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 January 2, 2000.
[ ] 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)
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, 2000, the aggregate market value of the voting common equity of
Registrant held by non-affiliates was approximately $8,920,668. Registrant has
no authorized non-voting common equity.
On March 15, 2000 Registrant had outstanding 1,977,965 shares of Common Stock,
$.01 par value.
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PART I
Item 1. Business.
(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 supplements
its contact offerings with non-contact products. Registrant's growth strategy
includes a specific focus in the surgical specialties of Otolaryngology and Head
and Neck surgery and Neurosurgery (ENT and Neurosurgery). 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 Neurosurgery, 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 and Neurosurgery, 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 1999, 1998 and 1997 to include
non-laser based products specifically targeted at the ENT and Neurosurgery
markets. In 1999, Registrant introduced the BiFrazier(TM), a bipolar suction
coagulator. During 1998, Registrant's new product offerings included the
ClearESS(R) irrigation and suction system and the HemoSleeve(R), a bipolar
microdebrider sleeve used in endoscopic sinus surgery. The new products offered
in 1997 included a line of reusable handheld instruments. The line of handheld
instruments called MedTREK was expanded during 1998. Registrant will continue to
seek to expand its product offerings within the ENT and Neurosurgery markets.
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's Contact Laser(TM) 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.
In January 1999, following Board of Director and stockholder approval,
Registrant amended its Restated Certificate of Incorporation to effect a
one-for-five reverse split of Registrant's Common Stock. Effective
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January 15, 1999, Registrant's Common Stock, which had been traded on the Nasdaq
National Market, commenced trading on the Nasdaq SmallCap market at Registrant's
request. Given Registrant's current market capitalization, Registrant believes
that the continued listing requirements of the Nasdaq SmallCap market are more
appropriate for Registrant's public float characteristics.
On April 29, 1999, Registrant entered a Settlement and Release Agreement with
Trimedyne, Inc. and Royice Everett, MD. Trimedyne had brought a patent
infringement action against Registrant in January 1995. After a series of
summary judgments in Registrant's favor and an appeal by Trimedyne, the
appellate court affirmed the trial court's grant of summary judgment that
Registrant's contact probes do not infringe any Trimedyne patents. The only
issue remaining in the case was whether a single product marketed by Registrant,
the SFB 1.0 Probe, infringed a single Trimedyne patent, the 5,380,317 patent.
The parties settled that issue (see Part I, Item 3, Legal Proceedings).
In June 1999, Registrant sold its former headquarters facility in Oaks,
Pennsylvania. As part of the purchase price, the buyer assumed the remaining
mortgage balances on the property at the time of sale (see Part I, Item 2,
Properties).
In June 1999, Registrant recorded a non-recurring charge of $1,440,000. This
non-recurring charge consisted of $719,000 in charges related to the
discontinuance of certain new product ventures, a $539,000 charge to reserve for
excess inventories and a $182,000 charge for severance and for related costs
associated with headcount reductions made in response to the discontinuance of
the new product ventures.
One of the new product ventures discontinued by Registrant was its relationship
with CorMedica Corporation. During 1997 and 1998, Registrant had supplied
CorMedica with laser systems and fibers for CorMedica to incorporate into its
proprietary catheter tracking and navigation system that CorMedica intended to
market for percutaneous transmittal endocardial revascularization ("PTER(TM)).
In early June 1999, CorMedica advised Registrant that it had not timely achieved
a key development milestone necessary to receive further funding. On June 15,
1999, Registrant filed a lawsuit against CorMedica seeking payment of its
outstanding receivable balance of $266,000.
In July 1999, Michael R. Stewart was appointed by the Board of Directors as
Registrant's President and Chief Executive Officer, succeeding W. Keith
Stoneback, who resigned as President and Chief Executive Officer of Registrant
to pursue other business interests. Mr. Stoneback received severance pay, which
included health benefits, until December 31, 1999. Prior to his appointment as
President and Chief Executive Officer of Registrant, Michael R. Stewart served
as Registrant's Vice President and Chief Financial Officer. In October 1999, the
Board of Directors appointed Davis Woodward, Registrant's former Vice President
of Legal and Tax Affairs, to serve as Vice President and Chief Financial
Officer.
In July 1999, Registrant's 8% subordinated notes, issued in 1992, matured. As a
result, Registrant paid $1,621,000 to noteholders to satisfy the remaining
principal balance outstanding (see Note 8 of Notes to Consolidated Financial
Statements).
There were no other significant changes in Registrant's business during the
fiscal year ended January 2, 2000.
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(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS.
Registrant is engaged primarily in one operating segment: the design,
development, manufacture and marketing of laser products and other instruments
for medical applications. See Note 14 of Notes to Consolidated Financial
Statements for segment information.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Registrant is primarily engaged in the development, manufacture and sale of a
proprietary Contact Laser System for surgery and other instruments for surgical
applications. During 1997, Registrant redefined its strategy for growth to
include a specific focus in the surgical specialties of ENT and Neurosurgery. 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 Neurosurgery,
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 and Neurosurgery, 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 1999, 1998 and 1997, revenues from sales of
Registrant's products and services were $7,951,000, $9,393,000 and $11,665,000,
respectively.
Registrant introduced Contact Laser surgery by combining proprietary Contact
Laser Delivery Systems with an Nd:YAG laser unit to create a multi-specialty
surgical instrument that can cut, coagulate or vaporize tissue. Registrant's
Contact Laser Delivery Systems can be used effectively with any wavelength of
laser between 532um and 1064um. Included in these wavelengths are the KTP laser
(532um), Diode laser (various wavelengths) and Nd:YAG laser (1064um).
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." 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.
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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 $615.
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 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 effect desired. 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 $395 to $520.
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 $65.
Reusable Laser Aspiration Handpieces. Registrant's 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.
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Handheld Sinus Instrumentation. Registrant markets a line of 27 precision
thru-cutting instruments used for minimally invasive sinus surgery. The line
includes instruments with cutting tips at several different angles to allow for
convenient access to difficult-to-reach anatomy. The instruments' list prices
range from $225 to $975.
Irrigation and Suction System. Registrant manufactures and markets ClearESS(TM),
which provides convenient and effective irrigation and suction to remove blood
and debris for enhanced visualization during endoscopic sinus surgery. The
ClearESS kit, which includes suction and irrigation tubing, currently has a list
price per package ranging from $495 to $795.
Bipolar Devices. Registrant manufactures and markets HemoSleeve(TM), a bipolar
sleeve which fits over the surgeon's existing microdebrider, and Bi-Frazier(TM),
a handheld bipolar suction coagulator. Both the HemoSleeve and Bi-Frazier
provide the surgeon with precise bipolar coagulation while the Bi-Frazier has
added suction capabilities. Both products improve surgical efficiency and
enhance visualization by reducing intra-operative bleeding. Registrant's
HemoSleeve has a list price of $295 for a package of five. Registrant's
Bi-Frazier has a list price of $245 for a package of five.
Marketing
Registrant sells its products to surgeons and hospitals. Registrant works
closely with these 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.
Registrant's marketing efforts include activities designed to educate physicians
and nurses in the use of Registrant's products.
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 President and CEO 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 support specialists, who provide similar consultation
within Registrant's Laser OnCall(TM) rental offering; and marketing and
technology personnel, 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 distributors, whose employees are not Registrant's
employees, to provide these services. Registrant distributes its products
internationally through independent distributors.
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.
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International Markets. During 1999, Registrant's international marketing
activities included working through distributors in various countries in Europe,
the Middle East, the Far East, South America, Mexico and Canada.
Research and Development
Registrant focuses its research and product development efforts on tissue effect
technologies that include laser and non-laser based technologies on improving
its offerings in ENT and Neurosurgery. Registrant's technological capabilities
are designed to be responsive to the surgeon's needs. Registrant has the ability
to respond to development requirements in the areas of optical/materials
technology, laser and electrosurgical technology and mechanical and electronics
technology. During 1999, 1998 and 1997, Registrant spent $741,000, $1,179,000
and $910,000 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.
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 handpieces, the disposable gas and fluid cartridge systems,
ceramic-enclosed probes, adjustable touch-control handpieces, ClearESS
irrigation and suction system, the HemoSleeve micro-debrider sleeve and the
Bi-Frazier suction coagulator have been developed by employees of Registrant;
Registrant has retained ownership of all such proprietary technology.
Registrant's handheld sinus instrument line was developed by an outside
consultant and is manufactured by a domestic supplier.
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 and Neurosurgery
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.
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Registrant continues to be aware that certain companies have introduced into the
market concepts or products that draw on Contact Laser technology. Registrant
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. Registrant's non-laser
products employ novel features which cause them to be differentiated in the
marketplace. Certain of these products have patent applications pending.
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.
Registrant has also placed on the market several Class I, 510(k) exempt, ENT
products, including handheld surgical instruments and suction/irrigation
products. Additionally, Registrant has received 510(k) clearance for HemoSleeve
and Bi-Frazier.
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 Quality System Regulations for
medical devices. These regulations, administered by the FDA, set forth
requirements to be observed in the design, 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
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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, 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. As of January 2, 2000, Registrant had sixteen patents issued by the U.S.
Patent and Trademark Office which generally expire 17 years from the following
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); March 4, 1997 (surgical tool for use with Contact Laser);
September 5, 1998 ( a continuation of surgical laser tool issued March 4, 1997);
November 10, 1998 (laterally-emitting laser devices); August 31, 1999 (method of
treating a body cavity issue using an endoscopic sugical laser); and September
28, 1999 (photooptic breakdown probe). Registrant has several other patents
pending before the U.S. Patent and Trademark Office, as well as other patents
and pending applications overseas.
Registrant has also begun to establish a proprietary position for its new
products. Registrant has filed patent applications with the U.S. Patent and
Trademark Office for its HemoSleeve(R) and ClearESS(TM) products and anticipates
that applications will be filed for other new products.
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, both registered and unregistered. Registrant believes its
trademarks encourage customer loyalty and aid in the differentiation of
Registrant's products from competitors' products. Accordingly, Registrant has
registered seven of its trademarks with the U.S. Patent and Trademark Office. It
has filed its intent to
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register other trademarks, principally in areas outside of Contact Laser(TM)
surgery. Registrant has other registrations issued or pending abroad.
Employees
As of January 2, 2000, Registrant had 50 employees of whom 21 were engaged in
manufacturing, service and operations, 7 in research and product development, 12
in sales, marketing and customer service and 10 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 through distributors in Western Europe, Canada, the
Middle East, the Far East and South America. During fiscal 1999, 1998 and 1997,
domestic sales represented 89%, 87% and 84% respectively, of Registrant's total
sales. All export sales are transacted in U.S. currency.
Item 2. Properties.
On June 30, 1999, Registrant sold its four acres in Oaks, Pennsylvania on which
a 57,000 square foot office building was located. At the time of sale, the
property had a cost basis of $6,472,000 and accumulated depreciation of
$2,235,000. In connection with the sale, the mortgages having a balance at June
30, 1999 of $3,922,000 were assumed by the buyer. The cash payment received by
Registrant at the time of sale was $398,000, which included $45,000 of
restricted cash held in escrow for payment of taxes related to the sale.
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 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 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 secured a replacement subtenant, but in January
1999, the replacement subtenant abandoned the sub-let premises and the sublease.
Registrant does not expect to secure a new subtenant before the expiration of
the lease.
Item 3. Legal Proceedings.
On April 29, 1999, Registrant entered a Settlement and Release Agreement with
Trimedyne, Inc. and Royice Everett, MD. Trimedyne had brought a patent
infringement action against Registrant in January 1995. After a series of
summary judgments in Registrant's favor and an appeal by Trimedyne, the
appellate court affirmed the trial court's grant of summary judgment that
Registrant's contact probes do not infringe any Trimedyne patents. The only
issue remaining in the case was whether a single Registrant product, the SFB 1.0
Probe, infringed a single Trimedyne patent, the 5,380,317 patent.
Given that sales of the SFB Probe were not significant, Registrant determined to
settle the suit rather than incur prohibitive costs of litigation that would not
be matched by the benefits from the action, even if concluded successfully. The
settlement provides, among its other terms, for a mutual release of claims, a
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license to Registrant in five of Trimedyne's patents, a covenant by Trimedyne
not to sue Registrant over the SFB Probe, an immaterial payment by Registrant
and a royalty going forward on Registrant's sales of the SFB Probe. While
Registrant does not admit infringement of the `317 patent, it has acknowledged
its validity.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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." Until January 14, 1999, Registrant's Common Stock was
quoted on the Nasdaq National Market. Since January 15, 1999, Registrant's
Common Stock has been traded on the Nasdaq SmallCap Market. As of March 15,
2000, there were approximately 530 record holders of Registrant's Common Stock.
On March 15, 2000, the closing price of Registrant's Common Stock on the Nasdaq
Stock Market was $4.75 per share. The following table sets forth the high and
low sales prices, restated if applicable for the effect of the one-for-five
reverse split on January 8, 1999, for Registrant's Common Stock for each
quarterly period within the two most recent fiscal years.
1999 High Low
---- ---
First Quarter $3.13 $1.38
Second Quarter 4.47 1.63
Third Quarter 2.50 1.00
Fourth Quarter 2.31 1.38
1998 High Low
---- ---
First Quarter $9.53 $5.63
Second Quarter 6.88 3.44
Third Quarter 5.63 2.50
Fourth Quarter 3.75 1.25
Registrant has never paid any cash dividends on its Common Stock and does not
expect to pay cash dividends in the foreseeable future.
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Item 6. Selected Consolidated Financial Data.
The following table summarizes certain selected financial data for the five
years ended January 2, 2000. The selected financial data for Registrant at
January 2, 2000 and January 3, 1999 and for each of the three years in the
period ended January 2, 2000 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 28, 1997, December 29, 1996
and December 31, 1995, and for each of the two years in the period ended
December 29, 1996, 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>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $7,951 $9,393 $11,665 $10,974 $14,839
Gross profit 4,565 4,927 6,893 6,912 8,702
Percentage of sales 57.4% 52.5% 59.1% 58.6%
Selling, general and administrative expenses 4,427 5,944 6,613 8,072 10,047
Product development expenses 741 1,179 910 1,404 2,143
Non-recurring charges (credits) (177)(1) 1,915(3)
Net gain on settlement of patent litigation - - - -
Operating income (loss) (2,043) (2,681) (453) (4,068) 523
Net loss (1,883) (2,552) (381) (4,508) (58)
Basic and diluted loss per share (5)(6) ($0.95) ($1.29) ($0.19) ($2.28) ($0.03)
Shares used in calculation of basic and diluted
loss per share (5) 1,978 1,978 1,977 1,973 1,970
Balance Sheet Data:
Cash, cash equivalents and short-term investments $3,749 $6,023 $6,549 $6,120 $8,147
Accounts receivable, net 1,210 1,437 1,925 2,899 3,225
Inventories 1,793 2,540 2,986 3,534 3,866
Total assets 8,020 16,648 19,996 21,490 24,821
Long-term debt 16 3,965 4,509 4,971 4,503
Convertible subordinated notes - 1,624 1,633 1,660 1,786
Stockholders' equity $6,722 $8,594 $11,357 $11,308 $15,690
===========================================================================================================================
</TABLE>
(1) See Note 10 of Notes to Consolidated Financial Statements.
(2) Severance and other costs associated with workforce reductions, and
facility related costs.
(3) Write-down of certain fiber inventory, intangible assets, and costs
associated with workforce reductions.
(4) Net settlement of lawsuit with Laser Industries Ltd. and its subsidiary
Sharplan Lasers, Inc.
(5) Restated for the effect of the one-for-five reverse Common Stock split
implemented on January 8, 1999.
(6) The inclusion of common share equivalents had an anti-dilutive effect when
calculating diluted loss per share, and, as a result, diluted loss per
share was equivalent to basic loss per share for each period presented.
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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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
In 1999, Registrant recorded a non-recurring charge of $1,440,000. This
non-recurring charge consisted of a $719,000 charge related to the
discontinuance of certain new product ventures and a $539,000 charge to reserve
for excess inventories, both of which affected the balance sheet as discussed in
the following two paragraphs.
In response to the discontinuance of new product ventures, certain receivables
in the amount of $663,000 were reserved. Of this amount, $364,000 related to
accounts receivable owed Registrant and were charged to the allowance for
doubtful accounts, which accounted for the increase in the allowance for
doubtful accounts balance of $351,000, to $489,000 at January 2, 2000. The
remaining receivable reserved as part of the discontinuance of new product
ventures was a note receivable owed Registrant in the amount of $291,000. This
reserve on the note receivable accounted for the majority of the $386,000
decline in Other Assets, which had a balance of $51,000 at January 2, 2000.
In Registrant's efforts to better align its inventory value with current revenue
expectations, a non-recurring charge of $539,000 was recorded in 1999 to reserve
for excess inventories. The inventory balance at January 2, 2000 was $1,793,000
as compared to the inventory balance of $2,540,000 at January 3, 1999, a
decrease of $749,000. This decrease was mainly attributable to the non-recurring
charge to reserve for excess inventories related to the discontinuance of new
product ventures.
On June 30, 1999, Registrant sold its property in Oaks, Pennsylvania. The sale
of the property accounted for the decline in property held for sale, net, on the
balance sheet at January 2, 2000 as compared to January 3, 1999.
The combined current and long-term debt was $179,000 at January 2, 2000,
compared to $6,161,000 at January 3, 1999, a decrease of $5,982,000. This
decline was mainly attributable to the buyer assuming the mortgages on the
property at the time of sale and Registrant's payment of $1,621,000 to satisfy
the maturity of the 8% subordinated notes on July 30, 1999.
Accrued liabilities of $604,000 at January 2, 2000, declined $526,000 or 47%
from accrued liabilities of $1,130,000 at January 3, 1999. This decline was
primarily attributable to reductions in legal fees and deferred laser system
service contract revenue, as well as the timing of miscellaneous liability
payments.
Net Sales
Registrant's net sales are primarily comprised of Contact Laser Delivery Systems
and related accessories and Nd:YAG Laser Systems. 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 1999, net sales were $7,951,000, a
decrease of $1,442,000, or 15%, from 1998 sales of $9,393,000. The 1998 sales of
$9,393,000 decreased $2,272,000, or 19% from 1997 sales of $11,665,000.
Net sales of disposables and related accessories, which comprised 74% of
Registrant's net sales in 1999, declined 6% and 5% in 1999 and 1998,
respectively, due to the lower level of Contact Laser(TM) Delivery System and
Accessory sales primarily within the urology market, which were offset, in part,
by increases in sales of new disposable product sales in 1999 and
instrumentation sales in 1998.
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<PAGE>
Net sales of Nd:YAG laser systems, which comprised 10% of Registrant's net sales
in 1999, decreased by 10% from 1998 on a 12% decline in units. The decrease was
caused by a 75% decline in international laser system unit sales, resulting
primarily from a decline in sales to Registrant's distributor in China. This
decrease was offset, in part, by a 46% increase in domestic laser system unit
sales, resulting primarily from Registrant's focus in the ENT and Neurosurgical
markets. In 1999, the overall average unit selling price of an Nd:YAG laser
system remained consistent as compared to 1998.
Net sales of Nd:YAG laser systems, which comprised 9% of Registrant's net sales
in 1998, decreased by 59% from 1997 on a 63% decline in units. The decrease in
laser system sales was attributable to both domestic hospital budget constraints
and to the effect of the Asian economic situation which rendered certain
distributors unable to secure funding for planned purchases. In 1998, the
overall average unit selling price of an Nd:YAG laser system increased 11% as
compared to 1997 due to increases in the selling price of new laser systems.
Registrant operates a program called Laser On Call(TM), in which it provides to
customers a per-procedure turnkey rental of its complete Contact Laser Delivery
System. Rental revenue accounted for 8%, 10% and 9% of net sales in 1999, 1998,
and 1997, respectively.
All other revenue, including contract development activities, accounted for 8%,
14% and 16% of net sales in 1999, 1998 and 1997, respectively. The decline in
other revenue in 1999 as compared to 1998 was attributable to the decrease in
contract development activities with CorMedica Corporation. In accordance with
the terms of the contract, Registrant supplied holmium lasers to CorMedica for
use in its PTER(TM) procedure (see Part I, Item I, Business). There were no
holmium lasers sales to CorMedica in 1999. Sales of holmium lasers to CorMedica
accounted for 6% of net sales in 1998.
Management will continue to invest in innovative product development and intends
to 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 stockholder value.
Gross Profit
Gross profit for the year ended January 2, 2000 decreased $362,000 or 7% from
1998. As a percentage of net sales, gross profit was 57%, an increase from 52%
in 1998. The increase in gross profits as a percentage of net sales was
primarily attributable to the inclusion of laser sales to CorMedica in 1998
which carried a lower gross profit, for which there were no comparable sales in
1999. Also contributing to the increase in gross profit as a percentage of net
sales was a 6% decrease in manufacturing expenses in 1999 as compared to 1998.
The decrease in manufacturing expenses was primarily attributed to reductions in
headcount at the end of the second quarter of 1999 in response to the
discontinuance of the CorMedica new product venture.
Gross profit for the year ended January 3, 1999 decreased $1,966,000 or 29% from
1997. As a percentage of net sales, gross profit was 52% in 1998, down from 59%
in 1997. The decrease in gross profit as a percentage of net sales resulted from
the inclusion in 1997 of initial contract development fees with no direct cost
for which there were no comparable fees in 1998.
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Operating Expenses
Selling, general and administrative expenses were $4,427,000 in 1999, compared
to $5,944,000 in 1998, a decrease of 26%. The decrease was primarily
attributable to the continuing efforts of Registrant to reduce expenses to a
level commensurate with current sales levels. In 1999, these reductions were
comprised primarily of personnel and related expense reductions.
Selling, general and administrative expenses were $5,944,000 in 1998, compared
to $6,613,000 in 1997, a decrease of 10%. The comparative decrease was due
primarily to significantly lower legal fees in 1998 due to the settlement in
1997 of two outstanding lawsuits. In 1998, Registrant reduced operating expenses
where appropriate relative to the lower level of net sales being experienced.
Product Development
Product development costs were $741,000, $1,179,000, and $910,000 in 1999, 1998
and 1997, respectively. The decrease in 1999 as compared to 1998 was due
primarily to a decrease in laser system development consulting charges
associated with the discontinuance of the CorMedica product venture. The
increase in 1998 over 1997 was due principally to increased manpower and other
expenditures associated with Registrant's private label and ENT and Neurosurgery
product development efforts.
Non-Recurring Charges (Credits)
In 1999, SLT recorded a non-recurring charge of $1,440,000. This non-recurring
charge consisted of $719,000 in charges related to the discontinuance of certain
new product ventures, a $539,000 charge to reserve for excess inventories and a
$182,000 charge for severance and related costs associated with headcount
reductions made in response to the discontinuance of the new product ventures.
In 1998, Registrant recorded a non-recurring charge related to the impending
sale of SLT's former headquarters facility in Oaks, Pennsylvania, which was
completed in June 1999. The charge consisted of a $325,000 write-down of the
asset necessitated by the terms of the sale and $160,000 in accrued closing
costs.
In 1997, Registrant recorded a benefit from the settlement of litigation with
C.R. Bard and the Bard Urological Division 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 terms under which the facility was 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.
Other Income
Other income primarily consisted of facility-related income and expense items.
Other income was $194,000 in 1999 and $407,000 in 1998, a decrease of $213,000
or 52%. The comparative decrease in other income was attributable to the sale of
Registrant's property in Oaks, Pennsylvania on June 30, 1999. Other income
increased $41,000, to $407,000 in 1998 as compared to the other income level of
$366,000 in 1997.
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Interest
Net interest expense of $34,000 in 1999 decreased $241,000 or 88% from net
interest expense of $275,000 in 1998. The comparative decrease was primarily
attributable to the elimination of mortgage interest payments as a result of the
sale of Registrant's property in Oaks, Pennsylvania on June 30, 1999. Net
interest expense in 1998 of $275,000 was relatively constant with net interest
expense of $282,000 in 1997.
Income Taxes
There was no tax provision in 1999 due to net losses incurred. The tax provision
in 1998 and 1997 of $3,000 and $12,000 respectively, was for state income taxes.
Registrant expects that its effective tax rate for 2000 will remain
significantly lower than the statutory rate due to continued availability of its
net operating loss carryforwards and tax credit carryforwards.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at January 2, 2000 were
$3,749,000, a decrease of $2,274,000 over the January 3, 1999 balance of
$6,023,000. Registrant invests its excess cash in high- quality, liquid,
short-term investments. The decrease in cash, cash equivalents and short-term
investments was primarily attributable to the maturity of Registrant's 8%
subordinated notes in the amount of $1,621,000 on July 30, 1999. Restricted cash
and cash equivalents at January 2, 2000 consisted of $45,000 held in escrow for
payment of taxes related to the sale of Registrant's property in Oaks,
Pennslyvania. Restricted cash and cash equivalents at January 3, 1999 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 on
the property in Oaks, Pennsylvania.
Registrant's $2,535,000 line of credit agreement with a bank expired on August
31, 1999. Registrant is currently seeking a new banking relationship and expects
to secure a new line of credit. Prior to the expiration of the line of credit,
the line provided for a $535,000 sub-line for letters of credit. Under its
sub-line, Registrant issued a letter of credit for $389,000 at January 3, 1999
in favor of Montgomery County Industrial Development Corporation ("MCIDC") under
the terms of the Mortgage and Security Agreement. Due to the sale of
Registrant's property in Oaks, Pennsylvania on June 30, 1999, that letter of
credit was no longer necessary. Borrowings on the line were secured by accounts
receivable and inventories and had an interest rate of the bank's prime rate
plus 1/2%. Borrowings on the line were subject to certain covenants, as defined,
with which Registrant was in compliance at all times.
In 1999, net cash used in operating activities was $437,000, which resulted
principally from losses incurred of $1,883,000 offset by net non-cash
adjustments of $2,292,000 and a decrease in accounts payable and accrued
liabilities of $884,000. The net non-cash adjustments of $2,292,000 included
non-recurring charges of $1,440,000. In 1998, net cash provided by operating
activities was $117,000, which resulted principally from losses incurred of
$2,552,000 offset by net non-cash adjustments of $1,515,000 and a decrease in
accounts receivable and inventory of $488,000 and $588,000, respectively. The
net non-cash adjustments of $1,515,000 included non-recurring charges of
$485,000.
Net cash used in investing activities was $166,000 in 1999 compared to cash
provided by investing activities of $1,741,000 in 1998. The decrease was
principally due to the maturity of certain short-term investments of $1,909,000
during 1998 compared to the purchase of certain short-term investments of
16
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$388,000 during 1999, offset in part by the cash receipt in 1999 of $398,000
from the sale of the property in Oaks Pennsylvania.
Net cash used in financing activities was $2,058,000 in 1999, compared to net
cash used in financing activities of $475,000 in 1998. The increase was the
result of Registrant's cash payment of $1,621,000 to the noteholders of
Registrant's 8% subordinated notes which matured on July 30, 1999.
Management believes that Registrant's current cash position will be sufficient
to fund operations and meet its commitments for long-term debt (see Note 8 of
Notes to Consolidated Financial Statements), other commitments and contingencies
(see Note 15 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 January 2, 2000.
Year 2000 Compliance
The Year 2000 issue related to Registrant's hardware and software programs as
well as Registrant's non-information technology, such as its telephone and
security system, did not result in any disruption of its business operations.
Registrant incurred Year 2000 costs of $8,000, which represented payment for new
software.
There were no Year 2000 related trends, such as increased purchases from
customers or changes in spending patterns, that had a material impact on the
results of operations.
As of March 15, 2000, Registrant has not encountered any material Year 2000
compliance issues with direct third parties, such as banks, service providers or
suppliers. It is not possible to state with certainty that all such third
parties are compliant, or that the operations of such third parties have not
been materially impacted by other parties with whom they themselves have a
material relationship, and who have failed to timely become Year 2000 compliant.
Consequently, it is not possible to predict whether or to what extent the Year
2000 issues may have an adverse material impact on Registrant as a result of
their impact on the operations of the third parties with whom Registrant has a
material relationship. For example, the failure to be Year 2000 compliant by a
supplier with whom Registrant has a material relationship could cause
significant disruption in Registrant's ability to submit and receive orders,
which could have a material adverse effect on Registrant's financial condition.
Registrant will continually monitor its relationships with third parties to
ensure they are Year 2000 compliant. If Registrant learns that one of these
third parties is not Year 2000 compliant, Registrant's contingency plan would
include replacing such third party.
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
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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.
Competition. Registrant faces substantial competition from conventional surgical
methods, from other manufacturers of surgical lasers and from manufacturers of
alternatives to surgical lasers. 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
18
<PAGE>
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 standards 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 sixteen
United States patents, several 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 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 on
terms satisfactory to Registrant.
Product Development and Acquisitions. 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.
Registrant seeks to expand its product offerings through both internal
development and acquisition of products and/or companies. No assurance can be
given that Registrant will be successful in carrying out
19
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an acquisition strategy or if an acquisition is made, that the acquisition will
be successfully integrated and result in increased revenues and profits.
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.
Nasdaq Listing Requirements. Registrant's Common Stock is traded on the Nasdaq
SmallCap market. In 1997, Nasdaq modified its listing requirements with which
Registrant was required to comply in order to remain listed on the Nasdaq Stock
Market. In January 1999, Registrant requested and received Nasdaq's approval to
move the market in which the Common Stock is traded from the Nasdaq National
Market to the Nasdaq SmallCap Market, due primarily to Registrant's inability to
satisfy the minimum public float requirement for the Nasdaq National Market.
Although Registrant's stock price has remained above Nasdaq's $1.00 minimum bid
requirement since the one-for-five reverse split of the Common Stock was
implemented in January 1999, no assurance can be given that the bid price of
Registrant's Common Stock will remain above the $1.00 minimum, or that
Registrant will continue to meet the other listing requirements required by the
Nasdaq SmallCap Market.
Item 8. Financial Statements and Supplementary Data. Page
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<S> <C>
Report of Independent Public Accountants................................................................. 21
Consolidated Balance Sheets at January 2, 2000 and January 3, 1999....................................... 22
Consolidated Statements of Operations for each of the three years in the period ended
January 2, 2000...................................................................................... 23
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended
January 2, 2000...................................................................................... 24
Consolidated Statements of Cash Flows for each of the three years in the period ended
January 2, 2000...................................................................................... 25
Notes to Consolidated Financial Statements............................................................... 26
Schedule II - Valuation and Qualifying Accounts.......................................................... 40
</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 January 2,
2000 and January 3, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended January 2, 2000. 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 January 2, 2000 and January 3, 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended January 2, 2000 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 21, 2000
21
<PAGE>
Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par values)
<TABLE>
<CAPTION>
Jan. 2, 2000 Jan. 3, 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 277 $ 2,938
(including restricted amounts of $45 and $100)
Short-term investments (Note 1) 3,472 3,085
Accounts receivable, net of allowance for doubtful accounts
of $489 and $138 1,210 1,437
Inventories (Note 2) 1,793 2,540
Other 51 437
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 6,803 10,437
Property and equipment, net (Note 3) 612 1,191
Property held for sale, net (Note 3) - 4,339
Patents and licensed technology, net (Note 4) 516 544
Other assets 89 137
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,020 $16,648
======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 163 $ 2,196
Accounts payable 515 763
Accrued liabilities (Note 7) 604 1,130
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,282 4,089
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 8) 16 3,965
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized,
1,978 shares issued and outstanding 20 20
Additional paid-in capital 33,033 33,033
Accumulated deficit (26,321) (24,438)
Deferred compensation (10) (21)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,722 8,594
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,020 $16,648
======================================================================================================================
</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
Jan. 2, 2000 Jan. 3, 1999 Dec. 28, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net sales $7,951 $9,393 $11,665
Cost of sales 3,386 4,466 4,772
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 4,565 4,927 6,893
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 4,427 5,944 6,613
Product development 741 1,179 910
Non-recurring charges (credits) (Note 10) 1,440 485 (177)
- ----------------------------------------------------------------------------------------------------------------------
6,608 7,608 7,346
- ----------------------------------------------------------------------------------------------------------------------
Operating loss (2,043) (2,681) (453)
Other income (194) (407) (366)
Interest expense 304 593 649
Interest income (270) (318) (367)
- ----------------------------------------------------------------------------------------------------------------------
Loss before income taxes (1,883) (2,549) (369)
Income taxes - 3 12
- ----------------------------------------------------------------------------------------------------------------------
Net loss ($1,883) ($2,552) ($381)
======================================================================================================================
Basic and diluted loss per share (Note 1) ($0.95) ($1.29) ($0.19)
======================================================================================================================
Weighted average shares used in calculation of basic and 1,978 1,978 1,977
diluted loss per share
======================================================================================================================
</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 Deferred
Stock Capital Deficit Compensation Total
--------------- --------------- ------------------ ------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 29, 1996 $20 $32,793 ($21,505) $ - $11,308
Conversion of subordinated notes to
common stock (6 shares) - 27 - - 27
Stock warrants issued (Note 9) - 403 - - 403
Net loss - - (381) - (381)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1997 20 33,223 (21,886) - 11,357
- -------------------------------------------------------------------------------------------------------------------------------
Conversion of subordinated notes to
common stock (2 shares) - 9 - - 9
Stock warrants cancelled (Note 9) - (232) - - (232)
Stock options issued for
Net loss - - (2,552) - (2,552)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1999 20 33,033 (24,438) (21) 8,594
- -------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation - - - 11 11
Net loss - - (1,883) - (1,883)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 2000 $20 $33,033 ($26,321) ($10) $6,722
===============================================================================================================================
</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
Jan. 2, 2000 Jan. 3, 1999 Dec. 28, 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss ($1,883) ($2,552) ($381)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 912 1,055 1,086
Imputed interest (15) (25) (16)
Non-recurring charges 1,440 485 847
Provision for bad debt 25 - -
Gain on sale of property held for sale (70) - -
(Increase) decrease in assets:
Accounts receivable (169) 488 974
Inventories 153 588 285
Other current assets 95 8 (310)
Other assets (41) 95 2
Increase (decrease) in liabilities:
Accounts payable (248) 251 (265)
Accrued liabilities (636) (276) (1,235)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (437) 117 987
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Sale of property held for sale 398 - -
(Purchases) sales of short-term investments (388) 1,909 (1,669)
Additions to property and equipment (144) (99) (154)
Patent costs (32) (85) (46)
(Purchase) cancellation of marketing agreement - 16 (103)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (166) 1,741 (1,972)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Payments on long-term debt (2,058) (475) (426)
Issuance of stock warrants - - 171
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,058) (475) (255)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,661) 1,383 (1,240)
Cash and Cash Equivalents, Beginning of Year 2,938 1,555 2,795
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $277 $2,938 $1,555
===================================================================================================================
</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
January 2, 2000
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.
Beginning in 1997 and continuing in 1998 and 1999, SLT expanded its product
offerings to include non-laser based products specifically targeted at the
Otolaryngology and Head and Neck and Neurosurgery (ENT and Neurosurgery)
markets. Those new product offerings include a line of reusable handheld
instruments and products for the control of bleeding and suction/irrigation.
Fiscal Year
SLT's fiscal year is the 52 or 53-week period ending the Sunday nearest to
December 31. Fiscal year 1999 included 52 weeks, fiscal year 1998 included 53
weeks, and fiscal year 1997 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:
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
(In thousands)
Cash and money market accounts $277 $ 898
Commercial paper - 1,494
Repurchase agreements - 446
Certificates of deposit-restricted - 100
- ---------------------------------------------------------------------------------------------------------------
$277 $2,938
===============================================================================================================
</TABLE>
Restricted cash at January 2, 2000 consisted of $45,000 held in escrow for
payment of taxes related to the sale of SLT's property in Oaks, Pennsylvania
(see Note 3). Restricted cash and cash equivalents at January 3, 1999 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 on
the property held for sale (see Note 8).
26
<PAGE>
Short-term Investments
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), 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 only in 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 January 2, 2000 or January 3,
1999. 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:
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
(In thousands)
U.S. Government securities $1,207 $1,731
U.S. corporate debt securities 772 1,354
Commercial paper 884 -
Certificates of deposit 360 -
Asset backed securities 249 -
- -------------------------------------------------------------------------------------------------
$3,472 $3,085
=================================================================================================
</TABLE>
The estimated fair value of short-term investments at January 2, 2000 due in one
year and due after one year was $2,916,000 and $556,000, 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 3
to 10 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 $788,000 in 1999, $974,000 in 1998 and $961,000 in 1997.
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 raw 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). As of January 2, 2000, there are no capitalized
litigation costs recorded.
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 consolidated 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 consolidated
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 $298,000, $593,000 and $649,000 in 1999, 1998 and 1997,
respectively. There were no income taxes paid in 1999 due to net losses
incurred. Income taxes paid in 1998 and 1997 were immaterial.
In connection with the sale of SLT's property in Oaks, Pennsylvania, (see Notes
3 and 8), the mortgages, having a balance of $3,922,000 at the time of the sale,
were assumed by the buyer.
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 earnings 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
28
<PAGE>
or converted 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 January 2, 2000, January 3, 1999 and December 28, 1997, SLT
has reported earnings per share on the face of the income statement. SLT had
common stock options and common stock warrants outstanding of 399,000, 395,000,
513,000 at January 2, 2000, January 3, 1999 and December 28, 1997, respectively.
Due to SLT's net loss position in 1999, 1998 and 1997, 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. All earnings per share calculations have been restated for the effect of
the one-for-five reverse Common Stock split implemented on January 8, 1999, (see
Note 6).
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 1999, 1998 or
1997, except as discussed in Note 10.
Note 2
Inventories:
(In thousands)
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Raw materials and work-in-process (see Note 10) $1,023 $1,691
Finished goods 770 849
- -----------------------------------------------------------------------------------------------------------------------
$1,793 $2,540
=======================================================================================================================
</TABLE>
Note 3
Property and Equipment and Property Held for Sale:
(In thousands)
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Property and equipment:
Furniture and office equipment $3,690 $3,608
Machinery and equipment 2,538 2,588
Demonstration equipment 401 419
Leasehold improvements 109 165
- -----------------------------------------------------------------------------------------------------------------------
6,738 6,780
Less-Accumulated depreciation and amortization (6,126) (5,589)
- -----------------------------------------------------------------------------------------------------------------------
Property and equipment, net $612 $1,191
=======================================================================================================================
</TABLE>
At January 2, 2000 and January 3, 1999, net property and equipment included
$22,000 and $150,000 respectively, for assets recorded under capitalized lease
arrangements. The related lease obligation of $179,000 and $494,000, was
included in long-term debt at January 2, 2000 and January 3, 1999, respectively
(see Note 8).
29
<PAGE>
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Property held for sale:
Building held for sale $ - $5,722
Land held for sale - 750
- -------------------------------------------------------------------------------------------------------
- 6,472
Less: Accumulated depreciation and amortization - (2,133)
- -------------------------------------------------------------------------------------------------------
Property held for sale, net $ - $4,339
=======================================================================================================
</TABLE>
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 July 1996, SLT entered into
an agreement to sublease the owned facility in Oaks, Pennsylvania for three
years. The agreement provided for a purchase option. 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. The net
property held for sale included non-recurring charges of $325,000 in 1998 (see
Note 10).
On June 30, 1999, SLT sold the property to the subleassee. At the time of the
sale, the property had a cost basis of $6,427,000 and accumulated depreciation
of $2,235,000. In connection with the sale, the mortgages having a balance at
June 30, 1999 of $3,922,000 were assumed by the buyer (see Note 8). The cash
payment received by SLT at the time of sale was $398,000, which included $45,000
of restricted cash held in escrow for payment of certain taxes.
Note 4
Patents and Licensed Technology:
(In thousands)
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Patents, net of accumulated amortization of $561 and $482 $484 $530
Licensed technology, net of accumulated amortization of $7 and $9 32 14
- ---------------------------------------------------------------------------------------------------------------------
$516 $544
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5
Common Stock Reverse Split:
On January 8, 1999, following Board of Director and stockholder approval, SLT
amended its Restated Certificate of Incorporation to effect a one-for-five
reverse split of the shares of SLT's Common Stock. All stockholders owning five
or more shares of SLT's Common Stock at the effective date received one share of
Common Stock in replacement for each five shares they held prior to the reverse
split. For those conversions resulting in fractional shares and for each
stockholder owning fewer than five common shares at the effective date, the
stockholder was entitled to receive cash in lieu of a fractional share at $0.41
per pre-split share. Par value of the Common Stock remained unchanged at $0.01
For all periods presented, references to the number of common shares, stock
options, stock warrants and earnings per share amounts in the consolidated
financial statements and related footnotes have been restated as appropriate to
reflect the effect of the reverse split.
30
<PAGE>
Note 6
Short-Term Borrowings:
SLT's $2,535,000 line of credit agreement with a bank expired on August 31,
1999. SLT is currently seeking a new banking relationship and expects to secure
a new line of credit. Prior to the expiration of the line of credit, the line
provided for a $535,000 sub-line for letters of credit. Under its sub-line, SLT
issued a letter of credit for $389,000 at January 3, 1999 in favor of Montgomery
County Industrial Development Corporation ("MCIDC") under the terms of the
Mortgage and Security Agreement. Due to the sale of SLT's property in Oaks,
Pennsylvania on June 30, 1999, that letter of credit was no longer necessary.
Borrowings on the line were secured by accounts receivable and inventories and
had an interest rate of the bank's prime rate plus 1/2%. Borrowings on the line
were subject to certain covenants, as defined, with which SLT was in compliance.
Note 7
Accrued Liabilities:
(In thousands)
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Facility related accruals (see Note 10) $166 $ 482
Deferred revenues 124 225
Accrued compensation 169 205
Other 145 218
- ------------------------------------------------------------------------------------------------------
$604 $1,130
======================================================================================================
</TABLE>
Note 8
Long-term Debt:
(In thousands)
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
<S> <C> <C>
Mortgage loans on property held for sale (see Note 3) $ - $4,043
Convertible subordinated notes - 1,624
Capital lease obligations (see Note 3) 179 494
- -----------------------------------------------------------------------------------------------------------
179 6,161
Less: Current portion (163) (2,196)
- -----------------------------------------------------------------------------------------------------------
$ 16 $3,965
===========================================================================================================
</TABLE>
At January 2, 2000 and January 3, 1999, the estimated fair value of long-term
debt described above was approximately the same as the carrying amount of such
debt.
On June 30, 1999, SLT sold its property in Oaks, Pennsylvania. In connection
with the sale, the mortgages, having a balance on June 30, 1999 of $3,922,000,
were assumed by the buyer (see Note 3).
On July 30, 1999, SLT's 8% subordinated notes matured and, as a result, SLT paid
$1,621,000 to the noteholders to satisfy the remaining principal balance
outstanding. The notes were issued as part of a settlement of certain
stockholders class-action litigation against SLT and certain directors and
officers in 1992. The notes were convertible at the option of the holders into
shares of SLT's Common Stock at a conversion price of $22.50, as adjusted for
the one-for-five reverse Common Stock split (see Note 5), and may have been
prepaid, without penalty, if the fair value of SLT's common stock exceeded 125%
of the conversion price for a specified period.
31
<PAGE>
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).
Future minimum payments for property under capital leases are as follows (in
thousands of dollars):
Year Amount
- -------------------------------------------------------------------------------
2000 $174
2001 10
2002 9
- -------------------------------------------------------------------------------
Total minimum lease obligation 193
Less: Interest (14)
- -------------------------------------------------------------------------------
Present value of total minimum lease obligation $179
===============================================================================
Note 9
Common Stock Options and Common Stock Warrants:
Common Stock Options:
All common stock option and warrant information presented in this note,
including the number and prices of options and warrants, has been restated for
the effect of the one-for-five reverse split of Common Stock implemented on
January 8, 1999 (see Note 5).
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 482,365 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 January 2, 2000, these plans had options to purchase no shares of
common stock outstanding and exercisable.
On December 31, 1997, options to purchase 79,520 shares of common stock were
forfeited. SLT has presented all option disclosures as if these options had been
forfeited on December 28, 1997, its fiscal year end.
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 $52,000, $323,000 and $294,000 for the years ended January 2,
2000, January 3, 1999 and December 28, 1997 respectively. SLT's net loss per
share would have been increased by approximately $0.03, $0.16 and $0.15 for the
years ended January 2, 2000, January 3, 1999, and December 28, 1997,
respectively.
The per share fair value of options granted during the years ended January 2,
2000, January 3, 1999 and December 28, 1997, was estimated at $0.81, $2.93 and
$3.13, respectively. There were no options granted below market or above market
during the three years. The fair value of each option grant was
32
<PAGE>
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rate of 5.56%,
5.56% and 6.35% for 1999, 1998 and 1997 grants, respectively; an expected life
of five years, five years, and eight years for 1999, 1998 and 1997 grants,
respectively; dividend yield of zero for all grants; and volatility of 50.6%,
49.5% and 47.6% for 1999, 1998 and 1997 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 January 2, 2000:
<TABLE>
<CAPTION>
Option Average
Shares Price Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding options at December 29, 1996 384,129 $6.25-75.00 $18.55
Granted 101,800 5.65-9.55 7.15
Forfeited (192,099) 5.95-75.00 20.30
- --------------------------------------------------------------------------------------------------------
Outstanding options at December 28, 1997 293,830 5.65-75.00 13.45
Granted 49,200 1.72-7.03 5.86
Forfeited (38,168) 1.72-75.00 15.47
- --------------------------------------------------------------------------------------------------------
Outstanding options at January 3, 1999 304,862 2.03-75.00 11.98
Granted 105,700 1.56-2.50 1.60
Forfeited (102,012) 1.63-75.00 8.83
- --------------------------------------------------------------------------------------------------------
Outstanding options at January 2, 2000 308,550 $1.56-75.00 $9.46
========================================================================================================
</TABLE>
At January 2, 2000, there were 168,099 options vested and exercisable and
173,815 options were available for grant. The following table summarizes the
options outstanding and exercisable by price range at January 2, 2000:
<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> <C>
$1.56-$1.63 96,900 9.52 $1.59 - $ -
2.03-6.25 69,700 7.09 5.76 49,004 5.95
7.03-12.50 71,200 6.61 8.53 49,725 9.02
13.13-32.50 63,690 3.80 21.76 62,310 21.95
52.08-75.00 7,060 0.37 52.60 7,060 52.60
- --------------------------------------------------------------------------------------------------------------------
$1.56-$75.00 308,550 6.91 $9.46 168,099 $14.75
====================================================================================================================
</TABLE>
33
<PAGE>
Common Stock Warrants:
During 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.
In accordance with the terms of the agreement with MedTREK, SLT issued 300,000
stock warrants to MedTREK in 1997. The value of the warrants at December 28,
1997 was $232,000. During 1998, SLT concluded that certain products under the
agreement would not be commercialized and that it was improbable that the
predetermined revenue targets necessary to vest the warrants would be achieved.
Therefore, in December 1998, SLT wrote-off the value of the warrants.
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 40,000 shares of SLT's common stock with an exercise price of $10.00
per share. In December 1997, SLT issued an additional warrant to purchase 40,000
shares of common stock with an exercise price of $10.00 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 January 2, 2000, 80,000 warrants were exercisable
for an exercise price of $10.00.
Note 10
Non-recurring Items:
In 1999, SLT recorded a non-recurring charge of $1,440,000. This non-recurring
charge consisted of $719,000 in charges related to the discontinuance of certain
new product ventures, a $539,000 charge to reserve for excess inventories and a
$182,000 charge for severance and related costs associated with headcount
reductions made in response to the discontinuance of the new product ventures.
The 1998 non-recurring charge represented costs on the impending sale of SLT's
former headquarters facility in Oaks, Pennsylvania, which was completed in June
1999. The charge consisted of a $325,000 write-down of the facility (see Note 3)
necessitated by the terms of the then impending sale and $160,000 in accrued
closing costs (see Note 7).
In 1997, SLT recorded non-recurring credits of $177,000, which was the net
effect of recording a benefit of $1,000,000 from the settlement of litigation,
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 terms under which the facility was 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.
Note 11
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 3% of the employee's compensation. SLT did not make
matching contributions in 1999, 1998 or 1997.
34
<PAGE>
Note 12
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 consolidated financial statements or tax returns.
SLT recorded provisions of $0, $3,000, and $12,000 in 1999, 1998 and 1997,
respectively. The provisions were for certain state income taxes; none was for
federal alternative minimum taxes ("AMT"). No provision was recorded in 1999 due
to losses incurred. Any other provisions, including accrual adjustments for
prior periods, were completely offset by changes in the deferred tax valuation
allowance, primarily due to the utilization of operating loss carryforwards.
Income tax expense consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal including AMT tax
Current $ - $ - $ -
Deferred (711) (995) (253)
State
Current - 3 12
Deferred (50) (69) (45)
- -------------------------------------------------------------------------------------------
(761) (1,061) (286)
Change in valuation allowance 761 1,064 298
- -------------------------------------------------------------------------------------------
Income tax expense $ - $ 3 $ 12
===========================================================================================
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected federal tax expense (benefit) at 34% rate ($640) ($867) ($125)
Change in valuation allowance 761 1,064 298
Other, at 34% rate (121) (197) (173)
State income tax - 3 12
- --------------------------------------------------------------------------------------------
Income tax expense $ - $ 3 $ 12
============================================================================================
</TABLE>
As of January 2, 2000, SLT had approximately $25,068,000 of federal net
operating loss carryforwards, which begin to expire in 2001. Included in the
aggregate net operating loss carryforwards are $6,829,000 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 $877,000 of federal tax credit
carryforwards. The carryforwards began to expire in 1999
35
<PAGE>
and will continue to expire in 2000 and thereafter. Net deductible temporary
differences were approximately $5,959,000 at January 2, 2000.
The changes in the deferred tax asset are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance, gross $11,382 $10,318
Net changes due to:
Operating loss carryforwards, value at 35% 488 689
Temporary differences, valued at 40% 243 325
Carryforward & AMT credits 30 50
- -------------------------------------------------------------------------------------------------
Ending balance, gross 12,143 11,382
Less: valuation allowance 12,143 11,382
- -------------------------------------------------------------------------------------------------
Ending balance, net $ - $ -
=================================================================================================
</TABLE>
The ending balances of the deferred tax asset have also been fully reserved,
reflecting the uncertainties as to realizability evidenced by SLT's historical
results and the general market conditions being experienced.
Deferred tax assets (liabilities) are comprised of the following (in thousands
of dollars):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets:
Temporary differences, @40%
Bad debts $ 404 $ 160
Building loss - 415
Deferred R&D costs 993 1,022
Deferred revenues 50 90
Depreciation 134 -
Inventoriable costs 12 37
Inventory reserves 386 316
Legal costs 248 308
Relocation reserve 67 129
Severance 7 11
Warranty 4 9
Misc. temporary differences 78 42
Loss carryforwards @35% 8,774 8,285
Carryforward & AMT credits 986 956
- ------------------------------------------------------------------------------------------------
Gross deferred tax assets 12,143 11,780
- ------------------------------------------------------------------------------------------------
Liabilities:
Depreciation @ 40% - (398)
- -------------------------------------------------------------------------------------------------
Gross deferred tax liabilities - (398)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset 12,143 11,382
Deferred net tax asset, valuation allowance (12,143) (11,382)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset, after valuation $ - $ -
==================================================================================================
</TABLE>
36
<PAGE>
The average federal and state income tax rate (net of federal benefit) used to
value operating loss carryforwards is 35%, due principally to more stringent
usage requirements for loss carryforwards in the Commonwealth of Pennsylvania.
Note 13
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 1999, 1998 and 1997, the firm's legal fees
were approximately $69,000, $58,000 and $324,000 respectively.
During 1994, SLT entered into a License Agreement with Fuller Research
Corporation for certain fiber delivery system technology. The principal
stockholder of Fuller Research Corporation 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 in royalties under the terms of the license agreement
in 1997. 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 Group 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. SLT's sales to
Kontron Instruments Group were $10,000, $53,000 and $112,000 for the fiscal
years ended January 2, 2000, January 3, 1999 and December 28, 1997,
respectively. Accounts receivable from sales to Kontron Instruments Group was
$31,000 at January 2, 2000 and January 3, 1999. A member of SLT's Board of
Directors served as Chief Executive Officer of Kontron Instruments Holding, N.V.
until December 1998.
Note 14
Business Segment and Geographic Data:
SLT is engaged primarily in one business segment: the design, development,
manufacture and marketing of laser products and other instruments for medical
applications. SLT's customers are primarily hospitals and medical centers. For
the years 1999, 1998, and 1997, SLT did not have material net sales to any one
individual customer.
SLT reports net sales in the following categories (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Disposables and accessories $5,910 $6,310 $6,651
Laser system sales, service and rental 2,041 3,083 4,042
Other - - 972
---------------------------------------------------------------------------------------------
Total net sales $7,951 $9,393 $11,665
=============================================================================================
</TABLE>
For the years 1999, 1998 and 1997, there were no material net sales attributed
to an individual foreign country. Net sales by geographic areas are as follows
(in thousands of dollars):
37
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic $7,043 $8,184 $9,822
Foreign 908 1,209 1,843
-----------------------------------------------------------------------------
Total Net Sales $7,951 $9,393 $11,665
=============================================================================
</TABLE>
Note 15
Commitments and Contingencies:
SLT leases office space and equipment under various non-cancelable operating
leases. For fiscal 1999, 1998 and 1997, rental payments were $511,000, $540,000,
and $564,000, respectively, and related primarily to facilities in
Montgomeryville, 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 10). Future minimum rental payments under operating leases
are as follows (in thousands of dollars):
2000 2001
--------------------------------------------------------------------------
Minimum rental payments $410 $106
Less: Sublease payments (40) -
--------------------------------------------------------------------------
Net rental payments $370 $106
==========================================================================
SLT has severance agreements with certain key executives and employees 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 2000 under these executive severance agreements, should all covered
executives and employees be terminated other than for cause, was approximately
$492,000 at January 2, 2000. Should all covered executives be terminated
following a change in control of SLT, the aggregate commitment under these
executive severance agreements at January 2, 2000 was approximately $337,000.
38
<PAGE>
Note 16
Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
For the Quarter Ended
(In thousands, except per share)
- ----------------------------------------------------------------------------------------------------------------
1999 April 4 July 4 Oct 3 Jan 2
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $2,262 $1,970 $1,915 $1,804
Gross profit 1,291 1,086 1,123 1,065
Net income (loss)(1) (277) (1,715) 47 62
Basic and diluted earnings (loss) per share ($0.14) ($0.87) $0.02 $0.03
- ----------------------------------------------------------------------------------------------------------------
1998 March 29 June 28 Sept. 27 Jan. 3
- ----------------------------------------------------------------------------------------------------------------
Net sales $2,367 $2,284 $2,200 $2,542
Gross profit 1,326 1,246 1,186 1,169
Net loss (2) (461) (527) (527) (1,037)
Basic and diluted loss per share ($0.23) ($0.27) ($0.27) ($0.52)
- ----------------------------------------------------------------------------------------------------------------
1997 March 30 June 29 Sept. 28 Dec. 28
- ----------------------------------------------------------------------------------------------------------------
Net sales $3,073 $2,904 $3,007 $2,681
Gross profit 1,728 1,631 1,910 1,624
Net income (loss) (3) (197) (282) 47 51
Basic and diluted earnings (loss) per share ($0.10) ($0.14) $0.02 $0.03
</TABLE>
(1) Includes a non-recurring charge of $1,440,000 for the quarter ended July 4,
1999 (see Note 10).
(2) Includes a non-recurring charge of $485,000 for the quarter ended January
3, 1999 (see Note 10).
(3) Includes a non-recurring credit of $177,000 for the quarter ended September
28, 1997 (see Note 10).
For all periods presented, basic and diluted earnings (loss) per share has been
computed under the guidelines of SFAS No. 128 (see Note 1) and has been restated
for the effect of the January 8, 1999 one-for-five reverse Common Stock split
(see Note 5). 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.
39
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions Charged to
<S> <C> <C> <C> <C> <C>
Balance at
Beginning of Cost and Other Balance at End
Description Period Expenses Accounts Deductions (1) of Period
- ---------------------------------------------------------------------------------------------------------------------
(In thousands)
FOR THE YEAR ENDED JANUARY 2,
2000
Reserve for Doubtful Accounts $138 $431 $4 $84 $489
====================================================================================================================
FOR THE YEAR ENDED JANUARY 3,
1999
Reserve for Doubtful Accounts $155 - - $17 $138
====================================================================================================================
FOR THE YEAR ENDED DECEMBER 28,
1997
Reserve for Doubtful Accounts $116 $ 73 - $34 $155
====================================================================================================================
</TABLE>
(1) Represents write-offs of specific accounts receivable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not applicable.
40
<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,
2000 is as follows:
<TABLE>
<CAPTION>
Name Age Positions held with Registrant
- ---- ---- -------------------------------
<S> <C> <C>
Michael R. Stewart 42 President and Chief Executive Officer, Vice President,
Finance and Chief Financial Officer
Davis Woodward 53 Chief Financial Officer, Vice President, Legal & Tax Affairs
and Secretary
</TABLE>
Michael R. Stewart has served as President and Chief Executive Officer since
July 1999. From October 1990 to July 1999, Mr. Stewart served as Vice President
and Chief Financial Officer.
Davis Woodward has served as Vice President and Chief Financial Officer since
October 1999 and served as Vice President, Legal & Tax Affairs from January 1995
until October 1999. 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.
Directors
The names of the Directors, and certain information about them as of March 15,
2000, are set forth below.
<TABLE>
<CAPTION>
Name of Director Age Principal Occupation Director Since
- ---------------- --- -------------------- --------------
<S> <C> <C> <C>
Richard J. DePiano............. 58 Chairman and Chief Executive Officer of Escalon 1986
Medical Corporation
Sheldon M. Bonovitz............ 62 Chairman and Partner, Duane, Morris & Heckscher LLP, 1985
Counsel to Registrant
Jay L. Federman................ 62 Ophthalmologist and attending Surgeon and Co-Director 1987
Director of Research, Wills Eye Hospital and Chief of
Ophthalmology at Medical College of Pennsylvania
Vincenzo Morelli............... 45 Former Chief Executive of Kontron Instruments 1995
Holding, N.V. and presently working as a European
advisor to Clayton, Dubilier and Rice
Michael R. Stewart............. 42 President and Chief Executive Officer of Registrant 1999
</TABLE>
Directors will serve until the 2000 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.
41
<PAGE>
Richard J. DePiano has served as the Chairman of the Board of Directors of
Registrant since July 1995. Since March 1997, Mr. DePiano has served as Chairman
and Chief Executive Officer of Escalon Medical Corp., of which he is also a
director. Mr. DePiano has been the Chief Executive Officer of The Sandhurst
Company, L.P. and the Managing Director of The Sandhurst Venture Fund since
1986.
Sheldon M. Bonovitz has 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, Premier Research Worldwide, Ltd. and
eResearchTechnology, Inc.
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. and Chief of
Ophthalmology at the Medical College of Pennsylvania.
Vincenzo Morelli served as Chief Executive Officer of Kontron Instruments
Holding N.V. from 1993 until December 1998. Mr. Morelli is presently working as
a European advisor to Clayton, Dubilier and Rice, a private equity firm.
Michael R. Stewart has served as President and Chief Executive Officer since
July 1999. Prior to Mr. Stewart's appointment as President and Chief Executive
Officer, he served as Registrant's Vice President and Chief Financial Officer
since October 1990.
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 each Outside
Directors receives options to purchase 6,000 shares every three years, provided
that if the Outside Director served as Chairman throughout the prior three-year
period, the option will be for 9,000 shares, and each person who becomes an
Outside Director in the future will receive options to purchase 6,000 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 9,000 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. The options are 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.
42
<PAGE>
An aggregate 77,000 shares of Common Stock are currently reserved for issuance
under the Outside Director Plan, of which 1,800 shares have been exercised and
69,600 shares are subject to outstanding options.
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 January 2, 2000,
January 3, 1999 and December 28, 1997 to the chief executive officers of
Registrant and the other executive officers of Registrant whose annual salary
and bonus in 1999 exceeded $100,000.
43
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards All Other
Name & Principal Position Year Salary ($) Options Compensation
- ------------------------- ---- ---------- ------- ------------
(#)(1) ($)(2)
------ ------
<S> <C> <C> <C> <C>
W. Keith Stoneback (3) 1999 $123,750 - $117,163(5)
President, Chief Executive 1998 229,327 - 4,905
Officer and Director 1997 225,000 10,000(4) 38,275(6)
Michael R. Stewart (7) 1999 169,507 50,000 643
President, Chief Executive 1998 153,932 - 643
Officer and Director 1997 143,843 5,000(4) 643
Davis Woodward (8) 1999 132,384 27,500(9) 1,285
Vice President, Chief Financial 1998 127,392 - 1,285
Officer 1997 119,664 4,000(4) 1,285
</TABLE>
- ------------
(1) Prior years data restated for the effect of the one-for-five reverse Common
Stock split implemented on January 8, 1999.
(2) Except as noted in footnotes 5 and 6, represents payments of premiums for
certain supplementary life insurance coverage.
(3) Mr. Stoneback served as President, Chief Executive Officer and a Director
from August 1996 to July 1999.
(4) These options were granted in 1998 for services rendered in 1997.
(5) Includes $111,202 in severance payments made by Registrant to Mr. Stoneback
pursuant to the terms of his Severance Agreement.
(6) Includes $32,314 in moving and relocation payments made by Registrant to
Mr. Stoneback pursuant to the terms of his Employment Agreement.
(7) Mr. Stewart was appointed President and Chief Executive Officer in July
1999. Prior to his appointment as President and Chief Executive Officer,
Mr. Stewart served as Registrant's Vice President and Chief Financial
Officer.
(8) Mr. Woodward was appointed Vice President and Chief Financial Officer in
October 1999. Prior to his appointment as Chief Financial Officer, Mr.
Woodward served as Registrant's Vice President, Legal and Tax Affairs.
(9) These options were granted in 2000 for services rendered in 1999.
The following table sets forth information with respect to options granted
during the fiscal year ended January 2, 2000 to the persons named in the Summary
Compensation Table above.
44
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
Options at Assumed Annual Rates
Granted to of Stock Price Appreciation
Employees for Option Term
Options In Fiscal Exercise ---------------------------
Name Granted(#) Year Price Expiration Date 5% 10%
- ---- ---------- ---- ----- --------------- --- ----
<S> <C> <C> <C> <C> <C> <C>
Michael R. Stewart 50,000 47.3% $1.56 October 5, 2009 $49,133 $124,511
</TABLE>
The following table sets forth information with respect to options held at
January 2, 2000 by the persons named in the Summary Compensation Table above. No
options were exercised by such persons during the fiscal year ended January 2,
2000. No outstanding options were in the money at January 2, 2000. If
applicable, the information presented in the following table was restated for
the effect of the one-for-five reverse Common Stock split implemented on January
8, 1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Options
at Fiscal Year End
----------------------------------------------
<S> <C> <C>
Name Exercisable Unexercisable
---- ----------- -------------
Michael R. Stewart 27,272 59,668
Davis Woodward 22,106 7,334
</TABLE>
Employment and Other Agreements
Effective July 1999, Mr. Stoneback resigned as Registrant's President and Chief
Executive Officer. Mr. Stoneback received as severance benefits his base salary,
auto allowance, health, disability and executive life insurance until December
31, 1999.
In October 1999, Registrant entered into an employment agreement with Michael R.
Stewart pursuant to which Mr. Stewart will serve as Registrant's President and
Chief Executive Officer through December 31, 2000 and, thereafter, for
successive one-year terms absent at least three months' prior written notice of
termination by either party. Mr. Stewart's annual base salary under the
agreement is $185,000 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 1999 bonus program. If Mr.
Stewart'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. Stewart will be entitled to severance benefits
equal to continuation of his base
45
<PAGE>
salary, health, disability and life insurance for a one-year period and the
right to exercise options which are not then exercisable for a period equal to
the lesser of one year from the date of termination for all options granted
after 1996 and five years from the date of termination for all options granted
before 1997 or the original term of such options. If Mr. Stewart's employment is
terminated without cause within two years following a change in control or if
Mr. Stewart resigns his employment within two years after a change in control
following (a) the relocation of Mr. Stewart's principal business location by
more than 35 miles, (b) a significant reduction in Mr. Stewart's duties and
responsibilities from those existing prior to the change in control or (c) a
reduction in Mr. Stewart's then-current base salary, Mr. Stewart will be
entitled to severance benefits equal to continuation of his base salary and his
health, disability and life insurance for a one year period and the right to
exercise any options granted under the agreement which are not otherwise
exercisable for a period equal to the lesser of one year from the date of
termination for all options granted after 1996 and five years from the date of
termination for all options granted before 1997 or the original term of such
options. Mr. Stewart was also granted under the agreement options to purchase
50,000 shares of Registrant's Common Stock at the market price. Registrant
provides long-term disability insurance equal to 60% of Mr. Stewart'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. Stewart 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 Mr. 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. Mr. 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. Mr. Woodward is
entitled to continue receiving his respective base salary for a period of 12
months under such circumstances. In addition, under such circumstances, Mr.
Woodward is also entitled to continue receiving the aforementioned insurance
coverages for a period of 12 months, and all unvested options which he holds
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, 2000, 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>
Steven T. Newby..................................... 183,000 (1) 9.28%
6116 Executive Blvd.
Rockville, MD 20852
Kontron Instruments Holding N.V..................... 139,130 7.03%
Julianaplein 22
Curacao, Netherlands Antilles
</TABLE>
- ------------
(1) Information furnished by stockholder as of January 31, 2000
46
<PAGE>
Security Ownership of Management
The following table sets forth the beneficial ownership of the Common Stock of
Registrant as of March 15, 2000 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 .................................................. 62,539 (1) 3.14%
Davis Woodward ................................................... 51,688 (2) 2.58%
Richard J. DePiano ............................................... 46,450 (3) 2.31%
Michael R. Stewart ............................................... 35,359 (4) 1.76%
Sheldon M. Bonovitz .............................................. 27,473 (5) 1.38%
Vincenzo Morelli ................................................. 14,000 (6) *
All directors and executive officers as a group (6 persons)....... 237,509 (7) 11.23%
</TABLE>
- ------------
* Less than one percent.
(1) Includes 15,700 shares which Dr. Federman has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 2000
and 2,499 shares owned by Dr. Federman's child. Dr. Federman disclaims
beneficial ownership of such 2,499 shares.
(2) Includes 26,906 shares which Mr. Woodward has the right to purchase under
outstanding stock options exercisable within 60 days after March 15, 2000.
(3) Includes 31,450 shares which Mr. DePiano has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 2000.
(4) Includes 34,073 shares which Mr. Stewart has the right to purchase under
outstanding stock options exercisable within 60 days after March 15, 2000.
(5) Includes 19,450 shares which Mr. Bonovitz has the right to acquire under
outstanding stock options exercisable within 60 days after March 15, 2000
and 2,923 shares owned by a trust of which Mr. Bonovitz is trustee for the
benefit of Mr. Bonovitz' child. Mr. Bonovitz disclaims beneficial ownership
of such 2,923 shares. Also includes 5,100 shares owned by a pension trust
of which Mr. Bonovitz is the beneficiary.
(6) Includes 3,000 shares held of record by Olive Branch Corp., a Liberian
corporation controlled by members of Mr. Morelli's family. Mr. Morelli
disclaims beneficial ownership of such shares. Also includes 10,000 shares
which Mr. Morelli has the right to purchase under outstanding stock options
exercisable within 60 days after March 15, 2000.
(7) Includes 137,579 shares which such persons have the right to purchase under
stock options exercisable within 60 days after March 15, 2000.
47
<PAGE>
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) 1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheets at January 2, 2000 and January 3, 1999................................22
Consolidated Statements of Operations for each of the three years in the
period ended January 2, 2000...................................................................23
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended January 2, 2000...................................................................24
Consolidated Statements of Cash Flows for each of the three years in the
period ended January 2, 2000...................................................................25
Notes to Consolidated Financial Statements........................................................26
Report of Independent Public Accountants..........................................................21
2. Financial Statement Schedules Page
----
Schedule II - Valuation and Qualifying Accounts for the three years in the period
ended January 2, 2000..........................................................................40
</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 January 2, 2000.
48
<PAGE>
(c) Exhibits
Exhibit Number Description of Exhibit
- -------------- -----------------------
3.1 Restated Certificate of Incorporation of Registrant as amended,
incorporated by reference to Exhibit 3.1 filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended January 3, 1999 filed on
April 1, 1999 ("the 1998 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 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").
10.2* 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").
10.3* 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 ("the 1996 Form S-8").
10.4* 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").
10.5 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").
10.6* 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").
10.7 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 incorporated by reference to Exhibit 10.9 filed
with Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1997, filed on March 25, 1998 ("the 1997 Form 10-K").
10.8 Agreement of Sale dated November 25, 1998, between Lenfest Oaks, Inc.
(an affiliate of Suburban Cable TV Co. Inc.) and SLT Properties, Inc.,
incorporated by reference to Exhibit 10.10 filed with the 1998 Form
10-K.
49
<PAGE>
10.9 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.
10.10 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; as amended by Letter Agreement dated November 5, 1997
from CoreStates Bank (successor to Meridian Bank) to Registrant,
incorporated by reference to Exhibit 10.15 filed with Registrant's 1997
Form 10-K; and as further amended by Letter Agreement dated March 17,
1999 from First Union Corporation (successor to CoreStates Bank) to
Registrant incorporated by reference to Exhibit 10.15 filed with
Registrant's 1998 Form 10-K.
10.11* 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
50
<PAGE>
10.16 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.
10.17 $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, incorporated by reference to Exhibit 10.47 filed
with Registrant's 1995 Form 10-K/A, as amended by an Amendment dated
December 24, 1997 incorporated by reference to Exhibit 10.47 filed with
Registrant's 1997 Form 10-K; as further amended by Amendment dated
December 28, 1998, incorporated by reference to Exhibit 10.45 filed
with Registrant's 1998 Form 10-K.
10.18 Termination of Lease, dated June 29, 1999 and effective June 30, 1999,
between Registrant and SLT Properties, Inc., incorporated by reference
to Exhibit 10.50 filed with Registrant's Form 10-Q for the fiscal
quarter ended July 4, 1999 filed on August 16, 1999 ("the Second
Quarter 1999 Form 10-Q").
10.19 Assumption and Assignment Agreement, dated June 28, 1999 and effective
June 30, 1999, among Montgomery County Industrial Development
Corporation, Pennsylvania Industrial Development Authority, Lenfest
Oaks, Inc., and SLT Properties, Inc., incorporated by reference to
Exhibit 10.51 filed with the Second Quarter 1999 Form 10-Q.
10.20 Assumption Agreement, dated June 28, 1999 and effective June 30, 1999,
among American United Life Insurance Company, Montgomery County
Industrial Development Corporation, Lenfest Oaks, Inc., SLT Properties,
Inc. and Registrant, incorporated by reference to Exhibit 10.52 filed
with the Second Quarter 1999 Form 10-Q.
10.21 Consent, Subordination and Assumption Agreement, dated June 28, 1999,
among Pennsylvania Industrial Development Authority, Montgomery County
Industrial Development Corporation, Lenfest Oaks, Inc., Suburban Cable
TV Co. Inc., SLT Properties, Inc. and Registrant, incorporated by
reference to Exhibit 10.53 filed with the Second Quarter 1999 Form
10-Q.
10.22 Termination of Assignment of Lease Agreement, dated June 23, 1999 and
effective June 30, 1999, among Pennsylvania Industrial Development
Authority, SLT Properties, Inc. and Registrant, incorporated by
reference to Exhibit 10.54 filed with the Second Quarter 1999 Form
10-Q.
10.23 Termination of Sublease Agreement, dated June 29, 1999 and effective
June 30, 1999, between Suburban Cable TV Co. Inc. and Registrant,
incorporated by reference to Exhibit 10.55 filed with the Second
Quarter 1999 Form 10-Q.
10.24* Severance Agreement, dated July 21, 1999, between W. Keith Stoneback
and Registrant, incorporated by reference to Exhibit 10.56 filed with
the Second Quarter 1999 Form 10-Q.
10.25* Employment Agreement dated October 5, 1999, between Registrant and
Michael R. Stewart.
51
<PAGE>
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, January 2, 2000.
* This exhibit represents a management contract or compensatory plan or
arrangement.
52
<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, 2000 SURGICAL LASER TECHNOLOGIES, INC.
By: /s/ Michael R. Stewart
------------------
Michael R. Stewart
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 Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Michael R. Stewart President, Chief Executive Officer and March 23, 2000
- ----------------------
Michael R. Stewart Director (principal executive officer)
/s/ Davis Woodward Vice President and Chief Financial Officer March 23, 2000
- ------------------ (principal financial and accounting officer)
Davis Woodward
/s/ Richard J. DePiano Chairman of the Board and March 23, 2000
- ---------------------- Director
Richard J. DePiano
/s/ Sheldon M. Bonovitz Director March 23, 2000
- -----------------------
Sheldon M. Bonovitz
/s/ Jay L. Federman Director March 23, 2000
- -------------------
Jay L. Federman
/s/ Vincenzo Morelli Director March 23, 2000
- --------------------
Vincenzo Morelli
</TABLE>
53
Exhibit 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of this 5th day of October, 1999 is
made by and between Surgical Laser Technologies, Inc., a Delaware corporation
with its principal offices located at 147 Keystone Drive, Montgomeryville, PA
18936, Pennsylvania (the "Company") and Michael R. Stewart, an individual
residing at 3930 Ruckman Way, Doylestown, PA 18901 (the "Executive").
WHEREAS, the Executive has previously served the Company as Vice
President and Chief Financial Officer and the parties hereto desire to set forth
the terms and conditions pursuant to which the Executive will now serve as
President and Chief Executive Officer of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Executive as President
and Chief Executive Officer of the Company upon the terms and conditions set
forth in this Agreement, and the Executive hereby accepts such employment.
2. CAPACITY AND DUTIES.
2.1 Position. The Executive shall serve the Company as
President and Chief Executive Officer. Subject to the direction and control of
the Board of Directors (the "Board"), the Executive, as President and Chief
Executive Officer, shall perform such executive, managerial and administrative
duties as are from time to time assigned to him by the Board and which are
consistent with his position as President and Chief Executive Officer. The
Executive shall be assigned to the Company's principal executive offices which
are presently located in Montgomeryville, Pennsylvania.
2.2 Election or Appointment as Director. The Executive also
agrees to serve without additional compensation, if elected or appointed
thereto, as a director of the Company or any of its subsidiaries, and as a
member of any committee of the Board of Directors of the Company or any of its
subsidiaries.
3. OBLIGATIONS OF EXECUTIVE.
3.1 Abiding by Rules. The Executive shall abide by the
policies and rules from time to time reasonably established in writing by the
Company, shall devote his full business time, attention and energies to the
business of the Company and shall not, during the term hereof, be engaged in any
other business activity, whether or not such business activity is pursued for
gain, profit or other pecuniary advantage, except as permitted by Section 3.2 or
approved in writing by the Board.
3.2 Outside Investments. The terms of this Section 3 shall not
prevent the Executive from investing his assets in such form or manner as he
chooses; provided, however, that the Executive shall not have any personal
interest, direct or indirect, financial or otherwise, in any supplier to, buyer
from, or competitor of the Company, or in any transaction between the Company
and a supplier or buyer unless such interest is, or arises solely from ownership
of, less than one percent (1%) of the outstanding capital stock of such supplier
or buyer and such capital stock is available to the general public through
trading on any national, regional or over-the-counter securities market.
1
<PAGE>
3.3 Outside Activities. The Executive shall not engage in any
activity or investment, whether or not permitted by this Section 3, if such
activity or investment substantially interferes with the performance of his
duties hereunder.
3.4 Securing New Employment. Anything herein to the contrary
notwithstanding, if the Company gives the Executive notice of termination of
this Agreement as of the end of its term or any renewal thereof in accordance
with the following Section 4, then during the last three (3) months of the
employment term the Company shall allow the Executive ample time within which to
locate and secure new employment although it is recognized that the Executive
shall continue to fulfill the obligations of his position with the Company as
best as possible to the extent that doing so does not conflict with his efforts
to secure new employment.
4. TERM OF AGREEMENT. Subject to the provisions of Section 11, the
initial term of this Agreement shall commence on the date hereof and expire on
December 31, 2000 (the "Initial Term"). Absent notice of termination given by
either party not later than three months prior to the expiration of the Initial
Term or any successor term, this Agreement shall automatically renew for
successive one-year terms. Each reference herein to "the term of this Agreement"
shall include the Initial Term and any successor term.
5. COMPENSATION.
5.1 Base Salary. Company agrees to pay, and Executive agrees
to accept, as base compensation for all services to be rendered by the Executive
hereunder the sum of One Hundred Eighty-Five Thousand Dollars ($185,000) per
annum (less appropriate deductions) payable on a current basis in a manner
consistent with the method of payment to other of the Company's other senior
executive officers (but in any event no less often than biweekly). Such annual
rate of base compensation in effect at any time during the term of this
Agreement shall hereinafter be referred to as the "Base Salary."
5.2 Review of Base Salary. The Board shall review from time to
time, but in no case less than annually and promptly after the end of each
fiscal year, the Executive's Base Salary and shall make such adjustments, if
any, as the Board shall determine, in its sole discretion, provided, however,
that no adjustment shall reduce the Base Salary below One Hundred Eighty-Five
Thousand Dollars ($185,000) per annum.
6. INCENTIVE CASH BONUS. The Executive shall be entitled to receive an
incentive cash bonus from the Company in accordance with the terms and
provisions of the Company's bonus program (the "Executive Bonus Program"), which
program shall provide the Executive a bonus opportunity of up to 50% of base
salary, with the amount of such bonus to be based on objective criteria related
to the Company's results of operations and the Board's evaluation of the
Company's performance. No termination of this Agreement, other than upon a
discharge for cause (as defined in Section 11.3) shall terminate the Executive's
right to receive the incentive cash bonus earned up to the time of such
termination. The incentive cash bonus that would otherwise be payable to the
Executive under this Section 6, assuming the Executive had remained employed for
the full calendar year in which the terminating event occurs, shall be
multiplied by a fraction, the denominator of which is twelve (12) and the
numerator of which is the number of full months of employment completed by the
Executive during the calendar year in which the terminating event occurs. Such
recalculated amount shall constitute the
2
<PAGE>
incentive cash bonus for the calendar year in which such terminating event
occurs, and no further incentive cash bonus shall be paid hereunder for any
subsequent calendar year.
7. ADDITIONAL BENEFITS. While this Agreement is in effect, the Company
shall provide the following additional benefits:
7.1 Vacation. The Executive shall receive such paid vacations
during each year as are made available to the Company's other senior executive
officers, but in no case less than four weeks each calendar year.
7.2 Automobile or Automobile Allowance. The Company shall
provide the Executive with an automobile allowance of $800 per month plus gas
and oil expenses.
7.3 Expense Reimbursement. Upon submission of proper vouchers,
the Company shall pay or reimburse the Executive for all necessary business and
entertainment expenses reasonably incurred by the Executive in connection with
the business of the Company.
7.4 Insurance Benefits. The Company shall provide the
Executive with medical, hospital and other insurance benefits equivalent to
those provided to the other senior executive officers of the Company.
7.5 Retirement Plan. The Executive shall be entitled to
participate in any profit sharing or pension plan made available to full-time
employees of the Company in accordance with the terms of such plans.
7.6 Disability Insurance. The Company shall provide the
Executive with an insured long-term disability benefit provided that the
Executive is insurable at standard rates on the date the Executive first applies
for the insurance. The amount of the benefit shall be no less than sixty percent
(60%) of the Executive's Base Salary during the period of disability; the
benefit shall commence no later than one year after the commencement of
disability; and the benefit shall be payable at least as long as the Executive
is disabled and is under age 65. If the Executive cannot be insured at standard
rates, the Company will purchase the maximum amount of coverage available for
the amount which would have been paid if this benefit could have been provided
at standard rates. As used in this Section 7.6, "disability" shall have the
meaning provided in the policy. The Executive agrees to submit to reasonable
medical examinations and otherwise reasonably to cooperate with the Company in
connection with obtaining such insurance.
7.7 Other Benefits. Without limiting any of the foregoing
benefits, the Executive shall receive all benefits and participate in all
benefit programs generally made available to other senior executive officers of
the Company.
8. LIFE INSURANCE. The Company will provide and maintain during the
term of this Agreement a life insurance policy on the life of the Executive in
the amount of $1,000,000 payable to Executive's designated beneficiary. The life
insurance policy shall be either a term policy or a whole life policy at the
discretion of the Company. The Executive agrees to submit to reasonable medical
examinations and otherwise reasonably to cooperate with the Company in
connection with obtaining such insurance.
3
<PAGE>
9. STOCK OPTIONS. The Company shall cause to be granted to the
Executive a stock option for a total of 50,000 shares of the Company's Common
Stock, par value $.01 per share, subject to the terms and provisions of the
Company's Equity Incentive Plan (the "Plan"), which Plan is incorporated herein
by reference. The option shall be exercisable in three equal consecutive annual
installments commencing one year from the date hereof. The terms and conditions
of the option shall be as set forth in the agreement provided for by the terms
of the Plan.
10. DISABILITY.
10.1 Determination of Disability. In the event that the
Executive is unable fully to perform his duties and responsibilities hereunder
by reason of physical or mental illness, injury or incapacity for a continuous
period of more than six (6) months, or for an aggregate of more than six (6)
months out of any twelve (12) consecutive month period during the term of this
Agreement, all as determined in good faith by the Board, after consultation with
a qualified physician selected by the Company, the Company may terminate the
Employment of the Executive hereunder and, if the Company shall so act, any and
all rights the Executive may have under this Agreement or otherwise as an
employee of the Company shall terminate, and the Company shall have no further
liability or obligation to the Executive for compensation hereunder; provided,
however, that the Executive will be entitled to receive the payments prescribed
under the Company's long-term disability benefit plan under which he was covered
during the period of his Employment by the Company and except that the Executive
shall be entitled to receive his Base Salary described in Section 5, his
incentive cash bonus described in Section 6, the insurance benefits described in
Section 7.4 and the life insurance coverage described in Section 8 for a period
of one year after the date of the termination by reason of disability. At the
end of this one year period, the Executive will be given the option to take over
the payments and ownership of the life insurance policy or policies described in
Section 8 then in effect to the extent permitted by the terms thereof. A
determination that the Executive is disabled under the insured long-term
disability plan described in Section 7.6 shall be deemed to be a determination
that the Executive is disabled for purposes of this Section 10.1.
Notwithstanding the foregoing, the Executive shall not be deemed terminated by
reason of disability unless and until the Executive has received a written
notice from the Company at least ninety (90) days prior to the Company's
intended date of termination stating (i) the Company's intent to terminate the
Executive by reason of disability; and (ii) the Company's intended date of such
termination.
10.2 Resumption of Duties. If the Executive shall resume his
duties within thirty (30) days after receipt of such a notice of termination and
continue to perform such duties for four (4) consecutive weeks thereafter, this
Agreement shall continue in full force and effect, without any reduction in Base
Salary or other benefits, and the notice of termination shall be considered null
and void and of no effect.
11. TERMINATION PRIOR TO END OF TERM.
11.1 Death. Except as hereinafter provided, the Executive's
employment hereunder and any and all rights under this Agreement or otherwise as
an employee of the Company shall terminate upon the death of the Executive and
thereafter the Company shall have no liability or obligation to the Executive's
estate or legal representatives hereunder, provided that the Executive shall be
entitled to the Base Salary, bonuses and other compensation earned by the
Executive prior to his death, but not paid.
4
<PAGE>
11.2 Discharge Without Cause. Except as set forth in Section
11.4 hereof, in the event the Company terminates the Executive's employment
without cause during the term of his employment hereunder or elects not to renew
Executive's employment hereunder pursuant to Section 4 hereof, each of which the
Company shall be entitled to do, the Executive shall receive from the Company
(in lieu of any rights or claims, other than the possible right to an incentive
bonus for the period prior to termination as set forth in Section 6 hereof, that
the Executive may have in respect to this Agreement, which rights or claims the
Executive hereby waives and releases in consideration for the severance payments
provided in this Section 11.2) as severance payments, and in consideration of
the Executive's compliance with the provisions of Section 13 during the
Restricted Period (as hereinafter defined), payment of the Executive's Base
Salary and the insurance benefits described in Sections 7.4, 7.6 and 8 hereof,
in each case for a period of one year beginning on the date of termination of
the Executive's employment. Payments of Base Salary shall be made at the same
times and in the same manner that such payments would have been made to the
Executive if his employment had not been terminated. In addition, under such
circumstances, the Executive shall be entitled to exercise all options
referenced in Section 9 hereof and all other options then held by the Executive
which are not then exercisable, subject to the terms and provisions of the
option agreement provided for by the terms of the Plan, for a period equal to
the lesser of (y) one year from the date of termination for all options granted
after 1996 and five years from the date of termination for all options granted
before 1997 or (z) the original term of such options. At the end of this one
year period, the Executive will be given the option to take over the payments
and ownership of the disability insurance policy described in Section 7.6 hereof
and the life insurance policy described in Section 8 hereof to the extent the
terms of such policies permit him to do so. If the Executive shall die
subsequent to the termination of his employment under this Section 11.2, such
death shall be deemed to have occurred during the term of the Executive's
employment hereunder as if termination under this Section 11.2 had not occurred
and Section 11.1 shall thereupon apply.
11.3 Discharge for Cause. The Company may terminate this
Agreement and discharge the Executive for cause at any time. In such event, the
Company's obligation to pay compensation and other amounts payable hereunder,
including any incentive cash bonus (or portion thereof) to or for the benefit of
the Executive, shall terminate on the date of such discharge. As used herein,
the term "discharge for cause" shall mean a discharge resulting from a
determination by the Board that any of the following have occurred:
(a) chronic alcoholism;
(b) drug addiction;
(c) indictment by a grand jury for commission of a
felony unless such indictment is dismissed within sixty (60) days of its
issuance;
(d) fraud or dishonesty resulting or intended to result
directly or indirectly in personal enrichment at the expense of the Company;
(e) regularly failing or refusing to follow policies or
directives reasonably established by the Board;
(f) willfully and persistently failing to attend to the
Executive's duties;
(g) committing acts amounting to gross negligence or
willful misconduct to the detriment of the Company or its affiliates; or
(h) otherwise breaching any of the material terms or
provisions of this Agreement.
5
<PAGE>
11.4 Termination Following Change in Control. In the event the
Executive's employment hereunder is terminated without cause at any time within
two years after a "Change in Control" (as hereinafter defined), which the
Company shall be entitled to do, or if the Executive voluntarily resigns his
employment hereunder within two years after a Change in Control following (a)
the relocation of the Executive's principal business location by more than 35
miles, (b) a significant reduction in the Executive's duties and
responsibilities from those existing prior to the Change in Control or (c) a
reduction in the Executive's then-current Base Salary, which the Executive shall
be entitled to do, the Executive shall receive from the Company (in lieu of any
rights or claims, other than the possible right to an incentive bonus for the
period prior to termination as set forth in Section 6 hereof, that the Executive
may have in respect of this Agreement, including without limitation the
provisions of Section 11.2 hereof, all of which rights or claims the Executive
hereby waives and releases in consideration for the severance payments provided
in this Section 11.4) as severance payments, and in consideration of the
Executive's compliance with the provisions of Section 13 hereof for so long as
payments are being made pursuant to this Section 11.4, payment of the
Executive's Base Salary and the insurance benefits described in Sections 7.4,
7.6 and 8 hereof, in each case for a period of one year beginning on the date of
termination of the Executive's employment. In addition, under such
circumstances, the Executive shall be entitled to exercise all options
referenced in Section 9 hereof and all other options then held by the Executive
which are not then exercisable, subject to the terms and provisions of the
option agreement provided for by the terms of the Plan, for a period equal to
the lesser of (y) one year from the date of termination for all options granted
after 1996 and five years from the date of the Change in Control for all options
granted before 1997 or (z) the original term of such options. For purposes of
this Section 11.4, a "Change in Control" shall mean the sale of all or
substantially all of the Company's assets to, or the acquisition (by purchase,
merger, reorganization or otherwise) of shares of the Company's capital stock
representing more than 50% of the votes which all stockholders are entitled to
cast by, any person or group of affiliated persons not presently affiliated with
the Company.
12. CONFIDENTIALITY; PUBLIC STATEMENTS.
12.1 Confidential Information. The Company may, pursuant to
the Executive's employment hereunder, provide to him and confide in him business
methods and systems, techniques and methods of operation developed at great
expense by the Company ("Trade Secrets") and which the Executive recognizes to
be unique assets of the Company's business. The Executive shall not, during or
at any time after the term of employment hereunder, directly or indirectly, in
any manner utilize or disclose to any person, firm, corporation, association or
other entity, except to directors, consultants or employees of the Company in
the course of his duties and where required by law: (a) any such Trade Secrets,
(b) any sales prospects, customer lists, products, research or data of any kind,
or (c) any information relating to strategic plans, sales costs, profits or the
financial condition of the Company or any of its customers or prospective
customers, which are not generally known to the public or recognized as standard
practice in the industries in which the Company shall be engaged. The Executive
further covenants and agrees that he will promptly deliver to the Company all
tangible evidence of the knowledge and information described in (a), (b) and
(c), above, prior to or at the termination of the Executive's employment.
12.2 Prohibited Public Statements. The Executive shall not,
either during or at any time after the termination of his Employment, make any
public statement (including a private statement
6
<PAGE>
reasonably likely to be repeated publicly) reflecting adversely on the Company
or its business prospects, except for such statements which during the
Executive's employment he may be required to make in the ordinary course of his
service as President and Chief Executive Officer.
13. NONCOMPETITION AND NONINTERFERENCE AGREEMENT.
13.1 Noncompetition. Subject to the geographic limitation of
Section 13.2, the Executive, for a period (the "Restricted Period") of one (1)
year following termination of employment in accordance with this Agreement,
shall not, directly or indirectly, on his behalf or on behalf of any other
person, firm, corporation, association or other entity, as an employee or
otherwise, engage in, or in any way be concerned with or negotiate for, or
acquire or maintain any ownership interest in any business or activity which is
the same as or competitive with that conducted by the Company at the termination
of his employment, or which was engaged in or developed by the Company at any
time during the term of employment for specific implementation in the immediate
future by the Company.
13.2 Geographic Limitation. The Executive acknowledges that
the Company is engaged in business throughout the United States and in many
foreign countries and that the Company intends to continue expanding the
geographic scope of its activities. Accordingly and in view of the nature of his
position and responsibilities, the Executive agrees that the provisions of
Section 13.1 shall be applicable to each state and each foreign country,
possession or territory in which the Company may be engaged in business as of
the termination of the Agreement.
13.3 Noninterference. The Executive agrees that during the
Restricted Period, the Executive will not directly or indirectly, for himself or
on behalf of any third party at any time in any manner, request or cause any of
the Company's customers to cancel or terminate any existing or continuing
business relationship with the Company; solicit, entice, persuade, induce,
request or otherwise cause any employee, officer or agent of the Company to
refrain from rendering services to the Company or to terminate his or her
relationship, contractual or otherwise, with the Company; induce or attempt to
influence any supplier to cease or refrain from doing business or to decline to
do business with the Company; divert or attempt to divert any supplier from the
Company; or induce or attempt to influence any supplier to decline to do
business with any businesses of the Company as such businesses are constituted
immediately prior to the termination of employment.
13.4 Nonsolicitation. The Executive agrees that during the
Restricted Period, the Executive will not directly or indirectly, for himself or
on behalf of any third party, solicit for business, accept any business from or
otherwise do, or contract to do, business with any person or entity who, at the
time of, or any time during the twelve (12) months preceding, such termination,
was an active customer or was actively solicited by the Company according to the
books and records of the Company and within the actual or constructive knowledge
of the Executive, provided, however, that nothing herein shall prohibit the
Executive from transacting business he solicits which is not competitive with
services or products offered, furnished or sold by the Company to such person or
entity.
14. EQUITABLE REMEDIES. The Executive acknowledges that his compliance
with the covenants in Section 12 or 13 of this Agreement is necessary to protect
the good will and other proprietary interests of the Company and that, in the
event of any violation by the Executive of the provisions of Section 12 or 13 of
this Agreement, the Company will sustain serious, irreparable and substantial
harm to its business, the extent of which will be difficult to determine and
impossible to remedy by an action at law for money damages. Accordingly, the
Executive agrees that, in the event of
7
<PAGE>
such violation or threatened violation by the Executive, the Company shall be
entitled to an injunction before trial from any court of competent jurisdiction
as a matter of course and upon the posting of not more than a nominal bond in
addition to all such other legal and equitable remedies as may be available to
the Company. The Executive further agrees that, in the event any of the
provisions of Sections 12 and 13 of this Agreement are determined by a court of
competent jurisdiction to be contrary to any applicable statute, law or rule, or
for any reason to be unenforceable as written, such court may modify any of such
provisions so as to permit enforcement thereof as thus modified.
15. ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding and agreement of the Executive and the Company respecting the
subject matter hereof, and supersedes all prior understandings and agreements,
oral or written, express or implied. This Agreement may not be modified or
amended orally, but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought.
16. HEADINGS. The section headings of this Agreement are for
convenience of reference only and are not to be considered in the interpretation
of the terms and conditions of this Agreement.
17. DEFINITION OF COMPANY. The Company is governed by its Board and,
accordingly, all references in this Agreement to the actions and discretion of
the Company are meant and deemed to refer to the actions and discretion of the
Board.
18. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when sent
by certified mail, postage prepaid, addressed as follows:
If to the Company:
Surgical Laser Technologies, Inc.
147 Keystone Drive
Montgomeryville, PA 18936
Attn: Chairman of the Board
with a copy given in the aforesaid manner to:
Thomas G. Spencer, Esquire
Duane, Morris & Heckscher LLP
One Liberty Place
Philadelphia, PA 19103-7396
If to the Executive, at his personal residence as set forth
above.
Any party may change the persons and address to which notices
or other communications are to be sent by giving written notice of such change
to the other party in the manner provided herein for giving notice.
19. WAIVER OF BREACH. No waiver by either party of any condition or of
the breach by the other of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances shall be deemed or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition, or of the breach of any other term or covenant
set
8
<PAGE>
forth in this Agreement. Moreover, the failure of either party to exercise any
right hereunder shall not bar the later exercise thereof.
20. INURE AND BIND; NONALIENATION. This Agreement shall inure to the
benefit of and be binding on the parties and their respective successors in
interest. The Executive shall not pledge, hypothecate, anticipate or in any way
create a lien upon any amounts provided under this Agreement. This Agreement and
the benefits payable hereunder shall not be assignable by either party without
the prior written consent of the other; provided, however, that nothing in this
Section shall preclude the Executive from designating a beneficiary to receive
any benefit payable hereunder upon his death, or the executors, administrators
or other legal representatives of the Executive or his estate from assigning any
rights hereunder to which they become entitled to the person or persons entitled
thereto.
21. GOVERNING LAW. This Agreement is entered into and shall be
construed in accordance with the laws of the Commonwealth of Pennsylvania.
22. CONTINUATION OF COVENANTS. The covenants and agreements of the
Executive set forth in Sections 12 and 13 shall survive termination of
employment, shall continue thereafter, and shall not expire unless and except as
may be expressly set forth in Sections 12 and 13.
23. INVALIDITY OR UNENFORCEABILITY. If any term or provision of this
Agreement is held to be invalid or unenforceable, for any reason, such
invalidity or unenforceability shall not affect any other term or provision
hereof and this Agreement shall continue in full force and effect as if such
invalid or unenforceable term or provision (to the extent of the invalidity or
unenforceability) had not been contained herein.
24. ARBITRATION. Except as provided in Section 14, any controversy or
claim arising out of or relating to this Agreement, or the breach hereof, shall
be settled by arbitration in Philadelphia, Pennsylvania, in accordance with the
laws of the Commonwealth of Pennsylvania by three arbitrators, one of whom shall
be appointed by the Company, one by the Executive and the third of whom shall be
appointed by the first two arbitrators. If either party fails to select an
arbitrator within 30 days after written notice of demand for arbitration from
the other, the other party may have such arbitrator appointed by the American
Arbitration Association. If the first two arbitrators cannot agree on the
appointment of a third arbitrator within 30 days after their selection, then the
third arbitrator shall be appointed by the American Arbitration Association. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction hereof. In the event that it shall
be necessary or desirable for the Company and/or the Executive to retain legal
counsel and/or incur other costs and expenses in connection with the enforcement
of any or all of either party's rights under this Agreement, each party shall
bear its own costs and expenses in connection with the enforcement of its rights
(including the enforcement of any arbitration award in court), regardless of the
final outcome.
25. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written.
Witness:
___________________________ By: /s/ Michael R. Stewart
----------------------
Michael R. Stewart
ATTEST: Surgical Laser Technologies, Inc.
___________________________ By: /s/ Richard J. DePiano
-----------------------------
Richard J. DePiano, Chairman
10
EXHIBIT 23
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 21, 2000. It should be noted that we have
not audited any financial statements of the Company subsequent to January 2,
2000, or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 23, 2000
1
<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, 2000
2
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JANUARY 2, 2000 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JANUARY 2, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Surgical Laser Technologies, Inc.
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