venture 19 (9) 14
Interest expense 624 691 720
Interest (income) (112) (89) (72)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (8) 939 (2,935)
Income taxes 50 26 -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) ($58) $913 ($2,935)
======================================================================================================================
Net income (loss) per share ($0.01) $0.10 ($0.33)
======================================================================================================================
Shares used in calculation of net income (loss) per share 9,851 9,309 9,011
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 25 -
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Deferred
Stock Capital Deficit Compensation Total
<S> <C> <C> <C> <C> <C>
Balance, January 3, 1993 $90 $30,040 $(14,917) $(6) $15,207
Exercise of stock options (16 shares) - 57 - - 57
Conversion of subordinated notes
to common stock (19 shares) - 85 - - 85
Amortization of deferred compensation - - - 6 6
Net (loss) - - (2,935) - (2,935)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1994 $90 $30,182 $(17,852) - $12,420
Exercise of stock options (46 shares) - 115 - - 115
Proceeds from issuance of common
stock, net of expenses (696 shares) 7 1,913 - - 1,920
Conversion of subordinated notes
to common stock (70 shares) 1 316 - - 317
Net income - - 913 - 913
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $98 $32,526 $(16,939) - $15,685
Conversion of subordinated notes
to common stock (14 shares) 1 62 - - 63
Net (loss) - - (58) - (58)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $99 $32,588 $(16,997) $- $15,690
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 26 -
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended
Dec. 31, 1995 Jan. 1, 1995 Jan. 2, 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ($58) $913 ($2,935)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in (income) loss of joint venture 19 (9) 14
Depreciation and amortization 1,833 2,004 2,243
Imputed interest (20) 28 18
Non-recurring charges (credits) 3,750 (838) 397
(Increase) decrease in assets:
Accounts receivable 1,243 (1,064) (508)
Inventories 135 8 1,974
Other current assets 64 69 (58)
Other assets (89) 88 (56)
Increase (decrease) in liabilities:
Accounts payable (832) (55) 376
Accrued liabilities (436) 3 226
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,609 1,147 1,691
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Sale (purchase) of short-term investments (3,244) - 1,236
Net additions to property and equipment (468) (709) (424)
Patent costs (672) (476) (745)
Investment in joint venture (150) - (218)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,534) (1,185) (151)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Payments on long-term debt (315) (606) (511)
Proceeds from debt - - 98
Proceeds from exercised stock options and warrants - 1 57
Proceeds from issuance of common stock - 1,920 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (315) 1,315 (356)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 760 1,277 1,184
Cash and Cash Equivalents, Beginning of Year 4,143 2,866 1,682
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $4,903 $4,143 $2,866
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 27 -
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Note 1
Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Surgical Laser Technologies, Inc. and its wholly owned subsidiaries ("SLT"). All
material intercompany balances and transactions have been eliminated.
Nature of Operations
SLT is engaged in the development, manufacture and sale of proprietary laser
systems for both contact and non-contact surgery. SLT's Contact Laser(TM) System
is comprised of a portable laser unit that delivers laser energy through Contact
Laser Delivery Systems. SLT's current product line includes four portable laser
units of various power levels, a family of over 100 laser probes, laser
scalpels, fibers and handpieces that provide different Wavelength Conversion(TM)
effect properties, power densities and configurations appropriate for cutting,
coagulation or vaporization.
Fiscal Year
SLT's fiscal year is the 52-or 53-week period ending the Sunday nearest to
December 31. Fiscal years 1995, 1994 and 1993 included 52 weeks.
Basis of Presentation
Certain prior period amounts have been reclassified to conform to the fiscal
1995 presentation.
Cash, Cash Equivalents and Short-term Investments
SLT invests its excess cash in highly liquid short-term investments included in
the balance sheet at the cost which approximates fair market value. For the
purpose of the statements of cash flows, SLT considers all highly liquid
investment instruments purchased with an original maturity of three months or
less to be cash equivalents. Investments purchased with a maturity of more than
three months are considered short-term investments. Cash, cash equivalents and
short-term investments consist of the following:
December 31, 1995 January 1, 1995
----------------- ---------------
(In thousands)
Cash and money market accounts $ 544 $1,284
Repurchase agreements 274 202
Certificates of deposit 100 100
Commercial paper 3,985 -
U.S. Government securities 3,244 2,557
-------- --------
$8,147 $4,143
======== ========
Restricted cash at December 31, 1995 and January 1, 1995 consisted of $100,000
pledged to the American United Life Insurance Company ("AULIC"), as a condition
of the first-position mortgage agreement with AULIC (see Note 9).
Property, Equipment, Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, primarily
three to ten years for demonstration equipment, furniture and fixtures,
machinery and equipment, and 30 years for buildings. Leasehold improvements are
amortized over the lesser of their useful lives or the lease term. Expenditures
for major renewals and betterments to property and equipment are capitalized,
and expenditures for maintenance and repairs are charged to operations as
incurred.
- 28 -
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Patent Costs
Costs incurred to obtain or defend patents are capitalized and amortized over
the shorter of their estimated useful lives or eight years. Capitalized
litigation costs are netted against recoveries if and when a recovery is
attained (see Note 4).
Revenue Recognition and Warranty Costs
Upon shipment of its product, SLT records a sale and accrues the related
estimated warranty costs.
Product Development Costs
Costs of research, new product development and product redesign are charged to
expense as incurred.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Supplemental Cash Flow Information
Interest paid was $624,000, $690,000, and $742,000 in 1995, 1994 and 1993,
respectively. Income taxes paid in 1995, 1994 and 1993 were immaterial.
The following noncash investing and financing activities took place: (i) during
1994, SLT settled lawsuits (see Note 6) which reduced the current portion of
long-term debt by $950,000 and accounts payable by $16,000; (ii) during 1995 and
1994, $62,000 and $316,000, respectively, of the 8% convertible subordinated
notes were converted at the request of the noteholders into common stock at a
conversion price of $4.50 per share; (iii) for bonuses previously accrued, SLT
issued additional common stock valued at the time of issuance at $114,000 and
$55,000 in the form of restricted stock awards for 1994 and 1993, respectively;
(iv) during 1993, SLT issued notes payable of $35,000 and $654,000 in connection
with the acquisition of patents and financing of certain patent litigation,
respectively. The $35,000 was paid in quarterly installments through April 1994
with interest at an annual rate of 5%. The $654,000 note had an annual interest
rate of 6% and was paid in monthly installments through April 1995.
Net Income (Loss) Per Share
Net income (loss) per share (primary and fully diluted) has been computed using
the weighted average number of common shares and common share equivalents
outstanding during each year. If the inclusion of common share equivalents would
have an anti-dilutive effect in the aggregate, they have been excluded from the
calculation. There is no material difference between the shares used for primary
and fully diluted net income (loss) per share in each of the years presented.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
Of." SFAS No. 121 establishes accounting standards for the impairment of long
lived assets, certain identifiable intangibles and goodwill. SLT is required to
adopt SFAS No. 121 effective January 1, 1996. SFAS No. 121 is not expected to
have a material effect on SLT's financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which will be adopted by SLT in 1996 as required by this
statement. SLT has elected to continue to measure such compensation expense
using the method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issue to Employees," as permitted by SFAS No. 123. When
adopted, SFAS No. 123 will not have any effect on SLT's financial position or
results of operations but will require SLT to provide expanded disclosure
regarding its stock-based employee compensation plans.
- 29 -
<PAGE>
Note 2
Inventories:
(In thousands)
December 31, 1995 January 1, 1995
----------------- ---------------
Raw materials and work-in-process $2,158 $2,934
Finished goods 1,708 1,791
------ ------
$3,866 $4,725
====== ======
Note 3
Property and Equipment:
(In thousands)
December 31, 1995 January 1, 1995
----------------- ---------------
Land $ 750 $ 750
Building 6,047 6,047
Furniture and office equipment 3,729 3,693
Demonstration equipment 1,661 1,513
Machinery and equipment 1,957 1,843
Leasehold improvements 454 451
-------- --------
14,598 14,297
Less-Accumulated depreciation and amortization (6,348) (5,428)
-------- --------
Property and equipment, net $ 8,250 $ 8,869
======== ========
At December 31, 1995, net property and equipment includes $96,000 for assets
recorded under capitalized lease arrangements. The related lease obligation of
$26,000 is included in long-term debt at December 31, 1995 (see Note 9).
- 30 -
<PAGE>
Note 4
Patents and Licensed Technology:
(In thousands)
December 31, 1995 January 1, 1995
----------------- ---------------
Patents, net of accumulated amortization
of $351 and $1,269 $ 520 $2,457
Licensed technology, net of accumulated
amortization of $4 and $1,230 (see Note 6) 44 901
Covenants not-to-compete, net of accumulated
amortization of $0 and $604 (see Note 6) -- 269
------ ------
$ 564 $3,627
====== ======
In December 1995, SLT settled its outstanding litigation with Laser Industries
Ltd. and its subsidiary Sharplan Lasers, Inc. for $8,125,000. In connection with
this settlement, that portion of the capitalized patent asset representing legal
fees incurred of $2,199,000 was written off, netting to a gain of $5,926,000, in
accordance with SLT's accounting policy (see Note 1 and Note 6).
In the fourth quarter of 1995, SLT wrote off the remaining unamortized portion
of the costs capitalized in the December 1990 technology acquisition from
Advanced Laser Systems Technology (see Note 6 and Note 11).
Note 5
Other Assets: December 31, 1995 January 1, 1995
(In thousands) ----------------- ---------------
Investment in joint venture $344 $213
Other 231 152
---- ----
$575 $365
==== ====
SLT is a 50% owner of Mediq PRN/SLT, a joint venture company formed in the third
quarter of 1993 to provide rentals of lasers and related equipment to hospitals
and other health care providers. The investment in Mediq PRN/SLT is recorded
using the equity method of accounting. SLT contributed $150,000 and $218,000 of
capital to the joint venture in 1995 and 1993, respectively. SLT may make
subsequent capital contributions in proportion to its equity share of the joint
venture, as needed and agreed to, by the joint venture partners.
Sales to Mediq PRN/SLT are recorded at an arms-length price. Under the equity
method, 50% of the gross margin from sales to the joint venture is deferred and
amortized to income as the related asset is used by the joint venture.
SLT's sales to Mediq PRN/SLT were $916,000, $1,440,000 and $414,000 for the
fiscal years ended December 31, 1995, January 1, 1995 and January 2, 1994,
respectively. Accounts receivable from sales to Mediq PRN/SLT were $142,000 and
$778,000 at December 31, 1995 and January 1, 1995, respectively.
- 31 -
<PAGE>
Note 6
Purchase of Technology License:
In December 1990, SLT purchased from Advanced Laser Systems Technology, Inc. and
its four principals ("ALST") an exclusive license for the use of certain laser
technology. The purchase price of $2,000,000 was recorded at its present value
and was being amortized on a straight line basis over five to seven years. In
connection with the purchase of the license, SLT and the principals of ALST
entered into covenants not-to-compete. These agreements had aggregate payments
of $1,000,000, were recorded at their present value and were amortized on a
straight-line basis over five to eight years. Of the purchase price for the
license agreement and the covenants not-to-compete, $2,050,000 was paid through
1992 and the balance was paid in the June 1994 settlement of SLT's legal dispute
with ALST (see Note 11).
In the fourth quarter of 1995, the remaining unamortized balances of the license
agreement, confidentiality and non-compete agreements, amounting to $697,000,
were written off reflecting that the major period of economic benefit from the
agreements had expired.
During 1995 and 1994, SLT paid $252,000 and $180,000, respectively, to the
principals of ALST under consulting agreements. These amounts were charged to
expense as incurred.
Note 7
Short-Term Borrowings:
At December 31, 1995 and January 1, 1995, SLT had a $2,750,000 line of credit
with its bank. The line of credit provides for a $750,000 sub-line for letters
of credit. Under its sub-line, SLT issued a letter of credit amounting to
$576,000 at December 31, 1995, which replaced the letter of credit issued in
1994 of $629,000, in favor of Montgomery County Industrial Development
Corporation ("MCIDC") under the terms of the Mortgage and Security Agreement.
Additionally, in 1995, SLT issued one minor trade letter of credit. Other than
for the letters of credit, there were no other borrowings on the line at any
time during 1995 and 1994. Borrowings on the line are secured by SLT's accounts
receivable and inventories and bear interest at the bank's prime rate plus 1/2%.
Borrowings on the line are subject to certain covenants as defined, with which
SLT was in compliance at December 31, 1995 and January 1, 1995. This credit
facility expires on June 30, 1996.
- 32 -
<PAGE>
Note 8
Accrued Liabilities:
(In thousands)
December 31, 1995 January 1, 1995
----------------- ---------------
Deferred revenues and gross profits $ 375 $ 360
Consolidation and relocation expenses (see Note 11) 732 783
Accrued royalties 227 173
Accrued compensation 180 497
Other 649 777
------ ------
$2,163 $2,590
====== ======
Note 9
Long-term Debt:
(In thousands)
December 31, 1995 January 1, 1995
----------------- ---------------
Mortgage loans $ 4,689 $ 4,880
Convertible subordinated note 1,786 1,848
Other note payable -- 86
Capital lease obligations (see Note 3) 26 67
------- -------
6,501 6,881
Less-Current portion (212) (314)
------- -------
$ 6,289 $ 6,567
======= =======
At December 31, 1995, mortgage loans include $3,138,000 remaining on a 10.5%
mortgage note, payable through 2011; and $1,551,000 remaining on a 3% note,
payable through 2006. The 10.5% note, held by AULIC, contains a provision which
prohibits prepayment until 2001 and is collateralized by restricted cash of
$100,000 and property and improvements. The 3% note is held by MCIDC on behalf
of the Pennsylvania Industrial Development Authority. A condition of this note
requires SLT to grant a security interest in assets equal to fifty percent of
the principal balance. At December 31, 1995, this condition was met by a letter
of credit (see Note 7), certain fixed assets and a second security interest in
SLT's accounts receivable and inventory. The 3% note also incorporates certain
job creation targets which have not been achieved. Under the jobs creation
clause, a prospective interest rate adjustment could result from failure to
achieve specified levels of employment. Management's expectation is that any
rate adjustment, if assessed, could result in a 2% prospective increase in the
3% note's annual interest rate.
The convertible subordinated notes bear interest at 8%, become due in July 1999
and require interest payments quarterly. The notes were issued as part of a
settlement of stockholder litigation against SLT and certain directors and
officers in 1992. The notes are convertible at the option of the holders into
shares of SLT's common stock at a conversion price of $4.50 and may be prepaid,
without penalty, if the fair value of SLT's common stock exceeds 125% of the
conversion price for a specified period.
At January 1, 1995, note payable represented $86,000 remaining on a 6.0%
unsecured note, payable through 1995. This note was issued in connection with
the financing of certain patent litigation. This note and other notes issued
during 1995 were paid in full and canceled as a result of the patent litigation
settlement.
The amount of long-term debt maturing in each of the next five years is $212,000
in 1996, $224,000 in 1997, $236,000 in 1998, $2,030,000 in 1999, $260,000 in
2000 and $3,539,000 in 2001 and thereafter.
- 33 -
<PAGE>
Note 10
Stock Options:
Under SLT's Non-Qualified Stock Option Plan, Incentive Stock Option Plan, Equity
Incentive Stock Option Plan and Stock Option Plan for Outside Directors, an
aggregate of 2,629,530 options for the purchase of Common Stock may be granted
to certain officers, directors, key employees and others. Options under all
plans expire no more than 10 years from the date of grant and have varying
vesting schedules.
Certain information relative to stock options is summarized as follows:
<TABLE>
<CAPTION>
Option Average
Shares Price Price
---------------- ----------------- ------------------
<S> <C> <C> <C>
Outstanding options at January 3, 1993 811,369 $ 2.30-20.17 $ 8.10
Granted 166,965 3.00-5.75 4.14
Exercised (16,315) 3.38-3.38 3.38
Canceled (42,146) 3.25-13.25 8.20
---------------- ----------------- ------------------
Outstanding options at January 2, 1994 919,873 2.30-20.17 7.71
Granted 669,624 2.38-4.25 3.03
Exercised (46,075) 2.50-4.00 2.52
Canceled (36,294) 2.30-16.33 5.21
---------------- ----------------- ------------------
Outstanding options at January 1, 1995 1,507,128 2.38-20.17 5.85
Granted 195,900 1.56-2.63 2.42
Canceled (208,742) 2.00-15.00 5.65
---------------- ----------------- ------------------
Outstanding options at December 31, 1995 1,494,286 $ 1.56-20.17 $ 5.43
================ ================= ==================
</TABLE>
At December 31, 1995 there were 868,790 options vested and exercisable and
677,223 options were available for grant.
Note 11
Non-recurring Items:
In 1995, SLT recorded non-recurring special charges of $1,915,000 which included
an $828,000 write-down of certain sharpened fiber inventories, a $697,000
write-off of certain intangible assets acquired in the 1990 technology
acquisition from ALST (see Note 6) and $390,000 for severance and other costs
associated with a workforce reduction. The write-down of certain inventories in
the fourth quarter was primarily predicated on changes in the market for certain
sharpened fiber product offerings. Competitive information gained during this
period indicated that the size of the market was smaller than had been
anticipated, lowering SLT's expectations for future sales of these products. The
write-off of certain intangible assets acquired in the 1990 technology
acquisition from ALST resulted from the release in October 1995 of ALST and
principals thereof from certain provisions of the original 1990 agreements.
In 1994, SLT recorded a net benefit of $838,000 which is the net effect of the
settlement of a lawsuit with ALST and principals thereof (see Note 6) partially
offset by a separate legal settlement with a former distributor. As part of the
settlement with ALST and principals thereof, payments due to ALST from SLT under
the original 1990 agreements were offset against amounts due in settlement of
such lawsuit, resulting in a benefit of $966,000. In the same period, SLT
settled a lawsuit with a former distributor for a total charge to SLT of
$250,000, of which all but $128,000, including $54,000 of interest expense, had
previously been accrued by SLT. The net benefit is reflected in the statement of
operations as a non-recurring credit to operating expenses of $892,000 and
interest expense of $54,000.
In 1993, SLT recorded a non-recurring charge of $397,000 to increase the reserve
established in 1991 for the relocation of SLT's manufacturing and warehousing
facilities from Kentucky to Pennsylvania. This charge was necessary to bring the
reserve associated with sub-leasing the facility in line with potential
sub-leasing opportunities (see Note 8 and Note 16).
- 34 -
<PAGE>
Note 12
Retirement Savings Plan:
SLT has a defined contribution retirement plan for the benefit of all eligible
employees. The plan is qualified under Section 401(k) of the Internal Revenue
Code and provides for discretionary matching contributions by SLT of 50% of
pretax contributions by an employee, up to a maximum of 6% of the employee's
compensation. SLT has not made matching contributions in 1995, 1994 or 1993.
Note 13
Income Taxes:
SLT accounts for income taxes pursuant to Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109
is an asset-and-liability approach that requires the recognition of deferred tax
assets and liabilities for the expected tax consequences of events that have
been recognized in SLT's financial statements or tax returns.
SLT recorded tax provisions of $50,000 and $26,000 in 1995 and 1994,
respectively. These provisions are for federal minimum income taxes and certain
state income taxes. Any other required tax provision was completely offset by a
reduction in the deferred tax valuation allowance, primarily due to the
utilization of net operating loss carryforwards. There was no provision in 1993
due to losses incurred.
Income tax expense consists of the following:
1995 1994 1993
---- ---- ----
(In thousands)
Federal including alternative minimum tax
Current $25 $-- $ --
Deferred -- -- --
State
Current 25 26 --
Deferred -- -- --
$50 $26 $ --
=== === =====
SLT has no income that is subject to foreign taxes. A reconciliation of the
effective tax rate with the federal statutory tax rate is as follows:
1995 1994 1993
---- ---- ----
(In thousands)
Expected federal tax expense (benefit)
at 34% rate $ (20) $ 311 $(998)
Net effect of operating loss
carryforwards at federal rate -- (311) --
Unbenefitted losses at federal rate 20 -- 998
State income tax, net of federal benefit 25 26 --
Alternative federal minimum tax 25 -- --
----- ------ ------
$ 50 $ 26 $ --
===== ====== ======
- 35 -
<PAGE>
As of December 31, 1995, SLT had approximately $19,580,000 of federal net
operating loss carryforwards, which begin to expire in 2001. Included in the
aggregate net operating loss carryforward is $6,698,000 of tax deductions
related to equity transactions, the benefit of which will be credited to
stockholders' equity, if and when realized. In addition, SLT had approximately
$711,000 of federal tax credit carryforwards which begin to expire in 1998. Net
deductible temporary differences were approximately $2,045,000 at December 31,
1995. The balance of the deferred tax asset as of the beginning of 1993 was
$7,293,000, comprised of: $5,463,000 ascribed to operating loss carryforwards;
$1,623,000 ascribed to temporary differences; $316,000 ascribed to tax credit
carryforwards and $(109,000) ascribed to expected credits from alternative
minimum tax payments. Offsetting the beginning balance was a commensurate
valuation allowance. The ending balances of the deferred tax asset have also
been fully reserved, reflecting the uncertainties as to realizability evidenced
by SLT's historical results and the general market conditions currently being
experienced.
The changes in the deferred tax asset are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance, gross $ 8,056 $ 8,529 $ 7,293
Net changes due to:
Operating loss carryforwards, valued at 35% (193) 338 1,255
Temporary differences, valued at 40% 378 (866) (317)
Tax credit carryforwards 32 55 98
Alternative minimum tax credit (25) -- --
------- ------- -------
Ending balance, gross 8,248 8,056 8,529
Less: valuation allowance 8,248 8,056 8,529
------- ------- -------
Ending balance, net $ 0 $ 0 $ 0
======= ======= =======
</TABLE>
The average Federal and state income tax rate (net of federal benefit) used to
value operating loss carryforwards is 35%, due principally to more stringent
usage requirements for loss carryforwards in the Commonwealth of Pennsylvania.
Note 14
Related Party Transactions:
A partner in the firm which acts as primary legal counsel to SLT is also a
director and stockholder of SLT. In 1995, 1994 and 1993, the firm's legal fees
were approximately $491,000, $237,000 and $164,000, respectively.
During 1994, SLT entered into a License Agreement with Fuller Research
Corporation for certain fiber delivery system technology. The principal
stockholder of Fuller Research Corporation is an executive officer of SLT. The
licensed technology was patented by Fuller Research Corporation before its
principal stockholder became an executive of SLT. SLT paid $24,000 and $14,000
in royalties under the terms of the license agreement in 1995 and 1994,
respectively.
In September 1995, SLT made an $82,000 equity investment, which represents an
11% interest, in the common stock of one of its international distributors. SLT
accounts for this investment using the cost method. SLT's sales to the
distributor were $533,000, $392,000 and $35,000 for the fiscal years ended
December 31, 1995, January 1, 1995, and January 2, 1994, respectively. Accounts
receivable from sales to the distributor were $256,000 and $136,000 at December
31, 1995 and January 1, 1995, respectively. James R. Appleby, Jr. is a member of
the distributor's Board of Directors.
During 1994, SLT entered into an Investment Agreement with Kontron Instruments
Holding N.V. (Kontron) under the terms of which Kontron Instruments made a $2.0
million equity investment, representing a 7% ownership position in SLT. Kontron
Instruments Holding N.V. is the parent company of Kontron Instruments group, a
European medical instruments manufacturer, which operates as SLT's market
development and distribution partner throughout most of Europe. SLT's sales to
Kontron Instruments were $792,000, $1,021,000 and $225,000 for the fiscal years
ended December 31, 1995, January 1, 1995 and January 2, 1994, respectively.
Accounts receivable from sales to Kontron Instruments were $279,000 and $340,000
at
- 36 -
<PAGE>
December 31, 1995 and January 1, 1995, respectively. Mr. Vincenzo Morelli is
the Chief Executive Officer of Kontron Instruments Holding, N.V. In April 1995,
Mr. Morelli became a member of SLT's Board of Directors.
Note 15
Business Segment and Geographic Data:
SLT is engaged in one business segment: the design, development, manufacture and
marketing of laser products for medical applications. SLT's customers are
primarily hospitals and medical centers. Net sales by geographic areas are as
follows:
1995 1994 1993
---------------- ------------------ ----------------
(In thousands)
Domestic $ 11,758 $ 16,756 $ 16,138
Foreign 3,081 4,752 2,099
----------------- ------------------ ----------------
$ 14,839 $ 21,508 $ 18,237
================= ================== ================
Note 16
Commitments and Contingencies:
As of December 31, 1995, SLT was a defendant in several pending lawsuits for
which management believes SLT has meritorious defenses. SLT therefore has not
made any accrual for the ultimate resolution of these lawsuits. Based on its
defenses in these actions, SLT firmly believes that neither Trimedyne nor Norio
Daikuzuno, the plaintiffs in the two material lawsuits pending against SLT, will
prevail, although no assurance can be given that SLT will not sustain an
unfavorable outcome. If SLT does not prevail, SLT cannot now provide any
reliable measure of its prospective loss.
SLT leases office space and equipment under various non-cancelable operating
leases. For fiscal 1995, 1994 and 1993, rent expense was $427,000, $445,000, and
$412,000, respectively, and relates primarily to facilities in Oaks,
Pennsylvania, and Hebron, Kentucky. The Hebron facility was vacated in 1991 as a
result of SLT's decision to consolidate and relocate manufacturing and
warehousing activities to Pennsylvania. SLT has sublet a portion of this
facility and is actively pursuing a sublease for the remaining portion of the
Hebron facility (see Note 11). Future minimum rental payments under operating
leases are as follows:
(In thousands) 1996 $ 453
1997 307
1998 296
1999 296
2000 198
2001 and thereafter 0
---------------
$ 1,550
===============
SLT has severance agreements with certain key executives which create
certain liabilities in the event of their termination of employment without
cause, or following a change in control of SLT. The aggregate commitment under
these executive severance agreements, should all covered executives be
terminated other than for cause, is approximately $1,100,000. Should all covered
executives be terminated following a change in control of SLT, the aggregate
commitment under these executive severance agreements is approximately
$1,400,000.
Beginning in 1994, SLT along with its joint venture partner, Mediq PRN,
guaranteed the payment of certain capital lease obligations of Mediq PRN/SLT.
The lease which was guaranteed was for the joint venture's financing of capital
equipment purchases from SLT. The total lease payments guaranteed by both
parties at December 31, 1995 was $907,000.
- 37 -
<PAGE>
Note 17
Quarterly Financial Data (Unaudited):
For the Quarter Ended
(In thousands, except per share)
------- ------- ------- -------
1995 April 2 July 2 Oct 1 Dec 31
------- ------- ------- -------
Net sales $ 4,167 $ 3,806 $ 3,082 $ 3,784
Gross profit 2,503 2,164 1,749 2,286
Net income (loss)(1) (1,261) (1,684) (996) 3,883
Net income (loss) per share ($ 0.13) ($ 0.17) ($ 0.10) $ 0.39
------- ------- ------- -------
1994 April 3 July 3 Oct 2 Jan 1
------- ------- ------- -------
Net sales $ 4,665 $ 5,304 $ 5,833 $ 5,706
Gross profit 2,833 3,388 3,642 3,631
Net income (loss)(2) (255) 950 203 15
Net income (loss) per share ($ 0.03) $ 0.10 $ 0.02 $ 0.01
------- ------- ------- -------
1993 April 4 July 4 Oct 3 Jan 2
------- ------- ------- -------
Net sales $ 4,545 $ 4,246 $ 4,562 $ 4,884
Gross profit 2,699 2,563 2,686 3,105
Net loss (3) (664) (731) (619) (921)
Net loss per share ($ 0.07) ($ 0.08) ($ 0.07) ($ 0.11)
(1) Includes net non-recurring charges of $390,000 and $1,525,000 for the
quarters ended July 2 and December 31, 1995, respectively (see Note 11),
and net patent litigation settlement of $5,926,000 for the quarter ended
December 31, 1995 (see Note 4).
(2) Includes net non-recurring credits of $838,000 for the quarter ended July
3, 1994 (see Note 11).
(3) Includes non-recurring charge of $397,000 for the quarter ended January 2,
1994 (see Note 11).
The accompanying notes are an integral part of these financial statements.
- 38 -
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Additions Charged to
Balance at Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions (1) Period
- ----------- ----------- -------- -------- --------------- ------
<S> <C> <C> <C> <C> <C>
(In thousands)
FOR THE YEAR
ENDED
DECEMBER 31,
1995
Reserve for
Doubtful
Accounts $110 $8 -- -- $118
====================================================================================================================================
FOR THE YEAR
ENDED
JANUARY 1,
1995
Reserve for
Doubtful
Accounts $105 $27 -- $22 $110
====================================================================================================================================
FOR THE YEAR
ENDED
JANUARY 2,
1994
Reserve for
Doubtful
Accounts $167 $21 -- $83 $105
====================================================================================================================================
</TABLE>
(1) Represents write-offs of specific accounts receivable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not applicable.
- 39 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers and Directors
Certain information about the executive officers and directors of
Registrant as of March 15, 1996 is as follows:
Name Age Position(s) Held with Registrant
---- --- --------------------------------
James R. Appleby, Jr. 50 President, Chief Executive Officer and Director
Terry A. Fuller, Ph.D 47 Executive Vice President, Chief Operating Officer
and Director
Michael R. Stewart 38 Vice President, Finance, Chief Financial Officer
and Treasurer
Ewald Lehrmann 52 Vice President and Managing Director of
International Operations
Davis Woodward 48 Vice President, Legal & Tax Affairs and Secretary
Richard J. DePiano 54 Chairman of the Board of Directors
Sheldon M. Bonovitz 58 Director
Jay L. Federman, M.D. 58 Director
Vincenzo Morelli 41 Director
James R. Appleby, Jr. has been President and Chief Executive Officer of
Registrant since October 1991 and a director since 1990. Mr. Appleby served as
President and Chief Operating Officer of Registrant from May 1990 to October
1991. Mr. Appleby is the brother-in-law of Mr. Lehrmann.
Terry A. Fuller, Ph.D. has served as Executive Vice President and Chief
Operating Officer of Registrant since June 1993 and a director since 1994. From
August 1990 until June 1993, Dr. Fuller served as Registrant's Executive Vice
President of Technology and Manufacturing, assuming responsibility for
Registrant's education programs in November 1992. From July 1990 until August
1990, he served as Vice President of Technology and New Business Development of
Registrant. Dr. Fuller is also President of Fuller Research Corporation.
Michael R. Stewart has served as Vice President, Finance since January 1996
and as Vice President and Chief Financial Officer of Registrant since October
1990. Mr. Stewart has served as Treasurer since November 1990.
- 40 -
<PAGE>
Ewald Lehrmann has been Vice President and Managing Director of
International Operations of Registrant since June 1993; he had served as Vice
President of Sales and Marketing of Registrant since June 1992. Mr. Lehrmann
served as Vice President of Marketing of Registrant from October 1990 to June
1992. Mr. Lehrmann is Mr. Appleby's brother-in-law.
Davis Woodward has served as Vice President, Legal & Tax Affairs of
Registrant since January 1995. From July 1990 to January 1995, Mr. Woodward
served as Assistant General Counsel and Director of Tax Planning. He has served
as Secretary since November 1990.
Richard J. DePiano has served as Chairman of the Board of Directors since
July 1995 and as a director since 1986. Mr. DePiano has been the Chief Executive
Officer of The Sandhurst Company, L.P. and the Managing Director of The
Sandhurst Venture Fund since 1986.
Sheldon M. Bonovitz has served as a director of the Registrant since 1985
and served as Chairman of the Board of Directors from March 1994 through July
1995. Mr. Bonovitz has been a partner in the law firm of Duane, Morris &
Heckscher, Philadelphia, Pennsylvania, since 1969, where he also serves as Vice
Chairman and a member of the management committee. Mr. Bonovitz also serves as a
director of Comcast Corporation and Mediq, Incorporated. Mr. Bonovitz has also
taught at the University of Pennsylvania Law School.
Jay L. Federman, M.D. has served as a director of Registrant since 1987.
Dr. Federman has been an attending surgeon and Co-Director of Research of Wills
Eye Hospital, Philadelphia, Pennsylvania, since 1980. Dr. Federman was a founder
of SITE Microsurgical Systems, Inc.
Vincenzo Morelli has been a director of Registrant since 1995 and has
served as Chief Executive Officer and director of Kontron Instruments Holding
N.V. since 1993. From 1990 through 1992, Mr. Morelli served as Executive Vice
President of New Holland (ex-Geotech), a joint venture of Fiat and Ford Motor
Company. From 1985 until 1990, Mr. Morelli served as President and Chief
Operating Officer of General Electric Company's European Medical Systems
Division.
Section 16 Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Registrant's officers, directors and owners of
more than 10% of any class of the Registrant's securities registered pursuant to
Section 12 of the Exchange Act to file reports of ownership and changes in
ownership with the Commission. The Commission's rules also require such persons
to furnish the Registrant with a copy of all Section 16(a) reports that they
file.
Based solely on a review of the copies of the reports which the Registrant
received and written representations from certain persons, the Registrant
believes that, except as set forth below, all such reporting persons complied
with such requirements. Terry A. Fuller was one day late filing a Form 4
reporting one acquisition in July 1995. Each of James R. Appleby, Jr., Terry A.
Fuller and Davis Woodward timely filed a Form 4 in January 1996 reporting
acquisitions that took place in December 1995, but each such Form 4 omitted to
report one exempt grant of options in January 1995 that should have been
reported on such Form 4. Each such reporting person has since filed a Form 5
reporting such option grants.
- 41 -
<PAGE>
Item 11. Executive Compensation.
Director Compensation
Each director of the Registrant who is not an officer or employee of the
Registrant (an "Outside Director") receives an annual retainer of $15,000 and a
fee of $500 for each committee meeting attended other than meetings held in
conjunction with meetings of the Board of Directors.
The Registrant also maintains a Stock Option Plan for Outside Directors
(the "Outside Director Plan"), pursuant to which: (a) on May 11, 1990, each
Outside Director on such date received options to purchase 9,000 shares of
Common Stock; (b) on May 11, 1990, each Outside Director who was a member of the
Executive Committee on such date received options to purchase an additional
3,750 shares of Common Stock; (c) each Outside Director who had completed three
years of service as an Outside Director on or before April 30, 1992 received
options to purchase 4,500 shares of Common Stock on such date; (d) each Outside
Director who had completed at least three years of service as an Outside
Director on May 26, 1994 (the "1994 Grant Date") was granted options to purchase
45,000 shares, provided that if the Outside Director served as Chairman on the
1994 Grant Date, the option granted was for 60,000 shares; (e) each Outside
Director who had not completed three years of service as an Outside Director on
the 1994 Grant Date will, on the last trading day coinciding with or immediately
following the completion of such three years of service, be granted options to
purchase 30,000 shares, provided that if the Outside Director serves as Chairman
throughout such three-year period, such option will be for 45,000 shares; (f)
for each three years of service after the 1994 Grant Date since the most recent
grant of options to an Outside Director, the Outside Director will be granted
options to purchase 30,000 shares, provided that if the Outside Director served
as Chairman throughout such three-year period, the option will be for 45,000
shares and (g) each person who became an Outside Director after the 1994 Grant
Date or hereafter becomes an Outside Director in the future received or will
receive options to purchase 30,000 shares of Common Stock on the fifteenth day
after election as an Outside Director, provided that if the Outside Director is
elected to serve as Chairman, the option granted will be for 45,000 shares.
All such options are exercisable at 100% of the fair market value of the
Common Stock on the date of grant and remain exercisable to the extent vested
until the earliest to occur of the expiration of ten years from the date of
grant, three years from cessation of service as a director due to disability,
one year from cessation of service as a director due to death or three months
from cessation of service as a director for any other reason. Options granted on
May 11, 1990 were fully exercisable when granted. Options granted on the 1994
Grant Date were exercisable 15,000 shares on the date of grant, with the balance
exercisable in three equal consecutive annual installments commencing one year
from the 1994 Grant Date. All other options granted under the Outside Director
Plan are or will be exercisable in three equal consecutive annual installments
commencing one year from the date of grant. Notwithstanding the foregoing, all
options granted under the Outside Director Plan become fully exercisable upon
consummation of any business combination transaction involving the sale of all
or substantially all of the assets of the Registrant to, or the acquisition of
shares of the Registrant's Common Stock representing more than 50% of the votes
which all stockholders of the Registrant are entitled to cast by, any person not
affiliated with the Registrant, directly or indirectly, through one or more
affiliates, or any other transaction or series of transactions having a similar
effect.
- 42 -
<PAGE>
An aggregate 385,000 shares of Common Stock are currently reserved for
issuance under the Outside Director Plan, of which 9,000 shares have been issued
and 286,500 shares are subject to outstanding options.
Executive Officer Compensation
The following table sets forth certain information with respect to
compensation paid by the Registrant during each of the three fiscal years ended
December 31, 1995, January 1, 1995 and January 2, 1994 to the chief executive
officer of the Registrant and the other four most highly compensated executive
officers of the Registrant.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
------------------------- ----------------------------
Restricted All Other
Stock Compensation
Name and Principal Position Year Salary($) Bonus($) Awards($) Options(#) ($)(1)
--------------------------- ---- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James R. Appleby, Jr. 1995 $281,960 $ 0 $ 0 50,000(2) $ 2,190
President, Chief Executive 1994 265,346 58,520 0 30,000(3) 2,190
Officer and Director 1993 257,067 51,500(4) 9,088(4) 150,000(5) 2,190
Terry A. Fuller 1995 186,507 0 0 40,000(2) 25,341(6)
Executive Vice President 1994 175,492 38,709 0 20,000(3) 46,102(6)(7)
And Chief Operating Officer 1993 169,671 27,200(4) 2,400(4) 100,000(5) 32,071(7)
Ewald Lehrmann 1995 147,039 0 0 0 1,038
Vice President and 1994 138,329 30,512 0 15,000(3) 1,038
Managing Director of 1993 133,769 10,720(4) 946(4) 25,000(5) 1,014
International Operations
Michael R. Stewart 1995 118,023 0 0 30,000(2) 643
Vice President and 1994 110,528 24,380 0 15,000(3) 643
Chief Financial Officer 1993 106,533 17,131(4) 1,511(4) 25,000(5) 628
Davis Woodward 1995 109,296 0 0 30,000(2) 1,285
Vice President, Legal and 1994 99,102 21,859 0 15,000(3) 1,285
Tax Affairs 1993 95,835 15,360(4) 2,711(4) 25,000(5) 1,285
</TABLE>
- ----------
(1) Except as noted in footnotes 6-7, represents payments of premiums for
certain supplementary life insurance coverage.
(2) These options were granted in 1996 for services rendered in 1995.
(3) These options were granted in 1995 for services rendered in 1994.
(4) In January 1994, the Compensation Committee awarded performance bonuses for
services rendered in 1993 and determined to pay such bonuses in the form of
restricted stock at a per share price equal to 85% of the fair market value
of the Common Stock on the date of grant, except that the Compensation
Committee determined to pay the named executive officers other than Messrs.
Appleby and Woodward 50% of their respective bonus in cash and the balance
in shares of restricted stock. A portion of such shares awarded in 1994 was
subject to forfeiture if the officer's employment was terminated other than
without cause within six months after the grant date (except in certain
circumstances involving a change of control in the Registrant), with the
number of shares subject to forfeiture equal to (a) the product of (i) the
number of restricted shares awarded multiplied by (ii) the fair market
value on the date of forfeiture minus (b) the amount of the bonus listed
under "Bonus" in the above table divided by (c) the fair market value on
the date of forfeiture. The difference between the aggregate market value
of the restricted shares on the grant date and the amount of the bonus
approved by the Compensation Committee is set forth in the above table
under the caption "Long-Term Compensation Awards -- Restricted Stock
Awards."
(5) These options were granted in 1994 for services rendered in 1993.
(6) Includes $24,000 and $14,000 in royalties paid by the Registrant to Fuller
Research Corporation in 1995 and 1994 respectively, pursuant to a License
Agreement between those parties. Terry A. Fuller is the President and
principal stockholder of Fuller Research Corporation.
(7) Includes $30,761 in lease payments by the Registrant to Fuller Research
Laboratories, a sole proprietorship owned by Dr. Fuller, pursuant to a
Lease Agreement between those parties relating to certain equipment.
- 43 -
<PAGE>
The following table sets forth information with respect to options granted
during the fiscal year ended December 31, 1995 to the persons named in the
Summary Compensation Table above.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
Options Granted at Assumed Annual Rates of
Options to Employees Exercise Expiration Stock Price Appreciation for
Name Granted(#)(1) in Fiscal Year Price Date Option Term
---- ------------- -------------- --------- ---- -----------------------------
5% 10%
---------- ---------
<S> <C> <C> <C> <C> <C> <C>
James R. Appleby, Jr. 30,000 18.1% $2.625 January 13, 2005 $49,525 $125,507
Terry A. Fuller 20,000 12.1 2.625 January 13, 2005 33,017 83,671
Ewald Lehrmann 15,000 9.0 2.625 January 13, 2005 24,763 62,754
Michael R. Stewart 15,000 9.0 2.625 January 13, 2005 24,763 62,754
Davis Woodward 15,000 9.0 2.625 January 13, 2005 24,763 62,754
</TABLE>
- ----------
(1) All of these options are exercisable in five equal consecutive annual
installments commencing one year from the date of grant (January 13,
1995), subject to acceleration of exercisability under certain
circumstances following a change in control of Registrant.
The following table sets forth information with respect to options held at
December 31, 1995 by the persons named in the Summary Compensation Table above.
No options were exercised by such persons during the fiscal year ended December
31, 1995. None of the options held at fiscal year-end set forth below were in
the money at December 31, 1995.
Fiscal Year-end Option Values
Number of Unexercised Options at Fiscal Year End (1)
Name Exercisable Unexercisable
---- ----------- -------------
James R. Appleby, Jr. 232,700 160,000
Terry A. Fuller 91,033 101,667
Ewald Lehrmann 47,333 36,867
Michael R. Stewart 41,033 38,667
Davis Woodward 31,933 40,267
- ----------
(1) The average weighted exercise price for the aggregate unexercised options
set forth in the table above is as follows for each of the named persons:
Mr. Appleby--$5.23; Dr. Fuller--$3.88; Mr. Lehrmann--$4.49; Mr.
Stewart--$4.35; and Mr. Woodward--$4.14.
Employment Agreements
Mr. Appleby has an employment agreement pursuant to which he serves as the
Registrant's President and Chief Executive Officer for successive one-year terms
ending December 31 of each year, absent at least three months' prior written
notice of termination by either party. Effective as of January 30, 1996, Mr.
Appleby's base salary under the agreement was reduced to $225,000, as part of
the
- 44 -
<PAGE>
Registrant's efforts to reduce expenditures.
Mr. Appleby remains eligible for a bonus under the Registrant's Executive Staff
Bonus Program. If the Registrant terminates Mr. Appleby's employment at the
expiration of any renewal term of the agreement, Mr. Appleby is entitled to
severance benefits equal to one year's base salary, 50% of the incentive bonus
which would have been payable for the succeeding year and hospital, medical,
disability and life insurance coverage for a period of one year. If Mr.
Appleby's employment is terminated by the Registrant without cause during the
term of the agreement or Mr. Appleby is removed as Chief Executive Officer
(except following a change in control as described below), Mr. Appleby is
entitled to identical severance benefits, except that with respect to the
incentive bonus, he is entitled to the full amount of such bonus for the period
through termination. Under certain circumstances following a change in control
of the Registrant after which Mr. Appleby no longer serves as an executive
officer of the Registrant in a capacity he determines to be acceptable or is
asked to relocate his principal business location: Mr. Appleby is entitled to
severance benefits equal to eighteen months' base salary, the amount of the
incentive bonus for the period through termination of employment with the
Registrant and hospital, medical, disability and life insurance coverage for a
period of eighteen months; all unvested options become exercisable in full; and
all outstanding options remain exercisable for the lesser of five years after
the change in control or the remaining scheduled term thereof. The Registrant
provides long-term disability insurance equal to 60% of Mr. Appleby's base
salary, a $1 million life insurance policy and automobile, vacation and other
insurance benefits as are available to the Registrant's senior executive
officers. During the term of the agreement and for a period of one year
thereafter (or while receiving any severance payments as described above), Mr.
Appleby is prohibited from competing with the Registrant in any respect,
interfering with the Registrant's business relationships or soliciting business
from the Registrant's customers.
In June 1992, the Registrant adopted a severance benefits program for
certain key employees, including Messrs. Fuller, Lehrmann, Stewart and Woodward.
Under the terms of this program, a participant whose employment is terminated by
the Registrant other than for cause and other than following a change in control
is entitled to continue receiving his then-current base salary and coverage
under the medical, dental, supplemental life and supplemental disability
insurance policies, if any, being provided at the time of termination for a
specified period, with the obligation to provide such insurance coverage
terminating in the event the participant is provided substantially the same
coverage from a new employer. Each of Messrs. Fuller, Lehrmann, Stewart and
Woodward is entitled to continue receiving such base salary and insurance
coverage for a period of 12 months under the foregoing circumstances. In
addition, if, within two years following a change in control of the Registrant,
a participant's employment is terminated without cause or the participant
resigns following (a) the relocation of his principal business location, (b) a
significant reduction in the duties or responsibilities from those existing
prior to the change in control or (c) a reduction in his then-current base
salary, then, in any such event, the participant is also entitled to continue
receiving his then-current base salary and coverage under the aforementioned
insurance program (subject to the restriction described above) for a specified
period. Messrs. Fuller and Lehrmann are entitled to continue receiving their
respective base salaries for a period of 18 months under such circumstances and
Messrs. Stewart and Woodward are entitled to continue receiving their respective
base salaries for a period of 12 months under such circumstances. In addition,
under such circumstances, each of Messrs. Fuller, Lehrmann, Stewart and Woodward
is also entitled to continue receiving the aforementioned insurance coverages
for a period of 12 months, and all unvested options which they hold become
exercisable in full and all outstanding options remain exercisable for the
lesser of five years or the remaining scheduled term thereof.
- 45 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of March 15, 1996, the amount and
percentage of the Registrant's outstanding Common Stock beneficially owned by
(i) each person who is known by the Registrant to own beneficially more than 5%
of its outstanding Common Stock, (ii) each director, (iii) each executive
officer named in the Summary Compensation Table and (iv) all executive officers
and directors of the Registrant as a group. The persons named in the table have
sole voting and investment power with respect to all shares of the Registrant
Common Stock shown as beneficially owned by them, subject to community property
laws where applicable and the information in the table and notes thereto.
Name of Individual
or Identify of Group Shares of Common Stock Beneficially Owned
- -------------------- -----------------------------------------
5% Holders: Amount Percentage
State of Wisconsin ------ ----------
Investment Board
121 East Wilson Street 892,589(1) 9.06
Madison, WI 53703
Kontron Instruments
Holding N.V. 695,652 7.06
Julianaplein 22
Curacao, Netherlands
Antilles
Directors:
James R. Appleby, Jr. 370,050(2) 3.65
Jay L. Federman 310,203(3) 3.12
Richard J. DePiano 207,250(4) 2.09
Terry A. Fuller 149,866(5) 1.50
Sheldon M. Bonovitz 142,131(6) 1.44
Vincenzo Morelli 30,000(7) *
Executive Officers (8):
Ewald Lehrmann 64,515(9) *
Michael R. Stewart 60,596(10) *
Davis Woodward 58,780(11) *
All directors and executive
officers as a group
(9 persons) 1,393,391(12) 12.80
- ----------
*Less than one percent.
(1) Information furnished by stockholder as of February 7, 1996.
- 46 -
<PAGE>
(2) Includes 296,700 shares which Mr. Appleby has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996
and 44,000 shares owned jointly with his wife.
(3) Includes 76,000 shares which Dr. Federman has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996.
(4) Includes 42,250 shares which Mr. DePiano has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996.
Also includes 90,000 shares owned by Mr. DePiano's wife. Mr. DePiano
disclaims beneficial ownership of such 90,000 shares.
(5) Includes 132,366 shares which Dr. Fuller has the right to purchase under
outstanding stock options exercisable within 60 days after March 15, 1996.
(6) Includes 47,250 shares which Mr. Bonovitz has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996,
19,027 shares owned by Mr. Bonovitz' wife and 29,238 shares owned by trusts
of which Mr. Bonovitz is trustee for the benefit of Mr. Bonovitz' children.
Mr. Bonovitz disclaims beneficial ownership of the 48,265 shares owned by
his wife and such trusts. Also includes 29,119 shares owned by the Marital
Trust Under the Will of Robert H. Fleisher, Deceased. Mr. Bonovitz is one
of the four trustees of such trust and disclaims beneficial ownership of
such 29,199 shares.
(7) Includes 15,000 shares held of record by Olive Branch Corp., a Liberian
corporation controlled by members of Mr. Morelli's family. Mr. Morelli
disclaims beneficial ownership of such shares. Also includes 10,000 shares
which Mr. Morelli has the right to acquire under outstanding stock options
exercisable with 60 days after March 15, 1996.
(8) Excludes executive officers listed under "Directors."
(9) Includes 59,866 shares which Mr. Lehrmann has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996.
(10) Includes 54,166 shares which Mr. Stewart has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996.
(11) Includes 45,866 shares which Mr. Woodward has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1996.
(12) Includes 764,464 shares which such persons have the right to acquire under
stock options exercisable within 60 days after March 15, 1996.
- 47 -
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Sheldon M. Bonovitz, a director of the Registrant, is a partner of Duane,
Morris & Heckscher, which serves as the Registrant's primary legal counsel.
Kontron Instruments Holding N.V., which owns more than 5% of the
Registrant's outstanding Common Stock, has affiliates that serve as the
Registrant's distributors throughout most of Europe. During 1995, total sales by
the Registrant to such affiliates were $792,000. Vincenzo Morelli, a director of
the Registrant, is the Chief Executive Officer and a director of Kontron
Instruments.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Page No.
--------
Consolidated Balance Sheets at December 31, 1995 and January 1, 1995 ..... 24
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1995 ............................................ 25
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1995 ............................... 26
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 ............................................ 27
Notes to Consolidated Financial Statements ................................ 28
Report of Independent Public Accountants .................................. 23
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<PAGE>
2. Financial Statement Schedules
Page No.
--------
Report of Independent Public Accountants................................... 23
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 31, 1995 and January 1, 1995.................. 38
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended December 31, 1995.
(c) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1 Restated Certificate of Incorporation of Registrant,
incorporated by reference to Exhibit 3.1 filed with
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 29, 1991 filed on March 30, 1992 (the "1991
Form 10-K").
3.2 By-Laws of Registrant, as amended, incorporated by reference
to Exhibit 3.2 filed with Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 1990 filed on
March 29, 1991 (the "1990 Form 10-K").
10.1 Lease dated September 12, 1991 between Registrant and SLT
Properties, Inc., incorporated by reference to Exhibit 10.1
filed with Registrant's 1991 Form 10-K.
10.2 Lease Agreement dated October 9, 1991 between Registrant and
Tioga Leasing Corporation, incorporated by reference to
Exhibit 10.2 filed with Registrant's 1991 Form 10-K.
10.3 1986 Incentive Stock Option Plan of Registrant, as amended
through November 29, 1989, incorporated by reference to
Exhibit 4(A) filed with Registrant's Form S-8 Registration
Statement filed on December 29, 1989, Registration No.
33-32835. (the "1989 Form S-8").
10.4 1986 Non-Qualified Stock Option Plan of Registrant, as
amended through November 29, 1989, incorporated by reference
to Exhibit 4(B) filed with the 1989 Form S-8.
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<PAGE>
10.5* Registrant's Equity Incentive Plan, as amended through May
26, 1994, incorporated by reference to Exhibit 4(A) filed
with Registrant's Form S-8 Registration Statement filed on
August 19, 1994, Registration No. 33-83074.
10.6* Second Amended and Restated Stock Option Plan for Outside
Directors of Registrant, incorporated by reference to
Exhibit 4(B) filed with Registrant's Form S-8 Registration
Statement filed on August 19, 1994, Registration No.
33-83074.
10.7 Collaboration and Assignment Agreement dated as of March 7,
1995 among Registrant, Daniel M. Schuman, M.D. and The
AMERICA Charitable Fund.
10.8* Employment Agreement dated as of May 11, 1990 between
Registrant and James R. Appleby, Jr., incorporated by
reference to Exhibit 10.10 filed with the 1990 Form 10-K; as
amended pursuant to a Letter Agreement between Registrant
and Mr. Appleby dated January 7, 1992, incorporated by
reference to Exhibit 10.11 filed with Registrant's 1991 Form
10-K; as amended pursuant to Letter Agreements between
Registrant and Mr. Appleby dated June 11, 1992 and February
3, 1993, incorporated by reference to Exhibit 10.9 filed
with Registrant's Annual Report on Form 10-K for the fiscal
year ended January 3, 1993 filed on April 19, 1993 (the
"1992 Form 10-K"); and as amended pursuant to a Letter
Agreement dated March 15, 1994 between Registrant and Mr.
Appleby, incorporated by reference to Exhibit 10.8 filed
with Registrant's Annual Report on Form 10-K for the fiscal
year ended January 2, 1994 filed on April 1, 1994 (the "1993
Form 10-K").
10.9 Employment Agreement dated March 1, 1987 between Registrant
and Norio Daikuzono, incorporated by reference to Exhibit
10.22 filed with the Form S-1.
10.10* Registrant's 1992 Executive Staff Bonus Program,
incorporated by reference to Exhibit 10.13 filed with
Registrant's 1991 Form 10-K.
10.11 License Agreement dated December 11, 1990 among Registrant,
Advanced Laser Systems Technology, Inc., Robert E. McKinney,
Dennis R. Bellar, Randel W. Owen, and Jim D. Keatley,
incorporated by reference to Exhibit 10.11 filed with the
1990 Form 10-K.
10.12 Agreement of Sale dated September 14, 1990 between Oaks
Associates and SLT Properties, Inc., incorporated by
reference to Exhibit 10.12 filed with the 1990 Form 10-K.
10.13 Installment Sale Agreement dated September 14, 1990 between
SLT Properties, Inc. and Montgomery County Industrial
Development Corporation, incorporated by reference to
Exhibit 10.14 filed with the 1990 Form 10-K, as amended
pursuant to the Amended and Restated Installment Sale
Agreement dated November 25, 1991 between SLT Properties,
Inc. and Montgomery County Industrial
- 50 -
<PAGE>
Development Corporation, incorporated by reference to
Exhibit 10.22 filed with Registrant's 1991 Form 10-K.
10.14 Acquisition Agreement dated September 14, 1990 between SLT
Properties, Inc. and Montgomery County Industrial
Development Corporation, incorporated by reference to
Exhibit 10.15 filed with Registrant's 1990 Form 10-K.
10.15 Amended and Restated Loan Agreement dated December 1,
1992 among Registrant, Meridian Bank, SLT Properties,
Inc., SLT Technology, Inc., Diversified
Properties-Equity Group, Inc. and Surgical Laser
Technologies Development, Inc., incorporated by
reference to Exhibit 10.20 filed with Registrant's
1992 Form 10-K; as amended pursuant to a First
Amendment thereto dated July 26, 1993, incorporated
by reference to Exhibit 10.15 filed with Registrant's
1993 Form 10-K; as amended pursuant to a Second
Amendment thereto dated January 19, 1995,
incorporated by reference to Exhibit 10.15 filed with
Registrant's Annual Report on Form 10-K for the
fiscal year ended January 1, 1995 filed on April 3,
1995 (the "1994 Form 10-K"); as amended pursuant to a
Third Amendment thereto dated December 20, 1995 and
as amended pursuant to a Letter Agreement accepted
March 14, 1996, incorporated by reference to Exhibit
10.15 filed with Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995
filed on April 1, 1996 (the "1995 Form 10-K").
10.16 Turnkey Development Agreement dated September 14, 1990
between SLT Properties, Inc. and Oaks Associates,
incorporated by reference to Exhibit 10.21 filed with
Registrant's 1990 Form 10-K.
10.17 Sixth Amended and Restated Line of Credit Note in the
principal amount of $2,750,000 dated January 19, 1995, of
Registrant to Meridian Bank, incorporated by reference to
Exhibit 10.17 filed with Registrant's 1994 Form 10-K.
10.18 Amended and Restated Security Agreement amended through
December 1, 1992 dated December 1, 1992 among Registrant,
Meridian Bank, SLT Properties, Inc., SLT Technology, Inc.,
Diversified Properties-Equity Group, Inc. and Surgical Laser
Technologies Development, Inc., incorporated by reference to
Exhibit 10.22 filed with Registrant's 1992 Form 10-K.
10.19 Pledge Agreement dated April 13, 1992 by SLT Technology,
Inc. to Meridian Bank, as amended by First Amendment to
Pledge Agreement dated December 1, 1992, incorporated by
reference to Exhibit 10.23 filed with Registrant's 1992 Form
10-K.
10.20 Mortgage Note in the principal amount of $3,400,000 dated
August 16, 1991 and delivered September 12, 1991 by
Registrant, SLT Properties, Inc. and Montgomery County
Industrial Development Corporation in favor of American
United Life
- 51 -
<PAGE>
Insurance Company, incorporated by reference to
Exhibit 10.35 filed with Registrant's 1991 Form 10-K.
10.21 Mortgage dated August 16, 1991 and delivered September 12,
1991 among SLT Properties, Inc., Montgomery County
Industrial Development Corporation and American United Life
Insurance Company, incorporated by reference to Exhibit
10.36 filed with Registrant's 1991 Form 10-K.
10.22 Guaranty Agreement dated August 16, 1991 and delivered
September 12, 1991 between Registrant and American United
Life Insurance Company, incorporated by reference to Exhibit
10.37 filed with Registrant's 1991 Form 10-K.
10.23 Assignment of Rents and Leases dated August 16, 1991 and
delivered September 12, 1991 by SLT Properties, Inc. and
Montgomery County Industrial Development Corporation to
American United Life Insurance Company, incorporated by
reference to Exhibit 10.38 filed with Registrant's 1991 Form
10-K.
10.24 Security and Pledge Agreement dated September 12, 1991 by
SLT Properties, Inc. in favor of American United Life
Insurance Company, incorporated by reference to Exhibit
10.39 filed with Registrant's 1991 Form 10-K.
10.25 Loan Agreement effective November 25, 1991 between
Montgomery County Industrial Development Corporation and
Pennsylvania Industrial Development Authority, incorporated
by reference to Exhibit 10.40 filed with Registrant's 1991
Form 10-K.
10.26 Note in the principal amount of $2,000,000 dated November
20, 1991 and delivered December 2, 1991 by Montgomery County
Industrial Development Corporation to Pennsylvania
Industrial Development Authority, incorporated by reference
to Exhibit 10.41 filed with Registrant's 1991 Form 10-K.
10.27 Open-End Mortgage made November 20, 1991 and delivered
December 2, 1991 between Montgomery County Industrial
Development Corporation and Pennsylvania Industrial
Development Authority, incorporated by reference to Exhibit
10.42 filed with Registrant's 1991 Form 10-K.
10.28 Consent, Subordination and Assumption Agreement dated
November 20, 1991 and delivered December 2, 1991 by SLT
Properties, Inc. and Montgomery County Industrial
Development Corporation in favor of Pennsylvania Industrial
Development Authority, incorporated by reference to Exhibit
10.43 filed with Registrant's 1991 Form 10-K.
10.29 Assignment of Installment Sale Agreement dated November 20,
1991 and delivered December 2, 1991 among Montgomery County
Industrial Development Corporation, SLT Properties, Inc. and
Pennsylvania Industrial Development
- 52 -
<PAGE>
Authority, incorporated by reference to Exhibit 10.44 filed
with Registrant's 1991 Form 10-K.
10.30 Assignment of Lease Agreement dated November 20, 1991 and
delivered December 2, 1991 among Registrant, SLT Properties,
Inc. and Pennsylvania Industrial Development Authority,
incorporated by reference to Exhibit 10.45 filed with
Registrant's 1991 Form 10-K.
10.31 Guaranty and Surety Agreement dated December 2, 1991 by
Registrant in favor of Pennsylvania Industrial Development
Authority, incorporated by reference to Exhibit 10.46 filed
with Registrant's 1991 Form 10-K.
10.32 Agreement for Additional Security dated September 14, 1990
among Registrant, SLT Properties, Inc. and Montgomery County
Industrial Development Corporation, incorporated by
reference to Exhibit 10.47 filed with Registrant's 1991 Form
10-K; as amended by Pledge Agreement dated December 1, 1992,
incorporated by reference to Exhibit 10.36 filed with
Registrant's 1992 Form 10-K.
10.33 Pledge and Security Agreement effective December 2, 1991
among Registrant, SLT Properties, Inc. and Montgomery County
Industrial Development Corporation, incorporated by
reference to Exhibit 10.48 filed with Registrant's 1991 Form
10-K.
10.34 Security Agreement dated December 1, 1992 among Registrant,
SLT Properties, Inc. and Montgomery County Industrial
Development Corporation, incorporated by reference to
Exhibit 10.38 filed with Registrant's 1992 Form 10-K.
10.35 Form of Registrant's 8% Convertible Subordinated Note due
July 30, 1999, incorporated by reference to Exhibit 10.39
filed with Registrant's 1992 Form 10-K.
10.36* Form of Agreements dated June 12, 1992 between Registrant
and Executive Officers with respect to severance and change
of control benefits, incorporated by reference to Exhibit
10.40 filed with Registrant's 1992 Form 10-K.
10.37 Lease Agreement dated March 5, 1990 between Duke Associates
#77 Limited Partnership and Registrant and Lease Addendum
Number One dated March 30, 1990, incorporated by reference
to Exhibit 10.41 filed with Registrant's 1992 Form 10-K.
10.38* Form of Restricted Stock Award dated as of January 18, 1993
between Registrant and Executive Officers, incorporated by
reference to Exhibit 10.42 filed with Registrant's 1992 Form
10-K.
- 53 -
<PAGE>
10.39* Form of Restricted Stock Award, dated as of January 18, 1994
between Registrant and Executive Officers, incorporated by
reference to Exhibit 10.39 filed with Registrant's 1993 Form
10-K.
10.40* License Agreement dated May 31, 1994 between Registrant and
Fuller Research Corporation, incorporated by reference to
Exhibit 10.40 filed with Registrant's 1994 Form 10-K.
10.41* Lease dated April 20, 1993 between Registrant and Fuller
Research Laboratories, incorporated by reference to Exhibit
10.41 filed with Registrant's 1994 Form 10-K.
10.42 Investment Agreement dated December 8, 1994 between
Registrant and Kontron Instruments Holding N.V.,
incorporated by reference to Exhibit 10.42 filed with
Registrant's 1994 Form 10-K.
10.43 Amendment to Confidentiality and Non-Compete Agreement dated
April 28, 1994 between Registrant and Terry A. Fuller,
amending Confidentiality and Non-Compete Agreement dated
June 6, 1990, incorporated by reference to Exhibit 10.43
filed with Registrant's 1994 Form 10-K.
10.44 Guaranty dated December 29, 1994 from Registrant to KCI
Financial Services, Inc., incorporated by reference to
Exhibit 10.44 filed with Registrant's 1994 Form 10-K.
10.45 Negative Pledge Agreement dated January 19, 1995 between
Registrant and Meridian Bank, incorporated by reference to
Exhibit 10.45 filed with Registrant's 1994 Form 10-K.
10.46 International Facilities Agreement dated January 19, 1995
between Registrant and Meridian Bank, incorporated by
reference to Exhibit 10.46 filed with Registrant's 1994 Form
10-K.
10.47 $629,430.53 Standby Letter of Credit dated as of
January 1, 1995 issued by Meridian Bank to the Montgomery
County Industrial Development Corporation for the account of
Registrant, incorporated by reference to Exhibit 10.47 filed
with Registrant's 1994 Form 10-K, as amended by an Amendment
dated December 22, 1995 reducing the amount of the Letter of
Credit to $575,607, incorporated by reference to Exhibit
10.47 filed with Registrant's 1995 Form 10-K.
21 Subsidiaries of Registrant, incorporated by reference to
Exhibit 22 filed with Registrant's 1993 Form 10-K.
23 Consents of Arthur Andersen LLP.
- 54 -
<PAGE>
27 Financial Data Schedule, incorporated by reference to
Exhibit 27 filed with Registrant's 1995 Form 10-K.
* This exhibit represents a management contract or compensatory plan or
arrangement.
- 55 -
<PAGE>
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 on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
SURGICAL LASER TECHNOLOGIES, INC.
Dated: August 28, 1996 By: /s/ Michael R. Stewart
--------------------------
Michael R. Stewart,
Vice President and Chief Financial
Officer
- 56 -
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit No. Exhibit
10.7 Collaboration and Assignment Agreement dated as of March 7, 1995 among
Registrant, Daniel M. Schuman, M.D. and The AMERICA Charitable Fund.
23 Consents of Arthur Andersen LLP
- 57 -
Collaboration and Assignment Agreement
THIS Collaboration and Assignment Agreement is made effective as of
this 7th day of March, 1995 by and among Daniel Schuman, M.D., an individual
practicing surgical medicine and residing at 3790 King's Way, Boca Raton,
Florida 33434, (hereinafter referred to as "Schuman"); The AMERICA Charitable
Fund, a tax-exempt public institution having a place of activity at Boca Raton,
Florida (hereinafter referred to as "AMERICA"); and Surgical Laser Technologies,
Inc., incorporated under the law of the State of Delaware and having its
principal place of business at 200 Cresson Boulevard, Oaks, Pennsylvania 19456
(hereinafter referred to as "SLT").
WITNESSETH:
WHEREAS, Schuman is the Medical Director for AMERICA, a public charity
having as one of its missions and purposes the education of surgeons and other
health-care providers in surgical and medical techniques that will relieve human
suffering;
WHEREAS, Schuman is also the inventor and owner of the entire right,
title and interest in and to the invention of the device and the surgical
technique employing "laserized" water and has taken steps to gain patent
protection to the same under U.S. Patent No. 5,333,603 and U.S. Patent
Application Nos. 07/841,053, now abandoned, CIP 08/0088,247 and FWC 08/123,697,
and subsequent related applications;
WHEREAS, SLT is principally engaged in the business of designing,
developing, manufacturing and marketing surgical lasers and associated surgical
fiber optic delivery systems for use in Contact Laser(TM) surgery, and holds
proprietary technology which may be necessary for practice of the invention;
WHEREAS, Schuman and SLT have collaborated in the promulgation and
furtherance of the subject invention and wish to collaborate more closely in the
future under the aegis of AMERICA;
WHEREAS, in aid of such collaboration, SLT desires to obtain, and
Schuman desires to grant, an assignment of the subject invention, and further
Schuman desires that part of his continuing financial interests in the subject
invention, as hereby assigned, should inure to the benefit of AMERICA, and
AMERICA wishes to receive such interests as a donation toward the fulfillment of
its mission and purpose; and
WHEREAS, no other parties, save for Schuman, SLT and AMERICA, have any
interest in or claim to the subject matter of this Agreement, and no other
parties, save for Schuman, SLT and AMERICA, should be made part of this
Agreement.
Agreements:
NOW THEREFORE, in consideration of the mutual covenants and mutual
obligations hereinafter contained, the parties hereto have agreed and do by
these presents agree as follows:
1. Definitions. The following terms have the following meanings for the
purposes of this Agreement unless otherwise clearly required by context:
(a) Schuman Invention. The term "Schuman Invention" as used herein
shall mean that invention, including as embodied in devices or methods, that is
set forth in U.S. Patent 5,333,603 and U.S. Patent Application Nos. 07/841,053
and 08/123,697, and any re-issues, continuations, continuations-in-part, or
divisionals of any such patent applications or patent, except to the extent that
Schuman may have already assigned or licensed any of his interest in the same as
set forth on Exhibit A.
(b) Patent Rights. The term "Patent Rights" as used herein shall
mean any and all rights in and to United States and foreign patent applications,
or patents, and in and to the inventions described therein, which Schuman now
owns or controls, or shall hereafter own or control during the Term of this
Agreement, relating to the Schuman Invention, including but not limited to said
U.S. Patent No. 5,333,603 and U.S. Patent Application Nos. 07/841,053 and
08/123,697, and any reissues, continuations, continuations-in-part or
divisionals thereof, as well as any and all Improvements which Schuman or SLT
may now own or hereafter make, invent or acquire during the Term of this
Agreement.
(c) Schuman Tip. The term "Schuman Tip" as used herein shall mean
any probe tip for use only with an operatively associated laser fiber delivery
system, as used in the Field of Use in the Territory. The term "Schuman Tip"
shall include without limitation surgical tips of the type shown in said U. S.
Patent No. 5,333,603 and U. S. Patent Application Nos. 07/841,053 and 08/123,697
and Improvements thereof. By way of example, SLT has provided to Schuman certain
of its Contact Laser(TM) flat tips as labeled for use in using "laserized" water
surgery.
(d) Improvements. The term "Improvements" as used herein shall mean,
for uses within the Field of Use identified below: (i) new developments or
enhancements of Schuman Tips and methods of using Schuman Tips; (ii)
developments that are equivalent or substantially equivalent to the tips of the
type shown in U. S. Patent No. 5,333,603 and U. S. Patent Application Nos.
07/841,053 and 08/123,697 and any reissues, continuations, continuations-in-part
or divisionals thereof; and (iii) developments concerning apparatus or processes
for producing Schuman Tips.
(e) Technical Information and/or Know-How. The expression "Technical
Information and/or Know-How" as used herein shall mean engineering drawings and
data, test records and production data which is now or hereinafter owned or
acquired by Schuman or SLT relating to Schuman Tips, to the practical embodiment
of the products and processes assigned hereunder and to the methods, tools and
equipment developed and/or used in connection with the manufacture and/or use
thereof.
(f) Territory. The term "Territory" as used herein shall mean all of
the countries of the world including, without limitation, the United States of
America, its territories and possessions.
(g) Field of Use. The term "Field of Use" as used herein shall mean
medical, surgical, dental and veterinary uses and applications, but shall not
extend to industrial or other uses or applications.
(h) Schuman Trademark. The term "Schuman Trademark" as used herein
shall mean the term "Schuman" where used as a trademark, whether registered or
not, or as a servicemark, whether registered or not.
2. Collaboration Obligations.
(a) SLT shall use its reasonable diligent efforts to commercially
exploit the Schuman Tips. Such efforts may include, but shall not be limited to,
support of professional symposia and/or dealings with National Medical
Enterprises. SLT shall control all aspects of manufacturing, sales and marketing
of the assigned Patent Rights. SLT shall seek suitable marketing clearances for
the Schuman Tips.
(b) In aid of SLT's development and exploitation obligations under
Section 2(a), Schuman shall collaborate and consult with SLT and provide
services of research and preceptorship, requested on a reasonable basis by SLT
and as reasonably available by Schuman.
(c) Schuman further agrees that during the Term of the Agreement, he
will not engage in the design or development of any Schuman Tip or Improvement
thereof for any competitor of SLT. SLT shall have a right of first offer from
Schuman for any product that, though it is not a Schuman Tip or Improvement,
functions in a manner similar to and competitive with that found within the
Schuman Invention. SLT shall have sixty (60) days from the date of such offer in
which to evaluate Schuman's product and offer; if SLT declines or fails to
accept such offer, Schuman may offer the product to other parties on terms no
more favorable than those offered to SLT.
(d) In further aid of SLT's development and exploitation obligations
under Section 2(a), and in furtherance of its own mission to foster the
education of surgeons and other health-care providers in surgical technique,
AMERICA shall make available for use by SLT its facilities at Boca Raton.
3. Assignment of Schuman Rights. In furtherance of the aims of
collaboration among the parties to this Agreement during the term hereof:
(a) Schuman hereby assigns to SLT, on the terms and conditions
hereinafter set forth, the sole and exclusive right, title and interest in and
to the Schuman Invention, the Patent Rights, the Schuman Tips and Improvements
thereon within the Field of Use in the Territory, and SLT hereby grants to
Schuman a personal royalty-free non-exclusive license to make and use, but not
to sell, devices covered by Schuman Invention. Such assignment shall further
encompass the right to use Technical Information and/or Know-How for the purpose
of manufacturing, marketing and commercially exploiting said Schuman Invention.
Such assignment shall be evidenced to the U.S. Patent and Trademark Office and
similar patent agencies in an assignment in the form substantially as set forth
in Exhibit B.
(b) In the event that Schuman has previously licensed, assigned or
otherwise agreed to share some of his rights in the Schuman Invention, as set
forth in Section 1(a), and the same may become free and available to SLT for
assignment hereunder, then SLT shall have a right of first refusal to the same,
for the same economic terms as specified in Exhibit A.
(c) Schuman agrees to endorse to Boca Sinus Group, Inc. that it
should negotiate in good faith with SLT for the assignment of its rights in the
Aqualaser Trademark. Schuman shall support the following terms of negotiation:
(i) that SLT shall have an exclusive worldwide royalty-free right to use the
Aqualaser Trademark in sales of Schuman Tips and other products using the
Schuman Invention; (ii) that in addition to and distinct from the rights set
forth in 3(c)(i), SLT shall have an exclusive worldwide right to exploit the
Aqualaser Trademark for licensing to third parties; (iii) that SLT and Schuman
shall collaborate in the exploitation of such third party licenses; (iv) that
Boca Sinus Group, Inc. shall first recover its registration costs for the
Aqualaser Trademark from revenues from such exploitation and thereafter it and
SLT shall share the profits from such exploitation equally ("Trademark
Profits"); and (v) that SLT shall have sole rights to manage, enforce and defend
the Aqualaser Trademark.
4. Payments Under the Agreement. In consideration for the grant under
Section 3(a) and in furtherance of the mission and purpose of AMERICA, SLT
agrees that it will make payments to Schuman, or his nominees (which may be a
trust established by Schuman or, in suitable cases may be public charities
including AMERICA), and to AMERICA in furtherance of its educational mission,
during the Term of this Agreement, in the following amounts and according to the
following terms:
(a) Reimbursement to Schuman. SLT shall make an initial payment of
fifteen thousand dollars ($15,000.00) to Schuman, due and payable within thirty
(30) days of the execution of this Agreement, as reimbursement to Schuman toward
previous outlays in attempting to secure Patent Rights in the Schuman Invention.
(b) Facility Fee.
(i) SLT shall pay a facility fee to AMERICA for the availability
of the AMERICA facility under Section 2(d). There shall be no facility fee in
the calendar year 1995. In subsequent calendar years, an annual facility fee of
thirty thousand dollars ($30,000.00), payable in quarterly installments, shall
be due to AMERICA, except that in the final year of the Term of this Agreement,
the facility fee shall be pro-rated according to the number of months in such
final year. The facility fee shall entitle SLT to six (6) two-day occasions of
scheduled use of the facility. Such facility fee shall be payable whether or not
SLT uses the facility.
(ii) Notwithstanding Section 4(b)(i), if the method patent
referred to in Section 7(a) is denied issuance by the U.S. Patent and Trademark
Office and the Board of Patent Appeals upholds that denial, then the annual
facility fee payable hereunder shall be fifteen thousand dollars ($15,000.00)
(iii) If, however, notwithstanding Sections 4(b)(i) and
4(b)(ii), AMERICA should be legally absolved of its duty to make its facility
available to SLT (e.g. AMERICA becomes bankrupt), then SLT shall no longer be
obligated to pay the facility fee. In such event, the provisions of Section
4(c)(iv) shall no longer apply.
(c) Unit-Earned Contributions. During the Term of this Agreement,
SLT shall pay to Schuman, or his nominees, Unit-Earned Contributions, based upon
the sale of Schuman Tips or other products covered by claims in Patent Rights or
patent applications using the Schuman Invention.
(i) Unit-Earned Contributions shall be computed as follows:
Form of Schuman Tip Unit-Earned Contribution
Schuman Tips discrete from the delivery 3% of the actual sales price of
system, or other discrete products, each tip or other discrete
covered by claims in Patent Rights product
or patent applications using the
Schuman Invention.
Schuman Tips integrated to the delivery 3% of that portion of the sales
system or other products integral to price of the delivery system
another product-item, covered by claims or product-item that is
in Patent Rights or patent applications attributable to the Schuman Tip,
using the Schuman Invention. or integral product figured on a
relative (fiber-tip or product/
product-item resp.), cost basis
but not more than the comparable
sales price of a discrete tip or
product-item as described above
(ii) Unit-Earned Contributions shall be payable over the life of
any patent that may issue as a Patent Right at the rate provided in Section
4(c)(i). However, if the method patent referred to in Section 7(a) is denied
issuance by the U.S. Patent and Trademark Office and the Board of Patent Appeals
upholds that denial, or such patent, if issued, should be found to be invalid,
then Unit-Earned Contributions payable under Section 4(c) as to Schuman Tips or
any other product shall be payable thereafter over the remainder, if any, of the
first ten (10) years of the Term at the reduced rate of 1.5%. If SLT elects to
extend the Term under Section 5(b), then the rate shall continue to be 1.5%.
(iii) Unit-Earned Contributions shall be paid within thirty (30)
days following each calendar quarter along with a detailed statement to Schuman
in support of the computation so made.
(iv) Notwithstanding the foregoing of this Section 4(c),
Unit-Earned Contributions shall be payable for a given quarter only if and to
the extent that the Unit-Earned Contributions earned under Section 4(c) through
the calendar year up to the end of the applicable calendar quarter exceed the
pro-rated, earned facility fee under Section 4(b).
(d) Election for Reversion and Non-Exclusivity.
(i) In the event that SLT finds the payment of the facility fee
under Section 4(b) to be burdensome, then SLT may elect to cause the assignment
of rights hereunder to revert to Schuman, retaining however a non-exclusive
license in the Schuman Invention, Patent Rights (if the negotiations set forth
in Section 3(c) are successful), Schuman Trademark, Schuman Tips and
Improvements. SLT must give notice of this election within ninety (90) days of
the end of the calendar year. In the event of such an election, Schuman may then
license, on a non-exclusive basis, similar rights to other licensees. See,
however, Section 4(d)(iii).
(ii) By virtue of an election under Section 4(d)(i), SLT shall
no longer be obliged to pay the facility fee under Section 4(b); should SLT
desire to use the facility under Section 7(d), then SLT shall pay the prevailing
rate to AMERICA. SLT shall not be relieved, by such election, of its obligation
to pay Unit-Earned Contributions under Section 4(c) to Schuman. Upon any such
election, SLT's financial liability to Schuman shall be no greater than that of
any other licensee of Schuman. See, however, Section 4(d)(iii).
(iii) Notwithstanding the foregoing Sections 4(d)(i) and
4(d)(ii), SLT shall not be permitted to make an election under Section 4(d)(i)
in the first five (5) calendar years of this Agreement, commencing with the
calendar year beginning January 1, 1996.
(e) Audit Rights.
Schuman shall have the right to designate an accountant, reasonably
acceptable to SLT, to audit SLT's records, ledgers and accounts from time to
time. However, no more than one such audit shall be required of SLT within any
calendar year; such an audit of the records for any calendar year must be
initiated within eighteen (18) months of the end of the calendar year. The
accountant shall confine his report to matters germane to the Unit-Earned
Contributions and the Trademark Profits, if any, payable under this Agreement
and shall otherwise preserve SLT's confidences.
5. Term. (a) This Agreement, subject to the provisions of Section 13,
shall continue in effect to the later of the: (i) the date of expiration or
extinction of the method patent referred to in Section 7(a); or (ii) ten (10)
years from the date of execution of this Agreement (the "Term"). (b) SLT may
elect by, written notice made within ninety (90) days after the occurrence in
Section 5(a)(i) or ninety (90) days before the occurrence in Section 5(a)(ii) to
extend the Term to the date of expiration or extinction of the last of the
Patent Rights to expire or become extinct.
6. Sublicenses. SLT may grant written licenses in and to the Schuman
Invention, and any Patent Rights deriving from the Schuman Invention, upon such
terms as SLT may arrange, provided that:
(a) SLT shall include all sales of Schuman Tips by all
licensees in SLT's statement to Schuman, as provided in Section 4(c) hereof, and
pay Unit-Earned Contributions thereon to Schuman as though all such sales by
licensees had in fact been made by SLT hereunder according to the schedule
provided in Section 4(c); and
(b) Schuman Tips shall be considered as sold by such licensees
when payment for the units is received by SLT from the licensee under the
license agreement, or sixty (60) days from the date the licensee invoices for
said units, whichever is sooner.
7. Prosecution of Patent Rights.
(a) SLT will be responsible, and will bear all costs, for
prosecuting a patent covering the method under Schuman Invention in the United
States, and such other countries as SLT may in its discretion determine. Schuman
will pass control of the prosecution of any extant subject patent applications
over to SLT and SLT's counsel.
(b) It is understood that SLT's patent counsel may advise that
in its judgment it is wise to abandon or otherwise retrench or curtail the
patent prosecution for the Schuman handpiece in the continuation-in part
08/123,697 in order to have the best opportunity for a method patent on the
Schuman Invention from the U.S. Patent and Trademark Office and possibly other
registries. It is understood and agreed that SLT shall be permitted to act on
such advice, notwithstanding that it may result that no patent may issue on the
subject devices or methods.
(c) Up until, but not after, SLT's election under Section
4(d), SLT may in its discretion seek patent protection on other aspects of the
Schuman Invention as well, and such aspects shall be considered Patent Rights
hereunder. Expenses in connection with filing and prosecution thereof shall be
paid by SLT.
(d) With respect to patent applications on patentable
Improvements in Schuman Tips in the United States and in any foreign country,
such patent applications shall be included in the Patent Rights.
8. Communication of Know-How and Improvements. In furtherance of the
collaboration envisioned under this Agreement:
(a) Schuman shall upon execution of this Agreement make
available to SLT any and all Technical Information and/or Know-How now possessed
by him or any person or persons employed or engaged by him or working on the
Schuman Invention. If, during the Term of this Agreement, any additional
Technical Information and/or Know-How is conceived, created or acquired by
Schuman or any person or persons associated with him, Schuman shall make the
same available to SLT within thirty (30) days thereafter.
(b) Schuman agrees that in the event that he should make any
Improvements, he shall immediately communicate the same to SLT in writing, and
SLT shall have the right to use such Improvements without increased financial
obligation to AMERICA or Schuman.
(c) The trademarks of SLT are: SLT, the SLT Logo, Contact
Laser, Wavelength Conversion, SLT FiberTact, FiberTact, ArthroProbe,
Laserthermia, EndoProbe, Laserpro, and SmartSense. Schuman and AMERICA may not
use the above trademarks unless SLT has approved the use, which approval shall
not be unreasonably withheld. The patents of SLT, as filed and registered in the
United States Patent and Trademark Office, are: 4,592,353; 4,693,244; 4,736,743;
4,785,805; 4,895,144; 4,895,145; 5,154,708; 5,221,279 and 5,380,318. Other
patents are pending before the U.S. Patent and Trademark Office.
9. Confidentiality of Proprietary Information.
(a) The parties agree that each may have a proprietary
interest in Technical Information and/or Know-How. The parties hereby covenant
and agree to hold all Technical Information and/or Know-How in trust and
confidence and further agree to refrain from disclosing in whole or in part any
Technical Information and/or Know-How except as may be required for SLT to
manufacture, market or commercially exploit the licensed products as
contemplated herein. A party shall take all reasonable steps to safeguard the
other party's Technical Information and/or Know-How so as to ensure that no
unauthorized person shall have access to any of the Technical Information and/or
Know-How, and that no person authorized to have access to any of the Technical
Information and/or Know-How shall make any unauthorized copy of the Technical
Information and/or Know-How.
(b) In explication of the undertakings in Section 9(a),
Schuman shall treat technical and clinical testing, if any, of the Schuman Tips
as Technical Information and/or Know-How.
(c) A party shall be released from the covenants and
agreements made in Section 11(a) and 11(b) upon the first to occur of the
following: (i) the publication of the Technical Information and/or Know-How in a
letter patent, (ii) the publication of the Technical Information and/or Know-How
made through the permission of disclosing party or its successors in interest,
(iii) the passage of two (2) years from the termination of this Agreement, or
(iv) the prior knowledge of the Technical Information and/or Know-How by any
third party.
(d) The parties shall treat the financial terms of this
Agreement as a matter of confidential information. Notwithstanding the foregoing
sentence, a party shall not be precluded, in the reasonable exercise of its
judgment or as a matter of regulatory or quasi-regulatory necessity, from
disclosing such terms to governmental agencies or in its financial reports.
10. Defense and Enforcement of the Invention.
(a) Neither Schuman nor AMERICA shall be obligated to defend
or save harmless SLT against any suit, claim or demand on actual or alleged
infringement of any patent or trademark or any unfair trade practice resulting
from the exercise or use of any of the rights assigned hereunder. In the event
that SLT shall become aware of any infringement of any patent arising out its
performance under this Agreement, it shall notify Schuman.
(b) Up until but not after SLT's election under Section 4(d),
SLT shall have sole discretion in matters relating to the enforcement of the
Patent Rights. Schuman agrees to cooperate with SLT in any way necessary, but
without expense to Schuman, in the prosecution of any action, suit or proceeding
for infringement. SLT shall bear all costs of litigation. Any recoveries out of
such enforcement shall first be allotted to recompensing SLT its legal costs and
fees in enforcing the Patent Rights. Remaining recoveries shall then be
considered a single sale for purposes of computing a Unit-Earned Contribution to
Schuman or the Trademark Rights; after payment of such contribution or profit
share, the balance of recoveries shall inure to SLT.
11. Warranties.
(a) Schuman represents and warrants that he is the inventor
and owner of the entire right, title and interest in and to said U.S. Patent
5,333,603 and U.S. Patent Application Nos. 07/841,053 and 08/1213,697, and all
re-issues, continuations, continuations-in-part, and divisionals thereof,
excepting the License in Exhibit A.
(b) SLT represents and warrants that it has the legal capacity
to perform its undertakings under this Agreement.
12. Indemnification.
(a) Each of the parties agrees to defend, indemnify and hold
the other party harmless of, from and against any and all claims, demands,
actions, judgments, damages, costs and expenses, including court costs and
reasonable attorneys' fees, arising out of or relating to his or its
misrepresentations of this Agreement.
(b) The indemnification provisions hereunder shall remain in
force for as long as such third-party claims may be brought against any of the
parties.
(c) Notwithstanding Section 12(a) and 12(b), provided Schuman
maintains professional liability insurance in the amount of $250,000 per
occurrence or $750,000 annual aggregate that covers the risks associated with
Schuman's performance under this Agreement, and provided further that the
misrepresentation is covered by the insurance, Schuman shall not be liable to
SLT in an amount greater than $250,000 per occurrence or $750,000 annual
aggregate. At SLT's request, Schuman shall provide evidence of such insurance
coverage.
(d) The foregoing provisions of this Section 12 shall not
limit a party's right to recover from the other party based on the other party's
breach of this Agreement.
(e) IN NO EVENT SHALL A PARTY BE LIABLE TO ANOTHER PARTY FOR
CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES OR ECONOMIC LOSS EVEN IF ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES OR LOSS.
13. Termination Due to Default, Etc. In respect of the termination or
expiration of this Agreement, the parties have agreed as follows:
(a) In the event that either SLT or Schuman, shall fail to
perform any of its undertakings herein contained, the other party shall have the
right, at its option and without prejudice to any other remedy which it may have
by law, to terminate this Agreement by giving the party in default ninety (90)
days notice in writing of its intention to terminate and specifying the default;
provided that: (i) if the default is remedied within the first seventy-five (75)
days after receipt of notice, or (ii) if, in the event that said remedy is not
practicable with said seventy-five day period, a plan to remedy said default is
begun within said seventy-five day period and consistently implemented to
completion, said notification shall become ineffective, and this Agreement shall
remain in full force and effect. Where however, a default is material and cannot
be substantially cured or equitably redressed, either in cause or effect, then
the Agreement shall terminate at the end of said ninety (90) day period. The
foregoing in Section 13 (a) shall apply to AMERICA as well, but only with
respect to its rights to receive a facility fee and its obligations to make its
facility available. Thus, for example, AMERICA cannot terminate this Agreement
if SLT should fail to pay Schuman a Unit Earned Contribution or Schuman's share
of the Trademark Profits, if any.
(b) SLT shall be rebuttably presumed to have failed to perform
its undertakings herein if:
(i) SLT voluntarily commences any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any state or
federal bankruptcy or insolvency law or any dissolution or liquidation
proceedings;
(ii) Any bankruptcy, reorganization, debt arrangement or
other case or proceeding under any state or federal bankruptcy or insolvency
law, or any dissolution or insolvency proceeding, is involuntarily commenced
against or in respect of SLT and either such case or proceeding is not dismissed
within sixty (60) days of the commencement thereof, or an order for relief is
entered therein; or
(iii) SLT makes a general assignment for the benefit of
creditors or admits in writing its inability to pay its debts as they become
due.
(c) SLT may, at its option, at any time after six years from
the execution of this Agreement or, if earlier, after upholding by the Board of
Patent Appeals of the denial of issuance of the method patent referred to in
Section 7(a) by the U.S. Patent and Trademark Office, terminate this Agreement
upon giving at least ninety (90) days written notice to Schuman and AMERICA
prior to the effective date of such termination.
(d) Upon such termination of this Agreement by SLT, each
licensee of SLT hereunder shall become a licensee of Schuman with Schuman
assuming the obligations and receiving the benefits theretofore assumed and
received by SLT under each such license. Upon termination or expiration of this
Agreement, all Patent Rights and rights in Schuman Trademark shall revert to
Schuman.
(e) Termination of this Agreement for any reason shall not
relieve SLT of its obligation to pay to Schuman and AMERICA all amounts accruing
to Schuman or AMERICA prior to the effective date of such termination.
14. Miscellaneous.
(a) Force Majeure. In the event that the performance by a
party hereto of its obligations hereunder shall be interrupted or delayed by any
occurrence not occasioned by the conduct of such party, whether such occurrence
be an act of God or common enemy or governmental agency (e.g. FDA), or the
result of war, riot, civil commotion or sovereign conduct, then the party whose
performance is so delayed or interrupted shall be excused from such performance
for such period of time as is reasonably necessary after the occurrence to
remedy the effects thereof.
(b) Sales and Use Tax. SLT shall be solely responsible and
liable for the payment of, or reimbursement to, Schuman with respect to, all
personal property taxes, sales or use taxes, state and local privilege or excise
taxes or assessments of any nature except income taxes applicable to Schuman
based on, pursuant to or contemplated by this Agreement, or amounts in lieu
thereof, which arise from, are based on or are contemplated by this Agreement
whether or not such taxes or assessments are collected from SLT or Schuman.
(c) Notices. All notices for purposes under this Agreement
shall be sent by registered mail and such notice shall be deemed to be properly
served upon proof of posting by registered mail, when addressed in the case of
Schuman to:
Daniel Schuman, M.D.
3790 King's Way
Boca Raton, Florida 33434
in the case of AMERICA to:
Medical Director
American Charitable Fund
9960 Central Park West (S)
Suite 300
Boca Raton, Florida 33428
PRIVATE and CONFIDENTIAL
and in the case of SLT to:
Executive Vice President and
Chief Operating Officer
SURGICAL LASER TECHNOLOGIES, INC.
200 Cresson Boulevard
Oaks, PA 19456
or to such other address as a party shall designate in writing to the other
party.
(d) Assignability. Schuman shall not assign to any third party
competitor of SLT any rights which Schuman may have under this Agreement unless
his assignee then has, or concurrently acquires, SLT's rights and obligations;
nor shall Schuman, without the written consent of SLT, assign his rights under
this Agreement to any third party competitor of SLT which is not then the owner
of all Patent Rights under which SLT is granted an assignment by this Agreement.
However, Schuman shall be free to assign his rights under this Agreement to a
nominee (including a trust for family estate planning purposes) that is not a
competitor of SLT. SLT shall have the right to assign this Agreement to the
successor or transferee of all or substantially all of that portion of its
business to which this Agreement applies, provided the written consent of
Schuman shall be obtained, which consent shall not be unreasonably withheld.
(e) No Agency. No party shall be deemed to be the agent or
partner of the other. The parties to this Agreement are independent of each
other. Notwithstanding the foregoing, Schuman and SLT recognize that the
Trademark Profits, if any, may have to be accounted for under a partnership for
income tax purposes.
(f) Injunctive Relief. In the event of a breach of the
foregoing provisions, the non-breaching party shall be entitled to equitable and
injunctive relief in addition to any other available remedies.
(g) Governing Law. This Agreement is to be construed and to
take effect as an agreement made in the Commonwealth of Pennsylvania, United
States of America, in accordance with the laws of that State. The parties hereby
submit to the jurisdiction of the courts of that State.
(h) Severability. In the event that any provision, term,
condition or object of this Agreement is in conflict with any law, measure,
ruling, court judgment (by consent or otherwise) or regulation of the government
of the United States of America or other country, or any department thereof, and
the legal counsel of either party shall advise that in its considered opinion
such conflict, or a reasonable possibility of such conflict exists, then either
party may propose to the other party appropriate modifications of this Agreement
to avoid such conflict; provided, however, that no modification shall in any
event be made which diminishes from the assignment granted to SLT or the
payments due to Schuman and AMERICA hereunder.
(i) Amendments, Waivers. No waiver, amendment or modification
of any provision of this Agreement shall be effective unless in writing and
signed by the party against whom such waiver, amendment or modification is
sought to be enforced. No failure or delay by either party in exercising any
right, power or remedy under this Agreement shall operate as a waiver of any
such or other right, power or remedy.
(j) Whole Agreement. This Agreement contains all of the
understandings, representations, warranties and obligations among Schuman,
AMERICA and SLT to the subject matter hereof, and no party shall be bound by any
prior agreement, oral or in writing, or by any representations, conditions,
definitions, or warranties with respect to the subject matter of this Agreement
other than as expressly provided herein or as otherwise expressly noted
elsewhere
IN WITNESS WHEREOF each of the parties hereto has executed this
Agreement, in duplicate, as of the date first above written.
Daniel Schuman, M.D.
March 13, 1995 By: /s/ Daniel M. Schuman, M.D.
- ----------------------- ----------------------------
Date Daniel M. Schuman, M.D.
The AMERICA Charitable Fund
March 12, 1995 By: /s/ Daniel M. Schuman, M.D.
- ----------------------- ----------------------------
Date Daniel M. Schuman, M.D.
Medical Director
Surgical Laser Technologies, Inc.
March 7, 1995 By: /s/ Terry A. Fuller
- ----------------------- ----------------------------
Date Terry A. Fuller, Ph.D.
Executive Vice President and
Chief Operating Officer
EXHIBIT A
Previous Divestiture of Schuman Invention
EXHIBIT B
FORM of ASSIGNMENT
WHEREAS, Daniel Schuman, M.D., a citizens of the United States of
America with post office address of 3790 King's Way, Boca Raton, FL 33434
hereinafter generally referred to as "ASSIGNOR", have invented a certain new and
useful invention known as the Schuman Invention for which we have executed
applications for Letters Patent of the United States for Serial No. 07/841,053
with filing date of February 25, 1992, now abandined, CIP Serial No. 08/088,247
with filing date of July 7, 1993 and, FWC Serial No. 08/123,697 with filing date
of September 17, 1993, and
WHEREAS, Surgical Laser Technologies, Inc., a Delaware corporation
having a place of business at 200 Cresson Blvd., Oaks, PA 19456, hereinafter
generally referred to as "ASSIGNEE", is desirous of acquiring said invention and
said application for Letters Patent,
NOW, THEREFORE, in consideration of the sum of One Dollar and other
good and valuable executed consideration, the full receipt and sufficiency of
all of which are hereby acknowledged, and intending to be legally bound hereby,
I, the undersigned ASSIGNOR, hereby agree to sell, assign, transfer and convey
and by these presents do sell, assign, transfer and convey unto the above-named
ASSIGNEE, the whole and entire right, title and interest
in and to said inventions as described in the above
applications for Letters Patent, for the territory of the United
States and its possessions and territories and all foreign countries,
and
in and to the above applications for Letters Patent
and any and all United States Letters Patent which may be granted on
said applications and all United States and foreign Letters Patent
which may be granted on said invention including divisions, reissues
and continuations;
said invention, applications and Letters Patent to be held and enjoyed by the
above-named ASSIGNEE, for ASSIGNEE's own use and behalf, and for ASSIGNEE's
legal representatives and assigns to the full end of the term or terms for which
said Letters Patent may be granted, as fully and entirely as the same would have
been held by the undersigned ASSIGNOR had this assignment and sale not been
made; and for the aforesaid consideration ASSIGNOR hereby covenants, agrees and
undertakes to execute, whenever requested by the above-named ASSIGNEE, all
patent applications, assignments, lawful oaths and any other papers which
ASSIGNEE may deem necessary or desirable for securing to ASSIGNEE or for
maintaining for ASSIGNEE all the Letters Patent and applications thereto hereby
assigned or agreed to be assigned; all without further compensation to the
undersigned ASSIGNOR.
/s/ Daniel M. Schuman (L.S.)
------------------------------
Daniel Schuman, M.D.
State of Florida :
ss
County of Palm Beach :
Before me, a notary public, in and for the State of Florida, County as
aforesaid, on this _____ day of March 1995 personally appeared Daniel Schuman,
M.D. who being to me personally known, and who having first executed the
foregoing instrument in my presence and having been by me first duly sworn, did
acknowledge the foregoing instrument as his free deed and act, signed, sealed
and delivered by him for the purpose therein stated and intending to be legally
bound thereby and intending that said instrument be recorded.
--------------------------------
Notary Public
ASSIGNMENT
WHEREAS, Daniel Schuman, M.D., a citizens of the United States of
America with post office address of 3790 King's Way, Boca Raton, FL 33434
hereinafter generally referred to as "ASSIGNOR", have invented a certain new and
useful invention known as the Schuman Invention for which we have executed
applications for Letters Patent of the United States for Serial No. 07/841,053
with filing date of February 25, 1992, now abandined, CIP Serial No. 08/088,247
with filing date of July 7, 1993 and, FWC Serial No. 08/123,697 with filing date
of September 17, 1993, and
WHEREAS, Surgical Laser Technologies, Inc., a Delaware corporation
having a place of business at 200 Cresson Blvd., Oaks, PA 19456, hereinafter
generally referred to as "ASSIGNEE", is desirous of acquiring said invention and
said application for Letters Patent,
NOW, THEREFORE, in consideration of the sum of One Dollar and other
good and valuable executed consideration, the full receipt and sufficiency of
all of which are hereby acknowledged, and intending to be legally bound hereby,
I, the undersigned ASSIGNOR, hereby agree to sell, assign, transfer and convey
and by these presents do sell, assign, transfer and convey unto the above-named
ASSIGNEE, the whole and entire right, title and interest
in and to said inventions as described in the above
applications for Letters Patent, for the territory of the United
States and its possessions and territories and all foreign countries,
and
in and to the above applications for Letters Patent
and any and all United States Letters Patent which may be granted on
said applications and all United States and foreign Letters Patent
which may be granted on said invention including divisions, reissues
and continuations;
said invention, applications and Letters Patent to be held and enjoyed by the
above-named ASSIGNEE, for ASSIGNEE's own use and behalf, and for ASSIGNEE's
legal representatives and assigns to the full end of the term or terms for which
said Letters Patent may be granted, as fully and entirely as the same would have
been held by the undersigned ASSIGNOR had this assignment and sale not been
made; and for the aforesaid consideration ASSIGNOR hereby covenants, agrees and
undertakes to execute, whenever requested by the above-named ASSIGNEE, all
patent applications, assignments, lawful oaths and any other papers which
ASSIGNEE may deem necessary or desirable for securing to ASSIGNEE or for
maintaining for ASSIGNEE all the Letters Patent and applications thereto hereby
assigned or agreed to be assigned; all without further compensation to the
undersigned ASSIGNOR.
/s/ Daniel M. Schuman (L.S.)
-----------------------------------
Daniel M. Schuman, M.D.
State of Florida :
ss
County of Palm Beach :
Before me, a notary public, in and for the State of Florida, County as
aforesaid, on this 13th day of March 1995 personally appeared Daniel Schuman,
M.D. who being to me personally known, and who having first executed the
foregoing instrument in my presence and having been by me first duly sworn, did
acknowledge the foregoing instrument as his free deed and act, signed, sealed
and delivered by him for the purpose therein stated and intending to be legally
bound thereby and intending that said instrument be recorded.
/s/ Teresa J. Mindel
--------------------------------
Notary Public
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Surgical Laser Technologies, Inc.:
As independent public accountants, we hereby consent to the inclusion in this
Form 10-K/A of our report dated February 7, 1996. It should be noted that we
have not audited any financial statements of the Company subsequent to February
7, 1996, or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
August 28, 1996
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ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Surgical Laser Technologies, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K/A, into the Company's previously filed Form
S-8 Registration Statements File Nos. 33-32835, 33-38748, 33-42451, 33- 49730
and 33-83074.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
August 28, 1996
