-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfKKiOSPar6d1K/X77pmP5/X/ncuFNtS25y3jdJMzAMoptIbiFpod4D0GxpZDFw6 Hf3hqnKNd5NIUUUOWoFPiQ== 0000950115-99-000493.txt : 19990403 0000950115-99-000493.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950115-99-000493 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SURGICAL LASER TECHNOLOGIES INC /DE/ CENTRAL INDEX KEY: 0000854099 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 311093148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17919 FILM NUMBER: 99586150 BUSINESS ADDRESS: STREET 1: 200 CRESSON BLVD PO BOX 880 CITY: OAKS STATE: PA ZIP: 19456 BUSINESS PHONE: 6106500700 MAIL ADDRESS: STREET 1: 200 CRESSON BLVD STREET 2: P O BOX 880 CITY: OAKS STATE: PA ZIP: 19456 10-K 1 ANNUAL REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to ________. Commission File Number 0-17919 Surgical Laser Technologies, Inc. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 31-1093148 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 147 Keystone Drive, Montgomeryville, PA 18936-9638 - ----------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 619-3600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value --------------------------- (Title of Class) 8% Convertible Subordinated Notes Due July 30, 1999 --------------------------------------------------- (Title of Class) Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X). No ( ). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.(X) As of March 15, 1999, the aggregate market value of the voting common equity of Registrant held by non-affiliates was approximately $3,243,099. Registrant has no authorized non-voting common equity. On March 15, 1999 Registrant had outstanding 1,977,879 shares of Common Stock, $.01 par value. PART I Item 1. Business. (a) GENERAL DEVELOPMENT OF BUSINESS. Surgical Laser Technologies, Inc. ("SLT" or "Registrant") was incorporated in December 1983 under the laws of the State of Delaware. Registrant's principal offices are located at 147 Keystone Drive, Montgomeryville, Pennsylvania 18936-9638, and its telephone number is (215) 619-3600. Registrant is engaged in the development, manufacture and sale of proprietary laser systems for both contact and non-contact surgery. Registrant's Contact Laser(TM) System, unlike conventional laser systems, enables the surgeon to use the laser instrument in direct contact with the tissue being treated, thereby significantly enhancing the ease of use and precision of laser surgery in many applications. Registrant's Contact Laser was the first Contact Laser surgery system developed for commercial application, and Registrant holds patent rights on the Wavelength Conversion(TM) effect technology which is the technological foundation for Contact Laser surgery. Registrant believes that Contact Laser surgery represents a significant advancement in laser surgery. Registrant supplements its contact offerings with non-contact products. Registrant's Contact Laser System is comprised of a portable laser unit that delivers laser energy through Contact Laser Delivery Systems. Registrant's current product line includes four portable laser units of various power levels and a family of over 100 Laser Probes, Laser Scalpels, fibers and handpieces that provide different Wavelength Conversion effect properties, power densities and configurations appropriate for cutting, coagulation or vaporization. The Wavelength Conversion effect properties permit Registrant's lasers to replicate the effect of several different laser systems. As a result of the system's design, a single Contact Laser System can be used within most surgical specialties to perform a broad range of minimally invasive and open surgical procedures. During 1997, Registrant redefined its strategy for growth to include a specific focus in the surgical specialties of Otolaryngology and Head and Neck surgery and Neurosurgery (ENT and Neurosurgery). In conjunction with this focused strategy, Registrant has entered and will continue to seek to enter into relationships with other companies to expand the use of Registrant's products in surgical specialties other than ENT and Neurosurgery, and has utilized and will continue to seek to utilize its strengths in supplying other companies with products that draw on Registrant's expertise and competencies. While refocusing its strategy in ENT and Neurosurgery, Registrant will take these other actions in an effort to enhance sales and to promote continued utilization of its products and services in those other surgical specialties. Registrant expanded its product offerings during 1998 and 1997 to include non-laser based products specifically targeted at the ENT and Neurosurgery markets. During 1998, Registrant's new product offerings included the ClearESS(TM) irrigation and suction system and the HemoSleeve(TM), a bipolar microdebrider sleeve used in endoscopic sinus surgery. The new products offered in 1997 included a line of reusable handheld instruments. The line of handheld instruments called MedTREK was expanded during 1998. Registrant will continue to seek to expand its product offerings within the ENT and Neurosurgery markets. 2 During 1998, Registrant continued to supply laser systems to CorMedica Corporation for CorMedica to incorporate into its proprietary catheter tracking and navigation system. CorMedica Corporation is a privately-held company engaged in the design, development and manufacture of proprietary integrated systems for catheter-based percutaneous transluminal endocardial revascularization (PTER(TM)) procedures. The laser systems are expected to be used by Cormedica in its investigational clinical trials for PTER. In July 1998, the United States Court of Appeals for the Federal Circuit affirmed the summary judgement of the District Court that Registrant's Contact Laser probes do not infringe a patent owned by Trimedyne. The appellate court also reversed the summary judgment of the District Court that Registrant's SFB1.0 product did not infringe upon Trimedyne's patent, remanding that portion of the litigation to the lower court for trial. In January 1999, to avoid the time and costs associated with patent litigation, Registrant and Trimedyne entered into settlement discussions. (see Part I, Item 3, Legal Proceedings). In November 1998, Registrant received the necessary Japanese regulatory approvals to sell its laser delivery systems and accessories in Japan. In December 1998, Registrant amended its private label supply agreement with Diomed Limited, a UK based manufacturer and marketer of diode lasers and related supplies to include sales to Olympus Japan Co., LTD. Under the amendment, Olympus Japan Co., LTD., will market Registrant's products in Japan under the Diomed label. In December 1998, Registrant concluded that certain products under its marketing rights agreement with MedTREK Corporation and its President would not be commercialized. (see Note 7 of Notes to Consolidated Financial Statements). As a result, the net value of the agreement, including the warrants issued, was written-off in December 1998. The marketing rights agreement provided Registrant with exclusive worldwide rights to certain new products and medical devices used within minimally invasive ENT surgery. In January 1999, Registrant amended its Restated Certificate of Incorporation with the State of Delaware to effect a one-for-five reverse split of Registrant's Common Stock (see Part I, Item 4, Submission of Matters to a Vote of Security Holders). Effective January 15, 1999, Registrant's Common Stock commenced trading on the Nasdaq SmallCap market at the Registrant's request. Given the Registrant's current market capitalization, the Registrant believes that the continued listing requirements of the Nasdaq SmallCap market are more appropriate for the Registrant's public float characteristics. There were no other significant changes in Registrant's business during the fiscal year ended January 3, 1999. (b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS. Registrant is engaged primarily in one operating segment: the design, development, manufacture and marketing of laser products and other instruments for medical applications. See Note 16 of Notes to Consolidated Financial Statements for segment information. (c) NARRATIVE DESCRIPTION OF BUSINESS. Registrant is primarily engaged in the development, manufacture and sale of a proprietary Contact Laser System for surgery. During 1997, Registrant redefined its strategy for growth to include a specific focus in the surgical specialties of ENT and Neurosurgery. In conjunction with this focused strategy, Registrant has entered and will continue to seek to enter into relationships with other companies to 3 expand the use of Registrant's products in surgical specialties other than ENT and Neurosurgery, and has utilized and will continue to seek to utilize its strengths in supplying other companies with products that draw on Registrant's expertise and competencies. While refocusing its strategy in ENT and Neurosurgery, Registrant will take these other actions in an effort to enhance sales and to promote continued utilization of its products and services in those other surgical specialties. During fiscal 1998, 1997 and 1996, revenues from sales of Registrant's products and services were $9,393,000, $11,665,000 and $10,974,000, respectively. Registrant introduced Contact Laser surgery by combining proprietary Contact Laser Delivery Systems with its own Nd:YAG laser unit to create a multi-specialty surgical instrument that can cut, coagulate or vaporize tissue. Almost all of the surgery performed today, endoscopic or open-cavity, utilizes two fundamental technologies -- mechanical cutting and clamping, and/or thermal vaporization and coagulation. The mechanical scalpel, scissors and suture are universally accepted. However, today's surgery increasingly requires additional control of bleeding, more precision and better access to diseased sites. Lasers are suited for this requirement. With the use of Registrant's Contact Laser System, a precise temperature profile, or gradient, is created upon contact with the tissue by Registrant's Laser Probes and Laser Scalpels. It is the temperature that directly causes the therapeutic effect. If the temperature is sufficiently high, the tissue will be vaporized (turned from liquid or solid into gas), creating a precise surgical incision or excision. Lower temperatures coagulate tissue and thus control bleeding or destroy diseased tissue. Registrant's proprietary Contact Laser probe and scalpel surface treatments provide the ability to alter selectively the temperature profile of tissue, replicating the clinical effect of many different types of lasers. These treatments are marketed under the trademark "Wavelength Conversion effect." In addition, Contact Laser surgery restores to the surgeon the advantages of tactile feedback lost with conventional lasers. Registrant's revenues are generated primarily by the sale of Contact Laser Delivery Systems and accessories and Nd:YAG laser units. Registrant's Contact Laser Delivery Systems consist of proprietary fiberoptic delivery systems which deliver the laser beam from Registrant's Nd:YAG laser unit via an optical fiber to the tissue, either directly or through a proprietary Laser Probe or Laser Scalpel. Disposable Fiberoptic Delivery Systems. Registrant has designed disposable optical quartz fibers to channel the laser beam from Registrant's laser unit to the fiber end, the Laser Probe or the Laser Scalpel or to one of 24 interchangeable, application-specific handpieces that hold the Laser Scalpel or Laser Probe. These proprietary optical fibers and handpieces are intended for single use and range currently in list price from $145 to $495. Laser Probes and Laser Scalpels. Registrant's proprietary Laser Probes and Laser Scalpels are made of either synthetic sapphire or fused silica and have high mechanical strength, high melting temperature and appropriate thermal conductivity. Most of these Laser Probes and Laser Scalpels use Registrant's patented Wavelength Conversion effect treatments or geometry. Registrant offers over 60 interchangeable Laser Probes and Laser Scalpels that provide different power densities through various geometric configurations appropriate for cutting, coagulation or vaporization. Laser Probes and Laser Scalpels are made with varying distal tip diameters and surface treatments, each with a different balance between cutting and coagulation, so that the instrument can be suited to the particular tissue effect 4 desired. Additionally, Registrant markets side-firing and direct-firing free-beam laser probes. Instead of changing laser units, surgeons may choose a different Laser Probe or Laser Scalpel to perform a different procedure. The Laser Probes and Laser Scalpels are intended for limited reuse, and the list prices currently range from $395 to $520. Disposable Gas or Fluid Cartridge Systems. Registrant's proprietary cartridge system provides gas or fluid to cool the junction between the optical fiber and the Laser Scalpel or the Laser Probe. These cartridges are sterile and used in one set of procedures. The list price of these cartridges is currently $65. Reusable Laser Aspiration Handpieces. Registrant's proprietary reusable stainless steel handpieces are all used with interchangeable laser aspiration wands and flexible endoscopic fibers. These proprietary handpieces are intended for intra-nasal/endoscopic sinus and oropharyngeal procedures requiring smoke and/or fluid evacuation. Wands have a list price of $95, and the handpiece list prices currently range from $235 to $395. Laser Units. Registrant markets the CLMD line of Nd:YAG laser units for use with its Contact Laser Delivery Systems. The line consists of four units: the CLMD 25-watt to tissue, on 110 volts; the CLMD 40-watt to tissue, on 110 volts; the CLMD Dual which operates up to 40-watts to tissue on 110 volts and up to 60-watts to tissue on 220 volts; and the CLMD 100-watt to tissue, on 220 volts. The laser units are modularly designed to allow the customer to upgrade from the 25-watt laser to the 40-watt or Dual laser and from the 40-watt laser to the Dual laser, and thus provide the customer the flexibility and versatility to change its laser system easily to meet its changing surgery needs. Current list prices for the lasers are as follows: CLMD 25-watt, 110-volt - $55,000; CLMD 40-watt, 110-volt - $70,000; CLMD Dual - $85,000; and CLMD 100 watt - $95,000. These prices include a one-year warranty. Virtually all of Registrant's laser systems and laser delivery systems are manufactured and assembled at Registrant's Montgomeryville, Pennsylvania facility. The raw materials used by Registrant are generally available in adequate supply. Registrant obtains all of its partially finished Laser Probes and Laser Scalpels from three suppliers in the United States. Registrant performs materials processing and final assembly on the Laser Probes and Laser Scalpels using proprietary and patented treatment processes. The fiberoptic delivery systems, with and without handpieces, are also manufactured by Registrant. Registrant's sterile gas and fluid cartridge systems are manufactured exclusively by a domestic supplier in accordance with Registrant's specifications. Handheld Sinus Instrumentation. Registrant markets a line of 23 precision thru-cutting instruments used for minimally invasive sinus surgery. The line includes instruments with cutting tips at several different angles to allow for convenient access to difficult-to-reach anatomy. The instruments' list prices range from $225 to $850. Irrigation and Suction System. Registrant manufactures and markets ClearESS(TM), which provides convenient and effective irrigation and suction to remove blood and debris for enhanced visualization during endoscopic sinus surgery. The ClearESS kit, which includes suction and irrigation tubing, currently has a list price per package ranging from $495 to $795. Bipolar Microdebrider Sleeve. Registrant manufactures and markets HemoSleeve(TM), a bipolar sleeve which fits over the surgeon's existing microdebrider. HemoSleeve provides the surgeon with precise bipolar coagulation which improves surgical efficiency and enhances visualization by reducing inter-operative post-debrider bleeding. Registrant's HemoSleeve has a list price of $295 for a package of five. 5 Marketing Registrant sells its Contact Laser Systems to end users by forming a responsive partnership with surgeons and hospitals to develop and apply innovative technologies that advance therapeutic benefit. Registrant's products are designed to improve cost-effectiveness and enhance access and ease of use. Registrant's marketing efforts include activities designed to educate physicians and nurses in the use of Registrant's products. Registrant's sales organization provides consultation and assistance to the surgeon and surgical staff on the effective use of Registrant's products. The consultative sales effort varies depending on many factors, which include the nature of the specialty involved and complexity of the procedures and continues throughout Registrant's long-term relationship with its customers. The length of the sales cycle for a laser unit varies from one month to one year, with the average sale requiring approximately six months. Registrant's President and CEO supervises these sales and marketing activities in the United States, which are conducted predominantly by Registrant-employed sales personnel. The sale and post-sale support provided by Registrant includes area managers who are trained in the utilization of Registrant's products, and who provide clinical consultation regarding safety, efficacy and operating room procedures; per diem support specialists, who provide similar consultation within Registrant's Laser OnCall(TM) rental offering; and marketing and technology personnel, who together provide the link between the surgeon and Registrant to create innovative solutions and identify new applications and product opportunities. In certain geographic areas of the United States, Registrant utilizes distributors, whose employees are not Registrant's employees, to provide these services. Registrant distributes its products internationally through independent distributors. Contract Development and Private Label Manufacturing. As part of Registrant's efforts to refocus its business strategy, Registrant has sought and will continue to seek to augment its sales to end-user customers by entering into specific contract development and private label manufacturing agreements with other manufacturers. These activities are designed to utilize Registrant's product strengths and capabilities. International Markets. During 1998, Registrant's international marketing activities included working through distributors in various countries in Europe, the Middle East, the Far East, South America, Mexico and Canada. Research and Development Registrant focuses its research and product development efforts on tissue effect technologies that include laser and non-laser based technologies and improving its offerings in ENT and Neurosurgery. Registrant's technological capabilities are designed to be responsive to the surgeon's needs. Registrant has the ability to respond to development requirements in the areas of optical/materials technology, laser and electrosurgical technology and mechanical and electronics technology. During 1998, 1997 and 1996, Registrant spent $1,179,000, $910,000 and $1,404,000 in product development expenses, respectively. Registrant's facility in Montgomeryville, Pennsylvania houses its product development activities. Registrant utilizes the technologies developed by Advanced Laser Systems Technology, Inc. ("ALST") which was licensed to Registrant in December 1990 in the development and manufacture of its CLMD laser units. Registrant, in addition to its internal product development programs, works closely with 6 medical centers, universities and other companies worldwide in an effort to develop additional products and applications. Registrant's core Laser Probe and Laser Scalpel technology was acquired by Registrant in 1985 in consideration for certain royalty payments on net sales of probes and scalpels. The disposable fiberoptic delivery systems, with and without hand-pieces, the disposable gas and fluid cartridge systems, ceramic-enclosed probes, adjustable touch-control hand-pieces, ClearESS irrigation and suction system and the HemoSleeve micro-debrider sleeve have been developed by employees of Registrant; Registrant has retained ownership of all such proprietary technology. Registrant's handheld sinus instrument line was developed by an outside consultant and is manufactured by a domestic supplier. Registrant continues to focus on applications in minimally invasive and open surgery procedures where precision and hemostasis are critical to the procedure being performed and where Registrant's products can demonstrate distinct clinical advantages and cost-effectiveness relative to traditional surgical methods. Competition Registrant faces substantial competition from other manufacturers of surgical systems, whose identity varies depending on the medical application for which the surgical system is being used, and from traditional surgical methods. Other companies are developing competitive surgical systems and related technologies and certain of these companies are substantially larger and have substantially greater resources than Registrant. These efforts could result in additional competitive pressures on Registrant's operations. In addition, Registrant faces substantial competition in ENT and Neurosurgery from well-established manufacturers of non-laser products. These well-established companies have substantially greater resources than Registrant and could exert considerable competitive pressure on Registrant. Registrant continues to be aware that certain companies have introduced into the market concepts or products that draw on Contact Laser technology. Registrant does not perceive that such concepts or products have a significant impact on Registrant's sales. Registrant, through its patented Contact Laser Delivery Systems, is able to produce a wide range of temperature gradients which address a broad range of surgical procedures within multiple specialties. Registrant's multiple specialty capability reduces a hospitals need to purchase several lasers to meet its specialists' varied requirements. These factors, coupled with the precision, hemostasis, tactile feedback and control provided by its Contact Laser Delivery Systems, are Registrant's primary competitive strengths. FDA and Related Matters The FDA generally must approve the commercial sale of new medical devices. Commercial sales of medical lasers must be preceded by either a premarket notification filing pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act, or the granting of premarket approval for a particular medical device. The 510(k) notification filing must contain information that establishes that the device in question is substantially equivalent to devices on the market. Registrant has received FDA clearance to 7 commercially market its Contact Laser System, including the laser unit, Laser Probes and Laser Scalpels and Fiberoptic Delivery System, in a variety of surgical specialties and procedures in gynecology, gastroenterology, urology, pulmonology, general and plastic surgery, cardio-thoracic surgery, ENT surgery, ophthalmology, neurosurgery and head and neck surgery. These clearances were granted under Section 510(k) on the basis of substantial equivalence to other laser or electrosurgical cutting devices that had received prior clearances or were otherwise permitted to be used in such areas. Registrant has also placed on the market several Class I, 510(k) exempt, ENT products, including handheld surgical instruments and suction/irrigation products (ClearESS). Additionally, Registrant has received 510(k) clearance for HemoSleeve. Registrant anticipates that most of its new products will also be eligible for the Section 510(k) procedure, although some new products, such as products for which there are few substantially equivalent devices or uses, may be subject to a lengthier review process. There can be no assurance that any future FDA clearances will be granted on a timely basis, if at all. Failure to obtain FDA clearance or extensive delay in the FDA clearance process for any new product which represents a significant development for Registrant would likely have a material adverse effect on Registrant's business. Following FDA clearance for commercial distribution, the primary form of government regulation of medical products is the Quality System Regulations for medical devices. These regulations, administered by the FDA, set forth requirements to be observed in the design, manufacture, storage, quality control procedures and installation of medical products for human use. In addition, there are a variety of registration and reporting requirements with which Registrant must comply. Registrant is also subject to the regulations under the Radiation Control for Health and Safety Act (1968) of the Center for Devices and Radiological Health ("CDRH") of the FDA. These regulations require laser manufacturers to file new product and annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features in lasers sold to end-users and to certify and label each laser sold as belonging to one of four classes, based on the level of radiation from the laser that is accessible to users. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product. CDRH is empowered to seek fines and other remedies for violations of the regulatory requirements. To date, Registrant has filed the documentation with CDRH for its laser products requiring such filing, and has not experienced any difficulties or incurred significant costs in complying with such regulations. In addition, federal law requires Medicare to establish guidelines for hospital reimbursement based on patient diagnosis ("Diagnostic Related Group" or "DRG"). Once a diagnosis is made, the payment to the hospital will be fixed irrespective of the length of the hospital stay, the method of treatment, the supplies used or the tests carried out. This provides the hospital with an incentive to adopt cost reduction methods. Registrant believes that the Contact Laser System may reduce costs to hospitals by reducing length of stay due primarily to the reduced need for invasive surgery, general anesthesia or related medical treatments. The FDA and other governmental agencies, both in the United States and in foreign countries, may adopt additional rules and regulations that may affect Registrant and its products. 8 Patents Registrant's patents offer significant protection to the differentiation of Registrant's Contact Laser Delivery Systems from competitors' products. Registrant has sought and enjoys such protection principally in the United States. As of January 3, 1999, Registrant had fourteen patents issued by the U.S. Patent and Trademark Office which generally expire 17 years from the following respective dates of issuance: September 15, 1987 (laser scalpels); April 12, 1988 (coatings); November 22, 1988 (two-piece disposable laser delivery system); April 18, 1989 (laser probes and scalpels); January 23, 1990 (supply system for sterile fluids and gases); January 23, 1990 (two-piece disposable laser delivery system); October 13, 1992 (unitary scalpel); June 22, 1993 (adjustable touch control hand-piece); January 10, 1995 (contact or insertion laser probe having wide angle radiation); May 16, 1995 (fused tip and fiber); May 28, 1996 (probe with inclusions); March 4, 1997 (surgical tool for use with Contact Laser); September 5, 1998 ( a continuation of surgical laser tool issued March 4, 1997); and November 10, 1998 (laterally-emitting laser devices). Registrant has several other patents pending before the U.S. Patent and Trademark Office, as well as other patents and pending applications overseas. Registrant has also begun to establish a proprietary position for its new products. Registrant has filed patent applications with the U.S. Patent and Trademark Office for its HemoSleeve(TM) and ClearESS(TM) products and anticipates that applications will be filed for other new products Registrant intends to continue its policy of defending vigorously the ownership and protection of its proprietary technology against significant encroachments. However, no assurance can be given that such policy will be successful. (see Part I, Item 3, Legal Proceedings). Many of Registrant's products and services are offered under trademarks and service marks, both registered and unregistered. Registrant believes its trademarks encourage customer loyalty and aid in the differentiation of Registrant's products from competitors' products. Accordingly, Registrant has registered seven of its trademarks with the U.S. Patent and Trademark Office. It has filed its intent to register other trademarks, principally in areas outside of Contact Laser(TM) surgery. Registrant has other registrations issued or pending abroad. Employees As of January 3, 1999, Registrant had 68 employees of whom 30 were engaged in manufacturing, service and operations, 8 in research and product development, 20 in sales, marketing and customer service and 10 in general administration. Registrant's employees are not represented by a union. Registrant considers its relations with employees to be good. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. In addition to Registrant's domestic sales, Registrant currently sells its products internationally through distributors in Western Europe, Canada, the Middle East, the Far East and South America. During fiscal 1998, 1997 and 1996, domestic sales represented 87%, 84% and 77% respectively, of Registrant's total sales. All export sales are transacted in U.S. currency. 9 Item 2. Properties. Registrant owns approximately four acres in Oaks, Pennsylvania on which a 57,000 square foot office building is located. On November 25, 1998, Registrant and the current lessee entered into an agreement of sale for the facility and are currently soliciting the consent of the mortgage lenders. It is anticipated that the lessee will assume the two mortgages discussed below. Closing is expected to occur before the end of June 1999. Registrant originally leased this property to the lessee under a three year lease, which included an option to purchase the property, dated March 21, 1996, as later amended on June 14, 1996. The lessee began occupying the facility in June 1996. The mortgages expected to be assumed by the purchaser are a first mortgage debt in favor of American United Life Insurance Corporation ("AULIC"), and a second mortgage held by Montgomery County Industrial Development Corporation ("MCIDC") on behalf of Pennsylvania Industrial Development Authority ("PIDA"). The balance of the first mortgage debt at January 3, 1999 was $2,865,000. The loan bears interest at 10.5% per year and is being repaid in equal monthly payments, including interest, of approximately $34,000 over 20 years. The balance of the second mortgage debt at January 3, 1999 was $1,178,000. The loan bears interest at 3% per year and is being repaid in equal monthly payments, including interest, of approximately $14,000 over 15 years. As a condition to the second mortgage, Registrant is required to hold collateral in favor of MCIDC, the terms of which will extend until Registrant has had four consecutive profitable calendar quarters. At January 3, 1999, the required amount of this security was $589,000; the form of the collateral was a standby letter of credit of $389,000 with the remainder covered by a first security interest in certain fixed assets and a second security interest in Registrant's accounts receivable and inventories. This requirement will be eliminated upon the assumption of the mortgage by the lessee. Registrant currently leases a 42,000 sq. ft. facility in Montgomeryville, Pennsylvania that houses all of its administrative and manufacturing operations. Registrant entered a five-year lease for the Montgomeryville facility on May 29, 1996. Registrant has leased on a month-to-month basis approximately 5,000 sq.ft. of space close to its new facility, but will terminate the short-term lease by the end of the first quarter 1999. Registrant also holds a lease on its former manufacturing facility in Hebron, Kentucky. The facility comprises 32,000 sq. ft. and is under lease through August 2000. Since the operations from this facility were transferred during 1992 to Pennsylvania, Registrant sought to sublet the facility. A subtenant for 19,500 sq. ft. of the facility was secured in April 1994; a subtenant for the balance of the space was secured in August 1996. In 1997, the first subtenant went out of business. Registrant secured a replacement subtenant, but in January 1999, the replacement subtenant abandoned the sub-let premises and the sublease. Registrant is currently seeking to find a further replacement subtenant. There can be no assurance that Registrant will succeed in finding a replacement subtenant or, if successful, that Registrant will succeed in keeping the subtenants at the facility through August 2000. Should Registrant be unsuccessful in obtaining a new subtenant for the 19,500 sq. ft., Registrant will incur an expense of approximately $75,000 which represents the remaining lease payments from the subtenent. Item 3. Legal Proceedings. Trimedyne. In January 1995, Trimedyne, Inc. filed a patent infringement action against Registrant. The suit was brought in the United States District Court for the Central District of California. Trimedyne had alleged that various products of Registrant infringed certain patents belonging to Trimedyne. 10 On July 11, 1996, the court entered a final judgment in favor of Registrant, dismissing Trimedyne's complaint. Trimedyne filed a motion for the court to reconsider its judgment. On August 7, 1996, the court denied Trimedyne's motion. On September 3, 1996, Trimedyne appealed from the lower court's judgment with respect to two of the patents at suit. On July 10, 1998, the Court of Appeals affirmed the lower court's ruling with respect to the patent concerning contact products, and reversed and remanded the decision with respect to a patent potentially covering one free-beam probe produced and sold by Registrant, holding that there were triable issues of fact. Although Registrant believes that the product in question is not violating the Trimedyne patent, in January 1999, Registrant entered into settlement discussions with Trimedyne in an effort to avoid the time and cost of a trial. Item 4. Submission of Matters to a Vote of Security Holders. Registrant held a Special Meeting of Stockholders on December 18, 1998. The stockholders approved an amendment of Registrant's Restated Certificate of Incorporation to effect a one-for-five reverse split of the shares of Registrant's Common Stock. The reverse split was approved with 8,233,980 votes in favor, 668,356 votes opposing and 23,877 votes abstaining. Registrant effected the one-for-five reverse split by amendment to its Restated Certificate of Incorporation on January 8, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Registrant's Common Stock, $.0l par value, is quoted on the Nasdaq Stock Market under the symbol "SLTI." Until January 14, 1999, Registrant's Common Stock was quoted on the Nasdaq National Market. Since January 15, 1999, Registrant's Common Stock has been traded on the Nasdaq SmallCap Market. As of March 15, 1999, there were approximately 574 record holders of Registrant's Common Stock. On March 15, 1999, the closing price of Registrant's Common Stock on the Nasdaq Stock Market was $1.75 per share. The following table sets forth the high and low sales prices, restated for the effect of the one-for-five reverse split on January 8, 1999, for Registrant's Common Stock for each quarterly period within the two most recent fiscal years. 1998 High Low ---- --- First Quarter $9.53 $5.63 Second Quarter 6.88 3.44 Third Quarter 5.63 2.50 Fourth Quarter 3.75 1.25 1997 High Low ---- --- First Quarter $8.15 $5.30 Second Quarter 7.80 5.30 Third Quarter 10.30 5.95 Fourth Quarter 14.40 6.25 Registrant has never paid any cash dividends on its Common Stock and does not expect to pay cash dividends in the foreseeable future. Registrant's bank line of credit agreement prohibits the declaration or payment of any dividends or distributions on any shares of its capital stock without the bank's prior written consent at any time there are outstanding obligations to the bank. 11 Item 6. Selected Consolidated Financial Data. The following table summarizes certain selected financial data for the five years ended January 3, 1999. The selected financial data for Registrant at January 3, 1999 and December 28, 1997 and for each of the three years in the period ended January 3, 1999 are derived from, and are qualified by reference to, the financial statements of Registrant, which are included elsewhere in this report. Such financial statements have been audited by Arthur Andersen LLP, independent public accountants, to the extent indicated in their report. The selected financial data for Registrant at December 29, 1996, December 31, 1995 and January 1, 1995, and for each of the two years in the period ended December 31, 1995, are derived from the audited financial statements of Registrant not included herein. This data should be read in conjunction with Registrant's financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this report. 12
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share) Statement of Operations Data: Net sales $9,393 $11,665 $10,974 $14,839 $21,508 Gross profit 4,927 6,893 6,912 8,702 13,494 Percentage of sales 52.5% 59.1% 63.0% 58.6% 62.7% Selling, general and administrative expenses $5,944 $6,613 $8,072 $10,047 $10,786 Product development expenses 1,179 910 1,404 2,143 2,068 Non-recurring charges (credits) 485(1) (177)(1) 1,504(1) 1,915(2) (892)(4) Net gain on settlement of patent litigation -- -- -- (5,926)(3) -- Operating income (loss) (2,681) (453) (4,068) 523 1,532 Net income (loss) (2,552) (381) (4,508) (58) 913 Basic and diluted earnings (loss) per share (5)(6) ($1.29) ($0.19) ($2.28) ($0.03) $0.50 Shares used in calculation of basic and diluted earnings (loss) per share (5) 1,978 1,977 1,973 1,970 1,842 Balance Sheet Data: Cash, cash equivalents and short-term investments $6,023 $6,549 $6,120 $8,147 $4,143 Accounts receivable, net 1,437 1,925 2,899 3,225 4,468 Inventories 2,540 2,986 3,534 3,866 4,725 Total assets 16,648 19,996 21,490 24,821 26,454 Long-term debt 3,965 4,509 4,971 4,503 4,719 Convertible subordinated debentures 1,624 1,633 1,660 1,786 1,848 Stockholders' equity $8,594 $11,357 $11,308 $15,690 $15,685 ====================================================================================================================
(1) See Note 12 of Notes to Consolidated Financial Statements. (2) Write-down of certain fiber inventory and intangible assets and costs associated with workforce reductions. (3) Net settlement of lawsuit with Laser Industries Ltd. and its subsidiary Sharplan Lasers, Inc. (4) Settlement of lawsuit with ALST partially offset by a separate legal settlement with a former distributor. (5) Restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999. (6) The inclusion of common share equivalents had an anti-dilutive effect when calculating diluted earnings (loss) per share, and, as a result, diluted earnings (loss) per share was equivalent to basic earnings (loss) per share for each period presented. No cash dividends were declared during any of the periods presented. The accompanying Consolidated Financial Statements and Notes thereto are an integral part of this information. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Net Sales Registrant's net sales of Contact Laser(TM) Systems are primarily comprised of Contact Laser Delivery Systems and related accessories and Nd:YAG Laser Systems. The U.S market is serviced predominantly by a direct sales force, while sales outside the United States are derived through a network of distributors. In 1998, net sales were $9,393,000, a decrease of $2,272,000, or 19%, from 1997 sales of $11,665,000. The 1997 sales of $11,665,000 increased $691,000, or 6% from 1996 sales of $10,974,000. 13 Net sales of Contact Laser Delivery Systems and related accessories, which comprised 71% of Registrant's net sales in 1998, declined 10% and 12% in 1998 and 1997, respectively, due to the lower level of sales of Nd:YAG laser systems and to lower sales primarily within the urology market, offsetting increases in sales within the ENT and neurosurgical markets where Registrant is currently concentrating its sales efforts. Net sales of Nd:YAG laser systems, which comprised 10% of Registrant's net sales in 1998, decreased by 59% on a 63% decline in units. The decrease in laser system sales was attributable to both domestic hospital budget constraints and to the effect of the Asian economic situation which rendered certain distributors unable to secure funding for planned purchases. In 1998, the overall average unit selling price of an Nd:YAG laser system remained consistant as compared to 1997. Net sales of Nd:YAG laser systems in 1997 was relatively constant with 1996, despite an increase of 34% in unit sales. Unit sales of new Nd:YAG laser systems in 1997 remained relatively constant with 1996, while sales of used and demonstration laser systems accounted for the percentage increase in unit sales. The increase in unit sales was due to both a higher volume of sales of Registrant's laser systems for ENT surgery as well as Registrant's continuing efforts to reduce demonstration laser inventory levels through a reduction in average unit prices. As a result, in 1997 the overall average unit selling price of an Nd:YAG laser system declined by 24% as compared to 1996. In October 1996, following the acquisition of the remaining 50% interest in the Mediq PRN/SLT joint venture (see Note 5 of Notes to Consolidated Financial Statements), revenues from the rental of Registrant's Nd:YAG laser systems and related Contact Laser Delivery Systems and accessories began to be included in net sales. In 1998 and 1997, respectively, rental revenue accounted for 10% and 9% of net sales. All other revenue, including contract development activities, accounted for 9% of net sales in 1998 and 1997. There were no contract development activities in 1996. Management will continue to invest in innovative product development and will continue to develop and expand its strategic business relationships while actively pursuing business combination or acquisition opportunities aimed at enhancing the generation of new revenues and increasing shareholder value. Gross Profit Gross profit for the year ended January 3, 1999 decreased $1,966,000 or 29% from the prior year. As a percentage of net sales, gross profit was 52%, down from 59% in 1997. The decrease in gross profit as a percentage of net sales resulted from the inclusion in 1997 of initial contract development fees with no direct cost for which there were no comparable fees in 1998. Gross profit for the year ended December 28, 1997 was constant with the prior year on a 6% increase in net sales. As a percentage of net sales, gross profit was 59%, down from 63% in 1996. The decrease in gross profit as a percentage of sales was due primarily to three factors. The main factor was a reduction in the selling price on certain Contact Laser Systems, enacted in an effort to reduce inventory levels. The second factor was the inclusion in all of 1997 of the Laser OnCall(TM) rental business which operated at a lower percentage gross profit as compared to the sale of lasers and delivery systems. A partial offset to those two factors was the higher percentage gross profit realized from contract development activities in 1997 for which there were no corresponding activities in 1996. 14 Operating Expenses Selling, general and administrative expenses were $5,944,000 in 1998, compared to $6,613,000 in 1997, a decrease of 10%. The comparative decrease was due primarily to significantly lower legal fees in 1998 due to the settlement in 1997 of two outstanding lawsuits. In 1998, Registrant continued to reduce operating expenses where appropriate relative to the lower level of net sales being experienced. Management expects to continue to monitor expense levels throughout 1999, making adjustments where warranted. Selling, general and administrative expenses in 1997 decreased 18% from the 1996 level of $8,072,000 due mainly to cost reduction actions taken in the third quarter of 1996. Such actions included reductions in workforce and related employee expenses and a reduction in the operating costs due to the consolidation of Registrant's facilities into one location. Also contributing to the decrease was a reduction in legal fees. Product Development Product development costs were $1,179,000, $910,000, and $1,404,000 in 1998, 1997 and 1996, respectively. The increase in 1998 versus 1997 was due principally to increased manpower and other expenditures associated with Registrant's private label and ENT and Neurosurgery product development efforts. Non-Recurring Charges (Credits) In 1998, Registrant recorded a non-recurring charge related to the impending sale of SLT's former headquarters facility in Oaks, Pennsylvania, which is expected to close before the end of June 1999. The charge consisted of a $325,000 write-down of the asset necessitated by the terms of the impending sale and $160,000 in accrued closing costs. In 1997, Registrant recorded a benefit from the settlement of litigation with C.R. Bard and the Bard Urological Division of $1,000,000. In addition, Registrant recorded non-recurring facility-related charges of $542,000 related to Registrant's former headquarters facility and $281,000 related to Registrant's former manufacturing facility in Kentucky. The $542,000 charge resulted from a write-down in the carrying value of the former headquarters facility necessitated by the terms under which the facility was expected to be sold at the end of the tenant's initial sublease term. The $281,000 charge resulted from the loss of Registrant's former subtenant and subsequent signing of a new subtenant at a lower rental rate. In 1996, Registrant recorded non-recurring charges of $1,504,000, representing third quarter restructuring charges of $1,201,000 for severance and other related costs, and a charge of $303,000 for the write-off of leasehold improvements at Registrant's former leased manufacturing facility in Oaks, Pennsylvania. The manufacturing operations have been consolidated with all other operations into Registrant's leased facility in Montgomeryville, Pennsylvania. Other Income Other income primarily consisted of facility-related income and expense items. Other income was $407,000 in 1998 and $366,000 in 1997, an increase of $41,000. In 1997, other income increased to $366,000 from a loss in 1996 of $23,000. This increase resulted from the inclusion of a full year of 15 sublease income in 1997 as compared to only six months of sublease income in 1996 and the inclusion of a charge to other income in 1996 of moving expenses to relocate Registrant's headquarters for which there were no corresponding costs in 1997. Interest Net interest expense in 1998 of $275,000 was relatively constant with net interest expense of $282,000 in 1997. Net interest expense of $282,000 in 1997 increased by $29,000 from $253,000 in 1996. The increase was due to the inclusion of a full year of interest expense on the capital leases acquired in the purchase of the Mediq PRN/SLT joint venture offset in part by higher interest income earned on cash, cash equivalents and short-term investments in 1997. Income Taxes The tax provision in 1998 and 1997 of $3,000 and $12,000 respectively, was for state income taxes. There was no provision for income taxes in 1996 due to the net taxable loss incurred. Registrant expects that its effective tax rate for 1999 will remain significantly lower than the statutory rate due to continued availability of its net operating loss carryforwards and tax credit carryforwards. MedTREK Agreement In 1997, Registrant acquired exclusive worldwide rights to certain new products and medical devices used in minimally invasive otolaryngology and head and neck (ENT) surgery, pursuant to an agreement with MedTREK Corporation and its President, Mr. Dom L. Gatto. In accordance with the terms of the agreement, Registrant was required to make cash payments to MedTREK when certain products were commercially introduced and has issued stock warrants to MedTREK that will vest when and if predetermined revenue targets are achieved. During 1998, SLT concluded that certain products under the agreement would not be commercialized. As a result, the net value of the agreement and any remaining liabilities associated with these products were written-off in December 1998. Also, since these products will not be commercialized, it is improbable that the predetermined revenue targets necessary to vest the warrants will be achieved. Therefore, in December 1998, SLT wrote-off the value of the warrants (see Note 7 of Notes to Consolidated Financial Statements). Liquidity and Capital Resources Cash, cash equivalents and short-term investments at January 3, 1999 were $6,023,000, a decrease of $526,000 over the December 28, 1997 balance of $6,549,000. Registrant invests its excess cash in high- quality, liquid, short-term investments. In each of the two years, $100,000 was restricted and pledged in favor of American United Life Insurance Company ("AULIC") as a condition of the first mortgage with AULIC (see Note 10 of Notes to Consolidated Financial Statements). At January 3, 1999 and December 28, 1997, letters of credit, issued under Registrant's bank line of credit, were outstanding in favor of the Montgomery County Industrial Development Corporation ("MCIDC") as a condition of the security agreement with MCIDC (see Note 10 of Notes to Consolidated Financial Statements). The letters of credit amounted to $389,000 and $453,000 at the end of 1998 and 1997, respectively. The letter of credit requirement and the restricted cash requirement are expected to be eliminated with the sale of the facility. Registrant has a $2,535,000 credit facility with a bank. This facility includes a sub-line for letters of credit of $535,000, under which the aforementioned letters of credit were issued. Other than the letter of credit requirement by MCIDC, and one other minor letter of credit, there were no borrowings under the 16 credit facility during 1998 or 1997. Borrowings under the credit facility are secured by Registrant's accounts receivable and inventories. The credit facility is subject to Registrant maintaining certain financial covenants as defined. Management expects to renew a line of credit facility when this facility expires on May 31, 1999. In 1998, net cash provided by operating activities was $117,000, which resulted principally from losses incurred of $2,552,000 offset by net non-cash adjustments of $1,515,000 and a decrease in accounts receivable and inventory of $488,000 and $588,000, respectively. The net non-cash adjustments of $1,515,000 included non-recurring charges of $485,000. Net cash provided by operating activities was $987,000 in 1997, primarily resulting from net non-cash adjustments of $1,917,000, a decrease in accounts receivable of $974,000, partially offset by the net loss incurred of $381,000 coupled with a decrease in accounts payable and accrued liabilities of $1,500,000. The net non-cash adjustments of $1,917,000 included non-recurring charges of $847,000. The decrease in accounts payable and accrued liabilities included royalty payments of $391,000 to Norio Daikuzono in connection with the settlement of litigation. Net cash provided by investing activities was $1,741,000 in 1998 compared to cash used in investing activities of $1,972,000 in 1997. The increase was principally due to the maturity of certain short-term investments of $1,909,000 during 1998 compared to the purchase of certain short-term investments of $1,669,000 during 1997. Net cash used in financing activities was $475,000 in 1998, compared to net cash used in financing activities of $255,000 in 1997. The increase was principally the result of stock warrants issued in 1997 of $171,000, of which there was no comparable issuance in 1998. Management believes that Registrant's current cash position and available line of credit will be sufficient to fund operations and meet its commitments for long-term debt (see Note 10 of Notes to Consolidated Financial Statements), other commitments and contingencies (see Note 17 of Notes to Consolidated Financial Statements) and capital expenditures. In July 1999, Registrant's 8% Subordinated Convertible Debentures will mature. Management believes that its cash position will be sufficient to meet this obligation. Management believes that inflation has not had a material effect on operations for the three years in the period ended January 3, 1999. Year 2000 Compliance Registrant has analyzed its information technology systems for the "Year 2000" compliance issues. Management believes that the "Year 2000" issue related to Registrant's hardware and software programs are not likely to result in any material adverse disruptions in Registrant's computer systems or its internal business operations. Registrant has purchased the latest version of its operating software package to provide remediation for the "Year 2000" issue. The costs of this new software was $8,000 and testing and implementation is to be completed by the third quarter of 1999. Registrant has analyzed and determined that the "Year 2000" issue related to its non-information technology, such as its telephone and security system, are not likely to result in any material disruption of it business operations. 17 Registrant is currently in the process of evaluating its relationships with third parties, such as banks, service providers and suppliers, with which Registrant has a direct and material relationship to determine whether they are "Year 2000" compliant. The responses received to date from such third parties to inquiries made by Registrant indicate that these third parties either are or expect to be compliant by the Year 2000. Even assuming that all material third parties confirm that they are or expect to be "Year 2000" compliant by December 31, 1999, it is not possible to state with certainty that such parties will be so compliant, or that the operations of such third parties will not be materially impacted by other parties with whom they themselves have a material relationship, and who fail to timely become "Year 2000" compliant. Consequently, it is not possible to predict whether or to what extent the "Year 2000" issues may have an adverse material impact on Registrant as a result of their impact on the operations of the third parties with whom Registrant has a material relationship. For example, the failure to be "Year 2000" compliant by a bank with whom Registrant has a material banking relationship could cause significant disruption in Registrant's ability to make payments, deposit funds and make investments, which could have a material adverse effect on Registrant's financial condition. Registrant has not established a contingency plan in case of failure of its information technology systems since it expects to have its new software system in place by the third quarter of 1999. Registrant will continuously monitor its relationships with banks, service providers and suppliers to ensure they expect to be "Year 2000" compliant. If Registrant learns that one of these third parties will not be "Year 2000" compliant, Registrant's contingency plan would include replacing such third party. Risk Factors The statements contained in this Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Additionally, from time to time, Registrant or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by Registrant with the Securities and Exchange Commission. These forward-looking statements reflect Registrant's views as of the date they are made with respect to future events and financial performance and are generally, but not exclusively, identified by the use of such terms as "intends," "expects," "plans," "projects," "estimates," "anticipates," "should" and "believes." However, these forward-looking statements are subject to many uncertainties and risks which could cause the actual results of Registrant to differ materially from any future results expressed or implied by such statements. Additionally, Registrant does not undertake any obligation to update any forward-looking statements. The risk factors identified in the cautionary statements below could cause actual results to differ materially from those suggested in these forward-looking statements. Also, Registrant may, from time to time, set forth additional risk factors on Forms 10-Q and 8-K. However, the risk factors listed below or in future reports of Registrant are not exhaustive. New risk factors emerge from time to time, and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all of such risk factors on Registrant's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The cautionary statements below are being made pursuant to the "safe-harbor" provisions of the Private 18 Securities Litigation Reform Act of 1995 (the "Act"). Registrant intends that all forward-looking statements made, in whatever form, be considered subject to the Act. Changes in the U.S. Health Care System. There has been substantial debate in the political arena related to prospective changes in the U.S. health care system. In addition, developments in both the public and the private sector have significantly affected the financing and delivery of health care in the United States, including the rapid expansion of managed care programs, the reduction of reimbursements under the capital cost pass through system for the Medicare program and the implementation of prospective governmental reimbursement programs based on diagnostic related groups. Cost containment has been a major element of these developments, which have had a material adverse effect on Registrant's results of operations over the past several years. There can be no assurance that such changes in the financing and delivery of health care will not continue to affect hospital capital equipment and supplies procurement patterns or dictate which surgical procedures will be covered by applicable insurance or government funded or subsidized programs, which could continue to have a material adverse impact on Registrant. Registrant also cannot predict the extent or impact of future legislation or regulations. Competition. Registrant faces substantial competition from conventional surgical methods, from other manufacturers of surgical lasers and from manufacturers of alternatives to surgical lasers. Competitive pressure could result in price competition or the introduction of new products by Registrant's competitors, which could have an adverse impact on Registrant's revenues and results of operations. In addition, Registrant is engaged in an industry characterized by extensive research efforts. Advances in medical lasers which improve clinical effectiveness and other discoveries or developments in either the medical device or drug industry could render Registrant's products obsolete. Some of the companies with which Registrant competes or may compete in the future have or may have more extensive research, marketing and manufacturing capabilities and significantly greater financial, technical and personnel resources than Registrant and may be better positioned to continue to improve their technology in order to compete in an evolving industry. Governmental Regulation. Government regulation in the U.S. and other countries is a significant factor in the development, manufacturing and marketing of many of Registrant's products and in Registrant's ongoing research and development activities. Specifically, medical devices are subject to United States Food and Drug Administration ("FDA") approval or clearance before they can be utilized for clinical studies or sold commercially. The process for obtaining the necessary approvals and compliance with applicable regulations can be costly and time-consuming. There can be no assurance that regulatory review will not involve delays or other actions adversely affecting the marketing and sales of Registrant's products. Registrant has received all of its FDA clearances to date using the procedure under Section 510(k). There is no assurance Registrant will continue to be able to obtain applicable government approvals or successfully comply with such regulations in a timely and cost-effective manner, if at all, and failure to do so may have an adverse effect on Registrant's financial condition and results of operation. Further, there can be no assurances that more stringent regulatory requirements and/or safety and quality standards will not be issued in the future with an adverse effect on Registrant's business. Although Registrant believes that it is in compliance with all applicable regulations of the FDA, current regulations depend heavily on administrative interpretation and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect Registrant. Registrant's products are similarly subject to foreign regulating bodies. Typically, foreign bodies readily allow Registrant's products to be traded within their jurisdictions, based on the fact that Registrant's products have secured clearance from the FDA. However, there can be no assurance that such foreign 19 bodies will not impose different, additional requirements that may materially hamper Registrant's ability to compete in overseas markets. Patents and Proprietary Technologies. Registrant's ability to compete effectively with other companies depends, in part, on its ability to protect and maintain the proprietary nature of its technology. Registrant owns fourteen United States patents, several Japanese patents and a number of issued foreign patents and pending patent applications for its products. Registrant treats its design and technical data as confidential, and relies on nondisclosure safeguards, such as confidentiality agreements, laws protecting trade secrets and agreements to protect proprietary information. Registrant has incurred substantial costs in enforcing its patents against infringement by others and defending itself against similar claims of others. Although Registrant has been successful to date in disputes involving the validity and enforceability of its patents and in defending itself against claims by others of patent infringement, there can be no assurance that Registrant will continue to be successful in such matters in the future or that Registrant's patents or other proprietary rights, even if continuing to be held valid, will be broad enough in scope to enable Registrant to prevent third parties from producing products using similar technologies or processes. As Registrant attempts to broaden its offerings in ENT and, to a lesser extent, in other surgical fields, Registrant perceives that it may be obliged to license technology from third parties in order to have competitive offerings. There can be no assurance that Registrant will be successful in obtaining such licenses on terms satisfactory to Registrant. Product Development and Acquisitions. Registrant is actively engaged in identifying market needs and in developing products to satisfy those unmet needs. Such products are not necessarily laser products. Registrant attempts to validate the existence of such unmet needs as well as the potential revenues, costs and profits involved in satisfying such needs. There is a material risk that Registrant's competitors may satisfy those needs with more effective or less expensive products. There is also a material risk that Registrant's estimates of the economic potential from such unmet needs may be incomplete or inaccurate, or that the products which Registrant develops to meet such needs will be untimely introduced or insufficiently effective clinically or economically to gain market acceptance. Registrant seeks to expand its product offerings through both internal development and acquisition of products and/or companies. No assurance can be given that Registrant will be successful in carrying out an acquisition strategy or that if an acquisition is made that the acquisition will be successfully integrated and result in increased revenues and profits. Change in Marketing Approach. Registrant is taking, or is contemplating taking, certain actions to transition its marketing approach from addressing a wide range of surgical specialties to providing a broader array of products to a more select market segment. Although Registrant believes that this transition will have a long-term positive financial impact, no assurance can be given that the actions taken will provide the intended results, or that Registrant will not experience short-term disruptions or an adverse impact of operations during the transition to this new marketing approach. Nasdaq Listing Requirements. Registrant's Common Stock is traded on the Nasdaq SmallCap market. In 1997, Nasdaq modified its listing requirements with which Registrant was required to comply in order to remain listed on the Nasdaq Stock Market. In January 1999, Registrant requested and received Nasdaq's approval to move the market in which the Common Stock is traded from the Nasdaq National Market to the Nasdaq SmallCap Market, due primarily to the Registrant's inability to satisfy the minimum public float requirement for the Nasdaq National Market. Although Registrant's stock price has remained above Nasdaq's $1.00 minimum bid requirement since the one-for-five reverse split of the Common Stock was 20 implemented in January 1999, no assurance can be given that the bid price of Registrant's Common Stock will remain above the $1.00 minimum, or that Registrant will continue to meet the other listing requirements required by the Nasdaq SmallCap Market. Item 8. Financial Statements and Supplementary Data. Page ---- Report of Independent Public Accountants.................................. 22 Consolidated Balance Sheets at January 3, 1999 and December 28, 1997................................................. 23 Consolidated Statements of Operations for each of the three years in the period ended January 3, 1999....................................................... 24 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 3, 1999....................................................... 25 Consolidated Statements of Cash Flows for each of the three years in the period ended January 3, 1999....................................................... 26 Notes to Consolidated Financial Statements................................ 27 Schedule II - Valuation and Qualifying Accounts........................... 44 All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the Consolidated Financial Statements or Notes thereto. 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Surgical Laser Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Surgical Laser Technologies, Inc. (a Delaware corporation) and Subsidiaries as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 3, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Surgical Laser Technologies, Inc. and Subsidiaries as of January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule included in Item 8 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Philadelphia, PA January 22, 1999 22 Surgical Laser Technologies, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except for par values)
Jan. 3, 1999 Dec. 28, 1997 Assets Current assets: Cash and cash equivalents (Note 1) $ 2,938 $ 1,555 (including restricted amounts of $100) Short-term investments (Note 1) 3,085 4,994 Accounts receivable, net of allowance for doubtful accounts of $138 and $155 1,437 1,925 Inventories (Note 2) 2,540 2,986 Other 437 445 -------- -------- Total current assets 10,437 11,905 Property and equipment, net (Note 3) 1,191 1,998 Property held for sale, net (Note 3) 4,339 4,869 Patents and licensed technology, net (Note 4) 544 576 Other assets 137 648 -------- -------- Total assets $ 16,648 $ 19,996 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 2,196 $ 504 Accounts payable 763 512 Accrued liabilities (Note 9) 1,130 1,481 -------- -------- Total current liabilities 4,089 2,497 -------- -------- Long-term debt (Note 10) 3,965 6,142 -------- -------- Commitments and Contingencies (Note 17) Stockholders' equity: Common stock, $.01 par value, 30,000 shares authorized, 1,978 shares and 1,977 shares issued and outstanding 20 20 Additional paid-in capital 33,033 33,223 Accumulated deficit (24,438) (21,886) Deferred compensation (21) -- -------- -------- Total stockholders' equity 8,594 11,357 -------- -------- Total liabilities and stockholders' equity $ 16,648 $ 19,996 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 23 Surgical Laser Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
For the Year Ended Jan. 3, 1999 Dec. 28, 1997 Dec. 29, 1996 Net sales $ 9,393 $ 11,665 $ 10,974 Cost of sales 4,466 4,772 4,062 -------- -------- -------- Gross profit 4,927 6,893 6,912 -------- -------- -------- Operating expenses: Selling, general and administrative 5,944 6,613 8,072 Product development 1,179 910 1,404 Non-recurring charges (credits) (Note 12) 485 (177) 1,504 -------- -------- -------- 7,608 7,346 10,980 -------- -------- -------- Operating loss (2,681) (453) (4,068) Equity in loss of joint venture -- -- 164 Other (income) loss (407) (366) 23 Interest expense 593 649 581 Interest income (318) (367) (328) -------- -------- -------- Loss before income taxes (2,549) (369) (4,508) Income taxes 3 12 -- -------- -------- -------- Net loss ($ 2,552) ($ 381) ($ 4,508) ======== ======== ======== Basic and diluted loss per share (Note 1) ($ 1.29) ($ 0.19) ($ 2.28) ======== ======== ======== Shares used in calculation of basic and diluted loss per share 1,978 1,977 1,973 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 24 Surgical Laser Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Additional Common Paid-In Accumulated Deferred Stock Capital Deficit Compensation Total Balance, December 31, 1995 $ 20 $ 32,667 ($16,997) -- $ 15,690 Conversion of subordinated notes to common stock (28 shares) -- 126 -- -- 126 Net loss -- -- (4,508) -- (4,508) -------- -------- -------- -------- -------- Balance, December 29, 1996 20 32,793 (21,505) -- 11,308 -------- -------- -------- -------- -------- Conversion of subordinated notes to common stock (6 shares) -- 27 -- -- 27 Stock warrants issued (Note 7 & 11) -- 403 -- -- 403 Net loss -- -- (381) -- (381) -------- -------- -------- -------- -------- Balance, December 28, 1997 20 33,223 (21,886) -- 11,357 -------- -------- -------- -------- -------- Conversion of subordinated notes to common stock (2 shares) -- 9 -- -- 9 Stock warrants cancelled (Note 7 & 11) -- (232) -- -- (232) Stock warrants issued -- 33 -- (21) 12 Net loss -- -- (2,552) -- (2,552) -------- -------- -------- -------- -------- Balance, January 3, 1999 $ 20 $ 33,033 ($24,438) ($ 21) $ 8,594 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 25 Surgical Laser Technologies, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Year Ended Jan. 3, 1999 Dec. 28, 1997 Dec. 29, 1996 Cash Flows From Operating Activities: Net loss ($2,552) ($ 381) ($4,508) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in loss of joint venture -- -- 164 Depreciation and amortization 1,055 1,086 981 Imputed interest (25) (16) (18) Non-recurring charges 485 847 1,030 (Increase) decrease in assets: Accounts receivable 488 974 560 Inventories 588 285 488 Other current assets 8 (310) 61 Other assets 95 2 7 Increase (decrease) in liabilities: Accounts payable 251 (265) 308 Accrued liabilities (276) (1,235) (422) ------- ------- ------- Net cash provided by (used in) operating activities 117 987 (1,349) ------- ------- ------- Cash Flows From Investing Activities: Cash received in acquisition of joint venture -- -- 190 Purchases (sales) of short-term investments 1,909 (1,669) (81) Additions to property and equipment (99) (154) (334) Patent costs (85) (46) (61) (Purchase) cancellation of marketing agreement 16 (103) -- Investment in joint venture -- -- (200) ------- ------- ------- Net cash provided by (used in) investing activities 1,741 (1,972) (486) ------- ------- ------- Cash Flows From Financing Activities: Payments on long-term debt (475) (426) (273) Issuance of stock warrants -- 171 -- ------- ------- ------- Net cash used in financing activities (475) (255) (273) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 1,383 (1,240) (2,108) Cash and Cash Equivalents, Beginning of Year 1,555 2,795 4,903 ------- ------- ------- Cash and Cash Equivalents, End of Year $ 2,938 $ 1,555 $ 2,795 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 26 Surgical Laser Technologies, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 3, 1999 Note 1 Summary of Significant Accounting Policies: Principles of Consolidation The accompanying consolidated financial statements include the accounts of Surgical Laser Technologies, Inc. and its wholly owned subsidiaries ("SLT"). All material intercompany balances and transactions have been eliminated. Nature of Operations SLT is engaged primarily in the development, manufacture, sale and rental of proprietary laser systems and delivery systems for both contact and non-contact surgery. SLT's Contact Laser(TM) System is comprised of a portable laser unit that delivers laser energy through Contact Laser Delivery Systems. SLT's current laser product line includes four portable laser units of various power levels, a family of over 100 laser probes, laser scalpels, fibers and handpieces that provide different Wavelength Conversion(TM) effect properties, power densities and configurations appropriate for cutting, coagulation or vaporization. Beginning in 1997 and continuing in 1998, SLT expanded its product offerings to include non-laser based products specifically targeted at the Otolaryngology and Head and Neck and Neurosurgery (ENT and Neurosurgery) markets. Those new product offerings include a line of reusable handheld instruments and products for the control of bleeding and irrigation. Fiscal Year SLT's fiscal year is the 52 or 53-week period ending the Sunday nearest to December 31. Fiscal year 1998 included 53 weeks and fiscal years 1997 and 1996 included 52 weeks. Cash and Cash Equivalents SLT invests its excess cash in highly liquid short-term investments. SLT considers short-term investments that are purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of the following at: January 3, 1999 December 28, 1997 --------------- ----------------- (In thousands) Commercial paper $1,494 $ -- Cash and money market accounts 898 312 Repurchase agreements 446 865 Certificates of deposit-restricted 100 100 U.S. Government securities -- 278 ------ ------ $2,938 $1,555 ====== ====== Restricted cash at January 3, 1999 and December 28, 1997 consisted of a $100,000 certificate of deposit pledged to American United Life Insurance Company ("AULIC"), as a condition of the first mortgage agreement with AULIC (see Note 10). 27 Short-term Investments Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), SLT has classified its entire portfolio of short-term investments as available for sale as they are available to support current operations or to take advantage of other investment opportunities. Securities available for sale are stated at fair value with unrealized gains and losses included in stockholders' equity. Dividend and interest income is recognized when earned and is recorded in interest income. The amortized cost of debt securities is adjusted for accretion of discounts to maturity. Such amortization is also included in interest income. SLT currently invests only in high-quality, short-term securities in accordance with its investment policy. As such, there were no significant differences between amortized cost and estimated fair value at January 3, 1999 or December 28, 1997. Additionally, because investments are short-term and are generally allowed to mature, unrealized gains and losses for both years have been minimal. The following table represents the estimated fair value breakdown of short-term investments by category: January 3, 1999 December 28, 1997 --------------- ----------------- (In thousands) U.S. Government securities $1,731 $2,821 U.S. corporate debt securities 1,354 770 Commercial paper -- 1,145 Certificates of deposit -- 258 ------ ------ $3,085 $4,994 ====== ====== The estimated fair value of short-term investments at January 3, 1999 due in one year and due after one year was $2,342,000 and $743,000, respectively. Property, Equipment, Depreciation and Amortization Property and equipment are recorded at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily 3 to 10 years for demonstration equipment, furniture and office equipment, machinery and equipment, and 30 years for buildings. Leasehold improvements are amortized over the lesser of their useful lives or the lease term. Depreciation expense was $974,000 in 1998, $961,000 in 1997 and $984,000 in 1996. Expenditures for major renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Inventories Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost is determined at the latest cost for raw materials and at production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. Laser units and laser accessories located at medical facilities for sales evaluation and demonstration purposes or those units/accessories used for development and medical training are included in property and equipment under the caption "demonstration equipment." These units and accessories are being depreciated over a period of up to 5 years. 28 Patent Costs Costs incurred to obtain or defend patents are capitalized and amortized over the shorter of their estimated useful lives or eight years. Capitalized litigation costs are netted against recoveries if and when a recovery is attained (see Note 4). Revenue Recognition and Warranty Costs Upon shipment of its product or delivery of a service, SLT records a sale and accrues the related estimated warranty costs, if any. Deferred Service Revenue Revenue under maintenance agreements is deferred and recognized over the term (primarily 1 to 2 years) of the agreements on a straight-line basis. Product Development Costs Costs of research, new product and development and product redesign are charged to expense as incurred. Use of Estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Supplemental Cash Flow Information Interest paid was $593,000, $649,000 and $581,000 in 1998, 1997 and 1996, respectively. Income taxes paid in 1998, 1997 and 1996 were immaterial. The following non-cash investing and financing activities occurred: (i) during 1998, 1997 and 1996, $9,000, $27,000 and $126,000, respectively, of the 8% convertible subordinated notes were converted at the request of the note holders into common stock at a pre-reverse split conversion price of $4.50 per share; and (ii) on September 30, 1996, SLT acquired the remaining 50% interest in the Mediq PRN/SLT joint venture for liabilities assumed (see Note 5). Earnings (Loss) Per Share Effective December 28, 1997, SLT adopted Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised 29 or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity. For the years ended January 3, 1999, December 28, 1997 and December 29, 1996, SLT has reported earnings per share on the face of the income statement. Due to SLT's net loss position in 1998, 1997 and 1996, the inclusion of common share equivalents had an anti-dilutive effect when calculating diluted earnings per share and, as a result, diluted EPS was equivalent to basic EPS for those years. All earnings per share calculations have been restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999, as discussed in Note 6. Impairment of Long-Lived Assets Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," SLT is required to evaluate the impairment of long-lived assets and certain identifiable intangible assets on a periodic basis. SLT reviews the realizability of its long-lived assets and other intangibles by analyzing the projected undiscounted cash flows and adjusts the net book value of the recorded assets when necessary. No such adjustments have been recorded in 1998, 1997 or 1996, except as discussed in Note 12. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 became effective for fiscal years beginning after December 15, 1997, with initial application as of the beginning of SLT's 1998 fiscal year. SFAS 130 requires comparative financial statements provided for earlier periods to be reclassified to reflect application of the provisions of the new standard. SLT has reviewed SFAS 130 and has determined that for the years ended January 3, 1999 and December 28, 1997, no items meeting the definition of comprehensive income as specified in SFAS 130 existed in the consolidated financial statements. As a result, no disclosure is necessary to comply with SFAS 130. Note 2 Inventories: (In thousands) January 3, 1999 December 28, 1997 --------------- ----------------- Raw materials and work-in-process $1,691 $1,702 Finished goods 849 1,284 ------ ------ $2,540 $2,986 ====== ====== 30 Note 3 Property and Equipment and Property Held for Sale: (In thousands) January 3, 1999 December 28, 1997 --------------- ----------------- Property and equipment: Furniture and office equipment $3,608 $3,549 Machinery and equipment 2,588 2,549 Demonstration equipment 419 1,391 Leasehold improvements 165 163 ------ ------ 6,780 7,652 Less-Accumulated depreciation and amortization (5,589) (5,654) ------ ------ Property and equipment, net $1,191 $1,998 ====== ====== At January 3, 1999 and December 28, 1997, net property and equipment included $150,000 and $310,000 respectively, for assets recorded under capitalized lease arrangements (see Note 5). The related lease obligation of $494,000 and $741,000, was included in long-term debt at January 3, 1999 and December 28, 1997, respectively (see Note 10). January 3, 1999 December 28, 1997 --------------- ----------------- Property held for sale: Building held for sale $5,722 $6,047 Land held for sale 750 750 ------ ------ 6,472 6,797 Less-Accumulated depreciation and amortization (2,133) (1,928) ------ ------ Property held for sale, net $4,339 $4,869 ====== ====== In July 1996, SLT relocated its administration, research and manufacturing operations from its owned and leased facilities in Oaks, Pennsylvania to a leased facility in Montgomeryville, Pennsylvania. In July 1996, SLT entered into an agreement to sublease the owned facility in Oaks, Pennsylvania for three years. The agreement provided for a purchase option in 1999. The excess of the lease income over the depreciation expense and facility costs was recorded as other income in the accompanying consolidated statements of operations. Future undiscounted cash flows from rents and proceeds from the sale of the property exceeded the net book value of the property at January 3, 1999. The net property held for sale included non-recurring charges of $325,000 and $542,000 in 1998 and 1997, respectively (see Note 12). The Company entered into an agreement of sale on this facility in November 1998 and expects to close on the sale of the facility before the end of June 1999. 31 Note 4 Patents and Licensed Technology: (In thousands) January 3, 1999 December 28, 1997 --------------- ----------------- Patents, net of accumulated amortization of $482 and $414 $530 $514 Licensed technology, net of accumulated amortization of $9 and $17 14 62 ---- ---- $544 $576 ==== ==== During 1998, SLT terminated one of its licensed technology agreements which at the time of cancellation had a value net of accumulated amortization of $45,000 (see Note 15). Note 5 Acquisition of Joint Venture: On September 30, 1996, SLT acquired the remaining 50% interest in the Mediq PRN/SLT joint venture held by Mediq PRN for the assumption of outstanding liabilities. The joint venture company was formed in 1993 to provide rentals of lasers and related equipment to hospitals and other health care providers. Prior to the acquisition, the investment in Mediq PRN/SLT was recorded using the equity method of accounting. Sales to Mediq PRN/SLT were recorded at an arms-length price. Under the equity method, 50% of the gross margin from sales to the joint venture was deferred and amortized to income as the related asset was used by the joint venture. SLT's sales to Mediq PRN/SLT were $131,000 and $916,000 for the nine months ended September 29, 1996 and the fiscal year ended December 31, 1995, respectively. SLT contributed $200,000 and $150,000 of capital to the joint venture in 1996 and 1995, respectively. The acquisition of Mediq PRN/SLT was accounted for as a purchase acquisition and, accordingly, the results of operations of Mediq PRN/SLT for the periods from the date of acquisition are included in the accompanying consolidated financial statements. On September 29, 1996, prior to the acquisition, SLT's investment in Mediq PRN/SLT and the deferred gross profit on sales to Mediq PRN/SLT were $380,000 and $280,000, respectively, resulting in a net investment of $100,000. As of the acquisition date, the fair value of the net assets of the joint venture exceeded SLT's net investment by $218,000, which was used to reduce the net book value of rental equipment. The net investment of $100,000 was allocated to the assets purchased and liabilities assumed, based upon the fair values on the date of acquisition, as follows (in thousands): Current assets, excluding cash acquired $360 Rental equipment 669 Other assets 17 Other liabilities (140) Long-term debt (996) ---- (90) Cash acquired 190 ---- Net assets acquired $100 ==== 32 The rental equipment acquired included $464,000 of lasers which are being accounted for as capital lease equipment under the guidelines of SFAS No. 13 and were recorded within property and equipment on the balance sheets (see Note 3). These lasers are being depreciated over a three year period. The long-term debt associated with these lasers was recorded within both current and long-term debt in the consolidated balance sheets (see Note 10). Note 6 Common Stock Reverse Split: On December 18, 1998, the stockholders of SLT approved an amendment of SLT's Restated Certificate of Incorporation to effect a one-for-five reverse split of the shares of SLT's Common Stock. SLT implemented the one-for-five reverse split on January 8, 1999. All stockholders owning five or more shares of SLT's Common Stock at the effective date received one share of Common Stock in replacement for each five shares they held prior to the reverse split. For those conversions resulting in fractional shares and for each stockholder owning fewer than five common shares at the effective date, the stockholder was entitled to receive cash in lieu of a fractional share at $0.41 per pre-split share. Par value of the Common Stock remained unchanged at $0.01 For all periods presented, references to the number of common shares, stock options, stock warrants and earnings per share amounts in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effect of the reverse split. Note 7 MedTREK Agreement: During 1997, SLT acquired exclusive worldwide rights to certain new products and medical devices used in minimally invasive otolaryngology and head and neck (ENT) surgery, pursuant to an agreement with MedTREK Corporation and its President, Mr. Dom L. Gatto. In accordance with the terms of the agreement, SLT is required to make cash payments to MedTREK when certain products have been commercially introduced and to issue stock warrants to MedTREK which will vest when predetermined revenue targets have been achieved. During 1997, SLT issued 300,000 stock warrants to MedTREK and has valued these warrants using the Black-Scholes Option Pricing Model (see Note 11). At December 28, 1997, the value of these warrants was $232,000 and the additional cash cost of acquiring the rights to the products as described above was $248,000. This total cost of $480,000 was included in other long-term assets in the consolidated balance sheet at December 28, 1997. At December 28, 1997, outstanding payments due to MedTREK of $145,000 were included in accrued liabilities in the consolidated balance sheet of SLT (see Note 9). During 1998, SLT concluded that certain products under the agreement would not be commercialized. As a result, the net value of the agreement and any remaining liabilities associated with those products were written-off in December 1998. Also, since those products will not be commercialized, it is improbable that the predetermined revenue targets necessary to vest the warrants will be achieved. Therefore, in December 1998, SLT wrote-off the value of the warrants. The net other long-term asset and accrued liability balance associated with the products and warrants written-off in December 1998 was $286,000 and $95,000, respectively. As of January 3, 1999, the remaining net other long-term asset and accrued liability was $65,000 and $20,000, respectively. This remaining asset and liability is associated with the products for which commercial introduction has or will occur, and continues to be amortized over its original five-year life. 33 Note 8 Short-Term Borrowings: At January 3, 1999 and December 28, 1997, SLT had a $2,535,000 line of credit with a bank. The line of credit provides for a $535,000 sub-line for letters of credit. Under its sub-line, SLT issued a letter of credit for $389,000 at January 3, 1999, which replaced the letter of credit issued in 1997 of $453,000, in favor of Montgomery County Industrial Development Corporation ("MCIDC") under the terms of the Mortgage and Security Agreement. Additionally, in 1996, SLT issued a letter of credit for $17,510 to its lessor, in compliance with the lease agreement for the Montgomeryville, Pennsylvania facility. Other than for these letters of credit there were no other borrowings on the line at any time during 1998 and 1997. Borrowings on the line are secured by accounts receivable and inventories and bear interest at the bank's prime rate plus 1/2%. Borrowings on the line are subject to certain covenants, as defined, with which SLT was in compliance at January 3, 1999 and December 28, 1997. This credit facility expires on May 31, 1999. Note 9 Accrued Liabilities: (In thousands) January 3, 1999 December 28, 1997 --------------- ----------------- Facility related accruals (see Note 12) $482 $523 Deferred revenues 225 317 Accrued compensation 167 176 Other 256 465 ------ ------ $1,130 $1,481 ====== ====== Note 10 Long-term Debt: (In thousands) January 3, 1999 December 28, 1997 --------------- ----------------- Mortgage loans on property held for sale (see Note 3) $4,043 $4,272 Convertible subordinated notes 1,624 1,633 Capital lease obligations (see Note 3 and Note 5) 494 741 ------ ------ 6,161 6,646 Less-Current portion (2,196) (504) ------ ------ $3,965 $6,142 ====== ====== At January 3, 1999 and December 28, 1997, the estimated fair value of long-term debt described above was approximately the same as the carrying amount of such debt. At January 3, 1999, mortgage loans included $2,865,000 remaining on a 10.5% mortgage note, payable through 2011; and $1,178,000 remaining on a 3% mortgage note, payable through 2006. The 10.5% note, held by AULIC, contains a provision which prohibits prepayment until 2001 and is collateralized by restricted cash of $100,000 and property and improvements. The 3% note is held by MCIDC on behalf of the Pennsylvania Industrial Development Authority. A condition of this note requires SLT to grant a security interest in assets equal to fifty percent of the principal balance. At January 3, 1999, this condition was met by a letter of credit (see Note 8), a first security interest in certain fixed assets and a 34 second security interest in accounts receivable and inventory. The facility is under an agreement of sale which is expected to close by the end of June 1999, at which time these mortgages are expected to be assumed by the buyer. The convertible subordinated notes bear interest at 8%, become due in July 1999 and require interest payments quarterly. The notes were issued as part of a settlement of certain stockholders class-action litigation against SLT and certain directors and officers in 1992. The notes are convertible at the option of the holders into shares of SLT's Common Stock at a conversion price of $22.50, as adjusted for the one-for-five reverse Common Stock split (see Note 6), and may be prepaid, without penalty, if the fair value of SLT's common stock exceeds 125% of the conversion price for a specified period. The obligations under capital leases are at fixed interest rates ranging from 9.5% to 13.44% and are collateralized by the related property and equipment (see Note 3). Future minimum rentals for property under capital leases are as follows (in thousands of dollars): Year Amount - ---- ------ 1999 $388 2000 161 2001 10 2002 9 ---- Total minimum lease obligation 568 Less: Interest (74) ---- Present value of total minimum lease obligation $494 ==== The amount of long-term debt (excluding obligations under capital leases) maturing in each of the next five years is $1,868,000 in 1999, $260,000 in 2000, $278,000 in 2001, $298,000 in 2002, $319,000 in 2003 and $2,644,000 in 2004 and thereafter. Note 11 Common Stock Options and Common Stock Warrants: Common Stock Options: All common stock option and warrant information presented in this note, including the number and prices of options and warrants, have been restated for the effect of the one-for-five reverse split of Common Stock implemented on January 8, 1999 (see Note 6). Under SLT's 1986 Non-Qualified Stock Option Plan, 1986 Incentive Stock Option Plan, Equity Incentive Plan and Second Amended and Restated Stock Option Plan for Outside Directors (the "Option Plans"), an aggregate of 482,645 shares of common stock may be issued pursuant to options that may be granted to certain officers, directors, key employees and others. Options under all plans expire no more than 10 years from the date of grant and have varying vesting schedules. In February 1996, the 1986 Non-Qualified Stock Option Plan and the 1986 Incentive Stock Option Plan expired by their terms with respect to any future grants. At January 3, 1999, these plans had options to purchase 280 shares of common stock outstanding and exercisable. 35 On December 31, 1997, options to purchase 79,520 shares of common stock were forfeited. SLT has presented all option disclosures as if these options had been forfeited on December 28, 1997. SLT accounts for the Option Plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the Option Plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), SLT's net loss would have been increased by approximately $323,000, $294,000 and $251,000 for the years ended January 3, 1999, December 28, 1997 and December 29, 1996 respectively. SLT's net loss per share would have been increased by approximately $0.16, $0.15 and $0.13 for the years ended January 3, 1999, December 28, 1997, and December 29, 1996, respectively. The per share fair value of options granted during the years ended January 3, 1999, December 28, 1997 and December 29, 1996, was estimated at $2.93, $3.13 and $6.82, respectively. There were no options granted below market or above market during the three years. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.554%, 6.346% and 6.360% for 1998, 1997 and 1996 grants, respectively; an expected life of five years, five years, and eight years for 1998, 1997 and 1996 grants, respectively; dividend yield of zero for all grants; and volatility of .495, .476 and .777 for 1998, 1997 and 1996 grants, respectively. Because the SFAS 123 method of accounting is not required to be applied to options granted prior to January 2, 1995, the resulting pro forma compensation charge may not be representative of that which may be expected in future years. The following table summarizes the transactions of SLT's Option Plans for the three year period ended January 3, 1999:
Option Average Shares Price Price ------ ----- ----- Outstanding options at December 31, 1995 298,857 $7.80-100.85 $27.15 Granted 125,180 6.25-15.65 8.60 Forfeited (39,908) 6.25-100.85 51.80 -------- ----------- ------ Outstanding options at December 29, 1996 384,129 $6.25-75.00 $18.55 Granted 101,800 5.65-9.55 7.15 Forfeited (192,099) 5.95-75.00 20.30 -------- ----------- ------ Outstanding options at December 28, 1997 293,830 $5.65-75.00 $13.45 Granted 49,200 1.72-7.03 5.86 Forfeited (38,168) 1.72-75.00 15.47 -------- ----------- ------ Outstanding options at January 3, 1999 304,862 $2.03-75.00 $11.98 ======== =========== ======
36 At January 3, 1999, there were 190,050 options vested and exercisable and 177,783 options were available for grant. The following table summarizes the options outstanding and exercisable by price range at January 3, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- Weighted Weighted Weighted Average Average Average Range of Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life Price Exercisable Price - ----------------- ----------- ---------------- -------- ----------- -------- $2.03-$6.25 74,700 8.16 $5.62 38,392 $6.15 $7.03-$7.81 62,932 8.31 $7.18 20,159 $7.37 $8.13-$10.31 79,200 7.87 $9.96 47,129 $10.09 $10.63-$21.25 63,450 5.33 $17.08 59,790 $17.35 $26.90-$75.00 24,580 2.63 $36.89 24,580 $36.89 ------------- ------- ---- ------ ------- ------ $2.03-$75.00 304,862 7.08 $11.98 190,050 $14.76 ============= ======= ==== ====== ======= ======
Common Stock Warrants: During 1997, SLT issued 300,000 stock warrants to MedTREK as part of the MedTREK Agreement (see Note 7). The value of the warrants at December 28, 1997 was $232,000. During 1998, SLT concluded that certain products under the agreement would not be commercialized, and therefore, that it was improbable that the predetermined revenue targets necessary to vest the warrants would be achieved. Therefore, in December 1998, SLT wrote-off the value of the warrants. In July 1997, SLT entered into an agreement to develop and supply certain laser-related devices. In connection with this agreement, SLT issued a warrant to purchase 40,000 shares of SLT's common stock with an exercise price of $10.00 per share. In December 1997, SLT issued an additional warrant to purchase 40,000 shares of common stock with an exercise price of $10.00 per share. Both warrants will expire on December 31, 2002. SLT recorded the $171,000 value of these warrants as an increase to additional paid-in capital and an offset to revenue earned under the agreement. At January 3, 1999, 80,000 warrants were exercisable for an exercise price of $10.00. Note 12 Non-recurring Items: The 1998 non-recurring charge represented costs on the impending sale of SLT's former headquarters facility in Oaks, Pennsylvania, which is expected before June 1999. The charge consisted of a $325,000 write-down of the facility (see Note 3) necessitated by the terms of the impending sale and $160,000 in accrued closing costs (see Note 9). In 1997 SLT recorded non-recurring credits of $177,000, which was the net effect of recording a benefit from the settlement of litigation of $1,000,000, offset in part by non-recurring charges of $542,000 related to SLT's former headquarters facility in Oaks, Pennsylvania (see Note 3) and $281,000 related to SLT's former manufacturing facility in Kentucky. The $542,000 charge resulted from a write-down in the carrying value of the former headquarters facility necessitated by the terms under which the facility 37 was expected to be sold at the end of the initial sublease term. The $281,000 charge resulted from the loss of a former tenant and the subsequent signing of a new tenant at a lesser rate. In 1996, SLT recorded non-recurring charges of $1,504,000, which included $303,000 in leasehold improvement write-offs related to SLT's Oaks, Pennsylvania manufacturing facility, $1,151,000 for severance and other costs associated with manpower reductions and restructuring and $50,000 for additional costs associated with sub-leases in Hebron, Kentucky. Note 13 Retirement Savings Plan: SLT has a defined contribution retirement plan that provides all eligible employees an opportunity to accumulate funds for their retirement. The plan is qualified under Section 401(k) of the Internal Revenue Code and provides for discretionary matching contributions by SLT of 50% of pretax contributions by an employee, up to a maximum of 6% of the employee's compensation. SLT did not make matching contributions in 1998, 1997 or 1996. Note 14 Income Taxes: SLT accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an asset-and-liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences of events that have been recognized in SLT's financial statements or tax returns. SLT recorded provisions of $3,000, $12,000, and $0 in 1998, 1997 and 1996, respectively. The provisions were for certain state income taxes; none was for federal alternative minimum taxes ("AMT"). No provision was recorded in 1996 due to losses incurred. Any other provisions, including accrual adjustments for prior periods, were completely offset by changes in the deferred tax valuation allowance, primarily due to the utilization of operating loss carryforwards. Income tax expense (benefit) consists of the following (in thousands of dollars): 1998 1997 1996 ---- ---- ---- Federal including AMT tax Current $ -- $ -- $ -- Deferred (995) (253) (1,711) State Current 3 12 -- Deferred (69) (45) (61) ------- ------- ------- (1,061) (286) (1,772) Change in valuation allowance 1,064 298 1,772 ------- ------- ------- Income tax expense $ 3 $ 12 $ -- ======= ======= ======= SLT has no income that is subject to foreign taxes. 38 A reconciliation of the effective tax rate with the federal statutory tax rate is as follows (in thousands of dollars): 1998 1997 1996 ---- ---- ---- Expected federal tax expense (benefit) at 34% rate ($ 867) ($ 125) ($1,532) Change in valuation allowance 1,064 298 1,772 Other, at 34% rate (197) (173) (240) State income tax 3 12 -- ------- ------- ------- Income tax expense $ 3 $ 12 $ -- ======= ======= ======= As of January 3, 1999, SLT had approximately $23,672,000 of federal net operating loss carryforwards, which begin to expire in 2001. Included in the aggregate net operating loss carryforwards are $6,850,000 of tax deductions related to equity transactions, the benefit of which will be credited to stockholders' equity, if and when realized against taxes not reducible by other deductions. In addition, SLT had approximately $841,000 of federal tax credit carryforwards which begin to expire in 1999. Net deductible temporary differences were approximately $5,352,000 at January 3, 1999. The changes in the deferred tax asset are as follows (in thousands of dollars): 1998 1997 ---- ---- Beginning balance, gross $ 10,318 $ 10,020 Net changes due to: Operating loss carryforwards, valued at 35% 689 (603) Temporary differences, valued at 40% 325 848 Carryforward & AMT credits 50 53 -------- -------- Ending balance, gross 11,382 10,318 Less: valuation allowance 11,382 10,318 -------- -------- Ending balance, net $ -- $ -- ======== ======== The ending balances of the deferred tax asset have also been fully reserved, reflecting the uncertainties as to realizability evidenced by SLT's historical results and the general market conditions being experienced. 39 Deferred tax assets (liabilities) are comprised of the following (in thousands of dollars): 1998 1997 ---- ---- Assets: Temporary differences, @40% Bad debts $ 160 $ 166 Building loss 415 217 Deferred R&D costs 1,022 943 Deferred revenues 90 -- Inventoriable costs 37 40 Inventory reserves 316 415 Legal costs 308 278 Relocation reserve 129 200 Severance 11 48 Warranty 9 12 Misc. temporary differences 42 53 Loss carryforwards @35% 8,285 7,596 Carryforward & AMT credits 956 906 -------- -------- Gross deferred tax assets 11,780 10,874 -------- -------- Liabilities: Depreciation @ 40% (398) (556) -------- -------- Gross deferred tax liabilities (398) (556) -------- -------- Net deferred tax asset 11,382 10,318 Deferred net tax asset, valuation allowance (11,382) (10,318) -------- -------- Net deferred tax asset, after valuation $ -- $ -- ======== ======== The average federal and state income tax rate (net of federal benefit) used to value operating loss carryforwards is 35%, due principally to more stringent usage requirements for loss carryforwards in the Commonwealth of Pennsylvania. Note 15 Related Party Transactions: A partner in the firm which acts as primary legal counsel to SLT is also a director and stockholder of SLT. In 1998, 1997 and 1996, the firm's legal fees were approximately $58,000, $324,000 and $388,000 respectively. In September 1995, SLT made an $82,000 equity investment, which represents an 11% interest, in the common stock of one of its international distributors. SLT accounts for this investment using the cost method. SLT's sales to the distributor were $23,000, $26,000 and $144,000 for the fiscal years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Accounts receivable from sales to the distributor were $7,000 and $69,000 at January 3, 1999 and December 28, 1997, respectively. SLT's Chief Executive Officer is a member of the distributor's Board of Directors. During 1994, SLT entered into a License Agreement with Fuller Research Corporation for certain fiber delivery system technology. The principal stockholder of Fuller Research Corporation was a director and an executive officer of SLT until November 1996. The licensed technology was patented by Fuller Research Corporation before its principal stockholder became an executive of SLT. SLT paid $45,000 40 and $34,000 in royalties under the terms of the license agreement in 1997 and 1996 respectively. SLT terminated the license agreement effective February 28, 1998 (see Note 4). During 1994, SLT entered into an Investment Agreement with Kontron Instruments Holding N.V. ("Kontron Instruments") under the terms of which Kontron Instruments Group made a $2.0 million equity investment in SLT, representing a 7% ownership position. Kontron Instruments Holding N.V. is the parent company of Kontron Instruments Group, a European medical instruments manufacturer, which operated as SLT's market development and distribution partner throughout most of Europe for a portion of fiscal 1997 and all of fiscal 1996. SLT's sales to Kontron Instruments Group were $53,000, $112,000 and $433,000 for the fiscal years ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Accounts receivable from sales to Kontron Instruments Group were $31,000 and $23,000 at January 3, 1999 and December 28, 1997, respectively. A member of SLT's Board of Directors served as Chief Executive Officer of Kontron Instruments Holding, N.V. until December 1998. Note 16 Business Segment and Geographic Data: Effective January 3, 1999, SLT adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. SFAS 131 defines operating segments as "components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance". SLT is engaged primarily in one business segment: the design, development, manufacture and marketing of laser products and other instruments for medical applications. SLT's customers are primarily hospitals and medical centers. For the years 1998, 1997, and 1996, SLT did not have material net sales to any one individual customer. SLT reports net sales in the following categories (in thousands of dollars): 1998 1997 1996 ---- ---- ---- Disposables and accessories $ 6,310 $ 6,651 $ 7,591 Laser system sales, service and rental 3,083 4,042 3,383 Other -- 972 -- ------- ------- ------- Total net sales $ 9,393 $11,665 $10,974 ======= ======= ======= 41 For the years 1998, 1997 and 1996, there were no material net sales attributed to an individual foreign country. Net sales by geographic areas are as follows (in thousands of dollars): 1998 1997 1996 ---- ---- ---- Domestic $8,184 $9,822 $8,444 Foreign 1,209 1,843 2,530 ------ ------- ------- Total Net Sales $9,393 $11,665 $10,974 ====== ======= ======= Note 17 Commitments and Contingencies: As of January 3, 1999, SLT was a defendant in one pending lawsuit in which the lower court had granted SLT summary judgement, and in which the plaintiffs filed an appeal. In July 1998, an appellate court ruled entirely in SLT's favor on an issue concerning SLT's Contact Laser(TM) proprietary position, and remanded the other, sole remaining issue back to the lower court, finding triable issues of fact. Having gauged the costs of further litigation, SLT embarked in January 1999 on settlement discussions with the plaintiffs, and based on those discussions believes that a reasonable settlement can be achieved with the plaintiffs. SLT has accordingly made provision for a substantial part of the expenses it expects to incur in achieving settlement. SLT leases office space and equipment under various non-cancelable operating leases. For fiscal 1998, 1997 and 1996, rental payments were $540,000, $564,000, and $540,000, respectively, and related primarily to facilities in Montgomeryville, Pennsylvania; Oaks, Pennsylvania; and Hebron, Kentucky. The Hebron facility was vacated in 1991 as a result of SLT's decision to consolidate and relocate manufacturing and warehousing activities to Pennsylvania and has subsequently been sublet (see Note 12). The Oaks, Pennsylvania facility lease expired in December 1996 and was not renewed. Future minimum rental payments under operating leases are as follows (in thousands of dollars): 1999 2000 2001 ---- ---- ---- Minimum rental payments $ 526 $ 420 $ 106 Less: Sublease payments (108) (72) -- ----- ----- ----- Net rental payments $ 418 $ 348 $ 106 ===== ===== ===== SLT has severance agreements with certain key executives and employees which create certain liabilities in the event of their termination of employment without cause, or following a change in control of SLT. The aggregate commitment in fiscal 1999 under these executive severance agreements, should all covered executives and employees be terminated other than for cause, was approximately $686,000 at January 3, 1999. Should all covered executives be terminated following a change in control of SLT, the aggregate commitment under these executive severance agreements at January 3, 1999 was approximately $657,000. 42 Note 18 Quarterly Financial Data (Unaudited):
For the Quarter Ended (In thousands, except per share) - ---------------------------------------------- ------- ------- ------- ------- 1998 March 29 June 28 Sept. 27 Jan. 3 - ---------------------------------------------- ------- ------- ------- ------- Net sales $ 2,367 $ 2,284 $ 2,200 $ 2,542 Gross profit 1,326 1,246 1,186 1,169 Net loss (1) (461) (527) (527) (1,037) Basic and diluted loss per share ($ 0.23) ($ 0.27) ($ 0.27) ($ 0.52) - ---------------------------------------------- ------- ------- ------- ------- 1997 March 30 June 29 Sept. 28 Dec. 28 - ---------------------------------------------- ------- ------- ------- ------- Net sales $ 3,073 $ 2,904 $ 3,007 $ 2,681 Gross profit 1,728 1,631 1,910 1,624 Net income (loss) (2) (197) (282) 47 51 Basic and diluted earnings (loss) per share ($ 0.10) ($ 0.14) $ 0.02 $ 0.03 - ---------------------------------------------- ------- ------- ------- ------- 1996 March 31 June 30 Sept. 29 Dec. 29 - ---------------------------------------------- ------- ------- ------- ------- Net sales $ 2,765 $ 2,784 $ 2,416 $ 3,009 Gross profit 1,715 1,855 1,576 1,766 Net loss (3) (820) (941) (2,483) (264) Basic and diluted loss per share ($ 0.42) ($ 0.48) ($ 1.26) ($ 0.13) ============================================== ======= ======= ======= =======
(1) Includes a non-recurring charge of $485,000 for the quarter ended January 3, 1999 (see Note 12). (2) Includes a non-recurring credit of $177,000 for the quarter ended September 28, 1997 (see Note 12). (3) Includes a non-recurring charge of $1,504,000 for the quarter ended September 29, 1996 (see Note 12). For all periods presented, basic and diluted earnings (loss) per share has been computed under the guidelines of SFAS No. 128 (see Note 1) and has been restated for the effect of the January 8, 1999 one-for-five reverse Common Stock split (see Note 6). In each period, the inclusion of common stock equivalents in the calculation of diluted earnings (loss) per share had an antidilutive effect on the calculation. As a result, diluted earnings (loss) per share was equivalent to basic earnings (loss) per share for each period presented. 43
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions Charged to -------------------- Balance at Balance at Beginning of Cost and Other End of Description Period Expenses Accounts Deductions (1) Period - ----------- ------------ -------- -------- -------------- -------------- (In thousands) FOR THE YEAR ENDED JANUARY 3, 1999 Reserve for Doubtful Accounts $155 -- -- $17 $138 ==== ==== ==== ==== ==== FOR THE YEAR ENDED DECEMBER 28, 1997 Reserve for Doubtful Accounts $116 $73 -- $34 $155 ==== ==== ==== ==== ==== FOR THE YEAR ENDED DECEMBER 29, 1996 Reserve for Doubtful Accounts $118 $258 -- $260 $116 ==== ==== ==== ==== ====
(1) Represents write-offs of specific accounts receivable. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. Not applicable. 44 PART III Item 10. Directors and Executive Officers of Registrant Executive Officers Certain information about the executive officers of Registrant as of March 15, 1999 is as follows:
Name Age Positions held with Registrant - ---- --- ------------------------------ W. Keith Stoneback 45 President, Chief Executive Officer and Director Michael R. Stewart 41 Vice President, Finance, Chief Financial Officer, and Treasurer Davis Woodward 51 Vice President, Legal & Tax Affairs and Secretary
W. Keith Stoneback has served as President, Chief Executive Officer and a director of Registrant since August 1996. From 1988 until 1994, he served in several senior management positions for AMSCO International, Inc., a leading manufacturer and marketer of sterilizers, surgical tables, lights and decontamination equipment for the hospital and life science markets, most recently as Corporate Vice President, with responsibility for worldwide manufacturing, marketing and research and development for the capital equipment and supplies business. From November 1994 until joining Registrant, Mr. Stoneback pursued personal investment and business-related interests. Michael R. Stewart has served as Vice President, Finance since January 1996 and as Vice President and Chief Financial Officer since October 1990. Mr. Stewart has served as Treasurer since November 1990. Davis Woodward has served as Vice President, Legal & Tax Affairs since January 1995. From July 1990 to January 1995, Mr. Woodward served as Assistant General Counsel and Director of Tax Planning. He has served as Secretary since November 1990. Directors The names of the Directors, and certain information about them as of March 15, 1999, are set forth below.
Name of Director Age Principal Occupation Director Since - ---------------- --- -------------------- -------------- Richard J. DePiano............. 57 Chairman and Chief Financial Officer of Escalon 1986 Medical Corporation Sheldon M. Bonovitz............ 61 Chairman and Partner, Duane, Morris & Heckscher LLP, 1985 Counsel to Registrant Jay L. Federman................ 61 Opthalmologist and attending Surgeon and Co-Director 1987 Director of Research, Wills Eye Hospital and Chief of Opthalmology at Medical College of Pennsylvania Vincenzo Morelli............... 44 Former Chief Executive of Kontron Instruments 1995 Holding, N.V. and presently pursuing other business and investment interests W. Keith Stoneback............. 45 President and Chief Executive Officer of Registrant 1996
45 Directors will serve until the 1999 Annual Meeting and until the due election of their respective successors. Except as set forth below, each of the nominees has been engaged in his principal occupation described above for the past five years. There are no family relationships among directors or officers of Registrant. Richard J. DePiano has served as the Chairman of the Board of Directors of Registrant since July 1995. Since March 1997, Mr. DePiano has served as Chairman and Chief Executive Officer of Escalon Medical Corp., of which he is also a director. Mr. DePiano has been the Chief Executive Officer of The Sandhurst Company, L.P. and the Managing Director of The Sandhurst Venture Fund since 1986. W. Keith Stoneback has served as President and Chief Executive Officer of Registrant since August 1996. From 1988 until 1994, he served in several senior management positions for AMSCO International, Inc., a leading manufacturer and marketer of sterilizers, surgical tables, lights and decontamination equipment for the hospital and life science markets, most recently as Corporate Vice President, with responsibility for worldwide manufacturing, marketing and research and development for the capital equipment and supplies business. From November 1994 until joining Registrant, Mr. Stoneback pursued personal investment and business-related interests. Sheldon M. Bonovitz has been a partner in the law firm of Duane, Morris & Heckscher LLP, Philadelphia, Pennsylvania, since 1969, where he also serves as Chairman and a member of the management committee. Mr. Bonovitz also serves as a director of Comcast Corporation. Jay L. Federman, M.D. has been an attending surgeon at Wills Eye Hospital, Philadelphia, Pennsylvania, since 1980 and an ophthalmologist in private practice since 1968. Dr. Federman was a founder of SITE Microsurgical Systems, Inc. and serves as a director of Escalon Medical Corp and Chief of Opthalmology at the Medical College of Pennsylvania. Vincenzo Morelli served as Chief Executive Officer of Kontron Instruments Holding N.V. from 1993 until December 1998. Mr. Morelli is presently pursuing other business and investment interests. Item 11. Executive Compensation Director Compensation Each director of Registrant who is not an officer or employee of Registrant (an "Outside Director") receives an annual retainer of $15,000 and a fee of $500 for each committee meeting attended other than meetings held in conjunction with meetings of the Board of Directors. Registrant also maintains the Second Amended and Restated Stock Option Plan for Outside Directors (the "Outside Director Plan"), pursuant to which: (a) on May 11, 1990, each Outside Director on such date received options to purchase 1,800 shares of Common Stock; (b) on May 11, 1990, each Outside Director who was a member of the Executive Committee on such date received options to purchase an additional 750 shares of Common Stock; (c) each Outside Director who had completed three years of service as an Outside Director on or before April 30, 1992 received options to purchase 900 shares of Common Stock on such date; (d) each Outside Director who had completed at least three years of service as an Outside Director on May 26, 1994 (the "1994 Grant Date") was granted options to purchase 9,000 shares, provided that if the Outside Director served as Chairman on the 1994 Grant Date, the option 46 granted was for 12,000 shares; (e) each Outside Director who had not completed three years of service as an Outside Director on the 1994 Grant Date will, on the last trading day coinciding with or immediately following the completion of such three years of service, be granted options to purchase 6,000 shares, provided that if the Outside Director serves as Chairman throughout such three-year period, such option will be for 9,000 shares; (f) for each three years of service after the 1994 Grant Date since the most recent grant of options to an Outside Director, the Outside Director will be granted options to purchase 6,000 shares, provided that if the Outside Director served as Chairman throughout such three-year period, the option will be for 9,000 shares and (g) each person who became an Outside Director after the 1994 Grant Date or hereafter becomes an Outside Director in the future received or will receive options to purchase 6,000 shares of Common Stock on the fifteenth day after election as an Outside Director, provided that if the Outside Director is elected to serve as Chairman, the option granted will be for 9,000 shares. All such options are exercisable at 100% of the fair market value of the Common Stock on the date of grant and remain exercisable to the extent vested until the earliest to occur of the expiration of ten years from the date of grant, three years from cessation of service as a director due to disability, one year from cessation of service as a director due to death or three months from cessation of service as a director for any other reason. Options granted on May 11, 1990 were fully exercisable when granted. Options granted on the 1994 Grant Date were exercisable 3,000 shares on the date of grant, with the balance exercisable in three equal consecutive annual installments commencing one year from the 1994 Grant Date. All other options granted under the Outside Director Plan are or will be exercisable in three equal consecutive annual installments commencing one year from the date of grant. Notwithstanding the foregoing, all options granted under the Outside Director Plan become fully exercisable upon consummation of any business combination transaction involving the sale of all or substantially all of the assets of Registrant to, or the acquisition of shares of Registrant's Common Stock representing more than 50% of the votes which all stockholders of Registrant are entitled to cast by, any person not affiliated with Registrant, directly or indirectly, through one or more affiliates, or any other transaction or series of transactions having a similar effect. An aggregate 77,000 shares of Common Stock are currently reserved for issuance under the Outside Director Plan, of which 1,800 shares have been issued and 69,600 shares are subject to outstanding options. Executive Officer Compensation The following table sets forth certain information with respect to compensation paid by Registrant during each of the three fiscal years ended January 3, 1999, December 28, 1997 and December 29, 1996 to the chief executive officers of Registrant and the other three executive officers of Registrant whose annual salary and bonus in 1998 exceeded $100,000. 47
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual ------------ Compensation Awards ------------ ------ All Other Name & Principal Position Year Salary ($) Options Compensation - ------------------------- ---- ---------- ------- ------------ (#)(1) ($)(2) ------- ------ W. Keith Stoneback (3) 1998 $229,327 - 4,905 President, Chief Executive 1997 225,000 10,000(4) 38,275(5) Officer and Director 1996 101,539 60,000 18,298(6) Michael R. Stewart 1998 153,932 -- 643 Vice President Finance and Chief 1997 143,843 5,000(4) 643 Financial Officer 1996 123,119 10,000(7) 643 Glenn H. Stahl (8) 1998 132,500 -- 10,583(9) Vice President Sales and 1997 122,500 15,000 -- Marketing 1996 -- -- -- Davis Woodward 1998 127,392 -- 1,285 Vice President, Legal & 1997 119,664 4,000(4) 1,285 Tax Affairs 1996 112,638 5,000(7) 1,285
- ------------ (1) Restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999. (2) Except as noted in footnotes 5, 6 and 9, represents payments of premiums for certain supplementary life insurance coverage. (3) Mr. Stoneback joined Registrant as President, Chief Executive Officer and a director in August 1996. (4) These options were granted in 1998 for services rendered in 1997. (5) Includes $32,314 in moving and relocation payments made by Registrant to Mr. Stoneback pursuant to the terms of his Employment Agreement. (6) Includes $18,054 in moving and relocation payments made by Registrant to Mr. Stoneback pursuant to the terms of his Employment Agreement. (7) These options were granted in 1997 for services rendered in 1996. (8) Mr. Stahl served as Vice President, Sales and Marketing from January 1997 until December 1998. (9) Represents severance pay related to Mr. Stahl's termination in December 1998. The following table sets forth information with respect to options granted during the fiscal year ended January 3, 1999 to the persons named in the Summary Compensation Table above. All information presented in the following table is restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999. 48
Option Grants in Last Fiscal Year % of Total Potential Realizable Value Options at Assumed Annual Rates Granted to of Stock Price Appreciation Employees for Option Term Options In Fiscal Exercise --------------------------- Name Granted(#) Year Price Expiration Date 5% 10% - ---- ---------- ---- ----- --------------- --- ---- W. Keith Stoneback 10,000 23.1% 7.030 January 23, 2008 $44,211 $112,040 Michael R. Stewart 5,000 11.6% 7.030 January 23, 2008 22,106 56,020 Davis Woodward 4,000 9.3% 7.030 January 23, 2008 17,685 44,816
The following table sets forth information with respect to options held at January 3, 1999 by the persons named in the Summary Compensation Table above. No options were exercised by such persons during the fiscal year ended January 3, 1999. No outstanding options were in the money at January 3, 1999. All information presented in the following table is restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999.
Fiscal Year-End Option Values Number of Unexercised Options at Fiscal Year End --------------------------- ----------------------- Name Exercisable Unexercisable ---- ----------- ------------- W. Keith Stoneback 40,000 30,000 Michael R. Stewart 21,673 15,267 Glenn H. Stahl 5,000 -- Davis Woodward 18,506 10,934
Employment and Other Agreements In August 1996, Registrant entered into an employment agreement with W. Keith Stoneback pursuant to which Mr. Stoneback will serve as Registrant's President and Chief Executive Officer through December 31, 1999 and, thereafter, for successive one-year terms absent at least three months' prior written notice of termination by either party. Mr. Stoneback's annual base salary under the agreement is $225,000, and his agreement provides that he will be eligible for a bonus of 50% of base salary pursuant to bonus programs developed by the Board of Directors based on objective criteria related to Registrant's results of operations. No bonus was paid for services under the 1998 bonus program. If Mr. Stoneback's employment is terminated by Registrant without cause during the initial or any renewal term of the agreement (other than following a change in control as described below), Mr. Stoneback will be entitled to severance benefits equal to continuation of his base salary, health, disability and life insurance for a one-year period and the right to exercise options which are not then exercisable but would have become exercisable on the next anniversary of the agreement. If Mr. Stoneback's employment is terminated without cause within three months following a change in control, Mr. Stoneback will be entitled to severance benefits equal to continuation of his base salary and his health, disability and life insurance for a period of eighteen months, subject to mitigation in the last six months of such period, and the right to exercise any options granted under the agreement which are not otherwise exercisable, which options will remain exercisable during the period in which he continues to receive the aforementioned severance benefits. Mr. Stoneback was also granted under the agreement options to purchase 60,000 shares, 49 restated for the effect of the one-for-five reverse Common Stock split implemented on January 8, 1999, of Registrant's Common Stock, at the market price. Registrant provides long-term disability insurance equal to 60% of Mr. Stoneback's base salary, a $1 million life insurance policy and automobile, vacation and other insurance benefits as are available to Registrant's other senior executive officers. During the term of the agreement and for a period of one year thereafter, Mr. Stoneback is prohibited from competing with Registrant in any respect, interfering with Registrant's business relationships or soliciting business from Registrant's customers. Effective January 1999, the Registrant terminated the employment of Mr. Stahl, Vice President of Sales and Marketing. Mr. Stahl received as severance benefits his base salary, health and disability insurance until January 29, 1999. In June 1992, Registrant adopted a severance benefits program for certain key employees, including Messrs. Stewart and Woodward. Under the terms of this program, a participant whose employment is terminated by Registrant other than for cause and other than following a change in control is entitled to continue receiving his then-current base salary and coverage under the medical, dental, supplemental life and supplemental disability insurance policies, if any, being provided at the time of termination for a specified period, with the obligation to provide such insurance coverage terminating in the event the participant is provided substantially the same coverage from a new employer. Each of Messrs. Stewart and Woodward is entitled to continue receiving such base salary and insurance coverage for a period of one year under the foregoing circumstances. In addition, if, within two years following a change in control of Registrant, a participant's employment is terminated without cause or the participant resigns following (a) the relocation of his principal business location, (b) a significant reduction in the duties or responsibilities from those existing prior to the change in control, or (c) a reduction in his then-current base salary, then, in any such event, the participant is also entitled to continue receiving his then-current base salary and coverage under the aforementioned insurance program (subject to the restriction described above) for a specified period. Messrs. Stewart and Woodward are entitled to continue receiving their respective base salaries for a period of 12 months under such circumstances. In addition, under such circumstances, each of Messrs. Stewart and Woodward is also entitled to continue receiving the aforementioned insurance coverages for a period of 12 months, and all unvested options which they hold become exercisable in full and all outstanding options remain exercisable for the lesser of the remaining scheduled term thereof or an extended exercise period, which is one year for options granted after December 1996 and five years for options granted before January 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 15, 1999, the following persons were known to Registrant to be the beneficial owners of more than 5% of Registrant's Common Stock:
Number of Percent Name and Address Shares of Class - ---------------- ------ -------- Steven T. Newby..................................... 180,000 (1) 9.10% 6116 Executive Blvd. Rockville, MD 20852 Kontron Instruments Holding N.V..................... 139,130 7.03% Julianaplein 22 Curacao, Netherlands Antilles
- ------------ (1) Information furnished by stockholder as of January 3, 1999 50 Security Ownership of Management The following table sets forth the beneficial ownership of the Common Stock of Registrant as of March 15, 1999 by each director, each executive officer named in the Summary Compensation Table and by all directors and executive officers as a group. The persons named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the table and notes thereto.
Shares Beneficially Owned ---------------------------- Name Number Percent - ---- ------ ------- Richard J. DePiano................................................ 62,450 (1) 3.11% Jay L. Federman................................................... 60,539 (2) 3.04% Sheldon M. Bonovitz............................................... 48,223 (3) 2.42% W. Keith Stoneback................................................ 47,333 (4) 2.34% Michael R. Stewart................................................ 28,558 (5) 1.42% Davis Woodward.................................................... 26,888 (6) 1.34% Vincenzo Morelli.................................................. 12,000 (7) * Glenn H. Stahl.................................................... 5,000 (8) * All directors and executive officers as a group (7 persons)....... 285,991 (9) 13.37%
- ------------ * Less than one percent. (1) Includes 29,450 shares which Mr. DePiano has the right to acquire under outstanding stock options exercisable within 60 days after March 15, 1999. Also includes 18,000 shares owned by Mr. DePiano's wife. Mr. DePiano disclaims beneficial ownership of such 18,000 shares. (2) Includes 13,700 shares which Dr. Federman has the right to acquire under outstanding stock options exercisable within 60 days after March 15, 1999 and 2,499 shares owned by Dr. Federman's child. Dr. Federman disclaims beneficial ownership of such 2,499 shares. (3) Includes 17,450 shares which Mr. Bonovitz has the right to acquire under outstanding stock options exercisable within 60 days after March 15, 1999, 5,005 shares owned by Mr. Bonovitz' wife and 5,846 shares owned by trusts of which Mr. Bonovitz is trustee for the benefit of Mr. Bonovitz' children. Mr. Bonovitz disclaims beneficial ownership of the 10,851 shares owned by his wife and such trusts. Also includes 5,823 shares owned by the Marital Trust Under the Will of Robert H. Fleisher, Deceased. Mr. Bonovitz is one of the four trustees of such trust and disclaims beneficial ownership of such 5,823 shares. Also includes 5,100 shares owned by a pension trust of which Mr. Bonovitz is the beneficiary. (4) Includes 43,333 shares which Mr. Stoneback has the right to purchase under outstanding stock options exercisable within 60 days after March 15, 1999. (5) Includes 27,272 shares which Mr. Stewart has the right to purchase under outstanding stock options exercisable within 60 days after March 15, 1999. 51 (6) Includes 22,106 shares which Mr. Woodward has the right to purchase under outstanding stock options exercisable within 60 days after March 15, 1999. (7) Includes 3,000 shares held of record by Olive Branch Corp., a Liberian corporation controlled by members of Mr. Morelli's family. Mr. Morelli disclaims beneficial ownership of such shares. Also includes 8,000 shares which Mr. Morelli has the right to purchase under outstanding stock options exercisable within 60 days after March 15, 1999. (8) Represents 5,000 shares which Mr. Stahl has the right to purchase under outstanding stock options exercisable within 60 days after March 15, 1999. (9) Includes 161,311 shares which such persons have the right to purchase under stock options exercisable within 60 days after March 15, 1999. Item 13. Certain Relationships and Related Transactions Certain Transactions Kontron Instruments Holding N.V., which owns more than 5% of Registrant's outstanding Common Stock, has affiliates that have served as Registrant's distributors throughout most of Europe. In March, 1997, Registrant and Kontron Instruments agreed to terminate the distribution agreement entered into in 1993, under which Kontron Instruments had been Registrant's distribution representative for most of Europe. Kontron Instruments has agreed to continue to represent Registrant in certain countries in Europe until successor distribution partners are identified by Registrant. During 1998, total sales by Registrant to such affiliates were $53,000. Vincenzo Morelli, a director of Registrant, served as the Chief Executive Officer of Kontron Instruments until December 1998. 52
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements Page ---- Consolidated Balance Sheets at January 3, 1999 and December 29, 1997..............................23 Consolidated Statements of Operations for each of the three years in the period ended January 3, 1999...................................................................24 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended January 3, 1999 ..................................................................25 Consolidated Statements of Cash Flows for each of the three years in the period ended January 3, 1999 ..................................................................26 Notes to Consolidated Financial Statements........................................................27 Report of Independent Public Accountants..........................................................22 2. Financial Statement Schedules Page ---- Schedule II - Valuation and Qualifying Accounts for the three years in the period ended January 3, 1999..........................................................................44 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended January 3, 1999. (c) Exhibits -------- Exhibit Number Description of Exhibit - -------------- ---------------------- 3.1 Restated Certificate of Incorporation of Registrant as amended. 3.2 By-laws of Registrant, as amended, incorporated by reference to Exhibit 3.2 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1990 filed on March 29, 1991 (the "1990 Form 10-K"). 10.1 Lease dated September 12, 1991 between Registrant and SLT Properties, Inc., incorporated by reference to Exhibit 10.1 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1991 filed on March 30, 1992 (the "1991 Form 10-K"). 10.2 Lease Agreement dated May 29, 1996, between Registrant and Nappen & Associates, incorporated by reference to Exhibit 10.51 filed with Registrant's Form 10-Q for the fiscal quarter ended June 30, 1996 filed on August 19, 1996 (the "Second Quarter 1996 Form 10-Q"). 53 10.3* Employment Agreement dated August 5, 1996, between Registrant and W. Keith Stoneback, incorporated by reference to Exhibit 10.1 filed with Registrant's Form 10-Q for the fiscal quarter ended September 29, 1996 filed on November 15, 1996 (the "Third Quarter 1996 Form 10-Q"). 10.4* 1986 Non-Qualified Stock Option Plan of Registrant, as amended through November 29, 1989, incorporated by reference to Exhibit 4(B) filed with the Registrant's Form S-8 Registration Statement filed on December 29, 1989, Registration No. 33-32835 (the "1989 Form S-8). 10.5* Registrant's Equity Incentive Plan, as amended through October 10, 1996, incorporated by reference to Exhibit 4 filed with Registrant's Form S-8 Registration Statement filed on January 3, 1997, Registration No. 333-19229. 10.6* Second Amended and Restated Stock Option Plan for Outside Directors of Registrant, incorporated by reference to Exhibit 4(B) filed with Registrant's Form S-8 Registration Statement filed on August 19, 1994, Registration No. 33-83074 (the "1994 Form S-8"). 10.7 Collaboration and Assignment Agreement dated as of March 7, 1995 among Registrant, Daniel M. Schuman, M.D. and the AMERICA Charitable Fund, incorporated by reference to Exhibit 10.7 filed with Registrant's Amendment No. 1 to Annual Report on Form 10-K/A filed on August 28, 1996 (the "1995 Form 10-K/A"). 10.8* Registrant's 1997 Executive Staff Bonus Program adopted January 17, 1997, incorporated by reference to Exhibit 10.54 filed with Registrant's Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended December 29, 1996 filed on April 7, 1997 ("the 1996 Form 10-K/A"). 10.9 Employment Agreement dated March 1, 1987 between Registrant and Norio Daikuzono, incorporated by reference to Exhibit 10.22 filed with the Form S-1, as amended by Settlement Agreement and Limited Mutual Release dated November 7, 1997 incorporated by reference to Exhibit 10.9 filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1997, filed on March 25, 1998 ("the 1997 Form 10-K"). 10.10 Agreement of Sale dated November 25, 1998, between Lenfest Oaks, Inc. (an affiliate of Suburban Cable TV Co. Inc.) and SLT Properties, Inc. 10.11 License Agreement dated December 11, 1990 among Registrant, Advanced Laser Systems Technology, Inc., Robert E. McKinney, Dennis R. Bellar, Randel W. Owen, and Jim D. Keatley, incorporated by reference to Exhibit 10.11 filed with the 1990 Form 10-K. 10.12 Agreement of Sale dated September 14, 1990 between Oaks Associates and SLT Properties, Inc., incorporated by reference to Exhibit 10.12 filed with the 1990 Form 10-K. 10.13 Installment Sale Agreement dated September 14, 1990 between SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10. 14 filed with the 1990 Form 10-K, as amended pursuant to the Amended and Restated Installment Sale Agreement dated November 25, 1991 between SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10.22 filed with Registrant's 1991 Form 10-K. 54 10.14 Acquisition Agreement dated September 14, 1990 between SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10.15 filed with Registrant's 1990 Form 10-K. 10.15 Amended and Restated Loan Agreement dated December 1, 1992 among Registrant, Meridian Bank, SLT Properties, Inc., SLT Technology, Inc., Diversified Properties-Equity Group, Inc. and Surgical Laser Technologies Development, Inc., incorporated by reference to Exhibit 10.20 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1993 filed on April 19, 1993 (the "1992 Form 10-K"); as amended pursuant to a First Amendment thereto dated July 26, 1993, incorporated by reference to Exhibit 10.15 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1994 filed on April 1, 1994 (the "1993 Form 10-K"); as amended pursuant to a Second Amendment thereto dated January 19, 1995, incorporated by reference to Exhibit 10.15 filed with Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1995 filed on April 3, 1995 (the "1994 Form 10-K"); as amended pursuant to a Third Amendment thereto dated December 20, 1995 and as amended pursuant to a Letter Agreement accepted March 14, 1996 filed with Registrant's 1995 Form 10-K/A; as amended by Letter Agreement dated November 5, 1997 from CoreStates Bank (successor to Meridian Bank) to Registrant, incorporated by reference to Exhibit 10.15 filed with Registrant's 1997 Form 10-K; and as further amended by Letter Agreement dated March 17, 1999 from First Union Corporation (successor to CoreStates Bank) to Registrant. 10.16 Turnkey Development Agreement dated September 14, 1990 between SLT Properties, Inc. and Oaks Associates, incorporated by reference to Exhibit 10.21 filed with Registrant's 1990 Form 10-K. 10.17 Sixth Amended and Restated Line of Credit Note in the principal amount of $2,750,000 dated January 19, 1995, of Registrant to Meridian Bank, incorporated by reference to Exhibit 10.17 filed with Registrant's 1994 Form 10-K. 10.18 Amended and Restated Security Agreement amended through December 1, 1992 dated December 1, 1992 among Registrant, Meridian Bank, SLT Properties, Inc., SLT Technology, Inc., Diversified Properties-Equity Group, Inc. and Surgical Laser Technologies Development, Inc., incorporated by reference to Exhibit 10.22 filed with Registrant's 1992 Form 10-K. 10.19 Pledge Agreement dated April 13, 1992 by SLT Technology, Inc. to Meridian Bank, as amended by First Amendment to Pledge Agreement dated December 1, 1992, incorporated by reference to Exhibit 10.23 filed with Registrant's 1992 Form 10-K. 10.20 Mortgage Note in the principal amount of $3,400,000 dated August 16, 1991 and delivered September 12, 1991 by Registrant, SLT Properties, Inc. and Montgomery County Industrial Development Corporation in favor of American United Life Insurance Company, incorporated by reference to Exhibit 10.35 filed with Registrant's 1991 Form 10-K. 10.21 Mortgage dated August 16, 1991 and delivered September 12, 1991 among SLT Properties, Inc., Montgomery County Industrial Development Corporation and American United Life Insurance Company, incorporated by reference to Exhibit 10.36 filed with Registrant's 1991 Form 10-K. 55 10.22 Guaranty Agreement dated August 16, 1991 and delivered September 12, 1991 between Registrant and American United Life Insurance Company, incorporated by reference to Exhibit 10.37 filed with Registrant's 1991 Form 10-K. 10.23 Assignment of Rents and Leases dated August 16, 1991 and delivered September 12, 1991 by SLT Properties, Inc. and Montgomery County Industrial Development Corporation to American United Life Insurance Company, incorporated by reference to Exhibit 10.38 filed with Registrant's 1991 Form 10-K. 10.24 Security and Pledge Agreement dated September 12, 1991 by SLT Properties, Inc. in favor of American United Life Insurance Company, incorporated by reference to Exhibit 10.39 filed with Registrant's 1991 Form 10-K. 10.25 Loan Agreement effective November 25, 1991 between Montgomery County Industrial Development Corporation and Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.40 filed with Registrant's 1991 Form 10-K. 10.26 Note in the principal amount of $2,000,000 dated November 20, 1991 and delivered December 2, 1991 by Montgomery County Industrial Development Corporation to Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.41 filed with Registrant's 1991 Form 10-K. 10.27 Open-end Mortgage made November 20, 1991 and delivered December 2, 1991 between Montgomery County Industrial Development Corporation and Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.42 filed with Registrant's 1991 Form 10-K. 10.28 Consent, Subordination and Assumption Agreement dated November 20, 1991 and delivered December 2, 1991 by SLT Properties, Inc. and Montgomery County Industrial Development Corporation in favor of Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.43 filed with Registrant's 1991 Form 10-K. 10.29 Assignment of Installment Sale Agreement dated November 20, 1991 and delivered December 2, 1991 among Montgomery County Industrial Development Corporation, SLT Properties, Inc. and Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.44 filed with Registrant's 1991 Form 10-K. 10.30 Assignment of Lease Agreement dated November 20, 1991 and delivered December 2, 1991 among Registrant, SLT Properties, Inc. and Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.45 filed with Registrant's 1991 Form 10-K. 10.31 Guaranty and Surety Agreement dated December 2, 1991 by Registrant in favor of Pennsylvania Industrial Development Authority, incorporated by reference to Exhibit 10.46 filed with Registrant's 1991 Form 10-K. 10.32 Agreement for Additional Security dated September 14, 1990 among Registrant, SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10.47 filed with Registrant's 1991 Form 10-K; as amended by Pledge Agreement dated 56 December 1, 1992, incorporated by reference to Exhibit 10.36 filed with Registrant's 1992 Form 10-K. 10.33 Pledge and Security Agreement effective December 2, 1991 among Registrant, SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10.48 filed with Registrant's 1991 Form 10-K. 10.34 Security Agreement dated December 1, 1992 among Registrant, SLT Properties, Inc. and Montgomery County Industrial Development Corporation, incorporated by reference to Exhibit 10.38 filed with Registrant's 1992 Form 10-K. 10.35 Form of Registrant's 8% Convertible Subordinated Note due July 30, 1999, incorporated by reference to Exhibit 10.39 filed with Registrant's 1992 Form 10-K. 10.36* Form of Agreements dated June 12, 1992 between Registrant and Executive Officers with respect to severance and change of control benefits, incorporated by reference to Exhibit 10.40 filed with Registrant's 1992 Form 10-K, as amended by Letter Agreement dated January 24, 1997 incorporated by reference to Exhibit 10.36 filed with Registrant's 1996 Form 10-K/A. 10.37 Lease Agreement dated March 5, 1990 between Duke Associates #77 Limited Partnership and Registrant and Lease Addendum Number One dated March 30, 1990, incorporated by reference to Exhibit 10.41 filed with Registrant's 1992 Form 10-K. 10.38 Property Agreement dated October 30, 1996, among Registrant, Terry A. Fuller, and Fuller Research Corporation, incorporated by reference to Exhibit 10.4 filed with Registrant's Third Quarter 1996 Form 10-Q. 10.39 Amendment to the Joint Venture and other Agreements dated September 30, 1996, among Registrant; Mediq/PRN Life Support Services, Inc.; and Mediq PRN/SLT, incorporated by reference to Exhibit 10.5 filed with Registrant's Third Quarter 1996 Form 10-Q. 10.40 Investment Agreement dated December 8, 1994 between Registrant and Kontron Instruments Holding N.V., incorporated by reference to Exhibit 10.42 filed with Registrant's 1994 Form 10-K. 10.41 Amendment to Confidentiality and Non-Compete Agreement dated April 28, 1994 between Registrant and Terry A. Fuller, amending Confidentiality and Non-Compete Agreement dated June 6, 1990, incorporated by reference to Exhibit 10.43 filed with Registrant's 1994 Form 10-K, as amended pursuant to Severance Agreement dated November 5, 1996, between Registrant and Dr. Fuller, incorporated by reference to Exhibit 10.3 filed with Registrant's Third Quarter 1996 Form 10-Q, and as further amended pursuant to Addendum dated December 20, 1996, between Registrant and Dr. Fuller, incorporated by reference to Exhibit 10.43 filed with Registrant's 1996 Form 10-K/A. 10.42 Guaranty dated December 29, 1994 from Registrant to KCI Financial Services, Inc., incorporated by reference to Exhibit 10.44 filed with Registrant's 1994 Form 10-K. 10.43 Negative Pledge Agreement dated January 19, 1995 between Registrant and Meridian Bank, incorporated by reference to Exhibit 10.45 filed with Registrant's 1994 Form 10-K. 57 10.44 International Facilities Agreement dated January 19, 1995 between Registrant and Meridian Bank, incorporated by reference to Exhibit 10.46 filed with Registrant's 1994 Form 10-K. 10.45 $629,430.53 Standby Letter of Credit dated as of January 1, 1995 issued by Meridian Bank to Montgomery County Industrial Development Corporation for the account of Registrant, incorporated by reference to Exhibit 10.47 filed with Registrant's 1994 Form 10-K, as amended by an Amendment dated December 22, 1995 reducing the amount of the Letter of Credit to $575,607, incorporated by reference to Exhibit 10.47 filed with Registrant's 1995 Form 10-K/A, as amended by an Amendment dated December 24, 1997 incorporated by reference to Exhibit 10.47 filed with Registrant's 1997 form 10-K; as further amended by Amendment dated December 28, 1998. 10.46 Sublease Agreement dated March 21, 1996 among Registrant; SLT Properties, Inc.; and Suburban Cable TV Co. Inc., incorporated by reference to Exhibit 10.48 filed with Registrant's Second Quarter 1996 Form 10-Q. 10.47 Subordination, Non-Disturbance and Attornment Agreement dated April 30, 1996, and delivered May 13, 1996, among Registrant; SLT Properties, Inc.; Suburban Cable TV Co. Inc.; and American United Life Insurance Company, incorporated by reference to Exhibit 10.50 filed with Registrant's Second Quarter 1996 Form 10-Q. 10.48 Non-Disturbance, Subordination and Attornment Agreement dated August 1, 1996, among Montgomery County Industrial Development Corporation; SLT Properties, Inc., Registrant; and Suburban Cable TV Co. Inc., incorporated by reference to Exhibit 10.6 filed with Registrant's Third Quarter 1996 Form 10-Q. 10.49 Non-Disturbance, Subordination and Attornment Agreement dated October 22, 1996 among Pennsylvania Industrial Development Authority; SLT Properties, Inc.; Registrant; and Suburban Cable TV Co. Inc., incorporated by reference to Exhibit 10.51 filed with Registrant's 1996 Form 10-K/A. 21 Subsidiaries of Registrant, incorporated by reference to Exhibit 22 filed with Registrant's 1993 Form 10-K. 23 Consents of Arthur Andersen LLP. 27 Financial Data Schedule, January 3, 1999. * This exhibit represents a management contract or compensatory plan or arrangement. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 1999 SURGICAL LASER TECHNOLOGIES, INC. By: /s/ W. Keith Stoneback ----------------------- W. Keith Stoneback President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ W. Keith Stoneback President, Chief Executive Officer and March 29, 1999 - ----------------------- Director (principal executive officer) W. Keith Stoneback /s/ Michael R. Stewart Vice President, Chief Financial Officer, and March 29, 1999 - ----------------------- Treasurer (principal financial Michael R. Stewart and accounting officer) /s/ Richard J. DePiano Chairman of the Board and March 29, 1999 - ----------------------- Director Richard J. DePiano /s/ Sheldon M. Bonovitz Director March 29, 1999 - ----------------------- Sheldon M. Bonovitz /s/ Jay L Federman Director March 29, 1999 - ----------------------- Jay L. Federman /s/ Vincenzo Morelli Director March 29, 1999 - ----------------------- Vincenzo Morelli
59 EX-3.1 2 CERTIFICATE OF AMENDMENT EXHIBIT 3.1 60 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF SURGICAL LASER TECHNOLOGIES, INC. Surgical Laser Technologies, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, pursuant to a Certificate of Incorporation that was originally filed on December 19, 1983 and restated pursuant to Restated Certificates of Incorporation that were filed on March 8, 1985 and March 26, 1992, respectively, DOES HEREBY CERTIFY THAT: FIRST: The Board of Directors of Surgical Laser Technologies, Inc. (the "Corporation"), at a duly convened meeting held on October 12, 1998, duly adopted a resolution setting forth a proposed amendment of the Restated Certificate of Incorporation of the Corporation (the "Amendment"), declaring the Amendment to be advisable and in the best interests of the Corporation and its stockholders, and calling a special meeting (the "Special Meeting") of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed Amendment is as follows: RESOLVED, that the Board of Directors hereby declares it advisable and in the best interests of the Corporation and its stockholders that Article Fourth of the Restated Certificate of Incorporation be amended and restated in its entirety so as to provide in full as follows: (a) The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 30,000,000 shares, all of which shall be shares of Common Stock, par value $.01 per share (the "Common Stock"). Each share of Common Stock issued and outstanding shall be identical in all respects one with the other. The holders of Common Stock shall have exclusively all other rights of stockholders including, but not by way of limitation, (i) the right to receive dividends, when and as declared by the Board of Directors out of assets lawfully available therefor and (ii) in the event of any distribution of assets upon liquidation, dissolution or winding up of the Corporation or otherwise, the right to receive ratably and equally all assets of the Corporation after payment of or provision for all obligations of the Corporation. (b) Effective as of 5:00 p.m. Eastern time (the "Effective Time") on the date of filing with the Secretary of State of the State of Delaware of a Certificate of Amendment of the Restated Certificate of Incorporation of the Corporation amending and restating this Article Fourth, each five shares of Common Stock issued and outstanding or (if any) held in treasury immediately prior to the Effective Time ("Old Common Stock") shall be automatically reclassified and changed into one validly issued, fully paid and nonassessable share of Common Stock. Stockholders who, immediately prior to the Effective Time, are holders of record of a number of shares of Old Common Stock that is not evenly divisible by five shall be entitled to receive from the Corporation in lieu of a fraction of a share of Common Stock an amount in cash determined by multiplying such fraction by the last reported sale price of the Common Stock on the first day of trading after the Effective Time. Each holder of record immediately prior to the Effective Time of shares of Old Common Stock shall at the Effective Time become the holder of 61 record of the number of whole shares of Common Stock as shall result from this reclassification and change. Each such holder of record shall be entitled to receive, upon surrender at the office of the transfer agent of the Corporation of the certificate or certificates theretofore representing shares of Old Common Stock in such form and accompanied by such documents, if any, as may be prescribed by the transfer agent of the Corporation, a new certificate or certificates representing the number of whole shares of Common Stock of which such holder is the holder of record after giving effect to the provisions of this paragraph (b) of this Article Fourth and any cash to which such holder is entitled in lieu of any fractional share of Common Stock. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the Special Meeting was duly called and held on December 18, 1998, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which Special Meeting the necessary number of shares as required by statute were voted in favor of the Amendment. THIRD: That the Amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Surgical Laser Technologies, Inc. has caused this Certificate of Amendment and Restatement to be signed by W. Keith Stoneback, its President and Chief Executive Officer, and A. Davis Woodward, its Secretary, this 18th day of December, 1998. (SEAL) SURGICAL LASER TECHNOLOGIES, INC. Attest: By: /s/ A. Davis Woodward By: /s/ W. Keith Stoneback --------------------------- ---------------------------- A. Davis Woodward, W. Keith Stoneback, Secretary President 62 RESTATED CERTIFICATE OF INCORPORATION OF SURGICAL LASER TECHNOLOGIES, INC. FIRST. The name of the Corporation is Surgical Laser Technologies, Inc. SECOND. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware and specifically, without limiting the generality of the foregoing, to design, develop, manufacture and market laser products for medical applications. FOURTH. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 30,000,000 shares, all of which shall be shares of Common Stock, par value $.01 per share (the "Common Stock"). Each share of Common Stock issued and outstanding shall be identical in all respects one with the other. The holders of Common Stock shall have exclusively all other rights of stockholders including, but not by way of limitation, (i) the right to receive dividends, when and as declared by the Board of Directors out of assets lawfully available therefor and (ii) in the event of any distribution of assets upon liquidation, dissolution or winding up of the Corporation or otherwise, the right to receive ratably and equally all assets of the Corporation after payment of or provision for all obligations of the Corporation. FIFTH. The Corporation is to have perpetual existence. SIXTH. Election of directors need not be by written ballot unless the by-laws of the Corporation shall so provide. SEVENTH. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal the by-laws of the Corporation. EIGHTH. The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as that section may be amended and supplemented from time to time, indemnify any and all persons whom it shall have power to indemnify under that section against any expenses, liabilities or other matters referred to in or covered by that section. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. NINTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 63 TENTH. This Restated Certificate of Incorporation has been duly adopted by unanimous written consent of the stockholders of the Corporation dated February 19, 1985, upon the recommendation by unanimous written consent of the Board of Directors of the Corporation dated February 19, 1985, all in accordance with the provisions of Sections 141, 228, 242 and 245 of the Delaware General Corporation Law. ELEVENTH. A director of the Corporation shall have no personal liability to the Corporation or its stockholders for monetary damages for breach of his fiduciary duty as a director; provided, however, this Article shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of a law; (iii) for the unlawful payment of dividends or unlawful stock repurchases under Section 174 of the General Corporation Law of the State of Delaware; or (iv) for any transaction from which the director derived an improper personal benefit. This Article shall not eliminate or limit the liability of a director for any act or omission occurring prior to the effective date of this Article. 64 EX-10.10 3 AMENDMENT OF SALE EXHIBIT 10.10 65 AGREEMENT OF SALE THIS AGREEMENT OF SALE (the "Agreement") dated November 25 , 1998 is by and between SLT PROPERTIES, INC. (the "Seller") and LENFEST OAKS, INC. (the "Buyer"), an affiliate of SUBURBAN CABLE TV CO. INC. ("Suburban"). BACKGROUND A. Buyer is an affiliate of Suburban, which is the sublessee of certain Premises (hereafter defined) under a sublease dated March 21, 1996 (the "Sublease") between Suburban, as Subtenant, and Surgical Laser Technologies, Inc., as Sublandlord ("Sublandlord"). Suburban has assigned to Buyer its rights in a Purchase Option, described in Section 2.3 of the Sublease, to purchase the Premises. B. Sublandlord is the lessee of the Premises under a certain lease (the "Lease") dated September 12, 1991 with Seller. C. Seller holds equitable title to the Premises under a certain installment sale agreement with Montgomery County Industrial Development Corporation ("MCIDC"). The Premises is subject to certain notes, mortgages and other documents more fully described in Exhibit "A" attached hereto and incorporated herein (collectively, the "Existing Mortgage Documents"). D. Buyer wishes to exercise the Purchase Option described in Section 2.3 of the Sublease and has executed and delivered to Seller this Agreement of Sale, the basic form of which has been incorporated into the Sublease as Exhibit "B" thereto, Buyer having elected to proceed under Section 4(b) of Exhibit "B" of the Sublease, by which Buyer will assume the Existing Mortgages on the Premises. E. American United Life Insurance Company ("AULIC"), first mortgage holder on the Premises, and Pennsylvania Industrial Development Authority ("PIDA"), second mortgage holder on the Premises, have expressed support for Buyer's desire to purchase the Premises and are receptive to allowing Buyer to assume their respective mortgage loans. F. MCIDC has also expressed support for Buyer's purchase of the Premises and is receptive to allowing Seller to assign its rights from MCIDC to Buyer. TERMS AND CONDITIONS 1. Premises. The Premises consists of all that certain parcel of land identified as 200 Cresson Blvd., Oaks, Upper Providence Township, Montgomery County, Pennsylvania together with all buildings thereon and all easements appurtenant thereto. 2. Purchase Price. In consideration of the release described in Paragraph 2(c) of this Agreement, the total purchase price for the Premises (the "Purchase Price") shall be FOUR MILLION FOUR HUNDRED SEVENTY-FIVE THOUSAND ($4,475,000.00) DOLLARS, which shall be paid by Buyer to Seller as follows, Buyer having elected to proceed under Section 4(b) of Exhibit "B" of the Sublease: 66 (a) Existing Mortgages. By Buyer's assumption of the Existing Mortgage Documents (as modified, as of the Closing Date) and acceptance of the Premises under and subject to: i) First Mortgage. The outstanding principal balance as of the Closing Date of the first mortgage loan (the "First Mortgage Loan") made by AULIC in the original principal amount of THREE MILLION FOUR HUNDRED THOUSAND ($3,400,000.00) DOLLARS secured by a first mortgage lien on the Premises; and ii) Second Mortgage. The outstanding principal balance as of the Closing Date of the second mortgage loan (the "Second Mortgage Loan") made by PIDA in the original principal amount of TWO MILLION ($2,000,000.00) DOLLARS secured by a second mortgage lien against the Premises. (b) Balance. The balance of the Purchase Price shall be paid to Seller on the Closing Date by electronic transfer of immediately available funds to account designated by Seller. (c) Seller's Contribution. Seller shall be released from the obligation to make payment to Buyer pursuant to Section 4(b)(iii) of Exhibit "B" of the Sublease. 3. Closing. Closing (the "Closing") under this Agreement shall take place at the offices of the Title Company insuring Buyer's title to the Premises, or at such other location as the Buyer and Seller shall mutually agree upon, on a date specified by Buyer by notice to Seller on or before the expiration of thirty (30) days after the satisfaction of the conditions precedent to Closing described in Paragraph 4 below, but not later than June 30, 1999 (the "Closing Date"). 4. Conditions to Closing. Closing of the Purchase Option under this Agreement is conditioned upon satisfaction of the following: (a) Assumption of Existing Mortgages. The Existing Mortgagees consent to the transfer of the Premises to Buyer under and subject to the Existing Mortgages under the following terms and conditions: i) The Lease between Seller and Sublandlord and the Sublease between Sublandlord and Suburban will both be terminated as of the Closing Date. ii) Both Seller and Sublandlord will be released from all personal liability under the Existing Mortgage Documents from and after the Closing Date. iii) Seller and Buyer shall bear equally the costs and fees imposed by AULIC and PIDA to permit Buyer to assume their respective mortgage loans, such costs and fees not to exceed THIRTY-FIVE THOUSAND ($35,000.00) DOLLARS, and likewise shall bear equally the reasonable costs and fees, if any (but not to exceed $2,000.00) imposed by MCIDC to approve and help to effect the transaction. (b) Cooperation. Buyer, Seller and Sublandlord shall cooperate with each other in seeking the approval of the Existing Mortgagees to the assumption of the Existing Mortgages on the conditions described in this Paragraph. 67 (c) Non-Satisfaction. If the conditions under this Paragraph 4 are not satisfied as of the Closing Date, then either Buyer or Seller may terminate this Agreement upon notice to the other. 5. Title. Title to the Premises at the Closing shall be good and marketable and insurable as such at regular rates by a reputable title company subject to easements and restrictions of record as of the date of the Sublease, the Existing Mortgage Documents, and other matters affecting title which do not impair or preclude the use of the Premises as described in the Sublease; easements visible upon the ground; and other matters affecting title to which Buyer has consented in writing, not to be unreasonably withheld. 6. Brokers. The provisions of Section 13.17 of the Sublease are incorporated into this Agreement as if set forth in full. 7. Reliance; "As-Is" Sale. Buyer has not relied, and will not purchase the Premises in reliance, upon any representation, warranty, statement, act or omission of Seller, Sublandlord, broker or any agent of Seller or Sublandlord not set forth in this Agreement. Except for such representations and warranties, if any, as Seller has expressly made in this Agreement, Buyer is purchasing the Premises strictly on an "as-is" basis. 8. Loss by Fire or Other Casualty. If prior to the Closing, the Premises, or any part thereof, shall be damaged by fire or other casualty not arising from the acts or omissions of Buyer, its agents or employees, such that the cost of repair does not exceed twenty (20%) percent of the Purchase Price, Seller and Buyer shall consummate this transaction without any abatement of the Purchase Price whatsoever and, at the Closing, all of the insurance proceeds payable as a result of such damage shall belong (and, to the extent received by Seller, shall be paid) to Buyer or, if such proceeds have not then been received by Seller, such proceeds and all of Seller's rights thereto shall be assigned by Seller to Buyer. If the cost of repair is more than twenty (20%) percent of the Purchase Price and the casualty did not arise as a result of the acts or omissions of Buyer, its agents or employees, then Buyer shall have the option to cancel this Agreement upon notice to Seller within twenty (20) days after the date of the casualty. Failure of Buyer to cancel shall be deemed an election to proceed to Closing as in the first sentence of this Paragraph 8. 9. Condemnation or Eminent Domain. If after execution of this Agreement but prior to Closing, a notice of condemnation or eminent domain shall be issued with respect to the Premises, Seller shall notify the Buyer and, if the taking does not materially affect the value or utility of the Premises, Buyer shall consummate this transaction without any abatement of the Purchase Price whatsoever, and at the Closing, the proceeds of any award or payment in respect of any such taking shall belong (and to the extent received by Seller, shall be paid) to Buyer or, if such proceeds have not then been received by Seller, such proceeds and all of Seller's rights thereto shall be assigned by Seller to Buyer. If the taking materially affects the value or utility of the Premises, Buyer shall have the right to cancel this Agreement upon notice to Seller within twenty (20) days after notification of the taking. Failure of Buyer to cancel shall be deemed an election to proceed to Closing as in the first sentence of this Paragraph 9. 10. Closing Documents. At the Closing: (a) Seller's Documents. Seller will deliver, or cause to be delivered, to Buyer: i) An assignment of Seller's equitable interest under the installment sale agreement with MCIDC, in form and substance reasonably acceptable to Buyer; 68 ii) An affidavit in accord with the Foreign Investments in Real Property Tax Act; iii) Termination of the Lease and Sublease; and iv) Such other documents as may be required by the provisions of this Agreement or as may be reasonably required to effectuate the transaction contemplated by this Agreement. (b) Buyer's Documents. Buyer will deliver, or cause to be delivered, to Seller: i) The Purchase Price including without limitation an assumption agreement and other documentation reasonably required by the Existing Mortgagees to effectuate the assumption of the Existing Mortgages; ii) Termination of the Sublease; and iii) Such other documents as may be required by the provisions of this Agreement or as may be reasonably required to effectuate the transaction contemplated by this Agreement. 11. Apportionments. County, Township and School District real estate taxes assessed against the Premises shall be apportioned between Buyer and Seller on a per diem basis, without discount or penalty and on the basis of the fiscal year of the authority levying same. 12. Expenses. (a) Any realty transfer taxes imposed by any governmental authority upon the conveyance of the Premises shall be divided equally between Seller and Buyer. (b) Buyer shall pay for all title insurance premiums and all recording fees for the deed and other documents to be recorded at the Closing except for documents required to be delivered by Seller to clear exceptions to title under this Agreement. 13. Assignability. This Agreement and the rights and obligations hereunder shall not be assignable by either party without the written consent of the other except that Buyer may assign its rights under this Agreement to its parent or an affiliate of its parent or a shareholder of its parent effective only at Closing and only in compliance with the following conditions: (a) notice is given to Seller and the Title Company of the identity of Buyer's prospective assignee not less than ten (10) days prior to Closing; and (b) AULIC and PIDA have approved the assumption of the Existing Mortgages by Buyer's intended assignee. In the event of any assignment by Buyer, Buyer and its assignee shall be jointly and severally liable for any additional tax payable as a result of the transfer in excess of the amount which would be payable based upon the Purchase Price set forth in this Agreement. Seller hereby consents to the assignment by Suburban to Buyer of its rights under the Purchase Option described in Section 2.3 of the Sublease. 14. Governing Law; Successors and Assigns. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. This Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. 15. Time of Essence. All times, wherever specified herein, are of the essence of this Agreement. 69 16. Headings. The headings preceding the text of the paragraphs and subparagraphs of this Agreement are inserted solely for convenience of reference and shall not constitute a part of this Agreement, nor shall they affect the meaning, construction or effect of this Agreement. 17. Entire Agreement; Amendments. This Agreement sets forth the agreement of the parties with respect to the subject matter hereof. This Agreement may not be changed orally but only by an agreement in writing, duly executed by or on behalf of the party against whom enforcement of any waiver, change, modification, consent or discharge is sought. 18. Recording. This Agreement shall not be recorded in the office for the recording of deeds or in any other office or place of public record except with the prior written consent of Seller. 19. Tender. Formal tender of an executed deed and purchase price is hereby waived; but nothing herein shall be deemed a waiver, concurrently with Closing hereunder, of the obligation of Seller to execute, acknowledge and deliver a deed for the Premises or the concurrent obligation of Buyer to pay the balance of the Purchase Price. 20. Recovery. As required by the Pennsylvania Real Estate Licensing and Registration Act, Seller and Buyer acknowledge notice of the following: (a) the Pennsylvania legislature has established a real estate recovery fund whose purpose is to compensate persons who obtain a judgment because of fraud, misrepresentation or deceit of any agent (for further information, call 717/783-3658); (b) agent's fee and the expiration of listing agreement, if any, are negotiable; and (c) the broker is agent of the Seller, not the Buyer. 21. Notices. Any notices under this Agreement shall be in writing and shall be given in accordance with the terms of the Sublease, except that notices to be given to Suburban Cable TV Co. Inc. shall instead be given to Lenfest Oaks, Inc. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties have hereunto executed this Agreement of Sale as of the date first above written. LENFEST OAKS, INC. SLT PROPERTIES, INC. By: Harry F. Brooks By: Michael R. Stewart ------------------------------ ------------------------------- Title: Vice President Title: Vice President, CFO --------------------------- ------------------------ Date: 11/24/98 Date: 11/25/98 -------------------------- ------------------------- In assent: SURGICAL LASER TECHNOLOGIES, INC. SUBURBAN CABLE TV CO. INC. By: Michael R. Stewart By: Harry F. Brooks ------------------------------ ------------------------------- Title: Vice President, CFO Title: Exec.Vice President --------------------------- ------------------------ Date: 11/25/98 Date: 11/24/98 -------------------------- ------------------------- 70 Exhibit A Existing Mortgage Documents A. $3,400,000 First Mortgage Loan from AULIC (all dated August 16, 1991 and delivered September 12, 1991 unless otherwise indicated) 1. $3,400,000 Mortgage Note executed by Borrower, Guarantor and MCIDC in favor of First Lender 2. Mortgage executed by Borrower and MCIDC in favor of First Lender 3. Guaranty Agreement executed by Guarantor 4. Assignment of Rents and Leases executed by Borrower and MCIDC 5. Tenant Agreement dated September 12, 1991 among Borrower, Guarantor and First Lender 6. UCC-1 Financing Statements executed by Borrower and MCIDC 7. Subordination Agreement among Borrower, Guarantor, MCIDC and First Lender B. $2,000,000 Second Mortgage Loan from PIDA (all dated November 20, 1991 and delivered December 2, 1991 unless otherwise indicated) 1. Amended and Restated Installment Sale Agreement dated November 25, 1991 between MCIDC and Borrower 2. Amended and Restated Installment Memorandum of Installment Sale Agreement 3. Loan Agreement between MCIDC and PIDA 4. $2,000,000 Note executed by MCIDC in favor of PIDA 5. Open-End Mortgage executed by MCIDC in favor of PIDA 6. Consent, Subordination and Assumption Agreement among Borrower, MCIDC and PIDA 7. Assignment of Installment Sale Agreement executed by MCIDC in favor of PIDA 8. Assignment of Lease dated December 2, 1991 executed by Borrower in favor of PIDA 9. Guaranty and Surety Agreement dated December 2, 1991 executed by Guarantor 71 EX-10.15 4 LETTER EXHIBIT 10.15 72 First Union National Bank PA5039 620 Brandywine Parkway West Chester, Pennsylvania 19380 610 918-8100 March 17, 1999 Mr. Craig Carra Surgical Laser Technologies, Inc. And Subsidiaries 147 Keystone Drive Montgomeryville, PA 18936 Dear Mr. Carra: We are pleased to inform you that First Union National Bank has reaffirmed and extended until May 31, 1999 the $2,535,000 line of credit availability to Surgical Laser Technologies, Inc. and Subsidiaries under the terms and conditions set forth in the letter dated November 5, 1997. Sincerely, /s/Stephanie S. Hanlon - --------------------------- Vice President 73 EX-10.45 5 CORRESPONDENCE EXHIBIT 10.45 74 Our Credit No. Date 603824/51810 12/28/98 Beneficiary Applicant Montgomery County Industrial Surgical Laser Technologies, Inc. Development Corporation 200 Cresson Blvd. 420 West Germantown Pike Oaks, PA 19456 Eagleville, PA 19403 Dear Beneficiary: We hereby amend our irrevocable summary letter of credit as follows: 1) The expiration date is extended to: 06/30/99 2) The amount available is decreased by: USD126,426.00 The new available balance is: USD389,753.00 Please note that any and all correspondence related to this letter of credit should now be sent to First Union National Bank, P.O. Box 13866, 1345 Chestnut Street, 9th Floor, Attention Letter of Credit Department, Mail Code: PA4926, Philadelphia, PA 19107. Except so far as otherwise expressly stated herein this amendment and the original letter of credit are now subject to the "Uniform Customs and Practice for Documentary Credits: (1998 revision), International Chamber of Commerce, Publication No. 500." All other terms and conditions remain unchanged. All inquiries regarding this credit should be directed to us at our phone numbers: (215) 973-5981; (215) 973-8157; (215) 973-1944. /s/ Diane Ruch - ------------------------------- Authorized Signature 75 EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 76 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Surgical Laser Technologies, Inc: As independent public accountants, we hereby consent to the inclusion in this Form 10-K of our report dated January 22, 1999. It should be noted that we have not audited any financial statements of the Company subsequent to January 3, 1999, or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Philadelphia, PA March 29, 1999 77 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Surgical Laser Technologies, Inc: As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements File Nos. 33-32835, 33-38748, 33-42451, 33-49730, 33-83074, and 333-19229. ARTHUR ANDERSEN LLP Philadelphia, PA March 29, 1999 78 EX-27 7 FDS --
5 EXHIBIT 27 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JANUARY 3, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. Year JAN-3-1999 JAN-3-1999 1,000 $2,938 3,085 1,575 (138) 2,540 10,437 13,252 (7,722) 16,648 4,089 6,161 0 0 99 8,495 16,648 9,393 9,393 4,466 4,466 7,608 0 275 (2,549) 3 (2,552) 0 0 0 (2,552) (1.29) (1.29)
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