-----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, LA3K5gIFSX4IYarSDKd9rMT2rn30zT3vErQTJPsJ7QDD9Q+8JxfoEtfFMxS2L3HY UFkoLXHSzUAoMReCZHo0rQ== 0000793523-99-000003.txt : 19990125 0000793523-99-000003.hdr.sgml : 19990125 ACCESSION NUMBER: 0000793523-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUXTEC CORP /MA/ CENTRAL INDEX KEY: 0000793523 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042741310 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14961 FILM NUMBER: 99511550 BUSINESS ADDRESS: STREET 1: 326 CLARK STREET CITY: WORCESTER STATE: WA ZIP: 01606 BUSINESS PHONE: 5088569454 MAIL ADDRESS: STREET 1: 326 CLARK STREET CITY: WORCESTER STATE: MA ZIP: 01606 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 31, 1998 [Fee Required] or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _____________ to _____________ Commission File Number: 0-14961 LUXTEC CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2741310 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 326 Clark Street, Worcester, Massachusetts 01606 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (508) 856-9454 Securities registered pursuant to Section 12(b) of the Act: American Stock Exchange Common Stock, $.01 par value per share (Title of class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 ] The aggregate market value of the voting Common Stock held by non-affiliates of the registrant was approximately $2,934,096 based on the closing price of such stock on January 19, 1999, as reported by the American Stock Exchange ($2.75 per share). As of January 19, 1999, 2,872,149 shares of Common stock, $.01 par value, were issued and outstanding. Documents Incorporated by Reference Form 10-K Reference Proxy Statement for the next Annual Meeting Part III PART I This report contains 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. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below. The industry in which the Company competes is characterized by rapid changes in technology and frequent new product introductions. The Company believes that its long-term growth depends largely on its ability to continue to enhance existing products and to introduce new products and features that meet the continually changing requirements of its customers. While the Company has invested heavily in new products and processes, there can be no assurance that it can continue to introduce new products and features on a timely basis or that certain of its products and processes will not be rendered noncompetitive or obsolete by its competitors. ITEM 1. BUSINESS The Corporation Luxtec Corporation, a Massachusetts Corporation (the "Corporation" or "Luxtec"), was organized in November 1981, and is engaged in the design, manufacture, marketing and distribution of fiber optic headlight and video camera systems, light sources, cables, retractors, surgical telescopes and other custom made surgical equipment for the medical and dental industries. Through its subsidiaries, Fiber Imaging Technologies, Inc. and CardioDyne, Inc., the Corporation also manufactures small diameter specialty endoscopes and motion tolerant blood pressure monitors, respectively, for the medical market. The Corporation has developed a proprietary, totally programmable, fiber optic drawing system designed to manufacture optical glass to a predetermined diameter as well as to control the actual size of the fiber bundles. The fibers are utilized in fiber optic cables which are incorporated with the Corporation's Surgical Headlight Systems and the Video Camera Systems as well as in an array of fiber optic transilluminators utilized with the Corporation's surgical instruments. The Corporation also markets replacement fiber optic cables and light sources for use with other manufacturers' products, including various endoscopic systems used in minimally invasive surgical procedures. The Corporation's CardioDyne, Inc. subsidiary is engaged in the design and development of proprietary, motion tolerant, non-invasive blood pressure ("BP") monitors for use on moving and exercising patients. The products are designed for use in the categories of exercise stress testing, emergency transport, obstetrics, and other applications where frequent, accurate blood pressure data is vital, yet where existing blood pressure monitors typically fail to work because of patient motion. The Corporation's two existing BP products have been approved for sale in the United States by the Food and Drug Administration (the "FDA"). The Corporation maintains its principal executive offices and facilities at 326 Clark Street, Worcester, Massachusetts 01606, and its telephone number is (508) 856-9454. Background and Technology Fiber Optics Fiber optics allow for the transmission, element by element, of a light or image from one place to another through a flexible conduit. Fiber optic technology permits the drawing of high quality optical glass rods and tubes into flexible fibers, each coated with a "jacket" (a film of an organic silicon), that protects the fibers from abrasion. This provides for an improved ability to bend and transmit light and images to and from inaccessible places. The technology used by Luxtec to provide illumination directly to the surgical site is facilitated by fiber optic cables piping light into an adjustable headlight composed of a series of lenses and mirrors mounted on a headband. These lenses then focus the light directly on the surgical site when worn by the surgeon. This provides a lightweight, low temperature illumination source to enhance visualization for microsurgical and deep cavity illumination. State of the art microsurgery often involves working on anatomical structures smaller than 1 millimeter in diameter. To work on such small structures, the surgeon often needs high quality, portable magnification devices. Luxtec telescopes are designed to offer high quality magnification with coincident illumination. Blood Pressure Monitoring An important symptom of patients with life threatening conditions such as shock, internal bleeding or heart failure, is usually a drop in blood pressure (BP). Thus, blood pressure is measured often on most patients, and is a key vital sign in medicine. The most common method of measuring blood pressure is by placing an inflated cuff around the arm in order to occlude arterial blood flow. Blood pressure is determined by slowly deflating the cuff and listening with a stethoscope for Korotkoff sounds (arterial blood flow vibrations) that begin at systolic BP and cease at diastolic BP. These measurements can be taken manually, or by using various automated and semi-automated instruments or systems. Small vibrations in the cuff pressure, called oscillometric pulses, are measured by most automatic blood pressure monitors and are used to derive systolic and diastolic blood pressure measurements. For resting patients whose blood pressure must be sampled periodically, automatic intermittent non-invasive blood pressure monitors are widely used. Current measuring techniques are very sensitive to any motion of the patient during the time that the actual reading is being taken. Most intermittent, non-invasive BP monitors work poorly or do not work at all on patients who are moving or being transported when the measurement is being taken. Motion interferes with the ability to detect critical sounds and, therefore, it is very difficult to measure the blood pressure of patients who are shivering, exercising or being transported. For patients whose blood pressure must be known more frequently, direct blood pressure measurement is routinely used. In direct measurement, a fluid filled catheter is introduced into an artery and connected to a pressure transducer. This form of direct, invasive BP monitoring is expensive and painful to the patient, requires frequent attention by a nurse or physician, and poses risks of infection and blood clots. Although several continuous non-invasive blood pressure monitors have been designed and introduced to the market, none has received wide clinical use to date. The Corporation believes this stems from questions regarding the accuracy, stability, and motion tolerance of such monitors. Products Headlight Systems The Corporation has designed and manufactures a line of fiber optic headlight systems that assist surgeons by illuminating the area of the surgical procedure. Designed to provide maximum performance and comfort, the Corporation's headlight systems are lightweight and provide the surgeon with a near coaxial view. The Corporation's patented headlight systems provide a virtually unobstructed view of the area of surgical procedure. Light Sources A fiber optic light source with solid state electronics permits the precise regulation of electric current in order to control illumination levels of Xenon and Halogen lamps and, thereby, eliminates fluctuations or "flickering" in the light provided. The lamps illuminate the end surface of the fiber optic cable through which the light is transmitted in a rigid or flexible mode without heat. The Corporation manufactures a product line of high quality, solid state Xenon and Halogen fiber optic light sources. The Corporation's light sources offer a wide range of light intensities in order to serve the varying requirements in illuminating surgical and diagnostic procedures. The Corporation's light sources are designed and manufactured to comply with U.L. 544 medical safety standards and are listed domestically with ETL Laboratories. Internationally, the Corporation works to achieve compliance with as many international standards as necessary to compete effectively on a worldwide basis (including the CE mark that has been attained on the present product line). The Corporation's model numbers 9100, 9175 and 9300 Xenon light sources produce high intensity light that is the equivalent of daylight in color. The white light produced by these light sources is used in instances where more intense illumination is required, e.g., for endoscopic television surgery or for use with the Corporation's Microlux television camera products. Fiber Optic Cables The Corporation designs and manufactures a complete range of fiber optic cables and holds patents on certain fiber optic cable assemblies. See "Patents and Proprietary Information." The Corporation has a range of fiber bundle diameters from 1.0 mm to 6.5 mm and also allows a surgeon to choose from various angles (180 degree, 90 degree and 45 degree) in order to optimize the use of surgical instruments. The Corporation employs a proprietary technology that enables the fiber optic interface to withstand significantly higher temperatures and that permits the use of higher output light sources. All of the Corporation's fiber optic cables are adaptable to competitors' light sources. The Corporation's Component Cable System allows the end-user to adapt the end fitting of each cable to their own needs. The Component Cable System is designed to provide the flexibility of universal cables by incorporating a patented process to permanently attach select end fittings to the cable and, thereby, customize the cable according to the user's needs, either at the point of manufacturing or at the customer's site. This allows the customer to reduce the inventory of replacement cables and facilitates a rapid turnaround when a cable needs to be replaced in the operating room, clinic, or surgi - center. Fiber Optic Headlight and Video Camera Systems The Corporation manufactures and markets a series of video products that are currently being used in the United States and approximately 26 countries around the world. The Corporation's Microlux Headlight Camera Systems are designed to televise most surgical procedures. The system is a very small, lightweight, solid state television camera mounted at the front of a headband, manufactured by the Corporation, and integrated with fiber optic illumination. The Corporation's Microlux System can transmit the surgeon's eye view of the procedure live to a television monitor for teaching purposes or to be recorded for later use. Surgical Telescopes The Corporation manufactures and markets a proprietary line of surgical telescopes. The custom fit telescopes provide the surgeon with increased magnification ranging from 2.5X to 4.5X. During the fourth quarter of fiscal year 1993, the Corporation introduced illumination to the surgical telescope, utilizing fiber optic delivery of light into the line of sight and thus providing the first surgical telescope with coaxial illumination. These products are part of the current product offering of the Corporation. Blood Pressure Monitors The Corporation has developed a proprietary electronic signal acquisition and signal processing technology that separates "motion noise" from systolic and diastolic blood pressure signals. In addition to the Corporation's current product line, the Corporation plans to use this technology to develop additional non-invasive blood pressure monitoring products that are motion tolerant. Microlaparascopic Products The Corporation's Fiber Imaging Technologies subsidiary manufactures and markets small diameter rigid, flexible and semi-flexible endoscopes that provide fields of view for either very high magnification of objects or panoramic views of internal cavities. These instruments can offer any direction of view that is required. The primary product line consists of endoscopes that are between 0.5mm and 2.7mm in diameter. Endoscopes are produced that contain working channels for the insertion of tools, fluid infusion or drainage. Fiber Imaging Technologies specializes in the design, manufacturing and marketing of custom optical systems that offer outstanding image quality and optimum energy delivery. Patents and Proprietary Information The medical device industry traditionally has placed considerable importance on obtaining and maintaining patents and trade secret protection for significant new technologies, products and processes. The Corporation maintains a policy of seeking patent protection in connection with certain elements of its technology when it believes that such protection will benefit the Corporation. The Corporation owns the following U.S. Patents (date of issuance shown in parentheses): * Patent No. 4516190 for Surgical Headlight (May 7, 1985) * Patent No. 4534617 for Fiber Optic Cable (August 13, 1985) * Patent No. 4616257 for Headlight Camera System (October 7, 1986) * Patent No. 4653848 for 45 degree and 90 degree Fiber Optic Cables (March 31, 1987) * Patent No. 4797736 for Videolux Television Fiber Optic Headlight Camera System (January 10, 1989) * Patent No. 5003605 for an electronically augmented stethoscope with timing sound (March 26, 1991) * Patent No. 5078469 for Optical System allowing coincident viewing, illuminating and photography (January 7, 1992) * Patent No. 5220453 for telescopic spectacles with coaxial illumination (June 15, 1993) * Patent No. 5295052 for a light source assembly (March 15 1994) * Patent No. D345368 for surgical telescopes (March 22, 1994) * Patent No. 5307432 for crimped light source termination (April 26, 1994) * Patent No. 5331357 for an illumination assembly (July 19, 1994) * Patent No. D349123 for spectacles having integral illumination (July 26, 1994) * Patent No. D350760 for an eyeglass frame temple (September 20, 1994) * Patent No. 5392781 for blood pressure monitoring in noisy environments (February 28, 1995) In addition, the Corporation has entered into an exclusive license agreement with InterMED Corporation for the rights to Patent No. 5222949 ("In-Vivo Hardenable Catheter") and No. 5334171 ("Flexible, Noncollapsible Catheter Tube with Hard and Soft Regions") for developing a line of catheters incorporating fiber optics to facilitate several potential specialized applications. The Corporation is the owner of four U.S. federal trademark registrations: (i) LUXTEC, registration number 1,453,098, registered August 18, 1987; (ii) LUXTEC (and design), registration number 1,476,726, registered February 16, 1988; (iii) LUXTEC (stylized), registration number 1,758,176, registered March 16, 1993; and (iv) LUXTEC, registration number 1,956,027, registered February 13, 1996. The Corporation is also the owner of the following foreign trademark registrations for its LUXTEC trademark: (i) Chile, registration number 452.314, registered October 31, 1995; and (ii) Peru, registration number 016214, registered June 14, 1995. In general, the Corporation relies on its development and manufacturing efforts and skills of its personnel rather than patent protection to establish and maintain its industry position. The Corporation treats its design and technical data as confidential and relies on nondisclosure agreements, trade secrets laws and non-competition agreements to protect its proprietary position. There can be no assurance that these measures will adequately protect the Corporation's proprietary technologies. Marketing and Sales Fiber Optics The Corporation's customers for its fiber optic and illumination products are acute care hospitals, clinics, surgi centers, and surgeons. An estimated 50,000 surgeons use the Corporation's products, on a worldwide basis. The Corporation's products provide illumination and magnification used during the surgical procedure. The Corporation distributes its fiber optic and illumination products through regional specialty surgical distributors, supported by Luxtec field specialists as well as a customer support team located in the Worcester facility. Internationally, Luxtec distributes through a network of local distributors. The Corporation currently has distributors in 27 countries. The Corporation competes on the basis of price, product quality and reliability. The Corporation believes that its large base of satisfied users is also a key marketing advantage and that the combination of satisfied customers and quality products positions the corporation as one of the premium vendors in the marketplace. The Corporation believes that it provides a higher standard of post sales support when compared to the competition and that the combination of service and a three year warranty stands as a significant market differentiation. The Corporation's marketing strategy is to provide training and support for the distributor channel, to enhance end user awareness and demand by participating as an exhibitor at major medical meetings, and to insure that the Corporation provides high quality and performance of its products. Blood Pressure Monitoring The Corporation believes that the initial target market segments for its products are for use in exercise stress testing, emergency transport, obstetrics and for post-operative patients. First shipments of production units occurred during the fourth quarter of fiscal year 1996. Exercise Stress Testing The exercise stress test is a common non-invasive test for evaluating heart function in known or suspected coronary artery disease. There are an estimated 5 million exercise stress tests done annually at approximately 20,000 exercise stress test labs in the U.S. Most stress test labs now measure blood pressure on their patients manually. Blood pressure must be measured accurately and often (recommended by many experts to be at least once per minute) during the test. A decline in systolic BP during exercise may reflect the presence of advanced coronary artery disease, and is a criterion for immediate termination of the stress test. This important indicator must be detected immediately to reduce patient risk. Yet measuring blood pressure, either manually or automatically, is difficult since the patient is moving and the treadmill creates interfering background noise. The CardioDyne NBP 2000 incorporates a sensor and companion processing software that significantly reduces the interference from motion and noise in the blood pressure signal. The Corporation believes this results in a reliable blood pressure measurement during an exercise stress test. The CardioDyne NBP 2000 has undergone clinical trials at Beth Israel Hospital, and has been tested by physicians and clinicians at several other hospitals, including Deaconess Hospital, and the University of Massachusetts Medical Center. Emergency Transport The Corporation estimates that the emergency transport (ambulance) market for the CardioDyne product line is potentially large. There are approximately 42,000 emergency transport vehicles in the U.S., of which the Corporation estimates that 30,000 are potential candidates for products based on the CardioDyne technology. The Corporation estimates that emergency victims of accidents, heart attacks, strokes, and other medical emergencies account for almost 10 million transports in the U.S. The Corporation further estimates that an additional 2 million medical patients are transferred between hospitals annually in emergency transport vehicles. These patients are often unstable or at risk of medical hazard, hence their vital signs (blood pressure, heart rate, respiration, and oxygen saturation) are measured frequently. Currently, blood pressure is measured manually on most transport patients and the measurement is difficult to do even by a skilled EMT because of the noise and vibration in the vehicle. Preliminary tests indicate that the CardioDyne NBP 2000 accurately measures blood pressure during transports, even with a shivering patient and even in the presence of vibration and noise. Obstetrics Blood pressure is an important parameter to monitor during labor and delivery due to the possibility of dangerously high blood pressures, hemorrhage and shock, as well as other potential complications. Frequent, accurate blood pressure information is important to manage these patients. However, women in labor frequently shiver, particularly those receiving epidural anesthesia. The Corporation believes that shivering causes commonly used oscillometric blood pressure monitors to become inaccurate or to cease working. To accurately measure blood pressure on shivering patients, the alternatives are invasive blood pressure measurement, which is expensive and risky, or frequent manual monitoring. The Corporation believes that the CardioDyne product line potentially provides a better alternative, as it accurately measures and records blood pressure on moving or shivering labor patients, without the cost and risk of invasive monitoring or the constant attention of manual monitoring. Post-Operative Many recovery room patients experience post anesthesia tremors. These patients are monitored for various vital signs, including blood pressure. The Corporation believes that current commercial models can become inaccurate or fail to work in this application due to patient tremor and that a motion tolerant monitor therefore may be well received in this market. Competition Fiber Optics The Corporation competes with national and international companies engaged in the manufacture of headlight systems, including B.F. Wehmer, Cogent Light Technologies, Inc. and Designs for Vision, and in fiber optic medical instruments with Pilling Weck Company, the Stryker Company and Richard Wolf & Company as well as other smaller diversified companies. In the replacement cable market, the Corporation competes with both original equipment manufacturers as well as others engaged in activities similar to that of the Corporation. The Corporation is not aware of any specific seasonal variation factors that directly affect net sales levels. The Corporation's management believes that direct competition in the light source market comes from several established companies having considerably larger and greater financial and human resources, including Cogent Light Technologies, Inc., Designs for Vision, Olympus, B.F. Wehmer, Karl Storz Company, and Richard Wolf & Company. Blood Pressure Monitoring The Corporation has identified two companies, Suntek and Colin Medical, that are currently supplying exercise blood pressure monitors in the U.S. The companies sell directly under their own name, and Colin produces an OEM version of its monitor that is sold by Quinton. Critical care blood pressure monitors are sold by numerous companies, including Critikon, Datascope, Colin, Hewlett Packard, Spacelabs and others. The Corporation believes that the CardioDyne product line performance, features and capabilities will allow it to compete effectively against these products. Nonetheless, the Corporation expects that many of its current and future competitors will have financial, technical, marketing, sales, manufacturing, distribution and other resources substantially greater than those of the Corporation. There can be no assurance that the Corporation will be able to compete successfully in its intended markets. Government Regulation The Corporation's products are subject to government regulation in the United States and other countries. In order to test clinically, produce and market products for human diagnostic or therapeutic use, the Corporation must comply with mandatory procedures and safety standards established by the United States Food and Drug Administration ("FDA") and comparable state and foreign regulatory agencies. Typically, products must meet regulatory standards as safe and effective for their intended use prior to being marketed for human applications. The clearance process is expensive and time consuming, and no assurance can be given that any agency will grant clearance for the sale of the Corporation's products or that the length of time the process will require will not be extensive. The Corporation believes that its facility is in compliance with the Federal Food and Drug Administration requirements for Good Manufacturing Practice. Major Customers For the year ended October 31, 1998, one customer, Specialty Surgical Instruments, accounted for 13% of the Corporation's net revenues. Research and Development The Corporation incurred approximately $523,000 of product development expenses in fiscal year 1998, $495,000 in fiscal 1997, and $543,000 in fiscal 1996. The increase in expenses in this category was directly related to the introduction of a major new product (the dual port light source) during fiscal 1998. Manufacturing and Suppliers The Corporation purchases components and materials from more than 300 vendors. The Corporation believes it can purchase substantially all of its product requirements from other competing vendors under similar terms. The Corporation has no long-term contract with any supplier. Backlog At October 31, 1998, the Corporation's backlog was $485,000, compared to $549,200 at October 31, 1997. The Corporation generally ships products within three weeks of the receipt of an order from a customer. The Corporation does not believe that its backlog accurately predicts the amount of quarterly or annual revenues. Employees As of October 31, 1998, the Corporation had 63 full time employees, of whom seven are executives, nine are engaged in supervisory capacities, 26 are in manufacturing and the remainder are involved in engineering, research and development, marketing and administration. None of the Corporation's employees is covered by a collective bargaining agreement. The Corporation believes its employee relations are good. Executive Officers For information with respect to the Executive Officers of the Corporation, see the section entitled "Election of Directors" appearing in the Corporation's Proxy Statement in connection with its next Annual Meeting of Shareholders or special meeting in lieu thereof, which section is incorporated herein by reference. ITEM 2. PROPERTIES The Corporation occupies approximately 30,000 square feet at 326 Clark Street, Worcester, Massachusetts under a lease is currently being renegotiated. The Corporation believes that this space is adequate to meet its current requirements and that alternative space would be available at comparable prices should the lease not be extended after its expiration. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, whether through solicitation of proxies or otherwise, during the fourth quarter of the Corporation's fiscal year ended October 31, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's Common Stock is traded on the American Stock Exchange (AMEX) under the AMEX symbol "LXU.EC." The Corporation's Common Stock has been listed on the American Stock Exchange since April 20, 1994. From September, 1986 until April, 1994 the Corporation's Common Stock was traded in the over-the-counter market on the National Association of Securities Dealers, Inc. Automated Quotations System (NASDAQ) under the NASDAQ symbol "LUXT." AMEX has notified the Corporation that the Corporation has fallen below the AMEX Emerging Company Marketplace guidelines for continued listing on the exchange and that AMEX is reviewing the Corporation's listing eligibility. As a result of a meeting between representatives of the Corporation and AMEX held on January 22, 1998, AMEX decided to continue the Corporation's listing. A further review of the Corporation's listing status was conducted in June, 1998, at which time AMEX further continued the Corporation's listing. The Corporation's fiscal 1998 financial performance resulted in a reduction of the shortfall from the AMEX listing guidelines. The Corporation is reviewing its options concerning actions it may take to comply with the AMEX guidelines. The following table sets forth the high and low closing sale prices of the Corporation's Common Stock on the AMEX during the periods indicated below. Common Stock High Low Fiscal Year Ended 10/31/97 First Quarter 4.00 2.63 Second Quarter 3.88 2.38 Third Quarter 3.00 2.38 Fourth Quarter 2.75 2.13 Fiscal Year Ended 10/31/98 First Quarter 3.25 2.06 Second Quarter 3.88 2.50 Third Quarter 6.38 3.13 Fourth Quarter 3.63 2.00 On January 19, 1999, the closing sale price of the Corporation's Common Stock on the American Stock Exchange was $2.75 per share. As of December 31, 1998, there were approximately 642 holders of record of the Corporation's Common Stock. The Corporation estimates that there are approximately 1,300 beneficial holders of the Corporation's Common Stock. The Corporation has not paid any cash dividends since its inception and the Board of Directors does not contemplate doing so in the near future. The Board of Directors currently intends to retain any future earnings for use in the Corporation's business. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated operating data and the consolidated balance sheet data presented below are derived from and qualified by reference to the Corporation's consolidated financial statements that have been audited by Arthur Andersen LLP, the Corporation's independent public accountants. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. Operating Data: (In thousands, except per share data) Year Ended October 31, 1994 1995 1996 1997 1998 Net Revenues . . . . . . . . . . $8,139 $7,755 $9,348 $10,977 $12,067 Net Income (Loss). . . . . . 164 (6,127) (571) (472) 185 Net Income (Loss) Per Share . . . . . . . . . . . . . . . . .11 (4.20) (.22) (.17) .06 (In thousands) Balance Sheet Data: Year Ended October 31, 1994 1995 1996 1997 1998 Working Capital. . . . . . . . $ 1,410 $ (599) $ 935 $ 1,394 $1,735 Total Assets. . . . . . . . . . . 4,072 4,122 5,295 5,803 5,959 . Long-term debt, less current portions . . . . - - 119 661 558 Stockholders' equity. . . . . 2,163 198 813 456 666
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This analysis of the Corporation's financial condition, capital resources and results of operations should be read in conjunction with the accompanying consolidated financial statements, including notes thereto. Results of Operations The following table sets forth certain consolidated financial data as a percentage of net revenues for the fiscal years ended October 31, 1996, 1997 and 1998. 1996 1997 1998 Net revenues 100% 100% 100% Cost of goods sold 57 60 58 Selling and marketing 23 22 18 Research and development 6 4 4 General and administrative 18 15 15 Other expense 2 2 3 Net (loss) income (6) (3) 2 Fiscal 1998 Compared with Fiscal 1997 Net Revenues: Net revenues of $12,066,787 for fiscal 1998 were 9.9% higher than the $10,977,435 reported for fiscal 1997. Luxtec domestic branded and OEM products were responsible for virtually all of the Corporation's revenue growth. International Luxtec branded revenues were below fiscal 1997 levels, primarily in the Pacific Rim area. Management believes that the introduction of new and improved products over the last two years was chiefly responsible for the fiscal 1998 revenue growth. The CardioDyne marketing effort was delayed during fiscal 1998. Cost of Goods Sold: Cost of goods sold increased to $6,959,620 or 57.7% of net revenues for fiscal 1998 compared to $6,544,409 or 59.6% of net revenues for fiscal 1997. The higher product cost related to the introduction of a series of new products in fiscal 1997 did not recur in fiscal 1998, resulting in an improvement in cost of goods sold as a percentage of net revenues. Gross Profit: Gross Profit increased to $5,107,167 or 42.3% of net revenues for fiscal 1998 compared to $4,433,026 or 40.4% of net revenues for fiscal 1997. The margin improvement percentage reflected an improvement related to products introduced during fiscal 1997. The Corporation does not expect gross profit margins to change dramatically from their 1998 relationship to revenues. Selling and Marketing Expenses: Selling and marketing expenses decreased to $2,205,693 for fiscal 1998 compared to $2,437,746 for fiscal 1997, a decrease of $232,053 or 9.5%. During fiscal 1998, Luxtec decreased its investment in the distribution channel for the CardioDyne product line. Management expects selling and marketing expenses for fiscal 1999 to remain in approximately the same ratio to sales as 1998. Research and Development: Research and development expenses were $522,593 in fiscal 1998 compared to $495,373 in fiscal 1997, an increase of $27,220 or 5.5%. The increase in expenses in this category was directly related to the completion of a major new product introduction (the dual port light source) during fiscal 1998. Management expects that research expenditures will increase as a result of the Corporation's product development plans. General and Administrative: General and administrative expenses were $1,824,606 in fiscal 1998 compared to $1,627,637 in fiscal 1997, an increase of $196,969 or 12.1%. The largest cost increases during fiscal 1998 were the result of new investment banking and investor relations programs. Interest: Interest expense increased to $269,318 during fiscal year 1998 compared with $234,024 during fiscal year 1997, an increase of $35,294 or 15.1%. The Corporation's interest cost increase was primarily the result of higher average balances for the revolving credit line. Fiscal 1997 Compared with Fiscal 1996 Net Revenues: Net revenues of $10,977,435 for fiscal 1997 were 17.4% higher than the $9,347,699 reported for fiscal 1996. The Luxtec branded and OEM products, both domestic and international, were responsible for virtually all of the Corporation's revenue growth. Management believes that the introduction of new and improved products during fiscal 1996 and fiscal 1997 was chiefly responsible for the fiscal 1997 revenue growth. Cost of Goods Sold: Cost of goods sold increased to $6,544,409 or 59.6% of net revenues for fiscal 1997 compared with $5,323,764 or 57.0% of net revenues for fiscal 1996. The higher product cost related to the recent introduction of a series of new products was the main reason for the higher costs in fiscal 1997. Gross Profit: Gross Profit increased to $4,433,026 or 40.4% of net revenues for fiscal 1997 compared to $4,023,935 or 43.0% of net revenues for fiscal 1996. Although the percentage decreased between years, the higher sales volume, partially offset by the higher costs related to product introductions and a contractual decrease in royalties received for a CardioDyne product, yielded the increased gross profit in fiscal 1997. Selling and Marketing Expenses: Selling and marketing expenses increased to $2,437,746 for fiscal 1997 compared to $2,190,881 for fiscal 1996, an increase of $246,865 or 11.3%. During fiscal 1997, Luxtec introduced marketing programs and continued to build the distribution channel for the new CardioDyne product line of motion tolerant blood pressure monitors. Research and Development: Research and development expenses were $495,373 in fiscal 1997 compared to $542,691 in fiscal 1996, a decrease of $47,318 or 8.7%. The decrease in expenses in this category was directly related to the completion of the introduction of two major product line upgrades during fiscal 1996. General and Administrative: General and administrative expenses were $1,627,637 in fiscal 1997 compared to $1,646,081 in fiscal 1996, representing a decrease of $18,444 or 1.1%. Fiscal year 1997 administrative activities and staffing levels remained essentially unchanged from fiscal 1996. Interest: Interest expense increased to $234,024 during fiscal year 1997 compared with $231,442 in fiscal 1996, an increase of $2,582 or 1%. The Corporation's cost of debt remained at approximately the same level during fiscal years 1997 and 1996. Liquidity and Capital Resources At October 31, 1998, the Corporation had working capital of approximately $1,734,700 compared to working capital of $1,394,500 at October 31, 1997. The increase was primarily the result of profitable operations for fiscal year 1998. On April 3, 1997, the Company received $500,000 from a new term loan agreement with a bank. Borrowings bear interest at the bank's prime rate plus 1.00%. Borrowings are secured by substantially all assets of the Company. Principal repayment is to be repaid from "Excess Cash Flow," as defined, but no later than April 3, 2002. The agreement contains covenants, including the maintenance of certain financial ratios, as defined. The Company was in compliance with all covenants for the year ended October 31, 1998. As an inducement to grant the loan under the stated terms, the Company issued a warrant that entitles the holder to purchase 44,000 shares of common stock at an exercise price of $3.00 per share (approximate fair market value at the date of grant), adjusted for certain dilutive events, as defined. The principal source of short-term borrowings during the year was a secured $2,500,000 revolving credit agreement. At October 31, 1998, the credit line borrowings balance was approximately $2,186,100. The interest rate on the credit line at the end of the fiscal year was 8.5%. The Corporation anticipates that its current cash requirements will be satisfied by cash flow from existing operations and the continuation of its revolving credit arrangement with a bank, although the Company is considering raising additional debt or equity in the near future. The Corporation had no significant capital expenditures during fiscal year 1998. Year 2000 The Year 2000 problem, which is common to most corporations, concerns the inability of information systems, primarily computer software programs, to properly recognize and process date sensitive information as the year 2000 approaches. Many computer systems and other equipment with embedded chips or microprocessors may not be able to appropriately interpret dates after December 31, 1999 because such systems use only two digits to indicate a year in the date field rather than four digits. If not corrected, many computers and computer applications could fail or create miscalculations, causing disruptions to the Company's operations. In addition, the failure of customer and supplier computer systems could result in interruption of sales and deliveries of key supplies or utilities. Because of the complexity of the issues and the number of parties involved, the Company cannot reasonably predict with certainty the nature or likelihood of such impacts. Using internal staff [and outside consultants], the Company is actively addressing this situation and anticipates that it will not experience a material adverse impact to its operations, liquidity or financial condition related to systems under its control. The Company is addressing the Year 2000 issue in four overlapping phases: (i) identification and assessment of all critical software systems and equipment requiring modification or replacement prior to 2000; (ii) assessment of critical business relationships requiring modification prior to 2000; (iii) corrective action and testing of critical systems; (iv) development of contingency and business continuation plans to mitigate any disruption to the Company's operations arising from the Year 2000 issue. The Company has upgraded its [financial and manufacturing] computer systems with specific year 2000 "fixes". Other computer systems used in the Company are currently being scheduled for upgrade during 1999. These systems are less critical to the Company's operations. The Company is in the process of implementing a plan to obtain information from its external service providers, significant suppliers and customers, and financial institutions to confirm their plans and readiness to become Year 2000 compliant, in order to better understand and evaluate how their Year 2000 issues may affect the Company's operations. The Company currently is not in a position to assess this aspect of the Year 2000 issue; however, the Company plans to take the necessary steps to provide itself with reasonable assurance that its service providers, suppliers, customers and financial institutions are Year 2000 compliant. This phase is approximately 15% complete to date. The Company currently believes it will be able to modify or replace its affected systems in time to minimize any detrimental effects on operations. The Company is developing contingency plans to identify and mitigate potential problems and disruptions to the Company's operations arising from the Year 2000 issue. This phase is expected to be completed by October 31, 1999. While it is not possible, at present, to give a precise estimate of the cost of this work, the Company does not expect that such costs will be material to the Company's results of operations in one or more fiscal quarters or years, and will not have a material adverse impact on the long-term results of operations, liquidity or consolidated financial position of the Company. To date, the Company has expensed less than $25,000 on the effort to combat the year 2000 problems inherent in its systems. The total direct costs of the Year 2000 corrections is expected to be less than $100,000 through the first two quarters of 2000. While the Company believes that its own internal assessment and planning efforts with respect to its external service providers, suppliers, customers and financial institutions are and will be adequate to address its Year 2000 concerns, there can be no assurance that these efforts will be successful or will not have a material adverse effect on the Company's operations. Risk Factors and Cautionary Statements When used in this Form 10-K and in future filings by the Corporation with the Securities and Exchange Commission, in the Corporation's press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Corporation wishes to advise readers that the factors listed below could cause the Corporation's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Corporation will NOT undertake and specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Corporation's revenues and income are derived primarily from the sale of medical devices. The medical device industry is highly competitive. Such competition could negatively impact the Corporation's market share and therefore reduce the Corporation's revenues and income. Another result of competition could be the reduction of average unit prices paid for the Corporation's products. This could have the impact of reducing the percentage of profit margin available to the Corporation for its product sales. The Corporation's future operating results are dependent on its ability to develop, produce and market new and innovative products and services. There are numerous risks inherent in this complex process, including rapid technological change and the requirement that the Corporation bring to market in a timely fashion new products and services that meet customers' needs. Historically, the Corporation's operating results have varied from fiscal period to fiscal period; accordingly, the Corporation's financial results in any particular fiscal period are not necessarily indicative of results for future periods. The Corporation offers a broad variety of products and services to customers around the world. Changes in the mix of products and services comprising revenues could cause actual operating results to vary from those expected. The Corporation's success is partly dependent on its ability to successfully predict and adjust production capacity to meet demand, which is partly dependent upon the ability of external suppliers to deliver components at reasonable prices and in a timely manner; capacity or supply constraints, as well as purchase commitments, could adversely affect future operating results. The Corporation operates in a highly competitive environment and in a highly competitive industry, which includes significant competitive pricing pressures and intense competition for skilled employees. The Corporation offers its products and services directly and through indirect distribution channels. Changes in the financial condition of, or the Corporation's relationship with, distributors and other indirect channel partners, could cause actual operating results to vary from those expected. The Corporation does business worldwide in over 50 countries. Global and/or regional economic factors and potential changes in laws and regulations affecting the Corporation's business, including without limitation, currency exchange rate fluctuations, changes in monetary policy and tariffs, and federal, state and international laws regulating the environment, could impact the Corporation's financial condition or future results of operations. The market price of the Corporation's securities could be subject to fluctuations in response to quarter to quarter variations in operating results, market conditions in the medical device industry, as well as general economic conditions and other factors external to the Corporation. LUXTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX PAGE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 19 CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1997 AND 1998 20 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 21 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 22 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Luxtec Corporation: We have audited the accompanying consolidated balance sheets of Luxtec Corporation (a Massachusetts corporation) and subsidiaries as of October 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Luxtec Corporation and subsidiaries as of October 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. Boston, Massachusetts December 9, 1998 LUXTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS October 31, 1997 1998 CURRENT ASSETS: Cash $ 41,712 $ 43,698 Accounts receivable, less reserves of approximately $320,000 and $250,000 in 2,319,945 2,571,230 1997 and 1998, respectively Inventories 2,527,309 2,549,244 Prepaid expenses and other current assets 71,191 55,068 --------------- --------------- Total current assets 4,960,157 5,219,240 --------------- --------------- PROPERTY AND EQUIPMENT, AT COST 2,476,691 2,570,501 ACCUMULATED DEPRECIATION AND AMORTIZATION (1,890,093) (2,075,345) --------------- --------------- Property and equipment, net 586,598 495,156 --------------- --------------- OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF APPROXIMATELY $143,000 AND 255,819 244,754 --------------- --------------- $109,000 IN 1997 AND 1998, RESPECTIVELY Total assets $ 5,802,574 $ 5,959,150 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving line of credit $ 2,082,854 $ 2,186,052 Current portion of equipment facility loan 65,186 88,726 Accounts payable 938,733 497,980 Accrued expenses 478,931 711,745 --------------- --------------- Total current liabilities 3,565,704 3,484,503 --------------- --------------- TERM NOTE 460,250 469,250 --------------- --------------- EQUIPMENT FACILITY LOAN, NET OF CURRENT PORTION 200,992 88,726 --------------- --------------- Minority Interest - 51,386 -------------- ---------------- COMMITMENTS (Note 13) REDEEMABLE PREFERRED STOCK, $1.00 PAR VALUE: Series A Preferred Stock- Authorized--500,000 shares Issued and outstanding--10,000 shares (at liquidation value) 1,119,768 1,199,768 --------------- --------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value- Authorized--10,000,000 shares Issued and outstanding--2,853,491 shares in 1997 and 2,867,592 in 1998 28,535 28,676 Additional paid-in capital 8,318,685 8,263,018 Accumulated deficit (7,891,360) (7,626,177) ---------------- ---------------- Total stockholders' equity 455,860 665,517 --------------- --------------- Total liabilities, redeemable preferred stock and stockholders' equity $ 5,802,574 $ 5,959,150 =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. LUXTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended October 31, 1996 1997 1998 NET REVENUES $ 9,347,699 $ 10,977,435 $ 12,066,787 COST OF GOODS SOLD 5,323,764 6,544,409 6,959,620 --------------- --------------- --------------- Gross profit 4,023,935 4,433,026 5,107,167 --------------- --------------- --------------- OPERATING EXPENSES: Selling and marketing 2,190,881 2,437,746 2,205,693 Research and development 542,691 495,373 522,593 General and administrative 1,646,081 1,627,637 1,824,606 --------------- --------------- --------------- Total operating expenses 4,379,653 4,560,756 4,552,892 --------------- --------------- --------------- (Loss) income from operations (355,718) (127,730) 554,275 --------------- --------------- --------------- OTHER EXPENSE: Interest expense (231,442) (234,024) (269,318) Other income (expense) 16,484 9,114 (19,774) --------------- --------------- ---------------- Total other expense (214,958) (224,910) (289,092) --------------- --------------- --------------- Net (loss) income (570,676) (352,640) 265,183 ACCRETION OF PREFERRED STOCK DIVIDENDS - 119,768 80,000 --------------- --------------- --------------- Net (loss) income applicable to common stockholders $ (570,676) $ (472,408) $ 185,183 =============== =============== =============== NET (LOSS) INCOME PER SHARE Basic $(.22) $(.17) $.06 ===== ===== ==== Diluted $(.22) $(.17) $.06 ===== ===== ==== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 2,574,705 2,849,538 2,863,147 ========= ========= ========= Diluted 2,574,705 2,849,538 2,937,026 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. LUXTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock, Additional $.01 Par Value Paid-in Accumulated Shares Amount Capital Deficit Total BALANCE, OCTOBER 31, 1995 2,436,541 $ 24,365 $7,141,576 $ (6,968,044) $ 197,897 Net loss - - - (570,676) (570,676) Issuance of common stock under 9,327 93 26,524 - 26,617 employee stock purchase plan Issuance of common stock under 1,500 15 2,430 - 2,445 stock option plan Issuance of common stock in a private placement, net of issuance costs of $25,885 394,171 3,942 1,152,686 - 1,156,628 ---------- ---------- ----------- ----------- ---------- BALANCE, OCTOBER 31, 1996 2,841,539 28,415 8,323,216 (7,538,720) 812,911 Net loss - - - (352,640) (352,640) Issuance of common stock under 11,952 120 27,135 - 27,255 employee stock purchase plan Dividends on Series A - - (76,666) - (76,666) Preferred Stock Issuance of warrants in connection with term note - - 45,000 - 45,000 ------------------------- ------------- ------------- ------------ BALANCE, OCTOBER 31, 1997 2,853,491 28,535 8,318,685 (7,891,360) 455,860 Net income - - - 265,183 265,183 Issuance of common stock under 9,311 93 12,938 - 13,031 employee stock purchase plan Issuance of common stock 4,790 48 11,395 - 11,443 under stock option plan Dividends on Series A - - (80,000) - (80,000) Preferred Stock ------------- -------------- ------------ ------------ ------------ BALANCE, OCTOBER 31, 1998 2,867,592 $ 28,676 $ 8,263,018 $ (7,626,177) $ 665,517 ========= ========= =========== ============= ==========
The accompanying notes are an integral part of these consolidated financia statements LUXTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended October 31, 1996 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (570,676) $ (352,640) $ 265,183 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities- Depreciation and amortization 265,258 301,448 215,163 Amortization of debt discount - 5,250 9,000 Provision for uncollectible accounts receivable 3,651 158,748 (70,000) Changes in current assets and liabilities- Accounts receivable (211,053) (737,024) (181,285) Inventories (477,014) (354,294) (21,935) Prepaid expenses and other current assets (127,826) 139,373 16,123 Accounts payable (827,668) 212,532 (440,753) Accrued expenses (188,901) 70,965 232,814 --------------- --------------- --------------- Net cash (used in) provided by operating activities (2,134,229) (555,642) 24,310 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (294,116) (110,951) (93,810) Increase in other assets (9,645) (35,660) (17,485) ---------------- ---------------- ---------------- Net cash used in investing activities (303,761) (146,611) (111,295) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on) revolving line of credit 415,915 (63,369) 103,198 Net proceeds from (payments on) equipment facility loan (2,980) 107,723 (88,726) Proceeds from note payable to stockholder 1,000,000 - - Proceeds from term note - 500,000 - Net proceeds from sale of subsidiary stock - 50,025 Net proceeds from issuance of common stock in a private 1,156,628 - - placement Issuance of common stock under stock option plan 2,445 - 11,443 Issuance of common stock under employee stock purchase plan 26,617 27,255 13,031 --------------- --------------- --------------- Net cash provided by financing activities 2,598,625 571,609 88,971 --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH 160,635 (130,644) 1,986 CASH, BEGINNING OF PERIOD 11,721 172,356 41,712 --------------- --------------- --------------- CASH, END OF PERIOD $ 172,356 $ 41,712 $ 43,698 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for Interest $ 157,144 $ 239,133 $ 257,661 =============== ============= ============= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment under equipment facility $ 161,435 $ - $ - ============= ============= ============= loan Conversion of note payable to stockholder to Series A $ - $ 1,043,102 $ - ============= ============= ============= Preferred Stock Accretion of Series A Preferred Stock $ - $ 76,666 $ 80,000 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. LUXTEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 (1) NATURE OF THE BUSINESS Luxtec Corporation (the Company) designs, manufactures and markets fiber optic headlights and headlight television camera systems (for audio-video recordings of surgical procedures), light sources, cables, retractors, loupes, surgical telescopes, blood pressure monitors and other custom-made surgical specialty instruments utilizing fiber optic technology for the medical and dental industries. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries: Fiber Imaging Technologies, Inc. (FIT), CardioDyne, Inc. (CardioDyne) and Cathtec, Inc. All intercompany accounts and transactions have been eliminated in consolidation. The minority interest on the accompanying balance sheet represents a 7.5% interest in FIT, not held by the Company (see Note 10). (b) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method and includes materials, labor and manufacturing overhead. (c) Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the assets. (d) Other Assets Other assets consist principally of patent costs, which are amortized using the straight-line method over five years. (e) Revenue Recognition Revenue is recognized when goods are shipped, at which time all conditions of sale have been met. (f) Research and Development Costs Research and development costs are charged to operations as incurred. (g) Net Income (Loss) per Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This statement established standards for computing and presenting earnings per share and applies to entities with publicly traded common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and warrants outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of dilutive common shares and warrants outstanding during the period. Diluted weighted average shares reflects the dilutive effect, if any, of common stock options based on the treasury stock method. No common stock options are considered dilutive in periods, such as the fiscal years ended October 31, 1996 and 1997, in which a loss is reported because all such common equivalent shares are antidilutive. The number of common equivalent shares excluded from the calculation because their effect would have been antidilutive was 604,671 and 1,190,721 and 646,331 for the years ended October 31, 1996, 1997 and 1998, respectively. The calculations of basic and diluted weighted average shares outstanding are as follows: ------------------October 31-------------------- 1996 1997 1998 Basic weighted average shares outstanding 2,574,705 2,849,538 2,863,147 Dilutive shares - - 73,879 Diluted weighted average shares outstanding 2,574,705 2,849,538 2,937,026 =============== ============= =========== (h) Realization of Long-Lived Assets In March 1995, the FASB issues SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of. SFAS No. 121 requires the Company to periodically assess the future recovery of the carrying amounts of long-lived assets. Management believes that the recorded value of its long-lived assets are realizable and that no impairment allowance is necessary pursuant to the provisions of SFAS No. 121. (i) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (j) New Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 130 is effective for the fiscal years beginning after December 15, 1997. In July 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Unless impracticable, companies would be required to restate prior period information upon adoption. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not believe the adoption of this accounting standard will have any impact on the Company's financial position or results of operations. (3) MERGER WITH CARDIODYNE, INC. On October 23, 1995, the Company consummated a merger agreement (the Merger) with CardioDyne, Inc., a development-stage company engaged in the development of products that monitor blood pressure. In addition to receiving shares of Luxtec common stock, shareholders of CardioDyne, Inc. are entitled to certain earnout payments based on the performance of products and agreements incorporating technology previously developed by CardioDyne, Inc., as defined. For a period of 17 years following the effective date of the Merger, former CardioDyne, Inc. shareholders are entitled to receive, in proportion to their former ownership percentages, 5% and 25% of revenues from product and license agreements, respectively, which incorporate technology previously developed by CardioDyne, Inc. Such earnout payments shall become payable 90 days after the end of the Company's fiscal year. Earnout payments shall be paid 50% in cash and 50% in Luxtec common stock and will be accounted for as an additional purchase price when paid. No earnout payments were required during fiscal 1996, 1997 or 1998. At October 31, 1998, the level of CardioDyne inventory is significantly in excess of the Company's current year sales of its products. Management has developed a strategy to reduce this inventory to desired levels during fiscal 1999 and believes no loss will be incurred on its disposition. (4) INVENTORIES Inventories consisted of the following at October 31, 1997 and 1998: 1997 1998 Raw material $ 1,357,761 $ 1,580,002 Work-in-process 318,312 352,464 Finished goods 851,236 616,778 --------------- --------------- $ 2,527,309 $ 2,549,244 =============== =============== (5) PROPERTY AND EQUIPMENT Property and equipment and their respective useful lives are as follows at October 31, 1997 and 1998: Estimated Useful 1997 1998 Lives Machinery and equipment 5-10 years $ 1,675,878 $ 1,737,103 Molds and tooling 5 years 221,818 248,893 Furniture and fixtures 10 years 342,753 348,262 Leasehold improvements Life of lease 236,242 236,243 --------------- --------------- $ 2,476,691 $ 2,570,501 =============== =============== (6) ACCRUED EXPENSES Accrued expenses consisted of the following at October 31, 1997 and 1998: 1997 1998 Accrued payroll and related expenses $ 220,713 $ 282,879 Other accrued expenses 258,218 428,866 --------------- --------------- $ 478,931 $ 711,745 ============= ============= (7) INCOME TAXES As of October 31, 1998, the Company had available net operating loss carryforwards of approximately $2,034,000, research and development credit carryforwards of approximately $175,000, and general business credit carryforwards of approximately $25,000 available to reduce future federal income taxes, if any. These carryforwards expire through 2012 and are subject to review and possible adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 limits a corporation's ability to utilize certain net operating loss carryforwards in the event of a cumulative change in ownership in excess of 50%, as defined. The Company follows the liability method of accounting for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, whereby a deferred tax liability is measured by the enacted tax rates that will be in effect when any differences between the financial statement and tax bases of assets and liabilities reverse. The components of the net deferred tax amount recognized in the accompanying consolidated balance sheets are set forth below: 1997 1998 Deferred tax assets $ 1,353,000 $ 1,284,000 Deferred tax liabilities - - Valuation allowance (1,353,000) (1,284,000) --------------- --------------- $ - $ - =============== =============== The appropriate tax effect of each type of temporary difference and carryforward before allocation of the valuation allowance is summarized as follows: 1997 1998 Net operating losses $ 889,000 $ 814,000 Inventory reserve 89,000 95,000 Bad debt reserve 74,000 34,000 Other temporary differences 129,000 141,000 Research and development credits 147,000 175,000 General business credits 25,000 25,000 --------------- --------------- $ 1,353,000 $ 1,284,000 =============== =============== Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its otherwise recognizable net deferred tax assets. (8) DEBT (a) Revolving Credit Line The Company has a $2,500,000 revolving line-of-credit agreement with a bank. The maximum amount available to borrow under the line is limited to the lesser of the total line committed or certain percentages of accounts receivable and inventory, as defined. Borrowings bear interest at the bank's prime rate (8% at October 31, 1998) plus .5%. Unused portions of the revolving line of credit accrue a fee at an annual rate of .25%. Borrowings are secured by substantially all assets of the Company. The agreement contains covenants, including the maintenance of certain financial ratios, as defined. The Company was in compliance with all covenants for the year ended October 31, 1998. At October 31, 1998, availability under the line of credit was approximately $314,000. The line of credit expires on March 31, 1999, unless renewed. (b) Long-Term Debt The Company has an equipment facility agreement with a bank. Borrowings bear interest at the bank's base rate (8% at October 31, 1998) plus .5% and are secured by substantially all assets of the Company. No further borrowings are available under this arrangement. At October 31, 1998, the Company had outstanding borrowings of $177,452 under this agreement, repayable as follows: 1999 $ 88,726 2000 88,726 --------------- $ 177,452 On March 31, 1997, the Company entered into a $500,000 term note agreement with a bank. The term note bears interest at prime (8% at October 31, 1998) plus 1.0%. Principal payments are payable in consecutive annual installments beginning on February 8, 1999 and continuing annually thereafter in an amount equal to the lesser of (a) $200,000 or (b) the greater of (i) zero and (ii) excess cash flow as defined. If not paid sooner, the term note is due on the earlier of (a) March 31, 2002, (b) the date of an equity infusion or (c) the date of a management change. At October 31, 1998, the Company had outstanding borrowings of $469,250 under this agreement. The Company was in compliance with all covenants at October 31, 1998. In connection with the term note agreement, the Company issued warrants to purchase 44,000 shares of common stock at an exercise price of $3.00 per share, expiring on March 31, 2002. Management has estimated the value of these warrants to be approximately $45,000, which has been recorded as a debt discount (amortized to interest expense over the payment term of 60 months). (9) SENIOR SUBORDINATED NOTES AND REDEEMABLE PREFERRED STOCK On December 18, 1995, the Company issued Senior Subordinated Notes (the Notes) to a stockholder for $1,000,000 in cash. Interest accrues on the Notes at the rate of 8% per annum and is payable annually in arrears. Principal on the Notes was due January 1, 2001. In connection with the financing, the Company issued a detachable stock warrant to an investor. The warrant entitles the holder to purchase 450,000 shares of common stock at an exercise price of $3.00 per share (fair market value at date of grant), adjusted for certain dilutive events, as defined. On November 14, 1996, the Company exchanged the Senior Subordinated Notes for 10,000 shares of the Company's nonvoting Series A preferred stock, $1.00 par value per share (the Series A Preferred Stock). The Series A Preferred Stock has the following rights and preferences: Dividends The holders of the Series A Preferred Stock shall be entitled to receive cash dividends of $8.00 per share per annum, payable when, as and if declared by the Board of Directors of the Company. Such dividends on the Series A Preferred Stock shall accrue and be cumulative from the date of issuance. During the years ended October 31, 1997 and 1998, the Company accrued $119,768 and $80,000 of dividends, respectively. Liquidation Preference Upon any liquidation, dissolution or winding up of the Company, after payment or provision for payment of all debts and other obligations and liabilities of the Company, the holders of the shares of preferred stock shall be entitled, before any distribution or payment is made upon any common stock, to be paid an amount equal to the redemption price ($100 per share) plus an amount equal to all accrued but unpaid dividends, and the holders of the preferred stock shall not be entitled to any further payment. Redemption The Company may, at the option of the Company's Board of Directors, redeem part or all of the outstanding shares of the Series A Preferred Stock at any time or times at a redemption price of $100 per share plus accrued but unpaid dividends. However, on January 1, 2001, the Company shall redeem all outstanding shares of the Series A Preferred Stock at a redemption price of $100 per share. (10) MINORITY INTEREST IN FIBER IMAGING TECHNOLOGIES, INC. On June 30, 1998, the Company sold 8,108 shares of FIT common stock to a German-based company, representing a 7.5% ownership interest for $50,025. (11) PRIVATE PLACEMENT OF COMMON STOCK On June 3, 1996, the Company raised approximately $1,182,000 through a private placement of common stock. In conjunction with the offering, the Company issued "units" at a price of $3 each. Each unit consists of one share of common stock, $0.01 par value per share, and one warrant that can be exchanged into one share of common stock for $6.00 per share, which exceeded the fair market value at the date of grant. The warrants (394,171 in total) are exercisable immediately and expire on December 31, 2001. (12) STOCK PLANS The Company maintains a stock option plan (the 1992 Stock Plan) that provides for the grant of incentive stock options, nonqualified stock options, stock awards and direct sales of stock. Under the 1992 Stock Plan, incentive stock options may be granted at an exercise price not less than the fair market value of the Company's common stock on the date of grant. Nonqualified options may be granted by the Board of Directors at its discretion. The difference, if any, between the exercise price and the fair value of the underlying common stock at the measurement date is charged to expense over the vesting period of such options with a corresponding credit to additional paid-in capital. The 1992 Stock Plan also provides that the options are exercisable at varying dates, as determined by the Compensation Committee of the Board of Directors (the Compensation Committee), and have terms not to exceed 10 years. In 1996, the Company's Board of Directors adopted an amendment to the Company's 1992 Stock Plan. The amendment to the 1992 Stock Plan (i) increased from 300,000 to 400,000 the number of shares authorized for issuance under the plan and (ii) limits to 100,000 the maximum number of shares of common stock with respect to which options may be granted to any employee in any calendar year. On April 21, 1994, the Board of Directors approved the 1993 Employee Stock Purchase Plan (the 1993 Plan) whereby the Company has reserved and may issue up to an aggregate of 25,000 shares of common stock in semiannual offerings. Stock is sold at 85% of fair market value, as defined. Shares subscribed to and issued under the 1993 Plan were 11,952 and 9,311 in 1997 and 1998, respectively. On December 8, 1994, the Company adopted a stock option plan for nonemployee directors (the 1995 Director Plan). The 1995 Director Plan provides that an aggregate of up to 200,000 nonqualified options may be granted to nonemployee directors, as determined by the Compensation Committee. Under the terms of the 1995 Director Plan, options are granted at not less than the fair market value of the Company's common stock on the date of grant. The 1995 Director Plan also provides that the options are exercisable at varying dates, as determined by the Compensation Committee, and have terms not to exceed 10 years. The following schedule summarizes the stock option and warrant activity for the three years ended October 31, 1998: Number of Shares Option Price Per Weighted Average Share Option Price Outstanding at October 31, 1995 310,000 1.25 - 4.63 3.46 Granted 913,571 2.75 - 6.00 4.30 Exercised (1,500) 1.63 1.63 --------------- ----------------- ------------ Outstanding at October 31, 1996 1,222,071 1.25 - 6.00 4.08 Granted 178,200 2.63 - 6.00 4.05 Cancelled (40,050) 1.25 - 4.63 3.25 --------------- ----------------- ------------ Outstanding at October 31, 1997 1,360,221 1.25 - 6.00 $ 4.10 Granted 31,400 2.44 2.44 Cancelled (7,300) 2.44 - 3.56 3.03 Exercised (4,790) 1.63 - 3.56 2.39 -------------- ------------------ ------------ Outstanding at October 31, 1998 1,379,53 $ 1.25-$ 6.00 $ 4.08 ============== ================= ====== Exercisable at October 31, 1998 1,140,645 $ 1.25-$ 6.00 $3.98 ============== ================= ====== As of October 31, 1997 and 1998, 600,000 shares of common stock have been reserved for issuance under the Company's stock option plans. On June 18, 1998, the Board of Directors of FIT approved the 1998 Stock Option Plan (the 1998 Plan) whereby FIT has reserved and may issue up to an aggregate of 50,000 shares of common stock. The 1998 Plan provides for the grant of incentive stock options, nonqualified stock options, stock awards and direct sales of stock. Under the 1998 Plan, incentive stock options may be granted at an exercise price not less than the fair market value of FIT's common stock on the date of grant. Non qualified options may be granted by the Board of Directors at its discretion. The difference, if any, between the exercise price and the fair value of the underlying common stock at the measurement date is charged to expense over the vesting period of such options with a corresponding credit to additional paid-in capital. The 1998 Plan also provides that the options are exercisable at varying dates, as determined by the Compensation Committee and have terms not to exceed ten years. The following schedule summarizes the stock option activity under the 1998 plan for the year ended October 31, 1998: Weighted Number of Shares Option Price Average Option Per Share Price Outstanding at October 31, 1997 - $ - $ - Granted 20,000 6.17 6.17 ------ ------- -------- Outstanding at October 31, 199 20,000 6.17 6.17 ====== ====== ========= Exercisable at October 31, 1998 10,000 $ 6.17 $ 6.17 ====== ======= ========= In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the pro forma disclosures required under SFAS No. 123 for options granted in 1996, 1997 and 1998 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions are as follows: 1997 1997 1998 Risk free interest rate 6.18% 7.00% 4.35% Expected dividend yield - - - Expected lives 10 years 10 years 10 years Expected volatility 18% 41% 85% Weighted average value of grants 1.60 1.86 3.89 Weighted average remaining contractual life of options outstanding 5.2 4.7 3.9 The total value of options granted during the fiscal years ended October 31, 1996, 1997 and 1998 was computed as approximately $87,000, $158,000 and $108,000, respectively. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been the following pro forma amounts: For the Years Ended October 31, 1996 1997 1998 Pro forma net (loss) income $ (657,676) $ (630,408) $ 77,183 ============== ============== ============== Pro forma net (loss) income per share- Basic $ (.26) $ (.22) $ .03 ======= ========== =========== Diluted $ (.26) $ (.22) $ .03 ======= ======= ===========
(13) COMMITMENTS The Company has noncancelable operating lease commitments that consist principally of rentals of facilities and machinery. Its manufacturing and office facilities are leased with a termination date of September 30, 1998. The Company is currently in the process of renegotiating this lease agreement and is occupying the facilities under a tenancy at will. The future minimum operating lease payments over their remaining terms are as follows: Fiscal Year Amount 1999 $ 201,640 2000 174,759 2001 18,097 --------------- Total minimum lease payments $ 394,496 ============= Rent expense charged to operations for operating leases was approximately $142,000, $169,000 and $170,000 in fiscal year 1996, 1997 and 1998, respectively. (14) BUSINESS SEGMENT AND EXPORT SALES The Company operates in one business segment: the manufacture, sale and distribution of a wide range of medical products using fiber optics. The Company operates from one location in the United States. Sales for this operation totaled the following: Geographic Destination For the Years Ended October 31, 1996 1997 1998 Domestic 84 % 84 % 81 % Europe 9 8 14 All others 7 8 5 ------- ------- ------- 100 % 100 % 100 % ======= ======= ======= (15) SIGNIFICANT CUSTOMERS/RELATED PARTY One customer, the president of which is a member of the Company's Board of Directors, accounted for 12%, 14% and 13% of net revenues in fiscal 1996, 1997 and 1998, respectively and 20% of the Company's accounts receivable at the end of fiscal 1998. Another customer accounted for 14% of the Company's accounts receivable at the end of fiscal 1998. (15) 401(k) RETIREMENT PLAN The Company maintains a qualified 401(k) retirement plan. The plan covers substantially all employees who have satisfied a six-month service requirement and have attained the age of 18. The 401(k) plan provides for an optional company contribution for any plan year at the Company's discretion. The Company contributed and charged to operations $13,536, $18,397 and $17,576 for the years ended October 31, 1996, 1997 and 1998, respectively. LUXTEC CORPORATION October 31, 1998 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the Directors and Executive Officers of the Corporation, see the section entitled "Election of Directors" appearing in the Corporation's Proxy Statement in connection with its next Annual Meeting of Shareholders or special meeting in lieu thereof, which section is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See the section entitled "Executive Compensation" appearing in the Corporation's Proxy Statement in connection with its next Annual Meeting of Shareholders or special meeting in lieu thereof, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the section entitled "Election of Directors" appearing in the Corporation's Proxy Statement in connection with its next Annual Meeting of Shareholders or special meeting in lieu thereof, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Louis C. Wallace is currently, and has been since 1989, a member of the Board of Directors of the Corporation. Mr. Wallace is the founder and President of Specialty Surgical Instrumentation, Inc. (SSI), a surgical distributor in ten (10) southeastern states. SSI is the largest single customer of the Corporation, representing approximately 13% of net revenues during fiscal 1998. SSI and Luxtec operate at arms' length with a contract substantially the same as the other domestic distributors of the Corporation's products. The Corporation expects that SSI will represent approximately the same percentage of net revenues during fiscal 1999 as occurred during fiscal 1998. LUXTEC CORPORATION October 31, 1998 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets as of October 31, 1997 and October 31, 1998. Consolidated Statements of Operations for the years ended October 31, 1996, October 31, 1997 and October 31, 1998. Consolidated Statements of Stockholders' Equity for the years ended October 31, 1996, October 31, 1997 and October 31, 1998. Consolidated Statements of Cash Flows for the years ended October 31, 1996, October 31, 1997 and October 31, 1998. Notes to Consolidated Financial Statements 2. Financial Statement Schedules No schedules are submitted because they are not applicable, not required or because the information is included elsewhere herein. LUXTEC CORPORATION October 31, 1998 3. Exhibits Exhibit Description Designation - ------- ----------- ----------- 2A Merger Agreement 2A**** 3A Articles of Organization 3A* 3B Amendment dated March 30, 1982 to Articles of Organization 3B* 3C Amendment dated August 9, 1984 to Articles of Organization 3C* 3D Amendment dated April 10, 1992 to Articles of Organization 3D** 3E Amendment dated October 20, 1995 to Articles of Organization 3E**** 3F Amendment dated October 20, 1995 to Articles of Organization 3F**** 3G Amendment dated September 16, 1996 to Articles of Organization 3G 3H Certificate of Vote of Directors Establishing a Series of a Class of Stock, 3H dated September 16, 1996 3I Certificate of Correction dated October 4, 1996 3I********* 3J Certificate of Correction dated October 4, 1996 3J********* 3K By-Laws 3K* 4A Specimen of Stock Certificate 4A* 4B Note Purchase Agreement dated as of December 18, 1995, by and between 4B******* the Company and Geneva Middle Market Investors, L.P. (`GMMI') 4C 8% Senior Subordinated Note due June 1, 2001, dated December 18, 1995 4C******* in the principal amount of $1,000,000, made by the Company in favor of GMMI 4D Rights Agreement made as of December 18, 1995, between the 4D******* Company and GMMI 4E Registration Rights Agreement made as of June 3, 1996, between the 4E******** Company and the Purchasers (as defined therein) 10L Lease for the premises in Worcester, MA 10L***** 10N Employment Agreement with James Hobbs 10N** 10O Luxtec Corporation 1992 Stock Plan 10O** 10P Luxtec Corporation 1995 Stock Option Plan for Non-Employee Directors 10P**** 10Q Bank Agreement 10Q****** 10R Warrant Agreement made as of December 18, 1995, between the Company 10R******* and GMMI 10S Warrant for 450,000 shares of Common Stock of the Company dated as of 10S******* December 18, 1995, in the name of GMMI 10T Form of Subscription Agreement and Letter of Investment Intent 10T******** between the Purchaser named therein and the Company
LUXTEC CORPORATION October 31, 1998 3. Exhibits (Continued) Exhibit Description Designation - ------- ----------- ----------- 10U Warrant Agreement made as of June 3, 1996, between the 10U******** Company and the Purchasers (as defined therein) 10V Form of Warrant 10V******** 21 Luxtec Subsidiaries 21 23 Consent of Independent Public Accountants 23 27 Financial Data Schedule 27
*Previously filed as exhibits to the Corporation's Registration Statement on Form S-18 SEC File No. 33-5514B declared effective on July 7, 1986. **Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1993. ***Previously filed as exhibits to the Corporation's Report on Form 10-Q for quarter ended July 31, 1994. ****Previously filed as exhibits to the Corporation's Proxy Statement dated October 20, 1995. *****Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1994. ******Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1995. *******Previously filed as exhibit to the Corporation's Proxy Statement date June 21, 1996. ********Previously filed as exhibits to the Corporation's Report on Form 10-Q for quarter ended July 31, 1996. *********Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1996. LUXTEC CORPORATION October 31, 1998 3. Exhibits (Continued) (b) Reports on Form 8-K: None. (c) Exhibits. The Corporation hereby files as exhibits to this Form 10-K those exhibits listed in Item 14 (a)(3), above, as being filed herewith. (d) Financial Statement Schedules. None. LUXTEC CORPORATION October 31, 1998 SIGNATURES Pursuant to the requirements of Section 13 or 15(D) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Worcester, Commonwealth of Massachusetts, on the 29th day of January 1999. LUXTEC CORPORATION by_______________________________ James W. Hobbs, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date President, Chief January 22, 199 James W. Hobbs Executive Officer, Director Chief Financial Officer, January 22, 1999 Samuel M. Stein Treasurer, Assistant Clerk Director January 22, 1999 James Berardo Director January 22, 1999 Paul Epstein Director January 22, 1999 James J. Goodman Director January 22, 1999 Patrick G. Phillipps Director January 22, 1999 Thomas J. Vander Salm Director January 22, 1999 Louis C. Wallace
Exhibits furnished pursuant to requirements of FORM 10K 3. Exhibits Exhibit Description Designation - ------- ----------- ----------- 2A Merger Agreement 2A**** 3A Articles of Organization 3A* 3B Amendment dated March 30, 1982 to Articles of Organization 3B* 3C Amendment dated August 9, 1984 to Articles of Organization 3C* 3D Amendment dated April 10, 1992 to Articles of Organization 3D** 3E Amendment dated October 20, 1995 to Articles of Organization 3E**** 3F Amendment dated October 20, 1995 to Articles of Organization 3F**** 3G Amendment dated September 16, 1996 to Articles of Organization 3G 3H Certificate of Vote of Directors Establishing a Series of a Class of Stock, 3H dated September 16, 1996 3I Certificate of Correction dated October 4, 1996 3I********* 3J Certificate of Correction dated October 4, 1996 3J********* 3K By-Laws 3K* 4A Specimen of Stock Certificate 4A* 4B Note Purchase Agreement dated as of December 18, 1995, by and between 4B******* the Company and Geneva Middle Market Investors, L.P. (`GMMI') 4C 8% Senior Subordinated Note due June 1, 2001, dated December 18, 1995 4C******* in the principal amount of $1,000,000, made by the Company in favor of GMMI 4D Rights Agreement made as of December 18, 1995, between 4D******* the Company and GMMI 4E Registration Rights Agreement made as of June 3, 1996, between the 4E******** Company and the Purchasers (as defined therein) 10L Lease for the premises in Worcester, MA 10L***** 10N Employment Agreement with James Hobbs 10N** 10O Luxtec Corporation 1992 Stock Plan 10O** 10P Luxtec Corporation 1995 Stock Option Plan for Non-Employee Directors 10P**** 10Q Bank Agreement 10Q****** 10R Warrant Agreement made as of December 18, 1995, between the Company 10R******* and GMMI 10S Warrant for 450,000 shares of Common Stock of the Company dated as of 10S******* December 18, 1995, in the name of GMMI
Exhibits furnished pursuant to requirements of FORM 10K 3. Exhibits (Continued) Exhibit Description Designation 10T Form of Subscription Agreement and Letter of Investment Intent 10T******** between the Purchaser named therein and the Company 10U Warrant Agreement made as of June 3, 1996, between the Company 10U******** and the Purchasers (as defined therein) 10V Form of Warrant 10V******** 21 Luxtec Subsidiaries 21 23 Consent of Independent Public Accountants 23 27 Financial Data Schedule 27
*Previously filed as exhibits to the Corporation's Registration Statement on Form S-18 SEC File No. 33-5514B declared effective on July 7, 1986. **Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1993. ***Previously filed as exhibits to the Corporation's Report on Form 10-Q for quarter ended July 31, 1994. ****Previously filed as exhibits to the Corporation's Proxy Statement dated October 20, 1995. *****Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1994. ******Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1995. *******Previously filed as exhibit to the Corporation's Proxy Statement dated June 21, 1996. ********Previously filed as exhibits to the Corporation's Report on Form 10-Q for quarter ended July 31, 1996. *********Previously filed as exhibit to the Corporation's Report on Form 10-K for fiscal year ended October 31, 1996. LUXTEC CORPORATION October 31, 1998 EXHIBIT 21 Luxtec Corporation Subsidiaries 1. Cathtec, Inc., a Massachusetts Corporation. 2. Fiber Imaging Technologies, Inc., a Massachusetts Corporation. 3. CardioDyne, Incorporated, a Massachusetts Corporation. EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-83510, 333-19087 and 333-19107). S/Arthur Andersen LLP ARTHUR ANDERSEN LLP Boston, Massachusetts January 20, 1999 Federal Identification No. 04-2741310 The Commonwealth of Massachusetts William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72) We, James W. Hobbs , President, and Justin P. Morreale , Clerk of Luxtec Corporation (Exact name of corporation) located at: 326 Clark Street, Worcester, Massachusetts 01606 (Street address of corporation in Massachusetts) certify that these Articles of Amendment effecting articles numbered: 3, 4 (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended) of the Articles of Organization were duly adopted at a meeting held on July 25, 1996, by vote of: 1,695,941 shares of Common Stock out of 2,449,480 shares outstanding, type, class & series (if any) shares of out of shares outstanding, type, class & series (if any) and shares of out of shares outstanding, type, class & series (if any) being at least a two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby: VOTED: To amend the Articles of Organization of the Corporation to authorize 500,000 shares of preferred stock, par value $1.00 per share, with such designations, powers, privileges and rights, and qualifications, limitations and restrictions in respect of each class or series of preferred stock as determined by vote of the Board of Directors or a committee thereof, and to authorize the Board of Directors to issue the preferred stock in such classes or series and to determine the powers, privileges and rights, and the qualifications, limitations and restrictions in respect to each class or series of preferred stock by vote. (See Continuation Page IV attached hereto as Exhibit A) Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on one side only of separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to more than one article may be made on a single sheet so long as each article requiring each addition is clearly indicated. To change the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: To total presently authorized is:
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - --------------------- ---------------------------- ------------------- --------------------------- ----------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - --------------------- ---------------------------- ------------------- --------------------------- ----------------- - --------------------- ---------------------------- ------------------- --------------------------- ----------------- COMMON: COMMON: 10,000,000 $.01 - --------------------- ---------------------------- ------------------- --------------------------- ----------------- - --------------------- ---------------------------- ------------------- --------------------------- ----------------- PREFERRED: PREFERRED: - --------------------- ---------------------------- ------------------- --------------------------- ----------------- Change the total authorized to: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - --------------------- ---------------------------- ------------------- --------------------------- ----------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - --------------------- ---------------------------- ------------------- --------------------------- ----------------- - --------------------- ---------------------------- ------------------- --------------------------- ----------------- COMMON: COMMON: 10,000,000 $.01 - --------------------- ---------------------------- ------------------- --------------------------- ----------------- - --------------------- ---------------------------- ------------------- --------------------------- ----------------- PREFERRED: PREFERRED: 500,000 $1.00 - --------------------- ---------------------------- ------------------- --------------------------- -----------------
The foregoing amendment(s) will become effective when these Articles of Amendment are filed in accordance with General Laws, Chapter 156B, Section 6 unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. Later effective date: __________________________ SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of September, 1996. /s/ James W. Hobbs , President /s/ Justin P. Morreale , Clerk THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) =============================================================================== I hereby approve the within Articles of Amendment, and the filing fee in the amount of $ 600 having been paid, said articles are deemed to have been filed with me this 19th day of September, 1996. Effective Date: WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: Victor J. Paci, Esq. Bingham, Dana & Gould LLP 150 Federal Street, Boston, MA 02110 Telephone: (617) 951-8000 The Commonwealth of Massachusetts William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108 Federal Identification No. 04-2741310 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 We James W. Hobbs, President and Justin P. Morreale, Clerk Luxtec Corporation (Name of Corporation) located at 326 Clark Street, Worcester, Massachusetts 01606 do hereby certify that by unanimous written consent in lieu of a meeting of the directors of the corporation dated as of May 31, 1996, the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: VOTED: That, subject to obtaining the requisite approval of the Amendment by stockholders of the Corporation and pursuant to the authority vested in the Board of Directors by Article IV of the Charter, as amended by the Amendment, a series of preferred stock, par value $1.00 per share, be and hereby is established and designated as Series A Preferred Stock, consisting of 10,000 shares, with, in addition to any set forth in the Charter, such designations, powers, privileges and rights, and qualifications, limitations and restrictions in respect thereof as contained in the Certificate of Vote of Directors Establishing A Series of a Class of Stock (the "Directors Certificate"), substantially in the form attached hereto as Exhibit B; and that the form of Directors Certificate attached hereto as Exhibit B be, and the same hereby is, adopted and approved by the Board of Directors of the Corporation. (See Continuation Page 2 attached as Exhibit B hereto) Note: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be numbered 2A, 2B, etc. Continuation sheets must have a left-hand margin 1 inch wide for binding and shall be 8 1/2" x 11". Only one side should be used. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have signed our names this 16th day of September, in the year 1996. /s/ James W. Hobbs President /s/ Justin P. Morreale Clerk THE COMMONWEALTH OF MASSACHUSETTS Certificate of Vote of Directors Establishing A Series of a Class of Stock (General Laws, Chapter 156B, Section 26) I hereby approve the within certificate and, the filing fee in the amount of $ 100 having been paid, said certificate is hereby filed this 19th day of September, 1996. William Francis Galvin Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF CERTIFICATE TO BE SENT TO: Victor J. Paci, Esq. Bingham, Dana & Gould 150 Federal Street, Boston, MA 02110 Telephone: (617) 951-8000 EXHIBIT A ARTICLES OF AMENDMENT to ARTICLES OF ORGANIZATION of LUXTEC CORPORATION Continuation Sheet VI ARTICLE VI Other lawful provisions, if any, for the conduct and regulation of business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: (If there are no provisions state "None".) 1. No director shall be personally liable to the corporation or to any of its stockholders for monetary damages for any breach of fiduciary duty by such director as a director notwithstanding any provision of law imposing such liability; provided, however, that, to the extent required from time to time by applicable law, this provision shall not eliminate the liability of a director, to the extent such liability is provided by applicable law, (a) for any breach of the director's duty of loyalty to the corporation or its stockholders, (b) for acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law, (c) under Section 61 or Section 62 of the Business Corporation Law of The Commonwealth of Massachusetts, or (d) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article VI-A shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to the effective date of such amendment or repeal. 2. Indemnification. 2.1. Right to Indemnification. The corporation shall indemnify and hold harmless each person who was or is a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal or administrative (a "Proceeding"), by reason of being, having been or having agreed to become, a director or officer of the corporation, or serving, having served or having agreed to serve, at the request of the corporation, as a director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan (any such person being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expense, liability and loss (including without limitation reasonable attorneys' fees, judgments, fines, "ERISA" excise taxes or penalties) incurred or suffered by the Indemnitee or on behalf of the Indemnitee in connection with such Proceeding and any appeal therefrom, unless the Indemnitee shall have been adjudicated in such Proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Notwithstanding anything to the contrary in this Article, except as set forth in Section 2.6 below, the corporation shall not indemnify or advance expenses to an Indemnitee seeking indemnification in connection with a Proceeding (or part thereof) initiated by the Indemnitee, unless the initiation thereof was approved by the Board of Directors of the corporation. 2.2. Settlements. Subject to compliance by the Indemnitee with the applicable provisions of Section 2.5 below, the right to indemnification conferred in this Article shall include the right to be paid by the corporation for amounts paid in settlement of any such Proceeding and any appeal therefrom, and all expenses (including attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless it is held or determined pursuant to Section 2.5 below that the Indemnitee did not act in good faith in the reasonable belief that his or her action was in the best interest of the corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. 2.3. Notification and Defense of Proceedings. The Indemnitee shall notify the corporation in writing as soon as reasonably practicable of any Proceeding involving the Indemnitee for which indemnity or advancement of expenses is intended to be sought. Any omission so to notify the corporation shall not relieve it from any liability that it may have to the Indemnitee under this Article unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the corporation. With respect to any Proceeding of which the corporation is so notified, the corporation shall be entitled, but not obligated, to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee, except as provided in the last sentence of this Section 2.3. After notice from the corporation to the Indemnitee of its election so to assume such defense (subject to the limitations in the last sentence of this Section 2.3), the corporation shall not be liable to the Indemnitee for any fees and expenses of counsel subsequently incurred by the Indemnitee in connection with such Proceeding, other than as provided below in this Section 2.3. The Indemnitee shall have the right to employ his or her own counsel in connection with such Proceeding, but the fees and expenses of such counsel incurred after notice from the corporation of its assumption of the defense thereof at its expense with counsel reasonably acceptable to Indemnitee shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee at the corporation's expense has been authorized by the corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the corporation and the Indemnitee in the conduct of the defense of such action or (iii) the corporation shall not in fact have employed counsel reasonably acceptable to the Indemnitee to assume the defense of such Proceeding within a reasonable time after receiving notice thereof, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the corporation, except as otherwise expressly provided by this Article. The corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any Proceeding brought by or in the right of the corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 2.4. Advancement of Expenses. Except as provided in Section 2.3 of this Article, as part of the right to indemnification granted by this Article, any expenses (including attorneys' fees) incurred by an Indemnitee in defending any Proceeding within the scope of Section 2.1 of this Article or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of a written undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the corporation as authorized by Section 2.1 or Section 2.2 of this Article. Such undertaking need not be secured and shall be accepted without reference to the financial ability of the Indemnitee to make such repayment. Such advancement of expenses shall be made by the corporation promptly following its receipt of written requests therefor by the Indemnitee, accompanied by reasonably detailed documentation, and of the foregoing undertaking. 2.5. Certain Presumptions and Determinations. If, in a Proceeding brought by or in the right of the corporation, a director or officer of the corporation is held not liable for monetary damages, whether because that director or officer is relieved of personal liability under the provisions of Section 1 of this Article or otherwise, that director or officer shall be deemed to have met the standard of conduct set forth in Section 2.1 and thus to be entitled to be indemnified by the corporation thereunder. In any adjudicated Proceeding against an Indemnitee brought by reason of the Indemnitee's serving, having served or agreed to serve, at the request of the corporation, an organization other than the corporation in one or more of the capacities indicated in Section 2.1, if the Indemnitee shall not have been adjudicated not to have acted in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization, the Indemnitee shall be deemed to have met the standard of conduct set forth in Section 2.1 and thus be entitled to be indemnified thereunder. An adjudication in such a Proceeding that the Indemnitee did not act in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization shall not create a presumption that the Indemnitee has not met the standard of conduct set forth in Section 2.1. In order to obtain indemnification of amounts paid in settlement pursuant to Section 2.2 of this Article, the Indemnitee shall submit to the corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to such indemnification. Any such indemnification under Section 2.2 shall be made promptly, and in any event within 60 days after receipt by the corporation of the written request of the Indemnitee, unless a court of competent jurisdiction holds within such 60-day period that the Indemnitee did not meet the standard of conduct set forth in Section 2.2 or the corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet such standard. Such determination shall be made by the Board of Directors of the corporation, based on advice of independent legal counsel (who may, with the consent of the Indemnitee, be regular legal counsel to the corporation). The corporation and the directors shall be under no obligation to undertake any such determination or to seek any ruling from any court. 2.6. Remedies. The right to indemnification or advances as granted by this Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the corporation denies such a request, in whole or in part, or, with respect to indemnification pursuant to Section 2.2, if no disposition thereof is made within the 60-day period referred to above in Section 2.5. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the corporation. Neither absence of any determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met any applicable standard of conduct, nor an actual determination by the corporation pursuant to Section 2.5 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including reasonable attorneys' fees) incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such Proceeding shall also be paid by the corporation. 2.7. Contract Right; Subsequent Amendment. The right to indemnification and advancement of expenses conferred in this Article shall be a contract right. No amendment, termination or repeal of this Article or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification or advancement of expenses under the provisions hereof with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring prior to the final adoption of such amendment, termination or repeal, except with the consent of the Indemnitee. 2.8. Other Rights. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office for the corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the corporation is specifically authorized to enter into, agreements with any Indemnitee providing indemnification rights and procedures different from those set forth in the Article. 2.9. Partial Indemnification. If an Indemnitee is entitled under any provision of this Article to indemnification by the corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by the Indemnitee or on his or her behalf in connection with any Proceeding and any appeal therefrom but not, however, for the total amount thereof, the corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. 2.10. Insurance. The corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another organization or employee benefit plan against any expense, liability or loss incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. 2.11. Merger or Consolidation. If the corporation is merged into or consolidated with another corporation and the corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the corporation under this Article with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring on or prior to the date of such merger or consolidation. 2.12. Savings Clause. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify and advance expenses to each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any Proceeding, including an action by or in the right of the corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. 2.13. Subsequent Legislation. If the Massachusetts General Laws are amended after adoption of this Article to expand further the indemnification permitted to Indemnitees, then the corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws as so amended. 2.14. Indemnification of Others. The corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to employees or agents of the corporation or other persons serving the corporation who are not Indemnitees, and such rights may be equivalent to, or greater or less than, those set forth in this Article. 3. Meeting of the stockholders of the corporation may be held anywhere in the United States. 4. The directors may make, amend, or repeal the By-Laws in whole or in part except with respect to any provision thereof which by law or the By-Laws requires action by the stockholders. 5. The corporation may be a partner in any business enterprise which the corporation would have power to conduct by itself. 6. The corporation may at any time enter into agreements to redeem an/or redeem its outstanding stock from any stockholder or stockholders without having to extend the same offer to its other stockholders. EXHIBIT B LUXTEC CORPORATION TERMS, RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A PREFERRED STOCK, $1.00 PAR VALUE CONTINUATION PAGE 2 The following is a description of the Series A Preferred Stock of Luxtec Corporation (the Company") and a statement of the preferences, qualifications, privileges, limitations, restrictions, and other special or relative rights granted to or imposed upon the shares of such class: Series A Preferred Stock. (a) Designation: Number of Shares. There is hereby established a series of Preferred Stock consisting of 10,000 shares of Preferred Stock par value $1.00 per share and the designation of such series shall be "Series A Preferred Stock" (the "Preferred Stock") (b) Voting. Except as otherwise provided by the laws of The Commonwealth of Massachusetts, and except as hereinafter provided, the holders of shares of Preferred Stock shall have no right to vote with respect to any matters to be voted on by the stockholders of the Company, nor to take any action in meetings with respect to any such matters. (c) Dividends. The holders of record of shares of the Preferred Stock shall be entitled to receive cash dividends, when, as and if declared by the Board of Directors out of assets which are legally available for the payment of such dividends, at the annual rate of $8.00 per share of Preferred Stock, and no more, payable quarterly on the last day of January, April, July and October in each year. Dividends shall be cumulative and will accrue on each share of Preferred Stock from the date of issue thereof, whether or not declared by the Board of Directors. Dividends payable on the Preferred Stock for any period less than a full quarter shall be computed on the basis of the actual number of days elapsed and a 360-day year, consisting of four 90-day quarters. (d) Redemption. (i) Redemption Price. The Preferred Stock shall be redeemable as hereinafter provided, upon notice given as hereinafter provided, by paying for each share in cash the sum of $100 (the "Redemption Price"). Not less than 10 days' prior written notice shall be given by mail, postage prepaid, to the holders of record of the Preferred Stock to be redeemed, such notice to be addressed to each such stockholder at its post office address as shown by the records of the Company. Said notice shall specify the place at which and the date, which date shall be a business day, on which the shares called for redemption will be redeemed and shall specify the shares called for redemption. If such notice of redemption shall have been duly given and if on or before the redemption date specified in such notice the funds necessary for such redemption shall have been set aside so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, after the close of business on such redemption date, the shares so called for redemption shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to shares so called for redemption, including the rights, if any, to receive notice and to vote, shall forthwith after the close of business on such redemption date cease and determine, except only the right of the holders thereof to receive the amount payable upon redemption thereof, without interest. Subject to the provisions hereof, the Board of Directors shall have authority to prescribe the manner in which the Preferred Stock shall be redeemed from time to time. (ii) Shares to be Redeemed. In case of the redemption of only a part of the outstanding shares of the Preferred Stock, all shares of Preferred Stock to be redeemed shall be selected pro rata there shall be so redeemed from each registered holder in whole shares, as nearly as practicable to the nearest share, that proportion of all of the shares to be redeemed which the number of shares held of record by such holder bears to the total number of shares of Preferred Stock at the time outstanding. (iii) All Past Dividends Must Be Paid Prior to Redemption. Except with the consent of the holders of all the shares of Preferred Stock at the time outstanding, the Company shall not, and shall not permit any subsidiary to, purchase or redeem shares of the Preferred Stock at the time outstanding unless all dividends on such shares for all past quarterly dividend periods shall have been paid or declared and a sum sufficient for the payment thereof set apart. (iv) Required Redemptions. On January 1, 2001, the Company shall redeem, in the manner and with the effect provided in this paragraph, at the Redemption Price of all shares of Preferred Stock as shall then remain outstanding, or at such other time or times as may be provided for in the Note Purchase Agreement dated as of December 18, 1995 between the Company and Geneva Middle Market Investors, L.P. (v) Optional Redemptions. The Company at the option of the Board of Directors may redeem, in the manner and with the effect provided in this paragraph, on or at any time or times part or all of the outstanding shares of Preferred Stock at the Redemption Price. (e) Liquidation. Upon any liquidation, dissolution or winding up of the Company, after payment or provision for payment of all debts and other obligations and liabilities of the Company, the holders of the shares of Preferred Stock shall be entitled, before any distribution or payment is made upon any Common Stock, to be paid an amount equal to the Redemption Price plus an amount equal to all accrued dividends, and the holders of the Preferred Stock shall not be entitled to any further payment. Upon any such liquidation, dissolution or winding up of the Company, after the holders of the Preferred Stock, at the time outstanding, shall have been paid in full the amounts to which they shall be entitled, the remaining net assets of the Company may be distributed to the holders of Common Stock. If, upon any such liquidation, dissolution or winding up of the Company, the assets of the Company distributable as aforesaid among the holders of the Preferred Stock at the time outstanding shall be insufficient to permit the payment to them of the full preferential amounts to which they are entitled, then the entire assets of the Company so available for distribution shall be distributed ratably among the holders of the Preferred Stock at the time outstanding in proportion to the full preferential amounts to which they are entitled. Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Redemption Price and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than thirty (30) days prior to the payment date stated therein, to the holders of record of the Preferred Stock, such notice to be addressed to each stockholder at its post office address as shown by the records of the Company. The consolidation or merger of the Company into or with any other corporation or corporations, or the sale or transfer by the Company of all or any part of its assets, or the reorganization or recapitalization of the Company, or the reduction of the capital stock of the Company, shall be deemed to be a liquidation, dissolution or winding up of the Company within the meaning of any of the provisions of this paragraph. (f) Restrictions. At any time when shares of Preferred Stock are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Company is required by law or by the Articles of Organization, and in addition to any other vote required by law or the Articles of Organization, without the approval of the holders of at least 60% of the then outstanding shares of Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, the Company will not: (i) Create or authorize the creation of any additional class or series of shares of stock unless the same ranks equal or junior to the Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Company, or increase the authorized amount of the Preferred Stock or increase the authorized amount of the Preferred Stock or increase the authorized amount of any additional class or series of shares of stock unless the same ranks equal or junior to the Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Company, or create or authorize any obligation or security, convertible into shares of the Preferred Stock or into shares of any other class or series of stock unless the same ranks equal or junior to the Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Company, whether any such creation, authorization or increase shall be by means of amendment to the Articles of Organization or by merger, consolidation or otherwise; or (ii) Purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of stock other than the Preferred Stock, except for dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock. EX-27 2 FINANCIAL DATA SCHEDULE FOR YEAR END 10-K
5 1000 12-MOS OCT-31-1998 NOV-1-1997 OCT-31-1998 44 0 2,821 250 2,549 5,219 2,571 2,075 5,959 3,485 0 0 1,200 29 637 5,959 12,067 12,067 6,960 5,107 20 0 269 265 0 0 0 0 0 265 .06 .06
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