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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended March 31, 1998
or
[_] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for transition period from _________ to _________.
Commission file number 0-17594
ION LASER TECHNOLOGY, INC.
(Name of small business issuer in its charter)
UTAH 87-0410364
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 DIPLOMAT DRIVE, #204
AIRPORT BUSINESS CENTER
LESTER, PA 19113
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number: (610) 362-1111
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Securities registered under Section 12(b) of the Act: Name of each exchange on which registered:
Common Stock, par value $.001 American Stock Exchange
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Securities registered under Section 12(g) of the Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's net revenues for the fiscal year ended March 31, 1998 were $4,609,253
The aggregate market value of the registrant's Common Stock held by non-
affiliates as of June 22, 1998 was approximately $7,385,227, based on the
closing sale price of the issuer's stock as reported by the American Stock
Exchange on such date.
The number of shares of common stock of the Registrant outstanding as of June
22, 1998 was 7,669,772.
Transitional Small Business Disclosure
Format (Check one): Yes ___ No X
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ION LASER TECHNOLOGY, INC.
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................ 3
ITEM 2. DESCRIPTION OF PROPERTY............................................ 9
ITEM 3. LEGAL PROCEEDINGS..................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........12
ITEM 7. FINANCIAL STATEMENTS...............................................15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.........15
ITEM 10. EXECUTIVE COMPENSATION.............................................18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................22
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Ion Laser Technology, Inc. ("ILT(TM)" or the "Company") develops, manufacturers,
sells and leases light-activated and laser-based dental and medical devices used
for both cosmetic and therapeutic purposes and, where applicable, the chemical
agents used in connection with these devices. The Company is committed to
provide tooth whitening and other therapeutic medical and dental procedures
through leading-edge technology.
The Company is developing a new, light-activated tooth whitening ("LATW")
device. The Company anticipates opening up to twenty BriteSmile Whitening
Centers in strategic locations across the United States by the first quarter of
calendar 1999, utilizing its new LATW technology.
The Company began as a laser manufacturing concern for the industrial markets
and was incorporated in the state of Utah on June 7, 1984. It began to focus on
the dental market with research and development in 1989. In December 1993, ILT
sold its first CO\2\ laser for dental use, the D1000 for soft tissue
applications. In August 1994, the Company introduced the first curing-only
argon laser with the proprietary multi-plex system. In April 1995, the first
stand alone argon laser, upgradeable to a multi-plex system, was introduced.
In February 1996, the Company received clearance from the United States Food and
Drug Administration ("FDA") to market a laser tooth whitening device. In
spring 1996, the Company began commercial introduction to the dental market of
its proprietary dual-laser tooth whitening system ("BriteSmile Laser Tooth
Whitening(TM)" or "LTW"(TM)), marketed under the trademark "BriteSmile(R)." On
July 8, 1997, the U.S. Patent and Trademark Office issued a patent to the
Company covering the LTW system. Thousands of patients have had their smile
brightened with the BriteSmile dual-laser method.
RECENT BUSINESS DEVELOPMENTS
Research and Development
- ------------------------
During the Company's fiscal year ended March 31, 1998, management focused its
resources on developing new dental products. Significant resources were devoted
to development of the Company's Apollo 9500 dual-purpose, curing and tooth
whitening device. However, due to design defects, the Apollo 9500 project has
been abandoned.
Meanwhile, new research and development efforts have commenced under the
direction of Dr. John Warner. As the Company's Director of Research and
Development, Dr. Warner has undertaken an accelerated program to develop a new
LATW device for use with the Company's tooth whitening system. In connection
with this development effort, the Company has leased a new research and
development facility in Evanston, Illinois, which is scheduled to open in July
1998 with three to four Company employees. In addition, the Company has engaged
two nationally recognized firms to provide the Company with product design and
electrical engineering technology and know how. Chemical products and reagents
for use with the new LATW device will be developed under the direction of Dr.
Warner, pursuant to the Company's anticipated development agreement with
OraCeutical LLC in Lee, Massachusetts.
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The Company continues to manufacture, distribute, and sell laser tooth whitening
chemical kits, as well as at-home and in-office use tooth bleaching reagents,
under the BriteSmile brand name and under other trademarks owned by the Company.
May 1998 Equity Financing
- -------------------------
On May 5, 1998, the Company issued and sold 1,860,465 shares of its Common Stock
(the "Shares") to its major shareholder, LCO Investments, Inc., pursuant to a
Stock Purchase Agreement dated as of May 4, 1998 (the "May 1998 Purchase
Agreement"). LCO is a corporation organized under the laws of Guernsey, Channel
Islands. The total consideration received by the Company for the Shares in this
offering was $5,000,000. In connection with the sale, the Company also agreed to
reprice options to purchase up to 1,173,334 shares of Common Stock previously
granted to LCO, such that the purchase price of the shares underlying the old
options was changed from $9.00 per share to $4.50 per share. 773,334 of the new,
repriced options are exercisable at any time until the close of business on
March 31, 2006. The balance of the options, 400,000, are exercisable at any time
until the close of business on May 1, 2007. The Shares, and the shares of Common
Stock underlying the options, are restricted and may not be transferred or sold,
except as permitted by the May 1998 Purchase Agreement, for a period of one year
after their acquisition by the purchasers. The Shares, including the shares
issuable upon exercise of the Options, are subject to certain piggy-back and
demand registration rights, as provided by a separate Registration Rights
Agreement between the Company and LCO dated as of May 4, 1998.
Change in Management
- --------------------
As part of the May 1998 financing, LCO retained its rights, granted in 1996 in
connection with an earlier purchase of Common Stock of the Company, for so long
as LCO and its affiliates and permitted transferees continue to hold 5% or more
of the outstanding Common Stock, (i) to nominate two persons for election as
directors of the Company ("LCO Directors"), (ii) to remove any LCO Director from
the board at any time by written notice to the board, and (iii) in the event of
the death, disability, legal incapacity, resignation or removal of an LCO
Director, to designate a successor nominee for election as a director of the
Company.
In April 1998, the Company's Board of Directors requested the resignation of all
current Company officers, including E. Wyatt Cannady, President and CEO, and
Richard S. Braddock, Chairman of the Board. In connection with the closing of
the May 1998 Stock Purchase Agreement, Messrs. Milton G. Adair, David E. Neff
and Richard S. Braddock resigned as directors of the Company, and LCO appointed
Brian Delaney to serve as one of the LCO Directors. Subsequently, R. Eric
Montgomery, President of OraCeutical LLC in Lee, Massachusetts, and Linda Oubre,
President of Tri-Com Ventures, a Walnut Creek, California consulting firm, were
appointed to the Company's board of directors. As of June 1, 1998, new executive
officers were appointed by the reconstituted board. See "Executive Officers and
Directors," below. It is anticipated that the nominees for directors of the
Company at the Company's August, 1998 Annual Meeting of shareholders will be
Anthony M. Pilaro, Richard V. Trefz, R. Eric Montgomery, Brian G. Delaney, and
Linda S. Oubre.
Relocation to Pennsylvania
- --------------------------
In May 1998, the Company closed its headquarters and manufacturing facility in
Salt Lake City, Utah and listed the Salt Lake facility for sale. In June 1998,
the Company acquired new administration and manufacturing facilities in Lester,
Pennsylvania, and new research and development facilities in Evanston, Illinois.
See Item 2, "Properties," below.
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Sale of Industrial Laser Assets
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Pursuant to agreement dated June 24, 1998, the Company sold its existing
inventory of industrial/scientific lasers, and the rights to service the
Company's existing industrial laser customers, to National Laser Corporation,
Salt Lake City, Utah, in consideration of $25,000 cash, royalty payments to the
Company related to sales by NLC to Company customers or for use of the Company's
patented technology, and a commitment from NLC to service the replacement part
needs of customers who continue to own and operate laser systems purchased from
the Company.
ILT(TM) PRODUCT LINES
Dental Markets
- --------------
The Company's principal product line includes light-activated tooth whitening
devices and other products manufactured for dental applications in the areas of
tooth whitening.
Tooth Whitening - The BriteSmile Process. The estimated $500 million spent
annually in the U.S. for dental bleaching currently involves antiquated,
inconvenient and time consuming methods that yield mediocre results. The
prospect of a quick, one appointment tooth whitening procedure that provides two
to three times the whitening results at a comparable price would conceivably
increase that market by two or three-fold. Recent inquiries also indicate that
the concept of tooth whitening is becoming increasingly accepted in developed
nations around the globe.
The Company plans to open 20 BriteSmile Whitening Centers in strategic locations
across the United States by the first quarter of calendar 1999. These centers
will offer the latest in tooth whitening technology and products in response to
the rapidly growing demand for such services. Following the initial U.S.
rollout, the Company plans to expand the centers both domestically and
internationally.
In March 1996, the Company acquired the assets and technology of Brite Smile,
Inc. ("BSI"), an Alabama corporation established in 1989 to market hydrogen
peroxide-based tooth whitening products. The primary products of BSI included
the original BriteSmile(R) at-home bleaching gel, the ACCELplus 50(TM) in-office
bleaching product, and an acid-etch gel. More recently, the Company added to
the product line a laser tooth whitening system utilizing the Company's own
high-powered argon and CO\2\ lasers (the "BriteSmile LTW" system). The LTW
system includes two primary components: a dual-laser whitening process and a
host of catalysts and activators used in the process. On July 8, 1997, the
United States Patent and Trademark Office issued a patent to the Company
covering the BriteSmile LTW system. The patent includes 37 claims to provide
patent protection for the use of argon and/or CO\2\ lasers in conjunction with
chemical whitening agents to effect the whitening of teeth, as well as the
chemical whitening agents themselves.
During fiscal 1998, sales of the Company's argon and CO\2\ lasers diminished as
the public awaited development of the Company's Apollo 9500 model laser for use
in the BriteSmile LTW System. Product design and manufacturing concerns have
caused the Company to re-evaluate the viability of the Apollo 9500 laser based
model. Accordingly, at present the Company has discontinued sales of its argon
and CO\2\ laser-based models and is focusing exclusively on the development,
manufacture, sale and leasing of a new Light-Activated Tooth-Whitening device.
See "Recent Business Developments -Research and Development", above.
Soft Tissue Procedures. Dental lasers may be used for certain periodontal
procedures, treatment of early forms of gum disease, and pre-surgical or
preventative periodontal procedures. Although the Company has received
5
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clearance for CO\2\ lasers for these procedures, to date the Company has
chosen to emphasize the tooth whitening market for its dental lasers.
PATENTS, TRADEMARKS AND LICENSES
The basic technology for laser manufacture has been well known since the early
1960's. A patent covering certain aspects of the laser was granted in 1987 to
Patlex Corporation ("Patlex") and continues in effect until the year 2004. The
Company manufactures certain of its products under license from this patent
holder to avoid infringing upon those patent rights. The royalty paid to Patlex
under this agreement is an amount equal to 2% of net foreign laser sales and 5%
of net domestic laser sales. This obligation will expire in 2004. No royalty
is paid on sales of lasers to the United States Government or its contract
parties.
The Company obtained a patent in May 1993 for a krypton or "mixed gas" ion laser
which uses a combination of gases to produce a controlled laser output of
multiple wavelengths or frequencies. This feature is not available in a laser
using a single type of gas. The Company received a patent in May 1995 on its
muliplexer system. The multiplexer permits laser beam delivery from a single
laser through fiber optics to multiple locations. The Company expects to
receive some royalties from NLC in connection with the licensing of this
technology as part of the sale of the Company's industrial division to NLC.
On April 1, 1997, the United States Patent Office issued a patent to the Company
on its "high-speed curing handpiece." The handpiece allows the laser beam to be
collimated such that the energy level of the beam of light remains consistent.
As part of the BSI acquisition, the Company acquired certain intellectual
property, including two patents relating to the use of hydrogen-peroxide and/or
fluoride in the whitening of teeth. The first patent relates to the method of
protecting the mucous membranes of the mouth while treating teeth (through use
of a soft tissue protectant gel) and the second relates to the composition of
the protective gel. Each of these patents were issued in 1991 and are
enforceable through the year 2008. In addition, on July 8, 1997, the Company
was granted a patent on laser tooth whitening which include 37 claims for the
use of argon and/or CO\2\ lasers in conjunction with chemical whitening agents
to effect the whitening of teeth, as well as the chemical whitening agents
themselves.
The Company owns the rights to the registered trademarks "BriteSmile" (name and
logo), "White Smile," and "Muco-Pro," used in connection with the tooth
whitening business.
Although the Company intends to continue to apply for patents as advised by
patent counsel, there can be no assurance that such patents will issue or that,
when they have issued, the same will not be infringed upon by third parties or
that they will cover all aspects of the product or system to which they relate.
Management generally believes that the Company's success depends more on its
ability to maintain state-of-the-art technology and to market its products on a
price-competitive and value-added basis, than on any legal protection that
patents may provide. The Company relies, and will continue to rely, on trade
secrets, know-how and other unpatented proprietary information in its business.
Certain key employees of the Company are required to enter into confidentiality
and non-competition agreements to protect the confidential information of the
Company. However, there is no assurance that these agreements would be
enforceable if they are breached or, if enforced, that they would adequately
protect the Company or provide an adequate remedy for the damage that may be
caused by such a breach.
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GOVERNMENT REGULATION
The Company's business is subject to various state and federal statutes and
regulations, particularly the manufacture and sale of lasers having medical and
dental applications. These products are subject to the provisions of the Safe
Medical Devices Act of 1990 and the Federal Food, Drug and Cosmetic Act of 1938,
including its amendments of 1976 and 1992 (the "Act"), administered by the FDA.
The Act generally classifies medical devices into categories and establishes
varying degrees of labeling and market clearance procedures for such categories.
The Company is subject to FDA standards and procedures governing the manufacture
of its "medical" lasers and to FDA inspection for compliance with such
standards. Among other things, the Company is required to manufacture these
products in accordance with Good Manufacturing Practices regulations ("GMP") and
is subject to periodic audits by the FDA. Compliance with GMP requires that the
Company implement strict quality control procedures, greater documentation and
record keeping, and that it hire highly qualified and specialized personnel.
The FDA approval process is expensive and can be very lengthy. There are two
principal methods by which FDA approval may be obtained. The least expensive
and less time-consuming method is to seek FDA market clearance through a "pre-
market" notification filing under Section 510(k) of the Act. This procedure
requires the Company to submit evidence proving that the covered "device" for
which the approval is sought is "substantially equivalent" to devices on the
market before the Amendment was adopted in 1976 or devices that have been
approved pursuant to the 510(k) procedure since that time.
Pursuant to this notification procedure, the Company has received clearance for
both its argon and CO\2\ lasers, permitting the Company to market these
products for oral soft tissue procedures to the dental market, certain medical
uses, composite curing, and LTW, under classifications that do not require pre-
market approval.
The FDA also imposes requirements on manufacturers and sellers of regulated
products, which include labeling, manufacturing practices, record keeping and
reporting. The FDA also may impose post-marketing practices, record keeping and
reporting requirements. Although the FDA notification and approval process and
compliance with the record keeping and manufacturing requirements is costly and
time-consuming, the failure to receive requisite approvals, or significant
delays in obtaining such approvals, would prevent the Company from bringing
products to the market and could have a materially adverse effect on the
Company's business.
In January 1998, the Company received certification to the ISO 9001 Quality
Systems Standard and the European Medical Device Directive. These documents
have been adopted and legislated worldwide, including in the U.S., as the
minimum acceptable standards for the design, manufacture, and distribution of
products. Certification is granted only after an extensive compliance audit of
a company's systems and procedures by an independent third party approved by
officials of the European Union. Once granted, this certification and the
associated "CE" mark allows smooth movement of products across international
borders. Effective June 1998, import of products into the European Union is
prohibited without this approval.
MARKETING
Since 1995, the Company has devoted much of its resources to promotion and
development of light-activated and laser-based tooth whitening.
Since the acquisition by the Company of BSI and the BriteSmile LTW system, the
Company has entered into agreements with and marketed laser activated tooth
whitening products and the related BriteSmile chemicals to approximately one
hundred thirty independent, practicing dentists. Also, the Company sells and
markets chemicals for use in dentist-prescribed in-office and at-home tooth
whitening regimens, including the BriteSmile bleaching product and flavorings
for the BriteSmile gel.
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The Company's dental products are sold directly by the Company's internal sales
staff, although domestic and foreign independent representatives are also
authorized to sell the dental products. Some dental dealers are distributing
the Company's "at home" tooth whitening products. Sales to consumers are made
through dentists who prescribe treatment. The Company plans to open its own
Dentist-Administered BriteSmile Tooth Whitening Centers in the coming year. The
Company uses trade journal advertising, field salespersons, brochures, mailings,
trade shows, and high profile dentists to promote sales of dental products. No
customer accounted for more than 10% of net sales of the Company in fiscal 1997
or 1998.
The Company had backlog orders of approximately $91,945 as of March 31, 1998.
Backlog orders are orders scheduled for future delivery. When ordering,
customers generally specify the desired delivery date. OEMs generally order
several months in advance and arrange for lasers to be delivered to fit their
own manufacturing schedules. No customer has ever scheduled an order to be
delivered more than 12 months from the date of order. Most backlog orders at
March 31, 1998 were scheduled for delivery within six months of that date. In
the past, the Company has experienced very little difficulty meeting delivery
dates. During fiscal 1998 the Company experienced a continuation in warranty
claims, primarily relating to the argon lasers sold as part of the LTW system.
The Company believes that measures taken to launch new tooth whitening devices
will reduce such claims in future periods, but there can be no assurance that
similar problems will not continue or arise in the future.
DISTRIBUTION METHODS
Foreign and domestic sales over the past two fiscal years are summarized as
follows:
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1998 1997
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Domestic Sales $3,128,266 $6,233,264
Foreign Sales $1,480,987 $ 849,282
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Total Sales $4,609,253 $7,082,546
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In the United States, products are sold directly by the Company from its
facility in Lester, Pennsylvania and through dental distributors. Sales leads
are developed by attending trade shows, advertising in trade magazines, and
listing the products in trade buyers guides.
COMPETITION
The Company is aware of several companies that offer tooth whitening products
for the dental market. The Company attempts to continue to market most of its
products at more affordable prices than its competitors. Company management
believes that the Company must keep its product line technology current and
continue to pursue new market niches if it is to remain competitive. Research
and development efforts of the Company focus on bringing new technology to the
market at a lower price than the competition and continually updating the
features and applications of the product line. In fiscal 1998 and 1997, the
Company spent $906,040 and $232,949 respectively, on research and development.
It expects to continue to allocate to research and development in fiscal 1999
amounts at least comparable to prior years.
Competition for dentist-prescribed home bleaching products is from Opalescence
(Ultradent), Nite White (Discus Dental), Platinum (Colgate), NuPro gold
(Dentsply), Perfecta (American Dental Hygienics), and Rembrandt (DenMat).
There continue to be numerous entrants into the in-office tooth whitening
market. Some of the Company's current and potential competitors may have greater
financial and marketing resources available to them than the Company. Some
other competitors, such as Premier and Kreative, also offer both light-activated
devices and gels.
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THE CHINESE JOINT VENTURE
In April 1989, the Company formed a wholly-owned subsidiary, Ion Laser
Technology Development Company, a Utah corporation ("ILT Development"). ILT
Development was formed for the purpose of entering into a joint venture with
Shanghai Laser Technology Company and Shanghai Minhang United Development
Company Ltd., two companies headquartered in Shanghai, China. The joint venture
operates under the name "Shanghai Ion Laser Technology Company Limited" (the
"Joint Venture") and manufactures, markets and services lasers and related
equipment from facilities located in the People's Republic of China. For the
year ended March 31, 1998, the Joint Venture purchased approximately $36,751 in
products from the Company. Management of the Company is currently evaluating
the Company's continued affiliation with the Joint Venture.
PRODUCT LIABILITY
The Company may become subject from time to time to suits alleging negligence,
product liability or related causes of action, although no such action is
currently pending. The Company maintains product liability insurance coverage
for its products. While the Company intends to continue to insure against such
actions, there can be no assurance that the Company will be successful in
maintaining such coverage or that the limits of such policies will be adequate
or renewable at prices or on terms which are sufficient for the Company's
business. A successful claim against the Company in excess of any insurance
coverage could have a material adverse effect upon the Company and its financial
condition. Claims against the Company, regardless of the merit or eventual
outcome of such claims, also may have a material adverse effect on the Company's
reputation and business. Product liability insurance for the fiscal years ended
March 31, 1998 and 1997 cost the Company approximately $35,000 and $27,000,
respectively.
EMPLOYEES
As of the date of this report, the Company has 22 full-time employees. None of
the Company's employees are represented by a union and the Company is not aware
of any efforts to unionize any employees. The Company believes its labor
relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
In May 1998, the Company listed for sale the 35,000 square foot building at 3828
South Main Street, Salt Lake City, Utah which it has occupied since 1991.
Recently the Company has relocated it corporate offices to Pennsylvania. As of
July 1, 1998, the Company entered into a five year lease agreement for a 4,700
square foot facility in Lester, Pennsylvania. Approximately 2,500 square feet of
the building is used for administration and office space, and 1,700 square feet
is used for manufacturing and warehousing.
The Company has also entered into a five year lease agreement for a 2,654 square
foot research and development facility located at 827 Davis Street Building, 820
Davis Street, Evanston, Illinois, 62201. Dr. John Warner, the Company's new
Director of Research and Development, directs the research and development
activities at the Evanston site.
The Company's facilities in Lester and Evanston are in good repair. The Company
has no plans to undertake significant renovation at either location.
ITEM 3. LEGAL PROCEEDINGS
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On or about November 27, 1996, a lawsuit was filed against the Company by Jerry
B. Black in the Circuit Court of Jefferson County, Alabama. Other defendants
include BSI, David K. Yarborough, Judy B. Yarborough and BriteSmile. The
Company acquired the BSI assets from Yarborough in 1996. The lawsuit is based
on allegations of misappropriation of confidential and proprietary information
and/or trade secrets on the part of the defendants. Specifically, Black claims
that he identified a material that could be used to isolate teeth during
whitening procedures and to protect the gums and other soft tissues of the
mouth. Black claims that this technique was not previously known when he
disclosed it to Yarborough in February 1995 and that Yarborough promised to keep
the technique confidential. Instead, according to Black, Yarborough
incorporated the technique into the method for whitening teeth which he sold to
the Company in March 1996. Black seeks to recover both compensatory and
punitive damages from the defendants in an unspecified amount.
The parties have engaged in significant discovery, including the deposition of
Black. After conducting that discovery, the Company filed a Motion for Summary
Judgment. That motion has been argued and the Court took the matter under
advisement. Thus, the Company is awaiting the Court's ruling on the motion.
Although the Company feels confident in its position, it cannot predict with any
certainty whether the motion will be granted. Additionally, if the Court denies
the motion, the Company intends to conduct further discovery and to expand its
pleadings to include Black as a co-conspirator in its cross-claims for fraud
against Yarborough. Thus, it is difficult at this stage to predict in any
meaningful way the potential liability of the Company, if any. However,
management of the Company continues to believe that the plaintiff's claims are
without merit and is proceeding aggressively in defense of the plaintiff's
claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter of
fiscal 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since 1995, the Company's common stock has been listed for trading on the
American Stock Exchange ("AMEX"). Prior to that time, the Company's common
stock was traded in the over-the-counter market. The following table sets forth,
for each full quarterly period during the past two fiscal years, and subsequent
interim periods for which financial statements are presented in this report, if
any, high and low sales price information as reported by AMEX or other
electronic services, as the case may be.
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1996
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March 31 $20.000 $ 3.938
June 30 $30.875 $13.625
September 30 $19.625 $ 9.750
December 31 $13.875 $ 8.250
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1997
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March 31 $12.125 $6.500
June 30 $ 9.625 $6.750
September 30 $ 8.375 $3.625
December 31 $5.6875 $2.375
1998
----
March 31 $ 3.625 $2.500
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As of June 22, 1998, there were approximately 300 holders of record of the
Company's stock. This number excludes the Company's estimate of the number of
beneficial owners of shares held in street name, the accuracy of which cannot be
guaranteed.
The Company has not paid any cash dividends on its common stock since its
inception. The policy of the Board of Directors is to retain earnings to
support growth; therefore, the Company does not anticipate paying any cash
dividends on its common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In addition to the issuance of shares upon exercise of options or otherwise as
reported elsewhere in this report, within the past three years the Company has
issued securities in transactions summarized below without registration of the
securities under the Securities Act of 1933, as amended (the "Securities Act").
FISCAL 1996
On February 6, 1996, the Company entered into an agreement to purchase
substantially all of the assets of Bright Smile, Inc., an Alabama corporation,
owned by David Yarborough. The purchase price paid to Yarborough was $800,000,
payable by the issuance of 200,000 restricted shares of the Company's Common
Stock. Yarborough was employed by the Company's BriteSmile subsidiary from the
time of the acquisition until his resignation on June 13, 1997.
On March 31, 1996, the Company sold a total of 300,000 restricted shares of
Common Stock and options to acquire an additional 1,000,000 shares of Common
Stock to three accredited investors as that term is defined under Rule 501 of
Regulation D under the Securities Act. The total purchase price for these shares
and options was $5,000,000. The options were exercisable at $20.00 per share
through March 31, 2006.
FISCAL 1997
On May 8, 1997, the Company sold a total of 428,572 restricted shares of Common
Stock and options to purchase 500,000 additional shares of Common Stock to LCO
Investments Limited and Richard Braddock, two of the investors who had purchased
in the March 31, 1996 private placement, for a total purchase price of
$3,000,000. The options were exercisable at $9.00 per share through May 1,
2007. In addition, the Company repriced certain of the options granted in the
March 31, 1996 private placement held by these same investors, so that such
options also became exercisable at $9.00 per share.
11
<PAGE>
FISCAL 1998 AND SUBSEQUENT
On May 5, 1998, the Company sold a total of 1,860,465 restricted shares of
Common Stock to its major shareholder, LCO Investments Limited, for a total
purchase price of $5,000,000. LCO is a corporation organized under the laws of
Guernsey, Channel Islands, with a branch office in Dublin, Ireland. In
connection with the sale, the Company also agreed to reprice options to purchase
up to 1,173,334 shares of common Stock previously granted to LCO, such that the
purchase price of the shares underlying the old options was changed from $9.00
per share to $4.50 per share. 773,334 of said options are exercisable through
March 31, 2006. 400,000 of said options are exercisable through May 1, 2007.
The Company granted options to purchase up to 225,000 shares at $9.00 per share
to Mr. Cannady in fiscal 1998 pursuant to his Employment Agreement, only a
portion of which have vested. In addition, during fiscal year 1998 the Company
granted options to purchase up to 564,000 shares of Common Stock to its
employees, directors, or key consultants pursuant to the Company's 1997 Stock
Option and Incentive Plan. Exercise prices of the options granted range from
$1.75 to $9.00 per share. Certain of the options vest and become exercisable in
increments over time. The options granted in fiscal 1998 to many of the
employees will expire automatically as a result of the employees' termination of
employment with the Company, and option plan provisions which provide for
cancellation of the options, if unexercised, 90 days after termination of
employment.
Since March 31, 1998, the Company has granted options to purchase up to 675,000
shares to six employees, directors, or key consultants pursuant to the
Company's 1997 Stock Option and Incentive Plan. Of those options, 575,000 are
exercisable at $1.75 per share, and 100,000 are exercisable at $2.75 per share.
Certain of the options vest and become exercisable in increments over time, or
upon achievement of sales goals.
With respect to all of the foregoing offers and sales of restricted and
unregistered securities by the Company, the Company relied on the provisions of
Sections 3(b) and 4(2) of the Securities Act and rules and regulations
promulgated thereunder, and upon Regulation S promulgated by the Securities and
Exchange Commission, including, but not limited to Rules 505 and 506 of
Regulation D, in that such transactions did not involve any public offering of
securities and were exempt from registration under the Securities Act. The
offer and sale of the securities in each instance was not made by any means of
general solicitation, the securities were acquired by the investors without a
view toward distribution, and all purchasers represented to the Company that
they were sophisticated and experienced in such transactions and investments and
able to bear the economic risk of their investment. A legend was placed on the
certificates and instruments representing these securities stating that the
securities evidenced by such certificates or instruments, as the case may be,
have not been registered under the Securities Act and setting forth the
restrictions on their transfer and sale. Each investor also signed a written
agreement, or agreed to so sign upon exercise of their options, that the
securities would not be sold without registration under the Securities Act or
pursuant to an applicable exemption from such registration.
It is anticipated that the Company will register with the Securities and
Exchange Commission, on Form S-8, up to 1,135,000 of the shares of Common Stock
underlying options granted, and which may be granted, to officers, directors,
and key employees in fiscal 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto contained
elsewhere in this report. The discussion of these results should not be
construed to imply any conclusion that any condition or circumstance discussed
herein will necessarily continue in the future.
12
<PAGE>
When used in this report, the words "believes," "anticipates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report, or
to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Net Sales
- ---------
Sales for the fiscal year ended March 31, 1998 totaled $4,609,253 compared to
$7,082,546 in the prior fiscal year, a decrease of approximately $2,473,293 or
35%. Dental sales decreased $2,223,638 in the year ended March 31, 1998, from
$5,060,000 in 1997 to $2,836,362 in 1998. The decrease in dental sales
generally in fiscal 1998 was due primarily to the anticipated change in product
offering from the Company's LTW system to a new arc lamp TW system, as well as
certain defects experienced with the existing LTW system. Purchases of the
existing LTW system were deferred in anticipation of the introduction of the new
product in fiscal 1998. The new technology was defective and the Company had no
sales of the arc lamp TW system in fiscal 1998. The Company has discontinued all
development work on the arc lamp TW system. Management does however, anticipate
the introduction of a new Light Activated Tooth Whitening Device, BriteSmile
2000, in fiscal 1999.
Existing sales of tooth whitening chemical products should continue at rates
generally comparable to those of fiscal 1998. Sales of the industrial and
scientific lasers showed a sharp decrease in fiscal 1998. Total scientific and
industrial sales in fiscal 1998 were $984,300 compared to $1,450,733 in fiscal
1997. Subsequent to year-end, the Company sold the remaining industrial and
scientific assets to a laser manufacturer in Salt Lake City, Utah.
Cost of Sales
- -------------
The Company's cost of sales, exclusive of the write-downs, increased from 59%
of sales in fiscal year 1997 to 77% of sales in fiscal year 1998. The increase
is due to the reduced sales of the higher margin LTW systems, as well as
increased warranty costs as a percentage of sales.
Selling & Administrative Expenses
- ---------------------------------
Administrative expenses increased from approximately 18.2 % of sales in fiscal
1997 (approximately $1,291,628) to 55% of sales in fiscal 1998 (or approximately
$2,534,727). The Company had increases in expenses over prior year for
shareholder relations, computer systems administration and human resources. The
Company incurred significant legal expenses in 1998 to protect its intellectual
property. Total legal and professional fees were $555,600 in fiscal 1998.
Selling expenses in fiscal 1998, were $2,395,543 or 52% of sales, compared to
$2,161,874 or approximately 30.5% of sales in fiscal 1997. A disproportionate
amount was expended on marketing the failed arc lamp TW device.
During fiscal 1997, the Company spent significant resources developing a direct-
response marketing campaign in an effort to expand the laser tooth whitening
market. The costs involved in developing this campaign were originally
capitalized. In fiscal 1998 all such deferred costs were expensed.
Research & Development Expenses
- -------------------------------
13
<PAGE>
Research and development expenses were $906,040 or 20% of sales and $232,949 or
3% of sales in fiscal 1998 and 1997 respectively representing an increase of
$673,091 in fiscal 1998. The increase in research and development expenses is
largely attributable to the development problems incurred by the Company with
respect to the failed arc lamp TW system. Subsequent to year end, the Company
has established a new research and development facility in Evanston, Illinois
under the direction of Dr. John Warner. The research and development team is
currently focused on the development of a new Light Activated Tooth Whitening
Device, BriteSmile 2000. Management anticipates research and development
expenditures to continue at rates at least comparable to prior years.
Asset Impairment and Write-Downs
- --------------------------------
The Company's declining sales and ongoing operating losses in fiscal 1998, which
further deteriorated in the fourth quarter of fiscal 1998, were indicators that
certain of the Company's assets were impaired. Accordingly, the Company recorded
total charges of $4,289,610 related to the impairment and write-down of certain
assets which will provide limited or no future benefit to the Company. Included
in the charges were the following: (i) $421,154 write-down of fixed assets,
(ii) $1,293,870 write-off of goodwill and patent costs relating to products or
technologies which the Company no longer intends to use and/or pursue; (iii)
$301,906 write-off of deferred marketing costs related to a direct-response
marketing campaign which had been developed in 1997 in an effort to expand the
laser tooth whitening market. The company aborted this marketing strategy in
fiscal 1998; and (iv) $2,272,680 write-down of inventories which have been
rendered obsolete or will be discontinued by the Company and either scrapped or
sold at substantially reduced values. The inventory write-downs have been
classified as cost of products sold--inventory write-downs.
Interest Income and Expense
- ---------------------------
Interest income in fiscal 1998 was $83,096. This income was related to cash
deposits made in connection with a $3,000,000 private placement of the Company's
securities in May, 1997.
Interest expense increased from approximately $109,000 during fiscal 1997 to
approximately $119,600 in fiscal 1998. The fiscal 1998 interest expense was
incurred primarily in respect of interest on the capital leases and the long-
term mortgage on the Company's Salt Lake City facility.
Income Taxes
- ------------
The Company had no income tax expense during fiscal 1998 due to its operating
loss. Furthermore, no income tax benefit was recognized due to the uncertainty
associated with the Company's ability to realize its deferred assets, comprised
primarily of net operating loss carryforwards. For further information on
income taxes and the remaining net operating loss carry forward available to the
Company, see Note 6 of the Notes to Consolidated Financial Statements.
Inflation
- ---------
The Company actively strives to contain costs on parts from suppliers by
renegotiating purchase order contracts. Inflation has not been a major factor
in the past and is not seen as a major factor that will impact the Company'
operations in the immediate future.
14
<PAGE>
Net Income (Loss)
- -----------------
The Company incurred a net loss of $9,112,693 in fiscal 1998, compared to a net
loss of $779,252 in 1997, of which $4,289,610 was due to asset impairment and
write-downs. The operating loss is due in large part to lower sales during
fiscal 1998, large increases in marketing or administrative expenses and legal
and research and development costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased $448,057 during fiscal 1998 mainly due to
the $3,000,000 capital infusion in April, 1997. Capital investment used
approximately $619,000 to purchase machinery and equipment used in production
processes and computer systems used in sales, production and administration of
the Company.
At March 31, 1998, the Company has outstanding purchase orders to acquire up to
approximately $2 million of inventory and supplies over an 18 month period. In
connection with the reduced level of operations, management is attempting to
cancel these orders.
In this section, the term "Current Ratio" means current assets divided by
current liabilities. "Working Capital" means current assets less current
liabilities.
The Company's Current Ratio and Working Capital at March 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Ratio 1.64 4.5
Working Capital $1,197,721 $3,563,894
</TABLE>
In May, 1998, the Company completed a private placement of its' common stock in
which it obtained proceeds of approximately $5,000,000. As of June 30, 1998,
the expected cash position of the Company will be approximately $4,000,000. As
a result of the curtailment of the operations in Sale Lake City and reduced
scope of operations, the Company believes that cash on hand, cash flow from
sales and amounts generated through sale of certain assets will be sufficient to
meet the Company's needs for the next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This Standard will become effective for the
Company's 1999 fiscal year. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. Management is currently assessing the impact of
implementation of this Standard on the consolidated financial statements of the
Company and does not believe that the implementation will have a material impact
on the Company's financial statements.
YEAR 2000
Many computer systems experience problems handling dates beyond the year 1999.
This is referred to widely as the "Year 2000" issue. As a result of the May
1998 closure of its Salt Lake City manufacturing facility and downsizing of its
operations, the potential impact of the Year 2000 issue on the Company is
greatly reduced. Additionally, the Company is in the process of upgrading its
primary financial and management systems, which upgrades are planned to be Year
2000 compliant. The Company continues to evaluate the Year 2000 exposures
15
<PAGE>
presented by its significant suppliers and other vendors whose systems may
impact the Company's operations. However, based on the significant reduction in
operations noted above, management believes that the Year 2000 issue will not
have a material impact on the Company's operations.
ITEM 7. FINANCIAL STATEMENTS
The Company's consolidated financial statements and associated notes are set
forth on pages F-1 through F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following sets forth the name, age and position of each director and
executive officer of the Company as of the date of this report:
NAME AGE CURRENT POSITION(S)/1/
- ------------------- --- ------------------------------------------
Richard V. Trefz 56 President, Chief Executive Officer and Director
David W. Bruhin 57 Vice President of Marketing, Business
Development and Planning
Brian G. Delaney 29 Acting Chief Financial Officer, Acting Company
Secretary, Director
Anthony M. Pilaro 62 Director
Linda S. Oubre 39 Director
R. Eric Montgomery 43 Director
E. Wyatt Cannady 60 Director
- -----------------
/1/ All directors serve for one year and until their successors are elected and
qualified. All officers serve at the pleasure of the Board of Directors.
There are no family relationships between any of the officers and
directors.
RICHARD V. TREFZ
Mr. Trefz became a member of the Board of Directors in November 1997. He was
appointed the President and CEO of the Company on June 1, 1998. From January
1995 to May 1998, Mr. Trefz was the Divisional CEO of Inductotherm Industries,
Inc., the world's leading and largest manufacturer of induction melting
equipment. Prior to that position, Mr. Trefz was President of DEN-TAL-EZ, Inc.
Mr. Trefz held various management positions with DEN-TAL-EZ, and ultimately
served as President from 1989 to 1994. Under his leadership as President, the
Company achieved the number two market share in dental handpieces, number one
share in vacuum systems, and number four position in operatory equipment in a
field of 15 manufacturers.
DAVID W. BRUHIN
16
<PAGE>
Mr. Bruhin was appointed Vice President of Marketing, Business Development and
Planning on June 1, 1998. Mr. Bruhin has more than 18 years of senior management
and consulting experience. He is currently in the process of establishing a
Marketing and Customer Service Center at the Company's newly established
headquarters in Lester, Pennsylvania, enabling the Company to more efficiently
respond to dentists' needs. From August 1995 to May 1998, Mr. Bruhin was
President of the Swarthmore Consulting Group, where he provided business
planning, marketing, consulting and acquisition advisory services to clients in
the dental industry. Prior to this position, he was Vice President of DEN-TAL-
EZ, Inc., where he undertook a wide range of responsibilities in management,
sales and marketing, and business and product development.
BRIAN G. DELANEY
Mr. Delaney was appointed Acting Chief Financial Officer and Acting Secretary of
the Company on May 5, 1998. He is currently employed with CAP Advisors Limited,
an affiliate of the Company, in their Dublin branch. He holds the position of
CAP Group Financial Director. Prior to serving with CAP, Mr. Delaney qualified
as a Chartered Accountant with Price Waterhouse where he worked as a Senior
Auditor for a wide variety of local and international clients.
ANTHONY M. PILARO
Mr. Pilaro has been a director of the Company since August, 1997. Presently, he
serves as Chairman of CAP Advisors Limited and maintains offices in Dublin,
Ireland. He is also Chairman of Excimer Vision Leasing L.P., a partnership
engaged in the business of leasing excimer laser systems. Mr. Pilaro has been
involved in private international investment banking. He was a Founding
Director and former Chief Executive Officer of Duty Free Shoppers Group Limited,
a founder of the predecessor VISX, Inc., and a founder and principal owner of
Excimer Vision Leasing, LP. A graduate of the University of Virginia '57, and
the University of Virginia Law School '60, Mr. Pilaro practiced law in New York
City through 1964.
LINDA S. OUBRE
Linda S. Oubre commenced serving as a director of the Company on May 21, 1998.
Ms. Oubre is the President of Tri Com Ventures in Walnut Creek, California. The
firm specializes in new venture planning and implementation consulting. Her
clients have included McGraw Hill's Business Week Magazine, Prodigy Online
----------------------
Service, and the United Nations Business Development Project in the Republic of
Belarus. Prior to starting Tri Com Ventures in 1996, Ms. Oubre was General
Manager, New Business Development, for the Los Angeles Times, and also served as
-----------------
Director of Operations for Walt Disney's Consumer Products Division and Manager
of Financial Planning for the Times Mirror Company. She has also been a
visiting instructor at the Wharton Business School.
R. ERIC MONTGOMERY
Mr. Montgomery has been a director of the Company since May 5, 1998. Mr.
Montgomery is an experienced consultant, researcher and entrepreneur in the oral
care and cosmetic products industries, and has been granted over 65 US and
foreign patents since 1981. Previously, from November 1997 until May 1998, he
served as an independent consultant to the Company through Applied Dental
Sciences, Inc. (Monterey, MA), the oral care products research and development
firm of which he has been President since 1992. Mr. Montgomery is also the
Founding Manager and President of OraCeutical LLC (Lee, MA), an organization
dedicated to the development of next generation products for use in the
professional dental office. Mr. Montgomery's organizations have developed
products for companies including The Dial Corporation, Natural White,
AgriNutrition, ProHealth Laboratories, OPI Products, American Dental Hygienics,
and Boots PLC. Mr. Montgomery is also President of IDEX Dental Sciences, Inc.
(Lee, MA), an intellectual property holding firm established by Mr. Montgomery
in March 1996.
17
<PAGE>
E. WYATT CANNADY
Mr. Cannady served as the President and Chief Executive Officer of the Company
from February 24, 1997 to April 1998. He has been dismissed as President and
CEO for cause. He was appointed a member of the Board of Directors of the
Company in April 1997. Mr. Cannady's service as a director of the Company will
expire in connection with the Company's Annual Meeting of Shareholders scheduled
to be held in August, 1998. Prior to joining the Company, Mr. Cannady served
from July 1994 to February 1997 as the President and Chief Executive Officer of
Spectranetics Corp., a Colorado Springs, Colorado, firm engaged in the business
of designing and manufacturing medical devices. From January 1992 to June 1994,
Mr. Cannady was the President and Chief Executive Officer of Loredan Biomedical,
Inc., Sacramento, California, also engaged in the development and manufacture of
medical devices.
Significant Employees or Consultants
- ------------------------------------
JOHN W. WARNER
Mr. Warner accepted the position of Research and Development Director for the
Company on May 15, 1998. Mr. Warner is an experienced research and technology
consultant and entrepreneur who was one of the leading contributors to the
development of ophthalmic applications of laser technology. Dr. Warner will
lead the Company's assessment of existing products and LATW development efforts
at research and development facilities recently established by the Company in
Evanston, Illinois. Dr. Warner has served as a consultant to Northwestern
University in the areas of technology development and commercialization. From
March 1986 to December 1990 he was the founder and CEO of Taunton Technologies,
Inc., a predecessor of VISX, Inc., engaged in the business of developing and
manufacturing excimer laser systems to perform ophthalmic surgery.
MICHAEL B. KNIGHT, DDS
Dr. Knight, a graduate of Bayler College of Dentistry ('87), currently serves as
a clinical dental advisor to the Company. He began work with the BriteSmile
tooth whitening system in the Spring of 1996, and was asked to help the Company
with the training of dentists across the US late in 1996. He assumed the duties
as director of training for the Company in the Spring of 1997, and in the Fall
of 1997, he left his successful private practice of 10 years to join the Company
in a full-time capacity. His duties primarily include the clinical testing and
evaluation of all Company products, the development of procedural protocol, and
interfacing with the dental community seeking technical assistance with the
BriteSmile tooth whitening procedure and products. Dr. Knight has successfully
treated over 400 patients with the BriteSmile system.
SALIM A. NATHOO
Dr. Nathoo was formerly employed by Colgate-Palmolive Co. as a Senior Researcher
from 1990 to 1998 and was a key player in the successful worldwide launch of the
Colgate Whitening program during his tenure there. Dr. Nathoo has lectured
globally on both the clinical and scientific aspects of tooth whitening, and he
is recognized as one of the leading authorities on the subject. Dr. Nathoo is
currently one of the founders of OraCeutical LLC and heads up its clinical
research arm, Oral Health Clinical Services, LLC (Piscataway, NJ). Dr. Nathoo
holds both a PhD and DDS from New York University, and has published over 40
papers in major scientific journals.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who beneficially own more than 10 percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10 percent shareholders are required by regulation of
the Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon its review of the copies of such forms furnished to it during
the fiscal year ended March 31, 1998, and representations made by certain
persons subject to this obligation that such filings were not required to be
made, the Company believes that all reports required to be filed by these
individuals and persons under Section 16(a) were filed in a timely manner and
the Company is not aware of any transactions in its outstanding securities by or
on behalf of any director, executive officer or 10 percent holder, which would
require the filing of any report pursuant to Section 16(a) during the fiscal
year ended March 31, 1998, that was not filed with the Commission.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows compensation paid by the Company
for services rendered during the past three fiscal years to E. Wyatt Cannady,
who served as the Company's Chief Executive Officer during the last fiscal year.
In April 1998, at the request of the directors of the Company, Mr. Cannady
resigned as the company's President and Chief Executive Officer. The Company has
appointed Richard V. Trefz as its new President and CEO, effective June 1, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION /1/ AWARDS
---------------------------------------------
NAME AND PRINCIPAL
POSITION YEAR SALARY BONUS OPTIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. Wyatt Cannady
President and CEO
since February 24, 1997 1998 $175,000 $ -0- -0-
1997 $ 19,080/(2)/ $25,000/(3)/ 225,000/(4)/
</TABLE>
- -----------------
/1/ Compensation deferred at the election of the executive, pursuant to the
Ion Laser Technology Profit Sharing Plan, is included in the year earned.
/2/ Base salary for the period February 24, 1997 (commencement of
employment) through March 31, 1997.
/3/ Signing bonus pursuant to Employment Agreement effective February 24,
1997.
/4/ Vest and become exercisable at the rate of 18,750 each April 1, July 1,
October 1 and January 1 during the Employment Agreement term, commencing
April 1997. Mr. Cannady's entitlement to options granted pursuant to his
Employment Agreement with the Company is in dispute as a result of the
Company's termination of Mr. Cannady's employment. See "Employment
Contracts and Termination of Employment Agreements," below.
19
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND MARCH 31, 1998 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS AT OPTIONS AT
ACQUIRED ON REALIZED MARCH 31, 1998/1/ MARCH 31, 1998/2/
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. Wyatt Cannady 0 0 75,000 150,000 $0 $0
</TABLE>
______________
/1/ Mr. Cannady's entitlement to options granted pursuant to his Employment
Agreement with the Company is in dispute as a result of the Company's
termination of Mr. Cannady's employment. See "Employment Contracts and
Termination of Employment Agreements," below.
/2/ Potential unrealized value is calculated as the fair market value at
March 31, 1998 ($2.44 per share) less the option exercise price times the
number of shares.
COMPENSATION OF DIRECTORS
Since March 31, 1996, the Board has been compensated pursuant to a program under
which all directors receive options to purchase 5,000 shares of common stock per
year for each year during which they serve as a director. The exercise price of
such options is 100% of the fair market price on the date of grant.
Additionally, outside directors have received cash payment in the amount of $500
per meeting physically attended; outside directors receive no cash compensation
for telephonic participation. Actual expenses incurred by outside directors are
compensated.
Certain new directors of the Company have been granted Units of Company equity
participation by LCO Investments Limited, a major shareholder of the Company.
As of May 11, 1998, LCO adopted an Incentive Compensation Plan (the "LCO Plan").
Under the LCO Plan, certain key employees, consultants or directors of the
Company may be given the opportunity to benefit from the appreciation in the
value of the LCO's present equity holdings in the Company. Such appreciation
rights are granted by way of incentive compensation units ("Units"), whose value
is determined by the increase in value of LCO's present holdings of Company
Common Stock above a prescribed base value of $4.75 per share. Each Unit
represents a percentage interest (determined by the total number of Units
granted under the LCO Plan) in such increase in value of LCO's holdings. In May
1998, LCO granted Units to the following directors of the Company as incentive
compensation: Richard Trefz, Brian Delaney, and Linda Oubre.
Pursuant to an Agreement in effect from November, 1997 through May 1998, Richard
Trefz received compensation from a Company affiliate, CAP Advisers Limited,
related to Mr. Trefz' service as a director of the Company. During the period
the Agreement was in force, Mr. Trefz received a consulting fee, paid by CAP
Advisers Limited, of $25,000. Mr. Trefz also received options to purchase
50,000 shares of Common Stock of the Company owned by CAP Advisers, at an
exercise price of $4.00 per share. Such options are exercisable at any time
through November 19, 2002, provided the options are exercised while Mr. Trefz is
a director, or within 30 days after the date he ceases to be a director. As of
June 1, 1998, this Agreement has been terminated and replaced with an Employment
Agreement relating to Mr. Trefz' appointment as President and CEO of the
Company.
20
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
E. Wyatt Cannady served as President and CEO of the Company from February 24,
1997 to April 1998, pursuant to the terms of an Employment Agreement dated April
25, 1997. The Employment Agreement provided for Mr. Cannady to serve until
March 31, 2000, at an annual base salary of $175,000 for the first year,
$195,000 for the second year, and $195,000 for the third year. Other benefits
included a one-time signing bonus of $25,000, annual bonuses contingent upon
achievement of goals established by the Board, participation in all incentive,
savings, retirement and welfare plans of the Company, reimbursement for
commuting from his residence to the Company's Salt Lake City office, and
reasonable secondary living expenses in Salt Lake City for one year. The
Agreement also provided for the grant of options to purchase 225,000 shares of
Common Stock of the Company at $9.00 per share, vesting 18,750 shares each
quarter.
With respect to compensation payable upon termination of employment, the
Agreement provides that if Mr. Cannady is terminated for cause, the Company is
released from most future financial obligations under the Agreement. However,
if he is not terminated for cause, he would be contractually entitled to
continue to receive his salary and benefits for one year, as well as stock
options, warrants and other similar rights. It is the position of the Company
that Mr. Cannady's employment was terminated for cause.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 22, 1998 regarding
beneficial stock ownership of (i) all persons known to the Company to be
beneficial owners of more than 5% of the outstanding common stock; (ii) each
director or director nominee, and each person who served at any time during
fiscal year 1998 as the Company's CEO, and (iii) all officers and directors of
the Company as a group. Each of the persons in the table below has sole voting
power and sole dispositive power as to all of the shares shown as beneficially
owned by them except as otherwise indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES BENEFICIALLY OWNED PERCENT OF OUTSTANDING SHARES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Richard V. Trefz
Airport Business Center
200 Diplomat Drive, Bay 204
Lester, PA 19113 25,000/2/ *
Brian G. Delaney
36 Fitzwilliam Place
Dublin 2, IRELAND -0- *
Anthony M. Pilaro
36 Fitzwilliam Place
Dublin 2, IRELAND 3,680,557/3/ 41.6%
R. Eric Montgomery
29 Fairview Road
P. O. Box 487
Monterey, MA 01245 175,000/4/ 2.2%
Linda S. Oubre
101 Ygnacio Valley Road, Suite 212
Walnut Creek, CA 94596 -0- *
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
E. Wyatt Cannady
P. O. Box 3089
Dana Point, CA 92629 75,000/1/ *
All Officers and Directors as a Group
(7 persons) 4,005,557/6/ 43.8%
5% BENEFICIAL OWNERS
LCO Investments Limited
Canada Court
Upland Road
St. Peter Port
Guernsey
Channel Islands 3,680,557/5/ 41.6%
</TABLE>
_________________
* Constitutes less than 1%.
/1/ Represents shares Mr. Cannady may have the right to acquire through the
exercise of options to purchase shares of Common Stock at $9.00 per
share. See, however, discussion regarding termination of Mr. Cannady's
Employment Agreement under "Employment Contracts and Termination of
Employment Arrangements."
/2/ Owned of record and beneficially.
/3/ Represents shares owned of record and beneficially by LCO Investments
Limited, including options to purchase 1,173,334 shares exercisable at
$4.50 per share. Mr. Pilaro is Chairman of CAP Advisors Limited. CAP
Advisors is the sole trustee of the ERSE Trust, of which LCO Investments
Limited is a wholly-owned subsidiary.
/4/ Represents shares which Mr. Montgomery has the right to acquire upon
the exercise of options exercisable at $3.20 per share.
/5/ Includes 1,173,334 shares subject to purchase within 60 days upon the
exercise of options. LCO Investments Limited is a wholly-owned subsidiary
of the ERSE Trust. The sole trustee of the ERSE Trust is CAP Advisers
Limited. Mr. Pilaro, a director of the Company, is Chairman of CAP
Advisors Limited.
/6/ Percentage based upon 9,143,106 shares outstanding, assuming exercise
by officers and directors of all stock options exercisable within 60 days
beneficially owned by them.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 5, 1998, the Company issued and sold 1,860,465 shares of its Common Stock
(the "Shares") to its major shareholder, LCO Investments Limited, pursuant to a
Stock Purchase Agreement dated as of May 4, 1998 (the "May 1998 Purchase
Agreement"). See Item 1, "Recent Business Developments--May 1998 Equity
Financing," above. LCO Investments Limited currently owns approximately 42% of
the Company, assuming exercise of outstanding options held by LCO. LCO is a
wholly-owned subsidiary of the ERSE Trust. The sole trustee of the ERSE Trust
is CAP Advisers Limited. Mr. Pilaro, a director of the Company, is Chairman of
CAP Advisors Limited.
22
<PAGE>
On May 12, 1997, the Company closed a private placement of 428,572 shares of
Common Stock of the Company (the "Shares"), and options to purchase 500,000
shares of Common Stock (the "Options"), pursuant to a Securities Purchase
Agreement dated as of May 8, 1997 (the "May 1997 Purchase Agreement"). The total
consideration received by the Company for the Shares and the Options in this
offering was $3,000,000. The Options are exercisable at any time until the close
of business on May 1, 2007. Pursuant to the May 1998 financing described above,
the exercise price of the options was amended to $4.50 per share. The Shares and
Options were sold to LCO Investments Limited and Richard S. Braddock, the
Chairman of the Board of the Company (the "Purchasers"). The Shares, and the
shares of Common Stock underlying the Options, are restricted and may not be
transferred or sold, except as permitted by the May 1997 Purchase Agreement, for
a period of one year after their acquisition by the Purchasers. The Shares,
including the shares issuable upon exercise of the Options, are subject to
certain piggyback and demand registration rights, as provided by a separate
Registration Rights Agreement dated as of May 8, 1997.
The Purchasers had invested in the Company previously by purchasing 280,000
shares of Common Stock and options to purchase 966,667 shares of Common Stock
under a Securities Purchase Agreement dated as of April 1, 1996, for a total
purchase price of $4,683,334.
The Company is negotiating, and anticipates entering into, an agreement with
OraCeutical LLC of Lee, Massachusetts, pursuant to which OraCeutical will
provide technology development services to the Company related to various light-
activated tooth whitening products and procedures, and a new, advanced
BriteSmile take-home tooth whitening product. Mr. Eric Montgomery, a director of
the Company, is the Founding Manager and President of OraCeutical, an
organization dedicated to the development of next generation products for use in
the professional dental office.
The Company expects to enter into a Consulting Agreement with its director,
Linda Oubre, pursuant to which Ms. Oubre will be retained for an initial term of
one-year at an hourly rate to conduct market research related to the
establishment of Company-owned tooth whitening centers throughout the United
States.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the Commission:
(A) EXHIBITS
Exhibit Number Title of Document
- -------------- -----------------
2 Asset Purchase Agreement and Plan of Reorganization by and
among BriteSmile, Inc., an Alabama corporation, BriteSmile,
Inc., a Utah corporation, and David K. Yarborough, together
with the exhibits and schedules forming part of the Asset
Purchase Agreement (incorporated by reference to the
Company's Current Report on Form 8-K dated March 7, 1996).
3.01 Articles of Incorporation and Amendments thereto
(incorporated by reference to the Company's Registration
Statement and Amendments thereto on Form 10 initially filed
August 8, 1990).
23
<PAGE>
3.02 Bylaws adopted May 2, 1996, (incorporated by reference to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1996).
10.01 Manufacturing and Office Space Lease (incorporated by
reference to the Company's Registration Statement and
Amendments thereto on Form 10 initially filed August 8,
1990).
10.02 The Contract for the Joint Venture (incorporated by
reference to the Company's Registration Statement and
Amendments thereto on Form 10 initially filed August 8,
1990).
10.03 Technology Transfer Contract for the Joint Venture
(incorporated by reference to the Company's Registration
Statement and Amendments thereto on Form 10 initially filed
August 8, 1990).
10.04 Articles of Association for the Joint Venture (incorporated
by reference to the Company's Registration Statement and
Amendments thereto on Form 10 initially filed August 8,
1990).
10.05 1990 Stock Option Plan for Employees of the Company
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996).
10.06 Securities Purchase Agreement dated April 1, 1996 for
300,000 shares of Common Stock and Options to Purchase
1,000,000 shares of Common Stock at $20 per share, between
the Company, LCO Investments Limited, Pinnacle Fund L.P.,
and Richard S. Braddock (incorporated by reference to the
Current Report on Form 8-K of the Company dated April 1,
1996).
10.07 Registration Rights Agreement dated April 1, 1996 between
the Company, LCO Investments Limited, Richard S. Braddock,
and Pinnacle Fund, L.P. (incorporated by reference to the
Current Report on Form 8-K of the Company dated April 1,
1996).
10.08 Employment Agreement dated April 25, 1997, effective
February 24, 1997, between the Company and E. Wyatt Cannady
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1997).
10.09 1997 Stock Option and Incentive Plan of the Company
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1997).
10.10 Securities Purchase Agreement dated May 8, 1997 for 428,572
shares of Common Stock and Options to Purchase 500,000
shares of Common Stock at $9.00 per share, among the
Company, LCO Investments Limited, and Richard S. Braddock
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1997).
10.11 Registration Rights Agreement dated May 8, 1997 among the
Company, LCO Investments Limited, and Richard S. Braddock
(incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1997).
24
<PAGE>
10.12 Stock Purchase Agreement dated as of May 4, 1998 for
1,860,465 shares of Common Stock, between the Company and
LCO Investments Limited, filed herewith.
10.13 Registration Rights Agreement dated as of May 4, 1998
between the Company and LCO Investments Limited, filed
herewith.
10.14 Consulting Agreement dated November 1997 between CAP
Advisers Limited and Richard Trefz, filed herewith.
21 Subsidiaries of the Company, incorporated by reference to
the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1996, previously filed.
27 Financial Data Schedule, filed herewith.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated May 4, 1998 for the
purpose of reporting the purchase of additional shares of Company Common Stock
by LCO Investments Limited, and the related resignation of Company directors and
appointment of new Company directors.
25
<PAGE>
SIGNATURES
In accordance with Section 13 and/or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ION LASER TECHNOLOGY, INC.
By: /s/ Brian G. Delaney
______________________________________
Brian G. Delaney
Acting Chief Financial Officer and Director
Dated June 27, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Richard V. Trefz June 27, 1998
- ---------------------
Richard V. Trefz President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Anthony M. Pilaro Director June 27, 1998
- ---------------------
Anthony M. Pilaro
/s/ Linda S. Oubre Director June 27, 1998
- ---------------------
Linda S. Oubre
/s/ R. Eric Montgomery Director June 27, 1998
- ---------------------
R. Eric Montgomery
26
<PAGE>
Ion Laser Technology, Inc.
Consolidated Financial Statements
Years ended March 31, 1998 and 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................ F-1
Consolidated Financial Statements
Consolidated Balance Sheets............................................. F-2
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Changes in Redeemable Common Stock
and Shareholders' Equity.............................................. F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Ion Laser Technology, Inc.
We have audited the accompanying consolidated balance sheets of Ion Laser
Technology, Inc., and subsidiaries as of March 31, 1998 and 1997 and the related
consolidated statements of operations, changes in redeemable common stock and
shareholders' equity, and cash flows for the years ended March 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ion
Laser Technology, Inc., and subsidiaries as of March 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for the years
ended March 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
June 3, 1998
Salt Lake City, Utah
F-1
<PAGE>
Ion Laser Technology, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1998 1997
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 503,279 $ 55,222
Accounts receivable, less allowance of
$189,565 and $104,875 at March 31, 1998
and 1997, respectively 531,059 1,412,625
Inventories 321,450 2,872,167
Prepaid expenses 58,533 226,326
Deferred taxes and other 313 20,515
Assets held for sale 1,667,790 --
-----------------------------
Total current assets 3,082,424 4,586,855
Property, plant and equipment, net 765,424 2,592,035
Investment in joint venture 174,839 189,360
Goodwill, less accumulated amortization of
$261,134 at March 31, 1997 -- 1,246,334
Patent costs, less accumulated amortization
of $7,893 and $8,775 at March 31, 1998 and
1997, respectively 426,369 414,493
Receivable from joint venture 212,805 232,945
Other assets -- 455,827
-----------------------------
Total assets $4,661,861 $9,717,849
=============================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Ion Laser Technology, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
MARCH 31
1998 1997
---------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 29,925 $ 45,529
Accounts payable 722,259 676,059
Accrued liabilities 953,235 194,551
Accrued warranty costs 85,111 76,348
Current portion of long-term debt 94,173 30,474
---------------------------
Total current liabilities 1,884,703 1,022,961
Long-term debt, less current portion 930,742 845,583
Commitments and Contingencies (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value:
Authorized shares 50,000,000
Issued and outstanding shares 5,809,307 and
5,144,030 at March 31, 1998 and 1997,
respectively 5,809 5,144
Additional paid-in capital 11,902,126 8,793,074
Accumulated deficit (10,011,306) (898,613)
Cumulative translation adjustment (50,213) (50,300)
---------------------------
Total shareholders' equity 1,846,416 7,849,305
---------------------------
Total liabilities and shareholders' equity $ 4,661,861 $9,717,849
===========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Ion Laser Technology, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997
---------------------------------
<S> <C> <C>
Net sales $ 4,609,253 $7,082,546
Cost of products sold:
Product sales 3,540,552 4,205,273
Inventory write-downs 2,272,680 --
---------------------------------
Total cost of products sold 5,813,232 4,205,273
Gross margin (1,203,979) 2,877,273
Selling and administrative expenses 4,930,270 3,453,502
Research and development expenses 906,040 232,949
Impairment charges and write-down of assets 2,016,930 --
---------------------------------
(9,057,219) (809,178)
Interest expense (119,643) (109,310)
Interest income 83,096 110,057
Other income (expense) (18,927) 40,180
---------------------------------
Net loss before income taxes (9,112,693) (768,251)
Income tax expense -- 11,001
Net loss $(9,112,693) $ (779,252)
=================================
Loss per common share - basic and diluted $ (1.62) $ (.15)
=================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Ion Laser Technology, Inc.
Consolidated Statements of Changes in Redeemable Common Stock and
Shareholders' Equity
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
REDEEMABLE ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN ACCUMULATED
------------------------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 150,000 $ 338,540 4,933,630 $4,934 $ 8,469,829 $ (119,361)
Exercise of stock options - - 210,400 210 384,705 -
Redemption of redeemable stock (150,000) (338,540) - - (61,460) -
Foreign currency translation adjustment - - - - - -
Net loss - - - - - (779,252)
-------------------------------------------------------------------------
Balance at March 31, 1997 - - 5,144,030 $5,144 $ 8,793,074 $ (898,613)
Exercise of stock options - - 236,705 237 109,480 -
Private Placement of common stock - - 428,572 428 2,999,572 -
Foreign currency translation adjustment - - - - - -
Net loss - - - - - (9,112,693)
-------------------------------------------------------------------------
Balance at March 31, 1998 - $ - 5,809,307 $5,809 $11,902,126 $(10,011,306)
=========================================================================
<CAPTION>
CUMULATIVE TOTAL
TRANSLATION SHAREHOLDERS
ADJUSTMENT EQUITY
----------------------------------
<S> <C> <C>
Balance at March 31, 1996 $(50,331) $ 8,305,071
Exercise of stock options - 384,915
Redemption of redeemable stock - (61,460)
Foreign currency translation adjustment 31 31
Net loss - (779,252)
------------------------------------
Balance at March 31, 1997 (50,300) $ 7,849,305
Exercise of stock options - 109,717
Private Placement of common stock - 3,000,000
Foreign currency translation adjustment 87 87
Net loss - (9,112,693)
------------------------------------
Balance at March 31, 1998 $(50,213) $ 1,846,416
====================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Ion Laser Technology, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997
----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,112,693) $ (779,252)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 421,997 255,433
Provision for losses on accounts receivable 84,690 64,875
Impairment and asset write-downs 4,289,610 -
Loss from joint venture operations 14,608 8,557
Changes in operating assets and liabilities:
Accounts receivable 817,016 (226,281)
Inventories 278,037 (1,523,306)
Prepaid expenses 167,793 (100,329)
Other assets 174,123 (411,713)
Accounts payable and accrued liabilities 804,884 (135,070)
Accrued warranty costs 8,763 (21,149)
--------------------------------------------
Net cash used in operating activities (2,051,172) (2,868,235)
INVESTING ACTIVITIES
Patent costs (124,900) (286,940)
Additions to property, plant and equipment (618,842) (1,264,922)
--------------------------------------------
Net cash used in investing activities (743,742) (1,551,862)
FINANCING ACTIVITIES
Proceeds from issuance of debt 310,968 -
Payments on debt (162,110) (591,508)
Payments on note payable (15,604) -
Proceeds from sale of common stock and exercise of
stock options 3,109,717 384,915
Redemption of common stock - (400,000)
Net cash provided by (used in) financing activities 3,242,971 (606,593)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 448,057 (5,026,690)
------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55,222 5,081,912
------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 503,279 $ 55,222
==========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 119,612 $ 109,310
Taxes paid - -
</TABLE>
See accompanying notes.
F-6
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements
March 31, 1998
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ion Laser Technology, Inc. (the Company) is a Utah corporation in the business
of developing, manufacturing and selling light-activated and laser-based dental
and medical devices and, where applicable, the chemical agents used in
connection with these devices. The Company sells to the dental market, original
equipment manufacturers (OEMs) and has also sold to industrial and scientific
users. The Company, under its "BriteSmile" trademark, sells both devices and
related reagents to the dental markets which are used in a process to whiten
teeth. The Company grants credit to most customers without requiring collateral.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Ion Laser Technology Development Company, and ILT
Systems BriteSmile, Inc. The Company's 26% interest in a foreign joint venture
is accounted for by the equity method. Significant intercompany accounts and
transactions have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market, determined on a first-in,
first-out basis.
PROPERTY, PLANT, AND EQUIPMENT
The Company uses the straight-line method to depreciate the cost of assets over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION USEFUL LIVES
-----------------------------------------------------
<S> <C>
Buildings and improvements 40
Machinery and equipment 5-7
Office furniture and equipment 5-7
Computer equipment 5
</TABLE>
Depreciation expense was $361,705 for 1998.
F-7
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue on product sales is recognized upon shipment. Reserves for sales
returns and allowances are recorded in the same period that the revenues from
product sales are recognized.
INTANGIBLE ASSETS
Goodwill is the result of costs in excess of the value of the net tangible
assets obtained in the acquisitions of Ion Laser Technology, Inc., and
BriteSmile, Inc., and is amortized using the straight-line method over 40 and 17
years, respectively. The cost of patents is amortized over the estimated useful
life of the patents, generally 17 years. The Company periodically evaluates
whether circumstances have occurred that indicate the remaining useful life of
intangible assets may warrant revision or that the remaining balance may not be
recoverable.
ADVERTISING COSTS
During fiscal year 1997, the Company incurred certain costs in connection with
its Brite Smile direct-response marketing program. A portion of those costs,
approximately $400,000 related to the production and communication of the
program, were deferred as other assets and were being amortized over a three
year period (see Note 2). The Company expenses all advertising costs associated
with non direct-response advertising programs as incurred. Such costs were
$1,016,244 in 1998.
EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No 128, Earnings
Per Share, which replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previous calculation of fully-diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
F-8
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE (CONTINUED)
Because the Company reported a net loss for each of the fiscal years ended March
31, 1998 and 1997, all common stock equivalents are anti-dilutive and,
accordingly, have been excluded from the earnings per share computation. As a
result, the numerator or net loss and the denominator or weighted average number
of common shares are the same for both basic and diluted earnings per share
computations. The weighted average number of shares used in calculating the loss
per share was 5,630,419 and 5,202,027 for 1998 and 1997, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred tax assets and liabilities are
provided on differences between financial reporting and taxable income, using
the enacted tax rates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RECLASSIFICATIONS
Certain reclassifications, none of which affect net income, have been made to
the prior year amounts in order to conform to the current year financial
statement presentation.
FOREIGN CURRENCY TRANSLATION
For the Company's investment in Shanghai Ion Laser Technology (the "Joint
Venture"), the functional currency has been determined to be the Chinese
Renminbi and, therefore, the investment in the Joint Venture is translated at
year-end exchange rates; the Company's portion of the Joint Venture's net loss
is translated at average exchange rates prevailing during the year. Such
translation adjustments are recorded as a separate component of shareholders'
equity.
F-9
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of 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 March 31, 1998 and 1997, and revenues and
expenses for the years then ended. Actual results could differ from the
estimates and assumptions used.
2. IMPAIRMENT AND ASSET WRITE-DOWNS
During 1998, the Company experienced declining sales and ongoing operating
losses principally caused by the anticipated change in product offering from the
Company's LTW system to a new arc lamp TW system, as well as product design
defects in its tooth whitening systems. These conditions were indicators that
certain of the Company's assets were impaired. Furthermore, as a result of the
Company's refocus of its activities exclusively in the dental whitening market,
certain of its assets in the industrial and scientific lines were impaired as
well.
Accordingly, the Company recorded total charges of $4,289,610 related to the
impairment and write-down of certain assets which will provide limited or no
future benefit to the Company. Included in the charges are the following: (i)
$421,154 write-down of fixed assets; (ii) $1,293,870 write-off of goodwill and
patent costs relating to products or technologies which the Company no longer
intends to use and/or pursue; (iii) $301,906 write-off of deferred marketing
costs related to a marketing program which has been discontinued by the Company;
and (iv) $2,272,680 write-down of inventories which have been rendered obsolete
or will be discontinued by the Company and either scrapped or sold at
substantially reduced values. The inventory write-downs have been classified as
cost of products sold inventory write-downs.
As a result of the furthering declines in operating results in the fourth
quarter of fiscal year 1998, under the direction of its Board of Directors, the
Company closed its Utah operating facility in May 1998, discontinued all
activities related to the industrial and scientific lines and plans to relocate
its corporate headquarters and remaining operations to Pennsylvania. In order to
emphasize the focus of the Company exclusively in the dental whitening market,
the Company has plans to change its name to "BriteSmile."
F-10
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
2. IMPAIRMENT AND ASSET WRITE-DOWNS (CONTINUED)
In connection with the Company's decision to relocate its operations to
Pennsylvania, a significant portion of the Company's workforce was terminated.
Because the plan of termination was not developed, approved or communicated
prior to year end, the associated severance costs did not meet the conditions
for a restructuring accrual at March 31, 1998. Accordingly, the Company expects
to incur additional expenses of approximately $200,000 in fiscal 1999 associated
with the workforce reduction.
3. INVENTORIES
Inventories consisted of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Raw materials $234,950 $1,038,156
Work in progress - 1,118,504
Finished goods 86,500 715,507
-------------------------
$321,450 $2,872,167
=========================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, stated at cost, consists of the following at
March 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Land - $ 100,000
Buildings and improvements - 1,195,287
Machinery and equipment $ 754,026 1,012,262
Office furniture and equipment 228,189 317,308
Computer equipment 459,023 438,904
Construction in progress 255,307 417,596
-------------------------
1,696,545 3,481,357
Less accumulated depreciation (931,121) (889,322)
-------------------------
$ 765,424 $2,592,035
=========================
</TABLE>
F-11
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
In connection with the impairment discussed in Note 2, the Company plans to
close its Utah facility and has offered to sell the related land, buildings and
selected pieces of equipment. The sale is expected to be completed within the
next fiscal year. Accordingly, the Company has reclassified such assets as
"assets held for sale" in the accompanying balance sheet.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31
1998 1997
-----------------------
<S> <C> <C>
Debt payable to the Small Business
Administration with interest at 7.6% per
annum and payments of principal and interest
of $3,902 due monthly through November 2012,
collateralized by a second mortgage on the
Company's building and improvements. $ 403,068 $404,767
Debt payable to a bank with interest at 1.5%
over prime rate, (10% at March 31, 1998) and
interest payments of $3,581 due monthly
through November 2002, collateralized by a
first mortgage on the Company's building and
improvements, with a final payment due
November, 2002. 423,047 471,290
Capital lease obligation 198,800 -
-----------------------
1,024,915 876,057
Less current portion of long-term debt 94,173 30,474
-----------------------
$ 930,742 $845,583
=======================
</TABLE>
F-12
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (CONTINUED)
The fair value of accounts payable, notes payable and long-term debt
approximates the recorded values. Principal maturities of long-term debt during
each of the next five fiscal years and thereafter are:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
------------------------------------
<S> <C>
1999 $ 94,173
2000 84,679
2001 74,942
2002 50,949
2003 419,081
Thereafter 301,091
----------
$1,024,915
==========
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
MARCH 31
1998 1997
------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Inventory overhead capitalization $ 32,353 $ 67,369
Product warranty accruals 31,746 32,223
Allowance for bad debt 70,707 39,118
Vacation accrual 24,708 5,975
Equity method investment 24,092 18,675
Inventory reserve 847,710 24,791
Property and equipment 235,313 58,294
Patents 40,113 -
Net operating loss carryforwards 2,299,339 379,004
Tax credits 90,085 90,085
Deferred marketing - (148,791)
Other - (28,549)
------------------------
Total deferred tax asset 3,696,166 538,194
Valuation allowance for deferred tax asset (3,696,166) (538,194)
------------------------
Net deferred tax asset $ - $ -
========================
</TABLE>
F-13
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
MARCH 31
1998 1997
----------------------
<S> <C> <C>
Current:
Federal $ - $ -
State - -
----------------------
Total current - -
----------------------
Deferred:
Federal - 11,001
State - -
----------------------
Total deferred - 11,001
======================
$ - $11,001
======================
</TABLE>
The provision for income taxes reconciles to the amounts computed by applying
the statutory federal rate to earnings (loss) before taxes as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Tax expense (benefit) at U.S. statutory rates $(3,098,316) $(264,945)
State income taxes (benefit) (300,719) (25,715)
Amortization write-off of goodwill 442,500 7,138
Other, net (201,437) 59,667
Change in valuation allowance 3,157,972 234,856
------------------------
$ - $ 11,001
========================
</TABLE>
The Company has approximately $90,000 of tax credits that under current tax law
can be used to offset future income tax liabilities. These credits will begin
expiring March 31, 2007 if not utilized. The Company also has approximately
$6,200,000 of federal and state net operating loss carryforwards that begin to
expire March 31, 2008. The net change in the valuation allowance for fiscal
1998 was $3,157,972.
F-14
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. BRITESMILE ACQUISITION
On March 7, 1996, the Company acquired certain assets and assumed certain
liabilities of BriteSmile, Inc. in exchange for 200,000 restricted shares of the
Company's common stock. This restricted stock had an estimated value of
$800,000 on the date of closing. Holders of these restricted shares had the
right, within 12 months following the closing of the acquisition, to require the
Company to repurchase up to an aggregate of $250,000 of restricted common stock,
at the then current market price of the Company's common stock. Share values of
the maximum amount of $250,000 of the common stock exchanged in the acquisition
has been included in redeemable common stock at March 31, 1996. During 1997,
the stock was redeemed by the Company for an aggregate price of $250,000.
8. SHAREHOLDERS' EQUITY
During 1990, the Company adopted an employee stock option plan, which was
approved by the shareholders on September 5, 1990. In January 1997, the Company
adopted the 1997 Stock Option and Incentive Plan. Under the terms of the plans,
the Company's stock to be offered shall be common stock and the aggregate number
of shares of stock to be delivered upon the exercise of all options granted
under both plans shall not exceed 7,000,000 shares. The Company has reserved
7,000,000 shares for future issuance under this plan. The option price per share
is determined by the board of directors, but shall be no less than the fair
market value on the date of the grant.
A summary of the Company's stock option activity and related information for
fiscal years 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE
OPTIONS OPTIONS
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 624,916 $1.40 877,816 $1.58
Granted 789,000 $5.77 -
Exercised (216,280) $1.32 (210,400) $1.81
Forfeited/expired (45,000) $2.49 (42,500) $1.25
---------- ---------
Outstanding at end of year 1,152,636 $4.63 624,916 $1.40
========== =========
</TABLE>
Exercise prices for outstanding options as of year-end ranged from $1.25 to
$9.00 and the weighted-average remaining contractual life of those options is
8.2 years.
F-15
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
The Company's pro forma compensation expense under the fair value method,
utilizing the Black-Scholes option valuation model, for stock options granted
between 1996 and 1998 was $305,470 for 1998 and $15,600 for 1997. Pro forma net
loss would have been $9,418,163 in 1998 and $794,852 in 1997. Basic and diluted
loss per share would have been $1.67 per share for 1998 and $0.15 per share for
1997.
The fair value for these options was estimated at the date of grant assuming an
average expected volatility of 85% for options issued during fiscal year 1998
and 72% for previous option issues, with no dividend yield. Other assumptions
for 1998 and 1997 are as follows: an average risk-free interest rate of 5.6%
and 6.6%, respectively, and average option lives of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options.
Because the fair value method of accounting for stock-based compensation has not
been applied to options granted prior to April 1, 1995, the preceding pro forma
compensation cost may not be representative of that to be expected in future
years.
As of March 31, 1998, stock options granted under the Company's employee stock
option plans for 472,886 shares of common stock are exercisable.
In October 1995, the Company sold 200,000 shares of restricted common stock to
United Technologies, Inc. as part of a joint venture agreement in exchange for
$125,000. The Company had the right to repurchase 100,000 shares of this stock
at a price of $1.50 per share at any time through October 31, 1997. United
Technologies, Inc. also had the right to put those 100,000 shares to the Company
at a redemption price of $1.50 at any time, beginning November 1, 1997 through
October 31, 1998 if the Company did not exercise its option to repurchase the
stock. The redeemable shares were recorded at their original issue price as
redeemable common stock. During 1997, 100,000 shares of the stock were redeemed
by the Company for an aggregate price of $150,000.
F-16
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
In May 1997, the Company completed a private placement of 428,572 shares of its
common stock resulting in total proceeds of $3,000,000. In connection therewith,
options to purchase 500,000 shares of the Company's common stock were granted at
an exercise price of $9.00 per share. Additionally, as further consideration,
the Company amended the exercise price of certain options granted in 1996,
relating to an aggregate of 966,667 shares of the Company's common stock, from
$20.00 per share to $9.00 per share.
9. COMMITMENTS AND CONTINGENCIES
RETIREMENT PLAN
On November 11, 1987, the Company adopted a Profit Sharing and Cash or Deferred
Compensation Arrangement. All employees with at least one year of service and
who have reached the age of twenty-one may participate. At the election of the
Board of Directors, the Company may contribute to either plan subject to the
limitations provided in the Internal Revenue Code. The Company made no
contributions to the plan during 1997 or 1998. At March 31, 1998 there is no
unfunded deferred benefit under these plans.
PATENT LICENSING AND ROYALTY AGREEMENTS
The Company entered into a licensing agreement effective October 1, 1988,
whereby it is required to pay royalties on the net sales price of certain laser
products sold, equal to 5% on United States and Canadian sales, 2% on foreign
sales and no royalties on sales to the United States Government or its
contracted entities.
Royalty payments made under this agreement for the years ended March 31, 1998
and 1997 were $29,326 and $119,217, respectively.
LITIGATION
The Company is party to litigation and claims arising in the normal course of
business, including certain claims made by supply vendors in connection with the
Company's decision to close its Utah operating facility. Management believes
that such matters will not have a material impact on the Company's financial
position or results of operations.
F-17
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER
At March 31, 1998, the Company had outstanding purchase orders to acquire up to
approximately $2 million of inventory and supplies over an 18 month period. In
connection with the reduced scope of operations, management is attempting to
cancel these orders.
10. JOINT VENTURE
On March 31, 1989, the Company entered into a joint venture agreement with
Shanghai Laser Technology Company and Shanghai Minhang United Development
Company, Ltd., both of the People's Republic of China. The Joint Venture
operates as Shanghai Ion Laser Technology Company Limited and produces, markets
and services various lasers and related equipment from operations located in the
People's Republic of China. As of March 31, 1998, the Company has a 26%
ownership interest in the Joint Venture. The Company's share of the Joint
Venture's net loss for fiscal 1998 and 1997 was $14,521 and $8,588, respectively
and is included in other expenses. During the fiscal years ended March 31, 1998
and 1997, the Company had sales to the Joint Venture of approximately $36,751
and $38,800, respectively. In addition, as of March 31, 1998 and 1997 the
Company had amounts receivable from the Joint Venture of approximately $250,620
and $232,945, respectively. The Company has an option to purchase up to a total
of 51% of the outstanding stock of the Joint Venture, at a purchase price that
would give the selling investor a 10% annualized return on its original
investment.
11. EXPORT SALES AND MAJOR CUSTOMERS
The breakdown of total export sales by geographic area for the years ended March
31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Europe 32% 43%
Asia 24% 36%
Canada 36% 16%
All other 8% 5%
--------------------------------
Total export sales 100% 100%
--------------------------------
Total export sales $1,480,987 $849,282
================================
</TABLE>
F-18
<PAGE>
Ion Laser Technology, Inc.
Notes to Consolidated Financial Statements (continued)
11. EXPORT SALES AND MAJOR CUSTOMERS (CONTINUED)
There were no customers for which sales exceeded 10% of total revenues during
fiscal 1997 and 1998. Such export sales are transacted in U.S. dollars.
12. NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This Standard will become effective for the
Company's 1999 fiscal year. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. Management is currently assessing the impact of
implementation of this Standard on the consolidated financial statements of the
Company and does not believe that the implementation will have a material impact
on the Company's financial statements.
13. SUBSEQUENT EVENTS
In May 1998, the Company completed a private placement of 1,860,465 shares of
its common stock resulting in proceeds to the Company of $5,000,000.
Additionally, as further consideration, the Company amended the exercise price
of certain options granted to the same investor in fiscal 1996 and fiscal 1998,
relating to an aggregate of 1,173,334 shares of the Company's common stock, from
$9.00 per share to $4.50 per share.
F-19
<PAGE>
EXHIBIT 10.12
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE, AND WILL BE OFFERED AND SOLD BY THE COMPANY IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF FEDERAL AND STATE
LAW BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE WITH THE PROVISIONS OF
SECTION 4(2) AND/OR REGULATION S PROMULGATED UNDER THE ACT. THE SECURITIES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY ANY REGULATORY AUTHORITY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
STOCK PURCHASE AGREEMENT
Ion Laser Technology, Inc.
3828 South Main Street
Salt Lake City, Utah 84121
Attn: Milton Adair
President and Chief Executive Officer
Gentlemen:
In connection with the offer and proposed issuance of $5,000,000 in Common
Stock (the "Offering") by Ion Laser Technology, Inc., a Utah corporation ("ILT"
or the "Company"), in reliance on exemptions from the registration requirements
of the U.S. Securities Act of 1933, as amended (the "Act"), LCO Investments
Limited ("Purchaser") and the Company hereby agree as follows:
1. Purchase of Securities. Subject to the terms and conditions of this
----------------------
Agreement, Purchaser hereby agrees to acquire, and the Company agrees to issue
and sell, One Million Eight Hundred Sixty Thousand Four Hundred Sixty Five
(1,860,465) shares of the Company's Common Stock, par value $.001 per share (the
"Common Stock"). The shares of Common Stock acquired by Purchaser hereunder
shall be referred to in this Agreement as the "Shares". The total purchase
price (the "Purchase Price") for the Shares shall be Five Million Dollars
($5,000,000), the Purchase Price per Share being the higher of the Company's
book value per share and the closing sale price per share of the Common Stock on
the date the Company's Board of Directors authorized this Agreement. The
Purchaser shall pay the Purchase Price in full at Closing, as hereinafter
defined, via wire transfer to an account of the Company identified by the
Purchaser and under the control of persons designated by or acceptable to the
Purchaser on or before the Closing Date, as that term is defined in Section 6 of
this Agreement. Wire instructions shall be provided prior to the Closing.
2. Amendment of Old Options. The Company hereby agrees to amend that
------------------------
certain Option to Purchase Shares of Common Stock dated May 8, 1997 issued to
LCO Investments Limited, relating to 400,000 shares of Common Stock, and that
certain Amended and Restated
<PAGE>
Option to Purchase Shares of Common Stock dated May 8, 1997 issued to LCO
Investments, relating to 773,334 shares of Common Stock (together, the "Old
Options"), such that the purchase price of the shares underlying the Old Options
shall be changed from $9.00 per share to $4.50 per share. The amendment to the
Old Options shall be in the form set forth in Exhibit "A" (the "Amendment to
Option Agreements") and by this reference made a part hereof.
3. Board Nominee Rights. The Company covenants and agrees that for so
--------------------
long as the Purchaser and its affiliates and permitted transferees collectively
are the beneficial owners of 5% or more of the issued and outstanding shares of
Common Stock of the Company, (i) the Purchaser shall have the right to nominate
two persons (each, a "Purchaser Director") for election to the Board of
Directors of the Company, (ii) the Purchaser shall have the exclusive right to
remove any Purchaser Director from the Board of Directors at any time by written
notice to the Board of Directors, and (iii) in the event of the death,
disability, legal incapacity, resignation or removal of a Purchaser Director,
the Purchaser shall have the exclusive right to designate a successor nominee
for election as a director of the Company (which successor, upon such election,
shall be a Purchaser Director). In determining the beneficial ownership of the
Purchaser and its affiliates and permitted transferees for purposes of this
Section, the shares of stock issuable upon any options granted by the Company to
the Purchaser, its affiliates or permitted transferees (including, without
limitation, the Old Options) shall be deemed to be issued and outstanding as
though such options had been exercised in full. The Company and the Purchaser
intend to have the Purchaser's rights under this Section supersede and not be
duplicative of its rights set forth in Section 7.3 of the Stock Purchase
Agreement, dated as of April 1, 1996, by and among the Company, the Purchaser,
Richard S. Braddock and Pinnacle Fund, L.P.
4. Delivery of Share Certificates and Amended Option Agreements. At the
------------------------------------------------------------
Closing, the Company shall deliver to Purchaser certificates representing the
Shares, which shall be fully paid and nonassessable upon issuance, and the
Amended Option Agreements.
5. Registration Rights and Exchange Filings. The Shares shall be subject
----------------------------------------
to certain registration rights, as provided in that certain Registration Rights
Agreement attached hereto as Exhibit "B" and by this reference made a part
hereof. (Such Registration Rights Agreement, together with this Agreement, and
the Amendment to Option Agreements, constitute the "Transaction Documents"). In
addition, ILT shall make appropriate filings under the rules of the American
Stock Exchange ("AMEX") in order that the Shares will be included in the
Company's listing with the AMEX.
6. Closing. Payment of the Purchase Price by the Purchaser and delivery
-------
of the Shares and the fully executed Amended Option Agreements by ILT shall be
deemed to be the completion of the transactions contemplated by this Agreement
("Closing"). Closing shall occur concurrently with the execution of this
Agreement, such later date as the Shares shall have been listed with the AMEX,
or such later date as the parties may hereafter agree in writing (the "Closing
Date").
2
<PAGE>
7. Use and Disposition of Proceeds. The gross proceeds of this
-------------------------------
transaction will be Five Million Dollars ($5,000,000). The Company agrees to
use the proceeds as shall be determined or directed by its Board of Directors as
constituted from time to time following the Closing, or as shall be determined
or directed pursuant to authority delegated by such Board.
8. Representations and Warranties of Purchaser. To induce the Company's
-------------------------------------------
acceptance of this Agreement, Purchaser hereby represents and warrants to the
Company and its agents and attorneys as follows:
8.1 Investor Status. Purchaser is an "accredited investor" within
---------------
the meaning of Section 501(a) of Regulation D under the Act or is not a
"U.S. Person" as that term is defined under Rule 902(o)(1) of Regulation S
under the Act.
8.2 Liquidity. Purchaser presently has sufficient liquid assets to
---------
pay the Purchase Price. Purchaser has adequate means of providing for its
current needs and contingencies and has no need for liquidity in its
investment in the Company or for a source of income from the Company.
Purchaser is capable of bearing the economic risk and the burden of the
investment contemplated by this Agreement, including, but not limited to,
the possibility of the complete loss of the value of the Shares and the
limited transferability of the Shares, which may make the liquidation of
the Shares impossible in the near future.
8.3 Organization, Standing, Authorization. Purchaser is duly
-------------------------------------
organized, validly existing, and in good standing under the laws of the
Guernsey, Channel Islands and has the requisite power and authority to
enter into this Agreement, acquire the Shares, and execute and deliver any
documents or instruments in connection with this Agreement. The execution
and delivery of this Agreement, and all other documents and instruments
executed by Purchaser in connection with any of the transactions
contemplated by this Agreement, have been duly authorized by all required
action of Purchaser's members or managers. The person executing, on
Purchaser's behalf, this Agreement and any other documents or instruments
executed by Purchaser in connection with this Agreement is duly authorized
to do so.
8.4 Absence of Conflicts. Purchaser represents and warrants that the
--------------------
execution and delivery of this Agreement and any other document or
instrument executed in connection with this Agreement, and the consummation
of the transactions contemplated thereby, and compliance with the
requirements thereof, will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Purchaser, or the
provision of any indenture, instrument or agreement to which Purchaser is
a party or is subject, or by which Purchaser or any of their properties is
bound, or conflict with or constitute a material default thereunder, or
result in the creation or imposition of any lien pursuant to the terms of
any such indenture, instrument or agreement, or constitute a breach of any
fiduciary duty owed by such Purchaser to any third party, or require the
approval of any third-party pursuant to any material contract,
3
<PAGE>
agreement, instrument, relationship or legal obligation to which Purchaser
are subject or to which any of their properties, operations or management
may be subject.
9. Sole Party in Interest. Purchaser represents that it is the sole and
----------------------
true party in interest, and no other person or entity has or will have upon the
issuance of the Shares beneficial ownership interest in the Shares or any
portion thereof, whether direct or indirect (excluding any contractual right to
payments based on the value of such Shares), other than the equity holders or
beneficiaries of such Purchaser.
9.1 Investment Purpose. Purchaser represents that it is acquiring
------------------
the Shares for its own account and for investment purposes and not for the
account or benefit of any U.S. person or other person or entity or for or
with a view to resale or distribution.
9.2 Knowledge and Experience. Purchaser is experienced in evaluating
------------------------
and making speculative investments, and has the capacity to protect
Purchaser's interests in connection with the acquisition of the Shares.
Purchaser has such knowledge and experience in financial and business
matters in general, and investments in the laser industry in particular,
that Purchaser is capable of evaluating the merits and risks of Purchaser's
investment in the Company. Purchaser has been informed that an investment
in the Company is speculative and has concluded that Purchaser's proposed
investment is appropriate in light of its overall investment objectives and
financial situation.
9.3 Investment Advisors. No party has received or will receive any
-------------------
compensation or other remuneration for advising Purchaser with respect to
this investment other than legal counsel, and Purchaser represents that no
investment advisor or purchaser representative has been consulted or
retained in connection with Purchaser's decision to invest in the Company.
9.4 Disclosure, Access to Information. Purchaser confirms that it
---------------------------------
has received and thoroughly read and is familiar with and understands this
Agreement, and that all documents, records, books and other information
pertaining to Purchaser's investment in the Company requested by Purchaser
have been made available for inspection and copying and that there are no
additional materials or documents that have been requested by Purchaser
that have not been made available by the Company. Purchaser further
acknowledges that since August 1997, Mr. Anthony Pilaro, a director of the
Purchaser, has served as a member of the Board of Directors of the
Company. Purchaser further acknowledges that the Company is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Purchaser has reviewed or received copies
of any such reports that have been requested by it. Without limiting the
generality of the foregoing, Purchaser acknowledges that it has received
and has reviewed copies of the following documents and materials, all of
which are incorporated herein by reference:
(1) Articles of Incorporation of the Company, as amended;
4
<PAGE>
(2) Bylaws of the Company, as amended;
(3) Annual Report on Form 10-KSB for the fiscal years ended
March 31, 1996 and 1997;
(4) Quarterly Reports on Form 10-QSB for the quarters ended June
30, September 30, and December 31, 1996 and 1997.
9.5 Exclusive Reliance on this Agreement. In making the decision to
------------------------------------
purchase the Shares, Purchaser has relied exclusively upon information
included in this Agreement or incorporated herein by reference pursuant to
Section 9.4, and not on any other representations, promises or information,
whether written or verbal, by any person. The Purchaser acknowledges that
the Company has realized and is continuing to realize net losses; that its
cash resources have declined significantly; that to date, the Company has
been unable to perform its obligations under its Distribution Agreement
("DMD Agreement") with Dental/Medical Diagnostics, Inc. ("DMD") in
accordance with the terms of the DMD Agreement, and is aware of the
termination provisions and other terms and conditions of the DMD Agreement.
9.6 Advice of Counsel. Purchaser understands the terms and
-----------------
conditions of this Agreement, has investigated all issues to Purchaser's
satisfaction, has consulted with such of Purchaser's own legal counsel or
other advisors as Purchaser deems necessary, and is not relying, and has
not relied on the Company for an explanation of the terms or conditions of
this Agreement or any document or instrument related to the transactions
contemplated thereby. Purchaser further acknowledges, understands and
agrees that, in arranging for the preparation of this Agreement and all
other documents and materials related thereto, the Company has not
attempted to procure, and has not procured, legal representation for
Purchaser.
9.7 Accuracy of Representations and Information. All representations
-------------------------------------------
made by Purchaser in this Agreement and all documents and instruments
related to this Agreement, and all information provided by Purchaser to the
Company concerning Purchaser and its financial position is correct and
complete in all material respects as of the date hereof. If there is any
material change in such information before the actual issuance of the
Shares, Purchaser immediately will provide such information to the Company.
9.8 No Representations. None of the following have ever been
------------------
represented, guaranteed, or warranted to Purchaser by the Company or any of
its employees, agents, representatives or affiliates, or any broker or any
other person, expressly or by implication:
(1) The approximate or exact length of time that Purchaser will
be required to remain as owner of the Shares;
5
<PAGE>
(2) The percentage of profit or amount of or type of
consideration, profit or loss (including tax write-offs or other tax
benefits) to be realized, if any, as a result of an investment in the
Shares; or
(3) The past performance or experience on the part of the Company
or any affiliate or their associates, agents or employees, or of any
other person as being indicative of future results of an investment in
the Shares.
9.9 Federal Tax Matters. Purchaser has reviewed and understands the
-------------------
federal income tax aspects of its purchase of the Shares, and has received
such advice in this regard as Purchaser deems necessary from qualified
sources such as attorneys, tax advisors or accountants, and is not relying
on any representative or employee of the Company for such advice.
9.10 No Brokers or Finders. Purchaser represents that no third
---------------------
person has in any way brought the parties together or been instrumental in
the negotiation, execution, or consummation of this Agreement or any
instrument, document or agreement related to this Agreement, or will
receive a fee or any compensation for doing so. Purchaser agrees to
indemnify the Company against any claim by any third person for any
commission, brokerage fee, finders fee, or other payment with respect to
this Agreement or the transactions contemplated hereby based upon any
alleged agreement or understanding between such party and such third
person, whether expressed or implied, arising from the actions of such
party. The covenants set forth in this Section shall survive the Closing
Date and the consummation of the transactions contemplated by this
Agreement.
10. Certain Risk Factors. Purchaser has been informed about and fully
--------------------
understands that there are risks associated with an investment in the Company,
including those disclosed in documents incorporated herein by reference pursuant
to Section 9.4, and those enumerated in Section 9.5, of this Agreement.
11. Manner of Sale. At no time was Purchaser presented with or solicited
--------------
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
12. Restricted Shares. Purchaser understands and acknowledges that the
-----------------
Shares have not been registered under the Act, or any state securities laws, and
that they will be issued in reliance upon certain exemptions from the
registration requirements of those laws, and thus cannot be resold unless they
are registered under the Act or unless the Company has first received an opinion
of competent securities counsel that registration is not required for such
resale. Purchaser agrees that it will not resell any Shares unless such resale
transaction is in accordance with Regulation S and/or Rule 144 under the Act,
pursuant to registration under the Act, or pursuant to an available exemption
from registration. With regard to the restrictions on resales of the Shares or
any security underlying or into which the Shares are or may be
6
<PAGE>
convertible, Purchaser is aware (i) of the limitations and applicability of
Securities and Exchange Commission Rule 144, (ii) that the Company will issue
stop transfer orders to its stock transfer agent in the event of attempts to
improperly transfer any such securities; and (iii) that a restrictive legend
will be placed on certificates representing the Shares and any security
underlying or into which any of the Shares are or will be convertible, which
legend will read substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR
QUALIFICATION PROVISIONS OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND STATE SECURITIES LAWS AND THEREFORE HAVE
NOT BEEN REGISTERED UNDER THE ACT OR UNDER THE SECURITIES LAWS OF
ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT COMPLIANCE WITH THE
PROVISIONS OF REGULATION S OR, IF APPLICABLE, RULE 144 UNDER THE
ACT, COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS
OF THE ACT OR APPLICABLE STATE LAWS, OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. THE COMPANY WILL
INSTRUCT ITS STOCK TRANSFER AGENT NOT TO RECOGNIZE ANY SALE OF
THESE SECURITIES UNLESS SUCH SALE IS MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR THE COMPANY HAS
FIRST RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY
AND ITS SECURITIES COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
13. Indemnification. The Company agrees to indemnify the Purchaser, its
---------------
officers, employees and agents, and hold them harmless from and against any and
all liability, damage, cost or expense, including attorney's fees, incurred on
account or arising out of any inaccuracy or omission in or breach of the
declarations, covenants, agreements, representations, and warranties by the
Company set forth or incorporated by reference herein.
14. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to Purchaser as follows:
14.1 Organization, Standing, Etc. The Company is duly organized,
----------------------------
validly existing, and in good standing under the laws of the State of Utah,
and has the requisite power and authority to enter into and perform this
Agreement and to execute and perform under the documents, instruments and
agreements related to this Agreement.
14.2 Authorization. The execution and delivery of this Agreement and
-------------
the consummation of the transactions contemplated herein have been duly
authorized by all required action of the Company, including any necessary
approval by its Board of
7
<PAGE>
Directors or shareholders, and each of the Transaction Documents and all
instruments and agreements to be delivered in connection therewith
constitute its legal, valid and binding obligation, enforceable against the
Company in accordance with their respective terms, subject to laws of
general application relating to the rights of creditors generally. The
qualified directors of the Company have authorized this Agreement and the
consummation of the transactions contemplated hereby in accordance with the
provisions of Section 16-10a-852 of the Utah Business Corporation Act.
14.3 Absence of Conflicts. Neither the execution and delivery of the
--------------------
Transactions Documents or any other agreement or instrument to be delivered
to the Purchaser in connection therewith, nor the consummation of the
transactions contemplated thereby, by the Company, shall (i) conflict with
or result in a breach of or constitute a violation or default under (A) any
provision of the Articles of Incorporation or By-laws, each as amended to
date, of the Company, or (B) the provision of any indenture, instrument or
agreement to which the Company is a party or by which it or any of its
properties is bound, or (C) any order, writ, judgment, award, injunction,
decree, law, statute, rule or regulation, license or permit applicable to
the Company; (ii) result in the creation or imposition of any lien pursuant
to the terms of any such indenture, instrument or agreement, or constitute
a breach of any fiduciary duty owned by the Company to any third party, or
(iii) require the approval of any third party pursuant to any material
contract, agreement, instrument, relationship or legal obligation to which
the Company is subject or to which it or any of its properties, operations
or management may be subject.
14.4 Capitalization. The authorized capital stock of the Company
--------------
consists of 50,000,000 shares of Common Stock par value $.001 per share.
As of May 1, 1998, 5,809,307 shares of Common Stock were issued and
outstanding, and no shares were held in the Company's treasury. All of the
outstanding shares of Common Stock are, and the Shares will be when paid
for and issued, duly authorized, validly issued, fully paid and non-
assessable and free of any preemptive rights.
14.5 Financial Statements. The Company's annual reports on Form 10-
--------------------
KSB for the fiscal years ended March 31, 1996 and 1997 (the "10-K's"), and
its quarterly reports on Form 10-QSB for the periods ended June 30,
September 30, and December 31, 1996 and 1997 (the "10-Qs"), and all 8-K's
filed by the Company since March 31, 1996 (the "8-K's) and its 1996 and
1997 Annual Proxy Statements, copies of which have been filed with or
furnished to the Securities and Exchange Commission, were when filed or
furnished, accurate in all material respects and did not include any untrue
statement of material fact or omit to state any material fact necessary to
make the statements therein not misleading. The financial statements
included in the 10-K's and the 10-Qs present fairly the financial position
of the Company at such dates and the results of its operations and cash
flows for the periods then ended, in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered by such statements.
8
<PAGE>
14.6 Litigation, Etc. Except as disclosed in the 10-K's and the 10-
----------------
Q's and 8-K's, there are no suits, actions or legal, administrative,
arbitration or other proceedings or governmental investigations or other
controversies pending, or to the knowledge of the Company threatened, or as
to which the Company has received any notice, claim or assertion, which
involve a potential cost or liability to the Company which would singly or
in the aggregate, materially or adversely affect the financial condition,
results of operations, business or prospects of the Company. The Company
is not in default with respect to any order, writ, injunction or decree of
any court or before any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign affecting or relating to it which is material to the financial
condition, results of operations or business of the Company.
14.7 Brokers and Finders. Neither the Company nor any person acting
-------------------
on behalf of the Company has employed any broker, agent or finder, or
incurred any liability for any brokerage fees, agents' commissions or
finders' fees, in connection with the transactions contemplated herein.
The Company agrees to indemnify Purchaser against any claim by any third
person for any commission, brokerage fee, finders fee, or other payment
with respect to this Agreement or the transactions contemplated hereby
based upon any alleged agreement or understanding between such party and
such third person, whether expressed or implied, arising from the actions
of such party. The covenants set forth in this Section shall survive the
Closing Date and the consummation of the transactions contemplated by this
Agreement.
14.8 Regulatory Compliance. To the best knowledge of the Company, it
---------------------
has operated and is currently operating in compliance in all material
respects with all laws, rules, regulations, orders, decrees, licenses or
permits applicable to it or to its business. The Company has not received
any notice from the FDA or any other governmental agency or authority of
any noncompliance by the Company with any law, rule, regulation, order,
decree, license or permit applicable to it or its business or properties.
14.9 Articles of Incorporation and By-laws. The Company has
-------------------------------------
delivered to the Purchaser copies of its Articles of Incorporation and all
amendments thereto, which copies are complete and correct. The Company is
not in default under or in violation of any provisions of its Articles of
Incorporation. The Company's Articles of Incorporation have not been
amended since the date of certification thereof and no action has been
taken for the purpose of effecting any amendment thereto. The Company has
delivered to the Purchaser copies of its By-laws and all amendments
thereto, which copies are complete and correct. The Company is not in
default under or in violation of any provision of its By-laws.
14.10 Product Liability. Except as disclosed to Purchaser prior to
-----------------
Closing, the Company has not received any notice, claim or assertion
regarding an actual or alleged liability of the Company with respect to any
of its products.
9
<PAGE>
14.11 OEM Relationships. Except as disclosed to Purchaser prior to
-----------------
Closing, the Company has not received any notice, claim or assertion from
or with respect to any OEM counterparty of the Company regarding intention
of such OEM party to either discontinue its relationship with the Company
or develop or market products in competition with the Company.
14.12 Patents and Proprietary Rights. The Company received FDA
------------------------------
market clearance for the argon laser in February 1996. The Company also
received formal notice of allowance for its initial patent application
concerning laser teeth whitening in April, 1997. The Company has no reason
to believe that any of its patents or proprietary rights infringes upon or
otherwise violates the patents or proprietary rights of any other party.
Except as disclosed to Purchaser prior to Closing, the Company has not
received any notice, claim or assertion that its patents or proprietary
rights infringe upon or otherwise violate the patents or proprietary rights
of any other party.
14.13 Unincorporated Documents or Materials. With respect to any
-------------------------------------
document or other materials received by the Purchaser from the Company or
its representatives which are incorporated herein by reference herein, (i)
the Company has no reason to believe any of such documents and materials or
any projections contained therein contain errors or misstatements or do not
adequately describe the transactions contemplated by this Agreement or the
status of the development of the Company's technology, and (ii) such
documents, materials and projections were prepared by the Company and its
management in good faith.
14.14 Information. To the best knowledge of the Company, the
-----------
information concerning the Company set forth in this Agreement is complete
and accurate in all material respects and does not contain any untrue
statement of a material fact or omit to state a material fact required to
make the statements made, in light of the circumstances under which they
were made, not misleading.
15. Nondisclosure. Except as required by applicable securities laws,
-------------
rules and regulations, prior to the Closing Date, no press release or other
announcement concerning the proposed transactions will be issued except by
mutual consent of the parties. This Agreement and all negotiations and
discussions between the parties in connection with this Agreement shall be
strictly confidential and will not be disclosed in any manner prior to the
Closing Date, except to employees and agents of the parties on a need-to-know
basis, as required by applicable law or regulations or as otherwise agreed by
the parties. After Closing, disclosure shall be at the sole discretion of the
Company.
16. Conditions to Closing. Closing of the transactions contemplated by
---------------------
this Agreement shall be contingent upon the satisfaction of the following
conditions precedent:
16.1 Approvals, Waivers, Etc. ILT shall have delivered to Purchaser
------------------------
evidence of all approvals, including waivers and consents, of its board of
directors, government or
10
<PAGE>
third-parties which may be required for the sale of the Shares, in full
force and effect as of the Closing Date.
16.2 Absence of Litigation. No litigation shall have been threatened
---------------------
or shall be pending challenging the purchase of the Shares contemplated by
this Agreement or which could have a material adverse effect on ILT.
16.3 No Bankruptcy. ILT shall not have filed for bankruptcy
-------------
protection, the appointment of a trustee or receiver, assignment for the
benefit of creditors, nor have taken any other action designed to protect
the Company, its property or assets from the rights of creditors; and no
other person shall have made any such filing or taken any such action in
respect of ILT.
16.4 No Breach of Agreements. Neither the execution and delivery of
-----------------------
the Transactions Documents or any other agreement or instrument to be
delivered to the Purchaser in connection therewith, nor the consummation of
the transactions contemplated thereby, by the Company, shall have
conflicted with or resulted in a breach of or constituted a violation or
default under (A) any provision of the Articles of Incorporation or By-
laws, each as amended to date, of the Company, or (B) the provision of any
indenture, instrument or agreement to which the Company is a party or by
which it or any of its properties is bound, or (C) any order, writ,
judgment, award, injunction, decree, law, statute, rule or regulation,
license or permit applicable to the Company.
16.5 AMEX Additional Listing Application. ILT shall have made all
-----------------------------------
appropriate filings under the rules of the American Stock Exchange and
shall have received notification from the AMEX that the Shares have been
approved for listing.
16.6 ILT Board Approval. The "qualified directors" of ILT (within
------------------
the meaning of Section 16-10a-850 of the Utah Business Corporation Act)
shall have authorized and approved the transactions contemplated by this
Agreement pursuant to the laws of the state of Utah.
16.7 Directors. Effective prior to or as of the Closing, the Company
---------
shall have accepted the resignations of Messrs. Milton G. Adair, David E.
Neff, and Richard S. Braddock as directors of the Company, and Eric
Montgomery and Brian Delaney shall have been appointed directors of the
Company.
16.8 Appointment of Executive Committee. As of the Closing, the
----------------------------------
Board of Directors of ILT shall have appointed Richard V. Trefz, Anthony M.
Pilaro and Brian Delaney to constitute the whole Executive Committee of the
Board, having all the power and authority delegable to an executive
committee under the laws of the State of Utah.
16.9 No Shareholder Approval Required. Counsel to ILT shall be
--------------------------------
satisfied that no approval or authorization of the transactions
contemplated by this Agreement by the
11
<PAGE>
shareholders of ILT shall be required under or pursuant to the laws of the
state of Utah, or the rules and regulations promulgated by the AMEX.
16.10 Opinions. The Company shall have delivered to the Purchaser an
--------
opinion of counsel to the Company that the Shares, when paid for and
issued, will be validly issued, fully paid and non-assessable, that the
Transaction Documents have been duly authorized and constitute legal and
binding obligations of the Company enforceable according to their terms,
and that no approval or authorization by the shareholders of ILT shall be
required under or pursuant to the laws of the state of Utah.
17. General Provisions.
------------------
17.1 Attorneys' Fees. In the event of a default in the performance
---------------
of this Agreement or any document or instrument executed in connection with
this Agreement, the defaulting party, in addition to all other obligations
of performance hereunder, shall pay reasonable attorneys' fees and costs
incurred by the non-defaulting party to enforce performance of this
Agreement.
17.2 Choice of Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Utah, including
choice of law rules.
17.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so signed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument.
17.4 Entire Agreement. This Agreement, and the Exhibits, Schedules
----------------
and other attachments referred to herein (all of which are incorporated in
this Agreement by reference) collectively set forth the entire agreement
between the parties as to the subject matter hereof, supersede any and all
prior or contemporaneous agreements or understandings of the parties
relating to the subject matter of this Agreement, and may not be amended
except by an instrument in writing signed by all of the parties to this
Agreement.
17.5 Expenses. The parties shall be responsible for and shall pay
--------
their own costs and expenses, including without limitation attorneys' fees
and accountants' fees and expenses, in connection with the conduct of the
due diligence inquiry, negotiation, execution and delivery of this
Agreement and the instruments, documents and agreements executed in
connection with this Agreement. Notwithstanding the foregoing, the Company
shall pay any stock transfer taxes payable in connection with the issue and
sale of the Shares to the Purchaser, and expenses which the Company is
obligated to pay under the Registration Rights Agreement with respect to
the Shares.
12
<PAGE>
17.6 Headings. The headings of the sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
17.7 Notices. All notices or other communications provided for under
-------
this Agreement shall be in writing, and mailed, telecopied or delivered by
hand delivery or by overnight courier service, to the parties at their
respective addresses as indicated below or at such other address as the
parties may designate in writing:
(1) If to Purchaser:
LCO Investments Limited
Canada Court
Upland Road, St. Peter Port
Guernsey, Channel Islands
With a copy to:
Michael Yong
Cap Advisers Limited
36 Fitzwilliam Place
Dublin 2, Ireland
(Tel. 011-353-1-661-4433)
(Fax 011-353-1-661-2456)
Craigh Leonard
Richards & O'Neil, LLP
885 Third Avenue
New York, N.Y. 10022-4873
(Tel. 212-207-1200)
(Fax 212-750-9022)
Robert B. Hiden, Jr.
Sullivan & Cromwell
125 Broad Street
New York, N.Y. 10004
(Tel. 212-558-3812)
(Fax 212-558-4783)
(2) If to the Company:
Ion Laser Technology, Inc.
13
<PAGE>
3828 South Main Street
Salt Lake City, Utah 84115
Fax: (801) 262-5770
With a copy to:
Jeffrey M. Jones, Esq.
DURHAM, EVANS, JONES & PINEGAR, P.C.
Key Bank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Fax: (801) 363-1835
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid);
when telecopied, upon confirmed transmission of the telecopied notice; when
hand delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
17.8 Severability. Should any one or more of the provisions of this
------------
Agreement be determined to be illegal or unenforceable, all other
provisions of this Agreement shall be given effect separately from the
provision or provisions determined to be illegal or unenforceable and shall
not be affected thereby.
17.9 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties and their successors, but shall not
be assignable by Purchaser without the prior written consent of the
Company; provided that Purchaser may assign its rights hereunder and in the
Registration Rights Agreement relating to the Shares to one or more
affiliates of Purchaser or to one or more charitable foundations in
circumstances where such assignees assume all obligations of Purchaser
thereunder and any such assignment does not violate the Securities Act of
1933, and provided further that Purchaser may sell or assign any or all of
the Shares in accordance with this Agreement and such Registration Rights
Agreement.
17.10 Survival of Representations, Warranties and Covenants Closing.
-------------------------------------------------------------
All warranties, representations, indemnities and agreements made in this
Agreement by a party hereto shall survive the date of this Agreement, the
Closing Date, the consummation of the transactions contemplated by this
Agreement, and the issuance by the Company of the Shares.
14
<PAGE>
IN WITNESS WHEREOF, the party named below has caused this Agreement to be
executed, as of the date first above written.
LCO INVESTMENTS LIMITED
BY: /s/ Anthony Pilaro
------------------------------
NAME: Anthony M. Pilaro
----------------------------
TITLE: Chairman
---------------------------
DATE: May 4, 1998
ACCEPTED AND AGREED:
ION LASER TECHNOLOGY, INC.
BY: /s/ Milton G. Adair
-----------------------------
NAME: Milton G. Adair
----------------------------
TITLE: President & CEO
---------------------------
DATE: May 4, 1998
15
<PAGE>
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") between ION LASER
TECHNOLOGY, INC., a Utah corporation (the "Company"), and LCO INVESTMENTS
LIMITED, a company organized under the laws of Guernsey, Channel Islands
("LCO"), is made and entered into as of May 4, 1998. LCO is referred to herein
as "Holder".
RECITALS
A. The Company and Holder have entered into that certain Stock Purchase
Agreement (the "Purchase Agreement") of even date with this Agreement, pursuant
to which Holder has agreed to purchase and the Company has agreed to sell shares
of its Common Stock, par value $.001 per share (the "Shares"), which Shares
(the "Registrable Securities") are now restricted and not registered under the
Securities Act of 1933, as amended, (the "Act") or under the provisions of any
state securities law.
B. Holder would not have agreed to execute the Purchase Agreement or to
consummate the transactions contemplated by the Purchase Agreement unless the
Company had agreed to enter into this Agreement.
AGREEMENT
In consideration of the promises contained in this Agreement and in the
Purchase Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which the parties acknowledge by their signatures below, the
Company and Holder agree as follows:
1. Piggyback Registrations. If at any time after 180 days from the date
-----------------------
of this Agreement the Company proposes to file a registration statement covering
proposed sales by it or any of its shareholders of shares of its capital stock
in a manner which would permit registration of shares of common stock for sale
to the public (other than a registration statement (i) covering only shares
issuable upon (a) the exercise of employee stock options or pursuant to an
employee stock purchase, dividend reinvestment or similar plan, or (b) the
exercise of a convertible security, or (ii) under a Registration Statement filed
on Form S-4 or S-8 or any similar form under the Act or (iii) pursuant to
Section 2, below), the Company will give prompt notice to Holder of such
proposed registration (which notice shall describe the proposed filing date and
the date by which the registration rights granted pursuant to this Section 1
must be exercised, the nature and method of any such sale or disposition of
securities and shall include a listing of the jurisdictions, if any, in which
the Company proposes to register or qualify the securities under the applicable
state securities or "Blue Sky" laws of such jurisdictions). At the request of
Holder given within thirty (30) calendar days after the receipt of such notice
by Holder (which request shall specify the number of shares Holder requests to
be included in such registration), the
<PAGE>
Company will use its best efforts to cause all shares as to which registration
has been requested by Holder to be included in such registration statement for
sale or disposition in accordance with the method described in the initial
notice given to Holder and subject to the same terms and conditions as the other
shares of capital stock being sold, and thereafter shall cause such registration
statement to be filed and become effective; provided, however, that the Company
shall be permitted to (A) withdraw the registration statement for any reason in
its sole and exclusive discretion and upon the written notice of such decision
to Holder shall be relieved of all of its obligations under this Section 1 with
respect to that particular registration; or (B) exclude all or any portion of
the shares sought to be registered by Holder from such registration statement if
the offering of the shares is an underwritten offering and to the extent that,
in the judgment of the managing underwriter of the offering, the inclusion of
such shares would be materially detrimental to the offering of the remaining
shares of capital stock, or such delay is necessary in light of market
conditions. Any shares sought to be registered by Holder so excluded from a
registration statement shall be excluded pro rata based on the total number of
shares of capital stock being sold by all selling security holders (other than
the Company).
2. Demand Registration. If at any time after 180 days from the date of
-------------------
this Agreement the Company shall be requested in writing by LCO (and LCO then
holds any issued and outstanding Registrable Securities at such time) to effect
the registration under the Act of shares of the Company's Common Stock then
owned by Holder (which request shall specify the aggregate number of shares
intended to be offered and sold by Holder, shall describe the nature or method
of the proposed offer and sale thereof and shall contain an undertaking by
Holder to cooperate fully with the Company in order to permit the Company to
comply with all applicable requirements of the Act and the rules and regulations
thereunder and to obtain acceleration of the effective date of the registration
statement contemplated thereby), the Company shall effect the registration of
such securities on an appropriate form under the Act, provided that:
2.1 LCO's rights under this Section 2 shall be exercisable only if
the shares as to which LCO requests registration have an aggregate value of at
least $500,000 based on the average of the closing sale price for the Company's
common stock as listed on the American Stock Exchange or any other exchange on
which the Company's common stock then may be traded for the thirty (30) trading-
day period immediately preceding the date of such request for registration;
2.2 The independent members of the Company's Board of Directors, with
the advice of such investment bankers or securities professionals as the Board
shall deem necessary, shall have determined in good faith that the cost of
complying with the request for registration under this Section 2 would not have
a materially adverse effect upon the Company, its operations or the market for
the Company's common stock, provided, however, that if the independent members
of the Company's Board of Directors determine in good faith that the cost of
complying with the request for registration would have a material adverse effect
upon the Company, its operations or the market for the Company's common stock,
the Company may decline Holder's request to register Holder's Registrable
Securities under the Act, provided further, however, that in such event the
Company may not thereafter again decline LCO's request for registration based
2
<PAGE>
upon this Section so long as such subsequent request is received by the Company
more than 120 days after LCO's request for registration which was declined based
upon this Section;
2.3 LCO shall be entitled to three demand registrations, provided
that registrations two and three may be effected on Form S-3 or its then
equivalent form promulgated by the SEC and, provided further, that any request
for registration pursuant to this Section 2 which does not result in the
declaration of effectiveness of a registration statement (which effectiveness is
maintained continuously for at least 120 days or such shorter period ending when
all shares to which LCO has requested registration in accordance herewith have
been sold in accordance with such registration) covering the offer and sale of
shares owned by Holder and requested to be included in such registration
statement, whether as a result of the withdrawal of the registration statement
by the Company or through other action or inaction of the Company or for any
other reason except for the voluntary decision of Holder to terminate the
registration after the request for such registration has been delivered to the
Company, shall not be counted in determining the number of times registration
rights have been exercised pursuant to this Section 2;
2.4 The Company shall be entitled to postpone the filing of any
registration statement otherwise required to be prepared and filed by it
pursuant to this Section 2, if at the time it receives a request for such
registration, the independent members of the Company's Board of Directors
determine that such registration and offering would materially interfere with
any existing or then presently contemplated financing, acquisition, corporate
reorganization or other material transaction involving the Company, and the
Company promptly gives LCO written notice of such determination, provided,
however, that such postponement shall not extend beyond the time that such
material interference continues to exist; and
2.5 LCO shall have no right to demand registration with respect to
any shares within ninety (90) calendar days after the effective date of any
registration statement previously filed by the Company, other than a
registration statement on Form S-8 or similar form.
3. Registration Procedures. If and whenever this Agreement contemplates
-----------------------
that the Company will effect the registration under the Act of any shares held
by Holder, the Company shall:
3.1 prepare and file with the Securities and Exchange Commission (the
"SEC") a registration statement on the appropriate form with respect to such
shares and use its best efforts to cause such registration statement to become
and remain effective as provided herein, provided that before filing any
amendments or supplements to a registration statement or prospectus, including
documents incorporated by reference after the initial filing of the registration
statement, the Company will furnish to Holder and the underwriters, if any,
copies of all such documents proposed to be filed at least five business days
prior thereto, which documents will be subject to the reasonable review of
Holder and underwriters, and the Company will not file an amendment to a
registration statement or prospectus or any supplement
3
<PAGE>
thereto (including such documents incorporated by reference) to which Holder or
the underwriters, if any, shall reasonably object;
3.2 prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith and
to take such other action as may be necessary to keep such registration
statement effective until the earlier of (i) the completion of the distribution
of shares so registered, or (ii) expiration of the 120 day period following
immediately the effective date of such registration statement (at which time
unsold shares may be deregistered), and otherwise comply with applicable
provisions of the Act and the rules and regulations promulgated under the Act;
3.3 furnish to Holder and its counsel, and to each underwriter of the
shares to be sold by Holder, without charge, such number of copies of one or
more preliminary prospectuses, any supplements thereto and a final prospectus
and any supplements thereto in conformity with the requirements of the Act, and
such other documents as Holder or such underwriter may reasonably request, in
order to facilitate the public sale or other disposition of such shares;
3.4 if, during any period in which, in the opinion of the Company's
counsel, a prospectus relating to the shares is required to be delivered under
the Act in connection with any offer or sale contemplated by any registration
statement, any event known to the Company occurs as a result of which the
prospectus would include an untrue statement of material fact or omit to state
any material fact necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend or supplement the related prospectus to comply with the
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the respective rules and regulations thereunder, to notify Holder promptly and
to prepare and file with the SEC an amendment or supplement, whether by filing
such documents pursuant to the Act or the Exchange Act as may be necessary to
correct such untrue statement or omission or to make any registration statement
or the related prospectus comply with such requirements and to furnish to Holder
and its counsel such amendment or supplement to such registration statement or
prospectus;
3.5 timely to file with the SEC (i) any amendment or supplement to
any registration statement or to any related prospectus that is required by the
Act or the Exchange Act or requested by the SEC, and (ii) all documents (and any
amendments to previously filed documents) required to be filed by the Company
pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act;
3.6 within five days of filing with the SEC of (i) any amendment or
supplement to any registration statement, (ii) any amendment or supplement to
the related prospectus, or (iii) any document incorporated by reference in any
of the foregoing or any amendment of or supplement to any such incorporated
document, to furnish a copy thereof to Holder;
4
<PAGE>
3.7 to advise Holder and its counsel promptly (i) when any post-
effective amendment to any registration statement becomes effective and when any
further amendment of or supplement to the prospectus shall be filed with the
SEC, (ii) of any request or proposed request by the SEC for an amendment or
supplement to any registration statement, to the related prospectus, to any
document incorporated by reference in any of the foregoing or for any additional
information, (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of any registration statement or any order directed to the related
prospectus or any document incorporated therein by reference or the initiation
or threat of any stop order proceeding or of any challenge to the accuracy or
adequacy of any document incorporated by reference in such prospectus, (iv) of
receipt by the Company of any notification with respect to the suspension of the
qualification of the shares for sale in any jurisdiction or the initiation or
threat of any proceeding for such purpose, and (v) of the happening of any event
which makes untrue any statement of a material fact made in any registration
statement or the related prospectus as amended or supplemented or which requires
the making of a change in such registration statement or such prospectus as
amended or supplemented in order to make any material statement therein not
misleading;
3.8 on or before the date a registration statement is declared
effective, use its best efforts to register or qualify the shares covered by
such registration statement under the securities or blue sky laws of such
jurisdictions as Holder shall reasonably request, considering the nature and
size of the offering, and do such other acts and things as may be reasonably
necessary to enable Holder to consummate the public sale or other disposition in
each such jurisdiction of such shares; provided, however, that the Company shall
not be obligated to qualify as a foreign corporation to do business under the
laws of any jurisdiction in which it has not been qualified, or to file any
general consent to service of process;
3.9 use its best efforts to cause all shares sold pursuant to any
registration statement to be listed on each national securities exchange, if
any, on which such shares are then listed;
3.10 enter into customary agreements (including, if applicable, an
underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such
Registrable Securities;
3.11 make reasonably available for inspection by Holder, any
underwriter participating in any disposition pursuant to the registration
statement, and any attorney, accountant or other agent retained by Holder or
underwriter (collectively, the "Inspectors"), all pertinent financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such Inspector in connection with such registration statement. Records and
other information which the Company determines, in good faith, to be
confidential and which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (i) the disclosure of such Records, in the
opinion of counsel
5
<PAGE>
reasonably acceptable to the Company, is necessary to avoid or correct a
misstatement or omission in the registration statement, or (ii) the release of
such records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction. Holder agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction, give
notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of the Records deemed
confidential;
3.12 use its best efforts to obtain a "cold comfort" letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by "cold comfort" letters as Holder, or
the managing underwriter, reasonably requests;
3.13 use its best efforts to obtain an opinion or opinions from
counsel for the Company in customary form;
3.14 make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the registration statement at the earliest
possible moment; and
3.15 cooperate with Holder and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing securities to be
sold under the registration statement, and enable such securities to be in such
denominations and registered in such names as the managing underwriter or
underwriters, if any, or Holder may request.
4. Agreements of Holder. Holder (i) upon receipt of a notice from the
--------------------
Company of the occurrence of any event of the kind described in Subsection 3.4
shall forthwith discontinue Holder's disposition of securities included in the
registration statement until Holder receives copies of the supplemented or
amended prospectus, and (ii) if so directed by the Company, shall deliver to the
Company, at the Company's expense, all copies (other than permanent file copies)
then in Holder's possession of the prospectus covering such securities that was
in effect at the time of receipt of such notice.
5. Withdrawal. If Holder disapproves of the terms of any offering, the
----------
sole remedy of Holder shall be to withdraw Holder's securities therefrom by
giving written notice to the Company and any managing underwriter (if any).
Holder's securities of the Company so withdrawn from the offering also shall be
withdrawn from registration.
6. Participation in Underwritten Registrations. In the case of any
-------------------------------------------
registration under Section 2, if Holder or the Company determines to enter into
an underwriting agreement in connection therewith, or in the case of a
registration under Section 1, if the Company determines to enter into an
underwriting agreement in connection therewith, (i) all shares of Holder's
securities to be included in such registration shall be subject to an
underwriting agreement, which shall be in customary form and contain such terms
as are customarily contained in such agreements, and (ii) no person may
participate in any such registration unless such person (A)
6
<PAGE>
agrees to sell such person's securities on the basis provided in such
underwriting arrangement, and (B) completes and executes all questionnaires,
powers-of-attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements.
7. Registration Expenses. With respect to each registration effected
---------------------
pursuant to Section 1 and to each registration under Section 2 of this
Agreement, the Company shall pay the following fees, disbursements and expenses:
all registration and filing fees, printing expenses, auditors' fees, listing
fees, registrar and transfer agent's fees, fees and disbursements of counsel to
the Company, reasonable fees and disbursements of not more than one counsel to
Holder in the case of each registration under Section 2 of this Agreement,
expenses (including reasonable fees and disbursements of counsel) of complying
with applicable securities or "Blue Sky" laws, and the fees of any securities
exchange in connection with the review of such offering. The underwriting
discounts and commissions allocable to the shares included in any offering shall
be borne by Holder.
8. Indemnification.
---------------
8.1 In each case of a registration of shares under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless Holder,
its officers and directors, each underwriter (as defined in the Act), and each
other person, if any, who controls Holder or any such underwriter within the
meaning of the Act or the Exchange Act, from and against any and all losses,
claims, damages and liabilities (including the fees and expenses of counsel in
connection therewith), arising out of any untrue statement or alleged untrue
statement of a material fact contained in any registration statement under which
such shares were registered under the Act, any prospectus or preliminary
prospectus contained therein, or any amendment or supplement thereto (including,
in each case, documents incorporated by reference therein), or arising out of
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements made therein not misleading,
except insofar as such losses, claims, damages or liabilities arise out of any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to Holder, Holder's counsel, or any underwriter, and
furnished to the Company in writing by Holder or such counsel or underwriter;
provided that the foregoing indemnification with respect to a preliminary
prospectus shall not inure to the benefit of any underwriter (or the benefit of
any person controlling such underwriter) from whom the person asserting any such
losses, claims, damages or liabilities purchased shares to the extent such
losses, claims, damages or liabilities result from the fact that a copy of the
final prospectus had not been sent or given to such person at or prior to
written confirmation of the sale of such shares to such person.
8.2 In each case of a registration of shares under the Act pursuant
to this Agreement, Holder will indemnify and hold harmless the Company, its
directors, its officers who sign the registration statement, its attorneys, each
underwriter and each person, if any, who controls the Company or such
underwriter within the meaning of the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to Holder, but only with
reference
7
<PAGE>
to information provided to the Company in writing by Holder and furnished to the
Company by Holder expressly for use in the registration statement, any publicly
available report of Holder published within the time frame of the registration
statement, any prospectus or preliminary prospectus contained therein, or any
amendment or supplement thereto.
8.3 In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "Indemnified Party") shall
promptly notify the person against whom such indemnity may be sought (the
"Indemnifying Party") in writing and the Indemnifying Party, upon request of the
Indemnified Party, shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party has agreed to the
retention of such counsel at its expense, or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the Indemnifying Party
and the Indemnified Party, the Indemnifying Party proposes that the same counsel
represent both the Indemnified Party and the Indemnifying Party and
representation of both parties by the counsel would be inappropriate due to
actual or potential differing interests between them. It is understood, where
the expense of separate counsel shall be borne by the Indemnifying Party
pursuant to the foregoing sentence, that the Indemnifying Party shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm qualified in
such jurisdiction to act as counsel for such Indemnified Party. The
Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Indemnifying Party agrees to
indemnify the Indemnified Party from and against any loss or liability by reason
of such settlement or judgment.
8.4 The indemnification pursuant to this Section 8 shall be on such
other terms and conditions as are at the time customary and reasonably required
by underwriters in public offerings, including providing for contribution in the
event indemnification provided in this Section 8 is unavailable or insufficient.
9. Holdback Agreement. Holder agrees not to effect any public sale or
------------------
distribution of the Company's shares of capital stock during the seven (7)
calendar days prior to and the ninety (90) calendar day period beginning on the
effective date of any underwritten registration statement effected pursuant to
this Agreement (except as part of such underwritten registration) unless the
managing underwriter or underwriters with respect to such offering otherwise
agree.
10. Selection of Underwriters. The Company will have the right to select
-------------------------
the investment banking firm(s) acting as managing underwriter in connection with
any underwritten public offering; provided, that in the event the offering is
--------
pursuant to a demand registration hereunder, Holder shall have the sole right to
select such managing underwriter.
8
<PAGE>
11. Survival. The indemnification provisions of Section 8 shall not
--------
terminate and shall survive forever.
12. Rule 144. The Company agrees that it will use its best efforts to
--------
file in a timely manner all reports required to be filed by it pursuant to the
Exchange Act and, at any time and upon request of Holder, will furnish Holder
and others with such information as may be necessary to enable Holder to effect
sales of Registrable Securities without registration pursuant to Rule 144 under
the Act.
13. General.
-------
13.1 Assignment. Except in connection with the transfer by Holder of
----------
not less than 100,000 shares of Common Stock, Holder's rights under this
Agreement shall not be transferable without the written consent of the Company;
provided that LCO may assign its rights under this Agreement to one or more
affiliates or to one or more charitable foundations who agree to be bound by
this Agreement as if they were LCO. Any attempted assignment or other transfer
of this Agreement in contravention of this Section 13.1 shall be null and void.
13.2 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when so signed shall be deemed to be an original,
and such counterparts together shall constitute one and the same instrument.
13.3 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties as to the subject matter hereof, supersedes any and all
prior or contemporaneous agreements or understandings of the parties relating to
the subject matter of this Agreement, and may not be amended except by an
instrument in writing signed by all of the parties to this Agreement.
13.4 Governing Law. The laws of the State of Utah (without giving
-------------
effect to the choice of law provisions thereof) shall govern the interpretation
and enforcement of this Agreement.
13.5 Headings. The headings of the sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
13.6 Notices. All notices or other communications provided for under
-------
this Agreement shall be in writing, and mailed, telecopied or delivered by hand
delivery or by overnight courier service, to the parties at their respective
addresses as indicated below or at such other address as the parties may
designate in writing:
If to LCO:
LCO Investments Limited
9
<PAGE>
Canada Court
Upland Road, St. Peter Port
Guernsey, Channel Islands
With a copy to:
Michael Yong
Cap Advisers Limited
36 Fitzwilliam Place
Dublin 2, Ireland
(Tel. 011-353-1-661-4433)
(Fax 011-353-1-661-2456)
Craigh Leonard
Richards & O'Neil, LLP
885 Third Avenue
New York, N.Y. 10022-4873
(Tel. 212-207-1200)
(Fax 212-750-9022)
Robert B. Hiden, Jr.
Sullivan & Cromwell
125 Broad Street
New York, N.Y. 10004
(Tel. 212-558-3812)
(Fax 212-558-4783)
If to the Company:
Ion Laser Technology, Inc.
3828 South Main Street
Salt Lake City, Utah 84115
With a copy to:
Durham, Evans, Jones & Pinegar
50 South Main, Suite 850
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones, Esq.
All notices and communications shall be effective as follows: When mailed, upon
three (3) business days after deposit in the mail (postage prepaid); when
telecopied, upon confirmed transmission of the telecopied notice; when hand
delivered, upon delivery; and when sent by overnight courier, the next business
day after deposit of the notice with the overnight courier.
10
<PAGE>
13.7 Remedies. Any person having rights under any provision of this
--------
Agreement will be entitled to enforce such rights specifically, to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
DATED: May 4, 1998.
ION LASER TECHNOLOGY, INC., a Utah corporation
By /s/ Milton G. Adair
-------------------------------------------
Milton G. Adair, President and CEO
LCO INVESTMENTS LIMITED
By Anthony M. Pilaro
--------------------------------------------
Its Chairman
-------------------------------------------
11
<PAGE>
EXHIBIT 10.14
AGREEMENT
This agreement, dated as of November ____, 1997 (this "AGREEMENT") between
CAP ADVISERS LIMITED, a company organized under the laws of Guernsey, Channel
Islands (the "COMPANY"), and RICHARD TREFZ (the "CONSULTANT").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company is an investment advisory company and wishes to engage
the Consultant to provide advisory services to the Company and certain other
designated entities (collectively, "DESIGNATED ENTITIES") with respect to the
business and affairs of Ion Laser Technology, Inc. ("ILT"); and
WHEREAS, the Consultant has been elected and has agreed to serve as a
member of the Board of Directors of ILT and has financial business experience
and is willing to make that experience available to the Company for the benefit
of the designated entities subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Consultancy Services Relating to Ion Laser Technology, Inc. The
-----------------------------------------------------------
Consultant shall provide the following services to the Company for the benefit
of the Company and designated entities:
(a) the Consultant will familiarize himself with the business and
affairs of ILT and any subsidiary thereof and render such advice
and reports to the Company with respect to the Company's or
designated entities' investment in securities of ILT as the
Company shall reasonably require from time to time; and
(b) the Consultant shall perform such other incidental services as
the Company may reasonably request from time to time.
As the full and complete consideration for the services to be provided by
the Consultant under Section 1 above the Company shall, in addition to the
Options granted under Section 3 below, pay the Consultant a consulting fee at a
rate of $50,000 per annum. Such fee shall be paid in equal quarterly
installments on the 15/th/ day of each January, April, July and October during
the term hereof, commencing January 15, 1998. The amount of any quarterly
payment shall be appropriately adjusted if the period to which any payment
relates is less than a full quarter and by the amount of any cash compensation
received with respect to such quarter by Consultant from ILT for his services as
a director or otherwise. The Company shall also reimburse the consultant for his
documented
<PAGE>
reasonable out-of-pocket costs incurred in the performance of his duties
hereunder to the extent such expenses are not reimbursed by ILT or any other
third party. The Consultant may keep for his own account any stock or options
received by him as a member of the Board of Directors of ILT without any
adjustment to the consulting fee payable hereunder.
2. Term of Agreement. The term of this Agreement shall commence on the
------------------
date hereof and shall continue thereafter until terminated by either party
giving at least 30 days' prior written notice to the other party.
3. Grant of Options. The Company hereby grants to the Consultant an
-----------------
option to purchase from the Company or its affiliate 50,000 shares of ILT common
stock at a purchase price of $4.00 per share ("OPTIONS").
4. Adjustment Upon Changes in Capitalization. In the vent of any change
------------------------------------------
in the number of shares of outstanding common stock of ILT prior to the
expiration of the Options by reason of stock dividends, split-ups,
distributions, recapitalizations, combinations, exchanges of shares or the like,
the number of shares of common stock or other securities subject to the Options
and the option price for the Options shall be adjusted appropriately.
5. Exercise of the Options.
-----------------------
(a) Subject to the provisions of Section 5(b), the Options may be
exercised in whole or in part by the Consultant at any time from
the date hereof to and including November 19, 2002.
(b) The Options may be exercised by the Consultant only while he is a
director of ILT or within 30 days after the date he ceases to be
such a director, except that in the event of his death while so
serving or in the event of his death within 30 days after the
date he ceases to so serve, then such option may be exercised by
his executors, administrators or other legal representatives,
heirs, legatees, next of kin or distributees within three months
of his death or if, later within three months after the date of
the legal qualification of the executors or administrators of his
estate. Notwithstanding anything in this "Agreement to the
contrary, the Options herein granted to the Consultant shall in
no event be exercisable after November 19, 2002 or after
Consultant shall have been removed as a director of ILT for
cause. For the purposes hereof, the term "cause" shall mean (i)
indictment for a crime and (ii) gross negligence or willful
malfeasance in the performance of his duties.
(c) The Options herein granted to the Consultant shall not be
transferrable by the Consultant other than by will or the laws of
descent and distribution, and shall be exercisable, during this
lifetime, only by him. The provisions for such Options shall
become null and void and inoperative immediately upon any
attempted sale, assignment, transfer or other disposition by the
Consultant of such Options or any of his right, title and
interest therein; provided, however, that nothing herein shall be
construed as prohibiting the Consultant upon his
<PAGE>
death (at any time while he has the right to exercise such
Options) from providing for the disposition of such Options or
his right, title and interest in it by will or as prohibiting the
transfer of such Options by the laws of descent and distribution.
(d) If the Consultant makes an exercise of the Options which relate
to at lease 15,000 shares of ILT common stock, the Company shall
use its best efforts to cause to be assigned to the Consultant
any registration rights to which the Company or any designated
entities may be entitled relating to such shares.
(e) In the event Consultant wishes to exercise the Options,
Consultant shall send a written notice to the Company specifying
a date (not earlier than 15 business days nor later than 45
business days from the date such notice is given) for the closing
of such purchase the ("Closing").
(f) The Closing shall be at such place in the United States or
Ireland as is reasonably designated by the Company. At the
Closing (i) the Consultant will make payment to the Company of
the aggregate option price of the ILT common stock to be sold by
the Company in immediately available funds by a wire transfer to
a bank designated by the Company at least two business day prior
to such Closing, and (ii) the Company shall deliver to the
Consultant a certificate or certificates representing the ILT
common stock purchased by the Consultant from such shareholder
duly endorsed in blank or accompanied by a stock power duly
signed in blank.
4. Relationship of Parties. The Consultant and the Company are entering
------------------------
into this Agreement as principals and nothing herein contained shall be
construed as making either party an agent of the other for any purpose or as
making either party an agent of any third party or as making the Consultant an
employee of the Company. In particular, the Consultant shall have no power to
enter into any contracts on behalf of the Company or to bind the Company in any
way or to require the Company to act in accordance with the advice,
recommendations and other services to be provided by the Consultant to the
Company hereunder.
5. Reports. The Consultant shall prepare and submit to the Company such
--------
regular periodic reports with respect to the activities undertaken by him in
connection with this "Agreement as the Company may reasonably request from time
to time (consistent with the Consultant's duties as an ILT Director).
6. Confidential Information. The Consultant shall not during the term of
-------------------------
this "Agreement (otherwise than in the proper performance of his duties) or
thereafter without the prior written consent of the Company divulge to any
person, firm or company, and shall during the term of this Agreement use his
best endeavors to prevent the publication or disclosure of, any information
concerning the confidential aspects and business, accounts or finances of the
Company or any of the designated entities or the identity of their respective
directors, trustees, shareholders or other beneficial owners or any of the
secrets, dealing, transactions or affairs of the Company or any of the
designated entities which have or may come to his knowledge during the course of
this Agreement
<PAGE>
or previously or otherwise. On the termination of this Agreement, the Consultant
shall forthwith surrender to the Company or as it may direct all original and
copy documents in his possession relating to the business or affairs of the
Company and any designated entities.
7. Notices. Any notice or other document to be given hereunder to the
--------
Company shall be delivered or sent by hand, by first class recorded delivery
post or by telecopier to the Company at its office address at 36 Fitzwilliam
Place, Dublin 2, Ireland, and any notice or other document to be given hereunder
to the Consultant shall be delivered to him or sent by hand, by first class
recorded delivery post or facsimilied to his address at 428 Wheatsheas Road,
Springfield, Pennsylvania 19060. Either party may change the address to which
notices are to be sent by informing the other party in writing of the new
address.
8. Governing Law. This Agreement and the relationships of the parties in
--------------
connection with the subject matter of this agreement shall be governed by and
construed in accordance with the laws of New York without regard to the choice
of law doctrine thereof.
9. General.
--------
(a) The Company shall notify the Consultant in writing from time to
time of those entities that are "designated entities" for the
purposes of this Agreement.
(b) All payments of money to the Consultant will be subject to such
deductions and withholdings by the Company as the Company is from
time to time required to make pursuant to law or governmental
regulations.
(c) This Agreement constitutes the entire agreement of the parties
hereto with respect to the services to be provided by the
Consultant to the Company and supersedes all prior agreements and
understandings of whatever nature between the parties hereto, and
each of the parties acknowledges that it has not been induced to
enter into this "Agreement by any representation not incorporated
in this Agreement.
10. Representation as to Investment. The exercise of the Options and the
--------------------------------
delivery of the shares subject to it will be contingent upon the Company's being
furnished by the Consultant, his legal representatives, or other persons
entitled to exercise the Options a statement in writing that at the time of such
exercise it is his or their intention to acquire the shares being purchased
solely for investment purposes and not with a view to distribution.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have executed this Agreement as
of the date first written above.
CAP ADVISERS LIMITED
By /s/ CAP ADVISERS LIMITED
----------------------------------------
Name:
Title:
/s/ Richard Trefz
--------------------------------------------
RICHARD TREFZ
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 503,279
<SECURITIES> 0
<RECEIVABLES> 720,624
<ALLOWANCES> 189,565
<INVENTORY> 321,450
<CURRENT-ASSETS> 3,082,424
<PP&E> 1,696,545
<DEPRECIATION> 931,121
<TOTAL-ASSETS> 4,661,861
<CURRENT-LIABILITIES> 1,884,703
<BONDS> 930,742
0
0
<COMMON> 5,809
<OTHER-SE> 1,840,607
<TOTAL-LIABILITY-AND-EQUITY> 1,846,416
<SALES> 4,609,253
<TOTAL-REVENUES> 4,609,253
<CGS> 5,813,232
<TOTAL-COSTS> 13,666,492
<OTHER-EXPENSES> 55,474
<LOSS-PROVISION> 2,462,245
<INTEREST-EXPENSE> 119,643
<INCOME-PRETAX> (9,112,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,112,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,112,693)
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
</TABLE>
