FORM 10-K
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
For the fiscal year ended December 28, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission File Number 0-17919
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 18936-9638
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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 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes (X). No ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.(X)
As of March 15, 1998, the aggregate market value of the voting common equity of
Registrant held by non-affiliates was approximately $11,257,136. Registrant has
no authorized non-voting common equity.
On March 15, 1998 Registrant had outstanding 9,888,946 shares of Common Stock,
$.01 par value.
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PART I
Item 1. Business.
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(a) GENERAL DEVELOPMENT OF BUSINESS.
Surgical Laser Technologies, Inc. ("SLT" or "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
18936-9638, 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 patent rights
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 effect properties, power densities
and configurations appropriate for cutting, coagulation or vaporization. The
Wavelength Conversion effect properties permit Registrant's 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.
During 1997, Registrant redefined its strategy for growth to include a specific
focus in the surgical specialties of Otolaryngology and Head and Neck (ENT)
surgery. In conjunction with this focused strategy, Registrant has entered and
will continue to seek to enter into relationships with other companies to expand
the use of Registrant's products in surgical specialties other than ENT, and has
utilized and will continue to seek to utilize its strengths in supplying other
companies with products that draw on Registrant's expertise and competencies.
While refocusing its strategy in ENT, Registrant will take these other actions
in an effort to enhance sales and to promote continued utilization of its
products and services in those other surgical specialties.
Registrant expanded its product offerings during 1997 to include non-laser based
products specifically targeted at the Otolaryngology and Head and Neck (ENT)
surgical market. Those new product offerings include a line of reusable handheld
instruments and a line of fluid absorption products for the control of bleeding.
Registrant will continue to seek to expand its product offerings within the ENT
surgical market.
In December 1997, Registrant entered into an agreement with CorMedica
Corporation which calls for Registrant to develop and supply lasers and
fiberoptic delivery systems for CorMedica to incorporate into its proprietary
catheter tracking and navigation system. CorMedica Corporation is a
privately-held
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company engaged in the design, development and manufacture of proprietary
integrated systems for catheter-based percutaneous transluminal endocardial
revascularization (PTER(TM)) procedures.
In November 1997, a settlement was reached in the suit brought in February 1995,
against Registrant, by Norio Daikuzono, the inventor of three of Registrant's
patents in Contact Laser technology. The settlement confirmed that Registrant
will continue to calculate royalties due to Mr. Daikuzono under the Contact
Laser patents as it had done historically. Certain royalty payments which
Registrant had set aside since 1993 pending receipt of proper tax documentation
from Mr. Daikuzono were paid to Mr. Daikuzono upon his presentation of the
required documentation. No other financial payments were required by the terms
of the settlement (See Part I, Item 3, Legal Proceedings).
In September 1997, Registrant was audited by TUV Product Services to the Quality
System requirements defined in the ISO 9001, EN46001 standards and Annex II of
the Medical Device Directive. This audit resulted in Registrant's Quality System
certification to the aforementioned standards. Registrant is now permitted to
apply the CE Mark to its products. Application of the CE Mark is mandatory for
the sale of medical products in the European Union after July 1998.
In July 1997, Registrant entered into a marketing rights agreement with MedTREK
Corporation and its President, Mr. Dom L. Gatto. The marketing rights agreement
provides Registrant with exclusive worldwide rights to certain new products and
medical devices used within minimally invasive Otolaryngology and Head and Neck
(ENT) surgery.
In July 1997, a settlement was reached in the suit brought by Registrant in
November 1994 against C.R. Bard, Inc. and the Bard Urological Division. The suit
had alleged failure on the part of Bard to comply with its contractual
obligations to Registrant. Registrant received a cash settlement of $1,000,000.
In June 1997, Registrant entered into a private label supply agreement with
Diomed Limited, a U.K. based manufacturer and marketer of diode lasers and
related supplies. Under the agreement, Diomed will purchase its requirements for
contact probes and disposable fiber delivery systems, made to its specifications
and trademarks, for use with its diode laser systems.
In March 1997, Registrant and Kontron Instruments agreed to terminate the
distribution agreement entered into in 1993, under which Kontron Instruments has
been Registrant's distribution representative for most of Europe. Kontron
Instruments has agreed to continue to represent Registrant in certain countries
in Europe until successor distribution partners are identified by Registrant.
There were no other significant changes in Registrant's business during the
fiscal year ended December 28, 1997.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Registrant operates predominantly in a single industry: development, manufacture
and sale of proprietary laser systems for both contact and non-contact surgery.
See Note 16 of Notes to Consolidated Financial Statements for geographic segment
information.
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(c) NARRATIVE DESCRIPTION OF BUSINESS.
Registrant is primarily engaged in the development, manufacture and sale of a
proprietary Contact Laser System for surgery. During 1997, Registrant redefined
its strategy for growth to include a specific focus in the surgical specialties
of Otolaryngology and Head and Neck (ENT) surgery. In conjunction with this
focused strategy, Registrant has and will continue to seek to enter into
relationships with other companies to expand the use of Registrant's products in
surgical specialties other than ENT, and has and will continue to seek to
utilize its strengths in supplying other companies with products that draw on
Registrant's expertise and competencies. While refocusing its strategy in ENT,
Registrant will take these other actions in an effort to enhance sales and to
promote continued utilization of its products and services in those other
surgical specialties. During fiscal 1997, 1996 and 1995, revenues from sales of
Registrant's products and services were $11,665,000, 10,974,000 and $14,839,000,
respectively.
Registrant introduced Contact Laser surgery by combining proprietary Contact
Laser Delivery Systems with its own Nd:YAG laser unit 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/or 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 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 primarily by the sale of Contact Laser
Delivery Systems and accessories and Nd:YAG laser units. Registrant's Contact
Laser Delivery Systems consist of proprietary fiberoptic delivery systems which
deliver the laser beam from Registrant's Nd:YAG laser unit via an optical fiber
to the tissue, either directly or through a proprietary Laser Probe or Laser
Scalpel.
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 24
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 $225.
Laser Probes and Laser Scalpels. Registrant's proprietary Laser Probes and Laser
Scalpels are made of either synthetic sapphire or fused silica and have high
mechanical strength, high melting temperature and
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appropriate thermal conductivity. Most of these Laser Probes and Laser
Scalpels use Registrant's patented Wavelength Conversion 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. Wands have a list price of $95, and the handpiece list
prices currently range from $235 to $395.
Laser Units. Registrant markets the CLMD line of Nd:YAG laser units for use with
its Contact Laser Delivery Systems. The line consists of four units: the CLMD
25-watt to tissue, on 110 volts; the CLMD 40-watt to tissue, on 110 volts; 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, on 220 volts.
The laser units 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 thus 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 100 watt - $95,000.
These prices include a one-year warranty.
Virtually all of Registrant's laser systems and laser delivery systems are
manufactured and assembled at Registrant's Montgomeryville, Pennsylvania
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 materials
processing and final assembly 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. Registrants
non-laser based product offerings, including hand-held surgical instruments and
fluid absorption products, are manufactured by domestic suppliers.
Registrant's strategy for long-term growth continues to be to expand the use of
Registrant's disposable delivery systems and to take advantage of Registrant's
unique market position as a provider of Contact Laser products and delivery
systems for multiple surgical specialties. In addition, Registrant is currently
targeting its marketing activities in the Otolaryngology and Head and Neck (ENT)
surgical market. Registrant will also seek to expand the utilization of its
infrastructure through strategic alliances and/or acquisitions.
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Marketing
Registrant sells its Contact Laser Systems to end users by forming a responsive
partnership with surgeons and hospitals to develop and apply innovative
technologies that advance therapeutic benefit. Registrant's products are
designed to improve cost-effectiveness and enhance access and ease of use across
a broad range of surgical procedures and specialties. Registrant's marketing
efforts include activities designed to educate physicians and nurses in the use
of Registrant's products.
Registrant also participates from time to time in various workshops and
educational programs that are sponsored by others. These programs, together with
direct mail, advertising, physician referrals and trade shows at which
Registrant participates, provide a significant majority of Registrant's
potential customers. Registrant's sales organization provides consultation and
assistance to the surgeon and surgical staff on the effective use of
Registrant's products. The consultative sales effort varies depending on many
factors, which include the nature of the specialty involved and complexity of
the procedures and continues throughout Registrant's long-term relationship with
its customers. The length of the sales cycle for a laser unit varies from one
month to one year, with the average sale requiring approximately six months.
Registrant's Vice President of Sales and Marketing supervises these 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 area managers who are trained in the utilization of
Registrant's products, and who provide clinical consultation regarding safety,
efficacy and operating room procedures; per diem clinical support specialists
and per diem support specialists, who provide similar consultation within
Registrant's Laser OnCall(TM) rental offering; 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 and product opportunities. In certain geographic areas of the
United States, Registrant utilizes manufacturer's representatives or
distributors, who are not Registrant's employees, to provide these services.
Registrant distributes its products internationally through independent
distributors supervised by a Manager of International Operations, who is based
in the United States.
Contract Development and Private Label Manufacturing. As part of Registrant's
efforts to refocus its business strategy, Registrant has sought and will
continue to seek to augment its sales to end-user customers by entering into
specific contract development and private label manufacturing agreements with
other manufacturers. These activities are designed to utilize Registrant's
product strengths and capabilities.
International Markets. During 1997, Registrant continued its international
marketing activities, working through distributors in various countries in
Europe, the Middle East, the Far East, South America, Mexico and Canada. In
1997, Registrant terminated its distribution agreement with Kontron Instruments,
which had been Registrant's distributor in most of Europe. Registrant is
actively seeking replacement distributors in many of the countries formerly
served by Kontron Instruments.
Research and Development
Registrant has historically focused its research and product development efforts
mainly on Contact Laser Delivery Systems. More recently, these efforts have been
focusing on both tissue effect technologies that include laser and non-laser
based technologies and improving its offerings in ENT. Registrant's
technological capabilities are designed to be responsive to the surgeon's needs.
Registrant has the ability to
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respond to development requirements in the areas of optical/materials
technology, laser technology and mechanical and electronics technology. During
1997, 1996 and 1995, Registrant spent $910,000, $1,404,000 and $2,143,000 in
product development expenses, respectively.
Registrant's facility in Montgomeryville, Pennsylvania houses its product
development activities. Registrant utilizes the technologies developed by
Advanced Laser Systems Technology, Inc. ("ALST") which was licensed to
Registrant in December 1990 in the development and manufacture of its CLMD laser
units. Registrant, in addition to its internal product development programs,
works closely with medical centers, universities and other companies worldwide
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. The disposable fiberoptic delivery systems, with and
without hand-pieces, the disposable gas and fluid cartridge systems,
ceramic-enclosed probes and adjustable touch-control hand-pieces have been
developed by employees of Registrant; Registrant has retained ownership of all
such proprietary technology.
Registrant continues to focus on applications in minimally invasive and open
surgery procedures where precision and hemostasis are critical to the procedure
being performed and where Registrant's products can demonstrate distinct
clinical advantages and cost-effectiveness relative to traditional surgical
methods.
Competition
Registrant faces substantial competition from other manufacturers of
surgical systems, whose identity varies depending on the medical application for
which the surgical system is being used, and from traditional surgical methods.
Other companies are developing competitive surgical systems and related
technologies and 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 operations.
In addition, Registrant faces substantial competition in ENT from
well-established manufacturers of non-laser products. These well-established
companies have substantially greater resources than Registrant and could exert
considerable competitive pressure on Registrant.
Registrant continues to be aware that certain companies have introduced into the
market concepts or products that draw on Contact Laser technology. Registrant
does not perceive that such concepts or products have a significant impact on
Registrant's sales.
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 hospitals need to purchase several lasers to meet its
specialists' varied requirements. These factors, coupled with the precision,
hemostasis, tactile feedback and control provided by its Contact Laser Delivery
Systems, are Registrant's primary competitive strengths.
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FDA and Related Matters
The FDA generally must approve the commercial sale of new medical devices.
Commercial sales of medical lasers must be preceded by either a premarket
notification filing pursuant to Section 510(k) of the Federal Food, Drug and
Cosmetic Act, or the granting of premarket approval for a particular medical
device.
The 510(k) notification filing must contain information that establishes that
the device in question is substantially equivalent to devices on the market.
Registrant has received FDA clearance to commercially market its Contact Laser
System, including the laser unit, Laser Probes and Laser Scalpels and Fiberoptic
Delivery System, in a variety of surgical specialties and procedures in
gynecology, gastroenterology, urology, pulmonology, general and plastic surgery,
cardio-thoracic surgery, ENT surgery, ophthalmology, neurosurgery and head and
neck surgery. These clearances were granted under Section 510(k) on the basis of
substantial equivalence to other laser or electrosurgical cutting devices that
had received prior clearances or were otherwise permitted to be used in such
areas.
The premarket approval procedure involves a more complex and lengthy review
process by the FDA than the 510(k) premarket notification procedure, and the
necessity to comply with the premarket approval procedure would require costly
and time-consuming studies by Registrant, which could take two years or more to
complete.
Registrant anticipates that most of its new products will also be eligible for
the Section 510(k) procedure, although some new products, such as products for
which there are few substantially equivalent devices or uses, may be subject to
a lengthier review process. There can be no assurance that any future FDA
clearances will be granted on a timely basis, if at all. Failure to obtain FDA
clearance or extensive delay in the FDA clearance process for any new product
which represents a significant development for Registrant would likely have a
material adverse effect on Registrant's business.
Following FDA clearance for commercial distribution, the primary form of
government regulation of medical products is the Good Manufacturing Practice
Regulations for medical devices. These regulations, administered by the FDA, set
forth requirements to be observed in the manufacture, storage, quality control
procedures and installation of medical products for human use. In addition,
there are a variety of registration and reporting requirements, with which
Registrant must comply.
Registrant is also subject to the regulations under the Radiation Control for
Health and Safety Act (1968) of the Center for Devices and Radiological Health
("CDRH") of the FDA. These regulations require laser manufacturers to file new
product and annual reports, to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end-users and to certify and label each laser sold as belonging to one
of four classes, based on the level of radiation from the laser that is
accessible to users. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. CDRH is
empowered to seek fines and other remedies for violations of the regulatory
requirements. To date, Registrant has filed the documentation with CDRH for its
laser products requiring such filing, and has not experienced any difficulties
or incurred significant costs in complying with such regulations.
In addition, federal law requires Medicare to establish guidelines for hospital
reimbursement based on patient diagnosis ("Diagnostic Related Group" or "DRG").
Once a diagnosis is made, the payment to the hospital will be fixed irrespective
of the length of the hospital stay, the method of treatment,
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the supplies used or the tests carried out. This provides the hospital with an
incentive to adopt cost reduction methods. Registrant believes that the Contact
Laser System may reduce costs to hospitals by reducing length of stay due
primarily to the reduced need for invasive surgery, general anesthesia or
related medical treatments.
The FDA and other governmental agencies, both in the United States and in
foreign countries, may adopt additional rules and regulations that may affect
Registrant and its products.
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 twelve 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 hand-piece); January 10, 1995
(contact or insertion laser probe having wide angle radiation); May 16, 1995
(fused tip and fiber); May 28, 1996 (probe with inclusions); and March 4, 1997
(surgical tool for use with Contact Laser). Two of Registrant's Japanese
patents, acquired in the fourth quarter of 1992, relate to an improved laser
scalpel and laser surgical apparatus and will aid in the promotion of
Registrant's products. 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
and protection of its proprietary technology against significant encroachments.
However, no assurance can be given that such policy will be successful. (See
Part I, Item 3, Legal Proceedings).
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 five of its trademarks with the U.S.
Patent and Trademark Office. It has filed its intent to register other
trademarks. Registrant has other registrations issued or pending abroad.
Employees
As of December 28, 1997, Registrant had 79 employees of whom 29 were engaged in
manufacturing, service and distribution, 12 in research and product development,
26 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 certain countries in the Middle East, the Far
East and South America. During fiscal 1997, 1996 and 1995, domestic sales
represented 84%, 77% and 79% respectively, of Registrant's total sales. All
export sales are transacted in U.S. currency.
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Item 2. Properties.
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Registrant owns approximately four acres in Oaks, Pennsylvania on which a 57,000
square foot office building is located. The property and improvements were
sublet in June 1996 (as discussed below), but remain subject to a first mortgage
with a balance at December 28, 1997 of $2,966,000. The loan bears interest at
10.5% per year and is being repaid in equal monthly payments, including
interest, of approximately $34,000 over 20 years.
The property and improvements also remain 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 28, 1997 of $1,306,000. The loan bears interest at 3% per year and is
being repaid in equal monthly payments, 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 28, 1997, the required
amount of this security was $653,000; the form of the collateral was a standby
letter of credit of $453,000 with the remainder covered by a first security
interest in certain fixed assets and a second security interest in Registrant's
accounts receivable and inventories.
Registrant sublet its Oaks, Pennsylvania property to Suburban Cable TV Co. Inc.
("Suburban") under a sublease dated March 21, 1996, as later amended on June 14,
1996. Registrant moved all of its operations out of the facility by July 1996.
Suburban began occupying this facility in June 1996 and has made significant
improvements to it for use in key central administrative functions. The sublease
is for three years and contains a purchase option for the facility. Suburban and
Registrant are in discussions regarding the potential acceleration of the
purchase option.
Registrant currently leases a 42,000 sq. ft. facility in Montgomeryville,
Pennsylvania that houses all of its administrative and manufacturing operations.
Registrant entered a five-year lease for the Montgomeryville facility on May 29,
1996. Registrant has leased on a short-term basis approximately 5,000 sq.ft.
close to its new facility in order to store surplus property and records.
Registrant also holds a lease on its former manufacturing facility in Hebron,
Kentucky. The facility comprises 32,000 sq. ft. and is under lease through
August 2000. Since the operations from this facility were transferred during
1992 to the leased facility located near Registrant's former headquarters in
Oaks, Pennsylvania, Registrant sought to sublet the facility. A subtenant for
19,500 sq. ft. of the facility was secured in April 1994; a subtenant for the
balance of the space was secured in August 1996. In 1997, the first subtenant
went out of business. Registrant has found a replacement subtenant, though at
reduced rates. There can be no assurance that the subtenants will remain at the
facility through August 2000.
Item 3. Legal Proceedings.
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Bard. In November 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 claiming that Bard failed to comply with its
contractual obligations to Registrant. The complaint alleged a cause of action
for breach of contract, anticipatory repudiation, negligent misrepresentation
and unfair competition. Registrant also asked for specific performance and, in
addition or in the alternative, for monetary damages. Registrant also sought an
injunction against, and indemnification from, Bard's enforcement against
Registrant with respect to patent rights
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potentially inuring to Bard. Finally, Registrant had claimed punitive damages.
As of July 18, 1997, Registrant settled this suit, pursuant to which Bard has
paid Registrant $1,000,000.
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 had alleged that various products
of Registrant infringe its U.S. Patent Nos. 4,646,737 and 5,380,317. On January
12, 1996, Trimedyne amended its complaint, alleging that most of Registrant's
probes and scalpels infringed a third patent in its possession, U.S. Patent No.
4,773,413. Registrant answered the complaint and the amended 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 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. 4,773,413 was issued on September 27, 1988. It 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. On May 6, 1996, the court
granted Registrant's motion for summary judgment that none of its accused probes
infringe the `413 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. On July 3, 1996, the
court granted Registrant's motion for summary judgment that its product does not
infringe the `317 Patent either literally or under the doctrine of equivalents.
On July 11, 1996, the court entered a final judgment in favor of Registrant,
dismissing Trimedyne's complaint. Trimedyne filed a motion for the court to
reconsider its judgment. On August 7, 1996, the court denied Trimedyne's motion.
On September 3, 1996, Trimedyne appealed from the lower court's judgment with
respect to the `413 and `317 Patents. Briefs were filed, and oral argument was
held on May 8, 1997. It is not known when the Court of Appeals will render its
decision.
Daikuzono. On November 14, 1997, a settlement was reached in the suit brought
against Registrant by Norio Daikuzono, the inventor of three of its patents in
Contact Laser technology. The suit, brought by Mr. Daikuzono on February 7,
1995, had alleged breach of contract related to a 1984 agreement between
Registrant and himself, breach of contract related to a 1987 employment
agreement between Registrant and himself, and patent infringement of the Contact
Laser patents. Mr. Daikuzono sought rescission of his assignment to Registrant
of the Contact Laser patents, royalties on an expanded product group as well as
an unspecified portion of the settlement proceeds from Registrant's prior patent
infringement actions, compensatory damages in excess of $1 million related to
the breach of the employment agreement, treble damages on those royalties that
allegedly had been willfully unpaid, and attorney's fees, costs and interest.
The settlement confirmed that Registrant will continue to calculate royalties
due to Mr. Daikuzono under the Contact Laser patents as it has done from the
beginning. Registrant agreed to release to Mr. Daikuzono certain royalties which
it had set aside since 1993 pending receipt from Mr. Daikuzono of proper tax
documentation. In
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<PAGE>
conjunction with the settlement of the suit, Mr. Daikuzono provided the
documentation sufficient for Registrant to release those royalties. No other
financial payments are required by the terms of the settlement.
Moreover, the settlement with Mr. Daikuzono and his affiliated company, SLT
Japan Co. Ltd., confirmed the continuing validity of the prior assignment by Mr.
Daikuzono to Registrant of all rights in the Contact Laser patents and any other
related European and Japanese patent applications and patents issued pursuant
thereto. As a result of the settlement, Registrant remains free to sell its
products worldwide, including Japan, although it has agreed, subject to certain
legal requirements, not to use its own name in Japan to reduce potential market
confusion with SLT Japan Co. Ltd. Registrant also agreed, for a three year
period, not to import into Japan certain laser units previously manufactured in
conjunction with NEC Electronics, Inc. Mr. Daikuzono and SLT Japan Co. Ltd.
remain free to sell products that do not infringe Registrant's patents, and
Registrant granted to Mr. Daikuzono a royalty-free, non-exclusive license to
practice in Japan all rights under any patents that may be issued pursuant to
Registrant's Japanese patent applications related to the Contact Laser patents.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter ended December 28, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
- ------- -------------------------------------------------------------
Registrant's Common Stock, $.0l par value, is quoted on the Nasdaq Stock Market
under the symbol "SLTI." As of March 15, 1998, there were approximately 644
record holders of Registrant's Common Stock. On March 15, 1998, the closing
price of Registrant's Common Stock on the Nasdaq Stock Market was $1.31 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.
1997 High Low
---- ---
First Quarter $1.63 $1.06
Second Quarter 1.56 1.06
Third Quarter 2.06 1.19
Fourth Quarter 2.88 1.25
1996 High Low
---- ---
First Quarter $4.19 $1.13
Second Quarter 3.94 2.13
Third Quarter 2.50 1.69
Fourth Quarter 2.38 1.19
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 without the bank's prior
written consent at any time when there are outstanding obligations to the bank.
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Item 6. Selected Consolidated Financial Data.
- ------- -------------------------------------
The following table summarizes certain selected financial data for the five
years ended December 28, 1997. The selected financial data for Registrant at
December 28, 1997 and December 29, 1996 and for each of the three years in the
period ended December 28, 1997 are derived from, and are qualified by reference
to, the financial statements of 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. The
selected financial data for Registrant at December 31, 1995, January 1, 1995 and
January 2, 1994, and for each of the two years in the period ended January 1,
1995, are derived from the audited financial statements of Registrant not
included herein. This data should be read in conjunction with Registrant's
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 11,665 $ 10,974 $ 14,839 $ 21,508 $ 18,237
Gross profit 6,893 6,912 8,702 13,494 11,053
Percentage of sales 59.1% 63.0% 58.6% 62.7% 60.6%
Selling, general and administrative expenses $ 6,613 $ 8,072 $ 10,047 $ 10,786 $ 10,444
Product development expenses 910 1,404 2,143 2,068 2,485
Non-recurring charges (credits) (177)(1) 1,504(1) 1,915 (1) (892)(3) 397(4)
Net gain on settlement of patent litigation -- -- (5,926)(2) -- --
Operating income (loss) (453) (4,068) 523 1,532 (2,273)
Net income (loss) (381) (4,508) (58) 913 (2,935)
Net income (loss) per share ($.04) ($0.46) ($0.01) $0.10 ($0.33)
Shares used in calculation of net income
(loss) per share 9,885 9,866 9,851 9,309 9,011
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 6,549 $ 6,120 $ 8,147 $ 4,143 $ 2,866
Accounts receivable, net 1,925 2,899 3,225 4,468 3,404
Inventories 2,986 3,534 3,866 4,725 4,626
Total assets 19,996 21,490 24,821 26,454 25,079
Long-term debt 4,509 4,971 4,503 4,719 5,054
Convertible subordinated debentures 1,633 1,660 1,786 1,848 2,165
Stockholders' equity $ 11,357 $ 11,308 $ 15,690 $ 15,685 $ 12,420
==========================================================================================================================
</TABLE>
(1) See Note 12 of Notes to Consolidated Financial Statements.
(2) See Note 4 of Notes to Consolidated Financial Statements.
(3) Settlement of lawsuit with ALST partially offset by a separate legal
settlement with a former distributor.
(4) Increase in the reserve established in 1991 for the relocation of Kentucky
operations.
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.
The U.S market is serviced predominantly by a direct sales force, while sales
outside the United States are derived through a network of distributors. In
1997, net sales were $11,665,000, an increase of $691,000, or 6%, from 1996
sales of $10,974,000. The 1996 sales of $10,974,000 were a $3,865,000, or 26%
decrease from 1995 sales of $14,839,000.
Net sales of Nd:YAG laser systems in 1997 was relatively constant with 1996,
despite an increase of 34% in unit sales. Unit sales of new Nd:YAG laser systems
in 1997 remained relatively constant with 1996, while sales of used and
demonstration laser systems accounted for the percentage increase in unit sales.
The increase in unit sales was due to both a higher volume of sales of
Registrant's laser systems for ENT surgery as well as Registrant's continuing
efforts to reduce demonstration laser inventory levels through a reduction in
average unit prices. As a result, in 1997 the overall average unit selling price
of an Nd:YAG laser system declined by 24% as compared to 1996.
Net sales of Nd:YAG laser systems in 1996 decreased by 29% on a 20% decline in
units. The decrease was due primarily to the continued weakness in the demand
for capital purchases by hospitals. This weakness was evidenced primarily in the
United States and European markets. Other international markets were also
affected, though to a lesser extent. While average unit prices remained
relatively constant in international markets, U.S. average unit prices declined
by 20% due mainly to a larger percentage of the unit sales consisting of
refurbished lasers.
Net sales of Contact Laser Delivery Systems and related accessories declined 12%
and 28% in 1997 and 1996, respectively, due to the lower level of sales of
Nd:YAG laser systems and to competition within the urology market, as well as in
other specialty markets.
Contract development activities accounted for 8% of net sales in 1997. There
were no contract development sales in 1996 and 1995.
In October 1996, following the acquisition of the remaining 50% interest in the
Mediq PRN/SLT joint venture (see Note 5 of Notes to Consolidated Financial
Statements), revenues from the rental of Registrant's Nd:YAG laser systems and
related Contact Laser Delivery Systems and accessories began to be included in
net sales. In 1997, rental revenue accounted for 9% of net sales.
Management 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 and increasing shareholder value.
Gross Profit
Gross profit for the year ended December 28, 1997 was constant with the prior
year on a 6% increase in net sales. As a percentage of net sales, gross profit
was 59%, down from 63% in 1996. The decrease in gross profit as a percentage of
sales was due primarily to three factors. The main factor was a reduction in the
selling price on certain Contact Laser Systems, enacted in an effort to reduce
inventory levels. The second factor was the inclusion in all of 1997 of the
Laser OnCall(TM) rental business which operated at a
14
<PAGE>
lower percentage gross profit as compared to the sale of lasers and
delivery systems. A partial offset to those two factors was the higher
percentage gross profit realized from contract development activities in 1997
for which there were no corresponding activities in 1996.
Gross profit for the year ended December 29, 1996 decreased $1,790,000 or 21%
from the prior year. As a percentage of net sales, gross profit was 63%, up from
59% in the 1995 fiscal year. The increase was attributable to cost reduction
measures taken throughout 1996 in response to the lower sales being realized.
Operating Expenses
In response to the lower level of sales experienced from 1994 to 1996,
Registrant implemented a course of actions aimed at bringing expense levels in
line with the requirements needed to support its actual sales. These actions
included reductions in workforce levels both in 1996 and 1995; the sublease of
Registrant's former headquarters/research facility; and the relocation of all of
Registrant's operations into a leased facility in Montgomeryville, Pennsylvania.
Selling, general and administrative expenses were $6,613,000 in 1997, compared
to $8,072,000 in 1996, a decrease of 18%. The comparative decrease was due
primarily to cost reduction actions taken in the third quarter of 1996. Such
actions included reductions in workforce and related employee expenses and a
reduction in the operating costs due to the consolidation of Registrant's
facilities into one location. Also contributing to the decrease was a reduction
in legal fees due to the settlement in 1997 of two of Registrant's outstanding
lawsuits (see Part I, Item 3, Legal Proceedings). Selling, general and
administrative expenses in 1996 decreased 20% from the 1995 level of $10,047,000
due mainly to the cost reduction actions which included reductions in manpower
and associated costs.
Product Development
Product development costs were $910,000, $1,404,000, and $2,143,000 in 1997,
1996 and 1995, respectively. The reduction in 1997 versus 1996 was due primarily
to personnel expense reduction actions taken in the third quarter of 1996. The
reduction in 1996 compared to 1995 was due primarily to lower manpower related
expenses and to the inclusion in the 1995 expenditures of $300,000 of expenses
related to consulting fees paid to the principals of Advanced Laser System
Technology, Inc. for which there were no corresponding expenses in 1996.
Non-Recurring Charges (Credits)
In 1997, Registrant recorded a benefit from the settlement of litigation with
C.R. Bard and the Bard Urological Division (see Part I, Item 3 Legal
proceedings) of $1,000,000. In addition, Registrant recorded non-recurring
facility related charges of $542,000 related to Registrant's former headquarters
facility and $281,000 related to Registrant's former manufacturing facility in
Kentucky. The $542,000 charge resulted from a write-down in the carrying value
of the former headquarters facility necessitated by the provision under which
the facility is expected to be sold at the end of the tenant's initial sublease
term. The $281,000 charge resulted from the loss of Registrant's former
subtenant and subsequent signing of a new subtenant at a lower rental rate.
In 1996, Registrant recorded non-recurring charges of $1,504,000, representing
third quarter restructuring charges of $1,201,000 for severance and other
related costs, and a charge of $303,000 for the write-off of leasehold
improvements at Registrant's former leased facility in Oaks, Pennsylvania. The
manufacturing
15
<PAGE>
operations have been consolidated with all other operations into Registrant's
leased facility in Montgomeryville, Pennsylvania.
In 1995, Registrant recorded non-recurring charges of $1,915,000 representing
fourth quarter charges of $828,000 for the write-down of certain 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.
Net Patent Litigation Settlement
In December 1995, Registrant received $8,125,000 in cash in settlement for
damages relating to the patent infringement suit which it had brought against
Sharplan Lasers, Inc. in May 1990, and later against its parent company, Laser
Industries Ltd. 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).
Other Income
Other income increased to $366,000 in 1997 from a loss of $23,000 in 1996. This
increase resulted from the inclusion of a full year of sublease income in 1997
as compared to only six months of sublease income in 1996 and the inclusion of a
charge to other income in 1996 of moving expenses to relocate Registrant's
headquarters for which there were no corresponding costs in 1997.
Interest
Net interest expense of $282,000 in 1997 increased by $29,000 from $253,000 in
1996. The increase was due to the inclusion of a full year of interest expense
on the capital leases acquired in the purchase of the Mediq PRN/SLT joint
venture offset in part by higher interest income earned on cash, cash
equivalents and short-term investments in 1997.
Net interest expense in 1996 of $253,000 decreased by $259,000 from $512,000 in
1995 due to higher interest income earned on cash equivalents and short-term
investments in 1996 versus 1995.
Income Taxes
The tax provision in 1997 of $12,000 was for state income taxes. There was no
provision for income taxes in 1996 due to the net taxable loss incurred. The tax
provision of $50,000 in 1995 was for federal alternative minimum and state
income taxes. Registrant expects that its effective tax rate for 1998 will
remain significantly lower than the statutory rate due to continued availability
of its net operating loss carryforwards and tax credit carryforwards.
MedTREK Agreement
In 1997, Registrant acquired exclusive worldwide rights to certain new products
and medical devices used in minimally invasive otolaryngology and head and neck
(ENT) surgery, pursuant to an agreement with MedTREK Corporation and its
President, Mr. Dom L. Gatto. In accordance with the terms of the agreement,
Registrant is required to make cash payments to MedTREK when certain products
have been commercially introduced and has issued stock warrants to MedTREK that
will vest when predetermined
16
<PAGE>
revenue targets have been achieved. The acquisition cost of $480,000 was
recorded within other long-term assets and is being amortized over a five year
period, the initial term of the agreement (See Note 7 and Note 11 of Notes to
Consolidated Financial Statements).
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at December 28, 1997 were
$6,549,000, an increase of $429,000 over the December 29, 1996 balance of
$6,120,000. Registrant invests its excess cash in high- quality, liquid,
short-term investments. 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 10 of Notes to Consolidated
Financial Statements). At December 28, 1997 and December 29, 1996, letters of
credit, issued under Registrant's bank line of credit, were outstanding in favor
of the Montgomery County Industrial Development Corporation ("MCIDC") as a
condition of the security agreement with MCIDC (See Note 10 of Notes to
Consolidated Financial Statements). The letters of credit amounted to $453,000
at the end of 1997 and $515,000 at the end of 1996. The letter of credit
requirement extends until Registrant records four consecutive quarters of
profitability in a given calendar year.
Registrant has a $2,535,000 credit facility with a bank. This facility includes
a sub-line for letters of credit of $535,000, under which the aforementioned
letters of credit were issued. Other than the letter of credit requirement by
MCIDC, and one other minor 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. The line is subject to
Registrant maintaining certain financial covenants as defined. Management
expects to renew a line of credit facility when this facility expires on May 31,
1998.
Net cash provided by operating activities was $987,000 in 1997, primarily
resulting from net non-cash adjustments of $1,917,000, a decrease in accounts
receivable of $974,000, the net loss incurred of $381,000 and a decrease in
accounts payable and accrued liabilities of $1,500,000. The net non-cash
adjustments of $1,917,000 include non-recurring charges of $847,000. The
decrease in accounts payable and accrued liabilities included royalty payments
of $391,000 to Norio Daikuzono in connection with the litigation settlement (See
Part I, Item 3, Legal Proceedings). In 1996, net cash used in operating
activities was $1,349,000, which resulted principally from losses incurred of
$4,508,000 offset by net non-cash adjustments of $2,157,000 and a decrease in
accounts receivable and inventory of $560,000 and $488,000, respectively. The
net non-cash adjustments of $2,157,000 included non-recurring charges of
$1,030,000.
Net cash used in investing activities increased $1,486,000 in 1997 to $1,972,000
from $486,000 in 1996. The increase in net cash used was due primarily to the
purchase in 1997 of short-term investments.
Net cash used in financing activities was $255,000 in 1997, compared to net cash
used in financing activities of $273,000 in 1996.
Management believes that Registrant's current cash position and available line
of credit will be sufficient to fund operations and meet its commitments for
long-term debt (See Note 10 of Notes to Consolidated Financial Statements),
other commitments and contingencies (See Note 17 of Notes to Consolidated
Financial Statements) and capital expenditures.
Management believes that inflation has not had a material effect on operations
for the three years in the period ended December 28, 1997.
17
<PAGE>
Year 2000 Compliance
Registrant has analyzed its management information systems for year 2000
compliance issues. Registrant has purchased the latest version of its software
package which has eliminated the Year 2000 issue. The costs of conversion to the
new version of the software package have not been material.
Risk Factors
The statements contained in this Form 10-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. Additionally, from time to time, Registrant or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in, but are not limited
to, press releases, oral statements made with the approval of an authorized
executive officer or in various filings made by Registrant with the Securities
and Exchange Commission. These forward-looking statements reflect Registrant's
views as of the date they are made with respect to future events and financial
performance and are generally, but not exclusively, identified by the use of
such terms as "intends," "expects," "plans," "projects," "estimates,"
"anticipates," "should" and "believes." However, these forward-looking
statements are subject to many uncertainties and risks which could cause the
actual results of Registrant to differ materially from any future results
expressed or implied by such statements. Additionally, Registrant does not
undertake any obligation to update any forward-looking statements.
The risk factors identified in the cautionary statements below could cause
actual results to differ materially from those suggested in these
forward-looking statements. Also, Registrant may, from time to time, set forth
additional risk factors on Forms 10-Q and 8-K. However, the risk factors listed
below or in future reports of Registrant are not exhaustive. New risk factors
emerge from time to time, and it is not possible for management to predict all
of such risk factors, nor can it assess the impact of all of such risk factors
on Registrant's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The cautionary
statements below are being made pursuant to the "safe-harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). Registrant
intends that all forward-looking statements made, in whatever form, be
considered subject to the Act.
Changes in the U.S. Health Care System. There has been substantial debate in the
political arena related to prospective changes in the U.S. health care system.
In addition, developments in both the public and the private sector have
significantly affected the financing and delivery of health care in the United
States, including the rapid expansion of managed care programs, the reduction of
reimbursements under the capital cost pass through system for the Medicare
program and the implementation of prospective governmental reimbursement
programs based on diagnostic related groups. Cost containment has been a major
element of these developments, which have had a material adverse effect on
Registrant's results of operations over the past several years. There can be no
assurance that such changes in the financing and delivery of health care will
not continue to affect hospital capital equipment and supplies procurement
patterns or dictate which surgical procedures will be covered by applicable
insurance or government funded or subsidized programs, which could continue to
have a material adverse impact on Registrant. Registrant also cannot predict the
extent or impact of future legislation or regulations.
18
<PAGE>
Competition. Registrant faces substantial competition from conventional surgical
methods, from other manufacturers of surgical lasers and from manufacturers of
alternatives to surgical lasers. For example, in late 1994, an electrosurgical
roller-ball type product was introduced that adversely affected Registrant's
results of operations in 1995. Competitive pressure could result in price
competition or the introduction of new products by Registrant's competitors,
which could have an adverse impact on Registrant's revenues and results of
operations. In addition, Registrant is engaged in an industry characterized by
extensive research efforts. Advances in medical lasers which improve clinical
effectiveness and other discoveries or developments in either the medical device
or drug industry could render Registrant's products obsolete. Some of the
companies with which Registrant competes or may compete in the future have or
may have more extensive research, marketing and manufacturing capabilities and
significantly greater financial, technical and personnel resources than
Registrant and may be better positioned to continue to improve their technology
in order to compete in an evolving industry.
Governmental Regulation. Government regulation in the U.S. and other countries
is a significant factor in the development, manufacturing and marketing of many
of Registrant's products and in Registrant's ongoing research and development
activities. Specifically, medical devices are subject to United States Food and
Drug Administration ("FDA") approval or clearance before they can be utilized
for clinical studies or sold commercially. The process for obtaining the
necessary approvals and compliance with applicable regulations can be costly and
time consuming. There can be no assurance that regulatory review will not
involve delays or other actions adversely affecting the marketing and sales of
Registrant's products. Registrant has received all of its FDA clearances to date
using the procedure under Section 510(k). There is no assurance Registrant will
continue to be able to obtain applicable government approvals or successfully
comply with such regulations in a timely and cost-effective manner, if at all,
and failure to do so may have an adverse effect on Registrant's financial
condition and results of operation. Further, there can be no assurances that
more stringent regulatory requirements and/or safety and quality standard will
not be issued in the future with an adverse effect on Registrant's business.
Although Registrant believes that it is in compliance with all applicable
regulations of the FDA, current regulations depend heavily on administrative
interpretation and there can be no assurance that future interpretations made by
the FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect Registrant.
Registrant's products are similarly subject to foreign regulating bodies.
Typically, foreign bodies readily allow Registrant's products to be traded
within their jurisdictions, based on the fact that Registrant's products have
secured clearance from the FDA. However, there can be no assurance that such
foreign bodies will not impose different, additional requirements that may
materially hamper Registrant's ability to compete in overseas markets.
Patents and Proprietary Technologies. Registrant's ability to compete
effectively with other companies depends, in part, on its ability to protect and
maintain the proprietary nature of its technology. Registrant owns twelve United
States patents, two Japanese patents and a number of issued foreign patents and
pending patent applications for its products. Registrant treats its design and
technical data as confidential, and relies on nondisclosure safeguards, such as
confidentiality agreements, laws protecting trade secrets and agreements to
protect proprietary information. Registrant has incurred substantial costs in
enforcing its patents against infringement by others and defending itself
against similar claims of others. Although Registrant has been successful to
date in disputes involving the validity and enforceability of its patents and in
defending itself against claims by others of patent infringement, there can be
no assurance that Registrant will continue to be successful in such matters in
the future or that Registrant's patents or other
19
<PAGE>
proprietary rights, even if continuing to be held valid, will be broad
enough in scope to enable Registrant to prevent third parties from producing
products using similar technologies or processes.
As Registrant attempts to broaden its offerings in ENT and, to a lesser extent,
in other surgical fields, Registrant perceives that it may be obliged to license
technology from third parties in order to have competitive offerings. There can
be no assurance that Registrant will be successful in obtaining such licenses,
or that if obtained, such licenses will not be at disadvantageous terms.
Product Development. Registrant is actively engaged in identifying market needs
and in developing products to satisfy those unmet needs. Such products are not
necessarily laser products. Registrant attempts to validate the existence of
such unmet needs as well as the potential revenues, costs and profits involved
in satisfying such needs. There is a material risk that Registrant's competitors
may satisfy those needs with more effective or less expensive products. There is
also a material risk that Registrant's estimates of the economic potential from
such unmet needs may be incomplete or inaccurate, or that the products which
Registrant develops to meet such needs will be untimely introduced or
insufficiently effective clinically or economically to gain market acceptance.
Change in Marketing Approach. Registrant is taking, or is contemplating taking,
certain actions to transition its marketing approach from addressing a wide
range of surgical specialties to providing a broader array of products to a more
select market segment. Although Registrant believes that this transition will
have a long-term positive financial impact, no assurance can be given that the
actions taken will provide the intended results, or that Registrant will not
experience short-term disruptions or an adverse impact of operations during the
transition to this new marketing approach.
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data. Page
- ------ ------------------------------------------- ----
<S> <C>
Report of Independent Public Accountants................................................................. 21
Consolidated Balance Sheets at December 28, 1997 and December 29, 1996................................... 22
Consolidated Statements of Operations for each of the three years in the period ended
December 28, 1997.................................................................................... 23
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended
December 28, 1997.................................................................................... 24
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 28, 1997.................................................................................... 25
Notes to Consolidated Financial Statements............................................................... 26
Schedule II - Valuation and Qualifying Accounts.......................................................... 42
</TABLE>
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.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Surgical Laser Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Surgical Laser
Technologies, Inc. (a Delaware corporation) and Subsidiaries as of December 28,
1997 and December 29, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 28, 1997. These financial statements and the 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surgical Laser Technologies,
Inc. and Subsidiaries as of December 28, 1997 and December 29, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 28, 1997 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 a required 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.
January 30, 1998
21
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par values)
<TABLE>
<CAPTION>
Dec. 28, 1997 Dec. 29, 1996
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 1) $1,555 $2,795
(including restricted amounts of $100)
Short-term investments (Note 1) 4,994 3,325
Accounts receivable, net of allowance for doubtful accounts
of $155 and $116 1,925 2,899
Inventories (Note 2) 2,986 3,534
Other 445 134
- ------------------------------------------------------------------------------------------------------------------
Total current assets 11,905 12,687
Property and equipment, net (Note 3) 1,998 2,325
Property held for sale, net (Note 3) 4,869 5,636
Patents and licensed technology, net (Note 4) 576 610
Other assets 648 232
==================================================================================================================
Total assets $19,996 $21,490
==================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $504 $468
Accounts payable 512 777
Accrued liabilities (Note 9) 1,481 2,306
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,497 3,551
- ------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 10) 6,142 6,631
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 17)
Stockholders' Equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,887 shares and 9,882 shares issued and outstanding 99 99
Additional paid-in capital 33,144 32,714
Accumulated deficit (21,886) (21,505)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,357 11,308
==================================================================================================================
Total liabilities and stockholders' equity $19,996 $21,490
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended
----------------------------------------------------
Dec. 28, 1997 Dec. 29, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $11,665 $10,974 $14,839
Cost of sales 4,772 4,062 6,137
- ------------------------------------------------------------------------------------------------------------------
Gross profit 6,893 6,912 8,702
- ------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 6,613 8,072 10,047
Product development 910 1,404 2,143
Non-recurring charges (credits) (Note 12) (177) 1,504 1,915
- ------------------------------------------------------------------------------------------------------------------
7,346 10,980 14,105
- ------------------------------------------------------------------------------------------------------------------
Net settlement of patent litigation (Note 4) - - 5,926
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) (453) (4,068) 523
Equity in loss of joint venture - 164 19
Other (income) loss (366) 23 -
Interest expense 649 581 624
Interest income (367) (328) (112)
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes (369) (4,508) (8)
Income taxes 12 - 50
==================================================================================================================
Net loss $(381) $(4,508) $(58)
==================================================================================================================
Basic and diluted loss per share (Note 1) $(0.04) $(0.46) $(0.01)
==================================================================================================================
Shares used in calculation of basic and diluted loss per share 9,885 9,866 9,851
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
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
Conversion of subordinated notes to
common stock (28 shares) - 126 - 126
Net loss - - (4,508) (4,508)
- ----------------------------------------------------------------------------------------------------
Balance, December 29, 1996 99 32,714 (21,505) 11,308
Conversion of subordinated notes to
common stock (6 shares) - 27 - 27
Stock warrants issued (Note 11) - 403 - 403
Net loss - - (381) (381)
- ----------------------------------------------------------------------------------------------------
Balance, December 28, 1997 $99 $33,144 $(21,886) $11,357
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended
--------------------------------------------------
Dec. 28, 1997 Dec. 29, 1996 Dec. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(381) $(4,508) $(58)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Equity in loss of joint venture - 164 19
Depreciation and amortization 1,086 981 1,833
Imputed interest (16) (18) (20)
Non-recurring charges 847 1,030 3,750
(Increase) decrease in assets:
Accounts receivable 974 560 1,243
Inventories 285 488 135
Other current assets (310) 61 64
Other assets 2 7 (89)
Increase (decrease) in liabilities:
Accounts payable (265) 308 (832)
Accrued liabilities (1,235) (422) (436)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 987 (1,349) 5,609
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Cash received in acquisition of joint venture - 190 -
Purchases of short-term investments (1,669) (81) (3,244)
Additions to property and equipment (154) (334) (468)
Patent costs (46) (61) (672)
Purchase of marketing agreement (103) - -
Investment in joint venture - (200) (150)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,972) (486) (4,534)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Payments on long-term debt (426) (273) (315)
Issuance of stock warrants 171 - -
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (255) (273) (315)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,240) (2,108) 760
Cash and Cash Equivalents, Beginning of Year 2,795 4,903 4,143
========================================================================================================================
Cash and Cash Equivalents, End of Year $1,555 $2,795 $4,903
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1997
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 primarily in the development, manufacture, sale and rental of
proprietary laser systems and delivery 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
laser 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.
In 1997, SLT expanded its product offerings to include non-laser based products
specifically targeted at the Otolaryngology and Head and Neck (ENT) surgical
market. Those new product offerings include a line of reusable handheld
instruments and a line of fluid absorption products for the control of bleeding.
Fiscal Year
SLT's fiscal year is the 52 or 53-week period ending the Sunday nearest to
December 31. Fiscal years 1997, 1996 and 1995 included 52 weeks.
Cash and Cash Equivalents
SLT invests its excess cash in highly liquid short-term investments. SLT
considers short-term investments that are purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents consisted
of the following at:
December 28, 1997 December 29, 1996
------------------ -------------------
(In thousands)
Cash and money market accounts $312 $543
Repurchase agreements 865 540
Certificates of deposit-restricted 100 100
Commercial paper - 99
U.S. Government securities 278 1,513
- -------------------------------------------------------------------------------
$1,555 $2,795
===============================================================================
Restricted cash at December 28, 1997 and December 29, 1996 consisted of a
$100,000 certificate of deposit pledged to American United Life Insurance
Company ("AULIC"), as a condition of the first mortgage agreement with AULIC
(See Note 10).
26
<PAGE>
Short-term Investments
Effective December 30, 1996, SLT adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect as of December 30, 1996 of the adoption of SFAS
115 did not have a material effect on SLT's financial condition or results of
operations.
SLT has classified its entire portfolio of short-term investments as available
for sale as they are available to support current operations or to take
advantage of other investment opportunities. Securities available for sale are
stated at fair value with unrealized gains and losses included in stockholders'
equity. Dividend and interest income is recognized when earned and is recorded
in interest income. The amortized cost of debt securities is adjusted for
accretion of discounts to maturity. Such amortization is also included in
interest income. SLT currently invests in only high-quality, short-term
securities in accordance with its investment policy. As such, there were no
significant differences between amortized cost and estimated fair value at
December 28, 1997 or December 29, 1996. Additionally, because investments are
short-term and are generally allowed to mature, unrealized gains and losses for
both years have been minimal.
The following table represents the estimated fair value breakdown of short-term
investments by category:
December 28, 1997 December 29, 1996
------------------ ------------------
(In thousands)
Commercial paper $1,145 $733
Certificates of deposit 258 -
U.S. Government securities 2,821 2,592
U.S. corporate debt securities 770 -
- --------------------------------------------------------------------------------
$4,994 $3,325
================================================================================
The estimated fair value of short-term investments at December 28, 1997 due in
one year or due after one year was $4,540,000 and $454,000, respectively.
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 office equipment,
machinery and equipment, and 30 years for buildings. Leasehold improvements are
amortized over the lesser of their useful lives or the lease term. Depreciation
expense was $961,000 in 1997, $984,000 in 1996 and $956,000 in 1995.
Expenditures for major renewals and betterments to property and equipment are
capitalized, while expenditures for maintenance and repairs are charged to
operations as incurred.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost is determined at the latest cost for materials and at production
cost (materials, labor and indirect manufacturing cost) for work-in-process and
finished goods.
Laser units and laser accessories located at medical facilities for sales
evaluation and demonstration purposes or those units/accessories used for
development and medical training are included in property and equipment under
the caption "demonstration equipment". These units and accessories are being
depreciated over a period of up to 5 years.
27
<PAGE>
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 or delivery of a service, SLT records a sale and
accrues the related estimated warranty costs, if any.
Deferred Service Revenue
Revenue under maintenance agreements is deferred and recognized over the term
(primarily 1 to 2 years) of the agreements on a straight-line basis.
Product Development Costs
Costs of research, new product and 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 $649,000, $581,000 and $624,000 in 1997, 1996 and 1995,
respectively. Income taxes paid in 1997, 1996 and 1995 were immaterial.
The following non-cash investing and financing activities occurred: (i) during
1997, 1996 and 1995, $27,000, $126,000 and $62,000, 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; and (ii) on
September 30, 1996, SLT acquired the remaining 50% interest in the Mediq PRN/SLT
joint venture for liabilities assumed (see Note 5).
Earnings (Loss) Per Share
Effective December 28, 1997, SLT adopted Statement of Financial Accounting
Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earning per share (EPS) and applies to
entities with publicly held common stock or potential common stock. SFAS 128
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings per Share. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
28
<PAGE>
into common stock or resulted in the issuance of common stock that would then
share in the earnings of the entity.
For the years ended December 28, 1997, December 29, 1996 and December 31, 1995,
SLT has reported earnings per share on the face of the income statement.
Due to SLT's net loss position in 1997, 1996 and 1995, the inclusion of common
share equivalents had an anti-dilutive effect when calculating diluted earnings
per share and, as a result, diluted EPS was equivalent to basic EPS for those
years.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," SLT is required to evaluate the impairment of long-lived assets and certain
identifiable intangible assets on a periodic basis. SLT reviews the
realizability of its long-lived assets and other intangibles by analyzing the
projected undiscounted cash flows and adjusts the net book value of the recorded
assets when necessary. No such adjustments have been recorded in 1997, 1996 and
1995, except as discussed in Note 12.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statements No. 130 and 131. Statement No. 130,
"Reporting Comprehensive Income," ("SFAS 130") requires that all items that are
required to be recognized under accounting standards or components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131") requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. SLT will
adopt SFAS 130 and 131 in fiscal year 1998, and based on current circumstances,
does not believe the effect of adoption will be material.
Note 2
Inventories:
(In thousands)
December 28, 1997 December 29, 1996
----------------- -----------------
Raw materials and work-in-process $1,702 $2,012
Finished goods 1,284 1,522
- -------------------------------------------------------------------------------
$2,986 $3,534
===============================================================================
Note 3
Property and Equipment and Property Held for Sale:
(In thousands)
December 28, 1997 December 29, 1996
----------------- -----------------
Property and Equipment:
Furniture and office equipment $3,549 $3,534
Demonstration equipment 1,391 1,706
Machinery and equipment 2,549 2,535
Leasehold improvements 163 141
- -------------------------------------------------------------------------------
7,652 7,916
Less-Accumulated depreciation and amortization (5,654) (5,591)
- -------------------------------------------------------------------------------
Property and equipment, net $1,998 $2,325
===============================================================================
29
<PAGE>
At December 28, 1997 and December 29, 1996, net property and equipment included
$310,000 and $440,000 respectively, for assets recorded under capitalized lease
arrangements (see Note 5). The related lease obligation of $741,000 and
$952,000, was included in long-term debt at December 28, 1997 and December 29,
1996, respectively (see Note 10).
December 28, 1997 December 29, 1996
----------------- -----------------
Property held for sale:
Land held for sale $750 $750
Building held for sale 6,047 6,047
- --------------------------------------------------------------------------------
6,797 6,797
Less-Accumulated depreciation and amortization (1,928) (1,161)
- --------------------------------------------------------------------------------
Property held for sale, net $4,869 $5,636
================================================================================
In July 1996, SLT relocated its administration, research and manufacturing
operations from its owned and leased facilities in Oaks, Pennsylvania to a
leased facility in Montgomeryville, Pennsylvania. In June 1996, SLT entered into
an agreement to sublease the owned facility in Oaks, Pennsylvania for three
years. The agreement provides for a $4,750,000 purchase option in 1999. The
excess of the lease income over the depreciation expense and facility costs was
recorded as other income in the accompanying consolidated statements of
operations. Future undiscounted cash flows from rents and proceeds from the sale
of the property exceeded the net book value of the property at December 28,
1997. Accumulated depreciation on property held for sale included a 1997
non-recurring charge of $542,000 (see Note 12).
<TABLE>
<CAPTION>
Note 4
Patents and Licensed Technology:
(In thousands)
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Patents, net of accumulated amortization of $414 and $361 $514 $571
Licensed technology, net of accumulated amortization of $17 and $9
(see Note 6) 62 39
- -------------------------------------------------------------------------------------------------------------------
$576 $610
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In December 1995, SLT settled its outstanding litigation with Laser Industries,
Ltd. and its subsidiary Sharplan Lasers, Inc. for $8,125,000. In accordance with
SLT's accounting policy, that portion of the capitalized patent asset
representing legal fees of $2,199,000 was charged against the proceeds,
resulting in a net settlement of $5,926,000 (see Note 12).
Note 5
Acquisition of Joint Venture:
On September 30, 1996, SLT acquired the remaining 50% interest in the Mediq
PRN/SLT joint venture held by Mediq PRN for the assumption of outstanding
liabilities. The joint venture company was formed in 1993 to provide rentals of
lasers and related equipment to hospitals and other health care providers. Prior
to the acquisition, the investment in Mediq PRN/SLT was recorded using the
equity method of accounting. Sales to Mediq PRN/SLT were recorded at an
arms-length price. Under the equity method, 50% of the gross margin from sales
to the joint venture was deferred and amortized to income as the related asset
was used by the joint venture. SLT's sales to Mediq PRN/SLT were $131,000 and
$916,000 for the nine
30
<PAGE>
months ended September 29, 1996 and the fiscal year ended December 31,
1995, respectively. SLT contributed $200,000 and $150,000 of capital to the
joint venture in 1996 and 1995, respectively.
The acquisition of Mediq PRN/SLT was accounted for as a purchase acquisition
and, accordingly, the results of operations of Mediq PRN/SLT for the periods
from the date of acquisition are included in the accompanying consolidated
financial statements.
On September 29, 1996, prior to the acquisition, SLT's investment in Mediq
PRN/SLT and the deferred gross profit on sales to Mediq PRN/SLT were $380,000
and $280,000, respectively, resulting in a net investment of $100,000. As of the
acquisition date, the fair value of the net assets of the joint venture exceeded
SLT's net investment by $218,000, which was used to reduce the net book value of
rental equipment. The net investment of $100,000 was allocated to the assets
purchased and liabilities assumed, based upon the fair values on the date of
acquisition, as follows (in thousands):
Current assets, excluding cash acquired $360
Rental equipment 669
Other assets 17
Other liabilities (140)
Long-term debt (996)
- -------------------------------------------------------------------------------
(90)
Cash acquired 190
===============================================================================
$100
===============================================================================
The rental equipment acquired included $464,000 of lasers which are being
accounted for as capital lease equipment under the guidelines of SFAS No. 13 and
were recorded within property and equipment on the balance sheets (see Note 3).
These lasers are being depreciated over a three year period. The long-term debt
associated with these lasers was recorded within both current and long-term debt
in the consolidated balance sheets (see Note 10).
The pro forma results of operations of SLT and Mediq PRN/SLT, combined on the
basis that the acquisition had taken place and was recorded as of the beginning
of the fiscal year for each period, is presented as follows:
(In thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------
Net sales $11,790 $15,506
Net loss (4,813) 337
Net loss per share $(0.49) $0.03
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of 1996 or at the beginning of
1995 or of future operations of the combined companies under the ownership and
management of SLT.
31
<PAGE>
Note 6
Purchase of Technology License:
In December 1990, SLT purchased from Advanced Laser Systems Technology, Inc.
("ALST") and its four principals 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 12).
Note 7
MedTREK Agreement:
During 1997, SLT acquired exclusive worldwide rights to certain new products and
medical devices used in minimally invasive otolaryngology and head and neck
(ENT) surgery, pursuant to an agreement with MedTREK Corporation and its
President, Mr. Dom L. Gatto. In accordance with the terms of the agreement, SLT
is required to make cash payments to MedTREK when certain products have been
commercially introduced and issue stock warrants to MedTREK which will vest when
predetermined revenue targets have been achieved.
As of December 28, 1997, SLT issued 300,000 stock warrants to MedTREK and has
valued these options using the Black-Scholes Option Pricing Model (see Note 11).
At December 28, 1997, the value of these warrants was $232,000 and the
additional cash cost of acquiring the rights to the products as described above
was $248,000. This total cost of $480,000 was included in other long-term assets
in the consolidated balance sheet at December 28, 1997. SLT is amortizing this
asset over the initial five year term of the contract. Amortization expense on
this contract in 1997 was $49,000. At December 28, 1997, outstanding payments
due to MedTREK of $145,000 were included in accrued liabilities in the
consolidated balance sheet of SLT (see Note 9).
Note 8
Short-Term Borrowings:
At December 28, 1997 and December 29, 1996, SLT had a $2,535,000 and $2,750,000
line of credit, respectively, with a bank. The line of credit provides for a
$535,000 sub-line for letters of credit. Under its sub-line, SLT issued a letter
of credit for $453,000 at December 28, 1997, which replaced the letter of credit
issued in 1996 of $515,000, in favor of Montgomery County Industrial Development
Corporation ("MCIDC") under the terms of the Mortgage and Security Agreement.
Additionally, in 1996, SLT issued a letter of credit for $17,510 to its lessor,
in compliance with the lease agreement for the Montgomeryville, Pennsylvania
facility. Other than for these letters of credit there were no other borrowings
on the line at any time during 1997 and 1996. Borrowings on the line are secured
by 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 28, 1997 and December 29,
1996. This credit facility expires on May 31, 1998.
32
<PAGE>
<TABLE>
<CAPTION>
Note 9
Accrued Liabilities:
(In thousands)
December 28, 1997 December 29, 1996
----------------- ------------------
<S> <C> <C>
Consolidation and relocation expenses (see Note 12) $523 $1,113
Accrued royalties 18 335
Deferred revenues 317 226
Accrued compensation 176 100
Accrued payments to MedTREK (see Note 7) 145 -
Other 302 532
- ----------------------------------------------------------------------------------------------------------
$1,481 $2,306
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Note 10
Long-term Debt:
(In thousands)
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Mortgage loans on property held for sale (see Note 3) $4,272 $4,487
Convertible subordinated notes 1,633 1,660
Capital lease obligations (see Note 3 and Note 5) 741 952
- ----------------------------------------------------------------------------------------------------------
6,646 7,099
Less-Current portion (504) (468)
- ----------------------------------------------------------------------------------------------------------
$6,142 $6,631
==========================================================================================================
</TABLE>
At December 28, 1997 and December 29, 1996, the estimated fair value of
long-term debt described above was approximately the same as the carrying amount
of such debt.
At December 28, 1997, mortgage loans included $2,966,000 remaining on a 10.5%
mortgage note, payable through 2011; and $1,306,000 remaining on a 3% mortgage
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 28, 1997, this condition was met by a
letter of credit (see Note 8), a first security interest in certain fixed assets
and a second security interest in accounts receivable and inventory.
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 stockholders class-action 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.
The obligations under capital leases are at fixed interest rates ranging from
9.5% to 13.44% and are collateralized by the related property and equipment (see
Note 3).
33
<PAGE>
Future minimum rentals for property under capital leases are as follows (in
thousands of dollars):
Year Amount
- -----------------------------------------------------------------------------
1998 $355
1999 343
2000 161
2001 10
2002 9
- -----------------------------------------------------------------------------
Total minimum lease obligation 878
Less: Interest (137)
- -----------------------------------------------------------------------------
Present value of total minimum lease obligation $741
=============================================================================
The amount of long-term debt (excluding obligations under capital leases)
maturing in each of the next five years is $229,000 in 1998, $1,877,000 in 1999,
$260,000 in 2000, $278,000 in 2001, $298,000 in 2002 and $2,963,000 in 2003 and
thereafter.
Note 11
Common Stock Options and Common Stock Warrants:
Common Stock Options:
Under SLT's 1986 Non-Qualified Stock Option Plan, 1986 Incentive Stock Option
Plan, Equity Incentive Plan and Second Amended and Restated Stock Option Plan
for Outside Directors (the "Option Plans"), an aggregate of 2,454,725 shares of
common stock may be issued pursuant to options that 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.
In February 1996, the 1986 Non-Qualified Stock Option Plan and the 1986
Incentive Stock Option Plan expired by their terms with respect to any future
grants. At December 28, 1997, these plans had options to purchase 42,904 shares
of common stock outstanding and exercisable.
On December 31, 1997, options to purchase 397,600 shares of common stock were
forfeited. SLT has presented all option disclosures as if these options had been
forfeited on December 28, 1997.
SLT accounts for the Option Plans under APB Opinion No.25, under which no
compensation cost has been recognized. Had compensation cost for the Option
Plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), SLT's net loss would have been increased by
approximately $294,000, $251,000 and $95,000 for the years ended December 28,
1997, December 29, 1996 and December 31, 1995 respectively. SLT's net loss per
share would have been increased by approximately $.03, $.02 and $.01 for the
years ended December 28, 1997, December 29, 1996, and December 31, 1995,
respectively.
The fair value of options granted during the years ended December 28, 1997,
December 29, 1996 and December 31, 1995, was estimated at $319,000, $854,000 and
$378,000, respectively. There were no options granted below market or above
market during the three years. The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest rate of 6.346%,
6.360% and 7.153% for 1997, 1996 and 1995 grants, respectively; an expected life
of five years, eight years, and eight years
34
<PAGE>
for 1997, 1996 and 1995 grants, respectively; dividend yield of zero for
all grants; and volatility of .476, .777 and .777 for 1997, 1996 and 1995
grants, respectively. Because the SFAS 123 method of accounting is not required
to be applied to options granted prior to January 2, 1995, the resulting pro
forma compensation charge may not be representative of that which may be
expected in future years.
The following table summarizes the transactions of SLT's Option Plans for the
three year period ended December 28, 1997:
<TABLE>
<CAPTION>
Option Average
Shares Price Price
------ ------ -------
<S> <C> <C> <C>
Outstanding options at January 1, 1995 1,507,128 $2.38 -20.17 $5.85
Granted 195,900 1.56 - 2.63 2.42
Forfeited (208,742) 2.00 -15.00 5.65
- --------------------------------------------------------------------------------------------------------
Outstanding options at December 31, 1995 1,494,286 $1.56 -20.17 $5.43
Granted 625,900 1.25 - 3.13 1.72
Forfeited (199,539) 1.25 -20.17 10.36
- --------------------------------------------------------------------------------------------------------
Outstanding options at December 29, 1996 1,920,647 $1.25 -15.00 $3.71
Granted 509,000 1.13 - 1.91 1.43
Forfeited (960,493) 1.19 -15.00 4.06
- --------------------------------------------------------------------------------------------------------
Outstanding options at December 28, 1997 1,469,154 $1.13-15.00 $2.69
========================================================================================================
</TABLE>
At December 28,1997, there were 722,105 options vested and exercisable and
985,571 options were available for grant. The following table summarizes the
options outstanding and exercisable by price range at December 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Weighted Average Average
Range of Exercise Number Remaining Exercise Number Weighted Average
Prices Outstanding Contractual Life Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.1250 - $1.4375 518,900 8.90 $1.3093 113,401 $1.2500
$1.5625 - $2.0625 426,000 8.77 $1.9615 126,000 $1.9702
$2.1250 - $4.6000 378,951 5.68 $3.5133 343,301 $3.6141
$5.3800 - $15.0000 145,303 3.50 $7.6209 139,403 $7.7001
- --------------------------------------------------------------------------------------------------------------------
$1.1250 - $15.0000 1,469,154 7.50 $2.6912 722,105 $3.7448
====================================================================================================================
</TABLE>
Common Stock Warrants:
In May 1997, SLT issued to a distributor warrants to purchase an aggregate of
125,000 shares of common stock with exercise prices ranging from $3.00 to $7.00
per share. These warrants were issued in consideration of services to be
provided to expand SLT's international product distribution. The warrants become
exercisable based on the achievement of certain revenue criteria, as defined, in
the distribution agreement. All such warrants will expire on December 31, 2002.
SLT will amortize the value of these warrants, which value is approximately
$13,000, to cost of sales in proportion to the revenue earned under the
agreement.
In July 1997, SLT issued two warrants to MedTREK to purchase an aggregate of
50,000 shares of common stock with exercise prices of $1.53 per share. These two
warrants were fully exercisable upon
35
<PAGE>
issuance. In addition, SLT issued four warrants to MedTREK for an aggregate
of 250,000 shares of common stock with exercise prices of $1.53 per share. The
additional four warrants were issued in consideration for services to be
rendered in support of SLT's commercialization of products in the
otolaryngology, head and neck and neurosurgery fields and become exercisable
based on the achievement of certain revenue milestones, as defined in the
agreement. All such warrants will expire on October 10, 2002. The $232,000 value
of these warrants has been capitalized in other long-term assets and is being
amortized to operating expense in proportion to the revenue generated from the
MedTREK agreement (see Note 7).
In July 1997, SLT entered into an agreement to develop and supply certain
laser-related devices. In connection with this agreement, SLT issued a warrant
to purchase 200,000 shares of SLT's common stock with an exercise price of $2.00
per share. In December 1997, SLT issued an additional warrant to purchase
200,000 shares of common stock with an exercise price of $2.00 per share. Both
warrants will expire on December 31, 2002. SLT recorded the $171,000 value of
these warrants as an increase to additional paid-in capital and an offset to
revenue earned under the agreement.
At December 28, 1997, 450,000 warrants were exercisable for an aggregate
exercise price of $1.95.
Note 12
Non-recurring Items:
In 1997 SLT recorded non-recurring credits of $177,000, which was the net effect
of recording a benefit from the settlement of litigation of $1,000,000, offset
in part by non-recurring charges of $542,000 related to SLT's former
headquarters facility in Oaks, Pennsylvania (see Note 3) and $281,000 related to
SLT's former manufacturing facility in Kentucky. The $542,000 charge resulted
from a write-down in the carrying value of the former headquarters facility
necessitated by the provision under which the facility is expected to be sold at
the end of the initial sublease term. The $281,000 charge resulted from the loss
of a former tenant and the subsequent signing of a new tenant at a lesser rate.
In 1996, SLT recorded non-recurring charges of $1,504,000, which included
$303,000 in leasehold improvement write-offs related to SLT's Oaks, Pennsylvania
manufacturing facility, $1,151,000 for severance and other costs associated with
manpower reductions and restructuring and $50,000 for additional costs
associated with sub-leases in Hebron, Kentucky.
In 1995, SLT recorded non-recurring 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.
Note 13
Retirement Savings Plan:
SLT has a defined contribution retirement plan that provides all eligible
employees an opportunity to accumulate funds for their retirement. 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 did not make
matching contributions in 1997, 1996 or 1995.
36
<PAGE>
Note 14
Income Taxes:
SLT accounts for income taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 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 provisions of $12,000, $0 and $50,000 in 1997, 1996 and 1995,
respectively. The provisions were for accrued federal alternative minimum taxes
("AMT") and certain state income taxes. No provision was recorded in 1996 due to
losses incurred. Any other tax provisions in 1997, 1996 and 1995, including
accrual adjustments for prior periods, were completely offset by changes in the
deferred tax valuation allowances, primarily due to the utilization of operating
loss carryforwards.
Income tax expense (benefit) consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal including AMT tax
Current $- $ - $25
Deferred (253) (1,711) (140)
State
Current 12 - 25
Deferred (45) (61) (52)
- ------------------------------------------------------------------------------------------------------
(286) (1,772) (142)
Change in valuation allowance 298 1,772 192
- ------------------------------------------------------------------------------------------------------
Income tax expense $12 $- $50
======================================================================================================
</TABLE>
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 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected federal tax expense (benefit) at 34% rate $(125) $(1,532) $(3)
Change in valuation allowance 298 1,772 192
Other (173) (240) (189)
State income tax, net of federal benefit 12 - 25
AMT tax - - 25
- -----------------------------------------------------------------------------------------------------------
Income tax expense $12 $- $50
===========================================================================================================
</TABLE>
As of December 28, 1997, SLT had approximately $21,703,000 of federal net
operating loss carryforwards, which begin to expire in 2001. Included in the
aggregate net operating loss carryforwards are $6,850,000 of tax deductions
related to equity transactions, the benefit of which will be credited to
stockholders' equity, if and when realized against taxes not reducible by other
deductions. In addition, SLT had approximately $764,000 of federal tax credit
carryforwards which begin to expire in 1998. Net deductible temporary
differences were approximately $4,540,000 at December 28, 1997.
37
<PAGE>
The ending balances of the net 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 being experienced.
The changes in the net deferred tax asset are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance, gross $10,020 $8,248
Net changes due to:
Operating loss carryforwards, valued at 35% (603) 1,346
Temporary differences, valued at 40% 848 150
Carryforward & AMT credits 53 276
- ----------------------------------------------------------------------------------------------
Ending balance, gross 10,318 10,020
Less: valuation allowance 10,318 10,020
- ----------------------------------------------------------------------------------------------
Ending balance, net $- $-
==============================================================================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in thousands
of dollars):
1997 1996
---- ----
Assets:
Temporary differences
Bad debts $166 $151
Building loss 217 -
Deferred R&D costs 943 176
Inventoriable costs 40 26
Inventory reserves 415 470
Legal costs 278 -
Relocation reserve 200 155
Severance 48 249
Warranty 12 9
Misc. temporary differences 53 167
Loss carryforwards 7,596 8,199
Carryforward & AMT credits 906 853
- --------------------------------------------------------------------------------
Gross deferred tax assets 10,874 10,455
- --------------------------------------------------------------------------------
Liabilities:
Temporary differences
Depreciation (556) (435)
- --------------------------------------------------------------------------------
Gross deferred tax liabilities (556) (435)
- --------------------------------------------------------------------------------
Deferred tax asset, before valuation 10,318 10,020
Valuation allowance (10,318) (10,020)
- --------------------------------------------------------------------------------
Net deferred tax asset, after valuation $- $-
================================================================================
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 Pennsylvania.
38
<PAGE>
Note 15
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 1997, 1996 and 1995, the firm's legal fees
were approximately $324,000, $388,000 and $491,000 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 $26,000, $144,000 and $533,000 for the fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
Accounts receivable from sales to the distributor were $69,000 and $245,000 at
December 28, 1997 and December 29, 1996, respectively. SLT's Chief Executive
Officer is a member of the distributor's Board of Directors.
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 was a director and an executive
officer of SLT until November 1996. The licensed technology was patented by
Fuller Research Corporation before its principal stockholder became an executive
of SLT. SLT paid $45,000, $34,000 and $24,000 in royalties under the terms of
the license agreement in 1997, 1996 and 1995, respectively. SLT terminated the
license agreement effective February 28, 1998.
During 1994, SLT entered into an Investment Agreement with Kontron Instruments
Holding N.V. ("Kontron Instruments") under the terms of which Kontron
Instruments made a $2.0 million equity investment in SLT, representing a 7%
ownership position. Kontron Instruments Holding N.V. is the parent company of
Kontron Instruments Group, a European medical instruments manufacturer, which
operated as SLT's market development and distribution partner throughout most of
Europe for a portion of fiscal 1997 and all of fiscal 1996 and 1995. SLT's sales
to Kontron Instruments were $112,000, $433,000 and $792,000 for the fiscal years
ended December 28, 1997, December 29, 1996 and December 31, 1995, respectively.
Accounts receivable from sales to Kontron Instruments were $23,000 and $149,000
at December 28, 1997 and December 29, 1996, respectively. The Chief Executive
Officer of Kontron Instruments Holding, N.V. is a member of SLT's Board of
Directors.
Note 16
Business Segment and Geographic Data:
SLT is engaged primarily 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 (in thousands of dollars):
1997 1996 1995
---- ---- ----
Domestic $9,822 $8,444 $11,758
Foreign 1,843 2,530 3,081
- --------------------------------------------------------------------------------
$11,665 $10,974 $14,839
================================================================================
39
<PAGE>
Note 17
Commitments and Contingencies:
As of December 28, 1997, SLT was a defendant in one pending lawsuit for which
management believes SLT has meritorious defenses and in which the trial court
has granted summary judgment in SLT's favor. SLT therefore has not made any
accrual for the ultimate resolution of this lawsuit. Based on its defenses in
this action, SLT firmly believes that Trimedyne, the plaintiff in the lawsuit,
will not prevail in its pending appeal, 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 1997, 1996 and 1995, rental payments were $564,000,
$540,000, and $427,000, respectively, and related primarily to facilities in
Montgomeryville, Pennsylvania; 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 and has
subsequently been sublet (see Note 12). The Oaks, Pennsylvania facility lease
expired in December 1996 and was not renewed. Future minimum rental payments
under operating leases are as follows (in thousands of dollars):
1998 1999 2000 2001
- --------------------------------------------------------------------------------
Minimum rental payments $535 $524 $420 $106
Less: Sublease payments (108) (108) (72) -
- --------------------------------------------------------------------------------
Net rental payments $427 $416 $348 $106
================================================================================
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 in fiscal 1998
under these executive severance agreements, should all covered executives be
terminated other than for cause, was approximately $499,000 at December 28,
1997. Should all covered executives be terminated following a change in control
of SLT, the aggregate commitment in fiscal 1998 and 1999 under these executive
severance agreements at December 28, 1997 was approximately $564,000 and
$113,000, respectively.
40
<PAGE>
Note 18
Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
For the Quarter Ended
(In thousands, except per share)
- -------------------------------------------------------------------------------------------------------------------
1997 March 30 June 29 Sept. 28 Dec. 28
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $3,073 $2,904 $3,007 $2,681
Gross profit 1,728 1,631 1,910 1,624
Net income (loss) (1) (197) (282) 47 51
Basic and diluted earnings (loss) per share $(0.02) $(0.03) $0.00 $0.01
- -------------------------------------------------------------------------------------------------------------------
1996 March 31 June 30 Sept. 29 Dec. 29
- -------------------------------------------------------------------------------------------------------------------
Net sales $2,765 $2,784 $2,416 $3,009
Gross profit 1,715 1,855 1,576 1,766
Net loss (2) (820) (941) (2,483) (264)
Basic and diluted loss per share $(0.08) $(0.10) $(0.25) $(0.03)
- -------------------------------------------------------------------------------------------------------------------
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) (3) (1,261) (1,684) (996) 3,883
Basic and diluted earnings (loss) per share $(0.13) $(0.17) $(0.10) $0.39
===================================================================================================================
</TABLE>
(1) Includes a non-recurring credit of $177,000 for the quarter ended September
28, 1997 (see Note 12).
(2) Includes non-recurring charge of $1,504,000 for the quarter ended September
29, 1996 (see Note 12).
(3) 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 12), and
net patent litigation settlement of $5,926,000 for the quarter ended
December 31,1995 (see Note 4).
For all periods presented, earnings (loss) per share has been computed under the
guidelines of SFAS 128 (see Note 1). In each period, the inclusion of common
stock equivalents in the calculation of diluted earnings (loss) per share had an
antidilutive effect on the calculation. As a result, diluted earnings (loss) per
share was equivalent to basic earnings (loss) per share for each period
presented.
41
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions Charged to
--------------------
Balance at
Beginning of Cost and Other Balance at End
Description Period Expenses Accounts Deductions (1) of Period
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 28,
1997
Reserve for Doubtful Accounts $116 73 - 34 $155
=======================================================================================================================
FOR THE YEAR ENDED DECEMBER 29,
1996
Reserve for Doubtful Accounts $118 $258 - $260 $116
=======================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
1995
Reserve for Doubtful Accounts $110 $8 - - $118
=======================================================================================================================
</TABLE>
(1) Represents write-offs of specific accounts receivable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
---------------------------------------------------------------------
Not applicable.
42
<PAGE>
PART III
- --------
Item 10. Directors and Executive Officers of Registrant
- ------- ----------------------------------------------
Executive Officers
- ------------------
Certain information about the executive officers of Registrant as of March 15,
1998 is as follows:
Name Age Positions held with Registrant
- ---- --- ------------------------------
W. Keith Stoneback 44 President, Chief Executive Officer and
Director
Michael R. Stewart 40 Vice President, Finance, Chief Financial
Officer, and Treasurer
Glenn H. Stahl 51 Vice President, Sales and Marketing
Davis Woodward 50 Vice President, Legal & Tax Affairs and
Secretary
W. Keith Stoneback has served as President, Chief Executive Officer and a
director of Registrant since August 1996. From 1988 until 1994, he served in
several senior management positions for AMSCO International, Inc., a leading
manufacturer and marketer of sterilizers, surgical tables, lights and
decontamination equipment for the hospital and life science markets, most
recently as Corporate Vice President, with responsibility for worldwide
manufacturing, marketing and research and development for the capital equipment
and supplies business. From November 1994 until joining Registrant, Mr.
Stoneback pursued personal investment and business-related interests.
Michael R. Stewart has served as Vice President, Finance since January 1996 and
as Vice President and Chief Financial Officer since October 1990. Mr. Stewart
has served as Treasurer since November 1990.
Glenn H. Stahl has served as Vice President, Sales and Marketing since January
1997. From September 1995 until November 1996, Mr. Stahl served as Vice
President, Strategic Development, for Circon Corporation. From November 1994 to
September 1995, he served as Vice President, Strategic Development for Cabot
Medical Corporation, where he also served as Vice President, Marketing from
September 1986 to October 1995.
Davis Woodward has served as Vice President, Legal & Tax Affairs 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.
43
<PAGE>
Directors
- ---------
The names of the Directors, and certain information about them as of March 15,
1998, are set forth below.
<TABLE>
<CAPTION>
Name of Director Age Principal Occupation Director Since
- ---------------- --- -------------------- --------------
<S> <C> <C> <C>
Richard J. DePiano................. 56 Chairman of the Board of Directors of the 1986
Registrant; Managing Director, The
Sandhurst Venture Fund
Sheldon M. Bonovitz................ 59 Chairman and Partner, Duane, Morris & 1985
Heckscher LLP, Counsel to Registrant
Jay L. Federman.................... 59 Attending Surgeon and Co-Director of 1987
Research, Wills Eye Hospital
Vincenzo Morelli................... 43 Chief Executive Officer, Kontron Instruments 1995
Holding N.V.
W. Keith Stoneback................. 44 President and Chief Executive 1996
Officer of Registrant
</TABLE>
Directors will serve until the 1998 Annual Meeting and until the due election of
their respective successors.
Except as set forth below, each of the nominees has been engaged in his
principal occupation described above for the past five years. There are no
family relationships among directors or officers of Registrant.
Richard J. DePiano has served as the Chairman of the Board of Directors of
Registrant since July 1995. 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. Since March 1997, Mr. DePiano also has served as Chief
Executive Officer of Escalon Medical Corp., of which he is also a director.
W. Keith Stoneback has served as President and Chief Executive Officer of
Registrant since August 1996. From 1988 until 1994, he served in several senior
management positions for AMSCO International, Inc., a leading manufacturer and
marketer of sterilizers, surgical tables, lights and decontamination equipment
for the hospital and life science markets, most recently as Corporate Vice
President, with responsibility for worldwide manufacturing, marketing and
research and development for the capital equipment and supplies business. From
November 1994 until joining Registrant, Mr. Stoneback pursued personal
investment and business-related interests.
Sheldon M. Bonovitz has been a partner in the law firm of Duane, Morris &
Heckscher LLP, Philadelphia, Pennsylvania, since 1969, where he also serves as
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 been an attending surgeon at Wills Eye Hospital,
Philadelphia, Pennsylvania, since 1980 and an ophthalmologist in private
practice since 1968. Dr. Federman was a founder of SITE Microsurgical Systems,
Inc. and serves as a director of Escalon Medical Corp.
Vincenzo Morelli has served as Chief Executive Officer and a director of Kontron
Instruments Holding N.V. since 1993.
44
<PAGE>
Item 11. Executive Compensation
- ------- ----------------------
Director Compensation
- ---------------------
Each director of Registrant who is not an officer or employee of 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.
Registrant also maintains the Second Amended and Restated 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 Registrant to, or the acquisition of
shares of Registrant's Common Stock representing more than 50% of the votes
which all stockholders of Registrant are entitled to cast by, any person not
affiliated with Registrant, directly or indirectly, through one or more
affiliates, or any other transaction or series of transactions having a similar
effect.
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
318,000 shares are subject to outstanding options.
45
<PAGE>
Executive Officer Compensation
- ------------------------------
The following table sets forth certain information with respect to
compensation paid by Registrant during each of the three fiscal years ended
December 28, 1997, December 29, 1996 and December 31, 1995 to the chief
executive officers of Registrant and the other three executive officers of
Registrant whose annual salary and bonus in 1997 exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------- ------------ All Other
Name & Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(1)
- ------------------------- ---- ---------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
W. Keith Stoneback(2) 1997 $225,000 $- 50,000(6) $38,275(3)
President, Chief Executive 1996 101,539 - 300,000 18,298(4)
Officer and Director 1995 - - - -
Michael R. Stewart 1997 143,843 - 25,000(6) 643
Vice President Finance and 1996 123,119 - 50,000(7) 643
Chief Financial Officer 1995 118,023 24,380 30,000(8) 643
Glenn H. Stahl(5) 1997 122,500 - 75,000 -
Vice President Sales and 1996 - - - -
Marketing 1995 - - - -
Davis Woodward 1997 119,664 - 20,000(6) 643
Vice President, Legal & 1996 112,638 - 25,000(7) 1,285
Tax Affairs 1995 109,296 - 30,000(8) 1,285
</TABLE>
- ------------
(1) Except as noted in footnotes 3 and 4, represents payments of premiums for
certain supplementary life insurance coverage.
(2) Mr. Stoneback joined Registrant as President, Chief Executive Officer and a
director in August 1996.
(3) Includes $32,314 in moving and relocation payments made by Registrant to Mr.
Stoneback pursuant to the terms of his Employment Agreement.
(4) Includes $18,054 in moving and relocation payments made by Registrant to
Mr. Stoneback pursuant to the terms of his Employment Agreement.
(5) Mr. Stahl joined Registrant as Vice President, Sales and Marketing in
January 1997.
(6) These options were granted in 1998 for services rendered in 1997.
(7) These options were granted in 1997 for services rendered in 1996.
(8) These options were granted in 1996 for services rendered in 1995.
46
<PAGE>
The following table sets forth information with respect to options granted
during the fiscal year ended December 28, 1997 to the persons named in the
Summary Compensation Table above.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realizable Value
% of Total at Assumed Annual Rates
Options Granted of Stock Appreciation
to Employees Price for Option Term
Options in Fiscal Exercise --------------------------
Name Granted(#) Year Price Expiration Date 5% 10%
- ---- ---------- --------------- -------- --------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Keith Stoneback - - - - - -
Michael R. Stewart 50,000 13.2% 1.438 January 24, 2007 45,202 114,550
Glenn H. Stahl 75,000 19.7% 1.438 January 24, 2007 67,803 171,825
Davis Woodward 25,000 6.6% 1.438 January 24, 2007 22,601 57,275
</TABLE>
The following table sets forth information with respect to options held at
December 28, 1997 by the persons named in the Summary Compensation Table above.
No options were exercised by such persons during the fiscal year ended December
28, 1997.
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year End
-------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Keith Stoneback 100,000 200,000 - -
Michael R. Stewart 74,900 84,800 1,500 9,125
Glenn H. Stahl - 75,000 - 4,688
Davis Woodward 66,600 60,600 1,500 7,563
</TABLE>
Employment and Other Agreements
In August 1996, Registrant entered into an employment agreement with W. Keith
Stoneback pursuant to which Mr. Stoneback will serve as Registrant's President
and Chief Executive Officer through December 31, 1999 and, thereafter, for
successive one-year terms absent at least three months' prior written notice of
termination by either party. Mr. Stoneback's annual base salary under the
agreement is $225,000, and his agreement provides that he will be eligible for a
bonus of 50% of base salary pursuant to bonus programs developed by the Board of
Directors based on objective criteria related to Registrant's results of
operations. No bonus was paid for services under the 1997 bonus program. Under
the 1998 bonus program, Mr. Stoneback will be entitled to a bonus opportunity of
50% of base salary. If Mr. Stoneback's employment is terminated by Registrant
without cause during the initial or any renewal term of the agreement (other
than following a change in control as described below), Mr. Stoneback will be
entitled to severance benefits equal to continuation of his base salary, health,
disability and life insurance for a one-year period and the right to exercise
options which are not then exercisable but would have become exercisable on the
next anniversary of the agreement. If Mr. Stoneback's employment is terminated
without cause within three months following a change in control, Mr. Stoneback
will be entitled to severance benefits equal to continuation of his base salary
and his health, disability and life insurance for a period of eighteen months,
subject to mitigation in the last six months of such period, and the right to
exercise any options granted
47
<PAGE>
under the agreement which are not otherwise exercisable, which options will
remain exercisable during the period in which he continues to receive the
aforementioned severance benefits. Mr. Stoneback was also granted under the
agreement options to purchase 300,000 shares of Registrant's Common Stock at the
market price. Registrant provides long-term disability insurance equal to 60% of
Mr. Stoneback's base salary, a $1 million life insurance policy and automobile,
vacation and other insurance benefits as are available to Registrant's other
senior executive officers. During the term of the agreement and for a period of
one year thereafter, Mr. Stoneback is prohibited from competing with Registrant
in any respect, interfering with Registrant's business relationships or
soliciting business from Registrant's customers.
In June 1992, Registrant adopted a severance benefits program for certain key
employees, including Messrs. Stewart and Woodward. Under the terms of this
program, a participant whose employment is terminated by 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.
Stewart and Woodward is entitled to continue receiving such base salary and
insurance coverage for a period of one year under the foregoing circumstances.
In addition, if, within two years following a change in control of 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. 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. 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 the
remaining scheduled term thereof or an extended exercise period, which is one
year for options granted after December 1996 and five years for options granted
before January 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
As of March 15, 1998, the following persons were known to Registrant to be the
beneficial owners of more than 5% of Registrant's Common Stock:
<TABLE>
<CAPTION>
Number of Percent
Name and Address Shares of Class
- ---------------- --------- --------
<S> <C> <C>
Kennedy Capital Management, Inc..................... 710,484 (1) 7.18%
10829 Olive Boulevard
St. Louis, MO 63141
Kontron Instruments Holding N.V..................... 695,652 7.03%
Julianaplein 22
Curacao, Netherlands Antilles
</TABLE>
- ------------
(1) Information furnished by stockholder as of February 10, 1998
48
<PAGE>
Security Ownership of Management
The following table sets forth the beneficial ownership of the Common Stock of
Registrant as of March 15, 1998 by each director, each executive officer named
in the Summary Compensation Table and by all directors and executive officers as
a group. The persons named in the table below have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in the table and notes thereto.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------
Name Number Percent
- ---- ------ -------
<S> <C> <C>
Jay L. Federman................................................... 330,203 (1) 3.31%
Richard J. DePiano................................................ 302,250 (2) 3.01%
Sheldon M. Bonovitz............................................... 231,131 (3) 2.32%
W. Keith Stoneback................................................ 115,000 (4) 1.15%
Michael R. Stewart................................................ 108,796 (5) 1.09%
Davis Woodward.................................................... 100,447 (6) 1.01%
Vincenzo Morelli.................................................. 50,000 (7) *
Glenn H. Stahl.................................................... 33,000 (8) *
All directors and executive officers as a group (8 persons)....... 1,270,827 (9) 12.05%
</TABLE>
- ------------
* Less than one percent.
(1) Includes 96,000 shares which Dr. Federman has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1998
and 12,499 shares owned by Dr. Federman's child. Dr.
Federman disclaims beneficial ownership of such 12,499 shares.
(2) Includes 137,250 shares which Mr. DePiano has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1998.
Also includes 90,000 shares owned by Mr. DePiano's wife.
Mr. DePiano disclaims beneficial ownership of such 90,000 shares.
(3) Includes 77,250 shares which Mr. Bonovitz has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 1998,
25,027 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 29,119 shares. Also includes 25,500 shares
owned by a pension trust of which Mr. Bonovitz is the beneficiary.
(4) Includes 100,000 shares which Mr. Stoneback has the right to purchase
under outstanding stock options exercisable within 60 days after March 15,
1998.
(5) Includes 102,366 shares which Mr. Stewart has the right to purchase under
outstanding stock options exercisable within 60 days after March 15, 1998.
49
<PAGE>
(6) Includes 86,533 shares which Mr. Woodward has the right to purchase under
outstanding stock options exercisable within 60 days after March 15, 1998.
(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 30,000 shares
which Mr. Morelli has the right to purchase under outstanding stock
options exercisable within 60 days after March 15, 1998.
(8) Represents 8,000 shares owned jointly with his spouse and includes 25,000
shares which Mr. Stahl has the right to purchase under outstanding stock
options exercisable within 60 days after March 15, 1998.
(9) Includes 654,399 shares which such persons have the right to purchase
under stock options exercisable within 60 days after March 15, 1998.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Certain Transactions
Kontron Instruments Holding N.V., which owns more than 5% of Registrant's
outstanding Common Stock, has affiliates that have served as Registrant's
distributors throughout most of Europe. In March, 1997, Registrant and Kontron
Instruments agreed to terminate the distribution agreement entered into in 1993,
under which Kontron Instruments had been Registrant's distribution
representative for most of Europe. Kontron Instruments has agreed to continue to
represent Registrant in certain countries in Europe until successor distribution
partners are identified by Registrant. During 1997, total sales by Registrant to
such affiliates were $112,000. Vincenzo Morelli, a director of Registrant, is
the Chief Executive Officer and a director of Kontron Instruments.
PART IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) 1. Financial Statements Page
-------------------- ----
<S> <C>
Consolidated Balance Sheets at December 28, 1997 and December 29, 1996............................22
Consolidated Statements of Operations for each of the three years in the
period ended December 28, 1997.................................................................23
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 28, 1997 ................................................................24
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 28, 1997 ................................................................25
Notes to Consolidated Financial Statements........................................................26
Report of Independent Public Accountants..........................................................21
50
<PAGE>
2. Financial Statement Schedules Page
----------------------------- ----
Schedule II - Valuation and Qualifying Accounts for the three years in the period
ended December 28, 1997........................................................................42
</TABLE>
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated 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 28, 1997.
(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 May 29, 1996, between Registrant and Nappen &
Associates, incorporated by reference to Exhibit 10.51 filed with
Registrant's Form 10-Q for the fiscal quarter ended June 30, 1996 filed
on August 19, 1996 (the "Second Quarter 1996 Form 10-Q").
10.3* Employment Agreement dated August 5, 1996, between Registrant and W.
Keith Stoneback, incorporated by reference to Exhibit 10.1 filed with
Registrant's Form 10-Q for the fiscal quarter ended September 29, 1996
filed on November 15, 1996 (the "Third Quarter 1996 Form 10-Q").
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 Registrant's Form S-8 Registration Statement filed on December 29,
1989, Registration No. 33-32835 (the "1989 Form S-8).
10.5* Registrant's Equity Incentive Plan, as amended through October 10,
1996, incorporated by reference to Exhibit 4 filed with Registrant's
Form S-8 Registration Statement filed on January 3, 1997, Registration
No. 333-19229.
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 (the "1994 Form S-8").
51
<PAGE>
10.7 Collaboration and Assignment Agreement dated as of March 7, 1995 among
Registrant, Daniel M. Schuman, M.D. and the AMERICA Charitable Fund,
incorporated by reference to Exhibit 10.7 filed with Registrant's
Amendment No. 1 to Annual Report on Form 10-K/A filed on August 28,
1996 (the "1995 Form 10-K/A").
10.8* Registrant's 1997 Executive Staff Bonus Program adopted January 17,
1997, incorporated by reference to Exhibit 10.54 filed with
Registrant's Amendment No. 1 to Annual Report on Form 10-K/A for the
fiscal year ended December 29, 1996 filed on April 7, 1997 ("the 1996
Form 10-K/A").
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, as amended by Settlement Agreement and Limited Mutual Release
dated November 7, 1997.
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 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 Annual Report on Form 10-K for the fiscal
year ended January 3, 1993 filed on April 19, 1993 (the "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 Annual Report on Form 10-K for the fiscal year ended
January 2, 1994 filed on April 1, 1994 (the "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 filed with Registrant's
1995 Form 10-K/A; and as further
52
<PAGE>
amended by Letter Agreement dated November 5, 1997 from CoreStates
Bank (successor to Meridian Bank) to Registrant.
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 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
53
<PAGE>
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 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, as amended by Letter Agreement dated January 24, 1997
incorporated by reference to Exhibit 10.36 filed with Registrant's 1996
Form 10-K/A.
54
<PAGE>
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 Property Agreement dated October 30, 1996, among Registrant, Terry A.
Fuller, and Fuller Research Corporation, incorporated by reference to
Exhibit 10.4 filed with Registrant's Third Quarter 1996 Form 10-Q.
10.39 Amendment to the Joint Venture and other Agreements dated September 30,
1996, among Registrant; Mediq/PRN Life Support Services, Inc.; and
Mediq PRN/SLT, incorporated by reference to Exhibit 10.5 filed with
Registrant's Third Quarter 1996 Form 10-Q.
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, as terminated effective February 28,
1998 by letter dated November 14, 1997 from Registrant to Fuller
Research Corporation.
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, as terminated by Property Agreement dated
October 30, 1996, incorporated by reference to Exhibit 10.4 filed with
Registrant's Third Quarter 1996 Form 10-Q.
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, as amended
pursuant to Severance Agreement dated November 5, 1996, between
Registrant and Dr. Fuller, incorporated by reference to Exhibit 10.3
filed with Registrant's Third Quarter 1996 Form 10-Q, and as further
amended pursuant to Addendum dated December 20, 1996, between
Registrant and Dr. Fuller, incorporated by reference to Exhibit 10.43
filed with Registrant's 1996 Form 10-K/A.
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 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,
55
<PAGE>
incorporated by reference to Exhibit 10.47 filed with Registrant's
1995 Form 10-K/A, as further amended by an Amendment dated
December 24, 1997.
10.48 Sublease Agreement dated March 21, 1996 among Registrant; SLT
Properties, Inc.; and Suburban Cable TV Co. Inc., incorporated by
reference to Exhibit 10.48 filed with Registrant's Second Quarter 1996
Form 10-Q.
10.49 Subordination, Non-Disturbance and Attornment Agreement dated April 30,
1996, and delivered May 13, 1996, among Registrant; SLT Properties,
Inc.; Suburban Cable TV Co. Inc.; and American United Life Insurance
Company, incorporated by reference to Exhibit 10.50 filed with
Registrant's Second Quarter 1996 Form 10-Q.
10.50 Non-Disturbance, Subordination and Attornment Agreement dated August 1,
1996, among Montgomery County Industrial Development Corporation; SLT
Properties, Inc., Registrant; and Suburban Cable TV Co. Inc.,
incorporated by reference to Exhibit 10.6 filed with Registrant's Third
Quarter 1996 Form 10-Q.
10.51 Non-Disturbance, Subordination and Attornment Agreement dated October
22, 1996 among Pennsylvania Industrial Development Authority; SLT
Properties, Inc.; Registrant; and Suburban Cable TV Co. Inc.,
incorporated by reference to Exhibit 10.51 filed with Registrant's 1996
Form 10-K/A.
21 Subsidiaries of Registrant, incorporated by reference to Exhibit 22
filed with Registrant's 1993 Form 10-K.
23 Consents of Arthur Andersen LLP.
27 Financial Data Schedule, December 28, 1997
27.1 Amended Financial Data Schedule December 29, 1996
27.2 Amended Financial Data Schedule December 31, 1995
- ------------
* This exhibit represents a management contract or compensatory plan or
arrangement.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: March 23, 1998 SURGICAL LASER TECHNOLOGIES, INC.
By: /s/ W. Keith Stoneback
-----------------------
W. Keith Stoneback
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ W. Keith Stoneback President, Chief Executive Officer and March 23, 1998
- ---------------------- Director (principal executive officer)
W. Keith Stoneback
/s/ Michael R. Stewart Vice President, Chief Financial Officer, and March 23, 1998
- ---------------------- Treasurer (principal financial
Michael R. Stewart and accounting officer)
/s/ Richard J. DePiano Chairman of the Board and March 23, 1998
- ---------------------- Director
Richard J. DePiano
/s/ Sheldon M. Bonovitz Director March 23, 1998
- -----------------------
Sheldon M. Bonovitz
/s/ Jay L Federman Director March 23, 1998
- ------------------
Jay L. Federman
/s/ Vincenzo Morelli Director March 23, 1998
- --------------------
Vincenzo Morelli
</TABLE>
57
<PAGE>
EX-10.9
58
<PAGE>
Settlement Agreement and Limited Mutual Release
This Settlement Agreement and Mutual Release, made and effective as of
this 7th day of November, 1997, by and between Surgical Laser Technologies, Inc.
("SLT"), a Delaware corporation, having a principal place of business at 147
Keystone Drive, Montgomeryville, Pennsylvania 18936; Norio Daikuzono
("Daikuzono"), a Japanese citizen and resident alien of the United States of
America, having an address at 4675 Cornell Road, Suite 180, Cincinnati, Ohio
45241; and SLT-Japan Company, Ltd., a Japanese company, having an address of 6th
Floor, Chiyoda Seimei Hachioji Yokoyamacho Bldg. 25-6, Yokoyama-cho,
Hachioji-shi, Tokyo 192, Japan as well as a branch address at 7840 Montgomery
Road, Cincinnati, Ohio 45236.
Recitals
WHEREAS, Daikuzono brought an action against SLT on five counts in the
United States District Court for the Southern District of Ohio, alleging breach
of contract, patent infringement and fraud;
WHEREAS, the two fraud counts were dismissed, and the venue of this
action was removed to the United States District Court for the Eastern District
of Pennsylvania, captioned Norio Daikuzono vs. Surgical Laser Technologies,
Inc., Civil Action No. 96-833 (the "Action");
WHEREAS, one of the contracts allegedly breached is an Employment
Agreement dated March 1, 1987, between SLT and Daikuzono (the "Employment
Agreement");
WHEREAS, Daikuzono alleged that SLT owed him approximately $1,000,000
in unpaid salary due under the Employment Agreement;
WHEREAS, Daikuzono also alleged that SLT owed him royalties earned from
his assignment to SLT of U.S. Patent Nos. 4,693,244; 4,592,353; and 4,736,743;
WHEREAS, SLT denied and disputed Daikuzono's claims and advanced
counterclaims against Daikuzono that Daikuzono had breached the Employment
Agreement, which counterclaims Daikuzono disputed;
WHEREAS, SLT and Daikuzono, each having asserted their claims against
the other at a cost to themselves in time, money and effort, wish now to enter
an agreement whereby this Action will be settled for all purposes and further
cost may be avoided and by which they may clarify and harmonize their future
relations.
59
<PAGE>
Agreement
NOW, THEREFORE, in consideration of the premises set forth above and the mutual
promises, agreements, covenants, undertakings, representations and warranties
set forth below, each of which is material to this agreement, and the
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound hereby, make the following agreement:
1. Definitions.
The following definitions shall apply for purposes of this Settlement
Agreement and Mutual Release ("Agreement"):
a. "SLT" means Surgical Laser Technologies, Inc. and its subsidiaries.
b. "SLT-Japan" means SLT-Japan Company, Ltd., a Japanese corporation, and
its subsidiaries.
c. "Contact Laser(TM) Patents" means the following three U.S. Patent Nos.:
4,693,244; 4,592,353; and 4,736,743.
d. "Person" means any individual, partnership, joint venture, association,
corporation or other entity.
e. "Court" means the United States District Court for the Eastern District
of Pennsylvania.
f. "Action" means that civil action maintained by Daikuzono against SLT in
the United States District Court for the Eastern District of
Pennsylvania, captioned Norio Daikuzono versus Surgical Laser
Technologies, Inc., Civil Action No. 96-833.
g. "Net Sales" means gross sales less any discounts off the gross sales
price.
2. Payment by SLT.
a. SLT shall pay Daikuzono the balance in that certain savings account no.
861464-3618, maintained by it at CoreStates Bank for royalties, and
interest thereon, accrued in favor of Daikuzono. The balance in that
account as of October 31, 1997 is $377,738.03, comprising royalties
earned through August 31, 1997. SLT shall deposit royalties earned
during September and October 1997 into the account on or before
November 11, 1997. Interest shall accrue on the balance in the account
and be paid to Daikuzono at the time of the payment of principal.
Royalties earned in November 1997 and in months thereafter shall not be
deposited into the account set forth in this Section 2(a), but shall be
paid in accordance with Section 5 below. Payment under this Section
2(a) shall be made by cashier's check, payable to "Norio Daikuzono and
White, Getgey & Meyer Co., L.P.A., his attorneys." Payment shall be
made within five (5) business days of the date that the Court enters an
order of dismissal of the Action, in accordance with Section 11 hereof.
60
<PAGE>
b. The amount of the payment made pursuant to this Section 2 shall
hereafter be a matter of confidence between the parties, and
neither the fact nor the amount of the payment shall be disclosed
by a party hereto or by counsel to a party hereto to any Person
without the written consent of the other party to this Agreement,
which consent shall not be unreasonably withheld. Notwithstanding
the foregoing, either party may make such disclosures as may be
required by or appropriate under applicable laws, including
without limitation federal or state securities laws, without the
necessity of prior written consent of the other party.
3. Withholding Taxes.
a. The payment described in Section 2(a) shall be made without
withholding of U.S. income taxes based upon Daikuzono's status as
a resident alien. Daikuzono has also provided SLT a copy of the
July 25, 1997 letter from his legal counsel in Japan, Akitaka
Kobayashi, verifying Daikuzono's current entitlement to the
royalties and shall have submitted by the time of payment set
forth in Section 2(a) other tax documentation supporting the
position that income taxes need not be withheld.
b. Daikuzono shall promptly notify SLT of any change in his tax
status in the United States. If SLT deems it appropriate under
applicable tax rules and regulations, Daikuzono shall submit
documentation necessary and sufficient to evidence the change in
status and to comply with the applicable rules and regulations.
c. Daikuzono shall indemnify, defend and hold SLT harmless for any
withholding taxes, interest and penalties that the Internal
Revenue Service, the Japanese Ministry of Finance or any other
governmental agency may assess against SLT based upon royalty
payments which SLT has made to Daikuzono prior to the date hereof,
or which are made under Section 2(a) pursuant to Daikuzono's
instructions and in prima facie compliance with the applicable tax
laws.
4. The Contact Laser(TM) Patents.
a. SLT shall pay Daikuzono a royalty of three percent (3%) on its net
sales of those products which SLT presently offers for sale and
which are identified in Appendix A hereto, being covered by a
claim of at least one of the Contact Laser(TM) Patents and not
comprising staple items of commerce. SLT has not been obliged
heretofore, nor shall it be obliged hereafter, to pay Daikuzono
royalty on any other products which it presently offers for sale,
including without limitation its laser systems, fiber delivery
systems and any options and accessories thereto, except as set
forth in Section 4(c) below.
b. In the event that SLT sells a product which it presently does not
offer for sale, which is covered by a claim of at least one of the
Contact Laser(TM) Patents and which does not comprise a staple
item of commerce, then SLT shall pay Daikuzono a royalty of three
percent (3%) on its net sales of the new product.
c. Where SLT sells, for a single aggregate price, a product bearing
royalty under Section 4(a) or 4(b) and a product not bearing such
royalty (including, without limitation, such products as laser
systems, fiber delivery systems and any options and accessories),
the price shall be allocated between the covered and non-covered
products in proportion to their several list prices,
61
<PAGE>
but where such discrete listprices do not exist, then the
allocation shall be in proportion to their direct costs to SLT.
d. SLT's obligation to pay royalties to Daikuzono under Section 4(a)
and 4(b) shall absolutely cease for products, otherwise covered
under a claim of a Contact Laser(TM) Patent, which are sold on or
after April 9, 2005.
e. Royalties under this Section 4 shall apply to net sales of
products by SLT made on or after November 1, 1997. Payment for
royalties for prior periods shall be liquidated by means of the
payment described in Section 2(a).
f. In the event that a Japanese counterpart to U.S. Patent Nos.
4,693,244; 4,592,353; or 4,736,743 should issue, then Daikuzono
shall have a non-exclusive and royalty-free license in Japan to
make, use and sell products covered by, and otherwise practice the
technology described in, the counterpart Japanese patent.
g. SLT acknowledges that it has no contractual or property rights by
which to preclude SLT-Japan from selling products which are
covered, without more, by the claims of the Contact Laser(TM)
Patents in the following countries: Cambodia, Indonesia, Laos,
Malaysia, North Korea, People's Republic of China, the
Philippines, Taiwan, Thailand, Singapore, South Korea and Vietnam.
h. SLT further acknowledges that apart from the counterpart Japanese
patents described 4(f), there are no foreign counterpart patents
to the Contact Laser(TM) Patents other than a counterpart to U.S.
Patent No. 4,736,743 in Great Britain, Germany, Austria and
Switzerland.
5. Royalty Payment.
a. For sales on or after November 1, 1997, of products bearing
royalty in favor of Daikuzono under Section 4 of this Agreement,
SLT shall pay royalties earned in a given month by the end of the
following month. Thus, by way of example, royalties earned in
November 1997 shall be payable by December 31, 1997. A grace
period of 5 days shall be allowed SLT after month end in which to
complete payment.
b. Payment shall be by wire transfer to the trust account of White,
Getgey & Meyer Co., L.P.A., pursuant to transfer instructions
given from time to time by White, Getgey & Meyer Co., L.P.A., such
instructions to become effective on thirty (30) days' prior
written notice to SLT.
c. Accompanying each payment made under Section 5(b) shall be a brief
statement by SLT setting forth the calculation supporting the
payment.
6. Other Undertakings.
a. In order to lessen potential confusion over the discrete
identities and roles of SLT and SLT-Japan, SLT shall not establish
and conduct direct operations in Japan in its own name, and
SLT-Japan shall not establish and conduct direct operations in the
United States of America in its own name. SLT shall be permitted
to establish and conduct operations in Japan, and SLT-Japan
shall be permitted to establish and conduct operations in the USA,
in the name of a
62
<PAGE>
subsidiary, affiliate or independent third-party, provided that
any such entity does not have or use such terms as "Surgical
Laser" or "SLT" in its formal company name or the informal company
name used in trade, or in the trademarks or service marks used in
the respective countries.
b. Notwithstanding the foregoing of Section 6(a), it is understood
and agreed that the parties hereto or the entities through which
such operations may be established and conducted in Japan (in the
case of SLT) and the USA (in the case of SLT-Japan) shall not be
precluded from clarifying to inquiring customers or other members
of the marketplace the entities' respective affiliations with SLT
and/or SLT-Japan, nor shall SLT and SLT-Japan be precluded from
ascribing on their products, or in the related product labeling
and trade literature, the provenance of such products to
themselves, whether such ascription is required under the laws of
the several jurisdictions, as by way of example 21 Code of Federal
Regulations Part 808 et seq., or whether such ascription is
appropriate under the rules governing registration of products
under international standards for medical devices, as by way of
example, EN ISO 9000 et seq., EN 46000 et seq. and the EC Medical
Device Directive (93/42).
c. From the date of this Agreement and until the third anniversary
thereof, SLT shall not import into Japan, nor cause to be imported
into Japan, any of the following SLT(R) Contact Laser(TM) Systems,
whether new, refurbished or remodeled: (i) the CLMD Contact Laser
System, a 35-watt laser system supplied to SLT in part by NEC
Electronics, Inc.; and (ii) the CL60 Contact Laser System, a
60-watt laser system supplied to SLT in part by NEC Electronics,
Inc.
d. Nothing in this Section 6 grants, directly or indirectly, any
rights in the intellectual property rights of a party to this
Agreement to another party hereto. No rights in the intellectual
property rights of a party to this Agreement are granted to
another party hereto except as specifically set forth elsewhere in
this Agreement.
7. Audit.
a. Daikuzono shall have the right to designate auditors to audit
those books and records of SLT that relate to the calculation of
royalties described under Sections 4 and 5 hereof. The audit shall
be as to entire discrete fiscal years of SLT for sales of products
made on or after November 1, 1997, excepting the period November
1, 1997 to December 28, 1997, which shall be treated as a partial,
but auditable fiscal year.
b. A discrete fiscal year shall be so audited no more than once, and
must be audited within three (3) years from its fiscal year-end.
Daikuzono shall give SLT at least sixty (60) days' prior written
notice of a desired audit, whereupon SLT and Daikuzono shall
establish a time and date for the audit. If SLT so desires, the
audit shall be conducted at the place where it regularly maintains
its books and records. While the audit may cover more than one
discrete fiscal year, no more than one such audit shall be allowed
per calendar year.
c. Notwithstanding Section 7(b), an audit commissioned by Daikuzono
for a discrete fiscal year shall not be conducted before SLT's
independent accountants shall have completed their audit or review
of the books and records of SLT for that fiscal year or before SLT
shall have issued its Form 10-K for the applicable fiscal year to
the Securities and Exchange Commission. Based upon the independent
accountants' review of SLT's calculation and payment of royalties
under
63
<PAGE>
Section 4 hereof, SLT may correct any discrepancy ascertained by
its accountants in such calculation or payment without interest,
penalty, fee or further liability to Daikuzono, provided that SLT
shall have originally calculated such royalties in good faith.
d. In the event that Daikuzono's auditors contend that a discrepancy
exists between the royalties as calculated by them and the
royalties as calculated, reviewed and possibly corrected by SLT
and its independent accountants, then Daikuzono's auditors shall
promptly set forth to SLT in detail the basis for their
contention, including without limitation the basis on which they
regard that products which SLT sold but on which it did not
calculate and pay royalties should be treated as products coming
within a claim of a Contact Laser(TM) Patent and otherwise bearing
royalty (thus excluding, for example, fiber delivery systems).
e. The parties shall confer in good faith on the discrepancy and
attempt to reach agreement on the same. If the parties cannot
reach agreement, then Daikuzono may give notice of default to SLT,
which SLT shall have thirty (30) days to cure. If such alleged
default is not so cured, then Daikuzono and SLT will submit the
issue to non-binding mediation through the auspices of an
independent mediation organization. One mediator will be selected.
Daikuzono and SLT will share equally the costs assessed by the
mediation organization. Daikuzono and SLT will pay their
respective attorneys' fees.
f. Daikuzono shall bear the cost of any audit commissioned by him
except in certain circumstances where such an audit determines
that a discrepancy greater than five percent (5%) (a "material
discrepancy") exists between the royalties calculated by
Daikuzono's auditors and the royalties calculated, reviewed and
possibly corrected by SLT and its independent accountants. The
cost of the first such audit that determines a material
discrepancy shall be borne by Daikuzono; the cost, up to but not
exceeding $2,000, of a subsequent audit that determines a material
discrepancy in a discrete fiscal year shall be borne by SLT.
g. In the event that SLT should fail to pay royalties in a timely
manner to Daikuzono, then SLT shall also be obliged to pay
Daikuzono simple interest at the annual rate of the prime rate of
interest, plus two percent (2%), reported by the Wall Street
Journal on the date such royalties first become due and payable to
the date they are paid.
h. Daikuzono and his auditors and other advisors shall treat
information from SLT concerning its calculation and payment of
royalties as confidential and material, non-public information,
unless such information is already in the public domain.
8. Default; Notice of Default; Right to Cure; Rights Upon Failure to
Cure.
a. In the event SLT fails to make any payment when due, under Section
5(a), it shall be in default.
b. As a condition precedent to the right of Daikuzono or SLT-Japan to
bring any legal action, based upon the occurrence of a default,
Daikuzono or SLT-Japan must first provide to SLT written notice of
default. Such notice shall specify the period for which the
default exists, the grounds for declaring such a default and
demanding that the default be cured. Such notice shall be sent in
accordance with Section 12(a). SLT shall then have thirty (30)
days from the date of the notice to cure the default.
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<PAGE>
c. In the event SLT fails to cure the default, after notice has been
given, Daikuzono or SLT-Japan shall have the right to bring an
action against SLT and seek any remedy available at law.
9. Voidance of Prior Agreements; Affirmation of Assignment.
a. This Settlement Agreement and Mutual Release voids, nullifies,
replaces and supersedes, for all purposes, all prior agreements,
undertakings and understandings by, between or among SLT,
Daikuzono and SLT-Japan. Such prior agreements, undertakings and
understandings include without limitation: (i) that certain
agreement dated March 21, 1984 between Daikuzono and SLT; (ii)
that certain agreement dated June 25, 1984 between Daikuzono and
Surgical Laser Technologies Ohio, Inc. (a former subsidiary of
SLT); (iii) that certain agreement dated on or about February 5,
1985 between Daikuzono and SLT; (iv) that certain agreement dated
March 1, 1987 between Daikuzono and SLT (the "Employment
Agreement"); and (v) that alleged agreement between Daikuzono and
SLT which Daikuzono has averred had been formed on or about July
7, 1990.
b. Notwithstanding Section 9(a), Daikuzono's prior assignments to SLT
of the Contact Laser(TM) Patents, and of any other patents and
patent applications assigned by Daikuzono to SLT, is hereby
affirmed, confirmed and ratified.
c. The parties represent and warrant to each other that there are no
agreements or understandings in force, or claims outstanding,
between SLT and SLT-Japan, except as set forth in this Agreement.
10. Mutual Limited Release.
SLT, Daikuzono and SLT-Japan mutually release each other from any and
all claims they may have against each other as of the date of this
Agreement, as follows:
a. SLT, for itself, its affiliates, successors and assigns, does
hereby forever and completely release, remise, acquit and
discharge Daikuzono, SLT-Japan and specifically SLT-Japan's US
affiliate Innovative Healthcare Devices, Inc., for and against any
and all claims, liabilities, demands, obligations, rights,
damages, costs, expenses and causes of action of any nature, kind
or character (whether tort, contract or statutory), known or
unknown, suspected or unsuspected, fixed or contingent, which are
based on, relate to, arise from or are in any way connected with
any oral or written statement, act, omission, warranty,
covenant, agreement or course of conduct, occurring on or before
the date hereof, but not as to such as occur after the date
hereof.
b. Daikuzono and SLT-Japan, for themselves, their affiliates,
successors and assigns, do hereby forever and completely release,
remise, acquit and discharge SLT and its officers, directors,
shareholders, and employees, joint ventures and affiliates from
and against any and all claims, liabilities, demands, obligations,
rights, damages, costs, expenses and causes of action of any
nature, kind or character (whether tort, contract or statutory),
known or unknown, suspected or unsuspected, fixed or contingent,
which are based on, relate to, arise from or are in any way
connected with any oral or written statement, act, omission,
warranty, covenant, agreement or course of conduct, occurring on
or before the date hereof, but not as to such as occur after the
date hereof.
65
<PAGE>
c. It is the intent of the parties hereto that the mutual
consideration received pursuant to this Agreement satisfies and
finally resolves all controversies that exist between them, and
the parties agree that such controversies are hereby satisfied and
resolved as between themselves.
d. None of the parties is presently aware that any product of another
party infringes any issued patent owned by that party. Therefore,
each party represents to the other parties that it does not
presently intend to bring a patent infringement action against
another party hereto, based on that other party's current
products.
11. Dismissal of Action.
Daikuzono and SLT shall promptly stipulate to the dismissal of the
Action with prejudice, with each party to bear its own costs and
attorneys' fees.
12. Miscellaneous.
a. Notices given to the parties hereunder shall be by certified or
registered mail, return receipt requested, or by an overnight
courier service which obtains evidence of receipt from the
addressee. Notice shall be sent to the addresses set forth above,
in the case of SLT to the attention of its President. Any notice to
a party hereunder shall be accompanied by notice also to its
outside counsel, as follows:
Counsel for Daikuzono and SLT-Japan:
------------------------------------
White, Getgey & Meyer Co., L.P.A.
1700 Fourth and Vine Tower
One West Fourth Street
Cincinnati, Ohio 45202
Attn: David P. Kamp, Esq.
Counsel for SLT:
----------------
Duane, Morris & Heckscher, LLP
One Liberty Place
Philadelphia, Pa. 19103
Attention: Gene E. K. Pratter, Esq.
<PAGE>
A notice shall be deemed given on the date set forth on the return
receipt as received by the recipient. A party or its counsel may
change its address hereunder, if notice is given of the same in
conformance with these provisions.
b. If part of this Agreement should be found to be void or
unenforceable, then the portion so found shall be excepted from
the Agreement, and the balance of the Agreement shall be construed
in such manner as to give as much effect as possible to the
parties' intentions.
c. Each party acknowledges that it has had the benefit of counsel of
the party's own selection. Each party agrees that this Agreement
has been jointly drafted and that neither party has been the sole
or prime draftsman of the Agreement.
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<PAGE>
d. This Agreement shall be construed in accordance with the laws of
Pennsylvania, and any litigation pursuant to this Agreement shall
be brought and maintained in the United States District Court for
the Eastern District of Pennsylvania.
e. No party shall be deemed to be the agent or partner of another.
The parties to this Agreement are independent of each other.
f. This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties hereto. A party may
assign its rights and obligations under this Agreement without the
consent of the other parties so long as the assignment
incorporates all of the rights and obligations of this Agreement.
g. Neither the execution nor the delivery of this Agreement, nor the
performance of the terms hereof, by any party hereto shall be
considered an admission by it of any present or past wrongdoing or
liability, and any and all such alleged admissions or liabilities
are hereby expressly denied by the parties hereto.
h. Consistent with Section 11, each party shall bear its own legal
costs in this matter.
i. The terms of the Settlement Agreement and Mutual Release shall not
be modified except in a writing signed by each party. A party's
forbearance from action or from pursuit of a remedy for a
grievance hereunder shall not be considered a waiver against a
future grievance.
j. This Agreement represents the entire agreement of the parties with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties, hereby have affixed their hands as of
the date first above written.
Surgical Laser Technologies, Inc. SLT-Japan Company, LtInc.
By: /s/ W. Keith Stoneback By: /s/ Norio Daikuzono
----------------------- -------------------------
Its: President and CEO Its:________________________
67
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Appendix A
Listing of SLT's Products under Sec. 4(a)
-----------------------------------------
SLT(R) Contact Laser(TM) Probes and Scalpels and Contact Fibers
----------------------------------------------------------------
HP 1.0 ILT12 MCX 1.5 MD 2.5
MD 3.5 MD 6 MRP 10 MRP 15
MRP 1.5 MRP 3 MRP 5 MRP 7
MRTP 1.5 MRTP 3 MRTP 5 MT 1.5
MT 3.5 MTR 1.5 MTR 3.5 MTRG 1.5
MTRG 2.5 MTRG 3.5 MTRL 10 MTRL 6
MTRL 3 MTRL 7 MTRL 8 RMD 2.5
RMTR 1.5 SMD 2.5 SMD 3.5 SMRP 10
SMRP 15 SMRP 1.5 SMRP 3 SMRP 5
SMRP 7 SMRTP 1.5 SMRTP 3 SMRTP 5
SMT 1.5 SMT 3.5 SMTR 1.5 SMTR 3.5
SMTRG 1.5 SMTRG 3.5 VMAX 4 ER 2
ER 4 ER 6 ER 8 ER 10
ER 10 ER 12 ERP 2 ERP 4
ERP 6 ERP 8 ERP 10 ERP 12
GR 2 GR 4 GR 6 GR 8
GR 10 GR 12 GRP 2 GRP 4
GRP 6 GRP 8 GRP 10 GRP 12
DF 2 CFE 0.8 CFRH 5 CFRH 8
CFRH 9 CFRH 11 OS 2 OS 3
Heraeus LaserBlade(TM) Scalpels and Contact Fibers
--------------------------------------------------
CLB 2 CLB 4 CLB 6 CLB 8
CLB 10 CLB 12 CLBX 0.2 CLBX 0.4
CLBX 0.6 CLBX 0.8 CLBX 1.0 CLBX 1.2
FLB 2 FLB 4 FLB 6 FLB 8
FLB 10 FLB 12 FLBX 0.2 FLBX 0.4
FLBX 0.6 FLBX 0.8 FLBX 1.0 FLBX 1.2
EC-25 EI-25 EV-25 EW-25
EI-50 LTV-01 TS 1.5
HSI conical contact fibers with parts numbers 0040-xxxx:
5160 5161 5401 5190
5191 5170 5171 5210
5211 5180 5181 5400
Contact Laser and LaserBlade are trademarks of SLT and Heraeus LaserSonics,
resp.
68
EXHIBIT 10.15
69
<PAGE>
CoreStates Bank, N.A.
Suburban Middle Market
FC 3-52-1-8
620 Brandywine Parkway
West Chester, PA 19380
610 918 8100
Fax 610 918 8162
November 5, 1997
Mr. Michael R. Stewart
Chief Financial Officer
Surgical Laser Technologies, Inc.
and Subsidiaries
147 Keystone Drive
Montgomeryville, PA 18936
Dear Mike:
We are pleased to inform you that CoreStates Bank N.A. (hereinafter referred to
as "Bank") has reaffirmed the following line of credit availability to Surgical
Laser Technologies, Inc. and Subsidiaries (hereinafter referred to as
"Borrower") under the terms and subject to the conditions set forth below:
1. AMOUNT: $2,535,000.00 secured working capital line of credit with a $535,000
subline for Standby Letters of Credit. Line of Credit borrowings are limited
to $2,000,000.00.
2. BORROWER: Surgical Laser Technologies, Inc. and Subsidiaries.
3. USE OF PROCEEDS: The advances under the line of credit shall be used
primarily for working capital and short-term borrowings. The subline of up
to $535,000 will support the issuance of standby letters of credit. The
issuance of all letters of is subject to compliance with certain guidelines
and procedures, as established by the Bank's International Department.
4. TERMS: The line of credit will be available to the Borrower until May 31,
1998 at which time continuation of the line will be considered by the Bank
on the basis of the Borrower's financial statements for the year ended
December 31, 1997 and other information available to Bank, or which the Bank
may reasonably request.
5. COLLATERAL: As security for the line of credit, the Bank will require a
first priority security interest perfected under the Uniform Commercial code
in all of the Borrower's corporate assets, including present and future
accounts, chattel paper, contracts, documents, equipment (including, but not
limited to fixtures, office equipment and furniture, and motor vehicles),
and accessions, general intangibles, instruments, inventory, and any
products and proceeds of the foregoing. The Bank will require evidence
70
<PAGE>
satisfactory to it and its counsel that the assets are free and clear of
any and all security interest except as set forth herein.
6. INTEREST RATE
A. Prime plus .50% for working capital and short term borrowings. Prime
Rate is floating rate of interest that is designated from time to
time by the Bank and is used by the Bank as a reference rate with
respect to different interest rates charged to borrowers. The rate of
interest shall change simultaneously and automatically upon the
Bank's designation of any change in such reference rate. The Bank's
determination and designation from time to time of the reference rate
shall not in any way preclude the Bank from making loans to other
borrowers at a rate which is higher or lower or different from the
reference rate. Interest is payable monthly.
B. Standby Letters of Credit - 1.5% Commission per annum in addition to
all other standard issuance and amendment fees.
7. NEGATIVE PLEDGE: Borrower shall execute a negative pledge agreement for all
patents.
8. FEES: The Borrower will pay an annual fee of 0.25% on the unused portion of
the line of credit. The fee will be calculated and payable on a quarterly
basis.
9. FINANCIAL COVENANTS: The Borrower shall maintain the following financial
covenants throughout the term of the loans in accordance with generally
accepted accounting principles. Covenants shall be tested on a quarterly
basis.
A. Minimum Cash Plus Qualified Accounts Receivable Coverage to Line
Outstandings and Letters of Credit issued of 2.0:1.0.
B. Maximum senior Debt to Tangible Capital Funds (defined as Total
Liabilities minus Subordinated Debt divided by Tangible Net Worth
plus Subordinated Debt) of 1.0:1.0.
The Borrower will be required to submit quarterly financial covenant
certifications verifying to the above.
10. OTHER CONDITIONS:
A. Dividends are not permitted.
B. Borrower cannot incur additional debt without Bank's prior approval.
C. The MCIDC is permitted to have a second lien on Borrower's accounts
receivable and inventory on a first lien on equipment.
11. SUBORDINATION OF DEBT: The Bank will require that the $1,649,731 in
unsecured convertible debt will subordinated to the Bank with the entire
principal to be paid no earlier than seven (7) years from date of
execution. The note does not have a confession of judgment clause. The
subordinated debt can be reduced only if converted to common stock.
71
<PAGE>
12. DOCUMENTATION: All documents produced or connected with this loan will be
satisfactory inform and substance to the Bank and its counsel. Our counsel
must be satisfied with the respect to the legality, validity, binding
effect, and enforceability of all instruments, agreements, and documents
used to effect and consummate the loans and transactions herein
contemplated. In addition, the Borrower acknowledges that it will provide
all instruments, agreements, and documents reasonably requested for by Bank
to complete the closing contemplated herein.
13. INSURANCE: The Borrower will provide fire and extended coverage insurance on
all insurable assets during the term of the loan, satisfactory to the Bank
as to form and insurer, and containing the standard mortgagee and/or loss
payee clauses in favor of the Bank. The amount of such coverage will not be
less than 80% of the insurable value of the assets or 100% of the loan
amount, whichever is greater. The insurance will be in effect evidenced by a
certificate of insurance submitted to the Bank prior to or at settlement.
The policy shall require a thirty-day notice of cancellation to the Bank.
14. LANDLORD'S WAIVER: The Bank shall require a landlord's waiver for any leased
premises in which collateral for the above credit accommodations may be
located.
15. FINANCIAL STATEMENTS: The Borrower shall deliver its annual audited
financial statements to the Bank within ninety (90) days after the close of
each fiscal year during the term of this commitment. The financial
statements will audited by an independent accountant satisfactory to the
Bank. The Borrower will also submit a 10K on an annual basis. In addition,
the Borrower will submit on a quarterly basis a Balance Sheet and Profit and
Loss Statement which may be internally prepared in accordance with GAAP and
signed by the chief financial officer. Submission of the quarterly
statements will be within 45 days after the end of each period. Finally,
agings of the accounts receivable and 10Q Reports will be submitted
quarterly to the Bank.
16. DEPOSIT RELATIONSHIP: The Borrower will maintain CoreStates Bank, N.A. as
its primary bank of account for the term of the above commitment.
17. DUE AUTHORIZATION: The Borrower will obtain all necessary authorization of
their respective boards of directors and shareholders to enter into any
agreement evidenced by this letter and will obtain, prior to the making of
the loan, such further authorization of their respective boards of directors
and shareholders as may be necessary or appropriate to the financing
arrangements set forth herein.
18. EXPENSES: The Borrower shall pay all out-of-pocket costs and expenses
incurred by the Bank in connection with the financing arrangement promptly
upon Bank's submission of a statement to the Borrower, This will include,
but not be limited to, attorney's fees and costs, lien search fees and
filing fees. These fees will paid by Borrower as a condition to closing and
whether or not the total transaction contained herein is closed.
19. SATISFACTORY FINANCIAL CONDITION: The Borrower shall maintain, in the Bank's
judgment, a satisfactory financial condition and shall notify the Bank
promptly in writing of any material adverse changes in its financial
condition since the date of its financial statements dated June 30, 1997.
20. COMMITMENT EXPIRATION: The Bank's commitment as outlined herein will
expire 30 days from the date of this letter unless accepted in its entirety
in writing as evidenced by executing the acknowledgment below.
72
<PAGE>
We appreciate the opportunity of making this commitment available to you. If the
terms and conditions outlined herein are acceptable to you, please execute the
acknowledgment on the original of this letter, returning it to the undersigned
in the envelope provided. Should you have any questions regarding this letter,
or if the Bank can be of further service, please feel free to contact the
undersigned at (610) 918-8105.
Sincerely,
CORESTATES BANK, N.A.
/s/ Maria S. Samson
---------------------
Maria S. Samson
Vice President
Suburban Middle Market
ACKNOWLEDGMENT:
We hereby accept the terms and conditions outlined herein this 6th day of
November, 1997.
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES:
/s/ Michael R. Stewart
-----------------------
By: Michael R. Stewart
Attest: Tim Powell
73
EXHIBIT 10.40
74
<PAGE>
November 14, 1997
Certified Mail and Facsimile
- ---------------------------
Fuller Research Corporation
944 Morgan Road
Rydal, Pennsylvania 19046
Attn: Terry A. Fuller, Ph.D., President
Dear Terry:
SLT hereby exercises its option to cancel the License Agreement, dated May 31,
1994, between Fuller Research Corporation and SLT. In accordance with Section
5.5, we are enclosing our check for $15,000 to cover the minimum royalties for
October, November and December 1997, and January and February 1998.
We shall look into our files and records and determine whether there are any
items of FRC's property that should be returned.
We are grateful for having had the opportunity to use the technology covered
under the Agreement. We wish you the best of luck in your future endeavors.
Yours very truly,
/s/ Davis Woodward
- -----------------------------------
Davis Woodward
Vice President, Legal & Tax Affairs
enclosure
cc. Keith Stoneback
Michael R. Stewart
75
EXHIBIT 10.47
76
<PAGE>
CORESTATES BANK, N.A.
OUR CREDIT NO. DATE
- ------------- ----
6O3824/518106 December 24, 1997
ANS
BENEFICIARY APPLICANT
- ----------- ---------
MONTGOMERY COUNTY INDUSTRIAL SURGICAL LASER TECHNOLOGIES INC.
DEVELOPMENT CORPORATION 200 CRESSON BLVD.
420 WEST GERMANTOWN PIKE OAKS, PA 19456
EAGLEVILLE, PA 19403
DEAR BENEFICIARY:
WE HEREBY AMEND OUR IRREVOCABLE STANDBY LETTER OF CREDIT AS FOLLOWS:
1) THE EXPIRATION DATE IS EXTENDED TO: DECEMBER 31, 1998.
2) THE AMOUNT AVAILABLE IS DECREASED BY: USD62,266.00
NEW AVAILABLE BALANCE: USD452,913.00
PLEASE NOTE THAT ANY AND ALL CORRESPONDENCE RELATED TO THIS LETTER OF CREDIT
SHOULD NOW BE SENT TO CORESTATES BANK, N.A., P.O. BOX 13866, 530 WALNUT STREET,
SEVENTH FLOOR, ATTENTION LETTER OF CREDIT DEPARTMENT, FIND CODE 1-9-7-1,
PHILADELPHIA, PA. 19106.
EXCEPT SO FAR AS OTHERWISE EXPRESSLY STATED HEREIN THIS AMENDMENT AND THE
ORIGINAL LETTER OF CREDIT ARE NOW SUBJECT TO THE "UNIFORM CUSTOMS AND PRACTICE
FOR DOCUMENTARY CREDITS: (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE,
PUBLICATION NO. 500".
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
ALL INQUIRIES REGARDING THIS CREDIT SHOULD BE DIRECTED TO US AT OUR PHONE
NUMBERS (215) 973-5981; (215) 973-8157; (215) 973-1944.
/s/ Richard Fortino
- --------------------
AUTHORIZED SIGNATURE
77
EXHIBIT 23
78
<PAGE>
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 of our report dated January 30, 1998. It should be noted that we have
not audited any financial statements of the Company subsequent to December 28,
1997, or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 23, 1998
79
<PAGE>
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, into the Company's previously filed Form S-8
Registration Statements File Nos. 33-32835, 33-38748, 33-42451, 33-49730,
33-83074 and 333-19229.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 23, 1998
80
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 28, 1997 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 1,555
<SECURITIES> 4,994
<RECEIVABLES> 2,080
<ALLOWANCES> (155)
<INVENTORY> 2,986
<CURRENT-ASSETS> 11,905
<PP&E> 14,449
<DEPRECIATION> (7,582)
<TOTAL-ASSETS> 19,996
<CURRENT-LIABILITIES> 2,497
<BONDS> 6,646
0
0
<COMMON> 99
<OTHER-SE> 11,258
<TOTAL-LIABILITY-AND-EQUITY> 19,996
<SALES> 11,665
<TOTAL-REVENUES> 11,665
<CGS> 4,772
<TOTAL-COSTS> 4,772
<OTHER-EXPENSES> 7,346
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> (369)
<INCOME-TAX> 12
<INCOME-CONTINUING> (381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 29, 1996 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 29,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 2,795
<SECURITIES> 3,325
<RECEIVABLES> 3,015
<ALLOWANCES> (116)
<INVENTORY> 3,534
<CURRENT-ASSETS> 12,687
<PP&E> 14,713
<DEPRECIATION> (6,752)
<TOTAL-ASSETS> 21,490
<CURRENT-LIABILITIES> 3,551
<BONDS> 7,099<F1>
0
0
<COMMON> 99
<OTHER-SE> 11,209
<TOTAL-LIABILITY-AND-EQUITY> 21,490
<SALES> 10,974
<TOTAL-REVENUES> 10,974
<CGS> 4,062
<TOTAL-COSTS> 4,062<F2>
<OTHER-EXPENSES> 10,982
<LOSS-PROVISION> (2)
<INTEREST-EXPENSE> 253<F3>
<INCOME-PRETAX> (4,508)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,508)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
<FN>
(1) Restated to include $7,099 of long term debt.
(2) Restated from $0 to $4,062.
(3) Restated to include $328 of interest income.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,903
<SECURITIES> 3,244
<RECEIVABLES> 3,343
<ALLOWANCES> (118)
<INVENTORY> 3,866
<CURRENT-ASSETS> 15,432
<PP&E> 14,597
<DEPRECIATION> (6,347)
<TOTAL-ASSETS> 24,821
<CURRENT-LIABILITIES> 2,842
<BONDS> 6,501<F1>
0
0
<COMMON> 99
<OTHER-SE> 15,592
<TOTAL-LIABILITY-AND-EQUITY> 24,821
<SALES> 14,839
<TOTAL-REVENUES> 14,839
<CGS> 6,137
<TOTAL-COSTS> 6,137
<OTHER-EXPENSES> 8,171
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 512<F2>
<INCOME-PRETAX> (8)
<INCOME-TAX> 50
<INCOME-CONTINUING> (58)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
<FN>
(1) Restated to include $6,501 of long term debt.
(2) Restated to include $112 of interest income.
</FN>
</TABLE>
